<PAGE> 1
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: September 30, 2000
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Commission File Number: 001-15023
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THE YANKEE CANDLE COMPANY, INC.
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(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04 259 1416
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
102 CHRISTIAN LANE, WHATELY, MASSACHUSETTS 01093
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(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 X No
------- -------
The registrant had 54,513,961 shares of Common Stock, par value $.01,
outstanding as of November 10, 2000.
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THE YANKEE CANDLE COMPANY, INC.
FORM 10-Q - Quarter Ended September 30, 2000
This Quarterly Report on Form 10-Q contains a number of forward-looking
statements. Any statements contained herein, including without limitation
statements to the effect that The Yankee Candle Company, Inc. (the "Company")
and its subsidiaries or its management "believes", "expects", "anticipates",
"plans" and similar expressions that are not statements of historical fact,
should be considered forward-looking statements. 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. There are a number of important
factors that could cause The Yankee Candle Company, Inc.'s actual results to
differ materially from those indicated by such forward-looking statements. These
factors include, without limitation, those set forth in Exhibit 99,
"Forward-Looking Information".
Index
ITEM PAGE
---- ----
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
as of September 30, 2000 and January 1, 2000 3
Condensed Consolidated Statements of Income
for the Thirteen Weeks Ended September 30, 2000 and
October 2, 1999 4
Condensed Consolidated Statements of Cash Flows for
the Thirty Nine Weeks ended September 30, 2000 and
October 2, 1999 5
Notes to the Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. Other Information
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
2
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PART I. Financial Information
Item 1. Condensed Consolidated Financial Statements
THE YANKEE CANDLE COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, 2000
(Unaudited) January 1, 2000
------------------ ---------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 9,630 $ 23,569
Accounts receivable 28,261 13,311
Inventory 45,425 21,994
Prepaid expenses and other current assets 4,852 3,176
Deferred tax assets 1,852 1,852
---------- ----------
Total current assets 90,020 63,902
Property, Plant And Equipment, net 90,471 65,217
Marketable Securities 1,079 816
Classic Vehicles 874 874
Deferred Financing Costs 4,207 5,093
Deferred Tax Assets 150,249 150,249
Other Assets 533 323
---------- ----------
Total Assets $ 337,433 $ 286,474
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 20,066 $ 14,662
Accrued interest 3,385 3,186
Accrued payroll 6,683 6,508
Accrued income taxes 4,618 5,635
Other accrued liabilities 5,264 5,611
Long-term debt, current portion 30,000 30,000
---------- ----------
Total current liabilities 70,016 65,602
Deferred Compensation Obligation 1,160 927
Long-Term Debt - less current portion 187,010 157,568
Deferred Rent 2,015 942
Stockholders' Equity
Common stock 1,041 1,041
Additional paid-in capital 224,386 224,483
Treasury stock (212,988) (212,988)
Retained earnings 66,047 50,181
Unearned stock compensation (782) (1,235)
Accumulated other comprehensive loss (472) (47)
---------- ---------
Total stockholders' equity 77,232 61,435
---------- ----------
Total Liabilities And Stockholders' Equity $ 337,433 $ 286,474
========== ==========
</TABLE>
See notes to Condensed Consolidated Financial Statements
3
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THE YANKEE CANDLE COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Thirteen Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
September 30, October 2, September 30, October 2,
2000 1999 2000 1999
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Net sales $ 74,346 $ 59,109 $ 194,205 $ 147,071
Cost of goods sold 34,305 25,883 88,479 65,291
-------- -------- --------- ---------
Gross profit 40,041 33,226 105,726 81,780
Selling expenses 15,832 11,324 43,436 29,058
General and administrative expenses 8,145 6,252 23,622 18,514
-------- -------- --------- ---------
Income from operations 16,064 15,650 38,668 34,208
Interest income (39) (63) (150) (559)
Interest expense 4,379 4,106 12,362 15,488
Other (income) expense (21) 58 13 (40)
------- -------- --------- ---------
Income before provision
for income taxes 11,745 11,549 26,443 19,319
Provision for income taxes 4,698 4,620 10,577 7,728
-------- -------- --------- ---------
Net income before extraordinary item 7,047 6,929 15,866 11,591
Extraordinary loss on early retirement of debt,
(less income tax benefit of $2,108) -- 3,162 -- 3,162
-------- -------- --------- ---------
Net income $ 7,047 $ 3,767 $ 15,866 $ 8,429
======== ======== ========= =========
Historical basic earnings per share
before extraordinary item $ 0.13 $ 0.13 $ 0.30 $ 0.24
extraordinary item -- (0.06) -- (0.07)
-------- -------- --------- ---------
$ 0.13 $ 0.07 $ 0.30 $ 0.17
======== ======== ========= =========
Historical diluted earnings per share
before extraordinary item $ 0.13 $ 0.13 $ 0.29 $ 0.23
