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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-Q Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended:       October 2, 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 47,725,222 shares of Common Stock, par value $0.01,
outstanding as of October 28, 2004.




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THE YANKEE CANDLE COMPANY, INC. FORM 10-Q  Quarter Ended October 2, 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 StatementsCondensed Consolidated Balance Sheets
as of October 2, 2004 and January 3, 2004
    
    
    3Condensed Consolidated Statements of Income
for the Thirteen and Thirty-Nine weeks
ended October 2, 2004 and September 27, 2003
    
    
    4Condensed Consolidated Statements of Cash Flows for the
Thirty-Nine weeks ended October 2, 2004 and September 27, 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
    
    
    18Item 4. Controls and Procedures
    
    
    19PART II. Other InformationItem 1. Legal Proceedings
    
    
    20Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    20Item 3. Defaults Upon Senior Securities
    
    
    20Item 4. Submission of Matters to a Vote of Security Holders
    
    
    20Item 5. Other Information
    
    
    20Item 6. Exhibits
    
    
    21Signatures
    
    
    21Ex-10.15 Management Incentive Plan (Corporate)Ex-10.16 Management Incentive Plan (Business Unit)Ex-31.1 Certification of CEOEx-31.2 Certification of CFOEx-32.1 Certification of CEO pursuant to Sec 906Ex-32.2 Certification of CFO pursuant to Sec 906
  2




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PART I. Financial Information 
 Item 1. Financial Statements THE YANKEE CANDLE COMPANY, INC. AND SUBSIDIARIES 
 
 October 2,
    
    January 3,2004
    
    2004(Unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    10,822
    
    
    $
    40,730Accounts receivable, net
    
    
    49,434
    
    
    
    24,251Inventory
    
    
    64,931
    
    
    
    42,186Prepaid expenses and other current assets
    
    
    10,124
    
    
    
    6,608Deferred tax assets
    
    
    3,128
    
    
    
    3,128TOTAL CURRENT ASSETS
    
    
    138,439
    
    
    
    116,903PROPERTY, PLANT AND EQUIPMENT-NET
    
    
    115,554
    
    
    
    114,774MARKETABLE SECURITIES
    
    
    1,558
    
    
    
    1,604DEFERRED FINANCING COSTS
    
    
    528
    
    
    
    588DEFERRED TAX ASSETS
    
    
    86,291
    
    
    
    100,346OTHER ASSETS
    
    
    10,049
    
    
    
    466TOTAL ASSETS
    
    $
    352,419
    
    
    $
    334,681LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    28,790
    
    
    $
    23,527Accrued payroll
    
    
    12,341
    
    
    
    13,348Accrued income taxes
    
    
    917
    
    
    
    22,025Other accrued liabilities
    
    
    13,995
    
    
    
    15,168Current portion of long-term debt
    
    
    10,000
    
    
    
    65,000TOTAL CURRENT LIABILITIES
    
    
    66,043
    
    
    
    139,068DEFERRED COMPENSATION OBLIGATION
    
    
    1,420
    
    
    
    1,525LONG TERM DEBT  Less current portion
    
    
    136,436
    
    
    
    DEFERRED RENT
    
    
    4,669
    
    
    
    3,815STOCKHOLDERS EQUITY
    
    
    143,851
    
    
    
    190,273TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    352,419
    
    
    $
    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 Thirty-Nine WeeksEnded
    
    EndedOctober 2,
    
    September 27,
    
    October 2,
    
    September 27,2004
    
    2003
    
    2004
    
    2003Sales
    
    $
    127,913
    
    
    $
    114,134
    
    
    $
    335,340
    
    
    $
    303,580Cost of sales
    
    
    54,906
    
    
    
    49,906
    
    
    
    146,172
    
    
    
    135,203Gross profit
    
    
    73,007
    
    
    
    64,228
    
    
    
    189,168
    
    
    
    168,377Selling expenses
    
    
    31,814
    
    
    
    28,653
    
    
    
    89,428
    
    
    
    80,192General and administrative expenses
    
    
    13,862
    
    
    
