** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

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

### ** **

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**FORM 10-K**

** **
| **(Mark One)**                                                                                                                                                     | ** **                                                                                    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
| **ý**                                                                                                                                                         | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
|                                                                                                                                                               |                                                                                          |
| **For the  fiscal year ended December 31, 2005**                                                                                                                   |
|                                                                                                                                                               |
| **OR**                                                                                                                                                             |
|                                                                                                                                                               |
| **o**                                                                                                                                                              | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                               |                                                                                          |
| **For the  transition period from             to            ** |

 

**Commission file number:  333-115046**

 

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**MRS. FIELDS FAMOUSBRANDS, LLC**

(Exact Name of Registrant Specified in ItsCharter)

 

| **Delaware**                                                    | ** ** | **80-0096938**                    |
|-----------------------------------------------------------------|------------|-----------------------------------|
| (State or Other Jurisdiction of  Incorporation or Organization) |       | (IRS Employer Identification No.) |

 

**2855 East Cottonwood Parkway, Suite 400**

**Salt Lake City, Utah 84121-1050**

(Address of principal executiveoffices)

 

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

 

Securities registered pursuant to Section12(b) of the Act: **None**

 

Securities registered pursuantto Section 12(g) of the Act: **None**

 

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Indicate by check mark if the registrant is a well-known seasonedissuer, as defined in Rule 405 of the Securities Act. YES o  NO ý

 

Indicate by check mark if the registrant is not required to filereports pursuant to Section 13 or Section 15(d) of the Act. YES o  NO ý

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. YES ý  NO o

 

Indicate bycheck mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K (§ 229.405 of this chapter) is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. ý

 

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

 
| Large accelerated filer o |   | Accelerated filer o |   | Non-accelerated filer ý |
|---------------------------|--------|---------------------|--------|-----------------------------------|

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Act).

YES o  NO ý

 

On July 2,2005, none of the registrant’s voting or non-voting equity was held bynon-affiliates. There is no established trading market for registrant’s commoninterests.

 

On March 15, 2006, 100common interests of registrant were outstanding.

 

### **DOCUMENTS INCORPORATED BY REFERENCE:  None**

 

 

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

### ** **

**TABLEOF CONTENTS**

 
| PART I     |
|------------|
|       |   |   |
| Item 1.    | Business |   |
|       |   |   |
| Item 1A.   | Risk Factors |   |
|       |   |   |
| Item 2.    | Properties |   |
|       |   |   |
| Item 3.    | Legal Proceedings |   |
|       |   |   |
| Item 4.    | Submission of Matters to a  Vote of Security Holders |   |
|       |   |   |
| PART II    |
|       |   |   |
| Item 5.    | Market for Registrant’s  Common Equity, Related Stockholder Matters and Issuer of Purchases of Equity  Securities |   |
|       |   |   |
| Item 6.    | Selected Financial Data |   |
|       |   |   |
| Item 7.    | Management’s Discussion and Analysis of Financial  Condition and Results of Operations |   |
|       |   |   |
| Item 7A.   | Quantitative and Qualitative Disclosures  about Market Risk |   |
|       |   |   |
| Item 8.    | Financial Statements and Supplementary Data |   |
|       |   |   |
| Item 9.    | Changes in and Disagreements With  Accountants on Accounting and Financial Disclosure |   |
|       |   |   |
| Item 9A.   | Controls and Procedures |   |
|       |   |   |
| Item 9B.   | Other Information |   |
|       |   |   |
| PART  III  |
|       |   |   |
| Item  10.  | Directors  and Executive Officers of the Registrant |   |
|       |   |   |
| Item 11.   | Executive Compensation |   |
|       |   |   |
| Item 12.   | Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters |   |
|       |   |   |
| Item 13.   | Certain Relationships and Related  Transactions |   |
|       |   |   |
| Item 14.   | Principal Accounting Fees and Services |   |
|       |   |   |
| PART  IV   |
|       |   |   |
| Item  15.  | Exhibits and  Financial Statement Schedules |   |
|       |   |   |
| SIGNATURES |   |

 

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Unless the context otherwise requires, references inthis report to the terms “Company,” “we,” “us,” or “our” generally refer toMrs. Fields Famous Brands, LLC, a Delaware limited liability company, and itssubsidiaries.

 

**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 allfactors described elsewhere in this report and in detail under “Item 1A. RiskFactors.”

 

You are cautioned not to place undue reliance on theseforward-looking statements, which reflect management’s analysis only as of thedate of this report. We undertake no obligation to publicly update or reviseany forward-looking statements, whether as a result of new information, futureevents or otherwise. In light of these risks, uncertainties and assumptions, theforward-looking events discussed in this report may not occur.

 

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**PARTI**

** **

# **Item 1. Business**

# ** **

# **Overview**

# ** **

We are one of thelargest franchisors in the premium snack food industry, featuringMrs. Fieldsâ, Great AmericanCookiesâ, TCBYâ, Pretzel Timeâand Pretzelmaker® as our core brands. Through our franchisees’ retail stores,we are the largest retailer of freshly baked, on-premises specialty cookies andbrownies in the United States of America (the “United States”); the largestretailer of soft-serve frozen yogurt in the United States; and the secondlargest retailer of baked on-premises pretzels in the United States. Inaddition, we operate a growing gifts business and have entered into licensingarrangements that attempt to leverage awareness of our core brands among ourretail customer base. We operate through a network of franchised stores, whichare located throughout the United States and in approximately 25 foreigncountries. As of December 31, 2005, our franchise network consisted of 2,479retail concept locations.

 

### ***Our History***

### ** **

We were formed in March 2004 in connection withthe reorganization of certain entities and segments that are under the commoncontrol of Mrs. Fields’ Companies, Inc. (“MFC”), formerly known asMrs. Fields Famous Brands, Inc. We are a wholly-owned subsidiary ofMrs. Fields’ Original Cookies, Inc. (“MFOC”). MFOC is a wholly-ownedsubsidiary of Mrs. Fields’ Holding Company, Inc. (“MFH”) and MFH is awholly-owned subsidiary of MFC. The majority shareholders of MFC are twoaffiliated private investment management firms: Capricorn Investors II, L.P. (“CapricornII”) and Capricorn Investors III, L.P. (“Capricorn III” together with CapricornII, “Capricorn”).

 

In a related series of transactions, we formed oracquired from MFOC new single member domestic limited liability companies thatare disregarded entities for U.S. federal income tax purposes for each of ourmajor brands, namely Mrs. Fields Franchising, LLC; Great American CookieCompany Franchising, LLC; TCBY Systems, LLC (“TCBY”); Pretzel Time Franchising,LLC; and Pretzelmaker Franchising, LLC. These subsidiaries hold certain assetsof and act as the franchisor for their respective brands. As part of thesetransactions, MFOC also made a capital contribution to us of all of itsinterests in several other entities, including Mrs. FieldsGifts, Inc. (which operates our gifts business), as well as the GreatAmerican Cookies manufacturing facility, which we then contributed to oursubsidiary, Great American Manufacturing, LLC.

 

We are highly leveraged. On March 16, 2004, we issued$80.7 million of 9 percent senior secured notes (the “9 percent Senior SecuredNotes”) and $115.0 million of 111⁄2 percent senior secured notes (the “111⁄2  percent Senior Secured Notes” together withthe 9 percent Senior Secured Notes, the “Senior Secured Notes”). In addition,certain investors, including Capricorn, limited partners of Capricorn and theiraffiliates, and the initial purchaser of our Senior Secured Notes, provided anadditional $22.5 million to our parent companies, of which$5.0 million was retained by MFOC to fund its operations and$17.5 million was contributed to us as common equity. The proceeds fromthe equity investment and the Senior Secured Notes were used to retiresubstantially all of the indebtedness of MFOC.

 

On August 23, 2004, we completed an offer to exchangean aggregate principal amount of up to $80.7 million of our 9 percent SeniorSecured Notes which have been registered under the Securities Act of 1933, asamended, for a like principal amount of our issued and outstanding 9 percentSenior Secured Notes from the registered holders thereof, and an aggregateprincipal amount of up to $115.0 million of our 111⁄2 percent Senior Secured Noteswhich have been registered under the Securities Act of 1933, as amended, for alike principal amount of our issued and outstanding 111⁄2 percent Senior SecuredNotes from the registered holders thereof. All of our original Senior SecuredNotes were tendered and exchanged as a result of this offer.

 

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### ***Business Strategy***

### ** **

We believe our businessstrategy aligns the interests of the Company with the interests of our retailfranchisees and focuses our joint efforts on strengthening and broadening theappeal of our brands through satisfying the wants and needs of consumers. Thatstrategy is based upon three continuing objectives:

 

•                  build profitableyear-over-year franchise sales;

•                  accelerategrowth of new franchised store development; and

•                  grow licensingand gifts operations.

 

We use the following key performance indicators to measure our successand progress:

 

•                  year-over-yearsame store franchise sales;

•                  net change innumber of retail concept locations; and

•                  year-over-yeargifts and licensing revenues.

 

*Build Profitable Year-Over-Year FranchiseeSales.*We believe increasing the sales of ourfranchisees is critical to the growth of our profitability and it remains a keyfocus of our marketing and operational initiatives. Our initiatives emphasizethe following goals:

 

•                  *Enhanced Consumer Focus.*By concentratingour franchise operations upon our customers’ wants and needs, we expect tocontinue to increase demand for our premium products. We are currently workingto create new excitement within our brands by modernizing and broadening theappeal of our menus, décor and services to distinguish our brands from ourcompetitors’ brands, developing new products for our customers, and improvingupon and further promoting products for which we have the strongest marketshare and a leading reputation. To this end, we have used consumer-basedresearch, testing and analysis to create initiatives designed to help drivesales.

 

•                  *Continued Investment in Our Brands.*In2005, we invested $3.0 million in marketing and other brand development ideas. In2006, we intend to invest an additional $1.0 million in similar initiatives. Thisinvestment in our brands is aimed at increasing sales at franchised locations. Wecontinue to view TCBY as the brand that offers us the greatest opportunity forincreasing profitable sales growth. TCBY’s products are aligned with currenthealth trends and its growth is not limited by mall based locations. We areworking to reconcept and reposition the TCBY brand consistent with our consumerand franchisee based strategic framework, building on today’s health consciousconsumer and the increasing popularity of yogurt generally among consumers. Thisreconcepting includes the test of the new dairy concepts as described elsewherein this report. Additionally, we continue to invest in ideas to increasecustomer counts and sales in our cookie and pretzel businesses.

 

•                  *Engage our Franchisees and Employees.*Acritical part of our efforts to drive profitable year-over-year franchiseesales has been to develop programs that engage the support of our franchiseesand employees. We are continuing to develop more lines of communication betweenthe company and franchisees to help strengthen our relationship with those who implementour business strategy. To this end, we have significantly improved the qualityof our monthly printed brand communications and have restructured our fieldorganization. We have also implemented regional meetings for franchisees andhold a periodic national convention to which all franchisees are invited. Wecontinue to take advantage of technological advances in an effort to increasethe ease and efficiency of communication with and among franchisees. We believethe alignment of our interests with the interests of our franchisees makes ashared vision possible.

 

*Accelerate Growth of New Franchised StoreDevelopment.*We believe that by continuing to focus onimproving franchisees’ profitability and reinvesting in our brands, we willcreate a superior franchise business model for prospective franchisees andpromote the development of new franchised stores, carts and kiosks. In recentyears the rate of closure of existing locations has exceeded the number of newfranchised locations. By promoting ideas to increase the rate of new openingsof franchised locations in our current markets and implementing initiatives toimprove existing locations, we believe our business strategy will enable us tostabilize and eventually grow the number of franchised locations both withinand outside of our current markets.

 

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*Grow Licensing andGifting Operations.*We have expanded several of ourbrands through our licensing and gifting segments. For example, we have grantedthird parties the exclusive North American rights to manufacture and sell,under our registered trademarks, items such as premium ready-to-eat brownies,chocolate chips, boxed chocolates, gourmet glazed popcorn and dry baking mixes,throughout the supermarket, drugstore and mass merchandise distribution markets.We intend to explore expansion of our licensing business by introducing newproducts in order to capitalize on our strong brand names and high qualityproduct reputation. We are also making significant investments in our giftingbusiness to provide a solid foundation for growth, including investments instate-of-the-art software, systems management and improved facilities. We havealso built a management team with industry expertise in such areas as directmarketing, merchandising and supply chains. Additionally, we are continuing torefine and improve the online shopping experience we offer to customers,including making improvements that better meet the needs of high volumebusiness-to-business customers.

 

#### ***Description of Business***

#### * *

###### *Our Bakery Brands*

###### * *

*Mrs. Fields.*Debbi Fields opened her first store in PaloAlto, California in 1977. The Mrs. Fields name quickly became associated withquality, freshly baked cookies right out-of-the-oven in a retail setting. Thestrength of the Mrs. Fields brand name enjoys high consumer brand awareness. Bybuilding on its legendary chocolate chip and white chocolate macadamia nutcookies, the Mrs. Fields brand has developed a comprehensive product line thatincludes many of America’s most beloved snack food treats.

 

*Great American Cookies Company.*Great American Cookies Company became aretail success in 1977 when the first store opened in Atlanta, Georgia’sPerimeter Mall. Founded on the strength of a generations-old family chocolatechip cookie recipe, Great American Cookies Company has grown throughout mallsand shopping centers nationwide. All of the cookies and brownies at GreatAmerican Cookies Company begin with carefully tested recipes, highly controlledproduction and the finest premium ingredients from our batter productionfacility in Atlanta, Georgia.

 

*Pretzel Time.*PretzelTime introduced its famous soft pretzel in 1991 and established itself inregional shopping centers across the country. From the number-one-sellingtraditional salted and buttered pretzel, to the development of the popularfresh Pretzel Bites, Pretzel Time’s menu provides many tasty choices forcustomers. Products also include a variety of refreshing beverage options,including sweet, quenching lemonade and the new, popular Breezer Smoothiesäfrozen beverage. These delicious beverages are an excellent complement tofreshly baked Pretzel Time pretzels.

 

*Pretzelmaker.*Thefirst Pretzelmaker pretzel was rolled, twisted and baked in 1991. Today, Pretzelmakerstores are found in a variety of venues. Pretzelmaker pretzels are a greatlow-calorie, convenient snack. Customers can enjoy a freshly prepared pretzeltopped with a variety of flavors and sauces, and complemented with beverageslike the new Breezer frozen beverage.

 

*Our Dairy Brands*

 

*TCBY.*TCBY has been a frozen treats productinnovator since its first opening in Little Rock, Arkansas in 1981. The greattasting, low-fat frozen yogurt concept received an enthusiastic response froman increasingly health conscious public and was the first in a line of groundbreaking menu items. TCBY product milestones include (i) developing non-fat andno-sugar added frozen treats; (ii) launching a line of frozen yogurt and sorbetnovelties; and (iii) introducing frozen yogurt to airports and travel plazasthrough its joint venture agreement with HMS Host, as successor-in-interest toHost International, Inc., Host Marriott Services USA, Inc., and Host MarriottTollroads Inc.,  (collectively “HMS Host”).

 

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*Two New Yogurt Test Concepts - Yovana**ä**Yogurt Café (“Yovana”) *and*Beriyo**ä**by TCBY (“Beriyo by TCBY”).*To take advantage of yogurt’s increasing popularity with consumersand to further explore how we can use yogurt’s continuing growth as a marketcategory to benefit our franchisees and enhance our brands, TCBY is testing twoadditional yogurt-focused concepts – Beriyo by TCBY and Yovana. These new testconcepts focus on different menu offerings, attempt to meet a specific set ofconsumer needs and appeal to consumers at different times of the day. Forexample, Beriyo by TCBY is being tested as a smoothie-focused concept to takeadvantage of consumers’ demandfor this product, while also offering TCBY frozen yogurt treats. The Yovanatest concept introduces a menu that attempts to appeal to multiple day-parts,and is built around premium yogurt prepared fresh daily in the store, includingfresh yogurt, drinkable yogurt blends, smoothies, and frozen yogurt treatsfeaturing seasonally fresh fruit and organic wholegrain granolas. Both conceptsare in the very early stages of testing. During 2006 we plan on limiting theYovana test to a small number of newly developed stores in a few markets, whileBeriyo by TCBY will be tested initially in new locations and converted TCBYtraditional store locations in several different markets.

 

#### *Our Products*

#### * *

**Cookies,Brownies, Cookie Cakes and Other Bakery Products**.  Thefranchised cookie retail stores bake continuously and serve numerousvarieties of freshly baked cookies, brownies, Cookie Cakes and otherbakery products. Although cookie and brownie sales are generally impulsepurchases, Cookie Cakes can be decorated with customized messages anddesigns for any special occasion and provide an opportunity for the cookiestores to become destination locations. Our bakery products are made using highquality ingredients and all dough is centrally manufactured and frozen orrefrigerated to maintain product quality and consistency. All productspass strict quality assurance and control steps at both the manufacturingplants and the stores.  Mrs. Fields and Great American Cookiescontinuously work on and test new products and promotions to give theircustomers a satisfying experience.

 

*Pretzels.*PretzelTime’s primary product is a hand-rolled soft pretzel, freshly baked from ourproprietary dry mix at each store location. Pretzel Time stores preparepretzels with a variety of flavors and specialty toppings, including cheddarcheese and cinnamon and sugar. Pretzelmaker sells hand-rolled soft pretzelsfreshly baked at each store location, using a proprietary dough shipped frozento each location. A selected number of Pretzel Time and Pretzelmaker locationsare currently participating in tests to identify best practices and potentialsynergies between the brands. As part of these tests, stores in both conceptsmay be offering consumers a more similar experience, including a similar menuand a single pretzel dough taste and texture that is appropriate for both thedry mix and frozen methods. The stores also offer lemonade, soft drinks andBreezer frozen beverages.

 

*Frozen Soft-Serve and Hand-Dipped Yogurt and FrozenNovelties.*We believeour soft-serve frozen yogurt is the only soft-serve frozen yogurt sold widelyin retail outlets in the United States that contains live active yogurtcultures, including *Lactobacillus bulgaricus*and *Streptococcus thermophilus*,which convert pasteurized milk to yogurt during fermentation and which arerequired by U.S. Food and Drug Administration (“FDA”) standards for a productto be called yogurt. One benefit of these yogurt cultures is that they act asfriendly bacteria that “pre-digest” or break down the lactose so that yogurtmay be tolerated by many individuals with lactose intolerance.

 

Our TCBY franchised retail stores offer our TCBY brand original 96% fatfree soft-serve frozen yogurt, non-fat frozen yogurt, no-sugar added/non-fatfrozen yogurt and non-fat/nondairy sorbets. Additionally, to capitalize onyogurt’s continued strong consumer appeal, we are currently planning a launchof a new TCBY hand-dipped product in the second quarter of 2006. Franchisedlocations serve a variety of menu items based on these products, includingwaffle cones, parfaits, shakes and sundaes. They also offer a premium line ofyogurt cakes and deep-dish pies, and our own TCBY Shiver® and CappuccinoChiller® products. TCBY yogurt is available in a variety of flavors.

 

*Yogurt Test Concepts Products.*Asdescribed above, we plan to open a small number of newly-developed stores in afew markets to test TCBY’s Yovana and Beriyo by TCBY products. The premium,fresh yogurt served at Yovana test stores, which includes both a 96% fat freeand a no-fat, no-sugar added variety, is prepared fresh each day in the storeusing our proprietary recipes, and contains 7 live active cultures. Beriyo byTCBY test stores will offer a range of products, including smoothies and TCBYfrozen yogurt treats.

 

In addition to products sold in our franchised retail stores, we sellnovelty frozen food items, such as the TCBY Fruit-N-Yogurt Bars, wholesale tothe retail grocery trade.

 

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*Beverages.*We sell Coca-Cola soft drinks, Dannon bottled water and other productsexclusively in all of our retail stores under agreements with Coca-Cola USAFountain. Some of our bakery stores also sell a Breezer smoothie drink thatincorporates certain products provided by Coca-Cola USA Fountain. Ourfranchised locations may also sell other beverages such as coffee and teas,purchased from one or more of our approved suppliers.

 

##### **Ingredients, Suppliers and Distributors**

##### * *

Werely primarily on outside suppliers and distributors for the ingredients usedin our products and other items used in our franchisees’ stores.

 

*Cookies, Brownies, Muffins andOther Bakery Products.*CountrysideBaking Company, Inc. (“Countryside”) manufactures the majority ofMrs. Fields brand frozen bakery products, which are made according to ourproprietary recipes, for our domestic and international franchisedstores and our gifts segment. Countryside manufactures our products strictly inaccordance with the standards, procedures, specifications, formulations andrecipes established by us, as well as all applicable federal, state and locallaws or regulations to which it is subject.

 

Oursupply agreement with Countryside gives us the right to oversee the quality ofthe products, but also requires Countryside to exercise its own quality controlto ensure that it meets all applicable standards, including those establishedby the United States Food, Drug and Cosmetic Act, and Title 21 of the Code ofFederal Regulations of the United States related to Food ManufacturingPractices. Countryside’s contract for making frozen products for us expires onDecember 31, 2006, unless extended by mutual agreement between the parties.We are in preliminary discussions about extending our contract withCountryside.

 

Our products manufactured by Countryside are thensold to our approved distributors, currently Dawn Food Products and KaleelBrothers, Inc. (“Kaleel Brothers”) for sale and distribution toMrs. Fields Cookie Stores. The initial term of the Supply and DistributionAgreement with Dawn Food Products expired on August 8, 2003, when it automaticallyrenewed for an additional one-year term. The distribution agreement continuesto renew automatically each year unless either party gives 180 days noticeof nonrenewal prior to the anniversary date, and is otherwise terminable atwill by either party upon 180 days notice. We do not have a supply anddistribution agreement with Kaleel Brothers.

 

Great AmericanCookies Company stores receive “ready to bake” refrigerated batter from ourmanufacturing facility in Atlanta, Georgia. The batter, which has a shelf lifeof about 90 days, is stored at the manufacturing facility for an averageof one to three weeks, depending on demand, before being shipped to ourfranchisees’ stores.  Paper products for Great American Cookies storesare distributed by Network Services Company.

 

*Pretzels.*Our Pretzel Time brand stores buy a proprietary dry mix fromour approved supplier, Pizza Blends, or current authorized distributors, DawnFood Products and Kaleel Brothers. Pretzels are mixed and baked at individualstores. Our Pretzelmaker brand stores purchase our proprietary frozen doughfrom our approved supplier, Layton Bakery, or current authorized distributors,Dawn Food Products and Kaleel Brothers. Individual stores then thaw, shapeand bake the pretzels on site. Some pretzel stores from both brands arecurrently testing a newly-formulated pretzel dough that is appropriate for boththe frozen and dry mix methods and which is designed to allow franchisees toreduce waste, while offering consumers the fresh product they enjoy from all ofour Pretzel Time and Pretzelmaker locations.

 

*Frozen Soft-Serve and Hand-DippedYogurt and Frozen Novelties.*Most TCBY brand products currently are produced by Americana FoodsLimited Partnership (“Americana”), a former subsidiary of TCBY Enterprises, LLC(“TCBY Enterprises”), under an exclusive Supply Agreement between TCBY andAmericana. See “Certain Relationships and Related Transactions—TCBY SupplyAgreement.” Americana, which is located in Dallas, Texas and currently ispartially owned by a subsidiary of Capricorn III, sells most of the products toour authorized distributors. Franchisees are required to purchase the productfrom the distributors that we designate. TCBY franchised stores located outsidethe United States receive products from various manufacturers, includingAmericana, and distributors approved by TCBY with the capability to distributeproducts in their respective countries***.***

 

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On August 5, 2005, TCBY received a notice fromBlue Line Distributing (“Blue Line”), TCBY’s principal distributor of TCBYproducts to its franchisees, exercising Blue Line’s option to terminate theFood Packaging Distribution Agreement between Blue Line and TCBY, datedNovember 14, 2002 (the “Distribution Agreement”). The effective date of thetermination, as provided by the Distribution Agreement, was scheduled to be 180days from the date that TCBY received the notice. Notwithstanding the notice oftermination, the parties negotiated an extension whereby Blue Line wouldcontinue to act as TCBY’s distributor beyond the termination date to allow TCBYto fully explore its options and assist in a transition without interruption ofservice to franchisees. Blue Line continues to provide distribution to someparts of the United States under this extension. TCBY is finalizingnegotiations with a number of regional distributors that will eventuallyreplace Blue Line, including KaleelBrothers in the northeastern United States. TCBY believes it will be able to identifydistributors for the remaining regions of the United States before Blue Lineceases its services under the negotiated extension. However, we anticipate thedistribution costs to many of our franchisees will increase under the newregional agreements, which may make it more difficult for them to operateprofitably, potentially increasing the number of permanent store closures.

 

*Yogurt TestConcepts.*Our yogurt test concept stores will purchasethe frozen yogurt that they serve from TCBY’s approved distributors. Because ofthe limited number of test locations and the changing nature of the test menus,TCBY plans to identify and approve local and regional suppliers anddistributors for many of the other products served at Yovana and Beriyo by TCBYstores.

 

All of the products, supplies and equipmentpurchased for sale or use by our franchisees must meet our specifications andstandards for quality, design, appearance, function and performance. We havethe right to designate certain suppliers and distributors for any of theseitems.

 

**Our Business Segments**

 

Our business is divided into three primary businesssegments for financial reporting purposes: franchising, gifts and licensing,which represented 60.9 percent, 34.3 percent and 4.6 percent of total revenues,respectively, for the year ended December 31, 2005. The franchising segmentconsists of revenues received either directly or indirectly from cookie, yogurtand pretzel stores, which are owned and operated by third parties. Theserevenues include franchise or license fees, monthly royalties based on apercentage of a franchisee’s gross sales, sales of cookie dough that we produceat our Great American Cookies manufacturing facility and certain productformulation fees and supplier allowances which are based upon sales tofranchisees. The gifts segment includes sales generated from our mail ordergift catalog and website. The licensing segment consists of other licensingfrom third parties for the sale of products bearing our brand names. Forfurther disclosure of reportable segments, see Note 9 to our consolidatedfinancial statements contained elsewhere in this report.

 

## ***Franchising***

## *** ***

We operate through a network of franchised stores,which are located throughout the United States and in approximately 25 foreigncountries. We actively recruit new franchisees and enter into a number offranchise agreements each year. We believe we will continue to recruit newfranchisees who will provide cash flow to our franchising segment by:

 

•                  emphasizing the use of proprietary dough,fresh and frozen yogurt, and dessert products, minimizing product qualityissues and ensuring a consistent product across all outlets;

 

•                  requiringfrequent quality, service and cleanliness evaluations of franchised stores byoperations support staff; and

 

•                  providinginitial and continuing training of franchisees to improve their financial andretail sales skills.

 

However, there can be no guarantee that we will beable to successfully recruit a significant number of new franchisees.

 

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As of December 31, 2005, our store portfolio consisted of1,978 domestic franchised locations, 328 international franchisedlocations and 173 licensed locations, which are described in more detailbelow. Our franchisees’ and licensees’ concept locations by concept aredistributed as follows:

 
| ** **                    | ** ** | **Domestic**   | ** ** | **International** | ** ** | **Licensed**  | ** ** | ** ** | ** ** |
|-------------------------------|------------|----------------|------------|-------------------|------------|---------------|------------|------------|------------|
| ** **                    | ** ** | **Franchised** | ** ** | **Franchised**    | ** ** | **Locations** | ** ** | **Total**  | ** ** |
| Mrs. Fields                   |       | 373            |       | 87                |       | 49            |       | 509        |       |
| Great American                |       | 279            |       | 1                 |       | 1             |       | 281        |       |
| Original Cookie               |       | —         |       | —            |       | 3             |       | 3          |       |
| Cookie subtotal               |       | 652            |       | 88                |       | 53            |       | 793        |       |
| Pretzel Time                  |       | 205            |       | 7                 |       | 6             |       | 218        |       |
| Pretzelmaker                  |       | 149            |       | 47                |       | 2             |       | 198        |       |
| Hot Sam                       |       | —         |       | —            |       | 3             |       | 3          |       |
| Pretzel subtotal              |       | 354            |       | 54                |       | 11            |       | 419        |       |
| Bakery brands subtotal        |       | 1,006          |       | 142               |       | 64            |       | 1,212      |       |
| TCBY - traditional stores     |       | 423            |       | —            |       | —        |       | 423        |       |
| TCBY - non-traditional stores |       | 548            |       | 186               |       | 109           |       | 843        |       |
| Yovana - test store           |       | 1              |       | —            |       | —        |       | 1          |       |
| Dairy brands subtotal         |       | 972            |       | 186               |       | 109           |       | 1,267      |       |
| Total                         |       | 1,978          |       | 328               |       | 173           |       | 2,479      |       |

 

The above tablecounts each concept location individually. For example, if a physical locationhad a Mrs. Fields store and a Pretzel Time store together, this would becounted as two concept locations in the table above. If actual physical storeswere counted rather than concept locations, total store counts would be reducedby 276 locations to 2,203.

 

MFOC and certain of its subsidiaries own 15 franchised and licensedretail concept locations as of December 31, 2005, representing 0.6 percentof the total retail concept locations. During the year ended December 31, 2005,we recognized $689,000 of franchise royalties and $730,000 of product salesrelating to retail concept locations owned by MFOC. MFOC expects that theseremaining retail concept locations will be sold to other franchisees or will beclosed during fiscal 2006.

 

*Store Location and Configuration.*

 

Possibilities for franchised locations include high pedestrian trafficareas, including malls, airport concourses, office building lobbies, andshopping and lifestyle centers. We have developed a number of retailconfigurations designed to adapt to a variety of retail environments. Inaddition to the stores that have been designed for prime mall locations, wehave developed other formats, such as kiosks, in-line retail and carts intendedto extend our brands’ presence within and beyond mall locations.

 

*Cookies*. Mrs. Fields and Great American Cookies Company stores areprimarily located in “A” and “B” grade malls in the United States. These storesare uniformly designed in accordance with the Mrs. Fields or GreatAmerican Cookies Company prototype, intended to create an upscale, open andinviting look. Individual store sizes typically range from 500 to 800 squarefeet, while kiosks tend to be somewhat smaller.

 

*Pretzels*. Pretzel Time and Pretzelmaker outlets have an average size of 500 to800 square feet in store locations and 200 square feet in kiosk locations. Thestores and kiosks are likely to be located in high traffic areas and aredesigned to enable customers to enjoy watching the pretzels being rolled,twisted and baked in minutes, which underscores freshness and contributes tothe product’s appeal.

 

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*Frozen Soft-Serve and Hand-Dipped Yogurt*. Generally, traditional TCBY domestic franchisedstores are located in shopping centers, freestanding locations and shoppingmalls. TCBY non-traditional locations include TCBY stores operated inconjunction with other concepts, such as Subway, Exxon and other conveniencestores and petroleum outlets. TCBY non-traditional locations also include “captive”outlets such as airports, toll road travel plazas, hospitals, office buildingsand sports arenas. A traditional TCBY store usually occupies 800 to 1,600square feet and accommodates both carryout and in-store business. Ourtraditional TCBY stores are designed as a “destination experience” andgenerally include some customer seating as well as a display case for yogurtcakes and pies. TCBY non-traditional domestic franchised stores are generallymuch smaller, offer a limited menu as compared to a traditional TCBY store andoften serve TCBY products through kiosks, soft-serve vending carts and countertop units located within other branded premises or captive locations.

 

*Yogurt Test Concepts.*Both**Yovanaand Beriyo by TCBY stores are in the early stages of testing and TCBYanticipates that their locations and configuration will evolve during the testperiod.

 

###### *FranchiseAgreements*

###### * *

Our franchises are typically granted for a specific site selected bythe franchisee and approved by us. Franchisees must offer the products andservices that we designate. We provide franchisees with suggested retailpricing for products and services, but franchisees are generally free to setthe retail prices at their stores.

 

*Cookies.*Each Mrs. Fields brand franchiseetypically pays an initial franchise fee of $30,000 per Mrs. Fields brandstore location and is responsible for funding the build-out of the new storeand purchasing initial dough inventory and supplies. Existing franchisees mayqualify for certain incentives when they purchase additional franchises. Thecost of opening a new store or purchasing an existing store can vary widelybased on individual operating and location costs. After a store is established,a franchisee pays weekly royalty fees of six percent of the franchised store’sgross sales for the prior week and a weekly advertising fee of from one tothree percent (currently one percent) of such gross sales.Mrs. Fields franchisees are required to purchase proprietary dough fromour authorized distributors or suppliers, which may pay us an amount based ontotal franchisee purchases. Franchises are typically granted for a period ofseven years. Franchisees in good standing have an option to renew for an additionalseven years at terms set forth in the then-current form of franchise agreement.

 

Each new Great American Cookies Company franchiseetypically pays an initial franchise fee of $30,000 per store and is responsiblefor funding the build-out of the new store and purchasing initial batterinventory and supplies. Existing franchisees may qualify for certain incentiveswhen they purchase additional franchises. The cost of opening a new store orpurchasing an existing store can vary widely based on individual operating andlocation costs. After a store is established, a Great American Cookies Companyfranchisee pays monthly royalty fees to us of six percent of the franchisedstore’s gross sales for the prior month and a monthly advertising fee of onepercent of such gross sales. Great American Cookies Company franchisees arerequired to purchase batter from our manufacturing facility, which recognizes aprofit on batter sales. The term of the franchise typically runs concurrentlywith the term of the Great American Cookies Company store lease and may besubject to an option to renew.

 

*Pretzels*.Each new Pretzel Time or Pretzelmaker franchisee typically pays an initiallicensing fee of $25,000 per new Pretzel Time or Pretzelmaker store and isresponsible for funding the development of the new store. Existing franchisees may qualify for certainincentives when they purchase additional franchises. The initialinvestment can vary based on individual operating and location costs. After astore is established, a Pretzel Time franchisee pays weekly royalty fees toPretzel Time of seven percent of the franchised store’s gross sales for theprior week and a marketing fee of from one to three percent (currently onepercent, but may be increased to one and one-half percent after the thirdquarter of 2006) of such gross sales. Franchisees are required to purchaseproprietary dough or dough mix from our authorized suppliers and distributors,which may pay us an amount based on total franchisee purchases. NewPretzelmaker franchisees pay weekly royalty fees to Pretzelmaker of sevenpercent of the franchised store’s gross sales for the prior week and amarketing fee of from one to three percent (currently one and one-half percent)of such gross sales. However, the majority of the Pretzelmaker system operatesunder a franchise agreement that provides for payment of a six percent royaltyfee, which will remain in effect until the current franchise agreement istransferred, renewed or otherwise modified to change the rate. Franchises aretypically granted for an initial term of seven years and franchisees in goodstanding have an option to renew for an additional seven years upon terms setforth in the then-current form of franchise agreement.

 

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*Frozen Soft-Serve and Hand-DippedYogurt.*Each new TCBYfranchisee typically pays an initial franchise fee of $25,000 per traditionalstore and from $2,500 to $15,000 per non-traditional location and isresponsible for funding the build-out of the new store and purchasing initialyogurt inventory and supplies. Existing franchisees may qualify for certainincentives when they purchase additional franchises. The cost for opening a newstore varies widely depending upon the size and location of the store. TCBYfranchisees purchase TCBY products only from authorized distributors. TCBYreceives a formulation fee on purchases of yogurt products by franchisees.

 

Franchisesfor traditional TCBY stores are usually granted for a period of ten years. Typically,franchisees in good standing have an option to renew for an additional tenyears at then-current terms (for non-traditional stores, the initial term isusually five years with a renewal term of five years). Currently, most TCBYfranchisees pay an ongoing royalty fee of four percent of its net revenues andan ongoing advertising fee of three percent of its net revenues, though somenewer franchise agreements give TCBY the right to charge a five percent royaltyand up to a five percent advertising fee. Franchisees currently pay the royaltyand advertising fees by way of a surcharge on TCBY products collected by ourauthorized distributor, which then remits the surcharge to us. We anticipatedlast year that we would begin transitioning TCBY to a different method ofroyalty and advertising fee collection for its traditional store franchisees.However, that transition has been postponed pending TCBY’s analysis of theBeriyo by TCBY and Yovana test concepts.

 

*YogurtTest Concepts.*The initial franchise fee and other fees forour yogurt test concepts are under review and remain subject to our testresults. Test concept locations will report their net revenues weekly to TCBY,will be required to use an approved point-of-sale system and will pay theirroyalty and advertising fund fees directly to TCBY based on reported sales.Once the test is completed, TCBY will evaluate the data and may include asimilar method in an overall plan to revitalize and reconcept qualifiedexisting TCBY Traditional store franchised locations.

 

*International*. Generally, we adopt a master franchiseagreement form of relationship for international distribution of our products.A master franchisee is granted the right to develop a minimum number oflocations in the defined territory within a certain time period. We determine,on a country-by-country basis, whether we will export proprietary products fromthe United States to that country or license the production of products locallyor regionally (possibly to the master franchisee). In addition, we may grant tothe master franchisee the distribution rights of certain products in thedefined country. The master franchisee generally receives sub-franchisingrights within the country that is the subject of the master franchise agreementif it maintains a specified level of its own locations. International locationsare generally smaller than domestic locations and produce less sales androyalties per location. Revenues from any single country (other than the UnitedStates) were not material. In the aggregate, revenues from internationallocations for fiscal 2005, 2004 and 2003 were $1.5 million, $1.0 million and$1.4 million, respectively, and represented 1.7 percent, 1.1 percent and1.7 percent of total revenues, respectively.

 

*Franchisee Training*

 

We believetraining the franchisees is a critical component in creating an effectiveretail environment, and accordingly, each of our brand concepts require newfranchisees to complete a training program conducted by our trainingspecialists at our training facility in Salt Lake City. The initial trainingprograms last from 7-9 days depending on the concept. We also make ongoingtraining programs available to franchisees to improve their quality andeffectiveness and may require certain franchisees to attend refresher trainingat our training facilities as part of operational compliance programs. Thetraining programs provide instruction to franchisees regarding equipment use,food preparation and safety, customer service, employee scheduling, methods of controllingoperating costs, management, the job function of hourly employees and otheraspects of retail store operations. Ongoing training courses in new products,standards and procedures are available at our training facilities or regionalmeetings throughout the year to all franchisee personnel. While initialtraining is provided free of charge to new franchisees, we have the right tocharge a reasonable fee for refresher or additional training. Franchisees paytheir own costs, such as living expenses and travel costs, to attend training.

 

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*Franchise Concept Licensing*

 

We have developeda concept licensing program for certain non-mall retail outlets that enables usto enter difficult-to-reach markets and facilitate brand exposure through “presence”and “prestige” marketing. Our licensees duplicate our franchisee store conceptand purchase our products from our various approved distributors. Our licenseesare generally food service corporations or contract management companies thatmanage and operate food service in “captive” locations. Our licensees includeHMS Host or its successor, which currently has an exclusive license to sellTCBY products in airports and travel plazas under a joint venture agreement withTCBY, and Marriott Management Services Corp. and Sodexho U.S.A., Inc. ortheir successors, which have non-exclusive licenses to sell certainMrs. Fields products in licensed stores that they develop and operate inspecified locations where they provide food services, such as commercialbuildings or complexes, under a month-to-month extension of trademark licenseagreements with a predecessor of MFOC. Because these arrangements entail theoperation of an actual concept location, these licensed locations are includedin our franchising business segment rather than in our licensing businesssegment, which encompasses our brand licensing activities.

 

***Gifting***

 

We market a variety offreshly baked cookies, brownies, candies and other gift items under our Mrs. Fieldsbrand name on the Internet and through gift catalogs. We began our giftsbusiness with two product offerings.  In fiscal 2005, we generatedrevenues of approximately $30.1 million and carried more than 250gifting items which represents 100 product groupings ranging fromcustomized cookie tins with company logos to birthday towers filled withcookies, brownies and jellybeans. Our gifts business segment is run throughMrs. Fields Gifts, Inc., our separate, wholly-owned subsidiary forgifts operations. The gifts segment has four direct sales channels:Internet, telephone, online affiliate programs, and strategicpartnerships/corporate accounts.

 

*Internet.*  We launched our Mrs. Fields website in 1997 and duringfiscal 2005 approximately 48 percent of all sales in the giftssegment where placed on-line. Our website allows each customer toestablish an account and track each order. Our principal URL is at *www.mrsfields.com.*

 

*Telephone.*  Customers also may place orders using a toll-free telephonenumber “1-800-COOKIES.” While sales from telephone orders continue to be asignificant portion of our gifts segment’s revenues, as a percentage of totalsales in the gifts segment, they have decreased as customers have migrated tothe Internet.

 

*Online Affiliate Programs.*  In July 2001, we launched anonline affiliate program with one of the largest pay-for-performance affiliatemarketing networks on the Internet. We now have over 3,000 affiliates whohave a text link or banner on their website to *www.mrsfields.com*.We compensate online affiliates on a commission basis for each sale thatoriginates from its website.

 

*Strategic Partnerships/Corporate Accounts.*  We have a number of partnerships withlarge online and catalog retailers that advertise Mrs. Fields brand productsto their customers for gifting purposes. Gifts are sold to partners atwholesale prices. The partners are responsible for shipping to the ultimatecustomer, advertising and customer service costs involved with theMrs. Fields gift program. We also have corporate gift relationships with anumber of large companies who use Mrs. Fields brand products to motivateemployees and reward customers.

 

*New Facility for Our Gifting Operations*

 

Effective as ofMarch 1, 2006, we entered into an Industrial Net Lease with Natomas MeadowsTwo, LLC, for the lease of approximately 159,000 square feet of space in SaltLake City, Utah. We willbe developing this newly leased space to accommodate our new state-of-the-artgifting operations. This new space will eventually replace approximately107,000 square feet of space we currently lease in areas throughout Salt LakeCity. We will then attempt to terminate the leases for the current space orsublet it. Currently, we anticipate we will open the gifting facility at thenew space in the third quarter of 2006.

 

*Consulting Fees*

 

InJanuary 2005, we engaged a consulting firm with significant experience in thedirect marketing industry to assist us in preparing a three to five yearstrategic plan to promote the growth of our gifts business segment. Duringfiscal 2005, we incurred expenses of approximately $800,000 for these services.The engagement ended in fiscal 2005 and we therefore do not expect such coststo be incurred in fiscal 2006.

