**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

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

 

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**FORM 10-K**

 

**FOR ANNUAL AND TRANSITION REPORTS**

**PURSUANT TO SECTIONS 13 OR 15(d)OF THESECURITIES EXCHANGE ACT OF 1934**

 
| **(Mark One)**                                                                                                                                                                                                                       | ** ** | ** **                                                                                    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
| **x**                                                                                                                                                                                                                                | ** ** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**     |
|                                                                                                                                                                                                                                 |       |                                                                                          |
| **For the  fiscal year ended January 1, 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 FAMOUS BRANDS, 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 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 an accelerated filer(as defined by Rule 12b-2 of the Exchange Act). YES o  NO ý

 

On July 3,2004, none of the registrant’s voting or non-voting equity was held bynon-affiliates.  There is no establishedtrading market for registrant’s common interests.

 

On March 15, 2005, 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 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 and Related Stockholder Matters |   |
|       |   |   |
| 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 |   |

 

2

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**PARTI**

** **

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

 

**DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS**

 

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

 

•                   the availability and adequacy of our cash flowto satisfy our obligations, including debt service on our long-term debt andadditional funds required for working capital;

 

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

 

•                   our ability to solicit new franchisees;

 

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

 

•                   the seasonal nature of our operations;

 

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

 

•                   changes in our business strategy or developmentplans;

 

•                   performance by our franchisees and licensees orchanges in relationships with our franchisees and licensees;

 

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

 

•                   adoption of new accounting pronouncements;

 

•                   changes in consumer preferences and our abilityto adequately anticipate such changes;

 

•                   changes in prices of our raw materials;

 

•                   changes in personnel or increased labor costs;

 

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

 

•                   changes in customer traffic;

 

•                   legal proceedings and regulatory matters;

 

•                   acts of war or terrorist incidents; and

 

•                   all other factors described under “Risk Factors” in our RegistrationStatement on Form S-4 (File No. 333-115046), as amended.

 

You arecautioned not to place undue reliance on these forward-looking statements,which reflect management’s analysis only as of the date of this report.  We undertake no obligation to publicly updateor revise any forward-looking statements, whether as a result of newinformation, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-lookingevents discussed in this report may not occur.

 

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# **Item 1. Business**

#  

# **Overview**

#  

We are one of the largestfranchisors in the premium snack food industry, featuring Mrs. Fieldsâ,Great American Cookie Companyâ, TCBYâ,Pretzel Timeâ and PretzelmakerÔas our core brands. Through our franchisees’ retail stores, we are the largestretailer of freshly baked, on-premises specialty cookies and brownies in theUnited States of America (the “United States”); the largest retailer of softserve frozen yogurt in the United States; and the second largest retailer ofbaked on-premises pretzels in the United States. In addition, we operate aprofitable gifts business and have entered into licensing arrangements thatattempt to leverage awareness of our core brands among our retail customerbase.  We operate through a network offranchised stores, which are located throughout the United States and inapproximately 30 foreign countries. As of January 1, 2005, our franchisenetwork consisted of 2,688 retail concept locations.

 

### ***Our History***

### *** ***

We are 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. We area wholly-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 is also MFC. Themajority shareholders of MFC are two affiliated private investment managementfirms, Capricorn Investors II, L.P. (“Capricorn II”) and Capricorn InvestorsIII, L.P. (“Capricorn III” together with Capricorn II, “Capricorn”).

 

On March 16, 2004, we issued $80.7 million of 9percent senior secured notes (the “9 percent Senior Secured Notes”) and $115.0million of 11 1/2 percent senior secured notes (the “11 1/2 percent SeniorSecured Notes” together with the 9 percent Senior Secured Notes, the “SeniorSecured Notes”). In addition, certain investors, including Capricorn, limitedpartners of Capricorn and their affiliates, and the initial purchaser of ourSenior Secured Notes, provided an additional $22.5 million to our parentcompanies, of which $5.0 million was retained by MFOC to fund itsoperations and $17.5 million was contributed to us as common equity. Theproceeds from the equity investment and the Senior Secured Notes were used toretire substantially all of the indebtedness of MFOC. In connection with theseevents, we reorganized our business in a series of transactions that were consummatedon or about March 16, 2004.

 

Concurrently with the completion of the offering ofthe Senior Secured Notes, TCBY Enterprises contributed all of the intellectualproperty related to the TCBY brand to TCBY and then transferred its entireinterest in TCBY to MFOC, which in turn contributed this interest to us. Inconnection with this transfer, TCBY Enterprises agreed to cooperate with TCBYin registering this transfer with trademark registration authorities whenrequested to do so by TCBY.

 

We were organized as a newsingle member domestic limited liability company that is a disregarded entityfor U.S. federal income tax purposes. Concurrently with the completion of theoffering of the Senior Secured Notes, we also organized a new single memberdomestic limited liability company that is a disregarded entity for U.S.federal income tax purposes for each of our major brands, other than TCBY(which continues to hold the TCBY brand), and MFOC contributed the intellectualproperty and licensing and franchising assets and specified liabilities of eachof the Mrs. Fields, Great American Cookie Company, Original CookieCompany, Pretzel Time, Pretzelmaker and Hot Sam brands to us or our newly-formedbrand specific subsidiaries. In connection with this contribution, we and oursubsidiaries entered into franchise agreements with MFOC and certain of itssubsidiaries under which they are permitted to act as our franchisees to selland distribute our products in their owned stores upon payment of franchiseroyalties and other amounts required under the franchise agreements. As aresult of these agreements, MFOC is our largest franchisee, based on franchiserevenues. MFOC also made a capital contribution to us of all of its interestsin TCBY, Mrs. Fields Cookies Australia and Mrs. FieldsGifts, Inc. (which operates our gifts business) as well as the GreatAmerican batter facility, which we then contributed to our newly-formedsubsidiary, Great American Manufacturing, LLC. While MFOC will continue tooperate its company owned stores in the near term, it also will continue itsongoing strategic review of store performance, with identified stores beingsold to new or existing franchisees or closed. Accordingly, MFOC anticipates areduction in its total number of owned retail stores over time with acorresponding reduction in its involvement in related store operations.

 

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OnAugust 23, 2004, we completed an offer to exchange an aggregate principalamount of up to $80.7 million of our 9 percent Senior Secured Notes which havebeen registered under the Securities Act of 1933, as amended, for a likeprincipal amount of our issued and outstanding 9 percent Senior Secured Notesfrom the registered holders thereof, and an aggregate principal amount of up to$115.0 million of our 11 1⁄2 percent Senior Secured Notes which have beenregistered under the Securities Act of 1933, as amended, for a like principalamount of our issued and outstanding 11 1⁄2 percent Senior Secured Notes from theregistered holders thereof. All of our original Senior Secured notes weretendered and exchanged as a result of this offer.

 

### ***Business Strategy***

### *** ***

We have developed a businessstrategy based on a strategic vision that accounts for the wants and needs ofour franchisees and consumers by aligning our interests with those of ourfranchisees at the retail level. There are three components to our strategicvision:

 

•  Build profitable year over year franchiseesales;

•  Accelerate growth of new franchised storedevelopment; and

•  Grow licensing and gifts operations.

 

*Build Profitable Year Over Year FranchiseeSales.*  Webelieve increasing the sales of our franchisees is critical to the growth ofour profitability. Therefore, we will focus on initiatives designed to driveprofitable year over year sales growth for our franchisees, emphasizing thefollowing goals:

 

•*  Enhanced Consumer Focus.* Byconcentrating our franchise operations upon our customers’ wants and needs, weexpect to increase the demand for our premium products. Some of our initiativesto create new excitement include modernizing and broadening the appeal of ourmenus, décor and services to distinguish our brands from our competitors’brands, developing new products for our customers, and improving upon andfurther promoting products for which we have the strongest market share and aleading reputation. To this end, we have focused our market research tounderstand the strengths of each of our core brands, such as the cookie cakesand product sampling at our Great American Cookie Company stores, andMrs. Fields’ reputation for decadence and superior quality.

 

•*  Increased Investment in Brands.* In2004, we invested $3.0 million in advertising, promotion and brandbuilding ideas. In 2005, we intend to invest an additional $3.0 million inadvertising, promotions and brand building ideas.  This investment in our brands is aimed atincreasing sales at franchised locations. We have identified TCBY as the brand that offers our greatestopportunity for building profitable sales in the short term. TCBY’s productsare aligned with current health trends and not limited by mall basedlocations.  We intend to reposition theTCBY concept consistent with our consumer and franchisee based strategicframework, building on today’s health conscious consumer with a desire for alow fat, healthy, yet satisfying treat, which we believe will increase positiveconsumer perception of our brand. We have begun to reconcept TCBY byredesigning its décor and updating its menus to accentuate our repositioningefforts.

 

•*  Engage our Franchisees and Employees.*A critical part of our efforts to drive profitable year over year franchiseesales will be to develop programs that will engage the support of ourfranchisees and employees. We intend to develop better lines of communicationbetween us and our franchisees and employees to strengthen our relationshipwith those who will implement our new business strategy. We believe the newalignment of our interests with the interests of our franchisees will make thisshared vision possible.

 

*Accelerate Growth of New Franchised StoreDevelopment.*  Webelieve that by focusing on improving franchisees’ profitability andreinvesting in our brands, we will create a superior franchise product forprospective franchisees and promote the development of new franchised stores,carts and kiosks. In recent years the rate of closure of existing locations hasexceeded the number of new franchised locations. By increasing the rate of newopenings of franchised locations in our current markets and implementinginitiatives to improve existing locations, we believe our business strategywill enable us to stabilize and eventually grow the number of franchisedlocations both within and outside of our current markets.

 

5

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*Grow Licensing and Gifts Operations.*  We have expanded our brands through ourlicensing and gifts segments. For example, we have granted third parties theexclusive North American rights to manufacture and sell, under our registeredtrademarks, items such as Mrs. Fields branded ready to eat cookies, boxedchocolates, gourmet glazed popcorn and other items throughout the supermarket,drug and mass merchandise distribution markets. We intend to explore expansion ofour licensing business by introducing new products in order to capitalize onour strong brand names and high quality product reputation. Through substantialincreases in catalog circulation, our gifts operations have grown rapidly withrevenues and contribution margin for this segment increasing at compoundedannual growth rates of 29.5 percent and 24.8 percent, respectively, since2000. We continue to focus upon expanding our customer base in the giftssegment to corporate and large retail customers. In addition, we anticipategrowing our gifts operations by acquiring new drop ship partners, investing inmarketing through catalog circulation and e-mail campaigns and adding newproducts.

 

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

####  

###### *Our 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. Thepioneering efforts of Mrs. Fields brand cookies created a significant newmarket niche of freshly baked specialty cookies. The strength of the Mrs.Fields brand name enjoys a high consumer brand awareness. In addition to oursignature cookies and brownies, we offer muffins, cookie cakes and otherpremium baked goods. By building on its legendary chocolate chip and whitechocolate macadamia nut cookies, the Mrs. Fields brand has developed acomprehensive product line that includes many of America’s most beloved snackfood treats.

 

*Great American Cookie Company.*  GreatAmerican Cookie Company cookies became a retail success in 1977 when the firststore opened in Atlanta, Georgia’s Perimeter Mall. Founded on the strength of agenerations-old family chocolate chip cookie recipe, Great American CookieCompany has grown to more than 250 stores in shopping centers nationwide. Allof the cookies and brownies at Great American Cookie Company begin withcarefully tested recipes, highly controlled production and the finest premiumingredients from our batter production facility in Atlanta, Georgia.

 

*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 productmilestones include: driving the waffle cone to the top of the nation’s frozentreat menu; developing non-fat and no-sugar added frozen treats; launching aline of frozen yogurt and sorbet novelties; introducing Low Carb LoversÔ frozen yogurt; creating the nation’s leadingline of soft-serve sorbet; developing a line of blended, soft-serve productsincluding TCBY Fruithead Smoothiesâ, the Shiverâ dessert and the Cappuccino Chillerâ; and introducing frozen yogurt franchisingto airports and travel plazas through its joint venture agreement with HMSHost.

 

*Pretzel Time.*  Pretzel Time introduced itsfamous soft pretzel in October 1991 and established itself as a market shareleader in regional shopping centers across the country. From ournumber-one-selling traditional buttered pretzel, to the development of thepopular Pretzel Dog and the Fresh Bites, we constantly work at adding anexciting new line-up of menu choices for our customer base. Today, our productofferings include a wide range of specialty pretzels including Cinnamon Sugar,Jalapeno, and Sour Cream and Onion. Our research and development team regularlyresearches changing customer preferences and our marketing team focuses on promotionsand products that will encourage consumers to view Pretzel Time products asquality meal replacement values.

 

*Pretzelmaker.*  The first Pretzelmaker pretzelwas rolled, twisted, and baked in 1991. Our plain pretzel is high in fiber andcomplex carbohydrates. In addition, consumers can have a custom preparedpretzel topped with a variety of flavors and sauces. This twist allows theconsumer to enjoy a wide range of flavors of freshly baked pretzels.Pretzelmaker stores exist in traditional locations such as regional malls andshopping venues and non-traditional locations such as theaters, sport stadiums,travel plazas, college campuses and hospitals. Pretzelmaker pretzels are agreat low-calorie, portable and convenient snack. New products, such as the PretzelDog, broaden the appeal for consumers looking for quality meal replacements ata reasonable price. Whether consumers are buying classic, Original pretzels,Garlic pretzels, or the popular Pretzel Bites, the Pretzelmaker brand continuesto respond to changing consumer preferences.

 

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O*ther Brands*.  Inaddition to our core brands previously described, we have entered into licenseagreements with MFOC for its operation or sublicensing of a small number of retailoutlets under The Original Cookie Companyâ and Hot Samâ brands. We anticipate MFOC will either closethese locations or convert them to one of our core brands.

 

#### *Our Products*

 

*Cookies, Brownies, Muffins andOther Bakery Products.*  Our franchised retail stores offer over 50different types of cookies, brownies, muffins and other bakery products, whichare baked continuously and served fresh throughout the day, as well as assortedsoft drinks, frozen drinks, coffee, tea and milk. Baked products are made usingonly high quality ingredients, and all dough is centrally manufactured andfrozen or refrigerated to maintain product quality and consistency. Allproducts pass strict quality assurance and control steps at both themanufacturing plants and the stores. In addition, we regularly create and testnew products to attract new customers and satisfy current customers.

 

Our cookie concept outlets also sell “cookie cakes.”Cookie cakes are extra-large cookies, which may be decorated with customer-selected,personalized messages for special occasions. Although cookie and brownie salesgenerally are the result of impulse buying, we believe that cookie cakes, whichare often purchased as gifts or for special occasions, differentiate us fromother specialty cookie retailers by making our cookie stores destinationoutlets.

 

*Frozen Yogurt, Ice Cream andFrozen Novelties.*  We believe our soft serve frozen yogurt isthe only soft serve frozen yogurt sold widely in retail outlets in the UnitedStates that contains *Lactobacillusbulgaricus* and *Streptococcusthermophilus*, the live and active yogurt cultures, which convertpasteurized milk to yogurt during fermentation and which are required by U.S.Food and Drug Administration (FDA) standards for a product to be called yogurt.One benefit of these yogurt cultures is that they act as friendly bacteria that“pre-digest” or break down the lactose so that yogurt may be tolerated byindividuals with lactose intolerance.

 

Our franchised retail stores offer our TCBY brandoriginal 96% fat free soft serve frozen yogurt, nonfat frozen yogurt, no sugaradded/nonfat frozen yogurt, and nonfat/nondairy sorbets. Additionally, in thesecond quarter of 2004, we introduced several flavors of “low carb” yogurt,which is available at most of our TCBY Traditional franchised retail stores.Franchised locations serve a variety of menu items based on these products,including smoothies, parfaits, shakes, malts, sundaes, banana splits, cakes andpies, and our own TCBY Shivers and Cappuccino Chillers. All of our yogurt types are available in a wide variety of flavors,including traditional flavors such as vanilla and chocolate, our signatureWhite Chocolate Mousse, other flavors such as Cookies and Cream, DutchChocolate and Peanut Butter, and seasonal favorites like Eggnog, Pumpkin, IrishCream and Blueberry Cheesecake.

 

In addition to products sold in our franchised retailstores, we sell novelty frozen food items, such as the TCBY Swirl Bar,wholesale to the retail grocery trade.

 

Many of our TCBY franchised stores also sell fruitjuice based beverages including TCBY Fruithead Smoothies, which are made withfrozen yogurt, nutritional supplements and juices, as well as soft drinks andother beverages.

 

*Pretzels.* Pretzel Time’s primary product is an all-natural, hand-rolled softpretzel, freshly baked from our proprietary dry mix at each store location.Pretzel Time stores prepare pretzels with a variety of flavors and specialtytoppings, including cheddar cheese, cream cheese and pizza sauce. Pretzelmakersells hand-rolled soft pretzels freshly baked at each store location. In orderto maintain a consistent and high quality product, the Pretzelmaker dough isshipped frozen to each location. The stores also offer soft drinks and freshlemonade.

 

*Beverages.*  Wesell Coca-Cola soft drinks and other products exclusively in all of our retailstores under agreements with Coca-Cola USA Fountain. In addition, Coffee BeanInternational, Inc., which currently is our only approved coffee supplier,supplies whole bean and ground roasted coffee blends under the Mrs. Fieldslabel to a number of our Mrs. Fields franchisees.

 

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##### *Ingredients, supplies anddistribution*

##### * *

We relyprimarily on outside suppliers and distributors for the ingredients used in ourproducts and other items used in our franchisees’ stores.

 

*Cookies, Brownies, Muffins and Other Bakery Products.* Countryside Baking Company, Inc. (“Countryside”) manufactures themajority of Mrs. Fields brand frozen bakery products, which are madeaccording to our proprietary recipes, for our franchised stores and our giftssegment.  Countryside manufactures ourproducts strictly in accordance with the standards, procedures, specifications,formulations and recipes established by us, as well as all applicable federal,state and local laws 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 theparties.

 

Our products manufactured by Countryside are thensold to our approved distributors, currently Dawn Food Products and KaleelBrothers, for sale and distribution to Mrs. Fields Cookie Stores.  The initial term of the Supply andDistribution Agreement with Dawn Food Products expired on August 8, 2003,when it automatically renewed for an additional one-year term. The distributionagreement continues to renew automatically each year unless either party gives180 days notice of nonrenewal prior to the anniversary date, and isotherwise terminable at will by either party upon 180 days notice.  We do not have a supply and distributionagreement with Kaleel Brothers.

 

Great American Cookie Company stores receive “ready to bake”refrigerated batter from our batter facility in Atlanta. The batter, which hasa shelf life of about 90 days, is stored at the batter facility for an averageof one to three weeks, depending on demand, before being shipped to ourfranchisees’ stores.

 

*Frozen Yogurt, Ice Cream andFrozen Novelties.*  Most TCBY brand products currently areproduced by Americana Foods Limited Partnership (“Americana”), a formersubsidiary of TCBY Enterprises, pursuant to the terms of an exclusive SupplyAgreement between TCBY and Americana. See “Certain Relationships and RelatedTransactions—TCBY Supply Agreement.” Americana, which is located in Dallas,Texas and currently is partially owned by a subsidiary of Capricorn III, one ofthe shareholders of MFC, sells most of the products to our current authorizeddistributor, Blue Line Distributing, for sale and distribution to TCBYfranchised stores under a Food and Packaging Distribution Agreement, datedNovember 14, 2002. The distribution agreement has an initial five-yearterm and is terminable at will by either party upon 180 days notice. Thedistribution markup charged to franchisees is subject to adjustment each Juneand December under the terms of the agreement.

 

*Pretzels.*  OurPretzel Time brand stores buy a proprietary dry mix from our approved supplier,Pizza Blends, or current authorized distributors, Dawn Food Products and KaleelBrothers. Pretzels are mixed and baked at individual stores. Our Pretzelmakerbrand stores purchase our proprietary frozen dough from our approved supplier,Layton Bakery, or current authorized distributor, Dawn Food Products.  Individual stores then thaw, shape and bakethe pretzels on site.

 

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.

 

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**Our Business Segments**

 

Our business is divided into three primary businesssegments for financial reporting purposes: franchising, gifts and licensing,which represented 64.2 percent, 29.7 percent and 5.7 percent of total revenues,respectively, for the year ended January 1, 2005.  The franchising segment consists of revenuesreceived either directly or indirectly from cookie, yogurt and pretzel stores,which are owned and operated by third parties. These revenues include franchise or license fees, monthly royaltiesbased on a percentage of a franchisee’s gross sales, sales of cookie dough thatwe produce at our Great American Cookie batter facility and certain productformulation fees and supplier allowances which are based upon sales tofranchisees.  The gifts segment includessales generated from our mail order gift catalog and website.  The licensing segment consists of otherlicensing from third parties for the sale of products bearing our brandnames.  For further disclosure ofreportable segments, see Note 9 to our consolidated financial statementscontained elsewhere in this report.

 

## ***Franchising***

## *** ***

We operate through a networkof franchised stores, which are located throughout the United States and inapproximately 30 foreign countries.  Weactively recruit new franchisees and enter into a number of franchiseagreements each year.  We believe we willcontinue to recruit new franchisees who will provide cash flow to ourfranchising segment by:

 

•                  emphasizing the use of proprietary dough,yogurt, ice cream and dessert products, minimizing product quality issues andensuring 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.

 

As of January 1,2005, our store portfolio consisted of 2,145 domestic franchisedlocations, 338 international franchised locations and 205 licensedlocations, which are described in more detail below. By brand, our franchisees’and licensees’ concept locations are distributed as follows:

 
| ** **                         | ** ** | **Domestic  Franchised** | ** ** | **International  Franchised** | ** ** | **Licensed  Locations** | ** ** | **Total** | ** ** |
|------------------------------------|------------|--------------------------|------------|-------------------------------|------------|-------------------------|------------|-----------|------------|
| Mrs. Fields                        |       | 386                      |       | 82                            |       | 53                      |       | 521       |       |
| Great American                     |       | 281                      |       | 1                             |       | 1                       |       | 283       |       |
| Original Cookie                    |       | —                   |       | —                        |       | 7                       |       | 7         |       |
| Cookie subtotal                    |       | 667                      |       | 83                            |       | 61                      |       | 811       |       |
|                               |       |                     |       |                          |       |                    |       |      |       |
| Pretzel Time                       |       | 221                      |       | 7                             |       | 5                       |       | 233       |       |
| Pretzelmaker                       |       | 157                      |       | 40                            |       | 3                       |       | 200       |       |
| Hot Sam                            |       | —                   |       | —                        |       | 11                      |       | 11        |       |
| Pretzel subtotal                   |       | 378                      |       | 47                            |       | 19                      |       | 444       |       |
| Bakery brands subtotal             |       | 1,045                    |       | 130                           |       | 80                      |       | 1,255     |       |
|                               |       |                     |       |                          |       |                    |       |      |       |
| TCBY – traditional stores     |       | 469                      |       | —                        |       | —                  |       | 469       |       |
| TCBY – non-traditional stores |       | 631                      |       | 208                           |       | 125                     |       | 964       |       |
| TCBY brands subtotal               |       | 1,100                    |       | 208                           |       | 125                     |       | 1,433     |       |
|                               |       |                     |       |                          |       |                    |       |      |       |
| Total                              |       | 2,145                    |       | 338                           |       | 205                     |       | 2,688     |       |

 

The above table countseach concept location individually. For example, if a physical location had aMrs. Fields store and a Pretzel Time store together, this would be countedas two concept locations in the table above. If actual physical stores werecounted, rather than concept locations, total store counts would be reduced by302 locations to 2,386.

 

MFOC and certain of itssubsidiaries own approximately 102 franchised and licensed retail conceptlocations as of January 1, 2005, representing 3.8 percent of the totalretail concept locations. During the year ended January 1, 2005, we recognized $2.8 million of franchiseroyalties and $2.9 million of product sales relating to retail conceptlocations owned by MFOC.  MFOC expectsthat most of these retail concept locations will be sold to new and currentfranchisees or will be closed during fiscal 2005.

 

9

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*Store Location and Configuration.*

 

Possibilities for franchised locations include highpedestrian traffic areas, including malls, airport concourses, office buildinglobbies, and shopping and lifestyle centers. We have developed a number ofretail configurations 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, Brownies, Muffins and Other Bakery Products*. Mrs. Fields and Great American Cookie Company stores have apresence in most of the “A” and “B” grade malls in the United States. Thesestores are uniformly designed in accordance with the Mrs. Fields or GreatAmerican Cookie Company prototype, making extensive use of glass, painted wood,brass, mirrors, lighting and point-of-sale displays intended to create anupscale, open and inviting look. Stores also attractively and efficiently displaytheir fresh-baked products using custom-made showcases. Individual store sizestypically range from 500 to 800 square feet.

 

*Frozen Yogurt, Ice Cream and Frozen Novelties*. Generally, traditional TCBY domestic franchised stores are located inshopping centers, freestanding locations and shopping malls. TCBYnon-traditional locations include TCBY stores operated in conjunction withother concepts, such as Subway, Exxon and other convenience stores andpetroleum 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 yogurtand ice cream cakes and pies. TCBY non-traditional domestic franchised storesare generally much smaller and offer a limited menu as compared to atraditional TCBY store and serve TCBY products through kiosks, soft servevending carts and counter top display units located within other premises orcaptive locations.

 

*Pretzels*.  Pretzel Time outlets have anaverage size of 500 to 800 square feet in store locations and 200 square feetin kiosk locations. Pretzel Time stores and kiosks are likely to be located inhigh traffic areas and are designed to enable customers to enjoy watching thepretzels being rolled, twisted and baked in minutes, which underscoresfreshness and contributes to the product’s appeal. The preferable size of aPretzelmaker store is between 500 and 700 square feet.

 

###### *FranchiseAgreements*

 

Ourfranchises are typically granted for a specific site selected by the franchiseeand approved by us.  Franchisees mustoffer the products and services 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, Brownies, Muffins and Other Bakery Products.*  EachMrs. Fields brand franchisee typically pays an initial franchise fee of$30,000 per Mrs. Fields brand store location and is responsible forfunding the build-out of the new store and purchasing initial dough inventoryand supplies.  The cost of opening a newstore or purchasing an existing store can vary widely based on individualoperating and location costs. After a store is established, a franchisee paysweekly royalty fees of six percent of the franchised store’s gross sales forthe prior week, and a weekly advertising fee from one to three percent(currently one percent) of gross sales. Mrs. Fields franchisees arerequired to purchase proprietary dough from our authorized distributors orsuppliers, which may pay us a rebate based on total franchisee purchases.Franchises are typically granted for a period of seven years. Franchisees ingood standing have an option to renew for an additional seven years at termsset forth in the then-current form of franchise agreement. 

 

10

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Each new Great AmericanCookie Company franchisee typically pays an initial franchise fee of $30,000per store and is responsible for funding the build-out of the new store and purchasinginitial batter inventory and supplies. The cost of opening a new store or purchasing an existing store can varywidely based on individual operating and location costs. After a store isestablished, a Great American Cookie Company franchisee pays monthly royaltyfees to us of six percent of the franchised store’s gross sales for the priormonth, and a monthly advertising fee of one percent of such gross sales. GreatAmerican Cookie Company franchisees are required to purchase batter from ourbatter facility, which makes a profit on batter sales. The term of thefranchise typically runs concurrently with the term of the Great AmericanCookie Company store lease, and may be subject to an option to renew.

 

*Frozen Yogurt, Ice Cream and Frozen Novelties.*  Eachnew TCBY franchisee typically pays an initial franchise fee of $25,000 pertraditional store and from $2,500 to $10,000 per non-traditional location, andis responsible for funding the build-out of the new store and purchasinginitial yogurt inventory and supplies. The cost for opening a new store varieswidely depending upon the size and location of the store. TCBY franchiseespurchase TCBY products only from authorized distributors. TCBY makes a profiton purchases of yogurt products by franchisees.

 

Franchisesfor traditional TCBY stores are usually granted for a period of ten years andwe offer franchisees in good standing 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). A franchisee pays anongoing royalty fee of four percent of its net revenues and an ongoingadvertising fee of three percent of its net revenues. Currently, franchiseespay the royalty and advertising fees by way of a surcharge on TCBY productscollected by our authorized distributor, which then remits the surcharge to us.

 

We anticipate thatbeginning sometime during the second half of 2005 we will transition to adifferent method of royalty and advertising fee collection for our traditionalstore franchisees. Under the new system, franchisees of TCBY traditional storeswill report their net revenues weekly to TCBY, and pay the four percent royaltyand three percent advertising fund fees directly to TCBY, based on reportedsales. For the time being, non-traditional store franchisees will continue topay royalties and advertising fund fees through the product surcharge.  We alsoanticipate increasing the royalty and advertising fee rates collected by TCBYto five percent and five percent, respectively. The increased rates will apply only to franchises operating under thenew form of franchise agreement effective on or about April 1, 2005, and TCBYmay opt to charge the existing fees for such franchises for a period of timeduring 2005 while it phases in the higher rates.