    12,146
    
    
    
    39,414
    
    
    
    36,272Income from operations
    
    
    27,331
    
    
    
    23,429
    
    
    
    60,326
    
    
    
    51,913Interest income
    
    
    
    
    
    
    (2
    )
    
    
    (7
    )
    
    
    (29
    )Interest expense
    
    
    1,093
    
    
    
    873
    
    
    
    3,062
    
    
    
    2,474Other expense (income)
    
    
    118
    
    
    
    (19
    )
    
    
    (109
    )
    
    
    144Income before provision for income taxes
    
    
    26,120
    
    
    
    22,577
    
    
    
    57,380
    
    
    
    49,324Provision for income taxes
    
    
    10,317
    
    
    
    8,918
    
    
    
    22,665
    
    
    
    19,483Net income
    
    $
    15,803
    
    
    $
    13,659
    
    
    $
    34,715
    
    
    $
    29,841Basic earnings per share
    
    $
    0.33
    
    
    $
    0.26
    
    
    $
    0.71
    
    
    $
    0.55Diluted earnings per share
    
    $
    0.33
    
    
    $
    0.26
    
    
    $
    0.70
    
    
    $
    0.55Weighted average shares:Basic
    
    
    47,959
    
    
    
    52,940
    
    
    
    49,179
    
    
    
    53,813Diluted
    
    
    48,316
    
    
    
    53,357
    
    
    
    49,560
    
    
    
    54,264
 See notes to Condensed Consolidated Financial Statements 4




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THE YANKEE CANDLE COMPANY, INC. AND SUBSIDIARIES 
 
 For the Thirty-Nine Weeks EndedOctober 2,
    
    September 27,2004
    
    2003CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:Net income
    
    $
    34,715
    
    
    $
    29,841Adjustments to reconcile net income to net cash provided by
(used in) operating activities:Depreciation and amortization
    
    
    16,001
    
    
    
    13,987Unrealized gain on marketable securities
    
    
    (33
    )
    
    
    (196
    )Stock-based compensation expense
    
    
    957
    
    
    
    492Deferred taxes
    
    
    14,054
    
    
    
    9,000Loss on disposal of fixed assets
    
    
    608
    
    
    
    136Changes in assets and liabilities:Accounts receivable, net
    
    
    (25,158
    )
    
    
    (14,951
    )Inventory
    
    
    (21,720
    )
    
    
    (20,537
    )Prepaid expenses and other assets
    
    
    (3,951
    )
    
    
    (2,375
    )Accounts payable
    
    
    5,261
    
    
    
    5,951Accrued expenses and other liabilities
    
    
    (22,542
    )
    
    
    (17,600
    )NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
    
    
    (1,808
    )
    
    
    3,748CASH FLOWS (USED IN) PROVIDED BY INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (15,975
    )
    
    
    (15,182
    )Investments in marketable securities
    
    
    (370
    )
    
    
    (259
    )Proceeds from sale of property and equipment
    
    
    7
    
    
    
    252Proceeds from sale of marketable securities
    
    
    450
    
    
    
    Business acquisition
    
    
    (11,500
    )
    
    
    NET CASH USED IN INVESTING ACTIVITIES
    
    
    (27,388
    )
    
    
    (15,189
    )CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:Net borrowings under bank credit agreements and other
    
    
    100,428
    
    
    
    73,367Repurchases of common stock
    
    
    (86,611
    )
    
    
    (73,743
    )Principal payments on long-term debt
    
    
    (19,000
    )
    
    
    (24,000
    )Net proceeds from issuance of common stock
    
    
    4,465
    
    
    
    992NET CASH USED IN FINANCING ACTIVITIES
    
    
    (718
    )
    
    
    (23,384
    )EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    6
    
    
    
    26NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (29,908
    )
    
    
    (34,799
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    40,730
    
    
    
    43,689CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    10,822
    
    
    $
    8,890SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid during the period for:Interest
    
