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: October 2, 1999
------------------
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
--------------
(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 X No
--- ---
The registrant had 54,498,629 shares of Common Stock, par value $.01,
outstanding as of November 15, 1999.
<PAGE>
THE YANKEE CANDLE COMPANY, INC.
FORM 10-Q - Quarter Ended October 2, 1999
Index
PART I. Financial Information Page Number
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets 3
as of October 2, 1999 and December 31, 1998
Unaudited Condensed Consolidated Statements of 4
Operations for the Thirteen Weeks Ended October 2,
1999 and the Three Months Ended September 30,
1998; and the Thirty-Nine Weeks Ended October 2,
1999 and the Nine Months Ended September 30, 1998
Unaudited Condensed Consolidated Statements of Cash 5
Flows for the Thirty-Nine Weeks Ended October 2,
1999 and the Nine Months Ended September 30, 1998
Notes to the Unaudited Condensed Consolidated 6
Financial Statements
Item 2. Management's Discussion and Analysis of 9
Financial Condition and Results of Operations
PART II. Other Information
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
<PAGE>
PART I. Financial Information
Item 1. Unaudited Condensed Consolidated Financial Statements
<TABLE>
<CAPTION>
THE YANKEE CANDLE COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except per share data)
(Unaudited)
October 2, 1999 December 31, 1998
--------------- -----------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 6,260 $ 30,411
Accounts receivable
Less allowances of $554 and $450 19,603 8,546
Inventory 29,051 12,482
Prepaid expenses and other current assets 2,691 855
Deferred tax assets 1,542 1,542
-------- --------
Total current assets 59,147 53,836
Property, Plant And Equipment (Net) 62,850 48,315
Marketable Securities 693 856
Classic Vehicles 874 874
Deferred Financing Costs 5,396 6,566
Deferred Tax Assets 164,474 164,474
Other Assets 493 424
-------- --------
Total Assets $293,927 $275,345
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<S> <C> <C>
Current Liabilities
Accounts payable $13,160 $13,287
Accrued interest 2,566 1,895
Accrued payroll 5,595 4,768
Accrued income taxes 4,428 -
Other accrued liabilities 3,410 2,982
Long-term debt, current portion 30,000 -
-------- --------
Total current liabilities 59,159 22,932
Deferred Compensation Obligation 785 1,004
Long-Term Debt 195,254 320,000
Stockholders' Equity (Deficit)
Common Stock, $.01 par value per share, 300,000 shares
authorized, 104,059 issued; 54,499 and 48,445 shares
outstanding at 1999 and 1998, respectively 1,041 980
Additional paid-in capital 224,772 126,610
Treasury stock, 49,560 shares in 1999 and
in 1998, at cost (212,988) (212,448)
Retained earnings 27,477 19,048
Capital subscription receivable - (1,084)
Unearned stock compensation (1,673) (1,698)
Accumulated other comprehensive income 100 1
-------- --------
Total stockholders' equity (deficit) 38,729 (68,591)
-------- --------
Total Liabilities And Stockholders Equity $293,927 $275,345
======== ========
See notes to Condensed Consolidated Financial Statements
</TABLE>
<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 Thirty-Nine Nine
Weeks Ended Months Ended Weeks Ended Months Ended
October 2, September 30, October 2, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 59,109 $ 43,611 $ 147,071 $ 107,665
Cost of goods sold $ 25,883 19,340 65,291 48,575
-------- -------- --------- ---------
Gross profit 33,226 24,271 81,780 59,090
Selling expenses 11,324 6,939 29,058 20,605
General and administrative expenses 6,252 4,871 18,514 12,823
Bonus related to the recapitalization - - - 61,263
-------- -------- --------- ---------
Income (loss) from operations 15,650 12,461 34,208 (35,601)
Interest income (63) (34) (559) (115)
Interest expense 4,106 5,878 15,488 10,557
Other (income) expense 58 (7) (40) 25
-------- -------- --------- ---------
Income (loss) before provision
for income taxes 11,549 6,624 19,319 (46,068)
Provision for income taxes 4,620 2,517 7,728 881
-------- -------- --------- ---------
Net income (loss) before extraordinary item 6,929 4,107 11,591 (46,949)
Extraordinary loss on early retirement of debt,
(less income tax benefit of $2,108) 3,162 - 3,162 -
-------- -------- --------- ---------