 

*Pretzels*.  Each new Pretzel Time or Pretzelmakerfranchisee typically pays an initial licensing fee of $25,000 per new PretzelTime store location and is responsible for funding the development of the newstore.  The initial investment can varybased on individual operating and location costs. After a store is established,a Pretzel Time franchisee pays weekly royalty fees to Pretzel Time of sevenpercent of the franchised store’s gross sales for the prior week, and amarketing fee of from one to three percent (currently one percent, but to beincreased to one and one-half percent effective approximately April 1, 2005) ofsuch gross sales. Franchisees are required to purchase proprietary dough or doughmix from our authorized suppliers and distributors, which may pay us a rebatebased on total franchisee purchases. Pretzelmaker franchisees pay weeklyroyalty fees to Pretzelmaker of six percent of the franchised store’s grosssales for the prior week, and a marketing fee of from one to three percent(currently one and one-half percent) of such gross sales. However, weanticipate increasing the royalty fee rate collected by Pretzelmaker to sevenpercent.  The increased rate will applyonly to franchises operating under the new form of franchise agreementeffective on or about April 1, 2005. Franchises are typically granted for an initial term of seven years, andfranchisees in good standing have an option to renew for an additional sevenyears upon terms set forth in the then-current form of franchise agreement.

 

*International*. Generally, we adopt a master franchise agreement form of relationshipfor international distribution of our products. A master franchisee is grantedthe right to develop a minimum number of locations in the defined territorywithin a certain time period. We determine, on a country-by-country basis,whether we will export proprietary products from the United States to thatcountry or license the production of products locally (possibly to the masterfranchisee). In addition, we may grant to the master franchisee thedistribution rights of certain products in the defined country. The masterfranchisee generally will receive sub-franchising rights within the countrythat is the subject of the master franchise agreement. 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 international locations for fiscal 2004, 2003 and 2002 were$1.0 million, $1.4 million and $1.1 million, respectively, and represented1.1 percent, 1.7 percent and 1.1 percent of total revenues, respectively. 

 

11

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*FranchiseeTraining*

* *

We believe training thefranchisees is a critical component in creating an effective retailenvironment, and accordingly, each of our brand concepts require newfranchisees to complete a training program conducted by our trainingspecialists at our new training facility in Salt Lake City. The initialtraining programs last from 6-12 days depending on the concept. We alsomake ongoing training programs available to franchisees to improve theirquality and effectiveness, and may require certain franchisees to attendrefresher training at our training facilities as part of operational complianceprograms. The training programs provide instruction to franchisees regardingequipment use, food preparation and safety, customer service, employeescheduling, methods of controlling operating costs, the management role, thejob function of hourly employees and other aspects of retail store operations.Ongoing training courses in new products, standards, and procedures are availableat our training facilities throughout the year to all franchisee personnel.While initial training is provided free of charge to new franchisees, we havethe right to charge a reasonable fee for refresher or additional training.Franchisees pay their own costs, such as living expenses and travel costs, toattend training.

 

*Franchise Concept Licensing*

* *

We have developed aconcept 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 agreementwith TCBY and Marriott Management Services Corp. and Sodexho U.S.A., Inc.or their 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. These licensed locations are included inour franchising business segment rather than in our licensing business segment.

 

***Gifts***

*** ***

We market a variety offreshly baked cookies, brownies, candies and other gift items under ourMrs. Fields brand name on the Internet and through gift catalogs. We beganour gifts business with two product offerings. In 2001, we moved our giftsoperations into a new production facility, which tripled capacity. In fiscal2004, we mailed approximately 9.3 million catalogs, generated revenues of$25.8 million and carried more than 250 gifts ranging from customized cookietins with company logos to birthday towers filled with cookies, brownies andjellybeans. Our gifts business segment is run through Mrs. FieldsGifts, Inc., our separate, wholly owned subsidiary for gifts operations.The gifts segment has five direct sales channels: Internet, telephone, onlineaffiliate programs, strategic partnerships/corporate accounts and supplylicensing.

 

*Internet.*  We launched ourMrs. Fields website in 1997, and during fiscal 2004 approximately35 percent of all sales in the gifts segment originated from our website.Our website allows each customer to establish an account and track each order.Our principal URL is at *www.mrsfields.com.*

 

*Telephone.*  Customers also may place ordersusing a toll-free telephone number “1-800-COOKIES.” While sales from telephoneorders continue to be a significant portion of our gifts segment’s revenues, asa percentage of total sales in the gifts segment, they have decreased ascustomers have migrated to the Internet.

 

*Online Affiliate Programs.*  InJuly 2001, we launched an online affiliate program with one of the largestpay-for-performance affiliate marketing networks on the Internet. We now haveover 11,000 affiliates who have a text link or banner on their website to *www.mrsfields.com*. We compensate onlineaffiliates on a commission basis for each sale that originates from itswebsite.

 

*Strategic Partnerships/CorporateAccounts.*  We have a number of partnerships with largeonline and catalog retailers that advertise Mrs. Fields brand products totheir customers for gifting purposes. Gifts are sold to partners at wholesaleprices. The partners are responsible for shipping to the ultimate customer,advertising and customer service costs involved with the Mrs. Fields giftprogram. We also have corporate gift relationships with a number of largecompanies who use Mrs. Fields brand products to motivate employees andreward customers.

 

12

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*Supply Licensing.*  We currently have arrangements with UnitedAirlines under which we sell cookies to the airline to promote ourMrs. Fields brand and products to their first-class customers. Forpurposes of our financial reporting segments, these licenses are deemed to bepart of our gifts business segment rather than part of our licensing businesssegment.

 

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. We expectto incur expenses of approximately $800,000 for these services.

 

***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 productstarget traditional mass market and retail locations, complementing our existingbusinesses.  Examples of licenses grantedto third parties include those for Mrs. Fields pre-packaged and ready-to-eatcookies, chocolate chips, boxed chocolates, gourmet glazed popcorn, and otherdry mixes.  Additionally, TCBY directlywholesales certain frozen yogurt novelty items to the supermarket, drugstoreand mass merchandise markets.

 

Our largest licensee ofMrs. Fields branded products is Shadewell Grove IP, LLC (“Shadewell”).  Shadewell 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.  Shadewell also has a license to market anddistribute high quality, pre-packaged chocolate chips utilizing the Mrs. Fieldstrademarks, service marks and trade names through designated retaildistribution channels.  During 2004, royaltiesearned from these licenses were approximately $3.1 million.

 

On December 24, 2004, weterminated a license agreement with Shadewell to market and distribute highquality, frozen cookie dough products utilizing the Mrs. Fields trademarks,service marks and trade names to the food away from home industry throughdesignated food service distribution channels. Among other reasons, we pursued the termination of this license tobetter align our interests with those of our franchisees.  We paid Shadewell a termination fee ofapproximately $1.1 million and in return received from Shadewell anindemnification and release of any and all claims arising from the licenseagreement.  During 2004, royalties earnedfrom this license were less than $100,000.

 

On December 24, 2004, weentered into another license agreement with Shadewell to market and distributepre-packaged, ready-to-eat shelf stable brownies and ready-to-eat shelf stabledessert toppings and syrups, each utilizing the Mrs. Fields trademarks, servicemarks and trade names through designated retail distribution channels.  Shadewell has until the end of calendar year2006 to commence distribution of these products.  In addition, Shadewell does not pay royaltiesfor one year from the date these products are first shipped.  Therefore, we may not earn any royalties fromthis license until fiscal 2008.

 

During 2004, we enteredinto two new license agreements with two new licensees.  On October 20, 2004, we entered into alicense agreement with a licensee to market and distribute certain high qualitybaking mixes utilizing the Mrs. Fields trademarks, service marks and tradenames through designated retail distribution channels.  On November 8, 2004, we entered into a licenseagreement with a licensee to develop, manufacture and distribute certain highquality, yogurt covered pretzel products utilizing certain TCBY trademarks,service marks and trade names through designated retail distributionchannels.  The initial term of theselicenses is five years and began on January 1, 2005.  Therefore, we expect to earn royalties fromthese licenses in fiscal 2005.

 

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**Geographic Information**

 

Revenues from franchisees,customers and licensees within the United States were $86.1 million, $80.6million and $94.3 million for fiscal 2004, 2003 and 2002, respectively, andrepresented 98.9 percent, 98.3 percent and 98.9 percent of total revenues forfiscal 2004, 2003 and 2002, respectively. Revenues from international franchisees, customers and licensees were$1.0 million, $1.4 million and $1.1 million for fiscal 2004, 2003 and 2002,respectively, and represented 1.1 percent, 1.7 percent and 1.1 percent of totalrevenues for fiscal 2004, 2003 and 2002, respectively.  Revenues from any single foreign country werenot material.  Providing geographicalinformation regarding long-lived assets is impracticable.

 

**Intellectual Property**

 

We are the holder ofnumerous trademarks that have been federally registered in the United Statesand in other countries located throughout the world. We are a party to disputeswith respect to trademarks in some foreign jurisdictions, none of which, in theopinion of management, is material to our business, financial condition orresults of operations.

 

As of January 1, 2005, weheld approximately 90 federal trademark registrations in the United Statesand approximately 510 trademark registrations in approximately103 countries and other jurisdictions outside the United States. Thetrademarks consist of various brand and product names and logos. We have alsoregistered numerous domain names which correspond to our brand and productnames. Trademarks are registered under United States laws for initial periodsof 6 to 10 years and in other countries for initial periods of 7 to20 years, and at any time, we may have trademarks whose registration willsoon expire and must be renewed. Under some of our license agreements, ourlicensees receive the rights to use our recipes, proprietary products and/orour registered trademarks. We view our trademarks and the ability to licensethem to third parties, as some of our most valuable assets.

 

We have pending, or arein the process of filing, applications for trademark registrations in a numberof foreign countries. In some of these countries it may not be possible toregister the name TCBY where the laws do not permit the registration ofacronyms. Similarly, registering offices in some jurisdictions may refuse toregister the mark THE COUNTRY’S BEST YOGURTâby taking the position that it is merely descriptive of the product. In a fewforeign countries, unrelated third parties have filed applications forregistration of TCBY and similar trademarks. Upon discovery of such filings, weroutinely contest such applications to preserve our ability to register ourtrademarks in those countries or to protect our existing registrations.

 

**Employees**

 

As of January 1, 2005, wehad approximately 824 employees, including approximately 562 temporary seasonalemployees whose positions are largely on-call or part-time.  We typically employ seasonal labor inconnection with our gifts operations in the fourth quarter in response toincreased demand around the holidays, which can more than double our workforceduring that period. None of our employees are covered by collective bargainingagreements, and very few employees, other than some employees engaged in ourgifts and manufacturing operations, are paid minimum wage.

 

As of January 1, 2005, ofour 824 employees, 70 employees provided certain management functions to MFOCin return for a fee in accordance with the provisions of a management agreementwith MFOC.  This number should decreaseas MFOC reduces its store operations. It is intended that this managementagreement will continue in effect until the expiration of all store leases forMFOC’s company-owned stores.

 

### **Seasonality**

### ** **

Our sales andcontribution from franchisees’ store operations is highly seasonal, but ourvarious brands experience counteracting seasonal effects. Our cookie and pretzelstores, primarily located in malls, tend to mirror customer traffic flow trendsin malls, which increases significantly during the fourth quarter, primarilybetween Thanksgiving and the end of the calendar year. Holiday gift purchasesalso 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.  Franchising segment revenues for each quarteras a percentage of total franchising segment revenues for the fiscal year endedJanuary 1, 2005 were 23.3 percent for the first quarter, 27.2 percent for thesecond quarter, 25.2 percent for the third quarter and 24.3 percent for thefourth quarter.

 

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Our sales andcontribution from our gifts segment is highly seasonal primarily due to holidaygift purchases that increase sales in the fourth quarter. Sales and segmentcontribution in the fourth quarter of 2004 were $13.0 million and $3.1 million,respectively, which represents 50.3 percent and 59.6 percent, respectively, oftotal sales and contribution of the gifts segment for the year ended January 1,2005.

 

### **Customers**

### ** **

Ourfranchising segment is not dependent upon any single franchisee.

 

Our giftssegment has one customer that accounted for $4.2 million,$3.0 million and $2.2 million, or 16.2 percent,17.2 percent and 17.2 percent of revenues of the gifts segment forthe years ended January 1, 2005, January 3, 2004 and December 28, 2002,respectively.

 

Our licensingsegment has one licensee that accounted for $3.1 million,$3.5 million and $3.8 million, or 62.7 percent,63.1 percent and 83.7 percent of the revenues of the licensingsegment for the years ended January 1, 2005, January 3, 2004 and December 28,2002, respectively.

 

### **Competition**

### ** **

We compete for customerswith other cookie, pretzel, yogurt and ice cream retailers, as well as otherconfectionery, sweet snack and specialty food retailers, including cinnamonrolls, baked goods and candy shops. The specialty retail food and snackindustry is highly competitive with respect to price, service, location andfood quality, and there are many well-established competitors with greaterresources than ours. We compete with these retailers on the basis of price,quality, location and service. We face competition from a wide variety ofsources, including such companies as Cinnabon, Auntie Anne’s SoftPretzels, Ben & Jerry’s Homemade, Haagen-Dazs and Baskin-Robbins 31Flavors.

 

In our mall based andcaptive locations, we tend to compete with a wide variety of food retailers,including both quick service restaurants and, to a lesser extent, sit-downdining establishments and centrally located “food courts.” In our strip malland stand-alone retail stores, our competition tends to be with other foodretailers within a geographical radius of our franchisees’ stores, which varybased on store location.

 

Our gifting segment competesfor customers primarily with other food gifting and mail order companies.  The food gifting and mail order industry ishighly competitive with respect to quality, freshness, selection, uniqueness,customer service and, to a lesser extent, price.  There are many well-established competitorswith greater resources than ours.  Ourcompetitors include Cheryl and Company, Harry and David, Omaha Steaks, Hershey’sGifts 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 our operations of possible future environmentallegislation or regulations.  During 2004,we did not incur any material capital expenditures for environmental controlfacilities and no such material expenditures are anticipated.

 

### **Backlog orders**

### ** **

Wedo not have significant backlog orders.

 

### **Additional information**

### ** **

We are subjectto the informational requirements of the Securities Exchange Act of 1934.  Accordingly, we file periodic reports andother information with the Securities 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 asreasonably practicable after electronically filing such materials with theSecurities and Exchange Commission.  Theymay also be obtained by writing to Mrs. Fields Famous Brands at 2855 EastCottonwood Parkway, Salt Lake City, UT 84121. In addition, you may obtain copies of these reports through theSecurities and Exchange Commission website at http://www.sec.gov or by visitingthe SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549or by calling the SEC at 800-SEC-0330.

 

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# **Item 2**.  Properties

#  

Wecurrently lease approximately 43,000 square feet of office space in Salt LakeCity, Utah, which is used as our corporate headquarters and franchisee supportcenter. MFOC uses undivided portions of the space as corporate headquarterspursuant to a sublease between MFOC and us. We also currently leaseapproximately 65,000 square feet of space in multiple other locations in Salt LakeCity, Utah for product development, training and gifts operations. We currentlyown the Great American Cookie Company batter production 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 ownsubstantially all of the equipment used in these facilities.

 

# **Item 3**.  Legal Proceedings

#  

We and our productsare subject to regulation by numerous governmental authorities, includingwithout limitation, federal, state and local laws and regulations governingfranchising, health, sanitation, environmental protection, safety and hiringand employment practices.

 

In the ordinary courseof business, we are involved in routine litigation, including franchisedisputes and trademark disputes. We are not a party to any legal proceedings(including the matter described below) which, in the opinion of management,after consultation with legal counsel, is material to our business, financialcondition or operations.

 

Our indirectsubsidiary, TCBY of Ireland, Inc., was the defendant in a recentlyconcluded case captioned Advanced Food Concepts, Ltd. et al. v. William P.Creasman, et al., Case No. 401-CV-00-117JMM, filed in the U.S. DistrictCourt for the Eastern District of Arkansas (the “Court”). This complaint wasfiled in 2001 by two former franchisees against TCBY of Ireland and othercorporate and individual defendants, but all defendants were subsequentlydismissed with the exception of TCBY of Ireland, Inc., the franchisorparty under a Transnational Master License Agreement entered into with certainof the plaintiffs and others.

 

The plaintiffs soughtdamages in excess of $70 million in connection with TCBY of Ireland’sperformance under and termination of the Transnational Master LicenseAgreement. On August 4, 2004, the Court granted TCBY of Ireland’s Motion forSummary Judgment on all remaining counts of the complaint. Plaintiffs subsequentlyfiled various motions, including a motion for reconsideration, which the Courtdenied, and TCBY of Ireland filed a motion for attorneys fees and costspursuant to Arkansas law.  On February 7,2005, the parties entered into a settlement agreement whereby plaintiffs agreedto pay defendants a negotiated sum for attorneys fees, and the parties agreednot to appeal the Court’s rulings.  OnFebruary 14, 2005, the Court entered its order dismissing the case withprejudice in accordance with the settlement agreement.

 

# **Item 4**.  Submission of Matters to a Vote of SecurityHolders

#  

None.

 

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**PART II**

 

# **Item 5**.  Market for Registrant’s Common Equity andRelated Stockholder Matters

#  

**Market Information and Number of Stockholders**

 

We area wholly owned subsidiary of Mrs. Fields’ Original Cookies, Inc. (“MFOC”).  There is no established trading market forMFOC’s or our common equity.

 

**Dividends**

 

For each ofthe three fiscal years in the period ended January 1, 2005, we did not declareor pay cash dividends; however, we did pay MFC $1.5 million and $7.1 millionduring fiscal years 2004 and 2003, respectively, for income taxes under a priortax sharing agreement.  Our ability todeclare or pay cash dividends is restricted by the indenture pertaining to ourSenior Secured Notes.  For a descriptionof these restrictions, see Note 3 to our consolidated financial statementscontained elsewhere in this report.

 

# **Item 6**.  Selected Financial Data

 

The followingtable presents our historical financial data as of the dates and for theperiods indicated.  We operate using a52/53-week year ending on the Saturday closest to December 31. Fiscal 2003includes 53 weeks; whereas, all other fiscal years include 52 weeks.  The selected historical financial data atJanuary 1, 2005, January 3, 2004, December 28, 2002 and December 29, 2001 andfor fiscal years 2004, 2003, 2002 and 2001 have been derived from our auditedconsolidated financial statements.  Theselected historical financial data at December 30, 2000 and for fiscal 2000 arederived from our unaudited consolidated historical financial statements.  The selected historical financial data shouldbe read in conjunction with “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and the historical consolidated financialstatements and the related notes, contained elsewhere in this report on Form10-K.

 
| ** **                                                                                                      | ** ** | **Fiscal Year Ended** | ** **    |
|-----------------------------------------------------------------------------------------------------------------|------------|-----------------------|---------------|
| ** **                                                                                                      | ** ** | **January 1,  2005**  | ** **    | **January 3,  2004** | ** ** | **December 28,  2002** | ** ** | **December 29,  2001** | ** ** | **December 30,  2000** | ** ** |
| **Income Statement Data:**                                                                                      |       |                  |          |   |   |   |   |   |   |   |   |
| Net revenues                                                                                                    |       | $                     | 87,060        |   | $ | 81,988 |   | $ | 95,392 |   | $ | 99,802 |   | $ | 77,992 |   |
| Income from continuing operations before  provision for income taxes and cumulative effect of accounting change |       | 4,816                 |          | 6,916 |   | 10,881 |   | (8,327 | ) | (9,265 | ) |
| **Balance Sheet Data (at end of period):**                                                                      |       |                  |          |   |   |   |   |   |   |   |   |
| Total assets                                                                                                    |       | $                     |  181,781 |   | $ |  162,602 |   | $ |  170,656 |   | $ |  216,644 |   | $ |  284,846 |   |
| Total debt (including capital lease obligations)                                                                |       | 196,210               |          | 185,762 |   | 187,776 |   | 204,426 |   | 208,408 |   |

 

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# **Item 7**.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations

 

**Executive Summary**

 

We are one of thelargest franchisors in the premium snack-food industry, featuring Mrs. Fields,Great American Cookie Company, TCBY, Pretzel Time and Pretzelmaker as our corebrands. Through our franchisees’ retail stores, we are the largest retailer offreshly baked on-premises specialty cookies and brownies in the United Statesof America (the “United States”); the largest retailer of soft serve frozenyogurt in the United States; and the second largest retailer of bakedon-premises pretzels in the United States. In addition, we operate a profitablegifts business and have entered into licensing arrangements that attempt toleverage awareness of our core brands among our retail customer base. Weoperate through a network of 2,688 retail concept locations, which are locatedthroughout the United States and in approximately 30 foreign countries.

 

Our businessis divided into three primary business segments for financial reportingpurposes: franchising, gifts and licensing, which represented 64.2 percent,29.7 percent and 5.7 percent of total revenues, respectively, for the yearended January 1, 2005.  

 

As of January 1, 2005, our store portfolioconsisted of 2,145 domestic franchised locations, 338 international franchisedlocations and 205 licensed locations. By brand, our franchisees’ and licensees’concept locations are distributed as follows:

 
| ** **                         | ** ** | **Domestic  Franchised** | ** ** | **International  Franchised** | ** ** | **Licensed  Locations** | ** ** | **Total** | ** ** |
|------------------------------------|------------|--------------------------|------------|-------------------------------|------------|-------------------------|------------|-----------|------------|
| Mrs. Fields                        |       | 386                      |       | 82                            |       | 53                      |       | 521       |       |
| Great American                     |       | 281                      |       | 1                             |       | 1                       |       | 283       |       |
| Original Cookie                    |       | —                   |       | —                        |       | 7                       |       | 7         |       |
| Cookie subtotal                    |       | 667                      |       | 83                            |       | 61                      |       | 811       |       |
|                               |       |                     |       |                          |       |                    |       |      |       |
| Pretzel Time                       |       | 221                      |       | 7                             |       | 5                       |       | 233       |       |
| Pretzelmaker                       |       | 157                      |       | 40                            |       | 3                       |       | 200       |       |
| Hot Sam                            |       | —                   |       | —                        |       | 11                      |       | 11        |       |
| Pretzel subtotal                   |       | 378                      |       | 47                            |       | 19                      |       | 444       |       |
| Bakery brands subtotal             |       | 1,045                    |       | 130                           |       | 80                      |       | 1,255     |       |
|                               |       |                     |       |                          |       |                    |       |      |       |
| TCBY – traditional stores     |       | 469                      |       | —                        |       | —                  |       | 469       |       |
| TCBY – non-traditional stores |       | 631                      |       | 208                           |       | 125                     |       | 964       |       |
| TCBY brands subtotal               |       | 1,100                    |       | 208                           |       | 125                     |       | 1,433     |       |
|                               |       |                     |       |                          |       |                    |       |      |       |
| Total                              |       | 2,145                    |       | 338                           |       | 205                     |       | 2,688     |       |

 

Theabove table counts each concept location individually. For example, if aphysical location had a Mrs. Fields store and a Pretzel Time store together,this would be counted as two concept locations in the table above. If actualphysical stores were counted, rather than concept locations, total store countswould be reduced by 302 locations to 2,386.

 

MFOCand certain of its subsidiaries own approximately 102 franchised and licensedretail concept locations, representing 3.8 percent of the total retail conceptlocations as of January 1, 2005. During the year ended January 1, 2005, werecognized $2.8 million of franchise royalties and $2.9 million of productsales relating to the retail concept locations owned by MFOC. MFOC expects thatmost of these retail concept locations will be sold to new and currentfranchisees or will be closed during fiscal 2005.

 

18

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 During the three-year period from December 29, 2001 to January 1, 2005,our store portfolio declined from 3,607 concept locations to 2,688 conceptlocations, as follows:

 
| ** **                 | ** ** | **Domestic  Franchised** | ** ** | **International  Franchised** | ** ** | **Licensed  Locations** | ** ** | **Total** | ** ** |
|----------------------------|------------|--------------------------|------------|-------------------------------|------------|-------------------------|------------|-----------|------------|
| Balance, December 29, 2001 |       | 2,794                    |       | 399                           |       | 414                     |       | 3,607     |       |
| New development openings   |       | 222                      |       | 43                            |       | 11                      |       | 276       |       |
| Permanent closings         |       | (453                     | )          | (76                           | )          | (108                    | )          | (637      | )          |
| Other openings, net        |       | 29                       |       | —                        |       | 9                       |       | 38        |       |
| 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     |       |

 

Ofthe 1,712 permanent closings between December 29, 2001 and January 1, 2005,58.9 percent related to TCBY brand non-traditional locations, 11.2 percentrelated to TCBY brand traditional locations, 19.0 percent related to bakeryconcept locations owned by franchisees other than MFOC and 10.9 percent relatedto retail concept locations owned by MFOC.

 

Ofthe 556 permanent closings between January 3, 2004 and January 1, 2005, 65.1percent related to TCBY brand non-traditional locations, 11.0 percent relatedto TCBY brand traditional locations, 17.8 percent related to bakery conceptlocations owned by franchisees other than MFOC and 6.1 percent related toretail concept locations owned by MFOC.

 

Numerousfactors have contributed to this declining store count over the past threefiscal years.  Some of the moresignificant factors may include the negative, widespread effects of September11, 2001 on the retail climate, particularly upon small, single-store andmall-based operators, 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 our current business strategies,described in more detail in Item 1 of this annual report on Form 10-K, willstabilize our store base and address many of these factors by increasing therate of new openings of franchised locations; developing new products and menuitems designed to align our concepts with consumer preferences; creatingincentives for qualified, existing franchisees to open new stores; andimplementing initiatives to improve operations and customer service at existinglocations.

 

Throughout this discussion, we refer to the total weeks that ourfranchised locations operate in any given period as “franchised unit weeks” anduse that term comparatively when describing factors that may affectperformance.    Fewer franchisedlocations translate naturally to fewer total franchised unit weeks that ourfranchisees operate and contribute revenues to us.  Other occurrences or considerations, such asthe fact that our fiscal year sometimes includes 53 weeks instead of thestandard 52, may increase the relative number of total weeks from period toperiod.  Because the TCBY system iscomprised of both larger, traditional locations and a significant number ofsmaller, non-traditional locations, we measure franchise unit weeks a bitdifferently for the TCBY system, based on our calculation that it takesapproximately three average non-traditional locations to equal the revenues ofone average traditional location.  Wetherefore refer to “traditional equivalent unit weeks” to describe the totalnumber of weeks that TCBY franchised locations operate in any given period,adjusted to account for the different impact that non-traditional TCBY storeopenings and closings may have on the system when compared to similar eventsaffecting traditional TCBY stores.

 

19

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**RecentDevelopments**

 

***Reorganization andRefinancing***

 

We were formed in March 2004 in connectionwith the reorganization of certain entities and segments that are under thecommon control of Mrs. Fields’ Companies, Inc. (“MFC”), formerly known as Mrs.Fields’ Famous Brands, Inc.  We are awholly-owned subsidiary of MFOC.  MFOC isa wholly-owned subsidiary of Mrs. Fields’ Holding Company, Inc. (“MFH”) and MFHis a wholly-owned subsidiary of MFC. Prior to the reorganization, TCBY Systems, LLC (“TCBY”) was awholly-owned subsidiary of TCBY Enterprises, LLC (“TCBY Enterprises”), whoseparent is also MFC.

 

As part ofthe reorganization described above, we refinanced substantially all of ourindebtedness.  We issued $80.7 million of9 percent senior secured notes (the “9 percent Senior Secured Notes”) inexchange for $80.7 million of 10 1/8 percent senior notes and issued $115.0million of 11 1/2 percent senior secured notes (the “11 1/2 percent SeniorSecured Notes” and together with the 9 percent Senior Secured Notes, the “SeniorSecured Notes”).  The proceeds from the11 1/2 percent Senior Secured Notes were used to retire the Company’s remaininglong-term debt.

 

On August 23, 2004, we completed an offer toexchange an aggregate principal amount of up to $80.7 million of our 9 percentSenior Secured Notes which were 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 11 1⁄2 percent Senior Secured Notes which were registered under theSecurities Act of 1933, as amended, for a like principal amount of our issuedand outstanding 11 1/2 percent Senior Secured Notes from the registered holdersthereof. All of the original Senior Secured Notes were tendered and exchangedas a result of this offer.