    $
    1,576
    
    
    $
    1,252Income taxes
    
    $
    28,643
    
    
    $
    28,253Purchase of equipment by assumption of capital lease
    
    $
    
    
    
    $
    35
 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 periods 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 fiscal 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: October 2,
    
    January 3,2004
    
    2004(in thousands)Finished goods
    
    $
    56,285
    
    
    $
    37,537Work-in-process
    
    
    827
    
    
    
    975Raw materials and packaging
    
    
    9,377
    
    
    
    4,48766,489
    
    
    
    42,999Less LIFO adjustment
    
    
    (1,558
    )
    
    
    (813
    )$
    64,931
    
    
    $
    42,186
 3. INCOME TAXES The Companys effective tax rate for the thirteen and thirty-nine weeks ended
October 2, 2004 and September 27, 2003 was 39.5%. The Company has provided and
expects to continue to provide in fiscal 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. 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 Thirty-Nine Weeks EndedOctober 2,
    
    September 27,
    
    October 2,
    
    September 27,2004
    
    2003
    
    2004
    
    2003(in thousands)Basic
    
    
    47,959
    
    
    
    52,940
    
    
    
    49,179
    
    
    
    53,813Add:Shares issuable
pursuant to stock
option grants
    
    
    357
    
    
    
    417
    
    
    
    381
    
    
    
    451Diluted
    
    
    48,316
    
    
    
    53,357
    
    
    
    49,560
    
    
    
    54,264
 For the thirteen and thirty-nine weeks ended October 2, 2004, 56,000 and 38,000
potential common shares which could dilute basic earnings per share in the
future were excluded, respectively, since their inclusion would have been
anti-dilutive. There were no anti-dilutive securities for the thirteen weeks
ended September 27, 2003. For the thirty-nine weeks ended September 27, 2003,
497,000 potential common shares which could dilute basic earnings per share in
the future were excluded. 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 $0.4 million and $1.0 million for the thirteen and
thirty-nine weeks ended October 2, 2004, respectively. Stock-based
compensation expense for the thirteen and thirty-nine weeks ended September 27,
2003 was $0.4 million. 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 WeeksEnded
    
    For the Thirty-Nine WeeksEndedOctober 2,
    
    September 27,
    
    October 2,
    
    September 27,2004
    
    2003
    
    2004
    
    2003(in thousands, except for per share amounts)Net income, as reported
    
    $
    15,803
    
    
    $
    13,659
    
    
    $
    34,715
    
    
    $
    29,841Add: Employee stock compensation recorded
under Opinion No. 25
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    65Deduct: Total stock based employee
compensation expense determined under fair
value based method for awards granted
prior to 2003, net of related tax effects
    
    
    282
    
    
    
    364
    
    
    
    847
    
    
    
    1,092Pro forma net income
    
    $
    15,521
    
    
    $
    13,317
    
    
    $
    33,868
    
    
    $
    28,814Earnings per share:Basic-as reported
    
    $
    0.33
    
    
    $
    0.26
    
    
    $
    0.71
    
    
    $
    0.55Basic-pro forma
    
    $
    0.32
    
    
    $
    0.25
    
    
    $
    0.69
    
    
    $
    0.54Weighted average basic shares outstanding
    
    
    47,959
    
    
    
    52,940
    
    
    
    49,179
    
    
    
    53,813Diluted-as reported
    
    $
    0.33
    
    
    $
    0.26
    
    
    $
    0.70
    
    
    $
    0.55Diluted-pro forma
    
    $
    0.32
    
    
    $
    0.25
    
    
    $
    0.68
    
    
    $
    0.53Weighted average diluted shares outstanding
    
    
    48,316
    
    
    
    53,357
    
    
    
    49,560
    
    
    
    54,264
 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
thirteen and thirty-nine weeks ended October 2, 2004 and September 27, 2003,
respectively. 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
thirty-nine weeks ended October 2, 2004, the Company repurchased a total of
517,700 and 3,027,800 shares of common stock for an aggregate purchase price of
$15.0 million and $86.6 million, respectively. During the thirteen and
thirty-nine weeks ended September 27, 2003, under a separate authorization from
the Board of Directors, the Company repurchased a total of 2,727,800 and
3,153,900 shares of common stock for an aggregate purchase price of $63.9
million and $73.7 million, respectively. 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s 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)Balance perThirteen Weeks
    