Net income (loss) $ 3,767 $ 4,107 $ 8,429 $ (46,949)
======== ======== ========= =========
Historical basic earnings (loss) per share
before extraordinary item $ 0.13 $ 0.09 $ 0.24 $ (0.67)
extraordinary item $ (0.06) - $ (0.07) -
-------- -------- --------- ---------
$ 0.07 $ 0.09 $ 0.17 $ (0.67)
======== ======== ========= =========
Historical diluted earnings (loss) per share
before extraordinary item $ 0.13 $ 0.08 $ 0.23 $ (0.67)
extraordinary item $ (0.06) - $ (0.06) -
-------- -------- --------- ---------
$ 0.07 $ 0.08 $ 0.17 $ (0.67)
======== ======== ========= =========
Proforma benefit for income taxes (17,506)
Proforma net loss $ (28,562)
=========
Proforma basic loss per share $ (0.41)
=========
Proforma diluted loss per share $ (0.41)
=========
Weighted average basic shares outstanding 52,884 47,778 48,851 70,139
Weighted average diluted shares outstanding 54,661 48,609 50,841 70,139
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)
Thirty-Nine Weeks Nine Months
Ended Ended
October 2, September 30,
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 8,429 $ (46,949)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Extraordinary loss on early extinguishment of debt 3,162 -
Depreciation and amortization 4,508 3,283
Unrealized (gain)/loss on marketable equity securities 46 (38)
Non-cash stock compensation 848 -
Loss on disposal of fixed assets and classic vehicles 116 81
Deferred taxes - (11)
Changes in assets and liabilities
Accounts receivable-net (11,065) (8,084)
Inventory (16,589) (8,869)
Prepaid expenses and other assets (1,913) (75)
Accounts payable (129) 3,213
Accrued expenses and other liabilities 8,601 10,514
--------- ---------
Net cash used in operating activities (3,986) (46,935)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (18,477) (5,084)
Proceeds from sale of property and equipment 26 821
Purchase of marketable equity securities (293) (293)
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 (18,334) (2,281)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the sale of common stock (net of fees
and expenses) 97,041 -
Proceeds from long term borrowings 225,254 312,704
Principal payments on long-term debt and capital
lease obligations (320,000) (10,954)
Payments for deferred financing costs (4,804) (7,115)
Payments for redemption of common stock (540) (229,149)
Proceeds from repayment on capital subscription receivable 1,084 -
Distributions to stockholder - (16,884)
--------- ---------
Net cash provided by (used in) financing activities (1,965) 48,602
EFFECT OF EXCHANGE RATE ON CASH 134 -
NET DECREASE IN CASH AND CASH EQUIVALENTS (24,151) (614)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 30,411 7,377
CASH AND CASH EQUIVALENTS, END OF PERIOD 6,260 6,763
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest 14,797 1,374
Income taxes 680 135
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 interim periods 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.
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 and Early Extinguishment of Debt
--------------------------------------------------------
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 $97,000. 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. The redemption of these subordinated
debentures resulted in a extraordinary charge to the statement of
operations of $3,162, net of tax. These charges related primarily to the
write-off of financing fees that had previously been deferred.
3. Financing Arrangements
----------------------
As discussed in note 2, on July 7, 1999, the Company entered into a new
credit facility. The facility provides for maximum borrowings of $300
million; $150 million in the form of term loans and $150 million under a
revolving credit facility and is collateralized by substantially all of the
assets of the Company. The facility will bear interest, at the option of
the Company (which is reset on a periodic basis), at either of a formula
based off certain domestic interest rates or a formula based off the
Eurodollar rate. Such formulas may be impacted, from time to time, by
changes in the Company's defined leverage ratio. A commitment fee is also
payable for unused commitments under the revolving credit facility, which
also can vary, from time to time, based on changes in the Company's defined
leverage ratio.
