SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended: MARCH 30, 2002
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Commission File Number: 001-15023
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THE YANKEE CANDLE COMPANY, INC.
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(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04 259 1416
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
16 YANKEE CANDLE WAY
SOUTH DEERFIELD, MASSACHUSETTS 01373
(Address of principal executive office and zip code)
(413) 665-8306
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $ 0.01 par value New York Stock Exchange, Inc.
(Title of class) (Name of each exchange where registered)
Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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The registrant had 54,342,830 shares of Common Stock, par value $0.01,
outstanding as of May 14, 2002.
THE YANKEE CANDLE COMPANY, INC.
FORM 10-Q - Quarter Ended March 30, 2002
This Quarterly Report on Form 10-Q contains a number of forward-looking
statements. Any statements contained herein, including without limitation
statements to the effect that The Yankee Candle Company, Inc. (the "Company",
"we", and "us") and its subsidiaries 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. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise. There are a number of important
factors that could cause 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."
Table of Contents
ITEM PAGE
- ---- -----
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
as of March 30, 2002 and December 29, 2001
Condensed Consolidated Statements of Operations 4
for the Thirteen weeks Ended March 30, 2002 and March 31, 2001
Condensed Consolidated Statements of Cash Flows for the Thirteen 5
weeks ended March 30, 2002 and March 31, 2001
Notes to the Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of 9
Financial Condition and Results of Operations
PART II. Other Information
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 14
2
PART I. Financial Information
Item 1. Condensed Consolidated Financial Statements
THE YANKEE CANDLE COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
March 30, December 29,
2002 2001
----------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 11,465 $ 30,531
Accounts receivable, less allowance of $325 at March 30, 2002
and December 29, 2001 27,650 23,141
Inventory 27,996 23,680
Prepaid expenses and other current assets 4,653 4,340
Deferred tax assets 3,544 3,544
--------- ---------
TOTAL CURRENT ASSETS 75,308 85,236
PROPERTY, PLANT AND EQUIPMENT-NET 106,902 103,975
MARKETABLE SECURITIES 1,128 961
DEFERRED FINANCING COSTS 2,536 2,815
DEFERRED TAX ASSETS 124,029 127,029
OTHER ASSETS 665 1,268
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TOTAL ASSETS $ 310,568 $ 321,284
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 20,148 $ 19,044
Accrued payroll 7,325 9,170
Accrued income taxes 970 14,462
Other accrued liabilities 11,407 12,367
Current portion of long-term debt 32,000 31,500
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TOTAL CURRENT LIABILITIES 71,850 86,543
DEFERRED COMPENSATION OBLIGATION 1,160 1,055
LONG TERM DEBT - Less current portion 79,493 83,500
DEFERRED RENT 2,416 2,082
STOCKHOLDERS' EQUITY:
Common stock 1,041 1,041
Additional paid-in capital 224,850 224,850
Treasury stock (213,752) (213,752)
Retained earnings 144,533 137,025
Unearned stock compensation (393) (522)
Accumulated other comprehensive loss (630) (538)
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TOTAL STOCKHOLDERS' EQUITY 155,649 148,104
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 310,568 $ 321,284
========= =========
See notes to Condensed Consolidated Financial Statements
3
THE YANKEE CANDLE COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
FOR THE THIRTEEN WEEKS ENDED
----------------------------
March 30, March 31,
2002 2001
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Net sales $ 88,184 $ 75,320
Cost of goods sold 42,109 38,015
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Gross profit 46,075 37,305
Selling expenses 21,220 17,175
General and administrative expenses 11,194 9,191
Restructuring charge -- 8,000
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Income from operations 13,661 2,939
Interest income (15) (42)
Interest expense 1,308 3,376
Other expense (income) 60 (102)
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Income (loss) before provision for (benefit from) income taxes 12,308 (293)
Provision for (benefit from) income taxes 4,800 (114)
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Net income (loss) $ 7,508 $ (179)
======== ========
Basic earnings per share $ 0.14 $ 0.00
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Diluted earnings per share $ 0.14 $ 0.00
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Weighted-average basic shares outstanding 53,638 53,617
======== ========
Weighted-average diluted shares outstanding 54,685 53,617
======== ========
See notes to Condensed Consolidated Financial Statements
4
