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  As Of               Filer                 Filing     As/For/On Docs:Pgs              Issuer               Agent

 3/28/03  MRS Fields Original Cookies Inc   10-K       12/28/02   12:168                                    Merrill Corp/New/- FA

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report                                       HTML  1,070K 
 2: EX-4.10     Instrument Defining the Rights of Security Holders  HTML     38K 
 3: EX-4.11     Instrument Defining the Rights of Security Holders  HTML     39K 
 4: EX-10.54    Material Contract                                   HTML     22K 
 5: EX-10.55    Material Contract                                   HTML     22K 
 6: EX-10.56    Material Contract                                   HTML     52K 
 7: EX-10.57    Material Contract                                   HTML     64K 
 8: EX-10.58    Material Contract                                   HTML     79K 
 9: EX-12.1     Statement re: Computation of Ratios                 HTML     21K 
10: EX-21.1     Subsidiaries of the Registrant                      HTML     10K 
11: EX-99.1     Miscellaneous Exhibit                               HTML     11K 
12: EX-99.3     Miscellaneous Exhibit                               HTML     28K 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

Commission file number 333-45179

MRS. FIELDS' ORIGINAL COOKIES, INC.
(Exact Name of Registrant Specified in Its Charter)

Registrant's telephone number, including area code: (801) 736-5600

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
None

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

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act. Yes o    No ý

        The Company had 400 shares of common stock outstanding at March 15, 2003

DOCUMENTS INCORPORATED BY REFERENCE:
None

MRS. FIELDS' ORIGINAL COOKIES, INC.

   
TABLE OF CONTENTS

2

   
PART I

        Unless the context otherwise requires, references to "we," "us," "our," "Mrs. Fields" and the "Company" in this report generally refer to Mrs. Fields' Original Cookies, Inc., a Delaware corporation, and its subsidiaries.

FORWARD-LOOKING INFORMATION

        This report contains forward-looking statements. Forward-looking statements include the words "may," "will," "estimate," "continue," "believe," "expect" or "anticipate" and other similar words. These forward-looking statements generally relate to our plans and objectives for future operations and are based upon management's reasonable estimates of future results or trends. Although the Company believes that the plans and objectives reflected in or suggested by such forward-looking statements are based upon assumptions that are reasonable, the Company may not achieve such plans or objectives. Actual results may differ materially from projected results due, but not limited, to unforeseen developments, including developments relating to the following:

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the availability and adequacy of cash flow to satisfy obligations, debt service on the senior notes and additional funds required for working capital,



•

the current negative stockholder's equity and the ability to solicit new franchisees,



•

the ability to sell selected company owned stores to franchisees,



•

economic, competitive, demographic, business and other conditions in various markets,



•

the seasonal nature of operations,



•

actions taken or failed to be taken by third parties, including the Company's customers, suppliers, competitors and shareholders, as well as legislative, regulatory, judicial and other governmental authorities,



•

changes in business strategy, capital improvements or development plans or in personnel or their compensation,



•

performance by franchisees and licensees,



•

difficulties or delays in developing and introducing anticipated new products or failure of customers to accept new product offerings,



•

changes in consumer preferences and the Company's ability to adequately anticipate such changes,



•

changes in raw materials and employee labor costs,



•

the termination of, or inability to renew on favorable terms, material agreements,



•

changes in relationships with the Company's franchisees and licensees, and



•

changes in customer traffic,



•

acts of war or terrorist incidents.

        The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report may not occur.

3

   
Item 1. Business

Description Of Business And Nature Of Operations

        Mrs. Fields' Original Cookies, Inc., a Delaware corporation (the "Company" or "Mrs. Fields"), is a wholly owned subsidiary of Mrs. Fields' Holding Company, Inc., a Delaware corporation ("Mrs. Fields' Holding"). Mrs. Fields' Holding is a wholly owned subsidiary of Mrs. Fields Famous Brands, Inc., a Delaware corporation ("MFFB"), which was established to combine Mrs. Fields' Holding and TCBY Holding Company, Inc., a Delaware corporation ("TCBY Holding"), under a common parent (see Note 1 of Notes to Consolidated Financial Statements included in Item 8 of Part II of this report). The Company has ten wholly owned operating subsidiaries: Great American Cookie Company, Inc., Pretzel Time, Inc., Pretzelmaker, Inc., Mrs. Fields Gifts, Inc., Mrs. Fields Cookies Australia, Mrs. Fields Cookies (Canada) Ltd., Pretzelmaker Canada, Inc., Sunshine Pretzel Time, Inc., Peachtree Pretzel Time, Inc., CMBC, Inc. and two partially owned subsidiaries.

        The Company operates, develops and franchises retail bakery stores and cafes, which sell freshly baked cookies, brownies, pretzels and other food products through four specialty branded concepts: Mrs. Fields Cookies, Great American Cookies, Pretzel Time and Pretzelmaker. In addition, the Company operates retail bakery stores that operate under two other branded concepts: Original Cookie Company and Hot Sam Pretzels.

        In connection with its franchising activities, the Company authorizes third-party licensees and franchisees to use certain business formats, systems, methods, procedures, designs, layouts, specifications, trade names and trademarks in the United States and other countries. Additionally, the Company licenses the use of its trademarks, logos and recipes to third parties for distribution of Mrs. Fields branded products through non-bakery stores and cafes. The Company also markets and distributes its products through mail order catalogs and the Internet.

History

        In 1996, an investor group led by Capricorn Investors II, L.P. ("Capricorn II") formed Mrs. Fields and The Mrs. Fields' Brand, Inc. as Delaware corporations and subsidiaries of Mrs. Fields' Holding. On September 17, 1996, Mrs. Fields' Holding initiated operations when the Company purchased substantially all of the assets and assumed certain liabilities of Mrs. Fields, Inc. and its subsidiaries, The Original Cookie Company, Incorporated ("Original Cookie") and the pretzel business of Hot Sam Company, Inc. ("Hot Sam").

        The Company has achieved growth in both its cookie and pretzel businesses through strategic acquisitions and may continue this strategy if appropriate opportunities arise. In a series of transactions in 1997 and 1998, the Company acquired the following:

•

all of the outstanding capital stock of Pretzel Time, Inc., the franchisor of the Pretzel Time concept, and substantially all of the assets of H&M Concepts Ltd. Co., the largest franchisee of Pretzel Time, Inc.,



•

all of the outstanding capital stock of Great American Cookie Company, Inc. ("Great American") and 48 stores from four Great American franchisees, and



•

all of the outstanding capital stock of Pretzelmaker, Inc. ("Pretzelmaker"). Pretzelmaker had 248 franchised stores at the time of acquisition.

        One of the key elements of Mrs. Fields' business plan has been, and continues to be, closing or franchising certain company owned stores that do not meet financial and geographical criteria established by management. As a result of converting certain stores to franchises, royalty revenues have increased and are expected to continue to increase, and net store sales and expenses associated with operating those stores have decreased.

4

        In late 1999 and early 2000, Mrs. Fields' Holding considered the acquisition of TCBY Enterprises, Inc. ("TCBY Enterprises"); however, because of debt limitations imposed upon Mrs. Fields' Holding by an indenture governing its senior notes, Mrs. Fields' Holding did not have access to sufficient capital to pursue an acquisition at that time. Instead, following a determination by Mrs. Fields' Holding's Board of Directors that such an acquisition by it would not constitute the wrongful taking of a corporate opportunity, Capricorn Investors III, L.P. ("Capricorn III"), an affiliate of Capricorn II, acquired a majority interest in TCBY Enterprises on June 1, 2000.

        In connection with the acquisition of TCBY Enterprises by Capricorn III, Mrs. Fields entered into a management agreement (the "TCBY Management Agreement") with TCBY Holding, TCBY Enterprises and TCBY Systems, LLC ("TCBY Systems"), a wholly owned subsidiary of TCBY Enterprises (collectively, "TCBY"), pursuant to which the corporate and administrative functions of TCBY were transferred to Mrs. Fields. Under the TCBY Management Agreement, Mrs. Fields has agreed to manage and operate TCBY's business, and pay specified operating and other costs of TCBY (including specified costs associated with expenses incurred on behalf of TCBY and the transfer of the management function from Little Rock, Arkansas to Salt Lake City, Utah in 2000), in exchange for a management fee paid by TCBY semi-monthly, which is in excess of the Company's costs to perform these services. Revenue generated from the management fee is reported in "Management fee revenue" in the Consolidated Statements of Operations and Comprehensive Loss included in Item 8 of Part II of this report. Management fee revenue was $11.3 million, $11.5 million and $7.5 million for the fiscal years ended December 28, 2002, December 29, 2001 and December 30, 2000, respectively.

        On August 31, 2001, the TCBY Management Agreement was amended to provide for TCBY to defer payment of certain portions (not to exceed $2.0 million in fees in any given fiscal year) of the management fee payable and to release such amounts based upon TCBY Systems' compliance with a ratio included in a TCBY Systems' credit facility. The Company agreed that the payment of a portion of the management fees and certain other amounts to be received by the Company under the TCBY Management Agreement would, under certain circumstances, be subordinated to certain indebtedness of TCBY Systems. To the extent that TCBY Systems' profitability was greater than required by the ratio test, the Company was entitled to receive a 15 percent "special management fee" based upon a calculation of the amount by which TCBY Systems exceeded the compliance ratio.

        On November 19, 2002, the TCBY Management Agreement was further amended. The amendment reduced the management fee to $867,000 per month for the period from October 2002 through and including September 2003, and to $783,000 per month for the period from October 2003 through and including December 2004. The amendment eliminated the deferral of management fees (described above) except for $1.5 million, which was retained as of September 28, 2002. This retained amount and accrued interest shall be paid to the Company upon TCBY Systems' full payment of its obligations under its credit facility. Included in amounts due from affiliates as of December 28, 2002 in the Consolidated Balance Sheets included in Item 8 of Part II of this report is $1.5 million related to such retention amount. The Company is entitled to receive interest at the highest non-default rate in effect under TCBY Systems' credit facility on any amounts deferred.

        On September 29, 2001, Mrs. Fields' Holding completed a reorganization (the "Mrs. Fields Reorganization"), pursuant to which the stockholders and optionholders of Mrs. Fields' Holding contributed their shares of common stock, preferred stock and options to MFFB, in exchange for the same number of shares of common stock and preferred stock of MFFB and MFFB options with essentially the same terms, except that the holders of MFFB preferred stock have the right to vote together with the holders of the MFFB common stock on matters submitted to the vote of the common stockholders.

        Immediately following the Mrs. Fields Reorganization, a wholly owned subsidiary of MFFB merged with and into TCBY Holding (the "Merger"). As a result of the Mrs. Fields Reorganization and the

5

Merger, Mrs. Fields' Holding and TCBY Holding have become first tier subsidiaries of MFFB. (See also "Overview" in Item 7 of Part II of this report.) The Mrs. Fields Reorganization and the Merger were initiated because the Company believed that synergies of the combined entity would exceed that of the independent companies, would avoid conflicts between shareholders and, ultimately, would simplify the day-to-day management of the two companies.

        The Mrs. Fields Reorganization and the Merger did not result in a "change of control" of Mrs. Fields' Holding or its subsidiaries, including the Company, under the Indenture governing the 14 percent Senior Secured Discount Notes due December 1, 2005 of Mrs. Fields' Holding, the Indenture governing the 10¹/8 percent Senior Notes due December 1, 2004 of the Company, or agreements governing Mrs. Fields' other indebtedness.