 

***Increased Investmentin Brands***

* *

During the fiscal year ended January 1, 2005,we incurred expenses of $3.0 million related to brand investmentinitiatives.  There were no such expensesin the prior year.  These expenses for brand investmentinitiatives for the year ended January 1, 2005 included increased advertisingand promotion of the TCBY brand and its products, including the introductionduring the second quarter of several flavors of “low carb” yogurt at most ofour TCBY traditional franchised retail stores of approximately $1.1 million,initial expenses relating to the reconcepting of TCBY of approximately $500,000and expenses relating to other TCBY initiatives of $300,000. We also incurredexpenses relating to brand investment initiatives of our bakery brands of $1.0million and our gifts business segment of $100,000.  During fiscal 2005, we intend to invest anadditional $3.0 million in advertising, promotions and brand buildinginitiatives.

 

## ***Termination ofLicense Agreement***

## *** ***

OnDecember 24, 2004, we terminated a license agreement with Shadewell Grove IP,LLP (“Shadewell”) to market and distribute high quality, frozen cookie doughproducts utilizing the Mrs. Fields trademarks, service marks and trade names tothe food away from home industry through designated food service distributionchannels.  Among other reasons, wepursued the termination of this license to better align our interests withthose of our franchisees.  We paidShadewell a termination fee of approximately $1.1 million and in returnreceived from Shadewell an indemnification and release of any and all claimsarising from the license agreement.  Thetermination fee was recorded in licensing expenses in the consolidatedstatement of operations for the year ended January 1, 2005.

 

## ***New LicenseAgreements***

## *** ***

During the fourthquarter 2004, we entered into two new license agreements with two newlicensees.  On October 20, 2004, weentered into a license agreement with a licensee to market and distributecertain high quality baking mixes utilizing the Mrs. Fields trademarks, servicemarks and trade names through designated retail distribution channels.  On November 8, 2004, we entered into alicense agreement with a licensee to develop, manufacture and distributecertain high quality, yogurt covered pretzel products utilizing certain TCBYtrademarks, service marks and trade names through designated retaildistribution channels.  The initial termof each of these licenses is five years commencing on January 1, 2005.  Therefore, we expect to earn royalties fromthese licenses in fiscal 2005.

 

20

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 On December 24, 2004, we entered into anotherlicense agreement with Shadewell to market and distribute pre-packaged,ready-to-eat shelf stable brownies and ready-to-eat shelf stable desserttoppings and syrups, each utilizing the Mrs. Fields trademarks, service marksand trade names through designated retail distribution channels.  Shadewell has until the end of calendar year2006 to commence distribution of these products.  In addition, Shadewell does not pay royaltiesfor one year from the date these products are first shipped.  Therefore, we may not earn any royalties fromthis license until fiscal 2008.

 

## ***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 to us. The consolidated financial statementsassume that the Company, for all periods presented, had existed as a separatelegal entity with the following four business segments: franchising, licensing,gifts and retail food sales. The consolidated financial statements, which havebeen carved out from the consolidated financial statements of MFOC and TCBYusing the historical results of operations and assets and liabilities of thesebusinesses and activities and which exclude the company-owned stores segment ofMFOC, reflect the accounting policies adopted by MFOC and TCBY in thepreparation of their consolidated financial statements and thus do notnecessarily reflect the accounting policies which we might have adopted had webeen an independent company. The historical consolidated financial statementsof the Company 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 (loss). MFOC’s general andadministrative expenses represent portions of MFOC’s corporate functions suchas human resources, legal, accounting and finance, treasury and informationtechnology systems, that have been allocated to us based on percentage of laborhours devoted by the functional department. These allocated costs are notnecessarily indicative of the costs that we would have incurred had we operatedas an independent, stand-alone entity for all periods presented.

 

Our cash balance at January 3, 2004 includes cash accountsspecifically attributable to us plus an allocated portion of cash included inMFOC’s centralized cash management systems. Accordingly, our cash atJanuary 3, 2004 may not be representative of what it would have been if wewere an independent company.

 

This “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”section is presented as if we had existed as a stand-alone company on ahistorical basis and should be read in conjunction with the consolidatedfinancial statements and the accompanying notes to the consolidated financialstatements included in Item 8 of this report on Form 10-K.

 

21

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**Results of Operations**

 

Thefollowing table sets forth, for the periods indicated, certain informationrelating to our operations and percentage changes from period to period. Weoperate using a 52/53-week year ending on the Saturday closest to December 31.Fiscal 2003 includes 53 weeks; whereas, fiscal 2004 and fiscal 2002 include 52weeks.

 
| ** **                                                                                                      | ** ** | **For the Fiscal Year Ended** | ** **   |
|-----------------------------------------------------------------------------------------------------------------|------------|-------------------------------|--------------|
| ** **                                                                                                      | ** ** | **January 1,  2005**          | ** **   | **January 3,  2004** | ** ** | **% Change** | ** ** | **December 28, 2002** | ** ** | **% Change** | ** ** |
| ** **                                                                                                      | ** ** | **(Dollars in thousands)**    | *** *** |
| **Statement of Operations Data:**                                                                               |       |                          |         |   |   |   |   |   |   |   |   |
| REVENUES:                                                                                                       |       |                          |         |   |   |   |   |   |   |   |   |
| Franchising                                                                                                     |       | $                             | 55,913       |   | $ | 58,645 |   | (4.7 | ) | $ | 61,332 |   | (4.4 | ) |
| Retail food sales                                                                                               |       | —                        |         | — |   | NM |   | 16,606 |   | NM |   |
| Gifts                                                                                                           |       | 25,849                        |         | 17,405 |   | 48.5 |   | 12,628 |   | 37.8 |   |
| Licensing                                                                                                       |       | 4,945                         |         | 5,464 |   | (9.5 | ) | 4,566 |   | 19.7 |   |
| Other                                                                                                           |       | 353                           |         | 474 |   | (25.5 | ) | 260 |   | 82.3 |   |
| Total revenues                                                                                                  |       | 87,060                        |         | 81,988 |   | 6.2 |   | 95,392 |   | (14.1 | ) |
| OPERATING COSTS AND EXPENSES:                                                                                   |       |                          |         |   |   |   |   |   |   |   |   |
| Franchising                                                                                                     |       | 21,893                        |         | 20,040 |   | 9.2 |   | 20,662 |   | (3.0 | ) |
| Cost of sales – retail food                                                                                |       | —                        |         | — |   | NM |   | 15,212 |   | NM |   |
| Gifts                                                                                                           |       | 20,733                        |         | 13,207 |   | 57.0 |   | 9,778 |   | 35.1 |   |
| Licensing                                                                                                       |       | 1,516                         |         | 1,155 |   | 31.3 |   | 143 |   | 707.7 |   |
| General and administrative                                                                                      |       | 9,727                         |         | 10,811 |   | (10.0 | ) | 12,129 |   | (10.9 | ) |
| Stock compensation expense                                                                                      |       | 75                            |         | 50 |   | 50.0 |   | 134 |   | (62.7 | ) |
| Costs associated with debt refinancing                                                                          |       | 249                           |         | 684 |   | (63.6 | ) | — |   | NM |   |
| Depreciation                                                                                                    |       | 1,221                         |         | 1,973 |   | (38.1 | ) | 1,905 |   | 3.6 |   |
| Amortization                                                                                                    |       | 2,832                         |         | 1,780 |   | 59.1 |   | 1,784 |   | (0.2 | ) |
| Other operating expenses (income), net                                                                          |       | 147                           |         | 331 |   | (55.6 | ) | (2,563 | ) | (112.9 | ) |
| Total operating costs and expenses                                                                              |       | 58,393                        |         | 50,031 |   | 16.7 |   | 59,184 |   | (15.5 | ) |
| Income from operations                                                                                          |       | 28,667                        |         | 31,957 |   | (10.3 | ) | 36,208 |   | (11.7 | ) |
| Interest expense, net                                                                                           |       | (24,905                       | )            | (25,041 | ) | (0.5 | ) | (25,327 | ) | (1.1 | ) |
| Other income                                                                                                    |       | 1,054                         |         | — |   | NM |   | — |   | NM |   |
| Income from continuing operations before provision  for income taxes and cumulative effect of accounting change |       | 4,816                         |         | 6,916 |   | (30.4 | ) | 10,881 |   | (36.4 | ) |
| Provision for income taxes                                                                                      |       | 2,254                         |         | 2,403 |   | (6.2 | ) | 4,365 |   | (44.9 | ) |
| Income from continuing operations before  cumulative effect of accounting change                                |       | 2,562                         |         | 4,513 |   | (43.2 | ) | 6,516 |   | (30.7 | ) |
| Income (loss) from discontinued operations  (net of income taxes of $65, $158 and $44, respectively)            |       | 104                           |         | 255 |   | (59.2 | ) | (288 | ) | NM |   |
| Income before cumulative effect of  accounting change                                                           |       | 2,666                         |         | 4,768 |   | (44.1 | ) | 6,228 |   | (23.4 | ) |
| Cumulative effect of accounting change                                                                          |       | —                        |         | — |   | NM |   | (35,175 | ) | NM |   |
| Net income (loss)                                                                                               |       | $                             | 2,666        |   | $ | 4,768 |   | (44.1 | ) | $ | (28,947 | ) | 116.5 |   |
|                                                                                                            |       |                          |         |   |   |   |   |   |   |   |   |
| Cash flows from operating activities                                                                            |       | $                             | 7,437        |   | $ | 15,155 |   | (50.9 | ) | $ | 24,296 |   | (37.6 | ) |
| Cash flows from investing activities                                                                            |       | $                             | 195          |   | $ | (220 | ) | NM |   | $ | (1,342 | ) | 83.6 |   |
| Cash flows from financing activities                                                                            |       | $                             | 10,918       |   | $ | (16,525 | ) | NM |   | $ | (22,097 | ) | 25.2 |   |

 

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

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

 

*Income From Operations—Overview*.  Income from operations was $28.7 millionfor fiscal 2004, a decrease of $3.3 million or 10.3 percent, from$32.0 million for fiscal 2003. This decrease was primarily attributable toa decrease in contribution from our franchising segment of $4.6 million, whichwas primarily attributable to $2.9 million of expenses incurred for brandinvestment initiatives, a decrease in franchising revenues of $2.7 million as aresult of fewer franchised unit weeks, partially offset by a decrease in otherdirect franchising expenses of $1.0 million. In addition, our licensingcontribution decreased $900,000 primarily as a result of a termination fee paidto Shadewell to terminate a license agreement for Mrs. Fields branded frozencookie dough for the food service industry and depreciation and amortizationexpense 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.*  The following table sets forth thecontribution from each of our reporting segments. Franchising contribution iscomprised of sales of new franchises and royalties from existing franchisesless direct operating expenses. Gifts contribution is comprised of sales of ourproducts through our catalog and Internet business less direct operatingexpenses. Licensing contribution is comprised of licensing fees received fromthird parties for the sale of products bearing our brand names less directoperating expenses.

 
| ** **                 | ** ** | **Fiscal Year Ended**      | ** ** | ** **           | ** ** |
|----------------------------|------------|----------------------------|------------|----------------------|------------|
| **Reporting Segment**      | ** ** | **January 1,  2005**       | ** ** | **January 3,  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 | ) |

 

**Franchising**

 

*FranchisingRevenues.* Franchising revenues were $55.9 millionfor fiscal 2004, a decrease of $2.7 million or 4.7 percent, from$58.6 million for fiscal 2003. This decrease was principally due to a $1.5million or 7.6 percent decrease in revenues from our TCBY franchise system as aresult of approximately 5,300 or 12.1 percent fewer traditional equivalent unitweeks and $1.2 million or 3.2 percent decrease in revenues from our bakeryfranchise system as a result of approximately 4,700 fewer franchised unit weeksor 7.8 percent.

 

The decreasein our TCBY franchise system revenues was principally comprised of decreases inproduct formulation revenues generated by purchases of TCBY products byfranchisees of $1.0 million or 8.6 percent, royalties of $400,000 or 6.6percent and initial franchise fees of $100,000 or 11.3 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 2.1 percent, partially offset byincreases in sales of products by our Great American Cookie batter facility toour franchisees of $200,000 and other bakery franchising revenues of $100,000.

 

*FranchisingExpenses.* Franchising expenses were $21.9 million for fiscal 2004, anincrease of $1.9 million or 9.2 percent, from $20.0 million for fiscal2003. This increase was principally due to increases in expenses for brandinvestment initiatives of $2.9 million, operating costs associated with ourGreat American Cookie batter facility of $900,000 principally due to rising rawingredients costs, product development expenses of $300,000, and franchiseetraining expenses of $100,000, partially offset by reductions in franchisedevelopment and selling expenses of $1.1 million, franchise operations andsupervision expenses of $1.0 million and marketing and advertising expenses of$200,000.

 

23

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*Franchising Contribution.*  The decrease in franchising contribution of$4.6 million or 11.9 percent was principally due to decreases in franchiserevenues through our TCBY franchise system of $1.5 million and our bakeryfranchise system of $1.2 million as a result of approximately 10,000 fewerfranchised unit weeks and increases in expenses incurred for brand investmentinitiatives of $2.9 million, operating expenses associated with our GreatAmerican Cookie batter facility of $900,000, product development expenses of $300,000, and franchisee trainingexpenses of $100,000, partially offset by reductions in franchise development andselling expenses of $1.1 million, franchise operations and supervision expensesof $1.0 million and marketing and advertising expenses of $200,000.

 

**Gifts**

 

*Gifts Revenues.*  Gifts revenues were $25.8 million for fiscal2004, an increase of $8.4 million or 48.5 percent, from$17.4 million for fiscal 2003. Gifts revenues consist of sales through ourcatalog and website as well as affiliations with other websites and sales tolarge corporate accounts for gifting purposes and commercial airlines.  The increase in revenues in fiscal 2004 wasdue to increases in sales through our catalogs and website of $6.8 million or64.0 percent, significant corporate accounts of $1.1 million or 38.2 percentand our affiliations with other websites of $700,000 or 26.4 percent, partiallyoffset by a reduction in sales to commercial airlines of $200,000 or 24.2percent.

 

*Gifts Expenses.*  Gifts expenses were $20.7 million forfiscal 2004, an increase of $7.5 million or 57.0 percent, from$13.2 million for fiscal 2003. This increase in expenses was due toincreases in cost of sales of $4.4 million associated with the increased salesvolume and increased cost of product, advertising and marketing expenses of$2.2 million due to increased circulation of catalogs, salaries and wagesexpenses of $300,000, banking and credit card fees of $200,000 due to increasedsales volume, expenses incurred for brand investment initiatives of $100,000and other operating expenses of $300,000.

 

*Gifts Contribution.*  The increase in gifts contribution of$900,000 or 21.9 percent was primarily attributable to an increase in giftssales of $8.4 million partially offset by an increase in gifts operatingexpenses of $7.5 million.  Giftscontribution as a percent of gifts revenues was 19.8 percent for fiscal 2004compared to 24.1 percent for fiscal 2003. This decrease in contribution margin was primarily due to increasedadvertising and marketing expenses due to increased circulation of catalogswhich increased this expense from 13.5 percent of sales in fiscal 2003 to 17.5percent of sales in fiscal 2004.

 

**Licensing**

 

*Licensing Revenues.*  Licensing revenues were $4.9 million forfiscal 2004, a decrease of $500,000 or 9.5 percent, from $5.4 million forfiscal 2003. This decrease was due to decreases in licensing royalties earnedunder our licensing agreement for the sale of TCBY frozen food specialtyproducts through retail channels of $500,000.

 

*Licensing Expenses.*  Licensing expenses were $1.5 million forfiscal 2004, an increase of $400,000 or 31.3 percent, from $1.1 millionfor fiscal 2003. This increase was due to a termination fee of approximately$1.1 million paid to Shadewell to terminate a license agreement for the sale ofMrs. Fields branded frozen cookie dough through certain food servicedistribution channels, partially offset by reduced licensing expenses of$700,000 incurred under our licensing agreement for TCBY frozen food specialtyproducts and marketing and spoilage allowances that were incurred in fiscal2003 as a result of distribution through a retail chain.  This distribution channel was terminated in2003.

 

*LicensingContribution.* The decrease in licensing contribution of $900,000 or 20.4 percent wasprimarily due to decreased royalties of $500,000 and the termination fee ofapproximately $1.1 million paid to Shadewell to terminate the frozen doughlicense, partially offset by the decrease in licensing expenses of $700,000.

 

**Other**

 

*General andAdministrative Expense.*  General and administrative expenses were $9.7million for fiscal 2004, a decrease of $1.1 million or 10.0 percent, from $10.8million 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 ourexecutive management team of $300,000, health insurance costs of $300,000 andbanking fees of $200,000, partially offset by increases in property andcasualty insurance expenses of $200,000 and workers compensation insuranceexpenses of $100,000.

 

24

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*Costs Associated with Debt Refinancing.*  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 AccountingStandards (“SFAS”) No. 15, “Accounting by Debtors and Creditors for TroubledDebt Restructurings,” these costs were expensed net of the gain recognized onretirement of the senior notes of $4.8 million.

 

*Depreciation and Amortization Expense.*  Total depreciation and amortization expensewas $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 trade names and recipes, which werepreviously considered to be indefinite lived assets and are now amortized overa 15 year life.

 

*Interest Expense, Net.*  Interest expense, net was $24.9 millionfor fiscal 2004, a decrease of $100,000 or 0.5 percent, from$25.0 million for fiscal 2003. This decrease was primarily due to lowerinterest expense incurred as a result of the refinancing of our debt in March2004 resulting in a lower effective interest rate on our outstanding debt forfiscal 2004 compared to the effective interest rate on our outstanding debt forfiscal 2003.  This decrease was partiallyoffset by the write-off of deferred loan costs of $2.7 million associated withour previous debt. These deferred loan costs were written off due to thecompletion of our debt refinancing on March 16, 2004.

 

*Other Income.*  Other income was $1.1 million for fiscal2004. Other income represents gain on the sale of certain equity warrants ofNonni’s Food Company, a predecessor-in-interest to Shadewell.

 

*ConsolidatedFinancial 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.

 

Totalliabilities at January 1, 2005 were $225.3 million, an increase of$6.9 million or 3.1 percent, from $218.4 million atJanuary 3, 2004. This increase was primarily due to an increase inlong-term debt of $10.0 million, accrued liabilities of $1.4 million andcapital lease obligations of $500,000, partially offset by decreases inaccounts payable of $2.4 million, deferred revenues of $900,000, deferred taxliability of $900,000, amounts due to affiliates of $400,000 and liabilities ofdiscontinued operations of $400,000.

 

25

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**FiscalYear Ended January 3, 2004 (Fiscal 2003)**

**Comparedto the Fiscal Year Ended December 28, 2002 (Fiscal 2002)**

 

*Income From Operations—Overview*.  Income from operations was $32.0 million forfiscal 2003, a decrease of $4.2 million or 11.7 percent, from $36.2 million forfiscal 2002. This decrease was primarily attributable to decreases incontribution margin from franchising of $2.1 million, from retail food sales of$1.4 million and from licensing of $100,000 and reimbursement of TCBYtransitional costs of $2.4 million included in other operating expenses(income), net in fiscal 2002 and increases in other operating expenses of$400,000 and debt refinancing costs of $700,000 offset by increases incontribution margin from gifts of $1.3 million and in other operating revenueof $200,000 and a reduction in general and administrative costs of $1.3million.

 

*Segment Contribution.*  The following table sets forth thecontribution from each of our reporting segments. Franchising contribution iscomprised of sales of new franchises and royalties from existing franchisesless direct operating expenses. Gifts contribution is comprised of sales of ourproducts through our catalog and Internet business less direct operatingexpenses. Licensing contribution is comprised of licensing fees received fromthird parties for the sale of products bearing our brand names less directoperating expenses.  Retail food salescontribution is comprised of sales of TCBY branded frozen food specialtyproducts and Mrs. Fields refrigerated cookie dough through retail channels lessdirect operating expenses.

 
| ** **                 | ** ** | **Fiscal Year Ended**      | ** ** | ** **             | ** ** |
|----------------------------|------------|----------------------------|------------|------------------------|------------|
| **Reporting Segment**      | ** ** | **January 3,  2004**       | ** ** | **December 28,  2002** | ** ** | **% Change** | ** ** |
| ** **                 | ** ** | **(Dollars in thousands)** | ** ** | ** **             | ** ** |
|                       |       |                       |       |                   |       |   |   |
| Franchising                |       | $                          | 38,605     |                   | $          | 40,670 |   | (5.1 | ) |
| Gifts                      |       | 4,198                      |       | 2,850                  |       | 47.3 |   |
| Licensing                  |       | 4,309                      |       | 4,423                  |       | (2.6 | ) |
| Retail food sales          |       | —                     |       | 1,394                  |       | (100.0 | ) |
| Total segment contribution |       | $                          | 47,112     |                   | 49,337     |   | (4.5 | ) |
|                            |            |                            |            |                        |            |  |  |  |  |

 

**Franchising**

 

*Franchising Revenues.*  Franchising revenues were $58.6 million forfiscal 2003, a decrease of $2.7 million or 4.4 percent, from $61.3 million forfiscal 2002. This decrease was principally due to a 14.3 percent decrease involume of TCBY frozen dairy products and novelties sold to franchisees as aresult of an aging marketing concept resulting in lower yogurt formulationcharges of $900,000, a decrease in royalties attributable to our TCBY conceptof $400,000 as a result of fewer traditional equivalent unit weeks and a 6.6percent decrease in year over year sales and a decrease in royaltiesattributable to our bakery franchised store locations of $1.4 million as aresult of fewer franchised unit weeks and a 3.9 percent decrease in year overyear sales.

 

*Franchising Expenses.*  Franchising expenses were $20.0 million forfiscal 2003, a decrease of $700,000 or 3.0 percent, from $20.7 million forfiscal 2002. This decrease was principally due to a decrease in franchisesupport and operating expenses of $1.2 million due to reduced payroll andrelated benefits and a decrease in marketing and advertising expenses of $1.1million, partially offset by increases in franchise development costs of$800,000, severance expenses relating to employees terminated in December 2003of $300,000 and operating and administrative costs of $500,000 relating to our GreatAmerican Cookie batter facility.

 

*Franchising Contribution.*   The decrease in franchising contribution wasprincipally due to a decrease in the volume of frozen dairy products sold toour TCBY franchisees of 14.3 percent resulting in lower contribution of$900,000, a decrease in royalties of $1.8 million or 7.0 percent resulting fromfewer franchised units opened in 2003 and lower year over year franchise sales,a decrease in contribution from our Great American Cookie batter facility of$500,000 as a result of higher operating costs, and increases in franchisedevelopment costs of $800,000 and severance expenses of $300,000. Thesereductions in revenues and contribution and increased development costs werepartially offset by reductions in franchise support and operating expenses of$1.2 million and marketing and advertising expenses of $1.1 million.

 

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**Gifts**

** **

*Gifts Revenues.*  Gifts revenues were $17.4 million for fiscal2003, an increase of $4.8 million or 37.8 percent, from $12.6 million forfiscal 2002. Gifts revenues consist of sales through our catalog and e-tailingwebsite. The increase in revenues in fiscal 2003 was due to increases incatalog and Internet sales of $2.6 million, corporate gift sales of $1.6million and sales to the airline industry of $600,000.

 

*Gifts Expenses.*  Gifts expenses were $13.2 million for fiscal2003, an increase of $3.4 million or 35.1 percent, from $9.8 million for fiscal2002. This increase in expenses was due to increases in cost of sales of $2.5million associated with the increased sales volume, salaries and benefits of$600,000, advertising and marketing of $200,000 and other operating costs of$100,000.

 

*Gifts Contribution.*  The increase in gifts contribution wasprimarily attributable to an increase in gifts sales of $4.8 million or 37.8percent offset by an increase in gifts operating expenses of $3.4 million or35.1 percent. Gifts contribution margin as a percent of sales was 24.2 percentfor fiscal 2003 compared to 22.6 percent for fiscal 2002. This increase incontribution margin was due to a reduction in gifts direct selling andadministrative expenses as a percent of sales.

 

**Licensing**

** **

*Licensing Revenues.*  Licensing revenues were $5.5 million forfiscal 2003, an increase of $900,000 or 19.7 percent, from $4.6 million forfiscal 2002. This increase was due to licensing royalties earned under ourlicensing agreement for the sale of TCBY frozen food specialty products throughretail channels of $1.5 million and an increase in licensing royalties for Mrs.Fields branded soft baked cookies distributed through retail channels byShadewell or its predecessors of $1.3 million, partially offset by a decreasein licensing royalties from premium candies and other various Mrs. Fieldsbranded products of $300,000 and a decrease in revenues from recipe sales androyalties from Shadewell or its predecessors to be distributed and sold throughinstitutional and food service channels of $1.6 million.

 

*Licensing Expenses.*  Licensing expenses were $1.2 million forfiscal 2003, an increase of $1.1 million from $100,000 for fiscal 2002. Thisincrease was due to licensing expenses incurred under our licensing agreementfor TCBY frozen food specialty products.

 

*Licensing Contribution.*  The decrease in licensing contribution of$100,000 or 2.6 percent was primarily due to an increase in licensingcontribution from royalties earned under our licensing agreement for the saleof TCBY frozen food specialty products through retail channels of $400,000 andan increase in licensing royalties from Mrs. Fields branded soft baked cookiesdistributed through retail channels by Shadewell or its predecessors of $1.3million, partially offset by a decrease in other licensing royalties for Mrs.Fields premium candies and other various Mrs. Fields branded products of$300,000 and a decrease in revenues from recipe sales and royalties fromShadewell or its predecessors to be distributed and sold through institutionaland food service channels of $1.6 million.

 

**Retail Food Sales**

 

*Retail Food Sales.*  Retail food sales for fiscal 2002 primarilyconsisted of sales of TCBY branded frozen specialty products and private labelice cream through retail channels. In connection with TCBY’s entry into anexclusive supply agreement with Americana Foods Limited Partnership (“Americana”),a former subsidiary of TCBY Enterprises (the “TCBY Supply Agreement”), theactual sale and distribution of these products was moved to Americana and TCBYnow receives a portion of the sales of such products as a payment under theTCBY Supply Agreement. Accordingly, subsequent to December 2002, such amountsare included in our licensing segment. Retail food sales for fiscal 2002 alsoconsisted of sales of Mrs. Fields branded refrigerated cookie dough. Revenuesfrom the sale of Mrs. Fields refrigerated cookie dough through retail channelswere not significant for fiscal 2003 and are included in other operatingrevenue for 2003.

 

*Retail Food Sales Contribution.*  In December 2002, we entered into the intothe TCBY Supply Agreement, pursuant to which the actual sale and distributionof TCBY branded frozen specialty products and private label ice cream was movedto Americana and TCBY now receives a portion of the sales of such products as apayment under the TCBY Supply Agreement. Accordingly, revenues earned andexpenses incurred under this licensing agreement are included in the licensingsegment for 2003. Revenues and related cost of sales from the sale of Mrs.Fields refrigerated cookie dough through retail channels were not significantfor fiscal 2003 and are included in other operating revenue and other operatingexpenses, respectively, for 2003.

 

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**Other**

 

*General and Administrative Expense.*  General and administrative expenses were$10.8 million for fiscal 2003, a decrease of $1.3 million or 10.9 percent, from$12.1 million for fiscal 2002. This decrease was due to reductions in payrolland related costs of $1.5 million resulting from our staff reductions in late2002, bad debt expense of $1.4 million, professional fees and legal expenses of$500,000, property, casualty and workers compensation insurance expenses of$300,000, and banking fees of $200,000 and other cost saving measures of $100,000.These decreased expenses were partially offset by increases in salaries andbonuses of $1.3 million, severance expenses relating to the termination of ourformer President and Chief Executive Officer of $800,000, severance expensesrelating to employees terminated in December 2003 of $400,000, and relocationand recruiting expenses of $200,000.

 

*Costs Associatedwith Debt Refinancing.* As of January 3, 2004, we had incurred $1.9 million of costs that weredirectly 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 $684,000 of these costsrelated to the exchange in March 2004 of $80.7 million of the existing senior notesfor $80.7 million of the newly issued 9 percent Senior Secured Notes and were expensed during the fiscal year endedJanuary 3, 2004 in accordance with SFAS No. 15, “Accounting by Debtors andCreditors for Troubled Debt Restructurings.”

 

*Depreciation and Amortization Expense.*  Total depreciation and amortization expensewas $3.8 million for fiscal 2003, an increase of $100,000 or 2.7 percent, from$3.7 million for fiscal 2002. Depreciation expense was $2.0 million for fiscal2003, an increase of $100,000 or 3.6 percent, from $1.9 million for fiscal2002. This increase was principally due to the write-off of equipment relatingto distribution of TCBY yogurt product in convenience stores. Amortizationexpense was $1.8 million for fiscal 2003 and fiscal 2002.