THE YANKEE CANDLE COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
FOR THE THIRTEEN WEEKS ENDED
-------------------------------
March 30, March 31,
2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 7,508 $ (179)
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Depreciation and amortization 4,087 3,288
Impairment -- 2,124
Unrealized (gain) loss on marketable securities (28) 88
Non-cash stock compensation 129 85
Deferred taxes 3,000 3,000
Loss (gain) on disposal of fixed assets and classic vehicles 46 (28)
Changes in assets and liabilities:
Accounts receivable-net (4,543) (5,867)
Inventory (4,371) (2,258)
Prepaid expenses and other assets 146 (1,564)
Accounts payable 1,109 (79)
Accrued expenses and other liabilities (15,854) (14,920)
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NET CASH FROM OPERATING ACTIVITIES (8,771) (16,310)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (6,726) (7,670)
Investments in marketable securities (139) (34)
Proceeds from sale of equipment 77 25
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NET CASH FROM INVESTING ACTIVITIES (6,788) (7,679)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under bank credit agreements 14,000 23,646
Principal payments on long-term debt (17,488) (7,512)
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NET CASH FROM FINANCING ACTIVITIES (3,488) 16,134
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EFFECT OF EXCHANGE RATE CHANGES ON CASH (19) (61)
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NET DECREASE IN CASH AND CASH EQUIVALENTS (19,066) (7,916)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 30,531 13,297
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 11,465 $ 5,381
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 1,069 $ 4,340
Income taxes 15,292 12,573
See notes to Condensed Consolidated Financial Statements
5
THE YANKEE CANDLE COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(Unaudited)
1. BASIS OF PRESENTATION
The unaudited interim condensed consolidated financial statements of The Yankee
Candle Company, Inc. (the "Company") and its subsidiaries have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("generally accepted accounting principles"). The financial information
included herein is unaudited; however, in the opinion of management such
information contains all adjustments necessary for a fair presentation of the
results for such periods. In addition, the Company believes such information
reflects all adjustments (consisting of normal recurring accruals) necessary for
a fair presentation of financial position, results of operations, cash flows and
comprehensive income (loss) for such periods. All intercompany transactions and
balances have been eliminated. The results of operations for the interim periods
are not necessarily indicative of the results to be expected for the full fiscal
year ending December 28, 2002.
Certain information and disclosures normally included in the notes to
consolidated financial statements have been condensed or omitted as permitted by
the rules and regulations of the Securities and Exchange Commission, although
the Company believes the disclosure is adequate to make the information
presented not misleading. The accompanying unaudited condensed financial
statements should be read in conjunction with the audited consolidated financial
statements of the Company for the year ended December 29, 2001.
2. INVENTORIES
Inventories are stated at the lower of cost or market on a last-in first-out
("LIFO") basis.
The components of inventory were as follows:
March 30, December 29,
2002 2001
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Finished goods $ 22,848 $ 19,523
Work-in-process 275 275
Raw materials and packaging 5,476 4,485
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28,599 24,283
Less LIFO reserve (603) (603)
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$ 27,996 $ 23,680
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3. INCOME TAXES
The Company's effective tax rate in the first quarter of fiscal 2002 and fiscal
2001 was 39%. The Company provides for income taxes at the end of each interim
period based on the estimated effective tax rate for a full fiscal year.
6
4. EARNINGS PER SHARE
Under SFAS No. 128, the Company provides dual presentation of earnings per share
("EPS") on a basic and diluted basis. The computation of basic earnings per
share is based on the weighted average number of common shares outstanding
during the period. The computation of diluted earnings per share includes the
dilutive effect of common stock equivalents consisting of certain shares subject
to stock options and certain contingently returnable shares. The number of
common stock equivalents which could dilute basic earnings per share in the
future, that were not included in the computation of diluted earnings per share
because to do so would have been antidilutive, was 78 and 1,045 for the thirteen
weeks ended March 30, 2002 and March 31, 2001, respectively. The following
summarizes the effects of the assumed issuance of dilutive securities on
weighted-average shares.
