UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended January 3, 2009
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 333-141699-05
YANKEE HOLDING CORP.
(Exact name of registrant as specified in its charter)
| | |
| Delaware | | 20-8304743 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
| 16 Yankee Candle Way, South Deerfield, Massachusetts | | 01373 |
| (Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (413) 665-8306
Securities registered pursuant to Section 12 (b) of the Act:
None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes x No ¨
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No x We are a voluntary filer of reports required of companies with public securities under Section 13 or 15(d) of the Securities Exchange Act of 1934, and we have filed all reports which would have been required of us during the past 12 months had we been subject to such provisions.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x Smaller Reporting Company ¨
The registrant has no common equity held by non-affiliates.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of April 2, 2009 there were 499,550 shares of Yankee Holding Corp. common stock, $.01 par value, outstanding, all of which are owned YCC Holdings LLC.
Documents incorporated by reference (to the extent indicated herein).
None
TABLE OF CONTENTS
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EXPLANATORY NOTE
On February 6, 2007, The Yankee Candle Company, Inc. (the “Predecessor”) merged (the “Merger”) with an affiliate of Madison Dearborn Partners, LLC (“MDP” or “Madison Dearborn”). In connection with the Merger, YCC Holdings LLC (“Holdings”) acquired all of the outstanding capital stock of the Predecessor for approximately $1,413.5 million in cash. Holdings is owned by affiliates of MDP and certain members of our senior management. Holdings owns 100% of the stock of Yankee Holding Corp. (the “Parent” or “Successor”), which in turn owns 100% of the stock of The Yankee Candle Company, Inc. The Merger and related transactions are sometimes referred to collectively as the “Transactions.”
This report contains the audited consolidated financial statements of the Successor as of and for the year ended January 3, 2009 and as of December 29, 2007 and for the period February 6, 2007 to December 29, 2007. The accompanying audited consolidated financial statements for the period December 31, 2006 to February 5, 2007 and the year ended December 30, 2006 are those of the Predecessor.
Unless the context specifies otherwise, “we,” “us,” “our,” or the “Company” refer to the Successor and its subsidiaries and for the periods prior to February 5, 2007, the Predecessor and its subsidiaries. The Successor is a Delaware corporation formed in connection with the Merger. The Predecessor is a Massachusetts corporation formed in 1976.
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains a number of forward-looking statements. Any statements contained herein, including without limitation statements to the effect that the Company or its management “believes”, “expects”, “anticipates”, “plans” and similar expressions that relate to prospective events or developments 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. There are a number of important factors that could cause our actual results to differ materially from those indicated by such forward-looking statements. These factors include, without limitation, those set forth below in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Future Operating Results.” We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
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PART I
Recent Economic Environment
The macroeconomic environment is clearly having a significant impact on consumer spending. Unemployment levels are projected by many to approach 9% or more, consumer confidence levels are depressed, the housing slump is worsening, and credit markets remain challenging. Obviously, these conditions point to consumption challenges for virtually all consumer facing companies including Yankee Candle. Our operations for the fifty-three weeks ended January 3, 2009 were significantly affected by these unprecedented macroeconomic conditions, as declining mall traffic and reduced consumer spending negatively impacted both our retail and wholesale businesses. In 2009, we expect that the deteriorating economic conditions will continue to challenge our business.
Overview
We are the largest specialty branded premium scented candle company in the United States based on our annual sales and profitability. The strong brand equity of the Yankee Candle® brand, coupled with our vertically integrated multi-channel business model, have enabled us to be the market leader in the premium scented candle market for many years. We design, develop, manufacture, and distribute the majority of the products we sell which allows us to offer distinctive, trend-appropriate products for every season, every customer, and every room in your home. We have a 39-year history of category leadership and growth by marketing Yankee Candle products as affordable luxuries, consumable products, and valued gifts for everyone on your list. We offer the broadest assortment of highly scented candles, innovative home fragrance products, and candle related home décor accessories in a variety of compelling fragrances, colors, styles, and price points.
Candle & Home Fragrance Assortment
Candle products are the foundation of our business, and are available in a wide range of fragrances and colors across a variety of jar candles, Samplers® votive candles, Tarts® wax potpourri, pillars and other candle products, the vast majority of which are marketed under the Yankee Candle® brand. Our candles are moderately-priced ranging from $1.99 for a Samplers® votive candle to $24.99 for a large 22oz jar candle. This variety ensures each customer can find Yankee Candle products appropriate for her lifestyle and budget. In addition to our core candle business, we successfully have extended the Yankee Candle brand into the growing home fragrance segment with a portfolio of innovative fragrance products for your home. Our assortment includes electric plug home fragrancers, decorative reed diffusers, room sprays, potpourri, and scented oils. Additionally, we offer products such as the Yankee Candle Car Jars® auto air fresheners to fragrance cars and small spaces. We also offer a wide array of coordinated candle related and home decor accessories in dozens of exclusive patterns, colors and styles, and numerous giftsets. In addition to our “everyday” product offerings, we also offer seasonally-appropriate fragrances, products, home décor accessories, and giftsets on a limited edition, seasonal basis. These themed temporary programs occur four times a year: Spring, Summer, Fall, and the Christmas/Holiday season.
Distribution: Customer Touchpoints
We sell our products in multiple channels of distribution across dozens of countries. Our customer touchpoints include our own company-operated retail stores and our direct-to-consumer catalogs and e-commerce/web business, as well as a global network of both national account and independent specialty gift customers and channels. We have an extensive and growing national and international wholesale segment with a diverse customer base that as of January 3, 2009 consisted of approximately 19,700 locations in North America, typically in non-shopping mall locations. We also have a growing retail store base primarily located in shopping malls and lifestyle centers. As of January 3, 2009, we operated 463 Yankee Candle retail stores in 43 states. We have achieved a compound annual store growth rate of 11% for the period from fiscal 2003 through fiscal 2008. We operate two flagship stores, a 90,000-square-foot store in South Deerfield, Massachusetts, which is a major tourist destination in Massachusetts, and a second 42,000-square-foot flagship store in Williamsburg, Virginia. We also sell our products directly to consumers through our direct mail catalogs and our Internet web sites at www.yankeecandle.com and www.aromanaturals.com. Outside of North America, we sell our products primarily through our subsidiary Yankee Candle Company (Europe), LTD, which has an international wholesale customer network of approximately 3,000 locations and distributors covering 23 countries.
Industry Overview
We operate in the domestic giftware industry, including various sub-segments such as the total candle, home fragrance, scented candle and premium scented candle segments. Based upon market data from Kline & Company, our market share of the premium scented candle market continued to climb over the last decade reaching over 44% in 2007. Other key industry insights according to Kline & Company include:
| | • | | the domestic home fragrance segment, including candles, has grown at an approximately 6% compound annual growth rate from 2003 to 2007, reaching approximately $7.0 billion; |
| | • | | the domestic scented candles segment has grown at an approximately 2% compound annual growth rate from 2003 to 2007, reaching approximately $3.3 billion; |
| | • | | the domestic premium scented candle segment, which is our primary market, has grown at an approximately 3% compound annual growth rate from 2003 to 2007, reaching approximately $1.9 billion; and |
| | • | | the premium scented candle sales channel represented 57% of the domestic scented candle market in 2007, versus 51% in 2003. |
New Product Innovation
We target approximately 25-30% of our total company net sales to come from the introduction of new products each year. Our long history as a product innovator in the premium scented candle segment has been supported by our strong and experienced in-house Brand Management, Marketing, Design, and Creative Development teams, which include artists, master fragrance specialists, designers, package developers, trend agents, R&D lab professionals, market researchers, and brand managers. These internal experts work closely together, along with a network of outside partners, to identify key market trends, to translate these key insights into business strategies, and to develop new product concepts.
In 2008, we introduced 35 new fragrances, as well as new product lines and forms, to our existing candle portfolio. We continued to expand our home fragrance product offerings, adding a number of new fragrances and styles to our existing products, including the addition of specialty reeds and a wide variety of electric home fragrancer designs. In addition, we rolled out our successful Concentrated Room Spray product and nationally launched the Fragrance Fan home fragrancer, Pump & Go™ car fragrancer, and expanded the variety of our auto air fresheners.
We also continued to grow and expand our portfolio of Yankee Candle “specialty” brands that target specific accounts, channels, or customer segments including: Yankee Candle® Simply HomeTM, Yankee Candle® Aromatherapy SPA, Yankee Candle® BeanswaxTM, and Yankee Candle® World Journeys.
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Historical Results
Fiscal 2008 consists of the fifty-three weeks ended January 3, 2009. Fiscal 2007 consists of the periods December 31, 2006 to February 5, 2007 (Predecessor) and February 6, 2007 to December 29, 2007 (Successor). The fifty-two weeks ended December 30, 2006 (Predecessor) is referred to as fiscal 2006. From fiscal 2003 through fiscal 2008, we have experienced compound annual sales growth of 7%. Each of our distribution channels has contributed to this growth. Our retail segment has achieved 9% compound annual sales growth for the period from fiscal 2003 through fiscal 2008 and accounted for 57% of our $713.7 million total sales in 2008. Our wholesale segment has achieved a 5% compound annual sales growth for the period from fiscal 2003 through fiscal 2008 and accounted for 43% of total sales in 2008. In fiscal 2008, our sales decreased 3% from 2007, comprised of a 1% increase in retail sales and a 8% decrease in wholesale sales. We believe our historically strong operating performance has been the result of the strength of the Yankee Candle® brand, the loyalty of our customer base, our commitment to product quality and innovation, the efficiency of our vertically integrated business model and the success of our multi-channel distribution strategy.
In February 2007 we consummated the Merger between our Predecessor and Madison Dearborn, all as more fully set forth in the preceding section entitled “Explanatory Note.”
Wholesale Operations
Our wholesale strategy focuses on home decor, gift and other image appropriate retailers. The wholesale business is an integral part of our growth strategy and, together with our other distribution channels, helps to further build our brand awareness. For the period from fiscal 2003 through fiscal 2008 our wholesale segment achieved 5% compound annual sales growth. Wholesale sales, as a percentage of total sales, decreased slightly from 45% in fiscal 2007 to 43% in fiscal 2008. We believe that as a result of our strong brand name, the popularity and profitability of our products and our emphasis on customer service, our wholesale customers are extremely loyal, with approximately 60% of them having been customers for over five years. No customer accounted for more than 10% of our total Company sales in 2008, 2007 and 2006.
The strength of our brand, the profitability and quality of our products, and our successful in-store merchandising and display system have made us the top selling brand for many of our wholesale customers. We have consistently been ranked first in gift store sales in the domestic candle category, and have consistently been ranked either first or second in product reorders across all giftware categories by Giftbeat, a giftware industry publication.
We actively seek to increase wholesale sales through our innovative product display systems, promotional programs, new products and telemarketing initiatives. We promote a “Shop Within A Shop” display system to our wholesale customers which presents our products in a distinctive wood hutch. We recommend that dealers invest in a minimum of an 8 to 12-foot display system which enhances Yankee Candle’s brand recognition in the marketplace which we believe positively impacts our wholesale sales. We have also introduced new products and implemented a number of promotional programs to increase the square footage dedicated to Yankee Candle® products as well as the breadth of Yankee Candle® products offered by our wholesale customers. In addition, we provide category management expertise and advice to our wholesale customers on an ongoing basis regarding product knowledge, display suggestions, promotional ideas and geographical consumer preferences. As one example, we operate Yankee Candle University, a training program with in-depth courses on Yankee Candle product information, sales tactics and marketing techniques. We have a selective dealer approval process, designed to apply consistent nationwide standards for all Yankee Candle authorized retailers.
We use a dedicated in-house direct telemarketing sales force along with a third party service to service our wholesale customers. In addition, we have several account managers located in field offices across the United States to help us service our larger accounts. This provides us with greater control over the sales process, and allows us to provide customers with better and more accurate information, faster order turn-around and improved customer service, to create more consistent merchandising nationwide and to reduce costs.
See Note 19, “Segments of Enterprise and Related Information,” to the accompanying consolidated financial statements for sales, gross profit and operating margin by segment.
International Operations
Sales from our international operations were approximately $48.1 million, $42.6 million and $28.5 million for fiscal years 2008, 2007 and 2006, respectively. We sell our products in Europe and elsewhere primarily through our subsidiary Yankee Candle Company (Europe), LTD (“YCE”), utilizing our distribution center located in Bristol, England. As of January 3, 2009 YCE was selling our products to approximately 3,000 locations and distributors covering 23 countries. We also sell to various countries in Asia through a distributor. Sales from our international operations outside of North America have accounted for less than 10% of our total revenues during fiscal 2008, 2007 and 2006.
Retail Operations
Retail Stores
Our retail operations include retail stores, consumer direct mail catalogs and Internet operations and Chandler’s restaurant (located at our South Deerfield, Massachusetts flagship store). All of our retail stores are Company-owned and operated; none are franchised. For the period from fiscal 2003 through fiscal 2008, our retail segment achieved 9% compound annual sales growth from $266.6 million to $410.3 million. Retail sales, as a percentage of total sales, increased from 55% in fiscal 2007 to 57% in fiscal 2008.
In fiscal 2008, we increased our Yankee Candle retail sales base by 34 net stores, ending the year with 463 Yankee Candle retail stores in 43 states. The average capital requirement to open a new Yankee Candle store, including working capital, is approximately $275,000.
In opening new stores, we target high traffic retail locations in shopping malls and lifestyle centers. Our retail stores, excluding our two flagship stores, average approximately 1,650 square feet. Of our 463 Yankee Candle retail stores, 303 are located in shopping malls. We plan to open approximately 30 additional stores in 2009.
The non-shopping mall locations include our South Deerfield, Massachusetts and Williamsburg, Virginia flagship stores. We believe that our flagship stores are the world’s largest candle and holiday-themed stores with approximately 90,000 square feet of retail and entertainment space in South Deerfield and 42,000 square feet in Williamsburg. These stores promote Yankee Candle’s brand image and culture and allow us to test new product and fragrance introductions. The South Deerfield flagship store is a major tourist destination and provides visitors with a total shopping and entertainment experience including the Yankee Candlemaking Museum and Chandler’s, a 240-seat restaurant. This flagship store also includes our Yankee Candle Home “store within a store,” which showcases home goods, accessories, furnishings and decorative accents in sophisticated country décor settings. The Williamsburg flagship store opened in November 2005. The store is our first shopping entertainment center outside our South Deerfield flagship store. The Williamsburg flagship store features candle dipping, candle-making demonstrations, animated musical entertainment and an old-time photo studio.
Outstanding customer service and a knowledgeable employee base are key elements of our retail strategy. We emphasize formal employee training, particularly with respect to product quality, candle manufacturing and the heritage of Yankee Candle. We also have a well-developed, eleven-day training program for managers and assistant managers and an in-store training program for sales associates. Our high customer service standards are an integral part of our ongoing success. Each store is responsible for implementing and maintaining these customer service standards.
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Consumer Direct: Catalog and Internet
As part of our retail operations, we market our products through our consumer direct mail catalogs and Internet web sites. Our consumer direct mail catalog and Internet business generated $30.9 million of sales in 2008, compared to $25.7 million in 2007.
Our consumer direct mail catalogs feature a wide selection of our most popular products, together with additional products and offerings exclusive to our catalog channel. We believe that our consumer direct mail catalog constitutes an important marketing tool, serving to increase the awareness and strength of the Yankee Candle® brand and driving sales to our retail stores and Internet web sites.
Yankee Candle Company Fundraising
In addition, we operate a fundraising division, Yankee Candle Company Fundraising. Our fundraising division distributes selected Yankee Candle® brand products through fundraising organizations. Our fundraising division generated $ 22.9 million in sales in 2008, compared to $20.0 million in 2007.
See Note 19, “Segments of Enterprise and Related Information,” to the accompanying consolidated financial statements for sales, gross profit and operating margin by segment.
Our web sites, www.yankeecandle.com and www.aromanaturals.com provide our on-line customers with an easy and convenient way to purchase a wide variety of our most popular products. The web sites also offer features designed to promote sales and provide enhanced customer service and convenience, including personalized guest registration, gift cards and other gift giving programs, a store locator, decorating ideas, sites dedicated to corporate gifts, weddings and other customized purchasing opportunities, including a personalized candle configuring capability that enables users to design and purchase their own custom-labeled Samplers® votive candles to commemorate special events such as weddings. In addition to our consumer-oriented web sites, we have a separate business-to-business web site dedicated to our wholesale customers that offers such features as on-line ordering, order status information, purchase history and an enhanced dealer locator program. We continually upgrade our web sites in order to better serve our retail and wholesale customers.
Illuminations
In 2006, the Company acquired certain assets of Candle Acquisition Corp. (“Illuminations”), including the Illuminations® brand, 14 Illuminations retail stores located in California, Arizona and Washington, and the Illuminations consumer direct business comprised of catalog sales and internet sales via www.Illuminations.com. In 2008 our operations included 28 Illuminations retail stores as of January 3, 2009, together with the consumer direct business. During the fourth quarter of 2008, the Company initiated a restructuring plan involving the closing of the Company’s 28 Illuminations retail stores and the discontinuance of the related Illuminations consumer direct and wholesale businesses. We expect to substantially complete these restructuring activities by April 30, 2009. For more details, see Footnote 16 to our Consolidated Financial Statements.
Manufacturing
Approximately 68% of our 2008 sales were generated by products manufactured at our 294,000 square foot facility in Whately, Massachusetts. As a vertically integrated manufacturer, we are able to closely monitor the quality of our products, control our production costs and effectively manage inventory. We believe this is an important competitive advantage that enables us to ensure high quality products, maintain affordable pricing and provide reliable customer service.
Our products are manufactured using filled, molded, extruded, compressed and dipped manufacturing methods. The majority of our products are filled products which are produced by pouring colored, scented liquid wax into a glass container with a wick. Pillars are made by extrusion, in which wax is pressed around a wick through a die. Tapers are produced through a dipping process and Tarts® wax potpourri and Samplers® votive candles are made by compression.
We use high quality fragrances, premium grade, highly refined paraffin and soy waxes, and superior wicks and dyes to maintain the premium quality characteristics of our products. Our manufacturing processes are designed to ensure the highest quality of candle fragrance, wick quality and placement, color, fill level, shelf life and burn rate. We are continuously engaged in efforts to further improve our quality and lower our costs by using efficient production and distribution methods and technological advancements.
Suppliers
We maintain strong relationships with our principal fragrance and wax suppliers. We believe we use the highest-quality suppliers in our industry. We have been in the business of manufacturing premium scented candles for many years and are therefore knowledgeable about the different levels of quality of raw materials used in manufacturing candles. As a result, we have developed, jointly with our suppliers, proprietary fragrances which are exclusive to Yankee Candle. Most raw materials used in the manufacturing process, including glassware, wick and packaging materials, are readily available from alternative sources at comparable prices. In 2008, no single supplier represented more than 10% of our total cost of goods sold.
Order Processing and Distribution
Our systems allow us to maintain efficient order processing from the time an order enters the system through shipping and ultimate payment collection from customers. We operate uniform computer and communication software systems allowing for online information access between our headquarters and retail stores. We use a software package that allows us to forecast demand for our products and efficiently plan our production schedules. We also utilize a pick-to-light system which allows Yankee Candle employees at our distribution center to receive information directly from the order collection center and quickly identify, by way of blinking lights, the products and quantity necessary for a particular order. To accurately track shipments and provide better service to customers we also use handheld optical scanners and bar coded labels. Our platform of manufacturing and distribution software enables us to further enhance our inventory management and customer service capabilities and also support a larger infrastructure. We believe that our systems for the processing and shipment of orders from our distribution center have enabled us to improve our overall customer service through enhanced order accuracy and reduced turnaround time.
The products we sell in the United States are generally shipped by various national small-parcel carriers or other freight carriers. Our products are shipped to our retail stores on a fluctuating schedule, with the frequency of deliveries based upon a store’s sales volume and seasonal variances in demand. We ship to wholesale customers as orders are received. We believe that our timely and accurate distribution is an important differentiating factor for our wholesale customers. This belief is based on numerous conversations between our management and sales force, on the one hand, and our wholesale customers, on the other hand.
Intellectual Property
As of January 3, 2009, Yankee Candle has 128 U.S. registered trademarks, several of which are the subject of multiple registrations, including Yankee® (for candles), Yankee Candle® , Illuminations® , Housewarmer® , Samplers® , Tarts® , Car Jars® and Aroma Naturals® , and has pending several additional trademark applications with respect to its products. We also register certain of our trademarks in various foreign countries. Trademark registrations allow us to use those trademarks on an exclusive basis in connection with our products. If we continue to use our trademarks and make all required filings and payments these trademarks can continue in perpetuity. These registrations are in addition to various copyright registrations and patents held by us, and all trademark, copyright and other intellectual property rights of Yankee Candle under statutory and common law. Our intellectual property further includes various proprietary product formulas, business methods and manufacturing and design “know how,” as well as intellectual property associated with our acquisitions of Aroma Naturals and Illuminations, including tradenames used in each business.
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We believe that our trademarks and intellectual property rights are valuable assets and we intend to maintain and renew our trademarks and their registrations and to vigorously defend them and all of our intellectual property rights against infringement.
Environmental Matters
We are subject to various federal, state, local and foreign laws and regulations governing the generation, storage, use, emission, discharge, transportation and disposal of hazardous materials and the health and safety of our employees. In addition, we are subject to environmental laws which may require investigation and cleanup of any contamination at facilities we own or operate or at third party waste disposal sites we use. These laws could impose liability even if we did not know of, or were not responsible for, the contamination.
We have in the past and will in the future incur costs to comply with environmental laws. We are not, however, aware of any costs or liabilities relating to environmental matters, including any claims or actions under environmental laws or obligations to perform any cleanups at any of our facilities or any third party waste disposal sites, that are expected to have a material adverse effect on our operations, cash flow or financial condition. It is possible, however, that such costs or liabilities may arise in the future.
Competition
We compete generally for the disposable income of consumers with other manufacturers and retailers in the 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, home fragrance, personal care and other fragrance-inspired products and with other gifts within a comparable price range, like boxes of candy, flowers, wine, fine soap and related merchandise. Our competitors distribute their products through independent gift retailers, department stores, mass market stores and mail order houses and some of our competitors are part of large, diversified companies having greater financial resources and a wider range of product offerings than us.
In the premium scented candle segment of the market, in which we primarily compete, our manufacturing competitors include Blyth Industries, Inc., as well as many smaller branded manufacturers and private label manufacturers. There has been some consolidation in recent years in the manufacturing segment of the candle market and based on our current knowledge and understanding of the industry we expect that this trend may continue.
Our retail stores compete primarily with specialty candle and personal care retailers and a variety of other retailers including department stores, gift stores and national specialty retailers that carry candles along with personal care items, giftware and houseware. In addition, while we focus primarily on the premium scented candle segment, candles are also sold outside of that segment by a variety of retailers including mass merchandisers.
Employees
At January 3, 2009, we employed approximately 2,300 full-time employees and approximately 2,800 part-time employees. We are not subject to any collective bargaining agreements, and we believe that our relations with our employees are good. We also use seasonal and temporary workers, as necessary, to supplement our labor force during peak selling or manufacturing seasons.
Available Information
We make our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and related amendments, available free of charge through our website at www.yankeecandle.com as soon as reasonably practicable after we electronically file such material with (or furnish such material to) the Securities and Exchange Commission (the “SEC” or the “Commission”). The information contained on our website is not incorporated by reference into this Annual Report on Form 10-K and should not be considered to be part of this Annual Report on Form 10-K.
There are a number of factors that might cause our actual results to differ significantly from the results reflected by the forward-looking statements contained herein. 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. Investors should consider the following factors before investing in our Company.
The current economic conditions and uncertain future outlook, including the credit and liquidity crisis in the financial markets and the continued deterioration in consumer confidence and spending, may continue to negatively impact our business and results of operations.
As widely reported, financial and credit markets in the United States and globally have been experiencing unprecedented levels of volatility and disruption in recent months, which has resulted in, among other things, severely diminished liquidity and credit availability and a widespread reduction in business activity and consumer spending and confidence. In 2008, these economic conditions negatively impacted our business and our results of operations. Any continuation or further deterioration in the current economic conditions, or any prolonged global, national or regional recession, may materially adversely affect our results of operations and financial condition.
These economic developments affect businesses such as ours in a number of ways. The current adverse market conditions, including the tightening of credit in financial markets, negatively impacts the discretionary spending of our consumers and may result in a decrease in sales or demand for our products. Similarly, these conditions may negatively impact the financial and operating condition of our wholesale customer base, or their ability to obtain credit, either of which in turn could cause them to reduce or delay their purchases of our products and increase our exposure to losses from bad debts. Similarly, these conditions could also increase the likelihood that one or more of our wholesale customers may file for bankruptcy or similar protection from creditors, which also may result in a loss of sales and increase our exposure to bad debt.
From a financing perspective, we believe that we currently have sufficient liquidity to support the ongoing activities of our business, service our existing debt and invest in future growth opportunities. While the existing conditions have therefore not currently impacted our ability to finance our operations, the continuation or further deterioration of the unprecedented instability and tightening of the credit markets may adversely affect our ability to access the credit market and to obtain any additional financing or refinancing on satisfactory terms or at all.
We are unable to predict the likely duration and severity of the ongoing disruption in financial markets and adverse economic conditions in the United States and other countries, nor are we able to predict the long-term impact of these conditions on our operations.
Counterparties to our secured credit facility and interest rate swaps may not be able to fulfill their obligations due to disruptions in the global financial and credit markets.
As a result of concerns about the stability of the financial and credit markets and the strength of counterparties during this challenging global macroeconomic environment, many financial institutions have reduced, and in some instances ceased to provide, funding to borrowers. In our case, Lehman Commercial Paper, Inc. (“LCP”), one of the lenders under our $125 million senior secured credit facility (the “Credit Facility”), and who also serves as the Administrative Agent thereunder, of the senior secured credit facility “Credit Facility” declared bankruptcy in September 2008. LCP’s share of the Credit Facility was 12% or $15.0 million of the total funds available to
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us under the Credit Facility. As a result of the bankruptcy, our ability to draw upon that portion of the Credit Facility has been reduced. To date, we have not secured substitute financing. If we are unable to secure additional or substitute funding from other parties, our Credit Facility would be effectively reduced from $125.0 million to $110.0 million. Based upon information available to us, we have no indication that other financial institutions syndicated under our Credit Facility would be unable to fulfill their commitments to us. However, if additional counterparties were to become unable to fulfill those obligations, that may adversely affect our results of operations, financial condition and liquidity.
Additionally, we have entered into interest rate swap agreements to hedge the variability of interest payments associated with our Credit Facility. We may be exposed to losses in the event of nonperformance by counterparties on these instruments. Continued turbulence is the global credit markets and the U.S. economy may adversely affect our results of operations and financial condition.
We have been required to recognize a pre-tax, non-cash impairment charge related to goodwill and other intangible assets, and we may be required to recognize additional impairment charges against goodwill or intangible assets in the future.
At January 3, 2009, the net carrying value of our goodwill and intangible assets totaled approximately $643.8 million and $308.9 million respectively. Our amortizing intangible assets are subject to impairment testing in accordance with Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, and our non-amortizing goodwill and tradenames are subject to impairment tests in accordance with SFAS No. 142, “Goodwill and Intangible Assets.” We review the carrying value of our intangible assets and goodwill for impairment whenever events or circumstances indicate that their carrying value may not be recoverable, at least annually for our goodwill and tradnames. Significant negative industry or economic trends, including disruptions to our business, unexpected significant changes or planned changes in the use of our intangible assets, and mergers and acquisitions could result in an impairment charge for any of our intangible assets, goodwill or other long-lived assets. We completed our annual impairment testing of goodwill and indefinite-lived intangible assets as of November 1, 2008. As a result of these analyses we recorded impairment charges of $375.2 million and $87.4 million related to our goodwill and tradenames, respectively during the fourth quarter ended January 3, 2009.
In the impairment analyses we used certain estimates and assumptions, including a combination of market-based and income-based approaches, each of which were weighted at 50% for the impairment test performed as of November 1, 2008. The market-based approach estimates fair value by applying multiples of potential earnings, such as EBITDA and revenue, of publicly traded comparable companies. We believe this approach is appropriate because it provides a fair value using multiples from companies with operations and economic characteristics similar to our reporting units. The income-based approach is based on projected future debt-free cash flow that is discounted to present value using factors that consider the timing and risk of the future cash flows. We believe this approach is appropriate because it provides a fair value estimate based upon the reporting units expected long-term operations and cash flow performance. The income-based approach is based on future projections of operating results and cash flows. These projections are discounted to present value using a weighted average cost of capital for market participants, who are generally thought to be industry participants. The future projections are based on both past performance and the projections and assumptions used in our current operating plan. Such assumptions are subject to change as a result of changing economic and competitive conditions and could result in additional impairment charges. Further, if the economic market conditions continue to worsen and our estimated future discounted cash flows decrease further we may incur additional impairment charges. Additional impairment charges related to our goodwill, tradenames or other intangible assets could have a significant impact on our financial position and results of operations.
Our substantial indebtedness could have a material adverse effect on our financial condition and operations.
After giving effect to the Transactions and related use of proceeds, we have a substantial amount of debt, which requires significant interest and principal payments. Subject to the limits contained in the indentures governing our senior notes and our senior subordinated notes and our senior secured credit facility, we may be able to incur additional debt from time to time, including drawing on our senior secured revolving credit facility, to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. If we do so, the risks related to our business associated with our high level of debt could intensify. Specifically, our high level of debt could have important consequences to the holders of the notes, including the following:
| | • | | making it more difficult for us to satisfy our obligations with respect to the notes and our other debt; |
| | • | | requiring us to dedicate a substantial portion of our cash flow from operations to debt service payments on our and our subsidiaries’ debt, which would reduce the funds available for working capital, capital expenditures, acquisitions and other general corporate purposes; |
| | • | | limiting our flexibility in planning for, or reacting to, changes in the industry in which we operate; |
| | • | | placing us at a competitive disadvantage compared to any of our less leveraged competitors; |
| | • | | increasing our vulnerability to both general and industry–specific adverse economic conditions; and |
| | • | | limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements and increasing our cost of borrowing. |
We and/or our subsidiaries may be able to incur substantial additional debt in the future in addition to our notes and our senior secured credit facility. The addition of further debt to our current debt levels could intensify the leverage–related risks that we now face.
Our debt agreements contain restrictions on our ability to operate our business and to pursue our business strategies, and our failure to comply with these covenants could result in an acceleration of our repayment terms.
The credit agreement governing our senior secured credit facility and the indentures governing our notes contain, and agreements governing future debt issuances may contain, covenants that restrict our ability to finance future operations or capital needs, to respond to changing business and economic conditions or to engage in other transactions or business activities that may be important to our growth strategy or otherwise important to us. The credit agreement and the indentures restrict, among other things, our ability and the ability of our subsidiaries to:
| | • | | pay dividends or make other distributions on our capital stock or repurchase our capital stock or subordinated indebtedness; |
| | • | | make investments or other specified restricted payments; |
| | • | | sell assets and subsidiary stock; |
| | • | | enter into transactions with affiliates; and |
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| | • | | enter into mergers, consolidations and sales of substantially all assets. |
In addition, the credit agreement related to our senior secured credit facility requires us to satisfy a senior secured leverage ratio and to repay outstanding borrowings under such facility with proceeds we receive from certain sales of property or assets and specified future debt offerings. We cannot assure you that we will be able to maintain compliance with such covenants in the future and, if we fail to do so, that we will be able to obtain waivers from the lenders and/or amend the covenants.
Any breach of the covenants in the credit agreement or the indentures could result in a default of the obligations under such debt and cause a default under other debt. If there were an event of default under the credit agreement related to our senior secured credit facility that was not cured or waived, the lenders under our senior secured credit facility could cause all amounts outstanding with respect to the borrowings under our senior secured credit facility to be due and payable immediately. Our assets and cash flow may not be sufficient to fully repay borrowings under our senior secured credit facility and our obligations under the notes if accelerated upon an event of default. If, as or when required, we are unable to repay, refinance or restructure our indebtedness under, or amend the covenants contained in, our senior secured credit facility, the lenders under our senior secured credit facility could institute foreclosure proceedings against the assets securing borrowings under our senior secured credit facility.
We may not be able to generate sufficient cash flows to meet our debt service obligations.
Our ability to make payments on and to refinance our indebtedness and to fund planned capital expenditures depends on our ability to generate cash from our future operations. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Our business may not generate sufficient cash flow from operations, or future borrowings under our senior secured credit facility, or from other sources, may not be available to us in an amount sufficient, to enable us to repay our indebtedness or to fund our other liquidity needs, including capital expenditure requirements. If we cannot service our indebtedness, we may have to take actions such as selling assets, seeking additional equity or reducing or delaying capital expenditures, strategic acquisitions, investments or alliances. Our senior secured credit facility and the indentures governing the notes restrict our ability to sell assets and use the proceeds from such sales. Additionally, we may not be able to refinance any of our indebtedness on commercially reasonable terms, or at all. If we cannot service our indebtedness, it could impede the implementation of our business strategy or prevent us from entering into transactions that would otherwise benefit our business.
The interests of our controlling stockholders may conflict with the interests of the noteholders.
Private equity funds managed by Madison Dearborn indirectly own substantially all of our common stock. The interests of these funds as equity holders may conflict with the interests of the noteholders. The controlling stockholders may have an incentive to increase the value of their investment or cause us to distribute funds to the detriment of our financial condition and affect our ability to make payments on the outstanding notes. In addition, these funds have the power to elect a majority of our Board of Directors and appoint new officers and management and, therefore, effectively control many other major decisions regarding our operations. Three of our directors are employed by Madison Dearborn. Additionally, our controlling stockholders are in the business of making investments in companies and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. Our controlling stockholders may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us.
If we fail to grow our business as planned, our future operating results may suffer. It will be difficult to maintain our historical growth rates.
We intend to continue to pursue a long-term business strategy of increasing sales and earnings by expanding our retail and wholesale operations both in the United States and internationally. However, our ability to grow these businesses in the short-term, including during 2009, may be negatively impacted by the current economic conditions. Our ability to implement our growth strategy successfully will also be dependent in part on several factors beyond our control, including consumer preferences, and the competitive environment in the markets in which we compete, and we may not be able to achieve our planned growth or sustain our financial performance. Our ability to anticipate changes in the candle, home fragrance and giftware industries, and identify industry trends, will be critical factors in our ability to grow as planned and remain competitive.
We expect that it will become more difficult to maintain our historical growth rate, which could negatively impact our operating margins and results of operations. New stores typically generate lower operating margin contributions than mature stores because fixed costs, as a percentage of sales, are higher and because pre-opening costs are fully expensed in the year of opening. In addition, our retail sales generate lower margins than our wholesale sales. Our wholesale business has grown by increasing sales to existing customers and by adding new customers. If we are not able to continue this, our sales growth and profitability could be adversely affected. In addition, as we expand our wholesale business into new channels of trade that we believe to be appropriate, sales in some of these new channels may, for competitive reasons within the channels, generate lower margins than do our existing wholesale sales. Similarly, as we continue to broaden our product offerings in order to meet consumer demand, we may do so in part by adding products that have lower product margins than those of our core candle products.
We may be unable to continue to open new stores successfully.
Our retail strategy depends in large part on our ability to successfully open new stores in both existing and new geographic markets. For our growth strategy to be successful, we must identify and lease favorable store sites on favorable economic terms, hire and train managers and associates and adapt management and operational systems to meet the needs of our expanded operations. These tasks may be difficult to accomplish successfully and any changes in the availability of suitable real estate locations on acceptable terms could adversely impact our retail growth. If we are unable to open new stores as quickly as planned, then our future sales and profits could be materially adversely affected. Even if we succeed in opening new stores, these new stores may not achieve the same sales or profit levels as our existing stores. Also, our retail growth strategy includes opening new stores in markets where we already have a presence so we can take advantage of economies of scale in marketing, distribution and supervision costs, or the opening of new malls or centers in the market. However, these new stores may result in the loss of sales in existing stores in nearby areas, thereby negatively impacting our comparable store sales. A decrease in our retail comparable store sales will have an adverse impact on our cash flows and earnings. This is due to the fact that a significant portion of our expenses are comprised of fixed costs, such as lease payments, and our ability to decrease expenses in response to negative comparable store sales is limited in the short term. If comparable store sales decline it will negatively impact earnings. Our retail strategy also depends upon our ability to successfully renew the expiring leases of our profitable existing stores. If we are unable to do so at planned levels and upon favorable economic terms, then our future sales and profits could be negatively affected.
We face significant competition in the giftware industry. This competition could cause our revenues or margins to fall short of expectations 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 and retailers in the giftware industry. The giftware industry is highly competitive with a large number of both large and small participants and relatively low barriers to entry.
Our products compete with other scented and unscented candle, home fragrance and personal care 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 primarily with specialty candle retailers and a variety of other retailers including department stores, gift stores and national specialty retailers that carry candles along with personal care items, giftware and houseware. In addition, while we
9
focus primarily on the premium scented candle segment, scented and unscented candles are also sold outside of that segment by a variety of retailers, including mass merchandisers. In our wholesale business, we compete with numerous manufacturers and importers of candles, home fragrance products and other home decor and gift items for the limited space available in our wholesale customer locations for the display and sale of such products to consumers. 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. Many of our competitors source their products from low cost manufacturers outside of the United States. This competitive environment could adversely affect our future revenues and profits, financial condition and liquidity and our ability to continue to grow our business.
A material decline in consumers’ discretionary income could cause our sales and income to decline.
Our results depend on consumer spending, which is influenced by general economic conditions and the availability of discretionary income. Accordingly, we may experience declines in sales during periods of significant economic volatility and disruption such as the one we are currently experiencing, or during other economic downturns or periods of uncertainty like that which followed the September 11, 2001 terrorist attacks on the United States or which result from the threat of war or the possibility of further terrorist attacks. Any material decline in the amount of discretionary spending could have a material adverse effect on our sales and income.
Because we are not a diversified company and are primarily dependent upon one industry, we have less flexibility in reacting to unfavorable consumer trends, adverse economic conditions or business cycles.
We rely primarily on the sale of premium scented candles and related products in the giftware industry. In the event that sales of these products decline or do not meet our expectations, we cannot rely on the sales of other products to offset such a shortfall. As a significant portion of our expenses is comprised of fixed costs, such as lease payments, our ability to decrease expenses in response to adverse business conditions is limited in the short term. As a result, unfavorable consumer trends, adverse economic conditions or changes in the business cycle could have a material and adverse impact on our earnings.
If we lose our senior executive officers, or are unable to attract and retain the talent required for our business, our business could be disrupted and our financial performance could suffer.
Our success is in part dependent upon the retention of our senior executive officers. If our senior executive officers become unable or unwilling to participate in our business, our future business and financial performance could be materially affected. In addition, as our business grows in size and complexity we must be able to continue to attract, develop and retain qualified personnel sufficient to allow us to adequately manage and grow our business. If we are unable to do so, our operating results could be negatively impacted. We cannot guarantee that we will be able to attract and retain personnel as and when necessary in the future.
Many aspects of our manufacturing and distribution facilities are customized for our business; as a result, the loss of one of these facilities would disrupt our operations.
Approximately 68% of our 2008 sales were generated by products we manufactured at our manufacturing facility in Whately, Massachusetts and we rely primarily on our distribution facilities in South Deerfield, Massachusetts to distribute our 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. Similarly, our distribution facilities rely upon customized machinery, systems and operations, the loss of which would materially affect our operations. Although our manufacturing and distribution facilities are adequately insured, if our facilities were destroyed we believe it would take up to twelve months to resume operations at a level equivalent to current operations.
Seasonal, quarterly and other fluctuations in our business, and general industry and market conditions, could affect the market for our results of operations.
Our sales and operating results vary from quarter to quarter. We have historically realized higher sales and operating income in our fourth quarter, particularly in our retail business, which accounts for 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. In addition, in anticipation of increased holiday sales activity, we incur certain significant incremental expenses, including the hiring of a substantial number of temporary employees to supplement our existing workforce. 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 sales and income depending on various factors, including, among other things, the number of new retail stores we open in a particular quarter, changes in the ordering patterns of our wholesale customers during a particular quarter, pricing and promotional activities of our competitors, and the mix of products sold. Most of our operating expenses, such as rent expense, advertising and promotional expense and employee wages and salaries, do not vary directly with sales and are difficult to adjust in the short term. As a result, if sales for a particular quarter are below our expectations, we might not be able to proportionately reduce operating expenses for that quarter, and therefore a sales shortfall could have a disproportionate effect on our operating results for that quarter. Further, our comparable store sales from our retail business in a particular quarter could be adversely affected by competition, the opening nearby of new retail stores or wholesale locations, economic or other general conditions or our inability to execute a particular business strategy. As a result of these factors, we may report in the future sales, operating results or comparable store sales that do not match the expectations of analysts and investors. This could cause the price of the notes to decline.
Sustained interruptions in the supply of products from overseas may affect our operating results.
We source various accessories and other products from Asia. A sustained interruption of the operations of our suppliers, as a result of economic difficulties, the impact of health epidemics, natural disasters such as the 2004 tsunami or other factors, could have an adverse effect on our ability to receive timely shipments of certain of our products, which might in turn negatively impact our sales and operating results.
Further increases in wax prices above the rate of inflation may negatively impact our cost of goods sold and margins. Any shortages in refined oil supplies could impact our wax supply.
In the past several years, including 2007 and for most of 2008, significant increases in the price of crude oil have adversely impacted our transportation and freight costs and have contributed to significant increases in the cost of various raw materials, including wax which is a petroleum-based product. This in turn negatively impacts our cost of goods sold and margins. In addition, we believe that rising oil prices and corresponding increases in raw materials and transportation costs negatively impact not only our business but consumer sentiment and the economy at large. Continued weakness in consumer confidence and the macro-economic environment could negatively impact our sales and earnings. While oil prices have recently decreased significantly, we have not experienced as significant a reduction in our transportation and freight costs or in the price of various raw materials, including wax.
Historically, the market price of wax has generally moved with inflation. However, in the past several years the price of wax has increased at a rate significantly above the rate of inflation. Despite the recent downward movement of oil prices, wax prices have remained at historically high levels. Future significant increases in wax prices could have an adverse affect on our cost of goods sold and could lower our margins.
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In addition to the impact of increased wax prices, any shortages in refined oil supplies may impact our wax supply. For example, in 2005, due to hurricanes in the Gulf Coast region and the closing and disruption of oil refineries located there significantly limited our ability to source wax and negatively impacted our operations. While we experienced no supply issues in 2008, any future prolonged interruption or reduction in wax supplies could negatively impact our operations, sales and earnings.
The loss or significant deterioration in the financial condition of a significant wholesale customer could negatively impact our sales and operating results.
A significant deterioration in the financial condition of one of our major customers, or the loss of such a customer, could have a material adverse effect on our sales, profitability and cash flow to the extent that we are unable to offset any revenue losses with additional revenue from existing customers or by opening new accounts. We continually monitor and evaluate the credit status of our customers and attempt to adjust trade and credit terms as appropriate. However, a bankruptcy filing by a key customer could have a material adverse effect on our business, results of operations and financial condition. In this regard, we note that on May 2, 2008 Linens ‘N Things (“Linens”) filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. At the time of that filing we had an outstanding receivable balance due from Linens and are an unsecured creditor with respect to that receivable. As noted in Note 20 to the consolidated financial statements we recorded a bad debt provision in the amount of $4.5 million during the quarter ended June 28, 2008 with respect to the pre-petition receivable due from Linens. Linens is now in the process of liquidating its assets. The loss of revenue from Linens as a result of these proceedings, if not offset in whole or in part by additional revenue from existing customers or from new accounts, could materially adversely impact our operating results and financial condition.
There are also various potential claims which may arise in connection with bankruptcy proceedings that, if filed and adversely decided, could potentially negatively impact our operating results and financial condition. For example, in connection with the Linens bankruptcy we received a letter dated December 19, 2008 from counsel to Linens Holding Co. and its affiliates, which letter alleges that, pursuant to Sections 547 and 550 of the United States Bankruptcy Code, we are required to return to Linens approximately $6.6 million in allegedly “preferential” transfers allegedly made to Yankee Candle during the 90-day period preceding the filing of the Linens bankruptcy cases. The letter also alleges that Yankee Candle is required to pay to Linens approximately $1.3 million on account of credits allegedly earned but not redeemed by Linens prior to the filing of the Linens bankruptcy cases. The letter offered to settle these claims and threatened legal action if settlement terms cannot be reached. We are currently evaluating these alleged claims with outside counsel. While we believe we have a number of strong potential defenses to all or a significant portion of these claims and plan to vigorously contest any action brought by Linens, we cannot at this time predict what the outcome of this matter would be if legal action were to be pursued by Linens. If any matter were to be brought by Linens and were decided in a manner adverse to us, it could materially adversely impact our results of operations.
Given the current economic environment, there is an increased risk that additional wholesale customers could be forced to declare bankruptcy or significantly reduce their operations or purchases from us. The loss of one or more significant wholesale customers, or a significant reduction in their operations, could materially adversely impact our results of operations and financial condition.
Other factors may also cause our actual results to differ materially from our estimates and projections.
In addition to the foregoing, there are other factors which may cause our actual results to differ materially from our estimates and projections. Such factors include the following:
| | • | | changes in the general economic conditions in the United States including, but not limited to, consumer debt levels, financial market performance, interest rates, consumer sentiment, inflation, commodity prices, unemployment and other factors that impact consumer confidence and spending; |
| | • | | changes in levels of competition from our current competitors and potential new competition from both retail stores and alternative methods or channels of distribution; |
| | • | | loss of a significant vendor or prolonged disruption of product supply; |
| | • | | the successful introduction of new products and technologies in our product categories, including the frequency of such introductions, the level of consumer acceptance of new products and technologies, and their impact on demand for existing products and technologies; |
| | • | | the impact of changes in pricing and profit margins associated with our sourced products or raw materials; |
| | • | | changes in income tax laws or regulations, or in interpretations of existing income tax laws or regulations; |
| | • | | adverse outcomes from significant litigation matters; |
| | • | | the imposition of additional restrictions or regulations regarding the sale of products we offer; |
| | • | | changes in our ability to attract, retain and develop highly-qualified employees or changes in the cost or availability of a sufficient labor force to manage and support our operations; |
| | • | | changes in our ability to meet objectives with regard to business acquisitions or new business ventures; |
| | • | | the occurrence of severe weather events prohibiting or discouraging consumers from traveling to retail or wholesale locations; |
| | • | | the disruption of global, national or regional transportation systems; |
| | • | | the occurrence of certain material events including natural disasters, acts of terrorism, the outbreak of war or other significant national or international events; |
| | • | | our ability to react in a timely manner and maintain our critical business processes and information systems capabilities in a disaster recovery situation; and |
| | • | | changes in our ability to manage our existing computer systems and technology infrastructures, and our ability to implement successfully new computer systems and technology infrastructures. |
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
Not applicable.
11
We own or lease several facilities located in Massachusetts, Virginia, California and Bristol, England, as described in the table below:
| | | | |
TYPE OF FACILITY | | LOCATION | | SIZE |
Manufacturing | | Whately, MA | | 294,000 sq.ft. |
Distribution center (1) (2) | | South Deerfield, MA | | 256,000 sq ft. |
Warehouse (1) | | South Hadley, MA | | 150,000 sq.ft. |
Warehouse (1) (3) | | South Deerfield, MA | | 138,000 sq.ft |
Flagship retail store and restaurant (4) | | South Deerfield, MA | | 90,000 sq.ft. |
Corporate offices (1) (5) | | South Deerfield, MA | | 75,000 sq.ft. |
Distribution center (1) | | Bristol, England | | 62,000 sq.ft. |
Distribution center | | South Deerfield, MA | | 60,000 sq.ft. |
Office and warehouse space | | South Deerfield, MA | | 44,000 sq.ft. |
Flagship retail store (6) | | Williamsburg, VA | | 42,000 sq.ft. |
Manufacturing (1) | | South Deerfield, MA | | 19,000 sq.ft |
Manufacturing and distribution center (7) | | Irvine, CA | | 15,000 sq.ft. |
Employee health and fitness center | | South Deerfield, MA | | 12,000 sq.ft. |
Corporate Offices (1) (8) | | Petaluma, CA | | 12,000 sq.ft. |
Notes:
| (2) | We have the right under the lease to expand this facility from time to time. We believe that the facility has the capacity to be expanded by up to an additional 105,000 sq. ft. |
| (3) | This lease term began on January 1, 2008 and expires on December 31, 2009. |
| (4) | This building includes an additional 11,000 sq. ft. of office space. |
| (5) | We have the right under the lease to expand this facility from time to time. We believe that the facility has the capacity to be expanded by up to an additional 30,000 square feet. |
| (6) | This building includes an additional 23,000 sq. ft. of mezzanine space. |
| (7) | As a result of the acquisition of Aroma Naturals, Inc., we entered into a lease of this facility in 2005. |
| (8) | As a result of the acquisition of Illuminations, we entered into a lease of this facility. |
We believe these facilities are suitable and adequate to meet our current needs. In addition to the foregoing facilities, and the retail stores referenced below, we own various other properties in the Deerfield/Whately area, none of which are material to our operations.