 

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***Licensing***

 

Over the past few years,we have pursued a “branding” strategy, using the registered trademarks ofMrs. Fields and TCBY brands to reinforce the brand with consumers andimprove market share. Branded products target traditional mass market andretail locations, complementing our existing businesses. Examples of licensesgranted to third parties include those for Mrs. Fields chocolate chips, boxedchocolates, gourmet glazed popcorn and baking mixes. Additionally, TCBY hasentered into a license agreement for the distribution of high quality, yogurtcovered pretzel products utilizing certain TCBY trademarks and directlywholesales certain frozen yogurt novelty items to the supermarket, drugstoreand mass merchandise distribution markets.

 

During 2005, our largestlicensee of Mrs. Fields branded products was Shadewell Grove IP, LLC (“Shadewell”).Shadewell currently has a license to market and distribute high quality,pre-packaged chocolate chips utilizing the Mrs. Fields trademarks, servicemarks and trade names through designated retail distribution channels. During2005, royalties earned from this license totaled approximately $126,000. Shadewellalso has a license to market and distribute pre-packaged, ready-to-eat shelfstable brownies and ready-to-eat shelf stable dessert toppings and syrups, eachutilizing the Mrs. Fields trademarks, service marks and trade names throughdesignated retail distribution channels. Shadewell has until the end ofcalendar year 2006 to commence distribution of these additional products. Inaddition, Shadewell does not pay royalties for one year from the date theseproducts are first shipped. Therefore, we may not earn any royalties from thisadditional license until fiscal 2008.

 

Prior to August 13, 2005,Shadewell and Mrs. Fields Franchising, LLC (“MFF”) were parties to twoadditional license agreements that granted Shadewell a license to develop,manufacture, distribute and sell ready-to-eat shelf stable cookie products andhigh quality, prepackaged, ready-to-eat, pre-baked cookie products (the “LicenseAgreements”) using certain Mrs. Fields trademarks, service marks and tradenames in designated distribution channels. MFF terminated the LicenseAgreements effective August 13, 2005 for Shadewell’s failure to make certainpayments to MFF in a timely manner.

 

On October 5, 2005,Shadewell filed a Verified Complaint, Motion for Restraining Order and relateddocuments (the “Action”) in the Court of Chancery of the State of Delawareagainst MFF. In the Action, Shadewell alleges that they did not materiallybreach the shelf-stable and ready-to-eat, pre-baked cookie licenses, and thatthe License Agreements were improperly terminated 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 seeks unspecified damages related to itsclaims that MFF breached certain obligations under the License Agreements. Atrial of the Action was held on November 29, 2005, followed by post-trialbriefs and arguments in January 2006, but the court has not yet rendered itsdecision. The Company believes that Shadewell’s allegations in the Action arewithout merit and intends to vigorously defend its interests. The Companybelieves that neither the Action nor the termination of the License Agreementswill have a material effect on the Company’s consolidated financial position orresults of operations. Pending a decision, the parties continue to fulfilltheir obligations under the License Agreements. During 2005, royalties earnedfrom the terminated licenses totaled $2.2 million.

 

On December 19,2005, MFF entered into an Option Agreement and Amendment to License Agreement(the “Option”) with Maxfield Candy Company (“Maxfield”).  Maxfield is oneof our licensees, producing and selling Mrs. Fields branded premium candyproducts in certain distribution channels under a Trademark License Agreementdated January 3, 2000 (the “License”).  The Option grants MFF anoption to repurchase the License, excercisable during a period from the secondto the fifth anniversary of the date of the Option.  The Option purchaseprice is $1 million, one-half of which was paid by MFF when the Option wassigned by the parties, and one-half of which will be paid to Maxfield on thefirst anniversary of that date.  The repurchase price for the License isdue only if MFF exercises the Option and ranges from $4.5 million to $7.0million, depending on when the Option is exercised.  One-half of theOption purchase price will be credited to the License repurchase price in amanner described in the Option if MFF exercises the Option.  The partiesagreed to certain modifications of the License as part of the Option.

 

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**Geographic Information**

 

Revenuesfrom franchisees, customers and licensees within the United States wereapproximately $86.5 million, $86.1 million and $80.6 million for fiscal 2005,2004 and 2003, respectively, and represented 98.3 percent, 98.9 percent and98.3 percent of total revenues for fiscal 2005, 2004 and 2003, respectively. Revenuesfrom international franchisees, customers and licensees were approximately $1.5million, $1.0 million and $1.4 million for fiscal 2005, 2004 and 2003,respectively, and represented 1.7 percent, 1.1 percent and 1.7 percent of totalrevenues for fiscal 2005, 2004 and 2003, respectively. Revenues from any singleforeign country were not material. Providing geographical information regardinglong-lived assets is impracticable.

 

**Intellectual Property**

 

We are the holderof numerous trademarks that have been federally registered in the United Statesand in other countries located throughout the world. We are not currentlya party to any disputes with respect to our trademarks in any foreignjurisdictions, although we are challenging the use of certainregistered domain names that may infringe on our trademarks originating fromvarious sources, none of which, in the opinion of management, is material toour business, financial condition or results of operations.

 

As of December 31, 2005, we held 87 federaltrademark registrations in the United States and 517 trademarkregistrations in approximately 100 countries and other jurisdictionsoutside the United States. The trademarks consist of various brand and productnames and logos. We have also registered numerous domain names which correspondto our brand and product names. Trademarks are registered under United Stateslaws for initial periods of 6 to 10 years and in other countries forinitial periods of 7 to 20 years, and at any time, we may have trademarkswhose registration will soon expire and must be renewed. Under some of ourlicense agreements, our licensees receive the rights to use our recipes,proprietary products and/or our registered trademarks. We view our trademarksand the ability to license them to third parties, as some of our most valuableassets.

 

We have pending, or are in the process of filing, applications fortrademark registrations in a number of foreign countries. In some of thesecountries it may not be possible to register the name TCBY where the laws donot permit the registration of acronyms. Similarly, registering offices insome limited jurisdictions may refuse to register themark EMITLEZTERPâ or FRESHNESS WITH A TWISTâ by taking the position that itis merely descriptive of the product. In a few foreign countries, unrelatedthird parties have filed applications for registration of one or more of our trademarks.Upon discovery of such filings, we routinely contest such applications topreserve our ability to register our trademarks in those countries or toprotect our existing registrations.

 

**Employees**

 

As of December 31,2005, we had approximately 1,000 employees, including approximately 719temporary seasonal employees whose positions are largely on-call or part-time. Wetypically employ seasonal labor in connection with our gifts operations in thefourth quarter in response to increased demand around the holidays. None of ouremployees are covered by collective bargaining agreements and very fewemployees, other than some employees engaged in our gifts and manufacturingoperations, are paid minimum wage.

 

As of December 31,2005, of our 1,000 employees, 52 employees provided certain managementfunctions to MFOC in return for a fee in accordance with the provisions of amanagement agreement with MFOC. This number may decrease as MFOC continues toreduce its store operations. It is intended that the management agreementproviding for these services will continue in effect until the expiration ofall store leases for MFOC’s company-owned stores.

 

### **Seasonality**

### ** **

Our sales andcontribution from franchisees’ store operations are highly seasonal, but ourvarious brands experience counteracting seasonal effects. Our cookie andpretzel stores, primarily located in malls, tend to mirror customer trafficflow trends in malls, which increase significantly during the fourth quarter,primarily between Thanksgiving and the end of the calendar year. Holiday giftpurchases also are a significant factor in increased sales in the fourthquarter. However, TCBY stores and products experience their strongest salesperiods during the warmer months from late Spring through early Fall. Franchisingsegment revenues for each quarter as a percentage of total franchising segmentrevenues for the fiscal year ended December 31, 2005 were 23.1 percent for thefirst quarter, 26.1 percent for the second quarter, 24.9 percent for the thirdquarter and 25.9 percent for the fourth quarter.

 

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Oursales and contribution from our gifts segment are highly seasonal primarily dueto holiday gift purchases that increase sales in the fourth quarter. Sales andcontribution in the fourth quarter of 2005 were $15.9 million and $2.4 million,respectively, which represents 52.7 percent and 139.8 percent, respectively, oftotal sales and contribution of the gifts segment for the year ended December31, 2005.

 

### **Customers**

### ** **

Our franchising segment is not dependent upon any single franchisee.

 

Our gifts segment has one customer that accounted for$3.6 million, $4.2 million and $3.0 million, or 11.8 percent,16.2 percent and 17.2 percent of revenues of the gifts segment forthe years ended December 31, 2005, January 1, 2005 and January 3, 2004,respectively.

 

Our licensing segment has one licensee, Shadewell, thataccounted for $2.3 million, $3.1 million and $3.5 million, or57.6 percent, 62.7 percent and 63.1 percent of the revenues ofthe licensing segment for the years ended December 31, 2005, January 1, 2005and January 3, 2004, respectively. A majority of these revenues wereattributable to licenses that have been terminated.

 

### **Competition**

### ** **

In our franchisingsegment, we compete for customers with other cookie, pretzel, yogurt and icecream retailers, as well as other confectionery, sweet snack and specialty foodretailers, including cinnamon rolls, baked goods and candy shops. The specialtyretail food and snack industry is highly competitive with respect to price,service, location and food quality and there are many well-establishedcompetitors with greater resources than ours. We compete with these retailerson the basis of price, quality, location and service. We face competition froma wide variety of sources, including such companies as Cinnabon, AuntieAnne’s Soft Pretzels, Haagen-Dazs, Baskin-Robbins 31 Flavors and Cold StoneCreamery.

 

In our mall basedand captive locations, we tend to compete with a wide variety of foodretailers, including both quick service restaurants and, to a lesser extent,sit-down dining establishments and centrally located “food courts.” In ourstrip mall and stand-alone retail stores, our competition tends to be withother food retailers within a geographical radius of our franchisees’ stores,which vary based on store location.

 

Our giftingsegment competes for customers primarily with other food gifting and mail ordercompanies. The food gifting and mail order industry is highly competitive withrespect to quality, freshness, selection, uniqueness, customer service and, toa lesser extent, price. There are many well-established competitors withgreater resources than ours. Our competitors include such companies as Cheryland Company (acquired by 1-800-FLOWERS), Harry and David, Omaha Steaks, PopcornFactory and Mrs. Beasley’s.

 

### **Environmental Matters**

### ** **

Weare not aware of any federal, state, or local environmental laws or regulationsthat will materially affect our earnings or competitive position, or result inmaterial capital expenditures. However, we cannot predict the effect on ouroperations of possible future environmental legislation or regulations. During2005, we did not incur any material capital expenditures for environmental controlfacilities and no such material expenditures are anticipated.

 

### **Backlog orders**

### ** **

Wedo not have material backlog orders.

 

### **Additional information**

### ** **

Weare subject to the informational requirements of the Securities Exchange Act of1934. Accordingly, we file periodic reports and other information with theSecurities and Exchange Commission. We make our annual report on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K and amendments tothose reports available through our Internet site*, www.mrsfields.com* as soon as reasonably practicable afterelectronically filing such materials with the Securities and ExchangeCommission. They may also be obtained by writing to Mrs. Fields Famous Brandsat 2855 East Cottonwood Parkway, Salt Lake City, UT 84121. In addition, copiesof these reports may be obtained through the Securities and Exchange Commissionwebsite at www.sec.gov or by visiting the SEC’s Public Reference Room at 450Fifth Street, NW, Washington, DC 20549 or by calling the SEC at 800-SEC-0330.

 

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**Item 1A. Risk Factors**

 

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

 

***Risks Related to our Business***

 

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

 

We believe that theimplementation of our business strategy is key to enabling us to grow ourrevenues and profitability and, ultimately, our future success. Our businessstrategy is focused on increasing the sales of our franchisees, acceleratingthe development of new franchised stores, carts and kiosks and growing ourlicensing and gifts operations, each of which we believe is critical to oursuccess.

 

Our business strategy isdependent in part on our ability to develop, test and implement a reconceptingof our TCBY brand. If we are unsuccessful, our performance will be adverselyaffected.

 

Our initial focus willinclude the “repositioning” of our TCBY brand by targeting today’s healthconscious consumers and the “reconcepting” of our TCBY brand by redesigning itstrademarks, décor and updating its menus. We have begun the process ofreviewing how best to develop and implement the reconcepting, including thetesting of our Beriyo by TCBY and Yovana concepts. However, we do not know howsuccessful we will be in developing or implementing a reconcepting plan or theextent to which the capital investment required to implement such areconcepting plan will be available when needed. If we are unable tosuccessfully implement this or any other aspect of our business strategy, ourbusiness operations or financial condition could be adversely affected.

 

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

 

The sale of franchises isregulated by various state laws as well as by the Federal Trade Commission. TheFederal Trade Commission requires that franchisors make extensive disclosure ina uniform franchise prospectus to prospective franchisees but does not requireregistration. However, a number of states require annual registration of theuniform franchise prospectus with state authorities or other disclosure inconnection with franchise offers and sales. In addition, several states have “franchiserelationship laws” or “business opportunity laws” that limit the ability of thefranchisors to terminate agreements or to withhold consent to renewal ortransfer of these agreements.

 

There are certain eventsthat require us to make certain disclosure to state authorities. Further,renewal of uniform franchise offering circular registrations are required inseveral states within a certain period of time following our fiscal year end. Fromtime to time in the future, there will be periods of time after certain eventsor in connection with renewal during which we may be prohibited from sellingour franchises in certain states. Without limiting the foregoing, our financialcondition requires us to defer collection of certain fees in some states untilthe store opens, and in Virginia, prohibits us from offering new franchises forsale. If we are unable to sell our franchises for an extended period of time incertain states, our business operations or financial condition could beadversely affected.

 

*Adecline in mall traffic could cause our bakery brand franchise income todecrease materially.*

 

We believe that the amount and proximity ofpedestrian traffic near our bakery brand stores strongly influence sales of ourproducts, which we believe are frequently impulse purchases. In recent years,we believe visits to major shopping malls, where at December 31, 2005 themajority of our bakery franchisees’ stores are located, have experiencedperiods of decline. This trend has had a negative impact on our revenues. Wecannot be sure that this trend will not continue or that this trend can beoffset by increased sales per customer. A prolonged decline in mall trafficcould adversely affect our financial condition and results of operations.

 

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*We believe our brand identity iscritical to the success of our business. If we are unable to use any of ourtrademarks or to protect our trade secrets, our sales and our results ofoperations will be adversely affected.*

 

We believe that our trademarks have significantvalue and are important to the marketing of our retail outlets and products andthe operations of our franchisees’ stores, gifts segment and licensingstrategy. Most of our trademarks are federally registered before the UnitedStates Patent and Trademark Office and registered or pending in many foreigncountries. However, we cannot be sure that our trademarks cannot becircumvented, or that our trademarks do not or will not violate the proprietaryrights of others. If a challenge to one of our trademarks is successful, wecould be prevented from continuing to use that trademark. A negative rulingconcerning our use, or the validity or enforceability of one of our trademarkswould adversely affect our sales of the related products and our operatingresults. In addition, we cannot be sure that we will have the financialresources necessary to police the use of our trademarks by our franchisees andlicensees, or enforce or defend our trademarks, which could result in incorrector unauthorized use of our trademarks. Moreover, we may not be able to use orregister our existing trademarks abroad due to the application of foreign laws,which would force us to adopt new trademarks for use in those jurisdictionsthat initially will not be as recognizable as our existing marks. Despite ourefforts to protect our trade secrets, unauthorized parties may attempt toobtain and use information regarding our proprietary recipes and our means ofprotecting our trade secret rights may not be adequate. The occurrence of anyof these factors could diminish the value of our trademark portfolio or tradesecrets and negatively impact our sales, business operations and strategies.

 

*Our information systems are anintegral part of our gifts segment business. Systems disruptions and failurescould cause our customers to become dissatisfied with us and may impair ourbusiness.*

 

Our ability to maintain our website, network systemand telecommunications equipment in working order and to reasonably protectthem from interruption is critical to the success of our gifts businesssegment. Our website must accommodate regular traffic, deliver information andcomplete transactions. Our customers, advertisers and business alliances maybecome dissatisfied by any systems failure that interrupts our ability toprovide our products and services to them.

 

*We believe that our relationshipwith our franchisees and retail licensees is critical to the success of ourbusiness. If these franchise and retail license agreements were to beterminated or if we are unable to maintain these relationships, our sales and ourresults of operations would be adversely affected.*

 

Exclusive of MFOC, who as of December 31, 2005 ownedand operated 15 franchised locations under franchise agreements with us, 17 ofour franchisees or licensees own ten or more retail concept locations. Intotal, these franchisees own 356****retail conceptlocations and contributed approximately $4.5 million or 8.4****percent of our franchise revenues for the year endedDecember 31, 2005. For the same period, franchise revenues made up 60.9****percent of our total revenues. The termination of these keyfranchise or retail license agreements or lower than anticipated sales may havean adverse affect on our financial condition and results of operations. Wecannot be sure that our relations with franchisees and licensees will notchange or that our licensees will continue to perform as they have in the past,which could result in franchise or license agreements being terminated by us orby our franchisees or licensees.

 

Generally, we believe our relationship with our franchiseesand our licensees is a critical component in the success of our business. As anexample, as required by state and federal franchise disclosure rules, we mustprovide all prospective franchisees with the name and contact information foreach of the concept’s existing franchisees. Prospects often contact existingfranchisees as part of their due diligence before making a franchise purchasedecision. If our relationship with existing franchisees becomes strained, itmay slow or suspend franchise development with new franchisees, as well ascurtail additional development with existing franchisees.

 

*We may be harmed by actions takenby our franchisees or licensees that are beyond our control.*

 

Our franchisees and licensees generally areindependent contractors and are not our employees. We require our franchiseesand licensees to adhere to strict production, display, storage and marketingspecifications and procedures, and we provide training and support tofranchisees, but the quality of franchised store operations or licensedproducts may be diminished by any number of factors beyond our control.Consequently, franchisees may not operate stores, or licensees may not produceor market licensed products in a manner consistent with our standards and requirements,or may not hire and train qualified managers and other store personnel. If theydo not, our image, reputation and brand may suffer, and our franchise andlicense revenues as well as our ability to attract prospective franchisees maybe adversely affected.

 

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*We are vulnerable to fluctuationsin the cost, availability and quality of our ingredients.*

 

The cost, availability and quality of theingredients we use to prepare our products at the Great American Cookiesmanufacturing facility and in our gifts operations are subject to a range offactors, many of which are beyond our control. Fluctuations in economic andpolitical conditions, weather and demand could adversely affect the costs ofour ingredients. We have no control over fluctuations in the price ofcommodities and we may not be able to pass through any cost increases to ourcustomers. We are dependent on frequent deliveries of fresh ingredients,thereby subjecting us to the risk of shortages or interruptions in supply. Allof these factors could cause adverse market conditions which could adverselyaffect our financial results.

 

*We depend heavily on our suppliersand distributors.*

 

We depend on two primary suppliers, Countryside andAmericana, which supply products for our Mrs. Fields brand and TCBY brand,respectively. Americana is a related party. Our agreement with Americana isdescribed in “Certain Relationships and Related Transactions—TCBY SupplyAgreement.” We also depend on our primary distributors for distribution ofperishable and non-perishable items to our franchisees. As described in “Business—Ingredients,Supplies and Distribution,” our primary distributor to our TCBY system hasexercised its right to terminate our distribution agreement with them. Althoughwe believe the distributor will continue to serve the system until we are ableto identify other distribution solutions, there can be no assurances of thecontinued extension, or of our ability to replace their services with a distributorwho offers similar pricing. Our reliance on our suppliers subjects us to anumber of risks, including possible delays or interruptions in supplies,diminished control over quality and a potential lack of adequate raw materialcapacity. Any disruption in the supply of or degradation in the quality of theraw materials provided by our suppliers could have a material adverse effect onour business, operating results and financial condition. In addition, suchdisruptions in supply or degradations in quality could have a long-termdetrimental impact on our efforts to develop a strong brand identity and aloyal consumer base. If any supplier or distributor fails to perform asanticipated, or if there is a termination or any disruption in any of these relationshipsfor any reason, it could have a material adverse effect on our results ofoperations.

 

*If we lose key managementpersonnel, we may have difficulty in implementing the business strategy thatcurrent management has developed, and may fail to achieve expected profits as aresult.*

 

Our success depends on the continued services of oursenior management, particularly Stephen Russo, our President and ChiefExecutive Officer. In addition, our continued growth depends, in part, onattracting and retaining skilled managers and employees as well as management’sability to utilize effectively our key personnel. If Stephen Russo or any othersenior management personnel leaves us, we may have difficulty in implementingthe business strategy they have developed and may fail to achieve expectedprofits as a result. We cannot be sure that management’s efforts to integrate,utilize, attract and retain personnel will be successful.

 

*Our failure to respond todemographic trends, changes in consumer preferences and other factors and ourfailure to implement new marketing strategies could have a material adverseeffect on our results of operations.*

 

The specialty and snack food industry is affected bychanges in consumer preferences, tastes and eating habits, local, regional,national and international economic conditions, demographic trends and malltraffic patterns. A number of factors, including increased food, labor andbenefits costs, the availability of experienced management and hourly employeesand difficulties or delays in developing and introducing new products to suitconsumer preferences, may adversely affect the specialty retail industry ingeneral and our franchise outlets in particular. Our failure to anticipate,identify and respond to changing consumer preferences and economic conditionsand the failure of our customers to respond favorably to our marketing or newproducts could have a material adverse effect on our results of operations.

 

*There is intense competition inthe specialty food retailers industry.*

 

The specialty retail food and snack food industry ishighly competitive with respect to price, service, location and food qualityand within the industry we compete with cookie, pretzel, frozen yogurt and icecream retailers, as well as other confectionary, sweet snack and specialtyfoods retailers, many of which have greater resources than we have.Consequently, we cannot be certain that we can compete successfully with theseother food retailers.

 

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In addition to the risks we face from currentcompetitors, we cannot be certain that we can successfully compete with any newentrants into the specialty retail food and snack food industry who mayintroduce new and successful products or marketing. Our inability to competeadequately would have a material adverse effect on our results of operations.

 

*Adverse publicity, particularlyabout health concerns, could reduce our sales and adversely affect results ofoperations.*

 

Our ability to compete depends in part onmaintaining our reputation with consumers. We could be adversely affected bypublicity resulting from food quality, illness, injury or other healthconcerns, including food borne illness claims, or operating issues stemmingfrom one store, a limited number of stores or even a competitor’s store. Inaddition, we use ingredients in several of our products, such as nuts, to whichsome people may have allergies, and butter and cream, which are high in fat.There may be adverse publicity about the health risks relating to these orother ingredients. Adverse publicity about these factors could reduce sales ofour products and adversely affect results of operations.

 

*Our international operations areexposed to various risks that could have a material adverse effect on ourresults of operations and financial condition.*

 

We have franchisedretail stores in numerous foreign countries. While most of our operations arein the United States, through our franchised retail store locations, we alsohave operations in numerous other regions, including operations in Canada,South America, the Caribbean, the Middle East and Asia, representingapproximately 1.7 percent of our revenue in fiscal 2005. We expect toexpand into additional regions in the future. Our international operations aresubject to many additional risks, including:

 

•                  theburden of complying with multiple and possibly conflicting laws and anyunexpected changes in regulatory requirements;

 

•                  importand export restrictions and tariffs;

 

•                  additionalexpenses relating to the difficulties and costs of staffing and managinginternational operations;

 

•                  litigationin foreign jurisdictions;

 

•                  potentiallyadverse tax consequences;

 

•                  increasedcompetition as a result of subsidies to local companies;

 

•                  politicalinstability or war;

 

•                  culturaldifferences;

 

•                  theimpact of business cycles and economic instability; and

 

•                  increasedexpense as a result of inflation.

 

Any one of these factors could have a materialadverse affect our sales of products or services to our international customersand curtail our expansion strategy.

 

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*Government regulation of ourbusiness could adversely affect the results of our operations.*

 

Numerous governmental authorities have issued regulations that apply tous and our franchisees’ stores, including, without limitation, federal, stateand local laws and regulations governing health, sanitation, environmentalprotection, safety, hiring and employment practices, including laws, such asthe Fair Labor Standards Act, governing such matters as minimum wages, overtimeand other working conditions. The FDA administers regulations that apply to ourproducts. If we fail to obtain or retain the required food licenses or tocomply with applicable governmental regulations, or if there is any increase inemployee benefit costs or other costs associated with employees, our costscould increase as we attempt to comply with regulations. Our revenues coulddecrease if we or our suppliers are unable to manufacture or if our franchiseesor licensees are unable to sell products in locations in which we do not haverequired licenses. Our products, the manufacturers and their manufacturingfacilities are also subject to periodic inspection. Discovery of problems mayreduce our results of operations because of costs of compliance or inability tomanufacture or sell products for failure to comply with regulations.

 

In addition, the sale of franchises is regulated byvarious state laws as well as by the Federal Trade Commission. The FederalTrade Commission requires that franchisors make extensive disclosure in aUniform Franchise prospectus to prospective franchisees but does not requireregistration. However, a number of states require registration of the Uniform Franchiseprospectus with state authorities or other disclosure in connection withfranchise offers and sales. In addition, several states have “franchiserelationship laws” or “business opportunity laws” that limit the ability of thefranchisors to terminate agreements or to withhold consent to renewal ortransfer of these agreements. While we believe that we are in compliance withexisting regulations in the jurisdictions where we currently offer franchises,we cannot predict the effect of any future legislation or regulation on ourbusiness operations or financial condition. Additionally, bills haveoccasionally been introduced in Congress which would provide for federalregulation of aspects of franchisor-franchisee relationships. We cannot predictwhat effect those regulations could have on our business.

 

*Any interruption in fundingsources used by franchisees to purchase and develop our franchises couldadversely impact our ability to market franchises.*

 

Many of our franchisees must obtain loans to purchaseand develop our franchises. One significant source of this funding is the U.S.Small Business Administration (“SBA”). Any suspension of funding or delays inapproval of the SBA’s funding budget will affect our franchisees’ ability toobtain funding from this significant source and adversely impact our ability tomarket franchises.

 

*Litigation, including productliability litigation, could reduce our results of operations or increase ourlosses because of the cost of paying on successful claims, and we may not beable to continue to obtain adequate insurance.*

 

We are involved in routine litigation in theordinary course of business, including franchise disputes. Although we have notbeen significantly adversely affected in the past by litigation, there can beno assurance as to the effect of any future disputes.

 

Although we currently are not subject to any productliability litigation, there can be no assurance that product liabilitylitigation will not occur in the future involving our products. Our qualitycontrol program is designed to maintain high standards for the food andmaterials and food preparation procedures used by franchised stores. Productsare periodically inspected by our personnel at both the point of sale locationsand the manufacturing facilities to ensure that they conform to our standards.In addition to insurance held by our suppliers, we maintain insurance relatingto personal injury and product liability in amounts that we consider adequatefor the retail food industry. While we have been able to obtain insurance inthe past, there can be no assurance that we will be able to maintain theseinsurance policies in the future. Consequently, any successful claim againstus, in an amount materially exceeding our coverage, could adversely affect ouroperating results.

 

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*We experienced a number offranchise store closures since 2002. If this trend continues, our financialposition and results of operations could be adversely affected.*

 

Since the end of fiscal 2002, 106 retail conceptlocations were closed by MFOC and 1,335 retail concept locations were closed byother franchisees. These closures represent 43.9 percent of the totalnumber of stores open at the beginning of 2003. In comparison, 636 retailconcept locations have opened since 2002. Since the end of fiscal 2002, thenumber of Mrs. Fields brand locations has decreased by 7.5 percent,the number of Great American Cookies Company brand locations has decreased by5.1 percent, the number of TCBY brand traditional locations has decreasedby 24.3 percent, the number of TCBY brand non-traditional locations hasdecreased by 37.8 percent, the number of Pretzel Time brand locations hasdecreased by 12.8 percent and the number of Pretzelmaker brand locationshas decreased by 10.8 percent. There can be no assurances that storeclosures will not occur in the future or that we will be able to successfullyopen additional stores in the future. If this trend continues, our financialcondition and results of operations could be adversely affected.

 

*Quarterly fluctuations andseasonality.*

 

Our operating results are subject to quarterly andseasonal fluctuations. Our sales and income from franchisees’ store operationsare seasonal given the significant impact of the high number of mall basedlocations. At these locations, sales tend to mirror customer traffic flowtrends in malls, which increase significantly during the fourth quarter,primarily between Thanksgiving and the end of the calendar year. Holiday giftpurchases also are a significant factor in increased sales in the fourthquarter. However, with the addition of TCBY franchised stores, we have hedgedagainst this seasonality impact by introducing a concept that tends to have itsstrongest sales periods during the warmer months from late Spring through earlyFall. In addition, by marketing our cookie brands around holidays that occur inlate Winter and early Spring, such as Valentine’s Day and Easter as well asholidays in the late Fall, such as Halloween, we hope to continue to decreasethe impact of seasonality on our cash flow. However, there can be no assurancethat we will be successful in decreasing the impact of seasonality on our cashflow. If we are unable to manage seasonal fluctuations of cash flow, ourfinancial condition and results of operations may be adversely affected.

 

***Risks Related to our SubstantialIndebtedness.***

 

*Our substantiallevel of indebtedness could adversely affect our financial condition andprevent us from fulfilling our obligations under our Senior Secured Notes.*

 

We have substantial indebtedness represented by ourSenior Secured Notes. In addition, subject to restrictions in the indenturegoverning the Senior Secured Notes (the “Indenture”), we may incur additionalindebtedness.

 

Our high level of indebtedness could have importantconsequences, including the following:

 

•                  ourability to obtain additional financing for working capital, capitalexpenditures, acquisitions or general corporate purposes may be impaired;

 

•                  wemust use a substantial portion of our cash flow from operations to pay interestand required principal on the Senior Secured Notes and, to the extent incurred,our other indebtedness, which will reduce the funds available to us foroperations and other purposes;

 

•                  ourhigh level of indebtedness could place us at a competitive disadvantagecompared to our competitors that may have proportionately less debt;

 

•                  ourflexibility in planning for, or reacting to, changes in our business and theindustry in which we operate may be limited; and

 

•                  ourhigh level of indebtedness makes us more vulnerable to economic downturns andadverse developments in our business.

 

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We expect toobtain the money to pay our expenses and to pay the amounts due under theSenior Secured Notes and our other debt primarily from our operations. Ourability to meet our expenses and make these payments thus depends on our futureperformance, which will be affected by financial, business, economic and otherfactors, many of which we cannot control. Our business may not generatesufficient cash flow from operations in the future and our currentlyanticipated growth in revenue and cash flow may not be realized, either or bothof which could result in our being unable to repay indebtedness, including theSenior Secured Notes, or to fund other liquidity needs. If we do not haveenough money, we may be required to refinance all or part of our then existingdebt (including the Senior Secured Notes), sell assets or borrow more money.However, there can be no assurance that we will be able to accomplish any ofthese alternatives on terms acceptable to us, or at all. In addition, the termsof existing or future debt agreements, including the Indenture, may restrict usfrom adopting any of these alternatives. The failure to generate sufficientcash flow or to achieve any of these alternatives could materially adverselyaffect our business and our ability to pay the amounts due under the SeniorSecured Notes.

 

*The Indenture imposes significantoperating and financial restrictions, which may prevent us from pursuingcertain business opportunities and taking certain actions.*

 

The Indenture imposes significant operating andfinancial restrictions on us. These restrictions limit or prohibit, among otherthings, our ability to:

 

•                  incuradditional indebtedness;

 

•                  repaysubordinated indebtedness prior to stated maturities;

 

•                  paydividends on or redeem or repurchase our stock;

 

•                  issuecapital stock;

 

•                  makeinvestments;

 

•                  createliens;

 

•                  sellcertain assets or merge with or into other companies;

 

•                  enterinto certain transactions with stockholders and affiliates;

 

•                  sellstock in our subsidiaries;

 

•                  restrictdividends, distributions or other payments from our subsidiaries; and

 

•                  otherwiseconduct necessary corporate activities.

 

These restrictions could adversely affect ourability to finance our future operations or capital needs and pursue availablebusiness opportunities. A breach of any of these restrictions could result in adefault in respect of the related indebtedness. If a default occurs, therelevant lenders could elect to declare the indebtedness, together with accruedinterest and fees, to be immediately due and payable and proceed against any collateralsecuring that indebtedness. Acceleration of our other indebtedness could resultin a default under the terms of the Indenture and our assets may not besufficient to satisfy our obligations under our indebtedness, including theSenior Secured Notes.

 

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*Our parent companies may takeactions that conflict with bondholder, franchisee and other interests.*

 

As a result of its direct control of our ultimateparent company and indirect control of MFH and MFOC, Capricorn II and CapricornIII together control the power to elect our managers, to appoint members ofmanagement and to approve all actions requiring the approval of the holders ofour common interests, including adopting amendments to our certificate offormation and limited liability company agreement as well as approving mergers,acquisitions or sales of all or substantially all of our assets. The actionsmay conflict with the interests of bondholders, franchisees and others. Similarly,the interests of our parent companies could conflict with other stakeholderinterests. For example, if we encounter financial difficulties or are unable topay our debts as they mature, the interests of MFOC as a holder of equity mightconflict with holders of the Senior Secured Notes. Our parent companies alsomay have an interest in pursuing acquisitions, divestitures, financings orother transactions that, in their judgment, could enhance their equityinvestment, even though such transactions might materially adversely affect ourfinancial condition and results of operations.

 

# **Item 2. Properties**

# ** **

We currently lease approximately 43,000 square feet of office space inSalt Lake City, Utah, which is used as our company headquarters and franchiseesupport center. MFOC uses undivided portions of the space as corporateheadquarters pursuant to a sublease between MFOC and us. We also currentlylease approximately 120,000 square feet of space in multiple other locations inSalt Lake City, Utah for product development, training and gifts operations. Wecurrently own the Great American Cookies manufacturing facility, located in abuilding of approximately 32,000 square feet in Atlanta, Georgia. In addition,we lease approximately 5,200 square feet of warehouse space in Atlanta, Georgia,which we use for raw material and supply dry storage. We own substantially allof the equipment used in these facilities. Effective as of March 1, 2006, weentered into an Industrial Net Lease with Natomas Meadows Two, LLC, for thelease of approximately 159,000 square feet of space in Salt Lake City, Utah. Wewill be developing this newly leased space to accommodate our newstate-of-the-art gifting operations. This new space will eventually replaceapproximately 107,000 square feet of space we currently lease in areasthroughout Salt Lake City. We will then attempt to terminate the leases for thecurrent space or sublet it. Currently, we anticipate we will open the giftingfacility at the new space in the third quarter of 2006.

 

# **Item 3. Legal Proceedings**

# ** **

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

 

In the ordinary course of business, we are involved in routinelitigation, including franchise disputes and trademark disputes. We are not aparty to any legal proceedings (including the matter described below) that, inthe opinion of management, after consultation with legal counsel, is materialto our business, financial condition or results of operations.

 

Effective as of August13, 2005, our wholly-owned subsidiary, MFF terminated two license agreementswith Shadewell for Shadewell’s failure to make certain payments to MFF in atimely manner. These terminated license agreements granted Shadewell a licenseto develop, manufacture, distribute and sell ready-to-eat, shelf stable cookieproducts and high quality, prepackaged, ready-to-eat, pre-baked cookie productsusing certain Mrs. Fields trademarks, service marks and trade names indistribution channels designated in the license agreements.

 

On October 5, 2005,Shadewell filed the Action in the Court of Chancery of the State of Delawareagainst MFF. In the Action, Shadewell alleges that they did not materiallybreach the shelf-stable and ready-to-eat, pre-baked cookie licenses, and thatthe License Agreements were improperly terminated 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 seeks unspecified damages related to itsclaims that MFF breached certain obligations under the License Agreements. Atrial of the Action was held on November 29, 2005, followed by post-trialbriefs and arguments in January 2006, but the court has not yet rendered itsdecision. The Company believes that Shadewell’s allegations in the Action arewithout merit and intends to vigorously defend its interests. The Companybelieves that neither the Action nor the termination of the License Agreementswill have a material effect on the Company’s consolidated financial position orresults of operations. During 2005, royalties earned from the terminatedlicenses totaled $2.2 million.

 

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# **Item 4. Submission of Matters to a Vote ofSecurity Holders**

 

None.

 

**PART II**

 

# **Item 5. Market for Registrant’s Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securities**

# ** **

**Market Information and Number of Stockholders**

 

We are a wholly-ownedsubsidiary of Mrs. Fields’ Original Cookies, Inc. (“MFOC”). There is noestablished trading market for MFOC’s or our common equity.

 

**Dividends**

 

For each of the three fiscal years in the period ended December 31,2005, we did not declare or pay cash dividends; however, we did pay MFC $1.5million and $7.1 million during fiscal 2004 and 2003, respectively, for incometaxes under a prior tax sharing agreement. Our ability to declare or pay cashdividends is restricted by the indenture pertaining to our Senior Secured Notes.For a description of these restrictions, see Note 3 to our consolidatedfinancial statements contained elsewhere in this report.

 

# **Item 6. Selected Financial Data**

# ** **

The following table presents our historical financial data as of thedates and for the periods indicated. We operate using a 52/53-week year endingon the Saturday closest to December 31. Fiscal 2003 includes 53 weeks; whereas,all other fiscal years include 52 weeks. The selected historical financial dataat December 31, 2005, January 1, 2005, January 3, 2004, December 28, 2002 andDecember 29, 2001 and for fiscal 2005, 2004, 2003, 2002 and 2001 have beenderived from our audited consolidated financial statements. The selectedhistorical financial data should be read in conjunction with “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andthe historical consolidated financial statements and the related notes,contained elsewhere in this report on Form 10-K.

 
| ** **                                                                            | ** ** | **Fiscal Year Ended** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                            | ** ** | **December 31,**           | ** ** | **January 1,** | ** ** | **January 3,** | ** ** | **December 28,** | ** ** | **December 29,** | ** ** |
| ** **                                                                            | ** ** | **2005**                        | ** ** | **2005** | ** ** | **2004** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                                            | ** ** | **(Dollars in thousands)**      | ** ** |
| **Income Statement Data:**                                                            |       |                            |       |   |   |   |   |   |   |   |   |
| Net revenues                                                                          |       | $                               | 87,952     |   | $ | 87,060 |   | $ | 81,988 |   | $ | 95,392 |   | $ | 99,802 |   |
| Income (loss) from continuing operations  before provision (benefit) for income taxes |       | (40,716                         | )          | 4,816 |   | 6,916 |   | 10,881 |   | (8,327 | ) |
| **Balance Sheet Data (at end of period):**                                            |       |                            |       |   |   |   |   |   |   |   |   |
| Total assets                                                                          |       | $                               | 139,897    |   | $ | 181,781 |   | $ | 162,602 |   | $ | 170,656 |   | $ | 216,644 |   |
| Total debt (including capital lease obligations)                                      |       | 196,336                         |       | 196,210 |   | 185,762 |   | 187,776 |   | 204,426 |   |

 

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# **Item 7. Management’s Discussion and Analysisof Financial Condition and Results of Operations**

# ** **

**Executive Summary**

 

Mrs. Fields Famous Brands, LLC (“we”, “us”, “the Company” or similarterms) is one of the largest franchisors in the premium snack-food industry,featuring Mrs. Fields®, Great American Cookies®, TCBY®, Pretzel Time® andPretzelmaker® as our core brands. Through our franchisees’ retail stores, weare the largest retailer of freshly baked on-premises specialty cookies andbrownies in the United States of America (the “United States”); the largestretailer of soft-serve frozen yogurt in the United States; and the secondlargest retailer of baked on-premises pretzels in the United States. Inaddition, we operate a growing gifts business and have entered into licensingarrangements that attempt to leverage awareness of our core brands among ourretail customer base. We operate through a network of 2,479 retail conceptlocations, which are located throughout the United States and in approximately25 foreign countries.

 

Our business is dividedinto three primary business segments for financial reporting purposes:franchising, gifts and licensing, which represented 60.9 percent, 34.3 percentand 4.6 percent of total revenues, respectively, for the year ended December31, 2005. 

 

We believe our businessstrategy aligns the interests of the Company with the interests of our retailfranchisees and focuses our joint efforts on strengthening and broadening theappeal of our brands through satisfying the wants and needs of consumers. Thatstrategy is based upon three continuing objectives:

 

•                  build profitableyear-over-year franchise sales;

•                  accelerategrowth of new franchised store development; and

•                  grow licensingand gifts operations.

 

We use the following key performance indicators to measure our successand progress:

 

•                  year-over-yearsame store franchise sales;

•                  net change innumber of retail concept locations; and

•                  year-over-yeargifts and licensing revenues.

 

Our performance against these key performance indicators is presentedand discussed throughout the management’s discussion and analysis.

 

As of December 31, 2005, our store portfolio consisted of 1,978domestic franchised locations, 328 international franchised locations and 173licensed locations. Our franchisees’ and licensees’ concept locations by brandare distributed as follows:

 
| ** **                    | ** ** | **Domestic**   | ** ** | **International** | ** ** | **Licensed**  | ** ** | ** ** | ** ** |
|-------------------------------|------------|----------------|------------|-------------------|------------|---------------|------------|------------|------------|
| ** **                    | ** ** | **Franchised** | ** ** | **Franchised**    | ** ** | **Locations** | ** ** | **Total**  | ** ** |
| Mrs. Fields                   |       | 373            |       | 87                |       | 49            |       | 509        |       |
| Great American                |       | 279            |       | 1                 |       | 1             |       | 281        |       |
| Original Cookie               |       | —         |       | —            |       | 3             |       | 3          |       |
| Cookie subtotal               |       | 652            |       | 88                |       | 53            |       | 793        |       |
| Pretzel Time                  |       | 205            |       | 7                 |       | 6             |       | 218        |       |
| Pretzelmaker                  |       | 149            |       | 47                |       | 2             |       | 198        |       |
| Hot Sam                       |       | —         |       | —            |       | 3             |       | 3          |       |
| Pretzel subtotal              |       | 354            |       | 54                |       | 11            |       | 419        |       |
| Bakery brands subtotal        |       | 1,006          |       | 142               |       | 64            |       | 1,212      |       |
| TCBY - traditional stores     |       | 423            |       | —            |       | —        |       | 423        |       |
| TCBY - non-traditional stores |       | 548            |       | 186               |       | 109           |       | 843        |       |
| Yovana - test store           |       | 1              |       | —            |       | —        |       | 1          |       |
| Dairy brands subtotal         |       | 972            |       | 186               |       | 109           |       | 1,267      |       |
| Total                         |       | 1,978          |       | 328               |       | 173           |       | 2,479      |       |

 

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The previous table counts each concept location individually. Forexample, if a physical location had a Mrs. Fields store and a Pretzel Timestore together, this would be counted as two concept locations in the tableabove. If actual physical stores were counted rather than concept locations,total store counts would be reduced by 276 locations to 2,203.

