##### Table of Contents



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: September 30, 2006
 Commission File Number: 001-15023
 THE YANKEE CANDLE COMPANY, INC.
  MASSACHUSETTS
    
    04 259 1416(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 
   þ o
  þ o o
 o þ




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##### 



Item
    
    PagePART I. Financial InformationItem 1. Financial Statements-UnauditedCondensed Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005
    
    
    3Condensed Consolidated Statements of Income for the
Thirteen and Thirty-Nine weeks ended September 30, 2006 and October 1, 2005
    
    
    4Condensed Consolidated Statements of Cash Flows for the Thirty-Nine weeks ended September 30, 2006 and October 1, 2005
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    26PART II. Other InformationItem 1. Legal Proceedings
    
    
    26Item 1A. Risk Factors
    
    
    26Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    31Item 3. Defaults Upon Senior Securities
    
    
    31Item 4. Submission of Matters to a Vote of Security Holders
    
    
    31Item 5. Other Information
    
    
    31Item 6. Exhibits
    
    
    31Signatures
    
    
    32Ex-31.1 Section 302 Certification of CEOEx-31.2 Section 302 Certification of CFOEx-32.1 Section 906 Certification of CEOEx-32.2 Section 906 Certification of CFO
  2




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##### Table of Contents



PART I  Financial Information
 
 Item 1. Financial Statements.
  
   September 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    9,756
    
    
    $
    12,655Accounts receivable, net
    
    
    67,366
    
    
    
    42,546Inventory
    
    
    87,404
    
    
    
    55,528Prepaid expenses and other current assets
    
    
    12,383
    
    
    
    9,060Deferred tax assets
    
    
    5,704
    
    
    
    6,734TOTAL CURRENT ASSETS
    
    
    182,613
    
    
    
    126,523PROPERTY, PLANT AND EQUIPMENT-NET
    
    
    136,859
    
    
    
    139,089MARKETABLE SECURITIES
    
    
    2,194
    
    
    
    2,223DEFERRED TAX ASSETS
    
    
    69,515
    
    
    
    73,975GOODWILL
    
    
    13,719
    
    
    
    6,035INTANGIBLE ASSETS
    
    
    16,797
    
    
    
    6,849OTHER ASSETS
    
    
    751
    
    
    
    440TOTAL ASSETS
    
    $
    422,448
    
    
    $
    355,134LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    20,320
    
    
    $
    21,068Accrued payroll
    
    
    12,928
    
    
    
    14,319Accrued income taxes
    
    
    4,070
    
    
    
    20,828Accrued purchases of property and equipment
    
    
    743
    
    
    
    5,944Accrued repurchases of common stock
    
    
    
    
    
    
    5,463Other accrued liabilities
    
    
    19,160
    
    
    
    22,919Short-term debt
    
    
    40,000
    
    
    
    TOTAL CURRENT LIABILITIES
    
    
    97,221
    
    
    
    90,541DEFERRED COMPENSATION OBLIGATION
    
    
    2,330
    
    
    
    2,418LONG-TERM DEBT
    
    
    241,000
    
    
    
    178,000DEFERRED RENT
    
    
    16,688
    
    
    
    16,031STOCKHOLDERS EQUITY
    
    
    65,209
    
    
    
    68,144TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    422,448
    
    
    $
    355,134
  3




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For the Thirteen Weeks
    
    
    For the Thirty-Nine WeeksEnded
    
    
    EndedSeptember 30,
    
    
    October 1,
    
    
    September 30,
    
    
    October 1,2006
    
    
    2005
    
    
    2006
    
    
    2005Sales
    
    $
    159,604
    
    
    $
    136,500
    
    
    $
    409,768
    
    
    $
    364,303Cost of sales
    
    
    72,981
    
    
    
    60,368
    
    
    
    188,032
    
    
    
    161,485Gross profit
    
    
    86,623
    
    
    
    76,132
    
    
    