Other than the South Deerfield and Williamsburg flagship stores and three smaller retail locations, we lease our retail stores. Initial store leases for mall locations typically range from eight to ten years. For non-mall locations, most leases are five years, with a five-year renewal option.
12
Our Yankee Candle retail stores were located in the following 43 states as of January 3, 2009:
STORE COUNT
| | | | | | |
STATE | | MALL | | NON-MALL | | TOTAL |
ALABAMA | | 2 | | 1 | | 3 |
ARIZONA | | 4 | | 1 | | 5 |
ARKANSAS | | — | | 1 | | 1 |
CALIFORNIA | | 14 | | — | | 14 |
COLORADO | | 3 | | 7 | | 10 |
CONNECTICUT | | 8 | | 4 | | 12 |
DELAWARE | | 2 | | — | | 2 |
FLORIDA | | 24 | | 10 | | 34 |
GEORGIA | | 11 | | 4 | | 15 |
ILLINOIS | | 13 | | 14 | | 27 |
INDIANA | | 9 | | 5 | | 14 |
IOWA | | 5 | | — | | 5 |
KANSAS | | 3 | | 2 | | 5 |
KENTUCKY | | 4 | | 2 | | 6 |
LOUISIANA | | 2 | | 1 | | 3 |
MAINE | | 2 | | 2 | | 4 |
MARYLAND | | 11 | | 6 | | 17 |
MASSACHUSETTS | | 16 | �� | 15 | | 31 |
MICHIGAN | | 15 | | 5 | | 20 |
MINNESOTA | | 6 | | 3 | | 9 |
MISSISSIPPI | | 1 | | 1 | | 2 |
MISSOURI | | 7 | | 4 | | 11 |
NEBRASKA | | 1 | | 3 | | 4 |
NEVADA | | 1 | | 1 | | 2 |
NEW HAMPSHIRE | | 5 | | 2 | | 7 |
NEW JERSEY | | 9 | | 8 | | 17 |
NEW YORK | | 24 | | 7 | | 31 |
NORTH CAROLINA | | 12 | | 3 | | 15 |
NORTH DAKOTA | | 1 | | — | | 1 |
OHIO | | 15 | | 7 | | 22 |
OKLAHOMA | | 3 | | 1 | | 4 |
OREGON | | 2 | | — | | 2 |
PENNSYLVANIA | | 19 | | 8 | | 27 |
RHODE ISLAND | | 1 | | 3 | | 4 |
SOUTH CAROLINA | | 4 | | 6 | | 10 |
SOUTH DAKOTA | | 1 | | — | | 1 |
TENNESSEE | | 7 | | 5 | | 12 |
TEXAS | | 11 | | 8 | | 19 |
VERMONT | | — | | 3 | | 3 |
VIRGINIA | | 14 | | 6 | | 20 |
WASHINGTON | | 1 | | — | | 1 |
WEST VIRGINIA | | 2 | | — | | 2 |
WISCONSIN | | 8 | | 1 | | 9 |
| | | | | | |
TOTAL | | 303 | | 160 | | 463 |
| | | | | | |
In addition to the Yankee Candle retail stores above, there were 28 Illuminations stores open as of January 3, 2009. During the fourth quarter of 2008, we initiated a restructuring plan involving the closing of the Company’s 28 Illuminations retail stores. We expect to close all of our Illuminations stores by April 30, 2009.
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A class action lawsuit was filed against us in February 2005 for alleged violations of certain California state wage and hour and employment laws with respect to certain employees in our California retail stores. In December 2007 a preliminary settlement agreement was reached pursuant to mediation. The settlement is now pending court approval. Pursuant to the agreement we would pay a total of $950,000 (inclusive of attorneys’ fees and administrative expenses) into a settlement fund. This amount was recorded in our consolidated statement of operations during the fourth quarter of fiscal 2007. We expect to make this payment to the settlement fund in the first half of 2009.
In connection with the Linens ‘N Things (“Linens”) bankruptcy proceedings we received a letter dated December 19, 2008 from counsel to Linens Holding Co. and its affiliates, which letter alleges that, pursuant to Sections 547 and 550 of the United States Bankruptcy Code, we are required to return to Linens approximately $6,600,000 in allegedly “preferential” transfers allegedly made to Yankee Candle during the 90-day period preceding the filing of the Linens bankruptcy cases. The letter also alleges that Yankee Candle is required to pay to Linens approximately $1,300,000 on account of credits allegedly earned but not redeemed by Linens prior to the filing of the Linens bankruptcy cases. The letter offered to settle these claims and threatened legal action if settlement terms cannot be reached. We are currently evaluating these alleged claims with outside counsel. While we believe we have a number of strong potential defenses to all or a significant portion of these claims and plan to vigorously contest any action brought by Linens, we cannot at this time predict what the outcome of this matter would be if legal action were to be pursued by Linens. As of January 3, 2009 we did not record any amount related to these claims in our consolidated statement of operations. If any matter were to be brought by Linens and were decided in a manner adverse to us, it could materially adversely impact our results of operations.
We are also party to various other litigation matters, in most cases involving ordinary and routine claims incidental to our business. We cannot estimate with certainty our ultimate legal and financial liability with respect to such pending litigation matters. However, we believe, based on our examination of such matters, that our ultimate liability will not have a material adverse effect on our financial position, results of operations or cash flows.
| ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
Not applicable.
PART II
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
There is no market for our equity securities, all of which are held by YCC Holdings, LLC, our parent company. As of April 2, 2009, there were 29 holders of our parent company’s Class A common units, 58 holders of our parent company’s Class B common units and 9 holders of our parent company’s Class C common units. See “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.” Our credit agreement and our senior notes and senior subordinated notes restrict the making of dividends by our parent company, other than tax distributions in accordance with its operating agreement. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.” Our parent company’s Incentive Equity Plan provides for the issuance of 474,897 Class B common units, 37,748 of which remained available for future issuance as of January 3, 2009. The Company authorized a new class of units, Class C common units, in October 2007, which are available for issuance under the Incentive Equity Plan. Any issuances of Class C common units reduces the amount of Class B common units available for future grant.
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| ITEM 6. | SELECTED FINANCIAL DATA |
The selected historical consolidated financial and other data that follows should be read in conjunction with the “Consolidated Financial Statements”, the accompanying notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Annual Report on Form 10-K. The historical financial data as of January 3, 2009 and December 29, 2007 and for the fifty-three weeks ended January 3, 2009, and for the periods December 31, 2006 to February 5, 2007 and February 6, 2007 to December 29, 2007 and for the fifty-two weeks ended December 30, 2006 has been derived from the audited consolidated financial statements and the accompanying notes included in this document at Item 8.
The historical financial data as of December 30, 2006, December 31, 2005, and January 1, 2005 and for the fifty-two weeks ended December 31, 2005 and January 1, 2005 has been derived from audited financial statements for the corresponding periods, which are not contained in this document.
The selected historical financial data may not be indicative of our future performance.
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| | | Successor | | | | | Predecessor | |
| | | Fifty-three
Weeks Ended
January 3,
2009 | | | Period
February 6,
2007 to
December 29,
2007 | | | | | Period
December 31,
2006 to
February 5,
2007 | | | Fifty-two Weeks Ended | |
| | | | | | | December 30,
2006 | | | December 31,
2005 | | | January 1,
2005 | |
| | | | | | | | | | | (In thousands) | |
Statement of Income Data: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sales | | $ | 713,742 | | | $ | 683,573 | | | | | $ | 53,382 | | | $ | 687,557 | | | $ | 601,181 | | | $ | 554,202 | |
Cost of sales | | | 307,175 | | | | 329,571 | | | | | | 24,553 | | | | 297,338 | | | | 257,455 | | | | 230,519 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit | | | 406,567 | | | | 354,002 | | | | | | 28,829 | | | | 390,219 | | | | 343,726 | | | | 323,683 | |
Selling expenses | | | 213,241 | | | | 192,398 | | | | | | 16,201 | | | | 168,194 | | | | 146,055 | | | | 131,333 | |
General and administrative expenses | | | 53,485 | | | | 62,717 | | | | | | 13,828 | | | | 73,135 | | | | 57,366 | | | | 53,023 | |
Restructuring charges | | | 13,857 | (2) | | | — | | | | | | — | | | | (397 | ) | | | 5,546 | | | | — | |
Goodwill and intangible asset impairments | | | 462,616 | (1) | | | — | | | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Loss) income from operations | | | (336,632 | ) | | | 98,887 | | | | | | (1,200 | ) | | | 149,287 | | | | 134,759 | | | | 139,327 | |
Net other expense | | | 94,449 | | | | 91,248 | | | | | | 970 | | | | 15,223 | | | | 6,725 | | | | 2,651 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Loss) income before (benefit from) provision for income taxes | | | (431,081 | ) | | | 7,639 | | | | | | (2,170 | ) | | | 134,064 | | | | 128,034 | | | | 136,676 | |
(Benefit from) provision for income taxes | | | (21,757 | ) | | | 3,112 | | | | | | (340 | ) | | | 49,549 | | | | 49,933 | | | | 53,987 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Net (loss) income | | $ | (409,324 | ) | | $ | 4,527 | | | | | $ | (1,830 | ) | | $ | 84,515 | | | $ | 78,101 | | | $ | 82,689 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
Balance Sheet Data (as of end of fiscal year): | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 130,577 | | | $ | 5,627 | | | | | | n/a | | | $ | 22,773 | | | $ | 12,655 | | | $ | 36,424 | |
Working capital | | | 116,260 | | | | 37,663 | | | | | | n/a | | | | 34,295 | | | | 35,982 | | | | 44,107 | |
Total assets | | | 1,372,569 | | | | 1,775,797 | | | | | | n/a | | | | 372,922 | | | | 355,134 | | | | 346,359 | |
Total debt | | | 1,183,125 | | | | 1,130,125 | | | | | | n/a | | | | 140,000 | | | | 178,000 | | | | 75,000 | |
Total stockholders’ (deficit) equity | | | (2,821 | ) | | | 416,605 | | | | | | n/a | | | | 115,565 | | | | 68,144 | | | | 179,663 | |
Other Data: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Number of retail stores (at end of fiscal year) | | | 491 | | | | 459 | | | | | | n/a | | | | 420 | | | | 390 | | | | 345 | |
Comparable store sales | | | (7.8 | )% | | | (2.2 | )%(3) | | | | | n/a | | | | 9.0 | % | | | (3.8 | )% | | | (1.8 | )% |
Comparable sales including Consumer Direct | | | (6.1 | )% | | | (2.3 | )%(3) | | | | | n/a | | | | 10.4 | % | | | (2.3 | )% | | | (2.0 | )% |
Gross profit margin | | | 57.0 | % | | | 51.8 | % | | | | | 54.0 | % | | | 56.8 | % | | | 57.2 | % | | | 58.4 | % |
Depreciation and amortization | | $ | 46,995 | | | $ | 41,988 | | | | | $ | 2,673 | | | $ | 26,780 | | | $ | 24,788 | | | $ | 21,850 | |
Capital expenditures | | | 19,983 | | | | 28,178 | | | | | | 733 | | | | 24,888 | | | | 39,180 | | | | 28,908 | |
EBITDA | | | (293,672 | ) (1) | | | 137,954 | | | | | | 1,437 | | | | 175,600 | | | | 159,615 | | | | 161,584 | |
Cash Flow Data: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net cash flows from operating activities | | $ | 88,641 | | | $ | 73,224 | | | | | $ | (10,067 | ) | | $ | 144,045 | | | $ | 106,543 | | | $ | 122,061 | |
Net cash flows from investing activities | | | (18,747 | ) | | | (1,457,960 | ) | | | | | (2,250 | ) | | | (50,399 | ) | | | (39,656 | ) | | | (39,753 | ) |
Net cash flows from financing activities | | | 55,390 | | | | 1,375,540 | | | | | | 4,317 | | | | (83,870 | ) | | | (90,491 | ) | | | (85,875 | ) |
| (1) | We completed our annual impairment testing of goodwill and indefinite-lived intangible assets as of November 1, 2008. As a result of the annual impairment testing, we recorded an impairment charges of $462.6 million related to our goodwill and indefinite lived intangible assets during the fourth quarter of 2008. |
| (2) | We recorded restructuring charges of $13.9 million for the 53 weeks ended January 3, 2009. Our restructuring plans involve the closing of the our Illuminations retail stores, moving the Illuminations corporate headquarters from Petaluma, California to our South Deerfield, Massachusetts headquarters, the discontinuance of the related Illuminations consumer direct business and the write-off of the Illuminations tradename. In addition to the Illuminations related items, the restructuring plans include the closing of one underperforming Yankee Candle retail store, and limited reductions in our corporate and administrative workforce. |
| (3) | For the 52 weeks ended December 29, 2007. |
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Other Data – EBITDA
Management presents EBITDA, which is a non-GAAP liquidity measure, because we believe that it is a useful tool for us and our investors to measure our ability to meet debt service, capital expenditure and working capital requirements. EBITDA, as presented, may not be comparable to similarly titled measures reported by other companies since not all companies necessarily calculate EBITDA in an identical manner and therefore is not necessarily an accurate means of comparison between companies. EBITDA is not intended to represent cash flows for the period or funds available for management’s discretionary use nor has it been represented as an alternative to operating income as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. In order to compensate for differences in the calculation of EBITDA across companies, EBITDA should be evaluated in conjunction with GAAP measures such as operating income, net income, cash flow from operations and other measures of equal importance. In addition, the Company’s debt covenants in the credit agreement relating to our Credit Facility contain ratios based on an EBITDA measure as defined in Note 11, “Long-term Debt,” to the consolidated financial statements. EBITDA as presented below differs from the definition used in our Credit Facility, as further described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations- Liquidity and Capital Resources.
A reconciliation of EBITDA to cash flows provided by (used in) operations is as follows:
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| | | Successor | | | | | Predecessor | |
| | | Fifty-three
Weeks Ended
January 3,
2009 | | | Period
February 6,
2007 to
December 29,
2007 | | | | | Period
December 31,
2006 to
February 5,
2007 | | | Fifty-two
Weeks Ended
December 30,
2006 | | | Fifty-two
Weeks Ended
December 31,
2005 | | | Fifty-two
Weeks Ended
January 1,
2005 | |
EBITDA | | $ | (293,672 | ) | | $ | 137,954 | | | | | $ | 1,437 | | | $ | 175,600 | | | $ | 159,615 | | | $ | 161,584 | |
Benefit from (provision for) income taxes | | | 21,757 | | | | (3,112 | ) | | | | | 340 | | | | (49,549 | ) | | | (49,933 | ) | | | (53,987 | ) |
Interest expense, net | | | (94,918 | ) | | | (92,400 | ) | | | | | (985 | ) | | | (15,328 | ) | | | (7,227 | ) | | | (4,139 | ) |
Amortization of deferred financing costs | | | 4,504 | | | | 4,071 | | | | | | 51 | | | | 572 | | | | 434 | | | | 1,081 | |
Equity-based compensation expense | | | 892 | | | | 670 | | | | | | 8,638 | | | | 5,772 | | | | 3,418 | | | | 1,561 | |
Non-cash charge related to increased inventory carrying value | | | — | | | | 40,472 | | | | | | — | | | | — | | | | — | | | | — | |
Deferred taxes | | | (19,059 | ) | | | (14,132 | ) | | | | | (3,905 | ) | | | 7,549 | | | | 7,864 | | | | 14,901 | |
Non-cash restructuring charges | | | 12,050 | | | | — | | | | | | — | | | | — | | | | — | | | | — | |
Goodwill and intangible asset impairments | | | 462,616 | | | | — | | | | | | — | | | | — | | | | — | | | | — | |
Other non-cash items | | | (1,964 | ) | | | 299 | | | | | | (4,361 | ) | | | (1,269 | ) | | | 2,133 | | | | 354 | |
Net changes in assets and liabilities | | | (3,565 | ) | | | (598 | ) | | | | | (11,282 | ) | | | 20,698 | | | | (9,761 | ) | | | 706 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash flows from operating activities | | $ | 88,641 | | | $ | 73,224 | | | | | $ | (10,067 | ) | | $ | 144,045 | | | $ | 106,543 | | | $ | 122,061 | |
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| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about operating results and the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies, among others, involve its more significant estimates and judgments and are therefore particularly important to an understanding of our results of operations and financial position.
VALUATION OF LONG-LIVED ASSETS, INCLUDING INTANGIBLES
Long-lived assets on our consolidated balance sheets consist primarily of property and equipment, customer lists, tradenames and goodwill. An intangible asset with a finite useful life is amortized; an intangible asset with an indefinite useful life is not amortized, but is evaluated annually for impairment. Reaching a determination on useful life requires significant judgments and assumptions regarding the future effects of obsolescence, competition and other economic factors. We have determined that our tradenames have an indefinite useful life and, therefore, are not being amortized. We periodically review the carrying value of all of these assets. We undertake this review when facts and circumstances suggest that cash flows emanating from those assets may be diminished, and at least annually in the case of tradenames and goodwill.
For goodwill, the annual impairment evaluation compares the fair value of a reporting unit to its carrying value and consists of two steps. First, we determine the fair value of each of our reporting units and compare them to the corresponding carrying values. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of the goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with Statement of Financial Accounting Standards (“SFAS”) 141, “Business Combinations”. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill.
We perform our annual impairment testing at the reporting unit level. We reviewed the provisions of SFAS 142, “Goodwill and Other Intangible Assets,” with respect to the criteria necessary to evaluate the number of reporting units that exist. We also considered the way it manages its operations and the nature of those operations. Based on its review, we identified four reporting units: retail, wholesale, Aroma Naturals and Illuminations.
Fair values of the reporting units are derived through a combination of market-based and income-based approaches, each of which were weighted at 50% for the impairment test performed as of November 1, 2008. The market-based approach estimates fair value by applying multiples of potential earnings, such as EBITDA and
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revenue, of publicly traded comparable companies. We believe this approach is appropriate because it provides a fair value using multiples from companies with operations and economic characteristics similar to our reporting units. The income-based approach is based on projected future debt-free cash flow that is discounted to present value using factors that consider the timing and risk of the future cash flows. We believe this approach is appropriate because it provides a fair value estimate based upon the reporting units expected long-term operations and cash flow performance. The income-based approach is based on a reporting unit’s future projections of operating results and cash flows. These projections are discounted to present value using a weighted average cost of capital for market participants, who are generally thought to be industry participants. The future projections are based on both past performance and the projections and assumptions used in our current operating plan. Such assumptions are subject to change as a result of changing economic and competitive conditions.
We initiated a restructuring plan during the fourth quarter of 2008 which led us to the determination that our Illuminations reporting unit was fully impaired. Based on the restructuring plans we determined that the Illuminations tradename had no fair value and during the fourth quarter ended January 3, 2009, we recorded an impairment charge of $4.5 million related to the write-off of the Illuminations tradename. We expect to close all of our Illuminations stores by April 30, 2009. There was no goodwill associated with the Illuminations reporting unit.
We completed our annual impairment testing of goodwill and indefinite-lived intangible assets as of November 1, 2008. Based on the first step in our annual assessment we determined that the carrying value of each of our reporting units exceeded their fair value, indicating that our goodwill and intangible assets were impaired. This was primarily driven by a decline in our estimated future discounted cash flows for each reporting unit. The current adverse economic market conditions were the primary driver for the decline in our estimated future discounted cash flows.
In the second step of our impairment analysis we calculated the implied fair value of goodwill for each of our three remaining reporting units: retail, wholesale and Aroma Naturals. The implied fair value of goodwill was calculated similar to how goodwill is calculated in a business combination. We also performed an analysis utilizing discounted future cash flows related to certain of our intangible assets to determine the fair value of each of the respective assets. As a result of these analyses we recorded impairment charges of $375.2 million and $87.4 million related to our goodwill and tradenames, respectively, during the fourth quarter ended January 3, 2009. These impairment charges related to all three of our reporting units: retail, wholesale and Aroma Naturals. Aroma Naturals is reported within our wholesale segment.
The income-based approach is based on future projections of operating results and cash flows. These projections are discounted to present value using a weighted average cost of capital for market participants, who are generally thought to be industry participants. Our future projections of operating results are based on both past performance and the projections and assumptions used in our current operating plan. Changes to our discount rate assumptions or our operating projections as a result of changing economic and competitive conditions and could result in additional impairment charges. Further, if the economic market conditions continue to worsen and our estimated future discounted cash flows decrease further we may incur additional impairment charges. Additional impairment charges related to our goodwill, tradenames or other intangible assets could have a significant impact on our financial position and results of operations.
SALES / RECEIVABLES
We sell our products both directly to retail customers and through wholesale channels. Merchandise sales are recognized upon transfer of ownership, including passage of title to the customer and transfer of the risk of loss related to those goods. In our wholesale segment, products are shipped “free on board” shipping point; however revenue is recognized at the time the product is received by the customer due to our practice of absorbing risk of loss in the event of damaged or lost shipments. In our retail segment, transfer of title takes place at the point of sale (i.e., at our retail stores). There are no situations, either in our wholesale or retail segments, where legal risk of loss does not transfer immediately upon receipt by our customers. Although we do not provide a contractual right of return, in the course of arriving at practical business solutions to various claims, we have allowed sales returns and allowances. In these situations, customer claims for credit or return due to damage, defect, shortage or other reason must be pre-approved by us before credit is issued or such product is accepted for return. Such returns have not precluded sales recognition because we have a long history with such returns, which we use in establishing a reserve. This reserve, however, is subject to change. In our wholesale segment, we have included a reserve in our financial statements representing our estimated obligation related to promotional marketing activities. In addition to returns, we bear credit risk relative to our wholesale customers. We have provided a reserve for bad debts in our financial statements based on our estimates of the creditworthiness of our customers. However, this reserve is also subject to change. Changes in these reserves could affect our operating results.
OTHER INCOME STATEMENT ACCOUNTS
Included within cost of sales on our consolidated statements of operations are the cost of the merchandise we sell through our retail and wholesale segments, inbound and outbound freight costs, the operational costs of our distribution facilities (which include receiving costs, inspection and warehousing costs and salaries) and expenses incurred by the Company’s merchandising and buying operations.
Included within selling expenses are costs directly related to both wholesale and retail operations and primarily consist of payroll, occupancy, advertising and other operating costs, as well as pre–opening costs, which are expensed as incurred.
Included within general and administrative expenses are costs associated with corporate overhead departments, including senior management, accounting, information systems, management incentive programs and bonus and costs that are not readily allocable to either the retail or wholesale segments.
INVENTORY
We write down our inventory for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and the estimated market value, based upon assumptions about future demand and market conditions. If actual future demand or market conditions are less favorable than those projected by management, additional inventory write–downs may be required. Prior to the Merger we valued our inventory at the lower of cost or fair market value on a last–in first–out (“LIFO”) basis. At February 6, 2007, as a result of purchase accounting, inventories were revalued by approximately $43.5 million to estimated fair value. Since the Merger on February 6, 2007, we have valued our inventory at the lower of cost or market on a first–in first–out (“FIFO”) basis. Fluctuations in inventory levels along with the cost of raw materials could impact the carrying value of our inventory. Changes in the carrying value of inventory could affect our operating results.
DERIVATIVE INSTRUMENTS
In accordance with SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, we designated the interest rate swap derivative arrangements entered into on February 14, 2007 and February 13, 2008 as cash flow hedges and recognize the fair value of the instruments on the accompanying consolidated balance sheets. Gains and losses related to a hedge that result from changes in the fair value of the hedge are either recognized in income immediately to offset the gain or loss on the hedged item, or the effective portion is deferred and reported as a component of other comprehensive income in stockholders’ equity and subsequently recognized in income when the hedged item affects earnings. Since inception there has been no hedge ineffectiveness recorded in earnings. Changes in the hedges effectiveness could adversely impact our future operating results.
In November 2008, we entered into an agreement with a financial institution to hedge a portion of our diesel fuel requirements. This agreement is based on diesel fuel consumed by independent freight carriers delivering our products. These carriers charge us a basic rate per mile that is subject to a fuel surcharge for diesel fuel price
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increases that they incur. The hedge agreement is designed to reduce our exposure to the volatility of diesel fuel pricing and the resulting fuel surcharges payable by us by setting a fixed price per gallon for the year. This diesel hedge agreement does not qualify for hedge accounting under SFAS 133. Accordingly, we mark the diesel hedge to market every quarter with the changes in fair value recognized in earnings. As of January 3, 2009, we recognized a loss of $0.3 million in other income on the consolidated statement of operations. Changes in the fair value of the diesel hedge could adversely impact our future operating results.
INCOME TAXES
We file income tax returns in the U.S. federal jurisdiction, various states, the United Kingdom and Germany. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business there are many transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties based on estimates of whether, and to what extent, additional taxes will be due. We adjust these reserves in light of changing facts and circumstances. The provision for income taxes includes the impact of our reserve positions and changes to those reserves when appropriate. We also recognize deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities using expected tax rates in effect in the years in which the differences are expected to reverse.
We have significant deferred tax liabilities recorded on our financial statements, which are attributable to the effect of purchase accounting adjustments recorded as a result of the Merger. We also have a significant deferred tax asset recorded on our financial statements. This asset arose at the time of our recapitalization in 1998 and reflects the tax benefit of future tax deductions for us from the recapitalization. The recoverability of this future tax deduction is dependent upon our future profitability. We have made an assessment that this asset is likely to be recovered and is appropriately reflected on the balance sheet. Should we find that we are not able to utilize this deduction in the future we would have to record a reserve for all or a part of this asset, which would adversely affect our operating results and cash flows.
EQUITY-BASED COMPENSATION
Effective as of the beginning of the first quarter of fiscal 2006, we adopted SFAS No. 123(R) “Share–Based Payment” (“SFAS 123(R)”). SFAS 123(R) is a revision of SFAS 123, as amended, “Accounting for Stock–Based Compensation” (“SFAS 123”), and supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). SFAS 123(R) eliminates the alternative to use the intrinsic value method of accounting that was provided in SFAS 123 and requires that the cost resulting from all share–based payment transactions be recognized in the financial statements. SFAS 123(R) establishes fair value as the measurement objective in accounting for share–based payment arrangements and requires all companies to apply a fair–value–based measurement method in accounting for all share–based payment transactions with employees. We adopted SFAS 123(R) using a modified prospective application, as permitted under SFAS 123(R). Under this application, we are required to record compensation expense for all awards granted after the date of adoption, including our Class B and Class C common units and for the unvested portion of previously granted awards that remained outstanding at the date of adoption.
Equity based compensation charges of $0.9 million were recorded in the accompanying consolidated statements of operations for the fifty-three weeks ended January 3, 2009.
For periods February 6, 2007 to December 29, 2007 and December 31, 2006 to February 5, 2007 and the fifty-two weeks ended December 30, 2006 share-based compensation charges of $0.7 million, $8.6 million and $5.8 million, respectively, were recorded in the accompanying consolidated statements of operations. The increase in share-based compensation charges during the period December 31, 2006 to February 5, 2007 was attributable to share–based compensation charges of $8.2 million as a result of the accelerated vesting associated with stock options, restricted and performance shares that resulted from the Merger.
With respect to stock-based awards granted prior to the Merger, the fair value of the stock options granted was estimated on the date of grant using a Black–Scholes option valuation model. The risk–free rate was based on the U.S. Treasury yield curve in effect at the time of grant which most closely correlates with the expected life of the options. The expected life (estimated period of time outstanding) of the stock options granted was estimated using the historical exercise behavior of employees. Expected volatility was based on a combination of implied volatilities from traded options on the Predecessor’s stock, historical volatility of the Predecessor’s stock and other factors. Expected dividend yield was based on the Predecessor’s dividend policy at the time the options were granted.
With respect to the Class B and Class C common units, since we are no longer publicly traded as a result of the Merger, we base our estimate of expected volatility on the median historical volatility of a group of eight comparable public companies. The historical volatilities of the comparable companies were measured over a 5–year historical period. The expected term of the Class B and Class C common units granted represents the period of time that such units are expected to be outstanding and is assumed to be approximately 5 years based on management’s estimates of the time to a liquidity event. We do not expect to pay dividends, and accordingly, the dividend yield is zero. The risk free interest rate reflects a five-year period commensurate with the expected time to a liquidity event and was based on the U.S. Treasury yield curve.
PERFORMANCE MEASURES
We measure the performance of our retail and wholesale segments through a segment margin calculation, which specifically identifies not only gross profit on the sales of products through the two channels but also costs and expenses specifically related to each segment.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
We have experienced, and will experience in the future, fluctuations in our quarterly operating results. There are numerous factors that can contribute to these fluctuations; however, the principal factors are seasonality, new store openings and store closings and wholesale activity.
Seasonality. We have historically realized higher revenues and operating income in our fourth quarter, particularly in our retail business. This has been primarily due to increased sales in the giftware industry during the holiday season in the fourth quarter.
Retail Store Openings and Closings. The timing of our new store openings and closings may have an impact on our quarterly results. First, we incur certain one-time expenses related to opening each new store. These expenses, which consist primarily of occupancy, salaries, supplies and marketing costs, are expensed as incurred. Second, most store expenses vary proportionately with sales, but there is a fixed cost component. This typically results in lower store profitability when a new store opens because new stores generally have lower sales than mature stores. Due to both of these factors, during periods when new store openings as a percentage of the base are higher, operating profit may decline in dollars and/or as a percentage of sales. As the overall store base matures, the fixed cost component of selling expenses is spread over an increased level of sales, assuming sales increase as stores age, resulting in a decrease in selling and other expenses as a percentage of sales.
Wholesale Account Activity. The timing of new wholesale accounts may have an impact on our quarterly results due to the size of initial opening orders and promotional programs associated with the roll-out of orders. In addition, the loss of wholesale accounts may impact our quarterly results.
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OVERVIEW
In accordance with generally accepted accounting principles, we have separated our historical financial results for the Predecessor and Successor. The separate presentation is required under generally accepted accounting principles when there is a change in accounting basis, which occurred when purchase accounting was applied to the acquisition of the Predecessor. Purchase accounting requires that the historical carrying value of assets acquired and liabilities assumed be adjusted to fair value, which may yield results that are not comparable on a period–to–period basis due to the different, and sometimes higher, cost basis associated with the allocation of the purchase price. In addition, due to financial transactions completed in connection with the Merger, we experienced other changes in our results of operations for the period following the Merger. There have been no material changes to the operations or customer relationships of our business as a result of the acquisition of the Predecessor.
The following table presents our results of operations for the fifty-three weeks ended January 3, 2009, the periods February 6, 2007 to December 29, 2007 (Successor) and December 31, 2006 to February 5, 2007 (Predecessor) and fifty-two weeks ended December 30, 2006 (in millions):
| | | | | | | | | | | | | | | | | |
| | | Successor | | | Successor | | | | Predecessor | | | Predecessor | |
| | | Fifty-three Weeks
Ended
January 3, 2009 | | | Period
February 6, 2007
to December 29, 2007 | | | | Period
December 31, 2006
to February 5, 2007 | | | Fifty-two Weeks
Ended
December 30, 2006 | |
Statements of Operations Data: | | | | | | | | | | | | | | | | | |
Sales | | $ | 713.7 | | | $ | 683.6 | | | | $ | 53.4 | | | $ | 687.5 | |
Cost of sales | | | 307.2 | | | | 329.6 | | | | | 24.6 | | | | 297.3 | |
| | | | | | | | | | | | | | | | | |
Gross profit | | | 406.5 | | | | 354.0 | | | | | 28.8 | | | | 390.2 | |
Selling expenses | | | 213.2 | | | | 192.4 | | | | | 16.2 | | | | 168.2 | |
General and administrative expenses | | | 53.5 | | | | 62.7 | | | | | 13.8 | | | | 73.1 | |
Restructuring charges | | | 13.9 | | | | — | | | | | — | | | | (0.4 | ) |
Goodwill and intangible asset impairments | | | 462.6 | | | | — | | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | |
(Loss) income from operations | | | (336.7 | ) | | | 98.9 | | | | | (1.2 | ) | | | 149.3 | |
Net other expense | | | 94.4 | | | | 91.3 | | | | | 0.9 | | | | 15.2 | |
| | | | | | | | | | | | | | | | | |
(Loss) income before (benefit from) provision for income taxes | | | (431.1 | ) | | | 7.6 | | | | | (2.1 | ) | | | 134.1 | |
(Benefit from) provision for income taxes | | | (21.8 | ) | | | 3.1 | | | | | (0.3 | ) | | | 49.6 | |
| | | | | | | | | | | | | | | | | |
Net (loss) income | | $ | (409.3 | ) | | $ | 4.5 | | | | $ | (1.8 | ) | | $ | 84.5 | |
| | | | | | | | | | | | | | | | | |
In addition, the following table sets forth the various components of our consolidated statements of operations, expressed as a percentage of sales, for the periods indicated that are used in connection with the discussion herein.
| | | | | | | | | | | | | | |
| | | Successor | | | Successor | | | | | Predecessor | | | Predecessor | |
| | | Fifty-three Weeks
Ended
January 3, 2009 | | | Period
February 6, 2007
to December 29, 2007 | | | | | Period
December 31, 2006
to February 5, 2007 | | | Fifty-two Weeks
Ended
December 30, 2006 | |
Statements of Operations Data: | | | | | | | | | | | | | | |
Sales: | | | | | | | | | | | | | | |
Wholesale | | 42.5 | % | | 44.2 | % | | | | 50.3 | % | | 43.4 | % |
Retail | | 57.5 | % | | 55.8 | % | | | | 49.7 | % | | 56.6 | % |
| | | | | | | | | | | | | | |
Total net sales | | 100.0 | % | | 100.0 | % | | | | 100.0 | % | | 100.0 | % |
Cost of sales | | 43.0 | % | | 48.2 | % | | | | 46.0 | % | | 43.2 | % |
| | | | | | | | | | | | | | |
Gross profit | | 57.0 | % | | 51.8 | % | | | | 54.0 | % | | 56.8 | % |
Selling expenses | | 29.9 | % | | 28.1 | % | | | | 30.3 | % | | 24.5 | % |
General and administrative expenses | | 7.5 | % | | 9.2 | % | | | | 25.9 | % | | 10.6 | % |
Restructuring charges | | 1.9 | % | | — | % | | | | — | % | | — | % |
Goodwill and intangible asset impairments | | 64.8 | % | | — | % | | | | — | % | | — | % |
| | | | | | | | | | | | | | |
(Loss) income from operations | | (47.1 | )% | | 14.5 | % | | | | (2.2 | )% | | 21.7 | % |
Net other expense | | 13.3 | % | | 13.3 | % | | | | 1.8 | % | | 2.2 | % |
| | | | | | | | | | | | | | |
(Loss) income before (benefit from) provision for income taxes | | (60.4 | )% | | 1.2 | % | | | | (4.0 | )% | | 19.5 | % |
(Benefit from) provision for income taxes | | (3.1 | )% | | 0.5 | % | | | | (0.6 | )% | | 7.2 | % |
| | | | | | | | | | | | | | |
Net (loss) income | | (57.3 | )% | | 0.7 | % | | | | (3.4 | )% | | 12.3 | % |
| | | | | | | | | | | | | | |
To enhance our analysis of operating results and cash flows, in the discussion that follows, we have presented our sales and gross profit information on a combined basis for the fifty-two weeks ended December 29, 2007. The discussion for sales and gross profit for the combined fifty-two weeks ended December 29, 2007 represents the mathematical addition of the period December 31, 2006 to February 5, 2007 (Predecessor) and the period from February 6, 2007 to December 29, 2007 (Successor). We believe the combined discussion of sales and gross profit provides relevant information for investors. This discussion of our combined sales and gross profit, however is not intended to represent what our sales or gross profit would have been had the Transactions occurred at the beginning of the period.
In the following discussion of sales and gross profit, comparisons are made between the fifty-three week period ended January 3, 2009 (“fiscal 2008 or 2008”) and combined fifty-two week period ended December 29, 2007 (“fiscal 2007 or 2007”) and the fifty-two week period ended December 30, 2006 (“fiscal 2006 or 2006”), notwithstanding the presentation in our consolidated statements of operations for the fifty-two weeks of fiscal 2007 which is comprised of the period from December 31, 2006 to February 5, 2007 (Predecessor) and the period from February 6, 2007 to December 29, 2007 (Successor). We have prepared our discussion of sales and gross profit without regard to the differentiation between the period from December 31, 2006 to February 5, 2007 (Predecessor) and the period from February 6, 2007 to December 29, 2007 (Successor). The following table represents the mathematical addition of sales and gross profit for the period December 31, 2006 to February 5, 2007 (Predecessor) and the period from February 6, 2007 to December 29, 2007 (Successor) (in millions):
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| | | | | | | | | | | |
| | | Successor | | | | Predecessor | | |
| | | Period
February 6, 2007
to December 29, 2007 | | | | Period
December 31, 2006
to February 5, 2007 | | Non-GAAP
Combined Fifty-
two Weeks Ended
December 29, 2007 |
Sales | | $ | 683.6 | | | | $ | 53.4 | | $ | 737.0 |
Cost of sales | | | 329.6 | | | | | 24.6 | | | 354.2 |
| | | | | | | | | | | |
Gross profit | | $ | 354.0 | | | | $ | 28.8 | | $ | 382.8 |
| | | | | | | | | | | |
We do not believe a combined discussion of our results of operations below gross profit would be meaningful and, accordingly for the discussion of our results of operations below gross profit we have prepared the following discussion by comparing fiscal 2008 to the period from February 6, 2007 to December 29, 2007 (Successor) and fiscal 2006. In addition we have provided a separate stand-alone discussion for the period December 31, 2006 to February 5, 2007 (Predecessor).
EXECUTIVE SUMMARY
Widespread national and international concern over instability in the financial markets and the deteriorating state of the economy has increased significantly during the fifty-three weeks ended January 3, 2009 and most notably during the past two quarters with unprecedented market volatility and disruption in the economy of the United States and abroad. Also, the recession has become more pronounced, highlighted by higher unemployment levels, further deterioration in consumer confidence and reduced consumer spending, which have distinguished 2008 from 2007.
The current retail and economic environment continues to be difficult. General consumer spending levels, including employment levels and other economic conditions, greatly impact the retail and wholesale industries. Like other consumer-facing companies, our business continues to be negatively impacted. Declining mall traffic and reduced consumer spending obviously impact both our retail and wholesale businesses. Our operations for the fifty-three weeks ended January 3, 2009 were significantly impacted by the volatility of the economic environment and our available credit under our facility was decreased. The following is a summary of our fifty-three weeks ended January 3, 2009:
| | • | | The fiscal year ended January 3, 2009 consisted of 53 weeks and the fiscal year ended December 29, 2007 consisted of 52 weeks. |
| | • | | As a result of the deteriorating economic environment our sales decreased 3.1% to $713.7 million in 2008 from $737.0 million in 2007. While sales declined, we enhanced our business by continuing to introduce innovative new products through our retail and wholesale channels, continuing investments in the modernization of existing stores and the introduction of new stores, and investing in information systems and supply chain operations. |
| | • | | Comparable store and catalog and Internet sales for our Yankee Candle stores decreased 6.1% in 2008 compared to 2007. Yankee Candle comparable store sales for 2008 decreased 7.8% compared to 2007. The decrease in comparable store sales was driven by a decrease in mall traffic due to the deteriorating economic environment. |
| | • | | We completed our annual impairment testing of goodwill and indefinite-lived intangible assets as of November 1, 2008. As a result of the annual impairment testing, we recorded impairment charges of $375.2 million and $87.4 million related to our goodwill and tradenames, respectively, during the fourth quarter of 2008. This impairment charge was primarily driven by a decline in our estimated future discounted cash flows, which was in turn primarily attributable to the current adverse macroeconomic conditions. |
| | • | | We recorded restructuring charges of $13.9 million for the 53 weeks ended January 3, 2009. Our restructuring plans involve the closing of the all of our Illuminations retail stores, moving the Illuminations corporate headquarters from Petaluma, California to our South Deerfield, Massachusetts headquarters, the discontinuance of the related Illuminations consumer direct business and the write-off of the Illuminations tradename. |
| | • | | We reported a net loss of $409.3 million in 2008, including the above described impairment charge of $462.6 million, compared to net income of $2.7 million for 2007. |
| | • | | As part of the recent disruption in the credit markets, during the third quarter of 2008, Lehman Commercial Paper, Inc. (“LCP”) one of the creditors, who also serves as the Administrative Agent of our Credit Facility, declared bankruptcy. LCP’s share of the Credit Facility was 12% or $15.0 million of the $125.0 million revolving facility. To date, we have not secured substitute financing. If we are unable to secure additional or substitute funding from other parties, the Credit Facility would effectively be reduced from $125.0 million to $110.0 million. |
| | • | | In fiscal 2008 we increased our Yankee Candle retail sales base by 34 net stores, ending the year with 463 Yankee Candle retail stores in 43 states. |
| | • | | We ended fiscal 2008 with approximately 22,700 wholesale locations, including our European operations. |
FIFTY-THREE WEEKS ENDED JANUARY 3, 2009 (“2008”) COMPARED TO THE PERIODS DECEMBER 31, 2006 TO FEBRUARY 5, 2007 AND FEBRUARY 6, 2007 TO DECEMBER 29, 2007 (“2007”)
GENERAL
The fiscal year ended January 3, 2009 consisted of 53 weeks and the fiscal year ended December 29, 2007 consisted of 52 weeks.
SALES
Sales decreased 3.1% to $713.7 million in 2008 from $737.0 million in 2007. The additional 53rd week in 2008 contributed $9.6 million and $4.0 million in retail and wholesale sales, respectively.
Retail Sales
Retail sales increased 0.6% to $410.3 million for 2008 from $407.7 million for 2007.
The increase in retail sales was achieved primarily through (i) the addition of 35 new Yankee Candle retail stores opened in 2008 which increased sales by approximately $14.4 million, (ii) increased sales attributable to stores opened in 2007 that have not entered the comparable store base (which in 2007 were open for less than a full year) of approximately $10.7 million, (iii) increased catalog and Internet sales of approximately $5.2 million and (iv) increased sales in our Yankee Candle Fundraising division of approximately $2.9 million, offset in part by decreased comparable store sales of approximately $26.5 million and a decrease in sales in our Illuminations division of approximately $4.1 million.
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Comparable store and catalog and Internet sales for our Yankee Candle stores decreased 6.1% in 2008 compared to 2007. Yankee Candle comparable store sales for 2008 decreased 7.8% compared to 2007. Comparable store sales represent a comparison of sales during the corresponding fiscal periods on stores in our comparable stores sales base. A store first enters our comparable store sales base in the fourteenth fiscal month of operation. The decrease in comparable store sales was driven by a decrease in mall traffic due to the deteriorating economic environment. There were 426 stores included in the Yankee Candle comparable store base as of January 3, 2009 as compared to 401 stores included in the Yankee Candle comparable store base as of December 29, 2007. Illuminations stores are not included in our comparable store base. There were 491 total retail stores (including 28 Illuminations stores) open as of January 3, 2009, compared to 459 total retail stores (including 30 Illuminations stores) open as of December 29, 2007. Permanently closed stores are excluded from the comparable store calculation beginning in the month in which the store closes.
Wholesale Sales
Wholesale sales, including European operations, decreased 7.8% to $303.4 million for 2008 from $329.3 million for 2007.
The decrease in wholesale sales was primarily due to decreased sales to domestic wholesale locations in operation prior to 2007 of approximately $42.2 million, decreases in sales from new product ventures of $1.6 million and decreased sales from our Aroma Naturals subsidiary of approximately $0.2 million, partially offset by increased sales to domestic wholesale locations opened during the last 12 months of approximately $12.7 million and increased sales in our European operations of approximately $5.6 million. The decrease in wholesale sales can be attributed to the deteriorating economic environment.
GROSS PROFIT
Gross profit is sales less cost of sales. Included within cost of sales are the cost of the merchandise we sell through our retail and wholesale segments, inbound and outbound freight costs, the operational costs of our distribution facilities, which include receiving costs, inspection and warehousing costs, and salaries and expenses incurred by the Company’s buying and merchandising operations.
Gross profit increased 6.2% to $406.6 million in 2008 from $382.8 million in 2007. As a percentage of sales, gross profit increased to 57.0% in 2008 from 51.9% in 2007. The effect of purchase accounting adjustments increased gross profit year over year by approximately $40.0 million. The increase in gross profit was primarily related to the step-up of the carrying value of inventory at the acquisition date.
Retail Gross Profit
Retail gross profit dollars increased 8.6% to $266.4 million for 2008 from $245.4 million for 2007. The increase in gross profit dollars was primarily attributed to (i) the impact of price increases initiated on selected products during the first and third quarters of fiscal 2008, which, assuming no elasticity, contributed approximately $22.7 million, (ii) the decreased impact of purchase accounting adjustments in the current year as compared to the prior year of approximately $21.7 million, (iii) increased profitability in our Yankee Candle Fundraising division of approximately $4.0 million and (iv) sales increases in our retail operations, which contributed approximately $3.0 million. These increases in gross profit were partially offset by increased promotional activity of $23.3 million, increased costs in our supply chain operations of $4.0 million and decreased profitability in our Illuminations division of approximately $3.1 million.
As a percentage of sales, retail gross profit increased to 64.9% for 2008 from 60.2% for 2007. The increase in retail gross profit rate was primarily the result of the (i) decreased impact of purchase accounting adjustments of approximately 5.3%, (ii) the impact of price increases initiated on selected products during the first and third quarters of fiscal 2008, which, assuming no elasticity, contributed approximately 2.1% and (iii) increased profitability in our Yankee Candle Fundraising division of approximately 0.5% offset in part by increased marketing and promotional activity of approximately 2.0% and decreased productivity in our supply chain operations of approximately 1.2%.
Wholesale Gross Profit
Wholesale gross profit dollars increased 2.0% to $140.2 million for 2008 from $137.4 million for 2007. The increase in wholesale gross profit dollars was primarily attributable to the decreased impact of purchase accounting adjustments in the current year as compared to the prior year of approximately $18.4 million and the impact of price increases initiated on selected products during the first and third quarters of fiscal 2008, which, assuming no elasticity, contributed approximately $14.4 million, offset in part by (i) sales decreases within our wholesale operations, which contributed approximately $16.9 million, (ii) decreased productivity in our supply chain operations of $9.2 million, (iii) increased marketing and promotional activity of approximately $2.7 million and (iv) decreased profitability of our new product ventures of approximately $1.2 million.
As a percentage of sales, wholesale gross profit increased to 46.2% for 2008 from 41.7% for 2007. The increase in wholesale gross profit rate was primarily the result of the result of the decreased impact of purchase accounting adjustments in the current year as compared to the prior year of approximately 5.6% and the impact of price increases initiated on selected products during the first and third quarters of fiscal 2008 which, assuming no elasticity, contributed approximately 2.7% of the increase, offset in part by decreased productivity in supply chain operations of 3.2%, increased marketing and promotional activity of 0.5% and a decrease in new product ventures, which decreased gross profit by approximately 0.2%.
SELLING EXPENSES
Selling expenses were $213.2 million for the fifty-three weeks ended January 3, 2009 as compared to $192.4 million for the period February 6, 2007 to December 29, 2007. These expenses are related to both wholesale and retail operations and consist of payroll, occupancy, advertising and other operating costs, as well as pre-opening costs, which are expensed as incurred. Customer list amortization of approximately $15.6 million and $14.2 million is included in selling expense for the fifty-three weeks ended January 3, 2009 and the period February 6, 2007 to December 29, 2007, respectively. As a percentage of sales, selling expenses were 29.9% and 28.1% for the fifty-three weeks ended January 3, 2009 and the period February 6, 2007 to December 29, 2007.
Selling expenses for the period December 31, 2006 to February 5, 2007 (Predecessor) were $16.2 million and represented 30.3% of sales.
Retail Selling Expenses
Retail selling expenses were $174.1 million for the fifty-three weeks ended January 3, 2009 as compared to $160.5 million for the period February 6, 2007 to December 29, 2007. Retail selling expenses were $14.4 million for the period December 31, 2006 to February 5, 2007 (Predecessor). These expenses relate to payroll, occupancy, advertising and other store operating costs, as well as pre–opening costs, which are expensed as incurred.
As a percentage of retail sales, retail selling expenses were 42.4%, 42.1% and 54.4% for the fifty-three weeks ended January 3, 2009, the period February 6, 2007 to December 29, 2007 and the period December 31, 2006 to February 5, 2007, respectively.
The decrease in selling expense dollars and rate was primarily due to a decrease in marketing expense driven by a reduction in catalog circulation and promotional mailings.
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Wholesale Selling Expenses
Wholesale selling expenses were $39.1 million for the fifty-three weeks ended January 3, 2009 as compared to $31.9 million for the period February 6, 2007 to December 29, 2007. For the period December 31, 2006 to February 5, 2007 (Predecessor) wholesale selling expenses were $1.8 million. These expenses relate to payroll, advertising and other operating costs. As a percentage of wholesale sales, wholesale selling expenses were 12.9%, 10.5% and 6.6% for the fifty-three weeks ended January 3, 2009, the period February 6, 2007 to December 29, 2007 and the period December 31, 2006 to February 5, 2007, respectively.
