Yankee Holding Corp. - FORM 10-Q

Attached files

Attached files

Yankee Holding Corp. Reports

Also read

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

file	filename
EX-32.1 - SECTION 906 CEO CERTIFICATION - Yankee Holding Corp.	dex321.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - Yankee Holding Corp.	dex312.htm
EX-32.2 - SECTION 906 CFO CERTIFICATION - Yankee Holding Corp.	dex322.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - Yankee Holding Corp.	dex311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

Quarterly report pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

For the quarterly period ended: July 3, 2010

Commission File Number: 333-141699-05

YANKEE HOLDING CORP.

(Exact name of registrant as specified in its charter)

DELAWARE

20-8304743

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

16 YANKEE CANDLE WAY

SOUTH DEERFIELD, MASSACHUSETTS 01373

(Address of principal executive 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 ¨ No x We are a voluntary filer of reports required of companies with public securities under Section 13 or 15(d) of the Securities Exchange Act of 1934, and we will have filed all reports which would have been required of us during the past 12 months had we been subject to such provisions.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of August 6, 2010, there were 498,299 shares of Yankee Holding Corp. common stock, $.01 par value, outstanding, all of which are owned by YCC Holdings LLC.

YANKEE HOLDING CORP.

FORM 10-Q – Quarter Ended July 3, 2010

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 Yankee Holding Corp. 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 our actual results to differ materially from those indicated by such forward-looking statements. These factors include, without limitation, those set forth below in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Future Operating Results” and those set forth under Item 1A-Risk Factors. 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		Page
PART I. Financial Information
Item 1.	Financial Statements - Unaudited
	Condensed Consolidated Balance Sheets as of July 3, 2010 and January 2, 2010	3
	Condensed Consolidated Statements of Operations for the Thirteen Weeks Ended July 3, 2010 and July 4, 2009	4
	Condensed Consolidated Statements of Operations for the Twenty-Six Weeks Ended July 3, 2010 and July 4, 2009	5
	Condensed Consolidated Statements of Cash Flows for the Twenty-Six Weeks Ended July 3, 2010 and July 4, 2009	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	31
PART II. Other Information
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults Upon Senior Securities	35
Item 5.	Other Information	36
Item 6.	Exhibits	36
Signatures		37

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements.

YANKEE HOLDING CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(Unaudited)


	July 3, 2010		January 2, 2010
ASSETS
CURRENT ASSETS:
Cash	$	1,452	$	9,095
Accounts receivable, net		30,129		43,928
Inventory		83,650		59,530
Prepaid expenses and other current assets		23,419		12,094
Deferred tax assets		12,286		11,208


TOTAL CURRENT ASSETS		150,936		135,855

PROPERTY AND EQUIPMENT, NET		122,992		124,768
MARKETABLE SECURITIES		1,231		1,168
GOODWILL		643,570		643,570
INTANGIBLE ASSETS		287,902		294,201
DEFERRED FINANCING COSTS		16,844		18,731
OTHER ASSETS		665		787


TOTAL ASSETS	$	1,224,140	$	1,219,080


LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	20,270	$	21,648
Accrued payroll		7,631		15,613
Accrued interest		17,742		17,844
Accrued purchases of property and equipment		2,752		1,901
Current portion of capital leases		520		—
Other accrued liabilities		41,833		43,705


TOTAL CURRENT LIABILITIES		90,748		100,711

DEFERRED COMPENSATION OBLIGATION		1,325		1,369
DEFERRED TAX LIABILITIES		92,825		91,706
LONG-TERM DEBT		1,017,125		989,125
DEFERRED RENT		10,900		10,643
CAPITAL LEASES, NET OF CURRENT PORTION		1,348		—
OTHER LONG-TERM LIABILITIES		2,312		2,283
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY		7,557		23,243


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,224,140	$	1,219,080

See notes to condensed consolidated financial statements

YANKEE HOLDING CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)

(Unaudited)


	Thirteen Weeks Ended July 3, 2010			Thirteen Weeks Ended July 4, 2009
Sales	$	125,368		$	118,853
Cost of sales		55,687			51,532