    221,736
    
    
    
    202,818Selling expenses
    
    
    40,670
    
    
    
    34,767
    
    
    
    114,519
    
    
    
    99,382General and administrative expenses
    
    
    17,015
    
    
    
    14,689
    
    
    
    47,534
    
    
    
    41,964Income from operations
    
    
    28,938
    
    
    
    26,676
    
    
    
    59,683
    
    
    
    61,472Interest income
    
    
    (7
    )
    
    
    (5
    )
    
    
    (20
    )
    
    
    (17
    )Interest expense
    
    
    4,682
    
    
    
    2,347
    
    
    
    11,211
    
    
    
    4,809Other (income) expense
    
    
    (165
    )
    
    
    (897
    )
    
    
    (459
    )
    
    
    (200
    )Income before provision for income taxes
    
    
    24,428
    
    
    
    25,231
    
    
    
    48,951
    
    
    
    56,880Provision for income taxes
    
    
    9,527
    
    
    
    9,840
    
    
    
    16,753
    
    
    
    22,183Net income
    
    $
    14,901
    
    
    $
    15,391
    
    
    $
    32,198
    
    
    $
    34,697Basic earnings per share
    
    $
    0.37
    
    
    $
    0.35
    
    
    $
    0.80
    
    
    $
    0.77Diluted earnings per share
    
    $
    0.37
    
    
    $
    0.35
    
    
    $
    0.79
    
    
    $
    0.76Weighted average shares:Basic
    
    
    39,784
    
    
    
    43,787
    
    
    
    40,405
    
    
    
    45,237Diluted
    
    
    40,085
    
    
    
    44,223
    
    
    
    40,737
    
    
    
    45,709
  4




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For the Thirty-Nine Weeks EndedSeptember 30,
    
    
    October 1,2006
    
    
    2005CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:Net income
    
    $
    32,198
    
    
    $
    34,697Adjustments to reconcile net income to net cash provided by (used
in) operating activities:Depreciation and amortization
    
    
    19,652
    
    
    
    18,355Unrealized loss (gain) on marketable securities
    
    
    29
    
    
    
    (30
    )Stock-based compensation expense
    
    
    4,348
    
    
    
    2,587Deferred taxes
    
    
    5,490
    
    
    
    7,004Loss on disposal of fixed assets
    
    
    144
    
    
    
    253Changes in assets and liabilities:Accounts receivable, net
    
    
    (24,261
    )
    
    
    (28,251
    )Inventory
    
    
    (28,547
    )
    
    
    (22,594
    )Prepaid expenses and other assets
    
    
    (3,225
    )
    
    
    (2,523
    )Investments in marketable securities
    
    
    (597
    )
    
    
    (520
    )Accounts payable
    
    
    (810
    )
    
    
    9,337Accrued income taxes
    
    
    (15,972
    )
    
    
    (22,146
    )Accrued expenses and other liabilities
    
    
    (9,948
    )
    
    
    (1,065
    )NET CASH USED IN OPERATING ACTIVITIES
    
    
    (21,499
    )
    
    
    (4,896
    )CASH FLOWS (USED IN) PROVIDED BY INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (19,410
    )
    
    
    (22,344
    )Proceeds from sale of property and equipment
    
    
    11
    
    
    
    14Payment of contingent consideration on GBI acquisition
    
    
    (1,333
    )
    
    
    Payment for Illuminations acquisition
    
    
    (22,111
    )
    
    
    Purchase of intangible assets
    
    
    
    
    
    
    (604
    )NET CASH USED IN INVESTING ACTIVITIES
    
    
    (42,843
    )
    
    
    (22,934
    )CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:Net borrowings under bank credit agreements
    
    
    103,000
    
    
    
    125,000Deferred financing costs
    
    
    (279
    )
    
    
    (343
    )Payments for redemption of common stock
    
    
    (41,977
    )
    