    
    
    
    
    
    
    
    
    Unallocated/
    
    CondensedEnded
    
    
    
    
    
    
    
    
    
    Corporate/
    
    ConsolidatedOctober 2, 2004
    
    Retail
    
    Wholesale
    
    Other
    
    Statements of IncomeSales
    
    $
    54,597
    
    
    $
    73,316
    
    
    $
    
    
    
    $
    127,913Gross Profit
    
    
    37,501
    
    
    
    35,506
    
    
    
    
    
    
    
    73,007Income from operations
    
    
    10,042
    
    
    
    31,151
    
    
    
    (13,862
    )
    
    
    27,331Other expense
    
    
    
    
    
    
    
    
    
    
    (1,211
    )
    
    
    (1,211
    )Income before
provision for income
taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,120
 Balance perThirteen Weeks
    
    
    
    
    
    
    
    
    
    Unallocated/
    
    CondensedEnded
    
    
    
    
    
    
    
    
    
    Corporate/
    
    ConsolidatedSeptember 27, 2003
    
    Retail
    
    Wholesale
    
    Other
    
    Statements of IncomeSales
    
    $
    51,323
    
    
    $
    62,811
    
    
    $
    
    
    
    $
    114,134Gross Profit
    
    
    34,807
    
    
    
    29,421
    
    
    
    
    
    
    
    64,228Income from operations
    
    
    9,472
    
    
    
    26,103
    
    
    
    (12,146
    )
    
    
    23,429Other expense
    
    
    
    
    
    
    
    
    
    
    (852
    )
    
    
    (852
    )Income before
provision for income
taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,577
 Balance perThirty-Nine Weeks
    
    
    
    
    
    
    
    
    
    Unallocated/
    
    CondensedEnded
    
    
    
    
    
    
    
    
    
    Corporate/
    
    ConsolidatedOctober 2, 2004
    
    Retail
    
    Wholesale
    
    Other
    
    Statements of IncomeSales
    
    $
    148,615
    
    
    $
    186,725
    
    
    $
    
    
    
    $
    335,340Gross Profit
    
    
    100,066
    
    
    
    89,102
    
    
    
    
    
    
    
    189,168Income from operations
    
    
    21,560
    
    
    
    78,180
    
    
    
    (39,414
    )
    
    
    60,326Other expense
    
    
    
    
    
    
    
    
    
    
    (2,946
    )
    
    
    (2,946
    )Income before
provision for income
taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57,380
 Balance perThirty-Nine Weeks
    
    
    
    
    
    
    
    
    
    Unallocated/
    
    CondensedEnded
    
    
    
    
    
    
    
    
    
    Corporate/
    
    ConsolidatedSeptember 27, 2003
    
    Retail
    
    Wholesale
    
    Other
    
    Statements of IncomeSales
    
    $
    140,604
    
    
    $
    162,976
    
    
    $
    
    
    
    $
    303,580Gross Profit
    
    
    93,164
    
    
    
    75,213
    
    
    
    
    
    
    
    168,377Income from operations
    
    
    21,560
    
    
    
    66,625
    
    
    
    (36,272
    )
    
    
    51,913Other expense
    
    
    
    
    
    
    
    
    
    
    (2,589
    )
    
    
    (2,589
    )Income before
provision for income
taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49,324
 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 October 2, 2004: For the thirteen weeks ended
    
    For the thirteen weeks ended
    
    For the thirteen weeks endedApril 3, 2004
    
    July 3, 2004
    
    October 2, 2004(in thousands)Accrued as of
    
    
    
    
    
    Accrued as of
    
    
    
    
    
    Accrued as of
    
    
    
    
    