 

*Interest Expense,Net.*  Interestexpense, net was $25.0 million for fiscal 2003, a decrease of $300,000 or 1.1percent, from $25.3 million for fiscal 2002. The decrease was primarily due tothe lower average outstanding balance of our lines of credit offset by anincrease in amortization of deferred loan costs during fiscal 2003.

 

*Cumulative Effect of Accounting Change.*  We recorded a non-cash charge ofapproximately $35.2 million in fiscal 2002 to reduce the carrying value of thegoodwill associated with our dairy franchising reporting unit. Such charge isnon operational in nature and was recorded as a cumulative effect of anaccounting change upon the mandatory adoption of SFAS No. 142 effective thebeginning of fiscal 2002.

 

*Consolidated Financial Condition.** *Totalassets at January 3, 2004 were $162.6 million, a decrease of $8.1 million or4.7 percent, from $170.7 million at December 28, 2002. This decrease wasprimarily attributable to decreases in net deferred loan costs of $2.2 million,net property and equipment of $1.7 million, net intangible assets of $1.7million, cash and cash equivalents of $1.6 million, assets of discontinuedoperations of $700,000, deferred tax assets of $600,000, and net receivables of$500,000 offset by increases in inventories of $600,000 and prepaid and otherassets of $300,000.

 

Total liabilities at January 3, 2004 were$218.4 million, a decrease of $400,000 or 0.2 percent, from $218.8 million atDecember 28, 2002. This decrease was primarily due to decreases in our borrowingsunder our line of credit and long-term debt of $2.0 million, amounts dueaffiliates of $3.4 million, deferred tax liability of $1.4 million, liabilitiesof discontinued operations of $400,000 and deferred revenue of $100,000 offsetby increases in accounts payable and accrued liabilities of $6.9 million.

 

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

 

Net cash flows provided by operatingactivities were $7.4 million for fiscal 2004, a decrease of $7.8 million, fromnet cash flows provided by operating activities of $15.2 million for fiscal2003.  This decrease was principally dueto decreases in contribution by our operating segments of $4.5 millionprimarily as a result of brand investment expenses and payment of licensetermination fee of $1.1 million as previously discussed, cash provided from  changes inworking capital of $3.5 million and cash provided from activities ofdiscontinued operations of $800,000 offset by a decrease in general andadministrative expenses of $1.1 million

 

Net cash flows provided by operatingactivities were $15.2 million for fiscal 2003, a decrease of $9.1 million or37.6 percent, from $24.3 million for fiscal 2002. This decrease was primarilyattributable to decreases in contribution margin from our operating segments of$3.7 million, cash provided from reimbursement of TCBY transitional costs of$2.4 million in fiscal 2002, cash provided from changes in working capital of$4.6 million and cash provided from activities of discontinued operations of$1.5 million offset by a decrease in general and administrative expenses of$3.1 million.

 

Net cash flowsprovided by investing activities were $200,000 for fiscal 2004, an increase of$400,000, from cash used in investing activities of $200,000 for fiscal2003.  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 flowsused in investing activities were $200,000 for fiscal 2003, a decrease of $1.1million or 83.6 percent, from $1.3 million for fiscal 2002. This decrease wasprimarily attributable to capital expenditures incurred in 2002 associated withpurchases of equipment for our gifts segment and new accounting and systemssoftware and hardware.

 

Net cash flows provided by financingactivities were $10.9 million for fiscal 2004, an increase of $27.4 millionfrom cash used in financing activities of $16.5 million for fiscal 2003.  This increase was principally due to thecompletion of our debt refinancing on March 16, 2004 which resulted in $115.0million in proceeds from the issuance of our 11 1⁄2 percent Senior Secured Notes,a capital contribution by MFOC of $17.5 million and a decrease in otheractivity with parent of $2.9 million, partially offset by increases in paymentsto retire our previous debt of $98.3 million, payments of debt issuance costsof $9.6 million and payments to repurchase stock options of MFC of $100,000.

 

Net cash flowsused in financing activities were $16.5 million for fiscal 2003, a decrease of$5.6 million or 25.2 percent, from $22.1 million for fiscal 2002. This decreasewas primarily attributable to an increase in net borrowings on the line ofcredit of $10.6 million and decreased payments on long-term debt of $4.0million offset by a decrease in contributions by our parent of $8.2 million andincreased payments of debt financing costs of $1.0 million.

 

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

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

Ourprincipal sources of liquidity are cash flows from operating activities andcash on hand.  At January 1, 2005, we had$19.9 million of cash on hand.  Duringfiscal 2005, we expect that our principal uses of cash will be for workingcapital, capital expenditures of approximately $3.0 million and interestpayments on our Senior Secured Notes of $20.5 million.  During 2005, we will not be required but wemay offer to repurchase a portion of the Senior Secured Notes as described below.  In addition, to the extent we have cashavailable and it is permitted by the indenture agreement, we may pay dividendsto our parent companies for uses such as acquisitions, debt repayments anddividends.  We believe that cash providedby operating activities and cash on hand will be adequate to meet our cashrequirements for the next 12 months.

 

We arehighly leveraged. At January 1, 2005, we had $195.7 million of long-term debtrepresented by the Senior Secured Notes. TheSenior Secured Notes mature on March 15, 2011, with interest payable semi-annuallyon March 15 and September 15. Due to borrowing restrictions under theindenture governing the Senior Secured Notes, our ability to obtain additionaldebt financing is significantly limited. The Senior Secured Notes require us tooffer to repurchase a portion of the notes at 100 percent of the principalamount, plus accrued and unpaid interest thereon to the date of purchase, with50 percent of our “excess cash flow”, as defined in the indentureagreement, when the ratio of our net indebtedness to consolidated EBITDA isabove 3.75 to 1.0 and the cumulative unpaid excess cash flow offer amountexceeds $10.0 million. For a more detailed description of the material terms ofthe Senior Secured Notes, see Note 3 to our consolidated financial statementsincluded elsewhere in this report on Form 10-K. 

 

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 The following table reflects our futurecontractual cash obligations as of January 1, 2005 (dollars in thousands).

 
| ** **                         | ** ** | ** ** | ** ** | **Payments Due by Fiscal Year** | ** ** |
|------------------------------------|------------|------------|------------|---------------------------------|------------|
| **Contractual Cash Obligations**   | ** ** | **Total**  | ** ** | **2005**                        | ** ** | **2006-2007** | ** ** | **2008-2009** | ** ** | **After 2009** | ** ** |
| ** **                         | ** ** | ** ** | ** ** | ** **                      | ** ** | **(Dollars in thousands)** | ** ** | ** ** | ** ** |
|                               |       |       |       |                            |       |   |   |   |   |   |   |
| Senior Secured Notes               |       | $          | 195,747    |                            | $          | — |   | $ | — |   | $ | — |   | $ | 195,747 |   |
| Interest-Senior Secured Notes      |       | 133,198    |       | 20,492                          |       | 40,984 |   | 40,984 |   | 30,738 |   |
| Capital lease obligations          |       | 705        |       | 85                              |       | 170 |   | 170 |   | 280 |   |
| Operating leases                   |       | 9,006      |       | 1,437                           |       | 2,886 |   | 2,747 |   | 1,936 |   |
| Total Contractual Cash Obligations |       | $          | 338,656    |                            | $          | 22,014 |   | $ | 44,040 |   | $ | 43,901 |   | $ | 228,701 |   |

 

**Inflation**

 

The impact of inflation on our business has not beensignificant in recent years.  Some of ouremployees are paid hourly wages at the Federal minimum wage level.  Minimum wage increases will negatively impactour payroll costs in the short term, but management believes such impact can beoffset in the long term through lower staffing of operations and, if necessary,through product price increases.

 

**Seasonality**

** **

Our sales and contribution from franchisees’ store operations is highlyseasonal, but our various brands experience counteracting seasonal effects. Ourcookie and pretzel stores, primarily located in malls, tend to mirror customertraffic flow trends in malls, which increasessignificantly during the fourth quarter, primarily between Thanksgiving and theend of the calendar year. Holiday gift purchases also are a significant factorin increased sales in the fourth quarter. However, TCBY stores and productsexperience their strongest sales periods during the warmer months from late Spring through early Fall. Franchising segment revenues for each quarter as a percentage of totalfranchising segment revenues for the fiscal year ended January 1, 2005 were23.3 percent for the first quarter, 27.2 percent of the second quarter, 25.2percent in the third quarter and 24.3 percent for the fourth quarter.

 

Our sales andcontribution from our gifts segment is highly seasonal primarily due to holidaygift purchases that increase sales in the fourth quarter. Sales and segmentcontribution in the fourth quarter of 2004 were $13.0million and $3.1 million, respectively, which represents 50.3 percent and 59.6percent, respectively, of total sales and contribution of the gifts segment forthe year ended January 1, 2005.

 

**Critical Accounting Policies**

** **

 The preparation offinancial statements requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities, disclosure of contingentassets and liabilities and the reported amounts of revenues and expenses in ourconsolidated financial statements. Management has reviewed with our AuditCommittee the accounting policies that it uses to prepare our consolidatedfinancial statements and believes that the following policies are the mostimportant to the portrayal of our financial condition and the results of ouroperations while requiring the use of judgments and estimates about the effectsof matters that are inherently uncertain.

 

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

 

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 On an annual basis, we complete an evaluationof goodwill associated with our various reporting units. To the extent that thefair value associated with goodwill is determined to be less than the recordedvalue, we write down the value of the related goodwill. The estimated fairvalue of goodwill is affected by, among other things, our business plan for thefuture, estimated results of future operations and the comparable companiesthat are used to estimate the fair value of our goodwill. Changes in thebusiness plan or operating results that are different than the projections usedto develop the valuation of goodwill have an impact on the valuation of thegoodwill.

 

In conducting our impairment analyses, we perform analysesand tests of our goodwill with respect to our reporting units. The test methodsemployed involve assumptions concerning useful lives of intangible assets,interest and discount rates, projections and other assumptions of futurebusiness conditions. The assumptions employed are based on management’sjudgment using internal and external data.

 

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

 

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

 

*RevenueRecognition*.  We recognizerevenues from our initial franchising fees and licensing and other fees whenall material services or conditions relating to the revenues have beensubstantially performed or satisfied, which is generally upon the opening of astore. 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 product formulation fees and allowances from suppliersbased on product sales to franchisees. We recognize these fees and allowancesupon shipment of product to our distributors or franchisees.

 

# **Recent Accounting Pronouncements**

 

# **InDecember 2004, the FASB issued SFAS No. 123 (revised 2004) (“SFAS 123R”), “Share-BasedPayment,” which is a revision of SFAS No. 123 (“SFAS 123”), “Accounting forStock-Based Compensation.” SFAS No. 123R supersedes Accounting Principles Board(“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and amendsSFAS No. 95, “Statement of Cash Flows.” Generally, the approach in SFAS 123R issimilar to the approach described in SFAS 123. However, SFAS 123R requires allshare-based payments to employees, including grants of employee stock options,to be recognized in the income statement based on their fair values. Pro formadisclosure is no longer an alternative. The new standard will be effective forthe Company beginning July 3, 2005. The adoption of SFAS 123R is not expectedto have a material effect on our consolidated financial statements.**

 

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# **Item 7A.**  Quantitative and Qualitative Disclosuresabout Market Risk

 

Our major market risk exposure is changing interest rates. We do nothedge against changes in interest rates.

 

The table below provides information about our financial instrumentsthat are sensitive to changes in interest rates in the event of refinancingincluding principal cash flows and related weighted average interest rates byyear of expected maturity dates, based on the amount of indebtedness at January1, 2005.

 
| ** **                                              | ** ** | **2005**                   | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **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 and Supplementary Data

 

Ourconsolidated financial statements and supplementary data are listed in theindex appearing under Item 15A.

 

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

 

None.

 

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

 

The Company’s management, with the participation ofthe Company’s Chief Executive Officer and Chief Financial Officer, evaluatedthe effectiveness of the Company’s disclosure controls and procedures as of theend of the period covered by this report. Based on that evaluation, the Chief Executive Officer and ChiefFinancial Officer concluded that the Company’s disclosure controls andprocedures, as of the end of the period covered by this report, are functioningeffectively to provide reasonable assurance that the information required to bedisclosed by the Company in reports filed under the Securities Exchange Act of1934 is recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms. A controls system, no matter how well designed and operated, cannotprovide absolute assurance that the objectives of the controls system are met,and no evaluation of controls can provide absolute assurance that all controlissues and instances of fraud, if any, within a company have been detected.

 

Therehas been no change in our internal control over financial reporting (as definedin Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934)that occurred during our fiscal quarter ended January 1, 2005, that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

# **Item 9B.** Other Information

 

None.

 

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**PART III**

** **

# **Item 10.**  Directors and Executive Officers of theRegistrant

 

**Managers and Executive Officers**

 

The following table sets forth certain informationregarding the managers and executive officers of the Company as of March 1,2005.  Each of the executive officers andmanagers serve for a one-year term and until their successors are elected and qualified.

 
| **Name**            | ** ** | **Age** | ** ** | **Position**                                                     |
|---------------------|------------|---------|------------|------------------------------------------------------------------|
| Stephen Russo       |       | 55      |       | Manager, President and  Chief Executive Officer                  |
| Sandra M. Buffa     |       | 52      |       | Executive Vice President,  Chief Financial Officer and Treasurer |
| Dara Dejbakhsh      |       | 47      |       | Executive Vice President of  Operations and Development          |
| John Lauck          |       | 49      |       | Executive Vice President of  Marketing                           |
| Michael R. Ward     |       | 46      |       | Executive Vice President,  General Counsel and Secretary         |
| Alexander Coleman   |       | 38      |       | Manager                                                          |
| John D. Collins     |       | 66      |       | Manager                                                          |
| Richard M. Ferry    |       | 67      |       | Manager                                                          |
| George N. Fugelsang |       | 64      |       | Manager                                                          |
| Walker Lewis        |       | 60      |       | Manager                                                          |
| Peter W. Mullin     |       | 64      |       | Manager                                                          |
| Christopher Wright  |       | 47      |       | Manager                                                          |

 

***Mr. Russo*** has been President, Chief Executive Officerand Manager of the Company since March 2004, and has been President, ChiefExecutive Officer and a Director of MFOC, MFH and MFC since May 2003. FromJuly 1997 to April 2003, Mr. Russo was Retail Brands Operations Officerfor Allied Domecq QSR, where he was responsible for 10,700 units and totalsystem wide sales of $4.2 billion for brands such as Dunkin’ Donuts,Baskin Robbins and Togo’s.  From January1978 to June 1997, he served in various capacities for Dunkin’ Donuts.  He also has experience serving as Presidentof Mister Donut and a multi unit supervisor of a McDonald’s licensee.

 

***Ms. Buffa*** has been Executive Vice President, ChiefFinancial Officer and Treasurer of the Company, MFOC, MFH and  MFC since June 2004. SinceDecember 2004, she has been a Director of MFOC. From March 2004 to June 2004, Ms. Buffa was Senior VicePresident, Chief Financial Officer and Treasurer of the Company. She was SeniorVice President and Chief Financial Officer of MFOC from April 2001 toJune 2004 and of MFC from its inception in September 2001 toJune 2004. She has been Treasurer of MFC and of MFOC sinceDecember 19, 2003. She has significant retail experience and has served asChief Financial Officer for several growing entities involved with mergers andacquisitions, financings and divestitures. Immediately before joining MFC,Ms. Buffa spent a year on sabbatical. Prior to that, Ms. Buffa wasPresident of Crabtree & Evelyn, Ltd. from November 1998 toNovember 1999, and its Chief Financial Officer and a Director fromMarch 1998 to November 1998.

 

***Mr. Dejbakhsh*** has been Executive Vice President ofOperations & Development of the Company since June 2004. SinceDecember 2004, he has been a Director of MFOC. He served as Vice President of Operations of the Company fromMarch 2004 to June 2004, and as Vice President of Operations of MFOCfrom January 2004 to June 2004. Immediately before joining theCompany, Mr. Dejbakhsh spent six months on sabbatical. FromJanuary 1996 to June 2003, Mr. Dejbakhsh was Area Vice Presidentcovering operations, development and field marketing for the western U.S., Canada,Asia Pacific, and Australia for Allied Domecq, QSR in Randolph, Massachusetts.

 

***Mr. Lauck*** has been Executive Vice President ofMarketing of the Company and MFOC 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. Between November 1998and January 2000 Mr. Lauck was the Senior Vice President and ChiefMarketing Officer for Footaction and from November 1997 toNovember 1998 was the Vice President of Corporate Development forBlockbuster Video. Prior to Blockbuster, Mr. Lauck served in variousmarketing positions at Pizza Hut and General Mills. Mr. Lauck is adirector of Shadewell Grove Holdings, LLC, which is a parent of Shadewell GroveIP, LLC, a licensee of the Company.

 

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***Mr. Ward*** has been Executive Vice President, GeneralCounsel and Secretary of the Company, MFOC, MFH and MFC since June 2004.Since December 2004, he has been a Director of MFOC.  From March 2004 to June 2004, Mr.Ward was Senior Vice President, General Counsel and Secretary of the Company.Mr. Ward was Senior Vice President, General Counsel and Secretary of MFOC fromJune 2000 to June 2004 and of MFC from its inception inSeptember 2001 to June 2004. Mr. Ward was Vice President of Administrationand the Legal Department of MFOC from September 1996 to May 2000, andSecretary of MFOC since April 1999. Between 1991 and 1996, Mr. Ward’sresponsibilities were overseeing the Legal Department and Human ResourcesDepartment for Mrs. Fields, Inc., a predecessor to MFOC.  He currently serves as a member of the Boardof Directors of Prime Alliance Bank.  Heis admitted to practice law in the State of Utah.

 

***Mr. Coleman*** has been a Manager of the Company and aDirector of MFH and MFC since May 2004. From May 2004 to December 2004,Mr. Coleman was a Director of MFOC.  Since October 2004, Mr. Coleman has served as Managing Partner of AnnexCapital Management LLC, a private equity firm specializing in the purchase ofdirect investments in the secondary market. Prior to joining Annex Capital, Mr. Coleman served as ManagingInvestment Partner of Dresdner Kleinwort Capital from 1996 to 2004, and heldvarious positions at Citibank, NA and its affiliates, including CiticorpVenture Capital, from 1989 to 1995.  Mr.Coleman serves as a Director of Remy, Inc., Gardenburger, Inc. and KMC Telecom,Inc.

 

***Mr. Collins***has been a Manager of the Company and aDirector of MFH and MFC since December 2004. Since July 1999, Mr. Collins has worked as a consultant to non-publiccompanies.  From June 1999 to June 2000,Mr. Collins was a consultant to KPMG LLP. Prior to June 1999, he was a partner for KPMG LLP.  He currently serves as a member of the Boardof Directors of CCC Information Services Group, Inc. and 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 of the Company sinceMarch 2004, and has been a Director of MFH since September 1996 and of MFCsince its inception in September 2001. From September 1996 to December 2004, Mr. Ferry was a Director ofMFOC.  Mr. Ferry is Founder Chairmanof Korn/Ferry International, an international executive search firm, where heserved as Chairman from May 1997 to July 2001 and Chairman and ChiefExecutive Officer from May 1991 to May 1997. Mr. Ferry serves onthe Boards of Directors of Avery Dennison, Dole Food Company, Castle &Cooke, Inc. and Pacific Life Insurance Company. Mr. Ferry is an investorin both Capricorn II and Capricorn III.

 

***Mr. Fugelsang*** has been a Manager of the Company and aDirector of MFH and MFC since May 2004. From May 2004 to December 2004,Mr. Fugelsang was a Director of MFOC. From 1994 through 2001, Mr. Fugelsang was Chief Executive OfficerNorth America for the Dresdner Bank Group, based in New York City.Mr. Fugelsang serves as trustee and chairman of the finance committee atThunderbird, the Garvin School of International Management, and is also adirector of The American Institute for Contemporary German Studies at JohnsHopkins University. He is also a member of the international advisory board ofthe Monterey Institute of International Studies.

 

***Mr. Lewis*** has been a Manager of the Company sinceMarch 2004, and has been a Director of MFH since September 1996 and of MFCsince its inception in September 2001.From September 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 Owens Corning anddirector and Chairman of the Board of Directors of London Fog Industries andApplied Predictive Technologies.

 

***Mr. Mullin*** has been a Manager of the Company sinceMarch 2004, and has been a Director of MFH since September 1996 and of MFCsince its inception in September 2001. From September 2001 to December2004, Mr. Mullin was a Director of MFOC. Mr. Mullin founded Mullin Consulting, Inc., an executivecompensation, benefit planning and corporate insurance consulting firm, in 1969and serves as its Chairman. Mr. Mullin is a Director of Avery DennisonCorporation.  Mr. Mullin is aninvestor in Capricorn II and Capricorn III.

 

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***Mr. Wright*** has been a Manager of the Company sinceMarch 2004, and has been a Director of MFH and MFC since February 2002.From February 2002 until December 2004, Mr. Wright was a Director of MFOC.  Until June 2003, he served as Chairmanof various investment funds within Allianz Private Equity to whichMr. Wright was Senior Advisor. From 1996 to June 2002, he served asCEO of Dresdner Kleinwort Capital, LLC, the privateequity business of Dresdner Bank Group and from June 2002 toJune 2003 as Managing Director of Dresdner Kleinwort Wasserstein LLC. Heis director and serves on the corporate governance committee of the Board ofDirectors of Roper Industries, Inc., and is a director, compensationcommittee member and Chairman of the audit committee of the Board of Directorsof Genaissance Pharmaceuticals, Inc. Mr. Wright is also a director andadvisory board member of several other privately-held companies in the UnitedStates and Europe.  Mr. Wright alsohas served on the Limited Partner Advisory Committee of Capricorn III.

 

**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 the SecuritiesExchange Act of 1934.

 

**Code of Ethics**

 

The Company has adopted a Code of Ethical Conduct(the “Code”) which applies to all directors, officers and employees of theCompany, MFOC and its subsidiaries.  TheCode requires that all of the our employees actethically when conducting business.  TheCode provides a summary of the conduct required from all employees of theCompany, and is a source for guidance, accountability for and enforcement ofits provisions.  A complete copy of theCode has been posted on our website at www.mrsfields.com, and is included as anexhibit to this report.  We will satisfyany disclosure requirements under Item 5.05 of Form 8-K regarding an amendmentto, or waiver from, any provision of the Code with respect to our principalexecutive officer, principal financial officer, principal accounting officerand any persons performing similar functions by disclosing the nature of suchamendments 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 and the four other most highlycompensated executive officers of the Company and its subsidiaries other thanthe CEO who were serving as executive officers at the end of the last completedfiscal year (collectively, the “Named Executive Officers”).

 

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 The information set forth in the table reflectscompensation earned by such individuals for services with MFC and itssubsidiaries during the covered periods.

 

### **SUMMARY COMPENSATION TABLE**

 
| ** **                            | ** ** | ** **        | ** ** | ** **               | ** ** | ** **                           | ** ** | **Long-Term  Compensation**        | ** ** | ** **                                      | ** ** |
|---------------------------------------|------------|-------------------|------------|--------------------------|------------|--------------------------------------|------------|------------------------------------|------------|-------------------------------------------------|------------|
| **Name and Principal  Position**      | ** ** | **Year**          | ** ** | **Annual  Compensation** | ** ** | **Other  Annual  Compensation  ($)** | ** ** | **Restricted  Stock  Awards  ($)** | ** ** | **Securities  Underlying  Options/  SARS  ($)** | ** ** | **All Other  Compensation (5)  ($)** | ** ** |
| **Salary  ($)**                       | ** ** | **Bonus(4)  ($)** |
| **Stephen Russo(1)**                  |       | 2004              |       | 430,000                  |       | —                               |       | —                             |       | —                                          |       | — |   | 28,601 |   |
| President and Chief                   |       | 2003              |       | 270,263                  |       | 162,158                              |       | —                             |       | —                                          |       | — |   | 10,000 |   |
| Executive Officer                     |       | 2002              |       | —                   |       | —                               |       | —                             |       | —                                          |       | — |   | — |   |
|                                  |       |              |       |                     |       |                                 |       |                               |       |                                            |       |   |   |   |   |
| **Sandra M. Buffa**                   |       | 2004              |       | 307,083                  |       | —                               |       | —                             |       | —                                          |       | — |   | 12,508 |   |
| Executive Vice President,             |       | 2003              |       | 275,000                  |       | 225,000                              |       | —                             |       | —                                          |       | — |   | — |   |
| Chief Financial Officer and Treasurer |       | 2002              |       | 250,000                  |       | —                               |       | —                             |       | —                                          |       | — |   | 16,533 |   |
|                                  |       |              |       |                     |       |                                 |       |                               |       |                                            |       |   |   |   |   |
| **Michael R. Ward**                   |       | 2004              |       | 270,667                  |       | —                               |       | —                             |       | —                                          |       | — |   | 120,546 |   |
| Executive Vice President,             |       | 2003              |       | 260,192                  |       | 199,500                              |       | —                             |       | —                                          |       | — |   | 10,192 |   |
| General Counsel and Secretary         |       | 2002              |       | 225,000                  |       | —                               |       | —                             |       | —                                          |       | — |   | 13,127 |   |
|                                  |       |              |       |                     |       |                                 |       |                               |       |                                            |       |   |   |   |   |
| **Dara Dejbakhsh(2)**                 |       | 2004              |       | 252,848                  |       | —                               |       | —                             |       | —                                          |       | — |   | 109,060 |   |
| Executive Vice President              |       | 2003              |       | —                   |       | —                               |       | —                             |       | —                                          |       | — |   | — |   |
| of Operations and Development         |       | 2002              |       | —                   |       | —                               |       | —                             |       | —                                          |       | — |   | — |   |
|                                  |       |              |       |                     |       |                                 |       |                               |       |                                            |       |   |   |   |   |
| **John Lauck(3)**                     |       | 2004              |       | 253,312                  |       | —                               |       | —                             |       | —                                          |       | — |   | 122,449 |   |
| Executive Vice President              |       | 2003              |       | —                   |       | —                               |       | —                             |       | —                                          |       | — |   | — |   |
| of Marketing                          |       | 2002              |       | —                   |       | —                               |       | —                             |       | —                                          |       | — |   | — |   |

 

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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 withMFOC in January 2004, and with the Company at its inception in March 2004.

 

(3)                                  Mr. Lauck began his employment with theCompany in April 2004.

 

(4)                                  Bonus amounts reported are amounts earnedduring the applicable year, although they may have been paid in subsequentperiods. Bonus amounts do not include amounts earned for 2004 because suchamounts are not currently calculable through the latest practicable date.  Further, bonus amounts do not includeperformance units granted under MFC’s Phantom Stock Plan.

 

(5)                                  Amounts represent (i) matchingcontributions to the Mrs. Fields’ Original Cookies, Inc. 401(k)Retirement Savings Plan of $8,601 for Mr. Russo for fiscal year 2004 (therewere no matching contributions for any plan participant during 2003); $12,508and $9,013 for Ms. Buffa for fiscal years 2004 and 2002, respectively;$6,625 and $8,800 for Mr. Ward for fiscal years 2004 and 2002,respectively; and $1,875 for Mr. Dejbakhsh for fiscal year 2004;(ii) reimbursement of relocation expenses of $100,935 for Mr. Dejbakhshand $122,449 for Mr. Lauck for fiscal year 2004; (iii) taxable fringebenefit of $7,520 for Ms. Buffa for fiscal 2002; (iv) housing allowance of$20,000 and $10,000 for Mr. Russo for fiscal years 2004 and 2003, respectively;(v) car allowance of $6,250 for Mr. Dejbakhsh for fiscal year 2004,(vi) cash compensation in lieu of paid time off of $5,250, $10,192 and$4,327 for Mr. Ward for fiscal 2004, 2003 and 2002, respectively; and(vii) payments for voluntary termination of vested in-the-money options of$108,671 for Mr. Ward.

 

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**AggregatedOption/SAR Exercises and Fiscal Year-End Option/SAR Values**

** **

Effective as of September 1, 2004, the Board ofDirectors of MFC terminated the Employee Stock Option Plan of Mrs. Fields’Companies, Inc. (the “Prior Plan”). Although vested options under the Prior Plan were unaffected by thetermination of the Prior Plan, most Prior Plan participants elected tovoluntarily terminate all of their rights under the Prior Plan, including anyrights to vested options, in consideration for the opportunity to participatein the Phantom Stock Plan of Mrs. Fields’ Companies, Inc. (the “Phantom Plan”).  None of the Named Executive Officers held anyexercisable or unexercisable options or SARs under the Prior Plan or otherwiseat January 1, 2005.  One Named ExecutiveOfficer, Michael Ward, received a payment of $108,671 in exchange for hisvoluntary termination of fully vested options to purchase 24,642 shares of MFC’scommon stock, which options were in-the-money with an exercise price of $10.00per share, as compared with the stock value of $14.41 per share, as determinedby management, at the time the options were terminated.  This payment is included in All OtherCompensation in the Summary Compensation Table set forth previously.