 

MFOC and certain of its subsidiaries own 15 franchised and licensedretail concept locations as of December 31, 2005, representing 0.6 percent ofthe total retail concept locations. During the year ended December 31, 2005, werecognized $689,000 of franchise royalties and $730,000 of product salesrelating to the retail concept locations owned by MFOC. MFOC expects that theseretail concept locations will be sold to other franchisees or will be closedduring fiscal 2006.

 

During the three-year period from December 28, 2002 to December 31,2005, our store portfolio declined from 3,284 concept locations to 2,479concept locations, as follows:

 
| ** **                 | ** ** | **Total Company** | ** ** |
|----------------------------|------------|------------------------|------------|
| ** **                 | ** ** | **Domestic**           | ** ** | **International** | ** ** | **Licensed** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | **Franchised**         | ** ** | **Franchised** | ** ** | **Locations** | ** ** | **Total** | ** ** |
| Balance December 28, 2002  |       | 2,592                  |       | 366 |   | 326 |   | 3,284 |   |
| New development openings   |       | 203                    |       | 48 |   | 7 |   | 258 |   |
| Permanent closings         |       | (410                   | )          | (38 | ) | (71 | ) | (519 | ) |
| Other openings, net        |       | (5                     | )          | 2 |   | 7 |   | 4 |   |
| Balance, January 3, 2004   |       | 2,380                  |       | 378 |   | 269 |   | 3,027 |   |
| New development openings   |       | 147                    |       | 57 |   | 2 |   | 206 |   |
| Permanent closings         |       | (397                   | )          | (97 | ) | (62 | ) | (556 | ) |
| Other openings, net        |       | 15                     |       | — |   | (4 | ) | 11 |   |
| Balance, January 1, 2005   |       | 2,145                  |       | 338 |   | 205 |   | 2,688 |   |
| New development openings   |       | 78                     |       | 59 |   | 2 |   | 139 |   |
| Permanent closings         |       | (259                   | )          | (74 | ) | (33 | ) | (366 | ) |
| Other openings, net        |       | 14                     |       | 5 |   | (1 | ) | 18 |   |
| Balance, December 31, 2005 |       | 1,978                  |       | 328 |   | 173 |   | 2,479 |   |

 

The following tables provide additional detail of new developmentopenings and permanent closings of our concept locations during the three-yearperiod from December 28, 2002 to December 31, 2005:

 
| ** **                 | ** ** | **Domestic Franchised** | ** ** |
|----------------------------|------------|------------------------------|------------|
| ** **                 | ** ** | ** **                   | ** ** | ** ** | ** ** | **Non-** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | ** **                   | ** ** | **Traditional** | ** ** | **Traditional** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | **Bakery**                   | ** ** | **Dairy** | ** ** | **Dairy** | ** ** | **Total** | ** ** |
| Balance December 28, 2002  |       | 1,120                        |       | 560 |   | 912 |   | 2,592 |   |
| New development openings   |       | 69                           |       | 27 |   | 107 |   | 203 |   |
| Permanent closings         |       | (114                         | )          | (72 | ) | (224 | ) | (410 | ) |
| Other openings, net        |       | (6                           | )          | (13 | ) | 14 |   | (5 | ) |
| Balance, January 3, 2004   |       | 1,069                        |       | 502 |   | 809 |   | 2,380 |   |
| New development openings   |       | 63                           |       | 21 |   | 63 |   | 147 |   |
| Permanent closings         |       | (93                          | )          | (61 | ) | (243 | ) | (397 | ) |
| Other openings, net        |       | 6                            |       | 7 |   | 2 |   | 15 |   |
| Balance, January 1, 2005   |       | 1,045                        |       | 469 |   | 631 |   | 2,145 |   |
| New development openings   |       | 49                           |       | 15 |   | 14 |   | 78 |   |
| Permanent closings         |       | (93                          | )          | (61 | ) | (105 | ) | (259 | ) |
| Other openings, net        |       | 5                            |       | 1 |   | 8 |   | 14 |   |
| Balance, December 31, 2005 |       | 1,006                        |       | 424 |   | 548 |   | 1,978 |   |

 

27

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| ** **                 | ** ** | **International Franchised** | ** ** |
|----------------------------|------------|-----------------------------------|------------|
| ** **                 | ** ** | ** **                        | ** ** | **Non-** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | ** **                        | ** ** | **Traditional** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | **Bakery**                        | ** ** | **Dairy** | ** ** | **Total** | ** ** |
| Balance December 28, 2002  |       | 116                               |       | 250 |   | 366 |   |
| New development openings   |       | 27                                |       | 21 |   | 48 |   |
| Permanent closings         |       | (16                               | )          | (22 | ) | (38 | ) |
| Other openings, net        |       | (1                                | )          | 3 |   | 2 |   |
| Balance, January 3, 2004   |       | 126                               |       | 252 |   | 378 |   |
| New development openings   |       | 23                                |       | 34 |   | 57 |   |
| Permanent closings         |       | (19                               | )          | (78 | ) | (97 | ) |
| Other openings, net        |       | —                            |       | — |   | — |   |
| Balance, January 1, 2005   |       | 130                               |       | 208 |   | 338 |   |
| New development openings   |       | 30                                |       | 29 |   | 59 |   |
| Permanent closings         |       | (19                               | )          | (55 | ) | (74 | ) |
| Other openings, net        |       | 1                                 |       | 4 |   | 5 |   |
| Balance, December 31, 2005 |       | 142                               |       | 186 |   | 328 |   |

 
| ** **                 | ** ** | **Licensed Locations** | ** ** |
|----------------------------|------------|-----------------------------|------------|
| ** **                 | ** ** | ** **                  | ** ** | **Non-** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | ** **                  | ** ** | **Traditional** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | **Bakery**                  | ** ** | **Dairy** | ** ** | **Total** | ** ** |
| Balance December 28, 2002  |       | 132                         |       | 194 |   | 326 |   |
| New development openings   |       | 1                           |       | 6 |   | 7 |   |
| Permanent closings         |       | (30                         | )          | (41 | ) | (71 | ) |
| Other openings, net        |       | —                      |       | 7 |   | 7 |   |
| Balance, January 3, 2004   |       | 103                         |       | 166 |   | 269 |   |
| New development openings   |       | 2                           |       | — |   | 2 |   |
| Permanent closings         |       | (21                         | )          | (41 | ) | (62 | ) |
| Other openings, net        |       | (4                          | )          | — |   | (4 | ) |
| Balance, January 1, 2005   |       | 80                          |       | 125 |   | 205 |   |
| New development openings   |       | 1                           |       | 1 |   | 2 |   |
| Permanent closings         |       | (16                         | )          | (17 | ) | (33 | ) |
| Other openings, net        |       | (1                          | )          | — |   | (1 | ) |
| Balance, December 31, 2005 |       | 64                          |       | 109 |   | 173 |   |

 

Numerousfactors have contributed to this declining store count over the past threefiscal years. Some of the more significant factors may include periods ofdeclining mall traffic, several significant shifts in consumer tastes andpreferences, and challenges faced by some franchises in lower volume,non-traditional venues, primarily in the TCBY franchise system. We believe ourcurrent business strategies, described in more detail in Item 1 of this annualreport on Form 10-K, will stabilize our store base and address many of thesefactors by (i) increasing the rate of new openings of franchised locations;(ii) developing new products and menu items designed to align our concepts withconsumer preferences; (iii) creating incentives for qualified, existingfranchisees to open new stores; and (iv) implementing initiatives to improveoperations and customer service at existing locations. However, our ability tostabilize our store base is uncertain and if stores continue to close, it couldhave a material adverse effect on our financial condition and results ofoperations.

 

28

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Throughout thisdiscussion, we refer to the total weeks that our franchised locations operatein any given period as “franchised unit weeks” and use that term comparativelywhen describing factors that may affect performance. Fewer franchised locationstranslate naturally to fewer total franchised unit weeks that our franchiseesoperate and contribute revenues to us. Other occurrences or considerations,such as the fact that our fiscal year sometimes includes 53 weeks instead ofthe standard 52, may increase the relative number of total weeks from period toperiod. Because the TCBY system is comprised of both larger, traditionallocations and a significant number of smaller, non-traditional locations, wemeasure franchise unit weeks a bit differently for the TCBY system, based onour calculation that it takes approximately three average non-traditionallocations to equal the revenues of one average traditional location. Wetherefore refer to “traditional equivalent unit weeks” to describe the totalnumber of weeks that TCBY franchised locations operate in any given period,adjusted to account for the different impact that non-traditional TCBY storeopenings and closings may have on the system when compared to similar eventsaffecting traditional TCBY stores.

 

**RecentDevelopments**

 

**Impairmentof Goodwill and Intangible Assets**

 

On an annual basis (in the fourth quarter),we perform an assessment for impairment of our carrying value of goodwillassociated with each of our reporting units defined as Bakery Franchising,Dairy Franchising, Gifts and Licensing. We engaged an independent appraisalfirm to assist us in determining the fair value of each of our reporting unitsand compared it to the carrying amount of the reporting unit. As of December31, 2005, the carrying amount of the Dairy Franchising reporting unit exceededthe fair value of the reporting unit indicating goodwill impairment.

 

Additionally, as of December 31, 2005, wedetermined the carrying value of our definite-lived intangible assetsassociated with our Dairy Franchising reporting unit to be greater than thefair value of those assets. Therefore, we recorded a charge for impairment tothe carrying value of the definite-lived intangibles, specifically trade namesand franchise relationships of $1.7 million and $7.2 million, respectively, forthe year ended December 31, 2005. We determined the fair value of these assetsthrough the assistance of an independent valuation firm.

 

We compared the implied fair value of theDairy Franchising reporting unit’s goodwill with the carrying amount of thegoodwill and determined an impairment of Dairy Franchising goodwill of $34.8million for the fiscal year ended December 31, 2005. The implied fair value ofthe goodwill is determined by allocating the fair value of the reporting unitto all of the assets (recognized and unrecognized) and liabilities of thereporting unit in a manner similar to a purchase price allocation, inaccordance with SFAS No. 141, “Business Combinations.”  As a result, we recorded a charge of $34.8million for the fiscal year ended December 31, 2005 to reduce the carryingvalue of the goodwill associated with our Dairy Franchising reporting unit.

 

These impairments were principally a resultof an eroding TCBY franchise system due to fewer locations, consistent negativeyear-over-year same store sales by our TCBY franchisees and our inability tolocate and open a significant number of new or additional franchise locations. Thesefactors have resulted in continued decreases in franchise royalties and yogurtformulation revenues from our TCBY franchise system.

 

We anticipate that our dairy unit weeks willcontinue to decline in the near future, at least until our reconcepting testsare completed and we have developed a plan to implement the reconceptingin qualified TCBY traditional stores. We anticipate our reconcepting tests willbe completed in the fourth quarter of fiscal 2006. While we are encouraged bythe consumer data we have collected, there can be no assurances that ourreconcepting plans or implementation will be successful, or that a reconceptingwill slow or reverse the declining TCBY store count or contribution, which mayadversely affect our results of operations.

 

29

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***Dairy Test Concepts***

 

*Two New Yogurt Test Concepts -Yovana**ä**Yogurt Café (“Yovana”),*and*Beriyo**ä**by TCBY (“Beriyo by TCBY”).*To take advantage of yogurt’s increasing popularity with consumersand to further explore how we can use yogurt’s continuing growth as a marketcategory to benefit our franchisees and enhance our brands, TCBY is testing twoadditional yogurt-focused concepts – Beriyo by TCBY and Yovana. These new testconcepts focus on different menu offerings, attempt to meet a specific set ofconsumer needs and appeal to consumers at different times of the day. Forexample, Beriyo by TCBY is being tested as a smoothie-focused concept to takeadvantage of consumers’ increasing demand for this product, while also offeringTCBY frozen yogurt treats. The Yovana test concept introduces a menu thatattempts to appeal to multiple day-parts and is built around premium yogurtprepared fresh daily in the store, including fresh yogurt, drinkable yogurtblends, smoothies and frozen yogurt treats featuring seasonally fresh fruit andorganic wholegrain granolas. Both concepts are in the very early stages oftesting. We plan on limiting the Yovana test during 2006 to a small number ofnewly developed stores in a few markets with high fresh yogurt consumption,while Beriyo by TCBY will be tested initially in new locations and convertedTCBY traditional store locations in several different markets during 2006.

 

## ***New GiftingFacility Lease***

## *** ***

Effective as of March 1, 2006, we entered into an Industrial Net Leasewith Natomas Meadows Two, LLC, for the lease of approximately 159,000 squarefeet of space in Salt Lake City, Utah. We will be developing this newly leasedspace to accommodate our new state-of-the-art gifting operations. This newspace will eventually replace approximately 107,000 square feet of space wecurrently lease in areas throughout Salt Lake City. We will then attempt toterminate the leases for the current space or sublet it. Currently, weanticipate we will open the gifting facility at the new space in the thirdquarter of 2006.

 

## ***Termination ofLicense Agreement***

## *** ***

Prior to August 13, 2005, Shadewell Grove IP, LLC (“Shadewell”) andMrs. Fields Franchising, LLC (“MFF”) were parties to two license agreementsthat granted Shadewell a license to develop, manufacture, distribute and sellready-to-eat shelf stable cookie products and high quality, prepackaged,ready-to-eat pre-baked cookie products using the Mrs. Fields trademarks,service marks and trade names in distribution channels designated in thelicense agreements. MFF terminated the License Agreements effective August 31,2005 for Shadewell’s failure to make certain payments to MFF in a timelymanner.

 

On October 5, 2005, Shadewell filed a Verified Complaint, Motion forRestraining Order and related documents (the “Action”) in the Court of Chanceryof the State of Delaware against MFF. In the Action, Shadewell alleges thatthey did not materially breach the shelf-stable and ready-to-eat pre-bakedcookie licenses, and that the License Agreements were improperly terminated byMFF. Among other relief, Shadewell seeks a court order that the LicenseAgreements remain in full force and effect and that MFF must specificallyperform its obligations under the License Agreements. Shadewell also seeksunspecified damages related to its claims that MFF breached certain obligationsunder the License Agreements. A trial of the Action was held on November 29,2005, followed by post-trial briefs and arguments in January 2006, but thecourt has not yet rendered its decision. We believe that Shadewell’s allegationsin the Action are without merit and intend to vigorously defend our interests. Webelieve that neither the Action nor the termination of the License Agreementswill have a material effect on our consolidated financial position or resultsof operations. During 2005, royalties earned from the terminated licensestotaled $2.2 million.

 

30

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***Blue Line Distributing***

 

On August 5, 2005, TCBY received a noticefrom Blue Line Distributing (“Blue Line”), TCBY’s principal distributor of TCBYproducts to its franchisees, exercising Blue Line’s option to terminate theFood Packaging Distribution Agreement between Blue Line and TCBY, datedNovember 14, 2002 (the “Distribution Agreement”). The effective date of thetermination, as provided by the Distribution Agreement, was scheduled to be 180days from the date that TCBY received the notice. Notwithstanding the notice oftermination, the parties negotiated an extension whereby Blue Line wouldcontinue to act as TCBY’s distributor beyond the termination date to allow TCBYto fully explore its options and assist in a transition without interruption ofservice to franchisees. Blue Line continues to provide distribution to someparts of the United States under this extension. TCBY is finalizingnegotiations with a number of regional distributors who will eventually replaceBlue Line, including KaleelBrothers, in the northeastern United States. TCBY believes it will be able toidentify distributors for the remaining regions of the United States beforeBlue Line ceases its services under the negotiated extension. However, weanticipate the distribution costs to many of our franchisees will increaseunder the new regional agreements, which may make it more difficult for them tooperate profitably, potentially increasing the number of permanent storeclosures.

 

**Carve-OutAccounting**

 

Thehistorical consolidated financial statements included in Item 8 of this reporton Form 10-K reflect, for the periods indicated, the financial condition,results of operations and cash flows of the businesses transferred orcontributed from MFOC and TCBY Systems, LLC (“TCBY”) to us. The consolidatedfinancial statements assume that the Company, for all periods presented, hadexisted as a separate legal entity with the following three business segments:franchising, gifts and licensing. The consolidated financial statements, whichhave been carved out from the consolidated financial statements of MFOC andTCBY using the historical results of operations and assets and liabilities ofthese businesses and activities and which exclude the company-owned storessegment of MFOC, reflect the accounting policies adopted by MFOC and TCBY inthe preparation of their consolidated financial statements and thus do not necessarilyreflect the accounting policies which we might have adopted had we been anindependent company. The historical consolidated financial statements of theCompany include those accounts specifically attributable to the Company,substantially all of the indebtedness of MFOC and TCBY, and allocations ofexpenses relating to shared services and administrative functions incurred atMFOC.

 

Historically, MFOC has not allocated its various corporate overheadexpenses, and common general and administrative expenses to its operatingbusiness units. However, an allocation of such expenses has been included ingeneral and administrative expenses in the accompanying consolidated statementsof operations and comprehensive income. MFOC’s general and administrative expensesrepresent portions of MFOC’s corporate functions such as human resources,legal, accounting and finance, treasury and information technology systems,that have been allocated to us based on percentage of labor hours devoted bythe functional department. These allocated costs are not necessarily indicativeof the costs that we would have incurred had we operated as an independent,stand-alone entity for all periods presented.

 

This “Management’s Discussion and Analysis of Financial Condition andResults of Operations” section is presented as if we had existed as a stand-alonecompany on a historical basis and should be read in conjunction with theconsolidated financial statements and the accompanying notes to theconsolidated financial statements included in Item 8 of this report onForm 10-K.

 

31

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**Resultsof Operations**

 

The following table sets forth, for the periods indicated, certaininformation relating to our operations and percentage changes from period toperiod. We operate using a 52/53-week year ending on the Saturday closest toDecember 31. Fiscal 2003 includes 53 weeks; whereas, fiscal 2005 and fiscal2004 include 52 weeks.

 
| ** **                                                                                   | ** ** | **For the Fiscal Year Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **December 31,**                             | ** ** | **January 1,** | ** ** | **%** | ** ** | **January 3,** | ** ** | **%** | ** ** |
| ** **                                                                                   | ** ** | **2005**                                          | ** ** | **2005** | ** ** | **Change** | ** ** | **2004** | ** ** | **Change** | ** ** |
| ** **                                                                                   | ** ** | **(Dollars in thousands)**              | ** ** |
| **Statement of Operations Data:**                                                            |       |                                              |       |   |   |   |   |   |   |   |   |
| REVENUES:                                                                                    |       |                                              |       |   |   |   |   |   |   |   |   |
| Franchising                                                                                  |       | $                                                 | 53,528     |   | $ | 55,913 |   | (4.3 | ) | $ | 58,645 |   | (4.7 | ) |
| Gifts                                                                                        |       | 30,136                                            |       | 25,849 |   | 16.6 |   | 17,405 |   | 48.5 |   |
| Licensing                                                                                    |       | 4,016                                             |       | 4,945 |   | (18.8 | ) | 5,464 |   | (9.5 | ) |
| Other                                                                                        |       | 272                                               |       | 353 |   | (22.9 | ) | 474 |   | (25.5 | ) |
| Total revenues                                                                               |       | 87,952                                            |       | 87,060 |   | 1.0 |   | 81,988 |   | 6.2 |   |
| OPERATING COSTS AND EXPENSES:                                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| Franchising                                                                                  |       | 21,746                                            |       | 21,893 |   | (0.7 | ) | 20,040 |   | 9.2 |   |
| Gifts                                                                                        |       | 28,418                                            |       | 20,733 |   | 37.1 |   | 13,207 |   | 57.0 |   |
| Licensing                                                                                    |       | 1,132                                             |       | 1,516 |   | (25.3 | ) | 1,155 |   | 31.3 |   |
| General and administrative                                                                   |       | 8,527                                             |       | 9,727 |   | (12.3 | ) | 10,811 |   | (10.0 | ) |
| Stock compensation expense                                                                   |       | —                                            |       | 75 |   | NM |   | 50 |   | 50.0 |   |
| Costs associated with debt refinancing, net                                                  |       | —                                            |       | 249 |   | NM |   | 684 |   | (63.6 | ) |
| Depreciation                                                                                 |       | 1,145                                             |       | 1,221 |   | (6.2 | ) | 1,973 |   | (38.1 | ) |
| Amortization                                                                                 |       | 2,831                                             |       | 2,832 |   | (0.0 | ) | 1,780 |   | 59.1 |   |
| Impairment of goodwill and intangible  assets                                                |       | 43,707                                            |       | — |   | NM |   | — |   | NM |   |
| Other operating expenses, net                                                                |       | 219                                               |       | 147 |   | 49.0 |   | 331 |   | (55.6 | ) |
| Total operating costs and expenses                                                           |       | 107,725                                           |       | 58,393 |   | 84.5 |   | 50,031 |   | 16.7 |   |
| Income (loss) from operations                                                                |       | (19,773                                           | )          | 28,667 |   | NM |   | 31,957 |   | (10.3 | ) |
| Interest expense, net                                                                        |       | (20,943                                           | )          | (24,905 | ) | (15.9 | ) | (25,041 | ) | (0.5 | ) |
| Other income                                                                                 |       | —                                            |       | 1,054 |   | NM |   | — |   | NM |   |
| Income (loss) from continuing operations  before provision (benefit) for income taxes        |       | (40,716                                           | )          | 4,816 |   | NM |   | 6,916 |   | (30.4 | ) |
| Provision (benefit) for income taxes                                                         |       | (2,808                                            | )          | 2,254 |   | NM |   | 2,403 |   | (6.2 | ) |
| Income (loss) from continuing operations                                                     |       | (37,908                                           | )          | 2,562 |   | NM |   | 4,513 |   | (43.2 | ) |
| Income from discontinued operations (net of  income taxes of $0, $65 and $158, respectively) |       | —                                            |       | 104 |   | NM |   | 255 |   | (59.2 | ) |
| Net income (loss)                                                                            |       | $                                                 | (37,908    | ) | $ | 2,666 |   | NM |   | $ | 4,768 |   | (44.1 | ) |
|                                                                                         |       |                                              |       |   |   |   |   |   |   |   |   |
| Cash flows from operating activities                                                         |       | $                                                 | 6,564      |   | $ | 7,437 |   | (11.7 | ) | $ | 15,155 |   | (50.9 | ) |
| Cash flows from investing activities                                                         |       | $                                                 | (2,674     | ) | $ | 195 |   | NM |   | $ | (220 | ) | NM |   |
| Cash flows from financing activities                                                         |       | $                                                 | (72        | ) | $ | 10,918 |   | NM |   | $ | (16,525 | ) | NM |   |

 

32

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**FiscalYear Ended December 31, 2005 (Fiscal 2005)**

**Comparedto the Fiscal Year Ended January 1, 2005 (Fiscal 2004)**

 

*Income FromOperations—Overview*. Loss from operations was $19.8 millionfor fiscal 2005, a decrease of $48.8 from income from operations of$28.7 million for fiscal 2004. This decrease was attributable toimpairment of goodwill and intangible assets of $43.7 million and a decrease incontribution from our business segments of $6.2 million partially offset byreductions in general and administrative expenses of $1.2 million and costsassociated with our debt refinancing in 2004 of $200,000. Decreases incontribution from our business segments of $6.2 million was comprised ofdecreases in our franchising segment contribution of $2.2 million or 6.6percent, our gifting segment contribution of $3.4 million or 66.4 percent andour licensing segment contribution of $600,000 or 15.9 percent.

 

The decrease in contribution from ourfranchising segment of $2.2 million was primarily due to lower productformulation revenues of $2.3 million and royalties of $1.5 million due toapproximately 7,400 fewer unit weeks offset by an increase in product sales tofranchisees from our Great American Cookies manufacturing facility of $1.6million.

 

The decrease in contribution from our giftingsegment of $3.4 million was due to increased sales of $4.3 million offset byincreases in costs of goods sold of $2.0 million related to the increase insales, selling and marketing costs of $2.8 million principally due to increasedcirculation of our catalogs and general and administrative costs of $2.9million principally due to increased professional fees of $1.3 million, costsassociated with our new gifting management team of $1.3 million includingcompensation, recruiting and relocation costs, and other general andadministrative costs of $300,000.

 

The decrease in contribution from ourlicensing segment of $500,000 was principally due to increased legal costsassociated with the litigation and termination of our license agreements forthe sale of Mrs. Fields branded shelf stable cookies and ready-to-eat pre-bakedcookie products.

 

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

 
| ** **                 | ** ** | **For the Fiscal Year Ended** | ** ** | ** **          | ** ** |
|----------------------------|------------|---------------------------------------------------|------------|---------------------|------------|
| ** **                 | ** ** | **December 31,**                             | ** ** | **January 1,** | ** ** | **%** | ** ** |
| **Reporting Segment** | ** ** | **2005**                                          | ** ** | **2005**            | ** ** | **Change** | ** ** |
| ** **                 | ** ** | **(Dollars in thousands)**              | ** ** | ** **          | ** ** |
| Franchising                |       | $                                                 | 31,782     |                | $          | 34,020 |   | (6.6 | ) |
| Gifts                      |       | 1,718                                             |       | 5,116               |       | (66.4 | ) |
| Licensing                  |       | 2,884                                             |       | 3,429               |       | (15.9 | ) |
| Total segment contribution |       | $                                                 | 36,384     |                | $          | 42,565 |   | (14.5 | ) |

 

33

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**Franchising**

 

The following table details the revenues andoperating expenses of the franchising segment for the years ended December 31,2005 and January 1, 2005 (in thousands):

 
| ** **                           | ** ** | **For the Fiscal Year Ended** | ** ** |
|--------------------------------------|------------|---------------------------------------------------|------------|
| ** **                           | ** ** | **December, 31**                             | ** ** | **January 1,** | ** ** | **%** | ** ** |
| ** **                           | ** ** | **2005**                                          | ** ** | **2005** | ** ** | **Change** | ** ** |
| Bakery revenues                      |       | $                                                 | 38,945     |   | $ | 37,809 |   | 3.0 |   |
| Dairy revenues                       |       | 14,583                                            |       | 18,104 |   | (19.4 | ) |
| Total Franchising Revenues           |       | 53,528                                            |       | 55,913 |   | (4.3 | ) |
|                                 |       |                                              |       |   |   |   |   |
| Bakery operating expenses            |       | 17,129                                            |       | 16,203 |   | 5.7 |   |
| Dairy operating expenses             |       | 4,617                                             |       | 5,690 |   | (18.9 | ) |
| Total Franchising Operating Expenses |       | 21,746                                            |       | 21,893 |   | (0.7 | ) |
| Total Franchising Contribution       |       | $                                                 | 31,782     |   | $ | 34,020 |   | (6.6 | ) |

 

The following table details the year-over-year (“YOY”)percentage increase (decrease) in same store sales for the years ended December31, 2005 and January 1, 2005:

 
| ** **                                      | ** ** | **For the Fiscal Year Ended** | ** ** | ** **          | ** ** |
|-------------------------------------------------|------------|---------------------------------------------------|------------|---------------------|------------|
| ** **                                      | ** ** | **December 31,**                                  | ** ** | **January 1,** | ** ** | ** ** | ** ** |
| **YOY % Change by Concept** | ** ** | **2005**                                          | ** ** | **2005**            | ** ** | ** ** | ** ** |
| Mrs. Fields                                     |       | (0.6                                              | )          | (1.2                | )          |   |   |
| Great American Cookies                          |       | 4.8                                               |       | 7.2                 |       |   |   |
| Pretzel Time                                    |       | 2.7                                               |       | (2.6                | )          |   |   |
| Pretzelmaker                                    |       | 10.7                                              |       | (1.0                | )          |   |   |
| Total Bakery                                    |       | 3.0                                               |       | 1.3                 |       |   |   |
| TCBY                                            |       | (0.8                                              | )          | (2.6                | )          |   |   |
| Total Company                                   |       | 1.9                                               |       | (0.1                | )          |   |   |

 

*Year-Over-Year Same Store Sales.*Wehad significant improvement in our year-over-year same store sales in fiscal2005 from all of our concepts except Great American Cookies. Year-over-yearsame store sales for all concepts were 1.9 percent for fiscal 2005 compared toa negative 0.1 percent for fiscal 2004. This positive year-over-year same storesales in 2005 was due to our bakery concepts while our TCBY concept continuedwith negative year-over-over-year sales.

 

Our Mrs. Fields conceptyear-over-year same store sales were a negative 0.6 percent for fiscal 2005compared to a negative 1.2 percent for fiscal 2004. This improvement in thetrend was due to new product introductions such as our ice blended drinks(Breezer smoothies and Chillers) and renewed emphasis on decorated Big CookieCakes. Our Great American Cookies concept year-over-year same store sales were4.8 percent for fiscal 2005 compared to 7.2 percent for fiscal 2004. Thecontinued positive in year-over-year sales was due to continued focus on cookiecakes from fiscal 2004 and our stronger focus on our “Cookie Express”decorating table for key holidays.

 

Our Pretzel concepts,Pretzel Time and Pretzelmaker had positive year-over-year sales of 2.7 percentand 10.7 percent for fiscal 2005 compared to a negative 2.6 percent and anegative 1.0 percent for fiscal 2004, respectively. These improvements were dueto the introduction of bite-sized pretzels by our Pretzelmaker franchisees inlate fiscal 2004, and continued participation by our Pretzel Time franchiseesand the launch of Breezers smoothies. We believe sales at our Pretzel conceptsalso benefited from a decrease in popularity of “low carb” diets that appear tohave peaked in 2003.

 

Our TCBY concept year-over-year same store sales werea negative 0.8 percent for fiscal 2005 compared to a negative 2.6 percent forfiscal 2004. This improvement was due to the introduction of cakes and pieswhich tend to increase the average customer ticket and a renewed emphasis onlocal store marketing, including product sampling and coupons.

 

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*Franchising Revenues.*Franchisingrevenues were $53.5 million for fiscal 2005, a decrease of $2.4 million or4.3 percent, from $55.9 million for fiscal 2004. This decrease wasprincipally due to lower revenues from our dairy franchise system of $3.5million or 19.4 percent offset by an increase in revenues from our bakeryfranchise system of $1.1 million or 3.0 percent.

 

The decrease in our dairy franchise system revenues of$3.5 million was principally comprised of decreases in product formulationrevenues generated by purchases of TCBY products by franchisees of $1.8 millionor 16.5 percent, royalties of $1.4 million or 22.3 percent and initialfranchise fees of $300,000 or 32.5 percent. The decrease in royalties andproduct formulation is principally attributable to approximately 4,700 or 12.2percent fewer unit weeks and a decrease in our franchisees’ year-over-year samestore sales of 0.8 percent. We anticipate that our dairy unit weeks willcontinue to decline in the near future, at least until our reconcepting testsare completed and we have developed a plan to implement the reconcepting inqualified TCBY traditional stores. We anticipate our reconcepting tests will becompleted in the fourth quarter of fiscal 2006. While we are encouraged by theconsumer data we have collected, there can be no assurances that ourreconcepting tests or implementation will be successful, or that a reconceptingwill slow or reverse the declining TCBY store count or contribution, which mayadversely affect our results of operations.

 

The increase in our bakery franchise system revenueswas principally attributable to increases in sales of products by our GreatAmerican Cookies manufacturing facility to our franchisees of $1.6 million or10.3 percent and initial franchise fees of $300,000 or 18.1 percent, partiallyoffset by reductions of product formulation revenues generated by purchases ofcertain bakery products by franchisees of $500,000 or 11.4 percent, lowerroyalties of $100,000 or 0.6 percent and other bakery franchising revenues of$100,000. The increase in sales by our Great American Cookies manufacturingfacility was primarily due to a price increase to our franchisees of 8.3percent effective April 2005. Lower royalties and product formulation revenuesearned through our bakery franchise system was primarily due to approximately2,700 fewer unit weeks or 4.8 percent.

 

*Franchising Expenses.*Franchisingexpenses are comprised of operation and supervision expense wherein we providesupport, direction and supervision to the franchisees; development and supportexpenses including product development costs, expenses relating to newfranchise development, marketing and advertising, bad debt expense and otherdirect franchising expenses; and cost of product sales associated with ourGreat American Cookies manufacturing facility including raw ingredients, laborand other manufacturing costs. Franchising expenses were $21.7 million forfiscal 2005, a decrease of $200,000 or 0.7 percent, from $21.9 million forfiscal 2004. This decrease was attributable to decreases in franchiseoperations and supervision of $800,000 or 20.1 percent partially offset byincreases in franchise development and support costs of $100,000 or 1.9 percentand an increase in product cost of sales associated with our Great AmericanCookies manufacturing facility of $500,000 or 4.4 percent.

 

The decrease in operationsand supervision expense of $800,000 was principally due to decreases insalaries and related employee costs of $600,000, travel costs of $100,000 andother supervisory costs of $100,000. The decrease in franchise development andsupport costs of $100,000 was due to reductions in expenses for brandinitiatives of $700,000, advertising of $600,000, recruiting and relocationscosts of $300,000, bad debt expense of $200,000, and product development costsof $100,000 offset by increases in development salaries and related costs of$1.4 million, staffing and administrative costs of $300,000 relating todocumentation of audits of franchisees and other direct franchising costs of$100,000. The increase in product cost of sales associated with our GreatAmerican Cookies manufacturing facility of $500,000 is principally due toincreased raw ingredients costs of $400,000 or 5.6 percent and manufacturinglabor of $100,000 or 10.0 percent.

 

# **Gifts**

 

*Gifts Revenues.*Giftsrevenues were $30.1 million for fiscal 2005, an increase of $4.3 millionor 16.6 percent, from $25.8 million for fiscal 2004. Gifts revenuesconsist of sales through our catalog and website as well as affiliations withother websites and sales to large corporate accounts for gifting purposes andcommercial airlines. The increase in revenues in fiscal 2005 was due toincreases in sales through our catalog and website of $3.1 million, Internetsearch engines of $1.4 million, and national accounts of $200,000 offset by areduction in sales through our partners of $200,000 and airline customers of$200,000.

 

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*Gifts Expenses.*Giftsexpenses were $28.4 million for fiscal 2005, an increase of $7.7 millionor 37.1 percent, from $20.7 million for fiscal 2004. This increase inexpenses was due to increases in cost of goods sold of $2.0 million, sellingexpenses of $2.8 million comprised of $2.6 million for increased circulation ofour catalogs and $200,000 for bank and credit card fees associated with theincreased sales, and general and administrative expenses of $2.9 million. Theincrease in general and administrative expenses was due to increases incompensation and related costs of $700,000, recruiting and relocation costs of$600,000 associated with the hiring of the President, Vice President ofOperations and the Director of Merchandising, professional fees of $800,000 dueto consulting fees to assist us in preparing a five-year strategic plan, the write-offof certain software of $400,000, bad debt expense of $200,000 and otheroperating expenses of $200,000.

 

**Licensing**

 

*Licensing Revenues.*Licensingrevenues were $4.0 million for fiscal 2005, a decrease of $900,000 or18.8 percent, from $4.9 million for fiscal 2004. This decrease was due todecreases in licensing royalties earned under our licensing agreement for thesale of Mrs. Fields branded shelf stable cookies of $800,000 and TCBY frozenfood specialty products through retail channels of $200,000 partially offset byan increase in royalties earned under our licensing agreement for the sale ofTCBY yogurt covered pretzels of $100,000.

 

*Licensing Expenses.*Licensingexpenses were $1.1 million for fiscal 2005, a decrease of $400,000 or25.3 percent, from $1.5 million for fiscal 2004. This decrease was dueone-time expense in 2004 for a termination fee of $1.1 million paid toShadewell to terminate the frozen dough license partially offset by increasesin fiscal 2005 of legal fees associated litigation surrounding the terminationof our license agreements for the sale of Mrs. Fields branded shelf stablecookies and ready-to-eat, pre-baked cookie products of $400,000 and costsassociated with writing-off obsolete packaging for our TCBY frozen specialtyproducts that did not comply with the new labeling requirements mandated by theU.S. Food and Drug Administration effective January 1, 2006 of $200,000.

 

**Other**

 

*General and Administrative Expense.*Generaland administrative expenses were $8.5 million for fiscal 2005, a decrease of$1.2 million or 12.3 percent, from $9.7 million for fiscal 2004. This decreasewas primarily due to reductions in incentive compensation of $1.4 million,severance costs associated with termination of certain members of our executivemanagement team in 2004 of $500,000, property, casualty and workerscompensation’ insurance of $100,000 and other operating costs of $100,000partially offset by increases in professional fees of $300,000, healthinsurance costs of $200,000, compensation and related payroll costs of$200,000, and recruiting and relocation expense of $200,000.

 

*Depreciation and AmortizationExpense.*Total depreciation and amortization expense was$4.0 million for fiscal 2005, a decrease of $100,000 or 1.9 percent, from $4.1million for fiscal 2004. Depreciation expense was $1.1 million for fiscal 2005,a decrease of $100,000 or 6.2 percent, from $1.2 million for fiscal 2004. Amortizationexpense for fiscal 2005 was $2.8 million consistent with fiscal 2004.

 

*Impairment of Goodwill andIntangible Assets.*For2005, we recorded a charge of $43.7 million to reduce the carrying value of thegoodwill and other intangible assets associated with our Dairy Franchisingreporting unit. This impairment was principally the result of an eroding Dairyfranchise system due to fewer locations, consistent negative year-over-yearsame store sales by our Dairy franchisees and our inability to locate and opena significant number of new or additional franchise locations. These factorshave resulted in continued decreases in franchise royalties and yogurtformulation revenues from our Dairy franchise system. See “Business –Impairment of Goodwill and Intangible Assets.”

 

*Interest Expense, Net.*Interestexpense, net was**$**20.9 million for fiscal 2005, a decrease of **$**4.0 millionor 15.9 percent, from $24.9 million for fiscal 2004. This decreasewas primarily due to the write-off of deferred loan costs of $2.8 million inthe first quarter of 2004 associated with our previous debt. These deferredloan costs were written off due to the completion of our debt refinancing onMarch 16, 2004. Additionally, the decrease in interest expense, net was theresult of a reduction in amortization of deferred loan costs of **$**1.0 millionas a result of the lower deferred loan costs associated with new borrowings anda lower effective interest rate on the new borrowings and an increase of$300,000 in interest income earned on our cash balances offset by an increasein interest expense of $100,000 associated with our capital lease obligations.

 

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*Consolidated Financial Condition.*Totalassets at December 31, 2005 were $139.9 million, a decrease of $41.9 millionor 23.0 percent, from $181.8 million at January 1, 2005. This decreasewas primarily attributable to decreases in goodwill of $34.8 million, nettrademarks and other intangible assets of $10.7 million, net deferred loancosts of $900,000, prepaid expenses of $300,000 and deferred tax assets of$200,000 partially offset by an increase in cash and cash equivalents of $3.8million, inventories of $300,000 and net property and equipment of $900,000.

 

Total liabilities at December 31, 2005 were $221.3million, a decrease of $4.0 million from $225.3 million at January 1,2005. This decrease was primarily due to decreases in deferred tax liability of$3.9 million, accrued liabilities of $2.4 million and deferred revenues of $1.2million partially offset by increases in accounts payable of $2.2 million,amounts due to affiliates of $1.2 million and capital lease obligations of$100,000.

 

**FiscalYear Ended January 1, 2005 (Fiscal 2004)**

**Comparedto the Fiscal Year Ended January 3, 2004 (Fiscal 2003)**

 

*Income From Operations—Overview.*Incomefrom operations was $28.7 million for fiscal 2004, a decrease of $3.3million or 10.3 percent, from $32.0 million for fiscal 2003. Thisdecrease was primarily attributable to a decrease in contribution from ourfranchising segment of $4.6 million, which was primarily attributable to $2.9million of expenses incurred for brand investment initiatives, a decrease infranchising revenues of $2.7 million as a result of fewer franchised unitweeks, partially offset by a decrease in other direct franchising expenses of$1.0 million. In addition, our licensing contribution decreased $900,000primarily as a result of a termination fee paid to Shadewell to terminate alicense agreement for Mrs. Fields branded frozen cookie dough for the foodservice industry and depreciation and amortization expense increased $300,000. Thesereductions in operating income of $5.8 million were partially offset by anincrease in contribution from our gifts segment of $900,000 and decreases ingeneral and administrative expenses of $1.1 million, costs associated with ourdebt refinancing of $400,000 and other operating expenses of $100,000.