The increase in wholesale selling expenses in dollars and rate was the result of the impairment of our outstanding pre-petition receivable balance with Linens ‘N Things of approximately $4.5 million, or 1.5% and an increase in amortization of intangible assets due to the acquisition of the Company of $1.2 million, or 0.4%.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist primarily of personnel–related costs including senior management, accounting, information systems, management incentive programs and costs that are not readily allocable to either the retail or wholesale operations. General and administrative expenses were $53.5 million, $62.7 million and $13.8 million for the fifty-three weeks ended January 3, 2009 and the periods February 6, 2007 to December 29, 2007 and December 31, 2006 to February 5, 2007 (Predecessor), respectively. As a percentage of sales, general and administrative expenses were 7.5%, 9.2% and 25.9% for 2007 for the fifty-three weeks ended January 3, 2009 and the periods February 6, 2007 to December 29, 2007 and December 31, 2006 to February 5, 2007, respectively.
The decrease in general and administrative expenses was primarily related to changes in our benefit policies which reduced benefit related costs by approximately $6.7 million, a reduction in our management incentive plan expense of approximately $4.3 million and a reduction in our labor and employment related expenses due to a hiring freeze of approximately $2.5 million. The period December 31, 2006 to February 5, 2007 included equity–based compensation expense of $8.2 million as a result of the accelerated vesting associated with stock options, restricted and performance shares as a result of the Merger.
RESTRUCTURING CHARGES
During the first quarter of fiscal 2008, we initiated a restructuring plan designed to close three underperforming Illuminations stores and move the Illuminations corporate headquarters from Petaluma, California to the Company’s South Deerfield, Massachusetts headquarters. In connection with this restructuring plan, a charge of $1.5 million was recorded during the thirteen weeks ended March 29, 2008. Included in the restructuring charge was $0.6 million related to lease termination costs, $0.5 million related to non-cash fixed assets write-offs and other costs, and $0.4 million in employee related costs. As of March 29, 2008 the three underperforming stores had been closed.
During the fourth quarter of 2008, we initiated a restructuring plan involving the closing of the Company’s remaining 28 Illuminations retail stores and the discontinuance of the related Illuminations consumer direct business, the closing of one underperforming Yankee Candle retail store, and limited reductions in the Company’s corporate and administrative workforce. We expect to close the Illuminations stores by April 30, 2009. In connection with the fourth quarter restructuring plan, a charge of $12.4 million was recorded during the fourteen weeks ended January 3, 2009. Included in the restructuring charge was $0.6 million related to occupancy related costs, primarily consisting of lease termination costs, $7.3 million related to fixed asset write-offs and other costs and the write-off of the Illuminations tradename of $4.5 million. We currently expect the total charge related to the restructuring plan to be approximately $18.0 million to $22.0 million including the $12.4 million recorded in the fourth quarter of 2008. The majority of these additional costs relate to lease termination costs that will be incurred during the first half of 2009. The lease termination related to the Illuminations corporate headquarters in Petaluma, California expires in March 2013. This lease will be paid through March 2013 unless we are able to structure a buyout agreement with the landlord.
The following is a summary of restructuring charge activity for the fifty-three weeks ended January 3, 2009 (in thousands):
| | | | | | | | | | | | | |
| | | Fifty-Three Weeks
Ended
January 3, 2009 | | | |
| | | Expense | | Costs
Paid | | Non-Cash
Charges | | | Accrued as of
January 3,
2009 |
Occupancy related | | $ | 1,233 | | $ | 349 | | $ | (157 | ) | | $ | 1,041 |
Fixed asset impairment and other | | | 7,767 | | | 42 | | | 7,700 | | | | 25 |
Employee related | | | 350 | | | 350 | | | — | | | | — |
Impairment of Illuminations tradename | | | 4,507 | | | — | | | 4,507 | | | | — |
| | | | | | | | | | | | | |
Total | | $ | 13,857 | | $ | 741 | | $ | 12,050 | | | $ | 1,066 |
| | | | | | | | | | | | | |
GOODWILL AND INTANGIBLE ASSET IMPAIRMENTS
We completed our annual impairment testing of goodwill and indefinite-lived intangible assets as of November 1, 2008. Based on the first step in our annual assessment we determined that the carrying value of each of our reporting units exceeded their fair value, indicating that our goodwill and intangible assets were impaired. This was primarily driven by a decline in our estimated future discounted cash flows for each reporting unit. The current adverse economic market conditions were the primary driver for the decline in our estimated future discounted cash flows. In addition, we initiated a restructuring plan during the fourth quarter of 2008 which led us to the determination that our Illuminations reporting unit was fully impaired. During the fourth quarter of 2008, we recorded a charge related to the write-off the Illuminations tradename in the amount of $4.5 million. There was no goodwill associated with the Illuminations reporting unit.
In the second step of our impairment analysis we calculated the implied fair value of goodwill for each of our three remaining reporting units: retail, wholesale and Aroma Naturals. The implied fair value of goodwill was calculated similar to how goodwill is calculated in a business combination. We also performed an analysis utilizing discounted future cash flows related to certain of our intangible assets to determine the fair value of each of the respective assets. As a result of these analyses we recorded impairment charges of $375.2 million and $87.4 million related to our goodwill and tradenames, respectively, during the fourth quarter ended January 3, 2009. These impairment charges related to all three of our reporting units: retail, wholesale and Aroma Naturals. Aroma Naturals is reported within our wholesale segment.
OTHER EXPENSE, NET
Other expense, net was $94.4 million, $91.2 million and $0.9 million for the fifty-three weeks ended January 3, 2009 and the periods February 6, 2007 to December 29, 2007 and December 31, 2006 to February 5, 2007, respectively. The primary component of other expense, net was interest expense, which was $95.0 million, $92.4 million and $1.0 million for the fifty-three weeks ended January 3, 2009 and the periods February 6, 2007 to December 29, 2007 and December 31, 2006 to February 5, 2007 (Predecessor), respectively.
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During the fifty-three weeks ended January 3, 2009, we paid $9.5 million, plus accrued interest of $0.4 million, to repurchase $12.0 million of our senior subordinated notes in the open market. In connection with this early repurchase, we recorded a gain of $2.1 million in other income, net of deferred financing costs written off in the amount of $0.4 million.
PROVISION FOR (BENEFIT FROM) INCOME TAXES
The (benefit from) provision for income taxes for the fifty-three weeks ended January 3, 2009 and the period February 6, 2007 to December 29, 2007 was ($21.8) million and $3.1 million, respectively. The benefit from income taxes for the period December 31, 2006 to February 5, 2007 was $0.3 million. The effective tax rates for the fifty-three weeks ended January 3, 2009, the period February 6, 2007 to December 29, 2007 and the period December 31, 2006 to February 5, 2007 (Predecessor) were 5.0%, 40.7% and 15.7%, respectively. The decrease in the effective tax rate for the fifty-three weeks ended January 3, 2009 is primarily related to the goodwill and tradenames impairment charge causing the permanent tax adjustments to have a greater impact on the effective tax rate.
THE PERIODS DECEMBER 31, 2006 TO FEBRUARY 5, 2007 AND FEBRUARY 6, 2007 TO DECEMBER 29, 2007 COMPARED TO FIFTY-TWO WEEKS ENDED DECEMBER 30, 2006 (“2006”)
GENERAL
The fiscal years ended December 29, 2007 and December 30, 2006 each consisted of 52 weeks.
SALES
Sales increased 7.2% to $737.0 million in 2007 from $687.6 million in 2006.
Retail Sales
Retail sales increased 4.9% to $407.7 million for 2007 from $388.8 million for 2006. The increase in retail sales was achieved primarily through sales attributable to our Illuminations division acquired in July 2006 of approximately $10.9 million, the addition of 27 new Yankee Candle retail stores opened in 2007 which increased sales by approximately $10.3 million, increased sales attributable to stores opened and acquired in 2006 that have not entered the comparable store base (which in 2006 were open for less than a full year) of approximately $4.2 million, and increased sales in our Yankee Candle Fundraising division of approximately $1.6 million, offset in part by a decrease in our catalog and Internet sales of approximately $1.1 million and decreased comparable store sales of approximately $7.0 million.
Comparable store and catalog and Internet sales for our Yankee Candle stores decreased 2.3% in 2007 compared to 2006. Yankee Candle comparable store sales for 2007 decreased 2.2% compared to 2006. Comparable store sales represent a comparison of sales during the corresponding fiscal periods on stores in our comparable stores sales base. A store first enters our comparable store sales base in the fourteenth fiscal month of operation. There were 401 stores included in the Yankee Candle comparable store base as of December 29, 2007, and 28 of these stores were included for less than a full year. There were 459 retail stores open as of December 29, 2007, compared to 420 retail stores open as of December 30, 2006. Permanently closed stores are excluded from the comparable store calculation beginning in the month in which the store closes.
Wholesale Sales
Wholesale sales, including European operations, increased 10.2% to $329.3 million for 2007 from $298.7 million for 2006. The increase in wholesale sales was achieved primarily from increased sales in our European operations of approximately $13.3 million, increased sales to domestic wholesale locations opened during the last 12 months of approximately $8.1 million, sales derived from new product ventures of $4.7 million, increased sales to domestic wholesale locations in operation prior to 2006 of approximately $3.3 million, and increased sales from our Aroma Naturals subsidiary of approximately $1.2 million.
GROSS PROFIT
Gross profit is sales less cost of sales. Included within cost of sales are the cost of the merchandise we sell through our retail and wholesale segments, inbound and outbound freight costs, the operational costs of our distribution facilities, which include receiving costs, inspection and warehousing costs, and salaries and expenses incurred by the Company’s buying and merchandising operations.
Gross profit decreased 1.9% to $382.8 million in 2007 from $390.2 million in 2006. As a percentage of sales, gross profit decreased to 51.9% in 2007 from 56.8% in 2006. The effect of purchase accounting adjustments decreased gross profit by approximately $39.5 million or 5.4% of sales in 2007. The decrease in gross profit was primarily related to the step-up of the carrying value of inventory at the acquisition date.
Retail Gross Profit
Retail gross profit dollars decreased 3.6% to $245.4 million for 2007 from $254.6 million for 2006. The decrease in gross profit dollars was primarily due to the effect of purchase accounting adjustments of approximately $21.4 million, increased promotional activity of $11.1 million and decreased profitability in our Yankee Candle fundraising division of approximately $0.7 million, offset in part by sales increases in our retail operations which contributed approximately $13.6 million, decreased costs in supply chain operations of approximately $5.3 million and the acquisition of Illuminations in 2006 which contributed approximately $5.1 million.
As a percentage of sales, retail gross profit decreased to 60.2% for 2007 from 65.5% for 2006. The decrease in retail gross profit rate was primarily the result of the effect of purchase accounting adjustments of approximately 5.3%, increased marketing and promotional activity of approximately 0.9%, the acquisition of Illuminations in 2006 of approximately 0.5% and decreased profitability in our Yankee Candle fundraising division of approximately 0.4%, offset in part by increased productivity in supply chain operations of approximately 1.3% and a 0.5% increase attributable to increased sales.
Wholesale Gross Profit
Wholesale gross profit dollars increased 1.3% to $137.4 million for 2007 from $135.6 million for 2006. The increase in wholesale gross profit dollars was primarily attributable to sales increases within our European and domestic wholesale operations, which contributed approximately $18.7 million, new product ventures of approximately $2.5 million and decreased costs in our supply chain operations of approximately $1.5 million, offset in part by the effect of purchase accounting adjustments of approximately $18.1 million and increased promotional activity of approximately $2.8 million.
As a percentage of sales, wholesale gross profit decreased to 41.7% for 2007 from 45.4% for 2006. The decrease in wholesale gross profit rate was primarily the result of the effect of purchase accounting adjustments of approximately 5.5% and increased promotional activity of approximately 0.4%, offset in part by a 1.7% increase attributable to increased sales and increased productivity in supply chain operations of 0.5%.
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SELLING EXPENSES
Selling expenses were $192.4 million for the period February 6, 2007 to December 29, 2007 as compared to $168.2 million in 2006. These expenses are related to both wholesale and retail operations and consist of payroll, occupancy, advertising and other operating costs, as well as pre-opening costs, which are expensed as incurred. In addition, the effect of purchase accounting adjustments of approximately $14.2 million, primarily related to customer list amortization is included in selling expense for the period February 6, 2007 to December 29, 2007. As a percentage of sales, selling expenses were 28.1% and 24.5% for the period February 6, 2007 to December 29, 2007 and the fifty-two weeks ended December 30, 2006, respectively.
Selling expenses for the period December 31, 2006 to February 5, 2007 (Predecessor) were $16.2 million and represented 30.3% of sales.
Retail Selling Expenses
Retail selling expenses $160.5 million for the period February 6, 2007 to December 29, 2007 as compared to $149.2 million for 2006. Retail selling expenses were $14.4 million for the period December 31, 2006 to February 5, 2007 (Predecessor.) These expenses relate to payroll, occupancy, advertising and other store operating costs, as well as pre–opening costs, which are expensed as incurred. The increase in retail selling expenses in dollars was primarily related to selling expenses incurred in our Illuminations stores of approximately $11.0 million, 27 new Yankee Candle retail stores opened in 2007 and the 28 new Yankee Candle retail stores opened in 2006 which together contributed approximately $8.0 million and the effect of purchase accounting adjustments of approximately $3.3 million.
As a percentage of retail sales, retail selling expenses were 42.1% and 54.4% for the period February 6, 2007 to December 29, 2007 and the period December 31, 2006 to February 5, 2007 (Predecessor), respectively. Retail selling expenses represented 38.4% of retail sales for 2006. The increase in selling expense rate was primarily due to higher selling expense associated with the Illuminations stores of 1.5%, the effect of purchase accounting adjustments of 0.8% and selling expenses of our two most recent store classes of 0.2%. These two store classes are considered immature stores, which are generally stores that are less than three years old. Immature stores typically generate higher selling expenses as a percentage of sales than stores that have been open for more than three years since fixed costs, as a percent of sales, are higher in the early sales maturation period.
Wholesale Selling Expenses
Wholesale selling expenses $31.9 million for the period February 6, 2007 to December 29, 2007 as compared to $19.0 million for 2006. For the period December 31, 2006 to February 5, 2007 (Predecessor) wholesale selling expenses were $1.8 million. These expenses relate to payroll, advertising and other operating costs. As a percentage of wholesale sales, wholesale selling expenses were 10.5% and 6.6% for the period February 6, 2007 to December 29, 2007 and the period December 31, 2006 to February 5, 2007 (Predecessor), respectively. Wholesale selling expenses represented 6.4% of wholesale sales for 2006. The increase in wholesale selling expenses in dollars and rate was primarily the result of the effect of purchase accounting adjustments of $10.9 million or 3.3%.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist primarily of personnel–related costs including senior management, accounting, information systems, management incentive programs and costs that are not readily allocable to either the retail or wholesale operations. General and administrative expenses were $62.7 million and $13.8 million for the periods February 6, 2007 to December 29, 2007 and December 31, 2006 to February 5, 2007 (Predecessor), respectively, as compared to $72.7 million for 2006. As a percentage of sales, general and administrative expenses were 9.2%, 25.9% and 10.6% for the periods February 6, 2007 to December 29, 2007 and December 31, 2006 to February 5, 2007 and 2006, respectively.
The increase in general and administrative expense in dollars was primarily attributable to an increase in stock–based compensation expense of $8.2 million as a result of the accelerated vesting associated with stock options, restricted and performance shares that resulted from the Merger and costs incurred with the Merger of $5.1 million. The increase in general and administrative expense as a percentage of sales for the period December 31, 2006 to February 5, 2007 was primarily due to the increase in equity-based compensation expense as a result of the accelerated vesting associated with stock options, restricted and performance shares as a result of the Merger.
OTHER EXPENSE, NET
Other expense, net was $91.2 million and $0.9 million for the periods February 6, 2007 to December 29, 2007 and December 31, 2006 to February 5, 2007, respectively, as compared to $15.2 million for 2006. The primary component of other expense, net was interest expense of $92.4 million and $1.0 million for the periods February 6, 2007 to December 29, 2007 and December 31, 2006 to February 5, 2007 (Predecessor), respectively. Interest expense for the fifty-two weeks ended December 30, 2006 was $15.3 million.
The increase in interest expense was primarily due to an increase in our average daily debt outstanding during the period primarily due to borrowings associated with the Merger and increased borrowing rates as a result of an increase in bank lending rates associated with the new debt.
PROVISION FOR INCOME TAXES
The provision for income taxes for the period February 6, 2007 to December 29, 2007 was $3.1 million as compared to a provision for income taxes of $49.5 million for 2006. The benefit from income taxes for the period December 31, 2006 to February 5, 2007 (Predecessor) was $0.3 million. The effective tax rates for the period February 6, 2007 to December 29, 2007 and the period December 31, 2006 to February 5, 2007 (Predecessor) were 40.7% and 15.7%, respectively. The effective tax rate for 2006 was 37.0%. The increase in the effective tax rate for the period February 6, 2007 to December 29, 2007 is primarily related to reduced pre-tax income rate for the period February 6, 2007 to December 29, 2007 coupled with a favorable IRS audit settlement in 2006.
LIQUIDITY AND CAPITAL RESOURCES
Senior Notes, Senior Subordinated Notes and Senior Secured Credit Facility
In connection with the Transactions, we significantly increased our level of debt upon entering into the $650.0 million senior secured term loan facility and issuance of the $325.0 million 8.50% senior notes and the $200.0 million 9.75% senior subordinated notes. As of January 3, 2009, we had outstanding debt of $1,183.1 million.
Obligations under the senior notes are guaranteed on an unsecured senior basis and the senior subordinated notes are guaranteed on an unsecured senior subordinated basis, by Parent and the Company’s existing and future domestic subsidiaries. If we cannot make any payment on either or both series of notes, the guarantors must make the payment instead. In the event of certain change in control events specified in the indentures governing the notes, we must offer to repurchase all or a portion of the notes at 101% of the principal amount of the exchange notes on the date of purchase, plus any accrued and unpaid interest to the date of repurchase.
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The indentures governing the senior notes and senior subordinated notes restrict our (and most or all of our subsidiaries’) ability to incur additional debt; pay dividends or make other distributions on our capital stock or repurchase our capital stock or subordinated indebtedness; make investments or other specified restricted payments; create liens; sell assets and subsidiary stock; enter into transactions with affiliates; and enter into mergers, consolidations and sales of substantially all assets.
During the fifty-three weeks ended January 3, 2009, we paid $9.5 million, plus accrued interest of $0.4 million, to repurchase $12.0 million of the senior subordinated notes in the open market. In connection with this early repurchase, we recorded a gain of $2.1 million, net of deferred financing costs written off in the amount of $0.4 million.
Our senior secured credit facility (the “Credit Facility”) consists of a $650.0 million 7–year senior term loan facility and a 6–year $125.0 million senior secured revolving credit facility. All borrowings under the Credit Facility bear interest at a rate per annum equal to an applicable margin, plus, at the Company’s option, (i) the higher of (x) the prime rate (as set forth on the British Banking Association Telerate Page 5) and (y) the federal funds effective rate, plus one-half percent (0.50%) per annum or (ii) the Eurodollar rate, and resets periodically. In addition to paying interest on outstanding principal under the senior secured credit facility, the Company is required to pay a commitment fee to the lenders in respect of unutilized loan commitments at a rate of 0.50% per annum. The senior secured term loan facility matures on February 6, 2014 and the senior secured revolving credit facility matures on February 6, 2013.
As a result of concerns about the stability of the financial and credit markets and the strength of counterparties during this challenging global macroeconomic environment, many financial institutions have reduced, and in some instances ceased to provide, funding to borrowers. In our case, Lehman Commercial Paper, Inc. (“LCP”), one of the lenders under our $125.0 million Credit Facility, and who also serves as the Administrative Agent thereunder, of the Credit Facility declared bankruptcy in September 2008. LCP’s share of the Credit Facility was 12% or $15.0 million of the total funds available under our Credit Facility. As a result of the bankruptcy, our ability to draw upon that portion of the Credit Facility has been reduced. To date, we have not secured substitute financing. If we are unable to secure additional or substitute funding from other parties, our Credit Facility would be effectively reduced from $125.0 million to $110.0 million. As of January 3, 2009, $70.0 million was outstanding under our Credit Facility of which approximately $8.4 million is payable to LCP, leaving the remaining LCP share of $6.6 million unavailable to us on that date.
In addition to the amounts outstanding under the Credit Facility and amounts unavailable due to the LCP bankruptcy there were outstanding letters of credit of $1.6 million, leaving $46.8 million in availability under the Credit Facility as of January 3, 2009, excluding the $6.6 million applicable to LCP. As of January 3, 2009, we were in compliance with all covenants under the Credit Facility.
We have an interest rate swap agreement to hedge a portion of the cash flows associated with the Credit Facility. The agreement has a total notional value of $415.0 million. The $415.0 million notional value amortizes over the life of the swap. The interest rate swap agreement effectively converts approximately 60% of the outstanding amount under the Credit Facility, which is floating–rate debt, to a fixed–rate by having the Company pay fixed–rate amounts in exchange for the receipt of the amount of the floating–rate interest payments.
In addition, we have a second interest rate swap agreement to hedge an additional portion of the cash flows associated with the Credit Facility. The agreement has a total notional value of $100.0 million. The $100.0 million notional value increases on March 31, 2010 to approximately $397.0 million and then amortizes over the remaining life of the swap. The interest rate swap agreement effectively converts approximately 15% of the outstanding amount under the Credit Facility, which is floating–rate debt, to a fixed–rate by having the Company pay fixed–rate amounts in exchange for the receipt of the amount of the floating–rate interest payments.
All obligations under the Credit Facility are guaranteed by the Parent and each of the Company’s existing and future domestic subsidiaries. In addition, the senior secured credit facility is secured by first priority perfected liens on all of the Company’s capital stock and substantially all of the Company’s existing and future material assets and the existing and future material assets of the Company’s guarantors, except that only up to 66% of the voting capital stock of the first tier foreign subsidiaries and 100% of the non–voting capital stock of such foreign subsidiaries will be pledged in favor of the senior secured credit facility and each of the guarantor’s assets.
The Credit Facility permits all or any portion of the loans outstanding to be prepaid at any time and commitments to be terminated in whole or in part at our option without premium or penalty. The Company is required to repay amounts borrowed under the senior secured term loan facility in equal quarterly installments in an aggregate annual amount equal to one percent (1.0%) of the original principal amount of the senior secured term loan facility with the balance being payable on the maturity date of the senior secured term loan facility.
Subject to certain exceptions, the Credit Facility requires that 100% of the net proceeds from certain asset sales, casualty insurance, condemnations and debt issuances, and 50% (subject to step downs) from excess cash flow, as defined, for each fiscal year must be used to pay down outstanding borrowings. The calculation to determine if the Company has excess cash flow per the Credit Facility is prepared on an annual basis at the end of each fiscal year. As of January 3, 2009, we had excess cash flow, as defined in the Credit Facility, of $37.7 million. This amount is classified as short-term debt on the accompanying consolidated balance sheet and will be used to reduce our outstanding borrowings in 2009.
The Credit Facility contains a financial covenant which requires that we maintain at the end of each fiscal quarter, commencing with the quarter ended January 3, 2009 through the quarter ending October 3, 2009, a consolidated total secured debt (net of cash and cash equivalents not to exceed $30,000) to consolidated EBITDA ratio of no more than 4.00 to 1.00. As of January 3, 2009, the Company’s actual secured leverage ratio was 3.47 to 1.00, as calculated in accordance with the Credit Facility. As of January 3, 2009, total secured debt was approximately $640.1 million (net of $30.0 million in cash). Under the Credit Facility, EBITDA is defined as net income plus, interest, taxes, depreciation and amortization, further adjusted to add back extraordinary, unusual or non-recurring losses, non-cash stock option expense, fees and expenses related to the Transaction, fees and expenses under the Management Agreement with our equity sponsor, restructuring charges or reserves, as well as other non-cash charges, expenses or losses, and further adjusted to subtract extraordinary, unusual or non-recurring gains, other non-cash income or gains, and certain cash contributions to our common equity. Set forth below is a reconciliation of Consolidated Adjusted EBITDA, as calculated under the Credit Facility, to EBITDA and net loss for the fifty-three weeks ended January 3, 2009 (in thousands):
| | | | |
Net loss | | $ | (409,324 | ) |
Income tax benefit | | | (21,757 | ) |
Interest expense, net (excluding amortization of deferred financing fees) | | | 90,414 | |
Depreciation and amortization | | | 46,995 | |
| | | | |
EBITDA | | | (293,672 | ) |
Equity-based compensation expense | | | 892 | |
Restructuring charges | | | 13,857 | |
Goodwill and intangible asset impairments | | | 462,616 | |
Fees paid pursuant to management agreement | | | 1,500 | |
Other non-cash income | | | (714 | ) |
| | | | |
Consolidated Adjusted EBITDA under the Credit Facility | | $ | 184,479 | |
| | | | |
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The Credit Facility also contains certain other limitations on the Company’s and certain of the Company’s restricted subsidiaries’, as defined in the credit agreement related to our Credit Facility, ability to incur additional debt, guarantee other obligations, grant liens on assets, make investments or acquisitions, dispose of assets, make optional payments or modifications of other debt instruments, pay dividends or other payments on capital stock, engage in mergers or consolidations, enter into sale and leaseback transactions, enter into arrangements that restrict the Company’s ability to pay dividends or grant liens and engage in transactions with affiliates.
The Consolidated Adjusted EBITDA ratio is a material component of the Credit Facility. Non-compliance with the maximum Consolidated Adjusted EBITDA ratio could prevent us from borrowing under our Credit Facility and would result in a default under the credit agreement related to our Credit Facility. If there were an event of default under the credit agreement related to our Credit Facility that was not cured or waived, the lenders under our Credit Facility could cause all amounts outstanding under our Credit Facility to be due and payable immediately, which would have a material adverse effect on our financial position and cash flows.
Cash Flows and Funding of our Operations
We maintain cash balances at several financial institutions. At January 3, 2009 accounts at each institution are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250. In addition, the FDIC has implemented a transaction account guarantee program through December 31, 2009. Through this program all non-interest bearing accounts at participating institutions are fully guaranteed by the FDIC for the entire amount in the account. Uninsured balances aggregated $16.4 million and $3.3 million at January 3, 2009 and December 29, 2007, respectively.
Cash as of January 3, 2009 of $130.6 million increased by $125.0 million compared to $5.6 million as of December 29, 2007. Cash provided by operating activities was $88.6 million. Cash provided by operating activities includes total payments of $5.7 million of taxes, primarily related to fiscal 2007 and estimated payments for fiscal 2008. Cash provided by operating activities also includes cash paid for interest of $90.2 million.
Net cash used in investing activities was $18.7 million for the fifty-three weeks ended January 3, 2009, which primarily consists of purchases of property and equipment related to new stores. Net cash provided by financing activities was $55.4 million for the year ended January 3, 2009, which includes borrowings under the revolving credit facility of $100.5 million partially offset by the repayment of $45.0 million of debt.
We fund our operations through a combination of internally generated cash from operations and from borrowings under the Credit Facility. Our primary uses of cash are working capital requirements, new store expenditures, new store inventory purchases and debt service requirements. We anticipate that cash generated from operations together with amounts available under the Credit Facility will be sufficient to meet its future working capital requirements, new store expenditures, new store inventory purchases and debt service obligations as they become due over the next twelve months. However, our ability to fund future operating expenses and capital expenditures and our ability to make scheduled payments of interest on, to pay principal on or refinance indebtedness and to satisfy any other present or future debt obligations will depend on future operating performance which will be affected by general economic, financial and other factors beyond our control. In addition, borrowings under our credit facility are dependent upon our continued compliance with the financial and other covenants contained therein.
Due to the seasonality of the business, we do not generate positive cash flow from operations through the first three quarters of our fiscal year. As such, we draw on the Revolver portion of our Credit Facility during these times to fund operations. In the fourth quarter, these borrowings are typically repaid in full using cash generated from operations during the fourth quarter holiday season. We typically reach our peak borrowings of approximately $90.0 million during the latter part of the third quarter. However, due to the extreme disruption in the financial markets during the latter half of 2008 and the volatility of the economic environment as a whole, we strategically held our cash and did not repay our outstanding revolver. We ended 2008 with revolver borrowings of $70.0 million and cash of $130.6 million.
We review and forecast our cash flow on a daily basis for the current year and on a quarterly basis for the upcoming year to ensure we have adequate liquidity to fund our business. We believe that we will, for the foreseeable future, be able to meet our debt service obligations, fund our working capital requirements, fund our capital expenditures and be in compliance with our covenants under our Credit Facility.
Contractual Commitments
In addition to obligations to repay our debt obligations, we lease the majority of our retail stores under operating leases. The following table summarizes our contractual commitments including both our debt and lease obligations:
| | | | | | | | | | | | | | | | | | | | | |
| | | Payments due by period (in thousands) |
Contractual obligations | | Total | | 2009 | | 2010 | | 2011 | | 2012 | | 2013 | | Thereafter |
Debt obligations | | $ | 1,183,125 | | $ | 37,650 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 1,145,475 |
Operating leases | | | 190,995 | | | 35,825 | | | 31,811 | | | 28,744 | | | 23,915 | | | 19,782 | | | 50,918 |
Purchase commitments (1) | | | 21,966 | | | 21,966 | | | — | | | — | | | — | | | — | | | — |
Estimated interest payments (2) | | | 451,776 | | | 82,486 | | | 76,570 | | | 69,246 | | | 67,453 | | | 65,640 | | | 90,381 |
| | | | | | | | | | | | | | | | | | | | | |
Total contractual obligations (3) | | $ | 1,847,862 | | $ | 177,927 | | $ | 108,381 | | $ | 97,990 | | $ | 91,368 | | $ | 85,422 | | $ | 1,286,774 |
| | | | | | | | | | | | | | | | | | | | | |
| (1) | Includes open purchase orders for goods purchased in the ordinary course of our business, whether or not we are able to cancel such purchase orders. |
| (2) | Estimated interest payments are based on the outstanding debt balance of $ 1,183.1 million at January 3, 2009. The rates used in the calculation of the estimated interest payments were the rates outstanding at January 3, 2009 on the senior secured revolving credit facility, senior secured term loan, senior notes and senior subordinated notes. |
Includes estimated payments on interest rate swaps. Estimated payments on interest rate swaps are based on an estimated quarterly net settlement for the difference between the fixed rate and the variable rate based upon the three–month LIBOR rate on the notional amount of the interest rate swaps. The three month LIBOR rate used in the estimated calculation is the rate outstanding at January 3, 2009. These payments when made are part of interest expense in the consolidated statement of operations.
| (3) | The table above excludes $2.9 million in uncertain tax positions, as we are unable to make reasonably reliable estimates of the period of cash settlement, if any, with the respective taxing authorities. The $2.9 million in uncertain tax positions includes $0.5 million of accrued interest and penalties. |
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements,” (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements. SFAS 157 does not expand or require new fair value measures, however the application of this statement may change current practice. The requirements of SFAS 157 were first effective for our fiscal year beginning December 30, 2007 and interim periods within that fiscal year. However, in February 2008 the FASB decided that an entity need not apply this standard to nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis until the subsequent year.
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Accordingly, our adoption of this standard on December 30, 2007 is limited to financial assets and liabilities, which primarily impacts the valuation of our derivative contract. The initial adoption of SFAS 157 did not have a material effect on our financial condition, results of operations and cash flows. However, we are still in the process of evaluating this standard with respect to its impact on nonfinancial assets and liabilities and therefore have not yet determined the impact that it will have on our financial statements upon full adoption.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115” (SFAS 159). SFAS 159 permits entities to measure many financial instruments and certain other items at fair value. Entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date. SFAS 159 also establishes presentation and disclosure requirements. The Company adopted SFAS 159 on December 30, 2007 and has elected not to apply the fair value option to any of its financial instruments other than those described in Note 8, “Fair Value Measurements” to the accompanying consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (SFAS 161). SFAS 161 amends and expands the disclosure requirements of SFAS 133 with the intent to provide users of financial statements with an enhanced understanding of how and why an entity uses derivative instruments and their impact on an entity’s financial position, financial performance and cash flows. The requirements of SFAS 161 are effective for our fiscal year beginning on January 4, 2009. The Company is in the process of evaluating the impact of adopting SFAS 161 on our derivative disclosures.
In May 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 162, “Hierarchy of Generally Accepted Accounting Principles” (SFAS 162). This statement is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements of nongovernmental entities that are presented in conformity with GAAP. This statement will be effective 60 days following the U.S. Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendment to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The Company is currently evaluating the potential impact, if any, of the adoption of SFAS 162 on its financial condition, results of operations and cash flows.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our market risks relate primarily to changes in interest rates. At January 3, 2009, we had $670.1 million of floating rate debt and $513.0 million of fixed rate debt. For fixed rate debt, interest rate changes affect the fair market value, but do not impact earnings or cash flows. Conversely for floating rate debt, interest rate changes do not affect the fair market value but do impact future earnings and cash flows, assuming other factors are held constant. The $670.1 million outstanding under our Credit Facility bears interest at variable rates. All borrowings under the Credit Facility bear interest at a rate per annum equal to an applicable margin, plus, at the Company’s option, (i) the higher of (a) the prime rate (as set forth on the British Banking Association Telerate Page 5) and (b) the federal funds effective rate, plus one-half percent (0.50%) per annum or (ii) the Eurodollar rate, and resets periodically. As of January 3, 2009, the weighted average combined interest rate on the senior secured term loan facility and senior secured revolving credit facility was 3.35%. This Credit Facility is intended to fund operating needs. Because this Credit Facility carries a variable interest rate pegged to market indices, our results of operations and cash flows will be exposed to changes in interest rates. Based on January 3, 2009 borrowing levels, a 1.00% increase or decrease in current market interest rates would have the effect of causing an approximately $6.7 million additional annual pre–tax charge or credit to the statement of operations.
The variable nature of our obligations under the Credit Facility creates interest rate risk. In order to mitigate this risk we have entered into certain interest rate swaps. In February 2007, we entered into an interest rate swap agreement in the notional amount of $415.0 million to hedge floating rate debt for the period between February 14, 2007 and March 30, 2010. The $415.0 million notional value amortizes over the life of the swap. The swap, which is with a highly rated counterparty, is treated as a cash flow hedge for accounting purposes and on which we pay a fixed rate of 5.095% and receive LIBOR from the counterparty. In February 2008, we entered into a second interest rate swap agreement in the notional value of $100.0 million, effective March 31, 2008. The $100.0 million notional value increases on March 31, 2010 to approximately $397.0 million and then amortizes over the remaining life of the swap. The swap, which is with a highly rated counterparty, is treated as a cash flow hedge for accounting purposes and on which we pay a fixed rate of 3.347% and receive LIBOR from the counterparty. See Note 12, “Derivative Financial Instruments” to the accompanying consolidated financial statements for additional information.
In November 2008, we entered into an agreement with a financial institution to hedge a portion of its diesel fuel requirements. This agreement is based on diesel fuel consumed by independent freight carriers delivering our products. These carriers charge us a basic rate per mile that is subject to a fuel surcharge for diesel fuel price increases that they incur. The hedge agreement is designed to reduce the our exposure to the volatility of diesel fuel pricing and the resulting fuel surcharges payable by us by setting a fixed price per gallon for the year. This diesel hedge agreement does not qualify for hedge accounting under SFAS 133. Accordingly, we mark the diesel hedge to market every quarter with the changes in fair value recognized in earnings. As of January 3, 2009, we recognized a loss of $0.3 million in other income on the consolidated statement of operations.
We buy a variety of raw materials for inclusion in our products. The only raw material that is considered to be of a commodity nature is wax. Wax is a petroleum based product. Its market price has not historically fluctuated with the movement of oil prices and has instead generally moved with inflation. However, in the past several years the price of wax has increased at a rate significantly above the rate of inflation. Future increases in wax prices could have an adverse affect on our cost of goods sold and could lower our margins.
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| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Yankee Holding Corp.
South Deerfield, Massachusetts
We have audited the accompanying consolidated balance sheets of Yankee Holding Corp. and subsidiaries (the “Successor Company”) as of January 3, 2009 and December 29, 2007, the related consolidated statements of operations, stockholders’ (deficit) equity, and cash flows for the fifty three weeks ended January 3, 2009 and for the period from February 6, 2007 to December 29, 2007 and the consolidated statements of operations, stockholders’ (deficit) equity, and cash flows of The Yankee Candle Company, Inc. and subsidiaries (the “Predecessor Company”) for the period from December 31, 2006 to February 5, 2007 and the fifty two weeks ended December 30, 2006. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Successor Company as of January 3, 2009 and December 29, 2007, and the results of their operations and their cash flows for the fifty three weeks ended January 3, 2009, the period February 6, 2007 through December 29, 2007 and the results of operations and cash flows of the Predecessor Company for the period December 31, 2006 through February 5, 2007 and the fifty two weeks ended December 30, 2006 in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Yankee Holding Corp. and subsidiaries internal control over financial reporting as of January 3, 2009, based on the criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 2, 2009 expressed an unqualified opinion on their internal control over financial reporting.
/s/ Deloitte & Touche LLP
Hartford, Connecticut
April 2, 2009
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YANKEE HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
| | | | | | | | |
| | | January 3,
2009 | | | December 29,
2007 | |
| ASSETS | | | | | | | | |
CURRENT ASSETS: | | | | | | | | |
Cash | | $ | 130,577 | | | $ | 5,627 | |
Accounts receivable, net | | | 39,153 | | | | 52,126 | |
Inventory | | | 63,035 | | | | 69,963 | |
Prepaid expenses and other current assets | | | 10,184 | | | | 9,344 | |
Deferred tax assets | | | 12,869 | | | | 18,271 | |
| | | | | | | | |
TOTAL CURRENT ASSETS | | | 255,818 | | | | 155,331 | |
| | |
PROPERTY AND EQUIPMENT-NET | | | 138,222 | | | | 155,911 | |
MARKETABLE SECURITIES | | | 540 | | | | 259 | |
GOODWILL | | | 643,801 | | | | 1,019,982 | |
INTANGIBLE ASSETS | | | 308,877 | | | | 414,242 | |
DEFERRED FINANCING COSTS | | | 24,170 | | | | 28,654 | |
OTHER ASSETS | | | 1,141 | | | | 1,418 | |
| | | | | | | | |
TOTAL ASSETS | | $ | 1,372,569 | | | $ | 1,775,797 | |
| | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY | | | | | | | | |
| | |
CURRENT LIABILITIES: | | | | | | | | |
Accounts payable | | $ | 22,812 | | | $ | 21,613 | |
Accrued payroll | | | 7,741 | | | | 17,394 | |
Accrued interest | | | 18,042 | | | | 17,679 | |
Accrued income taxes | | | 4,931 | | | | 15,755 | |
Accrued purchases of property and equipment | | | 4,279 | | | | 2,818 | |
Other accrued liabilities | | | 44,103 | | | | 35,909 | |
Current portion of long-term debt | | | 37,650 | | | | 6,500 | |
| | | | | | | | |
TOTAL CURRENT LIABILITIES | | | 139,558 | | | | 117,668 | |
| | |
DEFERRED COMPENSATION OBLIGATION | | | 740 | | | | 410 | |
DEFERRED TAX LIABILITIES | | | 75,905 | | | | 105,565 | |
LONG-TERM DEBT | | | 1,145,475 | | | | 1,123,625 | |
DEFERRED RENT | | | 10,810 | | | | 10,230 | |
OTHER LONG-TERM LIABILITIES | | | 2,902 | | | | 1,694 | |
COMMITMENTS AND CONTINGENCIES (NOTE 17) | | | | | | | | |
STOCKHOLDERS’ (DEFICIT) EQUITY: | | | | | | | | |
Common stock: $.01 par value; 500,000 issued and 499,550 outstanding at January 3, 2009 and 500,000 issued and 499,660 outstanding at December 29, 2007 | | | 418,107 | | | | 418,083 | |
Treasury stock: at cost, 450 shares at January 3, 2009 and 340 shares at December 29, 2007 | | | (423 | ) | | | (294 | ) |
Additional paid-in capital | | | 1,562 | | | | 670 | |
(Accumulated deficit) retained earnings | | | (404,797 | ) | | | 4,527 | |
Accumulated other comprehensive loss | | | (17,270 | ) | | | (6,381 | ) |
| | | | | | | | |
Total stockholders’ (deficit) equity | | | (2,821 | ) | | | 416,605 | |
| | | | | | | | |
TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY | | $ | 1,372,569 | | | $ | 1,775,797 | |
| | | | | | | | |
See notes to consolidated financial statements
29
YANKEE HOLDING CORP. AND SUBSIDIARIES (AND PREDECESSOR)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
| | | | | | | | | | | | | | | | | | |
| | | Successor | | | | | Predecessor | |
| | | Fifty-three
Weeks Ended
January 3, 2009 | | | Period
February 6, 2007
to December 29, 2007 | | | | | Period
December 31, 2006
to February 5, 2007 | | | Fifty-two
Weeks Ended
December 30, 2006 | |
SALES | | $ | 713,742 | | | $ | 683,573 | | | | | $ | 53,382 | | | $ | 687,557 | |
COST OF SALES | | | 307,175 | | | | 329,571 | | | | | | 24,553 | | | | 297,338 | |
| | | | | | | | | | | | | | | | | | |
GROSS PROFIT | | | 406,567 | | | | 354,002 | | | | | | 28,829 | | | | 390,219 | |
| | | | | | | | | | | | | | | | | | |
| | | | | |
OPERATING EXPENSES: | | | | | | | | | | | | | | | | | | |
Selling expenses | | | 213,241 | | | | 192,398 | | | | | | 16,201 | | | | 168,194 | |
General and administrative expenses | | | 53,485 | | | | 62,717 | | | | | | 13,828 | | | | 73,135 | |
Restructuring charges | | | 13,857 | | | | — | | | | | | — | | | | (397 | ) |
Goodwill and intangible asset impairments | | | 462,616 | | | | — | | | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | |
Total operating expenses | | | 743,199 | | | | 255,115 | | | | | | 30,029 | | | | 240,932 | |
| | | | | | | | | | | | | | | | | | |
(LOSS) INCOME FROM OPERATIONS | | | (336,632 | ) | | | 98,887 | | | | | | (1,200 | ) | | | 149,287 | |
| | | | | |
OTHER (INCOME) EXPENSE: | | | | | | | | | | | | | | | | | | |
Interest income | | | (38 | ) | | | (43 | ) | | | | | (1 | ) | | | (30 | ) |
Interest expense | | | 94,956 | | | | 92,443 | | | | | | 986 | | | | 15,358 | |
Gain on extinguishment of debt | | | (2,131 | ) | | | — | | | | | | — | | | | — | |
Other expense (income) | | | 1,662 | | | | (1,152 | ) | | | | | (15 | ) | | | (105 | ) |
| | | | | | | | | | | | | | | | | | |
Total other expense | | | 94,449 | | | | 91,248 | | | | | | 970 | | | | 15,223 | |
| | | | | | | | | | | | | | | | | | |
(LOSS) INCOME BEFORE (BENEFIT FROM) PROVISION FOR INCOME TAXES | | | (431,081 | ) | | | 7,639 | | | | | | (2,170 | ) | | | 134,064 | |
| | | | | |
(BENEFIT FROM) PROVISION FOR INCOME TAXES | | | (21,757 | ) | | | 3,112 | | | | | | (340 | ) | | | 49,549 | |
| | | | | | | | | | | | | | | | | | |
NET (LOSS) INCOME | | $ | (409,324 | ) | | $ | 4,527 | | | | | $ | (1,830 | ) | | $ | 84,515 | |
| | | | | | | | | | | | | | | | | | |
See notes to consolidated financial statements
30
YANKEE HOLDING CORP. AND SUBSIDIARIES (AND PREDECESSOR)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY
(in thousands, except treasury shares)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Common Stock | | | Additional
Paid in
Capital | | | Treasury Stock | | | Retained
Earnings
(Accumulated
Deficit) | | | Accumulated
Other
Comprehensive
Income (Loss) | | | Comprehensive
Income (Loss) | | | Total | |
| | | Shares | | | Amount | | | | Shares | | Amount | | | | | |
(Predecessor) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE, DECEMBER 31, 2005 | | 40,963 | | | $ | 410 | | | $ | 96,132 | | | — | | $ | — | | | $ | (27,536 | ) | | $ | (862 | ) | | | | | | $ | 68,144 | |
Issuance of common stock and option exercises, including related tax benefits of $1,808 | | 320 | | | | 3 | | | | 7,362 | | | — | | | — | | | | — | | | | — | | | | | | | | 7,365 | |
Stock compensation expense | | — | | | | — | | | | 5,772 | | | — | | | — | | | | — | | | | — | | | | | | | | 5,772 | |
Payments for the redemption of common stock | | (1,437 | ) | | | (14 | ) | | | (3,548 | ) | | — | | | — | | | | (38,415 | ) | | | — | | | | | | | | (41,977 | ) |
Payments for dividends | | — | | | | — | | | | — | | | — | | | — | | | | (10,097 | ) | | | — | | | | | | | | (10,097 | ) |
Comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | — | | | | — | | | | — | | | — | | | — | | | | 84,515 | | | | — | | | $ | 84,515 | | | | 84,515 | |
Foreign currency translation | | — | | | | — | | | | — | | | — | | | — | | | | — | | | | 1,843 | | | | 1,843 | | | | 1,843 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 86,358 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE, DECEMBER 30, 2006 | | 39,846 | | | | 399 | | | | 105,718 | | | — | | | — | | | | 8,467 | | | | 981 | | | | | | | | 115,565 | |
Tax benefit from exercise of stock options | | — | | | | — | | | | 3,818 | | | — | | | — | | | | — | | | | — | | | | | | | | 3,818 | |
Stock compensation expense | | — | | | | — | | | | 8,638 | | | — | | | — | | | | — | | | | — | | | | | | | | 8,638 | |
Cumulative effect of adoption of FIN 48 | | — | | | | — | | | | — | | | — | | | — | | | | (224 | ) | | | — | | | | | | | | (224 | ) |
Comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | — | | | | — | | | | — | | | — | | | — | | | | (1,830 | ) | | | — | | | $ | (1,830 | ) | | | (1,830 | ) |
Foreign currency translation | | — | | | | — | | | | — | | | — | | | — | | | | — | | | | 58 | | | | 58 | | | | 58 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | (1,772 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE, FEBRUARY 5, 2007 | | 39,846 | | | | 399 | | | | 118,174 | | | — | | | — | | | | 6,413 | | | | 1,039 | | | | | | | | 126,025 | |
(Successor) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of common stock, net of $15,000 of issuance costs | | 1 | | | | 418,083 | | | | — | | | — | | | — | | | | — | | | | — | | | | | | | | 418,083 | |
Stock split | | 499 | | | | — | | | | — | | | — | | | — | | | | — | | | | — | | | | | | | | — | |
Repurchase of common stock | | — | | | | — | | | | — | | | 340 | | | (294 | ) | | | — | | | | — | | | | | | | | (294 | ) |
Stock compensation expense | | — | | | | — | | | | 670 | | | — | | | — | | | | — | | | | — | | | | | | | | 670 | |
Comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | — | | | | — | | | | — | | | — | | | — | | | | 4,527 | | | | — | | | $ | 4,527 | | | | 4,527 | |
Foreign currency translation | | — | | | | — | | | | — | | | — | | | — | | | | — | | | | (651 | ) | | | (651 | ) | | | (651 | ) |
Unrealized loss on interest rate swap, net of tax | | — | | | | — | | | | — | | | — | | | — | | | | — | | | | (5,730 | ) | | | (5,730 | ) | | | (5,730 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | (1,854 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE, DECEMBER 29, 2007 | | 500 | | | | 418,083 | | | | 670 | | | 340 | | | (294 | ) | | | 4,527 | | | | (6,381 | ) | | | | | | | 416,605 | |
Issuance of common stock | | — | | | | 24 | | | | — | | | — | | | — | | | | — | | | | — | | | | | | | | 24 | |
Repurchase of common stock | | — | | | | — | | | | — | | | 110 | | | (129 | ) | | | — | | | | — | | | | | | | | (129 | ) |
Stock compensation expense | | — | | | | — | | | | 892 | | | — | | | — | | | | — | | | | — | | | | | | | | 892 | |
Comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss | | — | | | | — | | | | — | | | — | | | — | | | | (409,324 | ) | | | — | | | $ | (409,324 | ) | | | (409,324 | ) |
Foreign currency translation | | — | | | | — | | | | — | | | — | | | — | | | | — | | | | (3,887 | ) | | | (3,887 | ) | | | (3,887 | ) |
Unrealized loss on interest rate swaps, net of tax | | — | | | | — | | | | — | | | — | | | — | | | | — | | | | (7,002 | ) | | | (7,002 | ) | | | (7,002 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Comprehensive loss | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | (420,213 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
BALANCE, JANUARY 3, 2009 | | 500 | | | $ | 418,107 | | | $ | 1,562 | | | 450 | | $ | (423 | ) | | $ | (404,797 | ) | | $ | (17,270 | ) | | | | | | $ | (2,821 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
See notes to consolidated financial statements
31
YANKEE HOLDING CORP. AND SUBSIDIARIES (AND PREDECESSOR)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | | | | | | | | | | | | | | | | |
| | | Successor | | | | | Predecessor | |
| | | Fifty-three
Weeks
Ended
January 3,
2009 | | | Period
February 6,
2007 to
December 29,
2007 | | | | | Period
December 31,
2006 to
February 5,
2007 | | | Fifty-two
Weeks
Ended
December 30,
2006 | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | | | | | | | |
Net (loss) income | | $ | (409,324 | ) | | $ | 4,527 | | | | | $ | (1,830 | ) | | $ | 84,515 | |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | | | | | | | | | | | | |
Gain on extinguishment of debt | | | (2,131 | ) | | | — | | | | | | — | | | | — | |
Depreciation and amortization | | | 46,995 | | | | 41,988 | | | | | | 2,673 | | | | 26,780 | |
Unrealized loss (gain) on marketable securities | | | 235 | | | | 238 | | | | | | (31 | ) | | | 13 | |
Share-based compensation expense | | | 892 | | | | 670 | | | | | | 8,638 | | | | 5,772 | |
Deferred taxes | | | (19,056 | ) | | | (14,132 | ) | | | | | (3,905 | ) | | | 7,549 | |
Non-cash charge related to increased inventory carrying value | | | — | | | | 40,472 | | | | | | — | | | | — | |
Loss on disposal and impairment of property and equipment | | | 448 | | | | 640 | | | | | | 14 | | | | 450 | |
Restructuring charges | | | 12,050 | | | | — | | | | | | — | | | | — | |
Goodwill and intangible asset impairments | | | 462,616 | | | | — | | | | | | — | | | | — | |
Investments in marketable securities | | | (516 | ) | | | (581 | ) | | | | | (27 | ) | | | (772 | ) |
Excess tax benefit from exercise of stock options | | | — | | | | — | | | | | | (4,317 | ) | | | (960 | ) |
Changes in assets and liabilities | | | | | | | | | | | | | | | | | | |
Accounts receivable, net | | | 10,333 | | | | (18,389 | ) | | | | | 179 | | | | 9,551 | |
Inventory | | | 4,161 | | | | (2,958 | ) | | | | | (2,739 | ) | | | (1,973 | ) |
Prepaid expenses and other assets | | | (67 | ) | | | (1,428 | ) | | | | | 336 | | | | 617 | |
Accounts payable | | | 1,516 | | | | 2,306 | | | | | | (4,443 | ) | | | 4,363 | |
Income taxes payable | | | (9,401 | ) | | | (9,456 | ) | | | | | 3,642 | | | | 6,620 | |
Accrued expenses and other liabilities | | | (10,110 | ) | | | 29,327 | | | | | | (8,257 | ) | | | 1,520 | |
| | | | | | | | | | | | | | | | | | |
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | | | 88,641 | | | | 73,224 | | | | | | (10,067 | ) | | | 144,045 | |
| | | | | | | | | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | | | | | | |
Purchases of property and equipment | | | (18,522 | ) | | | (28,484 | ) | | | | | (2,250 | ) | | | (26,822 | ) |
Acquisition of the Company | | | — | | | | (1,429,476 | ) | | | | | — | | | | — | |
Payment of contingent consideration related to business acquisitions | | | (225 | ) | | | — | | | | | | — | | | | (1,333 | ) |
Cash paid for business acquisitions | | | — | | | | — | | | | | | — | | | | (22,244 | ) |
| | | | | | | | | | | | | | | | | | |
NET CASH USED IN INVESTING ACTIVITIES | | | (18,747 | ) | | | (1,457,960 | ) | | | | | (2,250 | ) | | | (50,399 | ) |
| | | | | | | | | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | | | | | | |
Payments for redemption of common stock | | | — | | | | — | | | | | | — | | | | (41,977 | ) |
Net proceeds from issuance of common stock | | | 24 | | | | 418,083 | | | | | | — | | | | 5,557 | |
Dividends paid | | | — | | | | — | | | | | | — | | | | (10,097 | ) |
Repurchase of common stock | | | (129 | ) | | | (294 | ) | | | | | — | | | | — | |
Deferred financing costs | | | — | | | | (32,374 | ) | | | | | — | | | | (313 | ) |
Excess tax benefit from exercise of stock options | | | — | | | | — | | | | | | 4,317 | | | | 960 | |
Repayments under bank credit agreements | | | — | | | | — | | | | | | — | | | | (38,000 | ) |
Borrowings under senior secured term loan facility | | | — | | | | 650,000 | | | | | | — | | | | — | |
Borrowings under senior secured revolving credit facility | | | 100,500 | | | | 111,000 | | | | | | — | | | | — | |
Borrowings under senior notes and senior subordinated notes | | | — | | | | 525,000 | | | | | | — | | | | — | |
Repayment of borrowings | | | (45,005 | ) | | | (295,875 | ) | | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | |
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | | | 55,390 | | | | 1,375,540 | | | | | | 4,317 | | | | (83,870 | ) |
| | | | | | | | | | | | | | | | | | |
EFFECT OF EXCHANGE RATE CHANGES ON CASH | | | (334 | ) | | | 39 | | | | | | 11 | | | | 342 | |
NET INCREASE (DECREASE) IN CASH | | | 124,950 | | | | (9,157 | ) | | | | | (7,989 | ) | | | 10,118 | |
CASH, BEGINNING OF PERIOD | | | 5,627 | | | | 14,784 | | | | | | 22,773 | | | | 12,655 | |
| | | | | | | | | | | | | | | | | | |
CASH, END OF PERIOD | | $ | 130,577 | | | $ | 5,627 | | | | | $ | 14,784 | | | $ | 22,773 | |
| | | | | | | | | | | | | | | | | | |
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | | | | | | | | | | | | | | | | | | |
Cash paid (received) during the period for: | | | | | | | | | | | | | | | | | | |
Interest | | $ | 90,229 | | | $ | 71,326 | | | | | $ | 903 | | | $ | 14,865 | |
| | | | | | | | | | | | | | | | | | |
Income taxes | | $ | 5,735 | | | $ | 27,013 | | | | | $ | (77 | ) | | $ | 34,404 | |
| | | | | | | | | | | | | | | | | | |
Net (increase) decrease in accrued purchases of property and equipment | | $ | (1,461 | ) | | $ | 337 | | | | | $ | 1,520 | | | $ | 1,948 | |
| | | | | | | | | | | | | | | | | | |
See notes to consolidated financial statements
32
YANKEE HOLDING CORP. AND SUBSIDIARIES (AND PREDECESSOR)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE FIFTY-THREE WEEKS ENDED JANUARY 3, 2009,
THE PERIODS DECEMBER 31, 2006 TO FEBRUARY 5, 2007 AND FEBRUARY 6, 2007 TO DECEMBER 29, 2007,
AND THE FIFTY-TWO WEEKS ENDED DECEMBER 30, 2006
(in thousands, except share data)
1. NATURE OF BUSINESS
Yankee Holding Corp. and subsidiaries (“Yankee Candle” or “the Company”) is a leading designer, manufacturer and branded marketer of premium scented candles in the giftware industry. The strong brand equity of the Yankee Candle brand, coupled with its vertically integrated multi-channel business model, have enabled the Company to be a market leader in the premium scented candle market for many years. The Company designs, develops, manufactures, and distributes the majority of the products it sells which allows the Company to offer distinctive, trend-appropriate products for every season, every customer, and every room in your home. The Company has a 39-year history of offering its distinctive products and marketing them as affordable luxuries for everyone on your list. The Company offers a broad assortment of highly scented candles, innovative home fragrance products, and candle related home décor accessories in a variety of compelling fragrances, colors, styles, and price points.