Gross profit		69,681			67,321
Selling expenses		48,258			45,384
General and administrative expenses		13,952			15,339
Restructuring charges		29			227


Operating income		7,442			6,371
Interest income		—			(1	)
Interest expense		18,462			21,824
Other expense		4,751			39


Loss from continuing operations before benefit from income taxes		(15,771	)		(15,491	)
Benefit from income taxes		(5,621	)		(7,050	)


Loss from continuing operations		(10,150	)		(8,441	)
Loss from discontinued operations, net of income taxes		(38	)		(4,081	)


Net loss	$	(10,188	)	$	(12,522	)

See notes to condensed consolidated financial statements

YANKEE HOLDING CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)

(Unaudited)


	Twenty-Six Weeks Ended July 3, 2010			Twenty-Six Weeks Ended July 4, 2009
Sales	$	266,342		$	238,071
Cost of sales		117,998			103,299


Gross profit		148,344			134,772
Selling expenses		97,826			90,623
General and administrative expenses		30,630			30,702
Restructuring charges		829			975


Operating income		19,059			12,472
Interest income		—			(11	)
Interest expense		38,270			43,539
Other expense		9,483			1,475


Loss from continuing operations before benefit from income taxes		(28,694	)		(32,531	)
Benefit from income taxes		(10,298	)		(14,144	)


Loss from continuing operations		(18,396	)		(18,387	)
Loss from discontinued operations, net of income taxes		(294	)		(5,623	)


Net loss	$	(18,690	)	$	(24,010	)

See notes to condensed consolidated financial statements

YANKEE HOLDING CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


	Twenty-Six Weeks Ended July 3, 2010			Twenty-Six Weeks Ended July 4, 2009
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss	$	(18,690	)	$	(24,010	)
Adjustments to reconcile net loss to net cash used in operating activities:
Realized loss (gain) on derivative contracts		8,990			(561	)
Depreciation and amortization		21,175			23,072
Unrealized loss (gain) on marketable securities		59			(57	)
Share-based compensation expense		516			411
Deferred taxes		(2,324	)		2,849
Non-cash adjustments related to restructuring		10			(877	)
Loss on disposal and impairment of property and equipment		7			538
Investments in marketable securities		(423	)		(390	)
Changes in assets and liabilities:
Accounts receivable		13,245			8,686
Inventory		(25,027	)		(13,771	)
Prepaid expenses and other assets		(2,012	)		(1,056	)
Accounts payable		(1,318	)		(39	)
Income taxes		(9,340	)		(27,072	)
Accrued expenses and other liabilities		(11,147	)		(18	)


NET CASH USED IN OPERATING ACTIVITIES		(26,279	)		(32,295	)


CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment		(8,734	)		(9,732	)
Proceeds from sale of property and equipment		192			—


NET CASH USED IN INVESTING ACTIVITIES		(8,542	)		(9,732	)


CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Borrowings under Credit Facility		39,000			20,055
Repayments under Credit Facility		(11,000	)		(101,726	)
Proceeds from issuance of common equity units		25			35
Repurchase of common equity units		(643	)		(364	)
Principal payments on capital lease		(106	)		—


NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		27,276			(82,000	)


EFFECT OF EXCHANGE RATE CHANGES ON CASH		(98	)		63


NET DECREASE IN CASH		(7,643	)		(123,964	)
CASH, BEGINNING OF PERIOD		9,095			130,577


CASH, END OF PERIOD	$	1,452		$	6,613


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	36,325		$	40,991


Income taxes	$	1,197		$	6,578


Net change in accrued purchases of property and equipment	$	(851	)	$	2,416


Capital lease obligations related to equipment purchase	$	1,974		$	—

See notes to condensed consolidated financial statements

YANKEE HOLDING CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share data)

(Unaudited)

1. BASIS OF PRESENTATION

The unaudited interim condensed consolidated financial statements of Yankee Holding Corp. and subsidiaries (“Yankee Candle” or “the Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles” or “GAAP”). 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, and cash flows as of the date and for the periods indicated. All intercompany transactions and balances have been eliminated. The accompanying condensed consolidated statements of cash flows for the twenty-six weeks ended July 4, 2009 have been revised to present the financing cash flow activities of borrowings and repayments under the Company’s Credit Facility on a gross basis. The results of operations for the interim period are not necessarily indicative of the results to be expected for the full fiscal year.

