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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
 FORM 10-Q Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended:   July 3, 2004 Commission File Number:    001-15023 THE YANKEE CANDLE COMPANY, INC.  MASSACHUSETTS
    
    
    
    04 259 1416(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 office and zip code) (413) 665-8306
(Registrants telephone number, including area code) 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   x     No   o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes   x     No   o The registrant had 47,865,808 shares of Common Stock, par value $0.01,
outstanding as of August 9, 2004.




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THE YANKEE CANDLE COMPANY, INC. FORM 10-Q  Quarter Ended July 3, 2004 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. and its
subsidiaries (Yankee Candle, the Company, we, and us) 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
its 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. Management undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.  
 Table of Contents Item
    
    
    
    PagePART I.
    
    Financial InformationItem 1.
    
    Financial Statements-UnauditedCondensed Consolidated Balance Sheets
as of July 3, 2004 and January 3, 2004
    
    
    3Condensed Consolidated Statements of Income
for the Thirteen and Twenty-Six weeks
ended July 3, 2004 and June 28, 2003
    
    
    4Condensed Consolidated Statements of Cash Flows for the
Twenty-Six weeks ended July 3, 2004 and June 28, 2003
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    11Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    19Item 4.
    
    Controls and Procedures
    
    
    19PART II.
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    
    20Item 2.
    
    Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities
    
    
    20Item 3.
    
    Defaults Upon Senior Securities
    
    
    20Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    20Item 5.
    
    Other Information
    
    
    20Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    21Signatures
    
    
    
    
    21EX-10.14 FORM OF CREDIT AGREEMENTEx-31.1 Section 302 Certification of Chief Executive OfficerEx-31.2 Section 302 Certification of Chief Financial OfficerEx-32.1 Section 906 Certification of Chief Executive OfficerEx-32.2 Section 906 Certification of Chief Financial Officer
  2




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PART I. Financial Information 
 Item 1. Condensed Consolidated Financial Statements THE YANKEE CANDLE COMPANY, INC. AND SUBSIDIARIES 
   July 3,
    
    January 3,2004
    
    2004ASSETS
    
    (Unaudited)CURRENT ASSETS:Cash and cash equivalents
    
    $
    9,064
    
    
    $
    40,730Accounts receivable, net
    
    
    25,032
    
    
    
    24,251Inventory
    
    
    54,131
    
    
    
    42,186Prepaid expenses and other current assets
    
    
    10,765
    
    
    
    6,608Deferred tax assets
    
    
    3,128
    
    
    
    3,128TOTAL CURRENT ASSETS
    
    
    102,120
    
    
    
    116,903PROPERTY, PLANT AND EQUIPMENT-NET
    
    
    114,913
    
    
    
    114,774MARKETABLE SECURITIES
    
    
    1,978
    
    
    
    1,604DEFERRED FINANCING COSTS
    
    
    590
    
    
    
    588DEFERRED TAX ASSETS
    
    
    93,645
    
    
    
    100,346OTHER ASSETS
    
    
    10,604
    
    
    
    466TOTAL ASSETS
    
    $
    323,850
    
    
    $
    334,681LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    16,940
    
    
    $
    23,527Accrued payroll
    
    
    10,343
    
    
    
    13,348Accrued income taxes
    
    
    
    
    
    
    22,025Other accrued liabilities
    
    
    11,947
    
    
    
    15,168Current portion of long-term debt
    
    
    
    
    
    
    65,000TOTAL CURRENT LIABILITIES
    
    
    39,230
    
    
    
    139,068DEFERRED COMPENSATION OBLIGATION
    
    
    1,841
    
    
    
    1,525LONG TERM DEBT  Less current portion
    
    
    136,436
    
    
    
    DEFERRED RENT
    
    
    4,595
    
    
    
    3,815STOCKHOLDERS EQUITY
    
    
    141,748

    
    
    
    190,273TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    323,850
    
    
    $
    334,681
 See notes to Condensed Consolidated Financial Statements 3




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THE YANKEE CANDLE COMPANY, INC. AND SUBSIDIARIES 
    For the Thirteen Weeks
    
    For the Twenty-Six WeeksEnded
    
    EndedJuly 3,
    
    June 28,
    
    July 3,
    
    June 28,2004
    
    2003
    
    2004
    
    2003Sales
    
    $
    100,908
    
    
    $
    92,393
    
    
    $
    207,427
    
    
    $
    189,446Cost of sales
    
    
    43,895
    
    
    
    41,218
    
    
    
    91,266
    
    
    
    85,297Gross profit
    
    
    57,013
    
    
    
    51,175
    
    
    
    116,161
    
    
    
    104,149Selling expenses
    
    
    29,763
    
    
    
    26,839
    
    
    
    57,614
    
    
    
    51,540General and administrative expenses
    
    
    12,312
    
    
    
    11,679
    
    
    
    25,552
    
    
    
    24,126Income from operations
    
    
    14,938
    
    
    
    12,657
    
    
    
    32,995
    
    
    
    28,483Interest income
    
    
    (4
    )
    
    
    (24
    )
    
    
    (9
    )
    
    
    (27
    )Interest expense
    
    
    1,159
    
    
    
    815
    
    
    
    1,971
    
    
    
    1,600Other (income) expense
    
    
    (134
    )
    
    
    37
    
    
    
    (227
    )
    
    
    163Income before provision for income taxes
    
    
    13,917
    
    
    
    11,829
    
    
    
    31,260
    
    
    
    26,747Provision for income taxes
    
    
    5,497
    
    
    
    4,672
    
    
    
    12,348
    
    
    
    10,565Net income
    
    $
    8,420
    
    
    $
    7,157
    
    
    $
    18,912
    
    
    $
    16,182Basic earnings per share
    
    $
    0.17
    
    
    $
    0.13
    
    
    $
    0.38
    
    
    $
    0.30Diluted earnings per share
    
    $
    0.17
    
    
    $
    0.13
    
    
    $
    0.38
    
    
    $
    0.30Weighted average shares:Basic
    
    
    49,298
    
    
    
    54,304
    
    
    
    49,790
    
    
    
    54,249Diluted
    
    
    49,671
    
    
    
    54,650
    
    
    
    50,182
    
    
    
    54,609
 See notes to Condensed Consolidated Financial Statements 4




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THE YANKEE CANDLE COMPANY, INC. AND SUBSIDIARIES 
    For the Twenty-Six Weeks EndedJuly 3,
    
    June 28,2004
    
    2003CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:Net income
    
    $
    18,912
    
    
    $
    16,182Adjustments to reconcile net income to net cash provided by
(used in) operating activities:Depreciation and amortization
    
    
    10,557
    
    
    