FOR THE THIRTEEN WEEKS ENDED
--------------------------------
MARCH 30, 2002 MARCH 31, 2001
-------------- --------------
Weighted average basic shares
outstanding 53,638 53,617
Adjustments:
Contingently returnable shares
and shares issuable pursuant to
stock option grants 1,047 --
------ ------
Weighted average diluted shares
outstanding 54,685 53,617
====== ======
5. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes all changes in equity during the period. It
has two components: net income (loss) and other comprehensive income (loss).
Comprehensive income (loss), net of related tax effects, is as follows:
FOR THE THIRTEEN WEEKS ENDED
-------------------------------
MARCH 30, 2002 MARCH 31, 2001
-------------- --------------
Net income (loss) $ 7,508 $ (179)
Other comprehensive income (loss):
Translation adjustment (92) (312)
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Total other comprehensive income (loss) (92) (312)
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Comprehensive income (loss) $ 7,416 $ (491)
======= =======
Accumulated other comprehensive loss reported on the Company's Condensed
Consolidated Balance Sheets consists of foreign currency translation
adjustments.
7
6. SEGMENT INFORMATION
The Company has segmented its operations in a manner that reflects how its chief
operating decision-maker (the "CEO") currently reviews the results of the
Company and its subsidiaries' businesses. The Company has two reportable
segments - retail and wholesale. The identification of these segments results
from management's recognition that while the product sold is similar, the type
of customer for the product and services and the methods used to distribute the
product are different.
BALANCE PER
THIRTEEN WEEKS UNALLOCATED/ CONDENSED
ENDED CORPORATE/ CONSOLIDATED
MARCH 30, 2002 RETAIL WHOLESALE OTHER FINANCIAL STATEMENTS
- -------------- ------ --------- ------------ --------------------
Net sales $ 42,148 $ 46,036 $ -- $ 88,184
Gross profit 25,652 20,423 -- 46,075
Operating margin 7,120 17,735 (11,194) 13,661
Unallocated costs -- -- (1,353) (1,353)
Income before provision
for income taxes -- -- -- 12,308
BALANCE PER
THIRTEEN WEEKS UNALLOCATED/ CONDENSED
ENDED CORPORATE/ CONSOLIDATED
MARCH 31, 2001 RETAIL WHOLESALE OTHER FINANCIAL STATEMENTS
- -------------- ------ --------- ------------ --------------------
Net sales $34,756 $40,564 $ -- $75,320
Gross profit 20,847 16,458 -- 37,305
Operating margin 5,883 14,248 (17,192) 2,939
Unallocated costs -- -- (3,232) (3,232)
Loss before benefit
from income taxes -- -- -- (293)
7. RESTRUCTURING CHARGE
On February 14, 2001, the Company announced plans to consolidate and restructure
its distribution, manufacturing and supply chain operations. The Company's Form
10-K for the fifty-two weeks ended December 29, 2001 disclosed the principal
components of this restructuring plan. An analysis of the activity within the
remaining restructuring reserve is as follows:
ACCRUED AS OF ACCRUED AS OF
DECEMBER 29, 2001 COSTS PAID MARCH 30, 2002
----------------- ---------- --------------
Occupancy $1,854 $254 $1,600
Employee related 331 73 258
--- -- ---
Total $2,185 $327 $1,858
====== ==== ======
8. NEWLY ISSUED ACCOUNTING STANDARDS
In August, 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" was issued. This statement amends the provisions of SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" and Accounting Principles Board No. 30, "Reporting
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." This statement, which excludes goodwill from its scope,
establishes the methodology to be used for evaluating (i) long-lived assets to
be held and used, (ii) long-lived assets to be disposed of other than by sale,
and (iii) long-lived assets to be disposed of by sale, for both ongoing and
discontinued operations. In addition, SFAS No. 144 broadens the treatment of
discontinued operations to include components of an entity rather than just
segments of a business. SFAS No. 144 was adopted by the Company in the first
quarter of fiscal 2002. SFAS No. 144 did not have a material impact on our
financial position and results of operations.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Critical accounting policies have been discussed in Management's Discussion and
Analysis of Financial Condition and Results of Operations in the Company's Form
10-K for the fifty-two weeks ended December 29, 2001. Management continues to
believe that the policies that were disclosed are those that are critical to its
business.