extraordinary item -- (0.06) -- (0.06)
-------- -------- --------- ---------
$0.13 $0.07 $ 0.29 $ 0.17
======== ======== ========= =========
Weighted average basic shares outstanding 52,900 52,884 52,900 48,851
Weighted average diluted shares outstanding 54,695 54,661 54,662 50,841
</TABLE>
See notes to Condensed Consolidated Financial Statements
4
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THE YANKEE CANDLE COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended
September 30, October 2,
2000 1999
----------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 15,866 $ 8,429
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 7,403 4,508
Unrealized loss on marketable equity securities 16 46
Non-cash stock compensation 454 848
Loss on disposal of fixed assets and classic vehicles 33 116
Changes in assets and liabilities
Accounts receivable, net (15,115) (11,065)
Inventory (24,225) (16,589)
Prepaid expenses and other assets (1,858) (1,913)
Accounts payable 5,357 (129)
Accrued expenses and other liabilities (665) 8,601
-------- --------
Net cash used in operating activities (12,734) (3,986)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (31,851) (18,477)
Proceeds from sale of property and equipment 4 26
Purchase of marketable equity securities (279) (293)
Proceeds from sale of marketable equity securities -- 410
-------- --------
Net cash used in investing activities (32,126) (18,334)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the sale of common stock (net of fees and expenses) (97) 97,041
Proceeds from long term borrowings 53,015 225,254
Proceeds from other financing activities 579 --
Principal payments on long-term debt and capital
lease obligations (22,500) (320,000)
Payments for deferred financing costs -- (4,804)
Payments for redemption of common stock -- (540)
Proceeds from repayment on capital subscription receivable -- 1,084
-------- ---------
Net cash provided by (used in) financing activities 30,997 (1,965)
EFFECT OF EXCHANGE RATE ON CASH (76) 134
NET DECREASE IN CASH AND CASH EQUIVALENTS (13,939) (24,151)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 23,569 30,411
-------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,630 $ 6,260
======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 11,327 $ 14,797
Income taxes $ 11,778 $ 680
</TABLE>
See notes to Condensed Consolidated Financial Statements
5
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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. (the "Company") and its subsidiaries have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The interim 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. 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 fifty-two weeks ending December 30, 2000.
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 fifty-two weeks ended January 1, 2000.
2. 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:
September 30, January 1,
2000 2000
------------- ----------
Finished goods $39,498 $17,579
Work in process 229 196
Raw materials 5,698 4,219
------- -------
Total Inventory $45,425 $21,994
======= =======
3. INCOME TAXES
The Company's effective tax rate in the third quarter of fiscal 2000 and 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.
4. 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
issuance of dilutive securities on weighted average shares. There were 79,000
anti-dilutive options outstanding at September 30, 2000 and zero as of October
2, 1999.
<TABLE>
<CAPTION>
Thirteen Thirteen Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
September 30, October 2, September 30, October 2,
2000 1999 2000 1999
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Weighted average basic shares outstanding 52,900 52,884 52,900 48,851
Contingently returnable shares and shares
issuable pursuant to stock option grants 1,795 1,777 1,762 1,990
------ ------ ------ ------
Weighted average diluted shares outstanding 54,695 54,661 54,662 50,841
====== ====== ====== ======
</TABLE>
6
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5. COMPREHENSIVE INCOME
Comprehensive income includes all changes in equity during the period. It has
two components: net income and other comprehensive income. Accumulated other
comprehensive income reported on the Company's Condensed Consolidated Balance
Sheets consists of foreign currency translation adjustments. Comprehensive
income, net of related tax effects, is as follows (in thousands):
<TABLE>
<CAPTION>
Thirteen Thirteen Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended Weeks Ended Weeks Ended
September 30, October 2, September 30, October 2,
2000 1999 2000 1999
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Net income $ 7,047 $ 3,767 $ 15,866 $ 8,429
Translation adjustment (134) 214 (425) 99
----- --- ----- --
Total comprehensive income $ 6,913 $ 3,981 $ 15,441 $ 8,528
======= ======= ======== =======
</TABLE>
6. SEGMENT INFORMATION
The Company has segmented its operations in a manner that reflects how its chief
operating decision-maker (the "CEO") currently reviews the results of the
Company and its subsidiaries' businesses. The Company has two reportable
segments - retail and wholesale. The identification of these segments results
from management's recognition that while the product produced is similar, the
type of customer for the product and services and the methods used to distribute
the product are different.