    9,139Unrealized gain on marketable securities
    
    
    (53
    )
    
    
    (139
    )Stock-based compensation expense
    
    
    573
    
    
    
    43Deferred taxes
    
    
    6,700
    
    
    
    6,000Loss on disposal of fixed assets and classic vehicles
    
    
    182
    
    
    
    122Changes in assets and liabilities:Accounts receivable, net
    
    
    (702
    )
    
    
    3,050Inventory
    
    
    (10,856
    )
    
    
    (9,723
    )Prepaid expenses and other assets
    
    
    (4,868
    )
    
    
    (5,604
    )Accounts payable
    
    
    (6,594
    )
    
    
    (1,032
    )Accrued expenses and other liabilities
    
    
    (27,169
    )
    
    
    (22,409
    )NET CASH USED IN OPERATING ACTIVITIES
    
    
    (13,318
    )
    
    
    (4,371
    )CASH FLOWS (USED IN) PROVIDED BY INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (9,785
    )
    
    
    (9,745
    )Investments in marketable securities
    
    
    (320
    )
    
    
    (233
    )Proceeds from sale of property and equipment
    
    
    9
    
    
    
    63Business acquisition
    
    
    (11,500
    )
    
    
    NET CASH USED IN INVESTING ACTIVITIES
    
    
    (21,596
    )
    
    
    (9,915
    )CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:Net borrowings under bank credit agreements and other
    
    
    90,220
    
    
    
    4,487Repurchases of common stock
    
    
    (71,623
    )
    
    
    (9,765
    )Principal payments on long term debt
    
    
    (19,000
    )
    
    
    (16,000
    )Net proceeds from issuance of common stock
    
    
    3,627
    
    
    
    298NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
    
    
    3,224
    
    
    
    (20,980
    )EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    24
    
    
    
    20NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (31,666
    )
    
    
    (35,246
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    40,730
    
    
    
    43,689CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    9,064
    
    
    $
    8,443SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid during the period for:Interest
    
    $
    649
    
    
    $
    811Income taxes
    
    $
    28,043
    
    
    $
    27,505Purchase of equipment by assumption of capital lease
    
    $
    
    
    
    $
    57
 See notes to Condensed Consolidated Financial Statements 5




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THE YANKEE CANDLE COMPANY, INC. AND SUBSIDIARIES 
   1. BASIS OF PRESENTATION The unaudited interim condensed consolidated financial statements of The Yankee
Candle Company, Inc. and its subsidiaries (the Company) 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 reflects all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of financial position, results of
operations, cash flows and comprehensive income for such periods. All
intercompany transactions and balances have been eliminated. The results of
operations for the interim period are not necessarily indicative of the results
to be expected for the full fiscal years. 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. The
accompanying unaudited condensed financial statements should be read in
conjunction with the audited consolidated financial statements of the Company
for the year ended January 3, 2004 included in the Companys Annual Report on
Form 10-K. 2. INVENTORIES The components of inventory were as follows: July 3,
    
    January 3,2004
    
    2004(in thousands)Finished goods
    
    $
    47,368
    
    
    $
    37,537Work-in-process
    
    
    464
    
    
    
    975Raw materials and packaging
    
    
    7,112
    
    
    
    4,48754,944
    
    
    
    42,999Less LIFO adjustment
    
    
    (813
    )
    
    
    (813
    )$
    54,131
    
    
    $
    42,186
 3. INCOME TAXES The Companys effective tax rate for the thirteen and twenty-six weeks ended
July 3, 2004 and June 28, 2003 was 39.5%. The Company has provided and expects
to continue to provide in 2004 a valuation allowance against the deferred tax
asset for its international operations. The valuation allowance has been
considered in establishing the 39.5% effective tax rate. As a result, it is
anticipated that the effective tax rate for 2004 will be approximately 39.5%.
Management re-evaluates the Companys effective tax rate on a quarterly basis. 6




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4. EARNINGS PER SHARE SFAS No. 128, Earnings Per Share, requires two presentations of earnings per
share, basic and diluted. Basic earnings per share is computed by dividing
income available to common stockholders (the numerator) by the weighted-
average number of common shares outstanding (the denominator) for the period.
The computation of diluted earnings per share is similar to basic earnings per
share, except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the potentially
dilutive common shares had been issued. The denominator in the calculation is
based on the following weighted-average number of common shares: For the Thirteen Weeks Ended
    
    For the Twenty-Six Weeks EndedJuly 3, 2004
    
    June 28, 2003
    
    July 3, 2004
    
    June 28, 2003(in thousands)Basic
    
    
    49,298
    
    
    
    54,304
    
    
    
    49,790
    
    
    
    54,249Add:Shares issuable
pursuant to stock
option grants
    
    
    373
    
    
    
    346
    
    
    
    392
    
    
    
    360Diluted
    
    
    49,671
    
    
    
    54,650
    
    
    
    50,182
    
    
    
    54,609
 For both the thirteen and twenty-six weeks ended June 28, 2003, 458,000
potential common shares which could dilute basic earnings per share in the
future were excluded since their inclusion would have been antidilutive. For
the thirteen and twenty-six weeks ended July 3, 2004, 31,000 and 28,000
potential common shares which could dilute basic earnings per share in the
future were excluded, respectively since their inclusion would have been
antidilutive. 5. STOCK BASED COMPENSATION The Company sponsors stock option plans. Prior to the third quarter of fiscal
2003, the Company accounted for employee options or share awards under the
intrinsic-value method prescribed by Accounting Principles Board Opinion No. 25
Accounting for Stock Issued to Employees. Compensation expense, if any, was
recognized based on the difference between the fair value of the common stock
and the exercise price of the option on the measurement date, as defined by
Opinion No. 25. Pro forma disclosures of net earnings and earnings per share
had been provided supplementally, as if the fair value method of accounting
defined in SFAS No. 123 Accounting for Stock Based Compensation had been
applied. Effective in the third quarter of fiscal 2003, the Company adopted
the fair value recognition provisions of SFAS No. 123 using the prospective
transition method provided by SFAS No. 148 Accounting for Stock Based
Compensation-Transition and Disclosure, an amendment of SFAS No. 123. Under
the prospective transition method, the Company has valued all stock option
grants beginning with grants made in fiscal 2003. These are being expensed
over the vesting period based on the fair value at the date of the grant. The
adoption of the fair value method of accounting for stock-based compensation
resulted in a charge of $0.3 million and $0.6 million for the thirteen and
twenty-six weeks ended July 3, 2004, respectively. Awards under the Companys option plan vest, in general, over a four year
period. Therefore, the cost related to stock-based employee compensation
included in the determination of net income for all periods presented in the Companys historical consolidated Statements of Income is less
than that which would have been recognized if the fair value based method had
been applied to all awards since the original effective date of SFAS No. 123. 7