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 “SEC”). The accompanying unaudited condensed financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended January 2, 2010 included in the Company’s Annual Report on Form 10-K. Unless otherwise indicated, all amounts are in thousands.

2. RECENT ACCOUNTING PRONOUNCEMENTS

In January 2010, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that expands the required disclosures about fair value measurements. This guidance provides for new disclosures requiring the Company to (i) disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers and (ii) present separately information about purchases, sales, issuances and settlements in the reconciliation of Level 3 fair value measurements. This guidance also provides clarification of existing disclosures requiring the Company to (i) determine each class of assets and liabilities based on the nature and risks of the investments rather than by major security type and (ii) for each class of assets and liabilities, disclose the valuation techniques and inputs used to measure fair value for both Level 2 and Level 3 fair value measurements. This guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the presentation of purchases, sales, issuances and settlements in the reconciliation of Level 3 fair value measurements, which is effective for interim and annual reporting periods beginning after December 15, 2010. Accordingly, the Company adopted this guidance as of January 3, 2010, with the exception of the guidance related to the presentation of purchases, sales, issuances and settlements in the reconciliation of Level 3 fair value measurements, which will be effective for the Company on January 2, 2011. The Company does not anticipate that the adoption of the second part of this guidance will have a material impact on the Company’s condensed consolidated financial statements.

3. DISCONTINUED OPERATIONS

During 2009, the Company discontinued the operations of its Illuminations and Aroma Naturals businesses. Accordingly, the Company has classified the results of operations of the Illuminations and Aroma Naturals businesses as discontinued operations for all periods presented. The discontinued operations of both the Illuminations and Aroma Naturals businesses are as follows:


	Thirteen Weeks Ended						Twenty-Six Weeks Ended
	July 3, 2010			July 4, 2009			July 3, 2010			July 4, 2009
Sales	$	—		$	2,855		$	—		$	9,345

Loss from discontinued operations	$	(60	)	$	(6,704	)	$	(461	)	$	(9,235	)
Benefit from income taxes		(22	)		(2,623	)		(167	)		(3,612	)

Loss from discontinued operations, net of income taxes	$	(38	)	$	(4,081	)	$	(294	)	$	(5,623	)

For the twenty-six weeks ended July 3, 2010, the loss from discontinued operations included restructuring charges of $366. For the thirteen weeks and twenty-six weeks ended July 4, 2009, the loss from discontinued operations included restructuring charges of $5,046 and $6,713, respectively.

4. RESTRUCTURING CHARGES

During January 2010, the Company executed a plan to reduce its administrative workforce and reorganize its distribution network, closing one leased facility.

During the fourth quarter of 2008, the Company initiated a restructuring plan involving the closing of the Company’s remaining 28 Illuminations retail stores and the discontinuance of the related Illuminations consumer direct business, the closing of one underperforming Yankee Candle retail store, and limited reductions in the Company’s corporate and administrative workforce. As of July 4, 2009, the Company had closed all of its Illuminations stores and had discontinued the Illuminations consumer direct business. In addition, on July 14, 2009, the Board of Directors approved a decision to discontinue the Company’s Aroma Naturals division and explore different strategic alternatives, including a potential sale. On October 21, 2009, the Company sold certain assets associated with the Aroma Naturals division.