 

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

 

Effective as of May 23, 2004, the Board of Directorsof MFC approved adoption of the Phantom Plan. The final form of the Phantom Plan as approved by the Board was attachedas an exhibit to the Company’s Form 10-Q for its third quarter ended October 2,2004.    The purpose of the Phantom Plan is to providelong-term incentives to certain key employees of the MFC or its subsidiaries (“Participants”)as determined by the Compensation Committee of the 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 receive Performance Units inamounts recommended by the CEO and determined by the Committee.  Upon the completion of a Triggering Event,Participants receive payments reflecting the number and value of theirPerformance Units at the time of the completion of the Event. Payments toParticipants may be made in cash or through issuance of equity securities ofMFC, as determined by the Committee.  Thevalue of a Performance Unit at the completion of a Triggering Event is thevalue of one share of Common Stock of MFC as determined in good faith by theBoard of Directors. If the Board determines the need, it may seek the advice ofan independent advisor.

 

Maximum number ofPerformance Units that may be granted under the Plan is one million.  Subdivisions, splits, or combinationsinvolving MFC’s Common Stock will proportionately affect the number ofPerformance Units that have been awarded under the Plan.  In May 2004, the Committee approved the grantof up to 392,418 Performance Units allocated among Participants as determinedby the Committee.  Future grants, if any,shall also be as determined by the Committee. Currently, 349,250 Performance Units have been granted to Participants.  

 

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 The followingtable sets forth information regarding the Phantom Plan awards granted to NamedExecutive Officers:

 

**LONG-TERMINCENTIVE PLANS—AWARDS IN FISCAL YEAR 2004**

 
| ** **                                                       | ** ** | ** **               | ** ** | ** **                                                    | ** ** | **Estimated Future Payouts Under Non-  Stock Price-Based Plans (2)** | ** ** |
|------------------------------------------------------------------|------------|--------------------------|------------|---------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **(a)**                                                          | ** ** | **(b)**                  | ** ** | **(c)**                                                       | ** ** | **(d)**                                                              | ** ** | **(e)** | ** ** | **(f)** | ** ** |
| **Name and Principal Position**                                  | ** ** | **Number of  Units (#)** | ** ** | **Performances or Other  Period Until Maturation  or Payout** | ** ** | **Threshold  ($ or #)**                                         | ** ** | **Target  ($ or #)** | ** ** | **Maximum  ($ or #)** | ** ** |
| **Stephen Russo**                                                |       | 137,346                  |       | Upon Triggering Event (1)                                     |       | —                                                               |       | — |   | — |   |
| President and Chief Executive Officer                            |       |                     |       |                                                          |       |                                                                 |       |   |   |   |   |
| **Sandra M. Buffa**                                              |       | 39,242                   |       | Upon Triggering Event (1)                                     |       | —                                                               |       | — |   | — |   |
| Executive Vice President, Chief Financial  Officer and Treasurer |       |                     |       |                                                          |       |                                                                 |       |   |   |   |   |
| **Michael R. Ward**                                              |       | 39,242                   |       | Upon Triggering Event (1)                                     |       | —                                                               |       | — |   | — |   |
| Executive Vice President, General Counsel  and Secretary         |       |                     |       |                                                          |       |                                                                 |       |   |   |   |   |
| **Dara Dejbakhsh**                                               |       | 39,242                   |       | Upon Triggering Event (1)                                     |       | —                                                               |       | — |   | — |   |
| Executive Vice President of Operations and  Development          |       |                     |       |                                                          |       |                                                                 |       |   |   |   |   |
| **John Lauck**                                                   |       | 39,242                   |       | Upon Triggering Event (1)                                     |       | —                                                               |       | — |   | — |   |
| Executive Vice President of Marketing                            |       |                     |       |                                                          |       |                                                                 |       |   |   |   |   |

 

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(1)A “Triggering Event” is the first to occur of:  (i) a sale of substantially all of the assetsof MFC; (ii) a public offering of MFC’s Common Stock where MFC receivesproceeds, net of any underwriter’s discounts and expenses, of not less than $50million; or (iii)  any stock sale, mergeror other transaction where the owners of Common Stock immediately before thetransaction do not own in excess of 50 percent of the common stock of theentity surviving such sale, merger or other transaction.

 

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

 

**Compensation of Managers**

 

TheBoard of Managers of the Company meets regularly on a quarterly basis and moreoften as required. Board members, other than officers of the Company, arecompensated for services rendered annually in the form of a payment of $15,000in cash and the grant of options to purchase common stock of MFC under the MFC’sDirector Stock Option Plan, as more fully described immediately below. Membersof the Audit Committee and Compensation Committee of the Board of Managers ofthe Company also receive the following compensation for their service on suchcommittees:  (a) the chairperson of eachcommittee receives an annual cash retainer fee of $5,000; and (b) each memberwho does not serve as chair receives a cash fee of $750 for each committeemeeting that they attend.

 

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**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.

 

*ExecutiveCommittee.*  The Executive Committee is composed ofMessrs. Russo (Chairperson), Ferry and Fugelsang.  The purpose of this committee is to act onbehalf of the entire Board of Managers between Board meetings.

 

*CompensationCommittee.*  The Compensation Committee is composed ofMessrs. Ferry (Chairperson), Lewis and Mullin. The purpose of this committee isto ensure that the Company has a broad plan of executive compensation that iscompetitive and motivating to the degree that it will attract, hold and inspireperformance of managerial and other key personnel of a quality and nature thatwill enhance the growth and profitability of the Company.

 

*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 and internal auditors.The committee also is responsible for ensuring that the independent auditorssubmit a formal written statement to the Company regarding relationships andservices which may affect the auditors’ objectivity and independence.

 

**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 StockOption Plan, a committee of the Board of MFC is authorized to administer thePlan and has the power, among other things, to grant awards of options forcommon stock of MFC to outside directors of MFC and its subsidiaries, includingthe Company. MFC’s Director Stock Option Plan provides for the issuance of timevested options, which vest 25.0 percent per year on the anniversaries ofthe dates on which they are granted and vest in full upon a change of controlof MFC or the Company. A total of 100,000 shares of common stock of MFC arereserved for issuance under MFC’s Director Stock Option Plan and as of March 1,2005 there were outstanding options providing for the issuance of up to 58,605of those shares. Common stock of MFC issued under the Director Stock OptionPlan is subject to customary 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, but it is expected that such changes will be implemented in thethird or fourth quarter of 2005.

 

**Employment Agreements**

** **

MFC’s Board of Directors named Stephen Russo as thenew President and CEO of MFC and its subsidiaries effective May 15, 2003.Mr. Russo receives a base salary of $430,000 under his current employmentagreement. His employment agreement provides for a period of employment ofthree years from the date of the agreement, subject to termination provisionsand to automatic extension of the agreement. The employment agreement permits Mr. Russoto participate in any incentive compensation plan adopted by the Company, inits benefit 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, fringe benefits,payment of expenses and automobile allowances.

 

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 The other executives who have employmentagreements with the Company, and their current base salaries are:Sandra M. Buffa, Executive Vice President and Chief Financial Officer,$310,000; and Michael R. Ward, Executive Vice President, General Counseland Secretary, $273,000. Each employment agreement provides for a period ofemployment of two years from the date of the agreement, subject to terminationprovisions and to automatic extension of the agreement. Each employmentagreement permits the employee to participate in any incentive compensationplan adopted by the Company, in its benefit plans and in an equity-based planor 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 his or herthen 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 employmentagreements have customary provisions for vacation, fringe benefits, payment ofexpenses and automobile allowances.

 

**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, Mr. Hodges received 28 months of salary asseverance, which was paid semi-monthly through the end of 2004, and the balancebecame due in a lump sum in January 2005. All severance obligations havebeen paid to Mr. Hodges under the Separation Agreement.

 

Under terms of a stockholders’ agreement among MFC andits stockholders, there are put and call rights with respect to the commonshares of MFC, including common shares received upon exercise of options.Pursuant to the Separation Agreement, Mr. Hodges and MFC agreed that allof the shares of MFC’s common stock held by Mr. Hodges, which includes certainshares that Mr. Hodges put to the MFC and 100 additional shares of MFCcommon stock that are being deemed as called by MFC as set forth in theSeparation Agreement, were purchased by MFC for an aggregate purchase price of$449,479.

 

In addition, under the Separation Agreement,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 January 1, 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, and PeterMullin.  No disclosures concerning any memberof the Compensation Committee is required to be included in this Report underItem 402(j) of Regulation S-K.

 

40

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# **Item 12.**  Security Ownership of Certain BeneficialOwners 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, 2005, believed by us to be accurate based on informationprovided to us concerning the beneficial ownership of capital stock of  MFC by eachstockholder who is known by us to own beneficially in excess of five percent ofthe outstanding voting stock and by each director, the Named Executive Officersand all executive officers and directors as a group. The stockholders listedbelow are deemed beneficial owners of the common interests of the Company as aresult of their ownership of capital stock of MFC. Except as otherwiseindicated, all persons listed below have (1) sole voting power andinvestment power with respect to their shares, except to the extent that authorityis shared by spouses under applicable law, and (2) record and beneficialownership with respect to their shares. The shares and percentages describedbelow include shares of common stock which were outstanding or issuable within60 days upon the exercise of options outstanding as of March 1, 2005, andgive effect to the exercise of warrants issued by MFC. See “ExecutiveCompensation” and “Compensation of Managers.”

 

As of March 1, 2005, there were 37 recordholders of the MFC’s common stock.

 
| ** **                                                | ** ** | **Common Stock ****   | ** ** | **Preferred Stock *****  | ** ** | **Aggregate**         | ** ** |
|-----------------------------------------------------------|------------|-----------------------|------------|--------------------------|------------|-----------------------|------------|
| **Name of Beneficial Owner**                              | ** ** | **Number  of Shares** | ** ** | **Percentage  of Class** | ** ** | **Number  of Shares** | ** ** | **Percentage  of Class** | ** ** | **Voting  Power** | ** ** |
| Capricorn Investors II, L.P.(1)(8)                        |       | 3,245,211             |       | 50.93                    | %          | —                |       | — |   | 50.78 | % |
| Capricorn Investors III, L.P.(1)(8)                       |       | 2,055,794             |       | 32.27                    | %          | —                |       | — |   | 32.56 | % |
| Annex Holdings I LP-Delaware(2)                           |       | 355,242               |       | 5.58                     | %          | 4,995                 |       | 33.93 | % | 7.98 | % |
| Charlesbank Equity Fund II LP(3)                          |       | 164,774               |       | 2.59                     | %          | 5,000                 |       | 33.96 | % | 2.97 | % |
| Affiliates of Stewart Resnick(4)                          |       | 164,912               |       | 2.59                     | %          | 1,000                 |       | 6.79 | % | 2.66 | % |
| Alexander Coleman(5)                                      |       | —                |       | —                   |       | —                |       | — |   | — |   |
| John D. Collins(5)                                        |       | —                |       | —                   |       | —                |       | — |   | — |   |
| Richard M. Ferry(5)(6)(7)                                 |       | 18,148                |       |                     | *          | 50                    |       |   | * |   | * |
| George N. Fugelsang(5)                                    |       | —                |       | —                   |       | —                |       | — |   | — |   |
| Walker Lewis(5)(6)                                        |       | 15,274                |       |                     | *          | —                |       | — |   |   | * |
| Peter W. Mullin(5)(6)(7)                                  |       | 24,294                |       |                     | *          | 163                   |       |   | * |   | * |
| Christopher Wright(5)(6)                                  |       | 759                   |       |                     | *          | —                |       | — |   |   | * |
| Herbert Winokur, Jr.(5)(7)(8)                             |       | 6,729                 |       |                     | *          | 899                   |       | 6.10 | % |   | * |
| Stephen Russo(5)                                          |       | —                |       | —                   |       | —                |       | — |   | — |   |
| Sandra Buffa                                              |       | —                |       | —                   |       | —                |       | — |   | — |   |
| Dara Dejbakhsh                                            |       | —                |       | —                   |       | —                |       | — |   | — |   |
| John Lauck                                                |       | —                |       | —                   |       | —                |       | — |   | — |   |
| Michael Ward                                              |       | 299                   |       |                     | *          | 40                    |       |   | * |   | * |
|                                                      |       |                  |       |                     |       |                  |       |   |   |   |   |
| All executive officers and directors as a  group(5)(6)(7) |       | 65,503                |       | 1.03                     | %          | 1,152                 |       | 7.82 | % | 1.12 | % |

 

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*                                         Less than 1%.

 

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

 

***                           16.5% preferred stock, par value $.001 pershare, 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,1301 Avenue of the Americas, 39th Floor,New York, NY 10019.

 

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

 

41

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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, LosAngeles, CA 90064.

 

(5)                                  Mr. Russo, Mr. Coleman, Mr.Collins, Mr. Ferry, Mr. Fugelsang, Mr. Lewis, Mr. Mullinand Mr. Wright are directors of MFC and Managers of the Company.  Mr. Winokur is managing member of CapricornHoldings, LLC, the General Partner of Capricorn II, and Capricorn Holdings III,LLC, the General Partner of 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, 2005,as follows:  Mr. Ferry, 7,774shares; Mr. Lewis, 7,774 shares; Mr. Mullin, 7,774 shares;Mr. Wright, 759 shares; and all executive officers and directors as agroup, 24,081 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 and Capricorn III.  Capricorn II has 14,986 shares and CapricornIII has 562 shares currently exercisable or exercisable on or before May 1,2005.

 

**EquityCompensation Plan Information**

 

The following table sets forth information relating tocompensation plans under which equity securities of MFC are authorized forissuance, as of January 1, 2005.  Theequity compensation plans that have been approved by security holders are theMrs. Fields’ Companies, Inc. Employee Stock Option Plan and the Mrs. Fields’Companies, Inc. Director Stock Option Plan. 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 |       | 58,605                                                                                        |       | 15.30                                                                    |       | 41,395                                                                                     |       |
|                                                          |       |                                                                                          |       |                                                                     |       |                                                                                       |       |
| Total                                                         |       | 68,605                                                                                        |       | $                                                                        | 16.30      |                                                                                       | 41,395     |   |

 

In addition to the plans reflected in the table above,MFC has a Phantom Plan discussed elsewhere in this report on Form 10-K.  The Phantom Plan has not been approved bysecurity holders, and such approval is not required.  The value of awards underthe Phantom Plan reflect the value of MFC’s equity securities, butParticipants may receive cash payments in lieu of securities for PerformanceUnits that they hold upon certain triggering events.  The maximum number of Performance Units thatmay be granted under the Phantom Plan is one million units.  In May 2004, the committee administering thePlan approved the grant of up to 392,418 Performance Units, and as of January1, 2005, 349,250 Performance Units have been granted to Participants.

 

42

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# **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, thatstockholder must first offer the shares to MFC and other stockholders at thesame price and on substantially the same terms. MFC has a right of first refusalwith respect to such shares, with the stockholders having the right, if MFCdoes not buy all of the shares, to purchase such shares on a pro rata basis.

 

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 such stockholders’shares of common stock; or (ii) if the sale is structured as a mergerrequiring the consent of stockholders, vote such stockholders’ shares in favorof the sale. The stockholders’ agreement also gives certain rights to certainstockholders upon an initial public offering consummated by MFC, and includesother 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.

 

**Contribution Agreement**

** **

On March 16, 2004, we entered into a contributionagreement (and certain related ancillary agreements related to specific assetsor groups of assets) with MFOC and certain of its subsidiaries, pursuant towhich all of the assets related to their franchising, licensing, gifts andretail food sales business segments were transferred to us. MFOC retainedassets related to ownership or operation of its company ownedretail stores and specified liabilities. The contribution agreement (andthe ancillary agreements) provided that assets consisting of cash or cashequivalents were identified and contributed to us in a manner consistent withthe financial statements included herein and that any amounts received by aparty to the contribution agreement that, pursuant to its terms, is theproperty of another party, promptly shall be remitted to such other party. Allaccounts payable associated with the assets transferred to us were transitionedto us by MFOC by April 3, 2004 and we reimbursed MFOC for any paymentsmade in respect of invoices recorded for such accounts payable from the datethe assets were contributed to us through the date of such transition.

 

43

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**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 period from March 16, 2004 throughJanuary 1, 2005, MFOC reimbursed us $2.8 million for management servicesprovided under the management agreement. These reimbursement amounts are intended to reflect the actual costs ofproviding these services and are not intended to generate 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-frontfranchising fee for stores open as of the date of the franchise agreements inrecognition of the fact that the stores owned and operated by MFOC wereoperated prior to entering into the franchise agreements. These franchiseagreements are terminable by us in the event of non-payment of the franchisefees for a period of 10 days, followed by a 10-day opportunity to cure, orother material violation of the franchise agreements. As a result of theseagreements, MFOC is our largest franchisee, based on franchise revenues. Theaggregate amount of franchise royalties paid to us by MFOC during fiscal year2004 was $2.8 million.  The aggregateamount of franchise royalties that would have been required to be paid to us byMFOC, had these franchise agreements been in effect, would have been$4.8 million and $6.8 million, for each of fiscal years 2003 and2002, 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. The TCBY Supply Agreement requires that TCBY,through its distributor and franchisees, purchase at least 75 percent ofthe product 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 revenues related to theproduct manufactured by Americana of $11.7 million, $13.1 million and $28.0million for the years ended January 1, 2005, January 3, 2004 and December 28,2002, respectively.  In addition,Americana sells TCBY branded frozen specialty products and private label icecream through retail channels and pays TCBY a portion of the sales price underthe TCBY Supply Agreement. TCBY invoiced Americana $930,000 and $1.9 millionfor the fiscal years ended 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  $381,000 and$892,000 for the fiscal years ended January 1, 2005 and January 3, 2004,respectively, relating to the reimbursement of these costs.

 

44

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**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 period fromMarch 16, 2004 to January 1, 2005, MFOC paid rent of $220,000 to us.  Management expects that MFOC’s aggregaterental payments to us will be approximately $326,000 in fiscal year 2005. MFOC’sshare is expected to decrease over time with corresponding reduced operations.It is intended that the sublease will continue in effect until the expirationof all store leases for which MFOC is the lessee, following which the MFOCsublease will be terminated and we would thereafter be responsible for allrental 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 whooperate stores previously owned by MFOC on which MFOC remains as the tenant. Wedo not charge MFOC separately for this service, but certain costs associatedwith our performance 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.  For the period from March 16, 2004 to January1, 2005, we paid MFC $925,000 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 theperiod from March 16, 2004 to January 1, 2005, we paid MFOC $1.9 million forour share of employee benefit costs.

 

**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 years ended January 1, 2005, January 3, 2004 and December 28, 2002,we paid recruiting fees to Korn/Ferry International of $132,000, $362,000 and$64,000, respectively.

 

**Applied Predictive Technologies**

** **

We have periodically engaged Applied PredictiveTechnologies to evaluate the economics and demographic trends of certain malland retail site locations for which Walker Lewis, one of the members of ourboard of managers, is Chairman of the Board. For the years ended January 3,2004 and December 28, 2002, we paid Applied Predictive Technologies$68,000 and $161,000, respectively. There were no amounts paid to APT in fiscal 2004.

 

45

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**Shadewell Grove Holdings, LLC and Shadewell Grove IP,LLC**

 

Prior to 2004, we had entered into various trademark license agreementsand exclusively licensed certain recipes to Nonni’s Food Company, Inc. (“Nonni’s”), a manufacturer and distributor ofsoft baked cookies. In addition, we owned warrants to purchase 111,111 sharesof Nonni’s common stock at an exercise price of $10.775.   In March 2004, Nonni’s was acquired by athird party investor in a stock purchase (the “Nonni’s Purchase”). As part ofthe Nonni’s Purchase, in consideration for the sale of the warrants to purchase111,111 shares of Nonni’s common stock, we received an aggregate of $1.3million, of which approximately $200,000 is being held in an escrow accountpending post-closing adjustments related to the Nonni’s Purchase.  As a result, we recorded a gain on the saleof these warrants of $1.1 million in other income in our consolidated statementof operations during the year ended January 1, 2005.  Any proceeds received from the amount held inescrow will be recorded as other income when received. Immediately prior to theNonni’s Purchase, the Mrs. Fields product division of Nonni’s and itsrelated assets were contributed to a newly-formed entity, Shadewell GroveHoldings, LLC (“Shadewell Holdings”).  Wereceived from Shadewell Holdings our pro-rata share of preferred units inShadewell Holdings, approximately 4.1 percent, as if the warrants in Nonni’scommon stock had been exercised immediately prior the Nonni’s purchase.

 

InDecember 2004, we paid Shadewell Holdings approximately $102,000 for additionalpreferred units of Shadewell Holdings to maintain our pro-rata ownership ofShadewell Holdings.  This investment isrecorded in other assets in our consolidated balance sheet as of January 1,2005. We have appointed John Lauck, one of our executive officers, to representus as a director of Shadewell Holdings.

 

ShadewellGrove IP, LLC (“Shadewell”), a wholly-owned subsidiary of Shadewell Holdings, haslicenses to develop, manufacture and distribute ready-to-eat shelf stablecookie products utilizing the Mrs. Fields trademarks, service marks and tradenames through retail distribution channels and designated food servicedistribution channels. Shadewell also has a license to market and distributehigh quality, pre-packaged chocolate chips utilizing the Mrs. Fieldstrademarks, service marks and trade names through designated retail distributionchannels. Prior to December 24, 2004, Shadewell had a license agreement tomarket and distribute high quality, frozen cookie dough products utilizing theMrs. Fields trademarks, service marks and trade names to the food away fromhome industry through designated food service distribution channels. For theyears ended January 1, 2005, January 3, 2004 and December 28, 2002, weearned royalty and licensing revenues associated with the licensing and recipesales agreements of $3.1 million, $3.5 million and $3.8 million,respectively.

 

OnDecember 24, 2004, we terminated the license agreement with Shadewell to marketand distribute high quality, frozen cookie dough products utilizing the Mrs.Fields trademarks, service marks and trade names to the food away from homeindustry through designated food service distribution channels.  Among other reasons, we pursued thetermination of this license to better align our interests with those of ourfranchisees.  We paid Shadewell atermination fee of $1.1 million and in return received from Shadewell anindemnification and release of any and all claims arising from the licenseagreement.  The termination fee wasrecorded in licensing expenses in our consolidated statement of operations forthe year ended January 1, 2005.

 

**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 January 1, 2005, our ratio of Net Indebtedness to ConsolidatedEBITDA was approximately 5.15:1.0.

 

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**Agreement with Former CEO**

** **

As more fully described under “Certain SeveranceObligations with Past Management,” pursuant to the terms of a SeparationAgreement, dated August 6, 2003, by and among MFC, MFOC and Larry A.Hodges, and a Severance Assumption Agreement, dated March 16, 2004, by andamong Mr. Hodges, MFC, MFOC and the Company, Mr. Hodges has receivedcertain payments from us and may receive additional payments from MFC.   In addition, Mr. Hodges holds shares ofpreferred stock of MFC.

 

**Expense Reimbursement Agreement**

** **

On March 16, 2004, we entered into an expensereimbursement agreement pursuant to which we agreed to pay all of the expensesof each of Capricorn II, Capricorn III, MFC and all of MFC’s subsidiaries,including our expenses, incurred in connection with our offering of the SeniorSecured Notes, the formation of us and our subsidiaries, and all relatedmatters.

 

**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 and Services

# ** **

KPMG LLP served as ourindependent accountants for the fiscal years ended January 1, 2005 and January1, 2004. During the fiscal years endedJanuary 1, 2005 and January 3, 2004, fees for services provided by KPMG LLPwere as follows (in thousands):

 
| ** **         | ** ** | **January 1,  2005** | ** ** | **January 3,  2004** | ** ** |
|--------------------|------------|----------------------|------------|----------------------|------------|
| Audit fees         |       | $                    | 195        |                 | $          | 210 |   |
| Audit-related fees |       | 153                  |       | 604                  |       |
| Tax fees           |       | 58                   |       | 83                   |       |
| All other fees     |       | —               |       | —               |       |
| Total              |       | $                    | 406        |                 | $          | 897 |   |

 

The aggregate feesincluded in the audit fees category are fees for the respective fiscal yearsfor the audit of our annual consolidated financial statements and review of financialstatements and statutory and regulatory filings or engagements.  The aggregate fees for each of the othercategories are fees billed in the respective fiscal years.

 

**AuditFees**

 

Audit fees consist offees billed for professional services rendered in connection with the audit ofour consolidated financial statements included in our Annual Report on Form10-K and for the review of our consolidated financial statements included inour Quarterly Reports on Form 10-Q.

 

**Audit-RelatedFees**

 

Audit-relatedfees consist of fees billed in the fiscal years ended January 1, 2005 andJanuary 3, 2004 for professional services rendered in reviewing our debtoffering documents and our debt registration with the Securities and ExchangeCommission on Form S-4 totaling approximately $136,000 and $122,000,respectively.  Also included are feesbilled in the fiscal years ended January 1, 2005 and January 3, 2004 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 and $482,000,respectively.

 

**Tax Fees**

** **

Tax fees consist of feesbilled for professional services rendered in connection with the review of taxreturns and tax planning.

 

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**AuditCommittee Pre-Approval Policies and Procedures**

** **

The Audit Committeepre-approves the services provided to us by KPMG LLP in connection with theaudit of our annual consolidated financial statements, the review of ourquarterly financial statements and tax review and planning services. Ifmanagement proposes to engage KPMG LLP for other audit or permitted non-auditservices, the Audit Committee pre-approves these services on a case-by-case basis.The Audit Committee approved all the services provided to us by KPMG LLPdescribed above.

 

**PART IV**

** **

# **Item 15.**  Exhibits and Financial Statement Schedules

# ** **

(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 January 1, 2005 and January 3, 2004                                                                             |   |
| Consolidated  Statements of Operations and Comprehensive Income (Loss) for the years ended  January 1, 2005, January 3, 2004 and December 28, 2002 |   |
| Consolidated  Statements of Member’s Deficit for the years ended January 1, 2005, January  3, 2004 and December 28, 2002                      |   |
| Consolidated  Statements of Cash Flows for the years ended January 1, 2005, January 3, 2004  and December 28, 2002                                 |   |
| 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.

 

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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 Cookie Company  Franchising, LLC                                                                               |
|            |       |                                                                                                                                                      |
| 3.6*            |       | Limited Liability Agreement of Great American Cookie 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                                                                                                             |

 

49

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| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                              |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 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                                                                                                                                                                                            |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 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 11 1¤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 11 1¤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 11 1¤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 Cookie 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. |

 

50

----

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                         |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                                                                                                                                                                                    |
| 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.                                                                                                                                                                       |
|             |       |                                                                                                                                                                                                                                                                                                                    |
| 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 Cookie Company, LLC, and Great American Cookie Company Franchising,  LLC                                                                                                                                                              |
|             |       |                                                                                                                                                                                                                                                                                                                    |
| 10.6*            |       | International Trademark Assignment, dated March 16, 2004, between  Great American Cookie Company, LLC, and Great American Cookie 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                                                                                                                                                                   |

 

51

----

 
| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                                                                             |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                                                                                                                                                        |
| 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.                                                                                                                                                           |
|             |       |                                                                                                                                                                                                                                                                                        |
| 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 Cookie Company Franchise Agreement, dated as of March  16, 2004, by and between Great American Cookie 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.                                                                                                                                   |

 

52

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| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                                      |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                                                                                                                 |
| 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.                                                                                                             |
|             |       |                                                                                                                                                                                                                                                 |
| 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.                                                                                  |

 

53

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| **Exhibit  No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                   |
|------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                                                                                                                                                                                              |
| 10.57*           |       | Amended and Restated Employment Agreement, dated March 16, 2004, by  and between Sandra Buffa and Mrs. Fields Famous Brands, LLC                                                                                                                                                                                                  |
|             |       |                                                                                                                                                                                                                                                                                                                              |
| 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. |
|             |       |                                                                                                                                                                                                                                                                                                                              |
| 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                                                                                                                                                                                                           |
|             |       |                                                                                                                                                                                                                                                                                                                              |
| 12.1****         |       | Computation of ratio of earnings to fixed charges of Mrs. Fields  Famous Brands, LLC                                                                                                                                                                                                                                              |
|             |       |                                                                                                                                                                                                                                                                                                                              |
| 14.1****         |       | Code of Ethics of Mrs. Fields’ Original Cookies, Inc. and its  subsidiaries                                                                                                                                                                                                                                                  |
|             |       |                                                                                                                                                                                                                                                                                                                              |
| 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 correspondingexhibit 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 correspondingexhibit number to Amendment No. 1 to the Company’s Registration Statement onForm S-4 (No. 333-115046) filed with the Securities and Exchange Commission onJuly 2, 2004, and incorporated herein by reference.

