SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended: July 3, 1999
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Commission File Number: 001-15023
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THE YANKEE CANDLE COMPANY, INC.
-------------------------------
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04 259 1416
- -----------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
102 CHRISTIAN LANE, WHATELY, MASSACHUSETTS 01093
- ---------------------------------------------------------------------------
(Address of principal executive office and zip code)
(413) 665-8306
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $ 0.01 par value New York Stock Exchange, Inc.
(Title of class) (Name of each exchange where
registered)
Indicate by check mark whether 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 No X
----- ---
The registrant had 54,513,961 shares of Common Stock, par value $.01,
outstanding as of August 9, 1999.
<PAGE>
THE YANKEE CANDLE COMPANY, INC.
FORM 10-Q - Quarter Ended July 3, 1999
Index
PART I. Financial Information Page Number
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance 3
Sheets as of July 3, 1999 and December
31, 1998
Unaudited Condensed Consolidated 4
Statements of Operations for the
Thirteen Weeks Ended July 3, 1999 and
the Three Months Ended June 30, 1998,
and the Twenty Six Weeks Ended July 3,
1999 and the Six Months Ended June 30,
1998
Unaudited Condensed Consolidated 5
Statements of Cash Flows for the
Twenty Six Weeks Ended July 3, 1999 and
the Six Months Ended June 30, 1998
Notes to the Unaudited Condensed 6
Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of 9
Financial Condition and Results of Operations
PART II. Other Information
Item 2. Changes in Securities and Use of Proceeds 15
Item 4. Submission of Matters to a Vote of Security 15
Holders
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
<PAGE>
PART I. Financial Information
Item 1. Unaudited Condensed Consolidated Financial Statements
THE YANKEE CANDLE COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except per share data)
(Unaudited)
July 3, 1999 December 31, 1998
------------ -----------------
ASSETS
Current Assets:
Cash and cash equivalents $12,149 $ 30,411
Accounts receivable
Less allowances of $505 and $450 7,581 8,546
Stock subscription receivable 101,206 -
Inventory 26,177 12,482
Prepaid expenses and other current assets 2,492 855
Deferred tax assets 1,541 1,542
----- -----
Total current assets 151,146 53,836
Property, Plant And Equipment (Net) 56,503 48,315
Marketable Securities 698 856
Classic Vehicles 874 874
Deferred Financing Costs 6,162 6,566
Deferred Tax Assets 164,474 164,474
Other Assets 450 424
--- ---
Total Assets $380,307 $275,345
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable $11,453 $13,287
Accrued interest 1,984 1,895
Accrued payroll 4,369 4,768
Accrued income taxes 2,052 -
Other accrued liabilities 5,366 2,982
----- -----
Total current liabilities 25,224 22,932
Deferred Compensation Obligation 766 1,004
Long-Term Debt 320,000 320,000
Stockholders' Equity (Deficit)
Common Stock, $.01 par value per share,
300,000 shares authorized; 98,005
issued; 54,499 and 48,445 shares
outstanding at 1999 and 1998,
respectively 1,041 980
Additional paid-in capital 225,277 126,610
Treasury stock, 49,560 shares in 1999
and 49,560 shares in 1998, at cost (212,989) (212,448)
Retained earnings 23,808 19,048
Capital subscription receivable (750) (1,084)
Unearned stock compensation (1,956) (1,698)
Accumulated other comprehensive income (loss) (114) 1
------ --------
Total stockholders' equity (deficit) 34,317 (68,591)
------ --------
Total Liabilities And Stockholders Equity $380,307 $275,345
======== ========
See notes to Condensed Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
THE YANKEE CANDLE COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Thirteen Three Months Twenty Six Six
Weeks Ended Months Ended Weeks Ended Months Ended
July 3, 1999 June 30, 1998 July 3, 1999 June 30,1998
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 41,372 $ 28,742 $87,962 $ 64,055
Cost of goods sold 18,605 12,835 39,409 29,235
------ ------ ------ ------
Gross profit 22,767 15,907 48,553 34,820
Selling expenses 9,224 6,186 17,733 13,666
General and administrative 3,946 6,049 12,262 7,952
expenses
Bonus related to the - 61,263 - 61,263
recapitalization ----- ------ ------ ------
Income (loss) from operations 7,494 (55,488) 18,558 (48,061)
Interest income (206) (33) (496) (81)
Interest expense 5,611 4,309 11,379 4,678
Other (income) expense (51) 44 (95) 33
---- -- ---- --
Income (loss) before provision
(benefit) for income taxes 2,140 (59,808) 7,770 (52,691)
Provision (benefit) for income 856 (1,636) 3,108 (1,636)
taxes --- ------- ----- -------
Net income (loss) $ 1,284 $ (58,172) $ 4,662 $ (51,055)
======= ========== ======= =========
Historical basic earnings
(loss) per share $ 0.03 $ (0.90) $ 0.10 $ (0.63)
Historical diluted earnings
(loss) per share $ 0.03 $ (0.90) $ 0.10 $ (0.63)
Proforma benefit for
income taxes (22,727) (20,023)
Proforma net loss $ (37,081) $ (32,668)
Proforma basic loss per share $ (0.57) $ (0.40)
Proforma diluted loss per share $ (0.57) $ (0.40)
Weighted average basic shares
outstanding 46,848 64,752 46,839 81,378
Weighted average diluted shares
outstanding 49,034 64,752 48,935 81,378
See notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE YANKEE CANDLE COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Twenty Six Weeks Six Months
Ended Ended
July 3, 1999 June 30, 1998
------------ --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 4,662 $ (51,055)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,741 2,070
Unrealized (gain)/loss on marketable equity securities 3 (8)
Non-cash stock compensation 565 -
Loss on disposal of fixed assets and classic vehicles 8 36
Changes in assets and liabilities
Accounts receivable-net 933 (38)
Inventory (13,852) (7,929)
Prepaid expenses and other assets (1,707) (68)
Accounts payable (1,841) 781
Accrued expenses and other liabilities 1,518 839
----- ---
Net cash used in operating activities (6,970) (55,372)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (10,570) (2,829)
Proceeds from sale of property and equipment 26 772
Purchase of marketable equity securities (255) (241)
Proceeds from sale of marketable equity securities 410 -
Proceeds from sale of classical cars - 702
Proceeds from repayment of shareholder loan 1,573
----- -----
Net cash used in investing activities (10,389) (23)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long term borrowings - 312,695
Principal payments on long-term debt and capital
lease obligations - (7,954)
Payments for deferred financing costs - (7,115)
Payments for expenses related to the sale of common stock (834) -
Payments for redemption of common stock (540) (228,950)
Proceeds from repayment on capital subscription
receivable 334 -
Distributions to stockholder - (16,884)
-------- ------
Net cash provided by (used in) financing activities (1,040) 51,792
EFFECT OF EXCHANGE RATE ON CASH 137 -
NET DECREASE IN CASH AND CASH EQUIVALENTS (18,262) (3,603)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 30,411 7,377
------ -----
CASH AND CASH EQUIVALENTS, END OF PERIOD $12,149 $3,774
====== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $11,277 $882
Income taxes $620 $-
NON-CASH TRANSACTION:
At July 3, 1999 the Company had a subscription receivable totaling $101,206
related to the sale of common stock and the exercise of options. This
resulted in an increase in common stock and additional paid in capital of
$61 and $98,762 respectively. The subscription is net of $7,020 in fees.
See notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(Unaudited)
1. Basis Of Presentation
---------------------
The unaudited interim condensed consolidated financial statements of The
Yankee Candle Company, Inc. and its wholly-owned subsidiaries (the
"Company") have been prepared in accordance with generally accepted
accounting principles. The financial information included herein is
unaudited; however in the opinion of management, such information contains
all adjustments necessary for a fair presentation of the results for such
periods. In addition, the Company believes such information reflects all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation of financial position and results of operations for such
periods. Certain prior year amounts have been reclassified to conform to
the current presentation. All intercompany transactions and balances have
been eliminated. The results of operations for the 13 weeks ended July 3,
1999 are not necessarily indicative of the results to be expected for the
full fiscal year ending January 1, 2000. Effective January 1, 1999, the
Company adopted a 52/53 week fiscal year.
Certain information and disclosures normally included in the notes to
consolidated financial statements have been condensed or omitted as
permitted by the rules and regulations of the Securities and Exchange
Commission, although the Company believes the disclosure is adequate to
make the information presented not misleading. The accompanying unaudited
condensed financial statements should be read in conjunction with the
audited consolidated financial statements of the Company for the year ended
December 31, 1998.
Principles Of Consolidation
- ---------------------------
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Accounting Estimates
- --------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Newly Issued Accounting Standards
- ---------------------------------
During 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued by the Financial Accounting Standards
Board. This statement is effective for periods beginning after June 15,
2000. The Company is currently evaluating the impact, if any, of this
statement.
Pro Forma Adjustments
- ---------------------
The Company had, until the Recapitalization (see note 3), elected to be
treated as an S Corporation for federal and state income tax purposes.
Under this previous election, income for federal income tax purposes was
not taxed at the corporate level but was taxed to the sole shareholder.
On April 27, 1998, the Company's tax status changed from an S Corporation
to a C Corporation. The income statement reflects a provision for income
taxes for federal and state purposes for the period the Company was a C
Corporation and a provision for state taxes for the periods the Company was
an S Corporation. The pro forma financial information shows the effect on
the 1998 financial statements as if the Company had been taxed as a C
Corporation during 1998 instead of an S Corporation until April 27, 1998.
2. Initial Public Offering
-----------------------
On July 1, 1999, the Company confirmed orders for the sale of 6,000 shares
of common stock at $18 per share in an initial public offering and listed
its stock on the New York Stock Exchange. The proceeds to the Company,
after deducting the underwriting fees and other expenses, were
approximately $98,600. On July 7, 1999, the Company used these proceeds,
together with $220,000 of bank borrowings under a new credit facility and
available cash, to redeem $320,000 aggregate principal amount of
outstanding subordinated debentures, after which, none of the subordinated
debentures were outstanding.
3. Recapitalization And Financings
-------------------------------
On March 25, 1998, the Company entered into a Recapitalization Agreement
with Yankee Candle Holdings Corp. ("Holdings"), Michael Kittredge ("MK"),
and affiliates of Forstmann Little & Co. ("FL&Co."). On April 27, 1998, in
connection with the recapitalization, the Company (i) redeemed (the
"Redemption") a portion of its common stock held by MK for approximately
$200,000; (ii) paid transaction fees and expenses, including financing
fees, of approximately $19,550; (iii) repaid existing indebtedness of
approximately $49,300; and (iv) paid bonuses related to the
recapitalization of approximately $61,263. In addition, Holdings acquired
shares of common stock from MK for approximately $180,000. This purchase
was financed by the issuance of Holdings' common stock to FL&Co. and senior
management. Upon completion of this series of transactions (the
"Recapitalization"), Holdings owned 90% of the common stock and MK retained
10% of the common stock of the Company.
The Redemption and related transactions described above were financed
through the issuance of $320,000 of subordinated notes (the "Subordinated
Debentures"). In addition, the Company entered into a credit agreement with
a consortium of banks that provided for a $60,000 revolving credit
facility. The Company borrowed $2,500 under this revolving credit facility.