<TABLE>
<CAPTION>
Balance per
Thirteen Weeks Unallocated/ Condensed
Ended Corporate/ Consolidated
September 30, 2000 Retail Wholesale Other Statements of Income
------------------ ------ --------- ------------ --------------------
<S> <C> <C> <C> <C>
Net sales $35,976 $38,370 $ -- $ 74,346
Gross profit 22,944 17,097 -- 40,041
Operating margin 9,035 15,174 (8,145) 16,064
Unallocated costs -- -- (4,319) (4,319)
Income before provision for income taxes -- -- -- 11,745
</TABLE>
<TABLE>
<CAPTION>
Balance per
Thirteen Weeks Unallocated/ Condensed
Ended Corporate/ Consolidated
October 2, 1999 Retail Wholesale Other Statements of Income
--------------- ------ --------- ------------ --------------------
<S> <C> <C> <C> <C>
Net sales $24,484 $34,625 $ -- $59,109
Gross profit 16,255 16,971 -- 33,226
Operating margin 6,500 15,402 (6,252) 15,650
Unallocated costs -- -- (4,101) (4,101)
Income before provision for income taxes -- -- -- $11,549
</TABLE>
<TABLE>
<CAPTION>
Balance per
Thirty-Nine Weeks Unallocated/ Condensed
Ended Corporate/ Consolidated
September 30, 2000 Retail Wholesale Other Statements of Income
------------------ ------ --------- ------------ --------------------
<S> <C> <C> <C> <C>
Net sales $87,251 $106,954 $ -- $194,205
Gross profit 56,272 49,454 -- 105,726
Operating margin 18,877 43,413 (23,622) 38,668
Unallocated costs -- -- (12,225) (12,225)
Income before provision for income taxes -- -- -- $ 26,443
</TABLE>
7
<PAGE> 8
<TABLE>
<CAPTION>
Balance per
Thirty-Nine Weeks Unallocated/ Condensed
Ended Corporate/ Consolidated
October 2, 1999 Retail Wholesale Other Statements of income
--------------- ------ --------- ------------ --------------------
<S> <C> <C> <C> <C>
Net sales $57,930 $89,141 $ -- $147,071
Gross profit 38,307 43,473 -- 81,780
Operating margin 13,912 38,810 (18,514) 34,208
Unallocated costs -- -- (14,889) (14,889)
Income before provision for income taxes -- -- -- $ 19,319
</TABLE>
7. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 133
will be effective for fiscal years beginning after June 15, 2000. SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. Under SFAS 133, certain contracts that were not formerly
considered derivatives may now meet the definition of a derivative. The Company
intends to adopt SFAS 133 effective January 1, 2001. Management does not expect
the adoption of SFAS 133 to have a significant impact on the financial position
or results of operations of the Company because the Company does not have
significant derivative activity.
In December, 1999 the Securities and Exchange Commission ("SEC") released Staff
Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial
Statements." This SAB clarifies certain elements of revenue recognition. Since
December, the SEC has issued several amendments that have effectively postponed
the implementation date until the fourth quarter of fiscal 2000. Management
currently believes that the implementation of the SAB will not have a material
impact on the Company's financial statements.
In July, 2000, the Emerging Issues Task Force reached a consensus on Issue
00-10, "Accounting for Shipping and Handling Fees and Costs". The Consensus
specifically stated that all amounts billed to a customer in a sale transaction
related to shipping and handling, if any, represent revenues earned for the
goods provided and should be classified as revenue. It also stated that costs
incurred for shipping and handling should be classified as costs of goods sold.
It is currently the Company's policy to record shipping and handling revenue and
shipping and handling costs as a component of net revenue. The Company is
required to adopt this Consensus in the fourth quarter of fiscal 2000 and is
currently evaluating the impact this Consensus will have on its consolidated
statement of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
NET SALES
Net sales increased 25.8% to $74.3 million for the thirteen weeks ended
September 30, 2000 from $59.1 million for the thirteen weeks ended October 2,
1999; and increased 32.0% to $194.2 million for the thirty-nine weeks ended
September 30, 2000 from $147.1 million for the thirty-nine weeks ended October
2, 1999. This growth was achieved by increasing the number of retail stores,
increasing sales in existing retail stores and mail-order operations, and
increasing sales to wholesale customers.
Wholesale sales increased 10.8% to $38.4 million for the thirteen weeks ended
September 30, 2000 from $34.6 million for the thirteen weeks ended October 2,
1999; and increased 20.0% to $107.0 for the thirty-nine weeks ended September
30, 2000 from $89.1 million for the thirty-nine weeks ended October 2, 1999.
This growth was achieved primarily by increasing sales to existing customers.
The Company believes wholesale sales growth has been and will continue to be
positively impacted by continuing to increase sales to existing customers,
promotional spending, the addition of new wholesale locations and the
anticipated growth of its European operations.