    Accrued as ofJanuary 3, 2004
    
    Costs paid
    
    April 3, 2004
    
    Costs paid
    
    July 3, 2004
    
    Costs paid
    
    October 2, 2004Occupancy
    
    $
    796
    
    
    $
    60
    
    
    $
    736
    
    
    $
    84
    
    
    $
    652
    
    
    $
    54
    
    
    $
    598
 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. 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 October 2, 2004 and for subsequent fiscal quarters
(at October 2, 2004 this ratio was 0.94 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 10




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than 2.25 to 1.00 for fiscal 2006 and thereafter (for the thirteen weeks
ended October 2, 2004 this ratio was 4.74 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 the Credit Facility) is not less than $75 million as of the end of the
second and third quarters of fiscal 2004 and $100 million plus 25% of fiscal
2004 net income for the year ended January 2, 2005. For fiscal 2005, the
Companys Consolidated Net Worth cannot be less than $100 million plus 25% of
2004 net income, plus 25% of net income for each fiscal quarter thereafter. At October 2, 2004, the Company had $0.4 million of outstanding letters of
credit and available borrowings of $53.2 million under the revolving credit
facility. 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. The following table provides an allocation of the purchase
price for the acquired assets of GBI: (in thousands)Cash purchase price
    
    $
    11,500Assets acquired:Property, plant and equipment
    
    
    250Non-compete agreements
    
    
    790Inventory
    
    
    1,000Customer relationships
    
    
    3,160Trade name
    
    
    1,960Goodwill
    
    
    4,340Total allocation
    
    $
    11,500
 The customer relationship
and non-compete agreements assets are being amortized
over their useful lives of four years. Amortization expense, related to the
customer relationships and non-compete agreements, for the thirteen and
thirty-nine weeks ended October 2, 2004 was $0.3 million. The
Company anticipates recording amortization expense of $0.3 million in the
fourth quarter of fiscal 2004, $1.0 million for each of the fiscal years 2005,
2006, 2007 and $0.4 million for fiscal 2008. 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 but will be subject to an annual impairment test. For segment
reporting purposes, the GBI Division is included in the Wholesale segment.
The GBI Divisions results of operations were immaterial to the Companys
operations during the thirteen and thirty-nine weeks ended October 2, 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 11




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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, 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 balance sheet. 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 fiscal 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 fiscal 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 12




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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 $0.4 million and $1.0 million for the thirteen and
thirty-nine weeks ended October 2, 2004. Stock-based compensation expense for
the thirteen and thirty-nine weeks ended September 27, 2003 was $0.4 million. 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. 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 Thirty-Nine weeks ended October 2, 2004
versus September 27, 2003 SALES Sales increased 12.1% to $127.9 million for the thirteen weeks ended October 2,
2004 from $114.1 million for the thirteen weeks ended September 27, 2003; and
increased 10.5% to $335.3 million for the thirty-nine weeks ended October 2,
2004 from $303.6 million for the thirty-nine weeks ended September 27, 2003. Wholesale sales, including European operations, increased 16.7% to $73.3
million for the thirteen weeks ended October 2, 2004 from $62.8 million for the
thirteen weeks ended September 27, 2003; and increased 14.6% to $186.7 million
for the thirty-nine weeks ended October 2, 2004 from $163.0 million for the
thirty-nine weeks ended September 27, 2003. The growth for the thirteen weeks
ended October 2, 2004 was achieved primarily from sales to wholesale locations
opened during the last 12 months and to a lesser extent by increasing sales to
wholesale locations in operation prior to September 27, 2003. The growth for
the thirty-nine weeks ended October 2, 2004 was achieved primarily by
increasing sales to existing customers and to a lesser extent from sales to
wholesale locations opened during the last 12 months. Retail sales increased 6.4% to $54.6 million for the thirteen weeks ended
October 2, 2004 from $51.3 million for the thirteen weeks ended September 27,
2003; and increased 5.7% to $148.6 million for the thirty-nine weeks ended
October 2, 2004 from $140.6 million for the thirty-nine weeks ended September
27, 2003. The increase in retail sales for the thirteen weeks ended October 2,
2004 compared to the prior year period was due primarily to the addition of new
stores opened in 2004 and to a lesser extent increased sales in the 49 stores
opened in 2003. The increase in retail sales for the thirty-nine weeks ended
October 2, 2004 compared to the prior year period was due primarily to
increased 13