As part of these restructuring plans, the Company recorded restructuring charges of $29 and $1,195 during the thirteen and twenty-six weeks ended July 3, 2010, respectively. For the thirteen weeks ended July 3, 2010, the restructuring charges consisted of final closing expenses related to a leased warehouse facility that had been closed in conjunction with the January 2010 restructuring. For the twenty-six weeks ended July 3, 2010, the restructuring charges primarily include employee severance and lease related termination costs. As of July 3, 2010, the occupancy related accrual primarily relates to a lease termination for an Illuminations retail store and the Illuminations corporate headquarters. The lease related to the Illuminations corporate headquarters in Petaluma, California expires in March 2013. This lease will be paid through March 2013 unless the Company is able to structure a buyout agreement with the landlord. As of July 3, 2010, the Company has recorded $23,902 in total restructuring charges in regards to these plans, inclusive of amounts recorded during fiscal years 2008 and 2009.

The following is a summary of restructuring charge activity for the thirteen and twenty-six weeks ended July 3, 2010:


			Thirteen Weeks Ended July 3, 2010
	Accrued as of April 3, 2010		Expense		Costs Paid			Non-Cash Charges		Accrued as of July 3, 2010
Continuing Operations
Occupancy related	$	64	$	29	$	(93	)	$	—	$	—
Employee related		437		—		(188	)		—		249


Total Continuing Operations		501		29		(281	)		—		249


Discontinued Operations
Occupancy related		1,142		—		(38	)		—		1,104
Employee related		9		—		—			—		9


Total Discontinued Operations		1,151		—		(38	)		—		1,113


Total Restructuring Charges	$	1,652	$	29	$	(319	)	$	—	$	1,362


			Twenty-Six Weeks Ended July 3, 2010
	Accrued as of January 2, 2010		Expense		Costs Paid			Non-Cash Charges			Accrued as of July 3, 2010
Continuing Operations
Occupancy related	$	17	$	210	$	(217	)	$	(10	)	$	—
Employee related		32		619		(402	)		—			249


Total Continuing Operations		49		829		(619	)		(10	)		249


Discontinued Operations
Occupancy related		2,474		366		(1,736	)		—			1,104
Employee related		41		—		(32	)		—			9


Total Discontinued Operations		2,515		366		(1,768	)		—			1,113


Total Restructuring Charges	$	2,564	$	1,195	$	(2,387	)	$	(10	)	$	1,362

5. SHARE-BASED COMPENSATION

A summary of the Company’s nonvested shares as of July 3, 2010, and the activity for the twenty-six weeks ended July 3, 2010 is presented below:


	Class A Common Units		Weighted Average Calculated Value	Class B Common Units		Weighted Average Calculated Value		Class C Common Units		Weighted Average Calculated Value
Nonvested at January 2, 2010	—		—	152,136		$	9.39	75,037		$	11.56
Granted	198		—	—			—	39,000		$	34.40
Forfeited	—		—	(9,683	)	$	9.39	(28,886	)	$	12.35
Vested	(198	)	—	(34,160	)	$	9.39	(11,868	)	$	19.48


Nonvested at July 3, 2010	—		—	108,293		$	9.39	73,283		$	22.12

During the twenty-six weeks ended July 3, 2010, the Company repurchased 1,135 vested Class A common units, 12,394 vested Class B common units and 13,316 vested Class C common units, for $643. The Company anticipates that all of its nonvested common units will vest.

The total estimated fair value of equity awards vested during twenty-six weeks ended July 3, 2010 was $552. Share-based compensation expense for the twenty-six weeks ended July 3, 2010 and July 4, 2009 was $516 and $411, respectively.

As of July 3, 2010, there was approximately $2,555 of total unrecognized compensation cost related to Class B and Class C common unit equity awards and there was no unrecognized expense related to the Class A common unit equity awards. This cost is expected to be recognized over the remaining vesting period, of approximately 5 years (July 2010 to April 2015).

Presented below is a summary of assumptions for the indicated period. There were 17,400 Class C grants for the twenty-six weeks ended July 4, 2009.