        In November 2002, the Company merged its wholly owned subsidiary Mrs. Fields' Brand, Inc. into Mrs. Fields' Original Cookies, Inc. In December 2002, the Company formed Mrs. Fields Gifts, Inc., a separate wholly owned subsidiary for the mail order operations.

Access to Financial Information

        The Company files annual, quarterly and current reports and other documents with the United States Securities and Exchange Commission ("SEC") under the Securities and Exchange Act of 1934. The SEC maintains an Internet website www.sec.gov that contains these reports. The Company also makes available free of charge on its Internet website www.mrsfields.com the Company's Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. These financial reports are accessible under the financial option on the Company's Internet website as soon as reasonably practicable after the Company electronically files such reports with the SEC. The reports remain accessible on the Company's Internet website for approximately one year.

General

        Mrs. Fields is one of the largest retailers in the premium snack-food industry, with cookies and pretzels as its major product lines. Mrs. Fields is the largest retailer in the United States of baked-on-premises cookies, which the Company sells primarily under its Mrs. Fields Cookies and Great American Cookies brand names. Mrs. Fields Cookies is among the most widely recognized and respected brand names in the premium cookie industry with 94 percent brand awareness among consumers. Mrs. Fields is the second largest retailer in the United States of baked-on-premises pretzels, which the Company sells primarily under its Pretzel Time and Pretzelmaker brand names. As of January 25, 2003, Mrs. Fields' retail network consisted of 1,360 locations, of which 836 were cookie stores, 501 were pretzel stores and 23 were bakery café locations that sell a combination of the products that Mrs. Fields offers. Of the total stores, 323 were company owned and 1,037 were franchised or licensed. Mrs. Fields derives its revenues principally from the sale of the Company's products in its company owned stores and through its mail order segment, the sale of proprietary batter to its Great American Cookies franchised stores and royalties based on gross sales from franchisees and licensees. In addition, the Company generates revenues from initial franchise fees, the sale of existing company owned stores to franchisees and management fees from TCBY.

6

Product Offerings

        Mrs. Fields product offerings consist primarily of fresh baked cookies, brownies, "sweet dough" soft pretzels, "Bavarian" style pretzels and beverages. During the year ended December 28, 2002, the Company's revenue mix at company owned stores consisted of the following:

        Cookies and Brownies.    As of January 25, 2003, the Company operates and franchises 836 specialty retail cookie outlets, including full-size stores and satellite (carts and kiosks) stores. Of these stores, 515 stores are operated under the Mrs. Fields brand, 296 under the Great American brand and 25 stores under the Original Cookie brand. The Company has 762 cookie stores in 48 states and the District of Columbia, with its Great American stores concentrated in the southeastern and south central states and its Mrs. Fields and Original Cookie stores located in the western, mid-western and eastern states. There is little overlap between Mrs. Fields and Great American stores, with a dual presence in 8 of the 637 malls in which the Company has cookie stores.

        Management believes that Mrs. Fields' market is the premium quality, baked on-premises segment of the approximately $6.0 billion U.S. cookie industry. The Company offers over 50 different types of cookies, brownies and muffins, which are baked continuously and served fresh throughout the day, as well as assorted soft drinks, frozen drinks, coffee, tea and milk. Baked products are made using only high quality ingredients, and all dough is centrally manufactured and frozen or refrigerated to maintain product quality and consistency. All products pass strict quality assurance and control steps at both the manufacturing plants and the stores. In addition, Mrs. Fields continually creates and tests new products to attract new customers and satisfy current customers.

        The Company's cookie concept outlets also sell "Cookie Cakes." Cookie cakes are extra-large cookies, decorated with customer-selected, personalized messages for special occasions. Although cookie sales are generally the result of impulse buying, the Company believes that cookie cakes, which are often purchased as gifts for special occasions, differentiate the Company from other specialty cookie retailers by making the Company's cookie stores destination outlets.

        Pretzels.    As of January 25, 2003, the Company operates and franchises 501 retail pretzel stores, which offer "sweet dough" soft pretzels and "Bavarian" style pretzels with a variety of toppings. Of these stores, 257 stores are operated under the Pretzel Time brand, 220 stores under the Pretzelmaker brand and 24 stores under the Hot Sam brand. Pretzel Time's primary product is an all-natural, hand-rolled soft pretzel, freshly baked from scratch at each store location. Pretzel Time stores prepare pretzels with a variety of flavors and specialty toppings, including cheddar cheese, cream cheese and pizza sauce. Pretzelmaker sells hand-rolled soft pretzels freshly baked at each store location. In order to maintain a consistent and high quality product, the dough is shipped frozen to each location. The stores also offer soft drinks and fruit juices.

        Bakery Cafés.    As of January 25, 2003, the Company operates and franchises 23 stores under the name Mrs. Fields Bakery Café or Great American Bakery Café in which it sells core products including cookies, brownies, frozen yogurt, ice cream and pretzels under the Mrs. Fields, Great American, TCBY and Pretzel Time brand names, as well as other products, including breakfast items, such as muffins, bagels and coffee, and lunch items, such as soup and sandwiches. The bakery cafés have higher operating costs and have not yet contributed the level of earnings to the Company that management expects to ultimately achieve.

7

Business Strategy

        The Company's objective is to increase sales and profitability at its company owned and franchised stores by implementing the key elements of its long-term business strategy. The Company's business strategy includes diversification of the Company's income base from company owned mall retail locations and franchises to other business segments that capitalize on the Company's branded concepts. The key elements of the Company's business strategy are as follows:

        Capitalize on Cross Selling and Co-Branding Opportunities.    The Company intends to capitalize on cross selling and co-branding opportunities by offering multiple product lines in a single location, providing franchisees of one brand the ability to become franchisees of the Company's other brands and/or the TCBY brand. Additionally, the Company has the ability to market bundled brands to potential and existing licensees. As noted above, the Company operates and franchises bakery café stores specifically designed for cross selling each of the Company's multiple core brands in a single location. As of January 25, 2003, the Company operates and franchises 23 such stores. The Company will continue to explore additional co-branding opportunities with well-respected national and regional brands.

        Capitalize on the Strong Brand Names.    The Company believes that the Mrs. Fields' brand name is the most widely recognized and respected brand name in the retail premium cookie industry. Mrs. Fields brand stores, for the year ended December 28, 2002, achieved average revenue of $321,000 per store compared to an average revenue of $289,000 per store for Great American stores and of $252,000 per store for Original Cookie stores. The Company intends to further capitalize on the Mrs. Fields' brand name by further developing and expanding the ways it markets products, including kiosks and carts in malls, airports, convention centers, office building and street fronts; increasing the emphasis on the mail order and Internet business; and developing and capitalizing on licensing opportunities, such as linking sales of Mrs. Fields with prominent names in the retailing and food service industry, expanding licensing agreements with our existing licensees, entering into new licensing agreements with food service operators and developing product line extensions, such as cocoa, chocolate chips, ice cream, chocolates and ready to eat cookies sold in supermarkets and other convenient locations.

        The Company believes the Pretzel Time brand name is one of the leading brand names in pretzel retailing. The Company believes that there are significant opportunities to improve existing Hot Sam store operations by continuing to convert company owned Hot Sam stores to Pretzel Time stores. Pretzel Time stores have, for the year ended December 28, 2002, achieved average revenue of $229,000 per store compared to an average revenue of $211,000 per store for Hot Sam stores. The Company believes that capitalizing on the Pretzel Time name and product offering may result in an increase in net sales and income from store operations.

        Develop Franchised Stores.    As of January 25, 2003, the Company had 1,037 franchised and licensed stores. During 2002, the Company franchised 92 new stores and sold 70 company owned stores to new and existing franchisees. The Company plans to continue to aggressively expand its franchised stores. The Company intends to franchise approximately 65 to 90 new single concept or co-branded pretzel and cookie stores and to sell approximately 60 to 75 company owned stores to new and existing franchisees. The Company does not intend to develop or franchise any additional Original Cookie or Hot Sam stores.

        Continue Development of New Products.    The Company maintains a product development department that continually creates and tests new products to revitalize the interest of current customers and attract new customers. Once a new product is identified, prototypes are developed to determine the initial formula. For Mrs. Fields' products, the formula is then scaled up for test production runs at one or more approved facilities. Once the product has been successfully produced,

8

ingredient specifications, formulas, manufacturing processes, finished product specifications, shelf life, storage and distribution procedures are established. The new product is either immediately launched throughout the system, as in the case of seasonal items or simple line extensions, or test marketed in a limited number of stores. After a trial period to evaluate both consumer response and store operations' impact, the new product is either fully implemented, modified or discontinued. In December 2002, the Company entered into a three year licensing agreement with Sesame Workshop (Sesame Street) to use, among other things, the likeness of the Cookie Monster and Elmo characters. In the first quarter of 2003, the Company plans to begin offering cookies that bear the likeness of Cookie Monster and Elmo. Management believes these products will attract families with children under six years old. Additionally, Pretzel Time and Pretzelmaker are expanding their traditional customer base by continuing to introduce meal replacement product lines.

        Increase International Locations.    In addition to pursuing new store development opportunities within the United States, the Company intends to continue to grow internationally by expanding its franchise operations. As of January 25, 2003, there were 104 franchised Mrs. Fields, Pretzel Time and Pretzelmaker brand stores open internationally. Additionally, the Company entered into international area license agreements in Greece, India, South Korea, Kuwait, People's Republic of China and Qatar in 2002. The revenue associated with these license agreements is amortized over the term of the license, generally five years, or based upon the opening of franchised units as defined in the agreements.

Store Operations

        Store Base.    As of January 25, 2003, the Company's store portfolio consisted of 323 company owned stores, 840 domestic franchised locations, 104 international franchised locations and 93 licensed locations. By brand, the Company's stores are distributed as follows:

9

        As of January 25, 2003, the Company's domestic stores were located in 48 states and the District of Columbia as follows:

10

        Configuration.    The Company has developed a number of retail configurations that have wide application and adaptability to a variety of retail environments. In addition to the stores that have been designed for prime mall locations, the Company has developed other formats intended to extend its presence within and beyond mall locations. The introduction of frozen dough technology has led to a number of new store configurations, expanded product offerings in smaller outlets and non-traditional formats. The Company is expanding the products offered in current mall and non-urban areas, adding the full product line of brands it currently owns or operates.

•

General. All of the retail store configurations are designed to include the same high-quality marketing, merchandising and design features that customers have come to expect from Mrs. Fields. The store designs are bright with high-profile trademark identity. All products are baked throughout the day on the premises with ovens located in full view of the customer to support the "fresh-baked" image. All designs contain retail display, small refrigerators and/or freezers and cash registers.



•

Cookie Stores. All stores are uniformly designed in accordance with the Mrs. Fields, Great American or Original Cookie prototype, making extensive use of glass, painted wood, brass, mirrors, lighting and point-of-sale displays intended to create an upscale, open and inviting look. Stores also attractively and efficiently display their fresh-baked products using custom-made showcases. Store size ranges from 500 to 800 square feet and the typical company owned store is about 600 to 700 square feet with a minimum of about 15 linear feet of counter space.