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The following table illustrates the effect on net income and earnings per share
if the fair value based method had been applied to all outstanding and unvested
awards in each period. For the Thirteen Weeks
    
    For the Twenty-Six WeeksEnded
    
    EndedJuly 3,
    
    June 28,
    
    July 3,
    
    June 28,2004
    
    2003
    
    2004
    
    2003(in thousands, except for per share amounts)Net income, as reported
    
    $
    8,420
    
    
    $
    7,157
    
    
    $
    18,912
    
    
    $
    16,182Add: Stock compensation recorded under
Opinion No. 25
    
    
    
    
    
    
    21
    
    
    
    
    
    
    
    43Deduct: Total stock based employee
compensation expense determined under fair
value based method for awards granted
prior to 2003, net of related tax effects
    
    
    282
    
    
    
    363
    
    
    
    564
    
    
    
    727Pro forma net income
    
    $
    8,138
    
    
    $
    6,815
    
    
    $
    18,348
    
    
    $
    15,498Earnings per share:Basic-as reported
    
    $
    0.17
    
    
    $
    0.13
    
    
    $
    0.38
    
    
    $
    0.30Basic-pro forma
    
    $
    0.17
    
    
    $
    0.13
    
    
    $
    0.37
    
    
    $
    0.29Weighted average basic shares outstanding
    
    
    49,298
    
    
    
    54,304
    
    
    
    49,790
    
    
    
    54,249Diluted-as reported
    
    $
    0.17
    
    
    $
    0.13
    
    
    $
    0.38
    
    
    $
    0.30Diluted-pro forma
    
    $
    0.16
    
    
    $
    0.12
    
    
    $
    0.37
    
    
    $
    0.28Weighted average diluted shares outstanding
    
    
    49,671
    
    
    
    54,650
    
    
    
    50,182
    
    
    
    54,609
 The following weighted-average assumptions were used to compute the pro forma
results of operations for fiscal 2004 and 2003 and the stock option expense
that was recorded in the Condensed Consolidated Statements of Income in the
second quarter of fiscal 2004: 2004
    
    2003Volatility
    
    
    23
    %
    
    
    44
    %Dividend yield
    
    
    0
    %
    
    
    0
    %Risk free interest rate
    
    
    3.25
    %
    
    
    2.85
    %Expected lives
    
    4 years
    
    4 years
 6. STOCK REPURCHASE PROGRAM On February 18, 2004, the Company announced that its Board of Directors had
approved a stock repurchase program authorizing the Company to repurchase up to
$100 million of Yankee Candle common stock. During the thirteen and twenty-six
weeks ended July 3, 2004, the Company repurchased a total of 1,704,000 and
2,510,100 shares of common stock for an aggregate purchase price of $48.8
million and $71.6 million, respectively. During the thirteen and twenty-six
weeks ended June 28, 2003 the Company repurchased a total of 426,100 shares of
common stock for an aggregate purchase price of $9.8 million. All 426,100
shares were repurchased in June 2003. 8




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7. 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. (in thousands)Thirteen Weeks
    
    
    
    
    
    
    
    
    
    Unallocated/
    
    Balance perEnded
    
    
    
    
    
    
    
    
    
    Corporate/
    
    ConsolidatedJuly 3, 2004
    
    Retail
    
    Wholesale
    
    Other
    
    Statements of IncomeSales
    
    $
    48,114
    
    
    $
    52,794
    
    
    $
    
    
    
    $
    100,908Gross Profit
    
    
    31,985
    
    
    
    25,028
    
    
    
    
    
    
    
    57,013Income from operations
    
    
    5,509
    
    
    
    21,741
    
    
    
    (12,312
    )
    
    
    14,938Other expense
    
    
    
    
    
    
    
    
    
    
    (1,021
    )
    
    
    (1,021
    )Income before
provision for income
taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,917
 Thirteen Weeks
    
    
    
    
    
    
    
    
    
    Unallocated/
    
    Balance perEnded
    
    
    
    
    
    
    
    
    
    Corporate/
    
    ConsolidatedJune 28, 2003
    
    Retail
    
    Wholesale
    
    Other
    
    Statements of IncomeSales
    
    $
    45,265
    
    
    $
    47,128
    
    
    $
    
    
    
    $
    92,393Gross Profit
    
    
    29,859
    
    
    
    21,316
    
    
    
    
    
    
    
    51,175Income from operations
    
    
    5,784
    
    
    
    18,552
    
    
    
    (11,679
    )
    
    
    12,657Other expense
    
    
    
    
    
    
    
    
    
    
    (828
    )
    
    
    (828
    )Income before
provision for income
taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,829
 Twenty-Six Weeks
    
    
    
    
    
    
    
    
    
    Unallocated/
    
    Balance perEnded
    
    
    
    
    
    
    
    
    
    Corporate/
    
    ConsolidatedJuly 3, 2004
    
    Retail
    
    Wholesale
    
    Other
    
    Statements of IncomeSales
    
    $
    94,018
    
    
    $
    113,409
    
    
    $
    
    
    
    $
    207,427Gross Profit
    
    
    62,566
    
    
    
    53,595
    
    
    
    
    
    
    
    116,161Income from operations
    
    
    11,519
    
    
    
    47,028
    
    
    
    (25,552
    )
    
    
    32,995Other expense
    
    
    
    
    
    
    
    
    
    
    (1,735
    )
    
    
    (1,735
    )Income before
provision for income
taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,260
 Twenty-Six Weeks
    
    
    
    
    
    
    
    
    
    Unallocated/
    
    Balance perEnded
    
    
    
    
    
    
    
    
    
    Corporate/
    
    ConsolidatedJune 28, 2003
    
    Retail
    
    Wholesale
    
    Other
    
    Statements of IncomeSales
    
    $
    89,281
    
    
    $
    100,165
    
    
    $
    
    
    
    $
    189,446Gross Profit
    
    
    58,357
    
    
    
    45,792
    
    
    
    
    
    
    
    104,149Income from operations
    
    
    12,088
    
    
    
    40,521
    
    
    
    (24,126
    )
    
    
    28,483Other expense
    
    
    
    
    
    
    
    
    
    
    (1,736
    )
    
    
    (1,736
    )Income before
provision for income
taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,747
 9