Retail sales increased 46.9% to $36.0 million for the thirteen weeks ended
September 30, 2000 from $24.5 million for the thirteen weeks ended October 2,
1999; and increased 50.6% to $87.3 million for the thirty-nine weeks ended
September 30, 2000 from $57.9 million for the thirty-nine weeks ended October 2,
1999. This growth was achieved by increasing the number of retail stores and
increasing sales in existing retail stores. Mail-order operations also continued
to show period over period growth. There were 142 retail stores open as of
September 30, 2000 compared to
8
<PAGE> 9
96 retail stores open as of October 2, 1999 and 102 retail stores open
as of January 1, 2000. Comparable store and mail-order hub sales increased
18% for the quarter ended September 30, 2000 and increased 17% for the
thirty-nine weeks ended September 30, 2000. Retail comparable store sales
increased 14% for both the quarter and the thirty-nine weeks ended September 30,
2000. There were 92 retail stores included in the comparable store base as of
September 30, 2000. The Company's continued growth in comp store sales is
attributable to the increased number and strong performance of new stores
entering the comp store base as well as the strong performance of its existing
store base.
GROSS PROFIT
Gross profit increased 20.5% to $40.0 million for the thirteen weeks ended
September 30, 2000 from $33.2 million for the thirteen weeks ended October 2,
1999; and increased 29.3% to $105.7 million for the thirty-nine weeks ended
September 30, 2000 from $81.8 million for the thirty-nine weeks ended October 2,
1999. As a percentage of sales, gross profit decreased to 53.9% for the thirteen
weeks ended September 30, 2000 from 56.2% for the thirteen weeks ended October
2, 1999; and decreased to 54.4% for the thirty-nine weeks ended September 30,
2000 from 55.6% for the thirty-nine weeks ended October 2, 1999. The decline in
the gross profit rate for the thirteen and thirty-nine weeks ended September 30,
2000 was entirely attributable to an increase in distribution expense. This
increase was the result of two factors. First, the Company's Salt Lake City
distribution center, fully operational for the quarter and thirty-nine weeks
ended September 30, 2000, had only been operational for five weeks during the
same periods last year. The Company made a conscious decision to incur these
additional expenses to develop its distribution infrastructure in advance of
need. It anticipates that, in the long run, these additional expenses will be
fully absorbed across a greater volume of activity. Second, the Company incurred
approximately $1.3 million of unexpected distribution costs due to
inefficiencies created by its new distribution software. These inefficiencies,
which resulted in an increase in the number of shipments in the quarter and the
average distribution cost of each order, were corrected by the end of the
quarter.
SELLING EXPENSES
Selling expenses increased 39.8% to $15.8 million for the thirteen weeks ended
September 30, 2000 from $11.3 million for the thirteen weeks ended October 2,
1999; and increased 49.5% to $43.4 million for the thirty-nine weeks ended
September 30, 2000 from $29.1 million for the thirty-nine weeks ended October 2,
1999. These expenses are related to both wholesale and retail operations and
consist of payroll, occupancy, advertising and other operating costs, as well as
preopening costs, which are expensed as incurred. As a percentage of sales,
selling expenses increased to 21.3% for the thirteen weeks ended September 30,
2000 from 19.2% for the thirteen weeks ended October 2, 1999; and increased to
22.4% for the thirty-nine weeks ended September 30, 2000 from 19.8% for the
thirty-nine weeks ended October 2, 1999. The increase in selling expense in
dollars and as a percentage of sales for the thirteen and the thirty-nine weeks
ended September 30, 2000 was due to the continued growth in the number of retail
stores, from 96 as of October 2, 1999 to 142 as of September, 2000. Retail
sales, which have higher selling expenses as a percentage of sales than
wholesale sales, represented 48.4% of total sales in the thirteen weeks ended
September 30, 2000 compared to 41.4% in the thirteen weeks ended October 2,
1999; and 44.9% of total sales in the thirty-nine weeks ended September 30, 2000
compared to 39.4% in the thirty-nine weeks ended October 2, 1999. The Company
opened 40 stores in the fifty-two weeks ended January 1, 2000 and 40 in the
thirty-nine weeks ended September 30, 2000. New stores typically generate lower
operating margin contributions than stores that have been open for more than one
year since fixed costs, as a percentage of sales, are higher during the early
sales maturation period. In fact, excluding the sales and selling expenses of
the 1999 and 2000 store classes from the thirteen and thirty-nine weeks ended
September 30, 2000, and the sales and selling expenses of the 1999 store class
from the thirteen and thirty-nine weeks ended October 2, 1999, store selling
expense declined as a percent of sales.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses, which consist primarily of
personnel-related costs incurred in the administration of support functions,
increased 30.3% to $8.1 million for the thirteen weeks ended September 30, 2000
from $6.3 million for the thirteen weeks ended October 2, 1999; and increased
27.6% to $23.6 million for the thirty-nine weeks ended September 30, 2000 from
$18.5 million for the thirty-nine weeks ended October 2, 1999. As a percentage
of sales, general and administrative expenses increased slightly to 11.0% for
the thirteen weeks ended September 30, 2000 from 10.6% for the thirteen weeks
ended October 2, 1999; and decreased to 12.2% for the thirty-nine weeks ended
September 30, 2000 from 12.6% for the thirty-nine weeks ended October 2, 1999.