RESULTS OF OPERATIONS - Thirteen weeks ended March 30, 2002 versus thirteen
weeks ended March 31, 2001.
NET SALES
Net sales increased 17.1% to $88.2 million for the thirteen weeks ended March
30, 2002 from $75.3 million for the thirteen weeks ended March 31, 2001. This
growth was achieved by increasing the number of retail stores, increasing sales
in catalog and Internet operations and increasing the number of wholesale
customers.
Wholesale sales, including European operations, increased 13.5% to $46.0 million
for the thirteen weeks ended March 30, 2002 from $40.6 million for the thirteen
weeks ended March 31, 2001. This growth was achieved by increasing the number of
wholesale locations. We believe that wholesale sales growth has been and will
continue to be positively impacted by marketing and merchandising programs, new
product introductions, wholesale exclusive products, the addition of new
wholesale locations and the anticipated continued growth of our European
operations.
Retail sales increased 21.3% to $42.1 million for the thirteen weeks ended March
30, 2002 from $34.8 million for the thirteen weeks ended March 31, 2001. This
growth was achieved by increasing the number of retail stores and increasing
sales in catalog and Internet operations. There were 202 retail stores open as
of March 30, 2002 compared to 154 retail stores open as of March 31, 2001 and
192 retail stores open as of December 29, 2001. Comparable store and catalog and
Internet sales for the thirteen weeks ended March 30, 2002 increased 1% over the
thirteen weeks ended March 31, 2001. Retail comparable store sales decreased 4%
compared to the thirteen weeks ended March 31, 2001 as a result of continued
softness in the economy and decreased mall traffic. There were 150 retail stores
included in the comparable store base as of March 30, 2002.
GROSS PROFIT
Gross profit increased 23.5% to $46.1 million for the thirteen weeks ended March
30, 2002 from $37.3 million for the thirteen weeks ended March 31, 2001. As a
percentage of sales, gross profit increased to 52.2% for the thirteen weeks
ended March 30, 2002 from 49.5% for the thirteen weeks ended March 31, 2001. The
increase in gross profit dollars was primarily attributable to the increase in
sales and more efficient supply chain operations. The improvement in gross
profit rate in the first quarter of 2002 compared to the first quarter of 2001
was primarily the result of supply chain inefficiencies in the first quarter of
2001 that were not experienced in the first quarter of 2002, improved
productivity in supply chain operations and a higher mix of retail sales
compared to wholesale sales. Retail sales, which have a higher gross profit rate
than wholesale sales represented 47.8% of total sales in the first quarter of
2002 compared to 46.1% in the first quarter of 2001.
SELLING EXPENSES
Selling expenses increased 23.6% to $21.2 million for the thirteen weeks ended
March 30, 2002 from $17.2 million for the thirteen weeks ended March 31, 2001.
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. As a percentage of sales,
selling expenses increased to 24.1% for the thirteen weeks ended March 30, 2002
from 22.8% for the thirteen weeks ended March 31, 2001. The primary factor
behind the increase in selling expenses in dollars and as a percentage of sales
was the increase in the number of retail stores we operated and the resulting
shift in business mix between retail and wholesale sales. Retail sales, which
have higher selling expenses as a percentage of sales than wholesale sales,
represented 47.8% of total sales in the first quarter of 2002 compared to 46.1%
in the first quarter of 2001. The number of retail stores increased from 154
retail stores open as of March 31, 2001 to 202 retail stores open as of March
30, 2002. The increase in selling expenses as a percentage of sales is also
explained by the heavy weighting of new stores. We opened 45 stores in 2001 and
ten new stores in the first quarter of 2002. New stores typically generate
higher selling expenses as a percentage of sales than stores that have been open
for more than one year since fixed costs, as a percentage of sales, are higher
during the early sales maturation period and since pre-opening costs are fully
expensed in the year of opening. Excluding the sales and selling expenses of the
2002 and 2001 store classes from the thirteen weeks ended March 30, 2002 and the
sales and selling expenses of the 2001 store class from the thirteen weeks ended
March 31, 2001, selling expenses declined as a percentage of sales.