Principal payments relating to the $150 million in term loans will commence
in December 1999 and will consist of quarterly installments ranging from
$7.5 million to $9.5 million to be paid through July 2004. No payments of
principal are due under the revolving credit borrowings until July 2004.
Accordingly, the following schedule presents the five year maturities of
current borrowings:
Due in Fiscal: Principal Amount
-------------- ----------------
1999 7,500
2000 30,000
2001 30,000
2002 31,500
2003 32,000
Thereafter 94,000
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:
October 2, December 31,
1999 1998
---- ----
Finished Goods $25,327 $ 9,967
Work in process 93 126
Raw materials 4,058 2,816
------- -------
29,478 12,909
Less LIFO Reserve 427 427
------- -------
Total Inventory $29,051 $12,482
======= =======
5. Income Taxes
------------
The Company's effective tax rate in the third 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 Thirty-Nine Nine
Weeks Ended Months Ended Weeks Ended Months Ended
October 2, September 30, October 2, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average basic shares outstanding 52,884 47,778 48,851 70,139
Contingently returnable shares and shares
issuable pursuant to stock option grants 1,777 831 1,990 -
------ ------ ------ ------
Weighted average diluted shares outstanding 54,661 48,609 50,841 70,139
</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 Thirty-Nine Nine
Weeks Ended Months Ended Weeks Ended Months Ended
October 2, September 30, October 2, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $3,767 $4,107 $8,429 $(46,949)
Translation adjustment 214 - 99 -
------ ------ ------ --------
Total comprehensive income (loss) $3,981 $4,107 $8,528 $(46,949)
====== ====== ====== ========
</TABLE>
8. Segment Information
-------------------
The Company has two reportable segments - retail and wholesale. Management
has changed the organization structure for purposes of presenting segment
information such that certain general and administrative costs previously
categorized as retail are now included in Unallocated/Corporate/Other.
These changes more accurately reflect the results of segment operations and
have been presented as such for the current and prior periods.
<TABLE>
<CAPTION>
Balance per
Thirteen Weeks Unallocated/ Condensed
Ended Corporate/ Consolidated
October 2, 1999 Retail Wholesale Other Financial Statements
- --------------- ------ --------- ----- --------------------
<S> <C> <C> <C> <C>
Net sales $24,484 $34,625 $0 $59,109
Operating earnings 6,500 15,402 (6,252) 15,650
Unallocated costs 0 0 4,101 4,101
Earning before taxes 0 0 0 11,549
<CAPTION>
Balance per
Three Months Unallocated/ Condensed
Ended Corporate/ Consolidated
September 30, 1998 Retail Wholesale Other Financial Statements
- --------------- ------ --------- ----- --------------------
<S> <C> <C> <C> <C>
Net sales $15,929 $27,682 $0 $43,611
Operating earnings 4,825 12,507 (4,871) 12,461
Unallocated costs 0 0 5,837 5,837
Earning before taxes 0 0 0 6,624
<CAPTION>
Balance per
Thirty-Nine Weeks Unallocated/ Condensed
Ended Corporate/ Consolidated
October 2, 1999 Retail Wholesale Other Financial Statements
- --------------- ------ --------- ----- --------------------
<S> <C> <C> <C> <C>
Net sales $57,930 $89,141 $0 $147,071
Operating earnings 13,912 38,810 (18,514) 34,208
Unallocated costs 0 0 14,889 14,889
Earning before taxes 0 0 0 19,319
<CAPTION>
Balance per
Nine Months Unallocated/ Condensed
Ended Corporate/ Consolidated
September 30, 1998 Retail Wholesale Other Financial Statements
- --------------- ------ --------- ----- --------------------
<S> <C> <C> <C> <C>
Net sales $39,614 $68,051 $0 $107,665
Operating earnings (loss) 10,309 28,177 (74,087) (35,601)
Unallocated costs 0 0 10,467 10,467
Earning (loss) before taxes 0 0 0 (46,068)
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS - Thirteen and Thirty-nine weeks ended October 2, 1999
versus Three and Nine months ended September 30, 1998.