Assumptions	Twenty-Six Weeks Ended July 3, 2010			Twenty-Six Weeks Ended July 4, 2009
Weighted average calculated value of awards granted	$	34.40		$	7.60
Weighted average volatility		39.7	%		37.0	%
Weighted average expected term (in years)		5.0			5.0
Dividend yield		—			—
Weighted average risk-free interest rate		2.7	%		1.7	%

With respect to the Class B and Class C common units, since the Company is no longer publicly traded, the Company based its estimate of expected volatility on the median historical volatility of a group of eight comparable public companies. The historical volatilities of the comparable companies were measured over a 5-year historical period. The expected term of the Class B and Class C common units granted represents the period of time that the units are expected to be outstanding and is assumed to be approximately five years based on management’s estimate of the time to a liquidity event. The Company does not expect to pay dividends, and accordingly, the dividend yield is zero. The risk free interest rate reflects a five-year period commensurate with the expected time to a liquidity event and was based on the U.S. Treasury yield curve.

6. INVENTORY

The Company values its inventory on the first–in first–out (“FIFO”) basis. The components of inventory were as follows:


	July 3, 2010		January 2, 2010
Finished goods	$	72,376	$	52,765
Work-in-process		208		375
Raw materials and packaging		11,066		6,390


Total inventory	$	83,650	$	59,530

7. GOODWILL AND INTANGIBLE ASSETS

The Company has determined that its tradenames have an indefinite useful life and, therefore, are not being amortized. Under the Intangibles Topic of the ASC, goodwill and indefinite lived intangible assets are not amortized but are subject to an annual impairment test. There were no changes in the carrying amount of goodwill during the twenty-six weeks ended July 3, 2010.

Intangible Assets

The carrying amount and accumulated amortization of intangible assets consisted of the following:


	Weighted Average Useful Life (in years)	Gross Carrying Amount		Accumulated Amortization			Net Book Value
July 3, 2010
Indefinite life:
Tradenames	N/A	$	267,755	$	—		$	267,755


Finite-lived intangible assets:
Customer lists	5		63,638		(44,185	)		19,453
Favorable lease agreements	5		2,330		(1,640	)		690
Other	3		36		(32	)		4


Total finite-lived intangible assets			66,004		(45,857	)		20,147


Total intangible assets		$	333,759	$	(45,857	)	$	287,902


January 2, 2010
Indefinite life:
Tradenames	N/A	$	267,755	$	—		$	267,755


Finite-lived intangible assets:
Customer lists	5		63,675		(38,048	)		25,627
Favorable lease agreements	5		2,330		(1,516	)		814
Other	3		36		(31	)		5


Total finite-lived intangible assets			66,041		(39,595	)		26,446


Total intangible assets		$	333,796	$	(39,595	)	$	294,201

Total amortization expense from finite–lived intangible assets was $3,082 and $3,485 for the thirteen weeks ended July 3, 2010 and July 4, 2009, respectively. Total amortization expense from finite–lived intangible assets was $6,262 and $6,962 for the twenty-six weeks ended July 3, 2010 and July 4, 2009, respectively. These intangible assets are amortized on a straight line basis. Favorable lease agreements are amortized over the remaining lease term of each respective lease.

8. LONG-TERM DEBT

Long-term debt consisted of the following at July 3, 2010 and January 2, 2010:


	July 3, 2010		January 2, 2010
Senior secured revolving credit facility	$	39,000	$	11,000
Senior secured term loan facility		465,125		465,125
Senior notes due 2015		325,000		325,000
Senior subordinated notes due 2017		188,000		188,000


Total	$	1,017,125	$	989,125

Senior Secured Credit Facility

The Company’s senior secured credit facility (the “Credit Facility”) consists of a $650,000 senior secured term loan facility (“Term Facility”) maturing on February 6, 2014 and a $125,000 senior secured revolving credit facility (“Revolving Facility”), which expires on February 6, 2013.

All borrowings under the Credit Facility bear interest at a rate per annum equal to an applicable margin, plus, at the Company’s option, (i) the higher of (a) the prime rate (as set forth on the British Banking Association Telerate Page 5) and (b) the federal funds effective rate, plus one-half percent (0.50%) per annum or (ii) the Eurodollar rate, and resets periodically. In addition to paying interest on outstanding principal under the Credit Facility, the Company is required to pay a commitment fee to the lenders in respect of unutilized loan commitments at a rate of 0.50% per annum. As of July 3, 2010, the weighted average combined interest rate on the Term Facility and Revolving Facility was 2.31%.