9
SEGMENT PROFITABILITY
Segment profitability is net sales less cost of sales and selling expenses.
Segment profitability for our wholesale operations, including Europe, was $17.7
million, or 38.5% of wholesale sales in 2002 compared to $14.2 million or 35.1%
of wholesale sales in 2001. Segment profitability for the Company's retail
operations was $7.1 million or 16.9% of retail sales in 2002 compared to $5.9
million or 16.9% of retail sales in 2001. The increase in segment profitability
was primarily attributable to inefficiencies in supply chain operations that
were experienced in the first quarter ended March 31, 2001 that were not
experienced in the first quarter ended March 30, 2002 and improved productivity
in supply chain operations.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses, which consist primarily of
personnel-related costs incurred in support functions, increased 21.8% to $11.2
million for the thirteen weeks ended March 30, 2002 from $9.2 million for the
thirteen weeks ended March 31, 2001. As a percentage of sales, general and
administrative expenses increased to 12.7% for the thirteen weeks ended March
30, 2002 from 12.2% for the thirteen weeks ended March 31, 2001. The increase in
general and administrative expenses in dollars and as a percentage of sales for
the thirteen weeks ended March 30, 2002 was due primarily to investments made
during 2001 to build our organizational infrastructure which have not been
anniversaried, including occupancy expenses associated with our new headquarters
opened in May 2001, and expenses associated with the fiscal 2002 bonus program.
NET OTHER EXPENSE
Net other expense was $1.4 million for the thirteen weeks ended March 30, 2002,
compared to $3.2 million for the thirteen weeks ended March 31, 2001. The
primary component of the expense in each of these periods was interest expense,
which was $1.3 million in the thirteen weeks of 2002 compared to $3.4 million in
the thirteen weeks of 2001. Interest expense in the thirteen weeks ended March
30, 2002 decreased compared to the thirteen weeks ended March 31, 2001 due to a
reduction in the total debt outstanding from $173.5 million at March 31, 2001
compared to $111.5 million at March 30, 2002 and a reduction in borrowing rates
resulting from decreases in the federal funds and eurodollar rates.
PROVISION FOR INCOME TAXES
The Company's effective tax rate for the thirteen weeks ended March 30, 2002 and
March 31, 2001 was 39%. Management estimates that the current effective tax rate
will remain in place for the entire year based on its current tax structure.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $19.1 million compared to December 29,
2001. This decrease was partially attributable to cash used in operating
activities of $8.8 million, which includes a $15.3 million payment of corporate
income taxes for fiscal 2001 and fiscal 2002. Capital expenditures for the
thirteen weeks ended March 30, 2002 were $6.7 million, primarily related to the
capital requirements to open ten new stores, investments in our new Home Store
located in our Flagship location in South Deerfield, Massachusetts, which is
scheduled to open in the second quarter of 2002 and investments in manufacturing
operations. Net cash used in financing activities was $3.5 million for the
thirteen weeks ended March 30, 2002 which primarily represents net paydowns
during the quarter on our credit facility.
We opened ten stores during the thirteen weeks ended March 30, 2002 and we
expect to open approximately 35 additional stores during the next thirty-nine
weeks of fiscal 2002. We expect to meet our cash requirements through a
combination of available cash, operating cash flow and borrowings under our
credit facility.
As of March 30, 2002, we were in compliance with all covenants under our credit
facility. Available borrowings under the revolving credit facility were $113.5
million.
We expect that our current cash and cash equivalents and the funds available
under our revolving credit and term loan facility will be sufficient to fund our
planned store openings and other recurring operational cash needs.
10
RECENT ACCOUNTING PRONOUNCEMENTS
In August, 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" was issued. This statement amends the provisions of SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" and Accounting Principles Board No. 30, "Reporting
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." This statement, which excludes goodwill from its scope,
establishes the methodology to be used for evaluating (i) long-lived assets to
be held and used, (ii) long-lived assets to be disposed of other than by sale,
and (iii) long-lived assets to be disposed of by sale, for both ongoing and
discontinued operations. In addition, SFAS No. 144 broadens the treatment of
discontinued operations to include components of an entity rather than just
segments of a business. SFAS No. 144 was adopted by the Company in the first
quarter of fiscal 2002. SFAS No. 144 did not have a material impact on our
financial position and results of operations.