The Company incurred financing costs of approximately $7,100, which were
recorded as deferred financing costs. In addition, the Company incurred
approximately $12,450 of transaction costs related to the Recapitalization,
which were charged to treasury stock.
4. Inventories
-----------
Inventory quantities are substantiated through the completion of quarter
end physical inventory counts. Inventories are stated at the lower of cost
or market on a last-in first-out ("LIFO") basis.
The components of inventory were as follows:
July 3, 1999 December 31, 1998
------------ -----------------
Finished Goods $22,824 $ 9,967
Work in process 72 126
Raw materials 3,708 2,816
----- -----
26,604 12,909
Less LIFO Reserve 427 427
Total Inventory $ 26,177 $ 12,482
-------- --------
5. Income Taxes
------------
The Company's effective tax rate in the second quarter of fiscal 1999 was
40%. The Company provides for income taxes at the end of each interim
period based on the estimated effective tax rate for a full fiscal year.
These financial statements also contain a pro forma calculation of tax
expense as if the Company had become a C Corporation on January 1, 1998.
6. Earnings Per Share
------------------
Under SFAS No. 128, the Company provides dual presentation of earnings per
share ("EPS") on a basic and diluted basis. The computation of basic
earnings per share is based on the weighted average number of common shares
outstanding during the period. The computation of diluted earnings per
share includes the dilutive effect of common stock equivalents consisting
of certain shares subject to stock options. The Company's granting of
certain stock options resulted in the potential dilution of basic EPS. The
following summarizes the effects of the assumed issuance of anti-dilutive
securities on weighted-average shares.
<TABLE>
<CAPTION>
Thirteen Three Twenty Six Six
Weeks Ended Months Ended Weeks Ended Months Ended
July 3, 1999 June 30, 1998 July 3, 1999 June 30, 1998
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Weighted average basic shares outstanding 46,848 64,752 46,839 81,378
Contingently returnable shares and shares
issuable pursuant to stock option grants 2,186 - 2,096 -
Weighted average diluted shares outstanding 49,034 64,752 48,935 81,378
</TABLE>
7. Comprehensive Income
--------------------
The Company adopted SFAS 130, "Reporting Comprehensive Income" as of
December 31, 1998. Comprehensive income includes all changes in equity
during the period except those resulting from transactions with owners of
the Company; it has two components: net income and other comprehensive
income. Accumulated other comprehensive income reported on the Company's
Consolidated Balance Sheets consists of foreign currency translation
adjustments. Comprehensive income, net of related tax effects, is as
follows (in thousands):
<TABLE>
<CAPTION>
Thirteen Three Twenty Six Six
Weeks Ended Months Ended Weeks Ended Months Ended
July 3, 1999 June 30, 1998 July 3, 1999 June 30, 1998
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Net income $ 1,284 $ (58,172) $ 4,662 $ (51,055)
Translation adjustment (112) - (115) -
----- - ----- -
Total comprehensive income $ 1,172 $ (58,172) $ 4,547 $ (51,055)
</TABLE>
8. Segment Information
-------------------
The Company has two reportable segments - retail and wholesale.
<TABLE>
<CAPTION>
Balance per
Unallocated/ Condensed
Thirteen Weeks Corporate/ Consolidated
Ended July 3, 1999 Retail Wholesale Other Financial Statements
- ------------------ ------ --------- ------------ --------------------
<S> <C> <C> <C> <C>
Net sales $16,418 $24,954 $0 $41,372
Operating earnings 1,016 10,614 (4,136) 7,494
Unallocated costs 0 0 5,354 5,354
Earning before taxes 0 0 0 2,140
<CAPTION>
Balance per
Unallocated/ Condensed
Three Months Corporate/ Consolidated
Ended June 3, 1998 Retail Wholesale Other Financial Statements
- ------------------ ------ --------- ------------ --------------------
<S> <C> <C> <C> <C>
Net sales $12,062 $16,680 $0 $28,742
Operating earnings 983 7,281 (63,752) (55,488)
Unallocated costs 0 0 4,320 4,320
Earning before taxes 0 0 0 (59,808)
<CAPTION>
Balance per
Unallocated/ Condensed
Twenty Six Weeks Corporate/ Consolidated
Ended July 3, 1999 Retail Wholesale Other Financial Statements
- ------------------ ------ --------- ------------ --------------------
<S> <C> <C> <C> <C>
Net sales $33,445 $54,517 $0 $87,962
Operating earnings 3,790 23,410 (8,642) 18,558
Unallocated costs 0 0 10,788 10,788
Earning before taxes 0 0 0 7,770
<CAPTION>
Balance per
Unallocated/ Condensed
Six Months Corporate/ Consolidated
Ended June 30, 1998 Retail Wholesale Other Financial Statements
- ------------------- ------ --------- ------------ --------------------
<S> <C> <C> <C> <C>
Net sales $23,685 $40,370 $0 $64,055
Operating earnings 2,472 15,696 (66,229) (48,061)
Unallocated costs 0 0 4,630 4,630
Earning before taxes 0 0 0 (52,691)
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Net Sales
- ---------
Net sales increased 44% to $41.4 million for the thirteen weeks ended July
3, 1999 from $28.7 million for the three months ended June 30, 1998; and
increased 37% to $88.0 million for the twenty-six weeks ended July 3, 1999
from $64.1 million for the six months ended June 30, 1998. This growth was
achieved by increasing the number of our retail stores, and increasing
sales in existing retail stores and to wholesale customers.
Wholesale sales increased 50% to $25.0 million for the thirteen weeks ended
July 3, 1999 from $16.7 million for the three months ended June 30, 1998;
and increased 35% to $54.5 million for the twenty-six weeks ended July 3,
1999 from $40.4 million for the six months ended June 30, 1998. This growth
was achieved primarily by increasing sales to existing customers, adding
new wholesale accounts and initiating sales through our new European
distribution center.