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8. RESTRUCTURING RESERVE A restructuring charge for $8 million was recorded in fiscal 2001 to record
costs associated with the Companys decision to consolidate and restructure its
distribution and manufacturing operations. The Company closed its Utah
distribution facility and restructured its distribution and manufacturing
work-force during 2001. Included in the restructuring charge were severance
and other employee related costs, $2.1 million of a non-cash write-down of
non-recoverable leasehold improvements, fixture and equipment investments and
estimated continuing occupancy expenses for abandoned facilities, net of
anticipated sub-lease income. As a result of this consolidation and
restructuring, the Company terminated approximately 450 manufacturing and
logistics employees. An analysis of the activity within the remaining
restructuring reserve was as follows at July 3, 2004: For the thirteen weeks ended
    
    For the thirteen weeks endedApril 3, 2004
    
    
    
    July 3, 2004(in thousands)Accrued as of
    
    
    
    
    
    Accrued as of
    
    
    
    
    
    Accrued as ofJanuary 3, 2004
    
    Costs paid
    
    April 3, 2004
    
    Costs paid
    
    July 3, 2004Occupancy
    
    $
    796
    
    
    $
    60
    
    
    $
    736
    
    
    $
    84
    
    
    $
    652
 During the second quarter of fiscal 2002, the Company was successful in
subletting the facility for the remaining lease term. The sublet income does
not fully offset the Companys lease obligations, therefore the initial
occupancy reserve remained unchanged after this sublet. 9. LONG TERM DEBT On May 19, 2004, the Company entered into a new $200 million senior unsecured
revolving credit facility (the Credit Facility) with Citizens Bank of
Massachusetts and a syndicate of lenders. This new Credit Facility has two
Tranches, a $150 million Tranche (Tranche A) that expires on May 19, 2007 and
a $50 million Tranche (Tranche B) that expires on May 18, 2005. The new
Credit Facility replaced the $150 million revolving credit facility that was
scheduled to expire on July 7, 2004. This new Credit Facility will be used by
the Company for, among other things, working capital, refinancing existing
debt, letters of credit, repurchase of the Companys common stock and other
general corporate purposes. As a result of refinancing the existing debt, all
of the Companys debt has been classified as long term as of July 3, 2004. Amounts outstanding under the Credit Facility bear interest at a rate equal to,
at the Companys option, the Citizens Bank Base Rate, or Eurodollar Rate.
Eurodollar borrowings under Tranche A of the Credit Facility include a margin
rate ranging from 0.70% to 1.00% and borrowings under Tranche B include a
margin rate ranging from 0.75% to 1.05%. These rates vary depending on the
Companys outstanding borrowings. In addition, the Company is required to pay
the lenders a quarterly commitment fee on the unused revolving loan commitment
amount. The commitment fee under Tranche A ranges from 0.15% to 0.25% and
under Tranche B range from 0.10% to 0.20%. Fees for outstanding commercial and
standby letters of credit range from 0.70% to 1.00%. The Company is also
required to pay a utilization fee on the total Credit Facility of 0.125% once
outstanding borrowings exceed $100 million. The Credit Facility requires that
the Company comply with several financial and other covenants, including
requirements that the Company maintain at the end of each fiscal quarter the
following financial ratios as set forth in the credit agreement:  
    
    a consolidated total debt to consolidated EBITDA ratio of no more
than 2.00 to 1.00 at July 3, 2004 and for subsequent fiscal quarters
(at July 3, 2004 this ratio was 0.90 to 1.00 ).
    
    a fixed charge coverage ratio (the ratio of the sum of consolidated
EBITDA plus rent expense, less cash taxes paid and capital expenditures
to the sum of consolidated cash interest expense plus rent expense and
dividends) of no less than 1.75 to 1.00 for fiscal 2004; no less than
2.00 to 1.00 for fiscal 2005; and no less than 2.25 to 1.00 during
fiscal 2006 and thereafter (at July 3, 2004 this ratio was 4.75 to 1.00). The Credit Facility permits the payment of cash dividends by the Company of up
to 50% of the current fiscal years net income and the repurchase of the
Companys shares, so long as the Companys Consolidated Net Worth (as defined
in 10




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the Credit Facility) is not less than $75 million for the second and third
quarter of fiscal 2004, $100 million plus 25% of fiscal 2004 net income.
Beginning in 2005, the Consolidated Net Worth will be the $100 million plus 25%
of 2004 net income, plus 25% of net income for each fiscal quarter thereafter. Available borrowings under the revolving credit facility were approximately
$63.3 million. 10.  BUSINESS ACQUISITION On June 7, 2004, the Company acquired substantially all of the assets of GBI
Marketing, Inc. (GBI), a privately owned and operated distributor of selected
gift products, including Yankee Candle® products, to fundraising
organizations. The total purchase price was approximately $14.5 million, $3.0
million of which is contingent and will be recorded as additional goodwill upon
the achievement of certain performance objectives over the next three years.
The cash purchase price was borrowed under the
Companys $200 million unsecured credit facility. Due to the proximity of the
acquisition date to July 3, 2004, the allocation of the purchase price is
subject to refinement. The following table provides a preliminary allocation
of the purchase price for the acquired assets of GBI: (in thousands)Cash purchase price
    
    $
    11,500Assets acquired:Property, plant and equipment
    
    
    250Inventory
    
    
    1,000Customer relationships
    
    
    3,450Trade name
    
    
    1,960Goodwill
    
    
    4,840$
    11,500
 The customer relationship asset is being amortized over its useful life of four
years. The Company plans to operate a fundraising division using the name GBI
Marketing (the GBI Division) and, accordingly, the trade name is deemed to
have an indefinite life and will not be amortized. The goodwill is
tax deductible over a 15 year period. For segment reporting
purposes, the GBI Division will be included in the Wholesale segment. The
GBI Divisions results of operations were immaterial to the Companys
operations during the thirteen weeks ended July 3, 2004. Historical pro forma
results of operations have not been provided due to immateriality. 
 ITEM 2.  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. On an on-going basis,
management evaluates its estimates and judgments, including those related to
inventories, restructuring costs, bad debts, intangible assets, income taxes,
debt service and contingencies and litigation. 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. Revenue/receivables We sell our products both directly to retail customers and through wholesale
channels. Revenue from the sale of merchandise to retail customers is
recognized at the time of sale, while revenue from wholesale customers is
recognized when risk of loss has passed to the customers. We believe that this
is the time that persuasive evidence of an agreement exists, delivery has
occurred, the price is fixed and determinable and collectability is reasonably
assured. Revenue is recognized net of any applicable discounts and allowances.
Customers, be they retail or wholesale, do have the right to return product to
us in certain limited situations. Such rights of return have not precluded
revenue recognition because we have a long history with such returns, which we
use in constructing a reserve. This reserve, 11