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Pretzel Stores. Pretzel Time outlets have an average size of 500 to 800 square feet in store locations and 200 square feet in kiosk locations. Pretzel Time stores are designed to enable customers to enjoy watching the pretzels being rolled, twisted and baked, which underscores freshness and contributes to the product's growing appeal. The preferable size of a Pretzelmaker store is between 500 and 700 square feet. Stores and kiosks are likely to be located in high traffic areas allowing the efficient store layout and display to attract customers to watch the pretzels being rolled and baked in minutes.



•

Bakery Café Stores. The average size of a bakery café store, which combines the attributes of cookie, pretzel and frozen yogurt and ice cream stores, is between 1,000 and 1,500 square feet for malls and 1,500 to 2,000 square feet for lifestyle, entertainment and street front locations with 25 to 30 foot fronts and/or counter space.



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Kiosks and Carts. The Company and its franchisees and licensees also operate cookie kiosks and carts in a number of malls on a year-round basis. Kiosks typically have 100 to 250 square feet of retail space, supported by off-site storage and preparation space. Carts range in size from 30 to 92 square feet. Because of their small size, most carts and kiosks do not have baking equipment and are supplied cookie products by a fully-equipped store usually located in the same mall. The Company continues to seek opportunities to expand and sell from carts and kiosks in malls, airports, convention centers and street fronts giving these outlets greater flexibility in the products they can offer.

        Location and Leasing.    Due to the impulse nature of Mrs. Fields' business, the Company tries to locate its outlets in areas of high pedestrian traffic with easy proximity to pedestrian traffic flow and at a distance from other food providers. Possibilities for locations include any high pedestrian traffic areas, including second locations within malls, airport concourses, office building lobbies, hospitals and universities. Most of our stores are in malls with "A" and "B" classifications, which generally have the following characteristics: size greater than 700,000 square feet, sales per square foot greater than $300, population density greater than 150,000 people within a five-mile radius, median family income greater than $50,000, generally supported by national fashion anchor tenants and located to minimize competition from other malls.

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        As of January 25, 2003, Mrs. Fields, including franchise locations, has a presence in approximately 87 percent of the top 150 (as measured in sales per square foot) "A" and "B" malls in the United States. Great American stores are located primarily in high-traffic "B" malls. The majority of our pretzel stores are located in shopping malls falling into "A", "B" and "C" classifications. The Company's new bakery café stores are a vehicle for consolidating multiple operations in mall locations and pursuing locations outside the mall environment, such as mixed use, entertainment and lifestyle centers.

        Marketing and Advertising.    The Company's in-house marketing department and an outside public relations company emphasize product sampling, local store marketing and brand name identification. Historically, the Company has spent relatively little on paid advertising, relying mainly on in-store signage and promotions. In addition to posters and display of products, the Company promotes products by offering special packaging and selling other promotional items.

•

Cookie Stores. In its Mrs. Fields' stores, the Company advertises at the store level, using the aroma of fresh-baked cookies and the attractive arrangement of finished products to create a store ambiance that is conducive to sales. The Company cultivates local customer loyalty by offering discounts to employees in malls where stores are located and occasionally offers other discounts. The Company also promotes its products as gifts, particularly at holiday time. The Company's marketing strategy for Great American has emphasized strong merchandising of Great American products, including cookie cakes, and the use of proactive sales techniques, including the free sampling of products and other methods intended to increase the size of customer orders.



•

Pretzel Stores. In pretzel stores, the Company uses "entertainment" at the store level, including the hand rolling of the pretzel, to attract customers to the front counter. The Company promotes combination purchases, which are sales that include a pretzel and a beverage, to increase the amount of the average customer check.



•

Bakery Café Stores. In bakery café stores, the Company gives the customer the opportunity to select from a variety of snack products, as well as to buy a meal combination. Express lunch specials include a sandwich, soup, cookie and beverage. The bakery café stores incorporate the marketing strategies of both the cookie stores and pretzel stores.

Customer Profile.

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Cookie Stores. The Company believes that its products are best targeted to a demographic profile, which is relatively young, with upper-middle income levels. The primary customer is female, age 18 to 49, frequently with children, some college education, and a household income in the $60,000 to $70,000 range. Secondarily, many teens are customers as they frequent malls more consistently.



•

Pretzel Stores. Because pretzels are generally perceived as a healthier snack alternative to sweet treats, they are best targeted to a demographic profile, which is relatively young, age 18 to 34, female with children and living in households with an income under $50,000. Among customers with children, children appear to be strong motivators of the purchase.



•

Bakery Café Stores. Management believes that the broad variety of product offerings may allow Mrs. Fields to target a wider demographic profile than single product stores. The bakery café appeals to consumers seeking a great tasting, reasonably priced snack or meal.

        Seasonality.    The Company's sales and profitability in both the cookie business and the pretzel business are subject to seasonal fluctuation and are traditionally higher during the Thanksgiving and Christmas holiday season and other gift-giving holidays due to increased mall traffic and holiday gift purchases. Sales of frozen yogurt and ice cream are higher during the warmer summer months.

12

Supplies and Distribution

        Ingredients and Supplies.    The Company relies primarily on outside suppliers and distributors for the ingredients used in products and other items used in its stores. Mrs. Fields' stores receive frozen products, made according to proprietary recipes, from its primary supplier, International Multifoods Corporation ("Multifoods"). Multifoods uses stringent quality controls in testing ingredients and manufacturing, and products are not released for distribution unless they pass all quality control steps, including an evaluation of the finished baked product. Multifoods' contract for making frozen products for us expires on December 31, 2003. Multifoods supplies the majority of Mrs. Fields and Original Cookie frozen bakery products. In January 2003, the Company entered into a supply agreement with Countryside Baking Company, Inc. ("Countryside") to replace Multifoods as the Company's primary supplier of frozen bakery products. It is anticipated that the transition from Multifoods to Countryside will be completed by May 2003. The agreement expires December 31, 2006. Great American stores receive ready-to-bake refrigerated batter from the Company's batter facility in Atlanta.

        Pretzel Time stores buy a proprietary dry mix from selected distributors and mix and bake pretzels at individual stores. Pretzel Time franchisees buy from various distributors. Pretzelmaker and Hot Sam Stores buy frozen pretzel dough from selected distributors.

        Most supplies, other than dough, are ordered from distributors by either the Company or the franchisee and are directly shipped to the stores. The Company sells Coca-Cola® soft drinks exclusively in all of its company owned and franchised stores under agreements with Coca-Cola Fountain ("CCF"). In March 2003, the Company renewed its beverage marketing agreement with CCF. The term of the agreement is the later of six years, or until certain gallon volumes have been purchased.

        The Company receives a formulation fee on the sale of dough products by Multifoods and certain allowances on beverage purchases from CCF. Formulation fees and allowances earned relating to products sold to company owned stores are recorded as a reduction of cost of sales. Formulation fees and allowances earned relating to products sold to franchised stores are recorded as franchising revenues.

        Distribution.    Mrs. Fields utilizes two primary distributors for distribution of perishable and non-perishable items to our Mrs. Fields, Original Cookie, Pretzel Time, Pretzelmaker and Hot Sam stores weekly. The distributors own and maintain all of the inventory, but are authorized to purchase inventory items only from authorized vendors at prices that have been negotiated. Great American stores receive batter from the Company's Atlanta batter facility by refrigerated common carrier. Riverport Equipment and Distribution Company ("Riverport"), a wholly owned subsidiary of TCBY Systems, offers equipment and smallware supplies to our company owned stores and franchisees at a profit. During the first quarter of 2003, Riverport will transition this function to an unrelated third party, Bintz, Inc. On January 9, 2003, the Company signed an agreement with Bintz, Inc. to distribute equipment and smallware supplies to our company owned stores and franchisees.

Company Owned Store Operations

        Management Structure.    Each store has an on-site management team generally consisting of a manager and an assistant manager. The store manager is responsible for hiring, training and motivating store personnel. The Company monitors all stores with a regionally based staff of sales managers. Each regional sales manager is responsible for overseeing approximately 15 company owned cookie and pretzel stores within his or her region. Each regional sales manager reports to one of the four regional vice-presidents of store operations. The operations management is also responsible for introducing new products and processes to the stores, ensuring proper implementation and quality control.

        Management Incentives.    Each manager of a company owned store is eligible for salary increases and bonuses based upon the performance of his or her store, including customer service, sales, profits

13

and store appearance. Management believes that its incentive and other programs have achieved a strong retention rate of store managers and regional sales managers. Approximately 66 percent of Mrs. Fields' regional sales managers have been with Mrs. Fields for at least three years (29 percent for over four years), and 54 percent of Mrs. Fields' store managers have been with Mrs. Fields for at least three years (40 percent for over four years).

        Training.    The Company believes store managers are a critical component in creating an effective retail environment and, accordingly, has developed ongoing programs to improve the quality and effectiveness of its store managers and increase retention rates. New Mrs. Fields store managers are required to attend a two-week training program at the Company's Salt Lake City training facility, and ongoing training courses in new products, standards and procedures are available throughout the year to all Mrs. Fields personnel. Managers of Great American stores are required to attend a one-week training program at Great American's Atlanta training facility, known as "Cookie University." In addition, training courses are available throughout the year to all Great American personnel.

        Quality Control.    The Company maintains a quality control inspection program, which consists of both scheduled and unscheduled inspections by its operations management, as well as a "mystery shopper" program. The Company's operations management conducts formal inspections of each of the Company's stores on a regular basis. The Company's "mystery shopper" program, which began in 1999, employs professional mystery shoppers recruited by mystery shop companies, who fill out questionnaires following visits to stores and report their results to the Company by an Internet web site.

Franchise Operations

        In accordance with the Company's business strategy, Mrs. Fields has been selling, and expects to continue to sell, company owned stores to franchisees, who operate with a lower cost structure. The Company may also choose to sell stores to provide liquidity or to develop additional stores with greater potential in the future. The Company is also actively seeking to franchise new stores.

        Mrs. Fields' franchisees come from a wide variety of business backgrounds and bring with them different operating styles and business objectives. Among the Company's franchisees are full-time store operators, retired professionals and people seeking a second source of income. The majority of Mrs. Fields' franchisees own one store. As of January 25, 2003, the 12 largest Mrs. Fields' franchisees operated 147 stores and the largest Mrs. Fields' franchisee operated 18 stores.

        Cookies.    Each Mrs. Fields' franchisee pays an initial franchise fee of $30,000 per Mrs. Fields' store location and is responsible for funding the build-out of the new store and purchasing initial dough inventory and supplies, at a total cost of approximately $200,000, including the initial franchise fee. However, the cost of opening a new store can vary based on individual operating and location costs. The Company also charges franchisees a fee to handle equipment purchases and to provide other assistance in helping the franchisee to set up operations. After a store is set up, a franchisee pays royalty fees of 6 percent of the franchised store's annual gross sales and an advertising fee of 1 percent (increasing to 1.25 percent as of May 4, 2003) of annual gross sales.