    
    (119,998
    )Excess tax benefit from exercise of stock options
    
    
    924
    
    
    
    Dividends paid
    
    
    (5,093
    )
    
    
    (5,757
    )Net proceeds from issuance of common stock
    
    
    4,714
    
    
    
    2,350NET CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    61,289
    
    
    
    1,252EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    154
    
    
    
    (98
    )NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (2,899
    )
    
    
    (26,676
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    12,655
    
    
    
    36,424CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    9,756
    
    
    $
    9,748SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid during the period for:Interest
    
    $
    10,567
    
    
    $
    3,888Income taxes
    
    $
    26,301
    
    
    $
    37,489Net decrease in accrued purchases of property and equipment
    
    $
    5,201
    
    
    $
    
  5




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6




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For the Thirteen Weeks
    
    
    For the Thirty-Nine WeeksEnded
    
    
    EndedSeptember 30,
    
    
    October 1,
    
    
    September 30,
    
    
    October 1,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands, except per share data)Net income, as reported
    
    $
    14,901
    
    
    $
    15,391
    
    
    $
    32,198
    
    
    $
    34,697Add: Stock-based compensation expense
included in reported net income, net of
related tax effects
    
    
    967
    
    
    
    537
    
    
    
    2,652
    
    
    
    1,578Deduct: Total stock-based compensation
expense determined under fair value based
method for all awards, net of related tax
effects
    
    
    (967
    )
    
    
    (666
    )
    
    
    (2,652
    )
    
    
    (1,966
    )Pro forma net income
    
    $
    14,901
    
    
    $
    15,262
    
    
    $
    32,198
    
    
    $
    34,309Earnings per share:Basic-as reported
    
    $
    .37
    
    
    $
    0.35
    
    
    $
    .80
    
    
    $
    0.77Basic-pro forma
    
    $
    .37
    
    
    $
    0.35
    
    
    $
    .80
    
    
    $
    0.76Weighted average basic shares outstanding
    
    
    39,784
    
    
    
    43,787
    
    
    
    40,405
    
    
    
    45,237Diluted-as reported
    
    $
    .37
    
    
    $
    0.35
    
    
    $
    .79
    
    
    $
    0.76Diluted-pro forma
    
    $
    .37
    
    
    $
    0.35
    
    
    $
    .79
    
    
    $
    0.75Weighted average diluted shares outstanding
    
    
    40,085
    
    
    
    44,223
    
    
    
    40,737
    
    
    
    45,709
  Stock Options
     7




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2006
    
    2005Volatility
    
    
    33.0
    %
    
    
    32.8
    %Dividend yield
    
    
    0.2
    %
    
    
    0.0
    %Risk free interest rate
    
    
    3.5
    %
    
    
    3.3
    %Expected lives
    
    4.1 years
    
    
    4.0 years
  Weighted AverageExercise PriceOptions
    
    
    Per ShareOutstanding at December 31, 2005
    
    
    2,054,080
    
    
    $
    22.35Granted
    
    
    370,850
    
    
    
    27.85Exercised
    
    
    (278,471
    )
    
    
    17.01Forfeited
    
    
    (108,075
    )
    
    
    27.64Outstanding at September 30, 2006
    
    
    2,038,384
    
    
    $
    23.80Exercisable at September 30, 2006
    
    
    1,091,795
    
    
    $
    20.09
    AverageRange of
    
    
    Options
    
    
    Options
    
    
    Remaining LifeExercise Prices
    
    
    Outstanding
    
    
    Exercisable
    
    
    (Years)$
    4.25
    
    
    
    13,702
    
    
    
    13,702
    
    
    
    1.811.88-16.20
    
    
    
    352,500
    
    
    
    347,500
    
    
    
    4.616.80-18.00
    
    
    
    123,407
    
    
    
    120,282
    
    
    
    3.621.13-21.30
    
    
    
    415,750
    
    
    
    332,750
    
    
    