 

***                           Included as an exhibit, with correspondingexhibit number to Amendment No. 2 to the Company’s Registration Statement onForm S-4 (No. 333-115046) filed with the Securities and Exchange Commission onJuly 12, 2004, and incorporated herein by reference.

 

****                    Filed herewith.

 

54

----

 

# **SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
| **MRS. FIELDS FAMOUS BRANDS, LLC**                    |     |
|-------------------------------------------------------|----------|
| ** **                                            |     |
|                                                  |     |
| /s/ Stephen Russo                                     |     | March 18, 2005 |   |
| *Stephen Russo, President and*                        | *Date*   |
| *Chief Executive Officer*                             | * * |
| * *                                              | * * |
| * *                                              | * * |
| /s/ Sandra M. Buffa                                   |     | March 18, 2005 |   |
| *Sandra M. Buffa, Executive Vice  President*          | *Date*   |
| *and* Chief Financial  Officer                        | * * |
| *(Chief Financial and Principal  Accounting Officer)* | * * |

###### * *

55

----

 

**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated.

 
| **Signature**                        | ** ** | **Title**                | ** **                          | **Date** |
|--------------------------------------|------------|--------------------------|-------------------------------------|----------|
|                                 |       |                     |                                |     |
|   /s/  Stephen Russo       |       |                     | President, Chief  Executive Officer |     | March 18, 2005 |
|   Stephen  Russo           |       | and Manager              |                                |     |
|                                 |       |                     |                                |     |
|   /s/  Sandra M. Buffa     |       |                     | Executive Vice  President and       |     | March 18, 2005 |
|   Sandra  M. Buffa         |       | Chief Financial  Officer |                                |     |
|                                 |       |                     |                                |     |
|   /s/  Alexander Coleman   |       |                     | Manager                             |     | March 18, 2005 |
|   Alexander  Coleman       |       |                     |                                |     |
|                                 |       |                     |                                |     |
|   /s/  John D. Collins     |       |                     | Manager                             |     | March 18, 2005 |
|   John  D. Collins         |       |                     |                                |     |
|                                 |       |                     |                                |     |
|   /s/  Richard M. Ferry    |       |                     | Manager                             |     | March 18, 2005 |
|   Richard  M. Ferry        |       |                     |                                |     |
|                                 |       |                     |                                |     |
|   /s/  George N. Fugelsang |       |                     | Manager                             |     | March 18, 2005 |
|   George  N. Fugelsang     |       |                     |                                |     |
|                                 |       |                     |                                |     |
|   /s/  Walker Lewis        |       |                     | Manager                             |     | March 18, 2005 |
|   Walker  Lewis            |       |                     |                                |     |
|                                 |       |                     |                                |     |
|   /s/  Peter W. Mullin     |       |                     | Manager                             |     | March 18, 2005 |
|   Peter  W. Mullin         |       |                     |                                |     |
|                                 |       |                     |                                |     |
|                                 |       |                     | Manager                             |     |   |
|   Christopher  Wright      |       |                     |                                |     |

 

56

----

 

**MRS. FIELDS FAMOUS BRANDS, LLC**

**SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS**

 
| **Description**                  | ** ** | **Balance at  beginning  of period** | ** ** | **Additions** | ** ** | **Deductions** | ** ** | **Balance at  end of  period** | ** ** |
|----------------------------------|------------|--------------------------------------|------------|---------------|------------|----------------|------------|--------------------------------|------------|
| Allowance for Doubtful Accounts: |       |                                 |       |          |       |           |       |                           |       |
| 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 |   |
| Year ended December 28, 2002     |       | $                                    | 2,490,000  |          | $          | 1,637,000      |       | $                              | 1,693,000  |   | $ | 2,434,000 |   |

 

S-1

----

 

**MRS. FIELDS FAMOUS BRANDS, LLC**

**INDEX TO CONSOLIDATED FINANCIALSTATEMENTS**

 
| Report  of Independent Registered Public Accounting Firm                                                                                           |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Consolidated Balance Sheets  as of January 1, 2005 and January 3, 2004                                                                             |   |
| Consolidated  Statements of Operations and Comprehensive Income (Loss) for the years ended  January 1, 2005, January 3, 2004 and December 28, 2002 |   |
| Consolidated  Statements of Member’s Deficit for the years ended January 1, 2005, January  3, 2004 and December 28, 2002                      |   |
| Consolidated  Statements of Cash Flows for the years ended January 1, 2005, January 3, 2004  and December 28, 2002                                 |   |
| Notes to  the Consolidated Financial Statements                                                                                                    |   |

 

F-1

----

 

## **Report of Independent Registered PublicAccounting Firm**

## ** **

TheBoard of Managers

Mrs. FieldsFamous Brands, LLC:

 

We have audited theaccompanying consolidated balance sheets of Mrs. Fields Famous Brands, LLC(see Note 1) as of January 1, 2005 and January 3, 2004, and the relatedconsolidated statements of operations and comprehensive income (loss), member’sdeficit and cash flows for the fiscal years ended January 1, 2005, January 3,2004 and December 28, 2002. In connection with our audits of the consolidatedfinancial statements, we also have audited financial statement scheduleII.  These consolidated financialstatements and financial statement schedule are the responsibility of theCompany’s management. Our responsibility is to express an opinion on theseconsolidated financial statements and financial statement schedule based on ouraudits.

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.

 

As described in Note 1 to the consolidated financial statements, theaccompanying consolidated financial statements prior to formation of theCompany on March 16, 2004 were prepared solely to present the assetscontributed and the liabilities assumed pursuant to the formation of theCompany through the combination of certain assets and liabilities of Mrs.Fields’ Original Cookies, Inc. and subsidiaries (MFOC) and all of the assetsand liabilities of TCBY Systems, LLC and subsidiaries, and are not intended tobe a complete historical presentation of all the assets and liabilities ofMFOC.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the consolidated financial positionof Mrs. Fields Famous Brands, LLC as of January 1, 2005 and January 3, 2004,and the consolidated results of operations and cash flows for the fiscal yearsended January 1, 2005, January 3, 2004 and December 28, 2002 in conformity withU.S. generally accepted accounting principles. Also in our opinion, the relatedfinancial statement schedule, when considered in relation to the basicconsolidated financial statements taken as a whole, presents fairly, in allmaterial respects, the information set forth therein.

 

As discussed in Note 2 to the consolidated financial statements, theCompany adopted the provisions of the Financial Accounting Standards Board’sStatement of Financial Accounting Standards No. 142, “Goodwill and OtherIntangible Assets,” as of December 30, 2001.

 

KPMGLLP

 

SaltLake City, Utah

# **March 15, 2005**

 

F-2

----

 

**MRS. FIELDS FAMOUS BRANDS, LLC**

# **Consolidated Balance Sheets**

# **(Dollars inthousands)**

 
| ** **                                                                                | ** ** | **January 1,  2005** | ** ** | **January 3,  2004** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ASSETS:                                                                                   |       |                 |       |                 |       |
| Cash and cash equivalents                                                                 |       | $                    | 19,859     |                 | $          | 1,300 |   |
| Receivables, net of allowance for doubtful  accounts of $1,295 and $1,948, respectively   |       | 8,039                |       | 9,070                |       |
| Amounts due from affiliates                                                               |       | 23                   |       | —               |       |
| Inventories                                                                               |       | 2,626                |       | 1,962                |       |
| Prepaid expenses and other                                                                |       | 1,200                |       | 1,122                |       |
| Deferred tax asset                                                                        |       | 1,120                |       | 1,535                |       |
|                                                                                      |       |                 |       |                 |       |
| Total current assets                                                                      |       | 32,867               |       | 14,989               |       |
|                                                                                      |       |                 |       |                 |       |
| Property and equipment, net                                                               |       | 3,486                |       | 3,174                |       |
| Goodwill, net                                                                             |       | 113,456              |       | 113,456              |       |
| Trademarks and other intangible assets, net                                               |       | 23,419               |       | 26,149               |       |
| Deferred loan costs, net of accumulated  amortization of $9,043 and $20,470, respectively |       | 7,885                |       | 4,222                |       |
| Other assets                                                                              |       | 668                  |       | 612                  |       |
|                                                                                      |       |                 |       |                 |       |
|                                                                                      |       | $                    | 181,781    |                 | $          | 162,602 |   |
|                                                                                      |       |                 |       |                 |       |
| LIABILITIES AND MEMBER’S DEFICIT:                                                    |       |                 |       |                 |       |
| Accounts payable                                                                          |       | $                    | 4,334      |                 | $          | 6,789 |   |
| Accrued liabilities                                                                       |       | 14,646               |       | 13,210               |       |
| Current liabilities of discontinued  operations                                           |       | —               |       | 405                  |       |
| Amounts due to affiliates                                                                 |       | 2,780                |       | 3,135                |       |
| Current portion of capital lease  obligations                                             |       | 36                   |       | —               |       |
| Current portion of deferred revenues                                                      |       | 2,049                |       | 2,289                |       |
|                                                                                      |       |                 |       |                 |       |
| Total current liabilities                                                                 |       | 23,845               |       | 25,828               |       |
|                                                                                      |       |                 |       |                 |       |
| Long-term debt                                                                            |       | 195,747              |       | 185,762              |       |
| Capital lease obligations, net of current  portion                                        |       | 427                  |       | —               |       |
| Deferred revenues, net of current portion                                                 |       | 1,387                |       | 2,019                |       |
| Deferred tax liability                                                                    |       | 3,876                |       | 4,814                |       |
|                                                                                      |       |                 |       |                 |       |
| Total liabilities                                                                         |       | 225,282              |       | 218,423              |       |
|                                                                                      |       |                 |       |                 |       |
| Member’s deficit                                                                     |       | (43,365              | )          | (55,601              | )          |
| Deferred stock compensation                                                               |       | —               |       | (75                  | )          |
| Accumulated other comprehensive loss                                                      |       | (136                 | )          | (145                 | )          |
|                                                                                      |       |                 |       |                 |       |
| Total member’s deficit                                                               |       | (43,501              | )          | (55,821              | )          |
|                                                                                      |       |                 |       |                 |       |
| COMMITMENTS AND CONTINGENCIES                                                             |       |                 |       |                 |       |
|                                                                                      |       | $                    | 181,781    |                 | $          | 162,602 |   |

 

See accompanying notes to the consolidated financial statements.

 

F-3

----

 

**MRS. FIELDSFAMOUS BRANDS, LLC**

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

**(Dollars inthousands)**

 
| ** **                                                                                                      | ** ** | **For the Fiscal Year Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                      | ** ** | **January 1,  2005**          | ** ** | **January 3,  2004** | ** ** | **December 28,  2002** | ** ** |
| REVENUES:                                                                                                       |       |                          |       |   |   |   |   |
| Franchising                                                                                                     |       | $                             | 55,913     |   | $ | 58,645 |   | $ | 61,332 |   |
| Retail food sales                                                                                               |       | —                        |       | — |   | 16,606 |   |
| Gifts                                                                                                           |       | 25,849                        |       | 17,405 |   | 12,628 |   |
| Licensing                                                                                                       |       | 4,945                         |       | 5,464 |   | 4,566 |   |
| Other                                                                                                           |       | 353                           |       | 474 |   | 260 |   |
|                                                                                                            |       |                          |       |   |   |   |   |
| Total revenues                                                                                                  |       | 87,060                        |       | 81,988 |   | 95,392 |   |
|                                                                                                            |       |                          |       |   |   |   |   |
| OPERATING COSTS AND EXPENSES:                                                                                   |       |                          |       |   |   |   |   |
| Franchising                                                                                                     |       | 21,893                        |       | 20,040 |   | 20,662 |   |
| Costs of sales - retail food                                                                                    |       | —                        |       | — |   | 15,212 |   |
| Gifts                                                                                                           |       | 20,733                        |       | 13,207 |   | 9,778 |   |
| Licensing                                                                                                       |       | 1,516                         |       | 1,155 |   | 143 |   |
| General and administrative                                                                                      |       | 9,727                         |       | 10,811 |   | 12,129 |   |
| Stock compensation expense                                                                                      |       | 75                            |       | 50 |   | 134 |   |
| Costs associated with debt refinancing, net                                                                     |       | 249                           |       | 684 |   | — |   |
| Depreciation                                                                                                    |       | 1,221                         |       | 1,973 |   | 1,905 |   |
| Amortization                                                                                                    |       | 2,832                         |       | 1,780 |   | 1,784 |   |
| Other operating expenses (income), net                                                                          |       | 147                           |       | 331 |   | (2,563 | ) |
|                                                                                                            |       |                          |       |   |   |   |   |
| Total operating costs and expenses                                                                              |       | 58,393                        |       | 50,031 |   | 59,184 |   |
|                                                                                                            |       |                          |       |   |   |   |   |
| Income from operations                                                                                          |       | 28,667                        |       | 31,957 |   | 36,208 |   |
|                                                                                                            |       |                          |       |   |   |   |   |
| Interest expense, net                                                                                           |       | (24,905                       | )          | (25,041 | ) | (25,327 | ) |
| Other income                                                                                                    |       | 1,054                         |       | — |   | — |   |
|                                                                                                            |       |                          |       |   |   |   |   |
| Income from continuing operations before provision  for income taxes and cumulative effect of accounting change |       | 4,816                         |       | 6,916 |   | 10,881 |   |
| Provision for income taxes                                                                                      |       | 2,254                         |       | 2,403 |   | 4,365 |   |
|                                                                                                            |       |                          |       |   |   |   |   |
| Income from continuing operations before cumulative  effect of accounting change                                |       | 2,562                         |       | 4,513 |   | 6,516 |   |
|                                                                                                            |       |                          |       |   |   |   |   |
| Income (loss) from discontinued operations  (net of income taxes of $65, $158 and $44, respectively)            |       | 104                           |       | 255 |   | (288 | ) |
|                                                                                                            |       |                          |       |   |   |   |   |
| Income before cumulative effect of accounting  change                                                           |       | 2,666                         |       | 4,768 |   | 6,228 |   |
| Cumulative effect of accounting change                                                                          |       | —                        |       | — |   | (35,175 | ) |
|                                                                                                            |       |                          |       |   |   |   |   |
| Net income (loss)                                                                                               |       | $                             | 2,666      |   | $ | 4,768 |   | $ | (28,947 | ) |
|                                                                                                            |       |                          |       |   |   |   |   |
| COMPREHENSIVE INCOME (LOSS):                                                                                    |       |                          |       |   |   |   |   |
| Net income (loss)                                                                                               |       | $                             | 2,666      |   | $ | 4,768 |   | $ | (28,947 | ) |
| Foreign currency translation adjustment                                                                         |       | 9                             |       | (10 | ) | (43 | ) |
|                                                                                                            |       |                          |       |   |   |   |   |
| Comprehensive income (loss)                                                                                     |       | $                             | 2,675      |   | $ | 4,758 |   | $ | (28,990 | ) |

 

See accompanying notes to the consolidated financial statements.

 

F-4

----

 

**MRS. FIELDS FAMOUS BRANDS, LLC**

# **Consolidated Statements of Member’s Deficit**

# **(Dollars inthousands)**

 
| ** **                                          | ** ** | **Member’s  Deficit** | ** ** | **Deferred  Stock  Compensation** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Total** | ** ** |
|-----------------------------------------------------|------------|----------------------------|------------|-----------------------------------|------------|---------------------------------------------|------------|-----------|------------|
| Balance at December 29, 2001                        |       | $                          | (14,857    | )                                 | $          | (487                                        | )          | $         | (92        | ) | $ | (15,436 | ) |
| Stock compensation expense                          |       | —                     |       | 134                               |       | —                                      |       | 134       |       |
| Distribution to parent under tax sharing  agreement |       | (834                       | )          | —                            |       | —                                      |       | (834      | )          |
| Other comprehensive loss                            |       | —                     |       | —                            |       | (43                                         | )          | (43       | )          |
| Dividend to parent for merger costs                 |       | (134                       | )          | —                            |       | —                                      |       | (134      | )          |
| Unvested options returned to plan                   |       | (24                        | )          | 24                                |       | —                                      |       | —    |       |
| Contributions by parent                             |       | 8,290                      |       | —                            |       | —                                      |       | 8,290     |       |
| Net loss                                            |       | (28,947                    | )          | —                            |       | —                                      |       | (28,947   | )          |
| Other activity with parent                          |       | (11,135                    | )          | —                            |       | —                                      |       | (11,135   | )          |
| 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 loss                            |       | —                     |       | —                            |       | 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 | ) |

 

See accompanying notes to the consolidated financial statements.

 

F-5

----

 

**MRS. FIELDS FAMOUS BRANDS, LLC**

# **Consolidated Statements of Cash Flows**

# **(Dollars inthousands)**

 
| ** **                                                                 | ** ** | **For the Fiscal Year Ended** | ** ** |
|----------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                 | ** ** | **January 1,  2005**          | ** ** | **January 3,  2004** | ** ** | **December 28,  2002** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                      |       |                          |       |   |   |   |   |
| Net income (loss) from continuing operations                               |       | $                             | 2,562      |   | $ | 4,513 |   | $ | (28,659 | ) |
| Loss from cumulative effect of accounting  change                          |       | —                        |       | — |   | 35,175 |   |
| Gain on sale of equity warrants                                            |       | (1,054                        | )          | — |   | — |   |
| Depreciation and amortization                                              |       | 4,053                         |       | 3,753 |   | 3,689 |   |
| Amortization of deferred loan costs                                        |       | 3,518                         |       | 4,578 |   | 4,987 |   |
| Stock compensation expense                                                 |       | 75                            |       | 50 |   | 134 |   |
| Amortization of discount on notes                                          |       | 1,245                         |       | 596 |   | 517 |   |
| Non-cash debt increases associated with PIK  interest                      |       | —                        |       | 585 |   | 516 |   |
| Deferred income taxes                                                      |       | (523                          | )          | (846 | ) | 843 |   |
| Changes in assets and liabilities                                          |       |                          |       |   |   |   |   |
| Receivables, net                                                           |       | 1,031                         |       | 249 |   | 1,640 |   |
| Amounts due to/from affiliates, net                                        |       | (378                          | )          | (4,652 | ) | 1,227 |   |
| Inventories, net                                                           |       | (664                          | )          | (590 | ) | 608 |   |
| Prepaid rent and other                                                     |       | (78                           | )          | (539 | ) | 71 |   |
| Other assets                                                               |       | (158                          | )          | 59 |   | 182 |   |
| Accounts payable                                                           |       | (2,455                        | )          | 594 |   | 2,325 |   |
| Accrued liabilities                                                        |       | 1,436                         |       | 6,356 |   | (2,038 | ) |
| Deferred revenue                                                           |       | (872                          | )          | (92 | ) | 1,029 |   |
| Net cash provided by continuing operating  activities                      |       | 7,738                         |       | 14,614 |   | 22,246 |   |
| Net cash (used in) provided by discontinued  operating activities          |       | (301                          | )          | 541 |   | 2,050 |   |
| Net cash provided by operating activities                                  |       | 7,437                         |       | 15,155 |   | 24,296 |   |
|                                                                       |       |                          |       |   |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                      |       |                          |       |   |   |   |   |
| Proceeds from sale of equity warrants                                      |       | 1,054                         |       | — |   | — |   |
| Purchases of property and equipment                                        |       | (859                          | )          | (220 | ) | (1,342 | ) |
| Net cash provided by (used in) investing  activities                       |       | 195                           |       | (220 | ) | (1,342 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                      |       |                          |       |   |   |   |   |
| Net borrowings (payments) under line of  credit                            |       | (3,452                        | )          | 2,480 |   | (8,072 | ) |
| Principal payments on long-term debt                                       |       | (98,014                       | )          | (5,609 | ) | (9,611 | ) |
| Payment of debt financing costs                                            |       | (11,975                       | )          | (2,351 | ) | (1,435 | ) |
| Proceeds from issuance of Senior Secured  Notes                            |       | 115,000                       |       | — |   | — |   |
| Principal payments on capital lease                                        |       | (37                           | )          | — |   | — |   |
| Contribution by parent                                                     |       | 17,500                        |       | — |   | 8,290 |   |
| Repurchase of stock options in parent                                      |       | (108                          | )          | — |   | — |   |
| Distribution to parent under tax sharing  agreement and merger costs       |       | —                        |       | (76 | ) | (134 | ) |
| Other activity with parent                                                 |       | (7,996                        | )          | (10,969 | ) | (11,135 | ) |
| Net cash provided by (used in) financing  activities                       |       | 10,918                        |       | (16,525 | ) | (22,097 | ) |
| Effect of foreign exchange rate changes on  cash                           |       | 9                             |       | (10 | ) | (43 | ) |
| Net increase (decrease) in cash and cash  equivalents                      |       | 18,559                        |       | (1,600 | ) | 814 |   |
| Cash and cash equivalents at beginning of  period                          |       | 1,300                         |       | 2,900 |   | 2,086 |   |
| Cash and cash equivalents at end of period                                 |       | $                             | 19,859     |   | $ | 1,300 |   | $ | 2,900 |   |
|                                                                       |       |                          |       |   |   |   |   |
| **Supplemental Disclosure of Cash Flow  Information**                      |       |                          |       |   |   |   |   |
| Cash paid for interest                                                     |       | $                             | 16,541     |   | $ | 19,050 |   | $ | 20,018 |   |
| Cash paid for income taxes                                                 |       | 50                            |       | 317 |   | 100 |   |
| Cash paid to parent for income taxes                                       |       | 1,450                         |       | 7,050 |   | — |   |
|                                                                       |       |                          |       |   |   |   |   |
| **Supplemental Disclosure of Noncash  Investing and Financing Activities** |       |                          |       |   |   |   |   |
| Distributions payable to parent under tax  sharing agreement               |       | $                             | —     |   | $ | 1,555 |   | $ | 834 |   |
| Assets acquired under capital lease                                        |       | 500                           |       | — |   | — |   |
| Property and equipment contributed by  parent                              |       | 174                           |       | — |   | — |   |

 

See accompanying notes to the consolidated financial statements.

 

F-6

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**MRS. FIELDS FAMOUS BRANDS, LLC**

# **Notes to the Consolidated FinancialStatements**

 

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

 

***Basis of Presentation***

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 is also MFC.

 

The accompanying consolidated financial statements prior to theformation of the Company on March 16, 2004 include the accounts of TCBY and thefranchising, gifts, licensing and retail food sales segments of MFOC. InMarch 2004, MFC completed a reorganization whereby TCBY and thefranchising, gifts and licensing segments of MFOC were contributed to theCompany. These financial statements have been prepared to reflect this reorganizationas if it had occurred on December 30, 2001 (the beginning of fiscal 2002.)

 

Theconsolidated financial statements assume that Mrs. Fields, for all periodspresented, had existed as a separate legal entity with the following fourbusiness segments: franchising, gifts, licensing and retail food sales. Theconsolidated financial statements, which have been carved out from theconsolidated financial statements of MFOC and TCBY prior to the reorganizationusing the historical results of operations and assets and liabilities of thesebusinesses and activities and which exclude the company-owned stores segment ofMFOC, reflect the accounting policies adopted by MFOC and TCBY in thepreparation of their consolidated financial statements and thus do notnecessarily reflect the accounting policies which Mrs. Fields might haveadopted had it been an independent company. The historical consolidatedfinancial statements of Mrs. Fields include those accounts specificallyattributable to Mrs. Fields, substantially all of the indebtedness of MFOCand TCBY, and allocations of expenses relating to shared services andadministrative functions incurred at MFOC.

 

Historically,MFOC has not allocated its various corporate overhead expenses, and commongeneral and administrative expenses to its operating business units. However,an allocation of such expenses has been included in general and administrativeexpenses for the periods prior to the reorganization in the accompanyingconsolidated statements of operations and comprehensive income (loss). TheCompany’s general and administrative expenses represent portions of MFOC’scorporate functions such as human resources, legal, accounting and finance,treasury and information technology systems, that have been allocated to Mrs. Fieldsbased on percentage of labor hours devoted by the functional department. Theseallocated costs are not necessarily indicative of the costs thatMrs. Fields would have incurred had it operated as an independent,stand-alone entity for all periods presented.

 

F-7

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Mrs. Fields’cash balances at January 3, 2004 include cash accounts specificallyattributable to Mrs. Fields plus an allocated portion of cash included inMFOC’s centralized cash management systems. Accordingly, Mrs. Fields’ cashat January 3, 2004 may not be representative of what it would have been ifMrs. Fields were an independent company.

 

Theaccompanying consolidated financial statements have been prepared in accordancewith accounting principles generally accepted in the United States of America.All transactions and balances between the consolidated entities and segmentshave been eliminated.

 

***Description of Business***

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.

 

In connection with its franchising activities, the Company authorizesthird-party licensees and franchisees to use certain business formats, systems,methods, procedures, designs, layouts, specifications, trade names andtrademarks in the United States of America (the “United States”) and othercountries. Additionally, the Company licenses the use of its trademarks, logosand recipes to third parties for distribution of Mrs. Fields and TCBYbranded products through non-bakery stores and cafes. The Company also marketsand distributes its products through catalogs and the Internet.

 

**2.     Summary of Significant Accounting Policies**

 

***Accounting Periods***

TheCompany operates using a 52/53-week year ending on the Saturday closest toDecember 31. Fiscal 2004 is a 52-week year ending January 1, 2005.Fiscal year 2003 is a 53-week year ending January 3, 2004. Fiscal year 2002 isa 52-week year ending December 28, 2002.

 

***Foreign Currency Translation***

The balance sheet accounts of foreign subsidiaries are translated intoU.S. dollars using the applicable balance sheet date exchange rates, whilerevenues and expenses are translated using the average exchange rates for theperiod presented.

 

F-8

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***Related-Party Transactions***

Mrs. Fields has contractual relationships with various affiliates,primarily MFOC, MFH, TCBY Enterprises and MFC, which are intended to be fair tothe parties involved in the transactions and on terms similar to what could benegotiated with independent third parties. Sometimes the Company is required tonegotiate the agreements for both sides of the transaction. Also, inherent inany contractual relationship is the interpretation of the intent of theagreement at a later time when unanticipated events occur. When situations likethese occur, the Company attempts objectively to determine the terms of thetransaction or interpret the intent of the agreement on a fair and independentbasis. However, there is no guarantee that the Company will be successful indoing so. Individual affiliate transactions or a series of related transactionsin excess of $1.0 million require a resolution by the Board of Managersand individual affiliate transactions or a series of related transactions inexcess of $5.0 million require an “opinion of fairness” by an accounting,appraisal or investment banking firm.

 

***Use of Estimates***

The preparation of financial statements in conformity with U.S.generally accepted accounting principles requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates.

 

The Company’s significant accounting estimates include estimates foremployee benefits and related insurances, reserves for doubtful accounts andobsolete and excessive inventories, asset valuation allowances, depreciationand amortization.

 

***Cash and Cash Equivalents***

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 InsuranceCorporation (FDIC) insurance limit.

 

F-9

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***Receivables***

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

 

Priorto fiscal 2001, TCBY extended credit from time to time in the form of notesreceivable to franchisees and certain of these notes receivable remainoutstanding. Notes receivable from franchisees are primarily collateralized byequipment located at the franchisees’ stores. The notes bear interest at marketrates and mature at various dates through April 2009. TCBY regularlyreviews the notes for non-performance. Notes that are considered non-performingare placed on a non-accrual status when the collectability of principal orinterest becomes uncertain. During the years ended January 1, 2005,January 3, 2004 and December 28, 2002, TCBY recognized no interestincome pertaining to these notes receivable.

 

Priorto fiscal 2001, TCBY factored various notes receivable aggregating$2.1 million. Under the terms of the factoring agreement, TCBY isultimately responsible to the factoring agent for the realizability of thenotes receivable. In the event of non-performance, the factoring agent hasrecourse against TCBY to a maximum level of $701,000 and $939,000 as of January1, 2005 and January 3, 2004, respectively. The Company has reserves of $569,000and $634,000 as of January 1, 2005 and January 3, 2004, respectively, for thispotential recourse liability. This reserve is included in accrued liabilitiesin the accompanying consolidated balance sheets.