The Company sells its products through several channels including wholesale customers who operate approximately 19,700 locations in North America, 463 Company-owned and operated Yankee Candle retail stores in 43 states as of January 3, 2009, direct mail catalogs, its Internet web sites (www.yankeecandle.com, www.illuminations.com and www.aromanaturals.com), and our subsidiary Yankee Candle Company (Europe) LTD, which has an international wholesale customer network of approximately 3,000 locations and distributors covering 23 countries.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION – On February 6, 2007, The Yankee Candle Company, Inc. (the “Predecessor”) merged (the “Merger”) with an affiliate of Madison Dearborn Partners, LLC (“MDP”). In connection with the Merger, YCC Holdings LLC, or (“Holdings”) acquired all of the outstanding capital stock for $1,413,527 in cash. Holdings is owned by an affiliate of MDP and certain members of our senior management. Holdings owns 100% of the stock of Yankee Holding Corp., (the “Parent” or “Successor”), which in turn owns 100% of the stock of The Yankee Candle Company, Inc.
This report contains the audited consolidated financial statements of the Successor as of and for the year ended January 3, 2009 and as of December 29, 2007 and for the period February 6, 2007 to December 29, 2007. The accompanying audited consolidated financial statements for the period December 31, 2006 to February 5, 2007 and the year ended December 30, 2006 are those of the Predecessor.
We have separated our historical financial results for the Predecessor and Successor. The separate presentation is required as there was a change in accounting basis, which occurred when purchase accounting was applied to the acquisition of the Predecessor. Purchase accounting requires that the historical carrying value of assets acquired and liabilities assumed be adjusted to fair value, which may yield results that are not comparable on a period-to-period basis due to the different, and sometimes higher, cost basis associated with the allocation of the purchase price.
Unless the context specifies otherwise, “we,” “us,” “our,” or the “Company” refer to the Successor and its subsidiaries and for the periods prior to February 5, 2007, the Predecessor and its subsidiaries. The Successor is a Delaware corporation formed in connection with the Merger. The Predecessor was a Massachusetts corporation formed in 1976.
The fiscal year is the fifty-two or fifty-three weeks ending the Saturday closest to December 31. Fiscal 2008 consists of the fifty-three weeks ended January 3, 2009. Fiscal 2007 consists of the periods December 31, 2006 to February 5, 2007 (Predecessor) and February 6, 2007 to December 29, 2007 (Successor). The fifty-two weeks ended December 30, 2006 (Predecessor) is referred to as fiscal 2006.
PRINCIPLES OF CONSOLIDATION – The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated.
ACCOUNTING ESTIMATES – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
SALES RECOGNITION – The Company sells its products both directly to retail customers and through wholesale channels. Merchandise sales are recognized upon transfer of ownership, including passage of title to the customer and transfer of the risk of loss related to those goods. In the wholesale segment, products are shipped “free on board” shipping point, however revenue is recognized at the time the product is received by the customer due to the Company’s practice of absorbing risk of loss in the event of damaged or lost shipments. In the retail segment, transfer of title takes place at the point of sale (i.e., at our retail stores). There are no situations, either in the wholesale or retail segments, where legal risk of loss does not transfer immediately upon receipt by customers. Although the Company does not provide a contractual right of return, in the course of arriving at practical business solutions to various claims, the Company has allowed sales returns and allowances. In these situations, customer claims for credit or return due to damage, defect, shortage or other reason must be pre-approved by the Company before credit is issued or such product is accepted for return. Such returns have not precluded sales recognition because the Company has a long history with such return activity, which is used in estimating a reserve. This accrual, however, is subject to change if actual returns differ from historical and expected return rates. In the wholesale segment, the Company has included an allowance in its financial statements representing its estimated obligation related to promotional marketing activities. In addition to returns, the Company bears credit risk relative to wholesale customers. The Company has provided an allowance for bad debts in the financial statements based on estimates of the creditworthiness of customers. However, this allowance is also subject to change. Changes in the estimates could affect operating results.
The Company sells gift cards to customers in both Yankee Candle and other third party retail stores and through catalog and Internet operations. The gift cards do not have an expiration date. At the point of sale of a gift card, the Company records deferred revenue. The Company recognizes income from gift cards when the gift card is redeemed by the customer. Gift card breakage income is recorded based on the Company’s historical redemption pattern (which is subject to change if or when actual patterns of redemptions change). Based on historical information, the Company determined that redemptions decreased to a de minimis amount 36 months after issuance and that approximately 8% of the gift card’s value will never be redeemed. Gift card breakage income is recorded monthly in proportion to the actual redemption of gift cards in that month based on the Company’s historical redemption pattern. Gift card breakage income is included in sales in the consolidated statements of operations.
CASH AND CASH EQUIVALENTS – The Company considers all short-term investments with maturities of three months or less at the date of purchase to be cash
33
equivalents. The Company had no cash equivalents as of January 3, 2009 and December 29, 2007. The Company’s cash includes interest-bearing and non-interest bearing accounts. The Company maintains cash balances at several financial institutions. At January 3, 2009 accounts at each institution are insured by the Federal Deposit Insurance Corporation (FDIC) through its transaction account guarantee program. Through this program all non-interest bearing accounts at participating institutions are fully guaranteed by the FDIC for the entire amount in the account. The transaction account guarantee program runs through December 31, 2009. Uninsured balances aggregated $16,437 and $3,336 at January 3, 2009 and December 29, 2007, respectively.
INVENTORIES – The Predecessor valued its inventories on the last–in first–out (“LIFO”) basis. The Successor values its inventories using the first–in first–out (“FIFO”) basis. Inventory quantities on hand are regularly reviewed, and where necessary provisions for excess and obsolete inventory are recorded based primarily on the Company’s forecast of product demand and production requirements.
PROPERTY AND EQUIPMENT – Property and equipment are stated at cost and are depreciated on the straight-line method based on the estimated useful lives of the various assets. The estimated useful lives are as follows:
| | |
| | | Years |
Buildings and improvements | | 5 - 40 |
Computer equipment | | 2 - 6 |
Furniture and fixtures | | 5 - 10 |
Equipment | | 2 - 10 |
Vehicles | | 3 - 5 |
Leasehold improvements are amortized using the straight-line method over the lesser of the estimated life of the improvement or the remaining life of the lease. Expenditures for normal maintenance and repairs are charged to expense as incurred.
MARKETABLE SECURITIES – The Company classifies the marketable securities held in its deferred compensation plan as trading securities under Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” In accordance with the provisions of this statement, the investment balance is stated at fair market value, based on third party market quotes. Unrealized gains and losses are reflected in earnings; realized gains and losses are also reflected in earnings and are computed using the specific-identification method. The assets held in the deferred compensation plan reflect amounts due to employees, but are available for general creditors of the Company in the event the Company becomes insolvent. The Company has recorded the investment balance as a non-current asset and a long-term liability entitled “deferred compensation obligation” on the consolidated balance sheets.
The marketable securities held in this plan consist of investments in mutual funds at January 3, 2009 and December 29, 2007. Unrealized (losses) gains included in operations during the fifty-three weeks ended January 3, 2009 and the periods February 6, 2007 to December 29, 2007 and December 31, 2006 to February 5, 2007 were $(235), $(238) and $31, respectively. Unrealized losses included in operations during the fifty-two weeks ended December 30, 2006 were $(13). Realized (losses) gains recorded during the fifty-three weeks ended January 3, 2009 and the period February 6, 2007 to December 29, 2007 were $(3) and $275, respectively. Realized gains of $108 were recorded during the fifty-two weeks ended December 30, 2006. There were no realized gains (losses) recognized for the period December 31, 2006 to February 5, 2007.
GOODWILL AND INTANGIBLE ASSETS – The Company accounts for goodwill and intangible assets in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”. Under SFAS 142, goodwill and certain intangible assets with indefinite lives are not amortized but are subject to an annual impairment test. For goodwill, the annual impairment evaluation compares the fair value of each of the Company’s reporting units to their respective carrying value. The Company completed its annual impairment testing of goodwill and indefinite-lived intangible assets as of November 1, 2008. As a result of its annual impairment analysis the Company recorded impairment charges of $375,216 and $87,400 related to its goodwill and tradenames, respectively. At January 3, 2009 and December 29, 2007 goodwill totaled $643,801 and $1,019,982, respectively. We initiated a restructuring plan during the fourth quarter of 2008 which led us to the determination that our Illuminations reporting unit was fully impaired. Based on the restructuring plans we determined that the Illuminations tradename had no fair value and during the fourth quarter ended January 3, 2009, we recorded an impairment charge of $4,507 related to the write-off of the Illuminations tradename.
Intangible assets totaled $308,877 and $414,242 at January 3, 2009 and December 29, 2007, respectively. See Note 9, “Goodwill and Intangible Assets,” to the consolidated financial statements for further details regarding the annual impairment test.
IMPAIRMENT OF OTHER LONG-LIVED ASSETS – The Company reviews the recoverability of its other long-lived assets (property and equipment and customer lists) when events or changes in circumstances occur that indicate that the carrying value of the assets may not be recoverable. This review is based on the Company’s ability to recover the carrying value of the assets from expected undiscounted future cash flows. If an impairment is indicated, the Company measures the loss based on the fair value of the asset using various valuation techniques. If an impairment loss exists, the amount of the loss will be recorded in the consolidated statements of operations. In fiscal 2008 the Company recorded $7,700 in fixed asset and other impairments related to the restructuring discussed in Note 16, “Restructuring Charges,” to the consolidated financial statements.
RESTRUCTURING CHARGES – The Company accounts for its restructuring plans in accordance with SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities.” Under SFAS 146 a liability for costs associated with an exit or disposal activity is recognized and measured at fair value when the liability is incurred. For the fifty-three weeks ended January 3, 2009, the Company recorded a restructuring charge of $13,857. For additional information on the 2008 restructuring plans see Note 16, “Restructuring Charges,” to the consolidated financial statements.
ADVERTISING – The Company expenses advertising costs as they are incurred. Advertising expense was $15,382, $18,100 and $1,056 for the fifty-three weeks ended January 3, 2009 and the periods February 6, 2007 to December 29, 2007 and December 31, 2006 to February 5, 2007, respectively. For the fifty-two weeks ended December 30, 2006 advertising expense was $15,189.
INCOME TAXES – The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities using expected tax rates in effect in the years in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount that is more likely than not to be realized. The provision for income taxes in the consolidated statements of operations is the actual computed tax obligation or receivable for the period, plus or minus the change during the period in deferred income tax assets and liabilities.
The Company adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, or FIN 48, effective December 31, 2006. FIN 48 clarifies whether or not to recognize assets or liabilities for tax positions taken that may be challenged by a taxing authority. As a result of the implementation of FIN 48, the Company recognized a $224 increase in the liability for unrecognized tax benefits, which was accounted for as a decrease to retained earnings. As of January 3, 2009, the Company had $2,902 of unrecognized tax benefits, of which $462 would reduce income tax expense if recognized.
FAIR VALUE OF FINANCIAL INSTRUMENTS – In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (SFAS 157). SFAS 157
34
defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements. SFAS 157 does not expand or require new fair value measures, however the application of this statement may change current practice. The requirements of SFAS 157 were effective for our fiscal year beginning December 30, 2007 and interim periods within that fiscal year. In February 2008 the FASB deferred the application of this standard to nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis until the subsequent year. Accordingly, our adoption of this standard on December 30, 2007 was limited to financial assets and liabilities, which primarily impacted the valuation of our derivative contracts. See Note 8, “Fair Value Measurements,” to the consolidated financial statements for additional information.
FOREIGN OPERATIONS – Assets and liabilities of foreign operations are translated into U.S. dollars at the exchange rate on the balance sheet date. The results of foreign subsidiary operations are translated using average rates of exchange during each reporting period. Gains and losses upon translation are deferred and reported as a component of other comprehensive income. Foreign currency transaction gains or losses, whether realized or unrealized, are recorded directly in the consolidated statements of operations.
EQUITY BASED COMPENSATION – Effective January 1, 2006, the Company adopted SFAS No. 123(R) “Share-Based Payment”. The Company adopted SFAS 123(R) using a modified prospective application, as permitted under SFAS 123(R) and, accordingly, prior period amounts were not restated. Under this application, the Company is required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption. The effect of the adoption of SFAS 123(R) in 2006 resulted in a reduction of net income of $179. In addition, $960 of the excess tax benefit from the exercise of stock options has been classified as a financing activity in the statement of cash flows.
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements. SFAS 157 does not expand or require new fair value measures, however the application of this statement may change current practice. The requirements of SFAS 157 were first effective for our fiscal year beginning December 30, 2007 and interim periods within that fiscal year. In February 2008, the FASB deferred the application of this statement to nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis until the subsequent year.
Accordingly, our adoption of this standard on December 30, 2007 is limited to financial assets and liabilities, which primarily impacts the valuation of our derivative contract. The initial adoption of SFAS 157 did not have a material effect on our financial condition, results of operations and cash flows. However, we are still in the process of evaluating this standard with respect to its impact on nonfinancial assets and liabilities and therefore have not yet determined the impact that it will have on our financial statements upon full adoption.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115” (SFAS 159). SFAS 159 permits entities to measure many financial instruments and certain other items at fair value. Entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date. SFAS 159 also establishes presentation and disclosure requirements. The Company adopted SFAS 159 on December 30, 2007 and has elected not to apply the fair value option to any of its financial instruments other than those described in Note 8, “Fair Value Measurements” to the accompanying consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (SFAS 161). SFAS 161 amends and expands the disclosure requirements of SFAS 133 with the intent to provide users of financial statements with an enhanced understanding of how and why an entity uses derivative instruments and their impact on an entity’s financial position, financial performance and cash flows. The requirements of SFAS 161 are effective for our fiscal year beginning on January 4, 2009. The Company is in the process of evaluating the impact of adopting SFAS 161 on our derivative disclosures.
In May 2008, the FASB issued SFAS No. 162, “Hierarchy of Generally Accepted Accounting Principles” (SFAS 162). This statement is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements of nongovernmental entities that are presented in conformity with GAAP. This statement will be effective 60 days following the U.S. Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendment to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The Company is currently evaluating the potential impact, if any, of the adoption of SFAS 162 on its financial condition, results of operations and cash flows.
3. ACQUISITION OF THE COMPANY
On October 25, 2006, the Yankee Candle Company Inc. (“the Predecessor”) announced that it had entered into a definitive merger agreement (the “Merger”) under which affiliates of MDP, a private equity investment firm, agreed to acquire all of the outstanding shares of the Predecessor for $34.75 per share in cash. The Merger closed on February 6, 2007 (the “Effective Date”).
On the Effective Date, Holdings acquired all of the outstanding capital stock of the Predecessor for approximately $1,413,527 in cash. Holdings is owned by affiliates of MDP and certain members of our senior management and has no operations. The Successor and Yankee Acquisition Corp. (the “Merger Sub”) are corporations formed by Holdings in connection with the acquisition and, concurrently with the closing of the offering of the notes (described below) and the acquisition on February 6, 2007, the Merger Sub merged with and into The Yankee Candle Company, Inc., which was the surviving corporation and assumed the obligations of the Merger Sub under the notes and related indentures by operation of law.
Immediately following the Merger, The Yankee Candle Company, Inc. became a wholly–owned subsidiary of the Parent and a wholly–owned indirect subsidiary of Holdings and the equity investors indirectly own all of the Company’s outstanding equity interests.
The purchase price of the Company was allocated to the assets and liabilities acquired based on their estimated fair market values as of the Effective Date.
As a result of the consummation of the Transactions and the application of purchase accounting as of February 6, 2007, the consolidated financial statements for the periods after February 5, 2007 are presented on a different basis than that for the periods before February 6, 2007 and therefore are not comparable to prior periods.
4. PURCHASE ACCOUNTING
The Transactions have been accounted for as a purchase in accordance with SFAS 141, “Business Combinations,” whereby the purchase price paid to effect the Transactions was allocated to record acquired assets and liabilities at fair value. The Transactions and the allocation of the purchase price have been recorded as of February 6, 2007. The purchase price was $1,429,476.
Management utilized independent third-party appraisers in its valuation of certain tangible and intangible assets acquired and liabilities assumed. However, management
35
assumed full responsibility for the fair value of its tangible and intangible assets acquired and liabilities assumed in the final purchase price allocation. The Company recorded purchase accounting adjustments to increase the carrying value of property and equipment and inventory, to establish intangible assets for tradenames, customer lists and favorable lease commitments and to revalue the Company’s long-term deferred rent obligation, among other items.
The allocation of the purchase price for the acquisition of the Company is based on fair value of net assets acquired. The purchase price was allocated as follows (in thousands):
| | | | |
Cash consideration purchase price: | | | | |
Paid to shareholders | | $ | 1,413,527 | |
Transaction costs | | | 15,949 | |
| | | | |
| | | 1,429,476 | |
| | | | |
Net assets acquired: | | | | |
Inventory | | | 107,357 | |
Property and equipment | | | 154,995 | |
Trade receivables | | | 33,614 | |
Other assets | | | 14,960 | |
Record intangible assets acquired: | | | | |
Tradenames | | | 359,808 | |
Customer lists | | | 64,700 | |
Favorable lease agreements | | | 2,330 | |
Unfavorable lease agreements | | | (8,652 | ) |
Current liabilities assumed | | | (136,640 | ) |
Tax impact of purchase accounting adjustments | | | (182,753 | ) |
| | | | |
Net assets acquired at fair value | | | 409,719 | |
| | | | |
Goodwill | | $ | 1,019,757 | |
| | | | |
Goodwill as a result of this transaction is not deductible for tax purposes. See Note 9, “Goodwill and Intangible Assets”, to the consolidated financial statements for additional information.
Total fees and expenses related to the Transactions were approximately $52,925, consisting of approximately $4,602 of indirect transaction costs which were expensed, $15,949 of direct acquisition costs of the Company and $32,374 of deferred financing costs. Such fees include commitment, placement, financial advisory and other transaction fees as well as legal, accounting and other professional fees. The direct acquisition costs are included in the purchase price and are a component of goodwill. Deferred financing costs are comprised of approximately $15,171 related to the senior secured credit facility, which are amortized over 7 years, $10,170 related to the senior notes, which are amortized over 8 years and $7,033 related to the senior subordinated notes, which are amortized over 10 years. See Note 11, “Long-Term Debt”, for a complete description of the senior secured credit facility, senior notes and senior subordinated notes.
The unaudited pro forma results of operations provided below for the fifty-two weeks ended December 29, 2007 and December 30, 2006 are presented as though the Transaction had occurred at the beginning of the periods presented, after giving effect to purchase accounting adjustments relating to depreciation and amortization of revalued assets, interest expense associated with the senior secured credit facility, senior notes and senior subordinated notes as well as other acquisition related adjustments in connection with the Transactions. The pro forma results of operations are not necessarily indicative of the combined results that would have occurred had the Transactions been consummated at the beginning of the earliest period presented, or are they necessarily indicative of future operating results.
| | | | | | | |
| | | Fifty-two Weeks Ended | |
| | | December 29,
2007 | | December 30,
2006 | |
Net sales | | $ | 736,955 | | $ | 687,557 | |
Net income (loss) | | $ | 17,499 | | $ | (2,098 | ) |
5. EQUITY-BASED COMPENSATION
Effective as of the closing of the Transactions, all of the prior equity plans of the Predecessor ceased to be effective and all existing equity grants and awards were paid out. In connection with the Transactions, the Company entered into equity arrangements with certain members of senior management of the Company (“Management Investors”). The equity consists of ownership interests in Holdings. At the time of the Transactions there were two classes of these ownership interests: Class A common units and Class B common units. The Class A and Class B common units were issued to and purchased by the Management Investors under the YCC Holdings LLC 2007 Incentive Equity Plan adopted on February 6, 2007 (the “Plan”). The Plan grants the Board authorization to issue up to 593,622 Class B common units. The rights and obligations of Holdings and the holders of its Class A and Class B common units are generally set forth in Holdings’ limited liability company agreement, Holdings’ unitholders agreement and the individual Class A and Class B unit purchase agreements entered into with the respective unitholders (the “equity agreements”).
Upon closing of the Transactions, certain eligible Management Investors purchased 40,933 Class A common units (approximately 0.96% of Holdings’ Class A common units). The remaining 4,233,353 Class A common units were purchased by MDP in connection with the consummation of the Transactions. The purchase price paid by the Management Investors for the Class A common units was $101.22 per unit, the same as that paid by MDP pursuant to the Merger. The Class A common units are not subject to vesting. Each Management Investor has the right to require the Company to repurchase the Class A common units at original cost if the Company terminates him or her without cause or he or she resigns for good reason prior to the second anniversary of the closing of the Transactions.
Additionally, the Board approved the issuance of 474,897 shares of Class B common units. Pursuant to the Plan the Management Investors purchased 427,643 Class B common units of Holdings (representing approximately 9.9% of the residual equity interest of Holdings). The remainder of the Class B common units were available for issuance to eligible participants under the Plan. The Class B common units were purchased at a cost of $1.00 per unit. The Class B common units are subject to a five-year vesting period, with 10% of the units vesting immediately upon the date of purchase and the remainder generally vesting daily beginning on the sixth month anniversary of the purchase date, continuing over the subsequent 54 month period. If the Management Investors’ employment is terminated as a result of death or disability, an additional amount of Class B common units equal to the lesser of (i) twenty percent (20%) of the aggregate number of units held by such Management Investor and (ii) the remainder of the Management Investor’s unvested units, shall automatically become vested units. All unvested Class B common units will vest upon a sale of all or substantially all of the business to an independent third party so long as the employee holding such units continues to be an employee of the Company at the closing of the sale. Class B common units are also subject to the right of Holdings or, if not exercised by Holdings, of MDP, to repurchase such Class B common units upon a termination of employment, as more fully set forth in the equity agreements.
36
In October 2007, the Compensation Committee approved the creation of a new class of equity interest in Holdings, Class C common units, for future issuance to eligible participants under the Management Equity Plan. As approved by the Compensation Committee, the number of remaining authorized and unissued Class B common units will be reduced by any Class C common unit grants made, and the number of combined Class B common units and Class C common units can not exceed the initial pool of Class B common units originally reserved in connection with the Merger. Class C common units will otherwise have the same general characteristics as Class B common units, including with respect to time vesting and repurchase terms (except that unvested Class C common units are forfeited rather than repurchased as there is no initial capital outlay for the Class C common units). The recipient of a Class C common unit incentive grant is required to make a corresponding purchase of Class A common units, at then fair market value, which may range in size from $1 to $15 depending on the size of the Class C common unit grant. The Company currently anticipates that all future long-term equity incentive grants will be made using Class C common units.
Class A, Class B and Class C common units are all subject to various restrictions on transfer and other conditions, all as more fully set forth in the equity agreements. Holdings may issue additional units subject to the terms and conditions of certain of the equity agreements.
As of January 3, 2009, shares outstanding were as follows:
| | | | | | | |
| | | Class A
Common
Units | | Class B
Common
Units | | | Class C
Common
Units |
Outstanding at December 29, 2007 | | 4,271,715 | | 403,185 | | | 475 |
Granted | | 222 | | — | | | 40,873 |
Forfeited | | — | | (3,328 | ) | | — |
Repurchased | | — | | (4,737 | ) | | — |
| | | | | | | |
Outstanding at January 3, 2009 | | 4,271,937 | | 395,120 | | | 41,348 |
| | | | | | | |
Vested at January 3, 2009 | | 4,271,937 | | 150,916 | | | 7,790 |
| | | | | | | |
A summary of the Company’s nonvested shares as of January 3, 2009, and the activity for the fifty-three weeks ended January 3, 2009 is presented below:
| | | | | | | | | | | | |
| | | Class B
Common
Units | | | Weighted
Average
Calculated
Value | | Class C
Common
Units | | | Weighted
Average
Calculated
Value |
Nonvested at December 29, 2007 | | 327,837 | | | $ | 9.39 | | 428 | | | $ | 18.55 |
Granted | | — | | | | — | | 40,873 | | | $ | 13.72 |
Forfeited | | (3,328 | ) | | $ | 9.39 | | — | | | | — |
Vested | | (80,305 | ) | | $ | 9.39 | | (7,743 | ) | | $ | 13.76 |
| | | | | | | | | | | | |
Nonvested at January 3, 2009 | | 244,204 | | | $ | 9.39 | | 33,558 | | | $ | 13.77 |
| | | | | | | | | | | | |
The total estimated fair value of equity awards vested during the fifty-three weeks ended January 3, 2009 was $861. The total estimated fair value of equity awards vested during the period from February 6, 2007 to December 29, 2007 was approximately $784. Equity-based compensation expense for the fifty-three weeks ended January 3, 2009 and the period from February 6, 2007 to December 29, 2007 was $892 and $670, respectively.
As of January 3, 2009, there was approximately $2,762 of total unrecognized compensation cost related to Class B and Class C common unit equity awards and there is no unrecognized expense related to the Class A common unit equity awards. This cost is expected to be recognized over the remaining vesting period, of approximately 52 months (January 2009 to April 2013).
Presented below is a summary of assumptions for the indicated period. There were 12,086 class B grants, 475 class C grants and no Class A grants for the period from February 6, 2007 to December 29, 2007 by the Successor. There were no grants made for the period from December 31, 2006 to February 5, 2007 by the Predecessor.
| | | | | | | | |
Assumptions | | Fifty-Three Weeks
Ended January 3, 2009
Option Pricing Method
Black-Scholes | | | Period
February 6, 2007
to December 29, 2007
Option Pricing
Method Black-Scholes | |
Weighted average calculated value of awards granted | | $ | 13.72 | | | $ | 10.40 | |
Weighted average volatility | | | 29.1 | % | | | 30.0 | % |
Weighted average expected term (in years) | | | 3.9 | | | | 5.0 | |
Dividend yield | | | — | | | | — | |
Weighted average risk-free interest rate | | | 2.2 | % | | | 4.7 | % |
Weighted average expected annual forfeitures | | | — | | | | — | |
With respect to the Class B and Class C common units, since the Company is no longer publicly traded, the Company based its estimate of expected volatility on the median historical volatility of a group of eight comparable public companies. The historical volatilities of the comparable companies were measured over a 5-year historical period. The expected term of the Class B and Class C common units granted represents the period of time that the units are expected to be outstanding and is assumed to be approximately 5 years based on management’s estimate of the time to a liquidity event. The Company does not expect to pay dividends, and accordingly, the dividend yield is zero. The risk free interest rate reflects a five-year period commensurate with the expected time to a liquidity event and was based on the U.S. Treasury yield curve.
6. INVENTORIES
The Predecessor valued its inventories on the last–in first–out (“LIFO”) basis. The Successor has elected to value its inventories using the first–in first–out (“FIFO”) basis. As a result of the Merger, purchase accounting adjustments of approximately $43,452 were recorded to increase inventories to estimated fair value. During the period February 6, 2007 to December 29, 2007 approximately $40,472 of the increase has been recorded as a cost of sale in the consolidated statement of operations as the related inventory was sold. The remainder of the purchase accounting adjustment was due to a change in the basis of accounting from LIFO to FIFO.
37
The components of inventory were as follows:
| | | | | | |
| | | January 3,
2009 | | December 29,
2007 |
Finished goods | | $ | 54,939 | | $ | 62,723 |
Work-in-process | | | 212 | | | 559 |
Raw materials and packaging | | | 7,884 | | | 6,681 |
| | | | | | |
| | $ | 63,035 | | $ | 69,963 |
| | | | | | |
7. PROPERTY AND EQUIPMENT
The components of property and equipment were as follows:
| | | | | | | | |
| | | January 3,
2009 | | | December 29,
2007 | |
Land and improvements | | $ | 8,020 | | | $ | 7,918 | |
Buildings and improvements | | | 95,506 | | | | 95,708 | |
Computer equipment | | | 24,628 | | | | 21,827 | |
Furniture and fixtures | | | 32,154 | | | | 30,245 | |
Equipment | | | 21,899 | | | | 20,999 | |
Vehicles | | | 49 | | | | 53 | |
Construction in progress | | | 6,731 | | | | 4,847 | |
| | | | | | | | |
Total | | | 188,987 | | | | 181,597 | |
Less: accumulated depreciation and amortization | | | (50,765 | ) | | | (25,686 | ) |
| | | | | | | | |
| | $ | 138,222 | | | $ | 155,911 | |
| | | | | | | | |
Depreciation and amortization expense related to property and equipment was $29,309 for the fifty-three weeks ended January 3, 2009. For the periods December 31, 2006 to February 5, 2007 and February 6, 2007 to December 29, 2007 and for the fifty-two weeks ended December 30, 2006 $2,504, $26,020, and $24,984, respectively, was recognized in depreciation and amortization expense related to property and equipment. For the fifty-three weeks ended January 3, 2009 and for the periods December 31, 2006 to February 5, 2007 and February 6, 2007 to December 29, 2007, $161, $15 and $215, respectively, of interest was capitalized. In addition, $128 of interest was capitalized in the fifty-two weeks ended December 30, 2006.
8. FAIR VALUE MEASUREMENTS
On December 30, 2007 the Company adopted certain provisions of SFAS No. 157 “Fair Value Measurements” (SFAS 157), as described in Note 2, “Summary of Significant Accounting Policies, Recent Accounting Pronouncements.” The adoption of SFAS 157 did not have a material effect on the Company’s financial statements. SFAS 157 defines fair value, provides a consistent framework for measuring fair value under GAAP and expands fair value financial statement disclosure requirements. SFAS 157’s valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect market assumptions. SFAS 157 classifies these inputs into the following hierarchy:
Level 1 Inputs– Quoted prices for identical instruments in active markets.
Level 2 Inputs– Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 Inputs– Instruments with primarily unobservable value drivers.
The following table represents the fair value hierarchy for those financial assets and liabilities measured at fair value on a recurring basis as of January 3, 2009.
| | | | | | | | | | | | |
| | | Fair Value Measurements on a Recurring Basis
as of January 3, 2009 |
| | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | | | | | | |
Marketable securities | | $ | 540 | | $ | — | | $ | — | | $ | 540 |
| | | | | | | | | | | | |
Total Assets | | $ | 540 | | $ | — | | $ | — | | $ | 540 |
| | | | | | | | | | | | |
| | | | |
Liabilities | | | | | | | | | | | | |
Interest rate swaps | | $ | — | | $ | 20,914 | | $ | — | | $ | 20,914 |
Diesel hedge contract | | | — | | | 346 | | | — | | | 346 |
| | | | | | | | | | | | |
Total Liabilities | | $ | — | | $ | 21,260 | | $ | — | | $ | 21,260 |
| | | | | | | | | | | | |
The Company holds marketable securities in its deferred compensation plan. The marketable securities consist of investments in mutual funds and are recorded at fair value based on third party quotes. The Company uses an income approach to value the asset and liability for its outstanding interest rate swaps using a discounted cash flow model that takes into account the present value of future cash flows under the terms of the contract using current market information as of the reporting date such as the three month LIBOR curve and the creditworthiness of the Company and its counterparties. The fair value of the diesel hedge contract is based on home heating oil future prices for the duration of the contract.
38
Financial Instruments Not Measured at Fair Value
The Company’s long-term debt is recorded at historical amounts. The Company estimates the fair value of its long-term debt based on current quoted market prices. At January 3, 2009, the carrying value of the Company’s senior notes, senior subordinated and senior secured term loan was approximately $555 higher than its fair value of $558. At January 3, 2009, the Company can not approximate the fair value of its senior secured revolving credit facility because there was no recent trade history available. At December 29, 2007, the carrying value of the Company’s senior notes and senior subordinated notes was approximately $45 higher than its fair value of $480. At December 29, 2007, the fair value of the variable rate senior secured term loan facility and senior secured revolving credit facility approximated their carrying values.
9. GOODWILL AND INTANGIBLE ASSETS
The Company accounts for goodwill and intangible assets in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”. The Company has determined that its tradenames have an indefinite useful life and, therefore, are not being amortized. Under SFAS 142, goodwill and indefinite lived intangible assets are not amortized but are subject to an annual impairment test.
The Company has four reporting units: retail, wholesale, Aroma Naturals and Illuminations and two reportable segments: retail and wholesale. The retail and Illuminations reporting units are part of the retail segment and the wholesale and Aroma Naturals reporting units are part of the wholesale segment. The Company performs its annual impairment testing at the reporting unit level. Fair values of the reporting units are derived through a combination of market-based and income-based approaches, each of which were weighted at 50% for the impairment test performed as of November 1, 2008. The market-based approach estimates fair value by applying multiples of potential earnings, such as EBITDA and revenue, of publicly traded comparable companies. The Company believes this approach is appropriate because it provides a fair value using multiples from companies with operations and economic characteristics similar to our reporting units. The income-based approach is based on projected future debt-free cash flow that is discounted to present value using factors that consider the timing and risk of the future cash flows. The Company believes this approach is appropriate because it provides a fair value estimate based upon the reporting units expected long-term operations and cash flow performance. The income-based approach is based on a reporting unit’s future projections of operating results and cash flows. These projections are discounted to present value using a weighted average cost of capital for market participants, who are generally thought to be industry participants.
The Company initiated a restructuring plan during the fourth quarter of 2008 which led to the determination that the Illuminations reporting unit was fully impaired. Based on the restructuring plans the Company determined that the Illuminations tradename had no fair value and during the fourth quarter ended January 3, 2009, and recorded an impairment charge of $4,507 related to the write-off of the Illuminations tradename. The Company expects to close all of its Illuminations stores by April 30, 2009. There was no goodwill associated with the Illuminations reporting unit.
The Company completed its annual impairment testing of goodwill and indefinite-lived intangible assets as of November 1, 2008. Based on the first step of its annual assessment it was determined that the carrying value of each of the reporting units exceeded its fair value, indicating that goodwill and intangible assets were impaired. This was primarily driven by a decline in the estimated future discounted cash flows for each reporting unit. The current adverse economic market conditions were the primary driver for the decline in the estimated future discounted cash flows.
In the second step of the impairment analysis the Company calculated the implied fair value of goodwill for each of the three remaining reporting units: Retail, Wholesale and Aroma Naturals. The implied fair value of goodwill was calculated similar to how goodwill is calculated in a business combination. In addition, the Company also performed an analysis utilizing discounted future cash flows related to certain of our intangible assets to determine the fair value of each of the respective assets. As a result of these analyses the Company recorded impairment charges of $375,216 and $87,400 related to goodwill and tradenames, respectively during the fourth quarter ended January 3, 2009. These impairment charges related to all three of our reporting units: retail, wholesale and Aroma Naturals. Aroma Naturals is reported within the wholesale segment.
Intangible Assets
At January 3, 2009 and December 29, 2007, the carrying amount and accumulated amortization of intangible assets consisted of the following:
| | | | | | | | | | | | |
| | | Weighted
Average
Useful Life
(in years) | | Gross
Carrying
Amount | | Accumulated
Amortization | | | Net
Book
Value |
January 3, 2009 | | | | | | | | | | | | |
Indefinite life: | | | | | | | | | | | | |
Tradenames | | N/A | | $ | 267,955 | | $ | — | | | $ | 267,955 |
| | | | | | | | | | | | |
Finite-lived intangible assets: | | | | | | | | | | | | |
Customer lists | | 5 | | | 65,218 | | | (25,500 | ) | | | 39,718 |
Favorable lease agreements | | 5 | | | 2,330 | | | (1,138 | ) | | | 1,192 |
Other | | 3 | | | 36 | | | (24 | ) | | | 12 |
| | | | | | | | | | | | |
Total finite-lived intangible assets | | | | | 67,584 | | | (26,662 | ) | | | 40,922 |
| | | | | | | | | | | | |
Total intangible assets | | | | $ | 335,539 | | $ | (26,662 | ) | | $ | 308,877 |
| | | | | | | | | | | | |
December 29, 2007 | | | | | | | | | | | | |
Indefinite life: | | | | | | | | | | | | |
Tradenames | | N/A | | $ | 359,862 | | $ | — | | | $ | 359,862 |
| | | | | | | | | | | | |
Finite-lived intangible assets: | | | | | | | | | | | | |
Customer lists | | 5 | | | 64,700 | | | (12,081 | ) | | | 52,619 |
Favorable lease agreements | | 5 | | | 2,330 | | | (592 | ) | | | 1,738 |
Other | | 3 | | | 36 | | | (13 | ) | | | 23 |
| | | | | | | | | | | | |
Total finite-lived intangible assets | | | | | 67,066 | | | (12,686 | ) | | | 54,380 |
| | | | | | | | | | | | |
Total intangible assets | | | | $ | 426,928 | | $ | (12,686 | ) | | $ | 414,242 |
| | | | | | | | | | | | |
Total amortization expense from finite-lived intangible assets was $13,976 for the fifty-three weeks ended January 3, 2009. Total amortization expense from finite–lived intangible assets was $12,686 for the period February 6, 2007 to December 29, 2007, $178 for the period December 31, 2006 to February 5, 2007 and $1,531 for the fifty-two weeks ended December 30, 2006. The intangible assets are amortized on a straight line basis. Favorable lease agreements are amortized over the remaining lease term of each respective lease.
39
Aggregate amortization expense related to intangible assets at January 3, 2009 in each of the next five fiscal years and thereafter is expected to be as follows:
| | | |
2009 | | $ | 13,855 |
2010 | | | 12,748 |
2011 | | | 12,603 |
2012 | | | 1,457 |
2013 | | | 193 |
Thereafter | | | 66 |
| | | |
Total | | $ | 40,922 |
| | | |
Goodwill
In connection with the Transactions, the Company recorded goodwill in the amount of $1,019,757. This goodwill was allocated to retail in the amount of $354,937 and wholesale in the amount of $664,820. Subsequent to the Transactions an additional $225 of goodwill was recorded in relation to an additional purchase price payment related to the Aroma Naturals acquisition.
Changes in the carrying amount of goodwill by reportable segment were as follows:
| | | | | | | | | | | | |
| | | Retail | | | Wholesale | | | Consolidated | |
Balance at December 29, 2007 | | $ | 354,937 | | | $ | 665,045 | | | $ | 1,019,982 | |
Impairment of goodwill | | | (68,286 | ) | | | (306,930 | ) | | | (375,216 | ) |
Resolution of tax matters (1) | | | (350 | ) | | | (615 | ) | | | (965 | ) |
| | | | | | | | | | | | |
Balance at January 3, 2009 | | $ | 286,301 | | | $ | 357,500 | | | $ | 643,801 | |
| | | | | | | | | | | | |
| (1) | Resolution of certain tax matters related to a pre-transaction tax positions. |
10. CONCENTRATION OF CREDIT RISK
The Company maintains cash balances at several financial institutions. At January 3, 2009 accounts at each institution are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250. In addition, the FDIC has implemented a transaction account guarantee program through December 31, 2009. Through this program all non-interest bearing accounts at participating institutions are fully guaranteed by the FDIC for the entire amount in the account. Uninsured balances aggregated $16,437 and $3,336 at January 3, 2009 and December 29, 2007, respectively.
The Company extends credit to its wholesale customers. For the fifty-three weeks ended January 3, 2009 no single customer accounted for more than 10% of total sales. For the periods February 6, 2007 to December 29, 2007 and December 31, 2006 to February 5, 2007, and for the fifty-two weeks ended December 30, 2006, no single customer accounted for more than 10% of total sales.
11. LONG-TERM DEBT
Long-term debt consisted of the following at January 3, 2009 and December 29, 2007.
| | | | | | |
| | | January 3,
2009 | | December 29,
2007 |
Senior secured revolving credit facility | | $ | 70,000 | | $ | 5,000 |
Senior secured term loan facility | | | 600,125 | | | 600,125 |
Senior notes due 2015 | | | 325,000 | | | 325,000 |
Senior subordinated notes due 2017 | | | 188,000 | | | 200,000 |
| | | | | | |
Total | | | 1,183,125 | | | 1,130,125 |
Less current portion | | | 37,650 | | | 6,500 |
| | | | | | |
Long-term debt | | $ | 1,145,475 | | $ | 1,123,625 |
| | | | | | |
Senior Secured Credit Facility
The Company’s senior secured credit facility (the “Credit Facility”) consists of a $650,000 senior secured term loan facility maturing on February 6, 2014 and a $125,000 senior secured revolving credit facility, which expires on February 6, 2013. The senior secured term loan facility was used by the Company to finance part of the Merger. The senior secured revolving credit facility is being used by the Company for, among other things, working capital, letters of credit and other general corporate purposes.
All borrowings under the Credit Facility bear interest at a rate per annum equal to an applicable margin, plus, at the Company’s option, (i) the higher of (a) the prime rate (as set forth on the British Banking Association Telerate Page 5) and (b) the federal funds effective rate, plus one-half percent (0.50%) per annum or (ii) the Eurodollar rate, and resets periodically. In addition to paying interest on outstanding principal under the senior secured credit facility, the Company is required to pay a commitment fee to the lenders in respect of unutilized loan commitments at a rate of 0.50% per annum. As of January 3, 2009, the weighted average combined interest rate on the senior secured term loan facility and senior secured revolving credit facility was 3.35%.
All obligations under the Credit Facility are guaranteed by the Parent and each of the Company’s existing and future domestic subsidiaries. In addition, the Credit Facility is secured by first priority perfected liens on all of the Company’s capital stock and substantially all of the Company’s existing and future material assets and the existing and future material assets of the Company’s guarantors, except that only up to 66% of the voting capital stock of the first tier foreign subsidiaries and 100% of the non–voting capital stock of such foreign subsidiaries will be pledged in favor of the senior secured credit facility and each of the guarantor’s assets.
The Credit Facility permits all or any portion of the loans outstanding to be prepaid at any time and commitments to be terminated in whole or in part at the Company’s
40
option without premium or penalty. The Company is required to repay amounts borrowed under the senior secured term loan facility in equal quarterly installments in an aggregate annual amount equal to one percent (1.0%) of the original principal amount of the senior secured term loan facility with the balance being payable on the maturity date of the senior secured term loan facility.
Subject to certain exceptions, the Credit Facility requires that 100% of the net proceeds from certain asset sales, casualty insurance, condemnations and debt issuances, and 50% (subject to step downs) from excess cash flow, as defined, for each fiscal year must be used to pay down outstanding borrowings. The calculation to determine if the Company has excess cash flow per the Credit Facility is prepared on an annual basis at the end of each fiscal year. As of January 3, 2009, the Company had excess cash flow, as defined in the Credit Facility of $37,650. This amount is classified as short-term debt on the accompanying consolidated balance sheet and will be used to reduce the Company’s outstanding borrowings in 2009.