 

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

 
| ** **                 | ** ** | **Fiscal Year Ended**      | ** ** | ** **          | ** ** |
|----------------------------|------------|--------------------------------------|------------|---------------------|------------|
| ** **                 | ** ** | **January 1,**                  | ** ** | **January 3,** | ** ** | **%** | ** ** |
| **Reporting Segment** | ** ** | **2005**                             | ** ** | **2004**            | ** ** | **Change** | ** ** |
| ** **                 | ** ** | **(Dollars in thousands)** | ** ** | ** **          | ** ** |
| Franchising                |       | $                                    | 34,020     |                | $          | 38,605 |   | (11.9 | ) |
| Gifts                      |       | 5,116                                |       | 4,198               |       | 21.9 |   |
| Licensing                  |       | 3,429                                |       | 4,309               |       | (20.4 | ) |
| Total segment contribution |       | $                                    | 42,565     |                | $          | 47,112 |   | (9.7 | ) |

 

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**Franchising**

 

The following table details the revenues and operatingexpenses of the franchising segment for the years ended January 1, 2005 andJanuary 3, 2004 (in thousands):

 
| ** **                           | ** ** | **For the Fiscal Year Ended** | ** ** |
|--------------------------------------|------------|---------------------------------------------------|------------|
| ** **                           | ** ** | **January 1,**                               | ** ** | **January 3,** | ** ** | **%** | ** ** |
| ** **                           | ** ** | **2005**                                          | ** ** | **2004** | ** ** | **Change** | ** ** |
| Bakery revenues                      |       | $                                                 | 37,809     |   | $ | 39,051 |   | (3.2 | ) |
| Dairy revenues                       |       | 18,104                                            |       | 19,594 |   | (7.6 | ) |
| Total Franchising Revenues           |       | 55,913                                            |       | 58,645 |   | (4.7 | ) |
|                                 |       |                                              |       |   |   |   |   |
| Bakery operating expenses            |       | 16,203                                            |       | 14,279 |   | 13.5 |   |
| Dairy operating expenses             |       | 5,690                                             |       | 5,761 |   | (1.2 | ) |
| Total Franchising Operating Expenses |       | 21,893                                            |       | 20,040 |   | 9.2 |   |
| Total Franchising Contribution       |       | $                                                 | 34,020     |   | $ | 38,605 |   | (11.9 | ) |

 

The following table details YOY percentage increase(decrease) in same store sales for the years ended January 1, 2005 and January3, 2004:

 
| ** **                                      | ** ** | **For the Fiscal Year Ended** | ** ** | ** **          | ** ** |
|-------------------------------------------------|------------|---------------------------------------------------|------------|---------------------|------------|
| ** **                                      | ** ** | **January 1,**                               | ** ** | **January 3,** | ** ** | ** ** | ** ** |
| **YOY % Change by Concept** | ** ** | **2005**                                          | ** ** | **2004**            | ** ** | ** ** | ** ** |
| Mrs. Fields                                     |       | (1.2                                              | )          | (3.9                | )          |   |   |
| Great American Cookies                          |       | 7.2                                               |       | (1.4                | )          |   |   |
| Pretzel Time                                    |       | (2.6                                              | )          | (6.8                | )          |   |   |
| Pretzelmaker                                    |       | (1.0                                              | )          | (7.7                | )          |   |   |
| Total Bakery                                    |       | 1.3                                               |       | (5.0                | )          |   |   |
| TCBY                                            |       | (2.6                                              | )          | (7.1                | )          |   |   |
| Total company                                   |       | (0.1                                              | )          | (5.7                | )          |   |   |

 

*Year-Over-Year Same Store Sales.*Year-over-yearsame store sales for all concepts were a negative 0.1 percent for fiscal 2004compared to a negative 5.7 percent for fiscal 2003. This improvement was due toour bakery concepts which experienced positive year-over-year sales of 1.3percent while our TCBY concept continued with year-over-over-year sales of anegative 2.6 percent.

 

Our Mrs. Fields concept year-over-year same storesales were a negative 1.2 percent for fiscal 2004 compared to a negative 3.9percent for fiscal 2003. This improvement in same store sales was due tovarious promotions which were to attract customers back to the store andreacquaint the customer to our product. Our Great American Cookies conceptyear-over-year same store sales were 7.2 percent for fiscal 2004 compared to anegative 1.4 percent for fiscal 2003. The improvement in year-over-year saleswas due to promotions such as “5 for $5.00” and renewed focus on cookie cakessales.

 

Our pretzel concepts’, Pretzel Time and Pretzelmaker,  year-over-year sales were a negative 2.6percent and a negative 1.0 percent for fiscal 2004 compared to a negative 6.8percent and a negative 7.7 percent for fiscal 2003, respectively. Theseimprovements were due to introduction of bite-sized pretzels to ourPretzelmaker franchisees in late fiscal 2004 and a refocus on the bite-sizedpretzels by our Pretzel Time franchisees. Additionally, as the “low carb” dietsfaded in 2003 sales at our pretzel concept improved.

 

Our TCBY concept year-over-year same store sales werea negative 2.6 percent for fiscal 2004 compared to a negative 7.1 percent forfiscal 2003. This improvement was due to the introduction of “low carb” yogurtduring the surge of low carb consumer activity and an increased focus on publicrelations marketing.

 

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*Franchising Revenues.*Franchisingrevenues were $55.9 million for fiscal 2004, a decrease of $2.7 million or4.7 percent, from $58.6 million for fiscal 2003. This decrease wasprincipally due to a $1.5 million or 7.6 percent decrease in revenues from ourdairy franchise system as a result of approximately 5,300 or 12.1 percent fewertraditional equivalent unit weeks and $1.2 million or 3.2 percent decrease inrevenues from our bakery franchise system as a result of approximately 4,700fewer franchised unit weeks or 7.8 percent.

 

The decrease in our dairy franchise system revenueswas principally comprised of decreases in product formulation revenuesgenerated by purchases of TCBY products by franchisees of $1.0 million or 8.6percent, royalties of $400,000 or 6.6 percent and initial franchise fees of$100,000 or 11.3 percent. The decrease in product formulation revenues androyalties was primarily attributable to approximately 5,300 fewer traditionalequivalent unit weeks or 12.1 percent and a decrease in our franchiseesyear-over-year same store sales of 2.6 percent.

 

The decrease in our bakeryfranchise system revenues was principally comprised of decreases in initialfranchise fees of $600,000 or 27.8 percent, product formulation revenuesgenerated by purchases of certain bakery products by franchisees of $400,000 or9.1 percent and royalties of $500,000 or 3.1 percent, partially offset byincreases in sales of products by our Great American Cookies manufacturingfacility to our franchisees of $200,000 and other bakery franchising revenuesof $200,000. The decrease in product formulation revenues and royalties wasprincipally due to approximately 4,700 fewer unit weeks or 7.8 percent partiallyoffset by an increase in our franchisees year-over-year same store sales of 1.3percent.

 

*Franchising Expenses.*Franchisingexpenses were $21.9 million for fiscal 2004, an increase of $1.9 millionor 9.2 percent, from $20.0 million for fiscal 2003. This increase wasprincipally due to increases in expenses for brand investment initiatives of$2.9 million, product cost of sales associated with our Great American Cookiesmanufacturing facility of $900,000 principally due to rising raw ingredients costs,product development expenses of $300,000, and franchisee training expenses of$100,000, partially offset by reductions in franchise development and sellingexpenses of $1.2 million, franchise operations and supervision expenses of$900,000 and marketing and advertising expenses of $200,000.

 

**Gifts**

 

*Gifts Revenues.*Giftsrevenues were $25.8 million for fiscal 2004, an increase of $8.4 millionor 48.5 percent, from $17.4 million for fiscal 2003. Gifts revenuesconsist of sales through our catalog and website as well as affiliations withother websites and sales to large corporate accounts for gifting purposes andcommercial airlines. The increase in revenues in fiscal 2004 was due toincreases in sales through our catalogs and website of $6.8 million or 64.0percent, significant corporate accounts of $1.1 million or 38.2 percent and ouraffiliations with other websites of $700,000 or 26.4 percent, partially offsetby a reduction in sales to commercial airlines of $200,000 or 24.2 percent.

 

*Gifts Expenses.*Giftsexpenses were $20.7 million for fiscal 2004, an increase of$7.5 million or 57.0 percent, from $13.2 million for fiscal 2003.This increase in expenses was due to increases in cost of sales of $4.4 millionassociated with the increased sales volume and increased cost of product,advertising and marketing expenses of $2.2 million due to increased circulationof catalogs, salaries and wages expenses of $300,000, banking and credit cardfees of $200,000 due to increased sales volume, expenses incurred for brandinvestment initiatives of $100,000 and other operating expenses of $300,000.

 

**Licensing**

 

*Licensing Revenues.*Licensingrevenues were $4.9 million for fiscal 2004, a decrease of $500,000 or9.5 percent, from $5.4 million for fiscal 2003. This decrease was due todecreases in licensing royalties earned under our licensing agreement for thesale of TCBY frozen food specialty products through retail channels of$500,000.

 

*Licensing Expenses.*Licensingexpenses were $1.5 million for fiscal 2004, an increase of $400,000 or31.3 percent, from $1.1 million for fiscal 2003. This increase was due toa termination fee of approximately $1.1 million paid to Shadewell to terminatea license agreement for the sale of Mrs. Fields branded frozen cookie dough throughcertain food service distribution channels, partially offset by reducedlicensing expenses of $700,000 incurred under our licensing agreement for TCBYfrozen food specialty products and marketing and spoilage allowances that wereincurred in fiscal 2003 as a result of distribution through a retail chain. Thisdistribution channel was terminated in 2003.

 

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**Other**

 

*General and Administrative Expense.*Generaland administrative expenses were $9.7 million for fiscal 2004, a decrease of$1.1 million or 10.0 percent, from $10.8 million for fiscal 2003. This decreasewas primarily due to decreases in professional and legal fees of $600,000,severance costs associated with the terminations of certain members of our executivemanagement team of $300,000, health insurance costs of $300,000 and bankingfees of $200,000, partially offset by increases in property and casualtyinsurance expenses of $200,000 and workers compensation insurance expenses of$100,000.

 

*Costs Associated with DebtRefinancing.*We incurred $13.9 million of costs thatwere directly related to our debt refinancing completed on March 16, 2004.Generally, these costs would be deferred and amortized as interest expense overthe term of the borrowings. However, approximately $5.0 million of thesecosts related to the exchange in March 2004 of $80.7 million of theexisting senior notes for $80.7 million of the newly issued 9 percentSenior Secured Notes. In accordance with Statement of Financial Accounting Standards(“SFAS”) No. 15, “Accounting by Debtors and Creditors for Troubled DebtRestructurings,” these costs were expensed net of the gain recognized onretirement of the senior notes of $4.8 million.

 

*Depreciation and AmortizationExpense.*Total depreciation and amortization expense was$4.1 million for fiscal 2004 and $3.8 million for fiscal 2003.Depreciation expense was $1.2 million for fiscal 2004, a decrease of $800,000or 38.1 percent, from $2.0 million for fiscal 2003. This decrease was principallydue to the write-off of equipment relating to distribution of TCBY yogurtproduct in convenience stores in the third quarter of 2003. Amortizationexpense was $2.8 million for fiscal 2004, an increase of $1.0 million or59.1 percent from $1.8 million for fiscal 2003. This increase was due tothe amortization associated with the TCBY franchise relationships, which werepreviously considered to be indefinite-lived assets and are now amortized overa 12 year life.

 

*Interest Expense, Net.*Interestexpense, net was $24.9 million for fiscal 2004, a decrease of $100,000 or0.5 percent, from $25.0 million for fiscal 2003. This decrease wasprimarily due to lower interest expense incurred as a result of the refinancingof our debt in March 2004 resulting in a lower effective interest rate on ouroutstanding debt for fiscal 2004 compared to the effective interest rate on ouroutstanding debt for fiscal 2003. This decrease was partially offset by thewrite-off of deferred loan costs of $2.7 million associated with our previousdebt. These deferred loan costs were written off due to the completion of ourdebt refinancing on March 16, 2004.

 

*Other Income.*Otherincome was $1.1 million for fiscal 2004. Other income represents gain onthe sale of certain equity warrants of Nonni’s Food Company, apredecessor-in-interest to Shadewell.

 

*Consolidated Financial Condition.*Totalassets at January 1, 2005 were $181.8 million, an increase of$19.2 million or 11.8 percent, from $162.6 million atJanuary 3, 2004. This increase was primarily attributable to increases incash and cash equivalents of $18.6 million, net deferred loan costs of$3.7 million, inventories of $700,000 and net property and equipment of$300,000, partially offset by decreases in accounts receivable of $1.0 million,net trademarks and other intangible assets of $2.7 million and deferred taxassets of $400,000.

 

Total liabilities at January 1, 2005 were $225.3million, an increase of $6.9 million or 3.1 percent, from$218.4 million at January 3, 2004. This increase was primarily due toan increase in long-term debt of $10.0 million, accrued liabilities of$1.4 million and capital lease obligations of $500,000, partially offset bydecreases in accounts payable of $2.4 million, deferred revenues of $900,000,deferred tax liability of $900,000, amounts due to affiliates of $400,000 andliabilities of discontinued operations of $400,000.

 

###### ***Consolidated Cash Flows for Fiscal 2005 Compared to Fiscal2004***

###### * *

Net cash flows provided by operating activities were$6.6 million for fiscal 2005, a decrease of $800,000, from net cash flowsprovided by operating activities of $7.4 million for fiscal 2004. This decreasewas principally due to decreases in contribution by our operating segmentspartially offset by increases in cash provided from changes in working capitalof $1.3 million and from discontinued operations of $300,000 and a decrease ingeneral and administrative expenses of $1.2 million.

 

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Net cash flows provided by operating activities were$7.4 million for fiscal 2004, a decrease of $7.8 million, from net cash flowsprovided by operating activities of $15.2 million for fiscal 2003. Thisdecrease was principally due to decreases in contribution by our operatingsegments of $4.5 million primarily as a result of brand investment expenses andpayment of license termination fee of $1.1 million as previously discussed,cash provided from changes in working capital of $3.5 million and cash providedfrom activities of discontinued operations of $800,000 offset by a decrease ingeneral and administrative expenses of $1.1 million.

 

Net cash flows used in investing activities were $2.7million for fiscal 2005, an increase of $2.9 million, from cash provided byinvesting activities of $200,000 for fiscal 2004. This increase wasattributable to increases in purchases of property and equipment of $1.3million and license repurchase option of $500,000 in fiscal 2005 and areduction in proceeds from the sale of equity warrants in Nonni’s Food Companyof $1.0 million that occurred in fiscal 2004.

 

Net cash flows provided by investing activities were$200,000 for fiscal 2004, an increase of $400,000, from cash used in investingactivities of $200,000 for fiscal 2003. This increase was attributable toproceeds from the sale of equity warrants in Nonni’s Food Company of $1.1million offset by an increase in capital expenditures primarily for our giftsbusiness segment of $700,000.

 

Net cash flows used in financing activities were$100,000 for fiscal 2005, a decrease of $11.0 million from cash provided byfinancing activities of $10.9 million for fiscal 2004. This decrease wasprincipally due to principal payments on our capital lease obligations of$100,000 and the completion of our debt refinancing on March 16, 2004 whichresulted in $115.0 million in proceeds from the issuance of our 111⁄2 percentSenior Secured Notes and a capital contribution by MFOC of $17.5 millionpartially offset by payments to retire our previous debt of $101.5 million,payments of debt issuance costs of $12.0 million, other activity with parent of$8.0 million and payments to repurchase stock options of MFC of $100,000.

 

Net cash flows provided by financing activities were$10.9 million for fiscal 2004, an increase of $27.4 million from cash used infinancing activities of $16.5 million for fiscal 2003. This increase wasprincipally due to the completion of our debt refinancing on March 16, 2004which resulted in $115.0 million in proceeds from the issuance of our 111⁄2percent Senior Secured Notes, a capital contribution by MFOC of $17.5 millionand a decrease in other activity with parent of $2.9 million, partially offsetby increases in payments to retire our previous debt of $98.3 million, paymentsof debt issuance costs of $9.6 million and payments to repurchase stock optionsof MFC of $100,000.

 

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

###### * *

Our principal sources of liquidity are cash flows fromoperating activities and cash on hand. At December 31, 2005, we had $23.7million of cash on hand. During fiscal 2006, we expect that our principal usesof cash will be for working capital, capital expenditures of approximately $4.0million primarily for leasehold improvements and equipment for our new giftsfacility and interest payments on our Senior Secured Notes of $20.5 million. AtDecember 31, 2005, we had no material commitments for capital expenditures. During2006, we will not be required but we may offer to repurchase a portion of theSenior Secured Notes as described below. In addition, to the extent we havecash available and it is permitted by the indenture agreement, we may paydividends to our parent companies for uses such as acquisitions, debtrepayments and dividends. We believe that cash provided by operating activitiesand cash on hand will be adequate to meet our cash requirements for the next 12months*.*

 

We are highly leveraged. At December 31, 2005, we had$195.7 million of long-term debt represented by the Senior Secured Notes. TheSenior Secured Notes mature on March 15, 2011, with interest payablesemi-annually on March 15 and September 15. Due to borrowing restrictionsunder the indenture governing the Senior Secured Notes, our ability to obtainadditional debt financing is significantly limited. The Senior Secured Notesrequire us to offer to repurchase a portion of the notes at 100 percent ofthe principal amount, plus accrued and unpaid interest thereon to the date ofpurchase, with 50 percent of our “excess cash flow”, as defined in theindenture agreement, when the ratio of our net indebtedness to consolidatedEBITDA is above 3.75 to 1.0 and the cumulative unpaid excess cash flow offeramount exceeds $10.0 million. For a more detailed description of the materialterms of the Senior Secured Notes, see Note 3 to our consolidated financialstatements included elsewhere in this report on Form 10-K.

 

The following table reflects our future contractualobligations as of December 31, 2005 (dollars in thousands).

 
| ** **                       | ** ** | **Payments Due by Fiscal Year** | ** ** |
|----------------------------------|------------|-----------------------------------------------------|------------|
| **Contractual Obligations** | ** ** | **Total**                                           | ** ** | **2006** | ** ** | **2007 - 2008** | ** ** | **2009 - 2010** | ** ** | **After 2010** | ** ** |
| Senior Secured Notes             |       | $                                                   | 195,747    |   | $ | — |   | $ | — |   | $ | — |   | $ | 195,747 |   |
| Interest-Senior Secured Notes    |       | 112,706                                             |       | 20,492 |   | 40,984 |   | 40,984 |   | 10,246 |   |
| Capital lease obligations        |       | 801                                                 |       | 158 |   | 274 |   | 170 |   | 199 |   |
| Operating leases                 |       | 8,324                                               |       | 1,617 |   | 3,046 |   | 2,991 |   | 670 |   |
| Total Contractual Obligations    |       | $                                                   | 317,578    |   | $ | 22,267 |   | $ | 44,304 |   | $ | 44,145 |   | $ | 206,862 |   |

 

The Company has entered into supply agreements to buyfrozen dough products and for the purchase of yogurt-based products, noveltiesand ice cream. The frozen dough product supply agreement stipulates minimumannual purchase commitments of not less than 15 million pounds ofproducts, approximately $19.7 million based on weighted average prices ineffect December 31, 2005, each year through the end of the contract,December 2006. These annual purchase commitments are satisfied primarilythrough the direct purchase of frozen dough products by our franchisees. Shouldthe Company not meet the annual minimum commitment, the supplier’s sole remedyis to cancel the supply agreement. Since these purchase commitments do notrepresent cash obligations to us, we have not included them in our contractualobligations table.

 

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TCBY’s supply agreementwith Americana Foods Limited Partnership (“Americana”) for the purchase ofyogurt-based products, novelties and ice cream (the “TCBY Supply Agreement”)stipulates minimum annual purchase commitments of at least 75 percent ofthe product volumes contained in the agreement through the term of theagreement, November 2007. These annual purchase commitments are satisfiedthrough the direct purchase of frozen yogurt-based products, novelties and icecream by TCBY’s distributors and franchisees. This purchase commitment does notrepresent a contractual cash obligation to us, but rather represents atriggering event that provides Americana the right to propose a new pricingstructure. Therefore, the minimum annual purchase commitments under this supplyagreement have not been included in the above contractual obligations table.

 

**Certain Information Concerning Off-Balance SheetArrangements**

 

As of December 31,2005, we did not have any relationships with unconsolidated entities orfinancial partnerships, such as entities often referred to as structuredfinance or special purpose entities, which would have been established for thepurpose of facilitating off-balance sheet arrangements or other contractuallynarrow or limited purposes. We are, therefore, not materially exposed tofinancing, liquidity, market or credit risk that could arise if we had engagedin such relationships.

 

**Inflation**

 

The impact ofinflation on our business has not been significant in recent years. Some of ouremployees are paid hourly wages at the Federal minimum wage level. Minimum wageincreases 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.

 

**Seasonality**

 

Our sales andcontribution from franchisees’ store operations are highly seasonal, but ourvarious brands experience counteracting seasonal effects. Our cookie andpretzel stores, primarily located in malls, tend to mirror customer trafficflow trends in malls, which increase significantly during the fourth quarter,primarily between Thanksgiving and the end of the calendar year. Holiday giftpurchases also are a significant factor in increased sales in the fourth quarter.However, TCBY stores and products experience their strongest sales periodsduring the warmer months from late Spring through early Fall. Franchisingsegment revenues for each quarter as a percentage of total franchising segmentrevenues for the fiscal year ended December 31, 2005 were 23.1 percent for thefirst quarter, 26.1 percent of the second quarter, 24.9 percent in the thirdquarter and 25.9 percent for the fourth quarter.

 

Our sales andcontribution from our gifts segment are highly seasonal primarily due toholiday gift purchases that increase sales in the fourth quarter. Sales andsegment contribution in the fourth quarter of 2005 were $15.9 million and $2.4million, respectively, which represents 52.7 percent and 139.8 percent,respectively, of total sales and contribution of the gifts segment for the yearended December 31, 2005.

 

**Critical Accounting Policies**

 

The preparation of financial statements requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities, disclosure of contingent assets and liabilities andthe reported amounts of revenues and expenses in our consolidated financialstatements. Management has reviewed with our Audit Committee the accountingpolicies that it uses to prepare our consolidated financial statements andbelieves that the following policies are the most important to the portrayal ofour financial condition and the results of our operations while requiring theuse of judgments and estimates about the effects of matters that are inherentlyuncertain.

 

*Impairment of Goodwill*.Goodwill is not amortized, but is subject to an annual assessment forimpairment, or more frequently if circumstances indicate potential impairment,through a comparison of fair value to its carrying amount. The two-stepapproach to assess our goodwill impairment requires that we first compare theestimated fair value of each reporting unit with goodwill to the carryingamount of the reporting unit’s assets and liabilities, including its goodwill.If the fair value of the reporting unit is below its carrying amount, then thesecond step of the impairment test is performed, in which the current fairvalue of the reporting unit’s assets and liabilities will determine the currentimplied fair value of the reporting unit’s goodwill.

 

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

 

In conducting our impairment analyses, we performanalyses and tests of our goodwill with respect to our reporting units. Thetest methods employed involve assumptions concerning useful lives of intangibleassets, interest and discount rates, projections and other assumptions offuture business conditions. The assumptions employed are based on management’sjudgment using internal and external data.

 

*Impairment of Long-lived and CertainIdentifiable Intangible Assets*. We review our long-livedassets for impairment when circumstances indicate that the book value of anasset may not be fully recovered by the undiscounted net cash flow generatedover the remaining life of the related asset or group of assets. If the cashflows generated by the asset are not sufficient to recover the remaining bookvalue of the asset, we are required to write down the value of the asset to itsestimated fair value. In evaluating whether the asset will generate sufficientcash flow to recover its book value, we estimate the amount of cash flow thatwill be generated by the asset and the remaining life of the asset. In makingour estimate, we consider the performance trends related to the asset, thelikelihood that the trends will continue or change, both at the asset level aswell as at the national economic level, and the length of time that we expectto retain the asset.

 

43

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

 

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

 

We receive cash payments for product formulation feesand allowances from suppliers based on the amount of product purchased directlyby our distributors and franchisees. These product formulation fees andallowances represent cash payments to us for the right to use our proprietaryformulations and recipes to manufacture the frozen dough, dough mixes and TCBYproducts these suppliers sell to our franchisees. Formulation fees andallowances are recorded as franchising revenues upon shipment of product to ourdistributors or franchisees.

 

# **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 ofAccounting Principles Board Opinion No. 20 (“APB” 20) and FASB Statement No. 3.”  Previously, APB 20, “Accounting Changes” andSFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements”required the inclusion of the cumulative effect of changes in accountingprinciples in net income of the period of the change. SFAS 154 requirescompanies to recognize changes in accounting principles, including changesrequired by new accounting pronouncements when the pronouncement does notinclude specific transition provisions, retrospectively to prior periods’financial statements. We will assess the impact of a retrospective applicationof a change in accounting principle in accordance with SFAS 154 if the need forsuch a change arises after the effective date of January 1, 2006.

 

In December 2004, the FASBissued SFAS No. 123 (revised 2004) (“SFAS 123R”), “Share-Based Payment,” whichis a revision of SFAS No. 123 (“SFAS 123”), “Accounting for Stock-BasedCompensation.” SFAS 123R supersedes Accounting Principles Board (“APB”) OpinionNo. 25, “Accounting for Stock Issued to Employees” and amends SFAS No. 95, “Statementof Cash Flows.” 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 beginningJanuary 1, 2006. The adoption of SFAS 123R is not expected to have a materialimpact on our consolidated financial position or results of operations.

 

In November 2004, the FASBissued SFAS No. 151 (“SFAS 151”), “Inventory Costs, an amendment ofARB No. 43, Chapter 4,” which clarifies the types of costs thatshould be expensed rather than capitalized as inventory. This statement alsoclarifies the circumstances under which fixed overhead costs associated withoperating facilities involved in inventory processing should be capitalized.The new standard will be effective for us beginning January 1, 2006. Theadoption of SFAS 151 is not expected to have a material impact on ourconsolidated financial position or results of operations.

 

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# **Item 7A. Quantitative and QualitativeDisclosures about Market Risk**

# ** **

Our major market risk exposure is changing interestrates. We do not hedge against changes in interest rates.

 

The table below provides information about ourfinancial instruments that are sensitive to changes in interest rates in theevent of refinancing including principal cash flows and related weightedaverage interest rates by year of expected maturity dates, based on the amountof indebtedness at December 31, 2005.

 
| ** **                                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|
| ** **                                              | ** ** | **(Dollars in thousands)** | ** ** |
| Long-term debt, including current portion  (fixed rate) |       | $                                    | —     |     | $          | —   |       | $        | —     |     | $          | —         |       | $         | —     |   | $ | 195,747 |   | $ | 195,747 |   |
| Weighted average interest rate                          |       | —                               |       | —   |       | —   |       | —   |       | —   |       | 10.47          | %          | 10.47     | %          |
|                                                         |            |                                      |            |          |            |          |            |          |            |          |            |                |            |           |            |  |  |  |  |  |  |  |

 

# **Item 8. Financial Statements andSupplementary Data**

# ** **

Our consolidated financial statements andsupplementary data are listed in the index appearing under Item 15A.

 

# **Item 9. Changes in and Disagreements With Accountantson Accounting and Financial Disclosure**

# ** **

None.

 

# **Item 9A. Controls and Procedures**

# ** **

The Company’s management,with the participation of the Company’s Chief Executive Officer and ChiefAccounting Officer, evaluated the effectiveness of the Company’s disclosurecontrols and procedures as of the end of the period covered by this report. Basedon that evaluation, the Chief Executive Officer and Chief Accounting Officerconcluded that the Company’s disclosure controls and procedures, as of the endof the period covered by this report, are functioning effectively to providereasonable assurance that the information required to be disclosed by theCompany in reports filed under the Securities Exchange Act of 1934 is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms. A controls system, no matter how well designed and operated,cannot provide absolute assurance that the objectives of the controls systemare met, and no evaluation of controls can provide absolute assurance that allcontrol issues and instances of fraud, if any, within a company have beendetected.

 

There has been no change inour internal control over financial reporting (as defined in Rules 13a-15(f)and 15d-15(f) under the Securities Exchange Act of 1934) that occurred duringour fiscal quarter ended December 31, 2005, that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

# **Item 9B. Other Information**

# ** **

None.

 

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**PART III**

 

# **Item 10. Directors and Executive Officers ofthe Registrant**

# ** **

**Managers and Executive Officers**

 

The following table sets forth certain informationregarding the managers, executive officers and certain other officers, of theCompany as of March 1, 2006. Each of the managers and executive officers servefor a one-year term and until their successors are elected and qualified.

 
| **Name**            | ** ** | **Age** | ** ** | **Position**                                                   |
|---------------------|------------|---------|------------|----------------------------------------------------------------|
| Stephen Russo       |       | 56      |       | Manager, President and  Chief Executive Officer                |
| Dara Dejbakhsh      |       | 48      |       | Executive Vice President  and Chief Operations Officer         |
| John Lauck          |       | 50      |       | Executive Vice President  and Chief Marketing Officer          |
| Michael R. Ward     |       | 47      |       | Executive Vice President,  Chief Legal Officer and Secretary   |
| Mark C. McBride     |       | 44      |       | Senior Vice President,  Chief Accounting Officer and Treasurer |
| Greg Berglund       |       | 39      |       | President, Mrs. Fields  Gifts, Inc.                            |
| Alexander Coleman   |       | 39      |       | Manager                                                        |
| John D. Collins     |       | 67      |       | Manager                                                        |
| Richard M. Ferry    |       | 68      |       | Manager                                                        |
| George N. Fugelsang |       | 65      |       | Manager                                                        |
| Walker Lewis        |       | 61      |       | Manager                                                        |
| Peter W. Mullin     |       | 65      |       | Manager                                                        |
| John D. Shafer      |       | 61      |       | Manager                                                        |
| Christopher Wright  |       | 48      |       | Manager                                                        |

 

***Mr. Russo*** has been President,Chief Executive Officer and Manager of the Company since March 2004, and hasbeen President, Chief Executive Officer and a Director of Mrs. Fields’ OriginalCookies, Inc. (“MFOC”), Mrs. Fields’ Holding Company, Inc. (“MFH”) and Mrs.Fields’ Companies, Inc. (“MFC”) since May 2003. From July 1997 to April2003, Mr. Russo was Retail Brands Operations Officer for Allied Domecq QSR,where he was responsible for 10,700 units and total system wide sales of$4.2 billion for brands such as Dunkin’ Donuts, Baskin Robbins and Togo’s.From January 1978 to June 1997, he served in various capacities for Dunkin’Donuts. He also has experience serving as President of Mister Donut and a multiunit supervisor of a McDonald’s licensee.

 

***Mr. Dejbakhsh*** has been ChiefOperations Officer of the Company since February 2006 and Executive VicePresident of Operations & Development of the Company since June 2004.Since December 2004, he has been a Director of MFOC. He served as VicePresident of Operations of the Company from March 2004 to June 2004,and as Vice President of Operations of MFOC from January 2004 toJune 2004. Immediately before joining the Company, Mr. Dejbakhshspent six months on sabbatical. From January 1996 to June 2003,Mr. Dejbakhsh was Area Vice President covering operations, development andfield marketing for the western U.S., Canada, Asia Pacific, and Australia forAllied Domecq QSR in Randolph, Massachusetts.

 

***Mr. Lauck*** has been ChiefMarketing Officer of the Company since February 2006 and Executive VicePresident of Marketing of the Company since April 2004. FromSeptember 2001 to April 2004, Mr. Lauck served as President andChief Marketing Officer for Arby’s Franchise Association. Prior to joining Arby’s,Mr. Lauck was on a one-year sabbatical. From February 2000 toJuly 2001 Mr. Lauck was Senior Vice President and Chief MarketingOfficer for Groceryworks.com, a home grocery delivery start-up. BetweenNovember 1998 and January 2000 Mr. Lauck was the Senior VicePresident and Chief Marketing Officer for Footaction and fromNovember 1997 to November 1998 was the Vice President of CorporateDevelopment for Blockbuster Video. Prior to Blockbuster, Mr. Lauck servedin various marketing positions at Pizza Hut and General Mills. Mr. Lauckis a director of Shadewell Grove Holdings, LLC, which is a parent of ShadewellGrove IP, LLC, a licensee of the Company.

 

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***Mr. Ward*** has been Chief LegalOfficer of the Company since February 2006 and Executive Vice President,General Counsel and Secretary of the Company, MFOC, MFH and MFC sinceJune 2004. Since December 2004, he has been a Director of MFOC. FromMarch 2004 to June 2004, Mr. Ward was Senior Vice President, GeneralCounsel and Secretary of the Company. Mr. Ward was Senior Vice President,General Counsel and Secretary of MFOC from June 2000 to June 2004 andof MFC from its inception in September 2001 to June 2004.Mr. Ward was Vice President of Administration and the Legal Department ofMFOC from September 1996 to May 2000, and Secretary of MFOC sinceApril 1999. Between 1991 and 1996, Mr. Ward’s responsibilities wereoverseeing the Legal Department and Human Resources Department forMrs. Fields, Inc., a predecessor to MFOC. He currently serves as amember of the Board of Directors of Prime Alliance Bank. He is admitted topractice law in the State of Utah.

 

***Mr. McBride*** was appointed Senior VicePresident, Chief Accounting Officer and Treasurer of the Company in March 2006.He was Vice President and Corporate Controller of the Company from August 2002to March 2006 and he was appointed Interim Chief Accounting Officer and InterimTreasurer of the Company from May 2005 to March 2006. Prior to joining theCompany, he was Chief Financial Officer of Ovid Technologies, Inc. from April2001 to July 2002. Mr. McBride was Vice President and Corporate Controller ofEvans & Sutherland Computer Corporation from September 1996 to April 2001. Hewas also the Corporate Secretary from March 1998 to March 2001. He was SeniorVice President and Chief Financial Officer of HealthRider, Inc from September1993 to September 1996. Mr. McBride is a Certified Public Accountant.

 

***Mr. Berglund*** has been President ofMrs. Fields Gifts since August 2005. From April 2001 to August 2005,Mr. Berglund was Senior Vice President and General Manager of DisneyDirect Marketing Services, Inc. in charge of the Walt Disney Company’s product-basedcatalog and e-commerce business.  Mr. Berglund added globalresponsibilities his last two years at Disney, overseeing the company’slicensed direct marketing business in Japan.  From July 1997 to April2001, Mr. Berglund was Vice President, Marketing for Cinmar, Inc., aCornerstone Brands company. There he was a part of the Frontgate catalog ande-commerce business.

 

***Mr. Coleman*** has been a Manager ofthe Company and a Director of MFH and MFC since May 2004. From May 2004 toDecember 2004, Mr. Coleman was a Director of MFOC. Since October 2004, Mr.Coleman has served as Managing Partner of Annex Capital Management LLC, aprivate equity firm specializing in the purchase of direct investments in thesecondary market. Prior to joining Annex Capital, Mr. Coleman served asManaging Investment Partner of Dresdner Kleinwort Capital from 1996 to 2004,and held various positions at Citibank, NA and its affiliates, includingCiticorp Venture Capital, from 1989 to 1995. Mr. Coleman serves as a Directorof Remy, Inc., Gardenburger, Inc. and KMC Telecom, Inc.

 

***Mr. Collins***has been a Manager of theCompany and a Director of MFH and MFC since December 2004. Since July 1999, Mr.Collins has worked as a consultant to non-public companies. From June 1999 toJune 2000, Mr. Collins was a consultant to KPMG LLP. Prior to June 1999, he wasa partner for KPMG LLP. He currently serves as a member of the Board ofDirectors of Excelsior Funds. Mr. Collins is also a member of the Board ofTrustees and Chairman of the Finance Committee of LeMoyne College in Syracuse,New York.

 

***Mr. Ferry*** has been a Manager ofthe Company since March 2004, and has been a Director of MFH sinceSeptember 1996 and of MFC since its inception in September 2001. FromSeptember 1996 to December 2004, Mr. Ferry was a Director of MFOC. Mr. Ferryis Founder Chairman of Korn/Ferry International, an international executivesearch firm, where he served as Chairman from May 1997 to July 2001and Chairman and Chief Executive Officer from May 1991 to May 1997.Mr. Ferry serves on the Boards of Directors of Avery Dennison, Dole FoodCompany, Castle & Cooke, Inc. and Pacific Life Insurance Company.Mr. Ferry is an investor in both Capricorn Investors II, L.P. (“CapricornII”) and Capricorn Investors III, L.P. (“Capricorn III”, together withCapricorn II, “Capricorn”).

 

***Mr. Fugelsang*** has been a Managerof the Company and a Director of MFH and MFC since May 2004. From May 2004to December 2004, Mr. Fugelsang was a Director of MFOC. From 1994 through 2001,Mr. Fugelsang was Chief Executive Officer North America for the DresdnerBank Group, based in New York City. Mr. Fugelsang serves as trustee andchairman of the finance committee at Thunderbird, the Garvin School ofInternational Management, and is also a director of ART, Advanced ResearchTechnologies. He is also a member of the international advisory board of theMonterey Institute of International Studies.

 

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***Mr. Lewis*** has been a Manager ofthe Company since March 2004, and has been a Director of MFH sinceSeptember 1996 and of MFC since its inception in September 2001. FromSeptember 1996 to May 2004, Mr. Lewis was a Director of MFOC. Mr. Lewis has served as the Chairman of Devon Value Advisers sinceJanuary 1997. Mr. Lewis serves as a director of Ameriprise, OwensCorning and Applied Predictive Technologies.

 

***Mr. Mullin*** has been a Manager ofthe Company since March 2004, and has been a Director of MFH sinceSeptember 1996 and of MFC since its inception in September 2001. FromSeptember 2001 to December 2004, Mr. Mullin was a Director of MFOC. Mr. Mullinfounded Mullin Consulting, Inc., an executive compensation, benefitplanning and corporate insurance consulting firm, in 1969 and serves as itsChairman. Mr. Mullin is a Director of Avery Dennison Corporation. Mr. Mullinis an investor in Capricorn II and Capricorn III.

 

***Mr. Shafer*** has been Manager of theCompany and Director of MFH and MFC since April 2005. Mr. Shafer has beenretired since 2003. He served as Chief Executive Officer of Allied Domecq, QSRfrom 1998 through January 2003, and served as Chief Operating Officer from1996to1998 of Allied Retailing. He served in various capacities of Dunkin’ Donuts,Inc from 1972 to 1996 including President from 1992 to 1996. Mr. Shafer alsoserves on the Board of Directors and Executive Committee for PlymouthPlantation, and is an Overseer and Advisory Board Member of the PlymouthPhilharmonic.

 

***Mr. Wright*** has been a Manager ofthe Company since March 2004, and has been a Director of MFH and MFC sinceFebruary 2002. From February 2002 until December 2004, Mr. Wright was aDirector of MFOC. Since 2003, he has been an Advisory Director at CampbellLutyens and Company, Ltd. From 1995 to June 2002, Mr. Wright served as CEOof Dresdner Kleinwort Capital, LLC, the private equity business of DresdnerBank Group and from 2002 to June 2003 as Managing Director of DresdnerKleinwort Wasserstein LLC. He is a Director and serves on the corporategovernance and audit committees of the Board of Directors of RoperIndustries, Inc. Mr. Wright has also been a Director of Merifin Capital, aprivate investment group since 1989 and serves as director and advisory boardmember of several other privately-held companies in the United States and Europe.

 

**Board Committees**

 

Three functioning committees of the Board of Managershave been organized: an Executive Committee, a Compensation Committee and anAudit Committee. Following is a brief description of each of these committees.

 

*Executive Committee.*TheExecutive Committee is composed of Messrs. Russo (Chairperson), Ferry andFugelsang. The purpose of this committee is to act on behalf of the entireBoard of Managers between Board meetings.

 

*Compensation Committee.*TheCompensation Committee is composed of Messrs. Ferry (Chairperson), Lewis,  Mullin and Shafer. The purpose of thiscommittee is to ensure that the Company has a broad plan of executivecompensation that is competitive and motivating to the degree that it willattract, hold and inspire performance of managerial and other key personnel ofa quality and nature that will enhance the growth and profitability of theCompany.

 

*Audit Committee.*TheAudit Committee is composed of Messrs. Fugelsang (Chairperson), Wright andCollins. The purpose of the Audit Committee is to provide assistance to theBoard of Managers in fulfilling their oversight responsibilities relating tothe Company financial statements and financial reporting process and internalcontrols in consultation with the Company’s independent registered publicaccountants and internal auditors. The committee also is responsible forensuring that the independent registered public accountants submit a formalwritten statement to the Company regarding relationships and services which mayaffect the auditors’ objectivity and independence.

 

**Audit Committee Financial Expert**

 

The Board of Managers of the Company has determinedthat Messrs. Fugelsang and Collins are the Company’s audit committee financialexperts, as defined by SEC rules, and that they are “independent” as the termis used in Item 7(e)(3)(iv) of Schedule 14A of the proxy rules under theSecurities Exchange Act of 1934.

 

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**Code of Ethics**

 

The Company has adopted a Code of Ethical Conduct (the“Code”) that applies to all directors, officers and employees of the Company,MFOC and its subsidiaries. The Code requires that all of our employees actethically when conducting business. The Code provides a summary of the conductrequired from all employees of the Company, and is a source for guidance,accountability for and enforcement of its provisions. A complete copy of theCode has been posted on our website at *www.mrsfields.com/privacy/ethics/.*We will satisfy any disclosure requirements under Item 5.05 of Form8-K regarding an amendment to, or waiver from, any provision of the Code withrespect to our principal executive officer, principal financial officer,principal accounting officer and any persons performing similar functions bydisclosing the nature of such amendments or waiver on our website.

 

# **Item 11. Executive Compensation**

# ** **

**Summary Compensation Table**

 

The following table sets forth information with regardto compensation for services rendered in all capacities to the Company and itssubsidiaries by the Chief Executive Officer, the three executive officers ofthe Company other than the CEO who were serving as executive officers at theend of the last completed fiscal year and one additional individual who wasamong the four most highly compensated employees of the Company other than theCEO, (collectively, the “Named Executive Officers”). The information set forthin the table reflects compensation earned by such individuals for services withMFC and its subsidiaries during the covered periods.

 

### **SUMMARY COMPENSATION TABLE**

 
| ** **                                             | ** ** | ** ** | ** ** | **Annual**       | ** ** | **Long -  Term** | ** ** | ** **       | ** ** |
|--------------------------------------------------------|------------|------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                                             | ** ** | ** ** | ** ** | **Compensation** | ** ** | **Compensation** | ** ** | ** **       | ** ** |
| ** **                                             | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** ** | ** ** | **Securities** | ** ** | ** ** | ** ** |
| ** **                                             | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** | **Other**        | ** ** | **Restricted** | ** ** | **Underlying** | ** ** | ** ** | ** ** |
| **Name and Principal**                                 | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** | **Annual**       | ** ** | **Stock** | ** ** | **Options/** | ** ** | **All  Other** | ** ** |
| **Position**                                           | ** ** | **Year**   | ** ** | **Salary**       | ** ** | **Bonus  (5)**   | ** ** | **Compensation** | ** ** | **Awards** | ** ** | **SARS** | ** ** | **Compensation  (6)** | ** ** |
| ** **                                             | ** ** | ** ** | ** ** | **($)**          | ** ** | **($)**          | ** ** | **($)**          | ** ** | **($)** | ** ** | **(#)** | ** ** | **($)** | ** ** |
| **Stephen  Russo (1)**                                 |       | 2005       |       | 440,625          |       | —           |       | —           |       | — |   | — |   | 31,616 |   |
| President and  Chief                                   |       | 2004       |       | 430,000          |       | 139,320          |       | —           |       | — |   | — |   | 28,601 |   |
| Executive Officer                                      |       | 2003       |       | 270,263          |       | 162,158          |       | —           |       | — |   | — |   | 10,000 |   |
| **Dara  Dejbakhsh (2)**                                |       | 2005       |       | 307,438          |       | —           |       | —           |       | — |   | — |   | 8,520 |   |
| Executive Vice  President and Chief Operations Officer |       | 2004       |       | 252,848          |       | 158,000          |       | —           |       | — |   | — |   | 109,060 |   |
| **John  Lauck (3)**                                    |       | 2005       |       | 358,677          |       | —           |       | —           |       | — |   | — |   | 5,415 |   |
| Executive Vice  President and Chief Marketing Officer  |       | 2004       |       | 253,312          |       | 175,000          |       | —           |       | — |   | — |   | 122,449 |   |
| **Michael  R. Ward**                                   |       | 2005       |       | 276,499          |       | —           |       | —           |       | — |   | — |   | 18,184 |   |
| Executive Vice  President,                             |       | 2004       |       | 270,667          |       | 106,750          |       | —           |       | — |   | — |   | 120,546 |   |
| Chief Legal  Officer and Secretary                     |       | 2003       |       | 260,192          |       | 199,500          |       | —           |       | — |   | — |   | 10,192 |   |
| **Greg  Berglund (4)**                                 |       | 2005       |       | 139,854          |       | 134,000          |       | —           |       | — |   | — |   | 199,611 |   |
| President, Mrs.  Fields Gifts, Inc.                    |       |       |       |             |       |             |       |             |       |   |   |   |   |   |   |

 

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(1)                                  Mr. Russo began his employment with MFOC inMay 2003 and with the Company at its inception in March 2004.