        Each new Great American franchisee pays an initial franchise fee of $30,000 per store and is responsible for funding the build-out of the new store and purchasing initial batter inventory and supplies, at a total cost of approximately $225,000, including the initial licensing fee. However, the cost of opening a new store can be significantly higher for franchisees who purchase existing company owned stores and otherwise varies based on individual operating and location costs. The Company also charges franchisees a fee to purchase equipment and to provide other assistance in helping the franchisee to set up operations. After a store is set up, a Great American franchisee pays royalty fees to Great American of 7 percent of the franchised store's annual gross sales. Great American

14

franchisees are required to purchase batter from the Company's batter facility, which makes a profit on batter sales.

        Pretzels.    Each new franchisee pays Pretzel Time an initial franchise fee of $25,000 per new Pretzel Time store location and is responsible for funding the build-out of the new store and supplies, at a total cost of approximately $200,000, including the initial franchise fee. However, the cost of opening a new store can vary based on individual operating and location costs. Pretzel Time also charges franchisees a fee to handle equipment purchases and to provide other assistance in helping the franchisee to set up operations. After a store is set up, a Pretzel Time franchisee pays royalty fees to Pretzel Time of 7 percent of the franchised store's annual gross sales and a marketing fee of 1 percent of annual gross sales.

        Each Pretzelmaker franchisee pays an initial franchise fee of $25,000 and is responsible for funding the build-out of the new store, equipment and supplies, at a total cost of approximately $215,000, including the initial franchise fee. However, the costs can vary depending on individual operating and location costs. Franchisees are also charged royalty fees from Pretzelmaker of 6 percent of the franchised store's annual gross sales and a marketing fee of 1.5 percent of annual gross sales.

        Franchisee Recruiting and Training.    The Company has been successful in recruiting franchisees and completing franchise transactions and believes it will continue to realize significant cash flow from franchising by:

•

emphasizing the use of proprietary dough, and dessert products, maximizing product quality and ensuring a consistent product across all outlets,



•

requiring frequent quality, service and cleanliness evaluations of franchised stores by operations support staff, and



•

providing initial and continuing training of franchisees to improve their financial and retail sales skills.

        The Company believes that training franchisees is a critical component in creating an effective retail environment and, therefore, makes ongoing training programs available to franchisees to improve the quality and effectiveness of their operations. Mrs. Fields' franchisees are required to attend a two-week training program at the Company's training facilities in Salt Lake City or Atlanta. Ongoing training courses in new products, standards and procedures are available throughout the year to all franchisee personnel.

        Quality Control.    The Company maintains a quality control inspection program, which consists of both scheduled and unscheduled inspections by its operations management, as well as a "mystery shopper" program. The Company's operations management conducts formal inspections of each of the franchise stores at least three times a year. The Company's "mystery shopper" program, which began in 1999, employs professional mystery shoppers recruited by mystery shop companies, who fill out questionnaires following visits to stores and report their results to the Company by an Internet web site.

Mail Order

        Mrs. Fields markets a variety of fresh baked cookies, brownies, candies and other gift items through the Company's website and gift catalogs. Mrs. Fields began its mail order business in 1988 with two product offerings. In 2001, the Company moved its mail order business into a new production facility, which tripled capacity. In fiscal 2002, the Company mailed approximately 4.2 million catalogs, generated revenue in excess of $12.6 million and carried 350 different inventory items ranging from customized cookie tins with company logos to birthday towers filled with cookies, brownies, and jellybeans. In December 2002, the Company formed Mrs. Fields Gifts, Inc., a separate wholly owned

15

subsidiary of Mrs. Fields, for the mail order operations. The mail order segment has four direct sales channels: Internet, telephone, online affiliations and strategic partners.

        Internet Orders.    The Company launched its website in 1997, and today approximately 40 percent of all sales in the mail order segment originate from the website. In November 2002, the Company launched an improved website that allows each customer to establish an account and track each order. The Company's principal URL is www.mrsfields.com, which on average receives over 6,000 visitors daily.

        Telephone Orders.    Customers may place orders using a toll-free telephone number "1-800-COOKIES". The number of telephone orders has increased since 1998; however, sales from telephone orders as a percentage of total sales in the mail order segment, have decreased as customers have migrated to the Internet.

        Online Affiliate Programs.    In July 2001, the Company launched its online affiliate program with one of the largest pay-for-performance affiliate marketing networks on the Internet. The Company now has over 11,000 affiliates who have a text link or banner on their website to www.mrsfields.com. The Company compensates an affiliate on a commission basis for each sale that originates from its website.

        Strategic Partnerships/Corporate Accounts.    The Company has a number of partnerships with large online and catalog retailers that advertise Mrs. Fields' products to their customers for gifting purposes. Gifts are sold to partners at wholesale prices. The partners are responsible for shipping to the ultimate customer, advertising and customer service costs involved with the Mrs. Fields' gift program. The Company also has corporate gift relationships with a number of large companies who use Mrs. Fields' products to motivate employees and reward customers.

Licensing

        In the past few years, the Company has utilized a "branding" strategy, which allows a licensee the right to use the Mrs. Fields' name (which is a registered trademark) to build brand exposure, expand sales, improve market share and to increase profits through cultivating different ways of distributing its products. The Company expects licensing to continue to be a major component of its growth in the future. The following is a comprehensive list of branding strategies with examples of current licensees within its system.

        Concept Licensing.    The Company has developed a licensing program for non-mall retail outlets that enables it to enter difficult-to-reach markets and facilitates brand exposure through "presence" and "prestige" marketing. Licensees duplicate the Mrs. Fields' store concept and purchase dough from various distributors. Our licensees are generally corporate customers; several of these licensees are contract management companies that manage and operate food service in host locations. Our licensees include Host Marriott, which has a non-exclusive license to sell our products in airports and travel plazas, from which we receive a royalty on product sold and ARAMARK Corporation, which sells product in stadiums and convention centers.

        Retail Licensing.    The Company is expanding the branding strategy to include products sold in other retail environments outside the original scope of the Company's retail cookie store concept. Current examples are Maxfield's Candy Co. and Nonni's Food Company, Inc., which have the exclusive North American rights to manufacture and sell, under our registered trademarks, candy and ready to eat cookies, respectively, and offer Mrs. Fields' candies and cookies throughout the supermarket, drug and mass merchandise markets.

Competition

        The Company competes for both leasing opportunities and customers with other cookie and pretzel retailers, as well as other confectionery, sweet snack and specialty food retailers, including

16

cinnamon rolls, baked goods and candy shops. The specialty retail food and snack industry is highly competitive with respect to price, service, location and food quality. There are many well-established competitors with greater resources than us. We compete with these retailers on the basis of price, quality, location and service. The Company faces competition from a wide variety of sources, including such companies as Cinnabon, Inc., Auntie Anne's Soft Pretzels and Baskin-Robbins 31 Flavors.

Employees

        As of December 28, 2002, the Company had approximately 3,175 employees. The Company had approximately 2,850 employees in company owned stores, of whom approximately 575 were store managers and assistant store managers and 2,275 were part-time sales assistants. The typical Mrs. Fields store employs 4 to 10 employees. During the period from November through January, the Company may hire as many as 750 additional part-time employees to handle additional mall traffic. Most employees are paid on an hourly basis, except store managers, and are not unionized. The Company has never experienced any significant work stoppages and believes that employee relations are good.

        As of December 28, 2002, only 99 of the approximately 2,850 employees in company owned stores earned the federal minimum wage. A minimum wage increase would have a negative impact on labor costs. However, management believes this would not have a significant impact on the Company's results of operations and can be mitigated in the long term through changing staffing patterns in store operations and, as necessary, through retail price increases. None of our employees is covered by collective bargaining agreements.

Trademarks

        Mrs. Fields is the holder of numerous trademarks that have been federally registered in the United States and in other countries located throughout the world. The Company is a party to disputes with respect to trademarks in some foreign jurisdictions, none of which, in the opinion of management, are material to its business, financial condition or results of operations.

        The Company currently holds 58 trademark registrations that are federally registered in the United States and 234 trademarks that are registered in 56 countries outside the United States. The trademarks consist of various brand and product names and logos. Trademarks are registered under United States laws for periods of 7 to 10 years and in other countries for periods of 7 to 20 years, and at any time, the Company may have trademarks whose registration will soon expire and must be renewed. Under its license agreements, its licensees receive the rights to use its recipes and its registered trademarks. The Company views its trademarks and the ability to license them to third parties as some of its most valuable assets.

        The Company has pending, or is in the process of filing, applications for trademark registrations in a number of foreign countries. In a few foreign countries, unrelated third parties have filed applications for registration of similar trademarks. Upon discovery of such filings, the Company routinely contests such applications to preserve its ability to register its trademarks in those countries or to protect existing registrations.

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Item 2. Properties

        As of December 28, 2002, Mrs. Fields is the tenant of 619 leases, of which 252 are currently subleased to franchisees ("Franchise Lease") with the franchisees assuming all obligations of the tenant under the Franchise Lease, except to the extent the Company subsidizes such leases. In the event a franchisee ceases operations or otherwise defaults under any of the Franchise Leases or in the event the Company ceases operations at any location governed by the operating leases, the Company will be primarily liable for the satisfaction of all obligations of the tenant under such leases. Most of Mrs. Fields operating leases provide for the payment of lease rents plus real estate taxes, utilities, insurance, common area charges and other expenses, as well as contingent rents, which generally range from 8 to 10 percent of net retail store sales in excess of stipulated amounts.

        Mrs. Fields currently leases 43,000 square feet of office space in Salt Lake City, Utah, which is used as corporate headquarters. The Company also leases approximately 58,000 square feet of space in Salt Lake City, Utah for product development, training and mail order operations. The Company owns substantially all of the equipment used in both of these facilities and in company owned retail outlets. Great American owns its batter production facility, located in a building of approximately 32,000 square feet in Atlanta, Georgia. The Atlanta facility also is used to house regional operational personnel and the Great American training center.

   
Item 3. Legal Proceedings

        In the ordinary course of business, the Company is involved in routine litigation, including franchise and trademark disputes. The Company is not a party to any legal proceedings which, in the opinion of management, after consultation with legal counsel, is material to its business, consolidated financial condition, results of operations or liquidity.

        The stores and the Company's products are subject to regulation by numerous governmental authorities, including, without limitation, federal, state and local laws and regulations governing health, sanitation, environmental protection, safety and hiring and employment practices.

   
Item 4. Submission of Matters to a Vote of Security Holders

        Not applicable.

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PART II

    Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

Market Information and Number of Stockholders

        The Company is a wholly owned subsidiary of Mrs. Fields' Holding. There is no established trading market for Mrs. Fields' or Mrs. Fields' Holding's common stock.

Dividends

        For each of the three fiscal years in the period ended December 28, 2002, Mrs. Fields did not declare or pay cash dividends. The Company's ability to declare or pay cash dividends is restricted by the covenants of its senior unsecured notes and current credit facility. During the fiscal year ended December 28, 2002, the Company distributed approximately $5.2 million to MFFB under a tax sharing agreement among the MFFB entities. Mrs. Fields paid $5.0 million to MFFB in March 2003 relating to its obligations under the tax sharing agreement. During the fiscal years ended December 29, 2001 and December 30, 2000, the Company distributed and paid approximately $800,000 and $2.5 million, respectively, to Mrs. Fields' Holding under a tax sharing agreement, which had been in effect since 1998. This tax sharing agreement was amended in September 2001 to include MFFB and TCBY.