Net Sales
- ---------
Net sales increased 36% to $59.1 million for the thirteen weeks ended
October 2, 1999 from $43.6 million for the three months ended September 30,
1998 and increased 37% to $147.1 million for the thirty-nine weeks ended
October, 2 1999 from $107.7 million for the nine months ended September 30,
1998. This growth was achieved by increasing the number of retail stores,
increasing sales in existing retail stores and increasing sales to
wholesale customers.
Wholesale sales increased 25% to $34.6 million for the thirteen weeks ended
October 2, 1999 from $27.7 million for the three months ended September 30,
1998 and increased 31% to $89.1 million for the thirty-nine weeks ended
October 2, 1999 from $68.1 million for the nine months ended September 30,
1998. This growth was achieved primarily by increasing sales to existing
customers, adding new wholesale accounts and sales through our new European
distribution center.
Retail sales increased 54% to $24.5 million for the thirteen weeks ended
October 2, 1999 from $15.9 million for the three months ended September 30,
1998 and increased 46% to $57.9 million for the thirty-nine weeks ended
October 2, 1999 from $39.6 million for the nine months ended September 30,
1998. This growth was achieved by increasing the number of our retail
stores and increasing sales in existing retail stores. There were 96 retail
stores open as of October 2, 1999 compared to 54 retail stores open as of
September 30, 1998 and 62 retail stores open as of December 31, 1998.
Comparable store and mail-order hub sales for the thirteen weeks ended
October 2, 1999 increased 19% over the three months ended September 30,
1998 and increased 17% for the thirty-nine weeks ended October 2, 1999
compared to the nine months ended September 30, 1998. There were 52 retail
stores included in our comparable store base as of October 2, 1999.
Gross Profit
- ------------
Gross profit increased 37% to $33.2 million for the thirteen weeks ended
October 2, 1999 from $24.3 million for the three months ended September 30,
1998 and increased 38% to $81.8 million for the thirty-nine weeks ended
October 2, 1999 from $59.1 million for the nine months ended September 30,
1998. This increase was attributable to the increase in sales. As a
percentage of sales, gross profit increased to 56.2% for the thirteen weeks
ended October 2, 1999 from 55.7% for the three months ended September 30,
1998. Gross profit was 55.6% for the thirty-nine weeks ended October 2,
1999 and 54.9% for the nine months ended September 30, 1998. The increase
in the gross profit rate for the quarter was attributable to a shift in
sales mix. Retail sales, which generate a higher gross profit than
wholesale sales, were 41.4% of total net sales for the thirteen weeks ended
October 2, 1999 compared to 36.5% of total net sales for the three months
ended September 30, 1998. The year-to-date increase in gross profit percent
is also the result of a shift in sales mix as Retail sales were 39.4% of
total net sales for the thirty-nine weeks ended October 2, 1999 as compared
to 36.8% for the nine months ended September 30, 1998.
Selling Expenses
- ----------------
Selling expenses increased 63.8% to $11.3 million for the thirteen weeks
ended October 2, 1999 from $6.9 million for the three months ended
September 30, 1998 and increased 41.3% to $29.1 million for the thirty-nine
weeks ended October 2, 1999 from $20.6 million for the nine months ended
September 30, 1998. These expenses are related to both our wholesale and
retail operations and consist of payroll, occupancy, advertising and other
operating costs. For the nine month period, excluding the commission paid
to independent manufacturer representatives in the first quarter of 1998,
the last of such payments, selling expenses increased 57.3% to $29.1
million in 1999 from $18.5 million in 1998. As a percentage of sales,
selling expenses increased to 19.2% for the thirteen weeks ended October 2,
1999 from 15.9% for the three months ended September 30, 1998 and increased
to 19.8% for the thirty-nine weeks ended October 2, 1999 from 19.1% for the
nine months ended September 30, 1998. As a percentage of sales, selling
expenses excluding commissions paid to independent manufacturer
representatives, increased to 19.8% for the thirty-nine weeks ended October
2, 1999 from 17.2% for the nine months ended September 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 54 as of September 30, 1998 to 96 as of
October 2, 1999 and costs associated with our new European distribution
center. The increase in selling expense for the nine month period was
primarily related to the continued growth in the number of retail stores we
operated 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 28.6% to $6.3 million for the thirteen weeks ended
October 2, 1999 from $4.9 million for the three months ended September 30,
1998, and increased 44.5% to $18.5 million for the thirty-nine weeks ended
October 2, 1999 from $12.8 million for the nine months ended September 30,
1998. As a percentage of sales, general and administrative expenses
decreased to 10.6% for the thirteen weeks ended October 2, 1999 from 11.2%
for the three months ended September 30, 1998 and increased to 12.6% for
the thirty-nine weeks ended October 2, 1999 from 11.9% for the nine months
ended September 30, 1998. The decrease in general and administrative
expenses as a percentage of sales for the quarter ended October 2, 1999 was
attributable to the Company's leveraging of such costs over a larger sales
base. The increase in general and administrative expense in dollars and as
a percentage of sales for the nine month period was primarily caused by
investments in building our organizational infrastructure.