 

(2)                                  Mr. Dejbakhsh began his employment with MFOCin January 2004 and with the Company at its inception in March 2004.

 

(3)                                  Mr. Lauck began his employment with the Companyin April 2004.

 

(4)                                  Mr. Berglund began his employment with theCompany in August 2005.

 

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(5)                                  Bonus amounts reported are amounts earnedduring the applicable year, although they may have been paid in subsequentperiods. Further, bonus amounts do not include performance units granted underMFC’s Phantom Stock Plan (“Phantom Plan”). The Company does not expect to paybonuses to the Named Executive Officers during 2006 for performance during 2005.Mr. Berglund’s bonus includes a signing bonus of $40,000 and a guaranteed bonusof $94,000***.***

 

(6)                                  Amounts represent (i) matchingcontributions to the MFOC 401(k) Retirement Savings Plan of $11,616 and $8,601for Mr. Russo for fiscal years 2005 and 2004 respectively (there were nomatching contributions for any plan participant during 2003); $7,494 and $6,625for Mr. Ward for fiscal years 2005 and 2004, respectively; $5,549 and$1,875 for Mr. Dejbakhsh for fiscal years 2005 and 2004 respectively; and$5,415 for Mr. Lauck for fiscal year 2005; (ii) reimbursement ofrelocation expenses of $2,971 and $100,935 for Mr. Dejbakhsh for fiscal years2005 and 2004 respectively; $122,449 for Mr. Lauck for fiscal year 2004; and$199,611 for Mr. Berglund for fiscal year 2005; (iii) housing allowance of$20,000, $20,000 and $10,000 for Mr. Russo for fiscal 2005, 2004 and 2003,respectively; (iv) car allowance of $6,250 for Mr. Dejbakhsh for fiscal 2004;(v) cash compensation in lieu of paid time off of $10,690, $5,250, and$10,192 for Mr. Ward for fiscal years 2005, 2004 and 2003 respectively;and (vi) payments for voluntary termination of vested in-the-money options of$108,671 for Mr. Ward during fiscal 2004.

 

**Long-TermIncentive Plan (“LTIP”) Awards Table**

 

Effective as of May 23, 2004, the Board of Directorsof MFC approved adoption of the Phantom Plan. The purpose of the PhantomPlan is to provide long-term incentives to certain key employees of MFC or itssubsidiaries (“Participants”) as determined by the Compensation Committee ofthe Board of Directors (the “Committee”). The Phantom Plan is unfunded, andParticipants do not receive any payment under the Phantom Plan until thecompletion of a Triggering Event (defined below). Participants receiveperformance units in amounts recommended by the CEO and determined by theCommittee. Upon the completion of a Triggering Event, Participants receivepayments reflecting the number and value of their performance units at the timeof the completion of the Triggering Event. Payments to Participants may be madein cash or through issuance of equity securities of MFC, as determined by theCommittee. The value of a performance unit at the completion of a TriggeringEvent is the value of one share of Common Stock of MFC as determined in good faithby the Board of Directors. If the Board determines the need, it may seek theadvice of an independent advisor.

 

Maximum number of performance units that may begranted under the Phantom Plan is one million units. Subdivisions, splits, orcombinations involving MFC’s Common Stock will proportionately affect thenumber of performance units that have been awarded under the Phantom Plan. InMay 2004, the Committee approved the grant of up to 392,418 performance unitsallocated among Participants as determined by the Committee. Future grants, ifany, shall also be as determined by the Committee. As of December 31, 2005,341,400 performance units have been granted to Participants.

 

The following table sets forth information regardingthe Phantom Plan awards granted to Named Executive Officers during the lastfiscal year:

 

**LONG-TERMINCENTIVE PLANS—AWARDS IN FISCAL YEAR 2005**

** **
| ** **                                     | ** ** | ** **         | ** ** | ** **                                                             | ** ** | **Estimated Future Payouts Under Non-  Stock Price-Based Plans (2)** | ** ** |
|------------------------------------------------|------------|--------------------|------------|------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|
| **(a)**                                        | ** ** | **(b)**            | ** ** | **(c)**                                                                | ** ** | **(d)**                                                                                                 | ** ** | **(e)** | ** ** | **(f)** | ** ** |
| ** **                                     | ** ** | **Number of** | ** ** | **Performances or Other  Period Until Maturation** | ** ** | **Threshold**                                                                                           | ** ** | **Target** | ** ** | **Maximum** | ** ** |
| **Name and Principal Position** | ** ** | **Units (#)** | ** ** | **or Payout**                                                     | ** ** | **($ or #)**                                                                                  | ** ** | **($ or #)** | ** ** | **($ or #)** | ** ** |
| **Greg Berglund**                              |       | 23,544             |       | Upon Triggering Event (1)                                              |       | —                                                                                                  |       | — |   | — |   |
| President, Mrs. Fields Gifts, Inc.             |       |               |       |                                                                   |       |                                                                                                    |       |   |   |   |   |

 

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(1)                                  A Triggering Event is the first to occurof:  (i) a sale of substantially all ofthe assets of MFC; (ii) a public offering of MFC’s Common Stock where MFCreceives proceeds, net of any underwriter’s discounts and expenses, of not lessthan $50 million; or (iii)  any stocksale, merger or other transaction where the owners of Common Stock immediatelybefore the transaction do not own in excess of 50 percent of the common stockof the entity surviving such sale, merger or other transaction (“Triggering Event”).

 

(2)                                  The Phantom Plan is a stock price-based plan.

 

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**Compensation of Managers**

 

The Board of Managers of the Company meets regularlyon a quarterly basis and more often as required. Board members, other thanofficers of the Company, are compensated for services rendered annually in theform of a payment of $15,000 in cash and the grant of options to purchasecommon stock of MFC under the MFC’s Director Stock Option Plan, as more fullydescribed immediately below. Members of the Audit Committee and CompensationCommittee of the Board of Managers of the Company also receive the followingcompensation for their service on such committees:  (a) the chairperson of each committeereceives an annual cash retainer fee of $5,000; and (b) each member who doesnot serve as chair receives a cash fee of $750 for each committee meeting thatthey attend.

 

**DirectorStock Option Plans**

 

Members of the Company’s Board of Managers, other thanofficers of the Company, are qualified to participate in MFC’s Director StockOption Plan. Under MFC’s Director Stock Option Plan, a committee of the Boardof MFC is authorized to administer the Plan and has the power, among otherthings, to grant awards of options for common stock of MFC to outside directorsof MFC and its subsidiaries, including the Company. MFC’s Director Stock OptionPlan provides for the issuance of time vested options, which vest25.0 percent per year on the anniversaries of the dates on which they aregranted and vest in full upon a change of control of MFC or the Company. Atotal of 100,000 shares of common stock of MFC are reserved for issuance underMFC’s Director Stock Option Plan and as of March 1, 2006 there were outstandingoptions providing for the issuance of up to 68,842 of those shares. Commonstock of MFC issued under the Director Stock Option Plan is subject tocustomary restrictions on transfer.

 

Changes to MFC’s Director Stock Option Plan currentlyare under consideration by the Compensation Committee and the Board ofDirectors of MFC. As of the date of this report, such changes have not beendetermined.

 

**Employment Agreements**

 

MFC’s Board of Directors named Stephen Russo as thePresident and CEO of MFC and its subsidiaries effective May 15, 2003.Mr. Russo receives a base salary of $440,625 under his amended andrestated employment agreement dated effective as of March 16, 2004. Hisemployment agreement provides for a period of employment of three years fromthe date of the agreement, subject to termination provisions and to automaticextension of the agreement. The employment agreement permits Mr. Russo toparticipate in any incentive compensation plan adopted by the Company, in itsbenefit plans and in an equity-based plan or arrangement. If the Companyterminates employment for cause or if Mr. Russo terminates employmentwithout good reason, the Company has no further obligation to pay him. If theCompany terminates his employment without cause or he terminates employmentwith good reason, Mr. Russo can receive severance pay of 24 months ofhis then-current salary, plus a portion of any discretionary bonus that wouldotherwise have been payable. The severance would be paid in 12 equal monthlyinstallments. The employment agreement prohibits Mr. Russo, for a yearfrom the date of termination of employment under the agreement, from becomingan employee, owner, officer, agent or director of a firm or person thatdirectly competes with the Company in a line or lines of business of theCompany that accounts for 10.0 percent or more of the Company’s grosssales, revenues or earnings before taxes. An exception is made for investmentsof not more than 3.0 percent of the equity of a company listed or tradedon a national securities exchange or an over-the-counter securities exchange.The employment agreement has customary provisions for vacation, fringebenefits, payment of expenses and automobile allowances.

 

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The Company also has an amended and restatedemployment agreement dated effective as of March 16, 2004 with Michael R. Ward,Executive Vice President, Chief Legal Officer and Secretary. Mr. Ward’s currentbase salary is $310,000. Mr. Ward’s employment agreement provides for a periodof employment of two years from the date of the agreement, subject totermination provisions and to automatic extension of the agreement. Theemployment agreement permits the employee to participate in any incentivecompensation plan adopted by the Company, in its benefit plans and in an equity-basedplan or arrangement. If the Company terminates employment for cause or if theemployee terminates employment without good reason, the Company has no furtherobligation to pay the employee. If the Company terminates the employee’semployment without cause or the employee terminates employment with goodreason, the employee can receive severance pay of 18 months of histhen-current salary, plus a portion of any discretionary bonus that wouldotherwise have been payable. The severance would be paid in 12 equal monthlyinstallments. The employment agreement prohibits the employee, for a year fromthe date of termination of employment under the agreement, from becoming anemployee, owner, officer, agent or director of a firm or person that directlycompetes with the Company in a line or lines of business of the Company thataccounts for 10.0 percent or more of the Company’s gross sales, revenuesor earnings before taxes. An exception is made for investments of not more than3.0 percent of the equity of a company listed or traded on a nationalsecurities exchange or an over-the-counter securities exchange. The employmentagreement has customary provisions for vacation, fringe benefits, payment ofexpenses and automobile allowances.

 

No other executive has an employment agreement withthe Company, but each of the executives except Messrs. Russo and Ward have anarrangement with the Company granting them the right to participate in theCompany’s bonus program and benefit plans and providing certain severancepayments to them in the event of termination without cause.

 

**CertainSeverance Obligations with Past Management**

 

On May 7, 2003, the Board of Directors of MFOCaccepted the resignation of Larry A. Hodges as its President, Chief ExecutiveOfficer and Director, which resignation was effective on May 14, 2003.Pursuant to the terms of a Separation Agreement, dated August 6, 2003, byand among MFC, MFOC and Mr. Hodges, and a Severance Assumption Agreement,dated as of March 16, 2004, by and among MFC, MFOC, the Company andMr. Hodges (the “ Separation Agreements”), Mr. Hodges received28 months of salary as severance, which was paid semi-monthly through theend of 2004, and the balance became due in a lump sum in January 2005. Allseverance obligations have been paid to Mr. Hodges under the SeparationAgreements.

 

In addition, under the Separation Agreements,Mr. Hodges and MFC also agreed that in lieu of Mr. Hodges havingexercised vested options to purchase 110,710.50 shares of MFC’s common stockprior to their lapse, MFC will pay to Mr. Hodges a transaction fee of$272,127 in the event that there is a change of control or initial publicoffering (as defined in MFC’s Employee Stock Option Plan) of MFC at a price pershare of MFC common stock of at least $10.00, such price per share beingsubject to equitable adjustment under the circumstances set forth inSection 4(b) of MFC’s Employee Stock Option Plan. Additionally,Mr. Hodges holds 100 shares of preferred stock of MFC.

 

**Compensation Committee Interlocks and InsiderParticipation in Compensation Decisions**

 

As of December 31, 2005, the Compensation Committee ofthe Board of Managers of the Company and the Board of Directors of MFH and MFC,was comprised of Richard Ferry, Chairperson, Walker Lewis, Peter Mullin, andJohn Shafer. No disclosures concerning any member of the Compensation Committeeis required to be included in this Report.

 

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# **Item 12. Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters**

# ** **

As of the date of this report, all of our commoninterests are owned by MFOC, which is wholly owned, through MFH, by MFC. Theaddress of MFOC, MFH, MFC and the executive officers and managers of theCompany is 2855 East Cottonwood Parkway, Suite 400, Salt Lake City, Utah 84121.The following table sets forth certain information, based on actual ownershipas of March 1, 2006, believed by us to be accurate based on informationprovided to us concerning the beneficial ownership of capital stock of MFC byeach stockholder who is known by us to own beneficially in excess of fivepercent of the outstanding voting stock and by each director, the NamedExecutive Officers and all executive officers and directors as a group. Thestockholders listed below are deemed beneficial owners of the common interestsof the Company as a result of their ownership of capital stock of MFC. Exceptas otherwise indicated, all persons listed below have (1) sole votingpower and investment power with respect to their shares, except to the extentthat authority is shared by spouses under applicable law, and (2) recordand beneficial ownership with respect to their shares. The shares and percentagesdescribed below include shares of common stock which were outstanding orissuable within 60 days upon the exercise of options outstanding as ofMarch 1, 2006, and give effect to the exercise of warrants issued by MFC. See “ExecutiveCompensation” and “Compensation of Managers.”

 

As of March 1, 2006, there were 37 record holders ofMFC’s common stock.

 
| ** **                                                | ** ** | **Common Stock **** | ** ** | **Preferred Stock ***** | ** ** | **Aggregate**      | ** ** |
|-----------------------------------------------------------|------------|-------------------------------|------------|-----------------------------------|------------|--------------------|------------|
| ** **                                                | ** ** | **Number**                    | ** ** | **Percentage**                    | ** ** | **Number**         | ** ** | **Percentage** | ** ** | **Voting** | ** ** |
| **Name of Beneficial Owner**               | ** ** | **of Shares**            | ** ** | **of Class**                 | ** ** | **of Shares** | ** ** | **of Class** | ** ** | **Power** | ** ** |
| Capricorn Investors II, L.P.(1)(8)                        |       | 3,245,918                     |       | 50.89                             | %          | —             |       | — |   | 50.74 | % |
| Capricon Investors III, L.P.(1)(8)                        |       | 2,056,228                     |       | 32.24                             | %          | —             |       | — |   | 32.53 | % |
| Annex Holdings I LP-Delaware(2)                           |       | 355,242                       |       | 5.57                              | %          | 4,995              |       | 33.93 | % | 5.94 | % |
| Charlesbank Equity Fund II LP(3)                          |       | 164,774                       |       | 2.58                              | %          | 5,000              |       | 33.96 | % | 2.97 | % |
| Affilates of Stewart Resnick(4)                           |       | 164,912                       |       | 2.59                              | %          | 1,000              |       | 6.79 | % | 2.65 | % |
| Alexander Coleman(5)(6)                                   |       | 152                           |       |                              | *          | —             |       | — |   | — |   |
| John D. Collins(5)                                        |       | —                        |       | —                            |       | —             |       | — |   | — |   |
| Richard M. Ferry(5)(6)(7)                                 |       | 18,379                        |       |                              | *          | 50                 |       |   | * |   | * |
| George N. Fugelsang(5)(6)                                 |       | 152                           |       |                              | *          | —             |       | — |   |   |   |
| Walker Lewis(5)(6)                                        |       | 15,845                        |       |                              | *          | —             |       | — |   |   | * |
| Peter W. Mullin(5)(6)(7)                                  |       | 24,865                        |       |                              | *          | 163                |       | 1.00 | % |   | * |
| John D. Shafer(5)                                         |       | —                        |       | —                            |       | —             |       | — |   | — |   |
| Christopher Wright(5)(6)                                  |       | 1,330                         |       |                              | *          | —             |       | — |   |   | * |
| Herbert Winokur, Jr.(5)(7)(8)                             |       | 6,729                         |       |                              | *          | 899                |       | 6.10 | % |   | * |
| Stephen Russo(5)                                          |       | 152                           |       |                              | *          | 20                 |       |   | * |   | * |
| Dara Dejbakhsh                                            |       | 152                           |       |                              | *          | 20                 |       |   | * |   | * |
| John Lauck                                                |       | 152                           |       |                              | *          | 20                 |       |   | * |   | * |
| Michael Ward                                              |       | 451                           |       |                              | *          | 60                 |       |   | * |   | * |
| Greg Berglund                                             |       | —                        |       | —                            |       | —             |       | — |   | — |   |
| All executive officers and directors as a  group(5)(6)(7) |       | 68,697                        |       | 1.08                              | %          | 1,233              |       | 8.33 | % | 1.17 | % |

 

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*              Less than 1%.

 

**           Common stock, par value $0.001 per share, ofMFC.

 

***         16.5% cumulative preferred stock, par value$0.001 per share, of MFC.

 

(1)           The address of Capricorn is 30 East ElmStreet, Greenwich, CT 06830.

 

(2)           The address of Annex Holdings I LP-Delawareis c/o Annex Capital ManagementLLC, 599 Lexington Avenue, New York, NY 10022.

 

(3)           The address of Charlesbank Equity Fund II LPis c/o Charlesbank Capital Partners, LLC, 600 Atlantic Ave., 26th Floor,Boston, MA 02210 2203.

 

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(4)           Stewart Resnick holds 7,485 common shares and1,000 preferred shares individually; 157,427 common shares are held by theStewart and Lynda Resnick Revocable Trust. The address of both Mr. Resnickand the Trust is 11444 W. Olympic Blvd., 10th Floor, Los Angeles, CA 90064.

 

(5)           Mr. Russo, Mr. Coleman, Mr.Collins, Mr. Ferry, Mr. Fugelsang, Mr. Lewis, Mr. Mullin,Mr. Shafer and Mr. Wright are directors of MFC and Managers of the Company.Mr. Winokur is managing member of Capricorn Holdings, LLC, the GeneralPartner of Capricorn II, and Capricorn Holdings III, LLC, the General Partnerof Capricorn III, and is a director of MFC. See “Management.”

 

(6)           The common share amounts and percentagesinclude common shares subject to options granted to Managers of the Companythat are currently exercisable or will be exercisable on or before May 1, 2006,as follows:  Mr. Coleman, 152shares; Mr. Ferry, 8,345 shares; Mr. Lewis, 8,345 shares; Mr. Mullin,8,345 shares; Mr. Wright, 1,330 shares; and all executive officers anddirectors as a group, 26,668 shares.

 

(7)           Includes common and preferred shares held byMr. Ferry, Mr. Mullin and Mr. Winokur in individual retirementaccounts, family trusts or family charitable foundations.

 

(8)           Options granted to Mr. Winokur under MFC’sDirector Stock Option Plan are issued to Capricorn II andCapricorn III. Capricorn II has 15,694 option and Capricorn III has 996options for shares currently exercisable or exercisable on or before May 1,2006.

 

**EquityCompensation Plan Information**

 

The following table sets forth information relating tocompensation plans under which equity securities of MFC are authorized forissuance, as of December 31, 2005. The equity compensation plans that have beenapproved by security holders are the Mrs. Fields’ Companies, Inc. EmployeeStock Option Plan and the Mrs. Fields’ Companies, Inc. Director Stock OptionPlan. The Employee Stock Option Plan was terminated effective September 1,2004.

 
| **Plan Category**                                        | ** ** | **Number of  securities to be  issued upon exercise  of outstanding  options**** and rights** | ** ** | **Weighted-average  exercise price  of outstanding  options and rights** | ** ** | **Number of securities  remaining for future  issuance under  equity compensation  plans** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|
|                                                          |       |                                                                                                                                  |       |                                                                                         |       |                                                                                                                     |       |   |
| Mrs. Fields’ Companies, Inc. Employee Stock  Option Plan |       | 10,000                                                                                                                                |       | $                                                                                            | 22.60      |                                                                                                                     | —     |   |
| Mrs. Fields’ Companies, Inc. Director Stock  Option Plan |       | 68,842                                                                                                                                |       | 15.13                                                                                        |       | 31,158                                                                                                                   |       |
|                                                          |       |                                                                                                                                  |       |                                                                                         |       |                                                                                                                     |       |
| Total                                                         |       | 78,842                                                                                                                                |       | $                                                                                            | 16.07      |                                                                                                                     | 31,158     |   |

 

In addition to the plans reflected in the table above,MFC has a Phantom Plan discussed elsewhere in this report on Form 10-K. ThePhantom Plan has not been approved by security holders and such approval is notrequired. The value of awards under the Phantom Plan reflect the value of MFC’sequity securities, but Participants may receive cash payments in lieu ofsecurities for performance units that they hold upon certain triggering events.The maximum number of performance units that may be granted under the PhantomPlan is one million units. In May 2004, the committee administering the PhantomPlan approved the grant of up to 392,418 performance units, and as of December31, 2005, 341,400 performance units have been granted to Participants.

 

# **Item 13. Certain Relationships and RelatedTransactions**

# ** **

**The Stockholders’ Agreement**

 

MFC has entered into a stockholders’ agreement, as ofSeptember 29, 2001, with its stockholders. The stockholders’ agreementprovides that stockholders may not transfer their shares of MFC, except tocertain permitted transferees. If at any time after seven years from the dateof the stockholders’ agreement any stockholder other than Capricorn II orCapricorn III receives an offer to purchase shares of common stock, that stockholdermust first offer the shares to MFC and other stockholders at the same price andon substantially the same terms. MFC has a right of first refusal with respectto such shares, with the stockholders having the right, if MFC does not buy allof the shares, to purchase such shares on a pro rata basis.

 

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If both Capricorn II and Capricorn III approve a saleor exchange of at least a majority of the outstanding common stock to a thirdparty that is not an affiliate of either Capricorn II or Capricorn III, theneither Capricorn entity has the right to require the other stockholders to(i) if the sale is structured as a sale of stock, sell all of suchstockholders’ shares of common stock; or (ii) if the sale is structured asa merger requiring the consent of stockholders, vote such stockholders’ sharesin favor of the sale. The stockholders’ agreement also gives certain rights tocertain stockholders upon an initial public offering consummated by MFC andincludes other provisions as set forth in the stockholders agreement.

 

**Control by Capricorn**

 

Capricorn II and Capricorn III, MFC’s majoritystockholders, together hold an aggregate of approximately 83 percent ofMFC’s common stock. In addition to Capricorn’s rights under the stockholders’agreement described above, Capricorn also has corporate law rights stemmingfrom its majority ownership of MFC. As a result of its direct control of MFC,and indirect control of MFH and MFOC, Capricorn II and Capricorn III togethercontrol the power to elect our managers, to appoint members of management andto approve all actions requiring the approval of the holders of our commoninterests, including adopting amendments to our certificate of formation andlimited liability company operating agreement as well as approving mergers,acquisitions or sales of all or substantially all of our assets. In addition,Capricorn currently has one managing director, Herbert S. Winokur, Jr., servingas a director of MFC.

 

**Management Agreement**

 

On March 16, 2004, we entered into a managementagreement with MFOC, pursuant to which we provide business and organizationalstrategy, financial and investment management, and other executive levelmanagement services to MFOC and its subsidiaries (other than us) upon the termsand subject to the conditions set forth in the management agreement. Ascompensation for these services, MFOC reimburses us the sum of the actualallocated costs of the fixed general and administrative functions plus thevariable general and administrative functions dedicated to the provision ofthese services as determined in good faith by us and MFOC. For the year endedDecember 31, 2005, MFOC reimbursed us $2.4******million for management services providedunder the management agreement. These reimbursement amounts are intended toreflect the actual costs of providing these services and are not intended togenerate revenues for us. We expect that the reimbursement amounts willdecrease over time as MFOC reduces its store operations. The managementagreement also provides that any amounts received by a party to the managementagreement that, pursuant to its terms, is the property of the other party,promptly shall be remitted to such other party. It is intended that thismanagement agreement will continue in effect until the expiration of all storeleases for which MFOC is the lessee.

 

**Franchise Agreements with MFOC**

 

On March 16, 2004, certain of our brand franchisorsubsidiaries entered into franchise agreements with MFOC, which permit MFOC tosell and distribute our products in its owned stores upon payment of franchiseroyalties and other amounts required under the franchise agreements. Thesefranchise agreements are similar to our standard form of franchise agreement,except that we did not charge an up-front franchising fee for stores open as ofthe date of the franchise agreements in recognition of the fact that the storesowned and operated by MFOC were operated prior to entering into the franchiseagreements. These franchise agreements are terminable by us in the event ofnon-payment of the franchise fees for a period of 10 days, followed by a10-day opportunity to cure, or other material violation of the franchiseagreements. The aggregate amount of franchise royalties paid to us by MFOCduring fiscal 2005 and fiscal 2004 was $689,000 and $2.8 million, respectively.

 

**TCBY Supply Agreement**

 

TCBY entered into an exclusive supply agreement with aformer subsidiary of TCBY Enterprises, Americana Foods Limited Partnership (“Americana”),on November 19, 2002 (the “TCBY Supply Agreement”). A subsidiary ofCapricorn III is a limited partner in Americana, the general partner of whichis an affiliate of Coolbrands International, Inc., which also manages thebusiness and operations of Americana pursuant to a management agreement.

 

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The TCBY Supply Agreement requires that TCBY, throughits distributor and franchisees, purchase at least 75 percent of theproduct volumes contained in the agreement. If purchases fall below75 percent of the quantity, then Americana has the right to propose a newpricing structure. If TCBY does not agree to the new pricing structure, thenAmericana has the right to terminate the agreement by giving 180 days ofwritten notice.

 

Americana produces all of the domestic TCBY brandedproducts and some of the international TCBY branded products at its productionfacility in Dallas, Texas. Americana sells most of its TCBY branded products toTCBY’s franchisees through Blue Line Distributing, in respect of which, TCBYreceives yogurt formulation fees, royalties and advertising funds billed to thefranchisees from Blue Line Distributing. Americana also sells TCBY brandedproducts to TCBY’s franchisees through other distributors, in respect of whichAmericana pays TCBY yogurt formulation fees, royalties and advertising fundsthat it bills TCBY’s franchisees through these other distributors. TCBYpurchases TCBY branded products from Americana and resells these products tocertain international distributors and franchisees. TCBY recognized revenuesrelated to the product manufactured by Americana of $9.6 million, $11.7 millionand $13.1 million for the years ended December 31, 2005, January 1, 2005 andJanuary 3, 2004, respectively. In addition, Americana sells TCBY branded frozenspecialty products and private label products through retail channels and paysTCBY a portion of the sales price under the TCBY Supply Agreement. TCBYinvoiced Americana $711,000, $930,000 and $1.9 million for the fiscal yearsended December 31, 2005, January 1, 2005 and January 3, 2004,respectively, relating to TCBY’s portion of these sales. As a result of thesesales, TCBY must reimburse Americana for certain costs. Americana invoiced TCBY$180,000, $381,000 and $892,000 for the fiscal years ended December 31, 2005,January 1, 2005 and January 3, 2004, respectively, relating to thereimbursement of these costs.

 

**MFOC Sublease**

 

On March 16, 2004, we entered into an assignmentagreement whereby the lease for the corporate headquarters was assigned fromMFOC to us. MFOC then entered into a sublease with us and will pay us, over theterm of the sublease, agreed rental payments that have been established basedon estimated usage of the headquarters by their personnel. For the year endedDecember 31, 2005 and the period from March 16, 2004 to January 1, 2005, MFOCpaid rent of $289,000 and $220,000, respectively, to us. Management expectsthat MFOC’s aggregate rental payments to us will be approximately $88,000 in fiscal2006. MFOC’s share is expected to decrease over time with corresponding reducedoperations. It is intended that the sublease will continue in effect until theexpiration of all store leases for which MFOC is the lessee, following whichthe MFOC sublease will be terminated and we would thereafter be responsible forall rental payments.

 

**MFOC Collection Agency Agreement**

 

On March 16, 2004, we and MFOC entered into acollection agency agreement under which we agreed to act as MFOC’s collectionagent for subtenant rental payments made by our franchisees who operate storespreviously owned by MFOC on which MFOC remains as the tenant. We do not chargeMFOC separately for this service, but certain costs associated with ourperformance of this agreement may be allocated to MFOC pursuant to ourmanagement agreement with MFOC.

 

**Insurance Allocation Agreement**

 

On March 16, 2004, we entered into an insuranceallocation agreement under which we agreed to make certain payments to MFC inrespect of our share of certain insurance costs, allocated based on ourestimation of the appropriate risk of loss of each of MFC’s subsidiaries. Theinsurance allocation agreement also provides for the allocation of workers’compensation costs based on the respective employee payroll and employmentcategory risk factor of each of MFC’s subsidiaries that generate payroll. Forthe year ended December 31, 2005, we paid MFC approximately $1.3 million,respectively, for our share of insurance costs.

 

**Benefits Agreement**

 

On March 16, 2004, we and MFOC entered into a benefitsagreement with MFOC under which we agreed to make certain payments to MFOC inrespect of our share of employee benefits costs based on the number of ouremployees. Costs associated with our employees providing services to MFOC underthe management agreement will be allocated consistent with shared expensesunder the management agreement. For the year ended December 31, 2005, we paidMFOC approximately $2.9 million, for our share of employee benefit costs.

 

56

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**Korn/Ferry International**

 

From time to time, we have engaged Korn/FerryInternational, an executive recruiting firm for which Richard Ferry, one of themembers of our board of managers, holds the honorary title of Founder Chairman.For the year ended December 31, 2005, we paid recruiting fees to Korn/FerryInternational of $158,000.

 

**Tax Allocation Agreement**

 

On March 16, 2004 we entered into a tax allocationagreement with MFC pursuant to which we agreed to make payments to MFC, aftertaking into account payments we make directly to tax authorities, based on ourhypothetical stand alone consolidated federal income tax liability, determinedas if we and our subsidiaries constituted our own consolidated group forfederal income tax purposes. We are not be permitted to make payments under thetax allocation agreement in respect of our hypothetical consolidated federaltaxable income, to the extent that such payments exceed the consolidatedfederal income taxes (including estimated taxes) payable in respect of MFC’sconsolidated federal income tax group, until and only while our ratio of NetIndebtedness to Consolidated EBITDA (each as defined in the indenture governingthe Senior Secured Notes) is less than 3.75:1.0 and we are otherwise incompliance with the terms of the indenture governing the Senior Secured Notes.Instead, we will accrue these amounts otherwise payable to MFC as a liabilityto MFC until we meet these conditions. As of December 31, 2005, our ratio ofNet Indebtedness to Consolidated EBITDA was approximately 6.07:1.0***.***

 

# **Managers’ and Officers’ Indemnification**

# ** **

The Company’s limited liability agreement providescustomary provisions providing for indemnification of our managers and officersin the performance of their duties to the fullest extent permitted by law.

 

# **Item 14. Principal Accounting Fees andServices**

# ** **

KPMG LLP served as our independent accountants for thefiscal years ended December 31, 2005 and January 1, 2005. During the fiscalyears ended December 31, 2005 and January 1, 2005, fees for services providedby KPMG LLP were as follows (in thousands):

 
| ** **         | ** ** | **December 31,** | ** ** | **January, 1** | ** ** |
|--------------------|------------|-----------------------|------------|---------------------|------------|
| ** **         | ** ** | **2005**              | ** ** | **2005**            | ** ** |
| Audit fees         |       | $                     | 210        |                | $          | 193 |   |
| Audit-related fees |       | —                |       | 153                 |       |
| Tax fees           |       | 63                    |       | 58                  |       |
| Total              |       | $                     | 273        |                | $          | 404 |   |

 

The aggregate fees included in the audit fees categoryare fees for the respective fiscal years for the audit of our annualconsolidated financial statements and review of financial statements andstatutory and regulatory filings or engagements. The aggregate fees for each ofthe other categories are fees billed in the respective fiscal years.

 

**AuditFees**

 

Audit fees consist of fees billed for professionalservices rendered in connection with the audit of our consolidated financialstatements included in our Annual Report on Form 10-K and for the review of ourconsolidated financial statements included in our Quarterly Reports on Form10-Q.

 

**Audit-RelatedFees**

 

Audit-related fees consist of fees billed in thefiscal year ended January 1, 2005 for professional services rendered inreviewing our debt offering documents and our debt registration with theSecurities and Exchange Commission on Form S-4 totaling approximately $136,000.Also included are fees billed in the fiscal year ended January 1, 2005 forprofessional services associated with re-auditing our consolidated financialstatements for periods prior to fiscal 2003 that were previously audited byanother accounting firm totaling approximately $17,000.

 

57

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**Tax Fees**

 

Tax fees consist of fees billed for professionalservices rendered in connection with the review of tax returns and tax compliance.

 

**AuditCommittee Pre-Approval Policies and Procedures**

 

The Audit Committee pre-approves the services providedto us by KPMG LLP in connection with the audit of our annual consolidatedfinancial statements, the review of our quarterly financial statements and taxreview and planning services. If management proposes to engage KPMG LLP forother audit or permitted non-audit services, the Audit Committee pre-approvesthese services on a case-by-case basis. The Audit Committee approved all theservices provided to us by KPMG LLP described above.

 

**PART IV**

 

# **Item 15. Exhibits and Financial StatementSchedules**

# ** **

(a)Document List

 

1.Financial Statements

 

The following consolidated financial statements of Mrs. Fields FamousBrands, LLC are included in Part II, Item 8:

 
| Report  of Independent Registered Public Accounting Firm                                                                                           |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Consolidated  Balance Sheets as of December 31, 2005 and January 1, 2005                                                                           |   |
| Consolidated Statements of  Operations and Comprehensive Income (Loss) for the years ended  December 31, 2005, January 1, 2005 and January 3, 2004 |   |
| Consolidated Statements of  Member’s Deficit for the years ended December 31, 2005, January 1, 2005 and  January 3, 2004                      |   |
| Consolidated Statements of  Cash Flows for the years ended December 31, 2005, January 1, 2005 and  January 3, 2004                                 |   |
| Notes  to the Consolidated Financial Statements                                                                                                    |   |

 

2. Financial Statement Schedules

 
| Schedule  II Valuation and Qualifying Accounts |   |
|------------------------------------------------|--------|

 

All other schedules for which provision is made in theapplicable accounting requirements of the Securities and Exchange Commissionare not required or the required information has been included within theconsolidated financial statements or the notes thereto.

 

58

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(b)           Exhibits

 
| **Exhibit No.** | ** ** | **Description** |
|-----------------|------------|-----------------|
|            | 3.1*       |            | Certificate of Formation of Mrs. Fields Famous Brands, LLC |
|            | 3.2*       |            | Limited Liability Agreement of Mrs. Fields Famous Brands, LLC, dated  as of February 4, 2004, by Mrs. Fields’ Original Cookies, Inc. |
|            | 3.3*       |            | Certificate of Incorporation of Mrs. Fields Financing Company, Inc. |
|            | 3.4*       |            | Bylaws of Mrs. Fields Financing Company, Inc. |
|            | 3.5*       |            | Certificate of Formation of Great American Cookies Company  Franchising, LLC |
|            | 3.6*       |            | Limited Liability Agreement of Great American Cookies Company  Franchising, LLC, dated as of February 4, 2004, by Mrs. Fields Famous Brands,  LLC |
|            | 3.7*       |            | Certificate of Formation of Great American Manufacturing, LLC |
|            | 3.8*       |            | Limited Liability Agreement of Great American Manufacturing, LLC,  dated as of February 4, 2004, by Mrs. Fields Famous Brands, LLC |
|            | 3.9*       |            | Articles of Incorporation of Mrs. Fields Cookies Australia |
|            | 3.10*      |            | Bylaws of Mrs. Fields Cookies Australia |
|            | 3.11*      |            | Certificate of Formation of Mrs. Fields Franchising, LLC |
|            | 3.12*      |            | Limited Liability Agreement of Mrs. Fields Franchising, LLC, dated as  of February 4, 2004, by Mrs. Fields Famous Brands, LLC |
|            | 3.13*      |            | Articles of Incorporation of Mrs. Fields Gifts, Inc. |
|            | 3.14*      |            | Bylaws of Mrs. Fields Gifts, Inc. |
|            | 3.15*      |            | Certificate of Formation of Pretzelmaker Franchising, LLC |
|            | 3.16*      |            | Limited Liability Agreement of Pretzelmaker Franchising, LLC, dated  as of February 4, 2004, by Mrs. Fields Famous Brands, LLC |
|            | 3.17*      |            | Certificate of Formation of Pretzel Time Franchising, LLC |
|            | 3.18*      |            | Limited Liability Agreement of Pretzel Time Franchising, LLC, dated  as of February 4, 2004, by Mrs. Fields Famous Brands, LLC |
|            | 3.19*      |            | Certificate of Incorporation of The Mrs. Fields’ Brand, Inc. |
|            | 3.20*      |            | Bylaws of The Mrs. Fields’ Brand, Inc. |
|            | 3.21*      |            | Articles of Incorporation of TCBY International, Inc. (f/k/a TCBY  Preparation, Inc.) |
|            | 3.22*      |            | Articles of Amendment to Articles of Incorporation of TCBY  International, Inc. (f/k/a TCBY Preparation, Inc.) changing name to TCBY  International, Inc. |
|            | 3.23*      |            | Bylaws of TCBY International, Inc. (f/k/a TCBY Preparation, Inc.) |
|            | 3.24*      |            | Articles of Incorporation of TCBY of Texas, Inc. |
|            | 3.25*      |            | Amended and Restated Bylaws of TCBY of Texas, Inc. |
|            | 3.26*      |            | Certificate of Formation of TCBY Systems, LLC |
|            | 3.27*      |            | Amended and Restated Limited Liability Agreement of TCBY Systems,  LLC, dated as of March 16, 2004, by Mrs. Fields Famous Brands, LLC |
|            | 4.1*       |            | Purchase Agreement, dated March 9, 2004, by and among Mrs. Fields  Famous Brands, LLC, Mrs. Fields Financing Company, Inc., Jefferies &  Company, Inc. as the Initial Purchaser, and the subsidiary guarantors named  therein |

 

59

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| **Exhibit No.** | ** ** | **Description** |
|-----------------|------------|-----------------|
|            | 4.2*       |            | Indenture, dated as of March 16, 2004, by and among Mrs. Fields  Famous Brands, LLC, Mrs. Fields Financing Company, Inc., the Guarantors  identified therein and The Bank of New York, as Trustee |
|            | 4.3*       |            | Form of 111⁄2% Senior Secured Notes due 2011 (included in Exhibit 4.2) |
|            | 4.4*       |            | Form of 9% Senior Secured Notes due 2011 (included in Exhibit 4.2) |
|            | 4.5*       |            | Form of Subsidiary Guarantees related to the 111⁄2% Senior Secured  Notes due 2011 (included in Exhibit 4.2) |
|            | 4.6*       |            | Form of Subsidiary Guarantees related to the 9% Senior Secured Notes  due 2011 (included in Exhibit 4.2) |
|            | 4.7*       |            | Registration Rights Agreement, dated March 16, 2004, by and among  Mrs. Fields Famous Brands, LLC, Mrs. Fields Financing Company, Inc, the  Subsidiary Guarantors named therein and Jefferies & Company, Inc., as  Initial Purchaser related to the 111⁄2% Senior Secured Notes due 2011 |
|            | 4.8*       |            | 9% Notes Registration Rights Agreement, dated March 16, 2004, by and  among Mrs. Fields Famous Brands, LLC, Mrs. Fields Financing Company, Inc.,  the Subsidiary Guarantors named therein and the holders of the 9% Senior  Secured Notes due 2011 related to the 9% Senior Secured Notes due 2011 |
|            | 4.9*       |            | Pledge Agreement, dated March 16, 2004, by and among Mrs. Fields  Famous Brands, LLC, TCBY Systems, LLC and The Bank of New York, as Trustee |
|            | 4.10*      |            | Security Agreement, dated March 16, 2004, by and among Mrs. Fields  Famous Brands, LLC, Mrs. Fields Financing Company, Inc., the Subsidiary  Guarantors named therein and The Bank of New York, as Trustee |
|            | 4.11*      |            | Trademark Security Agreement, dated March 16, 2004, by and among  Great American Cookies Company Franchising, LLC, Pretzelmaker Franchising,  LLC, Pretzel Time Franchising, LLC, TCBY Systems, LLC, The Mrs. Fields’  Brand, Inc. and The Bank of New York, as Trustee |
|            | 4.12*      |            | Account Control Agreement, dated as of March 16, 2004, by and among  LaSalle Bank, National Association, Mrs. Fields Famous Brands, LLC and The  Bank of New York, as Trustee |
|            | 4.13*      |            | Restricted Account Agreement, dated as of March 16, 2004, by and  among Wells Fargo Bank, N.A., Mrs. Fields Famous Brands, LLC and The Bank of  New York, as Trustee |
|            | 4.14*      |            | Restricted Account Agreement, dated as of March 16, 2004, by and  among Wells Fargo Bank, N.A., TCBY Systems, LLC and The Bank of New York, as  Trustee |
|            | 4.15*      |            | Deed to Secure Debt, Security Agreement, and Assignment of Leases and  Rents, dated as of March , 2004, by and between Great American Manufacturing,  LLC and The Bank of New York, as Trustee |
|            | 4.16       |            | First Supplemental Indenture, dated as of February 9, 2005, by and  among Mrs. Fields Famous Brands, LLC, Mrs. Fields Financing Company, Inc.,  the Guarantors (as defined in the Indenture) and The Bank of New York, as  Trustee, included as Exhibit 4.1 to the Company’s Current Report on Form 8-K  filed with the Securities and Exchange Commission on February 11, 2005, and  incorporated herein by reference. |
|            | 10.1*      |            | Contribution Agreement between TCBY Enterprises, Inc. and TCBY  Systems, LLC dated as of March 16, 2004 |
|            | 10.2*      |            | Contribution Agreement, dated as of March 16, 2004, by and among  Mrs. Fields’ Original Cookies, Inc., the subsidiaries of  Mrs. Fields’ Original Cookies, Inc. named therein, Mrs. Fields  Famous Brands, LLC and the subsidiaries of Mrs. Fields Famous Brands,  LLC named therein |
|            | 10.3**     |            | United States Trademark Assignment, dated March 16, 2004, between  Mrs. Fields’ Original Cookies, Inc. and The Mrs. Fields’ Brand, Inc. |