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Item 6. Selected Financial Data

        The following table presents historical financial data for Mrs. Fields' Original Cookies, Inc. and subsidiaries as of the dates and for the periods indicated. Mrs. Fields operates using a 52/53-week year ending on the Saturday closest to December 31. The selected historical financial data has been derived from the audited financial statements of Mrs. Fields. The selected historical financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical consolidated financial statements and the related notes, contained elsewhere in this Form 10-K.

(1)

Store contribution (which includes food sales, and sales of refrigerated cookie dough product in retail markets) is determined by subtracting all store operating expenses and cost of sales from net store and food sales. Management uses store contribution information to measure operating performance at the store level. Store contribution may not be comparable to other similarly titled measures. Store contribution is not a measure defined in accounting principles generally accepted in the United States of America and should not be considered in isolation or as a substitute for measures of performance in accordance with accounting principles generally accepted in the United States of America.

(2)

Franchising and licensing contribution is determined by subtracting all direct franchising and licensing operating expenses from franchising and licensing revenues which is principally comprised of royalties from franchisees and licensing revenues earned under licensing agreements of the Mrs. Fields' brand name. Management uses franchising and licensing contribution information to measure operating performance at each of these business segment levels. Franchising and licensing contribution is not a measure defined in accounting principles generally accepted in the United

20

States of America and should not be considered in isolation or as a substitute for measures of performance in accordance with accounting principles generally accepted in the United States of America.

(3)

Mail order contribution is determined by subtracting all direct mail order operating expenses and costs of sales from mail order food and product sales. Management uses mail order contribution information to measure operating performance at this business segment level. Mail order contribution is not a measure defined in accounting principles generally accepted in the United States of America and should not be considered in isolation or as a substitute for measures of performance in accordance with accounting principles generally accepted in the United States of America.

   
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies

        The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses in the Company's consolidated financial statements. Management has reviewed with the Audit Committee the accounting policies that it uses to prepare the Company's consolidated financial statements and believes that the following policies are the most important to the portrayal of the Company's financial condition and the results of its operations while requiring the use of judgments and estimates about the effects of matters that are inherently uncertain.

        Related Party Transactions.    Mrs. Fields has contractual relationships with various affiliates, primarily TCBY and Mrs. Fields' Holding, which are intended to be fair to the parties involved in the transactions and on terms similar to what could be negotiated with independent third parties. Sometimes the Company is required to negotiate the agreements for both sides of the transactions. Also, inherent in any contractual relationship is the interpretation of the intent of the agreement at a later time when unanticipated events occur. When situations like these occur, the Company attempts to objectively determine the terms of the transaction or interpret the intent of the agreement on a fair and independent basis. However, there is no guarantee that we will be successful in doing so. Individual affiliate transactions or a series of related transactions in excess of $1.0 million require a resolution by the Company's board of directors. Individual affiliate transactions or a series of related transactions in excess of $5.0 million require an "opinion of fairness" by an accounting, appraisal or investment banking firm.

        Tax Sharing Agreement.    As a result of the Mrs. Fields Reorganization, the Company entered into an Amended and Restated Tax Allocation Agreement with MFFB and Mrs. Fields' Holding (the "Tax Allocation Agreement"). The Tax Allocation Agreement is among MFFB, Mrs. Fields' Holding, TCBY Holding, and all of their respective subsidiaries (collectively, the "Group").

        The Tax Allocation Agreement provides for compensation to the Company for any utilization of the Company's net operating loss and capital loss carryforwards that existed as of the date of the Mrs. Fields Reorganization. The exact amount of any compensation is contingent upon the length of time between the utilization date and the date of the Mrs. Fields Reorganization and is subject to additional calculations as defined in the Supplement to Tax Allocation Agreement.

        Impairment of Goodwill and Intangible Assets.    On an annual basis, the Company completes a valuation of the intangible assets associated with its various operating segments. To the extent that the fair value associated with the intangible asset is less than the recorded value, the Company writes down the value of the related intangible asset. The valuation of the intangible assets is affected by, among other things, the Company's business plan for the future, estimated results of future operations and the

21

comparable companies that are used to value the Company's intangible assets. Changes in the business plan or operating results that are different than the projections used to develop the valuation of the intangible assets have an impact on the valuation of the intangible assets. Also, the decision to use one company versus another company as a benchmark may have an impact on the valuation of the intangible assets.

        Impairment of Long-lived Assets.    The Company reviews its long-lived assets for impairment when circumstances indicate that the book value of an asset may not be fully recovered by the undiscounted net cash flow generated over the remaining life of the related asset or group of assets. If the cash flows generated by the asset are not sufficient to recover the remaining book value of the asset, the Company is required to write down the value of the asset. In evaluating whether the asset will generate sufficient cash flow to recover its book value, the Company estimates the amount of cash flow that will be generated by the asset and the remaining life of the asset. In making our estimate, the Company considers the performance trends related to the asset, the likelihood that the trends will continue or change, both at the asset level as well as at the national economic level, and the length of time that we expect to retain the asset.

        Allowance for Doubtful Accounts.    The Company sells product to and receives royalties from its franchisees and sells product to other customers. Sometimes these franchisees and customers are unable or unwilling to pay for the products that they receive or royalties that they owe. Factors that affect the Company's ability to collect amounts that are due to Mrs. Fields include the financial strength of a franchisee or customer and its operations, the economic strength of the mall where the franchisee is located and the overall strength of the retail economy. Mrs. Fields is required to establish an estimated allowance for the amounts included in accounts receivable that it will not be able to collect in the future. To establish this allowance, it evaluates the customer's or 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 doubtful accounts change, Mrs. Fields may have to provide for a greater level of expense in future periods or to reverse amounts provided in prior periods.

        Store Closure Reserve.    The Company periodically closes under-performing stores, either individually or as part of an overall store closure plan. When a store is targeted for closure, it records a provision for costs that will be incurred in closing the store, which are predominately estimated lease termination costs. The costs include both settlement payments and continued contractual payments over time under original lease agreements. The amount of the provision is allocated between current amounts that are estimated to be paid within one year and long-term amounts that are estimated to be paid thereafter. The amount of the estimated reserve and the timing of the payments are affected by Mrs. Fields' ability to settle with the landlord for amounts less than the amount reserved and the timing of the payments agreed to in the settlement.

Recent Accounting Pronouncements

        In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset, except for obligations of lessees and the associated asset retirement costs. SFAS No. 143 requires that the fair value of the liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Company has not yet assessed the impact of SFAS No. 143 on the Company's consolidated financial position and results of operations.

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        In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement No. 4, 44 and 64, Amendment of FASB Statement No. 39, and Technical Corrections." The Statement rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishments of Debt," and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." SFAS No. 145 recognizes that the use of debt extinguishments can be a part of the risk management strategy of a company and hence, the classification of all early extinguishments of debt as an extraordinary item may no longer be appropriate. In addition, the Statement amends SFAS No. 39, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. Provisions of this Statement, as they relate to Statement No. 39, are to be effective for transactions occurring after May 15, 2002. Provisions, which relate to Statement No. 4, are effective for fiscal years beginning after May 15, 2002. The Company has not yet assessed the impact of SFAS No. 145 on the Company's consolidated financial position and results of operations.

        In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 is effective for transactions initiated after December 31, 2002. Under SFAS No. 146, a company will record a liability for a cost associated with an exit or disposal activity when that liability is incurred and can be measured at fair value. A liability is incurred when an event obligates the entity to transfer or use assets. The Company has not yet assessed the impact of SFAS No. 146 on the Company's consolidated financial position and results of operations.

        In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others," an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on the Company's consolidated financial statements. The recognition and measurement provisions for all guarantees are effective for financial statements of interim and annual periods ending after December 31, 2002.

        In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure," an amendment of FASB Statement No. 123. This Statement amends FASB Statement No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002 and are included in the Notes to Consolidated Financial Statements.

        In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities," an interpretation of Accounting Research Bulletin ("ARB") No. 51, "Consolidated Financial Statements." This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. The application of this Interpretation is not expected to have a material effect on the Company's consolidated financial statements. The Interpretation requires certain disclosures in financial statements issued after January 31, 2003 if it is reasonably possible that the Company will consolidate or disclose information about variable interest entities when the Interpretation becomes effective.

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Results of Operations of Mrs. Fields

        The following table sets forth, for the periods indicated, certain information relating to the operations of Mrs. Fields expressed in thousands of dollars and percentage changes from period to period.

(1)

Unit weeks refer to the number of company owned stores open at the end of each fiscal week multiplied by number of weeks in the period. Unit week average sales is calculated by dividing the net store sales by the number of unit weeks. Year-over-year comparable store sales is calculated by comparing the change in company owned store sales for stores that have been open more than 13 months. Management uses unit weeks, unit week average sales and year-over-year comparable store sales information to measure operating performance at the store business segment and store level. Unit weeks, unit week average sales and year-over-year comparable store sales are not measures defined in accounting principles generally accepted in the United States of America and should not be considered in isolation or as a substitute for measures of performance in accordance with accounting principles generally accepted in the United States of America.

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  52 Weeks Ended December 28, 2002 ("Fiscal 2002")
Compared to the 52 Weeks Ended December 29, 2001 ("Fiscal 2001")

        Income From Operations—Overview.    Income from operations was $3.7 million for fiscal 2002 compared to a loss from operations of $4.8 million for fiscal 2001, an increase in income from operations of $8.5 million. This increase in income from operations was primarily attributable to increases in contributions from franchising and licensing of $3.7 million and mail order of $700,000, other operating revenues of $1.5 million, TCBY transition income of $2.4 million and other operating income of $1.9 million and decreases in depreciation and amortization expense of $11.9 million, stock compensation expense of $1.8 million and store closure provision of $400,000 offset by decreases in store contribution of $6.9 million and management fee revenue of $200,000, increases in general and administrative expenses of $1.1 million and impairment of long-lived assets of $200,000 and restructuring costs associated with the Company exiting its Wal-Mart locations on September 28, 2002 of $7.5 million.

        Store contribution was $15.6 million for fiscal 2002, a decrease of $6.9 million or 30.6 percent, from store contribution of $22.5 million for fiscal 2001. The decrease was a result of a 2.3 percent decrease in same store comparable sales for fiscal 2002 from fiscal 2001. Additionally, the decrease resulted from the sale of 70 corporate owned stores to franchisees during fiscal 2002 and a $1.5 million loss incurred at the Company's Wal-Mart locations for fiscal 2002 compared to a loss of $600,000 during fiscal 2001.

        Franchising and licensing contribution was $22.6 million for fiscal 2002, an increase of $3.7 million or 19.2 percent, from franchising and licensing contribution of $19.0 million for fiscal 2001. This increase was principally the result of an increase in royalties and license fees earned under its Mrs. Fields branded product licenses for Mrs. Fields branded soft-baked cookies sold in retail stores, ice cream and premium hot cocoa of $1.2 million, an increase in initial franchise fees and franchise royalties of $1.2 million, and an increase in contribution from cookie batter sold to Great American Cookie franchisees of $1.0 million.

        Mail order contribution was $2.8 million for fiscal 2002, an increase of $600,000 or 29.9 percent, from $2.2 million for fiscal 2001. This increase was attributable to a 23.0 percent increase in mail order sales offset by a 21.2 percent increase in mail order operating expenses.