IMPACT OF INFLATION
We do not believe inflation has a significant impact on our operations. The
prices of our products have not varied based on the movement of the consumer
price index. The majority of material and labor costs are not materially
affected by inflation.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our market risks relate primarily to changes in interest rates. We bear this
risk in our outstanding debt. At March 30, 2002, there was $111.5 million of
debt outstanding, which consisted of $75.0 million in term loans and $36.5
million from our revolving credit facility. Because this debt carries a variable
interest rate pegged to market indices, our statements of operations and cash
flows are exposed to changes in interest rates.
We buy a variety of raw materials for inclusion in our products. The only raw
material that we consider to be of a commodity nature is wax. Wax is a
petroleum-based product, however, its market price has not historically
fluctuated with the movement of oil prices. Rather, over the past five years wax
prices have moved with inflation.
At this point in time, our operations outside of the United States are
immaterial. Accordingly, we are not exposed to substantial risks arising from
foreign currency exchange rates.
FUTURE OPERATING RESULTS
As referenced above, 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.
IF WE FAIL TO GROW OUR BUSINESS AS PLANNED, OUR BUSINESS COULD SUFFER AND
FINANCIAL RESULTS COULD DECLINE; AS WE GROW IT WILL BE DIFFICULT TO MAINTAIN OUR
HISTORICAL GROWTH RATES.
We intend to continue to pursue a business strategy of increasing sales and
earnings by expanding our retail and wholesale operations both in the United
States and internationally. We intend to grow internally and not by acquisition.
In particular, our retail growth strategy depends in large part on our ability
to open new stores in both existing and new geographic markets. Since our
ability to implement our growth strategy successfully will be dependent in part
on factors beyond our control, including consumer preferences and our
competitive environment, we may not be able to achieve our planned growth or
sustain our financial performance. Our ability to anticipate changes in the
candle and giftware industries, and identify industry trends, will be critical
factors in our ability to remain competitive.
We expect that, as we grow, it will become more difficult to maintain our growth
rate, 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, if we do not effectively
manage our growth, we may experience problems such as the supply chain
inefficiencies that occurred in 2000 due to overstaffing in our manufacturing
and logistics operations. These inefficiencies were corrected in 2001 through a
workforce reduction and the closing of our Salt Lake City distribution center,
but resulted in a decline in our gross profit in the last quarter of 2000 and a
restructuring charge of $8.0 million in 2001. We cannot assure that we will
11
continue to grow at a rate comparable to our historic growth rate or that our
historic financial performance will continue as we grow.
WE FACE SIGNIFICANT COMPETITION IN THE GIFTWARE INDUSTRY. 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
in the approximately $55.2 billion giftware industry. The giftware industry is
highly competitive with a large number of both large and small participants. Our
products compete with other scented and unscented candle 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 with franchised candle store chains, specialty candle stores and gift
and houseware retailers. Some of our competitors are part of large, diversified
companies which have greater financial resources and a wider range of product
offerings than we do. This competitive environment could adversely affect our
future revenues and profits, financial condition and liquidity and our ability
to continue to grow our business.
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 economic downturns or during periods of
uncertainty like that which followed the terrorist attacks on the United States,
and 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 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, OUR BUSINESS COULD BE DISRUPTED AND
OUR FINANCIAL PERFORMANCE COULD SUFFER.
Our success is substantially 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.
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 80% of our sales are generated by products we manufacture 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, 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 common stock.
Our net sales and operating results vary from quarter to quarter. We have
historically realized higher net 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. 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 net sales and income depending on
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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, 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
net sales and are difficult to adjust in the short term. As a result, if net
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
net 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,
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 net
sales, operating results or comparable store sales that do not match the
expectations of market analysts and investors. This could cause the trading
price of our common stock to decline. In addition, broad market and industry
fluctuations may adversely affect the price of our common stock, regardless of
our operating performance.