 

60

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| **Exhibit No.** | ** ** | **Description** |
|-----------------|------------|-----------------|
|            | 10.4**     |            | International Trademark Assignment, dated March 16, 2004, between  Mrs. Fields’ Original Cookies, Inc. and The Mrs. Fields’ Brand, Inc. |
|            | 10.5*      |            | United States Trademark Assignment, dated March 16, 2004, between  Great American Cookies Company, LLC, and Great American Cookies Company  Franchising, LLC |
|            | 10.6*      |            | International Trademark Assignment, dated March 16, 2004, between  Great American Cookies Company, LLC, and Great American Cookies Company  Franchising, LLC |
|            | 10.7*      |            | United States Trademark Assignment, dated March 16, 2004, between  Pretzel Time, LLC, and Pretzel Time Franchising, LLC |
|            | 10.8*      |            | International Trademark Assignment, dated March 16, 2004, between  Pretzel Time, LLC and Pretzel Time Franchising, LLC |
|            | 10.9*      |            | United States Trademark Assignment, dated March 16, 2004, between  Pretzelmaker, LLC and Pretzelmaker Franchising, LLC |
|            | 10.10*     |            | International Trademark Assignment, dated March 16, 2004, between  Pretzelmaker, LLC and Pretzelmaker Franchising, LLC |
|            | 10.11**    |            | United States Trademark Assignment, dated March 16, 2004, between  TCBY Enterprises, Inc. and TCBY Systems, LLC |
|            | 10.12**    |            | International Trademark Assignment, dated March 16, 2004, between  TCBY Enterprises, Inc. and TCBY Systems, LLC |
|            | 10.13*     |            | Severance Assumption Agreement, dated as of March 16, 2004, by and  among Mrs. Fields’ Original Cookies, Inc., Mrs. Fields Famous Brands, LLC,  Larry A. Hodges and Mrs. Fields’ Companies, Inc. |
|            | 10.14*     |            | Management Agreement, dated as of March 16, 2004, by and between Mrs.  Fields Famous Brands, LLC and Mrs. Fields’ Original Cookies, Inc. |
|            | 10.15*     |            | Tax Allocation Agreement, dated as of March 16, 2004, by and among  Mrs. Fields’ Companies, Inc., Mrs. Fields Famous Brands, LLC and the  subsidiaries of Mrs. Fields Famous Brands, LLC named therein |
|            | 10.16*     |            | Insurance Allocation Agreement, dated as of March 16, 2004, by and  among Mrs. Fields’ Companies, Inc. and all of its subsidiaries |
|            | 10.17*     |            | Benefits Allocation Agreement, dated as of March 16, 2004, by and  among Mrs. Fields’ Original Cookies, Inc., Mrs. Fields Famous Brands, LLC and  the subsidiaries of Mrs. Fields Famous Brands, LLC named therein |
|            | 10.18*     |            | Collection Agency Agreement, dated as of March 16, 2004, by and between  Mrs. Fields’ Original Cookies, Inc. and Mrs. Fields Famous Brands, LLC |
|            | 10.19*     |            | Expense Reimbursement Agreement, dated as of March 16, 2004, among  Mrs. Fields Famous Brands, LLC, Mrs. Fields’ Companies, Inc., Mrs. Fields’  Holding Company, Inc., Mrs. Fields’ Original Cookies, Inc., Capricorn  Investors II, L.P., and Capricorn Investors III, L.P. |
|            | 10.20*     |            | Lease Agreement, dated January 19, 1998, as amended by Lease Addendum  No. 1 dated June 4, 1998, and Lease Addendum No. 2, dated October 19, 2000,  between 2855 E. Cottonwood Parkway L.C. and Mrs. Fields’ Original Cookies,  Inc. |
|            | 10.21*     |            | Assignment and Assumption of Lease, dated as of March 16, 2004,  between Mrs. Fields’ Original Cookies, Inc. and Mrs. Fields Famous Brands,  LLC, pertaining to the Cottonwood Parkway Headquarters Lease |
|            | 10.22*     |            | Sublease, dated as of March 16, 2004, by and between Mrs. Fields  Famous Brands, LLC and Mrs. Fields’ Original Cookies, Inc. |

 

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| **Exhibit No.** | ** ** | **Description** |
|-----------------|------------|-----------------|
|            | 10.23*     |            | Lease Agreement, dated May 31, 2003, between Mrs. Fields’ Original  Cookies, Inc. and Transwestern Commercial Services LP, pertaining to the  Training Facility |
|            | 10.24*     |            | Assignment and Assumption of Lease, dated as of March 16, 2004,  between Mrs. Fields’ Original Cookies, Inc. and Mrs. Fields Famous Brands,  LLC, pertaining to the Training Facility Lease |
|            | 10.25*     |            | Lease Agreement, dated March 31, 2001, between Mrs. Fields’ Original  Cookies, Inc. and Mrs. Fields Famous Brands, LLC, pertaining to the Mrs.  Fields Gifts Facility |
|            | 10.26*     |            | Assignment and Assumption of Lease, dated as of March 16, 2004,  between Mrs. Fields’ Original Cookies, Inc. and Mrs. Fields Famous Brands,  LLC, pertaining to the Mrs. Fields Gifts Facility Lease |
|            | 10.27*     |            | Mrs. Fields Franchise Agreement, dated as of March 16, 2004, by and  among Mrs. Fields Franchising, LLC and Mrs. Fields’ Original Cookies, Inc. |
|            | 10.28*     |            | Great American Cookies Company Franchise Agreement, dated as of March  16, 2004, by and between Great American Cookies Company Franchising, LLC and  Mrs. Fields’ Original Cookies, Inc. |
|            | 10.29*     |            | Pretzel Time Franchise Agreement, dated as of March 16, 2004, by and  between Pretzel Time Franchising, LLC and Mrs. Fields’ Original Cookies, Inc. |
|            | 10.30*     |            | Pretzelmaker Franchise Agreement, dated as of March 16, 2004, by and  between Pretzelmaker Franchising, LLC and Mrs. Fields’ Original Cookies, Inc. |
|            | 10.31**    |            | TCBY Franchise Agreement, dated as of March 16, 2004, by and between  TCBY Systems, LLC and Mrs. Fields’ Original Cookies, Inc. |
|            | 10.32**    |            | License Agreement, dated as of March 16, 2004, by and between Mrs.  Fields Franchising, LLC and Mrs. Fields’ Original Cookies, Inc., related to  the Hot Sam brand |
|            | 10.33*     |            | License Agreement, dated as of March 16, 2004, between Mrs. Fields  Franchising, LLC and Mrs. Fields’ Original Cookies, Inc., related to the  Original Cookie Company brand |
|            | 10.34*     |            | Purchase Agreement, dated December 1, 1999, between The Mrs. Fields’  Brand, Inc. and Nonni’s Food Company, Inc. |
|            | 10.35*     |            | Amendment Number One to Purchase Agreement, dated as of December 28,  2000, between The Mrs. Fields’ Brand, Inc. and Nonni’s Food Company, Inc. |
|            | 10.36*     |            | Amendment Number Two to Purchase Agreement, dated as of January 17,  2002, between The Mrs. Fields’ Brand, Inc. and Nonni’s Food Company, Inc. |
|            | 10.37*     |            | Trademark License Agreement, dated January 3, 2000, between The Mrs.  Fields’ Brand, Inc. and Nonni’s Food Company, Inc. |
|            | 10.38*     |            | Amendment No. 1, dated December 29, 2000, to Trademark License  Agreement dated January 3, 2000, between The Mrs. Fields’ Brand, Inc. and  Nonni’s Food Company, Inc. |
|            | 10.39*     |            | Trademark License Agreement, dated February 21, 2001, between The  Mrs. Fields’ Brand, Inc. and Nonni’s Food Company, Inc. |
|            | 10.40*     |            | Amendment No. 1, dated January 17, 2002, to Trademark License Agreement  dated February 21, 2001, between The Mrs. Fields’ Brand, Inc. and Nonni’s  Food Company, Inc. |
|            | 10.41*     |            | Amendment No. 2, dated March 31, 2003, to Trademark License Agreement  dated February 21, 2001, between Mrs. Fields’ Original Cookies, Inc. and Nonni’s  Food Company, Inc. |
|            | 10.42*     |            | Trademark License Agreement, dated as of January 2, 2002, between The  Mrs. Fields’ Brand, Inc. and Nonni’s Food Company, Inc. |
|            | 10.43*     |            | Trademark License Agreement, dated March 31, 2003, between Mrs.  Fields’ Original Cookies, Inc. and Nonni’s Food Company, Inc. |

 

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| **Exhibit No.** | ** ** | **Description** |
|-----------------|------------|-----------------|
|            | 10.44*     |            | Marriott-TCBY Joint Venture Agreement, dated May 25, 1989, among TCBY  Enterprises, Inc., TCBY Systems, Inc. and Host International, Inc., Host  Marriott Services USA, Inc., and Host Marriott Tollroads, Inc. |
|            | 10.45*     |            | First Amendment to Marriott-TCBY Joint Venture Agreement, dated as of  January 1, 1990, among TCBY Enterprises, Inc., TCBY Systems, Inc. and Host  International, Inc., Host Marriott Services USA, Inc., and Host Marriott  Tollroads, Inc. |
|            | 10.46*     |            | Second Amendment to Marriott-TCBY Joint Venture Agreement, dated as  of March 1, 1991, among TCBY Enterprises, Inc., TCBY Systems, Inc. and Host  International, Inc., Host Marriott Services USA, Inc., and Host Marriott  Tollroads, Inc. |
|            | 10.47*     |            | Third Amendment to Marriott-TCBY Joint Venture Agreement, dated as of  October 1, 1991, among TCBY Enterprises, Inc., TCBY Systems, Inc. and Host  International, Inc., Host Marriott Services USA, Inc., and Host Marriott  Tollroads, Inc. |
|            | 10.48*     |            | Fourth Amendment to Host Marriott-TCBY Joint Venture Agreement, dated  as of November 30, 1998, among TCBY Enterprises, Inc., TCBY Systems, Inc. and  Host International, Inc., Host Marriott Services USA, Inc., and Host Marriott  Tollroads, Inc. |
|            | 10.49***   |            | Supply Agreement, dated December 31, 2002, between Mrs. Fields’  Original Cookies, Inc. and Countryside Baking Company, Inc. |
|            | 10.50***   |            | Exclusive Supply Agreement, dated as of November 19, 2002, by and between  TCBY Systems, LLC and Americana Foods Limited Partnership |
|            | 10.51**    |            | Beverage Marketing Agreement, dated March 7, 2003, between Mrs.  Fields’ Original Cookies, Inc. and Coca-Cola Fountain, part of The Coca-Cola  Company |
|            | 10.52*     |            | Assignment Agreement, dated as of March 16, 2004, by and among Mrs.  Fields’ Original Cookies, Inc., Mrs. Fields Famous Brands, LLC and Coca-Cola  Fountain |
|            | 10.53*     |            | Supply and Distribution Agreement, dated August 9, 1998, between Mrs.  Fields’ Original Cookies, Inc. and Dawn Food Products |
|            | 10.54*     |            | Assignment Agreement, dated as of March 16, 2004, by and among Mrs.  Fields’ Original Cookies, Inc., Mrs. Fields Famous Brands, LLC and Dawn Food  Products |
|            | 10.55*     |            | Food and Packaging Distribution Agreement, dated November 14, 2002,  between TCBY Systems, LLC and Blue Line Distributing |
|            | 10.56*     |            | Amended and Restated Employment Agreement, dated March 16, 2004, by  and among Stephen Russo, Mrs. Fields Famous Brands, LLC and Mrs. Fields’  Companies, Inc. |
|            | 10.57      |            | [Reserved] |
|            | 10.58*     |            | Amended and Restated Employment Agreement, dated March 16, 2004, by  and between Michael R. Ward and Mrs. Fields Famous Brands, LLC |
|            | 10.59**    |            | Mrs. Fields’ Companies, Inc. Director Stock Option Plan (f/k/a Mrs.  Fields Famous Brands, Inc. Director Stock Option Plan) |
|            | 10.60**    |            | Mrs. Fields’ Companies, Inc. Employee Stock Option Plan (f/k/a Mrs.  Fields Famous Brands, Inc. Employee Stock Option Plan) |
|            | 10.61      |            | Mrs. Fields’ Companies, Inc. Phantom Stock Plan, effective as of May  25, 2004, and form of performance unit Grant Agreement, included as Exhibit  10.61 to the Company’s quarterly report on Form 10-Q filed with the  Securities and Exchange Commission on November 16, 2004, and incorporated  herein by reference. |

 

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| **Exhibit No.** | ** **  | **Description** |
|-----------------|-------------|-----------------|
|            | 10.62****   |            | Termination Agreement and Release, dated as of December 24, 2004,  between Mrs. Fields Franchising, LLC and Shadewell Grove IP, LLC, pertaining  to termination of a Trademark License Agreement between their  predecessors-in-interest dated January 2, 2002 |
|            | 10.63****   |            | Amendment to Trademark License Agreements, dated as of December 24,  2004, between Mrs. Fields Franchising, LLC and Shadewell Grove IP, LLC,  amending certain Trademark License Agreements between their  predecessors-in-interest |
|            | 10.64****   |            | Marketing Allowance Agreement, dated as of December 24, 2004, between  Mrs. Fields Franchising, LLC and Shadewell Grove IP, LLC |
|            | 10.65****   |            | Trademark License Agreement, dated December 24, 2004, between Mrs.  Fields Franchising, LLC and Shadewell Grove IP, LLC |
|            | 10.66† |            | Option Agreement and Amendment to License Agreement, dated December 12,  2005 between Maxfield Candy Company and Mrs. Fields Franchising, LLC |
|            | 10.67       |            | Industrial Net Lease Agreement, effective as of March 1, 2006 by and  between Natomas Meadows Two, LLC and Mrs. Fields Famous Brands, LLC filed as  exhibit 10.1 to the Company’s current report on Form 8-K filed with the  Securities and Exchange Commission on March 6, 2006 |
|            | 10.68† |            | Extension to Distribution Agreement, dated effective as of November  15, 2005, between Blue Line Distributing, a division of Little Caesar  Enterprises, Inc., and TCBY Systems, LLC. |
|            | 12.1†  |            | Computation of ratio of earnings to fixed charges of Mrs. Fields  Famous Brands, LLC |
|            | 21.1†  |            | Subsidiaries of Mrs. Fields Famous Brands, LLC |
|            | 31.1†  |            | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)  and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended |
|            | 31.2†  |            | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)  and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended |
|            | 32†    |            | Certification of Chief Executive Officer and Chief Financial Officer  pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |

 

----

| *      | Included as an exhibit with corresponding exhibit number to the  Company’s Registration Statement on Form S-4 (No. 333-115046) filed with the  Securities and Exchange Commission on April 30, 2004, and incorporated herein  by reference.                    |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                |
| **     | Included as an exhibit, with corresponding exhibit number to  Amendment No. 1 to the Company’s Registration Statement on Form S-4 (No.  333-115046) filed with the Securities and Exchange Commission on July 2,  2004, and incorporated herein by reference.  |
|   |                                                                                                                                                                                                                                                                |
| ***    | Included as an exhibit, with corresponding exhibit number to  Amendment No. 2 to the Company’s Registration Statement on Form S-4 (No.  333-115046) filed with the Securities and Exchange Commission on July 12,  2004, and incorporated herein by reference. |
|   |                                                                                                                                                                                                                                                                |
| ****   | Included as an exhibit with corresponding exhibit number to the  Company’s annual report on Form 10-K filed with the Securities and Exchange  Commission on March 22, 2005, and incorporated herein by reference.                                              |
|   |                                                                                                                                                                                                                                                                |
| † | Filed herewith.                                                                                                                                                                                                                                                     |

 

64

----

 

# **SIGNATURES**

 

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

 

 
| **MRS. FIELDS FAMOUS BRANDS, LLC**     |     |
|----------------------------------------|----------|
|                                   |     |
|                                   |     |
| /s/ Stephen Russo                      |     | March 20, 2006 |   |
| *Stephen Russo, President and*         | *Date*   |
| *Chief Executive Officer*              | * * |
|                                   | * * |
|                                   | * * |
| /s/ Mark C. McBride                    |     | March 20, 2006 | ** ** |
| *Mark C. McBride*                      | *Date*   |
| Chief Accounting Officer and Treasurer |     |

 

65

----

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on thedates indicated.

 

 
| **Signature**              | ** ** | **Title**                           | ** ** | **Date**       |
|----------------------------|------------|-------------------------------------|------------|----------------|
|                       |       |                                |       |           |
| /s/ Stephen  Russo         |       | President, Chief  Executive Officer |       | March 20, 2006 |
| Stephen Russo              |       | and Manager                         |       |           |
|                       |       |                                |       |           |
| /s/ Mark C.  McBride       |       | Chief Accounting  Officer           |       | March 20, 2006 |
| Mark C. McBride            |       |                                |       |           |
|                       |       |                                |       |           |
| /s/ Alexander  Coleman     |       | Manager                             |       | March 20, 2006 |
| Alexander  Coleman         |       |                                |       |           |
|                       |       |                                |       |           |
| /s/ John D.  Collins       |       | Manager                             |       | March 20, 2006 |
| John D. Collins            |       |                                |       |           |
|                       |       |                                |       |           |
| /s/  Richard M. Ferry |       | Manager                             |       | March 20, 2006 |
| Richard M. Ferry           |       |                                |       |           |
|                       |       |                                |       |           |
| /s/ George N.  Fugelsang   |       | Manager                             |       | March 20, 2006 |
| George N.  Fugelsang       |       |                                |       |           |
|                       |       |                                |       |           |
| /s/ Walker Lewis           |       | Manager                             |       | March 20, 2006 |
| Walker Lewis               |       |                                |       |           |
|                       |       |                                |       |           |
| /s/ Peter W.  Mullin       |       | Manager                             |       | March 20, 2006 |
| Peter W. Mullin            |       |                                |       |           |
|                       |       |                                |       |           |
| /s/ John D.  Shafer        |       | Manager                             |       | March 20, 2006 |
| John D. Shafer             |       |                                |       |           |
|                       |       |                                |       |           |
| /s/ Christopher  Wright    |       | Manager                             |       | March 20, 2006 |
| Christopher  Wright        |       |                                |       |           |

 

66

----

 

**MRS. FIELDS FAMOUS BRANDS, LLC**

**SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS**

 
| ** **                       | ** ** | **Balance at** | ** ** | ** **    | ** ** | ** **     | ** ** | **Balance at** | ** ** |
|----------------------------------|------------|---------------------|------------|---------------|------------|----------------|------------|---------------------|------------|
| ** **                       | ** ** | **beginning**       | ** ** | ** **    | ** ** | ** **     | ** ** | **end of**     | ** ** |
| **Description**                  | ** ** | **of period**  | ** ** | **Additions** | ** ** | **Deductions** | ** ** | **period**          | ** ** |
| Allowance for Doubtful Accounts: |       |                |       |          |       |           |       |                |       |
| Year ended December 31, 2005     |       | $                   | 1,295,000  |          | $          | (74,000        | )          | $                   | 609,000    |   | $ | 612,000 |   |
| Year ended January 1, 2005       |       | $                   | 1,948,000  |          | $          | 161,000        |       | $                   | 814,000    |   | $ | 1,295,000 |   |
| Year ended January 3, 2004       |       | $                   | 2,434,000  |          | $          | 48,000         |       | $                   | 534,000    |   | $ | 1,948,000 |   |

 

S-1

----

 

**MRS. FIELDS FAMOUS BRANDS, LLC**

**INDEX TO CONSOLIDATED FINANCIALSTATEMENTS**

 
| Report  of Independent Registered Public Accounting Firm                                                                                            |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Consolidated  Balance Sheets as of December 31, 2005 and January 1, 2005                                                                            |   |
| Consolidated Statements of  Operations and Comprehensive Income (Loss) for the years ended December 31,  2005,  January 1, 2005 and January 3, 2004 |   |
| Consolidated  Statements of Member’s Deficit for the years ended December 31, 2005, January  1, 2005 and January 3, 2004                       |   |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2005, January 1,  2005 and January 3, 2004                                  |   |
| Notes  to the Consolidated Financial Statements                                                                                                     |   |

 

F-1

----

 

## ***Report of Independent RegisteredPublic Accounting Firm***

## *** ***

TheBoard of Managers

Mrs. FieldsFamous Brands, LLC:

 

We have audited theaccompanying consolidated balance sheets of Mrs. Fields Famous Brands, LLC (seeNote 1) as of December 31, 2005 and January 1, 2005, and the relatedconsolidated statements of operations and comprehensive income (loss), member’sdeficit and cash flows for the fiscal years ended December 31, 2005, January 1,2005 and January 3, 2004. In connection with our audits of the consolidatedfinancial statements, we also have audited financial statement schedule II. Theseconsolidated financial statements and financial statement schedule are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these consolidated financial statements and financial statementschedule based on our audits.

 

We conducted ouraudits in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

As described in Note 1 to theconsolidated financial statements, the accompanying consolidated financialstatements prior to formation of the Company on March 16, 2004 were preparedsolely to present the assets contributed and the liabilities assumed pursuantto the formation of the Company through the combination of certain assets andliabilities of Mrs. Fields’ Original Cookies, Inc. and subsidiaries (MFOC) andall of the assets and liabilities of TCBY Systems, LLC and subsidiaries, andare not intended to be a complete historical presentation of all the assets andliabilities of MFOC.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Mrs. Fields FamousBrands, LLC as of December 31, 2005 and January 1, 2005, and the results of theiroperations and their cash flows for the fiscal years ended December 31, 2005,January 1, 2005 and January 3, 2004 in conformity with U.S. generally acceptedaccounting principles. Also in our opinion, the related financial statementschedule, when considered in relation to the basic consolidated financialstatements taken as a whole, presents fairly, in all material respects, theinformation set forth therein.

 

 

KPMGLLP

 

SaltLake City, Utah

# **March 17, 2006**

 

F-2

----

 

**MRS. FIELDSFAMOUS BRANDS, LLC**

# **Consolidated Balance Sheets**

# **(Dollars inthousands)**

 
| ** **                                                                               | ** ** | **December 31,** | ** ** | **January 1,** | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                                                                               | ** ** | **2005**              | ** ** | **2005**            | ** ** |
| ASSETS:                                                                                  |       |                  |       |                |       |
| Cash and cash equivalents                                                                |       | $                     | 23,664     |                | $          | 19,859 |   |
| Receivables, net of allowance for doubtful  accounts of $612 and $1,295, respectively    |       | 8,061                 |       | 8,039               |       |
| Amounts due from affiliates                                                              |       | —                |       | 23                  |       |
| Inventories                                                                              |       | 2,869                 |       | 2,626               |       |
| Prepaid expenses and other                                                               |       | 932                   |       | 1,200               |       |
| Deferred tax asset                                                                       |       | 780                   |       | 1,120               |       |
| Total current assets                                                                     |       | 36,306                |       | 32,867              |       |
| Property and equipment, net                                                              |       | 4,360                 |       | 3,486               |       |
| Goodwill                                                                                 |       | 78,683                |       | 113,456             |       |
| Trademarks and other intangible assets, net                                              |       | 12,755                |       | 23,419              |       |
| Deferred loan costs, net of accumulated  amortization of $9,964 and $9,043, respectively |       | 6,964                 |       | 7,885               |       |
| Deferred tax asset                                                                       |       | 151                   |       | —              |       |
| Other assets                                                                             |       | 678                   |       | 668                 |       |
|                                                                                     |       | $                     | 139,897    |                | $          | 181,781 |   |
|                                                                                     |       |                  |       |                |       |
| LIABILITIES AND MEMBER’S DEFICIT:                                                   |       |                  |       |                |       |
| Accounts payable                                                                         |       | $                     | 6,496      |                | $          | 4,334 |   |
| Accrued liabilities                                                                      |       | 12,289                |       | 14,646              |       |
| Amounts due to affiliates                                                                |       | 3,949                 |       | 2,780               |       |
| Current portion of capital lease  obligations                                            |       | 104                   |       | 36                  |       |
| Current portion of deferred revenues                                                     |       | 1,074                 |       | 2,049               |       |
| Total current liabilities                                                                |       | 23,912                |       | 23,845              |       |
| Long-term debt                                                                           |       | 195,747               |       | 195,747             |       |
| Capital lease obligations, net of current  portion                                       |       | 485                   |       | 427                 |       |
| Deferred revenues, net of current portion                                                |       | 1,175                 |       | 1,387               |       |
| Deferred tax liability                                                                   |       | —                |       | 3,876               |       |
| Total liabilities                                                                        |       | 221,319               |       | 225,282             |       |
| Member’s deficit                                                                    |       | (81,273               | )          | (43,365             | )          |
| Accumulated other comprehensive loss                                                     |       | (149                  | )          | (136                | )          |
| Total member’s deficit                                                              |       | (81,422               | )          | (43,501             | )          |
| COMMITMENTS AND CONTINGENCIES                                                            |       | $                     | 139,897    |                | $          | 181,781 |   |

 

See accompanying notes to the consolidated financial statements.

 

F-3

----

** **

**MRS. FIELDSFAMOUS BRANDS, LLC**

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

**(Dollars in thousands)**

 
| ** **                                                                                   | ** ** | **For the Fiscal Year Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **December 31,**                             | ** ** | **January 1,** | ** ** | **January 3,** | ** ** |
| ** **                                                                                   | ** ** | **2005**                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| REVENUES:                                                                                    |       |                                              |       |   |   |   |   |
| Franchising                                                                                  |       | $                                                 | 53,528     |   | $ | 55,913 |   | $ | 58,645 |   |
| Gifts                                                                                        |       | 30,136                                            |       | 25,849 |   | 17,405 |   |
| Licensing                                                                                    |       | 4,016                                             |       | 4,945 |   | 5,464 |   |
| Other                                                                                        |       | 272                                               |       | 353 |   | 474 |   |
| Total revenues                                                                               |       | 87,952                                            |       | 87,060 |   | 81,988 |   |
| OPERATING COSTS AND EXPENSES:                                                                |       |                                              |       |   |   |   |   |
| Franchising                                                                                  |       | 21,746                                            |       | 21,893 |   | 20,040 |   |
| Gifts                                                                                        |       | 28,418                                            |       | 20,733 |   | 13,207 |   |
| Licensing                                                                                    |       | 1,132                                             |       | 1,516 |   | 1,155 |   |
| General and administrative                                                                   |       | 8,527                                             |       | 9,727 |   | 10,811 |   |
| Stock compensation expense                                                                   |       | —                                            |       | 75 |   | 50 |   |
| Costs associated with debt refinancing, net                                                  |       | —                                            |       | 249 |   | 684 |   |
| Depreciation                                                                                 |       | 1,145                                             |       | 1,221 |   | 1,973 |   |
| Amortization                                                                                 |       | 2,831                                             |       | 2,832 |   | 1,780 |   |
| Impairment of goodwill and intangible  assets                                                |       | 43,707                                            |       | — |   | — |   |
| Other operating expenses, net                                                                |       | 219                                               |       | 147 |   | 331 |   |
| Total operating costs and expenses                                                           |       | 107,725                                           |       | 58,393 |   | 50,031 |   |
| Income (loss) from operations                                                                |       | (19,773                                           | )          | 28,667 |   | 31,957 |   |
|                                                                                         |       |                                              |       |   |   |   |   |
| Interest expense, net                                                                        |       | (20,943                                           | )          | (24,905 | ) | (25,041 | ) |
| Other income                                                                                 |       | —                                            |       | 1,054 |   | — |   |
| Income (loss) from continuing operations  before provision (benefit) for income taxes        |       | (40,716                                           | )          | 4,816 |   | 6,916 |   |
| Provision (benefit) for income taxes                                                         |       | (2,808                                            | )          | 2,254 |   | 2,403 |   |
| Income (loss) from continuing operations                                                     |       | (37,908                                           | )          | 2,562 |   | 4,513 |   |
|                                                                                         |       |                                              |       |   |   |   |   |
| Income from discontinued operations (net of  income taxes of $0, $65 and $158, respectively) |       | —                                            |       | 104 |   | 255 |   |
| Net income (loss)                                                                            |       | $                                                 | (37,908    | ) | $ | 2,666 |   | $ | 4,768 |   |
|                                                                                         |       |                                              |       |   |   |   |   |
| COMPREHENSIVE INCOME (LOSS):                                                                 |       |                                              |       |   |   |   |   |
| Net income (loss)                                                                            |       | $                                                 | (37,908    | ) | $ | 2,666 |   | $ | 4,768 |   |
| Foreign currency translation adjustment                                                      |       | (13                                               | )          | 9 |   | (10 | ) |
| Comprehensive income (loss)                                                                  |       | $                                                 | (37,921    | ) | $ | 2,675 |   | $ | 4,758 |   |

 

See accompanying notes to the consolidated financial statements.

 

F-4

----

 

**MRS. FIELDSFAMOUS BRANDS, LLC**

# **ConsolidatedStatements of Member’s Deficit**

# **(Dollars inthousands)**

 
| ** **                                          | ** ** | ** **        | ** ** | ** **       | ** ** | **Accumulated**   | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|-------------------|------------|------------------|------------|-------------------|------------|------------|------------|
| ** **                                          | ** ** | ** **        | ** ** | **Deferred**     | ** ** | **Other**         | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | **Member’s** | ** ** | **Stock**        | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                          | ** ** | **Deficit**       | ** ** | **Compensation** | ** ** | **Loss**          | ** ** | **Total**  | ** ** |
| Balance at December 28, 2002                        |       | $                 | (47,641    | )                | $          | (329              | )          | $          | (135       | ) | $ | (48,105 | ) |
| Stock compensation expense                          |       | —            |       | 50               |       | —            |       | 50         |       |
| Unvested options returned to plan                   |       | (204              | )          | 204              |       | —            |       | —     |       |
| Distribution to parent under tax sharing  agreement |       | (1,555            | )          | —           |       | —            |       | (1,555     | )          |
| Other comprehensive loss                            |       | —            |       | —           |       | (10               | )          | (10        | )          |
| Net income                                          |       | 4,768             |       | —           |       | —            |       | 4,768      |       |
| Other activity with parent                          |       | (10,969           | )          | —           |       | —            |       | (10,969    | )          |
| Balance at January 3, 2004                          |       | (55,601           | )          | (75              | )          | (145              | )          | (55,821    | )          |
| Stock compensation expense                          |       | —            |       | 75               |       | —            |       | 75         |       |
| Contribution by parent                              |       | 17,500            |       | —           |       | —            |       | 17,500     |       |
| Repurchase of stock options in parent               |       | (108              | )          | —           |       | —            |       | (108       | )          |
| Other comprehensive income                          |       | —            |       | —           |       | 9                 |       | 9          |       |
| Net income                                          |       | 2,666             |       | —           |       | —            |       | 2,666      |       |
| Other activity with parent                          |       | (7,822            | )          | —           |       | —            |       | (7,822     | )          |
| Balance at January 1, 2005                          |       | (43,365           | )          | —           |       | (136              | )          | (43,501    | )          |
| Other comprehensive loss                            |       | —            |       | —           |       | (13               | )          | (13        | )          |
| Net loss                                            |       | (37,908           | )          | —           |       | —            |       | (37,908    | )          |
| Balance at December 31, 2005                        |       | $                 | (81,273    | )                | $          | —            |       | $          | (149       | ) | $ | (81,422 | ) |

 

See accompanying notes to the consolidated financial statements.

 

F-5

----

 

**MRS. FIELDSFAMOUS BRANDS, LLC**

# **ConsolidatedStatements of Cash Flows**

# **(Dollars inthousands)**

 
| ** **                                                                                     | ** ** | **For the Fiscal Year Ended** | ** ** |
|------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                     | ** ** | **December 31,**                             | ** ** | **January 1,** | ** ** | **January 3,** | ** ** |
| ** **                                                                                     | ** ** | **2005**                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                          |       |                                              |       |   |   |   |   |
| Net income (loss)                                                                              |       | $                                                 | (37,908    | ) | $ | 2,666 |   | $ | 4,768 |   |
| Net income from discontinued operations,  net of income taxes                                  |       | —                                            |       | (104 | ) | (255 | ) |
| Adjustments to reconcile net income (loss)  from to net cash provided by operating activities: |       |                                              |       |   |   |   |   |
| Loss on disposal of assets                                                                     |       | 353                                               |       | — |   | — |   |
| Impairment of goodwill and intangible  assets                                                  |       | 43,707                                            |       | — |   | — |   |
| Depreciation and amortization                                                                  |       | 3,976                                             |       | 4,053 |   | 3,753 |   |
| Amortization of deferred loan costs                                                            |       | 921                                               |       | 3,518 |   | 4,578 |   |
| Stock compensation expense                                                                     |       | —                                            |       | 75 |   | 50 |   |
| Amortization of discount on notes                                                              |       | —                                            |       | 1,245 |   | 596 |   |
| Gain on sale of equity warrants                                                                |       | —                                            |       | (1,054 | ) | — |   |
| Non-cash debt increases associated with PIK  interest                                          |       | —                                            |       | — |   | 585 |   |
| Deferred income taxes                                                                          |       | (3,687                                            | )          | (523 | ) | (846 | ) |
| Changes in assets and liabilities:                                                             |       |                                              |       |   |   |   |   |
| Receivables, net                                                                               |       | (22                                               | )          | 1,031 |   | 249 |   |
| Amounts due to/from affiliates, net                                                            |       | 1,192                                             |       | (378 | ) | (4,652 | ) |
| Inventories, net                                                                               |       | (243                                              | )          | (664 | ) | (590 | ) |
| Prepaid expenses and other                                                                     |       | 268                                               |       | (78 | ) | (539 | ) |
| Other assets                                                                                   |       | (111                                              | )          | (158 | ) | 59 |   |
| Accounts payable                                                                               |       | 2,162                                             |       | (2,455 | ) | 594 |   |
| Accrued liabilities                                                                            |       | (2,857                                            | )          | 1,436 |   | 6,356 |   |
| Deferred revenue                                                                               |       | (1,187                                            | )          | (872 | ) | (92 | ) |
| Net cash provided by continuing operating  activities                                          |       | 6,564                                             |       | 7,738 |   | 14,614 |   |
| Net cash (used in) provided by discontinued  operating activities                              |       | —                                            |       | (301 | ) | 541 |   |
| Net cash provided by operating activities                                                      |       | 6,564                                             |       | 7,437 |   | 15,155 |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                          |       |                                              |       |   |   |   |   |
| Proceeds from sale of equity warrants                                                          |       | —                                            |       | 1,054 |   | — |   |
| Purchases of property and equipment                                                            |       | (2,174                                            | )          | (859 | ) | (220 | ) |
| Purchase of license repurchase option                                                          |       | (500                                              | )          | — |   | — |   |
| Net cash (used in) provided by investing  activities                                           |       | (2,674                                            | )          | 195 |   | (220 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                          |       |                                              |       |   |   |   |   |
| Net borrowings (payments) under line of  credit                                                |       | —                                            |       | (3,452 | ) | 2,480 |   |
| Principal payments on long-term debt                                                           |       | —                                            |       | (98,014 | ) | (5,609 | ) |
| Payment of debt financing costs                                                                |       | —                                            |       | (11,975 | ) | (2,351 | ) |
| Proceeds from issuance of Senior Secured  Notes                                                |       | —                                            |       | 115,000 |   | — |   |
| Principal payments on capital lease                                                            |       | (72                                               | )          | (37 | ) | — |   |
| Contribution by parent                                                                         |       | —                                            |       | 17,500 |   | — |   |
| Repurchase of stock options in parent                                                          |       | —                                            |       | (108 | ) | — |   |
| Distribution to parent under tax sharing  agreement and merger costs                           |       | —                                            |       | — |   | (76 | ) |
| Other activity with parent                                                                     |       | —                                            |       | (7,996 | ) | (10,969 | ) |
| Net cash (used in) provided by financing activities                                            |       | (72                                               | )          | 10,918 |   | (16,525 | ) |
| Effect of foreign exchange rate changes on  cash                                               |       | (13                                               | )          | 9 |   | (10 | ) |
| Net increase (decrease) in cash and cash  equivalents                                          |       | 3,805                                             |       | 18,559 |   | (1,600 | ) |
| Cash and cash equivalents at beginning of  period                                              |       | 19,859                                            |       | 1,300 |   | 2,900 |   |
| Cash and cash equivalents at end of period                                                     |       | $                                                 | 23,664     |   | $ | 19,859 |   | $ | 1,300 |   |

 

See accompanying notes to the consolidated financial statements.

 

F-6

----

 
| ** **                                                                   | ** ** | **For the Fiscal Year Ended** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                   | ** ** | **December 31,**                             | ** ** | **January 1,** | ** ** | **January 3,** | ** ** |
| ** **                                                                   | ** ** | **2005**                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Supplemental Disclosures of Cash Flow  Information:**                      |       |                                              |       |   |   |   |   |
| Cash paid for interest                                                       |       | $                                                 | 20,562     |   | $ | 16,541 |   | $ | 19,050 |   |
| Cash paid for income taxes                                                   |       | 85                                                |       | 50 |   | 317 |   |
| Cash paid to parent for income taxes                                         |       | —                                            |       | 1,450 |   | 7,050 |   |
|                                                                         |       |                                              |       |   |   |   |   |
| **Supplemental Disclosures of Noncash  Investing and Financing Activities:** |       |                                              |       |   |   |   |   |
| Assets acquired under capital lease                                          |       | $                                                 | 198        |   | $ | 500 |   | $ | — |   |
| Property and equipment contributed by  parent                                |       | —                                            |       | 174 |   | — |   |
| Distributions payable to parent under tax  sharing agreement                 |       | —                                            |       | — |   | 1,555 |   |

 

See accompanying notes to the consolidated financial statements.

 

F-7

----

 

**MRS. FIELDSFAMOUS BRANDS, LLC**

# **Notes to theConsolidated Financial Statements**

# ** **

**1. Basis of Presentation and Description ofBusiness**

 

***Basis ofPresentation***

 

Mrs. Fields Famous Brands, LLC (the “Company” or“Mrs. Fields”) is an entity that was formed in March 2004 inconnection with the reorganization of certain entities and segments that areunder the common control of Mrs. Fields’ Companies, Inc. (“MFC”),formerly known as Mrs. Fields’ Famous Brands, Inc. The Company is awholly-owned subsidiary of Mrs. Fields’ Original Cookies, Inc.,(“MFOC”). MFOC is a wholly-owned subsidiary of Mrs. Fields’ HoldingCompany, Inc. (“MFH”), and MFH is a wholly-owned subsidiary of MFC. Priorto the reorganization, TCBY Systems, LLC (“TCBY”) was a wholly-owned subsidiaryof TCBY Enterprises, LLC (“TCBY Enterprises”), whose parent was also MFC.

 

The accompanying consolidated financial statementsprior to the formation of the Company on March 16, 2004 include the accounts ofTCBY and the franchising, gifts and licensing segments of MFOC. InMarch 2004, MFC completed a reorganization whereby TCBY and the franchising,gifts and licensing segments of MFOC were contributed to the Company. Thesefinancial statements have been prepared to reflect this reorganization as if ithad occurred on December 29, 2002 (the beginning of fiscal 2003.)

 

The consolidated financial statements assume thatMrs. Fields, for all periods presented, had existed as a separate legalentity with the following three business segments: franchising, gifts andlicensing. The consolidated financial statements, which have been carved outfrom the consolidated financial statements of MFOC and TCBY prior to thereorganization using the historical results of operations and assets andliabilities of these businesses and activities and which exclude thecompany-owned stores segment of MFOC, reflect the accounting policies adoptedby MFOC and TCBY in the preparation of their consolidated financial statementsand thus do not necessarily reflect the accounting policies whichMrs. Fields might have adopted had it been an independent company. Thehistorical consolidated financial statements of Mrs. Fields include thoseaccounts specifically attributable to Mrs. Fields, substantially all ofthe indebtedness of MFOC and TCBY, and allocations of expenses relating toshared services and administrative functions incurred at MFOC.

 

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

 

Theother activity with parent line items on the consolidated statements ofmember’s deficit and the consolidated statements of cash flows represent thenet activity between the Company and MFOC prior to the reorganization in March2004.

 

The accompanying consolidated financial statementshave been prepared in accordance with U.S. generally accepted accountingprinciples. All transactions and balances between the consolidated entities andsegments have been eliminated.

 

F-8

----

 

***Description ofBusiness***

 

TheCompany develops and franchises retail stores which sell core productsincluding cookies, brownies, frozen yogurt, ice cream and pretzels through fivespecialty branded concepts: Mrs. Fields, Great American Cookie Company,TCBY, Pretzel Time and Pretzelmaker.

 

Inconnection with its franchising activities, the Company authorizes third-partylicensees and franchisees to use certain business formats, systems, methods,procedures, designs, layouts, specifications, trade names and trademarks in theUnited States of America (the “United States”) and other countries.Additionally, the Company licenses the use of its trademarks, logos and recipesto third parties for distribution of Mrs. Fields and TCBY branded productsthrough non-bakery stores and cafes. The Company also markets and distributesproducts through catalogs and the Internet.