        Other operating revenue is principally comprised of $1.5 million received under the Company's business interruption insurance for the loss of the World Trade Center store as a result of the events of September 11, 2001.

        Company Owned and Franchised or Licensed Store Activity.    As of December 28, 2002, there were 330 company owned stores and 1,038 franchised or licensed stores in operation. The store activity for fiscal 2002 and fiscal 2001 is summarized as follows:

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        Net Store and Food Sales.    Total net store and food sales, which includes sales from stores and sales of refrigerated cookie dough product to retail markets were $115.5 million for fiscal 2002, a decrease of $10.9 million, or 8.6 percent, from $126.4 million for fiscal 2001. Refrigerated cookie dough product sales were $1.0 million and $1.2 million for fiscal 2002 and fiscal 2001, respectively.

        Store sales were $114.5 million for fiscal 2002, a decrease of $10.7 million or 8.6 percent, from $125.2 million for fiscal 2001. The decrease in store sales was principally due to a 2.3 percent reduction or $2.0 million in same store sales and 1,954 fewer store weeks (excluding Wal-Mart locations) resulting in a sales shortfall from normalized unit week average ("UWA") of $10.1 million. These decreases were partially offset by a net increase in sales of $2.0 million from the Company's Wal-Mart locations, which opened in mid-to-late 2001 and were closed effective September 28, 2002.

        Store operations:    The following table outlines the performance of the Company's store operations and segregates the performance of the Wal-Mart locations for fiscal 2002 and 2001 (dollars in thousands, excluding UWA sales and contribution).

        Cost of Sales—Store and Food.    Cost of sales was $27.4 million for fiscal 2002, a decrease of $2.2 million or 7.4 percent, from $29.6 million for fiscal 2001. Cost of sales for the refrigerated cookie dough product sold to retail markets was $900,000 and $1.0 million for fiscal 2002 and fiscal 2001, respectively.

        Cost of sales, stores only, was $26.5 million for fiscal 2002, a decrease of $2.1 million or 7.3 percent, from $28.6 million for fiscal 2001. This decrease was due to fewer operating stores and closure of the Wal-Mart locations. Cost of sales for the Company's traditional stores were $24.9 million for fiscal 2002, a decrease of $3.1 million or 8.2 percent, from $28.0 million for fiscal 2001 and was the result of 1,954 fewer unit weeks and cost containment strategies implemented, including the closing of non-performing stores. Cost of sales for the Company's traditional stores for fiscal 2002 as a percent of sales was 22.5 percent compared to 22.6 percent for fiscal 2001. This decrease was principally due to cost containment strategies and management of product waste.

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        Selling and Store Occupancy Costs.    Total selling and store occupancy costs were $72.4 million for fiscal 2002, a decrease of $1.9 million or 2.5 percent, from $74.3 million for fiscal 2001. This decrease was due to fewer stores opened during fiscal 2002 compared to fiscal 2001. Selling and store occupancy costs increased from 59.3 percent of sales in 2001 to 63.2 percent of sales in 2002.

        Labor costs for the traditional stores were 28.4 percent of sales and 27.9 percent sales for the fiscal 2002 and 2001, respectively. This was primarily the result of tightening of staffing levels in conjunction with the lower sales volume being experienced in 2002 as a result of the general recession as it continued throughout 2002 resulting in lower sales leverage on labor dollars.

        Store occupancy costs for the traditional stores were 24.0 percent of sales and 22.4 percent of sales for fiscal 2002 and 2001, respectively. This increase in store occupancy costs was due to general increases in base rents and further impacted by the inability to obtain leverage on the rents as a result of the general slow mall-driven retail sector.

        Other store expense for the traditional stores were 9.7 percent of sales and 8.6 percent of sales for fiscal 2002 and 2001, respectively. This increase was due to increased costs for property and liability insurance, utilities and other costs for which the stores were unable to obtain leverage.

        Franchising and Licensing Revenues.    Franchising and licensing revenues were $32.6 million for fiscal 2002, an increase of $3.0 million or 10.2 percent, from $29.6 million for fiscal 2001. Franchising revenues were $26.7 million for fiscal 2002, an increase of $1.9 million or 7.7 percent from $24.8 million for fiscal 2001. This increase was primarily due to an increase in initial franchise fees of $900,000 resulting from the sale of 70 additional corporate stores to franchisees with a corresponding increase in incremental franchise royalties and batter sales aggregating to $1.0 million.

        Licensing revenues were $5.9 million for fiscal 2002, an increase of $1.1 million or 22.6 percent, from $4.8 million for 2001. This increase was principally due to an increase in licensing revenues from the sale of certain recipes and royalties under the licensing agreement with a national manufacturer of soft-baked cookies. Revenues for the recipe sales and licensing royalties for fiscal 2002 were $3.8 million, an increase of $900,000 or 30.5 percent, from $2.9 million for fiscal 2001. Licensing revenues were also positively impacted in fiscal 2002 by royalties earned under new licensing agreements for Mrs. Fields branded hot cocoa of $100,000 and Mrs. Fields branded ice cream of $300,000.

        Franchising and Licensing Expenses.    Franchising and licensing expenses were $10.0 million for fiscal 2002, a decrease of $600,000 or 5.9 percent, from $10.6 million for fiscal 2001. This decrease was principally due to reduction of $300,000 in operating and administrative costs of the Company's batter facility which sells cookie batter to the Company's Great American Cookie franchisees, and a $300,000 reduction in administrative costs associated with the Company's international and domestic licensing group.

        Mail Order Revenues.    Mail order revenues were $12.6 million for fiscal 2002, an increase $2.3 million or 23.0 percent, from $10.3 million for fiscal 2001. Mail order revenues consist of sales through the Company's catalog and e-tailing web-site. The increase in revenues in fiscal 2002 was due to increases in catalog and Internet sales of $1.7 million as a result of additional catalogs published in 2002 and in corporate gift sales of $600,000 from a significant corporate customer who uses Mrs. Fields gift products in promotional and customer appreciation gifts.

        Mail Order Expense.    Mail order contribution was $2.8 million or 22.5 percent of sales for fiscal 2002 compared to $2.2 million or 21.3 percent of sales for fiscal 2001. Mail order expenses were $9.8 million for fiscal 2002, an increase of $1.7 million or 21.2 percent, from $8.1 million for fiscal 2001. This increase in expense was due to an increase in cost of sales of $700,000 associated with the

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increased sales volume, increased marketing and catalog costs of $600,000, and increased labor costs of $300,000.

        Management Fee Revenues.    Management fee revenue was $11.3 million for fiscal 2002, a decrease of $200,000 or 1.5 percent, from $11.5 million for fiscal 2001. The decrease was due to a decrease in the management fee effective October 1, 2002 as a result of an amendment to the TCBY Management Agreement.

        Other Operating Revenues.    Other operating revenues were $1.8 million for fiscal 2002, an increase of $1.5 million from $300,000 for fiscal 2001. This increase was primarily due to $1.5 million received under the Company's business interruption insurance policy for the loss of the Company's World Trade Center store as a result of the events of September 11, 2001.

        General and Administrative Expense.    General and administrative expenses were $33.0 million for fiscal 2002, an increase of $1.1 million or 3.3 percent, from $31.9 million for fiscal 2001. General and administrative expenses include operations and supervision costs associated with store and franchise operations and general and administrative costs of the Company.

        Operations and supervision expenses were $7.4 million for fiscal 2002, an increase of $500,000 or 6.7 percent, from $6.9 million for fiscal 2001. This increase was principally due to increases in payroll and related costs of $300,000, employee recruitment of $100,000 and various other costs of $100,000.

        General and administrative expenses were $25.6 million for fiscal 2002, an increase of $600,000 or 2.3 percent, from $25.0 million for fiscal 2001. This increase was due to increases in workers compensation costs of $800,000, health insurance costs of $700,000, marketing costs of $600,000 and legal costs of $500,000. These increased costs were offset by decreases in bonus compensation of $1.1 million, professional fees of $700,000 and travel and other costs of $200,000.

        Stock Compensation Expense.    Stock compensation expense was $193,000 for fiscal 2002, a decrease of $1.8 million or 90.3 percent, from $2.0 million for fiscal 2001. During fiscal 2001, the Company recognized $2.0 million of non-cash compensation expense related to the then-vested portion of MFFB stock options issued to Company employees, in exchange for options that had previously been outstanding at Mrs. Fields' Holding as part of the Mrs. Fields Reorganization (see Note 1 of Notes to Consolidated Financial Statements included in Item 8 of part II of this report). The exchange of the options created a new measurement date and, because the exercise price of the exchanged options was equal to the exercise price of the original MFH options and the fair value of the MFFB common stock at the date of grant was higher than the exercise price of the new options, the Company recognized compensation expense for the difference between the fair value of the MFFB options vested upon issuance and the exercise price of the original Mrs Fields' Holding options that had already vested. Compensation expense of $193,000 recognized by the Company during fiscal 2002 represents the difference in the exercise price and the fair value of the MFFB common stock at the date of the grant of the new options for options that vested during fiscal 2002.

        TCBY Transition Income.    TCBY transition income of $2.4 million for fiscal 2002 represented reimbursement by TCBY Enterprises of transitional costs incurred by the Company in fiscal 2000. The timing of the reimbursement was subject to when TCBY Enterprises' dairy processing plant generated sufficient cash in excess of the working capital requirements to make the reimbursement or upon the sale of the dairy processing plant. The processing plant was sold in November 2002.

        Store Closure Provision.    Store closure provision was $378,000 for fiscal 2001. There were no stores identified for closure in 2002 that required a reserve to cover early lease terminations costs. During late 2001, the Company identified four stores that were not performing at acceptable levels and recorded a reserve of $378,000 for the stores' planned closure.

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        Wal-Mart Restructuring Costs.    Wal-Mart restructuring costs were $7.5 million for fiscal 2002. In September 2002, the Company negotiated a release from Wal-Mart for the Company's Wal-Mart locations. In connection with that release, operations ceased at these locations on September 28, 2002. As a result, the carrying value of the equipment of $7.0 million was written off. Additionally, the associated inventory was written off and certain costs were incurred for exiting these stores. The Company does not anticipate incurring any additional charges associated with exiting the Wal-Mart locations.

        Impairment of Long-Lived Assets.    Impairment of long-lived assets was $4.2 million for fiscal 2002, an increase of $200,000 or 5.1 percent, from $4.0 million for fiscal 2001. During fiscal 2002 and fiscal 2001, the Company wrote down to net realizable value approximately $4.2 million and $2.6 million, respectively, of impaired long-lived store assets and the goodwill associated with company owned stores. Impairment of long-lived assets principally represents the impairment of certain store locations and their associated assets. This increase was principally due to the general economic recession continuing in 2002, whereby, the estimated future undiscounted cash flows (defined as the store's contribution) were estimated to be insufficient to recover the carrying value of the store's assets over the store's current lease period, and renewal period if the store were considered a core store.

        In fiscal 2001, the Company recognized an impairment of $1.4 million relating to goodwill associated with the Original Cookie and Hot Sam brand names and recipes. In the impairment assessment, the Company evaluated the future undiscounted cash flows from store contribution for Original Cookie and Hot Sam stores over the stores' current lease period. At expiration of the lease period, the stores will either be closed or converted to a Mrs. Fields, Great American, Pretzel Time or Pretzelmaker stores.