Our two largest stockholders, who are affiliates of Forstmann Little & Co.,
effectively control us and their interests may conflict with those of other
stockholders.
Partnerships affiliated with Forstmann Little & Co. own approximately 40% of our
outstanding common stock and effectively control us. Accordingly, they are able
to:
- - influence the election of our entire board of directors and, until they no
longer own any shares of our common stock, they have the contractual right
to nominate two directors to our board of directors,
- - control our management and policies, and
- - affect the outcome of any corporate transaction or other matter submitted to
our stockholders for approval, including mergers, consolidations and the
sale of all or substantially all of our assets, even where the transaction
is not in the best interests of all stockholders.
They will also be able to prevent or cause a change in control of Yankee Candle
and may be able to amend our Articles of Organization and By-Laws. The
interests of the Forstmann Little partnerships also may conflict with the
interests of the other holders of common stock.
PROVISIONS IN OUR CORPORATE DOCUMENTS AND MASSACHUSETTS LAW COULD DELAY OR
PREVENT A CHANGE IN CONTROL OF YANKEE CANDLE.
Our Articles of Organization and By-Laws may discourage, delay or prevent a
merger or acquisition involving Yankee Candle that our stockholders may consider
favorable, by:
- - authorizing the issuance of preferred stock, the terms of which may be
determined at the sole discretion of the board of directors,
- - providing for a classified board of directors, with staggered three-year
terms, and
- - establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted on by
stockholders at meetings.
Massachusetts law may also discourage, delay or prevent someone from acquiring
or merging with us.
THE PLEDGE OF SUBSTANTIALLY ALL OF OUR ASSETS TO SECURE OUR OBLIGATIONS UNDER
OUR CREDIT AGREEMENT MAY HINDER OUR ABILITY TO OBTAIN ADDITIONAL DEBT FINANCING
ON FAVORABLE TERMS.
We have pledged substantially all of our assets to secure our obligations under
our credit agreement. Subject to restrictions contained in our credit agreement,
we may incur additional indebtedness in the future. However, due to the pledge
of our assets, a creditor lending to us on a senior unsecured basis will be
effectively subordinated to our bank lenders. This could limit our ability to
obtain, or obtain on favorable terms, and may make more costly additional debt
financing outside of our credit agreement. While we do not expect to require
additional financing prior to the expiration of our credit agreement, if we
needed to do so the inability to obtain additional financing on favorable terms
could adversely impact our results of operations or inhibit our ability to
realize our growth strategy.
WE DO NOT CURRENTLY INTEND TO PAY DIVIDENDS ON OUR CAPITAL STOCK.
We have never paid a cash dividend on our common stock as a public company and
we do not intend to pay any cash dividends in the foreseeable future. Instead we
intend to retain earnings for the future operation of the business. Any
determination to pay dividends in the future will be at the discretion of our
board of directors and will be dependent upon our results of operations, our
financial condition, contractual and legal restrictions and other factors deemed
relevant by our board of directors. Under the terms of our existing credit
agreement, we may not declare or pay
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dividends on our common stock unless our ratio of consolidated total debt to
consolidated EBITDA is less than or equal to 2:1 or our aggregate principal
amount of loans and letters of credit outstanding is less than $100 million.
Although we meet this requirement, we do not currently intend to pay dividends.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities and Use of Proceeds
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Not Applicable
(b) Reports on Form 8-K
On February 26, 2002, in connection with its filing of a
Registration Statement on Form S-3 for the sale by certain
selling shareholders of up to 14,375,000 shares of the
Company's common stock, the Company filed a Report on Form 8-K
in order to disclose certain financial information provided in
the Registration Statement, including the Company's most
recent Consolidated Financial Statements and the accompanying
"Management's Discussion and Analysis of Financial Condition
and Results of Operations" provisions.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
THE YANKEE CANDLE COMPANY, INC.
/s/ Robert R. Spellman
-----------------------------------------
Date: May 14, 2002 By: Robert R. Spellman
Senior Vice President, Finance
and Chief Financial Officer
(Principal Financial Officer)
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