The Credit Facility contains a customary financial covenant which requires that the Company maintain at the end of each fiscal quarter, commencing with the quarter ended January 3, 2009 through the quarter ending October 3, 2009, a consolidated total secured debt (net of cash and cash equivalents not to exceed $30,000) to consolidated EBITDA ratio of no more than 4.00 to 1.00. As of January 3, 2009, the Company’s actual secured leverage ratio was 3.47 to 1.00, as calculated in accordance with the Credit Facility. As of January 3, 2009, total secured debt was approximately $640,125 (net of $30,000 in cash). Under the Credit Facility, EBITDA is defined as net income plus, interest, taxes, depreciation and amortization, further adjusted to add back extraordinary, unusual or non-recurring losses, non-cash stock option expense, fees and expenses related to the Transaction, fees and expenses under the Management Agreement with our equity sponsor, restructuring charges or reserves, as well as other non-cash charges, expenses or losses, and further adjusted to subtract extraordinary, unusual or non-recurring gains, other non-cash income or gains, and certain cash contributions to our common equity.
The Credit Facility also contains certain other limitations on the Company’s and certain of the Company’s restricted subsidiaries’, as defined in the Credit Facility, ability to incur additional debt, guarantee other obligations, grant liens on assets, make investments or acquisitions, dispose of assets, make optional payments or modifications of other debt instruments, pay dividends or other payments on capital stock, engage in mergers or consolidations, enter into sale and leaseback transactions, enter into arrangements that restrict the Company’s ability to pay dividends or grant liens and engage in transactions with affiliates.
As a result of concerns about the stability of the financial and credit markets and the strength of counterparties during this challenging global macroeconomic environment, many financial institutions have reduced, and in some instances ceased to provide, funding to borrowers. In the Company’s case, Lehman Commercial Paper, Inc. (“LCP”), one of the lenders under the Company’s $125,000 Credit Facility, and who also serves as the Administrative Agent thereunder, of the Credit Facility declared bankruptcy in September 2008. LCP’s share of the Credit Facility was 12% or $15,000 of the total funds available under the Credit Facility. As a result of the bankruptcy, the Company’s ability to draw upon that portion of the Credit Facility has been reduced. To date, the Company has not secured substitute financing. If the Company is unable to secure additional or substitute funding from other parties, the Credit Facility would be effectively reduced from $125,000 to $110,000. As of January 3, 2009, $70,000 was outstanding under the Credit Facility of which approximately $8,400 is payable to LCP, leaving the remaining LCP share of $6,600 unavailable to the Company on that date.
In addition to the amounts outstanding under the Credit Facility and amounts unavailable due to the LCP bankruptcy there were outstanding letters of credit of $1,633, leaving $46,767 in availability under the Credit Facility as of January 3, 2009, excluding the $6,600 applicable to LCP.
Senior Notes and Senior Subordinated Notes
The senior notes due 2015 bear interest at a per annum rate equal to 8.50%. Interest is paid every six months on February 15 and August 15, beginning on August 15, 2007. The senior subordinated notes due 2017 bear interest at a per annum rate equal to 9.75%. Interest is paid every six months on February 15 and August 15, beginning on August 15, 2007. The senior notes mature on February 15, 2015 and the senior subordinated notes mature on February 15, 2017.
The indentures governing the senior notes and senior subordinated notes restrict the Company’s (and most or all of the Company’s subsidiaries’) ability to: incur additional debt; pay dividends or make other distributions on the Company’s capital stock or repurchase capital stock or subordinated indebtedness; make investments or other specified restricted payments; create liens; sell assets and subsidiary stock; enter into transactions with affiliates; and enter into mergers, consolidations and sales of substantially all assets.
Obligations under the senior notes are guaranteed on an unsecured senior basis and obligations under the senior subordinated notes are guaranteed on an unsecured senior subordinated basis, by Parent and the Company’s existing and future domestic subsidiaries. If the Company cannot make any payment on either or both series of notes, the guarantors must make the payment instead.
In the event of certain change in control events specified in the indentures governing the notes, the Company must offer to repurchase all or a portion of the notes at 101% of the principal amount of the exchange notes on the date of purchase, plus any accrued and unpaid interest to the date of repurchase.
Senior Notes Redemption Provisions – The senior note indenture permits the Company on or after February 15, 2011, to redeem all or a part of the senior notes at its option at the redemption prices set forth below (expressed as a percentage of the principal amount), plus accrued and unpaid interest, on the senior notes to be redeemed to the applicable redemption date if redeemed during the twelve-month period beginning on February 15 of the years indicated below:
| | | |
Year | | Percentage | |
2011 | | 104.250 | % |
2012 | | 102.125 | % |
2013 and thereafter | | 100.000 | % |
The senior notes may also be redeemed, in whole or in part, at any time prior to February 15, 2011, at a redemption price equal to 100% of the principal amount of the senior notes redeemed plus a make whole premium calculated in accordance with the indenture plus accrued and unpaid interest to the applicable redemption date.
In addition, at any time prior to February 15, 2010, the Company under certain conditions may on one or more occasions redeem in the aggregate up to 35% of the aggregate principal amount of the senior notes issued under the indenture with the net cash proceeds of one or more equity offerings, at a redemption price of 108.500% of the principal amount of the senior notes, plus accrued and unpaid interest, to the redemption date provided such redemption occurs within 90 days after such equity offering.
Senior Subordinated Notes Redemption Provisions – The senior subordinated note indenture permits the Company on or after February 15, 2012, to redeem all or a part of the senior subordinated notes at its option at the redemption prices set forth below (expressed as a percentage of the principal amount), plus accrued and unpaid interest, on the Senior Notes to be redeemed to the applicable redemption date if redeemed during the twelve-month period beginning on February 15 of the years indicated below:
| | | |
Year | | Percentage | |
2012 | | 104.875 | % |
2013 | | 103.250 | % |
2014 | | 101.625 | % |
2015 and thereafter | | 100.000 | % |
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The senior subordinated notes may also be redeemed, in whole or in part, at any time prior to February 15, 2012, at a redemption price equal to 100% of the principal amount of the senior notes redeemed plus a make whole premium calculated in accordance with the indenture plus accrued and unpaid to the applicable redemption date.
In addition, at any time prior to February 15, 2010, the Company under certain conditions may on one or more occasions redeem in the aggregate up to 35% of the aggregate principal amount of the senior subordinated notes issued under the indenture with the net cash proceeds of one or more equity offerings, at a redemption price of 109.750% of the principal amount of the senior notes, plus accrued and unpaid interest, to the redemption date provided such redemption occurs within 90 days of such equity offering.
During the fifty-three weeks ended January 3, 2009, the Company paid $9,505, plus accrued interest of $414 to repurchase $12,000 of the senior subordinated notes in the open market. In connection with this repurchase, the Company recorded a gain of $2,131, net of deferred financing costs written off in the amount of $364. The repurchase was authorized by the Company’s Board of Directors pursuant to a resolution adopted on May 20, 2008.
12. DERIVATIVE FINANCIAL INSTRUMENTS
The Company follows SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended and related interpretations. SFAS 133 establishes accounting and reporting standards for derivative instruments. Specifically, SFAS 133 requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and to measure those instruments at fair value. Additionally, the fair value adjustments will affect either stockholders’ equity as accumulated other comprehensive income (loss) or net income (loss) depending on whether the derivative instrument qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity.
The Company uses interest rate swaps to eliminate the variability of a portion of cash flows associated with the forecasted interest payments on its $650,000 senior secured term loan facility. This is achieved through converting a portion of the floating rate senior secured term loan facility to a fixed rate by entering into pay-fixed interest rate swaps. The Company has determined that its interest rate swap agreements have been appropriately designated and documented as cash flow hedges under SFAS 133.
On February 14, 2007 the Company entered into an interest rate swap agreement with Merrill Lynch Capital Services, Inc. to hedge a portion of the cash flows associated with its $650,000 senior secured term loan facility. The agreement has a total notional value of $415,000. The $415,000 notional value amortizes over the life of the swap. The interest rate swap agreement effectively converts the senior secured term loan facility, which is floating-rate debt, to a fixed-rate up to the unamortized notional value of the swap by having the Company pay fixed-rate amounts in exchange for the receipt of the floating-rate interest payments. Under the terms of this agreement, a quarterly net settlement is made for the difference between the fixed rate of 5.095% and the variable rate based upon the three-month LIBOR rate on the notional amount of the interest rate swap. This interest rate swap agreement terminates on February 14, 2010.
As of January 3, 2009 the Company recorded the fair value of the derivative liability of $14,660 in other accrued liabilities, and $8,924 and $5,736 in other comprehensive loss and deferred taxes, respectively. For the fifty three weeks ended January 3, 2009 and the period February 6, 2007 to December 29, 2007 there was no hedge ineffectiveness recorded in earnings.
On February 13, 2008 the Company entered into another interest rate swap agreement with Bank of America, N.A., effective March 31, 2008, to hedge an additional portion of the cash flows associated with its $650,000 senior secured term loan facility. The agreement has an initial notional value of $100,000. The $100,000 notional value increases on March 31, 2010 to approximately $397,000 and then amortizes over the remaining life of the swap. The interest rate swap agreement converts amounts under the senior secured term loan facility, which is floating–rate debt, to a fixed–rate by having the Company pay fixed–rate amounts in exchange for the receipt of the amount of the floating–rate interest payments. Under the terms of this agreement, a quarterly net settlement is made for the difference between the fixed rate of 3.347% and the variable rate based upon the three–month LIBOR rate on the notional amount of the interest rate swap. This interest rate swap agreement terminates on March 31, 2011.
As of January 3, 2009 the Company recorded the fair value of the derivative liability of $6,254 in other current liabilities, and $3,807 and $2,447 in other comprehensive loss and deferred taxes, respectively. For the fifty-three weeks ended January 3, 2009 there was no hedge ineffectiveness recorded in earnings.
In November 2008, the Company entered into an agreement with a financial institution to hedge a portion of its diesel fuel requirements. This agreement is based on diesel fuel consumed by independent freight carriers delivering the Company’s products. These carriers charge the Company a basic rate per mile that is subject to a fuel surcharge for diesel fuel price increases that they incur. The hedge agreement is designed to reduce the Company’s exposure to the volatility of diesel fuel pricing and the resulting fuel surcharges payable by the Company by setting a fixed price per gallon for the year. This diesel hedge agreement does not qualify for hedge accounting under SFAS 133. Accordingly, the Company marks the diesel hedge to market every quarter with the changes in fair value recognized in earnings. For the fifty-three weeks ended January 3, 2009, the Company recognized a loss of $346 in other income on the consolidated statement of operations.
13. INCOME TAXES
The (benefit from) provision for income tax expense consists of the following:
| | | | | | | | | | | | | | | | | |
| | | Successor | | | | | Predecessor |
| | | Fifty-Three
Weeks Ended
January 3, 2009 | | | Period
February, 6 2007 to
December 29, 2007 | | | | | Period
December 31, 2006 to
February 5, 2007 | | | Fifty-Two
Weeks Ended
December 30, 2006 |
Federal: | | | | | | | | | | | | | | | | | |
Current | | $ | (2,476 | ) | | $ | 15,705 | | | | | $ | 3 | | | $ | 37,810 |
Deferred | | | (17,051 | ) | | | (13,511 | ) | | | | | (343 | ) | | | 6,664 |
| | | | | | | | | | | | | | | | | |
Total federal | | | (19,527 | ) | | | 2,194 | | | | | | (340 | ) | | | 44,474 |
| | | | | | | | | | | | | | | | | |
State: | | | | | | | | | | | | | | | | | |
Current | | | (225 | ) | | | 1,539 | | | | | | — | | | | 4,190 |
Deferred | | | (2,005 | ) | | | (621 | ) | | | | | — | | | | 885 |
| | | | | | | | | | | | | | | | | |
Total state | | | (2,230 | ) | | | 918 | | | | | | — | | | | 5,075 |
| | | | | | | | | | | | | | | | | |
Total income tax (benefit) provision | | $ | (21,757 | ) | | $ | 3,112 | | | | | $ | (340 | ) | | $ | 49,549 |
| | | | | | | | | | | | | | | | | |
42
In connection with the recapitalization of the Company in 1998, an election was made for federal and state income tax purposes to value the assets and liabilities of the Company at fair value. As a result of such election, there is a difference between the financial reporting and tax bases of the Company’s assets and liabilities. This difference was accounted for by recording a deferred tax asset of approximately $175,700 with a corresponding credit to additional paid-in capital. The deferred tax asset is being realized as these differences, including tax goodwill, are deducted, principally over a period of 15 years. In the opinion of management, the Company will have sufficient profits in the future to realize the deferred tax asset.
The tax effect of significant items comprising the Company’s net deferred tax assets (liabilities) are as follows:
| | | | | | | | | | | | | | |
| | | January 3,
2009 | | | December 29,
2007 | |
| | | Current | | Non-current | | | Current | | Non-current | |
Deferred tax assets: | | | | | | | | | | | | | | |
Basis differential as a result of a basis step-up for tax | | $ | — | | $ | 49,933 | | | $ | — | | $ | 61,963 | |
Interest rate swaps | | | 8,183 | | | — | | | | 3,683 | | | — | |
Domestic net operating loss—Predecessor | | | — | | | — | | | | 8,734 | | | — | |
Foreign net operating loss carryforwards | | | 81 | | | 925 | | | | 320 | | | — | |
Deferred compensation arrangements, including equity-based compensation | | | 290 | | | — | | | | 160 | | | — | |
Employee benefits | | | 85 | | | — | | | | 2,523 | | | — | |
Other | | | 4,230 | | | 1,355 | | | | 2,851 | | | 950 | |
Deferred tax liabilities: | | | | | | | | | | | | | | |
Fixed assets | | | — | | | (16,478 | ) | | | — | | | (20,114 | ) |
Intangible assets | | | — | | | (111,640 | ) | | | — | | | (148,364 | ) |
| | | | | | | | | | | | | | |
| | $ | 12,869 | | $ | (75,905 | ) | | $ | 18,271 | | $ | (105,565 | ) |
| | | | | | | | | | | | | | |
A reconciliation of the statutory federal income tax rate and the effective rate of the provision for income taxes consists of the following:
| | | | | | | | | | | | | | |
| | | Successor | | | | | Predecessor | |
| | | Fifty-Three
Weeks Ended
January 3, 2009 | | | Period
February 6, 2007 to
December 29, 2007 | | | | | Period
December 31, 2006 to
February 5, 2007 | | | Fifty-Two
Weeks Ended
December 30, 2006 | |
Statutory federal income tax rate | | 35.0 | % | | 35.0 | % | | | | 35.0 | % | | 35.0 | % |
State income taxes net of federal benefit | | 4.1 | | | 4.1 | | | | | 4.1 | | | 4.1 | |
| | | | | | | | | | | | | | |
Combined federal and state statutory income tax rates | | 39.1 | | | 39.1 | | | | | 39.1 | | | 39.1 | |
Goodwill impairment | | (34.1 | ) | | — | | | | | — | | | — | |
Domestic production activities deduction | | 0.1 | | | (9.7 | ) | | | | — | | | (0.7 | ) |
IRS audit settlement for prior years | | — | | | — | | | | | — | | | (1.7 | ) |
Non-deductible stock compensation expense | | (0.1 | ) | | 3.4 | | | | | — | | | — | |
Non-deductible compensation | | — | | | 4.4 | | | | | (30.3 | ) | | — | |
Foreign loss utilization and tax rate differential | | — | | | (10.4 | ) | | | | 10.6 | | | (0.2 | ) |
Non-deductible transaction costs | | — | | | 8.6 | | | | | (2.9 | ) | | 0.9 | |
Other | | — | | | 5.3 | | | | | (0.8 | ) | | (0.4 | ) |
| | | | | | | | | | | | | | |
| | 5.0 | % | | 40.7 | % | | | | 15.7 | % | | 37.0 | % |
| | | | | | | | | | | | | | |
In fiscal 2006, the Company recorded a benefit of $2,338 associated with the closure of an IRS audit for prior years. The benefit was primarily due to favorable transfer pricing adjustments associated with sales to the Company’s international subsidiary.
At December 30, 2006, the Company had foreign net operating loss carryforwards totaling approximately $3,417 with no expiration date. A valuation allowance of $950 had been established for these net operating losses, with $256 reversed in the period December 31, 2006 to February 5, 2007 and the remainder reversed in the period February 6, 2007 to December 29, 2007.
The Company files income tax returns in the U.S. federal jurisdiction, various states, and in the United Kingdom. The Company’s earliest open U.S. federal tax year and United Kingdom tax year is 2006. In addition, open tax years related to states remain subject to examination but are not considered material.
As a result of the implementation of FIN 48, the Company recognized a $224 increase in the liability for unrecognized tax benefits, which was accounted for as a reduction in retained earnings as of such date. As of December 31, 2006, the Company had $1,389 of unrecognized tax benefits, of which the entire amount would reduce income tax expense if recognized. The Company recognizes interest accrued and penalties, if any, related to unrecognized tax benefits in the provision for income taxes. For the fifty-three weeks ended January 3, 2009, the Company recognized through the consolidated statement of operations an increase in accrued interest of $89 and no expense related to penalties.
As of December 29, 2007, the Company had tax reserves of $3,571 and accrued interest and penalties of $593. As of December 29, 2007, the amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $1,309. As of January 3, 2009, the Company had tax reserves of $2,370 and accrued interest and penalties of $532. As of January 3, 2009, the amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $254.
43
A reconciliation of the beginning and ending amount of the tax reserves is as follows:
| | | | |
Balance – December 29, 2007 | | $ | 3,571 | |
Increases related to prior periods | | | 1,491 | |
Increases related to the current period | | | 106 | |
Decreases due to settlements with authorities | | | (2,262 | ) |
Decreases due to lapse of statutes | | | (536 | ) |
| | | | |
Balance – January 3, 2009 | | $ | 2,370 | |
| | | | |
14. PROFIT SHARING PLAN
The Company maintains a profit sharing plan (the “Plan”) under section 401(k) of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). During 2008, under the Plan the Company made discretionary matching contributions, which were determined annually based on a percentage of the employee’s pretax contributions. Matching contributions were subject to a cap based on a percentage of the employee’s eligible earnings, as defined in the Plan. Effective January 1, 2008 the Plan was amended to change the Company discretionary contribution from an annual contribution to a weekly match of 50% of the first 4% of eligible compensation.
Employer matching contributions amounted to $1,387 for the fifty-three weeks ended January 3, 2009. For the periods December 31, 2006 to February 5, 2007 and February 6, 2007 to December 29, 2007, and for the fifty-two weeks ended December 30, 2006 employer matching contributions were $103, $1,117, and $1,549 respectively.
15. EXECUTIVE DEFERRED COMPENSATION PLAN
The Company has an executive deferred compensation agreement with certain key employees. Under this agreement, the Company at its election may match certain elective salary deferrals of eligible employees’ compensation up to a maximum of $20 per employee per year. Employer contributions amounted to $188 for fiscal 2006. Benefits paid to retired or terminated employees during fiscal 2006 were $973.
In connection with the Transactions, which constituted a change in control event under the Company’s Deferred Compensation Plan, distributions totaling $2,129 were made to participants in February 2007. In February 2007, after the participant distributions, a new deferred compensation plan was established with the same key terms and conditions as the old plan. For the fifty-three weeks ended January 3, 2009 employer contributions totaled $200 and there were no benefits paid to retired or terminated employees. During the period February 6, 2007 to December 29, 2007 employer contributions totaled $136 and benefits paid to retired or terminated employees were $84.
16. RESTRUCTURING CHARGES
During the first quarter of fiscal 2008, the Company initiated a restructuring plan designed to close three underperforming Illuminations stores and move the Illuminations corporate headquarters from Petaluma, California to the Company’s South Deerfield, Massachusetts headquarters. In connection with this restructuring plan, a charge of $1,475 was recorded during the thirteen weeks ended March 29, 2008. Included in the restructuring charge was $632 related to lease termination costs, $493 related to non-cash fixed assets write-offs and other costs, and $350 in employee related costs. As of March 29, 2008 the three underperforming stores had been closed.
During the fourth quarter of 2008, the Company initiated a restructuring plan involving the closing of the Company’s remaining 28 Illuminations retail stores and the discontinuance of the related Illuminations consumer direct business, the closing of one underperforming Yankee Candle retail store, and limited reductions in the Company’s corporate and administrative workforce. The Company expects to close the Illuminations stores by April 30, 2009. In connection with the fourth quarter restructuring plan, a charge of $12,382 was recorded during the fourteen weeks ended January 3, 2009. Included in the restructuring charge was $601 related to occupancy related costs, primarily consisting of lease termination costs, $7,273 related to fixed asset write-offs and other costs and the write-off of the Illuminations tradename of $4,507. The Company currently expects the total charge related to the restructuring plan to be approximately $18,000 to $22,000 including the $12,382 recorded in the fourth quarter of 2008. The majority of these additional costs relate to lease termination costs that will be incurred during the first half of 2009. The lease termination related to the Illuminations corporate headquarters in Petaluma, California expires in March 2013. This lease will be paid through March 2013 unless the Company is able to structure a buyout agreement with the landlord.
The following is a summary of restructuring charge activity for the fifty-three weeks ended January 3, 2009:
| | | | | | | | | | | | | |
| | | Fifty-Three Weeks Ended January 3, 2009 | | | Accrued as of
January 3,
2009 |
| | | Expense | | Costs Paid | | Non-Cash
Charges | | | |
Occupancy related | | $ | 1,233 | | $ | 349 | | $ | (157 | ) | | $ | 1,041 |
Fixed asset impairment and other | | | 7,767 | | | 42 | | | 7,700 | | | | 25 |
Employee related | | | 350 | | | 350 | | | — | | | | — |
Impairment of Illuminations tradename | | | 4,507 | | | — | | | 4,507 | | | | — |
| | | | | | | | | | | | | |
Total | | $ | 13,857 | | $ | 741 | | $ | 12,050 | | | $ | 1,066 |
| | | | | | | | | | | | | |
17. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases most store locations, its corporate office building, a distribution facility and a number of vehicles. The operating leases, which expire in various years through 2021, contain renewal options ranging from six months to five years and provide for base rentals plus contingent rentals thereafter, which are a function of sales volume. In addition, the Company is required to pay real estate taxes, maintenance and other operating expenses applicable to the leased premises. Furthermore, several leases contain rent escalation clauses.
44
The aggregate annual future minimum lease commitments under operating leases as of January 3, 2009 are as follows:
| | | |
| | | Operating
Leases |
2009 | | $ | 35,825 |
2010 | | | 31,811 |
2011 | | | 28,744 |
2012 | | | 23,915 |
2013 | | | 19,782 |
Thereafter | | | 50,918 |
| | | |
Total minimum lease payments | | $ | 190,995 |
| | | |
Rent expense, including contingent rentals, for the fifty-three weeks ended January 3, 2009 was $37,090. For the periods December 31, 2006 to February 5, 2007 and February 6, 2007 to December 29, 2007, and the fifty-two weeks ended December 30, 2006 rent expense, including contingent rentals was $2,989, $32,231, and $28,892, respectively. Included in rent expense were contingent rental payments of approximately $531, $80, $607, and $699 for fifty-three weeks ended January 3, 2009, the periods December 31, 2006 to February 5, 2007 and February 6, 2007 to December 29, 2007 and the fifty-two weeks ended December 30, 2006, respectively. Contingent rental payments are based primarily on sales at respective retail locations.
In addition, the Company recognized sublease income in the amount of $274 for the fifty-three weeks ended January 3, 2009. For the periods December 31, 2006 to February 5, 2007 and February 6, 2007 to December 29, 2007, and for the fifty two weeks ended December 30, sublease rental income was $23, $234, and $292, respectively.
Contingencies
A class action lawsuit was filed against the Company in February 2005 for alleged violations of certain California state wage and hour and employment laws with respect to certain employees in the Company’s California retail stores. In December 2007 a preliminary settlement agreement was reached pursuant to mediation. The settlement is now pending court approval. Pursuant to the agreement the Company would pay a total of $950 (inclusive of attorneys’ fees and administrative expenses) into a settlement fund. This amount was recorded in the Company’s consolidated statement of operations during the fourth quarter of fiscal 2007. The Company expects to make this payment to the settlement fund in the first half of 2009.
In connection with the Linens ‘N Things (“Linens”) bankruptcy proceedings the Company received a letter dated December 19, 2008 from counsel to Linens Holding Co. and its affiliates, which letter alleges that, pursuant to Sections 547 and 550 of the United States Bankruptcy Code, the Company is required to return to Linens approximately $6,600 in allegedly “preferential” transfers allegedly made to Yankee Candle during the 90-day period preceding the filing of the Linens bankruptcy cases. The letter also alleges that Yankee Candle is required to pay to Linens approximately $1,300 on account of credits allegedly earned but not redeemed by Linens prior to the filing of the Linens bankruptcy cases. The letter offered to settle these claims and threatened legal action if settlement terms cannot be reached. The Company is currently evaluating these alleged claims with outside counsel. While the Company believes it has a number of strong potential defenses to all or a significant portion of these claims and plan to vigorously contest any action brought by Linens, the Company cannot at this time predict what the outcome of this matter would be if legal action were to be pursued by Linens. As of January 3, 2009, the Company did not record any amount related to these claims in its consolidated statement of operations. If any matter were to be brought by Linens and were decided in a manner adverse to us, it could materially adversely impact our results of operations.
In addition, the Company is engaged in various lawsuits, either as plaintiff or defendant. In the opinion of management, the ultimate outcome of these lawsuits will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
18. RELATED PARTY TRANSACTIONS
Upon closing of the Transactions, the Company entered into a management services contract with an affiliate of MDP pursuant to which MDP will provide the Company with management and consulting services and financial and advisory services on an ongoing basis for a fee of $1,500 per year, payable in equal quarterly installments, and reimbursement of out–of–pocket expenses incurred in connection with the provision of such services. The Company recorded $1,500 and $1,313 associated with the annual management fee for the fifty-three weeks ended January 3, 2009 and the period February 6, 2007 to December 29, 2007, respectively. Under this management services agreement, the Company also agreed to provide customary indemnification. Pursuant to such agreement, at the closing of the Transactions, MDP received a fee of approximately $15,000 plus out–of–pocket expenses for services rendered in connection with the Transactions.
19. SEGMENTS OF ENTERPRISE AND RELATED 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 sold is similar, the type of customer for the product and services and methods used to distribute the product are different.
The CEO evaluates both the Company’s retail and wholesale operations based on an “operating earnings” measure. Such measure gives recognition to specifically identifiable operating costs such as cost of sales and selling expenses. Administrative charges are generally not allocated to specific operating segments and are accordingly reflected in the unallocated/corporate/other reconciliation to the total consolidated results. As described in Note 3, “Acquisition of the Company,” the Merger of the Company on February 6, 2007 resulted in several purchase accounting adjustments to record assets and liabilities acquired at fair market value. The effects of purchase accounting adjustments on the operations of the Successor are not included in segment operations below, consistent with internal reports used by the CEO. These amounts are also included in the unallocated/corporate/other column. Other components of the consolidated statements of operations, which are classified below operating income, are also not allocated by segments. The Company does not account for or report assets, capital expenditures or depreciation and amortization by segment to the CEO.
The following are the relevant data for the fifty-three weeks ended January 3, 2009, the period February 6, 2007 to December 29, 2007 (Successor), the period December 31, 2006 to February 5, 2007 (Predecessor), and the fifty-two weeks ended December 30, 2006 (Predecessor):
45
| | | | | | | | | | | | | | |
Successor Fifty-Three Weeks ended January 3, 2009 | | Retail | | Wholesale | | Unallocated/
Corporate/
Other | | | Balance per
Consolidated
Statements of
Operations | |
Sales | | $ | 410,289 | | $ | 303,453 | | $ | — | | | $ | 713,742 | |
Gross profit | | | 266,111 | | | 139,905 | | | 551 | | | | 406,567 | |
Selling expenses | | | 170,580 | | | 27,043 | | | 15,618 | | | | 213,241 | |
Income (loss) from operations | | | 95,532 | | | 112,862 | | | (545,026 | ) | | | (336,632 | ) |
Other expense, net | | | — | | | — | | | (94,449 | ) | | | (94,449 | ) |
Loss before benefit from income taxes | | | — | | | — | | | — | | | | (431,081 | ) |
| | | | |
Successor Period February 6, 2007 to December 29, 2007 | | Retail | | Wholesale | | Unallocated/
Corporate/
Other | | | Balance per
Consolidated
Statements of
Operations | |
Sales | | $ | 381,168 | | $ | 302,405 | | $ | — | | | $ | 683,573 | |
Gross profit | | | 251,128 | | | 142,336 | | | (39,462 | ) | | | 354,002 | |
Selling expenses | | | 157,139 | | | 21,067 | | | 14,192 | | | | 192,398 | |
Income (loss) from operations | | | 93,989 | | | 121,269 | | | (116,371 | ) | | | 98,887 | |
Other expense, net | | | — | | | — | | | (91,248 | ) | | | (91,248 | ) |
Income before provision for income taxes | | | — | | | — | | | — | | | | 7,639 | |
| | | | |
Predecessor Period December 31, 2006 to February 5, 2007 | | Retail | | Wholesale | | Unallocated/
Corporate/
Other | | | Balance per
Consolidated
Statements of
Operations | |
Sales | | $ | 26,530 | | $ | 26,852 | | $ | — | | | $ | 53,382 | |
Gross profit | | | 15,653 | | | 13,176 | | | — | | | | 28,829 | |
Selling expenses | | | 14,423 | | | 1,778 | | | — | | | | 16,201 | |
Income (loss) from operations | | | 1,230 | | | 11,398 | | | (13,828 | ) | | | (1,200 | ) |
Other expense, net | | | — | | | — | | | (970 | ) | | | (970 | ) |
Loss before benefit from income taxes | | | — | | | — | | | — | | | | (2,170 | ) |
| | | | |
Predecessor Fifty-Two Weeks Ended December 30, 2006 | | Retail | | Wholesale | | Unallocated/
Corporate/
Other | | | Balance per
Consolidated
Statements of
Operations | |
Sales | | $ | 388,820 | | $ | 298,737 | | $ | — | | | $ | 687,557 | |
Gross profit | | | 254,616 | | | 135,603 | | | — | | | | 390,219 | |
Selling expenses | | | 149,155 | | | 19,039 | | | — | | | | 168,194 | |
Income (loss) from operations | | | 105,461 | | | 116,564 | | | (72,738 | ) | | | 149,287 | |
Other expense, net | | | — | | | — | | | (15,223 | ) | | | (15,223 | ) |
Income before provision for income taxes | | | — | | | — | | | — | | | | 134,064 | |
For the fifty-three weeks ended January 3, 2009, the period February 6, 2007 to December 29, 2007, the period December 31, 2006 to February 5, 2007 and for the fifty-two weeks ended December 30, 2006 revenues from the Company’s international operations were $48,057, $40,608, $2,021, and $28,549 respectively. Long lived assets of the Company’s international operations were approximately $877, and $1,128 as of January 3, 2009 and December 29, 2007, respectively. Goodwill at January 3, 2009 amounted to $643,801 with retail and wholesale allocated $286,301 and $357,500 respectively.
20. WRITE OFF OF RECEIVABLE
The Company accounts for its loss contingencies in accordance with SFAS No. 5, “Accounting for Contingencies.” SFAS 5 requires that an estimated loss is recorded when information available prior to the issuance of the financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred as of the date of the financial statements and the amount of loss can be reasonably estimated. If the threshold of probable is not met disclosure of the contingency should be made when there is at least a reasonable possibility that a loss has been incurred.
On May 2, 2008, one of the Company’s wholesale customers, Linens ‘N Things, filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The Company has an outstanding pre-petition receivable balance due from Linens ‘N Things and is an unsecured creditor with respect to that receivable. During the quarter ended June 28, 2008 the Company determined it was probable that the outstanding pre-petition receivable balance with Linens ‘N Things had become impaired and recorded a bad debt provision in the amount of $4,500.
21. BUSINESS ACQUISITIONS
On July 30, 2006, the Company acquired certain assets of Candle Acquisition Corp. (“Illuminations”), in an effort to build on its strategy to profitably build its business model by focusing on the Company’s core competency of premium candles. In addition, the acquisition will enhance the Company’s ability to penetrate the West Coast and urban markets. The acquisition included the Illuminations® brand, 14 Illuminations retail stores located in California, Arizona and Washington, and the Illuminations Consumer Direct business. Illuminations designs and markets premium scented candles, candle accessories, and other home decor products through retail satellite stores and the consumer direct channel. The total cash purchase price was approximately $22,244. The cash purchase price was borrowed under the Company’s $100,000 unsecured credit facility. The following table provides an allocation of the purchase price for the acquired assets of Illuminations:
46
| | | | |
| Cash purchase price | | $ | 22,244 | |
| Assets acquired: | | | | |
| Property, plant and equipment | | | 2,010 | |
| Inventory | | | 2,666 | |
| Favorable lease agreements | | | 877 | |
| Tradename | | | 10,100 | |
| Goodwill | | | 6,484 | |
| Other assets | | | 312 | |
| | | | |
| Total assets acquired | | | 22,449 | |
| Liabilities acquired: | | | | |
| Gift card liability | | | (205 | ) |
| | | | |
| Total | | $ | 22,244 | |
| | | | |
Illuminations’ results of operations were immaterial to the Company’s operations during fiscal 2006 and, therefore historical pro forma results of operations have not been provided. The favorable lease agreements were being amortized over the remaining lease terms of the related leases, prior to the Company being acquired on February 6, 2007. The goodwill as a result of this transaction is tax deductible over a 15 year period and tax attributes have been carried over into the Successor. For segment reporting purposes, Illuminations is included in the Retail segment.
During the fourth quarter of 2008, the Company initiated a restructuring plan involving the closing of the Company’s 28 Illuminations retail stores and the discontinuance of the related Illuminations consumer direct business. The Company expects to close the Illuminations stores by April 30, 2009. In connection with the fourth quarter restructuring plan the Company wrote-off of the Illuminations tradename of $4,507.
22. FINANCIAL INFORMATION RELATED TO GUARANTOR SUBSIDIARIES
As discussed in Note 11 “Long-term Debt,” obligations under the senior notes are guaranteed on an unsecured senior basis and obligations under the senior subordinated notes are guaranteed on an unsecured senior subordinated basis by the Parent and 100% of the issuer’s existing and future domestic subsidiaries. The senior notes are fully and unconditionally guaranteed by all of our 100% owned U.S. subsidiaries (the “Guarantor Subsidiaries”) on a senior unsecured basis. These guarantees are joint and several obligations of the Guarantors. The foreign subsidiary does not guarantee these notes.
The following tables present condensed consolidating supplementary financial information for the issuer of the notes, the Parent, the issuer’s domestic guarantor subsidiaries and the non guarantor together with eliminations as of and for the periods indicated. The issuer’s parent company is also a guarantor of the notes. Parent was a newly formed entity with no assets, liabilities or operations prior to the completion of the Merger on February 6, 2007. Separate complete financial statements of the respective guarantors would not provide additional material information that would be useful in assessing the financial composition of the guarantors.
The Company has corrected its previous presentation of its “investment in subsidiaries” within the parent company balance sheet to appropriately reflect its subsidiaries on an equity method basis, as of December 29, 2007. This also impacted the stockholder’s equity line item, inventory and the intercompany receivable/payable line item for the parent and its subsidiaries. The prior disclosure did not allocate certain intercompany balances to their respective entities; rather they were presented in a separate column as intercompany eliminations. The presentation as of December 29, 2007 has been corrected to properly allocate those balances. This adjustment had no impact to the condensed consolidating balance sheet, as the investment in subsidiaries line item, inventory and intercompany receivable/payable line item, and the subsidiaries stockholder’s equity line item, appropriately eliminate in both the prior year presentation and current year presentation.
In addition, the Company had previously presented intercompany payables and receivables transactions between the issuer and its guarantor and non-guarantor subsidiaries as financing activities. These transactions should have been presented in investing and financing activities. The accompanying condensed consolidating financial statements for 2007 have been corrected to properly present these cash flow activities in the respective columns. Any changes in the classification between investing and financing activities are eliminated in consolidation, therefore there is no impact on the condensed consolidating statement of cashflows for the periods February 6, 2007 to September 29, 2007 and for the periods December 31, 2006 to February 5, 2007.