        Depreciation and Amortization Expense.    Total depreciation and amortization expense was $10.2 million for fiscal 2002, a decrease of $11.9 million or 54.0 percent, from $22.1 million for fiscal 2001. Depreciation expense was $8.8 million for fiscal 2002, a decrease of $800,000 or 8.7 percent, from $9.6 million for fiscal 2001. This decrease was principally due to the fewer store assets as a result of store closures, the sale of corporate stores to franchisees and impairment of store assets discussed above.

        Amortization expense was $1.4 million for fiscal 2002, a decrease of $11.1 million or 88.7 percent, from $12.5 million for fiscal 2001. This decrease was due to the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets," which changed the accounting treatment applied to goodwill and other intangible assets after the assets have been initially recognized in the financial statements. Under SFAS No. 142, amortization of goodwill ceased and is assessed annually for impairment.

        Other Operating Income, Net.    Other operating income, net was $2.0 million, an increase of $1.9 million from $75,000 for fiscal 2001. The increase in other operating income was the result of net gains on stores sold to franchisees.

        Interest Expense, Net.    Interest expense, net was $17.4 million for fiscal 2002, an increase of $100,000 or 0.4 percent, from $17.3 million for fiscal 2001. The increase was primarily due to higher average outstanding balance of the Company's line of credit during fiscal 2002.

        Provision for Income Taxes.    Provision for income taxes was $102,000 for fiscal 2002 compared to $21,000 for fiscal 2001. Provision for income taxes for fiscal 2002 and 2001 primarily consisted of state and foreign income taxes.

        Cumulative Effect of Accounting Change.    The Company recorded a non-cash charge of approximately $39.1 million to reduce the carrying value of the goodwill associated with its company owned stores reporting unit. Such charge is non-operational in nature and was recorded as a cumulative effect of an accounting change upon the mandatory adoption of SFAS No. 142 effective the beginning of fiscal 2002.

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52 Weeks Ended December 29, 2001 ("Fiscal 2001")
Compared to the 52 Weeks Ended December 30, 2000 ("Fiscal 2000")

        Income (Loss) From Operations—Overview.    Loss from operations was $4.8 million for fiscal 2001 compared to income from operations of $2.2 million for fiscal 2000, a decrease in income from operations of $7.0 million. This decrease in income from operations was primarily attributable to a decrease in store contribution of $9.0 million and increases in general and administrative expenses of $5.5 million, stock compensation expense of $2.0 million and store closure provision of $1.4 million offset by increases in contributions from franchising and licensing of $2.0 million and mail order of $100,000, management fee revenue of $4.0 million, other operating revenues of $200,000 and other operating income of $300,000 and decreases in TCBY transition expense of $2.4 million, depreciation and amortization expense of $1.6 million and impairment of long-lived assets of $200,000.

        Store contribution was $22.5 million for fiscal 2001, a decrease of $9.0 million or 28.6 percent, from store contribution of $31.6 million for fiscal 2000. The decrease was a result of several factors. Prior to September 11, 2001 ("September 11") and as result of the economic recession, which commenced in March 2001, year-over-year sales were down 2.5 percent from that of the prior year. After September 11, year-over-year sales declined 5.6 percent from the prior year. The impact of the recession and September 11 resulted in year-over-year sales decrease of approximately $3.0 million and $1.3 million, respectively, aggregating to a reduction in year-over-year sales of $4.3 million and a reduction in store contribution of $3.0 million. The decrease in store contribution was also the result of contribution losses in poor performing stores identified for closure in 2001 of approximately $2.0 million, operating losses of the Wal-Mart locations of approximately $600,000, increased costs of raw materials, such as butter, of approximately $500,000 and labor and benefit increases of approximately $1.4 million.

        Of the Company's 474 corporate owned stores, 289 showed positive year-over-year results, and a store contribution margin of 18.9 percent, or 1 to 2 percent below expectations. The remaining stores included 87 stores with negative year-over-year sales, 45 Wal-Mart locations and 53 new stores and non year-over-year stores. These stores earned a negative contribution margin. The loss from these stores relative to target of 15 to 20 percent margin accounts for most of the year-over-year store contribution decline.

        Franchising and licensing contribution was $19.0 million for fiscal 2001, an increase of $2.0 million or 11.9 percent, from franchising and licensing contribution of $17.0 million for fiscal 2000. This increase was principally the result of an increase in royalties and license fees earned under its Mrs Fields branded product licenses for Mrs. Fields branded soft-baked cookies sold in retail stores and premium chocolates of $1.3 million and an increase in initial franchise fees and franchise royalties of $800,000.

        Mail order contribution was $2.2 million for fiscal 2001, an increase of $100,000 or 6.8 percent, from $2.1 million for fiscal 2000. This increase was attributable to an 11.7 percent increase in mail order sales offset by a 13.2 percent increase in mail order operating expenses.

        As discussed below, the results at the store contribution level were partially off set by strong performances in Franchising, Licensing, and Mail order.

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        Company owned and Franchised or Licensed Store Activity.    As of December 29, 2001, there were 474 company owned stores and 1,017 franchised or licensed stores in operation. The store activity for fiscal 2001 and fiscal 2000 is summarized as follows:

        Net Store and Food Sales.    Total net store and food sales, which includes sales from stores and sales of refrigerated cookie dough product to retail markets, were $126.4 million for fiscal 2001, a decrease of $8.3 million or 6.1 percent, from $134.7 million for fiscal 2000. Refrigerated cookie dough product sales were $1.2 million and $2.5 million for fiscal 2001 and fiscal 2000, respectively. The decrease in retail refrigerated cookie dough sales was principally due to the discontinuance of a frozen retail dough product. The product was discontinued due to its low contribution margin.

        Store sales were $125.2 million for fiscal 2001, a decrease of $7.0 million or 5.2 percent, from $132.2 million for fiscal 2000. As previously mentioned, the impact of September 11 and the recession hit the hardest in the fourth quarter of fiscal 2001. With the holiday shopping season, the fourth quarter is traditionally the Company's busy period with approximately 30 percent of annual store revenues occurring during that quarter. Net store revenues in the fourth quarter of fiscal 2001 decreased $3.7 million compared to the fourth quarter of fiscal 2000, representing 53.6 percent of the total decline in net store revenues from fiscal 2000 to fiscal 2001. The decrease in same store sales was the result of the general economic slow down and recession experienced in 2001 and the events of September 11, which reduced mall traffic and altered consumer-spending habits.

        Prior to the economic recession, which began in early 2001, the Company had experienced a 5.4 percent growth in store UWA sales from 1999 to 2000. However, the 2001 recession contributed to a 2.5 percent decrease in store UWA sales. The decrease in UWA sales was also the result of opening 45 Wal-Marts, which have experienced sales levels 60.0 percent lower than average. The original Wal-Mart model anticipated sales at 20.0 percent below average. Management believed that these locations offered a good opportunity to develop a presence outside of the mall environment.

        Cost of Sales—Store and Food.    Cost of sales was $29.6 million for fiscal 2001 and fiscal 2000. Cost of sales for the refrigerated cookie dough product sold to retail markets was $1.0 million and $1.8 million for fiscal 2001 and fiscal 2000, respectively.

        Cost of sales, stores only, was $28.6 million for fiscal 2001, an increase of $800,000 or 2.9 percent, from $27.8 million. As a percentage of net store sales, cost of sales increased from 21.1 percent in fiscal 2000 to 22.8 percent in fiscal 2001 due to an increase in raw ingredient costs and a change in product mix, including smoothies and other products that have lower gross margins. Butter costs increased by $500,000 in fiscal 2001 over the prior year.

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        Selling and Store Occupancy Costs.    Selling and store occupancy costs were $74.3 million for fiscal 2001, an increase of $800,000 or 1.1 percent, from $73.5 million for fiscal 2000. Labor costs increased 4.2 percent or $1.5 million from $34.1 million in fiscal 2000 to $35.6 million in fiscal 2001. This increase was attributable to an increase in company owned stores primarily because of the Company's expansion into Wal-Mart, which had higher labor costs as a percentage of sales than traditional stores. Additionally, labor costs as a percent of sales increased from 25.7 percent for fiscal 2000 to 28.3 percent for fiscal 2001. Rent and occupancy expense decreased $500,000 or 1.6 percent from $28.4 million in fiscal 2000 to $27.9 million in fiscal 2001. This was the result of the closing of certain stores, some of which had unfavorable lease terms or lower contribution margins, and lower contingent rents incurred as a result of the lower sales volume offset by additional rent expense from the expansion of new Wal-Mart and other stores.

        With sales decreasing from the general economic recession and slowdown experienced in 2001, the Company experienced negative leverage of its labor and rent expense. Store staffing levels were maintained at low levels to minimize labor to sales ratios, with staffing models and staffing dollars, along with rents, becoming relatively more fixed in nature.

        Other store and selling expenses were $10.8 million for fiscal 2001, a decrease of $200,000 or 2.4 percent, from $11.0 million for fiscal 2000.

        Franchising and Licensing Revenues.    Franchising and licensing revenues were $29.6 million for fiscal 2001, an increase of $2.6 million or 9.4 percent, from $27.0 million for fiscal 2000. Franchising revenues were $24.8 million for fiscal 2001, an increase of $900,000 or 3.9 percent, from $23.9 million for fiscal 2000. The increase in franchising revenues was partially attributable to increases in royalties of $400,000 and initial franchise fees of $400,000. The increase in royalty revenues of $400,000 from our franchisees is primarily due to 45 additional franchised locations open in fiscal 2001 compared to fiscal 2000.

        Licensing revenues were $4.8 million for fiscal 2001, an increase of $2.1 million or 76.1 percent, from $2.7 million in fiscal 2000. Licensing revenues were positively impacted in fiscal 2001 by $1.7 million as a result of the sale of certain recipes and a licensing agreement with a national manufacturer of cookies. The license agreement allows for the sale of soft-baked cookies branded under the Mrs. Fields name in specified retail channels and geographic locations. Royalties under the licensing agreement for fiscal 2001 were $2.0 million compared to $1.1 million for fiscal 2000.

        Licensing revenues were also positively impacted in fiscal 2001 by an increase in royalties from a candy manufacturer that distributes premium candies branded under the Mrs. Fields name. Royalties under the license agreement were $645,000 for fiscal 2001 compared to $229,000 for fiscal 2000.

        Additionally, during 2001, the Company entered into international area license agreements in Switzerland, Japan and Saudi Arabia. Revenue associated with these license agreements is recognized over the term of the license, generally five years, or based upon the specific opening of franchised units as defined in the agreements. Revenue recognized under these agreements totaled $15,000 in fiscal 2001.

        Franchising and Licensing Expense.    Franchising and licensing expense was $10.6 million for fiscal 2001, an increase of $600,000 or 5.2 percent, from $10.0 million for fiscal 2000. This increase in costs was principally due to additional administrative costs incurred for international and domestic licensing costs associated with the merger of TCBY in 2000 of $700,000 offset by reduced operating and administrative costs of $300,000 of the Company's batter facility which sells cookie batter to its Great American Cookie franchisees.