The increase in general and administrative expense in dollars is attributable to
the Company's continued investment in building its infrastructure. The slight
increase in general and administrative expenses as a percentage of sales in the
thirteen weeks ended September 30, 2000 was mainly attributable to the
amortization of development and consulting costs incurred in connection with the
Company's improved web-site, which went live on September 1, 2000. The decrease
in general and administrative expenses as a percentage of sales for the
thirty-nine weeks ended September 30, 2000 is attributable to the Company's
leveraging of these expenses over a larger sales base.
9
<PAGE> 10
INCOME FROM OPERATIONS
Income from operations increased 2.6% to $16.1 million, or 21.6% of sales, for
the thirteen weeks ended September 30, 2000 from $15.7 million, or 26.5% of
sales, for the thirteen weeks ended October 2, 1999; and increased 13.0% to
$38.7 million, or 19.9% of sales, for the thirty-nine weeks ended September 30,
2000 from $34.2 million, or 23.3% of sales, for the thirty-nine weeks ended
October 2, 1999. The decrease in income from operations as a percentage of sales
is due mainly to the higher mix of retail sales, which typically generate lower
operating margin contribution rates during the first three quarters of each
fiscal year than wholesale sales, and to the weighting of young stores. New
stores typically generate lower operating margin contributions than stores that
have been open for more than one year since fixed costs, as a percent of sales,
are higher during the early sales maturation period. As mentioned previously,
preopening costs are expensed as incurred.
SEGMENT PROFITABILITY
Segment profitability for the Company's wholesale operations, including Europe,
was $15.2 million or 39.5% of wholesale sales for the thirteen weeks ended
September 30, 2000 compared to $15.4 million or 44.5% of wholesale sales for the
thirteen weeks ended October 2, 1999. For the thirty-nine weeks ended September
30, 2000 wholesale segment profitability was $43.4 million or 40.6% of wholesale
sales compared to $38.8 million or 43.5% of wholesale sales for the thirty-nine
weeks ended October 2, 1999. The decrease in wholesale segment profitability
dollars and as a percentage of sales for the quarter was attributable to an
increase in distribution expense. The Company's Salt Lake City distribution
center, fully operational during the thirteen weeks ended September 30, 2000,
was only operational for five weeks during the same quarter last year. In
addition, the aforementioned inefficiencies caused by the Company's new
distribution software resulted in approximately $1.3 million of unexpected
costs. The increase in wholesale segment profitability dollars for the
thirty-nine week period was entirely attributable to the increase in sales. The
decrease in the wholesale segment profitability rate for the thirty-nine weeks
ended September 30, 2000 was attributable to increased distribution expense due
to inefficiencies resulting from the implementation of new distribution software
and the Company's Salt Lake City distribution center, which became operational
on August 30, 1999.
Segment profitability for the Company's retail operations was $9.0 million or
25.1% of retail sales for the thirteen weeks ended September 30, 2000 compared
to $6.5 million or 26.5% of retail sales for the thirteen weeks ended October 2,
1999; and $18.9 million or 21.6% of retail sales for the thirty-nine weeks ended
September 30, 2000 compared to $13.9 million or 24.0% of retail sales for the
thirty-nine weeks ended October 2, 1999. The decrease in retail segment
profitability as a percentage of sales for the quarter was attributable to an
increase in distribution expense. Distribution expense, which is allocated to
both segments, had an unfavorable impact on the retail segment profitability
rate due to inefficiencies resulting from the implementation of new distribution
software and timing of the Company's Salt Lake City distribution center as
described above. Excluding distribution expense, retail segment profitability
increased as a percentage of sales for the thirteen weeks ended September 30,
2000. The decrease in retail segment profitability as a percentage of sales for
the thirty-nine weeks ended September 30, 2000 is due distribution expense as
well as the to the heavy weighting of new stores. The Company opened 40 stores
in the fifty-two weeks ended January 1, 2000 and 40 in the thirty-nine weeks
ended September 30, 2000. In addition to preopening costs, which are expensed as
incurred, new stores typically generate lower operating margin contributions
than stores that have been open for more than one year since fixed costs, as a
percent of sales, are higher during the early sales maturation period.