Retail sales increased 36% to $16.4 million for the thirteen weeks ended
July 3, 1999 from $12.1 million for the three months ended June 30, 1998;
and increased 41% to $33.4 million for the twenty-six weeks ended July 3,
1999 from $23.7 million for the six months ended June 30, 1998. This growth
was achieved by increasing the number of our retail stores and increasing
sales in existing retail stores. There were 85 retail stores open as of
July 3, 1999 compared to 52 retail stores open as of June 30, 1998 and 62
retail stores open as of December 31, 1998. Comparable store and mail-order
hub sales for the thirteen weeks ended July 3, 1999 increased 12% over the
three months ended June 30, 1998, and increased 15% for the twenty-six
weeks ended July 3, 1999 compared to the six months ended June 30, 1998.
There were 52 retail stores included in our comparable store base as of
July 3, 1999, and four of these stores were included for less than the full
period.
Gross Profit
- ------------
Gross profit increased 43% to $22.8 million for the thirteen weeks ended
July 3, 1999 from $15.9 million for the three months ended June 30, 1998;
and increased 40% to $48.6 million for the twenty-six weeks ended July 3,
1999 from $34.8 million for the six months ended June 30, 1998. This
increase was entirely attributable to the increase in sales. As a
percentage of sales, gross profit decreased to 55.0% for the thirteen weeks
ended July 3, 1999 from 55.3% for the three months ended June 30, 1998; and
increased to 55.2% for the twenty-six weeks ended July 3, 1999 from 54.4%
for the six months ended June 30, 1998. The decline in the gross profit
rate for the quarter was entirely attributable to sales mix. Wholesale
sales, which generate a lower gross profit than retail sales, were 60.3% of
total net sales for the thirteen weeks ended July 3, 1999; and were 58.0%
of total net sales for the three months ended June 30, 1998. The increase
in gross profit rate for the six month period reflects improved gross
profit rates in both wholesale and retail operations. Additionally, retail
sales, which generate a higher gross profit than wholesale sales, were
38.0% of total net sales for the twenty-six weeks ended July 3, 1999; and
were 37.0% of total net sales for the six months ended June 30, 1998.
Selling Expenses
- ----------------
Selling expenses increased 48.4% to $9.2 million for the thirteen weeks
ended July 3, 1999 from $6.2 million for the three months ended June 30,
1998; and increased 29.2% to $17.7 million for the twenty-six weeks ended
July 3, 1999 from $13.7 million for the six months ended June 30, 1998.
These expenses are related to both our wholesale and retail operations and
consist of payroll, advertising, occupancy and other operating costs. For
the six month period, excluding the commission paid to independent
manufacturers representatives in the first quarter of 1998, the last of
such payments, selling expenses increased 52.6% to $17.7 million in 1999
from $11.6 million in 1998. As a percentage of sales, selling expenses
increased to 22.3% for the thirteen weeks ended July 3, 1999 from 21.5% for
the three months ended June 30, 1998. As a percentage of sales, selling
expenses excluding commissions paid to independent manufacturers
representatives, increased to 20.2% for the twenty-six weeks ended July 3,
1999 from 18.1% for the six months ended June 30, 1998. The increase in
selling expense in dollars and as a percentage of sales for the quarter was
primarily related to the continued growth in the number of retail stores we
operated from 52 as of June 30, 1998 to 85 as of July 3, 1999 and costs
associated with our new European distribution center. The increase in
selling expense for the six month period was primarily related to the
continued growth in the number of retail stores we operated, investment in
wholesale promotional programs and costs associated with our new European
distribution center.
General And Administrative Expenses
- -----------------------------------
General and administrative expenses, which consist primarily of personnel-
related costs incurred in the administration of support functions,
increased 53.8% to $6.0 million for the thirteen weeks ended July 3, 1999
from $3.9 million for the three months ended June 30, 1998, and increased
53.8% to $12.3 million for the twenty-six weeks ended July 3, 1999 from
$8.0 million for the six months ended June 30, 1998. As a percentage of
sales, general and administrative expenses increased to 14.6% for the
thirteen weeks ended July 3, 1999 from 13.7% for the three months ended
June 30, 1998 and increased to 13.9% for the twenty-six weeks ended July 3,
1999 from 12.4% for the six months ended June 30, 1998. The increase in
general and administrative expense in dollars and as a percentage of sales
for the three and six month periods was primarily caused by investments in
building our organizational infrastructure, and $0.6 million of consulting
expenses recorded in the first quarter of 1999.
Operating Margins
- -----------------
Operating margins for our wholesale operations were $10.6 million or 42.5%
of wholesale sales for the thirteen weeks ended July 3, 1999 compared to
$7.3 million or 43.7% of wholesale sales for the three months ended June
30, 1998. The increase in wholesale operating margin dollars for the
quarter was entirely attributable to the increase in sales. The decrease in
wholesale operating margin rate for the quarter was primarily attributable
to costs associated with our new European distribution center. Operating
margins for our wholesale operations were $23.4 million or 42.9% of
wholesale sales for the twenty-six weeks ended July 3, 1999 compared to
$15.7 million or 38.9% of wholesale sales for the six months ended June 30,
1998. The wholesale operating margin increase for the six month period was
primarily attributable to higher sales and to the elimination of
commissions paid to independent manufacturer representatives.