Operating Margins
- -----------------
Operating margins for our wholesale segment were $15.4 million or 44.5% of
wholesale sales for the thirteen weeks ended October 2, 1999 compared to
$12.5 million or 45.2% of wholesale sales for the three months ended
September 30, 1998. The wholesale operating margin decline as a percentage
of sales was entirely attributable to our start-up European operation.
Operating margins for our wholesale operations were $38.8 million or 43.5%
of wholesale sales for the thirty-nine weeks ended October 2, 1999 compared
to $28.2 million or 41.4% of wholesale sales for the nine months ended
September 30, 1998. The increase in wholesale operating margin dollars for
the nine month period was entirely attributable to the increase in sales.
The wholesale operating margin increase as a percentage of sales for the
nine month period was primarily attributable to higher sales and to the
elimination of commissions paid to independent manufacturer
representatives.
Operating margins for our retail segment were $6.5 million or 26.5% of
retail sales for the thirteen weeks ended October 2, 1999 compared to $4.8
million or 30.3% of retail sales for the three months ended September 30,
1998. Retail operating margins were $13.9 million or 24.0% of retail sales
for the thirty-nine weeks ended October 2, 1999 compared to $10.3 million
or 26.0% of retail sales for the nine months ended September 30, 1998. The
decrease in retail operating margin rate for the quarter and the nine
months was entirely attributable to the preopening expenses associated with
the opening of 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. The Company opened 11 stores
during the thirteen weeks ended October 2, 1999 compared to 2 during the
three months ended September 30, 1998. For the thirty-nine weeks ended
October 2, 1999 the Company opened 34 stores compared to 7 during the nine
months ended September 30, 1998.
Net Other Income (Expense)
- --------------------------
Net other expense was $4.1 million for the thirteen weeks ended October 2,
1999 compared to $5.8 million for the three months ended September 30, 1998
and was $14.9 million for the thirty-nine weeks ended October 2, 1999
compared to $10.5 million for the nine months ended September 30, 1998. The
primary component of the expense in each of these periods was interest
expense. Interest expense in the thirteen weeks ended October 2, 1999 was
down compared to the three months ended September 30, 1998 due to a
decrease in total borrowings by the Company. Proceeds from the Company's
July 1, 1999 initial public offering together with available cash and
$220.0 million of bank borrowings under a new credit facility were used to
redeem the $320.0 million subordinated debentures on July 7, 1999, thereby
reducing debt by approximately $100 million. Interest expense declined
subsequent to July 7, 1999 as a result of the debt reduction. Interest
expense increased in the thirty-nine weeks ended October 2, 1999 compared
to the nine months ended September 30, 1998 because of decreased borrowing
levels in the first four months of 1998. In connection with the 1998
recapitalization, the Company issued $320.0 million in subordinated
debentures in April 1998, which resulted in significantly higher interest
expense subsequent to this borrowing.