The Credit Facility contains a financial covenant which requires that the Company maintain at the end of each fiscal quarter, commencing with the quarter ended January 2, 2010 through the quarter ending October 2, 2010, a consolidated total secured debt (net of cash and cash equivalents not to exceed $30,000) to consolidated EBITDA ratio of no more than 3.75 to 1.00. The consolidated total secured debt to consolidated EBITDA ratio will change to no more than 3.25 to 1.00 for the fourth quarter ending January 1, 2011. As of July 3, 2010, the Company’s actual secured leverage ratio, as defined, was 2.71 to 1.00. As of July 3, 2010, total secured debt (including the Company’s capital lease obligations of $1,868) was $504,541 (net of $1,452 of cash). Under the Credit Facility, EBITDA is defined as net income plus, interest, taxes, depreciation and amortization, further adjusted to add back extraordinary, unusual or non-recurring losses, non-cash stock option expense, fees and expenses related to the Transaction, fees and expenses under the management services contract (“Management Agreement”) with our equity sponsor, restructuring charges or reserves, as well as other non-cash charges, expenses or losses, and further adjusted to subtract extraordinary, unusual or non-recurring gains, other non-cash income or gains, and certain cash contributions to our common equity.

As of July 3, 2010, the Company had outstanding letters of credit of $1,614 and $39,000 outstanding under the Revolving Facility, leaving $84,386 in availability under the Revolving Facility.

9. CAPITAL LEASES

In January 2010, the Company entered into two capital leases relating to certain computer equipment. The capital leases have a two and a five year term. As of July 3, 2010, the recorded value of the leased property under capital leases was $1,974 and is included in property and equipment in the condensed consolidated balance sheet. Accumulated amortization on the property under capital lease was $220 as of July 3, 2010. The related amortization is included in general and administrative expense.

Future minimum lease payments under the capital leases as of July 3, 2010 are as follows:


2010	$	314
2011		627
2012		404
2013		404
2014		404


Total minimum lease payments		2,153
Less amounts representing interest		(285	)


Total	$	1,868

10. DERIVATIVE FINANCIAL INSTRUMENTS

The Company follows the guidance under the Derivatives and Hedging Topic of the ASC, which establishes accounting and reporting standards for derivative instruments. The guidance requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and to measure those instruments at fair value. Additionally, the fair value adjustments will affect either stockholders’ equity as accumulated other comprehensive income (loss) (“OCI”) or net income (loss) depending on whether the derivative instrument qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity.

Interest Rate Swaps

The Company uses interest rate swaps to manage the variability of a portion of cash flows associated with the forecasted interest payments on its Term Facility. This is achieved through converting a portion of the floating rate Term Facility to a fixed rate by entering into pay-fixed interest rate swaps. During the second quarter of 2009 the Company changed the interest rate election on its Term Facility from the three-month LIBOR rate to the one-month LIBOR rate. As a result, the Company’s existing interest rate swaps were de-designated as cash flow hedges and the Company no longer accounts for these instruments using hedge accounting whereby changes in fair value were recognized in the condensed consolidated statements of operations. The unrealized loss of $21,725 which was included in OCI on the date the Company changed its interest rate election is being amortized to other expense over the remaining term of the respective interest rate swap agreements. The unamortized amount as of July 3, 2010, was $3,508.

Simultaneous with the de-designations, the Company entered into new interest rate swap agreements to further reduce the variability of cash flows associated with the forecasted interest payments on its Term Facility. These swaps are not designated as cash flow hedges and, are measured at fair value with changes in fair value recognized in the condensed consolidated statements of operations as a component of other expense.