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sales in 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 in retail sales for the thirteen and thirty-nine weeks
ended October 2, 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 thirty-nine weeks ended October 2, 2004 decreased 6.0% and
5.0% compared to the thirteen and thirty-nine weeks ended September 27, 2003,
respectively. Retail comparable store sales for the thirteen and thirty-nine
weeks ended October 2, 2004 decreased 6.0% and 4.0% compared to the thirteen
and thirty-nine weeks ended September 27, 2003, respectively. The primary
factor contributing to the decrease in comparable store sales was a decline in
our retail store traffic. 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 275 stores included
in the comparable store base as of October 2, 2004, and 42 of these stores were
included for less than a full year. There were 334 retail stores open as of
October 2, 2004 compared to 282 retail stores open as of September 27, 2003 and
286 retail stores open as of January 3, 2004. GROSS PROFIT Gross profit increased 13.7% to $73.0 million for the thirteen weeks ended
October 2, 2004 from $64.2 million for the thirteen weeks ended September 27,
2003; and increased 12.3% to $189.2 million for the thirty-nine weeks ended
October 2, 2004 from $168.4 million for the thirty-nine weeks ended September
27, 2003. As a percentage of sales, gross profit increased to 57.1% for the
thirteen weeks ended October 2, 2004 from 56.3% for the thirteen weeks ended
September 27, 2003; and increased to 56.4% for the thirty-nine weeks ended
October 2, 2004 from 55.5% for the thirty-nine weeks September 27, 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 thirty-nine
weeks ended October 2, 2004 compared to the prior year periods was primarily
the result of improved productivity in supply chain operations and the benefit
of cost reduction initiatives. SELLING EXPENSES Selling expenses increased 11.0% to $31.8 million for the thirteen weeks ended
October 2, 2004 from $28.7 million for the thirteen weeks ended September 27,
2003; and increased 11.5% to $89.4 million for the thirty-nine weeks ended
October 2, 2004 from $80.2 million for the thirty-nine weeks ended September
27, 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 decreased to 24.9% for the thirteen weeks ended October
2, 2004 from 25.1% for the thirteen weeks ended September 27, 2003; and
increased to 26.7% for the thirty-nine weeks ended October 2, 2004 from 26.4%
for the thirty-nine weeks ended September 27, 2003. The increase in selling
expenses in dollars for the thirteen and thirty-nine weeks ended October 2,
2004 was primarily related to the continued growth in the number of retail
stores, from 282 as of September 27, 2003 to 334 as of October 2, 2004. The
decrease in selling expenses as a percentage of sales for the thirteen weeks
ended October 2, 2004 was primarily related to the Companys leveraging of
these expenses over a larger sales base. The increase in selling expenses as a
percentage of sales for the thirty-nine weeks ended October 2, 2004 was
primarily related to the decline in 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 $31.2
million, or 42.5% of wholesale sales, for the thirteen weeks ended October 2,
2004 compared to $26.1 million, or 41.6% of wholesale sales, for the thirteen
weeks ended September 27, 2003. Segment profitability for our wholesale
operations, including Europe, was $78.2 million, or 41.9% of wholesale sales,
for the thirty-nine weeks ended October 2, 2004 compared to $66.6 million, or
40.9% of wholesale sales, for the thirty-nine weeks ended September 27, 2003.
The increase in wholesale segment profitability for the thirteen and
thirty-nine weeks ended October 2, 2004 was primarily attributable to increased
wholesale sales and increased wholesale gross profit dollars and rate. Segment
profitability for the Companys retail operations was $10.0 million or 18.4% of
retail sales for the thirteen weeks ended October 2, 2004 compared to $9.5
million or 18.5% of retail sales for the thirteen weeks ended September 27,
2003. Segment profitability for the Companys retail operations was $21.6
million or 14.5% of retail sales for the thirty-nine weeks ended October 2,
2004 compared to $21.6 million or 15.3% of retail sales for the thirty-nine
weeks ended September 27, 2003. The increase in retail segment profitability
in dollars for the thirteen weeks ended October 2, 2004 was primarily
attributable to an increase in sales and the leveraging of selling expenses
over a larger sales base. The decrease in retail segment profitability as a
percentage of sales for the thirteen 14