    6.322.32-29.75
    
    
    
    761,975
    
    
    
    185,550
    
    
    
    8.730.10-32.81
    
    
    
    371,050
    
    
    
    92,011
    
    
    
    8.6$
    4.25-$32.81
    
    
    
    2,038,384
    
    
    
    1,091,795
    
    
    
    7.1
 Restricted Stock and Performance Shares
   8




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##### Table of Contents



Weighted AverageRestricted
    
    
    Performance
    
    
    Grant DateShares
    
    
    Shares
    
    
    Fair ValueUnvested shares at December 31, 2005
    
    
    
    
    
    
    188,700
    
    
    $
    31.31Granted
    
    
    101,000
    
    
    
    38,000
    
    
    
    27.63Vested
    
    
    (2,700
    )
    
    
    
    
    
    
    28.01Forfeited
    
    
    (4,600
    )
    
    
    (15,425
    )
    
    
    30.44Unvested shares at September 30, 2006
    
    
    93,700
    
    
    
    211,275
    
    
    $
    29.69
   September 30,
    
    
    December 31,2006
    
    
    2005(in thousands)Finished goods
    
    $
    83,403
    
    
    $
    52,164Work-in-process
    
    
    676
    
    
    
    1Raw materials and packaging
    
    
    6,322
    
    
    
    5,91890,401
    
    
    
    58,083Less LIFO adjustment
    
    
    (2,997
    )
    
    
    (2,555
    )$
    87,404
    
    
    $
    55,528
  ®
 Cash purchase price
    
    $
    22,111Assets acquired:Property, plant and equipment
    
    
    2,010Inventory
    
    
    2,666Favorable lease agreements
    
    
    877Tradename
    
    
    10,100Goodwill
    
    
    6,351Other assets
    
    
    312Total assets acquired:
    
    
    22,316Liabilities acquired:Gift card liability
    
    
    (205
    )Total allocation
    
    $
    22,111
 9




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September 30, 2006Average
    
    
    
    
    
    
    
    
    
    
    
    
    
    December 31, 2005Useful Life
    
    Gross
    
    
    
    
    
    
    
    
    
    
    Gross(in
    
    Carrying
    
    
    Accumulated
    
    
    Net Book
    
    
    Carrying
    
    
    Accumulated
    
    
    Net Bookyears)
    
    Amount
    
    
    Amortization
    
    
    Value
    
    
    Amount
    
    
    Amortization
    
    
    Value(in thousands)Indefinite life:Trade names
    
    N/A
    
    $
    12,620
    
    
    $
    
    
    
    $
    12,620
    
    
    $
    2,520
    
    
    $
    
    
    
    $
    2,520Finite life:Deferred
financing costs
    
    5
    
    
    1,265
    
    
    
    (558
    )
    
    
    707
    
    
    
    987
    
    
    
    (393
    )
    
    
    594Customer lists
    
    4
    
    
    3,880
    
    
    
    (2,009
    )
    
    
    1,871
    
    
    
    3,880
    
    
    
    (1,283
    )
    
    
    2,597Non-competes
    
    3  4
    
    
    1,123
    
    
    
    (582
    )
    
    
    541
    
    
    
    1,123
    
    
    
    (361
    )
    
    
    762Favorable
lease agreements
    
    4
    
    
    877
    
    
    
    (77
    )
    
    
    800Trademarks
    
    15
    
    
    231
    
    
    
    (189
    )
    
    
    42
    
    
    
    231
    
    
    
    (178
    )
    
    
    53Formulas
    
    3
    
    
    431
    
    
    
    (215
    )
    
    
    216
    
    
    
    431
    
    
    
    (108
    )
    
    
    3237,807
    
    
    
    (3,630
    )
    
    
    4,177
    
    
    
    6,652
    
    
    
    (2,323
    )
    
    
    4,329Total intangible
assets
    
    
    
    $
    20,427
    
    
    $
    (3,630
    )
    