As a result of these transactions, the Company effectively converted a portion of its Term Facility, which is floating-rate debt, to a blended fixed-rate up to the aggregate amortizing notional value of the swaps by having the Company pay fixed-rate amounts in exchange for the receipt of the floating-rate interest payments. As of July 3, 2010, the aggregate notional value of the swaps was $385,028 or 82.8% of the amount outstanding on our Term Facility, resulting in a blended fixed rate of 3.26%. The aggregate notional value amortizes over the life of the swaps. Under the terms of these agreements, a monthly net settlement is made for the difference between the average fixed rate and the variable rate based upon the one-month LIBOR rate on the aggregate notional amount of the interest rate swaps. One of the Company’s interest rate swaps terminated in March 2010 with the remaining swap agreement scheduled to terminate in March 2011.

The Company also entered into forward starting, amortizing, interest rate swaps in the aggregate notional amount of $320,700 with a blended fixed rate of 3.49% to eliminate the variability in future interest payments by having the Company pay fixed-rate amounts in exchange for receipt of floating-rate interest payments. The effective date of the forward starting swaps is March 31, 2011, of which there are no settlements required until after that date. The forward starting swaps are not designated as cash flow hedges and, are measured at fair value with changes in fair value recognized in the condensed consolidated statements of operations as a component of other income (expense). The forward starting swap agreements terminate in March 2013.

The fair values of the Company’s derivative instruments as of July 3, 2010 and January 2, 2010, were as follows:


	Fair Values of Derivative Instruments Asset Derivatives
	Balance Sheet Location	July 3, 2010		January 2, 2010
Derivatives not designated as hedging instruments
Interest rate swap agreements	Prepaid expenses and other current assets	$	2,280	$	2,489


Total Derivative Assets		$	2,280	$	2,489


	Fair Value of Derivative Instruments Liability Derivatives
	Balance Sheet Location	July 3, 2010		January 2, 2010
Derivatives not designated as hedging instruments
Interest rate swap agreements	Other accrued liabilities	$	21,423	$	18,927


Total Derivative Liabilities		$	21,423	$	18,927

The effect of derivative instruments on the condensed consolidated statement of operations for the thirteen and twenty-six weeks ended July 3, 2010, was as follows:


		Amount of Realized Loss Recognized on Derivatives
	Location of Realized Loss Recognized on Derivatives	Thirteen Weeks Ended July 3, 2010		Twenty-Six Weeks Ended July 3, 2010
Derivatives not designated as hedging instruments
Interest rate swap agreements	Other expense	$	4,188	$	8,990


Total		$	4,188	$	8,990


		Amount of Loss Reclassified from Accumulated OCI into Income (Effective Portion)
	Location of Loss Reclassified from Accumulated OCI into Income (Effective Portion)	Thirteen Weeks Ended July 3, 2010		Twenty-Six Weeks Ended July 3, 2010
Cash Flow Hedges
Interest rate swap agreements	Other expense	$	1,169	$	6,284


Total		$	1,169	$	6,284

11. FAIR VALUE MEASUREMENTS

The Company follows the guidance prescribed by the Fair Value Measurements and Disclosures Topic of the ASC. The Fair Value Measurements and Disclosures Topic defines fair value and provides a consistent framework for measuring fair value under GAAP, including financial statement disclosure requirements. As specified under this Topic, valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect market assumptions. The Fair Value Measurements and Disclosures Topic classifies these inputs into the following hierarchy:

Level 1 Inputs– Quoted prices for identical instruments in active markets.

Level 2 Inputs– Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 Inputs– Instruments with primarily unobservable value drivers.

The following table represents the fair value hierarchy for those financial assets and liabilities measured at fair value on a recurring basis as of July 3, 2010 and January 2, 2010:


	Fair Value Measurements on a Recurring Basis as of July 3, 2010
	Level 1		Level 2		Level 3		Total
Assets
Interest rate swap agreements	$	—	$	2,280	$	—	$	2,280
Marketable securities		1,231		—		—		1,231


Total Assets	$	1,231	$	2,280	$	—	$	3,511


Liabilities
Interest rate swap agreements	$	—	$	21,423	$	—	$	21,423


Total Liabilities	$	—	$	21,423	$	—	$	21,423


	Fair Value Measurements on a Recurring Basis as of January 2, 2010
	Level 1		Level 2		Level 3		Total
Assets
Interest rate swap agreements	$	—	$	2,489	$	—	$	2,489
Marketable securities		1,168		—		—		1,168