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and thirty-nine weeks ended October 2, 2004 was primarily due to decreased
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 14.1% to $13.9
million for the thirteen weeks ended October 2, 2004 from $12.1 million for the
thirteen weeks ended September 27, 2003; and increased 8.7% to $39.4 million
for the thirty-nine weeks ended October 2, 2004 from $36.3 million for the
thirty-nine weeks ended September 27, 2003. As a percentage of sales, general
and administrative expenses increased to 10.8% for the thirteen weeks ended
October 2, 2004 from 10.6% for the thirteen weeks ended September 27, 2003; and
decreased to 11.8% for the thirty-nine weeks ended October 2, 2004 from 12.0%
for the thirty-nine weeks ended September 27, 2003. The increase in general
and administrative expense in dollars and as a percentage of sales for the
thirteen weeks ended October 2, 2004 compared to the thirteen weeks ended
September 27, 2003 was primarily attributable to labor costs. The increase in
labor costs was due primarily to new-hires made subsequent to the third quarter
of 2003. The increase in general and administrative expense in dollars for the
thirty-nine weeks ended October 2, 2004 compared to the thirty-nine weeks ended
September 27, 2003 was also primarily attributable to labor costs associated
with new hires made subsequent to the third quarter of 2003. The increase in
general and administrative expense for the thirty-nine weeks ended October 2,
2004 compared to the thirty-nine weeks ended September 27, 2003 was also due to
an increase in stock option expense. The decrease in general and
administrative expense as a percentage of sales for the thirty-nine weeks ended
October 2, 2004 compared to the thirty-nine weeks ended September 27, 2003 was
primarily due to the Companys leveraging of these expenses over a larger sales
base. NET OTHER EXPENSE Net other expense was $1.2 million for the thirteen weeks ended October 2,
2004, compared to $0.9 million for the thirteen weeks ended September 27, 2003;
and was $2.9 million for the thirty-nine weeks ended October 2, 2004 compared
to $2.6 million for the thirty-nine weeks ended September 27, 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 October 2, 2004 compared to
$0.9 million for the thirteen weeks ended September 27, 2003; and was $3.1
million for the thirty-nine weeks ended October 2, 2004 compared to $2.5
million for the thirty-nine weeks ended September 27, 2003. The average daily
debt outstanding increased in the thirteen and thirty-nine weeks ended October
2, 2004 compared to the thirteen and thirty-nine weeks ended September 27, 2003
primarily due to repurchases of our common stock. The impact of the higher
average debt outstanding was offset in part by a reduction in borrowing rates
under our credit facility. PROVISION FOR INCOME TAXES The effective tax rate for the thirteen and thirty-nine weeks ended October 2,
2004 and September 27, 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
presented 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 October 2, 2004 decreased by $29.9 million
compared to January 3, 2004. Cash used in operating activities was $1.8
million, which includes total payments of $28.6 million of corporate income
taxes for fiscal 2003 and fiscal 2004. Capital expenditures for the
thirty-nine weeks ended October 2, 2004 were $16.0 million, primarily related
to the capital requirements to open 49 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., a 15