 

**2. Summary of Significant Accounting Policies**

 

***Accounting Periods***

 

TheCompany operates using a 52/53-week fiscal year ending on the Saturday closestto December 31. Fiscal 2005 and 2004 are 52-week years ending December 31,2005 and January 1, 2005, respectively. Fiscal 2003 is a 53-week year endingJanuary 3, 2004.

 

***Foreign CurrencyTranslation***

 

Thebalance sheet accounts of foreign subsidiaries are translated into U.S. dollarsusing the applicable balance sheet date exchange rates, while revenues andexpenses are translated using the average exchange rates for the periodpresented.

 

***Related-PartyTransactions***

 

Mrs. Fields hascontractual relationships with various affiliates, primarily MFOC, MFH, TCBYEnterprises and MFC, which are intended to be fair to the parties involved inthe transactions and on terms similar to what could be negotiated withindependent third parties. Sometimes the Company is required to negotiate theagreements for both sides of the transaction. Also, inherent in any contractualrelationship is the interpretation of the intent of the agreement at a latertime when unanticipated events occur. When situations like these occur, theCompany attempts objectively to determine the terms of the transaction orinterpret the intent of the agreement on a fair and independent basis. However,there is no guarantee that the Company will be successful in doing so.Individual affiliate transactions or a series of related transactions in excessof $1.0 million require a resolution by the Board of Managers andindividual affiliate transactions or a series of related transactions in excessof $5.0 million require an “opinion of fairness” by an accounting,appraisal or investment banking firm.

 

***Use of Estimates***

 

The preparation of financialstatements in conformity with U.S. generally accepted accounting principlesrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. Actual results could differfrom those estimates.

 

The Company’s significantaccounting estimates include estimates for employee benefits and relatedinsurances, reserves for doubtful accounts and obsolete and excessiveinventories, asset valuation allowances, depreciation and amortization.

 

F-9

----

 

***Cash and CashEquivalents***

 

Cashand cash equivalents include all cash balances and highly liquid investmentswith an initial maturity of three months or less. The Company places itstemporary cash investments with high credit quality financial institutions. Attimes such investments may be in excess of the Federal Deposit Insurance Corporation(“FDIC”) insurance limit.

 

***Receivables***

 

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

 

Prior to fiscal 2001, TCBY extended credit from timeto time in the form of notes receivable to franchisees and certain of thesenotes receivable remain outstanding. Notes receivable from franchisees areprimarily collateralized by equipment located at the franchisees’ stores. Thesenotes bear interest at market rates and mature at various dates throughApril 2009. TCBY regularly reviews the notes for non-performance. Notesthat are considered non-performing are placed on a non-accrual status when thecollectability of principal or interest becomes uncertain. During the yearsended December 31, 2005, January 1, 2005 and January 3, 2004, TCBYrecognized no interest income pertaining to these notes receivable.

 

Prior to fiscal 2001, TCBY factored various notesreceivable aggregating $2.1 million. Under the terms of the factoringagreement, TCBY is ultimately responsible to the factoring agent for therealizability of the notes receivable. In the event of non-performance, thefactoring agent has recourse against TCBY to a maximum level of $478,000 and$701,000 as of December 31, 2005 and January 1, 2005, respectively. TheCompany has reserves of $478,000 and $569,000 as of December 31, 2005 andJanuary 1, 2005, respectively, for this potential recourse liability. Thisreserve is included in accrued liabilities in the accompanying consolidatedbalance sheets.

 

Notes receivable at December31, 2005 and January 1, 2005 comprised the following (in thousands):

 
| ** **                      | ** ** | **December 31,** | ** ** | **January 1,** | ** ** |
|---------------------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                      | ** ** | **2005**              | ** ** | **2005**            | ** ** |
| Non-performing notes            |       | $                     | —     |                | $          | 521 |   |
| Allowance for doubtful accounts |       | —                |       | (521                | )          |
| Non-performing notes, net       |       | —                |       | —              |       |
| Performing notes                |       | 195                   |       | 225                 |       |
| Allowance for doubtful accounts |       | (69                   | )          | (76                 | )          |
| Performing notes, net           |       | 126                   |       | 149                 |       |
|                            |       | $                     | 126        |                | $          | 149 |   |

 

F-10

----

 

The activity in the allowancefor notes receivable for the years ended December 31, 2005 and January 1, 2005is as follows (in thousands):

 
| ** **        | ** ** | **December 31,** | ** ** | **January 1,** | ** ** |
|-------------------|------------|-----------------------|------------|---------------------|------------|
| ** **        | ** ** | **2005**              | ** ** | **2005**            | ** ** |
| Beginning balance |       | $                     | (597       | )                   | $          | (713 | ) |
| Write-offs        |       | 528                   |       | 116                 |       |
|              |       | $                     | (69        | )                   | $          | (597 | ) |

 

***Inventories***

 

Inventories consist of rawmaterials, finished goods, packaging and novelties and are stated at the lowerof cost (first-in, first-out method) or market value. Inventories at December31, 2005 and January 1, 2005 are comprised of the following (in thousands):

 
| ** **     | ** ** | **December 31,** | ** ** | **January 1,** | ** ** |
|----------------|------------|-----------------------|------------|---------------------|------------|
| ** **     | ** ** | **2005**              | ** ** | **2005**            | ** ** |
| Raw materials  |       | $                     | 1,283      |                | $          | 958 |   |
| Finished goods |       | 770                   |       | 643                 |       |
| Packaging      |       | 548                   |       | 653                 |       |
| Novelties      |       | 268                   |       | 372                 |       |
|           |       | $                     | 2,869      |                | $          | 2,626 |   |

 

***Property andEquipment***

 

Equipment and fixtures arestated at cost less accumulated depreciation and are depreciated over three toseven years using the straight-line method. Leasehold improvements are statedat cost less accumulated depreciation and are depreciated over the term of thelease using the straight-line method. Property and equipment at December 31,2005 and January 1, 2005 are comprised of the following (in thousands):

 
| ** **                    | ** ** | **December 31,** | ** ** | **January 1,** | ** ** |
|-------------------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                    | ** ** | **2005**              | ** ** | **2005**            | ** ** |
| Leasehold improvements        |       | $                     | 4,241      |                | $          | 3,879 |   |
| Equipment and fixtures        |       | 7,927                 |       | 9,801               |       |
| Land                          |       | 240                   |       | 240                 |       |
|                          |       | 12,408                |       | 13,920              |       |
| Less accumulated depreciation |       | (8,048                | )          | (10,434             | )          |
|                          |       | $                     | 4,360      |                | $          | 3,486 |   |

 

Property and equipment atDecember 31, 2005 and January 1, 2005 includes gross assets acquired under acapital lease of $698,000 and $500,000, respectively, and related accumulateddepreciation of $139,000 and $53,000, respectively.

 

Expenditures that materiallyextend useful lives of property and equipment are capitalized. Routinemaintenance, repairs and renewal costs are expensed as incurred. Gains orlosses from the sale or retirement of property and equipment are recorded incurrent operations.

 

F-11

----

 

***Goodwill,Trademarks and Other Intangible Assets***

 

The Company accounts forgoodwill and other intangible assets in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 142 (“SFAS 142”), “Goodwill and OtherIntangible Assets.”  Goodwill andintangible assets acquired in a purchase business combination and determined tohave an indefinite useful life are not amortized, but are tested for impairmentat least annually in accordance with the provisions of SFAS 142.SFAS 142 also requires that intangible assets with estimable useful livesbe amortized over their respective estimated useful lives to their estimatedresidual values and be reviewed for impairment in accordance with SFAS No.144, “Accounting for Impairment or Disposal of Long-Lived Assets.”

 

On an annual basis (in thefourth quarter), the Company performs an assessment for impairment of itscarrying value of goodwill associated with each of its reporting units definedas Bakery Franchising, Dairy Franchising, Gifts and Licensing by comparing eachreporting unit’s fair value with its carrying value. The estimated fair valueof goodwill is affected by, among other things, operating results, theCompany’s business plan for the future, estimated results of future operationsand the comparable companies and transactions that are used to estimate thefair value of the goodwill. To the extent that the carrying value of areporting unit exceeds it fair value, goodwill is written down to its impliedfair value. Changes in the business plan or operating results that aredifferent than the projections used to develop the reporting units fair valuemay have an impact on the valuation of the goodwill. The Company engaged anindependent valuation firm to assist us in determining the fair value of eachof the Company’s reporting units and compared it to the carrying amount of thereporting unit as of December 31, 2005. The carrying amount of the DairyFranchising reporting unit exceeded its fair value.

 

The Company compared theimplied fair value of the Dairy Franchising reporting unit’s goodwill with thecarrying amount of the goodwill and determined an impairment of DairyFranchising goodwill of $34.8 million for the year ended December 31, 2005. Theimplied fair value of the goodwill is determined by allocating the fair valueof the reporting unit to all of the assets (recognized and unrecognized) andliabilities of the reporting unit in a manner similar to a purchase priceallocation, in accordance with SFAS No. 141, “Business Combinations.”

 

Additionally, the Companydetermined that a triggering event had occurred under SFAS No. 144 as a resultof an eroding TCBY franchise system, fewer locations, consistent negativeyear-over-year same store sales by our TCBY franchisees and the Company’sinability to locate and open a significant number of new or additionalfranchise locations. These factors have resulted in continued decreases infranchise royalties and yogurt formulation revenues from the Company’s TCBYfranchise system. Therefore, the Company recorded charges to write-down theTCBY trade names and franchise relationships of $1.7 million and $7.2 million,respectively, for the year ended December 31, 2005. In addition, the fair valuebecomes the new basis of the assets and they are amortized over the remaininguseful life of the assets pursuant to SFAS No. 144.

 

TheCompany anticipates that the TCBY locations will continue to decline in thenear future, at least until the reconcepting tests are completed and aplan has been developed to implement the reconcepting in qualified TCBYtraditional stores. The Company anticipates the reconcepting tests will becompleted in the fourth quarter of fiscal 2006. While management is encouragedby the consumer data we have collected, there can be no assurances that thereconcepting plans or implementation will be successful, or that a reconceptingwill slow or reverse the declining TCBY store count or contribution, which mayadversely affect the Company’s results of operations.

 

F-12

----

 

Thefollowing outlines the Company’s goodwill by reporting unit as of December 31,2005 and January 1, 2005 (in thousands):

 
| ** **         | ** ** | **December 31,** | ** ** | **January 1,** | ** ** |
|--------------------|------------|-----------------------|------------|---------------------|------------|
| ** **         | ** ** | **2005**              | ** ** | **2005**            | ** ** |
| Bakery Franchising |       | $                     | 60,404     |                | $          | 60,404 |   |
| Dairy Franchising  |       | 14,568                |       | 49,341              |       |
| Gifts              |       | 1,859                 |       | 1,859               |       |
| Licensing          |       | 1,852                 |       | 1,852               |       |
| Total              |       | $                     | 78,683     |                | $          | 113,456 |   |

 

Trademarks and other intangibleassets are comprised of definite-lived assets and are amortized over 5 to15 years. The following outlines the Company’s trademarks and otherintangibles as of December 31, 2005 and January 1, 2005 (in thousands):

 
| ** **                              | ** ** | **December 31,** | ** ** | **January 1,** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                              | ** ** | **2005**              | ** ** | **2005**            | ** ** |
| Trademarks and trade names              |       | $                     | 15,404     |                | $          | 19,761 |   |
| Franchise relationships                 |       | 2,600                 |       | 13,370              |       |
| Recipes                                 |       | 4,150                 |       | 4,150               |       |
| Reacquired franchise and license rights |       | 1,528                 |       | 528                 |       |
| Covenant not to compete                 |       | —                |       | 60                  |       |
|                                    |       | 23,682                |       | 37,869              |       |
| Less accumulated amortization           |       | (10,927               | )          | (14,450             | )          |
|                                    |       | $                     | 12,755     |                | $          | 23,419 |   |

 

During 2005, the Company,through Mrs. Fields Franchising, LLC (“MFF”), entered into an Option Agreementand Amendment to License Agreement (the “Option”) with Maxfield Candy Company(“Maxfield”), one of our licensees, who produces and sells Mrs. Fieldsbranded premium candy products in certain distribution channels under atrademark license agreement (the “License”).  The Option grants MFF an optionto repurchase the License, excercisable during a period from the second to thefifth anniversary of the Option date.  The Option purchase price is $1million, one-half of which was paid by MFF when the Option was signed by theparties, and one-half of which will be paid to Maxfield on the firstanniversary of that date.  The repurchase price for the License is dueonly if MFF exercises the Option and ranges from $4.5 million to $7.0 million,depending on when the Option is exercised.  One-half of the Option purchaseprice will be credited to the License repurchase price in a manner described inthe Option if MFF exercises the Option. The parties also agreed to certainmodifications of the License as part of the Option. At December 31, 2005, theOption purchase price is included in reacquired franchise and license rightsand is being amortized over the term of the Option.

 

F-13

----

 

Amortizationexpense of the intangible assets for the years ended December 31, 2005, January1, 2005 and January 3, 2004 was $2.7 million, $2.7 million and$1.7 million, respectively. Future amortization expense of the intangibleassets as of December 31, 2005, is estimated to be as follows (in thousands):

 
| **Fiscal Year** | ** ** | ** ** | ** ** |
|----------------------|------------|------------|------------|
| 2006                 |       | $          | 2,010      |   |
| 2007                 |       | 1,968      |       |
| 2008                 |       | 1,968      |       |
| 2009                 |       | 1,827      |       |
| 2010                 |       | 1,686      |       |
| Thereafter           |       | 3,296      |       |
|                 |       | $          | 12,755     |   |

 

***Deferred Loan Costs***

 

Deferred loan costs are amortized over the life of therelated debt using the effective interest method. During the years endedDecember 31, 2005, January 1, 2005 and January 3, 2004, the Company amortizeddeferred loan costs of approximately $921,000, $3.5 million and$4.6 million, respectively, to interest expense.

 

***Long-Lived Assets***

 

Long-lived assets are reviewed for impairment whenevents or changes in circumstances indicate that the book value of an asset maynot be fully recovered. The Company uses an estimate of future undiscounted netcash flows of the related asset or group of assets over the remaining life inmeasuring whether the assets are recoverable. Impairment of long-lived assetsis assessed at the lowest level for which there are identifiable cash flowsthat are independent of other groups of assets. Impairment to be recognized ismeasured by the amount by which the carrying amount of the assets exceeds thefair value of the assets. The impairment of long-lived assets requiresjudgments and estimates. If circumstances change, such estimates could alsochange.

 

***Accrued Liabilities***

 

Accruedliabilities consist of the following at December 31, 2005 and January 1,2005 (in thousands):

 
| ** **                        | ** ** | **December 31,** | ** ** | **January 1,** | ** ** |
|-----------------------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                        | ** ** | **2005**              | ** ** | **2005**            | ** ** |
| Accrued liabilities               |       | $                     | 4,778      |                | $          | 4,701 |   |
| Accrued compensation and benefits |       | 1,534                 |       | 3,968               |       |
| Accrued interest payable          |       | 5,977                 |       | 5,977               |       |
|                              |       | $                     | 12,289     |                | $          | 14,646 |   |

 

On June 24, 2004, the Companyannounced a reorganization of its executive management team effective June 28,2004. As a result of this reorganization, the Company terminated the employmentof two Senior Vice Presidents effective June 28, 2004 and accrued approximately$600,000 related to severance expenses. As of December 31, 2005, there were noremaining severance payments. As of January 1, 2005, remaining severancepayments of $466,000 were included in accrued compensation and benefits.

 

F-14

----

 

On May 7, 2003, the Boardof Directors of MFOC accepted the resignation of Larry A. Hodges as itsPresident, Chief Executive Officer and Director, which resignation waseffective on May 14, 2003. Pursuant to the terms of a Separation Agreementdated August 6, 2003 and a Severance Assumption Agreement datedMarch 16, 2004 among MFC, MFOC, the Company and Mr. Hodges (the“Separation Agreements”), Mr. Hodges received 28 months of salary asseverance, which was paid semi-monthly through the end of 2004, and the balancewas paid in a lump sum in January 2005. An aggregate of $321,000 inseverance payments were due to Mr. Hodges and were included in accruedcompensation and benefits as of January 1, 2005.

 

***Revenue Recognition***

 

Initial franchising andlicensing fees are recognized when all material services or conditions relatingto the franchising or licensing have been substantially performed or satisfied,which is generally upon the opening of a store by a franchisee or licensee.Franchise and license royalties, which are based on a percentage of gross storesales, are recognized as earned, which is generally upon sale of product byfranchisees or licensees. Minimum royalty payments under certain licensingagreements are deferred and recognized on a straight-line basis over the termof the agreement. Revenues from the sale of cookie dough that the Companyproduces and sells to certain franchisees are recognized at the time ofshipment and are classified in franchising revenues. Revenues from the sale ofcookie dough to grocery stores and wholesale clubs are recognized upon shipmentand are included in other revenues. Revenues from gifts are recognized at thetime of shipment.

 

The Company receives cashpayments for product formulation fees and allowances from suppliers based onthe amount of product purchased directly by our distributors and franchisees.The product formulation fees include cash payments to the Company for the rightto use the Company’s proprietary formulations and recipes to manufacture thefrozen dough, dough mixes and TCBY products these suppliers sell to ourfranchisees. Formulation fees and allowances are recorded as franchisingrevenues upon shipment of product to the Company’s distributors or franchisees.During fiscal 2005, 2004 and 2003, we included in franchising revenues $12.8million, $15.1 million and $16.5 million, respectively, for product formulationfees and allowances.

 

In March 2003, the Companyreceived $2.0 million from a supplier as an advance to maintain and expandbeverage concepts at the Company’s franchised store locations. This advance isbeing recognized as franchising revenues on a ratable basis over the six-yearterm of the agreement.

 

***Operating Expenses***

 

Franchising operating expensesconsist of costs incurred to generate franchising revenues which include (i)franchise development and support expenses including expenses relating to brandinvestment initiatives; (ii) operations and supervision expenses; and (iii)product cost of sales of our manufacturing facility.

 

Gifts operating expensesconsist of costs incurred to generate gift revenues which include (i) cost ofsales; (ii) selling and advertising costs; and (iii) general and administrativeexpenses directly related to the gifts segment. Cost of sales includes inboundfreight charges, purchasing and receiving costs, inspection costs, warehousingcosts and other costs of our distribution network.

 

Licensing operating expensesconsist of costs incurred to generate licensing revenues, which primarily areselling expenses, which include (i) payroll and payroll-related costs; (ii)outside commissions; and (iii) professional fees.

 

F-15

----

 

General and administrativeexpenses include (i) payroll and payroll-related costs of corporate employeessuch as executive, accounting, legal, human resources and information systemspersonnel; (ii) travel and travel-related expenses of corporate employees;(iii) professional and legal fees, bank charges, insurance costs and facilitycosts not related to the generation of revenues. These costs are associatedwith providing management support for all of our business segments*.*

 

***Shipping andHandling Costs***

 

The Company charges its giftsand manufacturing facility customers for shipping and handling costs andrecords the revenues in gifts revenues and franchising revenues, respectively.The costs for shipping and handling are included in gifts expense andfranchising expense, respectively.

 

***Income Taxes***

 

The Company is organized as asingle-member limited liability company and will not elect to be taxed as acorporation for federal income tax purposes. As such, for federal income taxpurposes, the Company will be “disregarded” and will be treated as a divisionof MFOC, its sole member. Although the Company is not expected to be atax-paying entity, the assets of the Company could be subject to income taxclaims against any member of its parent’s consolidated group.

 

The Company will be included in the consolidated federal income taxreturn of MFC, the Company’s ultimate parent. For historical financialreporting purposes, the Company has recognized income tax expense and deferredtax assets and liabilities as if it were filing a separate tax return. TheCompany has recognized deferred tax assets or liabilities for expected futuretax consequences of events that have been recognized in the financialstatements or tax returns. Under this method, deferred tax assets orliabilities have been determined based upon the difference between thefinancial and income tax bases of assets and liabilities using enacted taxrates expected to apply when differences are expected to be settled orrealized.

 

***Fair Value of Financial Instruments***

 

The Company estimates that the total fair market value of its 9 percentSenior Secured Notes (see Note 3) and its 111⁄2 percent Senior Secured Notes (seeNote 3) was approximately $56.5 million and $92.0 million, respectively, as ofDecember 31, 2005. These estimates are based on quoted market prices. The bookvalues of the Company’s other financial instruments, including accountsreceivable and accounts payable, approximate fair values at the respectivebalance sheet dates because of the relatively short maturity of theseinstruments or valuation allowances which have been recorded to report thebalances at fair value. The carrying amount of other long-term debt obligationsapproximates its fair value because the related interest rates are at marketrates.

 

***Advertising***

 

The Company administers advertising funds collected from itsfranchisees. The Company directs the expenditures of the advertising funds inconnection with advertising and marketing campaigns for the benefit of therespective concepts. The advertising funds and their related activities are notincluded in the accompanying consolidated financial statements.

 

Advertisingcosts are expensed as incurred. During the years ended December 31, 2005,January 1, 2005, and January 3, 2004, the Company incurred advertising expensesexcluding the expenditures of the advertising funds totaling approximately$6.0 million, $4.5 million and $1.7 million, respectively.

 

F-16

----

 

***Recent Accounting Pronouncements***

 

InMay 2005, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 154(“SFAS 154”), “Accounting for Changes and Errors Corrections - a Replacement ofAPB Opinion 20 and FASB Statement No. 3.” Previously, Accounting Principles Board Opinion No. 20 (“APB 20”),“Accounting Changes” 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 the change.SFAS 154 requires companies to recognize changes in accounting principles,including changes required by new accounting pronouncements when thepronouncement does not include specific transition provisions, retrospectivelyto prior periods’ financial statements. The Company will assess the impact of aretrospective application of a change in accounting principle in accordancewith SFAS 154 if the need for such a change arises after the effective date ofJanuary 1, 2006.

 

InDecember 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 supersedes AccountingPrinciples Board (“APB”) Opinion No. 25, “Accounting for Stock Issued toEmployees”. 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 the Companybeginning January 1, 2006. The adoption of SFAS 123R is not expected to have amaterial impact on the Company’s consolidated financial position or results ofoperations.

 

InNovember 2004, the FASB issued SFAS No. 151 (“SFAS 151”), “InventoryCosts, an amendment of ARB No. 43, Chapter 4,” which clarifies thetypes of costs that should be expensed rather than capitalized as inventory.This statement also clarifies the circumstances under which fixed overheadcosts associated with operating facilities involved in inventory processingshould be capitalized. The new standard will be effective for the Companybeginning January 1, 2006. The adoption of SFAS 151 is not expected tohave a material impact on the Company’s consolidated financial position orresults of operations.

 

**3. Long-Term Debt and Capital LeaseObligations**

 

***Long-Term Debt***

 

Long-term debt consists of thefollowing at December 31, 2005 and January 1, 2005 (in thousands):

 
| ** **                                                                                                                           | ** ** | **December 31,** | ** ** | **January 1,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                                                                                                                           | ** ** | **2005**              | ** ** | **2005**            | ** ** |
| Senior Secured Notes, interest at 11 1/2 percent  payable semi-annually in arrears on March 15 and September 15, due  March 15, 2011 |       | $                     | 115,000    |                | $          | 115,000 |   |
| Senior Secured Notes, interest at 9 percent  payable semi-annually in arrears on March 15 and September 15, due March 15,  2011      |       | 80,747                |       | 80,747              |       |
|                                                                                                                                 |       | $                     | 195,747    |                | $          | 195,747 |   |

 

F-17

----

 

***Debt Refinancing***

 

OnMarch 16, 2004, the Company issued $80.7 million of 9 percentsenior secured notes (the “9 percent Senior Secured Notes”) in exchangefor $80.7 million of existing senior notes (the “Senior Notes”) and issued$115.0 million of 111⁄2 percent senior secured notes (the “111⁄2percentSenior Secured Notes” together with the 9 percent Senior Secured Notes,the “Senior Secured Notes”). The proceeds from the 111⁄2 percent Senior SecuredNotes were used to retire substantially all of the Company’s indebtness, exceptcapital lease obligations.

 

TheSenior Secured Notes will mature March 15, 2011, with interest payablesemi-annually. The Senior Secured Notes rank senior in right of payment to allsubordinated indebtedness of the Company and rank equal in right of paymentwith all existing and future senior indebtedness of the Company. The Senior SecuredNotes are secured by all of the tangible and intangible assets of the Companyand its subsidiaries.

 

TheSenior Secured Notes are redeemable at the option of the Company anytime on orafter March 15, 2008. The Company may redeem up to 35 percent of theaggregate principal amount of the notes with the net proceeds of certain equityofferings prior to March 15, 2007. The Senior Secured Notes require the Companyto offer to repurchase a portion of the notes at 100 percent of theprincipal amount, plus accrued and unpaid interest thereon to the date ofpurchase, with 50 percent of the Company’s “excess cash flow”, as definedin the indenture agreement, when the ratio of the Company’s Net Indebtedness toConsolidated EBITDA is above 3.75 to 1.0 and the cumulative unpaid excess cashflow offer amount exceeds $10.0 million. In the event of a change in control,the holders of the Senior Secured Notes will have the right to put the notes tothe Company at 101 percent of their principal amount, plus accrued and unpaidinterest, provided at least 65 percent of the aggregate principal amountof the Senior Secured Notes originally issued remain outstanding.

 

TheSenior Secured Notes contain certain covenants that limit among other things,the ability of the Company and its subsidiaries to (i) incur additionalindebtedness; (ii) make certain investments or enter into sale andleaseback transactions; (iii) pay dividends, redeem subordinated debt,repurchase the Company’s or its subsidiaries stock or make any other restrictedpayments as defined in the indenture; (iv) enter into certain transactionswith affiliates; (v) create or incur liens; (vi) transfer or sellassets; (vii) make dividends, distributions or other payments from theCompany’s subsidiaries; (viii) consummate a merger, consolidation or saleof all or substantially all of our assets; and (ix) engage in unrelatedbusiness.

 

Asof January 1, 2005, the Company had incurred $13.9 million of costsdirectly related to the debt refinancing. Generally, these costs would bedeferred and amortized as interest expense over the term of the Senior SecuredNotes. However, for the years ended January 1, 2005 and January 3, 2004,respectively, approximately $5.0 million and $684,000 of these costs related tothe exchange of $80.7 million of Senior Notes for $80.7 million ofSenior Secured Notes and were expensed, net of the gain recognized on the earlyretirement of the remaining indebtedness of $4.8 million during the yearended January 1, 2005, in the respective period in accordance with SFASNo. 15, “Accounting by Debtors and Creditors for Troubled DebtRestructurings” and included in the caption “costs associated with debtrefinancing, net” in the consolidated statements of operations.

 

F-18

----

 

***Capital Lease Obligations***

 

Asof December 31, 2005, the future minimum lease payments, including interest,for capital lease obligations are as follows (in thousands):

 
| **Fiscal Year**                        | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|
| 2006                                        |       | $          | 158        |   |
| 2007                                        |       | 158        |       |
| 2008                                        |       | 116        |       |
| 2009                                        |       | 85         |       |
| 2010                                        |       | 85         |       |
| Thereafter                                  |       | 199        |       |
| Total minimum lease payments                |       | 801        |       |
| Less amount representing interest           |       | (212       | )          |
| Present value of net minimum lease payments |       | $          | 589        |   |

 

**4. Income Taxes**

 

***Provision for Income Taxes***

 

Thecomponents of the provision for income taxes for the years ended December 31,2005 January 1, 2005 and January 3, 2004 are as follows (in thousands):

 
| ** **                                 | ** ** | **For the Fiscal Year Ended** | ** ** |
|--------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                 | ** ** | **December 31,**                             | ** ** | **January 1,** | ** ** | **January 3,** | ** ** |
| ** **                                 | ** ** | **2005**                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| Current                                    |       |                                              |       |   |   |   |   |
| Federal                                    |       | $                                                 | 693        |   | $ | 2,180 |   | $ | 2,697 |   |
| State                                      |       | 150                                               |       | 517 |   | 552 |   |
| Foreign                                    |       | 36                                                |       | 80 |   | — |   |
|                                       |       | 879                                               |       | 2,777 |   | 3,249 |   |
| Deferred                                   |       |                                              |       |   |   |   |   |
| Federal                                    |       | (3,061                                            | )          | (434 | ) | (670 | ) |
| State                                      |       | (626                                              | )          | (89 | ) | (176 | ) |
|                                       |       | (3,687                                            | )          | (523 | ) | (846 | ) |
| Total provision (benefit) for income taxes |       | $                                                 | (2,808     | ) | $ | 2,254 |   | $ | 2,403 |   |

 

F-19

----

 

Thedifferences between income taxes at the U.S. federal statutory income tax rateand income taxes reported in the consolidated statements of operations for theyears ended December 31, 2005, January 1, 2005 and January 3, 2004 are asfollows (in thousands):

 
| ** **                             | ** ** | **For the Fiscal Year Ended** | ** ** |
|----------------------------------------|------------|---------------------------------------------------|------------|
| ** **                             | ** ** | **December 31,**                             | ** ** | **January 1,** | ** ** | **January 3,** | ** ** |
| ** **                             | ** ** | **2005**                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| Federal statutory income tax rate      |       | $                                                 | (13,843    | ) | $ | 1,637 |   | $ | 2,299 |   |
| State income taxes                     |       | (315                                              | )          | 209 |   | 269 |   |
| Impairment of goodwill and intangibles |       | 11,301                                            |       | — |   | — |   |
| Foreign taxes                          |       | —                                            |       | 80 |   | — |   |
| Deferred compensation adjustment       |       | —                                            |       | 572 |   | — |   |
| Other                                  |       | 49                                                |       | (244 | ) | (165 | ) |
| Effective income tax rate              |       | $                                                 | (2,808     | ) | $ | 2,254 |   | $ | 2,403 |   |

 

Thesignificant components of the Company’s deferred tax assets and liabilities atDecember 31, 2005 and January 1, 2005 are as follows (in thousands):

 
| ** **                                       | ** ** | **December 31,** | ** ** | **January 1,** | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|---------------------|------------|------------|------------|
| ** **                                       | ** ** | **2005**              | ** ** | **2005**            | ** ** | ** ** | ** ** |
| Deferred tax assets - current:                   |       |                  |       |                |       |       |       |
| Allowance for doubtful accounts                  |       | $                     | 232        |                | $          | 411        |       |   |   |
| Deferred revenues                                |       | 52                    |       | 198                 |       |       |       |
| Accrued expenses                                 |       | 304                   |       | 407                 |       |       |       |
| Other                                            |       | 192                   |       | 104                 |       |       |       |
| Deferred tax assets - current:                   |       | $                     | 780        |                | $          | 1,120      |       |   |   |
| Deferred tax liabilities - long-term:            |       |                  |       |                |       |       |       |
| Intangibles                                      |       | $                     | (2,084     | )                   | $          | (6,682     | )          |   |   |
| Other                                            |       | (95                   | )          | (134                | )          |       |       |
| Total deferred tax liabilities - long-term       |       | (2,179                | )          | (6,816              | )          |       |       |
| Deferred tax assets - long-term:                 |       |                  |       |                |       |       |       |
| Loan costs                                       |       | 1,575                 |       | 1,888               |       |       |       |
| Reserves                                         |       | 23                    |       | 391                 |       |       |       |
| Depreciation                                     |       | 455                   |       | 350                 |       |       |       |
| Other                                            |       | 277                   |       | 311                 |       |       |       |
| Total deferred tax assets - long-term            |       | 2,330                 |       | 2,940               |       |       |       |
| Deferred tax asset (liability), net -  long-term |       | $                     | 151        |                | $          | (3,876     | )          |   |   |

 

Avaluation allowance is provided when it is more likely than not that all orsome of the deferred income tax assets will not be realized. Management hasconcluded that it is more likely than not that the Company will realize itsdeferred income tax assets.

 

F-20

----

 

Inconnection with the reorganization described in Note 1, the Companyentered into a tax allocation agreement with MFC pursuant to which the Companyagreed to make payments to MFC, after taking into account payments the Companymakes directly to tax authorities, based on the Company’s stand-aloneconsolidated federal income tax liability, determined as if the Company and itssubsidiaries constituted their own consolidated group for federal income taxpurposes. The Company will not be permitted to make these payments to MFC,unless the MFC federal tax liability exceeds the Company’s stand-alone federaltax liability, until it meets certain financial ratios and is otherwise incompliance with the terms of the indenture governing the Senior Secured Notes.

 

**5. Long-Term Incentive Plans**

 

Effective as of May 23, 2004, the Board ofDirectors of MFC approved adoption of the Phantom Stock Plan of Mrs. Fields’Companies, Inc. (the “Phantom Plan”). The purpose of the Phantom Plan is toprovide long-tem incentives to key employees of MFC or its subsidiaries (the“Participants”) as determined by the Compensation Committee of the Board ofDirectors (the “Committee”). The Phantom Plan is unfunded, and Participants donot receive any payment under the Phantom Plan until the completion of thefirst to occur of (i) a sale of substantially all of the assets of MFC; (ii) apublic offering of MFC’s Common Stock where MFC receives proceeds, net of anyunderwriter’s discounts and expenses, of not less than $50 million; or (iii)any stock sale, merger or other transaction where the owners of Common Stockimmediately before the transaction do not own in excess of 50 percent of thecommon stock of the entity surviving such sale, merger or other transaction (a“Triggering Event”).

 

Participantsreceive performance units in amounts recommended by the CEO and determined bythe Committee. Upon the completion of a Triggering Event, Participants receivepayments reflecting the number and value of their performance units at the timeof the completion of the Triggering Event. Payments to Participants may be madein cash or through issuance of equity securities of MFC, as determined by theCommittee, at which time compensation expense will be recognized. The value ofa performance unit at the completion of a Triggering Event is the value of oneshare of common stock of MFC as determined in good faith by the Board ofDirectors. If the Board of Directors determines the need, it may seek theadvice of an independent advisor.

 

Themaximum number of performance units that may be granted under the Phantom Planis one million units. Subdivisions, splits, or combinations involving MFC’sCommon Stock will proportionately affect the number of performance units thathave been awarded under the Phantom Plan. In May 2004, the Committee approvedthe grant of up to 392,418 performance units allocated among Participants asdetermined by the Committee. Future grants, if any, shall also be determined bythe Committee. As of December 31, 2005, 341,400 performance units have beengranted to Participants.

 

Effectiveas of September 1, 2004, MFC terminated its Employee Stock Option Plan pursuantto the provisions of the plan. No further options will be granted under theplan. Valid and outstanding options granted to plan participants prior totermination were unaffected by the termination. Concurrent with thetermination, the Company paid $108,000 for the repurchase of certain stockoptions from the plan participants. Concurrent with the issuance of theperformance units of the Phantom Plan, most of the outstanding stock optionswere cancelled. At December 31, 2005, there are 10,000 stock optionsoutstanding.

 

F-21

----

 

Duringthe years ended January 1, 2005 and January 3, 2004, the Company recognized$75,000 and $50,000 of compensation expense, respectively, related to thefiscal 2001 issuance of MFC stock options to certain employees of the Company.Because the employees of the Company are the beneficiaries of the grant ofoptions in MFC stock, the related expense has been reflected in the Company’sconsolidated financial statements.

 

**6. Commitments and Contingencies**

 

***Legal Matters***

 

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

 

In the ordinary course of business, the Company isinvolved in routine litigation, including franchise disputes and trademarkdisputes. The Company is not a party to 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.

 

Effective as of August 13, 2005, the Company’swholly-owned subsidiary, MFF, terminated two license agreements (the “LicenseAgreements”) with Shadewell Grove IP, LLC (“Shadewell”) for Shadewell’s failureto make certain payments to MFF in a timely manner. These terminated LicenseAgreements granted Shadewell a license to develop, manufacture, distribute andsell ready-to-eat shelf stable cookie products and high quality, prepackaged,ready-to-eat, pre-baked cookie products using certain Mrs. Fields trademarks,service marks and trade names in distribution channels designated in theLicense Agreements.

 

On October 5, 2005, Shadewell filed a VerifiedComplaint, Motion for Restraining Order and related documents (the “Action”) inthe Court of Chancery of the State of Delaware against MFF. In the Action,Shadewell alleges that they did not materially breach the shelf-stable andready-to-eat, pre-baked cookie licenses, and that the License Agreements wereimproperly terminated by MFF. Among other relief, Shadewell seeks a court orderthat the License Agreements remain in full force and effect and that MFF mustspecifically perform its obligations under the License Agreements. Shadewellalso seeks unspecified damages related to its claims that MFF breached certainobligations under the License Agreements. A trial of the Action was held onNovember 29, 2005, followed by post-trial briefs and arguments in January 2006,but the court has not yet rendered its decision. The Company believes thatShadewell’s allegations in the Action are without merit and intends to vigorouslydefend its interests. The Company believes that neither the Action nor thetermination of the License Agreements will have a material effect on theCompany’s consolidated financial position or results of operations. During2005, royalties earned from the terminated licenses totaled $2.2 million.

 

***Operating Leases***

 

TheCompany leases office space, facilities and equipment under long-termnon-cancelable operating lease agreements with remaining terms of one to eightyears. Rent expense, net of sublease payments, was $1.3 million,$1.2 million and $1.2 million for the years ended December 31, 2005,January 1, 2005 and January 3, 2004, respectively.

 

F-22

----

 

Asof December 31, 2005, the future minimum lease payments due under operatingleases are as follows (in thousands):

 
| **Fiscal Year** | ** ** | ** ** | ** ** |
|----------------------|------------|------------|------------|
| 2006                 |       | $          | 1,617      |   |
| 2007                 |       | 1,547      |       |
| 2008                 |       | 1,499      |       |
| 2009                 |       | 1,486      |       |
| 2010                 |       | 1,505      |       |
| Thereafter           |       | 670        |       |
|                 |       | $          | 8,324      |   |

 

Asof December 31, 2005, the future minimum sublease payments due to the Companyunder these operating leases are as follows (in thousands):

 
| **Fiscal Year** | ** ** | ** ** | ** ** |
|----------------------|------------|------------|------------|
| 2006                 |       | $          | 253        |   |
| 2007                 |       | 163        |       |
| 2008                 |       | 123        |       |
| 2009                 |       | 39         |       |
|                 |       | $          | 578        |   |

 

***Contractual Arrangements***

 

TheCompany has entered into supply agreements to purchase frozen dough products,yogurt-based products, novelties and ice cream. The frozen dough product supplyagreement stipulates minimum annual purchase commitments of not less than15 million pounds of products, approximately $19.7 million based onweighted average prices in effect December 31, 2005, each year through the endof the contract, December 2006. These annual purchase commitments aresatisfied primarily through the direct purchase of frozen dough products byfranchisees. Should the Company not meet the annual minimum commitment, thesupplier’s sole remedy is to cancel the supply agreement. The Company did notmeet the annual minimum purchase commitment for the year ended December 31,2005; however, management does not expect the supplier to cancel the supplyagreement.

 

Thesupplier of the frozen dough product manufactures its products in one location.A production disruption or the supplier’s inability to secure the raw materialsused in the production of its products could adversely affect the operatingresults of the Company and its franchisees. Although management believes thatother suppliers could provide similar products on comparable terms, a change insuppliers could cause a delay in manufacturing and a possible loss of sales,which could adversely affect the financial position, results of operations orliquidity of the Company and its franchisees.

 

F-23

----

 

TCBY’ssupply agreement with Americana Foods Limited Partnership (“Americana”) for thepurchase of yogurt-based products, novelties and ice cream (the “TCBY SupplyAgreement”) stipulates minimum annual purchase commitments of at least75 percent of the product volumes contained in the agreement through theterm of the agreement, November 2007. These annual purchase commitmentsare satisfied through the direct purchase of frozen yogurt-based products,novelties and ice cream by TCBY’s distributors and franchisees. If thepurchases fall below 75 percent of the quantity, then Americana has theright to propose a new pricing structure. If TCBY doesn’t agree to the newpricing structure, then Americana has the right to terminate the agreement bygiving written notice 180 days prior to termination. The Company did notmeet the minimum annual purchase commitment for the year ended December 31,2005; however, management does not expect Americana to propose a new pricingstructure.

 

Americanamanufactures its products in one location. A production disruption orAmericana’s inability to secure the raw materials used in the production of itsproducts could adversely affect the operating results of TCBY and itsfranchisees. Although management believes that other suppliers could providesimilar products on comparable terms, a change in suppliers could cause a delayin manufacturing and a possible loss of sales, which could adversely affect thefinancial position, results of operations or liquidity of TCBY and itsfranchisees.

 

**7. Related-Party Transactions**

 

***Due To/From Affiliates***

 

Theamounts due to/from affiliates are comprised of amounts due to/from MFOC, MFH,TCBY Enterprises and affiliates and MFC at December 31, 2005 and January 1,2005 (in thousands):

 
| ** **                   | ** ** | **December 31,** | ** ** | **January 1,** | ** ** |
|------------------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                   | ** ** | **2005**              | ** ** | **2005**            | ** ** |
| Amounts due from affiliates: |       |                  |       |                |       |
| MFC                          |       | $                     | —     |                | $          | 23 |   |
| Amounts due to affiliates:   |       |                  |       |                |       |
| MFC - tax sharing            |       | $                     | 3,138      |                | $          | 2,382 |   |
| MFH                          |       | 273                   |       | 273                 |       |
| MFOC                         |       | 538                   |       | 125                 |       |
|                         |       | $                     | 3,949      |                | $          | 2,780 |   |

 

TheCompany has from time-to-time engaged Korn/Ferry International (“Korn/Ferry”),an international executive recruiting firm for which Richard Ferry, one of themembers of the board of managers, is also Founder Chairman. For the years endedDecember 31, 2005, January 1, 2005 and January 3, 2004, recruiting fees paid toKorn/Ferry totaled $158,000, $132,000 and $362,000, respectively.

 

TheCompany has periodically engaged Applied Predictive Technologies (“APT”) toevaluate the economic and demographic trends of certain mall and retail sitelocations. Walker Lewis, one of the members of the board of managers, isChairman of the Board of APT. For the year ended January 3, 2004, the Companypaid APT $68,000. There were no amounts paid to APT in fiscal 2005 or 2004.

 

F-24

----

 

***Franchise Agreements with MFOC***

 

Concurrentwith the completion of the reorganization (see Note 1), certain of theCompany’s brand franchisor subsidiaries entered into franchise agreements withMFOC, which permit MFOC to sell and distribute the Company’s products in itsowned stores upon payment of franchise royalties and other amounts required underthe franchise agreements. These franchise agreements are similar to theCompany’s standard form of franchise agreement, except that the Company did notcharge an up-front franchising fee for stores open as of the date of thefranchise agreements in recognition of the fact that the stores owned andoperated by MFOC were operated prior to giving effect to the reorganization.