NET OTHER EXPENSE
Net other expense was $4.3 million, or 5.8% of sales, for the thirteen weeks
ended September 30, 2000 compared to $4.1 million, or 6.9% of sales, for the
thirteen weeks ended October 2, 1999; and $12.2 million, or 6.3% of sales for
the thirty-nine weeks ended September 30, 2000 compared to $14.9 million, or
10.1% of sales for the thirty-nine weeks ended October 2, 1999. The primary
component of the expense in each of these periods was interest expense, which
was $4.4 million in the third quarter of 2000 compared to $4.1 million in the
third quarter of 1999; and $12.4 million for the thirty-nine weeks ended
September 30, 2000 compared to $15.5 million for the thirty-nine weeks ended
October 2, 1999. Interest expense was higher in the thirteen weeks due mainly to
an increase in interest rates. The Company ended the quarter with $217 million
in total debt compared to $225 million as of October 2, 1999. Net of cash and
equivalents, total borrowings were $207 million as September 30, 2000 compared
to $219 million as of October 2, 1999. Interest expense for the thirty-nine
weeks ended September 30, 2000 was down compared to the same period last year
due to a decrease in average debt outstanding for that period. 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
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were used to redeem $320.0 million subordinated debentures on July 7,
1999, thereby reducing debt by approximately $100 million. Debt levels have,
however, increased approximately $29.4 million during the thirty-nine weeks
ended September 30, 2000 compared to the end of the year to support seasonal
inventory requirements and capital expenditures. On an overall basis, however,
the reduction of debt owing to the initial public offering more than outweighed
the incremental borrowings for these expenditures.
PROVISION FOR INCOME TAXES
The Company's effective tax rate for the thirteen and the thirty-nine week
period ended September 30, 2000 and October 2, 1999 was 40%. Management
estimates that such rates will continue for the entire year based on its current
tax structure.
NET INCOME
Net income before extraordinary item was $7.0 million, or 9.5% of sales, for the
thirteen weeks ended September 30, 2000 compared to $6.9 million, or 11.7% of
sales, for the thirteen weeks ended October 2, 1999; and $15.9 million, or 8.2%
of sales, for the thirty-nine weeks ended September 30, 2000 compared to $11.6
million, or 7.9% of sales, for the thirty-nine weeks ended October 2, 1999. The
extraordinary item represents the write-off of deferred financing fees, net of
tax, related to the Company's $320.0 million subordinated debentures redeemed on
July 7, 1999. Net income was $7.0 million, or 9.5% of sales, for the thirteen
weeks ended September 30, 2000 compared to $3.8 million, or 6.4% of sales, for
the thirteen weeks ended October 2, 1999; and $15.9 million, or 8.2% of sales,
for the thirty-nine weeks ended September 30, 2000 compared to $8.4 million, or
5.7% of sales, for the thirty-nine weeks ended October 2, 1999.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 133
will be effective for fiscal years beginning after June 15, 2000. SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. Under SFAS 133, certain contracts that were not formerly
considered derivatives may now meet the definition of a derivative. The Company
intends to adopt SFAS 133 effective January 1, 2001. Management does not expect
the adoption of SFAS 133 to have a significant impact on the financial position
or results of operations of the Company because the Company does not have
significant derivative activity.
In December, 1999 the Securities and Exchange Commission ("SEC") released Staff
Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial
Statements." This SAB clarifies certain elements of revenue recognition. Since
December, the SEC has issued several amendments that have effectively postponed
the implementation date until the fourth quarter of fiscal 2000. Management
currently believes that the implementation of the SAB will not have a material
impact on the Company's financial statements.
In July, 2000, the Emerging Issues Task Force reached a consensus on Issue
00-10, "Accounting for Shipping and Handling Fees and Costs". The Consensus
specifically stated that all amounts billed to a customer in a sale transaction
related to shipping and handling, if any, represent revenues earned for the
goods provided and should be classified as revenue. It also stated that costs
incurred for shipping and handling should be classified as costs of goods sold.
It is currently the Company's policy to record shipping and handling revenue and
shipping and handling costs as a component of net revenue. The Company is
required to adopt this Consensus in the fourth quarter of fiscal 2000 and is
currently evaluating the impact this Consensus will have on its consolidated
statement of operations.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $13.9 million compared to January 1,
2000. This decrease was partially attributable to cash used in operating
activities of $12.7 million, which includes an increase in inventories of $24.2
million. Of the total increase in inventory, $9.7 million was attributable to
the continued ramping up of the Company's Salt Lake City distribution center to
enable this facility to efficiently serve a greatly expanded geography of
wholesale and retail customers. Historically the Company has always built
inventories in the third quarter of the year in order to satisfy holiday demand.
Management believes that inventory levels will decrease substantially in the
fourth quarter of fiscal 2000. Capital expenditures for the thirty-nine week
period ended September 30, 2000 were $31.9 million, primarily related to the
capital requirements to open 40 new stores and investments in manufacturing
equipment to meet increased production requirements.
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The Company opened 40 stores during the thirty-nine weeks ended September 30,
2000 and expects to open approximately 5 additional stores in the last quarter
of fiscal 2000. Management estimates that the Company's cash requirements,
including pre-opening expenses, leasehold improvements and fixtures, will be
approximately $250,000 for each new store. Accordingly, the Company expects to
use approximately $1.3 million for store openings during the last quarter of
fiscal 2000. 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 available cash and operating
cash flow.