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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 used in financing activities
was $0.7 million for the thirty-nine weeks ended October 2, 2004, which
includes net borrowings of $81.4 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 thirteen weeks ended October 2, 2004 we
repurchased a total of 517,700 shares of common stock for an aggregate purchase
price of $15.0 million. On a cumulative basis during fiscal 2004 we have
repurchased a total of 3,027,800 shares of our common stock for an aggregate
purchase price of $86.6 million. We opened 49 new stores and
closed one underperforming store during the
thirty-nine weeks ended October 2, 2004. The new store openings included two
Old Farmers Almanac test concept stores; and we expect to open approximately
six additional stores during the last quarter 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. See Note 9 for a description of its terms. As of October 2, 2004 we were in compliance with all covenants under our new
credit facility. We had $0.4 million of outstanding letters of credit and
available borrowings of $53.2 million under the revolving credit facility. 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. CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS The only off-balance sheet contractual obligations and commercial commitments
as of October 2, 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 16




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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 can continue to grow at a rate comparable to our
short or long-term historic growth rates 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 and the outbreak of the war in Iraq or which may
follow further terrorist attacks. Any material decline in the amount of
discretionary spending could have a material adverse effect on our sales and
income. Because we are not a diversified company and are 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 fiscal 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 17




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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. 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 October 2, 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 October 2, 2004, there was $146.4
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 October 2, 2004
borrowing levels, a 1.00% increase or decrease in current market interest rates
would have the effect of causing an approximately $1.4 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 October 2, 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. 18




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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, which suggests that its market price might fluctuate
proportionately with the movement of oil prices. However, its market price has
not historically fluctuated with the movement of oil prices, but has instead
generally moved with inflation over the past five years. We estimate that a
10% increase in the price we pay for wax would reduce the gross margin on our
manufactured candle products by approximately 0.20% if we did not increase our
retail selling prices. 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 October 2, 2004. Based on
this evaluation, our chief executive officer and chief financial officer
concluded that, as of October 2, 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 October 2, 2004 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting. 19




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##### Table of Contents



PART II. OTHER INFORMATION 
 Item 1.
    
    Legal ProceedingsNot Applicable
 
 Item 2.
    
    Unregistered Sales of Equity Securities and Use of ProceedsThe following table provides information about purchases by us of
our common stock during the thirty-nine weeks ended October 2,
2004.
 Remaining FundsTotal Number of Shares
    
    Available toPurchased as Part of
    
    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
    
    
    $
    77,153,8014/4/04-5/8/04
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    77,153,8015/9/04-6/5/04
    
    
    866,500
    
    
    
    27.45
    
    
    
    866,500
    
    
    $
    53,368,3766/6/04-7/3/04
    
    
    837,500
    
    
    
    29.84
    
    
    
    837,500
    
    
    $
    28,377,3767/4/04-8/7/04
    
    
    338,000
    
    
    
    29.55
    
    
    
    338,000
    
    
    $
    18,389,4768/8/04-9/4/04
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    18,389,4769/5/04-10/2/04
    
    
    179,700
    
    
    
    27.82
    
    
    
    179,700
    
    
    $
    13,390,222Total
    
    
    3,027,800
    
    
    $
    28.60
    
    
    
    3,027,800
 (1) All repurchases by us of our common stock during the thirty-nine weeks
ended October 2, 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 SecuritiesNot Applicable
 
 Item 4.
    
    Submission of Matters to a Vote of Security HoldersNot Applicable
 
 Item 5.
    
    Other InformationNot Applicable
 20




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Item 6.
    
    Exhibits(a) Exhibits
 10.15
    
    Management Incentive Plan for the
2004 Fiscal Year For Executive Committee Members  Corporate.10.16
    
    Management Incentive Plan for the
2004 Fiscal Year For Executive Committee Members  Business Unit.31.1
    
    Certification of Craig W. Rydin Pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, dated October 29, 2004.31.2
    
    Certification of Robert R. Spellman Pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, dated October 29, 2004.32.1
    
    Certification of Craig W. Rydin Pursuant to Rule 13a-14(b) under the
Securities Exchange Act of 1934, dated October 29, 2004.32.2
    
    Certification of Robert R. Spellman Pursuant to Rule 13a-14(b) under the
Securities Exchange Act of 1934, dated October 29, 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: October 29, 2004
    
    By: Robert R. SpellmanSenior Vice President, Financeand Chief Financial Officer(Principal Financial Officer)
 21