    $
    16,797
    
    
    $
    9,172
    
    
    $
    (2,323
    )
    
    $
    6,849
     10




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2006
    
    $
    5762007
    
    
    1,9832008
    
    
    1,0622009
    
    
    4492010
    
    
    104Thereafter
    
    
    3Total
    
    $
    4,177
   
    
    A required consolidated total debt to consolidated EBITDA ratio of no
more than 3.00 to 1.00. The original Credit Facility required a
consolidated total debt to consolidated EBITDA ratio of no more than
2.25 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 2.00 to 1.00. The
original Credit Facility required a fixed charge coverage ratio of no
less than 2.25 to 1.00.
    
    Amounts outstanding under the Amended Credit Facility bear interest at
a rate equal to, at the Companys option, Citizens Bank prime rate or
a Eurodollar rate that ranges from 0.50% to 1.125% above LIBOR. Under
the original Credit Facility, the Eurodollar rate ranged from 0.50% to
0.85% above LIBOR.
    
    The Company is required to pay the lenders a quarterly commitment fee
on the unused revolving loan commitment amount which ranges from
0.125% to 0.25%. Under the original Credit Facility, the commitment
fee ranged from 0.125% to 0.20%.
    
 
   11




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##### Table of Contents



Accrued
    
    
    
    
    
    
    Accrued
    
    
    
    
    
    
    Accrued
    
    
    
    
    
    
    Accruedas of
    
    
    
    
    
    
    as of
    
    
    
    
    
    
    as of
    
    
    
    
    
    
    as ofDecember
    
    
    Costs
    
    
    April
    
    
    Costs
    
    
    July
    
    
    Costs
    
    
    September31, 2005
    
    
    Paid
    
    
    1, 2006
    
    
    Paid
    
    
    1, 2006
    
    
    Paid
    
    
    30, 2006(in thousands)Occupancy
    
    $
    1,150
    
    
    $
    809
    
    
    $
    341
    
    
    $
    64
    
    
    $
    277
    
    
    $
    119
    
    
    $
    158Other expenses
    
    
    84
    
    
    
    26
    
    
    
    58
    
    
    
    30
    
    
    
    28
    
    
    
    4
    
    
    
    24Employee related
    
    
    473
    
    
    
    133
    
    
    
    340
    
    
    
    125
    
    
    
    215
    
    
    
    
    
    
    
    215Total
    
    $
    1,707
    
    
    $
    968
    
    
    $
    739
    
    
    $
    219
    
    
    $
    520
    
    
    $
    123
    
    
    $
    397
      For the Thirteen Weeks Ended
    
    
    For the Thirty-nine Weeks EndedSeptember 30,
    
    
    October 1,
    
    
    September 30,
    
    
    October 1,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)Basic
    
    
    39,784
    
    
    
    43,787
    
    
    
    40,405
    
    
    
    45,237Add:Shares issuable
pursuant to stock
awards
    
    
    301
    
    
    
    436
    
    
    
    332
    
    
    
    472Diluted
    
    
    40,085
    
    
    
    44,223
    
    
    
    40,737
    
    
    
    45,709
 12




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13




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(in thousands)Balance perUnallocated/
    
    
    ConsolidatedCorporate/
    
    
    Statements ofThirteen Weeks Ended September 30, 2006
    
    Retail
    
    
    Wholesale
    
    
    Other
    
    
    IncomeSales
    
    $
    72,127
    
    
    $
    87,477
    
    
    $
    
    
    
    $
    159,604Gross Profit
    
    
    47,782
    
    
    
    38,841
    
    
    
    
    
    
    
    86,623Selling Expenses
    
    
    34,846
    
    
    
    5,824
    
    
    
    
    
    
    
    40,670Operating Margin
    
    
    12,936
    
    
    
    33,017
    
    
    
    (17,015
    )
    
    
    28,938Other expense
    
    
    
    
    