As of September 30, 2000 the Company was in compliance with all covenants under
its credit facility. Funds available to be borrowed under the facility as of
September 30, 2000 were $53.0 million.
The Company expects that its current cash and cash equivalents, cash flow from
operations 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
The Company does not believe inflation has had a significant impact on its
operations. The prices of its products have not varied based on the movement of
the consumer price index. The majority of material and labor costs are not
materially affected by inflation.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risks relate primarily to changes in interest rates. The
Company bears this risk in two specific ways. First, it has debt outstanding. At
September 30, 2000 there was $217.0 million of debt outstanding, which consisted
of $120.0 million in term loans and $97.0 million from its revolving credit
facility. Because this debt carries a variable interest rate pegged to market
indices, the Company's statements of operations and 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 the Company's balance sheet. The average balance in such securities
was approximately $3.8 million during the thirty-nine weeks ended September 30,
2000. Earnings from these cash equivalents totaled $162,000 for the thirty-nine
weeks ended September 30, 2000.
The Company buys a variety of raw materials for inclusion in its products. The
only raw material that it considers 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, the Company's operations outside of the United States are
immaterial. Accordingly, it is not exposed to substantial risks arising from
foreign currency exchange rates.
FORWARD-LOOKING INFORMATION
Any statements in this document about future expectations, plans and prospects
for the Company, including statements containing the words "believes,"
"anticipates," "plans," "expects," "will," and similar expressions, constitute
forward-looking statements within the meaning of The Private Securities
Litigation Reform Act of 1995. There are a number of factors that might cause
the Company's actual results to differ significantly from the results reflected
by those forward-looking statements. In addition to factors generally affecting
the political, economic and competitive conditions in the United States and
abroad, such factors include those set forth below.
THE COMPANY MAY NOT BE ABLE TO GROW ITS BUSINESS AS PLANNED.
Yankee Candle intends to continue to pursue a business strategy of increasing
sales and earnings by expanding its retail and wholesale operations both in the
United States and internationally. The Company's retail growth strategy depends
in large part on its ability to open new stores in both existing and new
geographic markets. Because Yankee Candle's ability to implement its growth
strategy successfully will depend in part on factors beyond its control,
including changes in consumer preferences and in its competitive environment,
the Company may not be able to achieve its planned growth or sustain its
financial performance. Yankee Candle's ability to anticipate changes in the
candle and giftware industries, and identify industry trends will be critical
factors in its ability to remain competitive. The
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Company expects that, as it grows, it will become more difficult to maintain the
Company's growth rate. The Company cannot give assurances that it will continue
to grow at a rate comparable to Yankee Candle's historic growth rate or that its
historic financial performance will continue as the Company grows.
THE COMPANY FACES SIGNIFICANT COMPETITION IN THE GIFTWARE INDUSTRY, WHICH COULD
ADVERSELY AFFECT ITS FUTURE OPERATING RESULTS, FINANCIAL CONDITION AND LIQUIDITY
AND ITS ABILITY TO CONTINUE TO GROW ITS BUSINESS.
Yankee Candle competes generally for the disposable income of consumers with
other producers in the approximately $55 billion giftware industry. The giftware
industry is highly competitive with a large number of both large and small
participants. Yankee Candle's 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. The Company's retail
stores compete with franchised candle store chains, specialty candle stores and
gift and houseware retailers. Some of the Company's competitors are part of
large, diversified companies which have greater financial resources and a wider
range of product offerings than Yankee Candle does. This competitive environment
could adversely affect the Company's future revenues and profits, financial
condition and liquidity and its ability to continue to grow its business.
YANKEE CANDLE INCURRED INDEBTEDNESS IN CONNECTION WITH ITS 1998
RECAPITALIZATION, AND SERVICING ITS INDEBTEDNESS COULD REDUCE FUNDS AVAILABLE TO
GROW ITS BUSINESS.
At September 30, 2000 there was $217.0 million of debt outstanding, which
consisted of $120.0 million in term loans and $97.0 million from its revolving
credit facility. Although Yankee Candle believes that its cash flow from
operations and its available financing should be sufficient to meet its
anticipated requirements for growing the business and servicing its debt, the
Company's level of long-term indebtedness could reduce funds available to grow
its business in the future.
YANKEE CANDLE'S SUCCESS DEPENDS ON ITS SENIOR EXECUTIVE OFFICERS, THE LOSS OF
WHOM COULD DISRUPT THE COMPANY'S BUSINESS.
The Company's success is substantially dependent upon the retention of its
senior executive officers. Yankee Candle does not have employment agreements
with any of its senior executive officers, except its Chief Financial Officer.
If the Company's senior executive officers become unable or unwilling to
participate in the business of Yankee Candle, its future business and financial
performance could be materially affected.