Operating margins for retail operations were $1.0 million or 6.2% of retail
sales for the thirteen weeks ended July 3, 1999 compared to $1.0 million or
8.1% of retail sales for the three months ended June 30, 1998. The decrease
in retail operating margin rate for the quarter was entirely attributable
to the preopening expenses associated with opening 18 new stores and the
initial higher operating expenses, as a percentage of sales, of these
stores. Because new stores typically generate lower sales than the Company
average, the fixed cost component results in higher store operating and
selling expenses as a percentage of sales in these stores during their
start-up period. Operating margins for retail operations were $3.8 million
or 11.3% of retail sales for the twenty-six weeks ended July 3, 1999
compared to $2.5 million or 10.4% of retail sales for the six months ended
June 30, 1998. The retail operating margin increase for the six month
period was primarily attributable to higher sales, improved gross profit
rate and lower selling expenses as a percentage of sales.
Net Other Income (Expense)
- --------------------------
Net other expense was $5.4 million for the thirteen weeks ended July 3,
1999 compared to $4.3 million for the three months ended June 30, 1998; and
was $10.8 million for the twenty-six weeks ended July 3, 1999 compared to
$4.6 million for the six months ended June 30, 1998. The primary component
of the expense in each of these periods was interest expense. In connection
with the 1998 recapitalization, the Company borrowed $320.0 million in
April 1998, which resulted in significantly higher interest expense
subsequent to this borrowing.
Liquidity And Capital Resources
- -------------------------------
Cash and cash equivalents decreased by $18.3 million as compared to
December 31, 1998. This decrease was partially attributable to cash used in
operating activities of $7.0 million, which includes an increase in
inventories of $13.9 million. Capital expenditures for the twenty-six week
period ended July 3, 1999 were $10.6 million, primarily related to the
capital requirements to open 23 new stores and investments in manufacturing
equipment to meet increased production requirements.
The Company opened 23 stores during the twenty-six weeks ended July 3, 1999
and expects to open approximately 17 additional stores in the last two
quarters of fiscal 1999. Management estimates that the Company's cash
requirements, including pre-opening expenses, leasehold improvements and
fixtures, will be approximately $0.25 million for each new store.
Accordingly, the Company expects to use approximately of $4.3 million for
store openings during the last two quarters of fiscal 1999. In addition,
the Company plans to continue to make investments in manufacturing
equipment, information systems, distribution centers and store remodels to
improve operational efficiencies and customer service. The Company expects
to meet these cash requirements through a combination of available cash,
operating cash flow and borrowings from its existing revolving line of
credit.
Subsequent to the Company's Initial Public Offering (see note 2), the
Company terminated its existing revolving credit facility and entered into
a new credit facility with a syndicate of banks and other financial
institutions. The credit facility consists of $150.0 million of term loans
and a $150.0 million revolving credit facility. All of the term loans and
the loans under the revolving credit facility will bear interest, at our
option, at either of the following rates:
(a) the highest of:
- the rate from time to time publicly announced by The Chase
Manhattan Bank in New York as its prime rate,
- the secondary market rate for three-month certificates of deposit
from time to time plus 1% and
- the federal funds rate from time to time plus 1/2 of 1%,
in each case plus an applicable margin which is
- .50% for the first six months after July 7, 1999, and
- after these first six months, based on a pricing grid depending on
our leverage ratio at that time; or
(b) a Eurodollar rate plus an applicable margin which is
- 1.50% for the first six months after July 7, 1999, and
- after these first six months, based on a pricing grid depending on
our leverage ratio at that time.
We will also pay a commitment fee for the daily average unused commitment
under the revolving credit facility. The commitment fee is (a) 0.375% for
the first six months after July 7, 1999 and (b) after this period, based on
a pricing grid depending on our specified leverage ratio at that time. The
commitment fee will be payable quarterly in arrears and upon the final
maturity of the revolving credit facility. In addition, we will pay fees
for each letter of credit issued under the credit facility.
Beginning December 31, 1999, term loans under the credit facility will
amortize in quarterly installments. The revolving credit facility will
mature five years after July 7, 1999.
The credit facility is subject to mandatory prepayment with the net
proceeds of asset sales or additional indebtedness with specified
exceptions.
As of July 3, 1999, the Company was in compliance with all of its covenants
under the credit facility.
The Company expects that its current cash and cash equivalents and funds
available under its revolving credit and term loan facility will be
sufficient to fund its planned store openings and other recurring
operational cash needs for the next twelve months.
Impact Of Inflation
- -------------------
We do not believe inflation has a significant impact on our operations. The
prices of our products have not varied based on the movement of the
consumer price index. The majority of our material and labor costs are not
materially affected by inflation.
Year 2000 Compliance
- --------------------
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If not
corrected, many computer applications could fail or create erroneous
results by or at the Year 2000. The Year 2000 issue affects virtually all
companies and organizations.
We have established a project team to coordinate and address Year 2000
issues. This team is focusing its efforts on three areas:
- information systems software and hardware,
- facilities and distribution equipment, and
- third-party relationships.
We have implemented a systematic program to identify the areas where we
believe we are exposed to Year 2000 issues. Key information systems that
have been identified as critical to our operations include:
- inventory systems, including tracking inventory through the
manufacturing process and facilitating the picking of orders;
- order entry and accounts receivable systems, which allow us to enter
orders from our customers, bill our customers and track amounts owing
from them;
- Masterpiece application systems, which control our general ledger,
purchasing and accounts payable activities;
- a catalog system, which allows us to conduct catalog operations;
- a payroll system; and
- network systems, including our internal network
and office suite of products.
Our program with regard to information systems consists of three phases:
- an assessment phase which takes inventory of all major information and
non-information systems;
- a remediation phase which fixes Year 2000 issues identified in the
assessment phase; and
- a testing phase which tests the systems on a stand-alone and
integrated basis and, where applicable, completes final remediation.