Liquidity And Capital Resources
- -------------------------------
Cash and cash equivalents decreased by $24.2 million as compared to
December 31, 1998. This decrease was partially attributable to cash used in
operating activities of $4.0 million, which includes a seasonal increase in
inventories. Capital expenditures for the thirty-nine week period ended
October 2, 1999 were $18.5 million, primarily related to the capital
requirements to open 34 new stores and investments in manufacturing
equipment to meet increased production requirements.
The Company opened 34 stores during the thirty-nine weeks ended October 2,
1999 and expects to open approximately 6 additional stores in the last
quarter 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 $1.5 million for
store openings during the last quarter 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 and
operating cash flow.
Subsequent to the Company's Initial Public Offering (see note 2), the
Company terminated it's 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 a formula based off certain domestic interest rates or
a formula based off the Eurodollar rate.
We 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 totaling
$150.0 million will amortize in quarterly installments. The revolving
credit facility will mature five years after July 7, 1999.
As of October 2, 1999, the Company was in compliance with all of its
covenants under the credit facility. Available borrowings under the
facility were $75.0 million.
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 Testing
System Comments Completion Date Completion Date Completion Date
<S> <C> <C> <C> <C>
Inventory systems New programs; written May, 1999 May, 1999 Completed
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 December, 1999
programs and legacy
programs
Masterpiece
Applications Certified by vendor as January, 1999 January, 1999 Completed
Year 2000 compliant
Catalog system In-house application January, 1999 January, 1999 Completed
written in four digits
Payroll system Payroll services September, 1998 April, 1999 Completed
provided by third
party service bureau
that has certified
Year 2000 compliance
Network Certified by vendor as April, 1999 November, 1999 November, 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 $110,000. We
anticipate incurring an additional $25,000 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 fourth 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 98% 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, no
customer confirmation letters have been circulated.
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 as it relates
to materials procurement or sales channels. Testing that remains to be
completed as of November 16, 1999 is limited to report presentation in order
entry and accounts receivable and continued scheduled maintenance
procedures on the Company's internal network. If unforeseen difficulties
arise in bringing these two areas into Year 2000 compliance we will
reconsider developing a contingency plan.
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 October
2, 1999, we had $225.0 million of debt outstanding, which consisted of
$150.0 million in term loans and $75.0 million from our revolving credit
facility. Because this debt carries a variable interest rate pegged to
market indices, our statement of operations and our cash flows are exposed
to changes in interest rates.
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 $15.1 million during the
thirty-nine weeks ended October 2, 1999. Earnings from these cash
equivalents totaled $0.6 million for the thirty-nine weeks ended October 2,
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
Item 1. Legal Proceedings
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
existing stockholders of the Company and its parent in a
transaction not involving a public offering.
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
Not Applicable
(a) Exhibits
Exhibit 27 - Financial Data Schedule
Exhibit 99 - Forward-Looking Information
(b) Reports on Form 8-K
Not Applicable
<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: November 16, 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> 9-MOS
<FISCAL-YEAR-END> Jan-01-2000
<PERIOD-END> Oct-02-1999
<CASH> $6,260
<SECURITIES> 0
<RECEIVABLES> 20,157
<ALLOWANCES> 554
<INVENTORY> 29,051
<CURRENT-ASSETS> 59,147
<PP&E> 80,311
<DEPRECIATION> 17,461
<TOTAL-ASSETS> 293,927
<CURRENT-LIABILITIES> 59,159
<BONDS> 0
0
0
<COMMON> 1,041
<OTHER-SE> 37,688
<TOTAL-LIABILITY-AND-EQUITY> 293,927
<SALES> 147,071
<TOTAL-REVENUES> 147,071
<CGS> 65,291
<TOTAL-COSTS> 94,349
<OTHER-EXPENSES> 18,514
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,929
<INCOME-PRETAX> 19,319
<INCOME-TAX> 7,728
<INCOME-CONTINUING> 11,591
<DISCONTINUED> 0
<EXTRAORDINARY> 3,162
<CHANGES> 0
<NET-INCOME> 8,429
<EPS-BASIC> 0.17
<EPS-DILUTED> 0.17
</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.