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however, is subject to change. 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. 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. In addition, our inventory is stated at the lower of cost or
market on a last-in first-out (LIFO) 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. Taxes We have a significant deferred tax asset recorded on our financial statements.
This asset arose at the time of our recapitalization in 1998 and is a future
tax benefit for us. The realization of this future tax benefit 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 benefit 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. Restructuring reserve In fiscal 2001, we closed our distribution facility in Utah, recorded a
restructuring charge and established a reserve for future expenses related to
the restructuring. Part of the restructuring charge related to the lease
commitment that we have through 2005. In connection with the restructuring, we
did not record the entire lease commitment as a liability because we believed
we would be able to sublet the facility. During the second quarter of fiscal
2002, we were successful in subletting the facility for the remaining lease
term. If the facility were to be vacated by the current tenant in breach of
its sublease, this would negatively affect our results of operations and cash
flows. Value of long-lived assets, including intangibles Long-lived assets on our balance sheet consist primarily of property, plant and
equipment, customer relationships, trade name, goodwill and trademarks. We
periodically review the carrying value of all of these assets based, in part,
upon our projections of anticipated undiscounted future cash flows. We
undertake this review when facts and circumstances suggest that cash flows
emanating from those assets may be diminished. Any impairment charge that we
record reduces our earnings. While we believe that our future estimates are
reasonable, different assumptions regarding items such as future cash flows and
the volatility inherent in markets which we serve could affect our evaluations
and result in impairment charges against the carrying value of those assets. Stock based compensation Effective in 2003, we adopted the fair value recognition provisions of SFAS No.
123 Accounting for Stock Based Compensation. Under the prospective
transition method selected by us, as described in SFAS No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure, an amendment of SFAS No.
123, all stock option grants beginning with grants made in fiscal 2003 are
being expensed over the vesting period, based on the fair value at the date of
the grant. Fair value is determined based on a variety of factors, all of
which are estimates subject to judgment. Changes in estimated lives of
options, risk free interest rates or exercise patterns could impact our results
of operations. We recorded a charge of approximately $0.3 million and $0.6
million for the thirteen and twenty-six weeks ended July 3, 2004. Self-insurance We are self-insured for certain losses related to health insurance, although we
maintain stop-loss coverage with third-party insurers to limit our liability
exposure. Liabilities associated with these losses are estimated in part by considering historical claims experience, industry
factors, severity factors and other actuarial assumptions. 12




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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 may 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 and new
store openings. Seasonality.We have historically realized higher revenues and operating
income in our fourth quarter, particularly in our retail business. We believe
that this has been due primarily to the increase in the number of our retail
stores and to increased sales in the giftware industry during the holiday
season of the fourth quarter. New Store Openings.The timing of our new store openings may also 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
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. RESULTS OF OPERATIONS  Thirteen and Twenty-six weeks ended July 3, 2004 versus
June 28, 2003 SALES Sales increased 9.2% to $100.9 million for the thirteen weeks ended July 3,
2004 from $92.4 million for the thirteen weeks ended June 28, 2003; and
increased 9.5% to $207.4 million for the twenty-six weeks ended July 3, 2004
from $189.4 million for the twenty-six weeks ended June 28, 2003. Wholesale sales, including European operations, increased 12.0% to $52.8
million for the thirteen weeks ended July 3, 2004 from $47.1 million for the
thirteen weeks ended June 28, 2003; and increased 13.2% to $113.4 million for
the twenty-six weeks ended July 3, 2004 from $100.2 million for the twenty-six
weeks ended June 28, 2003. This growth was achieved primarily by increasing
sales to existing customers and to a lesser extent by increasing the number of
wholesale locations. Retail sales increased 6.3% to $48.1 million for the thirteen weeks ended July
3, 2004 from $45.3 million for the thirteen weeks ended June 28, 2003; and
increased 5.3% to $94.0 million for the twenty-six weeks ended July 3, 2004
from $89.3 million for the twenty-six weeks ended June 28, 2003. The increase
in retail sales for the thirteen and twenty-six weeks ended July 3, 2004
compared to the prior year, was due primarily to increased sales attributable
to the 49 stores opened in 2003 (which in 2003 were open for less than a full
year), and to a lesser extent to the addition of new stores opened in 2004.
The increase for the thirteen and twenty-six weeks ended July 3, 2004 was partially offset by a
decrease in retail comparable store and catalog and Internet sales. Comparable
store and catalog and Internet sales for the thirteen and twenty-six weeks
ended July 3, 2004 decreased 4.0% compared to the thirteen and twenty-six weeks
ended June 28, 2003. Retail comparable store sales for the thirteen and
twenty-six weeks ended July 3, 2004 decreased 3.0% compared to the thirteen and
twenty-six weeks ended June 28, 2003. The major factor contributing to the
decrease in comparable store sales was the decrease in sales at our 90,000
square foot South Deerfield, Massachusetts flagship store. We believe our
flagship store was negatively impacted by a decline in tourism traffic, perhaps
influenced by higher gasoline prices. Comparable store sales represent a
comparison of the sales, during the corresponding fiscal periods of the two
fiscal years compared, of the stores included in our comparable store sales
base. A store first enters our comparable store sales base in the first fiscal
period that begins after the first full year of operation. There were 263
stores included in the comparable store base as of July 3, 2004, and 47 of
these stores were included for less than a full year. There were 319 retail
stores open as of July 3, 2004 compared to 269 retail stores open as of June
28, 2003 and 286 retail stores open as of January 3, 2004. 13