    
    
    
    
    
    (4,510
    )
    
    
    (4,510
    )Income before
provision for
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,428
 Unallocated/
    
    
    Balance perCorporate/
    
    
    ConsolidatedThirteen Weeks Ended October 1, 2005
    
    Retail
    
    
    Wholesale
    
    
    Other
    
    
    Statements of IncomeSales
    
    $
    57,878
    
    
    $
    78,622
    
    
    $
    
    
    
    $
    136,500Gross Profit
    
    
    39,313
    
    
    
    36,819
    
    
    
    
    
    
    
    76,132Selling Expenses
    
    
    30,268
    
    
    
    4,499
    
    
    
    
    
    
    
    34,767Operating Margin
    
    
    9,045
    
    
    
    32,320
    
    
    
    (14,689
    )
    
    
    26,676Other expense
    
    
    
    
    
    
    
    
    
    
    (1,445
    )
    
    
    (1,445
    )Income before
provision for
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,231
 Unallocated/
    
    
    Balance perCorporate/
    
    
    ConsolidatedThirty-nine Weeks Ended September 30, 2006
    
    Retail
    
    
    Wholesale
    
    
    Other
    
    
    Statements of IncomeSales
    
    $
    192,832
    
    
    $
    216,936
    
    
    $
    
    
    
    $
    409,768Gross Profit
    
    
    125,419
    
    
    
    96,317
    
    
    
    
    
    
    
    221,736Selling Expenses
    
    
    98,056
    
    
    
    16,463
    
    
    
    
    
    
    
    114,519Operating Margin
    
    
    27,363
    
    
    
    79,854
    
    
    
    (47,534
    )
    
    
    59,683Other expense
    
    
    
    
    
    
    
    
    
    
    (10,732
    )
    
    
    (10,732
    )Income before
provision for
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48,951
 Unallocated/
    
    
    Balance perCorporate/
    
    
    ConsolidatedThirty-nine Weeks Ended October 1, 2005
    
    Retail
    
    
    Wholesale
    
    
    Other
    
    
    Statements of IncomeSales
    
    $
    159,586
    
    
    $
    204,717
    
    
    $
    
    
    
    $
    364,303Gross Profit
    
    
    104,946
    
    
    
    97,872
    
    
    
    
    
    
    
    202,818Selling Expenses
    
    
    86,499
    
    
    
    12,883
    
    
    
    
    
    
    
    99,382Operating Margin
    
    
    18,447
    
    
    
    84,989
    
    
    
    (41,964
    )
    
    
    61,472Other expense
    
    
    
    
    
    
    
    
    
    
    (4,592
    )
    
    
    (4,592
    )Income before
provision for
income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56,880
 International Operations
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
    
    All options outstanding immediately prior to the effective date of the Merger,
whether or not then vested or exercisable, shall be deemed vested and
shall be canceled as of such effective date, with
each holder of an option receiving for each share of common stock subject to the option, an
amount equal to the Merger Consideration less the per share exercise price of such option;
    
    All shares of restricted stock outstanding immediately prior to the effective date of
the Merger shall vest and become free of restrictions as of such effective date and each
such share of restricted stock shall be converted into a right to receive the
Merger Consideration; and
    
    Immediately prior to the effective date of the Merger, the Company shall issue to each
holder of a performance share award the following number of shares of common stock: (i)
with respect to the performance share award covering fiscal years 2004  2006, a number of
shares equal to 60% of the target number of each recipients
performance share award, (ii) with respect to
the performance share award covering fiscal years 2005  2007, a number of shares equal to
66.67% of the target number of each recipients performance
share award, and (iii) with respect to the
performance share award covering fiscal years 2006  2008, a number of shares equal to
33.33% of the target number of each recipients performance
share award.
  15




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 CRITICAL ACCOUNTING POLICIES AND ESTIMATES
  Sales/receivables
  Other income statement accounts
    Inventory
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Taxes
   Value of long-lived assets, including intangibles
   Stock-based compensation
    17