        Mail Order Revenues.    Mail order revenues were $10.3 million for fiscal 2001, an increase of $1.1 million or 11.7 percent, from $9.2 million for fiscal 2000. Mail order revenues consisted of sales

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through the Company's catalog and e-tailing web-site. Internet sales increased 53.0 percent from fiscal 2000 and represented $4.2 million, or 40.1 percent, of total mail order sales in fiscal 2001. Mail order sales also increased as a result of obtaining corporate customers who have used Mrs. Fields products as promotional products or customer appreciation gifts.

        Mail Order Expense.    Mail order expense was $8.1 million for fiscal 2001, an increase of $1.0 million or 13.2 percent, from $7.1 million for fiscal 2000. During 2001, mail order incurred additional rent charges of $170,000 from fiscal 2000 as a result of its expansion and relocation to a new facility. This expansion allowed for additional capacity to service the $1.1 million increase in revenues and provides capacity for future growth. Labor costs associated with the increased revenues increased $500,000 and general and administrative costs increased $200,000 for marketing and catalog. Cost of sales, as a percent of sales, decreased from 41.9 percent for fiscal 2000 to 38.0 percent for fiscal 2001. Net contribution for mail order was $2.2 million for fiscal 2001, an increase of $100,000, or 4.7 percent, from $2.1 million for fiscal 2000.

        Management Fee Revenues.    Management fee revenue was $11.5 million for fiscal 2001, an increase of $4.0 million or 52.5 percent, from $7.5 million for fiscal 2000. The increase was due to the Company receiving a management fee from TCBY for providing operation and support services for the entire year of 2001 compared to only seven months in 2000. The TCBY Management Agreement was entered into on June 1, 2000.

        General and Administrative, and TCBY Transitional and Other Expenses.    General and administrative expenses were $31.9 million, an increase of $5.5 million or 20.7 percent, from $26.4 million for fiscal 2000. The increase in general and administrative expenses is principally due to the increased costs associated with the management of TCBY under the TCBY Management Agreement and was partially offset by the elimination of costs incurred in 2000 transitioning TCBY's operations to Salt Lake City that did not recur in 2001. The TCBY Management Agreement was in place for seven months for fiscal 2000 versus 12 months for fiscal 2001. The additional increase in general and administrative expenses, including TCBY transitional costs, is the result of hiring additional executive management and costs associated with executive recruitment, relocation, and transactional costs and professional fees associated with the merger into MFFB.

        Stock Compensation Expense.    Stock compensation expense was $2.0 million for fiscal 2001. During fiscal 2001, the Company recognized $2.0 million of non-cash compensation expense related to the then vested portion of MFFB stock options issued to Company employees, in exchange for options that had previously been outstanding at Mrs. Fields' Holding as part of the Mrs. Fields Reorganization (see Note 1 of Notes to Consolidated Financial Statements included in Item 8 of Part II of this report). The exchange of the options created a new measurement date and, because the exercise price of the exchanged options was equal to the exercise price of the original MFH options and the fair value of the MFFB common stock at the date of grant was higher than the exercise price of the new options, the Company recognized compensation expense for the difference between the fair value of the MFFB options that vested upon issuance and the exercise price of the original Mrs. Fields' Holding options that had already vested.

        Store Closure Provision.    Store closure provision was $378,000 for fiscal 2001 compared to a reversal of expense of $1.0 million in fiscal 2000. During late 2001, the Company identified four additional stores that were not performing at acceptable levels and recorded a reserve of $378,000 for the stores' planned closure. Prior to 1999, the Company recorded a store closure reserve to cover early lease termination costs under a plan to close or franchise existing stores that were not earning acceptable levels of contribution. During 1999 and 2000, the Company was successful in closing certain of these stores at a negotiated cost less than had been provided for in the plan. A total of $1.0 million of costs in excess of the amounts required to close the stores was reversed in 2000.

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        Impairment of Long-Lived Assets.    Impairment of long-lived assets was $4.0 million for fiscal 2001, a decrease of $200,000 or 5.6 percent from $4.2 million for fiscal 2000. The Company annually assesses the impairment of its long-lived assets. During fiscal 2001 and fiscal 2000, the Company wrote down to net realizable value approximately $2.6 million and $3.6 million, respectively, of impaired long-lived store assets and the goodwill associated with these stores. The Company assessed the future undiscounted cash flows from store contributions over the stores' current lease period, and renewal period if the stores were considered a core store.

        In fiscal 2001, the Company recognized an impairment of $1.4 million relating to goodwill associated with the Original Cookie and Hot Sam brand names and recipes. In the impairment assessment, the Company assessed the future undiscounted cash flows from store contribution for Original Cookie and Hot Sam stores over the stores' current lease period. At expiration of the lease period, the stores will either be closed or converted to a Mrs. Fields, Great American, Pretzel Time or Pretzelmaker stores.

        Depreciation and Amortization Expense.    Total depreciation and amortization expense was $22.1 million for fiscal 2001, a decrease of $1.6 million or 6.7 percent, from $23.7 million for fiscal 2000. Depreciation expense was $9.6 million for fiscal 2001, a decrease of $800,000 or 7.8 percent from $10.4 million for fiscal 2000. Amortization expense was $12.5 million for fiscal 2001, a decrease of $800,000 or 5.9 percent from $13.3 million for fiscal 2000. These decreases were principally due to the store asset impairment recorded in fiscal 2001 and fiscal 2000 as previously discussed.

        Other Operating Income, Net.    Other operating income, net was $75,000 for fiscal 2001, an increase of $259,000, from other operating expense, net of $184,000 in 2000. The increase in other income was the result of net gains on stores sold to franchisees and property insurance proceeds received on the stores damaged as a result of the events September 11, 2001 in excess of the net book value of assets written off.

        Interest Expense, Net.    Interest expense, net for fiscal 2001 was $17.3 million, a decrease by $500,000 or 2.5 percent, from $17.8 million for fiscal 2000. The decrease was primarily due to lower effective interest on the Company's line of credit and lower balances outstanding on its capital lease obligations.

        Provision for Income Taxes.    In connection with the acquisition of Mrs. Fields, Inc. and Original Cookie Company in 1996, the Company recorded a deferred tax asset totaling $3.5 million. The Company increased the valuation allowance on the deferred tax asset in 2000 because it had not achieved taxable income subsequent to the date that the Company was formed. As the Company achieves a history of generating taxable income in the future, the valuation allowance against these deferred tax assets may be reduced to the extent that the deferred tax asset can be utilized for income tax return purposes.

Liquidity and Capital Resources

        General.    The Company's principal sources of liquidity are cash flows from operating activities, cash on hand, available borrowings under its revolving credit facility and proceeds from the sale of assets. At December 28, 2002, the Company had $2.6 million of unrestricted cash and $6.5 million available under its $9.0 million revolving credit facility, which was replaced on January 16, 2003. The terms of the Company's indenture governing its outstanding senior notes limit the Company's ability to borrow under the credit facility to a total of $9.9 million, excluding letters of credit. At December 28, 2002, the Company had outstanding borrowings of $972,000 and outstanding letters of credit totaling $1.5 million, which were scheduled to mature on or prior to March 31, 2003.

        On January 16, 2003, the Company entered into a new credit facility with Foothill Capital Corporation ("Foothill"). The Foothill credit facility bears interest at the prime rate plus 1.75 percent.

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The Foothill credit facility also requires a monthly servicing fee of $5,000 and an anniversary fee of $200,000. The Foothill credit facility provides for $11.9 million of credit comprised of a $9.9 million revolving line of credit for financing working capital expenditures and $2.0 million for letters of credit. The Foothill credit facility matures November 1, 2004 and is secured by substantially all of the assets of the Company.

        Mrs. Fields' operations have been negatively impacted by the continued recession that began in 2001 and the events of September 11, 2001. The Company has incurred net losses from the date of its formation resulting in a stockholder's deficit of $66.6 million at December 28, 2002. Approximately $62.4 million of such net losses have been the result of non-cash expenses, including the loss from the cumulative effect of an accounting change, depreciation and amortization of intangible assets, debt issuance costs and asset impairment on Wal-Mart locations in fiscal 2002. The Company generated $6.8 million of cash from operating activities during fiscal 2002, primarily from store sales and franchising and licensing revenues less costs and expenses incurred to generate those revenues. The Company generated $3.0 million of cash from investing activities during fiscal 2002, primarily from proceeds related to franchising 70 company owned stores, which were partially offset by capital expenditures. The Company utilized $10.6 million of cash for financing activities during fiscal 2002, principally due to payments on the Company's line of credit, long-term debt and capital leases.

        As of December 28, 2002, the Company had liquid assets (unrestricted cash and cash equivalents and accounts receivable) of $9.5 million, a decrease of $1.0 million or 9.2 percent, from December 29, 2001 when liquid assets were $10.5 million. Current assets were $13.3 million at December 28, 2002, a decrease of $3.9 million or 22.9 percent, from $17.2 million at December 29, 2001. This decrease was primarily the result of a decrease in cash and cash equivalents, inventories, amounts due from franchisees and licensees, amounts due from affiliates and assets held for sale, partially offset by an increase in prepaid rents.

        Long-term assets were $98.3 million at December 28, 2002, a decrease of $60.8 million or 38.2 percent, from $159.1 million at December 29, 2001. This decrease was due to a write off of goodwill in accordance with SFAS 142 of $39.1 million, write down of the carrying value of the long-term assets of the Company's Wal-Mart locations of $7.5 million, impairment of long-lived assets of $4.2 million, recurring depreciation and amortization of property and equipment, intangibles, and deferred loan costs and sale of company owned stores offset by purchases of property and equipment and amounts due from affiliates associated with the management fee retention amount under the TCBY Management Agreement of $1.5 million.

        Current liabilities were $32.7 million at December 28, 2002, a decrease of $6.9 million or 17.6 percent, from $39.6 million at December 29, 2001. This decrease is due to a decrease in accounts payable, borrowings on the Company's line of credit and current portion of store closure reserve, which was partially offset by an increase in the amounts due to affiliates related primarily to the Tax Allocation Agreement with MFFB.

        The Company's working capital deficit of $19.4 million at December 28, 2002 decreased by $3.0 million, or 13.6 percent, from a deficit of $22.4 million at December 29, 2001, for the reasons described above.

        As of December 28, 2002, Mrs. Fields is the tenant of 619 leases ("Operating Leases"), of which 252 are currently subleased to franchisees ("Franchise Leases") with the franchisees assuming all obligations of the tenant under the Franchise Lease, except to the extent the Company subsidizes such leases. In the event a franchisee ceases operations or otherwise defaults under any of the Franchise Leases or in the event the Company ceases operations at any location governed by the Operating Leases, the Company will be primarily liable for the satisfaction of all obligations of the tenant under such Leases.

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        In January 2003, the Company entered into a supply agreement with Countryside to replace Multifoods as the Company's primary supplier of frozen bakery products through December 2006. It is anticipated that the transition from Multifoods to Countryside will be completed by May 2003. The agreement stipulates minimum annual purchase commitments of not less than 15.0 million pounds of the products, approximately $16.5 million based on weighted average prices in effect at December 28, 2002, each year through the end of the contract. The purchase commitment for fiscal 2003 will be prorated based on the commencement date of purchases from Countryside. The annual minimum purchase commitment of 15.0 million pounds of products approximates the amount of products purchased during fiscal 2002.

        The following table reflects the Company's future contractual cash obligations as of December 28, 2002 and the supply agreement with Countryside explained above (in thousands):