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GROSS PROFIT Gross profit increased 11.4% to $57.0 million for the thirteen weeks ended July
3, 2004 from $51.2 million for the thirteen weeks ended June 28, 2003; and
increased 11.5% to $116.2 million for the twenty-six weeks ended July 3, 2004
from $104.1 million for the twenty-six weeks ended June 28, 2003. As a
percentage of sales, gross profit increased to 56.5% for the thirteen weeks
ended July 3, 2004 from 55.4% for the thirteen weeks ended June 28, 2003; and
increased to 56.0% for the twenty-six weeks ended July 3, 2004 from 55.0% for
the twenty-six weeks June 28, 2003. The increase in gross profit dollars was
primarily attributable to an increase in sales. The improvement in gross
profit rate for the thirteen and twenty-six weeks ended July 3, 2004 compared
to June 28, 2003 was primarily the result of improved productivity in supply
chain operations and the benefit of cost reduction initiatives. SELLING EXPENSES Selling expenses increased 10.9% to $29.8 million for the thirteen weeks ended
July 3, 2004 from $26.8 million for the thirteen weeks ended June 28, 2003; and
increased 11.8% to $57.6 million for the twenty-six weeks ended July 3, 2004
from $51.5 million for the twenty-six weeks ended June 28, 2003. 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 29.5% for the thirteen weeks ended July 3, 2004
from 29.0% for the thirteen weeks ended June 28, 2003; and increased to 27.8%
for the twenty-six weeks ended July 3, 2004 from 27.2% for the twenty-six weeks
ended June 28, 2003. The increase in selling expenses in dollars for the
thirteen and twenty-six weeks ended July 3, 2004 was primarily related to the
continued growth in the number of retail stores, from 269 as of June 28, 2003
to 319 as of July 3, 2004. The increase in selling expenses as a percentage of
sales for the thirteen weeks ended July 3, 2004 was primarily related to the
continued growth in the number of retail stores, from 269 as of June 28, 2003
to 319 as of July 3, 2004 and to a lesser extent a decline in retail comparable
store sales. The increase in selling expenses as a percentage of sales for the
twenty-six weeks ended July 3, 2004 was primarily related to a decline in
retail comparable store sales since the fixed components of labor and occupancy
do not decrease with negative retail comparable store sales. SEGMENT PROFITABILITY Segment profitability is sales less cost of goods sold and selling expenses.
Segment profitability for our wholesale operations, including Europe, was $21.7
million, or 41.2% of wholesale sales, for the thirteen weeks ended July 3, 2004
compared to $18.6 million, or 39.4% of wholesale sales, for the thirteen weeks
ended June 28, 2003. The increase in wholesale segment profitability was
primarily attributable to increased wholesale sales and increased wholesale
gross profit dollars and rate. Segment profitability for the Companys retail
operations was $5.5 million or 11.4% of retail sales for the thirteen weeks
ended July 3, 2004 compared to $5.8 million or 12.8% of retail sales for the thirteen
weeks ended June 28, 2003. The decrease in retail segment profitability in
dollars and as a percentage of sales was primarily attributable to lower
profitability in our Catalog and Internet operations, and to a lesser extent
the decrease in comparable store sales. We also incurred lease buyout and
asset impairment charges of $0.2 million related to a planned store closing. Segment profitability for our wholesale operations, including Europe, was $47.0
million, or 41.5% of wholesale sales, for the twenty-six weeks ended July 3,
2004 compared to $40.5 million, or 40.5% of wholesale sales, for the twenty-six
weeks ended June 28, 2003. The increase in wholesale segment profitability was
primarily attributable to increased wholesale sales and increased wholesale
gross profit dollars and rate. Segment profitability for the Companys retail
operations was $11.5 million or 12.3% of retail sales for the twenty-six weeks
ended July 3, 2004 compared to $12.1 million or 13.5% of retail sales for the
twenty-six weeks ended June 28, 2003. The decrease in retail segment
profitability for the twenty-six weeks ended July 3, 2004 compared to June 28,
2003 was primarily attributable to lower profitability in our Catalog and
Internet operations. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses, which consist primarily of
personnel-related costs incurred in support functions, increased 5.4% to $12.3
million for the thirteen weeks ended July 3, 2004 from $11.7 million for the
thirteen weeks ended June 28, 2003; and increased 5.9% to $25.6 million for the
twenty-six weeks ended July 3, 2004 from $24.1 million for the twenty-six weeks
ended June 28, 2003. As a percentage of sales, general and administrative
expenses decreased to 12.2% for the thirteen weeks ended July 3, 2004 from
12.6% for the thirteen weeks ended June 28, 2003; and decreased to 12.3% for
the twenty-six weeks ended July 3, 2004 from 12.7% for the twenty-six weeks
ended June 28, 2003. The increase in general and administrative expense was
primarily attributable to labor costs. The increase in 14




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labor costs is due primarily to new hires made subsequent to the second quarter of 2003, and to
stock option expense, which were not expensed in the same period last year. In the third quarter of 2003, we adopted the fair value recognition provisions
of SFAS No. 123. Under the prospective transition method selected by us as
described in SFAS No. 148, all stock option grants beginning with grants made
in fiscal 2003 are being expensed over the vesting period, based on the fair
value at the date of the grant. This resulted in $0.3 million of incremental
stock compensation expense in the thirteen weeks ended July 3, 2004 and $0.6
million of incremental stock compensation expense in the twenty-six weeks ended
July 3, 2004. NET OTHER EXPENSE Net other expense was $1.0 million for the thirteen weeks ended July 3, 2004,
compared to $0.8 million for the thirteen weeks ended June 28, 2003; and was
$1.7 million for the twenty-six weeks ended July 3, 2004 and June 28, 2003.
The primary component of the expense in each of these periods was interest
expense, which was $1.1 million for the thirteen weeks ended July 3, 2004
compared to $0.8 million for the thirteen weeks ended June 28, 2003; and was
$2.0 million for the twenty-six weeks ended July 3, 2004 compared to $1.6
million for the twenty-six weeks ended June 28, 2003. The average daily debt
outstanding increased in the thirteen and twenty-six weeks ended July 3, 2004
compared to the thirteen and twenty-six weeks ended June 28, 2003 primarily due
to repurchases of our common stock, the impact of which was offset in part by a
reduction in our borrowing rates under our credit facility. PROVISION FOR INCOME TAXES The effective tax rate for the thirteen and twenty-six weeks ended July 3, 2004
and June 28, 2003 was 39.5%. We have provided and expect to continue to
provide in 2004 a valuation allowance against the deferred tax asset for our
international operations. The valuation allowance has been considered in
establishing the 39.5% effective tax rate. As a result, it is anticipated that
our effective tax rate for 2004 will be approximately 39.5%. We re-evaluate
our effective tax rate on a quarterly basis. LIQUIDITY AND CAPITAL RESOURCES We have consistently generated positive cash flow from operations.
Specifically, over the last three fiscal years we have generated a total cash
flow of approximately $292 million, including approximately $113 million in
2003. These amounts have exceeded net income in the last three fiscal
years due to two factors. First, we have incurred non-cash charges for depreciation
and amortization. Second, income tax expense has significantly exceeded taxes
actually paid owing to the tax deduction that we continue to utilize that arose
from the 1998 recapitalization. This tax deduction is expected to continue to
provide an annual cash benefit for the next ten years. On an annual basis,
this results in tax savings of approximately $11.7 million per year through
2013 assuming sufficient income to realize the full benefit of this deduction.
These internally generated cash flows have been sufficient to fund necessary
capital expenditures for our expansion plans and other working capital needs. Cash and cash equivalents as of July 3, 2004 decreased by $31.7 million
compared to January 3, 2004. This decrease was due primarily to cash used in
operating activities of $13.3 million, which includes total payments of $28.0
million of corporate income taxes for fiscal 2003 and fiscal 2004. Capital
expenditures for the twenty-six weeks ended July 3, 2004 were $9.8 million,
primarily related to the capital requirements to open 33 new stores as well as
investments in information systems and supply chain operations. On June 7,
2004, we acquired substantially all of the assets of GBI Marketing, Inc.
(GBI), a privately owned and operated distributor of selected gift products,
including Yankee Candle® products, to fundraising organizations. The total
cash purchase price was approximately $11.5 million. Net cash provided by
financing activities was $3.2 million for the twenty-six weeks ended July 3,
2004, which includes net borrowings of $71.2 million under our credit facility
used to fund operations and repurchase common stock. On February 18, 2004, we announced that our Board of Directors had approved a
stock repurchase program authorizing us to repurchase up to $100 million of
Yankee Candle common stock. During the fiscal 2004 second quarter ended July
3, 2004 we repurchased a total of 1,704,000 shares of common stock for an
aggregate purchase price of $48.8 million. On a cumulative basis during fiscal
2004, we have repurchased a total of 2,510,100 shares of our common stock for
an aggregate purchase price of $71.6 million. We opened 33 new stores during the twenty-six weeks ended July 3, 2004, and we
expect to open approximately 12 to 15 additional stores during the last two
quarters of fiscal 2004. We expect to meet our cash requirements through a
combination of available cash, operating cash flow and borrowings under our
credit facility. On May 19, 2004, we entered into a new $200 million senior unsecured revolving
credit facility (the Credit Facility) with Citizens Bank of Massachusetts and
a syndicate of lenders. This new Credit Facility has two Tranches, a $150 15




