Milling & Baking News - July 4, 2006 - 11

B U S I N E S S

Riding extended wave of growth,
Otis Spunkmeyer seeks more
Continued from Page 1
Spunkmeyer has built its business in recent
years primarily on supplying its frozen
cookie dough to food service customers.
The product/channel combination
accounted for 63% of Otis Spunkmeyer
sales, which aggregated $336,250,000 in
the year ended Dec. 31, 2005. Sales were
up from $305,142,000 in 2004. From 2000
to 2005, net sales grew to $336.3 million
from $211.9 million, equating to a compounded annual growth rate of 9.7%.
Net income in 2005 was $5,387,000,
versus losses of $3,041,000, $5,068,000
and $1,649,000 in 2004, 2003 and 2002,
respectively.
The 2005 sales translate into approximately 10 million cookies per day, the
company said. Muffin sales, which represent 26% of the Otis Spunkmeyer business, total about 1 million units each day.
The remainder of the company's business
is devoted to thaw-and-serve products,
including cookies, danish and brownies.
To grow further in food service, Otis
Spunkmeyer is seeking opportunities
to build its principal categories (frozen

the Year twice since 2000," the company
said. The sandwich chain accounted for
16% of fiscal 2005 sales.
Subway is Otis Spunkmeyer's single
largest customer, the prospectus said,
and has been an effective vehicle for international expansion.
"We currently supply Subway stores
in approximately 56 countries, and we
recently augmented our existing relationships with several additional customers who are expanding internationally," the company said.
Food service customers are offered participation in a branded fresh baked cookie
program in which an Otis Spunkmeyer
convection oven is provided as are display cases and point-of-sale materials.
"We believe that our brand name together with the aroma of fresh baked cookies
increases our customers' traffic and average transaction size," the prospectus said.
Other opportunities for growth identified by Otis Spunkmeyer are the muffin,
which it expects to enjoy greater consumer demand for both healthier and more
indulgent product options, and increased

Otis Spunkmeyer manufacturing plants

Cayce, S.C.
San Leandro, Calif.
Export, Pa.
Austin, Texas

Square
footage
140,860
88,834
68,600
104,666

Cookie dough
Muffin
production
Current
production
Current
capacity
operating
capacity
operating
(pounds per week)
rate
(muffins per week) rate
2,200,000
84%
3,400,000
75%
950,000
65%
1,500,000
41%
1,200,000
78%
2,500,000
71%
600,000
46%
NA
NA

Source: Otis Spunkmeyer

cookie dough and muffins), increase its
market share and expand internationally
with its customers.
"Several of our key customers, including Subway and Sysco Corp., are experiencing significant growth," the company
said. "We believe we are well positioned
to grow with our customers given the
strength of our relationships and our
ability to provide superior service."
Food service customers include distributors, contractors, restaurant chains,
educational and health care facilities, onpremise catering companies, convenience
stores, military and lodging facilities. In
addition to Subway, food service customers, which accounted for 84% of fiscal 2005
net sales, included names such as Sysco
Corp., Aramark Corp. and Sodexho.
"We are the sole source cookie supplier
to Subway in North America (through its
franchisee purchasing organization) and
have been named Subway's Supplier of
12 / Milling & Baking News, July 4, 2006

penetration into restaurant chains.
"This segment, which includes quickservice restaurants and full-service restaurants, is relatively under-penetrated by Otis
Spunkmeyer today," the company said.
Similarly, the company identified its
limited presence in the retail channel as
an opportunity for growth.
"We believe our category expertise
and product innovation have positioned
us to penetrate leading retailers," Otis
Spunkmeyer said. "In 2005, we began
transitioning our retail D.S.D. network
volume to a combination of third-party
retail distribution and a direct-to-warehouse program. This shift is reducing
our distribution expenses in serving the
retail channel, improving in-store service
levels and making more resources available for us to grow our retail business.
"We have a focused retail strategy that
is dedicated to specific existing customers
such as Costco and Wal-Mart. We believe

our expertise will allow us to penetrate
leading retailers in both the bakery aisle
and in the in-store bakery departments. As
part of this strategy, we recently became a
cookie dough supplier to Safeway for their
North American in-store bakery program."
Otis Spunkmeyer was established by
Kenneth Rawlings in 1977, with a retail
cookie store in Oakland, Calif. The name
was created by his daughter, Kimberly, who
was 12 at the time. By 1983, the business
had grown to 22 stores, but management
made a strategic shift from retail stores to
higher margin wholesale manufacturing
with an emphasis on sales to food service
customers. The stores were divested and
the sale of frozen cookie dough became the
exclusive focus of the company.
The company entered the thaw-andserve muffin market in 1990 with the acquisition of a small baking company.
"During the early 1990s, we focused
on further developing our core food
service and retail business and securing national accounts with leading food
service operators as well as major retail
grocers," the prospectus said.
A restructuring in 1996 led to the hiring
of John Schiavo as president and chief executive officer. In August 2002, an investment group headed by Code Hennessy &
Simmons formed Otis Spunkmeyer Holdings, Inc. and acquired the company. As of
April 2006, the investment group owned
75% of the company's outstanding shares.
The 2002 acquisition was financed with
$110.3 million of borrowings under the
CHS Group's senior secured credit facility, the issuance by Otis Spunkmeyer of
$73 million in debt (including the $40 million), with interest rates of 18.5% to 19.5%,
and $103.2 million of equity contributions
by investors led by CHS Group.
In exchange for the investments, $49.3
million of preferred Class A stock was issued as was $46.3 million of common stock.
An additional $3 million of non-voting common stock was issued to one shareholder.
Otis Spunkmeyer also owns the Chippery frozen cookie products business,
having acquired the company (MerkelMcDonald Inc.) and its Austin, Texas,
plant in September 2005.
The Chippery was acquired for $37.1
million. The company's annual sales
were about $30 million.
Reacting to the planned i.p.o., Moody's
Investors Service on June 26 affirmed the
B1 rating of the company and changed
the outlook to positive from stable.
The improved outlook reflects the plan
stated in the prospectus to reduce high cost
debt and preferred stock, Moody's said.
"Should this i.p.o. transaction close and
debt be reduced as planned, Otis' credit
metrics could materially improve, and its
ratings be upgraded," the agency said. MBN
bakingbusiness.com / world-grain.com

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Milling & Baking News - July 4, 2006

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