BECAUSE YANKEE CANDLE IS NOT A DIVERSIFIED COMPANY AND IS DEPENDENT UPON ONE
INDUSTRY, YANKEE CANDLE HAS LESS FLEXIBILITY IN REACTING TO UNFAVORABLE CONSUMER
TRENDS, ADVERSE ECONOMIC CONDITIONS OR BUSINESS CYCLES.
THE LOSS OF THE COMPANY'S MANUFACTURING FACILITY WOULD DISRUPT ITS OPERATIONS.
Yankee Candle relies exclusively on its manufacturing facility in Whately,
Massachusetts to produce its candle products. Because most of its machinery is
designed or customized by Yankee Candle to manufacture its products, and because
the Company has strict quality control standards for its products, the loss of
its manufacturing facility, due to natural disaster or otherwise, would
materially affect the Company's operations. Although Yankee Candle's
manufacturing facility is adequately insured, the Company believes 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.
THE COMPANY MAY EXPERIENCE A DECLINE IN ITS RETAIL COMPARABLE STORE SALES, WHICH
COULD CAUSE THE PRICE OF ITS COMMON STOCK TO DROP.
Comparable store sales from the Company's retail business have contributed
significantly to Yankee Candle's overall sales growth. The Company's retail
comparable store sales could be adversely impacted by competition or Yankee
Candle's inability to execute its business strategy. If the Company's retail
comparable store sales declined for any reason, Yankee Candle could experience a
loss in its revenues and income, which could lower the price of the Company's
common stock.
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SEASONAL AND QUARTERLY FLUCTUATIONS IN THE COMPANY'S BUSINESS COULD AFFECT THE
MARKET FOR ITS COMMON STOCK.
Yankee Candle's revenues and operating results vary from quarter to quarter. The
Company has historically realized higher revenues and operating income in its
fourth quarter, particularly in its retail business, which is becoming a larger
portion of the Company's sales. Yankee Candle believes 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, the Company believes that
quarter to quarter comparisons of its operating results are not necessarily
meaningful and that these comparisons cannot be relied upon as indicators of
future performance. In addition, Yankee Candle may also experience quarterly
fluctuations in its revenues and income depending on various factors, including,
among other things, the number of new retail stores the Company opens in a
particular quarter, changes in the ordering patterns of our wholesale customers
during a particular quarter, and the mix of products sold. Most of the Company's
operating expenses, such as rent expense, advertising and promotional expense
and employee wages and salaries, do not vary directly with revenues and are
difficult to adjust in the short term. As a result, if revenues for a particular
quarter are below the Company's expectations, the Company could not
proportionately reduce operating expenses for that quarter, and therefore this
revenues shortfall would have a disproportionate effect on the Company's
operating results for that quarter. As a result of these factors, Yankee Candle
may report in the future revenues and operating results that do not match the
expectations of market analysts and investors. This could cause the trading
price of the Company's common stock to fluctuate.
YANKEE CANDLE IS CONTROLLED BY FORSTMANN LITTLE & CO. AND THE COMPANY'S
MANAGEMENT, WHOSE INTERESTS MAY CONFLICT WITH THOSE OF OTHER STOCKHOLDERS.
Partnerships affiliated with Forstmann Little & Co. and Yankee Candle's
management together own approximately 74% of the Company's outstanding
common stock and control the Company. Accordingly, they are able to:
- elect the Company's entire board of directors,
- control the Company's management and policies, and
- determine, without the consent of the Company's other stockholders, the
outcome of any corporate transaction or other matter submitted to the
Company's stockholders for approval, including mergers, consolidations and
the sale of all or substantially all of the Company's assets.
They are also able to prevent or cause a change in control of Yankee Candle and
are able to amend the Company's Articles of Organization and By-Laws at any
time. The interests of the Forstmann Little partnerships and the Company's
management also may conflict with the interests of the other holders of common
stock.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities and Use of Proceeds
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its 2000 Annual Meeting of Stockholders (the
"Annual Meeting") on June 1, 2000. At the Annual Meeting, the
following matters were submitted to a vote of the stockholders and
the following actions were taken with respect thereto:
The stockholders elected Theodore J. Forstmann, Michael S. Ovitz
and Jamie C. Nicholls as Class I Directors of the Company, to
serve until the 2003 Annual Meeting of Stockholders or until their
successors are duly elected and qualified. Holders of 53,121,696
shares of common stock voted to elect Mr. Forstmann. Holders of
53,160,127 shares of common stock voted to elect Mr. Ovitz.
Holders of 53,121,140 shares of common stock voted to elect
Ms. Nicholls.
The stockholders voted to ratify the appointment of Deloitte &
Touche LLP as the Company's independent auditors for the current
fiscal year by a vote 53,159,039 shares of common stock in favor,
7,707 shares of common stock against, and 6,476 shares of common
stock abstaining.
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
Not Applicable
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
Not Applicable
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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.
Date: 11/14/00 By: /s/ Robert R. Spellman
------------------------------ ----------------------------------
Robert R. Spellman
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
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