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million Tranche (Tranche A) that expires on May 19, 2007 and a $50 million
Tranche (Tranche B) that expires on May 18, 2005. The new Credit Facility
replaced the $150 million revolving credit facility that was scheduled to
expire on July 7, 2004. This new Credit Facility will be used by us for, among
other things, working capital, refinancing existing debt, letters of credit,
repurchase of our common stock and other general corporate purposes. As a
result of refinancing our existing debt, all of our debt has been classified as
long term as of July 3, 2004. Amounts outstanding under the Credit Facility bear interest at a rate equal to,
at our option, the Citizens Bank Base Rate, or Eurodollar Rate. Eurodollar
borrowings under Tranche A of the Credit Facility include a margin rate ranging
from 0.70% to 1.00% and borrowings under Tranche B include a margin rate
ranging from 0.75% to 1.05%. These rates vary depending on our outstanding
borrowings. In addition, we are required to pay the lenders a quarterly
commitment fee on the unused revolving loan commitment amount. The commitment
fee under Tranche A ranges from 0.15% to 0.25% and under Tranche B range from
0.10% to 0.20%. Fees for outstanding commercial and standby letters of credit
range from 0.70% to 1.00%. We are also required to pay a utilization fee on
the total Credit Facility of 0.125% once outstanding borrowings exceed $100
million. The Credit Facility requires that we comply with several financial
and other covenants, including requirements that we maintain at the end of each
fiscal quarter the following financial ratios as set forth in the credit
agreement:  
    
    a consolidated total debt to consolidated EBITDA ratio of no more
than 2.00 to 1.00 at July 3, 2004 and for subsequent fiscal quarters
(at July 3, 2004 this ratio was 0.90 to 1.00 ).
    
    a fixed charge coverage ratio (the ratio of the sum of consolidated
EBITDA plus rent expense, less cash taxes paid and capital expenditures
to the sum of consolidated cash interest expense plus rent expense and
dividends) of no less than 1.75 to 1.00 for fiscal 2004; no less than
2.00 to 1.00 for fiscal 2005; and no less than 2.25 to 1.00 during
fiscal 2006 and thereafter (at July 3, 2004 this ratio was 4.75 to 1.00). The Credit Facility permits the payment of cash dividends by us of up to 50% of
the current fiscal years net income and the repurchase of our shares, so long
as our Consolidated Net Worth (as defined in the Credit Facility) is not less
than $75 million for the second and third quarter of fiscal 2004, $100 million
plus 25% of fiscal 2004 net income. Beginning in 2005, the Consolidated Net
Worth will be the $100 million plus 25% of 2004 net income, plus 25% of net
income for each fiscal quarter thereafter. As of July 3, 2004, we were in compliance with all covenants under our new
credit facility. Available borrowings under the revolving credit facility were
approximately $63.3 million. We expect that the principal sources of funding for our planned store openings
and other working capital needs, capital expenditures, debt service obligations
and stock repurchase program will be a combination of our available cash and
cash equivalents, funds generated from operations, and borrowings under our
credit facility. We believe that our current funds and sources of funds will
be sufficient to fund our liquidity needs for at least the next 12 months.
However, there are a number of factors that may negatively impact our available
sources of funds. The amount of cash generated from operations will be
dependent upon factors such as the successful execution of our business plan
and general economic conditions. In addition, borrowings under our credit
facility are dependent upon our continued compliance with the financial and
other covenants contained therein. BUSINESS ACQUISITION On June 7, 2004, we acquired substantially all of the assets of GBI Marketing,
Inc. (GBI), a privately owned and operated distributor of selected gift
products, including Yankee Candle® products, to fundraising organizations.
The total purchase price was approximately $14.5 million, $3.0 million of which
is contingent and will be recorded as additional goodwill upon the achievement
of certain performance objectives over the next three years. The cash purchase
price was borrowed under our $200 million unsecured credit facility. Due to
the proximity of the acquisition date to July 3, 2004, the allocation of the
purchase price is subject to refinement. The following table provides a
preliminary allocation of the purchase price for the acquired assets of GBI: (in thousands)Cash purchase price
    
    $
    11,500Assets acquired:Property, plant and equipment
    
    
    250Inventory
    
    
    1,000Customer relationships
    
    
    3,450Trade name
    
    
    1,960Goodwill
    
    
    4,840$
    11,500
 16




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CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS The only off-balance sheet contractual obligations and commercial commitments
as of July 3, 2004 relate to operating lease obligations and letters of credit.
We have excluded these items from the balance sheet in accordance with
generally accepted accounting principles. 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. Our current plans are to grow internally and not by
acquisition, although from time to time we do consider possible acquisition
candidates. 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 the 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
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 operating 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. We
cannot assure you that we will continue to grow at a rate comparable to our
historic growth rate or that our historic financial performance will continue
as we grow. We face significant competition in the giftware industry. 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 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 September 11, 2001 terrorist attacks on the United States, the outbreak of the war in Iraq 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. 17