<TABLE>
<CAPTION>
Anticipated/Actual
Assessment Remediation Anticipated Testing
System Comments Completion Date Completion Completion
<S> <C> <C> <C> <C>
Inventory systems New programs; written May, 1999 May, 1999 September, 1999
with four digits or
purchased
and certified by vendors
as Year 2000 compliant
Order entry and
accounts receivable Combination of new January, 1999 January, 1999 October, 1999
programs and legacy
programs
Masterpiece
Applications Certified by vendor as January, 1999 January, 1999 October, 1999
Year 2000 compliant
Catalog system In-house application January, 1999 January, 1999 September, 1999
written in four digits
Payroll system Payroll services September 1998 April, 1999 June, 1999
provided by third
party service bureau
that has certified
Year 2000 compliance
Network Certified by vendor as April, 1999 September, 1999 September, 1999
Year 2000 compliant
or patches to be
provided
</TABLE>
Certifications have been requested and received from all software and
hardware vendors that are integral to the above-described systems.
Year 2000 exposures have been anticipated by our information systems
department over the last five years. Over that time period, virtually all
of our internally developed systems described above have been rewritten. In
addition, new hardware has been purchased. These changes are part of our
on-going program to improve our information systems. Our information
systems budget has therefore not had a separate Year 2000 component.
Rather, Year 2000 remediation has been a part of our improvement strategy.
Therefore, we have not had to defer any information technology projects due
to our Year 2000 efforts. Only in the latter part of fiscal 1998 has a
separate budget line item been identified for our Year 2000 efforts. Our
identified expenditures with regard to this effort have been less than
$10,000 for each of the last two quarters. We anticipate incurring an
additional $150,000 in costs through year end to complete our remediation
and testing efforts. These specific costs are being expensed as incurred.
The non-information systems, which may be affected by the Year 2000 issue,
include our equipment control systems including large tank monitors and
candle making machinery as well as internal building systems. We tested our
facilities and manufacturing and distribution equipment during our annual
shutdown in June 1999. Testing will continue through the third quarter of
1999.
We have approximately 60 vendors that are integral to our business. Letters
were sent to these vendors requesting that they confirm their Year 2000
compliance status. The Company has received a 90% response to date with all
vendors but one confirming Year 2000 compliance by December 31, 1999.
Because we have so little concentration of sales with any one customer,
there are very few customers to whom we intend to circulate a letter.
We have not experienced any Year 2000 related problems to date; therefore,
we have not lost any revenues.
We believe that a worst case Year 2000 scenario for us would involve a
complete failure in the basic infrastructure of the United States. In
particular, should shipping services such as UPS, RPS and common carriers
fail, we would be unable to obtain raw materials to produce our products
and would be unable to ship our products to customers and retail locations.
Similarly, if utility providers failed to provide electricity and other
basic services, we would be unable to produce or sell our products.
Based on our assessment efforts to date and barring the worst case scenario
described above, we do not believe that the Year 2000 issue will have a
material adverse effect on our financial condition or results of
operations. We believe that we will have the ability to process
transactions, whether they involve paying our employees, procuring material
from vendors or invoicing our customers, using our existing data processing
systems. We believe that our manufacturing processes are not subject to
substantial Year 2000 risk because, if a piece of equipment fails because
of a date dependency, alternative product routing within our plant can be
made.
Our ability to obtain raw materials is dependent on third parties. While we
do have primary vendors for our raw materials we believe that the materials
being provided are readily available from other vendors. Therefore, should
a specific vendor fail because of a Year 2000 compliance issue, the
materials being delivered by this vendor can be readily replaced. Our
substantial network of wholesale accounts and our growing number of retail
locations have led us to conclude that exposures in our ultimate sales
channels are not material.
For the above reasons, no contingency plan has been developed. In the event
final testing of our information systems applications prove difficult or
responses from key vendors indicate significant non-compliance exposures,
we will reconsider developing a contingency plan. This plan may include
increasing production near the year end to provide additional inventory to
counteract any plant or third party-related disruptions.
Our assessment of our Year 2000 compliance is based on numerous assumptions
about future events, including third party Year 2000 compliance plans and
other factors. However, we cannot guarantee that this assessment is correct
and actual results could differ materially from those anticipated.
Quantitative and Qualitative Disclosures About Market Risk
- ----------------------------------------------------------
Our market risks relate primarily to changes in interest rates. We bear
this risk in two specific ways. First, we have debt outstanding. At July 3,
1999, we had $320.0 million of debt in the form of three series of 6 3/4%
subordinated debentures. Because this borrowing had a fixed interest rate,
neither our statement of operations nor our cash flows had exposures to
changes in interest rates. There were no borrowings under our revolving
credit facility during the twenty six week period ended July 3, 1999. On
July 7, 1999, the Company redeemed the subordinated debentures by use of
the net proceeds of the Company's Initial Public Offering of $98.6 million,
$220.0 million of bank borrowings described in footnote number 2 and
available cash. Because this new facility will carry a variable interest
rate pegged to market indices, our statement of operations and our cash
flows will be exposed to changes in interest rates. This facility is
intended to fund operating needs if necessary.
The second component of interest rate risk involves the short-term
investment of excess cash. This risk impacts fair values, earnings and cash
flows. Excess cash is primarily invested in overnight repurchase agreements
backed by U.S. Government securities. These are considered to be cash
equivalents and are shown that way on our balance sheet. Our average
balance in such securities was approximately $21.1 million during the
twenty six weeks ended July 3, 1999. Earnings from these cash equivalents
totaled $0.5 million for the twenty six weeks ended July 3, 1999.
We buy a variety of raw materials for inclusion in our products. The only
raw material that we consider to be of a commodity nature is wax. Wax is a
petroleum-based product. However, its market price has not historically
fluctuated with the movement of oil prices. Rather, over the past five
years wax prices have moved with inflation.
At this point in time, our operations outside of the United States are
immaterial. Accordingly, we are not exposed to substantial risks arising
from foreign currency exchange rates.