 

Thesefranchise agreements are terminable by the Company in the event of non-paymentof the franchise royalties for a period of 10 days, followed by a 10-dayopportunity to cure, or other material violation of the franchise agreements.The aggregate amount of franchise royalties paid to the Company by MFOC duringfiscal 2005 and 2004 was $689,000 and $2.8 million, respectively. The aggregateamount of franchise royalties that would have been required to be paid to theCompany by MFOC, had these franchise agreements been in effect, would have been$4.8 million for fiscal 2003.

 

***Management Agreement with MFOC***

 

Inconnection with the reorganization (see Note 1), the Company entered intoa management agreement with MFOC, pursuant to which the Company providesbusiness and organizational strategy, financial and investment management andother executive-level management services to MFOC and its subsidiaries (otherthan the Company) upon the terms and conditions set forth in the managementagreement. As compensation for these services, on a monthly basis, MFOCreimburses the Company the allocated costs of the general and administrativefunctions dedicated to providing these services as determined in good faith bythe Company and MFOC. These reimbursement amounts are intended to reflect theactual costs of providing these services and are not intended to generaterevenues for the Company. Management expects that the reimbursement amountswill decrease over time as MFOC reduces its store operations. It is intendedthat this management agreement will continue in effect until the expiration ofall store leases for which MFOC is the lessee. For the year ended December 31,2005 and the period from the reorganization through January 1, 2005, MFOCreimbursed the Company $2.4 million and $2.8 million, respectively, formanagement services provided under the management agreement.

 

***MFOC Sublease***

 

Concurrentwith the completion of the reorganization (see Note 1), the Companyentered into an assignment agreement whereby the lease for the corporateheadquarters was assigned from MFOC to the Company. MFOC entered into asublease with the Company to pay the Company, over the term of the sublease,agreed rental payments that have been established based on estimated usage ofthe headquarters by their personnel. For the year ended December 31, 2005 andthe period from the reorganization through January 1, 2005, MFOC paid rent of$289,000 and $220,000, respectively, to the Company. Management estimates thatMFOC’s aggregate rental payments will be approximately $88,000 in fiscal 2006.MFOC’s share is expected to decrease over time with corresponding reducedoperations. It is intended that the sublease will continue in effect until theexpiration of all store leases for which MFOC is the lessee, following whichthe MFOC sublease will be terminated and the Company would therefore beresponsible for all rental payments.

 

***MFOC Collection Agency Agreement***

 

Concurrentwith the completion of the reorganization (see Note 1), the Companyentered into a collection agency agreement with MFOC under which the Companyagreed to act as MFOC’s collection agent for subtenant rental payments made bythe Company’s franchisees who operate stores previously owned by MFOC on whichMFOC remains as the tenant.

 

F-25

----

 

***Benefits Agreement with MFOC***

 

Concurrentwith the completion of the reorganization (see Note 1), the Companyentered into a benefits agreement with MFOC under which the Company agreed tomake certain payments to MFOC in respect to the Company’s share of employeebenefits costs based on the number of the Company’s employees. Costs associatedwith the Company’s employees providing services to MFOC under the managementagreement are allocated consistent with the shared expenses under themanagement agreement. For the year ended December 31, 2005 and the period fromthe reorganization through January 1, 2005, the Company paid MFOC $2.9 millionand $1.9 million, respectively, for the Company’s share of employee benefitscosts.

 

***Insurance Allocation Agreement withMFC***

 

Concurrentwith the completion of the reorganization (see Note 1), the Companyentered into an insurance allocation agreement with MFC under which the Companyagreed to make certain payments to MFC in respect to the Company’s share ofcertain insurance costs, allocated based on the Company’s estimation of theappropriate risk of loss of each of MFC’s subsidiaries. The insuranceallocation agreement also provides for the allocation of workers’ compensationcosts based on the respective employee payroll and employment category riskfactor of each of MFC’s subsidiaries that generates payroll. For the year endedDecember 31, 2005 and the period from the reorganization through January 1,2005, the Company paid MFC $1.3 million and $925,000, respectively, for theCompany’s share of insurance costs.

 

***Shadewell Grove Holdings, LLC andShadewell Grove IP, LLC***

 

Priorto 2004, the Company had entered into various trademark license agreements andexclusively licensed certain recipes to Nonni’s Food Company, Inc.(“Nonni’s”), a manufacturer and distributor of soft baked cookies. In addition,the Company owned warrants to purchase 111,111 shares of Nonni’s common stockat an exercise price of $10.775. In March 2004, Nonni’s was acquired by a thirdparty investor in a stock purchase (the “Nonni’s Purchase”). As part of theNonni’s Purchase, in consideration for the sale of the warrants to purchase111,111 shares of Nonni’s common stock, the Company was to receive an aggregateof $1.3 million, of which approximately $200,000 was being held in an escrowaccount pending post-closing adjustments related to the Nonni’s Purchase. As aresult, the Company recorded a gain on the sale of these warrants of $1.1million in other income in the consolidated statement of operations during theyear ended January 1, 2005. The Company received $122,000 in January 2006 fromNonni’s as final settlement related to the amount previously held in escrow andwill record a gain on the sale of the warrants in other income in theconsolidated statement of operations during the first quarter of fiscal 2006.

 

Immediatelyprior to the Nonni’s Purchase, the Mrs. Fields product division of Nonni’sand its related assets were contributed to a newly-formed entity, ShadewellGrove Holdings, LLC (“Shadewell Holdings”). The Company received from ShadewellHoldings its pro-rata share of preferred units in Shadewell Holdings,approximately 4.1 percent, as if the warrants in Nonni’s common stock had beenexercised immediately prior the Nonni’s purchase.

 

InMarch 2005 and December 2004, the Company paid Shadewell Holdings approximately$48,000 and $102,000, respectively, for additional preferred units of ShadewellHoldings to maintain its pro-rata ownership of Shadewell Holdings. Thisinvestment is recorded in other assets in the consolidated balance sheet as ofDecember 31, 2005 and January 1, 2005. The Company has appointed John Lauck,one of its executive officers, to represent the Company as a director ofShadewell Holdings.

 

F-26

----

 

Shadewell,a wholly-owned subsidiary of Shadewell Holdings, has licenses to develop,manufacture and distribute ready-to-eat shelf stable cookie products utilizingthe Mrs. Fields trademarks, service marks and trade names through retaildistribution channels and designated food service distribution channels. Shadewellalso has a license to market and distribute high quality, pre-packagedchocolate chips utilizing the Mrs. Fields trademarks, service marks and tradenames through designated retail distribution channels. For the years endedDecember 31, 2005, January 1, 2005, and January 3, 2004, the Company earnedroyalty and licensing revenues associated with the licensing and recipe salesagreements of $2.3 million, $3.1 million and $3.5 million,respectively.

 

OnDecember 24, 2004, the Company terminated the license agreement with Shadewellto market and distribute high quality, frozen cookie dough products utilizingthe Mrs. Fields trademarks, service marks and trade names to the food away fromhome industry through designated food service distribution channels. Amongother reasons, the Company pursued the termination of this license to betteralign the Company’s interests with those of the Company’s franchisees. TheCompany paid Shadewell a termination fee of $1.1 million and in return receivedfrom Shadewell an indemnification and release of any and all claims arisingfrom the license agreement. The termination fee was recorded in licensingexpenses in the consolidated statement of operations for the year ended January1, 2005.

 

***Co-marketing and Supply Agreement***

 

Americanais owned by an entity in which a limited partner of the entity is a subsidiaryof a significant shareholder of MFC. Americana manufactures yogurt-basedproducts, ice cream and novelty items for sale and distribution to TCBY’sfranchisees and distributors under the TCBY Supply Agreement datedNovember 20, 2002 (see Note 6). Under the TCBY Supply Agreement, theCompany recognized revenues related to the product manufactured by Americana of$9.6 million, $11.7 million and $13.1 million for the years endedDecember 31, 2005, January 1, 2005 and January 3, 2004, respectively. Inaddition, Americana sells TCBY branded frozen specialty products and privatelabel products through retail channels and pays TCBY a portion of the salesprice under the TCBY Supply Agreement. TCBY invoiced Americana $711,000,$930,000 and $1.9 million for the fiscal years ended December 31, 2005,January 1, 2005 and January 3, 2004, respectively, relating to TCBY’sportion of these sales. As a result of these sales, TCBY must reimburseAmericana for certain costs. Americana invoiced TCBY $180,000, $381,000 and$892,000 for the fiscal years ended December 31, 2005, January 1, 2005 andJanuary 3, 2004, respectively, relating to the reimbursement of these costs.

 

**8. Employee Benefit Plans**

 

MFOCsponsors the Mrs. Fields’ Original Cookies, Inc. 401(k) RetirementSavings Plan (the “Plan”) for all eligible employees of MFOC and itssubsidiaries. Under the terms of the Plan, employees may make contributions tothe Plan. During 2005 and 2004, a portion of the employee contributions to thePlan were matched by contributions from the Company at the rate of100 percent of the first three percent of employee contributions plus50 percent of the next two percent of employee contributions. The total matchingcontributions made by the Company to the Plan for the years ended December 31,2005 and January 1, 2005  wereapproximately $349,000 and $294,000, respectively. No contributions were madeto the Plan by the Company for the year ended January 3, 2004.

 

F-27

----

 

**9. Reportable Segments**

 

Operatingsegments are components of the Company for which separate financial informationis available that is evaluated regularly by management in deciding how toallocate resources and in assessing performance. This information is reportedon the basis that it is used internally for evaluating segment performance. TheCompany has three reportable operating segments; namely, franchising, gifts andlicensing. The franchising segment consists of revenues received eitherdirectly or indirectly from cookie, yogurt and pretzel stores, which are ownedand operated by third parties. These revenues include initial franchise orlicense fees, monthly royalties based on a percentage of a franchisee’s grosssales, sales of cookie dough that the Company produces and certain productformulation fees and supplier allowances which are based upon sales tofranchisees. The gifts segment includes sales generated from the Company’s mailorder gift catalog and website. The licensing segment consists of otherlicensing activity from third parties for the sale of products bearing theCompany’s brand names. The accounting policies for the segments are the same asthose discussed in the summary of significant accounting policies (see Note 2).Sales and transfers between segments are eliminated in consolidation.

 

TheCompany evaluates performance of each segment based on contribution.Contribution is computed as the difference between the revenues generated by areportable segment and the selling and occupancy expenses, cost of sales anddirect general and administrative expenses related to that reportable segment.Contribution is used as a measure of the operating performance of an operatingsegment. The Company does not allocate any indirect general and administrativeexpense, other operating income (expense), interest expense, depreciation andamortization or assets to its reportable operating segments.

 

Segmentrevenues and contribution for the years ended December 31, 2005, January 1,2005 and January 3, 2004 are presented in the following table (in thousands):

 
| ** **             | ** ** | **For the Fiscal Year Ended** | ** ** |
|------------------------|------------|---------------------------------------------------|------------|
| ** **             | ** ** | **December 31,**                             | ** ** | **January 1,** | ** ** | **January 3,** | ** ** |
| **Total Company** | ** ** | **2005**                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:              |       |                                              |       |   |   |   |   |
| Franchising            |       | $                                                 | 53,528     |   | $ | 55,913 |   | $ | 58,645 |   |
| Gifts                  |       | 30,136                                            |       | 25,849 |   | 17,405 |   |
| Licensing              |       | 4,016                                             |       | 4,945 |   | 5,464 |   |
|                   |       | $                                                 | 87,680     |   | $ | 86,707 |   | $ | 81,514 |   |
| Contribution:          |       |                                              |       |   |   |   |   |
| Franchising            |       | $                                                 | 31,782     |   | $ | 34,020 |   | $ | 38,605 |   |
| Gifts                  |       | 1,718                                             |       | 5,116 |   | 4,198 |   |
| Licensing              |       | 2,884                                             |       | 3,429 |   | 4,309 |   |
|                   |       | $                                                 | 36,384     |   | $ | 42,565 |   | $ | 47,112 |   |

 

F-28

----

 

Thereconciliation of contribution to net income for the years ended December 31,2005, January 1, 2005 and January 3, 2004 is as follows (in thousands):

 
| ** **                                                                                   | ** ** | **For the Fiscal Year Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **December 31,**                             | ** ** | **January 1,** | ** ** | **January 3,** | ** ** |
| ** **                                                                                   | ** ** | **2005**                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| Contribution                                                                                 |       | $                                                 | 36,384     |   | $ | 42,565 |   | $ | 47,112 |   |
| Other operating revenue                                                                      |       | 272                                               |       | 353 |   | 474 |   |
| General and administrative expense                                                           |       | (8,527                                            | )          | (9,727 | ) | (10,811 | ) |
| Stock compensation expense                                                                   |       | —                                            |       | (75 | ) | (50 | ) |
| Other operating expense, net                                                                 |       | (219                                              | )          | (396 | ) | (1,015 | ) |
| Interest expense, net                                                                        |       | (20,943                                           | )          | (24,905 | ) | (25,041 | ) |
| Other income                                                                                 |       | —                                            |       | 1,054 |   | — |   |
| Depreciation and amortization                                                                |       | (3,976                                            | )          | (4,053 | ) | (3,753 | ) |
| Impairment of goodwill and intangible  assets                                                |       | (43,707                                           | )          | — |   | — |   |
| Benefit (provision) for income taxes                                                         |       | 2,808                                             |       | (2,254 | ) | (2,403 | ) |
| Income (loss) from continuing operations                                                     |       | (37,908                                           | )          | 2,562 |   | 4,513 |   |
| Income from discontinued operations (net of  income taxes of $0, $65 and $458, respectively) |       | —                                            |       | 104 |   | 255 |   |
| Net income (loss)                                                                            |       | $                                                 | (37,908    | ) | $ | 2,666 |   | $ | 4,768 |   |

 

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

 

Revenuesfrom franchisees, customers and licensees within the United States were $86.5million, $86.1 million and $80.6 million or 98.3 percent, 98.9 percent and 98.3percent of total revenues for the years ended December 31, 2005, January 1,2005 and January 3, 2004, respectively. Revenues from internationalfranchisees, customers and licensees were $1.5 million, $1.0 million and $1.4million or 1.7 percent, 1.1 percent and 1.7 percent of total revenues for theyears ended December 31, 2005, January 1, 2005 and January 3, 2004,respectively. Revenues from any single foreign country were not material.Providing geographical information regarding long-lived assets isimpracticable.

 

TheCompany has one licensee that accounted for $2.3 million,$3.1 million and $3.5 million, or 57.6 percent,62.7 percent and 63.1 percent of the revenues of the licensingsegment for the years ended December 31, 2005, January 1, 2005 and January 3,2004, respectively. The Company has one customer in its gifts business segmentthat accounted for $3.6 million, $4.2 million and $3.0 million,or 11.8 percent, 16.2 percent and 17.2 percent of revenues ofthe gifts business segment for the years ended December 31, 2005, January 1,2005 and January 3, 2004, respectively. There were no other customers orlicensees that accounted for more than ten percent of Mrs. Fields’total revenues or any individual segment’s revenues.

 

F-29

----

 

**10. Discontinued Operations**

 

TCBYtransitioned its equipment sales segment (“Riverport”) to a third partyequipment and smallwares distributor during the quarter ended March 29,2003. The distributor purchased certain of Riverport’s inventory at cost,subject to certain slow moving inventory purchase price adjustments. Thesegment’s assets that were subject to depreciation and amortization were beingperiodically expensed over the remaining estimated useful life. The results ofoperations and financial position of Riverport are classified as discontinuedoperations in the accompanying consolidated financial statements. The Companydoes not anticipate any further activity relating to Riverport in futureperiods

 

**11. Supplemental Condensed Consolidating FinancialInformation**

 

TheSenior Secured Notes were issued by the Company and Mrs. Fields FinancingCompany, Inc., as co-issuers. Mrs. Fields Financing Company, Inc. is awholly-owned finance subsidiary of Mrs. Fields Famous Brands. The SeniorSecured Notes are fully and unconditionally guaranteed on a joint and severalbasis by all of the Company’s domestic subsidiaries other than minorsubsidiaries. Mrs. Fields Famous Brands has no independent assets oroperations. Therefore, supplemental financial information on a condensedconsolidating basis of the guarantor subsidiaries is not required. There are norestrictions on the Company’s ability to obtain cash dividends or otherdistributions of funds from the guarantor subsidiaries, except those imposed byapplicable law.

 

**12. Subsequent Event**

 

Effectiveas of March 1, 2006, we entered into an Industrial Net Lease (“Lease”) withNatomas Meadows Two, LLC, for the lease of approximately 159,000 square feet ofspace in Salt Lake City, Utah. Each month during the 120-month initial termunder the Lease, commencing on May 1, 2006, the Company is required to remitbase rent of $69,872. The Lease also requires additional payments, including a$100,000 security deposit, common area maintenance charges, taxes, maintenanceand utilities. We will be developing this newly leased space to accommodate ournew state-of-the-art gifting operations. This new space will eventually replaceapproximately 107,000 square feet of space we currently lease in areasthroughout Salt Lake City. We will then attempt to terminate the leases for thecurrent space or sublet it. Currently, we anticipate we will open the giftingfacility at the new space in the third quarter of 2006.

 

F-30

----

 

### **EXHIBIT INDEX**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                   |
|-----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1*            |       | Certificate of Formation of Mrs. Fields Famous Brands, LLC                                                                                                                                                                        |
| 3.2*            |       | Limited Liability Agreement of Mrs. Fields Famous Brands, LLC, dated  as of February 4, 2004, by Mrs. Fields’ Original Cookies, Inc.                                                                                         |
| 3.3*            |       | Certificate of Incorporation of Mrs. Fields Financing Company, Inc.                                                                                                                                                               |
| 3.4*            |       | Bylaws of Mrs. Fields Financing Company, Inc.                                                                                                                                                                                     |
| 3.5*            |       | Certificate of Formation of Great American Cookies Company  Franchising, LLC                                                                                                                                                      |
| 3.6*            |       | Limited Liability Agreement of Great American Cookies Company  Franchising, LLC, dated as of February 4, 2004, by Mrs. Fields Famous Brands,  LLC                                                                                 |
| 3.7*            |       | Certificate of Formation of Great American Manufacturing, LLC                                                                                                                                                                     |
| 3.8*            |       | Limited Liability Agreement of Great American Manufacturing, LLC,  dated as of February 4, 2004, by Mrs. Fields Famous Brands, LLC                                                                                           |
| 3.9*            |       | Articles of Incorporation of Mrs. Fields Cookies Australia                                                                                                                                                                        |
| 3.10*           |       | Bylaws of Mrs. Fields Cookies Australia                                                                                                                                                                                           |
| 3.11*           |       | Certificate of Formation of Mrs. Fields Franchising, LLC                                                                                                                                                                          |
| 3.12*           |       | Limited Liability Agreement of Mrs. Fields Franchising, LLC, dated as  of February 4, 2004, by Mrs. Fields Famous Brands, LLC                                                                                                     |
| 3.13*           |       | Articles of Incorporation of Mrs. Fields Gifts, Inc.                                                                                                                                                                              |
| 3.14*           |       | Bylaws of Mrs. Fields Gifts, Inc.                                                                                                                                                                                                 |
| 3.15*           |       | Certificate of Formation of Pretzelmaker Franchising, LLC                                                                                                                                                                         |
| 3.16*           |       | Limited Liability Agreement of Pretzelmaker Franchising, LLC, dated  as of February 4, 2004, by Mrs. Fields Famous Brands, LLC                                                                                                    |
| 3.17*           |       | Certificate of Formation of Pretzel Time Franchising, LLC                                                                                                                                                                         |
| 3.18*           |       | Limited Liability Agreement of Pretzel Time Franchising, LLC, dated  as of February 4, 2004, by Mrs. Fields Famous Brands, LLC                                                                                                    |
| 3.19*           |       | Certificate of Incorporation of The Mrs. Fields’ Brand, Inc.                                                                                                                                                                 |
| 3.20*           |       | Bylaws of The Mrs. Fields’ Brand, Inc.                                                                                                                                                                                       |
| 3.21*           |       | Articles of Incorporation of TCBY International, Inc. (f/k/a TCBY  Preparation, Inc.)                                                                                                                                             |
| 3.22*           |       | Articles of Amendment to Articles of Incorporation of TCBY  International, Inc. (f/k/a TCBY Preparation, Inc.) changing name to TCBY  International, Inc.                                                                         |
| 3.23*           |       | Bylaws of TCBY International, Inc. (f/k/a TCBY Preparation, Inc.)                                                                                                                                                                 |
| 3.24*           |       | Articles of Incorporation of TCBY of Texas, Inc.                                                                                                                                                                                  |
| 3.25*           |       | Amended and Restated Bylaws of TCBY of Texas, Inc.                                                                                                                                                                                |
| 3.26*           |       | Certificate of Formation of TCBY Systems, LLC                                                                                                                                                                                     |
| 3.27*           |       | Amended and Restated Limited Liability Agreement of TCBY Systems,  LLC, dated as of March 16, 2004, by Mrs. Fields Famous Brands, LLC                                                                                             |
| 4.1*            |       | Purchase Agreement, dated March 9, 2004, by and among Mrs. Fields  Famous Brands, LLC, Mrs. Fields Financing Company, Inc., Jefferies &  Company, Inc. as the Initial Purchaser, and the subsidiary guarantors named  therein |

 

----

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                              |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.2*            |       | Indenture, dated as of March 16, 2004, by and among Mrs. Fields  Famous Brands, LLC, Mrs. Fields Financing Company, Inc., the Guarantors  identified therein and The Bank of New York, as Trustee                                                                                                                                                                                                                            |
| 4.3*            |       | Form of 111⁄2% Senior Secured Notes due 2011 (included in Exhibit 4.2)                                                                                                                                                                                                                                                                                                                                                    |
| 4.4*            |       | Form of 9% Senior Secured Notes due 2011 (included in Exhibit 4.2)                                                                                                                                                                                                                                                                                                                                                           |
| 4.5*            |       | Form of Subsidiary Guarantees related to the 111⁄2% Senior Secured  Notes due 2011 (included in Exhibit 4.2)                                                                                                                                                                                                                                                                                                              |
| 4.6*            |       | Form of Subsidiary Guarantees related to the 9% Senior Secured Notes  due 2011 (included in Exhibit 4.2)                                                                                                                                                                                                                                                                                                                     |
| 4.7*            |       | Registration Rights Agreement, dated March 16, 2004, by and among  Mrs. Fields Famous Brands, LLC, Mrs. Fields Financing Company, Inc, the  Subsidiary Guarantors named therein and Jefferies & Company, Inc., as  Initial Purchaser related to the 111⁄2% Senior Secured Notes due 2011                                                                                                                              |
| 4.8*            |       | 9% Notes Registration Rights Agreement, dated March 16, 2004, by and  among Mrs. Fields Famous Brands, LLC, Mrs. Fields Financing Company, Inc.,  the Subsidiary Guarantors named therein and the holders of the 9% Senior  Secured Notes due 2011 related to the 9% Senior Secured Notes due 2011                                                                                                                           |
| 4.9*            |       | Pledge Agreement, dated March 16, 2004, by and among Mrs. Fields  Famous Brands, LLC, TCBY Systems, LLC and The Bank of New York, as Trustee                                                                                                                                                                                                                                                                                 |
| 4.10*           |       | Security Agreement, dated March 16, 2004, by and among Mrs. Fields  Famous Brands, LLC, Mrs. Fields Financing Company, Inc., the Subsidiary  Guarantors named therein and The Bank of New York, as Trustee                                                                                                                                                                                                                   |
| 4.11*           |       | Trademark Security Agreement, dated March 16, 2004, by and among  Great American Cookies Company Franchising, LLC, Pretzelmaker Franchising,  LLC, Pretzel Time Franchising, LLC, TCBY Systems, LLC, The Mrs. Fields’  Brand, Inc. and The Bank of New York, as Trustee                                                                                                                                                 |
| 4.12*           |       | Account Control Agreement, dated as of March 16, 2004, by and among  LaSalle Bank, National Association, Mrs. Fields Famous Brands, LLC and The  Bank of New York, as Trustee                                                                                                                                                                                                                                                |
| 4.13*           |       | Restricted Account Agreement, dated as of March 16, 2004, by and  among Wells Fargo Bank, N.A., Mrs. Fields Famous Brands, LLC and The Bank of  New York, as Trustee                                                                                                                                                                                                                                                         |
| 4.14*           |       | Restricted Account Agreement, dated as of March 16, 2004, by and  among Wells Fargo Bank, N.A., TCBY Systems, LLC and The Bank of New York, as  Trustee                                                                                                                                                                                                                                                                      |
| 4.15*           |       | Deed to Secure Debt, Security Agreement, and Assignment of Leases and  Rents, dated as of March , 2004, by and between Great American Manufacturing,  LLC and The Bank of New York, as Trustee                                                                                                                                                                                                                               |
| 4.16            |       | First Supplemental Indenture, dated as of February 9, 2005, by and  among Mrs. Fields Famous Brands, LLC, Mrs. Fields Financing Company, Inc.,  the Guarantors (as defined in the Indenture) and The Bank of New York, as  Trustee, included as Exhibit 4.1 to the Company’s Current Report on Form 8-K  filed with the Securities and Exchange Commission on February 11, 2005, and  incorporated herein by reference. |
| 10.1*           |       | Contribution Agreement between TCBY Enterprises, Inc. and TCBY  Systems, LLC dated as of March 16, 2004                                                                                                                                                                                                                                                                                                                      |
| 10.2*           |       | Contribution Agreement, dated as of March 16, 2004, by and among  Mrs. Fields’ Original Cookies, Inc., the subsidiaries of  Mrs. Fields’ Original Cookies, Inc. named therein, Mrs. Fields  Famous Brands, LLC and the subsidiaries of Mrs. Fields Famous Brands,  LLC named therein                                                                                                      |
| 10.3**          |       | United States Trademark Assignment, dated March 16, 2004, between  Mrs. Fields’ Original Cookies, Inc. and The Mrs. Fields’ Brand, Inc.                                                                                                                                                                                                                                                                            |

 

----

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                             |
|-----------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.4**          |       | International Trademark Assignment, dated March 16, 2004, between  Mrs. Fields’ Original Cookies, Inc. and The Mrs. Fields’ Brand, Inc.                                                                                                                                           |
| 10.5*           |       | United States Trademark Assignment, dated March 16, 2004, between  Great American Cookies Company, LLC, and Great American Cookies Company  Franchising, LLC                                                                                                                                |
| 10.6*           |       | International Trademark Assignment, dated March 16, 2004, between  Great American Cookies Company, LLC, and Great American Cookies Company  Franchising, LLC                                                                                                                                |
| 10.7*           |       | United States Trademark Assignment, dated March 16, 2004, between  Pretzel Time, LLC, and Pretzel Time Franchising, LLC                                                                                                                                                                     |
| 10.8*           |       | International Trademark Assignment, dated March 16, 2004, between  Pretzel Time, LLC and Pretzel Time Franchising, LLC                                                                                                                                                                      |
| 10.9*           |       | United States Trademark Assignment, dated March 16, 2004, between  Pretzelmaker, LLC and Pretzelmaker Franchising, LLC                                                                                                                                                                      |
| 10.10*          |       | International Trademark Assignment, dated March 16, 2004, between  Pretzelmaker, LLC and Pretzelmaker Franchising, LLC                                                                                                                                                                      |
| 10.11**         |       | United States Trademark Assignment, dated March 16, 2004, between  TCBY Enterprises, Inc. and TCBY Systems, LLC                                                                                                                                                                             |
| 10.12**         |       | International Trademark Assignment, dated March 16, 2004, between  TCBY Enterprises, Inc. and TCBY Systems, LLC                                                                                                                                                                             |
| 10.13*          |       | Severance Assumption Agreement, dated as of March 16, 2004, by and  among Mrs. Fields’ Original Cookies, Inc., Mrs. Fields Famous Brands, LLC,  Larry A. Hodges and Mrs. Fields’ Companies, Inc.                                                                                  |
| 10.14*          |       | Management Agreement, dated as of March 16, 2004, by and between Mrs.  Fields Famous Brands, LLC and Mrs. Fields’ Original Cookies, Inc.                                                                                                                                               |
| 10.15*          |       | Tax Allocation Agreement, dated as of March 16, 2004, by and among  Mrs. Fields’ Companies, Inc., Mrs. Fields Famous Brands, LLC and the  subsidiaries of Mrs. Fields Famous Brands, LLC named therein                                                                                 |
| 10.16*          |       | Insurance Allocation Agreement, dated as of March 16, 2004, by and  among Mrs. Fields’ Companies, Inc. and all of its subsidiaries                                                                                                                                                     |
| 10.17*          |       | Benefits Allocation Agreement, dated as of March 16, 2004, by and  among Mrs. Fields’ Original Cookies, Inc., Mrs. Fields Famous Brands, LLC and  the subsidiaries of Mrs. Fields Famous Brands, LLC named therein                                                                     |
| 10.18*          |       | Collection Agency Agreement, dated as of March 16, 2004, by and  between Mrs. Fields’ Original Cookies, Inc. and Mrs. Fields Famous Brands,  LLC                                                                                                                                       |
| 10.19*          |       | Expense Reimbursement Agreement, dated as of March 16, 2004, among  Mrs. Fields Famous Brands, LLC, Mrs. Fields’ Companies, Inc., Mrs. Fields’  Holding Company, Inc., Mrs. Fields’ Original Cookies, Inc., Capricorn  Investors II, L.P., and Capricorn Investors III, L.P. |
| 10.20*          |       | Lease Agreement, dated January 19, 1998, as amended by Lease Addendum  No. 1 dated June 4, 1998, and Lease Addendum No. 2, dated October 19, 2000,  between 2855 E. Cottonwood Parkway L.C. and Mrs. Fields’ Original Cookies,  Inc.                                                   |
| 10.21*          |       | Assignment and Assumption of Lease, dated as of March 16, 2004,  between Mrs. Fields’ Original Cookies, Inc. and Mrs. Fields Famous Brands,  LLC, pertaining to the Cottonwood Parkway Headquarters Lease                                                                              |
| 10.22*          |       | Sublease, dated as of March 16, 2004, by and between Mrs. Fields  Famous Brands, LLC and Mrs. Fields’ Original Cookies, Inc.                                                                                                                                                           |

 

----

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                           |
|-----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.23*          |       | Lease Agreement, dated May 31, 2003, between Mrs. Fields’ Original  Cookies, Inc. and Transwestern Commercial Services LP, pertaining to the  Training Facility                                      |
| 10.24*          |       | Assignment and Assumption of Lease, dated as of March 16, 2004,  between Mrs. Fields’ Original Cookies, Inc. and Mrs. Fields Famous Brands,  LLC, pertaining to the Training Facility Lease          |
| 10.25*          |       | Lease Agreement, dated March 31, 2001, between Mrs. Fields’ Original  Cookies, Inc. and Mrs. Fields Famous Brands, LLC, pertaining to the Mrs.  Fields Gifts Facility                                |
| 10.26*          |       | Assignment and Assumption of Lease, dated as of March 16, 2004,  between Mrs. Fields’ Original Cookies, Inc. and Mrs. Fields Famous Brands,  LLC, pertaining to the Mrs. Fields Gifts Facility Lease |
| 10.27*          |       | Mrs. Fields Franchise Agreement, dated as of March 16, 2004, by and  among Mrs. Fields Franchising, LLC and Mrs. Fields’ Original Cookies, Inc.                                                      |
| 10.28*          |       | Great American Cookies Company Franchise Agreement, dated as of March  16, 2004, by and between Great American Cookies Company Franchising, LLC and  Mrs. Fields’ Original Cookies, Inc.             |
| 10.29*          |       | Pretzel Time Franchise Agreement, dated as of March 16, 2004, by and  between Pretzel Time Franchising, LLC and Mrs. Fields’ Original Cookies, Inc.                                                  |
| 10.30*          |       | Pretzelmaker Franchise Agreement, dated as of March 16, 2004, by and  between Pretzelmaker Franchising, LLC and Mrs. Fields’ Original Cookies, Inc.                                                  |
| 10.31**         |       | TCBY Franchise Agreement, dated as of March 16, 2004, by and between  TCBY Systems, LLC and Mrs. Fields’ Original Cookies, Inc.                                                                      |
| 10.32**         |       | License Agreement, dated as of March 16, 2004, by and between Mrs.  Fields Franchising, LLC and Mrs. Fields’ Original Cookies, Inc., related to  the Hot Sam brand                                   |
| 10.33*          |       | License Agreement, dated as of March 16, 2004, between Mrs. Fields  Franchising, LLC and Mrs. Fields’ Original Cookies, Inc., related to the  Original Cookie Company brand                          |
| 10.34*          |       | Purchase Agreement, dated December 1, 1999, between The Mrs. Fields’  Brand, Inc. and Nonni’s Food Company, Inc.                                                                                |
| 10.35*          |       | Amendment Number One to Purchase Agreement, dated as of December 28,  2000, between The Mrs. Fields’ Brand, Inc. and Nonni’s Food Company, Inc.                                                 |
| 10.36*          |       | Amendment Number Two to Purchase Agreement, dated as of January 17,  2002, between The Mrs. Fields’ Brand, Inc. and Nonni’s Food Company, Inc.                                                  |
| 10.37*          |       | Trademark License Agreement, dated January 3, 2000, between The Mrs.  Fields’ Brand, Inc. and Nonni’s Food Company, Inc.                                                                        |
| 10.38*          |       | Amendment No. 1, dated December 29, 2000, to Trademark License  Agreement dated January 3, 2000, between The Mrs. Fields’ Brand, Inc. and  Nonni’s Food Company, Inc.                           |
| 10.39*          |       | Trademark License Agreement, dated February 21, 2001, between The  Mrs. Fields’ Brand, Inc. and Nonni’s Food Company, Inc.                                                                      |
| 10.40*          |       | Amendment No. 1, dated January 17, 2002, to Trademark License  Agreement dated February 21, 2001, between The Mrs. Fields’ Brand, Inc. and  Nonni’s Food Company, Inc.                          |
| 10.41*          |       | Amendment No. 2, dated March 31, 2003, to Trademark License Agreement  dated February 21, 2001, between Mrs. Fields’ Original Cookies, Inc. and  Nonni’s Food Company, Inc.                     |
| 10.42*          |       | Trademark License Agreement, dated as of January 2, 2002, between The  Mrs. Fields’ Brand, Inc. and Nonni’s Food Company, Inc.                                                                  |
| 10.43*          |       | Trademark License Agreement, dated March 31, 2003, between Mrs.  Fields’ Original Cookies, Inc. and Nonni’s Food Company, Inc.                                                                  |

 

----

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                   |
|-----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.44*          |       | Marriott-TCBY Joint Venture Agreement, dated May 25, 1989, among TCBY  Enterprises, Inc., TCBY Systems, Inc. and Host International, Inc., Host  Marriott Services USA, Inc., and Host Marriott Tollroads, Inc.                                                                                                                   |
| 10.45*          |       | First Amendment to Marriott-TCBY Joint Venture Agreement, dated as of  January 1, 1990, among TCBY Enterprises, Inc., TCBY Systems, Inc. and Host  International, Inc., Host Marriott Services USA, Inc., and Host Marriott  Tollroads, Inc.                                                                                      |
| 10.46*          |       | Second Amendment to Marriott-TCBY Joint Venture Agreement, dated as  of March 1, 1991, among TCBY Enterprises, Inc., TCBY Systems, Inc. and Host  International, Inc., Host Marriott Services USA, Inc., and Host Marriott  Tollroads, Inc.                                                                                       |
| 10.47*          |       | Third Amendment to Marriott-TCBY Joint Venture Agreement, dated as of  October 1, 1991, among TCBY Enterprises, Inc., TCBY Systems, Inc. and Host  International, Inc., Host Marriott Services USA, Inc., and Host Marriott  Tollroads, Inc.                                                                                      |
| 10.48*          |       | Fourth Amendment to Host Marriott-TCBY Joint Venture Agreement, dated  as of November 30, 1998, among TCBY Enterprises, Inc., TCBY Systems, Inc. and  Host International, Inc., Host Marriott Services USA, Inc., and Host Marriott  Tollroads, Inc.                                                                              |
| 10.49***        |       | Supply Agreement, dated December 31, 2002, between Mrs. Fields’  Original Cookies, Inc. and Countryside Baking Company, Inc.                                                                                                                                                                                                 |
| 10.50***        |       | Exclusive Supply Agreement, dated as of November 19, 2002, by and  between TCBY Systems, LLC and Americana Foods Limited Partnership                                                                                                                                                                                              |
| 10.51**         |       | Beverage Marketing Agreement, dated March 7, 2003, between Mrs.  Fields’ Original Cookies, Inc. and Coca-Cola Fountain, part of The Coca-Cola  Company                                                                                                                                                                       |
| 10.52*          |       | Assignment Agreement, dated as of March 16, 2004, by and among Mrs.  Fields’ Original Cookies, Inc., Mrs. Fields Famous Brands, LLC and Coca-Cola  Fountain                                                                                                                                                                  |
| 10.53*          |       | Supply and Distribution Agreement, dated August 9, 1998, between Mrs.  Fields’ Original Cookies, Inc. and Dawn Food Products                                                                                                                                                                                                 |
| 10.54*          |       | Assignment Agreement, dated as of March 16, 2004, by and among Mrs.  Fields’ Original Cookies, Inc., Mrs. Fields Famous Brands, LLC and Dawn Food  Products                                                                                                                                                                  |
| 10.55*          |       | Food and Packaging Distribution Agreement, dated November 14, 2002,  between TCBY Systems, LLC and Blue Line Distributing                                                                                                                                                                                                         |
| 10.56*          |       | Amended and Restated Employment Agreement, dated March 16, 2004, by  and among Stephen Russo, Mrs. Fields Famous Brands, LLC and Mrs. Fields’  Companies, Inc.                                                                                                                                                               |
| 10.57           |       | [Reserved]                                                                                                                                                                                                                                                                                                                        |
| 10.58*          |       | Amended and Restated Employment Agreement, dated March 16, 2004, by  and between Michael R. Ward and Mrs. Fields Famous Brands, LLC                                                                                                                                                                                               |
| 10.59**         |       | Mrs. Fields’ Companies, Inc. Director Stock Option Plan (f/k/a Mrs.  Fields Famous Brands, Inc. Director Stock Option Plan)                                                                                                                                                                                                  |
| 10.60**         |       | Mrs. Fields’ Companies, Inc. Employee Stock Option Plan (f/k/a Mrs.  Fields Famous Brands, Inc. Employee Stock Option Plan)                                                                                                                                                                                                  |
| 10.61           |       | Mrs. Fields’ Companies, Inc. Phantom Stock Plan, effective as of May  25, 2004, and form of performance unit Grant Agreement, included as Exhibit  10.61 to the Company’s quarterly report on Form 10-Q filed with the  Securities and Exchange Commission on November 16, 2004, and incorporated  herein by reference. |

 

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| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                      |
|-----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.62****       |       | Termination Agreement and Release, dated as of December 24, 2004,  between Mrs. Fields Franchising, LLC and Shadewell Grove IP, LLC, pertaining  to termination of a Trademark License Agreement between their predecessors-in-interest  dated January 2, 2002                       |
| 10.63****       |       | Amendment to Trademark License Agreements, dated as of December 24,  2004, between Mrs. Fields Franchising, LLC and Shadewell Grove IP, LLC,  amending certain Trademark License Agreements between their predecessors-in-interest                                                   |
| 10.64****       |       | Marketing Allowance Agreement, dated as of December 24, 2004, between  Mrs. Fields Franchising, LLC and Shadewell Grove IP, LLC                                                                                                                                                      |
| 10.65****       |       | Trademark License Agreement, dated December 24, 2004, between Mrs.  Fields Franchising, LLC and Shadewell Grove IP, LLC                                                                                                                                                              |
| 10.66†     |       | Option Agreement and Amendment to License Agreement, dated December 12,  2005 between Maxfield Candy Company and Mrs. Fields Franchising, LLC                                                                                                                                        |
| 10.67           |       | Industrial Net Lease Agreement effective as of March 1, 2006 by and  between Natomas Meadows Two, LLC and Mrs. Fields Famous Brands, LLC filed as  exhibit 10.1 to the Company’s current report on Form 8-K filed with the  Securities and Exchange Commission on March 6, 2006 |
| 10.68†     |       | Extension to Distribution Agreement, dated effective as of November  15, 2005, between Blue Line Distributing, a division of Little Caesar  Enterprises, Inc., and TCBY Systems, LLC.                                                                                                |
| 12.1†      |       | Computation of ratio of earnings to fixed charges of Mrs. Fields  Famous Brands, LLC                                                                                                                                                                                                 |
| 21.1†      |       | Subsidiaries of Mrs. Fields Famous Brands, LLC                                                                                                                                                                                                                                       |
| 31.1†      |       | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)  and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended                                                                                                                                           |
| 31.2†      |       | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)  and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended                                                                                                                                           |
| 32†        |       | Certification of Chief Executive Officer and Chief Financial Officer  pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                      |

 

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| *      | Included as an exhibit with corresponding exhibit number to the Company’s  Registration Statement on Form S-4  (No. 333-115046) filed with the Securities and Exchange Commission on April  30, 2004, and incorporated herein by reference.                    |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                |
| **     | Included as an exhibit, with corresponding exhibit number to  Amendment No. 1 to the Company’s Registration Statement on Form S-4 (No.  333-115046) filed with the Securities and Exchange Commission on July 2,  2004, and incorporated herein by reference.  |
|   |                                                                                                                                                                                                                                                                |
| ***    | Included as an exhibit, with corresponding exhibit number to  Amendment No. 2 to the Company’s Registration Statement on Form S-4 (No.  333-115046) filed with the Securities and Exchange Commission on July 12,  2004, and incorporated herein by reference. |
|   |                                                                                                                                                                                                                                                                |
| ****   | Included as an exhibit with corresponding exhibit number to the  Company’s annual report on Form 10-K filed with the Securities and Exchange  Commission on March 22, 2005, and incorporated herein by reference.                                              |
|   |                                                                                                                                                                                                                                                                |
| † | Filed herewith.                                                                                                                                                                                                                                                     |

 

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