 

Notesreceivable at January 1, 2005 and January 3, 2004 comprised the following (inthousands):

 
| ** **                      | ** ** | **January 1,  2005** | ** ** | **January 3,  2004** | ** ** |
|---------------------------------|------------|----------------------|------------|----------------------|------------|
| Non-performing notes            |       | $                    | 521        |                 | $          | 519 |   |
| Allowance for doubtful accounts |       | (521                 | )          | (519                 | )          |
| Non-performing notes, net       |       | —               |       | —               |       |
| Performing notes                |       | 225                  |       | 503                  |       |
| Allowance for doubtful accounts |       | (76                  | )          | (194                 | )          |
| Performing notes, net           |       | 149                  |       | 309                  |       |
|                            |       | $                    | 149        |                 | $          | 309 |   |

 

F-10

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The activity in theallowance for notes receivable for the years ended January 1, 2005 and January3, 2004 is as follows (in thousands):

 
| ** **        | ** ** | **January 1,  2005** | ** ** | **January 3,  2004** | ** ** |
|-------------------|------------|----------------------|------------|----------------------|------------|
| Beginning balance |       | $                    | (713       | )                    | $          | (886 | ) |
| Additions         |       | —               |       | (6                   | )          |
| Write-offs        |       | 116                  |       | 179                  |       |
|              |       | $                    | (597       | )                    | $          | (713 | ) |

 

***Inventories***

Inventories consist ofraw ingredients, food, beverages and supplies and are stated at the lower ofcost (first-in, first-out method) or market value. Inventories at January 1,2005 and January 3, 2004 are comprised of the following (in thousands):

 
| ** **             | ** ** | **January 1,  2005** | ** ** | **January 3,  2004** | ** ** |
|------------------------|------------|----------------------|------------|----------------------|------------|
| Food and beverage      |       | $                    | 2,114      |                 | $          | 1,563 |   |
| Raw ingredients        |       | 489                  |       | 365                  |       |
| Supplies and novelties |       | 23                   |       | 34                   |       |
|                   |       | $                    | 2,626      |                 | $          | 1,962 |   |

 

 

***Property and Equipment***

Equipment and fixturesare stated at cost less accumulated depreciation and are depreciated over threeto seven years using the straight-line method. Leasehold improvements are stated at cost less accumulated depreciationand are depreciated over the term of the lease using the straight-linemethod.  Property and equipment atJanuary 1, 2005 and January 3, 2004 are comprised of the following (inthousands):

 
| ** **                    | ** ** | **January 1,  2005** | ** ** | **January 3,  2004** | ** ** |
|-------------------------------|------------|----------------------|------------|----------------------|------------|
| Leasehold improvements        |       | $                    | 3,879      |                 | $          | 3,204 |   |
| Equipment and fixtures        |       | 9,801                |       | 9,695                |       |
| Land                          |       | 240                  |       | 240                  |       |
|                          |       | 13,920               |       | 13,139               |       |
| Less accumulated depreciation |       | (10,434              | )          | (9,965               | )          |
|                          |       | $                    | 3,486      |                 | $          | 3,174 |   |

 

Property and equipmentincludes gross assets acquired under a capital lease and related accumulateddepreciation of $500,000 and $53,000, respectively, at January 1, 2005.  There were no assets under a capital lease asof January 3, 2004.

 

Expenditures that materiallyincrease values or capacities or extend useful lives of property and equipmentare capitalized. Routine maintenance, repairs and renewal costs are expensed asincurred. Gains or losses from the sale or retirement of property and equipmentare recorded in current operations.

 

F-11

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

Goodwillrepresents the excess of costs over fair value of assets of businessesacquired. The Company adopted the provisions of Statement of FinancialAccounting Standards (“SFAS”) No. 142 (“SFAS 142”), “Goodwill and OtherIntangible Assets,” as of December 30, 2001. Goodwill and intangibleassets acquired in a purchase business combination and determined to have an indefiniteuseful life are not amortized, but are tested for impairment at least annuallyin accordance with the provisions of SFAS 142. SFAS 142 also requiresthat intangible assets with estimable useful lives be amortized over theirrespective estimated useful lives to their estimated residual values, andreviewed for impairment in accordance with SFAS 144, “Accounting forImpairment or Disposal of Long-Lived Assets.”

 

In connection withSFAS 142’s transitional goodwill impairment evaluation, the Company wasrequired to perform an assessment of whether there was an indication thatgoodwill was impaired as of the date of adoption. To accomplish this, theCompany identified its reporting units and determined the carrying value ofeach reporting unit by assigning the assets and liabilities, including goodwilland intangible assets, to those reporting units as of the date of adoption. TheCompany, through an independent appraisal firm, determined the fair value ofeach reporting unit and compared it to the carrying amount of the reportingunit. The carrying amount of the dairy franchising reporting unit exceeded thefair value of the reporting unit indicating goodwill impairment.

 

TheCompany compared the implied fair value of the dairy franchising reporting unit’sgoodwill with the carrying amount of its goodwill, both of which were measuredas of the date of adoption. The implied fair value of goodwill was determinedby allocating the fair value of the reporting unit to all of the assets(recognized and unrecognized) and liabilities of the reporting unit in a mannersimilar to a purchase price allocation. As a result, the Company recorded anon-cash charge of approximately $35.2 million to reduce the carryingvalue of the goodwill associated with its dairy franchising reporting unit.Such charge is non-operational in nature and is reflected as a cumulativeeffect of an accounting change in the accompanying consolidated statements ofoperations and comprehensive income (loss).

 

Thefollowing outlines the Company’s goodwill by reporting unit (in thousands):

 
| ** **         | ** ** | **January 1,  2005** | ** ** | **January 3,  2004** | ** ** |
|--------------------|------------|----------------------|------------|----------------------|------------|
| Bakery Franchising |       | $                    | 60,404     |                 | $          | 60,404 |   |
| Dairy Franchising  |       | 49,341               |       | 49,341               |       |
| Gifts              |       | 1,859                |       | 1,859                |       |
| Licensing          |       | 1,852                |       | 1,852                |       |
| Total              |       | $                    | 113,456    |                 | $          | 113,456 |   |

 

F-12

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Trademarksand other intangible assets are comprised of definite lived assets. Trademarks,tradenames and recipes are amortized over 15 years while franchise licenserights and covenants not to compete are amortized over 5 to 7 years. Thefollowing outlines the Company’s trademarks and other intangibles as of January1, 2005 and January 3, 2004 (inthousands):

 
| ** **                    | ** ** | **January 1,  2005** | ** ** | **January 3,  2004** | ** ** |
|-------------------------------|------------|----------------------|------------|----------------------|------------|
| Trademarks and tradenames     |       | $                    | 33,131     |                 | $          | 33,131 |   |
| Recipes                       |       | 4,150                |       | 4,150                |       |
| Reacquired franchise rights   |       | 528                  |       | 528                  |       |
| Covenant not to compete       |       | 60                   |       | 60                   |       |
|                          |       | 37,869               |       | 37,869               |       |
| Less accumulated amortization |       | (14,450              | )          | (11,720              | )          |
|                          |       | $                    | 23,419     |                 | $          | 26,149 |   |

 

Amortizationexpense of the intangible assets for the years ended January 1, 2005, January3, 2004 and December 28, 2002 was $2.7 million, $1.7 million and$1.7 million, respectively. Amortization expense of the intangible assetsfor the next five years is estimated to be $2.7 million each year.

 

#### ***Deferred Loan Costs***

Deferred loan costs are being amortized overthe life of the related debt using the straight-line method, which approximatesthe effective interest method. During the years ended January 1, 2005,January 3, 2004 and December 28, 2002, the Company amortized deferred loan costs of $3.5 million,$4.6 million and $5.0 million, respectively, to interest expense.

 

***Long-Lived Assets***

Long-lived assets are reviewed for impairmentwhen events or changes in circumstances indicate that the book value of anasset may not be fully recovered. The Company uses an estimate of futureundiscounted net cash flows of the related asset or group of assets over theremaining life in measuring whether the assets are recoverable. Impairment oflong-lived assets is assessed at the lowest level for which there areidentifiable cash flows that are independent of other groups of assets.Impairment to be recognized is measured by the amount by which the carryingamount of the assets exceeds the fair value of the assets. The impairment oflong-lived assets requires judgments and estimates. If circumstances change,such estimates could also change. 

 

F-13

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***Accrued Liabilities***

Accruedliabilities consist of the following at January 1, 2005 and January 3,2004 (in thousands):

 
| ** **                        | ** ** | **January 1,  2005** | ** ** | **January 3,  2004** | ** ** |
|-----------------------------------|------------|----------------------|------------|----------------------|------------|
| Accrued liabilities               |       | $                    | 4,701      |                 | $          | 7,628 |   |
| Accrued compensation and benefits |       | 3,968                |       | 3,555                |       |
| Accrued interest payable          |       | 5,977                |       | 2,027                |       |
|                              |       | $                    | 14,646     |                 | $          | 13,210 |   |

 

On June 24, 2004, theCompany announced a reorganization of its executive management team effectiveJune 28, 2004.  As a result of thisreorganization, the Company terminated the employment of two Senior VicePresidents effective June 28, 2004 and accrued approximately $600,000 relatedto severance expenses.  As of January 1,2005, remaining severance payments of $466,000 were included in accruedcompensation and benefits.

 

On May 7, 2003, theBoard of 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 and $735,000 in severance payments were due toMr. Hodges and are included in accrued compensation and benefits as of January1, 2005 and January 3, 2004, respectively.

 

Under the terms of astockholders’ agreement among MFC and its stockholders, there are put and callrights with respect to the common shares of MFC, including common sharesreceived upon exercise of options. Pursuant to the Separation Agreements, Mr.Hodges and MFC agreed that all of the shares of MFC’s common stock held by Mr.Hodges would be purchased by MFC for an aggregate purchase price of $449,479.This payment obligation to Mr. Hodges was assumed by the Company concurrentlywith the completion of the reorganization (see Note 1). As of January 1, 2005,this obligation payable to Mr. Hodges for the purchase of the shares of MFC’scommon stock was paid in full.

 

F-14

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***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 formulation fees and allowances fromsuppliers based (directly or indirectly) on product sales to franchisees.Formulation fees and allowances are recorded as franchising revenues uponshipment of product to the Company’s distributors or franchisees.

 

Priorto December 2002, revenues from the sale of TCBY branded frozen foodspecialty products and private-label ice cream to grocery stores and wholesaleclubs were recognized upon shipment and included in retail food sales. InDecember 2002, TCBY licensed the sale and distribution of these productsto a third party, whereby the Company now earns a licensing fee as products aresold and distributed by the third party. Accordingly, revenues subsequent toDecember 2002 that are earned under this licensing agreement are includedin licensing revenues.

 

In March 2003, the Company received$2.0 million from a supplier as an advance to maintain and expand beverageconcepts at the Company’s franchised store locations. This advance is beingrecognized as franchising revenues on a ratable basis over the six-year term ofthe agreement.

 

***Shipping and Handling Costs***

The Company charges its gifts and batterfacility customers for shipping and handling costs and records the revenues ingifts revenues and franchising revenues, respectively. The costs for shippingand handling are included in gifts expense and franchising expense,respectively.

 

***Income Taxes***

TheCompany is organized as a single-member limited liability company and will notelect to be taxed as a corporation for federal income tax purposes. As such,for federal income tax purposes, the Company will be “disregarded” and will betreated as a division of MFOC, its sole member. Although the Company is notexpected to be a tax-paying entity, the assets of the Company could be subjectto income tax claims against any member of its parent’s consolidated group.

 

F-15

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The Company will be included inthe consolidated federal income tax return of MFC, the Company’s ultimateparent. For historical financial reporting purposes, the Company has recognizedincome tax expense and deferred tax assets and liabilities as if it were filinga separate tax return. The Company has recognized deferred tax assets orliabilities for expected future tax consequences of events that have beenrecognized in the financial statements or tax returns. Under this method,deferred tax assets or liabilities have been determined based upon thedifference between the financial and income tax bases of assets and liabilitiesusing enacted tax rates expected to apply when differences are expected to besettled or realized.

 

***Fair Value of Financial Instruments***

TheCompany estimates that the total fair market value of its 9 percent SeniorSecured Notes (see Note 3) and its 11 1⁄2 percent Senior Secured Notes (see Note3) was approximately $69.8 million and $114.4 million, respectively as ofJanuary 1, 2005. The Company estimates that the total fair market value of itsSeries A/B Senior Notes and Series C Senior Notes (see Note 3)was approximately $84.0 million as of January 3, 2004. Theseestimates are based on quoted market prices. The book values of the Company’sother financial instruments, including accounts receivable and accounts payableapproximate fair values at the respective balance sheet dates because of therelatively short maturity of these instruments or valuation allowances whichhave been recorded to report the balances at fair value. The carrying amount ofother long-term debt obligations approximates its fair value because therelated interest rates are at market rates.

 

***Interest Rate Hedge***

Aspart of TCBY’s Senior Credit Facility arrangement (see Note 3), TCBY wasrequired to hedge the variability of interest rates through a hedginginstrument for at least 50 percent of the outstanding principalbalance.  On June 25, 2002, TCBYpurchased an interest rate cap (the “Cap”) with a notional amount of$20.0 million. The Cap had a ceiling related to the three-month LIBOR rateof 3.5 percent and expired on August 28, 2003. Because thethree-month LIBOR rate was less than the ceiling during the entire term of theCap, the Company recorded the Cap at its cost, which was amortized to interestexpense over the term of the Cap.

 

On August 26, 2003, TCBY purchased a Capwith a notional amount of $13.2 million. The Cap had a ceiling related tothe 1-month LIBOR rate of 3.5 percent and expired on March 31, 2004.Because the one-month LIBOR rate was less than the ceiling during the entireterm of the cap, the Company recorded the Cap at its cost, which was amortizedto interest expense over the term of the Cap.

#### *** ***

F-16

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#### ***Advertising***

TheCompany administers advertising funds collected from its franchisees. TheCompany directs the expenditures of the advertising funds in connection withadvertising and marketing campaigns for the benefit of the respective concepts.The advertising funds and their related activities are not included in theaccompanying consolidated financial statements.

 

Advertising costs are expensed as incurred.During the years ended January 1, 2005, January 3, 2004 and December 28,2002, the Company incurred advertising expenses excluding the expenditures ofthe advertising funds totaling approximately $4.5 million,$1.7 million and $2.2 million, respectively.

 

#### ***Recent AccountingPronouncements***

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 No. 123R supersedes AccountingPrinciples Board (“APB”) Opinion No. 25, “Accounting for Stock Issued toEmployees” and amends SFAS No. 95, “Statement of Cash Flows.” Generally, theapproach in SFAS 123R is similar to the approach described in SFAS 123.However, SFAS 123R requires all share-based payments to employees, includinggrants of employee stock options, to be recognized in the income statementbased on their fair values. Pro forma disclosure is no longer an alternative.The new standard will be effective for the Company beginning July 3, 2005. Theadoption of SFAS 123R is not expected to have a material effect on theCompany’s consolidated financial statements.

 

**3.     Long-Term Debt and Capital Lease Obligations**

** **

***Long-Term Debt***

Long-termdebt consists of the following (in thousands):

 
| ** **                                                                                                                                  | ** ** | **January 1,  2005** | ** ** | **January 3,  2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| Senior Secured Notes, interest at 111⁄2  percent payable semi-annually in arrears on March  15 and September 15, due March 15, 2011 |       | $                    | 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               |       | —               |       |
| Senior Notes, net of issuance discount of  $85                                                                                              |       | —               |       | 139,915              |       |
| Senior Credit Facility                                                                                                                      |       | —               |       | 21,800               |       |
| Subordinated Debt, net of issuance discount  of $1,160                                                                                      |       | —               |       | 20,595               |       |
| Borrowings under line of credit                                                                                                             |       | —               |       | 3,452                |       |
|                                                                                                                                        |       | $                    | 195,747    |                 | $          | 185,762 |   |

 

#### ***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 Senior Notes and issued $115.0 million of 11 1⁄2percent senior secured notes (the “11 1⁄2 percent Senior Secured Notes” togetherwith the 9 percent Senior Secured Notes, the “Senior Secured Notes”). Theproceeds from the 11 1⁄2 percent Senior Secured Notes were used to retire theCompany’s remaining Senior Notes, the Senior Credit Facility, the SubordinatedDebt and the line of credit.

 

F-17

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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 SeniorSecured Notes are secured by all of the tangible and intangible assets of theCompany and its subsidiaries.

 

TheSenior Secured Notes are redeemable at the option of the Company anytime on orafter March 15, 2008. Prior to March 15, 2007, the Company may redeemup to 35 percent of the aggregate principal amount of the notes with thenet proceeds of certain equity offerings. The Senior Secured Notes require theCompany 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 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 SecuredNotes will have the right to put the notes to the Company at 101 percentof their principal amount, plus accrued and unpaid interest, provided at least65 percent of the aggregate principal amount of the Senior Secured Notesoriginally issued remain outstanding.

 

#### ***The SeniorSecured Notes contain certain covenants that limit among other things, theability 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.***

 

#### ***As of January 1, 2005, the Company had incurred$13.9 million of costs directly related to the debt refinancing.Generally, these costs would be deferred and amortized as interest expense overthe term of the Senior Secured Notes. However, for the fiscal year endedJanuary 1, 2005 and January 3, 2004, respectively, approximately $5.0million and $684,000 of these costs related to the exchange of$80.7 million of Senior Notes for $80.7 million of Senior SecuredNotes and were expensed, net of the gain recognized on the early retirement ofthe remaining Senior Notes of $4.8 million during the fiscal year endedJanuary 1, 2005, in the respective period in accordance with SFAS No. 15,“Accounting by Debtors and Creditors for Troubled Debt Restructurings” andincluded in the caption “costs associated with debt refinancing, net” in theconsolidated statements of operations.***

 

F-18

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#### ***SeniorNotes***

OnNovember 26, 1997, MFOC issued $100.0 million total principal amountof Series A Senior Notes due December 1, 2004 pursuant to anindenture between MFOC and the Bank of New York (the “Indenture”). TheSeries A Senior Notes were issued pursuant to a private transaction thatwas not subject to the registration requirements of the Securities Act of 1933(the “Securities Act”). On June 12, 1998, a majority of the Series ASenior Notes were exchanged for 10 1¤8 percent Series B Senior Notes due December 1, 2004(collectively, the “Series A/B Senior Notes”), which were registered underthe Securities Act.

 

OnAugust 24, 1998, MFOC issued $40.0 million total principal amount ofSeries C Senior Notes due December 1, 2004 in connection with theacquisitions of Great American Cookie Company, Inc. and 48 stores fromfour franchisees. On June 21, 2000, all of the Series C Senior Notesand the remaining Series A Senior Notes were exchanged for theSeries A/B Senior Notes, which were registered under the Securities Act.The Series A/B Senior Notes and the Series C Senior Notes arecollectively referred to as the “Senior Notes.”

 

Inconnection with the issuance of the Series C Senior Notes, the Companyrecorded a discount of approximately $600,000. This discount was amortized tointerest expense over the approximate six-year life of the Series C SeniorNotes using the effective interest method.

 

#### ***Senior Credit Facility***

Inconnection with its acquisition in fiscal 2000, TCBY obtained a$50.0 million term loan (the “Senior Credit Facility”) from a consortiumof banks (the “Banks”). The Senior Credit Facility required installmentpayments over a four-year period.

 

OnAugust 31, 2001, TCBY amended and restated the Senior Credit Facilityagreement with the Banks (the “Amended and Restated Credit Agreement”). Thisamendment substantially modified the previous Senior Credit Facility’sfinancial covenants and payment terms, included an initial principal reductionof $2.9 million, and changed the nature of the Senior Credit Facility froma term loan to a revolving loan arrangement. The Amended and Restated Credit Agreement provided for a revolving loanfacility that was to expire in May 2005 and allowed for borrowings of upto $41.5 million.

 

Inconnection with amending the Senior Credit Facility in August 2001, theCompany incurred approximately $400,000 of non-refundable fees that werecapitalized as deferred loan costs and were amortized over the life of therelated debt.

 

F-19

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OnNovember 20, 2002, TCBY entered into Amendment No. 2 to the Amendedand Restated Credit Agreement (“Amendment No. 2”). Key provisions ofAmendment No. 2 included the following: a) expiration of the SeniorCredit Facility in March 2004, b) an initial principal reduction of$4.0 million, c) allowance for borrowings of up to $31.3 millionas of November 2002, d) substantial increases in the quarterlypayment amounts, e) substantial modification of the financial covenantsand the requirement that the covenants be calculated monthly rather thanquarterly, and f) an increase of the interest rates by 75 basis pointseffective as of the amendment date with an additional 100 basis point increaseeffective January 1, 2004. In connection with Amendment No. 2, TCBYincurred approximately $700,000 of non-refundable fees that were capitalized asdeferred loan costs and were amortized over the life of the related debt.

 

#### ***During the yearended December 28, 2002, TCBY wrote off $1.4 million of previouslycapitalized deferred loan costs that were associated with the original debtissuance and prior amendments in accordance with the FASB’s Emerging IssuesTask Force Issue No. 98-14, “Debtor’s Accounting for Changes inLine-of-Credit, or Revolving-Debt Arrangements.”***

 

Borrowings under the Amended and Restated Credit Agreement boreinterest at the election of TCBY at either: (1) the higher of the Banks’prime rate or the federal funds rate plus 4.5 percent or (2) theEurodollar rate plus 5.75 percent (“New Eurodollar Rate Loans”).  Interest was payable for the New EurodollarRate Loans when the underlying interest period expires or quarterly, whichevercame first.

 

TCBYalso incurred $125,000 in legal, accounting, and other non-capitalizable feesand expenses associated with amending the Senior Credit Facility that wereincluded in selling, general, and administrative expenses in the accompanyingconsolidated statements of operations during the year ended December 28,2002.

 

##### ***Subordinated Debt***

Inconnection with its acquisition in fiscal 2000, TCBY obtained$20.0 million of secured Subordinated Debt from institutional investors.The Subordinated Debt was issued at a discount of approximately$2.5 million. This discount was accreted to interest expense using theeffective interest rate method over the life of the debt. The principal amountof the Subordinated Debt was due in its entirety on November 15, 2005 andbore interest at an annual rate of 12.0 percent payable semi-annually incash plus 2.0 percent payable semi-annually through the issuance ofadditional Subordinated Debt notes (the “PIK Notes”). The PIK Notes boreinterest at an annual rate of 14.0 percent with interest payablesemi-annually through the issuance of additional PIK Notes. During each of theyears ended January 1, 2005, January 3, 2004 and December 28, 2002 TCBYrecorded interest expense of $86,000, $400,000 and $400,000 as a result of theaccretion of the discount and recorded interest expense of $44,000, $600,000and $500,000, respectively, as a result of issuing PIK Notes.

 

F-20

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##### ***Line of Credit***

OnJanuary 16, 2003, MFOC entered into a new credit facility with FoothillCapital Corporation (“Foothill”). The Foothill credit facility bore interest atthe prime rate plus 1.75 percent. The Foothill credit facility alsorequired a monthly servicing fee of $5,000 and an anniversary fee of $200,000.The Foothill credit facility provided for $11.9 million of creditcomprised of a $9.9 million revolving line of credit for financing workingcapital expenditures and $2.0 million for letters of credit. The Foothill creditfacility would have matured on November 1, 2004 and was secured bysubstantially all of the assets of MFOC.

 

##### ***Capital Lease Obligations***

As of January 1, 2005, the future minimum leasepayments, including interest, for capital lease obligations are as follows (inthousands):

 
| **Fiscal Year**                             | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|
| 2005                                        |       | $          | 85         |   |
| 2006                                        |       | 85         |       |
| 2007                                        |       | 85         |       |
| 2008                                        |       | 85         |       |
| 2009                                        |       | 85         |       |
| Thereafter                                  |       | 280        |       |
| Total minimum lease payments                |       | 705        |       |
| Less amount representing interest           |       | (242       | )          |
| Present value of net minimum lease payments |       | $          | 463        |   |

 

**4.     Income Taxes**

 

***Provision for Income Taxes***

Thecomponents of the provision for income taxes for the years ended January 1,2005, January 3, 2004 and December 28, 2002 are as follows (in thousands):

 
| ** **                       | ** ** | **Fiscal Year Ended** | ** ** |
|----------------------------------|------------|-----------------------|------------|
| ** **                       | ** ** | **January 1,  2005**  | ** ** | **January 3,  2004** | ** ** | **December 28,  2002** | ** ** |
| Current                          |       |                  |       |   |   |   |   |
| Federal                          |       | $                     | 2,180      |   | $ | 2,697 |   | $ | 2,925 |   |
| State                            |       | 517                   |       | 552 |   | 597 |   |
| Foreign                          |       | 80                    |       | — |   | — |   |
|                             |       | 2,777                 |       | 3,249 |   | 3,522 |   |
|                             |       |                  |       |   |   |   |   |
| Deferred                         |       |                  |       |   |   |   |   |
| Federal                          |       | (434                  | )          | (670 | ) | 757 |   |
| State                            |       | (89                   | )          | (176 | ) | 86 |   |
|                             |       | (523                  | )          | (846 | ) | 843 |   |
| Total provision for income taxes |       | $                     | 2,254      |   | $ | 2,403 |   | $ | 4,365 |   |

 

F-21

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The differences between income taxes at the U.S. federalstatutory income tax rate and income taxes reported in the consolidatedstatements of operations are as follows for the years ended January 1, 2005,January 3, 2004 and December 28, 2002:

 
| ** **                                 | ** ** | **Fiscal Year Ended** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **January 1,  2005**  | ** ** | **January 3,  2004** | ** ** | **December 28,  2002** | ** ** |
| Federal statutory income tax rate          |       | $                     | 1,637      |   | $ | 2,299 |   | $ | (8,260 | ) |
| Amortization of non-deductible intangibles |       | —                |       | — |   | 11,863 |   |
| Deferred compensation adjustment           |       | 572                   |       | — |   | — |   |
| State income taxes                         |       | 209                   |       | 269 |   | 451 |   |
| Foreign taxes                              |       | 80                    |       | — |   | — |   |
| Other                                      |       | (244                  | )          | (165 | ) | 311 |   |
| Effective income tax rate                  |       | $                     | 2,254      |   | $ | 2,403 |   | $ | 4,365 |   |

 

The significant components of the Company's deferred taxassets and liabilities at January 1, 2005 and January 3, 2004 are as follows(in thousands):

 
| ** **                                      | ** ** | **January 1,  2005** | ** ** | **January 3,  2004** | ** ** |
|-------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| Deferred tax assets – current:             |       |                 |       |                 |       |
| Allowance for doubtful accounts                 |       | $                    | 411        |                 | $          | 469 |   |
| Deferred revenues                               |       | 198                  |       | 575                  |       |
| Accrued expenses                                |       | 407                  |       | 387                  |       |
| Other                                           |       | 104                  |       | 104                  |       |
| Deferred tax assets – current              |       | $                    | 1,120      |                 | $          | 1,535 |   |
| Deferred tax liabilities – long-term       |       |                 |       |                 |       |
| Intangibles                                     |       | $                    | (6,682     | )                    | $          | (6,875 | ) |
| Other                                           |       | (134                 | )          | (172                 | )          |
| Total deferred tax liabilities – long-term |       | (6,816               | )          | (7,047               | )          |
| Deferred tax assets – long-term            |       |                 |       |                 |       |
| Loan costs                                      |       | 1,888                |       | —               |       |
| Deferred compensation                           |       | —               |       | 599                  |       |
| Reserves                                        |       | 391                  |       | 946                  |       |
| Depreciation                                    |       | 350                  |       | 343                  |       |
| Other                                           |       | 311                  |       | 345                  |       |
| Total deferred tax assets – long-term      |       | 2,940                |       | 2,233                |       |
| Deferred tax liability, net – long-term    |       | $                    | (3,876     | )                    | $          | (4,814 | ) |

 

In connection with the reorganization described inNote 1, the Company entered into a tax allocation agreement with MFCpursuant to which the Company agreed to make payments to MFC, after taking intoaccount payments the Company makes directly to tax authorities, based on theCompany's stand-alone consolidated federal income tax liability, determined asif the Company and its subsidiaries constituted their own consolidated groupfor federal income tax purposes. The Company will not be permitted to makethese payments to MFC,  unless the MFCfederal tax liability exceeds the Company's stand-alone federal tax liability,until it meets certain financial ratios and is otherwise in compliance with theterms of the indenture governing the Senior Secured Notes.

 

F-22

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**5.     Long-Term Incentive Plans**

 

Effective as of May 23, 2004, the Board of Directors of MFC approvedadoption of the Phantom Stock Plan of Mrs. Fields' Companies, Inc. (the"Phantom Plan").  The purposeof the Phantom Plan is to provide long-term incentives to certain key employeesof MFC or its subsidiaries (the "Participants") as determined by theCompensation Committee of the Board of Directors (the "Committee").  The Phantom Plan is unfunded, andParticipants do not receive any payment under the Phantom Plan until thecompletion of the first to occur of:  (i)a sale of substantially all of the assets of MFC; (ii) a public offering of theMFC's common stock where MFC receives proceeds, net of any underwriter's discountsand expenses, of not less than $50 million; or (iii) any stock sale, merger orother transaction where the owners of MFC's common stock immediately before thetransaction do not own in excess of 50% of the common stock of the entitysurviving such sale, merger or other transaction (a "TriggeringEvent"). Participants receive Performance Units in amounts recommended bythe CEO and determined by the Committee. Upon the completion of a Triggering Event, Participants receive paymentsreflecting the number and value of their Performance Units at the time of thecompletion of the Triggering Event. At that time, amounts paid to Participantswill be recognized as compensation expense. Payments to Participants may be made in cash or through issuance of equitysecurities of MFC, as determined by the Committee.  The value of a Performance Unit at thecompletion of a Triggering Event is the value of one share of common stock ofMFC as determined in good faith by the Board of Directors. If the Board ofDirectors determines the need, it may seek the advice of an independentadvisor.