Condensed consolidating financial information is as follows:
47
YANKEE HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
January 3, 2009
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Parent | | | Issuer of Notes | | | Guarantor
Subsidiaries | | | Non
Guarantor
Subsidiary | | Intercompany
Eliminations | | | Consolidated | |
| ASSETS | | | | | | | | | | | | | | | | | | | | | | | |
CURRENT ASSETS: | | | | | | | | | | | | | | | | | | | | | | | |
Cash | | $ | — | | | $ | 128,037 | | | $ | 2,147 | | | $ | 393 | | $ | — | | | $ | 130,577 | |
Accounts receivable, net | | | — | | | | 31,356 | | | | 783 | | | | 7,014 | | | — | | | | 39,153 | |
Inventory | | | — | | | | 54,843 | | | | 1,696 | | | | 6,496 | | | — | | | | 63,035 | |
Prepaid expenses and other current assets | | | — | | | | 9,447 | | | | 241 | | | | 496 | | | — | | | | 10,184 | |
Deferred tax assets | | | — | | | | 12,581 | | | | 288 | | | | — | | | — | | | | 12,869 | |
| | | | | | | | | | | | | | | | | | | | | | | |
TOTAL CURRENT ASSETS | | | — | | | | 236,264 | | | | 5,155 | | | | 14,399 | | | — | | | | 255,818 | |
| | | | | | |
PROPERTY AND EQUIPMENT, NET | | | — | | | | 136,724 | | | | 621 | | | | 877 | | | — | | | | 138,222 | |
MARKETABLE SECURITIES | | | — | | | | 540 | | | | — | | | | — | | | — | | | | 540 | |
GOODWILL | | | — | | | | 643,570 | | | | 231 | | | | — | | | — | | | | 643,801 | |
INTANGIBLE ASSETS | | | — | | | | 307,220 | | | | 1,191 | | | | 466 | | | — | | | | 308,877 | |
DEFERRED FINANCING COSTS | | | — | | | | 24,170 | | | | — | | | | — | | | — | | | | 24,170 | |
OTHER ASSETS | | | — | | | | 1,103 | | | | — | | | | 38 | | | — | | | | 1,141 | |
INTERCOMPANY RECEIVABLES | | | — | | | | 26,956 | | | | — | | | | — | | | (26,956 | ) | | | — | |
INVESTMENT IN SUBSIDIARIES | | | (2,821 | ) | | | (9,173 | ) | | | — | | | | — | | | 11,994 | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
TOTAL ASSETS | | $ | (2,821 | ) | | $ | 1,367,374 | | | $ | 7,198 | | | $ | 15,780 | | $ | (14,962 | ) | | $ | 1,372,569 | |
| | | | | | | | | | | | | | | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY | | | | | | | | | | | | | | | | | | | | | | | |
CURRENT LIABILITIES: | | | | | | | | | | | | | | | | | | | | | | | |
Accounts payable | | $ | — | | | $ | 21,445 | | | $ | 290 | | | $ | 1,077 | | $ | — | | | $ | 22,812 | |
Accrued payroll | | | — | | | | 7,495 | | | | 27 | | | | 219 | | | — | | | | 7,741 | |
Accrued interest | | | — | | | | 18,042 | | | | — | | | | — | | | — | | | | 18,042 | |
Accrued income taxes | | | — | | | | 4,931 | | | | — | | | | — | | | — | | | | 4,931 | |
Accrued purchases of property and equipment | | | — | | | | 4,279 | | | | — | | | | — | | | — | | | | 4,279 | |
Other accrued liabilities | | | — | | | | 40,544 | | | | 2,365 | | | | 1,194 | | | — | | | | 44,103 | |
Current portion of long-term debt | | | — | | | | 37,650 | | | | — | | | | — | | | — | | | | 37,650 | |
| | | | | | | | | | | | | | | | | | | | | | | |
TOTAL CURRENT LIABILITIES | | | — | | | | 134,386 | | | | 2,682 | | | | 2,490 | | | — | | | | 139,558 | |
| | | | | | |
DEFERRED COMPENSATION OBLIGATION | | | — | | | | 740 | | | | — | | | | — | | | — | | | | 740 | |
DEFERRED TAX LIABILITIES | | | — | | | | 75,905 | | | | — | | | | — | | | — | | | | 75,905 | |
LONG-TERM DEBT | | | — | | | | 1,145,475 | | | | — | | | | — | | | — | | | | 1,145,475 | |
DEFERRED RENT | | | — | | | | 10,787 | | | | 23 | | | | — | | | — | | | | 10,810 | |
OTHER LONG-TERM LIABILITIES | | | — | | | | 2,902 | | | | — | | | | — | | | — | | | | 2,902 | |
INTERCOMPANY PAYABLES | | | — | | | | — | | | | 15,495 | | | | 11,461 | | | (26,956 | ) | | | — | |
STOCKHOLDERS’ (DEFICIT) EQUITY | | | (2,821 | ) | | | (2,821 | ) | | | (11,002 | ) | | | 1,829 | | | 11,994 | | | | (2,821 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY | | $ | (2,821 | ) | | $ | 1,367,374 | | | $ | 7,198 | | | $ | 15,780 | | $ | (14,962 | ) | | $ | 1,372,569 | |
| | | | | | | | | | | | | | | | | | | | | | | |
48
YANKEE HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
December 29, 2007
(in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | | Parent | | Issuer of Notes | | Guarantor
Subsidiaries | | | Non
Guarantor
Subsidiary | | Intercompany
Eliminations | | | Consolidated |
ASSETS | | | | | | | | | | | | | | | | | | | | |
CURRENT ASSETS: | | | | | | | | | | | | | | | | | | | | |
Cash | | $ | — | | $ | 1,316 | | $ | 2,341 | | | $ | 1,970 | | $ | — | | | $ | 5,627 |
Accounts receivable, net | | | — | | | 40,655 | | | 1,251 | | | | 10,220 | | | — | | | | 52,126 |
Inventory | | | — | | | 60,580 | | | 1,470 | | | | 7,913 | | | — | | | | 69,963 |
Prepaid expenses and other current assets | | | — | | | 8,491 | | | 66 | | | | 787 | | | — | | | | 9,344 |
Deferred tax assets | | | — | | | 17,841 | | | 430 | | | | — | | | — | | | | 18,271 |
| | | | | | | | | | | | | | | | | | | | |
TOTAL CURRENT ASSETS | | | — | | | 128,883 | | | 5,558 | | | | 20,890 | | | — | | | | 155,331 |
| | | | | | |
PROPERTY AND EQUIPMENT, NET | | | — | | | 153,954 | | | 829 | | | | 1,128 | | | — | | | | 155,911 |
MARKETABLE SECURITIES | | | — | | | 259 | | | — | | | | — | | | — | | | | 259 |
GOODWILL | | | — | | | 1,010,862 | | | 9,120 | | | | — | | | — | | | | 1,019,982 |
INTANGIBLE ASSETS | | | — | | | 411,431 | | | 2,811 | | | | — | | | — | | | | 414,242 |
DEFERRED FINANCING COSTS | | | — | | | 28,654 | | | — | | | | — | | | — | | | | 28,654 |
OTHER ASSETS | | | — | | | 1,340 | | | — | | | | 78 | | | — | | | | 1,418 |
INTERCOMPANY RECEIVABLES | | | — | | | 28,492 | | | — | | | | — | | | (28,492 | ) | | | — |
INVESTMENT IN SUBSIDIARIES | | | 416,605 | | | 5,997 | | | — | | | | — | | | (422,602 | ) | | | — |
| | | | | | | | | | | | | | | | | | | | |
TOTAL ASSETS | | $ | 416,605 | | $ | 1,769,872 | | $ | 18,318 | | | $ | 22,096 | | $ | (451,094 | ) | | $ | 1,775,797 |
| | | | | | | | | | | | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | | | |
CURRENT LIABILITIES: | | | | | | | | | | | | | | | | | | | | |
Accounts payable | | $ | — | | $ | 20,350 | | $ | 355 | | | $ | 908 | | $ | — | | | $ | 21,613 |
Accrued payroll | | | — | | | 17,016 | | | 92 | | | | 286 | | | — | | | | 17,394 |
Accrued interest | | | — | | | 17,679 | | | — | | | | — | | | — | | | | 17,679 |
Accrued income taxes | | | — | | | 15,755 | | | — | | | | — | | | — | | | | 15,755 |
Accrued purchases of property and equipment | | | — | | | 2,818 | | | — | | | | — | | | — | | | | 2,818 |
Other accrued liabilities | | | — | | | 31,635 | | | 2,934 | | | | 1,340 | | | — | | | | 35,909 |
Current portion of long-term debt | | | — | | | 6,500 | | | — | | | | — | | | — | | | | 6,500 |
| | | | | | | | | | | | | | | | | | | | |
TOTAL CURRENT LIABILITIES | | | — | | | 111,753 | | | 3,381 | | | | 2,534 | | | — | | | | 117,668 |
| | | | | | |
DEFERRED COMPENSATION OBLIGATION | | | — | | | 410 | | | — | | | | — | | | — | | | | 410 |
DEFERRED TAX LIABILITIES | | | — | | | 105,565 | | | — | | | | — | | | — | | | | 105,565 |
LONG-TERM DEBT | | | — | | | 1,123,625 | | | — | | | | — | | | — | | | | 1,123,625 |
DEFERRED RENT | | | — | | | 10,220 | | | 10 | | | | — | | | — | | | | 10,230 |
OTHER LONG-TERM LIABILITIES | | | — | | | 1,694 | | | — | | | | — | | | — | | | | 1,694 |
INTERCOMPANY PAYABLES | | | — | | | — | | | 15,904 | | | | 12,588 | | | (28,492 | ) | | | — |
STOCKHOLDERS’ EQUITY | | | 416,605 | | | 416,605 | | | (977 | ) | | | 6,974 | | | (422,602 | ) | | | 416,605 |
| | | | | | | | | | | | | | | | | | | | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | $ | 416,605 | | $ | 1,769,872 | | $ | 18,318 | | | $ | 22,096 | | $ | (451,094 | ) | | $ | 1,775,797 |
| | | | | | | | | | | | | | | | | | | | |
49
YANKEE HOLDING CORP. AND SUBSIDIARIES (SUCCESSOR)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the Fifty-Three Weeks Ended January 3, 2009
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Parent | | | Issuer of
Notes | | | Guarantor
Subsidiaries | | | Non
Guarantor
Subsidiary | | | Intercompany
Eliminations | | | Consolidated | |
Sales | | $ | — | | | $ | 681,717 | | | $ | 7,991 | | | $ | 44,688 | | | $ | (20,654 | ) | | $ | 713,742 | |
Cost of sales | | | — | | | | 286,456 | | | | 4,680 | | | | 36,458 | | | | (20,419 | ) | | | 307,175 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Gross profit | | | — | | | | 395,261 | | | | 3,311 | | | | 8,230 | | | | (235 | ) | | | 406,567 | |
| | | | | | |
Selling expenses | | | — | | | | 200,406 | | | | 3,677 | | | | 9,398 | | | | (240 | ) | | | 213,241 | |
General and administrative expenses | | | — | | | | 53,310 | | | | — | | | | — | | | | 175 | | | | 53,485 | |
Restructuring charges | | | — | | | | 13,857 | | | | — | | | | — | | | | — | | | | 13,857 | |
Goodwill and intangible asset impairments | | | | | | | 452,427 | | | | 10,189 | | | | — | | | | — | | | | 462,616 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Loss from operations | | | — | | | | (324,739 | ) | | | (10,555 | ) | | | (1,168 | ) | | | (170 | ) | | | (336,632 | ) |
| | | | | | |
Interest income | | | — | | | | (14 | ) | | | — | | | | (24 | ) | | | — | | | | (38 | ) |
Interest expense | | | — | | | | 94,956 | | | | — | | | | — | | | | — | | | | 94,956 | |
Gain on extinguishment of debt | | | — | | | | (2,131 | ) | | | — | | | | — | | | | — | | | | (2,131 | ) |
Other expense (income) | | | — | | | | 2,272 | | | | — | | | | (610 | ) | | | — | | | | 1,662 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Loss before benefit from income taxes | | | — | | | | (419,822 | ) | | | (10,555 | ) | | | (534 | ) | | | (170 | ) | | | (431,081 | ) |
| | | | | | |
Benefit from income taxes | | | — | | | | (21,066 | ) | | | (530 | ) | | | (152 | ) | | | (9 | ) | | | (21,757 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Loss before equity earnings in subsidiaries | | | — | | | | (398,756 | ) | | | (10,025 | ) | | | (382 | ) | | | (161 | ) | | | (409,324 | ) |
| | | | | | |
Equity earnings in subsidiaries, net of tax | | | 409,324 | | | | 10,407 | | | | — | | | | — | | | | (419,731 | ) | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net (loss) income | | $ | (409,324 | ) | | $ | (409,163 | ) | | $ | (10,025 | ) | | $ | (382 | ) | | $ | 419,570 | | | $ | (409,324 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
YANKEE HOLDING CORP. AND SUBSIDIARIES (SUCCESSOR)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the Period February 6, 2007 to December 29, 2007
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Parent | | | Issuer of
Notes | | Guarantor
Subsidiaries | | | Non
Guarantor
Subsidiary | | | Intercompany
Eliminations | | | Consolidated | |
Sales | | $ | — | | | $ | 653,950 | | $ | 7,740 | | | $ | 37,382 | | | $ | (15,499 | ) | | $ | 683,573 | |
Cost of sales | | | — | | | | 306,323 | | | 5,474 | | | | 33,631 | | | | (15,857 | ) | | | 329,571 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Gross profit | | | — | | | | 347,627 | | | 2,266 | | | | 3,751 | | | | 358 | | | | 354,002 | |
| | | | | | |
Selling expenses | | | — | | | | 179,815 | | | 3,878 | | | | 8,705 | | | | — | | | | 192,398 | |
General and administrative expenses | | | — | | | | 62,717 | | | — | | | | — | | | | — | | | | 62,717 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) from operations | | | — | | | | 105,095 | | | (1,612 | ) | | | (4,954 | ) | | | 358 | | | | 98,887 | |
| | | | | | |
Interest income | | | — | | | | — | | | — | | | | (43 | ) | | | — | | | | (43 | ) |
Interest expense | | | — | | | | 92,443 | | | — | | | | — | | | | — | | | | 92,443 | |
Other expense (income) | | | — | | | | 2,766 | | | — | | | | (3,918 | ) | | | — | | | | (1,152 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) before provision for (benefit from) income taxes | | | — | | | | 9,886 | | | (1,612 | ) | | | (993 | ) | | | 358 | | | | 7,639 | |
Provision for (benefit from) income taxes | | | — | | | | 3,899 | | | (635 | ) | | | (297 | ) | | | 145 | | | | 3,112 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) before equity earnings in subsidiaries | | | — | | | | 5,987 | | | (977 | ) | | | (696 | ) | | | 213 | | | | 4,527 | |
Equity earnings in subsidiaries, net of tax | | | (4,527 | ) | | | 1,673 | | | — | | | | — | | | | 2,854 | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 4,527 | | | $ | 4,314 | | $ | (977 | ) | | $ | (696 | ) | | $ | (2,641 | ) | | $ | 4,527 | |
| | | | | | | | | | | | | | | | | | | | | | | |
50
YANKEE HOLDING CORP. AND SUBSIDIARIES (PREDECESSOR)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the Period December 31, 2006 to February 5, 2007
(in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | | Issuer of
Notes | | | Guarantor
Subsidiaries | | | Non
Guarantor
Subsidiary | | | Intercompany
Eliminations | | | Consolidated | |
Sales | | $ | 52,861 | | | $ | 555 | | | $ | 1,747 | | | $ | (1,781 | ) | | $ | 53,382 | |
Cost of sales | | | 23,935 | | | | 385 | | | | 1,473 | | | | (1,240 | ) | | | 24,553 | |
| | | | | | | | | | | | | | | | | | | | |
Gross profit | | | 28,926 | | | | 170 | | | | 274 | | | | (541 | ) | | | 28,829 | |
| | | | | |
Selling expenses | | | 15,312 | | | | 338 | | | | 551 | | | | — | | | | 16,201 | |
General and administrative expenses | | | 13,828 | | | | — | | | | — | | | | — | | | | 13,828 | |
| | | | | | | | | | | | | | | | | | | | |
Loss from operations | | | (214 | ) | | | (168 | ) | | | (277 | ) | | | (541 | ) | | | (1,200 | ) |
| | | | | |
Interest income | | | — | | | | — | | | | (1 | ) | | | — | | | | (1 | ) |
Interest expense | | | 986 | | | | — | | | | — | | | | — | | | | 986 | |
Other (income) expense | | | (39 | ) | | | — | | | | 24 | | | | — | | | | (15 | ) |
| | | | | | | | | | | | | | | | | | | | |
Loss before benefit from income taxes | | | (1,161 | ) | | | (168 | ) | | | (300 | ) | | | (541 | ) | | | (2,170 | ) |
Benefit from income taxes | | | (144 | ) | | | (21 | ) | | | (90 | ) | | | (85 | ) | | | (340 | ) |
| | | | | | | | | | | | | | | | | | | | |
Loss before equity earnings in subsidiaries | | | (1,017 | ) | | | (147 | ) | | | (210 | ) | | | (456 | ) | | | (1,830 | ) |
Equity losses of subsidiaries, net of tax | | | 357 | | | | — | | | | — | | | | (357 | ) | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Net loss | | $ | (1,374 | ) | | $ | (147 | ) | | $ | (210 | ) | | $ | (99 | ) | | $ | (1,830 | ) |
| | | | | | | | | | | | | | | | | | | | |
YANKEE HOLDING CORP. AND SUBSIDIARIES (PREDECESSOR)
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the Fifty-Two Weeks Ended December 30, 2006
(in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | | Issuer of
Notes | | | Guarantor
Subsidiaries | | | Non
Guarantor
Subsidiary | | | Intercompany
Eliminations | | | Consolidated | |
Sales | | $ | 666,390 | | | $ | 7,123 | | | $ | 25,840 | | | $ | (11,796 | ) | | $ | 687,557 | |
Cost of sales | | | 284,487 | | | | 3,893 | | | | 20,673 | | | | (11,715 | ) | | | 297,338 | |
| | | | | | | | | | | | | | | | | | | | |
Gross profit | | | 381,903 | | | | 3,230 | | | | 5,167 | | | | (81 | ) | | | 390,219 | |
| | | | | |
Selling expenses | | | 157,635 | | | | 4,200 | | | | 6,359 | | | | — | | | | 168,194 | |
General and administrative expenses | | | 73,135 | | | | — | | | | — | | | | — | | | | 73,135 | |
Restructure credit | | | (397 | ) | | | — | | | | — | | | | — | | | | (397 | ) |
| | | | | | | | | | | | | | | | | | | | |
Income (loss) from operations | | | 151,530 | | | | (970 | ) | | | (1,192 | ) | | | (81 | ) | | | 149,287 | |
| | | | | |
Interest income | | | — | | | | — | | | | (30 | ) | | | — | | | | (30 | ) |
Interest expense | | | 15,355 | | | | — | | | | 3 | | | | — | | | | 15,358 | |
Other expense (income) | | | 1,878 | | | | — | | | | (1,983 | ) | | | — | | | | (105 | ) |
Equity in earnings of subsidiaries | | | (209 | ) | | | — | | | | — | | | | 209 | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Income (loss) before provision for income taxes | | | 134,506 | | | | (970 | ) | | | 818 | | | | (290 | ) | | | 134,064 | |
Provision for (benefit from) income taxes | | | 50,017 | | | | (361 | ) | | | — | | | | (107 | ) | | | 49,549 | |
| | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 84,489 | | | $ | (609 | ) | | $ | 818 | | | $ | (183 | ) | | $ | 84,515 | |
| | | | | | | | | | | | | | | | | | | | |
51
YANKEE HOLDING CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Fifty-Three Weeks Ended January 3, 2009
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Parent | | | Issuer of
Notes | | | Guarantor
Subsidiaries | | | Non
Guarantor
Subsidiary | | | Intercompany
Eliminations | | | Consolidated | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | |
Net (loss) income | | $ | (409,324 | ) | | $ | (409,163 | ) | | $ | (10,025 | ) | | $ | (382 | ) | | $ | 419,570 | | | $ | (409,324 | ) |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | — | | | | 46,098 | | | | 575 | | | | 322 | | | | — | | | | 46,995 | |
Unrealized loss on marketable securities | | | — | | | | 235 | | | | — | | | | — | | | | — | | | | 235 | |
Equity based compensation expense | | | — | | | | 892 | | | | — | | | | — | | | | — | | | | 892 | |
Deferred taxes | | | — | | | | (19,198 | ) | | | 142 | | | | — | | | | — | | | | (19,056 | ) |
Restructuring charges | | | — | | | | 12,050 | | | | — | | | | — | | | | — | | | | 12,050 | |
Goodwill and intangible asset impairments | | | — | | | | 452,427 | | | | 10,189 | | | | — | | | | — | | | | 462,616 | |
Loss on disposal and impairment of property and equipment | | | — | | | | 448 | | | | — | | | | — | | | | — | | | | 448 | |
Investments in marketable securities | | | — | | | | (516 | ) | | | — | | | | — | | | | — | | | | (516 | ) |
Gain on extinguishment of debt | | | — | | | | (2,131 | ) | | | — | | | | — | | | | — | | | | (2,131 | ) |
Equity in earnings of subsidiaries | | | 409,324 | | | | 10,407 | | | | — | | | | (161 | ) | | | (419,570 | ) | | | — | |
Changes in assets and liabilities | | | | | | | | | | | | | | | | | | | | | | | | |
Accounts receivable, net | | | — | | | | 9,299 | | | | 468 | | | | 566 | | | | — | | | | 10,333 | |
Inventory | | | — | | | | 5,737 | | | | (226 | ) | | | (1,350 | ) | | | — | | | | 4,161 | |
Prepaid expenses and other assets | | | — | | | | 592 | | | | (175 | ) | | | (484 | ) | | | — | | | | (67 | ) |
Accounts payable | | | — | | | | 1,099 | | | | (65 | ) | | | 482 | | | | — | | | | 1,516 | |
Income Taxes Payable | | | — | | | | (9,401 | ) | | | — | | | | — | | | | — | | | | (9,401 | ) |
Accrued expenses and other liabilities | | | — | | | | (10,853 | ) | | | (396 | ) | | | 1,139 | | | | — | | | | (10,110 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
NET CASH PROVIDED BY OPERATING ACTIVITIES | | | — | | | | 88,022 | | | | 487 | | | | 132 | | | | — | | | | 88,641 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | |
Purchase of property and equipment | | | — | | | | (18,240 | ) | | | (47 | ) | | | (235 | ) | | | — | | | | (18,522 | ) |
Payment of contingent consideration on Aroma Naturals | | | — | | | | — | | | | (225 | ) | | | — | | | | — | | | | (225 | ) |
Intercompany payables/receivables | | | — | | | | 1,549 | | | | — | | | | — | | | | (1,549 | ) | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
NET CASH USED IN INVESTING ACTIVITIES | | | — | | | | (16,691 | ) | | | (272 | ) | | | (235 | ) | | | (1,549 | ) | | | (18,747 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | |
Repayments of borrowings | | | — | | | | (45,005 | ) | | | — | | | | — | | | | — | | | | (45,005 | ) |
Net proceeds from issuance of common stock | | | — | | | | 24 | | | | — | | | | — | | | | — | | | | 24 | |
Borrowings under senior secured revolving credit facility | | | — | | | | 100,500 | | | | — | | | | — | | | | — | | | | 100,500 | |
Repurchase of common stock | | | — | | | | (129 | ) | | | — | | | | — | | | | — | | | | (129 | ) |
Intercompany payables/receivables | | | — | | | | — | | | | (409 | ) | | | (1,140 | ) | | | 1,549 | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | | | — | | | | 55,390 | | | | (409 | ) | | | (1,140 | ) | | | 1,549 | | | | 55,390 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
EFFECT EXCHANGE RATE CHANGES ON CASH | | | — | | | | — | | | | — | | | | (334 | ) | | | — | | | | (334 | ) |
NET INCREASE(DECREASE) IN CASH | | | — | | | | 126,721 | | | | (194 | ) | | | (1,577 | ) | | | — | | | | 124,950 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
CASH, BEGINNING OF PERIOD | | | — | | | | 1,316 | | | | 2,341 | | | | 1,970 | | | | — | | | | 5,627 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
CASH, END OF PERIOD | | $ | — | | | $ | 128,037 | | | $ | 2,147 | | | $ | 393 | | | $ | — | | | $ | 130,577 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
52
YANKEE HOLDING CORP. AND SUBSIDIARIES (SUCCESSOR)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Period February 6, 2007 to December 29, 2007
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Parent | | | Issuer of
Notes | | | Guarantor
Subsidiaries | | | Non
Guarantor
Subsidiary | | | Intercompany
Eliminations | | | Consolidated | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 4,527 | | | $ | 4,314 | | | $ | (977 | ) | | $ | (696 | ) | | $ | (2,641 | ) | | $ | 4,527 | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | — | | | | 41,514 | | | | 237 | | | | 237 | | | | — | | | | 41,988 | |
Unrealized loss on marketable securities | | | — | | | | 238 | | | | — | | | | — | | | | — | | | | 238 | |
Equity based compensation expense | | | — | | | | 670 | | | | — | | | | — | | | | — | | | | 670 | |
Deferred taxes | | | — | | | | (14,025 | ) | | | (107 | ) | | | — | | | | — | | | | (14,132 | ) |
Non-cash charge related to increased inventory carrying value | | | — | | | | 40,472 | | | | — | | | | — | | | | — | | | | 40,472 | |
Loss on disposal and impairment of property and equipment | | | — | | | | 640 | | | | — | | | | — | | | | — | | | | 640 | |
Investments in marketable securities | | | — | | | | (581 | ) | | | — | | | | — | | | | — | | | | (581 | ) |
Equity in earnings of subsidiaries | | | (4,527 | ) | | | 1,673 | | | | — | | | | 213 | | | | 2,641 | | | | — | |
Changes in assets and liabilities | | | | | | | | | | | | | | | | | | | | | | | | |
Accounts receivable, net | | | — | | | | (13,024 | ) | | | (668 | ) | | | (4,697 | ) | | | — | | | | (18,389 | ) |
Inventory | | | — | | | | (2,572 | ) | | | (147 | ) | | | (239 | ) | | | — | | | | (2,958 | ) |
Prepaid expenses and other assets | | | — | | | | (3,635 | ) | | | 2,086 | | | | 121 | | | | — | | | | (1,428 | ) |
Accounts payable | | | — | | | | 2,396 | | | | 133 | | | | (223 | ) | | | — | | | | 2,306 | |
Income Taxes Payable | | | — | | | | (9,844 | ) | | | 371 | | | | 17 | | | | — | | | | (9,456 | ) |
Accrued expenses and other liabilities | | | — | | | | 29,144 | | | | 869 | | | | (686 | ) | | | — | | | | 29,327 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | | | — | | | | 77,380 | | | | 1,797 | | | | (5,953 | ) | | | — | | | | 73,224 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | |
Purchase of property and equipment | | | — | | | | (28,249 | ) | | | (69 | ) | | | (166 | ) | | | — | | | | (28,484 | ) |
Acquisition of the Company | | | — | | | | (1,429,476 | ) | | | — | | | | — | | | | — | | | | (1,429,476 | ) |
Intercompany payables/receivables | | | (418,083 | ) | | | (4,660 | ) | | | — | | | | — | | | | 422,743 | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES | | | (418,083 | ) | | | (1,462,385 | ) | | | (69 | ) | | | (166 | ) | | | 422,743 | | | | (1,457,960 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | |
Repayment of borrowings | | | — | | | | (295,875 | ) | | | — | | | | — | | | | — | | | | (295,875 | ) |
Net proceeds from issuance of common stock | | | 418,083 | | | | — | | | | — | | | | — | | | | — | | | | 418,083 | |
Borrowings under senior secured term loan facility | | | — | | | | 650,000 | | | | — | | | | — | | | | — | | | | 650,000 | |
Deferred financing costs | | | — | | | | (32,374 | ) | | | — | | | | — | | | | — | | | | (32,374 | ) |
Borrowings under senior secured revolving credit facility | | | — | | | | 111,000 | | | | — | | | | — | | | | — | | | | 111,000 | |
Borrowings under senior notes and senior subordinated notes | | | — | | | | 525,000 | | | | — | | | | — | | | | — | | | | 525,000 | |
Repurchase of common stock | | | — | | | | (294 | ) | | | — | | | | — | | | | — | | | | (294 | ) |
Intercompany payables/receivables | | | — | | | | 418,083 | | | | (1,543 | ) | | | 6,203 | | | | (422,743 | ) | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | | | 418,083 | | | | 1,375,540 | | | | (1,543 | ) | | | 6,203 | | | | (422,743 | ) | | | 1,375,540 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
EFFECT EXCHANGE RATE CHANGES ON CASH | | | — | | | | — | | | | — | | | | 39 | | | | — | | | | 39 | |
NET INCREASE(DECREASE) IN CASH | | | — | | | | (9,465 | ) | | | 185 | | | | 123 | | | | — | | | | (9,157 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
CASH, BEGINNING OF PERIOD | | | — | | | | 10,781 | | | | 2,156 | | | | 1,847 | | | | — | | | | 14,784 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
CASH, END OF PERIOD | | $ | — | | | $ | 1,316 | | | $ | 2,341 | | | $ | 1,970 | | | $ | — | | | $ | 5,627 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
53
YANKEE HOLDING CORP. AND SUBSIDIARIES (PREDECESSOR)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Period December 31, 2006 to February 5, 2007
(in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | | Issuer of
Notes | | | Guarantor
Subsidiaries | | | Non
Guarantor
Subsidiary | | | Intercompany
Eliminations | | | Consolidated | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | |
Net loss | | $ | (1,374 | ) | | $ | (147 | ) | | $ | (210 | ) | | $ | (99 | ) | | $ | (1,830 | ) |
Adjustments to reconcile net income to net cash used in operating activities: | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | 2,608 | | | | 46 | | | | 19 | | | | — | | | | 2,673 | |
Unrealized gain on marketable securities | | | (31 | ) | | | — | | | | — | | | | — | | | | (31 | ) |
Equity based compensation expense | | | 8,638 | | | | — | | | | — | | | | — | | | | 8,638 | |
Deferred taxes | | | (3,905 | ) | | | — | | | | — | | | | — | | | | (3,905 | ) |
Loss on disposal and impairment of property and equipment | | | 14 | | | | — | | | | — | | | | — | | | | 14 | |
Investments in marketable securities | | | (27 | ) | | | — | | | | — | | | | — | | | | (27 | ) |
Excess tax benefit from exercise of stock options | | | (4,317 | ) | | | — | | | | — | | | | — | | | | (4,317 | ) |
Equity in earnings of subsidiaries | | | 357 | | | | — | | | | (456 | ) | | | 99 | | | | — | |
Changes in assets and liabilities | | | | | | | | | | | | | | | | | | | | |
Accounts receivable, net | | | (1,190 | ) | | | 159 | | | | 1,210 | | | | — | | | | 179 | |
Inventory | | | (2,396 | ) | | | 152 | | | | (495 | ) | | | — | | | | (2,739 | ) |
Prepaid expenses and other assets | | | 697 | | | | 1 | | | | (362 | ) | | | — | | | | 336 | |
Accounts payable | | | (3,895 | ) | | | (191 | ) | | | (357 | ) | | | — | | | | (4,443 | ) |
Income taxes payable | | | 3,642 | | | | — | | | | — | | | | — | | | | 3,642 | |
Accrued expenses and other liabilities | | | (7,437 | ) | | | (550 | ) | | | (270 | ) | | | — | | | | (8,257 | ) |
| | | | | | | | | | | | | | | | | | | | |
NET CASH USED IN OPERATING ACTIVITIES | | | (8,616 | ) | | | (530 | ) | | | (921 | ) | | | — | | | | (10,067 | ) |
| | | | | | | | | | | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | |
Purchase of property and equipment | | | (2,247 | ) | | | — | | | | (3 | ) | | | — | | | | (2,250 | ) |
Intercompany payables/receivables | | | 660 | | | | — | | | | — | | | | (660 | ) | | | — | |
| | | | | | | | | | | | | | | | | | | | |
NET CASH USED IN INVESTING ACTIVITIES | | | (1,587 | ) | | | — | | | | (3 | ) | | | (660 | ) | | | (2,250 | ) |
| | | | | | | | | | | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | |
Excess tax benefit from exercise of stock options | | | 4,317 | | | | — | | | | — | | | | — | | | | 4,317 | |
Intercompany payables/receivables | | | — | | | | 324 | | | | (984 | ) | | | 660 | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | | | 4,317 | | | | 324 | | | | (984 | ) | | | 660 | | | | 4,317 | |
| | | | | | | | | | | | | | | | | | | | |
EFFECT EXCHANGE RATE CHANGES ON CASH | | | — | | | | — | | | | 11 | | | | — | | | | 11 | |
| | | | | | | | | | | | | | | | | | | | |
NET DECREASE IN CASH | | | (5,886 | ) | | | (206 | ) | | | (1,897 | ) | | | — | | | | (7,989 | ) |
CASH, BEGINNING OF PERIOD | | | 16,667 | | | | 2,362 | | | | 3,744 | | | | — | | | | 22,773 | |
| | | | | | | | | | | | | | | | | | | | |
CASH, END OF PERIOD | | $ | 10,781 | | | $ | 2,156 | | | $ | 1,847 | | | $ | — | | | $ | 14,784 | |
| | | | | | | | | | | | | | | | | | | | |
54
YANKEE HOLDING CORP. AND SUBSIDIARIES (PREDECESSOR)
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
For the Fifty-two Weeks Ended December 30, 2006
(in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | | Issuer of
Notes | | | Guarantor
Subsidiaries | | | Non
Guarantor
Subsidiary | | | Intercompany
Eliminations | | | Consolidated | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 84,489 | | | $ | (609 | ) | | $ | 818 | | | $ | (183 | ) | | $ | 84,515 | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization | | | 26,216 | | | | 380 | | | | 184 | | | | — | | | | 26,780 | |
Unrealized loss on marketable securities | | | 13 | | | | — | | | | — | | | | — | | | | 13 | |
Equity based compensation expense | | | 5,772 | | | | — | | | | — | | | | — | | | | 5,772 | |
Deferred taxes | | | 7,582 | | | | (33 | ) | | | — | | | | — | | | | 7,549 | |
Loss on disposal and impairments of property and equipment | | | 450 | | | | — | | | | — | | | | — | | | | 450 | |
Investments in marketable securities | | | (772 | ) | | | — | | | | — | | | | — | | | | (772 | ) |
Excess tax benefit from exercise of stock options | | | (960 | ) | | | — | | | | — | | | | — | | | | (960 | ) |
Equity in earnings of subsidiaries | | | (209 | ) | | | — | | | | — | | | | 209 | | | | — | |
Changes in assets and liabilities | | | | | | | | | | | | | | | | | | | | |
Accounts receivable, net | | | 10,358 | | | | (329 | ) | | | (478 | ) | | | — | | | | 9,551 | |
Inventory | | | (89 | ) | | | (631 | ) | | | (1,259 | ) | | | 6 | | | | (1,973 | ) |
Prepaid expenses and other assets | | | 423 | | | | 1 | | | | 193 | | | | — | | | | 617 | |
Accounts payable | | | 3,583 | | | | 196 | | | | 584 | | | | — | | | | 4,363 | |
Income taxes payable | | | 6,620 | | | | — | | | | — | | | | — | | | | 6,620 | |
Accrued expenses and other liabilities | | | 2,082 | | | | (241 | ) | | | (214 | ) | | | (107 | ) | | | 1,520 | |
| | | | | | | | | | | | | | | | | | | | |
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | | | 145,558 | | | | (1,266 | ) | | | (172 | ) | | | (75 | ) | | | 144,045 | |
| | | | | | | | | | | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | |
Purchase of property and equipment | | | (25,539 | ) | | | (990 | ) | | | (293 | ) | | | — | | | | (26,822 | ) |
Payment of contingent consideration on Yankee Candle Fundraising | | | (1,333 | ) | | | — | | | | — | | | | — | | | | (1,333 | ) |
Cash paid for business acquisitions | | | (22,244 | ) | | | — | | | | — | | | | — | | | | (22,244 | ) |
| | | | | | | | | | | | | | | | | | | | |
NET CASH USED IN INVESTING ACTIVITIES | | | (49,116 | ) | | | (990 | ) | | | (293 | ) | | | — | | | | (50,399 | ) |
| | | | | | | | | | | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | |
Repurchases of common stock | | | (41,977 | ) | | | — | | | | — | | | | — | | | | (41,977 | ) |
Net proceeds from issuance of common stock | | | 5,557 | | | | — | | | | — | | | | — | | | | 5,557 | |
Payments for dividends | | | (10,097 | ) | | | — | | | | — | | | | — | | | | (10,097 | ) |
Deferred financing costs | | | (313 | ) | | | — | | | | — | | | | — | | | | (313 | ) |
Excess tax benefit from exercise of stock options | | | 960 | | | | — | | | | — | | | | — | | | | 960 | |
Intercompany | | | (4,811 | ) | | | 2,480 | | | | 2,256 | | | | 75 | | | | — | |
Net repayments under bank credit agreements | | | (38,000 | ) | | | — | | | | — | | | | — | | | | (38,000 | ) |
| | | | | | | | | | | | | | | | | | | | |
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES | | | (88,681 | ) | | | 2,480 | | | | 2,256 | | | | 75 | | | | (83,870 | ) |
| | | | | | | | | | | | | | | | | | | | |
EFFECT EXCHANGE RATE CHANGES ON CASH | | | — | | | | — | | | | 342 | | | | — | | | | 342 | |
NET INCREASE IN CASH | | | 7,761 | | | | 224 | | | | 2,133 | | | | — | | | | 10,118 | |
CASH, BEGINNING OF YEAR | | | 8,906 | | | | 2,138 | | | | 1,611 | | | | — | | | | 12,655 | |
| | | | | | | | | | | | | | | | | | | | |
CASH, END OF YEAR | | $ | 16,667 | | | $ | 2,362 | | | $ | 3,744 | | | $ | — | | | $ | 22,773 | |
| | | | | | | | | | | | | | | | | | | | |
55
23. VALUATION AND QUALIFYING ACCOUNTS
| | | | | | | | | | | | | |
| Allowance for Doubtful Accounts | | Balance at
Beginning of
Fiscal Year | | Charged to
Costs and
Expenses | | Deductions From
Reserves | | | Balance at
End of
Fiscal Year |
Year Ended January 3, 2009: | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 2,333 | | $ | 4,839 | | $ | (934 | ) | | $ | 6,238 |
| | | | |
Period February 6, 2007 to December 29, 2007: | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 921 | | $ | 1,490 | | $ | (78 | ) | | $ | 2,333 |
| | | | |
Period December 31, 2006 to February 5, 2007: | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 928 | | $ | 22 | | $ | (29 | ) | | $ | 921 |
| | | | |
Year Ended December 30, 2006: | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 1,087 | | $ | 252 | | $ | (411 | ) | | $ | 928 |
Amounts charged to deductions from reserves represent the write-off of uncollectible balances.
24. QUARTERLY FINANCIAL DATA (UNAUDITED)
| | | | | | | | | | | | | | | | |
| | | Thirteen Weeks
Ended
March 29, 2008 | | | Thirteen Weeks
Ended
June 28, 2008 | | | Thirteen Weeks
Ended
September 27, 2008 | | | Fourteen Weeks
Ended
January 3, 2009 | |
Sales | | $ | 140,899 | | | $ | 127,472 | | | $ | 181,060 | | | $ | 264,311 | |
Cost of sales | | | 64,537 | | | | 55,004 | | | | 81,575 | | | | 106,059 | |
| | | | | | | | | | | | | | | | |
Gross profit | | | 76,362 | | | | 72,468 | | | | 99,485 | | | | 158,252 | |
Selling expenses | | | 49,514 | | | | 52,200 | | | | 50,874 | | | | 60,653 | |
General and administrative expenses | | | 14,414 | | | | 14,691 | | | | 15,388 | | | | 8,992 | |
Restructuring charges | | | 1,475 | | | | — | | | | — | | | | 12,382 | |
Goodwill and intangible asset impairments | | | — | | | | — | | | | — | | | | 462,616 | |
| | | | | | | | | | | | | | | | |
Income (loss) from operations | | | 10,959 | | | | 5,577 | | | | 33,223 | | | | (386,391 | ) |
Interest income | | | (12 | ) | | | (5 | ) | | | (5 | ) | | | (16 | ) |
Interest expense | | | 23,808 | | | | 22,968 | | | | 23,104 | | | | 25,076 | |
Gain on extinguishment of debt | | | — | | | | (2,131 | ) | | | — | | | | — | |
Other (income) expense | | | (101 | ) | | | (23 | ) | | | 52 | | | | 1,734 | |
| | | | | | | | | | | | | | | | |
(Loss) income before (benefit from) provision for income taxes | | | (12,736 | ) | | | (15,232 | ) | | | 10,072 | | | | (413,185 | ) |
(Benefit from) provision for income taxes | | | (4,878 | ) | | | (5,890 | ) | | | 3,332 | | | | (14,322 | ) |
| | | | | | | | | | | | | | | | |
Net (loss) income | | $ | (7,858 | ) | | $ | (9,342 | ) | | $ | 6,740 | | | $ | (398,863 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | Predecessor | | | | | Successor | |
| | | Period
December 31, 2006
to February 5, 2007 | | | | | Period
February 6, 2007
to March 31, 2007 | | | Thirteen Weeks
Ended
June 30, 2007 | | | Thirteen Weeks
Ended
September 29, 2007 | | | Thirteen Weeks
Ended
December 29, 2007 | |
Sales | | $ | 53,382 | | | | | $ | 89,617 | | | $ | 133,415 | | | $ | 175,815 | | | $ | 284,726 | |
Cost of sales | | | 24,553 | | | | | | 66,109 | | | | 72,918 | | | | 78,162 | | | | 112,383 | |
| | | | | | | | | | | | | | | | | | | | | | |
Gross profit | | | 28,829 | | | | | | 23,508 | | | | 60,497 | | | | 97,653 | | | | 172,343 | |
Selling expenses | | | 16,201 | | | | | | 29,443 | | | | 47,610 | | | | 51,530 | | | | 63,816 | |
General and administrative expenses | | | 13,828 | | | | | | 11,822 | | | | 18,431 | | | | 16,313 | | | | 16,150 | |
| | | | | | | | | | | | | | | | | | | | | | |
(Loss) income from operations | | | (1,200 | ) | | | | | (17,757 | ) | | | (5,544 | ) | | | 29,810 | | | | 92,377 | |
Interest income | | | (1 | ) | | | | | (12 | ) | | | (8 | ) | | | (15 | ) | | | (9 | ) |
Interest expense | | | 986 | | | | | | 15,863 | | | | 25,578 | | | | 25,619 | | | | 25,382 | |
Other income | | | (15 | ) | | | | | (10 | ) | | | (676 | ) | | | (35 | ) | | | (430 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
(Loss) income before (benefit from) provision for income taxes | | | (2,170 | ) | | | | | (33,598 | ) | | | (30,438 | ) | | | 4,241 | | | | 67,434 | |
(Benefit from) provision for income taxes | | | (340 | ) | | | | | (12,866 | ) | | | (13,773 | ) | | | 1,047 | | | | 28,705 | |
| | | | | | | | | | | | | | | | | | | | | | |
Net (loss) income | | $ | (1,830 | ) | | | | $ | (20,732 | ) | | $ | (16,665 | ) | | $ | 3,194 | | | $ | 38,729 | |
| | | | | | | | | | | | | | | | | | | | | | |
56
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
Not applicable.
| ITEM 9A. | CONTROLS AND PROCEDURES |
1. Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of January 3, 2009. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of January 3, 2009, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
2. Internal Control over Financial Reporting
(a) Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, a company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
| | • | | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transaction and dispositions of the assets of the company; |
| | • | | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and |
| | • | | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. |
Management assessed the effectiveness of our internal control over financial reporting as of January 3, 2009. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in its Internal Control-Integrated Framework.
Based on our assessment, management believes that, as of January 3, 2009 our internal control over financial reporting is effective based on the above criteria.
Deloitte & Touche LLP, our independent auditors, have issued an audit report on the effectiveness of our internal control over financial reporting. This report appears on page 57 of this Annual Report on Form 10-K.
Because of its inherent limitations, internal control over financial reporting, no matter how well designed, may not prevent or detect all material misstatements. Projections of any current evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate, or other such factors.
(b) Attestation Report of Independent Auditor
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Yankee Holding Corp.
South Deerfield, Massachusetts
We have audited the internal control over financial reporting of Yankee Holding Corp. and subsidiaries (the “Company”) as of January 3, 2009, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
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A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 3, 2009, based on the criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of January 3, 2009 and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the fifty three weeks then ended and our report dated April 2, 2009 expressed an unqualified opinion on those financial statements.
/s/ Deloitte & Touche LLP
Hartford, Connecticut
April 2, 2009
(c) Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended January 3, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| ITEM 9B. | OTHER INFORMATION |
Not applicable.
PART III
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The following table sets forth the names, ages and positions of our executive officers and directors as of April 2, 2009:
| | | | |
Name | | Age | | Position |
| Craig W. Rydin | | 57 | | Chairman of the Board and Chief Executive Officer, Director |
| | |
| Harlan M. Kent | | 46 | | President and Chief Operating Officer, Director |
| | |
| Bruce L. Hartman | | 55 | | Executive Vice President, Chief Administrative Officer and Chief Financial Officer |
| | |
| Stephen Farley | | 54 | | Senior Vice President, Retail |
| | |
| Arthur F. Rubeck | | 44 | | Senior Vice President, Supply Chain |
| | |
| Martha S. LaCroix | | 43 | | Senior Vice President, Human Resources |
| | |
| James A. Perley | | 46 | | Senior Vice President, General Counsel and Global Managing Director |
| | |
| Richard R. Ruffolo | | 41 | | Senior Vice President, Brand Marketing and Innovation |
| | |
| Michael Thorne | | 44 | | Senior Vice President, Wholesale |
| | |
| Robin P. Selati | | 42 | | Director |
| | |
| George A. Peinado | | 39 | | Director |
| | |
| Richard H. Copans | | 32 | | Director |
| | |
| Terry Burman | | 63 | | Director |
CRAIG W. RYDIN is the Chairman of the Board of Directors and Chief Executive Officer. Prior to joining Yankee Candle in April 2001, Mr. Rydin was the President of the Away From Home food services division of Campbell Soup Company since 1998, and President of the Godiva Chocolatier division of Campbell from 1996 to 1998. Prior to Godiva, Mr. Rydin held a number of senior management positions at Pepperidge Farm, Inc., also a part of Campbell. Mr. Rydin also serves on the Board of Directors of Priceline.com Incorporated and Phillips & Van Heusen, Inc.
HARLAN M. KENT is the President and Chief Operating Officer. Mr. Kent joined Yankee Candle in June 2001 as Senior Vice President, Wholesale. He was promoted to President in July 2004 and was promoted to his current position in December 2005. Prior to joining Yankee Candle, Mr. Kent was Senior Vice President and General Manager of the Wholesale Division of Totes Isotoner Corporation from 1997 to 2001, and Vice President of Global Sales and Marketing for the Winchester Division of Olin Corporation from 1995 to 1997. Mr. Kent has also held a number of senior marketing and strategic planning positions at both the Campbell Soup Company and its Pepperidge Farm Division. Mr. Kent also serves on the Board of Directors of the A.T. Cross Company.
BRUCE L. HARTMAN is the Executive Vice President, Chief Administrative Officer and Chief Financial Officer. Mr. Hartman joined Yankee Candle in January 2008 as Senior Vice President of Finance and Chief Financial Officer and was promoted to his current position in March 2009. Prior to joining the Company, Mr. Hartman served as Chief Financial Officer of Cushman & Wakefield. Prior to joining Cushman & Wakefield in 2006, Mr. Hartman served as Executive Vice President and Chief Financial Officer of Foot Locker, a leading international retailer of athletic shoes and apparel, from 1996 to 2005. Prior to Foot Locker, from 1986 to 1996 Mr. Hartman held several financial leadership positions of increasing responsibility, including Divisional Chief Financial Officer, with May Department Stores.
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STEPHEN FARLEY is the Senior Vice President, Retail. Prior to joining Yankee Candle in January 2005, Mr. Farley served as Executive Vice President, Marketing and Merchandising for The Bombay Company, a leading specialty retailer of home accessories and home décor. Prior to joining The Bombay Company in 2002, he served as Chief Marketing Officer for J.C. Penney, one of America’s largest department store, catalog and e-commerce retailers. Mr. Farley also previously held various senior leadership positions with Payless Shoe Source, Inc., Pizza Hut and the leading marketing and advertising agencies of Earle Palmer Brown and Saatchi & Saatchi.
ARTHUR F. RUBECK is the Senior Vice President, Supply Chain. Mr. Rubeck joined the Company in 1981 and has held several operational positions of increasing responsibility, including serving as Vice President, Manufacturing from 2003 until his promotion to his current position in February 2009.
MARTHA S. LACROIX is the Senior Vice President, Human Resources. Ms. LaCroix joined Yankee Candle in February 1993 as Director of Employee Relations and has since held various positions of increasing responsibility in the Company’s Human Resources Department. Ms. LaCroix was appointed Vice President, Human Resources in December 2000 and promoted to her current position in 2003.
JAMES A. PERLEY is the Senior Vice President, General Counsel of the Company and since 2006 has served as Global Managing Director overseeing the Company’s international subsidiary. Prior to joining Yankee Candle in September 1999, Mr. Perley was Vice President and General Counsel of Star Markets Company, Inc., where he served from 1997 to 1999. From 1987 to 1997, Mr. Perley was a member of the Boston-based law firm of Hale and Dorr LLP, where he served as an Associate from 1987-1992 and as a Junior Partner from 1992-1997.
RICHARD R. RUFFOLO is the Senior Vice President of Brand Marketing and Innovation. Prior to joining Yankee Candle in September 2005, Mr. Ruffolo held various senior leadership positions with the Bath & Body Works Division of Limited Brands, Inc. from 1998-2005, where he most recently served as Vice President and Category Leader of their True Blue SPA and American Girl realbeauty businesses. Prior to joining Bath & Body Works in 1998 he served as Category Director, Glade Candles for S.C. Johnson & Son, Inc. Mr. Ruffolo also previously held brand management positions with The Procter & Gamble Company and Ralston-Purina Company.
MICHAEL THORNE is the Senior Vice President of Wholesale. Prior to joining Yankee Candle in June 2006, Mr. Thorne was employed by Spalding Sports and the Russell Corp. from 2000 to 2006, where he most recently served as President, Russell Athletic Team and Bike Athletic Divisions. Mr. Thorne also previously held senior sales management positions within Pentland LLC, Franklin Sporting Goods and Wilson Sporting Goods.
ROBIN P. SELATI has served as a director of Holdings since February 2007. Mr. Selati is a Managing Director of Madison Dearborn and joined the firm in 1993. Prior to joining Madison Dearborn in 1993, Mr. Selati was associated with Alex Brown & Sons Incorporated in the consumer/retail investment banking group. Mr. Selati also serves on the board of directors of Carrols Restaurant Group, Inc., Tuesday Morning Corporation, Ruth’s Hospitality Group, Inc. and BF Bolthouse Holdco LLC.
GEORGE A. PEINADO has served as a director of Holdings since February 2007. Mr. Peinado is a Managing Director of Madison Dearborn and joined the firm in 2004. Prior to joining Madison Dearborn in 2004, Mr. Peinado was with DLJ Merchant Banking Partners and Morgan Stanley & Co. Mr. Peinado also serves on the board of directors of CDW Corporation and BF Bolthouse Holdco LLC.
RICHARD H. COPANS has served as a director of Holdings since February 2007. Mr. Copans is a Vice President of Madison Dearborn and joined the firm in 2005. Prior to joining Madison Dearborn in 2005, Mr. Copans was an analyst with Thomas H. Lee Partners and Morgan Stanley & Co.
TERRY BURMAN has served as a director of Holdings since October 2007. Mr. Burman is the Chief Executive Officer of Signet Group plc. Mr. Burman joined Signet Group in 1995 as the Chairman and CEO of Sterling Jewelers, Inc., a US division of Signet. Before joining Signet Group, Mr. Burman held various senior executive positions of increasing responsibility with Barry’s Jewelers, Inc. from 1980—1995, including President and Chief Executive Officer from 1993 – 1995. Prior to that, Mr. Burman was a Partner with Roberts Department Stores, a regional department store chain specializing in apparel. Mr. Burman also serves on the Board of Directors of Signet Group, plc.
There are no family relationships among any of the executive officers or directors.
Code of Business Conduct and Ethics
We have adopted a written code of conduct that applies to all of our directors, executive officers and employees, including our principal executive officer, principal financial officer, and principal accounting officer. The code of conduct includes provisions covering compliance with laws and regulations, insider trading practices, conflicts of interest, confidentiality, protection and proper use of our assets, accounting and record keeping, fair competition and fair dealing, business gifts and entertainment, payments to government personnel and the reporting of illegal or unethical behavior. You can obtain a copy of our code of conduct through the Investor Relations page of our website at www.yankeecandle.com. The Code is reviewed annually by the Board of Directors.
Board Committees
The Board of Directors is responsible for the general supervision and oversight of the affairs of the Company. In order to assist it in carrying out these duties, the Board has established and delegated certain authority to the following standing committees: the Audit Committee and the Compensation Committee. Each of these committees operates under a charter that has been approved by the Board.
Audit Committee
The Company is not required to have a separately-designated standing Audit Committee composed of independent directors, as its securities are not listed on a national securities exchange. However, in April 2007 the Company’s board of directors established a separately-designated standing Audit Committee. The current members of the Audit Committee are George A. Peinado (chair), Robin P. Selati, Richard H. Copans and Terry Burman. Messrs. Peinado, Selati and Copans were appointed as members in April 2007 and Mr. Burman was appointed in October 2007. The board of directors has determined that each of Messrs. Peinado, Selati and Copans is an audit committee financial expert, as such term is defined in the Securities Exchange Act of 1934, as amended. Each of Messrs. Peinado, Selati and Copans is employed by Madison Dearborn, a private equity investment firm affiliated with the Company’s controlling stockholder, and is therefore not independent.
Management is responsible for the preparation of the Company’s financial statements and the Company’s internal control over financial reporting and the financial reporting process. The Company’s independent registered public accounting firm is responsible for performing an independent audit of the Company’s financial statements in accordance with generally accepted auditing standards and to issue a report on those financial statements. The Audit Committee assists the Board of Directors in its oversight of the Company’s financial statements and its internal accounting policies and procedures. The Audit Committee’s primary duties and responsibilities include (i) monitoring the integrity of the Company’s financial reporting process and systems of internal controls regarding finance, accounting and legal compliance, (ii) monitoring the independence and performance of the Company’s independent auditor and monitoring the performance of the Company’s internal audit function,
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(iii) hiring and firing the Company’s independent auditor and approving any non-audit work performed for the Company by the independent auditor, (iv) providing an avenue of communication among the independent auditor, management and the Board, and (v) such other functions as may from time to time be delegated to it by the Board of Directors.
Compensation Committee
The current members of the Compensation Committee of the Board of Directors are Robin P. Selati (Chair), George A. Peinado, Richard H. Copans and Terry Burman. Messrs. Selati, Peinado and Copans have served on the Compensation Committee since April 2007 and Mr. Burman was appointed to the Committee in October 2007.
The Compensation Committee assists the Board of Directors in its oversight of the Company’s executive compensation policies and practices. The Compensation Committee’s primary responsibilities include (i) establishing total compensation for the Board, (ii) reviewing and approving total compensation for the Company’s executive officers, including oversight of all executive officer benefit plans and approve goals, (iii) determining and annually reviewing total compensation for the Company’s Chief Executive Officer, including reviewing and approving corporate goals and objectives relevant to the Chief Executive Officer’s compensation, (iv) overseeing the Company’s cash-based and equity-based incentive plans, (v) producing a compensation committee report on executive compensation as required by the SEC to be included in the Company’s Form 10-K or, if applicable, proxy statement and (vi) such other functions as may from time to time be delegated to it by the Board of Directors.
The Compensation Committee Report required by SEC rules is included on page 65 of this Annual Report.
Director Nomination Procedures
Pursuant to the unitholders agreement entered into in connection with the February 2007 merger, Madison Dearborn agreed that the initial Board of Managers of Holdings (the “Board”) shall consist of five members and include three members designated by Madison Dearborn, with the remaining two members being our Chief Executive Officer, who is currently Craig Rydin, and for so long as he remains an executive officer of the Company, Harlan Kent. Mr. Burman was appointed to the Board in October 2007. The composition of the board of directors or managers of each of Holdings’ subsidiaries shall be the same as that of the Board. In general, the Company’s obligations with respect to Board composition will terminate upon the earlier to occur of the consummation of a sale of the Company or the consummation of an initial public offering. At Madison Dearborn’s option, Madison Dearborn Board designees shall constitute a majority of any committees of the Board or the boards of directors of any subsidiary of Holdings.
| ITEM 11. | EXECUTIVE COMPENSATION |
Compensation Discussion and Analysis
General Overview
On February 6, 2007, our predecessor public company (the “Predecessor”) merged with an entity formed by Madison Dearborn Partners LLC, a private equity firm (“Madison Dearborn”), and the Company became privately-held (the “Merger”). YCC Holdings LLC (“Holdings LLC”), an entity organized and controlled by Madison Dearborn, is the indirect parent of the Company.
While several components of our former executive compensation program remain largely unchanged following the Merger, the public company equity component of our prior compensation program has been replaced by an equity program more typical of privately held companies. In connection with the Merger each of our executive officers and certain members of senior management were given the opportunity to purchase equity in Holdings LLC as described below under “—Long-Term Incentives (Equity Awards).” Newly hired employees for certain senior management or other key positions, or employees promoted to such positions, are also eligible for equity awards under the program. Madison Dearborn believes that equity ownership by management further aligns the interests of our executive officers with those of our other equity investors and encourages our executive officers to operate the business in a manner that enhances the Company’s equity value. We do not currently anticipate that additional incentive equity will be issued to our executive officers on an annual basis as part of future compensation arrangements. The Company’s equity compensation is discussed in more detail below.
The Compensation Committee of our Board of Directors (the “Compensation Committee”), which in 2008 consisted of the non-employee members of the Board of Directors, is responsible for the administration of the Company’s executive compensation program. As such, decisions with respect to our Chief Executive Officer’s compensation are made by the Compensation Committee and those relating to the compensation of our other executive officers are made by the Compensation Committee in consultation with our Chief Executive Officer. As it has in the past, the Compensation Committee has retained and continues to work closely with an independent compensation consultant, Towers Perrin, to assist the Compensation Committee in its ongoing administration and review of the Company’s executive compensation program.
Throughout this analysis, our Chief Executive Officer, Chief Financial Officer and the other individuals included in the Summary Compensation Table below are collectively referred to as the “named executive officers.”
Compensation Objectives and Program Structure
The Company’s executive compensation philosophy is designed to achieve value for our investors by using all elements of executive compensation to reinforce a results-oriented management culture focusing on our financial and operating performance, the achievement of longer-term strategic goals and objectives, and specific individual performance. The objectives of our compensation policies are (i) to provide a level of compensation that will allow us to attract, motivate, retain and reward talented executives who have the ability to contribute to our success, (ii) to link executive compensation to our success through the use of bonus payments based in whole or in part upon our performance (or that of a particular business unit), (iii) to align the interests of the executives with those of our investors, including through management co-investment with Madison Dearborn in the equity ownership of Holdings LLC under its “Management Equity Plan” (as defined below), thereby providing incentive for, and rewarding the attainment of, objectives that inure to the benefit of our investors and (iv) to motivate and reward high levels of individual performance or achievement.
Overview of Compensation and Process
The Compensation Committee works with management and its independent compensation consultant, Towers Perrin, to administer and oversee a comprehensive executive compensation program covering those members of management at the Vice President level or higher, together with other key management personnel, if any, that may be included from time to time by the Company and the Compensation Committee in their discretion (the “Program”). The Compensation Committee annually reviews and approves our executive compensation philosophy, which sets forth the objectives of the Program and covers all elements of the Company’s rewards for executives, including base salary, annual cash incentive opportunities, equity incentive opportunities and other benefits, and serves as the basis for the Compensation Committee’s decisions regarding compensation of our senior management. The executive compensation philosophy and the resulting Program are designed to support the Company’s compensation objectives, the key elements of which are discussed below.
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Among other services provided, Towers Perrin assists the Compensation Committee in evaluating the Program by providing information on general market pay practices and levels and those of our peer group and other comparable companies, and reviewing the Company’s pay policies as compared to those market practices. We would anticipate continuing to use the services of an independent consulting firm in the future on an as-needed basis in order to continue to provide advice and marketplace benchmarking data and to insure that our actual compensation practices remain competitive and consistent with our stated goals and executive compensation philosophy.
Peer Group.We are committed to providing competitive compensation opportunities to participants in the Program who are performing at a fully satisfactory level. Accordingly, as part of the Program the Compensation Committee’s consultant conducts extensive market research of comparable companies in order to develop the data necessary to establish appropriate market compensation levels. For purposes of determining market levels of compensation, we benchmark ourselves against a group of organizations within the retail/wholesale sector using industry surveys and other available data that reflect, to the extent possible, pay levels at such companies.
Given the fact that we are a manufacturer, retailer and wholesaler, finding the appropriate peer group is challenging. The organizations comprising our peer group have been selected over time based upon the following characteristics: (i) strong or emerging brands, (ii) strong financial performance (based on objective metrics such as earnings, growth, return on invested capital and other such measures), (iii) multi-channel business and distribution models and (iv) specialty retailing focus. The composition of our peer group is reviewed at least annually by the Compensation Committee. The peer group currently consists of publicly-traded companies, in large part because there is more publicly available compensation information from public companies.