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Self-insurance
  PERFORMANCE MEASURES
  FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
  Seasonality.
 New Store Openings.
 New Wholesale Accounts.
 RESULTS OF OPERATIONS
 Overview
 ® ® ® ® ® ®
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®
  EXECUTIVE SUMMARY
 
    
    For the thirteen weeks ended September 30, 2006, we reported net earnings of $14.9
million and diluted earnings per share of $0.37 compared to net earnings of $15.4 million
and diluted earnings per share of $0.35 for the thirteen weeks ended October 1, 2005. Net
sales increased 16.9% to $159.6 million for the thirteen weeks ended September 30, 2006
from $136.5 million for the thirteen weeks ended October 1, 2005.
    
    For the thirty-nine weeks ended September 30, 2006, we reported net earnings of $32.2
million and diluted earnings per share of $0.79 compared to net earnings of $34.7 million
and diluted earnings per share of $0.76 for the thirty-nine weeks ended October 1, 2005.
Net sales increased 12.5% to $409.8 million for the thirty-nine weeks ended September 30,
2006 from $364.3 million for the thirty-nine weeks ended October 1, 2005.
    
    We opened nine new Yankee Candle retail stores, acquired 14 Illuminations stores and
opened one new Illuminations store during the thirteen weeks ended September 30, 2006. We
opened 18 new Yankee Candle retail stores, acquired 14 Illuminations stores, opened one new
Illuminations store and closed 14 underperforming Yankee Candle stores during the
thirty-nine weeks ended September 30, 2006, 12 of which were closed pursuant to the
restructuring plan announced in fiscal 2005, bringing our total retail store count to 409.
We added 1,298 net new wholesale doors during the thirty-nine weeks ended September 30,
2006, bringing our total wholesale count to 19,882 including our European operations.
    
    We ended the third quarter with $281.0 million of outstanding borrowings under our
Credit Facilities as compared to $200.0 million at October 1, 2005. The increase was
primarily due to using the Credit Facilities to fund share repurchases, the Illuminations
acquisition, capital expenditures and our seasonal borrowing requirements. Additional
borrowing availability totaled $65.5 million at September 30, 2006.
 Thirteen and Thirty-nine weeks ended September 30, 2006 versus October 1, 2005
 SALES
  Retail Sales
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Wholesale Sales
   GROSS PROFIT
   Retail Gross Profit
  20




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Wholesale Gross Profit
   SELLING EXPENSES
  Retail Selling Expenses
  21




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Wholesale Selling Expenses
   SEGMENT PROFITABILITY
  Retail Operations
  22




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Wholesale Operations
      GENERAL AND ADMINISTRATIVE EXPENSES
    23




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NET OTHER EXPENSE
  PROVISION FOR INCOME TAXES
     LIQUIDITY AND CAPITAL RESOURCES
    
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
      
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
     25




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Item 4. Controls and Procedures
   
 PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
   If we fail to grow our business as planned, our future operating results may suffer. As we grow, it
will be difficult to maintain our historical growth rates.
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We may be unable to continue to open new stores successfully.
  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.
  A material decline in consumers discretionary income could cause our sales and income to decline
  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.
  If we lose our senior executive officers, or are unable to attract and retain the talent required
for our business, our business could be disrupted and our financial performance could suffer.
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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.
  Seasonal, quarterly and other fluctuations in our business, and general industry and market
conditions, could affect the market for our common stock.
  Sustained interruptions in the supply of products from overseas may affect our operating results.
  Provisions in our corporate documents and Massachusetts law could delay or prevent a change in
control of Yankee Candle.
  