 

The maximum number ofPerformance Units that may be granted under the Phantom Plan is one millionPerformance Units.  Subdivisions, splits,or combinations involving MFC's common stock will proportionately affect thenumber of Performance Units that have been awarded under the Phantom Plan.  In May 2004, the Committee approved the grantof up to 392,418 Performance Units allocated among Participants as determinedby the Committee. In December 2004, the Company granted 349,250 PerformanceUnits to Participants.  Future grants, ifany, shall also be as determined by the Committee.

 

Effective as of September 1,2004, MFC terminated its Employee Stock Option Plan pursuant to the provisionsof the plan.  No further options will begranted under the plan.  Valid andoutstanding options granted to plan participants prior to termination wereunaffected by the termination. Concurrent with the termination, the Company paid $108,000 for the repurchaseof certain stock options from the plan participants.  Concurrent with the issuance of thePerformance Units of the Phantom Plan, most of the outstanding stock optionswere cancelled.  At January 1, 2005,there are 10,000 stock options outstanding.

 

During the years ended January 1, 2005, January 3, 2004and December 28, 2002, the Company recognized $75,000, $50,000 and $134,000 ofnon-cash compensation expense, respectively, related to the fiscal 2001issuance of MFC stock options to certain employees of the Company. Because theemployees of the Company are the beneficiaries of the grant of options in MFCstock, the related expense has been reflected in the Company's consolidatedfinancial statements.

 

F-23

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**6.**              Commitmentsand Contingencies

 

***Legal Matters***

In the ordinary course of business, the Company isinvolved in routine litigation, including franchise disputes and trademarkdisputes.  The Company is not a party toany legal proceedings which, in the opinion of management, after consultationwith legal counsel, is material to its business, financial condition or resultsof operations.

 

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

 

TCBY of Ireland, Inc., anindirect subsidiary, was the defendant in a recently concluded case captionedAdvanced Food Concepts, Ltd. et al. v. William P. Creasman, et al., CaseNo. 401-CV-00-117JMM, filed in the U.S. District Court for the EasternDistrict of Arkansas (the "Court"). This complaint was filed in 2001by two former franchisees against TCBY of Ireland and other corporate andindividual defendants, but all defendants were subsequently dismissed with theexception of TCBY of Ireland, Inc., the franchisor party under aTransnational Master License Agreement entered into with certain of theplaintiffs and others.

 

The plaintiffs sought damages in excess of $70 million inconnection with TCBY of Ireland's performance under and termination of theTransnational Master License Agreement. On August 4, 2004, the Court grantedTCBY of Ireland's Motion for Summary Judgment on all remaining counts of thecomplaint. Plaintiffs subsequently filed various motions, including a motionfor reconsideration, which the Court denied, and TCBY of Ireland filed a motionfor attorneys fees and costs pursuant to Arkansas law.  On February 7, 2005, the parties entered intoa settlement agreement whereby plaintiffs agreed to pay defendants a negotiatedsum for attorneys fees, and the parties agreed not to appeal the Court's rulings.  On February 14, 2005, the Court entered itsorder dismissing the case with prejudice in accordance with the settlementagreement.

 

F-24

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***OperatingLeases***

The Company leases office space, facilities and equipmentunder long-term non-cancelable operating lease agreements with remaining termsof one to nine years. Rent expense was $1.2 million, $1.2 million and$1.4 million for the years ended January 1, 2005, January 3, 2004 andDecember 28, 2002, respectively.

 

As of January 1, 2005, the future minimum lease payments due underoperating leases are as follows (in thousands):

 
| **Fiscal Year** | ** ** | ** ** | ** ** |
|-----------------|------------|------------|------------|
| 2005            |       | $          | 1,437      |   |
| 2006            |       | 1,458      |       |
| 2007            |       | 1,428      |       |
| 2008            |       | 1,380      |       |
| 2009            |       | 1,367      |       |
| Thereafter      |       | 1,936      |       |
|            |       | $          | 9,006      |   |

 

As of January 1, 2005, the future minimum subleasepayments due to the Company under these operating leases are as follows (inthousands):

 
| **Fiscal Year** | ** ** | ** ** | ** ** |
|-----------------|------------|------------|------------|
| 2005            |       | $          | 487        |   |
| 2006            |       | 165        |       |
| 2007            |       | 163        |       |
| 2008            |       | 123        |       |
| 2009            |       | 31         |       |
|            |       | $          | 969        |   |

 

***ContractualArrangements***

The Company has entered into supply agreements to buy frozen doughproducts and for the purchase of yogurt-based products, novelties and icecream. The frozen dough product supply agreement stipulates minimum annualpurchase commitments of not less than 15.0 million pounds of products,approximately $22.1 million based on weighted average prices in effectJanuary 1, 2005, each year through the end of the contract,December 2006. These annual commitments are satisfied through the purchaseof frozen dough products by the Company's gifts business segment and throughthe purchase of frozen dough products by franchisees. Should the Company notmeet the annual minimum commitment, the supplier's sole remedy is to cancel thesupply agreement.

 

The supplier of the frozen dough product manufactures itsproducts in one location. A production disruption or the supplier's inabilityto secure the raw materials used in the production of its products couldadversely affect the operating results of Mrs. Fields and its franchisees.Although management believes that other suppliers could provide similarproducts on comparable terms, a change in suppliers could cause a delay inmanufacturing and a possible loss of sales, which could adversely affect thefinancial position, results of operations, or liquidity of the Company and itsfranchisees.

 

F-25

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TCBY's supply agreement with Americana Foods LimitedPartnership ("Americana") for the purchase of yogurt-based products, novelties and ice cream(the "TCBY Supply Agreement") stipulates minimum annual purchasecommitments of at least 75 percent of the product volumes contained in theagreement through the term of the agreement, November 2007. Thesecommitments are satisfied through the purchase of frozen yogurt-based products,novelties and ice cream by our distributors and franchisees. If the purchasesfall below 75 percent of the quantity, then Americana has the right topropose a new pricing structure. If TCBY doesn't agree to the new pricingstructure, then Americana has the right to terminate the agreement by givingwritten notice 180 days prior to termination.

 

Americana manufactures its products in one location. Aproduction disruption or Americana's inability to secure the raw materials usedin the production of its products could adversely affect the operating resultsof TCBY and its franchisees. Although management believes that other supplierscould provide similar products on comparable terms, a change in suppliers couldcause a delay in manufacturing and a possible loss of sales, which couldadversely affect the financial position, results of operations, or liquidity ofthe Company and its franchisees.

 

**7.****             ****Related-Party Transactions**

 

***Due To/FromAffiliates***

The amounts due to/from affiliates are comprised ofamounts due to/from MFOC, MFH, TCBY Enterprises and affiliates, and MFC atJanuary 1, 2005 and January 3, 2004 (in thousands):

 
| ** **                   | ** ** | **January 1,  2005** | ** ** | **January 3,  2004** | ** ** |
|------------------------------|------------|----------------------|------------|----------------------|------------|
| Amounts due from affiliates: |       |                 |       |                 |       |
| MFC                          |       | $                    | 23         |                 | $          | — |   |
| Amounts due to affiliates:   |       |                 |       |                 |       |
| MFC – tax sharing       |       | $                    | 2,382      |                 | $          | 2,312 |   |
| MFH                          |       | 273                  |       | 273                  |       |
| MFOC                         |       | 125                  |       | —               |       |
| TCBY Enterprises             |       | —               |       | 550                  |       |
|                         |       | $                    | 2,780      |                 | $          | 3,135 |   |

 

The Company has from time-to-time engaged Korn/FerryInternational ("Korn/Ferry"), an international executive recruitingfirm for which Richard Ferry, one of the members of the board of managers, isalso Founder Chairman. For the years ended January 1, 2005, January 3, 2004 andDecember 28, 2002, recruiting fees paid to Korn/Ferry totaled $132,000,$362,000 and $64,000, respectively.

 

The Company has periodically engaged Applied PredictiveTechnologies ("APT") to evaluate the economics anddemographic trends of certain mall and retail site locations. Walker Lewis, oneof the members of the board of managers, is Chairman of the Board of APT. Forthe years ended January 3, 2004 and December 28, 2002, the Company paid APT$68,000 and $161,000, respectively. There were no amounts paid to APT in fiscal 2004.

 

F-26

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***FranchiseAgreements with MFOC***

Concurrent with the completion of the reorganization (seeNote 1), certain of the Company's brand franchisor subsidiaries enteredinto franchise agreements with MFOC, which permit MFOC to sell and distributethe Company's products in its owned stores upon payment of franchise royaltiesand other amounts required under the franchise agreements. These franchiseagreements are similar to the Company's standard form of franchise agreement,except that the Company did not charge an up-front franchising fee for stores openas of the date of the franchise agreements in recognition of the fact that thestores owned and operated by MFOC were operated prior to giving effect to thereorganization.

 

These franchiseagreements are terminable by the Company in the event of non-payment of thefranchise royalties for a period of 10 days, followed by a 10-dayopportunity to cure, or other material violation of the franchise agreements.As a result of these agreements, MFOC is the Company's largest franchisee,based on franchise revenues.  Theaggregate amount of franchise royalties paid to the Company by MFOC duringfiscal year 2004 was $2.8 million.  Theaggregate amount of franchise royalties that would have been required to bepaid to the Company by MFOC, had these franchise agreements been in effect,would have been $4.8 million and $6.8 million, for each of fiscalyears 2003 and 2002, respectively.

 

***ManagementAgreement 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 sum of the actual allocated costs of the fixedgeneral and administrative functions plus the variable general andadministrative functions dedicated to providing these services as determined ingood faith by the Company and MFOC. These reimbursement amounts are intended toreflect the actual costs of providing these services and are not intended togenerate revenues for the Company. Management expects that the reimbursementamounts will decrease over time as MFOC reduces its store operations. It isintended that this management agreement will continue in effect until theexpiration of all store leases for which MFOC is the lessee.  For the period from the reorganizationthrough January 1, 2005, MFOC reimbursed the Company $2.8 million formanagement services provided under the management agreement.

 

F-27

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***MFOC Sublease***

Concurrent with the completion of the reorganization (seeNote 1), the Company entered into an assignment agreement whereby thelease for the corporate headquarters was assigned from MFOC to the Company.MFOC entered into a sublease with the Company to pay the Company, over the termof the sublease, agreed rental payments that have been established based onestimated usage of the headquarters by their personnel. For the period from thereorganization through January 1, 2005, MFOC paid rent of $220,000 to theCompany.  Management estimates thatMFOC's aggregate rental payments will be approximately $326,000 in fiscal year2005. MFOC's share is expected to decrease over time with corresponding reducedoperations. It is intended that the sublease will continue in effect until the expirationof all store leases for which MFOC is the lessee, following which the MFOCsublease will be terminated and the Company would therefore be responsible forall rental payments.

 

***MFOC CollectionAgency Agreement***

Concurrent with the completion of the reorganization (seeNote 1), the Company entered into a collection agency agreement with MFOCunder which the Company agreed to act as MFOC's collection agent for subtenantrental payments made by the Company's franchisees who operate stores previouslyowned by MFOC on which MFOC remains as the tenant.

 

***Benefits Agreement with MFOC***

Concurrent with the completion of thereorganization (see Note 1), the Company entered into a benefits agreementwith MFOC under which the Company agreed to make certain payments to MFOC inrespect to the Company's share of employee benefits costs based on the numberof the Company's employees. Costs associated with the Company's employeesproviding services to MFOC under the management agreement are allocatedconsistent with the shared expenses under the management agreement.  For the period from the reorganizationthrough January 1, 2005, the Company paid MFOC $1.9 million for the Company'sshare of employee benefits costs.

 

***Insurance Allocation Agreement with MFC***

Concurrent with the completion of thereorganization (see Note 1), the Company entered into an insuranceallocation agreement with MFC under which the Company agreed to make certainpayments to MFC in respect to the Company's share of certain insurance costs,allocated based on the Company's estimation of the appropriate risk of loss ofeach of MFC's subsidiaries. The insurance allocation agreement also providesfor the allocation of workers' compensation costs based on the respectiveemployee payroll and employment category risk factor of each of MFC'ssubsidiaries that generates payroll.  Forthe period from the reorganization through January 1, 2005, the Company paidMFC $925,000 for the Company's share of insurance costs.

 

F-28

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***Shadewell Grove Holdings, LLC and Shadewell 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. Inaddition, the Company owned warrants to purchase 111,111 shares of Nonni'scommon stock at an exercise price of $10.775.  In March 2004, Nonni's was acquired by a third party investor in a stockpurchase (the "Nonni's Purchase"). As part of the Nonni's Purchase,in consideration for the sale of the warrants to purchase 111,111 shares ofNonni's common stock, the Company received an aggregate of $1.3 million, ofwhich approximately $200,000 is being held in an escrow account pendingpost-closing adjustments related to the Nonni's Purchase.  As a result, the Company recorded a gain onthe sale of these warrants of $1.1 million in other income in the consolidatedstatement of operations during the year ended January 1, 2005.  Any proceeds received from the amount held inescrow will be recorded as other income when received. Immediately prior to theNonni's Purchase, the Mrs. Fields product division of Nonni's and itsrelated assets were contributed to a newly-formed entity, Shadewell GroveHoldings, LLC ("Shadewell Holdings"). The Company received from Shadewell Holdings its pro-rata share ofpreferred units in Shadewell Holdings, approximately 4.1 percent, as if thewarrants in Nonni's common stock had been exercised immediately prior theNonni's purchase.

 

InDecember 2004, the Company paid Shadewell Holdings approximately $102,000 foradditional preferred units of Shadewell Holdings to maintain its pro-rataownership of Shadewell Holdings.  Thisinvestment is recorded in other assets in the consolidated balance sheet as ofJanuary 1, 2005. The Company has appointed John Lauck, one of its executiveofficers, to represent the Company as a director of Shadewell Holdings.

 

ShadewellGrove IP, LLC ("Shadewell"), a wholly-owned subsidiary of ShadewellHoldings, has licenses to develop, manufacture and distribute ready-to-eatshelf stable cookie products utilizing the Mrs. Fields trademarks, servicemarks and trade names through retail distribution channels and designated foodservice distribution channels. Shadewell also has a license to market anddistribute high quality, pre-packaged chocolate chips utilizing the Mrs. Fieldstrademarks, service marks and trade names through designated retaildistribution channels. Prior to December 24, 2004, Shadewell had a licenseagreement to market and distribute high quality, frozen cookie dough productsutilizing the Mrs. Fields trademarks, service marks and trade names to the foodaway from home industry through designated food service distribution channels.For the years ended January 1, 2005, January 3, 2004 and December 28,2002, the Company earned royalty and licensing revenues associated with thelicensing and recipe sales agreements of $3.1 million, $3.5 millionand $3.8 million, respectively.

 

F-29

----

 

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.  Among other reasons, the Company pursued thetermination of this license to better align the Company's interests with thoseof 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.  Thetermination fee was recorded in licensing expenses in the consolidatedstatement of operations for the year ended January 1, 2005.

 

***Co-marketingand Supply Agreement***

In connection with its acquisition, TCBY had previouslyentered into an exclusive co-marketing and supply agreement with Americana. Upuntil November 19, 2002, Americana was a wholly-owned subsidiary of TCBYEnterprises. On November 20, 2002, TCBY Enterprises sold Americana to an entityin which a limited partner of the entity is a subsidiary of a significantshareholder of MFC.  Under the agreement,Americana manufactured yogurt-based products, ice cream, and novelty items forsale and distribution to TCBY's franchisees and distributors at agreed-uponprices, subject to changes in Americana's production costs. This agreement wasreplaced by the TCBY Supply Agreement on November 20, 2002 (seeNote 6). Under the original co-marketing and supply agreement and the TCBYSupply Agreement, the Company recognized revenues related to the productmanufactured by Americana of $11.7 million, $13.1 million and$28.0 million for the years ended January 1, 2005, January 3, 2004 andDecember 28, 2002, respectively.

 

***Reimbursementof TCBY Transition Costs***

The Company was entitled to receive approximately$2.4 million from TCBY Enterprises for reimbursement of expenses incurredon behalf of TCBY and one-time transition costs incurred in the transfer ofmanagement functions of TCBY from Little Rock, Arkansas to Salt Lake City, Utahin 2000. The reimbursement of these costs was subject to the point in time whenTCBY Enterprises' dairy processing plant (Americana) generated sufficient cashin excess of the working capital requirements of the dairy processing plant tomake the reimbursement or upon the sale of the dairy processing plant. During2002, the dairy processing plant was sold and the Company was reimbursed byTCBY Enterprises for these transition expenses. This amount has been includedin other operating income in the accompanying consolidated statement ofoperations for the year ended December 28, 2002.

 

F-30

----

 

**8.     Employee Benefit Plan**

 

MFOC sponsors the Mrs. Fields' OriginalCookies, Inc. 401(k) Retirement Savings Plan (the "Plan") forall eligible employees of MFOC and its subsidiaries. Under the terms of the Plan,employees may make contributions to the Plan. During 2002 and 2004, a portionof the employee contributions to the Plan were matched by contributions fromthe Company at the rate of 100 percent of the first three percent ofemployee contributions plus 50 percent of the next two percent of employeecontributions. The total matching contributions made by the Company to the Planfor the years ended January 1, 2005 and December 28, 2002 wereapproximately $294,000 and $308,000, respectively. No contributions were madeto the Plan by the Company for the year ended January 3, 2004.

 

**9.****             ****Reportable Segments**

 

Operating segments are components of the Company forwhich separate financial information is available that is evaluated regularlyby management in deciding how to allocate resources and in assessingperformance. This information is reported on the basis that it is usedinternally for evaluating segment performance. The Company has four reportableoperating segments; namely, franchising, gifts, licensing and retail foodsales. The franchising segment consists of revenues received either directly orindirectly from cookie, yogurt and pretzel stores, which are owned and operatedby third parties. These revenues include initial franchise or license fees,monthly royalties based on a percentage of a franchisee's gross sales, sales ofcookie dough that the Company produces, and certain product formulation feesand supplier allowances which are based upon sales to franchisees. The giftssegment includes sales generated from the Company's mail order gift catalog andweb site. The licensing segment consists of other licensing activity from thirdparties for the sale of products bearing the Company's brand names. The retailfood sales segment consists of sales of TCBY-branded frozen yogurt products andnovelties through retail channels.  Theaccounting policies for the segments are the same as those discussed in thesummary of significant accounting policies (see Note 2). Sales and transfersbetween segments are eliminated in consolidation.

 

Prior to December 2002, revenues from the sale ofTCBY-branded frozen food specialty products and private-label ice cream togrocery stores and wholesale clubs were recognized upon shipment and includedin retail food sales. In December 2002, TCBY licensed the sale anddistribution of these products to a third party, whereby the Company now earnsa licensing fee as products are sold and distributed by the third party.Accordingly, revenues subsequent to December 2002 that are earned underthis licensing agreement are included in licensing revenues.

 

The Company evaluates performance of each segment basedon contribution margin. Contribution margin is computed as the differencebetween the revenues generated by a reportable segment and the selling andoccupancy expenses, cost of sales and direct general and administrativeexpenses related to that reportable segment. Contribution margin is used as ameasure of the operating performance of an operating segment. The Company doesnot allocate any indirect general and administrative expense, other operatingincome (expense), interest expense, depreciation and amortization or assets toits reportable operating segments.

 

F-31

----

 

Segment revenues and contribution margin are presented inthe following table (in thousands):

 
| ** **           | ** ** | **Fiscal Year Ended** | ** ** |
|----------------------|------------|-----------------------|------------|
| ** **           | ** ** | **January 1,  2005**  | ** ** | **January 3,  2004** | ** ** | **December 28,  2002** | ** ** |
| Revenues:            |       |                  |       |   |   |   |   |
| Franchising          |       | $                     | 55,913     |   | $ | 58,645 |   | $ | 61,332 |   |
| Gifts                |       | 25,849                |       | 17,405 |   | 12,628 |   |
| Licensing            |       | 4,945                 |       | 5,464 |   | 4,566 |   |
| Retail food sales    |       | —                |       | — |   | 16,606 |   |
|                 |       | $                     | 86,707     |   | $ | 81,514 |   | $ | 95,132 |   |
| Contribution margin: |       |                  |       |   |   |   |   |
| Franchising          |       | $                     | 34,020     |   | $ | 38,605 |   | $ | 40,670 |   |
| Gifts                |       | 5,116                 |       | 4,198 |   | 2,850 |   |
| Licensing            |       | 3,429                 |       | 4,309 |   | 4,423 |   |
| Retail food sales    |       | —                |       | — |   | 1,394 |   |
|                 |       | $                     | 42,565     |   | $ | 47,112 |   | $ | 49,337 |   |

 

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

 
| ** **                                                                                           | ** ** | **Fiscal Year Ended** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                           | ** ** | **January 1,  2005**  | ** ** | **January 3,  2004** | ** ** | **December 28,  2002** | ** ** |
| Contribution margin                                                                                  |       | $                     | 42,565     |   | $ | 47,112 |   | $ | 49,337 |   |
| Other operating revenues                                                                             |       | 353                   |       | 474 |   | 260 |   |
| General and administrative expense                                                                   |       | (9,727                | )          | (10,811 | ) | (12,129 | ) |
| Stock compensation expense                                                                           |       | (75                   | )          | (50 | ) | (134 | ) |
| Other operating income (expense), net                                                                |       | (396                  | )          | (1,015 | ) | 2,563 |   |
| Interest expense, net                                                                                |       | (24,905               | )          | (25,041 | ) | (25,327 | ) |
| Other income                                                                                         |       | 1,054                 |       | — |   | — |   |
| Depreciation and amortization                                                                        |       | (4,053                | )          | (3,753 | ) | (3,689 | ) |
| Provision for income taxes                                                                           |       | (2,254                | )          | (2,403 | ) | (4,365 | ) |
| Income from current operations before  cumulative effect of accounting change                        |       | 2,562                 |       | 4,513 |   | 6,516 |   |
| Income (loss) from discontinued operations  (net of income taxes of $65, $158 and $44, respectively) |       | 104                   |       | 255 |   | (288 | ) |
| Income before cumulative effect of accounting  change                                                |       | 2,666                 |       | 4,768 |   | 6,228 |   |
| Cumulative effect of accounting change                                                               |       | —                |       | — |   | (35,175 | ) |
| Net income (loss)                                                                                    |       | $                     | 2,666      |   | $ | 4,768 |   | $ | (28,947 | ) |

 

The fixed assets and inventory of the Company primarilyrelate to the Company's Great American Cookie batter facility and giftsbusiness segment and related activities. Assets relating to franchising andlicensing activity are primarily amounts due from franchisees and licensees andgoodwill relating to franchising concepts.

 

F-32

----

 

Revenues from franchisees, customers and licensees withinthe United States were $86.1 million, $80.6 million and $94.3 million for theyears ended January 1, 2005, January 3, 2004 and December 28, 2002,respectively, and represented 98.9 percent, 98.3 percent and 98.9 percent oftotal revenues for the years ended January 1, 2005, January 3, 2004 andDecember 28, 2002, respectively. Revenues from international franchisees, customers and licensees were$1.0 million, $1.4 million and $1.1 million for the years ended January 1,2005, January 3, 2004 and December 28, 2002, respectively, and represented 1.1percent, 1.7 percent and 1.1 percent of total revenues for the years endedJanuary 1, 2005, January 3, 2004 and December 28, 2002, respectively.  Revenues from any single foreign country werenot material.  Providing geographicalinformation regarding long-lived assets is impracticable.

 

The Company has one licensee that accounted for$3.1 million, $3.5 million and $3.8 million, or62.7 percent, 63.1 percent and 83.7 percent of the revenues ofthe licensing segment for the years ended January 1, 2005, January 3, 2004 andDecember 28, 2002, respectively. The Company has one customer in its giftsbusiness segment that accounted for $4.2 million, $3.0 million and$2.2 million, or 16.2 percent, 17.2 percent and17.2 percent of revenues of the gifts business segment for the years endedJanuary 1, 2005, January 3, 2004 and December 28, 2002, respectively. Therewere no other customers or licensees that accounted for more than10.0 percent of Mrs. Fields' total revenues or any individualsegment's revenues.

 

**10.****      ****Discontinued Operations**

 

TCBY transitioned its equipment sales segment("Riverport") to a third party equipment and smallwares distributorduring the quarter ended March 29, 2003. The distributor purchased certainof Riverport's inventory at cost, subject to certain slow moving inventorypurchase price adjustments. The segment's assets that were subject todepreciation and amortization were being periodically expensed over the remainingestimated useful life. The results of operations and financial position ofRiverport are classified as discontinued operations in the accompanyingconsolidated financial statements.  TheCompany does not anticipate any further activity relating to Riverport infuture periods.

 

**11.****      ****Supplemental CondensedConsolidating Financial Information**

 

The Senior Secured Notes were issued by theCompany and Mrs. Fields Financing Company, Inc., as co-issuers.  Mrs. Fields Financing Company, Inc. is awholly owned finance subsidiary of the Company. The Senior Secured Notes are fully and unconditionally guaranteed on ajoint and several basis by all of the Company's domestic subsidiaries otherthan minor subsidiaries. Mrs. Fields Famous Brands has no independent assetsor operations. 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.

 

F-33

----

 

**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 Cookie Company  Franchising, LLC                                                                               |
|            |       |                                                                                                                                                      |
| 3.6*            |       | Limited Liability Agreement of Great American Cookie 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                                                                                                             |

 

----

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                              |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **      | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 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                                                                                                                                                                                            |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 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 11 1¤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 11 1¤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 11 1¤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 Cookie 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. |

 

----

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                         |
|-----------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                                                                                                                                                                                    |
| 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.                                                                                                                                                                       |
|            |       |                                                                                                                                                                                                                                                                                                                    |
| 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 Cookie Company, LLC, and Great American Cookie Company  Franchising, LLC                                                                                                                                                              |
|            |       |                                                                                                                                                                                                                                                                                                                    |
| 10.6*           |       | International Trademark Assignment, dated March 16, 2004, between  Great American Cookie Company, LLC, and Great American Cookie 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                                                                                                                                                                   |

 

----

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                             |
|-----------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                                                                                                                                                        |
| 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.                                                                                                                                                           |
|            |       |                                                                                                                                                                                                                                                                                        |
| 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 Cookie Company Franchise Agreement, dated as of March  16, 2004, by and between Great American Cookie 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.                                                                                                                                   |

 

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| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                      |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                                                                                                                 |
| 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.                                                                                                             |
|            |       |                                                                                                                                                                                                                                                 |
| 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.                                                                                  |

 

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| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                   |
|-----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                                                                                                                                                                                              |
| 10.57*          |       | Amended and Restated Employment Agreement, dated March 16, 2004, by  and between Sandra Buffa and Mrs. Fields Famous Brands, LLC                                                                                                                                                                                                  |
|            |       |                                                                                                                                                                                                                                                                                                                              |
| 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. |
|            |       |                                                                                                                                                                                                                                                                                                                              |
| 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                                                                                                                                                                                                           |
|            |       |                                                                                                                                                                                                                                                                                                                              |
| 12.1****        |       | Computation of ratio of earnings to fixed charges of Mrs. Fields  Famous Brands, LLC                                                                                                                                                                                                                                              |
|            |       |                                                                                                                                                                                                                                                                                                                              |
| 14.1****        |       | Code of Ethics of Mrs. Fields’ Original Cookies, Inc. and its  subsidiaries                                                                                                                                                                                                                                                  |
|            |       |                                                                                                                                                                                                                                                                                                                              |
| 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 correspondingexhibit 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 correspondingexhibit number to Amendment No. 1 to the Company’s Registration Statement onForm S-4 (No. 333-115046) filed with the Securities and Exchange Commission onJuly 2, 2004, and incorporated herein by reference.

 

***                           Included as an exhibit, with correspondingexhibit number to Amendment No. 2 to the Company’s Registration Statement onForm S-4 (No. 333-115046) filed with the Securities and Exchange Commission onJuly 12, 2004, and incorporated herein by reference.

 

****                    Filed herewith.

 

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