<PAGE>
PART II. OTHER INFORMATION
Items 1, 3, and 5 Not Applicable
Item 2. Changes in Securities and Use of Proceeds
On July 6, 1999, the Articles of Organization of The Yankee Candle
Company, Inc. (the "Company") was amended to change the
capitalization of the Company to: 300,000,000 shares of common
stock, $.01 par value per share, and 100,000,000 shares of
preferred stock, $.01 par value. Previously outstanding shares of
the Company's old common stock, no par value, were exchanged for
shares of the Company's new common stock, $.01 par value per
share, at a ratio of 1 : 98,005. This transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act of
1933, because the securities were issued to a small group of
sophisticated investors.
Item 4. Submission of Matters to a Vote of Security Holders
On April 8, 1999, the Company held a special meeting of
stockholders. At the special meeting, the stockholders unanimously
voted to approve an amendment to the Articles of Organization of
the Company, which increased the number of authorized shares of
common stock, no par value, of the Company, from 1,000 shares to
1,100 shares.
On April 16, 1999, the Company's stockholders acted by unanimous
written consent in lieu of a special meeting to approve the
adoption of the Company's 1999 Stock Option and Award Plan and the
Company's Employee Stock Option Plan.
On May 20, 1999, the Company's stockholders acted by unanimous
written consent in lieu of a special meeting to approve the
following matters:
(i) The adoption of an Agreement and Plan or Reorganization (the
"Reorganization Agreement"), between the Company and Yankee Candle
Holdings Corp. ("Holdings"), pursuant to which Holdings
transferred all of its assets to the Company in exchange for
shares of common stock, par value $.01 per share, and options to
purchase shares of such common stock.
(ii) The establishment of a classified board of directors as follows:
Class I Class II Class III
------- -------- ---------
Theodore J. Forstmann Nicholas C. Forstmann Sandra J. Horbach
Steven B. Klinsky Michael J. Kittredge Michael D. Parry
Michael S. Ovitz Ronald L. Sargent Emily Woods
(iii) The adoption of the Company's Employee Stock Purchase Plan
(iv) The adoption of an amendment to, and the restatement of, the
Articles of Organization of the Company to change the Company's
capitalization (as described in Item 2 above).
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
Exhibit 99 - Forward-Looking Information
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for
which this report is filed.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
THE YANKEE CANDLE COMPANY, INC.
/s/ Robert R. Spellman
-----------------------------------
Date: August 17, 1999 By: Robert R. Spellman
------------------------ Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from The
Yankee Candle Company, Inc. Unaudited Condensed Consolidated Financial
Statements and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Jan-01-2000
<PERIOD-END> Jul-03-1999
<CASH> 12,149
<SECURITIES> 0
<RECEIVABLES> 8,086
<ALLOWANCES> 505
<INVENTORY> 26,177
<CURRENT-ASSETS> 151,146
<PP&E> 72,730
<DEPRECIATION> 16,227
<TOTAL-ASSETS> 380,307
<CURRENT-LIABILITIES> 25,224
<BONDS> 0
0
0
<COMMON> 1,041
<OTHER-SE> 33,276
<TOTAL-LIABILITY-AND-EQUITY> 380,307
<SALES> 87,962
<TOTAL-REVENUES> 87,962
<CGS> 39,409
<TOTAL-COSTS> 57,142
<OTHER-EXPENSES> 12,262
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,883
<INCOME-PRETAX> 7,770
<INCOME-TAX> 3,108
<INCOME-CONTINUING> 4,662
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,662
<EPS-BASIC> 0.10
<EPS-DILUTED> 0.10
</TABLE>
Exhibit 99
Forward-Looking Information
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. The Yankee Candle Company, Inc.
("Yankee Candle" or the "Company") Form 10-K, Annual Report to
Stockholders, any Form 10-Q or Form 8-K of the Company, or any other oral
or written statements made by or on behalf of the Company, may include
forward-looking statements which reflect the Company's current views with
respect to future events and financial performance. These forward-looking
statements are identified by their use of such terms and phrases as
"intends," "intend," "intended," "goal," "estimate," "estimates,"
"expects," "expect," "expected," "project," "projects," "projected,"
"projections," "plans," "anticipates," "anticipated," "should," "designed
to," "foreseeable future," "believe," "believes," and "scheduled" and
similar expressions. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date the
statement was made. 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. The actual results of the Company
may differ significantly from the results discussed in forward-looking
statements. Factors that might cause such a difference include but are not
limited to: (a) the general political, economic and competitive conditions
in the United States and abroad; (b) changes in capital availability or
costs, such as changes in interest rates; (c) market perceptions of the
industry in which the Company operates, or security ratings; (d) government
regulation; (e) authoritative generally accepted accounting principles or
policy changes from such standard-setting bodies as the Financial
Accounting Standards Board and the Securities and Exchange Commission, and
the factors set forth below.
WE MAY NOT BE ABLE TO GROW OUR BUSINESS AS PLANNED.
We intend to continue to pursue a business strategy of increasing sales and
earnings by expanding our retail and wholesale operations both in the
United States and internationally. Our retail growth strategy depends in
large part on our ability to open new stores in both existing and new
geographic markets. Since we are planning to open more stores each year
than we have in the past, we may not be able to achieve our planned growth
or sustain our financial performance. Our ability to implement our growth
strategy successfully will also be dependent in part on factors beyond our
control, including changes in consumer preferences and in our competitive
environment. Our ability to anticipate changes in the candle and giftware
industries, and identify industry trends will be critical factors in our
ability to remain competitive.
We expect that, as we grow, it will become more difficult to maintain our
growth rate. We cannot assure you that we will continue to grow at a rate
comparable to our historic growth rate or that our historic financial
performance will continue as we grow.