    
    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.
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We are subject to a class action lawsuit in California.
  Further increases in oil prices will negatively impact our cost of goods sold and margins. Any
shortages in refined oil supplies could impact our wax supply. Further increases in wax prices
above the rate of inflation may also negatively impact our cost of goods sold and margins.
    Failure to complete the proposed Merger could negatively affect us.
  
    
    the current market price of our common stock may reflect a market
assumption that the Merger will occur, and a failure to complete the
Merger could result in a decline in the market price of our common
stock,
 
    
    certain costs relating to the Merger, such as legal, accounting and
certain financial advisory fees, are payable by us whether or not the Merger
is completed,
 
    
    under certain circumstances specified in the Merger Agreement, if the
Merger is not completed we may be required to pay the buyer a
termination fee of up to approximately $56,548,000,
 
    
    there may be substantial disruption to our business and a distraction
of our management and employees from day-to-day operations, because
matters related to the Merger may require substantial commitments of
their time and resources,
 
    
    uncertainty about the effect of the Merger may adversely affect our
relationships with our employees, customers, suppliers and other
persons with whom we have business relationships, and
 
    
    a putative shareholder class action lawsuit was filed against the
Company, its board of directors and MDP upon the announcement of
the Merger, which seeks, among other things, an injunction and
monetary damages, and it is possible that there could be additional
similar lawsuits filed relating to the Merger.
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Other factors may also cause our actual results to differ materially from our estimates and
projections.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  ApproximateDollar Value ofTotal Number of Shares
    
    
    Shares that MayPurchased as Part of
    
    
    Yet be PurchasedTotal Number of
    
    
    Average Price
    
    
    Publicly Announced
    
    
    Under the Plans orPeriod
    
    Shares Purchased (1)
    
    
    Paid per Share
    
    
    Plans or Programs (2)
    
    
    Programs1/1/06-4/1/06
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    64,989,5354/2/06-5/6/06
    
    
    333,200
    
    
    
    29.91
    
    
    
    333,200
    
    
    $
    55,023,5235/7/06-6/3/06
    
    
    845,700
    
    
    
    29.57
    
    
    
    845,700
    
    
    $
    30,016,1746/4/06-7/1/06
    
    
    257,800
    
    
    
    27.15
    
    
    
    257,800
    
    
    $
    23,016,9047/2/06-9/30/06
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    1,436,700
    
    
    $
    29.21
    
    
    
    1,436,700
    
    
    $
    23,016,904
 
 (1)
    
    All repurchases by us of our common stock during the thirty-nine weeks ended
September 30, 2006 were done pursuant to the repurchase programs that we publicly
announced on July 27, 2005.(2)
    
    Our Board of Directors approved the repurchase of up to $150 million of our
common stock pursuant to the stock repurchase program announced on July 27, 2005. There
is currently no expiration date for this stock repurchase program. Unless terminated
earlier by resolution of our Board of Directors, this stock repurchase program will
expire when we have reached the $150 million threshold. 
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 Item 5. Other Information
  
 Item 6. Exhibits
 10.1
    
    Form of Executive Severance Agreement*10.2
    
    Special Retention Bonus Plan dated as of September 14, 2006*10.3
    
    Amended and Restated Executive Deferred Compensation Plan*31.1
    
    Certification of Craig W. Rydin Pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934, dated November 2, 2006.31.2
    
    Certification of Bruce H. Besanko Pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934, dated November 2, 2006.32.1
    
    Certification of Craig W. Rydin Pursuant to Rule 13a-14(b) under the Securities
Exchange Act of 1934, dated November 2, 2006.32.2
    
    Certification of Bruce H. Besanko Pursuant to Rule 13a-14(b) under the Securities
Exchange Act of 1934, dated November 2, 2006.
 
 *
    
    Incorporated by reference from the Companys Current Report on Form 8-k filed on September
20, 2006. 31




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THE YANKEE CANDLE COMPANY, INC.Date: November 2, 2006
    
    /s/ Bruce H. Besanko

By: Bruce H. BesankoSenior Vice President, Financeand Chief Financial Officer(Principal Financial Officer)
 32