In 2008 there were a total of 21 companies in the peer group. The companies comprising the peer group are:
| | • | | American Eagle Outfitters |
| | • | | Ann Taylor Stores, Corporation |
| | • | | Charlotte Russe Holding, Inc. |
| | • | | Children’s Place Retail Stores, Inc. |
| | • | | Kenneth Cole Productions, Inc. |
| | • | | Pacific Sunwear of California, Inc. |
The only change made to the peer group in 2008 was to remove Oakley, Inc. due to their acquisition in 2008. Given the number of companies in our peer group, minor changes in the peer group’s composition should not have a significant impact on year-to-year market pay levels targeted by the Company. We anticipate continuing to use peer group analysis to establish market compensation levels going forward. The peer group information is supplemented by additional market information provided by Towers Perrin, which typically includes a compilation of survey data and reports from national compensation consulting firms and Towers Perrin’s own market and research information.
Using the market information from our peer group, together with additional market information from Towers Perrin, the Compensation Committee estimates market rates of pay for base salary, total cash compensation (base salary, plus annual cash incentives) and total compensation (total cash, plus the expected value of long-term incentives). These market rates were used to create targeted salary and bonus ranges. The ranges for each component of cash compensation were developed to ensure they were competitive with the appropriate market and targeted at approximately the 50th percentile of the market (the “median”). Over time, depending upon budgetary considerations and other factors, most participants who are performing satisfactorily are intended to be provided total cash compensation generally consistent with the market median. With respect to long-term incentive awards, while the Compensation Committee continues to consider the long-term incentive practices of public companies in our peer group to guide its approach to structuring compensation opportunities for our senior management, as a privately-held company we now seek to
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provide equity opportunities to our senior management that are intended to be generally consistent with the practices of other comparable privately-held companies. Given the differences between public company and private company equity programs, the Compensation Committee weighs total cash compensation (base salary plus annual cash incentives) more heavily than total compensation (base salary, plus annual cash incentives, plus the annualized expected value of long-term incentives) when benchmarking against the peer group. As such, total compensation opportunities in a given year may not be completely aligned with those of our public company peer group.
The Program is structured to tie a significant portion of the executive’s overall compensation to the performance of the Company and/or specific business units within the Company through the use of performance-based reward elements such as annual and long-term incentives. The following elements were included in the Program in fiscal 2008:
| | • | | Annual cash-based incentives (the “Management Incentive Plan” or “MIP”); |
| | • | | long-term equity-based incentives under the Company’s Management Equity Plan described below; and |
| | • | | other benefits based upon prevailing market norms. |
The Company does not have a pre-established policy or target for the allocation between either cash and non-cash or short-term and long-term incentive compensation. Rather, the Compensation Committee reviews information provided by Towers Perrin to determine the appropriate level and mix of incentive compensation, with the goal of total cash compensation being targeted at approximately the 50th percentile of the market median developed using the Company’s peer group data and other market information. With respect to long-term incentive compensation, Madison Dearborn and the Compensation Committee believe that management’s co-investment and other equity incentive awards in Holdings LLC will provide long-term incentives to grow the Company’s overall equity value. As a result, it is currently anticipated that additional long-term equity incentive grants beyond those awarded in 2007 in connection with the Merger (or those made or to be made with respect to new management employees hired or promoted into eligible positions subsequent to the Merger) will not be made on an annual basis as was done previously by our public company Predecessor.
The following summary of our compensation plans should be read in conjunction with the narrative disclosure contained in the section entitled “Executive Compensation Tables.”
Base Salary. Each participant in the Program is provided a salary based upon market compensation levels for his or her specific position or job function. These market levels are based upon peer group compensation levels, compensation levels at other comparable companies as reported in market data surveys compiled by Towers Perrin and general market compensation information, all of which are considered to arrive at a market “going rate.” We provide a base salary to attract and retain executive officers and to compensate them for their services rendered during the fiscal year. An individual will be paid a base salary on the basis of his or her skills (based on training, education and experience), contributions over time and annual performance. In establishing base salaries for each of our executive officers, the Compensation Committee considers numerous factors, including (i) its assessment of the executive’s performance, (ii) the executive’s leadership in executing Company initiatives and his or her potential future contributions and ability to enhance long-term enterprise value, (iii) the nature and scope of the executive’s responsibilities, (iv) the executive’s contributions and importance to the Company, (v) the executive’s integrity and compliance with law and with our Code of Business Conduct and Ethics, and (vi) the executive’s historical compensation and the nature and extent of the executive’s other forms of compensation. Most participants who are performing satisfactorily will be provided salaries that are generally consistent with the market median based upon similarly-situated executives of the companies in our peer group. Variations to this objective may occur at the discretion of the Compensation Committee and Chief Executive Officer, as applicable, based on the experience level of the individual and market factors as well as Company performance, retention concerns and other individual circumstances. Each year, the participant’s salary will be reviewed and may be increased if warranted. In general, if a participant’s role and performance level have not changed significantly, and his or her salary is consistent with market levels of pay, the participant can typically expect a modest increase in base salary in a given year.
With respect to 2008, Mr. Rydin’s base salary was determined solely by the Compensation Committee, while the base salaries of the other executive officers were established and approved by the Compensation Committee based upon input and recommendations from Mr. Rydin.
Annual Cash Incentives (Bonuses). We believe that a significant portion of an executive’s compensation should be tied to our performance. Therefore, in addition to a base salary, we provide a Management Incentive Plan (the “MIP”) which constitutes the variable, performance-based component of an executive’s cash compensation. The MIP is designed to reward members of management and other key individuals for performance within the applicable fiscal year. The MIP provides for a target incentive opportunity for each participant consistent with market practice for his or her position or job function. If the Company, business unit (if applicable) and individual performance are each at target levels (as pre-approved by the Compensation Committee), the participant’s total cash compensation (base salary, plus MIP incentive) is designed to be competitive with market practice for that role (i.e., generally consistent with the 50th percentile of market ranges established using the peer group and other market data provided by Towers Perrin). If performance is above or below target, total cash compensation is likewise designed to be above or below market levels, respectively.
The MIP is structured to provide a “pool” of incentive dollars based on our attainment of certain financial and operating results for the applicable year established and pre-approved by the Compensation Committee. The Company’s actual performance versus the pre-established performance objective determines the actual funding of the MIP incentive pool. The actual pool may exceed the target pool, or may be less than target, or even zero, based on our actual performance during such fiscal year. In addition, under the terms of the MIP the Compensation Committee may also in its discretion consider additional factors in determining the actual funding level of the MIP incentive pool.
The financial and operating metric used to measure Company performance under the MIP, as determined by the Compensation Committee, is “Adjusted EBITDA.” For MIP purposes, “Adjusted EBITDA” is defined as net income before net interest expense, income taxes, depreciation and amortization, amortization of deferred financing costs, equity compensation expense, expenses related to the Merger, any purchase price accounting adjustments as a result of the Merger, and any other nonrecurring or similar costs as may be deemed appropriate by the Board of Directors or Compensation Committee in its discretion. As a privately held company, the Compensation Committee believes that Adjusted EBITDA is a very important financial and operating metric to our investors and that using it as the measure of Company performance under the MIP will best align the interests of management with those of our investors.
The 2008 Adjusted EBITDA objective was established by the Compensation Committee in February 2008. In establishing the pre-approved Adjusted EBITDA performance targets used for purposes of the MIP incentive payments, the Compensation Committee seeks to establish an Adjusted EBITDA level that is not easily attainable and is instead intended to require a level of Company financial performance commensurate with that which could reasonably be expected to reward the Company’s equity holders. The Adjusted EBITDA targets are generally based upon the Company’s approved operating budget for the applicable fiscal year, as modified by the Compensation Committee in its discretion, based upon various factors it deems relevant (including, by way of example, its view of the expected level of difficulty of attaining the approved budget).
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Each individual participant’s target MIP incentive bonus payment is established annually by the Compensation Committee and expressed as percentage of the participant’s base salary earned in the fiscal year. The applicable percentage used to establish the participant’s target MIP award is based upon the participant’s position in the Company, performance and market benchmarks. Actual incentive bonus awards paid to individual participants are generally based upon the following factors:
Company Performance. As noted above, the funding of the overall MIP pool is determined by the Company’s actual performance versus its Adjusted EBITDA target (the “Company Portion”). Performance under the Company Portion of the incentive objective determines an initial award level for each MIP participant which may vary between 0% and 200% of a participant’s target award depending upon the Company’s actual Adjusted EBITDA performance. If actual Adjusted EBITDA exceeds the targeted Adjusted EBITDA, participants would receive an initial award (subject to adjustment as provided below) in excess of 100% of his or her target. If actual Adjusted EBITDA was less than the targeted Adjusted EBITDA, participants would receive an initial award (subject to adjustment as provided below) less than 100% of his or her target. The amount of any initial award above or below target is determined, based on actual Company performance as compared to target, using an award calibration schedule developed by Towers Perrin based upon market practices and approved by the Compensation Committee and included in the MIP. If the Company’s actual Adjusted EBITDA for the applicable fiscal year does not meet or exceed a pre-approved minimum threshold, participants would typically not receive any award and no other performance factors will be considered.
Business Unit Performance. For certain participants who work within one of our business units, a portion of their MIP target bonus amount is also tied to the segment profit achieved by such business unit as compared to the segment profit objective pre-determined by the Compensation Committee. Actual segment profit performance of the applicable business unit, as compared to this pre-determined objective, is then used as a “multiplier” to increase or decrease the initial award level established using the Company Portion. This multiplier factor will range from 0.0 to 1.50 based upon the actual segment profit performance and a range of corresponding multipliers pre-approved by the Compensation Committee. The MIP provides for a range of segment profit performance (e.g., 95% to 99% of the pre-approved segment profit target) and with respect to each such performance range assigns a corresponding range of multipliers to be applied by the Compensation Committee (e.g., .75 to .99). Based upon input from management, the Compensation Committee will determine the multiplier to be used. While there are no express factors which must be considered by the Compensation Committee in establishing a particular multiplier, among the factors that may be considered by the Compensation Committee are the relative performance of the Company or business unit as compared to its peers or the market generally, unforeseen economic conditions, matters beyond the Company’s control, other matters or conditions not foreseen at the time the segment profit target was established, the prior history of MIP payouts, the current status of the Company’s total cash and total direct compensation in relation to its peer group, retention concerns and other matters that the Compensation Committee may deem appropriate. If actual segment profit falls below the pre-approved segment profit minimum threshold established by the Compensation Committee, the multiplier factor will be zero, and participants in the applicable business unit will earn a reduced bonus for the year.
Individual Performance. The award level determined as a result of the Company Portion of the incentive objective, modified by the segment profit performance factor, if applicable, may be further modified based on individual performance. An assessment of the participant’s performance against his or her pre-determined key performance objectives established by his or her supervisor (and in the case of Mr. Rydin, by the Compensation Committee) at the start of the fiscal year, combined with an overall assessment of the participant’s individual contributions and performance in the applicable year, will result in a multiplier ranging from -50% to + 25% that will be used to multiply the award determined above in order to calculate the participant’s final incentive award for the fiscal year.
The Compensation Committee has the discretion to modify all or any portion of any award as it deems necessary or appropriate. While there are no express factors which must be considered by the Compensation Committee in exercising this discretion, among the factors that may be considered by the Compensation Committee are input from the Company’s Chief Executive Officer as to individual performance, the relative performance of the Company or business unit as compared to its peers or the market generally, unforeseen economic conditions, matters beyond the Company’s control, other matters or conditions not foreseen at the time the segment profit target was established, the prior history of MIP payouts, the current status of the Company’s total cash and total direct compensation in relation to its peer group, retention concerns and other matters that the Compensation Committee may deem appropriate.
Based upon fiscal year-end results, the funding of the pool is reviewed and approved by the Compensation Committee, and may be modified upward or downward in the Committee’s discretion (by way of example only, based upon factors such as intervening economic, market or industry factors that may be beyond the Company’s control or other circumstances, actions or events impacting the Company’s financial or operating results that were not contemplated by the Compensation Committee when establishing the performance objectives). Once established and approved by the Compensation Committee, the pool of dollars is allocated among MIP participants based on a combination of the above factors. Actual allocations of awards to individual participants are determined by the Chief Executive Officer and the Company’s Salary Committee (consisting of the Chief Executive Officer, Chief Financial Officer, Senior Vice President, Human Resources and Vice President, Human Resources), based on input from a participant’s direct manager, as well as senior management. All awards made to the Company’s executive officers are reviewed and approved by the Compensation Committee. The Compensation Committee is also responsible for determining the annual incentive amount for the Chief Executive Officer.
In 2008, the Company’s actual Adjusted EBITDA performance as determined by the Compensation Committee for MIP purposes was $189.1 million, which was approximately ninety percent (90%) of its pre-approved Adjusted EBITDA target established in February 2008. Based upon the calibration methodology contained in the MIP, and prior to the exercise of any discretion by the Compensation Committee as permitted under the MIP, this actual Adjusted EBITDA performance would have resulted in the funding of the overall MIP pool in an amount equal to approximately 21% of the amount that would have been funded if the pre-approved Adjusted EBITDA target performance had been achieved. However, over a course of several meetings the Compensation Committee discussed the Company’s performance in 2008 in the context of the unprecedented economic conditions, the severity of which was unanticipated by the Company and the Compensation Committee when the original Adjusted EBITDA target was established in February 2008, and in light of those conditions and other factors, the Compensation Committee considered the appropriate use of its discretion under the MIP to provide for additional funding of the MIP incentive pool. The primary factors in the Compensation Committee’s exercise of its discretion were the unprecedented nature of the macro-economic and financial conditions in 2008, the Company’s strong relative performance compared to other comparable companies, the Company’s successful management of productivity and expense initiatives and resulting ability to “claw back” EBITDA to levels disproportionately greater than the revenue lost as a result of the macro-economic conditions, the Company’s ability to manage its cash flow and pay down its debt ahead of schedule despite the economic conditions, the desire to reward and incent strong performers in 2008 and several matters beyond the Company’s reasonable control which negatively impacted the Company during the year (e.g., the bankruptcy of a significant wholesale customer). As a result of these and other considerations, the Compensation Committee ultimately elected to fund the 2008 MIP incentive pool at a level equal to 50% of the amount that would have been funded had the Company achieved its pre-approved Adjusted EBITDA target for the fiscal year. In approving this funding level, the intent of the Compensation Committee as communicated to management was that a 21% “base” funding level be allocated generally to most individuals and that the additional 29% funding pool be distributed more narrowly via the CEO’s discretion to primarily reward strong 2008 performance, high potential and/or key individuals. Given the unprecedented circumstances in 2008, and the resulting discretionary funding approved by the Compensation Committee, management did not strictly follow the mathematical calculations and multipliers of the MIP plan design in making its individual MIP awards, although the same factors (company performance, business unit performance and individual performance versus key performance objectives) were used to determine the awards. Participants whose performance in 2008 met or exceeded expectations were initially allocated an amount equal to 21% of their individual incentive target amount, and those initial allocations were then increased based upon business unit performance where applicable. As a final step, additional adjustments were made to reward strong 2008 performance and high potential or key individuals. The awards made to the named executive officers are reflected in the Summary Compensation Table set forth below. Each of the named executive officers received between 50% and 55% of their respective target incentive payments, with the exception of Mr. Hartman who received 80% of his target incentive payment. Mr. Hartman’s award level relative to those of the other named executive officers was primarily in recognition of his leadership, as Chief Financial Officer, of the Company’s successful management of productivity and expense initiatives and the impact of those initiatives on the Company’s 2008 performance.
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Long-Term Incentives (Equity Awards). In connection with the 2007 Merger, we entered into new equity arrangements with certain members of senior management of the Company (“Management Investors”). The new equity consists of ownership interests in Holdings LLC issued pursuant to the YCC Holdings LLC 2007 Incentive Equity Plan adopted on February 6, 2007 (as amended from time to time, the “Management Equity Plan”). The objective of the Management Equity Plan is to align the interests of management with those of Madison Dearborn and the Company’s other investors through direct personal investment that provides the potential for financial benefit to management if it operates the Company in a manner that enhances the equity value of the Company. The value of these investments will only be realized to the extent that significant equity value in the Company is created and realized in the future.
Class A Common Units. Upon the closing of the Merger, certain eligible Management Investors purchased Class A common units in Holdings LLC totaling in the aggregate approximately 0.96% of Holdings LLC’s total Class A common units. The remaining Class A common units available at the time of the Merger were purchased by investment funds affiliated with Madison Dearborn in connection with the consummation of the Merger. The purchase price paid by the Management Investors for the Class A common units in connection with the Merger was $101.22 per unit, the same as that paid by Madison Dearborn in connection with their purchase of Class A common units. These Class A common units were not considered by Madison Dearborn to be compensatory in nature but were instead deemed to be a co-investment opportunity afforded to the eligible Management Investors. Holders of Class A common units are entitled to a return of their capital investment in the Class A common units prior to the Class B common units having any rights to distributions, including in connection with a sale or other liquidation or dissolution of the Company. Thereafter, all units will participate in any residual distributions of the Company on a pro rata basis. The Class A common units are not subject to vesting. Each Management Investor has the right to require the Company to repurchase the Class A common units at original cost if the Company terminates him or her without cause or he or she resigns for good reason prior to the second anniversary of the closing of the Merger.
Class B Common Units. Also in connection with the Merger, the Board of Directors approved the issuance of Class B common units pursuant to the Management Equity Plan. Class B common units constitute the long-term equity incentive component of the Company’s Program and are available for issuance by the Company to eligible participants. The majority of the authorized Class B common units were issued in connection with the Merger, but additional Class B common units were held for issuance to additional eligible participants, including future new hires, under the Management Equity Plan. The Class B common units issued in connection with the Merger were purchased at a cost of $1.00 per unit. The Class B common units are subject to a five-year vesting period, with 10% of the units vesting immediately upon the date of purchase and the remainder vesting daily beginning on the sixth month anniversary of the purchase date, continuing over the subsequent 54 month period. If any Management Investor dies or becomes permanently disabled, such Management Investor will be credited with an additional 12 months worth of vesting for his or her Class B common units. The Class B common units are designed to provide for capital gains tax treatment with respect to any gain or loss realized upon the sale or liquidation of the units. All unvested Class B common units will vest upon a sale of all or substantially all of the business to an independent third party so long as the employee holding such units continues to be an employee of the Company at the closing of the sale. Class B common units are also subject to the right of Holdings LLC or, if not exercised by Holdings LLC, of Madison Dearborn, to repurchase such Class B common units upon a termination of employment, as more fully set forth in the applicable equity agreements.
Class C Common Units In October 2007, the Compensation Committee approved the creation of a new class of equity interest in Holdings LLC, Class C common units, for future issuance to eligible participants under the Management Equity Plan. As approved by the Compensation Committee, the number of remaining authorized and unissued Class B common units would be reduced by any Class C common unit grants actually made, and the number of combined Class B common units and Class C common units could not exceed the initial pool of Class B common units originally reserved in connection with the Merger.
Class C common units will otherwise have the same general characteristics as Class B common units, including with respect to time vesting and repurchase terms (except that unvested Class C common units are forfeited rather than repurchased as there is no initial capital outlay for the Class C common units). The Company currently anticipates that all future long-term equity incentive grants will be made using Class C common units.
In initially structuring and determining participation in the Management Equity Plan, as well as specific amounts provided to each participant thereunder, Madison Dearborn considered the practices of other comparable privately-held companies (including other companies in which it holds an investment) as well as the required returns Madison Dearborn will provide its investors. The Compensation Committee believes the opportunities provided to the Company’s senior management through the long-term equity incentive awards are competitive with typical practice in the private company/management buy-out sector. As opposed to the Company’s practice during the time it was a public company, the Company does not currently anticipate that it will be making any subsequent grants or awards to current equity holders under the Management Equity Plan in the near future.
Other Programs and Perquisites. We also provide our named executive officers, among others, with 401(k) and nonqualified deferred compensation matching programs, and certain named executive officers are provided a car allowance (typically determined by position and/or anticipated travel demands). Specifically, under our 401(k) Plan, we provided a discretionary match for the 2008 plan year that was equal to 50% of the first 4% of a participant’s eligible earnings up to a maximum of 2% of eligible earnings, which match was paid on a weekly basis throughout the year. In 2009, the Compensation Committee has approved an amendment to our 401(k) Plan reducing the amount of the weekly discretionary match to 25% of the first 4% of eligible earnings and providing for an additional discretionary match, based on the Company’s performance at the end of the fiscal year, which may be awarded at the discretion of the Compensation Committee. Under our nonqualified deferred compensation program an eligible participant may defer up to 100% of total annual salary and incentive compensation. The program will match 100% of the first $10,000 deferred and 50% of the next $20,000 deferred, up to a maximum matching contribution of $20,000. Vehicles are provided to certain executives based on the travel required in their position and their level at the Company. The Company either leases a vehicle for eligible executives or provides a monthly vehicle allowance. We provide such perquisites and other personal benefits as we believe are reasonable and consistent with our overall compensation program to better enable us to attract and retain superior employees for key positions.
Welfare Benefits. The named executive officers are offered health coverage, life and disability insurance under the same programs as all other salaried employees.
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Board of Directors has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, and recommended that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K. The members of the Compensation Committee in 2008 were Robin P. Selati, George A. Peinado, Richard H. Copans and Terry Burman.
|
Robin P. Selati |
George A. Peinado |
Richard H. Copans |
Terry Burman |
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Executive Compensation Tables
Summary Compensation Table
The following table summarizes the total compensation earned in 2008, 2007 and 2006 by our named executive officers:
| | | | | | | | | | | | | | | | | | | | | | | | | |
Name and Principal Position | | Year | | Salary ($) | | Bonus ($) | | Stock
Awards ($) | | Option
Awards ($) | | Non-Equity
Incentive Plan
Compensation
($) | | Change in Pension Value and Nonqualified Deferred Compensation Earnings ($) | | All Other
Compensation
($) | | Total ($) |
| | | | | | | (d) | | (e) | | (f) | | (g) | | (h) | | (i) | | (j) |
(a) | | (b) | | (c) | | (1) | | (2) | | (3) | | (4) | | (5) | | (6) | | (7) |
| Craig W. Rydin | | | | | | | | | | | | | | | | | | | | | | | | | |
Chairman and Chief Executive Officer | | 2008
2007
2006 | | $
| 879,327
843,654
774,228 | | $
| 244,013
155,000 — | | $
| 180,983
1,056,377
1,188,045 | | $
| —
1,018,011
442,753 | | $
| 230,823
776,162
1,022,000 | | —
—
— | | $
| 27,164
79,750
54,493 | | $
| 1,562,310
3,928,954
3,481,519 |
| Harlan M. Kent | | | | | | | | | | | | | | | | | | | | | | | | | |
President and Chief Operating Officer | | 2008
2007
2006 | | $
| 499,386
467,654
450,000 | | $
| 103,935
90,000
— | | $
| 135,732
299,350
323,128 | | $
| —
470,730
283,934 | | $
| 98,317
350,754
400,950 | | —
—
— | | $
| 27,250
43,208
40,200 | | $
| 864,620
1,721,696
1,498,212 |
| Bruce L. Hartman (8) | | | | | | | | | | | | | | | | | | | | | | | | | |
Senior Vice President, Finance and Chief Financial Officer | | 2008 | | $ | 451,923 | | $ | 170,036 | | $ | 93,200 | | $ | — | | $ | 83,041 | | — | | $ | 28,800 | | $ | 827,000 |
| Stephen Farley | | | | | | | | | | | | | | | | | | | | | | | | | |
Senior Vice President, Retail | | 2008
2007
2006 | | $
| 379,733
365,352
341,271 | | $
| 88,005
157,440
— | | $
| 54,293
118,071
80,155 | | $
| —
273,075
108,724 | | $
| 26,864
128,274
331,715 | | —
—
— | | $
| 31,800
32,600
26,975 | | $
| 580,695
1,074,812
888,840 |
| Richard R. Ruffolo | | | | | | | | | | | | | | | | | | | | | | | | | |
Senior Vice President, Brand, Marketing and Innovation | | 2008
2007
2006 | | $
| 374,631
351,260
337,750 | | $
| 40,030
101,400
— | | $
| 45,241
110,030
80,163 | | $
| —
223,720
73,953 | | $
| 44,244
135,081
145,908 | | —
—
— | | $
| 24,600
23,596
117,407 | | $
| 528,746
945,087
755,181 |
Edward R. Medina (9) | | 2008 | | $ | 224,519 | | $ | 21,329 | | $ | 8,141 | | $ | — | | $ | 23,575 | | — | | $ | 24,490 | | $ | 302,054 |
Vice President, Finance Principal Accounting Officer and Controller | | 2007
2006 | |
| 191,240
174,327 | |
| 52,500
— | |
| 38,168
25,801 | |
| 119,894
66,273 | |
| 100,000
69,190 | | —
— | |
| 4,075
6,351 | |
| 505,877
341,942 |
| (1) | With respect to 2008, this column represents amounts paid to the named executive officers under the Company’s 2008 Management Incentive Plan pursuant to the Compensation Committee’s exercise of its discretion as provided under the Plan in excess of the incentive award payments that would have been paid pursuant to the terms of the MIP based upon the Company’s achievement of its pre-approved performance target and prior to the exercise of such discretion. The Committee believes these payments were made pursuant to the MIP, which expressly contemplates the exercise of discretion by the Committee and the CEO, but the Company is reporting these amounts separately from those in column (g) in accordance with applicable SEC guidance. The amounts paid based upon the formula in the MIP are presented in column (g). The factors considered by the Committee in exercising its discretion are described above under “Compensation Discussion and Analysis – Annual Cash Incentives (Bonus).” With respect to 2007, this column represents one-time payments made to the named executive officers in connection with the February 2007 Merger under the Special Retention Bonus Plan established by the Predecessor for each employee remaining employed by the Company through the date three months following the change of control in 2007. |
| (2) | This column represents the dollar amount recognized by the Company for financial statement reporting purposes in accordance with SFAS 123R during the applicable fiscal year. With respect to the 2008 fiscal year, the amounts represent the portion of the fair value of the Class B or Class C units granted to the applicable executive that was recognized in fiscal 2008. With respect to the 2007 and 2006 fiscal years the amounts include the amounts recognized in the applicable fiscal year with respect to (i) the fair value of performance shares and restricted stock awards granted in 2006 as well as prior fiscal years, including amounts recognized due to the acceleration of vesting in connection with the Merger, for the period of December 31, 2006 to February 5, 2007 (i.e., prior to the Merger), and (ii) the fair value of Class B common units issued to the named executive officer during 2007. Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. See the “Grants of Plan-Based Awards” table for information on awards granted in fiscal 2008. These amounts reflect the Company’s accounting expense for these awards, and do not necessarily correspond to the actual value that will be recognized by the named executive officers. Please refer to Note 5 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for the year ended January 3, 2009 for the relevant assumptions used to determine the compensation expense for our unit awards. |
| (3) | This column represents the dollar amount recognized by the Company for financial statement reporting purposes in accordance with SFAS 123R with respect to the 2006 fiscal year and the period of December 31, 2006 to February 5, 2007 (i.e., prior to the Merger) for the fair value of stock options granted to each of the named executive officers in 2007 as well as prior fiscal years, including amounts recognized due to acceleration of vesting in connection with the Merger. Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. In February 2007, all such awards vested and were exchanged for cash payments in connection with the Merger. No stock option awards were granted in fiscal 2007 or fiscal 2008. These amounts reflect the Company’s accounting expense for these awards, and do not correspond to the actual value recognized by the named executive officers. Please refer to Note 5 in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for the year ended January 3, 2009 for the relevant assumptions used to determine the compensation expense for our option awards. |
| (4) | This column represents amounts earned during the corresponding fiscal year (and paid in the subsequent fiscal year) under the Company’s Management Incentive Plan, which are described below under “Management Incentive Plan.” |
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| (5) | The Company has no defined benefit pension plans. Earnings under the Company’s nonqualified deferred compensation plans are not “above market.” The Company’s deferred compensation plan provides for investment options through a third party administrator in a variety of mutual funds all of which are widely available. See the text accompanying the “Non-Qualified Deferred Compensation” table below for a description of this plan. |
| (6) | The dollar value of the amounts shown in this column for 2008 include the following: |
| | | | | | | | | |
| | | Vehicle
Expense | | Matching
Contributions
Under
401(k) Plan | | Executive Deferred
Compensation Plan
Matching
Contributions(a) |
Craig W. Rydin | | $ | 2,564 | | $ | 4,600 | | $ | 20,000 |
Harlan M. Kent | | $ | 2,650 | | $ | 4,600 | | $ | 20,000 |
Bruce L. Hartman | | $ | 8,800 | | $ | — | | $ | 20,000 |
Stephen Farley | | $ | 7,200 | | $ | 4,600 | | $ | 20,000 |
Richard R. Ruffolo | | $ | — | | $ | 4,600 | | $ | 20,000 |
Edward R. Medina | | $ | — | | $ | 4,490 | | $ | 20,000 |
(a) Amounts in this column represent amounts earned in 2008 and contributed to the plan in 2009. |
| (7) | The salary plus bonus plus the management incentive plan cash compensation received and reported in the Summary Compensation Table for 2008 represents between 81% and 89% of the total compensation received and reported for each named executive officer. |
| (8) | Mr. Hartman joined the Company on January 28, 2008. |
| (9) | Mr. Medina is not an executive officer of the Company but during the portion of 2008 prior to Mr. Hartman’s employment he performed the duties and functions of the Company’s Principal Financial Officer and is therefore included as a “named executive officer” for these purposes. |
Grants of Plan-Based Awards
The following table summarizes information regarding awards granted under the Company’s equity and non-equity incentive plans during 2008:
| | | | | | | | | | | | | | | | | | |
| Name | | Grant
Date | | Board Approval Date | | Estimated Possible Payouts Under
Non-Equity
Incentive Plan Awards
(1) | | All Other
Stock
Awards:
Number of
Shares of
Stock or
Units (#) (3) | | Grant
Date Fair
Value of
Stock
Awards
(4) |
| | | | Threshold
($) (2) | | Target ($) | | Maximum
($) | | |
(a) | | (b) | | | | (c) | | (d) | | (e) | | (i) | | (l) |
Craig W. Rydin | | | | | | | | | | | | | | | | | | |
-2008 Management Incentive Plan | | | | | | $ | 44,000 | | $ | 880,000 | | $ | 1,776,000 | | | | | |
Harlan M. Kent | | | | | | | | | | | | | | | | | | |
-2008 Management Incentive Plan | | | | | | $ | 18,750 | | $ | 375,002 | | $ | 750,003 | | | | | |
Bruce L. Hartman | | | | | | | | | | | | | | | | | | |
-2008 Management Incentive Plan | | | | | | $ | 15,817 | | $ | 316,346 | | $ | 632,692 | | | | | |
-Class C Common Units | | 6/27/08 | | 6/27/08 | | | | | | | | | | | 36,328 | | $ | 498,420 |
Stephen Farley | | | | | | | | | | | | | | | | | | |
-2008 Management Incentive Plan | | | | | | $ | 10,450 | | $ | 209,003 | | $ | 418,007 | | | | | |
Richard R. Ruffolo | | | | | | | | | | | | | | | | | | |
-2008 Management Incentive Plan | | | | | | $ | 8,438 | | $ | 168,751 | | $ | 337,502 | | | | | |
Edward R. Medina | | | | | | | | | | | | | | | | | | |
-2008 Management Incentive Plan | | | | | | $ | 4,500 | | $ | 90,000 | | $ | 180,000 | | | | | |
| (1) | These columns show the potential value of the payout for each named executive officer under the MIP in 2008 if the threshold, target and maximum goals are satisfied. The methodology for determining payout is based on Company performance (based on Adjusted EBITDA), business unit performance (if applicable) and individual performance as described above under “Compensation Discussion and Analysis – Annual Cash Incentives (Bonuses)”. In 2008, the Company’s actual Adjusted EBITDA was below its pre-approved Adjusted EBITDA objective. Based upon the Company’s actual Adjusted EBITDA performance and the Compensation Committee’s consideration of numerous other factors as described above under “Compensation Discussion and Analysis – Annual Cash Incentives (Bonuses)”, the Compensation Committee funded the MIP pool at an amount equal to 50% of the targeted amount had the Company achieved its pre-approved 2008 Adjusted EBITDA target. Actual bonus payments for the fiscal year are listed in columns (d) and (g) of the “Summary Compensation Table”. |
| (2) | Under the 2008 MIP, if the Company’s actual Adjusted EBITDA is less than 85% of the pre-approved Adjusted EBITDA target, then the Company Portion of the MIP award is $0 and no bonus payments would be made. The amounts shown in this column reflect the amounts that would theoretically be paid under the Company Portion of the 2008 MIP assuming (i) the Company achieved the 85% “threshold” Adjusted EBITDA performance and (ii) no adjustments to that award were made under the Business Performance or Individual Performance components of the 2008 MIP. |
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| (3) | The amounts in this column reflect the number of Class C common units of Holdings LLC issued to the named executive officer in connection with the commencement of his employment during 2008. |
| (4) | The “fair value” shown in this column represents the value established by the Company as of the grant date for financial statement reporting purposes in accordance with SFAS 123R. These amounts reflect the Company’s accounting expense for these awards, and do not necessarily correspond to the actual value that will be recognized by the named executive officers. |
Employment Contracts
Craig W. Rydin
On February 6, 2007, the Company entered into an Employment Agreement with Craig W. Rydin, the Chief Executive Officer of the Company, that superceded his former employment agreement dated May 2, 2001 with the Company. The agreement is for a term of 36 months, with automatic 1-year renewals unless either Mr. Rydin or the Company give notice of non-renewal within 30 days prior to the end of the initial 36-month term or any subsequent 1-year term. The Employment Agreement terminates immediately upon Mr. Rydin’s resignation, disability (as defined in the Executive Severance Agreement) or death and is also terminable by the Company with or without cause. Mr. Rydin’s Executive Severance Agreement with the Company, dated September 15, 2006, remains in full force and effect and contains certain non-competition and non-solicitation covenants to which Mr. Rydin is subject. See “—Termination and Change in Control Arrangements.”
During the term of the Employment Agreement, the Company will pay Mr. Rydin a base salary of $845,000 per year, subject to annual review. Mr. Rydin is also eligible for an annual bonus based on the achievement of targeted performance objectives as established by the Board of Directors in consultation with Mr. Rydin as the Chief Executive Officer. The Employment Agreement provides for a target bonus percentage equal to 100% of his base salary, but the bonus percentage may be reduced to 85% of his base salary based on performance that only meets certain threshold performance objectives and may be increased to as high as 200% of his base salary for performance that significantly exceeds the targeted performance objectives.
Mr. Rydin is eligible to receive payment of any annual bonus for a fiscal year only if he remains employed by the Company throughout such fiscal year; provided, that if Mr. Rydin’s employment is terminated as a result of death or disability (as defined in the Executive Severance Agreement), he shall be entitled to a pro-rated portion of his annual bonus to be determined in good faith by the Board of Directors, based on the year’s bonus metrics and the Company’s performance to date. If Mr. Rydin’s employment is terminated for any reason after the completion of any fiscal year but prior to the payment of any accrued target annual bonus earned in such fiscal year, he shall be entitled to payment of such earned but not yet paid annual bonus, except in the case of a termination for cause (as defined in the Executive Severance Agreement), in which case Mr. Rydin shall not be entitled to an annual bonus.
If, following an initial public offering of the Company, Holdings LLC or Parent’s equity securities, a change in “the ownership or effective control” or “a substantial portion of the assets” occurs within the meaning of Section 280G of the Code of the company whose equity securities are offered in the initial public offering, the Company will pay to Mr. Rydin an amount that, on an after-tax basis, equals any excise tax payable by Mr. Rydin pursuant to Section 4999 of the Code, by reason of any entitlements that are described in Section 280G(b)(2)(A)(i) of the Code, to the extent such entitlements result from such change in control event.
In addition, if any Executive Committee officer, including Mr. Rydin, is terminated without “cause” (as defined in the executive’s severance agreement and described below under “—Termination and Change in Control Arrangements”) within the two years following the closing of the Merger, and as a result becomes subject to an excise tax under Section 4999 of the Code, the Board of Directors and Mr. Rydin will in good faith determine the amount of any payment to be made to such executive committee officer to offset in whole or in part the cost of such excise tax, provided that in no event will the aggregate of all such payments made to all Executive Committee officers exceed $2 million. As used herein, the Executive Committee officers are Craig Rydin, James Perley, Mike Thorne, Paul Hill, Bruce Hartman, Martha LaCroix, Steve Farley, Harlan Kent and Richard Ruffolo.
In September 2006, all of the named executive officers (except for Mr. Hartman who entered into such an agreement in connection with his hiring in 2008) signed Executive Severance Agreements with the Company described below under “—Termination and Change in Control Arrangements.” Additionally, Mr. Kent’s prior employment agreement with the Company was terminated upon completion of the Merger in February 2007.
Mr. Rydin’s Employment Agreement was amended in 2008 to comply with Internal Revenue Code Section 409A. Specifically, the Agreement was revised to clarify that “gross-up” payments would be calculated at the actual tax rate as required by Section 409A. In addition, all Executive Severance Agreements were amended in 2008 to comply with Internal Revenue Code Section 409A. Revisions did not impact the amount of payments or other benefits provided under the Severance Agreements.
On March 5, 2009 the Company filed a Current Report on Form 8-K announcing that the Board of Managers of Holdings and the Boards of Directors of the Company had approved a plan of transition whereby Harlan M. Kent, the current President and Chief Operating Officer of the Company, was appointed President and Chief Executive Officer of the Company, and of Holdings and all subsidiaries of the Company, such appointment to be effective as of October 1, 2009 subject to the terms and conditions of an employment agreement between the Company and Mr. Kent. Mr. Kent will succeed Craig W. Rydin, the current Chairman and Chief Executive Officer of the Company. Mr. Rydin will continue to serve as CEO until October 1, 2009, at which time he will be named Executive Chairman of the Board of Directors of the Company. Mr. Rydin will serve in that capacity until October 1, 2010, at which time he will become Non-Executive Chairman of the Board of the Company. The Company entered into new employment agreements with Messrs. Rydin and Kent with respect to the above transition, copies of which were filed with the Form 8-K and are incorporated by reference in this Annual Report on Form 10-K.
Management Incentive Plan
The MIP is structured to provide an initial funding pool, the size of which is typically determined by the Company’s annual Adjusted EBITDA performance compared to a pre-determined annual Adjusted EBITDA target. This comparison was also used to establish the initial award level for each participant under the MIP (the “Company Portion”). As described above under “Compensation Discussion and Analysis – Annual Cash Incentives (Bonuses)”, a participant’s award in the MIP will typically then be adjusted based upon business unit performance, where applicable, and individual performance. Individual awards may be further adjusted by the Committee or the Chief Executive Officer pursuant to discretion afforded under the terms of the MIP. See “Compensation Discussion and Analysis – Annual Cash Incentives (Bonuses)” for a more detailed discussion of the structure of the MIP and the factors considered by the Committee and the Company in administering the MIP and the payments in respect of 2008 under the MIP.
Individual targets under the MIP are determined as a percentage multiplied by base salary earned in the fiscal year. The percentage is set based upon a participant’s level in the Company, performance goals and market rates. For the named executive officers, the 2008 MIP bonus targets were as follows: Mr. Rydin (100%), Mr. Kent (75%), Mr. Hartman (70%), Mr. Farley (55%), Mr. Ruffolo (45%) and Mr. Medina (40%).
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Outstanding Equity Awards at Fiscal Year-End
The following table summarizes the outstanding equity awards held by our named executive officers at the end of fiscal 2008:
| | | | | |
| | | Stock Awards |
| Name | | Number
of Shares
or Units of Stock
That Have
Not Vested
(#) | | Market
Value
of Shares
or Units
of Stock
That Have
Not Vested
($) |
| | | (g) | | (h) |
(a) | | (1) | | (2) |
Craig W. Rydin 2/6/07 Class B Common Units | | 58,668 | | $ | 0 |
Harlan M. Kent 2/6/07 Class B Common Units | | 44,002 | | $ | 0 |
Bruce L. Hartman 6/27/08 Class C Common Units | | 29,535 | | $ | 0 |
Stephen Farley 2/6/07 Class B Common Units | | 17,601 | | $ | 0 |
Richard R. Ruffolo 2/6/07 Class B Common Units | | 14,668 | | $ | 0 |
Edward R. Medina 2/6/07 Class B Common Units | | 2,641 | | $ | 0 |
| (1) | Represents the number of unvested Class B or Class C common units held by the named executive officer. Class B and Class C common units are subject to a five-year vesting period, with 10% of the units vesting immediately upon the date of purchase or grant and the remainder vesting daily beginning on the six month anniversary of the purchase or grant date, continuing over the subsequent 54 month period. |
| (2) | Represents the value as of January 3, 2009 as determined based upon a valuation analysis of the “fair market value” (as defined in the Company’s applicable equity documents) of total Company equity performed on a quarterly basis. |
Option Exercises and Stock Vested
The following table summarizes the number of Class B and/or Class C common units which vested in 2008 for each of our named executive officers:
| | | | | |
| | | Stock Awards |
Name | | Number
of Shares
Acquired
On Vesting
(#) (1) | | Value
Realized
On
Vesting
($) (2) |
| | |
(a) | | (b) | | (c) |
Craig W. Rydin | | | | | |
-Class B units | | 19,274 | | $ | — |
Harlan M. Kent | | | | | |
-Class B units | | 14,455 | | $ | — |
Bruce L. Hartman | | | | | |
-Class C units | | 6,793 | | $ | — |
Stephen Farley | | | | | |
-Class B units | | 5,782 | | $ | — |
Richard R. Ruffolo | | | | | |
-Class B units | | 4,818 | | $ | — |
Edward R. Medina | | | | | |
-Class B units | | 867 | | $ | — |
| (1) | Class B and Class C common units are subject to a five-year vesting period, with 10% of the units vesting immediately upon the date of purchase or grant and the remainder vesting daily beginning on the six month anniversary of the purchase or grant date, continuing over the subsequent 54 month period. |
| (2) | Because Class B and Class C common units vest on a daily basis, it is not practical to present a cumulative value as of each vesting date. No value is realized as a result of vesting of the Class B and Class C common units. See “– Compensation Discussion and Analysis – Long-Term Incentive (Equity Awards) – Class B Common Units” and “– Compensation Discussion and Analysis – Long-Term Incentive (Equity Awards) – Class C Common Units” for a description of the vesting of the Class B and Class C common units. |
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Non-Qualified Deferred Compensation
The following table summarizes the benefits to our named executive officers under our Executive Deferred Compensation Plan:
| | | | | | | | | | | | | | | |
Name (a) | | Executive
Contributions
in Last FY
($)
(b) (1) | | Registrant
Contributions
in Last FY
($)
(c) (2) | | Aggregate
Earnings
in Last
FY
($)
(d)
(3)(4) | | | Aggregate
Withdrawals/
Distributions
($)
(e) | | Aggregate
Balance
at Last
FYE
($)
(f)
(5) |
| | | | | |
Craig W. Rydin | | $ | 30,000 | | $ | 20,000 | | $ | (36,093 | ) | | 0 | | $ | 41,117 |
Bruce Hartman | | $ | 30,000 | | $ | 20,000 | | $ | (33,665 | ) | | 0 | | $ | 26,335 |
Harlan M. Kent | | $ | 30,000 | | $ | 20,000 | | $ | (41,427 | ) | | 0 | | $ | 41,076 |
Stephen Farley | | $ | 30,000 | | $ | 20,000 | | $ | (34,846 | ) | | 0 | | $ | 45,621 |
Richard R. Ruffolo | | $ | 30,000 | | $ | 20,000 | | $ | (38,143 | ) | | 0 | | $ | 41,857 |
Edward R. Medina | | $ | 40,000 | | $ | 20,000 | | $ | (8,024 | ) | | 0 | | $ | 31,977 |
| (1) | With respect to Messrs. Rydin, Hartman, Farley and Ruffolo, the amounts in this column represent amounts deferred by the named executive officer from base salary paid in 2008 and are therefore also included in the amounts reported in column (c) of the Summary Compensation table for 2008. With respect to Mr. Kent, the amount in this column represents contributions deferred by Mr. Kent from his 2007 MIP bonus payment (paid in March 2008) and is therefore also included in the amount reported in column (g) of the Summary Compensation Table for 2007. With respect to Mr. Medina, the amount in this column represents contributions deferred by Mr. Medina from his base salary paid in 2008 and his 2007 MIP bonus payment (paid in March 2008) and is therefore also included in the amounts reported in column (c) of the Summary Compensation Table for 2008 and column (g) of the Summary Compensation Table for 2007. |
| (2) | The amounts in this column are also reflected in column (i) of the Summary Compensation Table. Amounts in this column represent amounts earned in 2008 and contributed to the plan in 2009. |
| (3) | Earnings on deferred compensation are not included in the Summary Compensation Table because the earnings are not considered above-market or at a preferential rate of earning. |
| (4) | Amounts in this column represent the aggregate earnings and/or (losses) for the plan year ended January 3, 2009. |
| (5) | With respect to Messrs. Rydin, Kent, Farley and Ruffolo, the amounts in this column also include (i) a Registrant Contribution of $20,000 made by the Company in 2007 to the named executive officer, which amounts are therefore reported in column (i) of the Summary Compensation Table for 2007, and (ii) Executive Contributions of $30,000 by the named executive officer made in 2007. With respect to Messrs. Rydin, Farley and Ruffolo, these Executive Contribution amounts were deferred from base salary paid in 2007 and are therefore included in the amounts previously reported in column (c) of the Summary Compensation table for 2007. With respect to Mr. Kent, the 2007 Executive Contribution amount was deferred by Mr. Kent from his 2006 MIP bonus payment (paid in 2007) and is therefore included in the amount previously reported in column (g) for 2007. |
The Company’s Executive Deferred Compensation Plan (the “Plan”) is available to certain eligible management employees, including the named executive officers, and allows eligible employees the opportunity to defer no more than 100% of his or her annual base salary and 100% of his or her annual bonus or incentive compensation during a calendar year. The Company will make a matching company contribution to any participant who holds the title of senior vice president or higher, any vice president who is a member of the Company’s Executive Committee and any participant designated by the Compensation Committee as eligible. The amount of the company matching contribution equals 100% of the participant’s first $10,000 contributed to his deferral account during the calendar year and 50% of the next $20,000 contributed to his or her deferral account during the calendar year. To receive a company matching contribution, generally participants must be employed by the Company on the last day of the calendar year. Executives invested their account balances in investments accounts selected by the executive from an array of investment options determined by the Predecessor’s Compensation Committee and, following the Merger, by the Board of Directors. Executives may change such elections on a daily electronic basis.
Participants who are otherwise eligible to receive matching contributions under the terms of the Plan will receive pro-rata matching contributions in the event of a “change of control” of the Company (as defined in the Plan), termination of the Plan, death or disability of the participant or an amendment to the Plan to eliminate or reduce matching contributions. Accordingly, upon consummation of the February 2007 Merger, participants received matching contributions to which they were entitled for the portion of the fiscal year prior to the Merger.
Upon termination of employment with the Company, benefits are payable from the deferral account in lump sum form on or about the January 15th immediately following the termination date or if later, 45 days following the participant’s termination of employment unless such employee is a key employee (as defined in the Plan) in which case, the initial payment shall be made no earlier than six months following the termination. Upon death of a participant before commencement of payment, the Company will pay a lump sum representing the account balance to the participant’s beneficiary. Upon death of a participant after commencement of payment, the Company will pay a lump sum representing the account balance to the participant’s beneficiary at the same time and in the same manner as if the participant had survived. Upon a change in control event, benefits shall be distributed to the participant in lump sum form within 30 days following a change in control. A participant forfeits all matching company contributions in the event of his or her termination for “cause” (as defined in the Plan). The Company shall indemnify and hold harmless participants from all costs and expenses (including without limitation reasonable fees and expenses of counsel) incurred by any participant in connection with any effort or litigation to enforce his or her rights under the Plan.
Participants may apply for a withdrawal of all or a portion of their deferred compensation funds to meet a severe financial hardship, plus amounts necessary to pay any income and employment taxes reasonably anticipated as a result of the distribution. The hardship application must be reviewed and approved by the Compensation Committee.
Immediately following the Merger, participants in the Executive Deferred Compensation Plan received distributions of all account balances.