WE FACE SIGNIFICANT COMPETITION IN THE GIFTWARE INDUSTRY, WHICH COULD
ADVERSELY AFFECT OUR FUTURE OPERATING RESULTS, FINANCIAL CONDITION AND
LIQUIDITY AND OUR ABILITY TO CONTINUE TO GROW OUR BUSINESS.
We compete generally for the disposable income of consumers with other
producers in the $47 billion giftware industry. The giftware industry is
highly competitive with a large number of both large and small
participants. Our products compete with other scented and unscented candle
products and with other gifts within a comparable price range, like boxes
of candy, flowers, wine, fine soap and related merchandise. Our retail
stores compete with franchised candle store chains, specialty candle stores
and gift and houseware retailers. Some of our competitors are part of
large, diversified companies which have greater financial resources and a
wider range of product offerings than we do. This competitive environment
could adversely affect our future revenues and profits, financial condition
and liquidity and our ability to continue to grow our business.
WE INCURRED INDEBTEDNESS IN CONNECTION WITH OUR 1998 RECAPITALIZATION, AND
SERVICING OUR INDEBTEDNESS COULD REDUCE FUNDS AVAILABLE TO GROW OUR
BUSINESS.
Although we believe that our cash flow from operations and our available
financing should be sufficient to meet our anticipated requirements for
growing our business and servicing our debt, our level of long-term
indebtedness could reduce funds available to grow our business in the
future.
OUR SUCCESS DEPENDS ON OUR SENIOR EXECUTIVE OFFICERS, THE LOSS OF WHOM
COULD DISRUPT OUR BUSINESS.
Our success is substantially dependent upon the retention of our senior
executive officers. We do not have employment agreements with any of our
senior executive officers, except our Chief Financial Officer. If our
senior executive officers become unable or unwilling to participate in the
business of Yankee Candle, our future business and financial performance
could be materially affected.
BECAUSE WE ARE NOT A DIVERSIFIED COMPANY AND ARE DEPENDENT UPON ONE
INDUSTRY, WE HAVE LESS FLEXIBILITY IN REACTING TO UNFAVORABLE CONSUMER
TRENDS, ADVERSE ECONOMIC CONDITIONS OR BUSINESS CYCLES.
THE LOSS OF OUR MANUFACTURING FACILITY WOULD DISRUPT OUR OPERATIONS.
We rely exclusively on our manufacturing facility in Whately, Massachusetts
to produce our candle products. Because most of our machinery is designed
or customized by us to manufacture our products and because we have strict
quality control standards for our products, the loss of our manufacturing
facility, due to natural disaster or otherwise, would materially affect our
operations. Although our manufacturing facility is adequately insured, we
believe it would take a minimum of nine months to replace the plant and
machinery to a level equivalent to their current level of production and
quality control standards.
WE MAY EXPERIENCE A DECLINE IN OUR RETAIL COMPARABLE STORE SALES, WHICH
COULD CAUSE THE PRICE OF OUR COMMON STOCK TO DROP.
Our comparable store sales from our retail business have contributed
significantly to our overall sales growth. Our retail comparable store
sales could be adversely impacted by competition or our inability to
execute our business strategy. If our retail comparable store sales
declined for any reason, we could experience a loss in our revenues and
income, which could lower the price of our common stock.
SEASONAL AND QUARTERLY FLUCTUATIONS IN OUR BUSINESS COULD AFFECT THE MARKET
FOR OUR COMMON STOCK.
Our revenues and operating results vary from quarter to quarter. We have
historically realized higher revenues and operating income in our fourth
quarter, particularly in our retail business, which is becoming a larger
portion of our sales. We believe that this has been due primarily to an
increase in giftware industry sales during the holiday season of the fourth
quarter. As a result of this seasonality, we believe that quarter to
quarter comparisons of our operating results are not necessarily meaningful
and that these comparisons cannot be relied upon as indicators of future
performance. In addition, we may also experience quarterly fluctuations in
our revenues and income depending on how many new retail stores we open in
a particular quarter. These quarterly fluctuations that we may report in
the future may not match the expectations of market analysts and investors.
This could cause the trading price of our common stock to fluctuate.
WE ARE CONTROLLED BY FORSTMANN LITTLE & CO. AND OUR MANAGEMENT, WHOSE
INTERESTS MAY CONFLICT WITH THOSE OF OTHER STOCKHOLDERS.
Partnerships affiliated with Forstmann Little & Co. and our management
together own approximately 74% of our outstanding common stock and control
us. Accordingly, they are able to:
- elect our entire board of directors,
- control our management and policies, and
- determine, without the consent of our other stockholders, the outcome
of any corporate transaction or other matter submitted to our
stockholders for approval, including mergers, consolidations and the sale
of all or substantially all of our assets.
They are also able to prevent or cause a change in control of Yankee Candle
and are able to amend our Articles of Organization and By-Laws at any time.
The interests of the Forstmann Little partnerships and our management also
may conflict with the interests of the other holders of common stock.
YEAR 2000 FAILURES MAY ADVERSELY IMPACT OUR OPERATIONS.
Our business could be adversely affected by information technology issues
related to the Year 2000. The Year 2000 issue is a broad business issue,
whose impact may extend beyond traditional computer hardware and software
to possible failure of our plant systems, as well as to third parties. If
any of our systems are not Year 2000 compliant or if our customers or
suppliers fail to achieve Year 2000 compliance, we may experience the
following adverse consequences:
- our customers may be unable to place orders with us due either to our
system failures or to those of our customers,
- we may be unable to bill our customers and maintain adequate production
scheduling, inventory cost accounting and other elements of our business
that are dependent upon computer systems, and
- we may be unable to deliver our products on a timely basis.
The ability of third parties with whom we do business to address adequately
their Year 2000 issues is outside our control.