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Because we are not a diversified company and are effectively 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 one or more of 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 74% of our sales in 2003 were 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 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. 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, 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, 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 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. Public health epidemics such as Severe Acute Respiratory Syndrome may affect
our operating results. Approximately 11% of our sales in 2003 were generated by products, primarily
accessories, that we purchased overseas. Substantially all of these products
were purchased from East Asia. A sustained interruption of the operations of
our suppliers, as a result of the impact of Severe Acute Respiratory Syndrome
or other similar health epidemics, could have an adverse effect on our ability
to receive timely shipments of certain of our products and could result in
scrutiny or embargoing of goods produced in infected areas. 18




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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. 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.
Instead, we have retained earnings to repurchase our common stock and for the
future operation of our business. Under the terms of our new credit agreement,
we may not declare or pay dividends on our common stock unless our net worth
exceeds $75 million for the fiscal quarter ended July 3, 2004. Although we
currently meet this requirement, we have no current plan to pay dividends.
However, we intend to periodically evaluate the advisability of a dividend
program. 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. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk Our market risks relate primarily to changes in interest rates. We bear this
risk in our outstanding bank debt. At July 3, 2004, there was $136.4 million
of bank debt outstanding. Because this bank debt carries a variable interest
rate pegged to market indices, our results of operations and cash flows are
exposed to changes in interest rates. Based on July 3, 2004 borrowing levels, a
1.00% increase or decrease in current market interest rates would have the
effect of causing an approximately $1.3 million additional annual pre-tax
charge or credit to the statements of income. The second component of interest rate risk involves the short-term investment
of excess cash. This risk impacts fair values, earnings and cash flows.
Excess cash is primarily invested in interest bearing accounts that fluctuate
with market interest rates. Based on July 3, 2004 cash equivalents, a 1.00%
increase or decrease in current market interest rates would have the effect of
causing an approximately $0.1 million additional pre-tax credit or charge to
the annual statements of income. 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. 
 Item 4. 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 defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934 (the Exchange Act)) as of July 3, 2004. Based on this
evaluation, our chief executive officer and chief financial officer concluded
that, as of July 3, 2004, our disclosure controls and procedures were (1)
designed to ensure that material information relating to us, including our
consolidated subsidiaries, is made known to our chief executive officer and
chief financial officer by others within those entities, particularly during
the period in which this report was being prepared and (2) effective, in that
they provide reasonable assurance that information that we are required to
disclose in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SECs rules and forms. 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 July 3, 2004 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting. 19




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PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings Not Applicable 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities  The following table provides information about purchases by us of our common stock during the twenty-six weeks ended
July 3, 2004. Total Number of Shares
    
    Remaining Funds AvailablePurchased as Part of
    
    to Repurchase SharesTotal Number of
    
    Average Price
    
    Publicly Announced
    
    Under the PlansPeriod
    
    Shares Purchased (1)
    
    Paid per Share
    
    Plans or Programs (2)
    
    or Programs1/4/04-2/7/04
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    100,000,0002/8/04-3/6/04
    
    
    500,200
    
    
    
    28.52
    
    
    
    500,200
    
    
    $
    85,734,2963/7/04-4/3/04
    
    
    305,900
    
    
    
    28.05
    
    
    
    305,900
    
    
    $
    77,153,6594/4/04-5/8/04
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    77,153,6595/9/04-6/5/04
    
    
    866,500
    
    
    
    27.45
    
    
    
    866,500
    
    
    $
    53,368,2346/6/04-7/3/04
    
    
    837,500
    
    
    
    29.84
    
    
    
    837,500
    
    
    $
    28,377,234Total
    
    
    2,510,100
    
    
    $
    28.53
    
    
    
    2,510,100
 (1) All repurchases by us of our common stock during the twenty-six weeks
ended July 3, 2004 were done pursuant to the repurchase program that we
publicly announced on February 18, 2004 (the Program). (2) Our Board of Directors approved the repurchase of up to $100,000,000 of
our common stock pursuant to the Program. There is currently no
expiration date for the Program. Unless
terminated earlier by resolution of our Board of Directors, the Program will expire when we have reached the $100,000,000
threshold. 
 Item 3. Defaults Upon Senior Securities Not Applicable 
 Item 4. Submission of Matters to a Vote of Security Holders.  At our 2004 Annual Meeting of Stockholders held on June 16, 2004, our
stockholders elected Messrs. Dale F. Frey, Michael F. Hines and
Ronald L. Sargent to serve as Class II Directors of the Company for a
term of three years or until their respective successors are duly
elected and qualified. According to the report by the Inspector of
Elections, Messrs. Frey, Hines and Sargent were elected by the
following vote: Nominee
    
    Votes For
    
    Votes WithheldDale F. Frey
    
    
    47,553,462
    
    
    
    259,426Michael F. Hines
    
    
    47,556,121
    
    
    
    256,767Ronald L. Sargent
    
    
    47,298,921
    
    
    
    513,967
  In addition to the above Directors, the following individuals
currently serve as members of the Board of Directors: Sandra J.
Horbach, Jamie C. Nicholls, Robert J. OConnell, Michael B. Polk,
Craig W. Rydin, Robert R. Spellman, Doreen A. Wright.Stockholders also ratified the selection by the Audit Committee of
our Board of Directors of Deloitte & Touche LLP as our independent
auditor for the current fiscal year by a vote of 47,647,495 in favor,
152,066 opposed and 513,967 abstaining. 
 Item 5. Other Information Not Applicable 20




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Item 6. Exhibits and Reports on Form 8-K  (a)
    
    Exhibits 10.14
    
    Form of Credit Agreement among The Yankee Candle Company, Inc., Citizens
Bank of Massachusetts, as sole administrative agent, and the banks and
other financial institutions party thereto.31.1
    
    Certification of Craig W. Rydin Pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, dated August 9, 2004.31.2
    
    Certification of Robert R. Spellman Pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, dated August 9, 2004.32.1
    
    Certification of Craig W. Rydin Pursuant to Rule 13a-14(b) under the
Securities Exchange Act of 1934, dated August 9, 2004.32.2
    
    Certification of Robert R. Spellman Pursuant to Rule 13a-14(b) under the
Securities Exchange Act of 1934, dated August 9, 2004.
  (b)
    
    Reports on Form 8-KWe furnished a current report on Form 8-K dated April 28, 2004
pursuant to which we furnished, under Items 7 and 9, our earnings
release for the period ended April 3, 2004. 
 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 thereunto duly authorized. THE YANKEE CANDLE COMPANY, INC./s/ Robert R. SpellmanDate:
August 9, 2004
    
    
    
    By: Robert R. SpellmanSenior Vice President, Financeand Chief Financial Officer(Principal Financial Officer)
 21