Termination and Change in Control Arrangements
Assuming each named executive officer’s employment was terminated under each of the circumstances set forth below on January 3, 2009, the estimated values of payments and benefits to each named executive officer are set forth in the following table:
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| | | | | | | | | | |
Name | | Benefit(1) | | Termination
without Cause
more than
24 months after
a Change in
Control (1) | | Termination
without Cause or
Voluntary Termination
for Good Reason by
the Executive
within 24 Months of a
Change in Control (2) | | Voluntary
Termination
by the Executive
without Good
Reason |
Craig W. Rydin | | Cash Severance (3) | | $ | 2,640,000 | | $ | 4,400,000 | | — |
| | Medical and Dental Benefits (4) | | $ | 12,873 | | $ | 12,873 | | — |
| | Outplacement Services | | $ | 10,000 | | $ | 10,000 | | — |
| | Repurchase of Class A common units (5) | | | — | | $ | 2,304,982 | | |
| | Total (6) | | | | | | | | |
Harlan M. Kent | | Cash Severance (3) | | $ | 1,125,000 | | $ | 1,687,500 | | — |
| | Medical and Dental Benefits (4) | | $ | 12,357 | | $ | 12,357 | | — |
| | Outplacement Services | | $ | 10,000 | | $ | 10,000 | | — |
| | Repurchase of Class A common units (5) | | | — | | $ | 248,799 | | |
| | Total (6) | | | | | | | | |
Stephen Farley | | Cash Severance(3) | | $ | 589,000 | | $ | 798,000 | | — |
| | Medical and Dental Benefits (4) | | $ | 9,293 | | $ | 9,293 | | — |
| | Outplacement Services | | $ | 10,000 | | $ | 10,000 | | — |
| | Repurchase of Class A common units(5) | | | — | | $ | 51,420 | | |
| | Total (6) | | | | | | | | |
Richard R. Ruffolo | | Cash Severance (3) | | $ | 543,750 | | $ | 712,500 | | — |
| | Medical and Dental Benefits (4) | | $ | 9,293 | | $ | 9,293 | | — |
| | Outplacement Services | | $ | 10,000 | | $ | 10,000 | | — |
| | Repurchase of Class A common units(5) | | | — | | $ | 76,219 | | — |
| | Total (6) | | | | | | | | |
Bruce Hartman | | Cash Severance (3) | | $ | 1,100,000 | | $ | 1,625,000 | | — |
| | Medical and Dental Benefits (4) | | $ | 13,934 | | $ | 13,934 | | — |
| | Outplacement Services | | $ | 10,000 | | $ | 10,000 | | — |
| | Repurchase of Class A common units (5) | | | — | | | — | | — |
| | Total (6) | | | | | | | | |
Edward R. Medina | | Cash Severance (3) | | $ | 202,500 | | $ | 292,500 | | — |
| | Medical and Dental Benefits (4) | | $ | 4,647 | | $ | 4,647 | | — |
| | Outplacement Services | | $ | 10,000 | | $ | 10,000 | | — |
| | Repurchase of Class A common units(5) | | | — | | $ | 37,654 | | — |
| | Total (6) | | | | | | | | |
| (1) | The consummation of the Merger in February 2007 constituted a “change in control event” (as defined below) under the executive severance agreements. The executive severance agreements provide for differing levels of certain benefits if the named executive officer was terminated within 24 months of the Merger, which would have been the case in the event of a hypothetical termination as of January 3, 2009. None of the named executive officers were terminated on a date that is within 24 months following the Merger (February 7, 2009). The amounts in this column therefore reflect the estimated values of payments and benefits to each named executive officer if his employment is terminated after February 7, 2009. Had there been a termination as of January 3, 2009, the estimated values of payments and benefits to each named executive officer would be calculated in accordance with the column “Termination without Cause or Voluntary termination for Good Reason by the Executive within 24 months of a Change in Control.” |
| (2) | The amounts in this column represent the value of payments and benefits to a named executive officer if there had been a termination without cause or voluntary termination on January 3, 2009, which would have been within 24 months of the Merger. None of the named executive officers were actually terminated as of a date within 24 months of the Merger (i.e., prior to February 7, 2009). |
| (3) | Under the column “Termination without Cause or Voluntary termination for Good Reason by the Executive within 24 Months of a Change in Control,” these amounts represent: (i) cash severance in the form of a one-time payment of the following percentages of the sum of the individual’s base salary plus incentive award target under the MIP: Mr. Rydin – 200%; Messrs. Kent and Hartman – 150%; Messrs. Farley and Ruffolo – 100%; and Mr. Medina – 50%, plus (ii) a one-time payment of 100% of the incentive award target under the MIP, based on the assumption that the named executive officer was terminated on the last day of fiscal 2008. |
Under the column “Termination without Cause more than 24 Months after a Change in Control,” these amounts represent: (i) cash severance in the form of continued payment of base salary, in accordance with regular payroll practices (subject to applicable delay periods for benefits that constitute nonqualified deferred compensation under Section 409A of the Internal Revenue Code), for the following periods: Mr. Rydin – two years; Messrs. Kent and Hartman – 18 months; Messrs. Farley and Ruffolo – one year, and Mr. Medina – 6 months; plus (ii) a one-time payment of 100% of the incentive award target under the MIP, based on the assumption that the named executive officer was terminated on the last day of fiscal 2008.
| (4) | These amounts represent payment of insurance premiums by the Company for continued health and dental benefits as if the named executive officer were still an active employee of the Company, for the following periods after termination of employment: Mr. Rydin –two years; Messrs. Kent and Hartman – 18 months; and Messrs. Farley and Ruffolo – one year. The amount is based on the type of insurance coverage we carried for each named executive officer as of January 3, 2009 and is valued using the assumptions used for financial reporting purposes. |
| (5) | Pursuant to the Class A unit purchase agreement, if, at any time prior to the second anniversary of the date of such agreement, the executive is terminated by the Company without “cause” or the executive resigns for “good reason” (each as defined in the unit purchase agreement), the executive may elect to require the Company to repurchase all, but not less than all, of the executive’s Class A common units pursuant to the terms of a “put option.” The purchase price for the repurchased Class A common units is the original cost of such units paid by the executive. Original cost for units purchased in connection with the merger transactions was $101.22 per Class A common unit. Assuming a termination without cause as of January 3, 2009, the amounts in this row and column assume that the named executive officer exercised this “put option” and that his Class A units were repurchased by the Company for $101.22 per unit. |
| (6) | In addition to these benefits, each of the named executive officers would be entitled to the vested portion of is account balance under the Executive Deferred Compensation Plan in the event of his termination of employment, death or a change in control. See “Non-Qualified Deferred Compensation.” |
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Executive Severance Agreements
We are a party to various executive severance agreements with certain of our officers, including the named executive officers. These agreements provide for certain severance benefits to the executive in the event his or her employment is terminated (i) by the Company other than for cause (as defined below), disability or death prior to a change in control event or more than two years following a change in control event or (ii) by the Company other than for cause, disability or death or by the executive for good reason (as defined below) within two years of a change in control event. The consummation of the Merger in February 2007 constituted a change in control event as defined in the executive severance agreements.
“Change in control event” means an event or occurrence set forth in any one or more of paragraphs (a) through (c) below:
(a) the acquisition by an individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (a “Person”) of beneficial ownership of any capital stock of the Company if, after such acquisition, such Person beneficially owns (within the meaning of Rule 13d–3 promulgated under the Exchange Act) more than 50% of either (x) the then–outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”) or (y) the combined voting power of the then–outstanding securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that for purposes of this paragraph (a), the following acquisitions shall not constitute a Change in Control Event: (i) any acquisition directly from the Company (excluding an acquisition pursuant to the exercise, conversion or exchange of any security exercisable for, convertible into or exchangeable for common stock or voting securities of the Company, unless the Person exercising, converting or exchanging such security acquired such security directly from the Company or an underwriter or agent of the Company), (ii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (iii) any acquisition by any company pursuant to a Business Combination (as defined below) which complies with clauses (i) and (ii) of paragraph (c) below; or
(b) such time as the Continuing Directors (as defined below) do not constitute a majority of the Board (or, if applicable, the Board of Directors of a successor corporation to the Company), where the term “Continuing Director” means at any date a member of the Board (x) who was a member of the Board on the date of this Agreement or (y) who was nominated or elected subsequent to such date by at least two–thirds of the directors who were Continuing Directors at the time of such nomination or election or whose election to the Board was recommended or endorsed by at least two–thirds of the directors who were Continuing Directors at the time of such nomination or election; provided, however, that there shall be excluded from this clause (y) any individual whose initial assumption of office occurred as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents, by or on behalf of a person other than the Board; or
(c) the consummation of a Merger, consolidation, reorganization, recapitalization or share exchange involving the Company or a sale or other disposition of all or substantially all of the assets of the Company (a “Business Combination”), unless, immediately following such Business Combination, each of the following two conditions is satisfied: (i) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, at least 50% of the then–outstanding shares of common stock and the combined voting power of the then–outstanding securities entitled to vote generally in the election of directors, respectively, of the resulting or acquiring company in such Business Combination (which shall include, without limitation, a company which as a result of such transaction owns the Company or substantially all of the Company’s assets either directly or through one or more subsidiaries) (such resulting or acquiring company is referred to herein as the “Acquiring Company”) in substantially the same proportions as their ownership of the Outstanding Company Common Stock and Outstanding Company Voting Securities, respectively, immediately prior to such Business Combination; and (ii) no Person (excluding any employee benefit plan (or related trust) maintained or sponsored by the Company or by the Acquiring Company) beneficially owns, directly or indirectly, more than 50% of the then–outstanding shares of common stock of the Acquiring Company, or of the combined voting power of the then–outstanding securities of such company entitled to vote generally in the election of directors (except to the extent that such ownership existed prior to the Business Combination).
“Cause” means the executive’s (a) intentional failure to perform his or her reasonably assigned duties, (b) dishonesty or willful misconduct in the performance of his or her duties, (c) involvement in a transaction in connection with the performance of his or her duties to the Company or any of its subsidiaries which transaction is adverse to the interests of the Company or any of its subsidiaries and which is engaged in for personal profit or (d) willful violation of any law, rule or regulation in connection with the performance of his or her duties to the Company or any of its subsidiaries (other than traffic violations or similar offenses).
“Good reason” is defined as (a) a reduction of more than 5% in the executive’s annual base salary in effect immediately prior to the change in control event or a material reduction in the cash incentive compensation opportunities or other employee benefits available to the executive under the executive compensation plan for the fiscal year in which the change in control event occurs, (b) a material adverse change in the executive’s duties and responsibilities (other than reporting responsibilities) from those in effect immediately prior to the change in control event or (c) a requirement that the officer relocate his or her principal place of business to a location that is in excess of 50 miles from his or her principal place of business immediately prior to the change in control event. The Merger constituted a change in control event.
Upon a termination by the Company other than for cause, disability or death prior to a change in control event or more than two years following a change in control event; an executive is generally entitled, in addition to earned but unpaid compensation, to the following:
| | • | | cash severance in the form of continued payment of his or her base salary, in accordance with regular payroll practices, for the following periods: (1) in the case of the Chairman and Chief Executive Officer, two years; (2) in the case of the President and Chief Operating Officer and the Chief Financial Officer, 18 months; (3) in the case of Senior Vice Presidents, one year; and (4) in the case of Vice Presidents, six months; |
| | • | | a one time payment of his or her incentive award target under the management compensation plan, pro rata based on the number of days of that fiscal year for which he or she was terminated; and |
| | • | | a continuation of medical and dental benefits for the period of time during which severance will be paid or until the executive is eligible to receive such benefits from another employer, whichever is earlier. |
Upon a termination by the Company other than for cause, disability or death by the executive for good reason within two years of a change in control event, an executive is generally entitled, in addition to earned but unpaid compensation, to the following:
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| | • | | cash severance in the form of a one-time payment of the following amount: (1) in the case of the Chairman and Chief Executive Officer, 200% of the sum of his base salary plus his incentive award target under the management compensation plan; (2) in the case of the President and Chief Operating Officer and the Chief Financial Officer, 150% of the sum of his base salary plus his incentive award target under the management compensation plan; (3) in the case of Senior Vice Presidents, 100% of the sum of his or her base salary plus his or her incentive award target under the management compensation plan; and (4) in the case of Vice Presidents, the sum of (a) 50% of his or her base salary plus (b) his or her incentive award target under the management compensation plan; |
| | • | | a one-time payment of his or her incentive award target under the executive compensation plan, pro rated based on the number of days of that fiscal year for which he or she was terminated; and |
| | • | | a continuation of medical and dental benefits and all other employee benefits for the period of time during which severance will be paid or until the executive is eligible to receive such benefits from another employer, whichever is earlier. The Agreements provide for certain severance benefits to the executive in the event his or her employment is terminated under specified circumstances, as well as certain benefits upon a change in control event. |
The executive severance agreements also provided for accelerated vesting of stock options and restricted shares and specialized treatment of performance shares awards upon a change in control event. As the Merger constituted a change in control event, all of such awards were cancelled in exchange for cash payments in 2007.
As partial consideration for the benefits provided under the executive severance agreements, the executive is bound by a confidentiality agreement as well as non-compete and non-solicitation provisions included in the executive severance agreements. The non-compete provision prohibits the executive from engaging in or being affiliated with any business which is competitive with the Company while employed by the Company and for a period of two years after the termination of such employment for any reason. The non-solicitation provision prohibits the executive, either alone or in association with others, from soliciting any employee of the Company to leave the employ of the Company unless such individual’s employment with the Company has been terminated for a period of six months or longer. In addition, the executive’s receipt of the severance benefits would be contingent upon the executive signing a customary general release of claims against the Company.
In connection with the Merger, Madison Dearborn agreed that if any executive committee officer is terminated without “cause” (as defined in the executive severance agreements) within the two years following the Merger, and as a result becomes subject to an excise tax under Section 4999 of the Code, the Board of Directors and the executive will in good faith determine the amount of any payment to be made to such Executive Committee officer to offset in whole or in part the cost of such excise tax, provided that in no event will the aggregate of all such payments made to all executive committee officers exceed $2 million.
Additionally, if following an initial public offering of the Company, Holdings or Parent’s equity securities, a change in “the ownership or effective control” or “a substantial portion of the assets” occurs within the meaning of Section 280G of the Code of the company whose equity securities are offered in the initial public offering, the Company will pay to the executive committee officers an amount that, on an after-tax basis, equals any excise tax payable by such officer pursuant to Section 4999 of the Code, by reason of any entitlements that are described in Section 280G(b)(2)(A)(i) of the Code, to the extent such entitlements result from such change in control event.
Repurchase of Class A, Class B and Class C common units upon Termination of Employment
Certain members of our management team hold Class B and/or Class C common units under our Management Equity Plan. The terms of the Management Equity Plan and the individual award documents issued thereunder provide various rights in the event of a termination of employment.
Class A Unit Repurchase. Pursuant to the Class A unit purchase agreement, if, at any time prior to the second anniversary of the date of such agreement, the executive is terminated by the Company without “cause” or the executive resigns for “good reason” (each as defined in the unit purchase agreement), the executive may elect to require the Company to repurchase all, but not less than all, of the executive’s Class A common units pursuant to the terms of a “put option.” The purchase price for the repurchased Class A common units is the original cost of such units paid by the executive. Original cost for units purchased in connection with the merger transactions was $101.22 per Class A common unit.
Class B Unit Repurchase. Pursuant to the Class B unit purchase agreement, in the event executive ceases to be employed by the Company for any reason, all Class B common units shall be subject to repurchase at the Company’s option. In the event of a termination of employment, (i) the purchase price for each unvested Class B common unit shall be the lesser of (A) executive’s “original cost” for such unvested unit and (B) the Fair Market Value (as defined below) of such unvested unit as of the date of repurchase, and (ii) the purchase price for each vested Class B common unit shall be the Fair Market Value of such vested unit as of the date of repurchase; provided, however, if Executive employment is terminated with Cause (as defined in the unit purchase agreement), the purchase price for each Class B common unit (whether vested or not) shall be the lesser of (A) executive’s original cost for such unit and (B) the Fair Market Value of such unit as of the date of repurchase. With respect to the Class B unit purchase agreements entered into as of the Merger, original cost for the Class B common units was $1.00. “Fair Market Value” of any unit will be determined in good faith by the Board in its sole discretion in accordance with the provisions of the applicable equity documents.
Class C Unit Repurchase. Pursuant to the Class C unit grant agreement, in the event executive ceases to be employed by the Company for any reason, all vested Class C common units shall be subject to repurchase at the Company’s option. All unvested Class C units shall be automatically canceled without payment of any consideration therefor. In the event of a termination of employment, the purchase price for each vested Class C common unit shall be the Fair Market Value of such vested unit as of the date of repurchase; provided, however, if Executive employment is terminated with Cause (as defined in the unit grant agreement), all Class C units whether vested or not shall be automatically canceled without payment of any consideration therefor. “Fair Market Value” of any unit will be determined in good faith by the Board in its sole discretion in accordance with the provisions of the applicable equity documents.
Acceleration of Class B and Class C Units. If the executive’s employment is terminated as a result of death or disability, an additional amount of Class B and Class C common units equal to the lesser of (i) twenty percent (20%) of the aggregate number of units held by the executive and (ii) the remainder of executive’s unvested units, shall automatically become vested units. In addition, upon the occurrence of a Sale of the Company (as defined in the unit purchase agreement), on or prior to the fifth anniversary of the date of the unit purchase agreement, all unvested Class B and Class C common units shall become vested units so long as the executive is, and has been continuously, employed by the Company from the date of the unit purchase agreement, or unit grant agreement, as the case may be, through the date on which such Sale of the Company occurs.
Treatment of Units upon Sale of the Company.
In the event a “Sale of the Company” (as defined below) occurs, all unvested Class B and Class C common units vest automatically, and each holder of Class A common units, Class B common units and Class C common units (including unvested Class B and Class C common units) shall receive in exchange for such units an amount equal to the amount that such holder would have received in a complete liquidation of Holdings LLC (after satisfaction or assumption of all debts and liabilities, and in the case of Class C units taking into account the applicable participation thresholds) in accordance the terms of Holdings LLC’s Limited Liability Company Agreement. In addition, each unit holder will bear his pro rata share of the expenses incurred in connection with the Sale of the Company.
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“Sale of the Company”, as defined in the Limited Liability Company Agreement, means the sale of Holdings LLC (or the Company) to an independent third party or group of independent third parties pursuant to which such party or parties acquire (i) equity securities of Holdings (or the Company) possessing the voting power to elect a majority of the Board (or the board of directors of the Company) (whether by merger, consolidation or sale or transfer of Holdings or the Company’s equity securities) or (ii) all or substantially all of Holdings or the Company’s assets, in each case determined on a consolidated basis; provided that the term “Sale of the Company” shall not include a public offering.
Director Compensation
| | | | | | | | | |
Name (a) | | Fees
Earned
or Paid
in Cash
($)
(b) | | Stock
Awards
($)
(c)
(1) | | Total
($)
(h) |
Robin P. Selati | | $ | 0 | | $ | 0 | | $ | 0 |
George A. Peinado | | $ | 0 | | $ | 0 | | $ | 0 |
Richard H. Copans | | $ | 0 | | $ | 0 | | $ | 0 |
Terry Burman | | $ | 57,500 | | $ | 6,805 | | $ | 64,305 |
| (1) | This column represents the dollar amount recognized for financial statement reporting purposes with respect to the 2008 fiscal year for the fair value of Class C common units issued to Mr. Burman in accordance with SFAS 123R. Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. These amounts reflect the company’s accounting expense for these awards, and do not correspond to the actual value that will be recognized by the named executives. The grant date fair value of these awards was $28,400. As of January 3, 2009, Mr. Burman held 2,070 Class C common units, of which 498 were vested. |
Overview of Director Compensation
Our Board of Directors consists of Robin P. Selati, George A. Peinado, Richard H. Copans, Terry Burman, Craig W. Rydin and Harlan M. Kent. Messrs. Selati, Peinado and Copans are affiliates of Madison Dearborn ( “Madison Dearborn Directors”). Messrs. Rydin and Kent are employees of the Company (“Management Directors”). Mr. Burman is an independent director.
Under the Director Compensation Plan adopted by the Compensation Committee in 2007, neither Madison Dearborn Directors nor Management Directors are entitled to fees or equity compensation for their services as directors. The Director Compensation Plan provides for compensation for independent directors (defined as directors who are neither Madison Dearborn Directors nor Management Directors) consisting of the following elements: (i) a base annual retainer of $35,000, (ii) board and/or committee meeting fees of $1,500 per meeting attended in person and $750 per meeting participated in via telephone, and (iii) an equity award designed to provide a target net equity value of $500,000 based upon a liquidation value model approved by the Compensation Committee. Pursuant to this Director Compensation Plan, Mr. Burman received a grant of 2,070 Class C common units effective as of June 27, 2008. Mr. Burman also receives an annual retainer of $35,000 and board meeting fees as set forth above.
All of our directors are reimbursed for out-of-pocket expenses incurred in connection with attending all board and other committee meetings.
Compensation Committee Interlocks and Insider Participation
None of the Compensation Committee members were officers or employees of the Company or its subsidiaries. No executive officer of the Company has served as a member of the Board of Directors or Compensation Committee of another entity, one of whose executive officers served as a member of the Board of Directors or Compensation Committee of the Company.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT RELATED STOCKHOLDER MATTERS |
We are an indirect, wholly-owned subsidiary of Holdings LLC. All of our capital stock is owned by Parent, which in turn is owned by Holdings LLC. Holdings LLC was capitalized in connection with the 2007 Merger with approximately $433.1 million of equity capital in the form of Class A and Class B common units. As of February 1 , 2009, Holdings LLC had 4,271,937 Class A Units,, 395,396 Class B Units and 41,348 Class C Units outstanding. The following table sets forth information with respect to the beneficial ownership of the capital stock of Holdings LLC by:
| | • | | each person known to us to beneficially hold five percent or more of Holdings LLC’s equity; |
| | • | | each member of the board of managers of Holdings LLC; |
| | • | | each of our named executive officers; and |
| | • | | all of our executive officers and directors as a group. Except as noted below, the address for each of the directors and Named Executive Officers is c/o The Yankee Candle Company, 16 Yankee Candle Way, South Deerfield, Massachusetts 01373. |
Beneficial ownership has been determined in accordance with the applicable rules and regulations promulgated under the Exchange Act. None of the equity units listed in the table are pledged as security pursuant to any pledge arrangement or agreement.
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| | | | | | | | | | | | | | | | | | |
| | | Class A Common Units | | | Class B Common Units | | | Class C Common Units | |
| | | Number | | Percent of
Class | | | Number
(1) | | Percent of
Class | | | Number
(1) | | Percent of
Class | | | Total
Voting
Percent
(1)(2) | |
Principal Stockholders: | | | | | | | | | | | | | | | | | | |
Madison Dearborn (3) | | 4,233,353 | | 99.1 | % | | — | | — | | | — | | — | | | 95.4 | % |
| | | | | | | |
Directors and Named Executive Officers: | | | | | | | | | | | | | | | | | | |
Craig W. Rydin | | 22,772 | | * | | | 40,936 | | 25.5 | % | | — | | — | | | 1.4 | % |
Harlan M. Kent | | 2,458 | | * | | | 30,702 | | 19.3 | % | | — | | — | | | * | |
Bruce L. Hartman | | 139 | | * | | | — | | — | | | 8,561 | | 88.8 | % | | * | |
Stephen Farley | | 508 | | * | | | 12,280 | | 7.8 | % | | — | | — | | | * | |
Richard R. Ruffolo | | 753 | | * | | | 10,234 | | 6.5 | % | | — | | — | | | * | |
Edward R. Medina | | 372 | | * | | | 1,842 | | 1.2 | % | | — | | — | | | * | |
Terry Burman | | 46 | | * | | | — | | — | | | 597 | | 7.0 | % | | * | |
Robin P. Selati (3) | | — | | * | | | — | | — | | | — | | — | | | * | |
George A. Peinado (3) | | — | | * | | | — | | — | | | — | | — | | | * | |
Richard H. Copans (3) | | — | | * | | | — | | — | | | — | | — | | | * | |
All Directors and Executive Officers as a group (14 persons) | | 32,022 | | * | | | 125,876 | | 76.3 | % | | 9,158 | | 94.4 | % | | 3.8 | % |
* Denotes less than one percent.
| (1) | This amounts set forth in this column for each applicable individual represent the number of Class B and Class C common units vested as of February 1, 2009, plus the number of Class B or Class C common units that are scheduled to vest within 60 days of such date. Class B and Class C common units vest on a daily basis. Unvested Class B and Class C common units are not included in this column as such unvested units do not provide the holder with voting or dispositive power. For more information about the terms of the Class B and Class C common units see “— Certain Relationships and Related Party Transactions.” |
| (2) | The Class A, Class B and Class C common units vote together as a single class. The unvested Class B and Class C common units do not have voting rights. Pursuant to Holdings LLC’s limited liability company agreement, action of the members can be taken by the affirmative vote of a majority of the common units entitled to vote. For purposes of determining percentage of voting power, each person’s percentage represents such person’s percentage of the shares entitled to vote and excludes the unvested Class B and Class C common units. |
| (3) | Madison Dearborn Capital Partners V–A, L.P. (“MDP V–A”) is the direct beneficial owner of 3,330,116 Class A Units, Madison Dearborn Capital Partners V–C, L.P. (“MDP V–C”) is the direct beneficial owner of 869,884 Class A Units and Madison Dearborn Capital Partners V Executive–A, L.P. (“MDP Executive”) is the direct beneficial owner of 33,353 Class A Units. Madison Dearborn Partners V–A&C, L.P. (“MDP A&C”) is the general partner of MDP V–A, MDP V–C and MDP Executive. John A. Canning, Paul J. Finnegan and Samuel M. Mencoff are the sole members of a limited partner committee of MDP A&C that have the power, acting by majority vote, to vote or dispose of the shares directly held by MDP V–A, MDP V–C and MDP Executive. Messrs. Canning, Finnegan and Mencoff and MDP LLC each hereby disclaims any beneficial ownership of any shares directly held by MDP V–A, MDP V–C and MDP Executive. Each of Messrs. Selati, Peinado and Copans are employed by Madison Dearborn Partners LLC (“MDP LLC”), which is the general partner of MDP A&C, and disclaim beneficial ownership of the Class A Units held by MDP V–A, MDP V–C and MDP Executive except to the extent of his pecuniary interest therein. The address for MDP V-A, MDP V-C, MDP Executive and Messrs. Selati, Peinado and Copans is c/o Madison Dearborn Partners, LLC, Three First National Plaza, Suite 3800, 70 West Madison Street, Chicago, Illinois 60602. |
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE |
Payments to Madison Dearborn
In connection with the Merger, we entered a management services agreement with an affiliate of Madison Dearborn pursuant to which they will provide us with management and consulting services and financial and other advisory services. Pursuant to such agreement, they receive an aggregate annual management fee of $1.5 million and reimbursement of out-of-pocket expenses incurred in connection with the provision of such services. The management services agreement includes customary indemnification provisions in favor of the affiliate of Madison Dearborn.
Limited Liability Company Agreement and Unitholders Agreement
The Class A and Class B common units were issued to the Company’s executive officers under the YCC Holdings LLC 2007 Incentive Equity Plan. The rights and obligations of Holdings LLC and the holders of its Class A and Class B common units are generally set forth in Holdings LLC’s limited liability company agreement, Holdings LLC’s unitholders agreement and the Class A and Class B unit purchase agreements, copies of which were filed as exhibits to our registration statement on form S-4 filed on March 30, 2007 with the Securities and Exchange Commission.
Holders of the Class A and Class B common units are entitled to one vote per Class A common unit and one vote per vested Class B common unit held on all matters submitted to a vote of unitholders. The unitholders are entitled to allocations of profits and losses (as such terms are defined in the limited liability company agreement) of Holdings LLC and to distributions of cash and other property of Holdings LLC as set forth in the limited liability company agreement. Pursuant to the limited liability company agreement, the Class A common units are entitled to a return of capital after which the Class A common units and Class B common units will share in future distributions on a pro rata basis.
Both the Class A common units and Class B common units are subject to restrictions on transfer, and the Class B common units are also subject to the right of Holdings LLC or, if not exercised by Holdings LLC, Madison Dearborn’s right, to repurchase these Class B common units upon a termination of employment. If an employee’s employment with the Company terminates for any reason other than for cause, vested units can be repurchased at fair market value and unvested units can be repurchased at the lower of original cost and fair market value. Upon a termination for cause, both vested and unvested Class B common units can be repurchased at the lower of original cost and fair market value.
74
Holdings LLC may issue additional units subject to the terms and conditions of the limited liability agreement. Any units issued will be subject to the transfer restrictions set forth in the limited liability agreement and the unitholders agreement.
If Madison Dearborn seeks to sell all or substantially all of the Company, the Management Investors must consent to the sale and cooperate with Madison Dearborn, which may include selling their securities to the buyer on the terms and at the price negotiated by Madison Dearborn and signing whatever documents are reasonably necessary to consummate the sale.
Prior to an initial public offering, if Madison Dearborn sells a significant portion of its ownership interest in Holdings LLC to a third party (disregarding sales in the public market, transfers to its affiliates and certain other exceptions), the Management Investors will have the option (but will not be required to, except in the case of a sale of all or substantially all of the assets of the Company) to participate in the sale and sell alongside Madison Dearborn on a pro rata basis.
Prior to an initial public offering or a sale of all or substantially all of the Company, each Management Investor will be required to vote his or her units in favor of a board of managers consisting of three representatives of Madison Dearborn and Craig Rydin and Harlan Kent (for so long as they are employed by the Company).
In October 2007, the Compensation Committee approved the creation of a new class of equity interest in Holdings LLC, Class C common units, for future issuance to eligible participants under the Management Equity Plan. As approved by the Compensation Committee, the number of remaining authorized and unissued Class B common units would be reduced by any Class C common unit grants actually made, and the number of combined Class B common units and Class C common units could not exceed the initial pool of Class B common units originally reserved in connection with the Merger.
Class C common units will otherwise have the same general characteristics as Class B common units, including with respect to time vesting and repurchase terms (except that unvested Class C common units are forfeited rather than repurchased as there is no initial capital outlay for the Class C common units). The Company currently anticipates that all future long-term equity incentive grants will be made using Class C common units.
Madison Dearborn agreed to reimburse certain Management Investors, in the event such Management Investors are terminated by us without cause prior to the two year anniversary of the closing of the Merger, for the amount of any excise tax (plus additional taxes imposed on such amounts) he or she would be obligated to pay under Section 280G of the Internal Revenue Code of 1986, as amended, as a result of the consummation of the Merger transactions, not to exceed $2.0 million in the aggregate for all such Management Investors.
Registration Rights Agreement
In connection with the Merger transactions, certain of the Management Investors and Madison Dearborn entered into a registration agreement with Holdings LLC under which Madison Dearborn has the right to require Holdings LLC to register any or all of its securities under the Securities Act on Form S–1 or Form S–3, at Holding LLC’s expense. Additionally, certain Management Investors are entitled to request the inclusion of their registrable securities in any registration statement at Holdings LLC’s expense whenever Holdings LLC proposes to register any offering of its securities.
Director Independence
The Company has no securities listed for trading on a national securities exchange or in an automated inter-dealer quotation system of a national securities association which has requirements that a majority of its board of directors be independent. For purposes of complying with the disclosure requirements of the Securities and Exchange Commission, the Company has adopted the definition of independence used by The New York Stock Exchange (“NYSE”). Based on the director independence tests set forth in Rule 303A.02 of the NYSE Listing Standards, we believe Mr. Burman qualifies as an independent director. Note that under Rule 303A.00 of the NYSE Listing Standard, we would be considered a “controlled company” because more than 50% of our voting power is held by another company. Accordingly, even if we were a listed company on NYSE, we would not be required to maintain a majority of independent directors on our board.
Related Party Approval Policy
We do not have a formal related party approval policy for transactions required to be disclosed pursuant to Item 404(a) of Regulation S–K. However, it is our policy to comply with the covenant related to transactions with affiliates that is contained in the indentures governing our outstanding notes.
In 2008, the Company sold products in the ordinary course of business to one wholesale customer in whom Madison Dearborn holds an interest. The Company had sales of approximately $113,000 to Tuesday Morning Corporation. In 2008 the Company purchased products in the amount of approximately $700,000, in the ordinary course of business from CDW Corporation, in which Madison Dearborn holds an interest. Messrs. Selati, Peinado and Copans, the three Madison Dearborn employees who serve on the Company’s Board of Directors, were not involved in the transactions.
In February 2007, CapitalSource Inc., a company in which affiliates of Madison Dearborn Partners, LLC hold an approximately 8.5% interest as of December 31, 2008, purchased a portion of the revolving loan under our senior secured revolving credit facility. During 2008, the largest amount of principal outstanding under the loan at any one time was $14.2 million. As of December 31, 2008, the principal amount outstanding under this loan was $11.2 million. For the year ended December 31, 2008, we paid $0.5 million of interest and fees related to this loan.
| ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The following table summarizes the fees of Deloitte & Touche LLP, including the member firms of Deloitte Touche Tohmatsu, our independent registered public accounting firm, billed to us for each of the last two fiscal years for audit services and for other professional services:
| | | | | | |
Type of Fees | | 2008 | | 2007 |
Audit Fees (1) | | $ | 821,875 | | $ | 1,013,636 |
Audit-Related Fees (2) | | | — | | | — |
Tax Fees (3) | | | — | | | — |
All Other Fees (4) | | | 9,000 | | | — |
| | | | | | |
Total | | $ | 830,875 | | $ | 1,013,636 |
| | | | | | |
All other fees relate to the review of the Company’s responses associated with an SEC comment letter.
75
| (1) | In accordance with the applicable SEC definitions and rules, “Audit Fees” are fees billed by Deloitte & Touche LLP for professional services rendered for the audit of the Company’s financial statements for the applicable fiscal year, the audit of the Company’s internal control over financial reporting, and the reviews of the financial statements included in each of the Company’s Quarterly Reports on Form 10-Q during the applicable fiscal year, or any services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for the applicable fiscal year. |
| (2) | In accordance with the applicable SEC definitions and rules, “Audit-Related Fees” are fees billed by Deloitte & Touche LLP for assurance and related services rendered during the applicable fiscal year that are reasonably related to the performance of the audit or review of the Company’s financial statements, and which are not reported as Audit Fees. |
| (3) | In accordance with the applicable SEC definitions and rules, “Tax Fees” are fees billed by Deloitte & Touche LLP for professional services rendered for tax compliance, tax advice and tax planning. |
| (4) | In accordance with the applicable SEC definitions and rules, “All Other Fees” are fees billed by Deloitte & Touche LLP for products and services other than those reported as Audit Fees, Audit-Related Fees or Tax Fees. |
Pre-Approval Policies and Procedures
The Audit Committee of the Board of Directors has adopted policies and procedures relating to the approval of all audit and non-audit services that are to be performed by the Company’s independent registered public accounting firm. This policy generally provides that the Company will not engage its independent registered public accounting firm to render audit or non-audit services unless the service is specifically approved in advance by the Audit Committee or the engagement is entered into pursuant to one of the pre-approval procedures described below.
From time to time, the Audit Committee may pre-approve specified types of services that are expected to be provided to the Company by its independent registered public accounting firm during the next 12 months. Any such pre-approval is detailed as to the particular service or type of services to be provided and is also generally subject to a maximum dollar amount.
The Audit Committee has also delegated to the chairman of the Audit Committee the authority to approve any audit or non-audit services to be provided to the Company by its independent registered public accounting firm. Any approval of services by a member of the Audit Committee pursuant to this delegated authority is typically reported on at the next meeting of the Audit Committee.
All of the fees disclosed above with respect to 2008 related to services that were approved by the Audit Committee in accordance with the foregoing pre-approval policies and procedures.
PART IV
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
| (a) | Consolidated Financial Statements |
The consolidated financial statements listed below are included in this document under Item 8.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders’ (Deficit) Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
See the exhibit index accompanying this filing.
| (c) | Financial Statement Schedules |
All schedules for which provision is made in the applicable regulations of the Securities and Exchange Commission have been omitted because the information is disclosed in the Consolidated Financial Statements or because such schedules are not required or not applicable.
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SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on April 2, 2009.
| | |
| YANKEE HOLDING CORP. |
| |
| By | | /s/ CRAIG W. RYDIN |
| | Craig W. Rydin |
| | Chief Executive Officer |
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates noted.
| | | | |
Signature | | Capacity | | Date |
| | |
/s/ CRAIG W. RYDIN | | Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) | | April 2, 2009 |
| Craig W. Rydin | | | |
| | |
/s/ BRUCE L. HARTMAN | | Executive Vice President, Chief Administrative Officer and Chief Financial Officer (Principal Financial Officer) | | April 2, 2009 |
| Bruce L. Hartman | | | |
| | |
/s/ EDWARD R. MEDINA | | Vice President, Finance, Chief Accounting Officer and Controller (Principal Accounting Officer) | | April 2, 2009 |
| Edward R. Medina | | | |
| | |
/s/ HARLAN M. KENT | | President and Chief Operating Officer Director | | April 2, 2009 |
| Harlan M. Kent | | | |
| | |
/s/ ROBIN P. SELATI | | Director | | April 2, 2009 |
| Robin P. Selati | | | |
| | |
/s/ GEORGE A. PEINADO | | Director | | April 2, 2009 |
| George A. Peinado | | | |
| | |
/s/ RICHARD COPANS | | Director | | April 2, 2009 |
| Richard Copans | | | |
| | |
/s/ TERRY BURMAN | | Director | | April 2, 2009 |
| Terry Burman | | | |
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EXHIBIT INDEX
| | |
EXHIBIT NO. | | DESCRIPTION |
| 1.1 | | Purchase Agreement, dated February 1, 2007, among Yankee Acquisition Corp., Yankee Holding Corp., Merrill Lynch, Fenner, Pierce & Smith Incorporated and Lehman Brothers Inc., filed with The Yankee Candle Company’s Form S-4 filed on March 30, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| 1.2 | | Joinder to Purchase Agreement, dated February 6, 2007, among The Yankee Candle Company, Inc., Yankee Candle Admin LLC, Yankee Candle Restaurant Corp., Quality Gift Distributors, Inc. and Aroma Naturals, Inc., filed with The Yankee Candle Company’s Form S-4 filed on March 30, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| 2.1 | | Agreement and Plan of Merger, dated October 24, 2006, among YCC Holdings LLC, Yankee Acquisition Corp. and The Yankee Candle Company, Inc., filed with The Yankee Candle Company’s Form S-4 filed on March 30, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| 3.1 | | Amended and Restated Certificate of Incorporation of The Yankee Candle Company, Inc., filed with The Yankee Candle Company’s Form S-4 filed on March 30, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| 3.2 | | Amended and Restated By-laws of The Yankee Candle Company, Inc., filed with The Yankee Candle Company’s Form S-4 filed on March 30, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| 3.3 | | Certificate of Incorporation of Yankee Holding Corp., filed with The Yankee Candle Company’s Form S-4 filed on March 30, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| 3.4 | | Certificate of Amendment to the Certificate of Incorporation of Yankee Holding Corp., filed as Exhibit 3.1 to Yankee Holding Corp.’s Form 10-Q for the quarter ended September 29, 2007 filed on November 8, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| 3.5 | | By-Laws of Yankee Holding Corp., filed with The Yankee Candle Company’s Form S-4 filed on March 30, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| 3.6 | | Certificate of Formation of Yankee Candle Admin LLC, filed with The Yankee Candle Company’s Form S-4 filed on March 30, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| 3.7 | | Operating Agreement of Yankee Candle Admin LLC, filed with The Yankee Candle Company’s Form S-4 filed on March 30, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| 3.8 | | Certificate of Incorporation of Yankee Candle Restaurant Corp., filed with The Yankee Candle Company’s Form S-4 filed on March 30, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| 3.9 | | By-Laws of Yankee Candle Restaurant Corp., filed with The Yankee Candle Company’s Form S-4 filed on March 30, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| 3.10 | | Certificate of Incorporation of Quality Gift Distributors, Inc., filed with The Yankee Candle Company’s Form S-4 filed on March 30, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| 3.11 | | By-Laws of Quality Gift Distributors, Inc., filed with The Yankee Candle Company’s Form S-4 filed on March 30, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
78
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| |
EXHIBIT NO. | | DESCRIPTION |
| 3.14 | | Certificate of Formation of YCC Holdings LLC, filed with The Yankee Candle Company’s Form S-4 filed on March 30, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| 3.15 | | Limited Liability Company Agreement of YCC Holdings LLC, dated as of February 6, 2007, by and among the initial members identified therein, filed with The Yankee Candle Company’s Form S-4 filed on March 30, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| 4.1 | | Senior Note Indenture, dated as of February 6, 2007, among Yankee Acquisition Corp., Yankee Holding Corp. and HSBC BANK, USA, NATIONAL ASSOCIATION, as Trustee, filed with The Yankee Candle Company’s Form S-4 filed on March 30, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| 4.2 | | Senior Note Supplemental Indenture, dated February 6, 2007, among The Yankee Candle Company, Inc., Yankee Candle Admin LLC, Yankee Candle Restaurant Corp., Quality Gift Distributors, Inc. and Aroma Naturals, Inc. and HSBC BANK, USA, NATIONAL ASSOCIATION, as Trustee, filed with The Yankee Candle Company’s Form S-4 filed on March 30, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| 4.3 | | Senior Note Notation of Guaranty, dated February 6, 2007, among Yankee Candle Admin LLC, Yankee Candle Restaurant Corp., Quality Gift Distributors, Inc. and Aroma Naturals, Inc., filed with The Yankee Candle Company’s Form S-4 filed on March 30, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| 4.4 | | Senior Note Notation of Guaranty, dated February 6, 2007 of Yankee Holding Corp., filed with The Yankee Candle Company’s Form S-4 filed on March 30, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| 4.5 | | Senior Subordinated Note Indenture, dated as of February 6, 2007, among Yankee Acquisition Corp., Yankee Holding Corp. and HSBC BANK, USA, NATIONAL ASSOCIATION, as Trustee, filed with The Yankee Candle Company’s Form S-4 filed on March 30, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| 4.6 | | Senior Subordinated Note Supplemental Indenture, dated February 6, 2007, among The Yankee Candle Company, Inc., Yankee Candle Admin LLC, Yankee Candle Restaurant Corp., Quality Gift Distributors, Inc. and Aroma Naturals, Inc. and HSBC BANK, USA, NATIONAL ASSOCIATION, as Trustee, filed with The Yankee Candle Company’s Form S-4 filed on March 30, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| 4.7 | | Senior Subordinated Note Notation of Guaranty, dated February 6, 2007, among Yankee Candle Admin LLC, Yankee Candle Restaurant Corp., Quality Gift Distributors, Inc. and Aroma Naturals, Inc., filed with The Yankee Candle Company’s Form S-4 filed on March 30, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| 4.8 | | Senior Subordinated Note Notation of Guaranty, dated February 6, 2007 of Yankee Holding Corp., filed with The Yankee Candle Company’s Form S-4 filed on March 30, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| 4.9 | | Registration Rights Agreement, dated February 6, 2007, among Yankee Acquisition Corp., Yankee Holding Corp., Merrill Lynch, Fenner, Pierce & Smith Incorporated and Lehman Brothers Inc., filed with The Yankee Candle Company’s Form S-4 filed on March 30, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| 4.10 | | Registration Rights Joinder Agreement, dated February 6, 2007, among The Yankee Candle Company, Inc., Yankee Candle Admin LLC, Yankee Candle Restaurant Corp., Quality Gift Distributors, Inc. and Aroma Naturals, Inc., filed with The Yankee Candle Company’s Form S-4 filed on March 30, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
79
| | |
EXHIBIT NO. | | DESCRIPTION |
| 4.11 | | Form of Senior Note (attached as exhibit to Exhibit 4.1), filed with The Yankee Candle Company’s Form S-4 filed on March 30, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| 4.12 | | Form of Senior Subordinated Note (attached to Exhibit 4.5), filed with The Yankee Candle Company’s Form S-4 filed on March 30, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| 4.13 | | Second Supplemental Indenture, dated as of August 21, 2007, by and among The Yankee Candle Company, Inc and the guarantors listed therein and HSBC Bank USA N.A., as trustee relating to the 9 3/4% Senior Subordinated Notes due 2017, filed as Exhibit 4.1 to Yankee Holding Corp.’s Form 10-Q for the quarter ended September 29, 2007 filed on November 8, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| 4.14 | | Second Supplemental Indenture, dated as of August 21, 2007, by and among The Yankee Candle Company, Inc and the guarantors listed therein and HSBC Bank USA N.A., as trustee 8 1/2% Senior Notes due 2017, filed as Exhibit 4.2 to Yankee Holding Corp.’s Form 10-Q for the quarter ended September 29, 2007 filed on November 8, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| 10.1 | | Credit Agreement, dated as of February 6, 2007, among Yankee Acquisition Corp., Yankee Holding Corp., The Yankee Candle Company, Inc., the lenders party thereto, Lehman Commercial Paper Inc., Sovereign Bank, Wells Fargo Retail Finance, LLC, Lehman Brothers Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, filed with The Yankee Candle Company’s Form S-4 filed on March 30, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| 10.2 | | Guarantee and Collateral Agreement, dated as of February 6, 2007 among Lehman Commercial Paper Inc., Yankee Holding Corp., Yankee Acquisition Corp., The Yankee Candle Company, Inc., Merrill Lynch Capital Corporation, Sovereign Bank, Wells Fargo Retail Finance, LLC, Lehman Brothers Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, filed with The Yankee Candle Company’s Form S-4 filed on March 30, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| 10.3 | | Term Loan Promissory Note, dated February 6, 2007, by the Borrowers party thereto, in favor of Sovereign Bank, filed with The Yankee Candle Company’s Form S-4 filed on March 30, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| 10.4 | | Term Loan Promissory Note, dated February 6, 2007, by the Borrowers party thereto, in favor of Citizens Bank of Massachusetts, filed with The Yankee Candle Company’s Form S-4 filed on March 30, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| 10.5 | | Term Loan Promissory Note, dated February 6, 2007, by the Borrowers party thereto, in favor of CIT, filed with The Yankee Candle Company’s Form S-4 filed on March 30, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| 10.6 | | Revolving Credit Note, dated February 6, 2007, by the Borrowers party thereto, in favor of Sovereign Bank, filed with The Yankee Candle Company’s Form S-4 filed on March 30, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| 10.7 | | Revolving Credit Note, by the Borrowers party thereto, in favor of Citizens Bank of Massachusetts, filed with The Yankee Candle Company’s Form S-4 filed on March 30, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| 10.8 | | Amended and Restated Employment Agreement, dated March 4, 2009, between The Yankee Candle Company, Inc. and Craig W. Rydin, filed with Yankee Holding Corp.’s Form 8-K filed on March 5, 2009 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| 10.9 | | Employment Agreement dated March 4, 2009, between The Yankee Candle Company, Inc. and Harlan Kent, filed with Yankee Holding Corp.’s Form 8-K filed on March 5, 2009 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| *†10.10 | | YCC Holdings LLC Amended and Restated 2007 Incentive Equity Plan. |
| † | Indicates management contract or compensatory plan or arrangement. |
80
| | |
EXHIBIT NO. | | DESCRIPTION |
| †10.11 | | Form of Class A Unit Purchase Agreement (executive committee), filed with The Yankee Candle Company’s Form S-4 filed on March 30, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| †10.12 | | Form of Class A Unit Purchase Agreement (non-executive committee), filed with The Yankee Candle Company’s Form S-4 filed on March 30, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| †10.13 | | Class A Unit Purchase Agreement, dated February 6, 2007, between YCC Holdings LLC and Madison Dearborn Capital Partners V-A, L.P., Madison Dearborn Capital Partners V-C, L.P., and Madison Dearborn Partners V Executive-A, L.P., filed with The Yankee Candle Company’s Form S-4 filed on March 30, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| †10.14 | | Form of Class B Unit Purchase Agreement (executive committee), filed with The Yankee Candle Company’s Form S-4 filed on March 30, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| †10.15 | | Form of Class B Unit Purchase Agreement (non-executive committee), filed with The Yankee Candle Company’s Form S-4 filed on March 30, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| †10.16 | | Unitholders Agreement, dated February 6, 2007, by and among YCC Holdings LLC, Madison Dearborn Capital Partners V-A, L.P., Madison Dearborn Capital Partners C-A, L.P., Madison Dearborn Capital Partners V Executive-A, L.P., and each of the other persons listed therein, filed with The Yankee Candle Company’s Form S-4 filed on March 30, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| 10.17 | | Management Services Agreement, dated as of February 6, 2007, by and between the Yankee Candle Company, Inc. and Madison Dearborn Partners V-B, L.P., filed with The Yankee Candle Company’s Form S-4 filed on March 30, 2007 (Reg No. 333-141699) and incorporated herein by reference. |
| |
| *†10.18 | | Form of Class C Unit Purchase Agreement (executive committee). |
| |
| *†10.19 | | Form of Class C Unit Purchase Agreement (non-executive committee). |
| |
| *†10.20 | | Form of Class C Unit Purchase Agreement (director form). |
| |
| †10.21 | | Form of Executive Severance Agreement, filed as Exhibit 10.1 to The Yankee Candle Company, Inc.’s Form 8-K filed on September 20, 2006, is incorporated herein by reference. |
| |
| *†10.22 | | Form of Amendment of Executive Severance Agreement, dated December 31, 2008. |
| |
| *†10.23 | | Amended and Restated Executive Deferred Compensation Plan, dated December 23, 2008. |
| |
| *10.24 | | Amendment to the Yankee Candle Company, Inc. 401(K) and Profit Sharing Plan. |
| |
| *†10.25 | | Form of Management Incentive Plan for fiscal year 2008 for participants of Executive Compensation Plan. |
| |
| 10.26 | | Form of Indemnification Agreement between The Yankee Candle Company, Inc. and its directors and executive officers, filed as Exhibit 99.3 to The Yankee Candle Company, Inc.’s Form 8-K filed on June 8, 2005 is incorporated herein by reference. |
| |
| *21.1 | | Subsidiaries of Yankee Holding Corp. |
| |
| *31.1 | | Certification of Chief Executive Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
| *31.2 | | Certification of Chief Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
| *32.1 | | Certification of Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| |
| *32.2 | | Certification of Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| † | Indicates management contract or compensatory plan or arrangement. |
81