Total Assets	$	1,168	$	2,489	$	—	$	3,657


Liabilities
Interest rate swap agreements	$	—	$	18,927	$	—	$	18,927


Total Liabilities	$	—	$	18,927	$	—	$	18,927

The Company holds marketable securities in its deferred compensation plan. The marketable securities consist of investments in mutual funds and are recorded at fair value based on third party quotes. The Company uses an income approach to value the asset and liability for its interest rate swaps using a discounted cash flow model that takes into account the present value of future cash flows under the terms of the contract using current market information as of the reporting date such as the one month LIBOR curve and the creditworthiness of the Company and its counterparties.

Financial Instruments Not Measured at Fair Value

The Company’s long-term debt is recorded at historical amounts. The Company estimates the fair value of its long-term debt based on current quoted market prices. As of July 3, 2010, the carrying value of the Company’s senior notes, senior subordinated notes and Term Facility was $978,125 compared to a fair value of $959,313. As of January 2, 2010, the carrying value of the Company’s senior notes, senior subordinated and senior secured term loan was $978,125 compared to a fair value of $941,004. It is impracticable for the Company to estimate the fair value of its Revolving Facility.

12. COMPREHENSIVE LOSS

Comprehensive loss, net of tax, is as follows:


	Thirteen Weeks Ended July 3, 2010			Thirteen Weeks Ended July 4, 2009			Twenty-Six Weeks Ended July 3, 2010			Twenty-Six Weeks Ended July 4, 2009
Net loss	$	(10,188	)	$	(12,522	)	$	(18,690	)	$	(24,010	)
Other comprehensive income (loss):
Currency translation adjustments		360			2,026			(718	)		3,115
Change in unrealized gain (loss) on interest rate swaps, net of tax		712			(544	)		3,825			544

Other comprehensive income		1,072			1,482			3,107			3,659

Comprehensive loss	$	(9,116	)	$	(11,040	)	$	(15,583	)	$	(20,351	)

13. SEGMENTS OF ENTERPRISE AND RELATED INFORMATION

The Company has segmented its operations in a manner that reflects how its chief operating decision–maker (the “CEO”) currently reviews the results of the Company and its subsidiaries’ businesses. The Company has two reportable segments–retail and wholesale. The identification of these segments results from management’s recognition that while the product sold is similar, the type of customer for the product and services and methods used to distribute the product are different.

The CEO evaluates both its retail and wholesale operations based on an “operating earnings” measure. Such measure gives recognition to specifically identifiable operating costs such as cost of sales and selling expenses. Administrative charges are generally not allocated to specific operating segments and are accordingly reflected in the unallocated/corporate/other reconciliation to the total consolidated results. Other components of the condensed consolidated statements of operations, which are classified below operating income, are also not allocated by segments. The Company does not account for or report assets, capital expenditures or depreciation and amortization by segment to the CEO.

The following are the relevant data for the thirteen and twenty-six weeks ended July 3, 2010 and July 4, 2009:


Thirteen Weeks Ended July 3, 2010	Retail		Wholesale		Unallocated/ Corporate/ Other			Balance per Condensed Consolidated Statements of Operations
Sales	$	71,693	$	53,675	$	—		$	125,368
Gross profit		45,163		24,556		(38	)		69,681
Selling expenses		38,582		6,107		3,569			48,258
Operating income (loss)		6,581		18,449		(17,588	)		7,442
Interest and other expense, net		—		—		(23,213	)		(23,213	)
Income (loss) from continuing operations before provision for (benefit from) income taxes		6,581		18,449		(40,801	)		(15,771	)



Thirteen Weeks Ended July 4, 2009	Retail		Wholesale		Unallocated/ Corporate / Other			Balance per Condensed Consolidated Statements of Operations
Sales	$	68,133	$	50,720	$	—		$	118,853
Gross profit		44,230		23,053		38			67,321
Selling expenses		36,821		4,557		4,006			45,384
Operating income (loss)		7,409		18,496		(19,534	)		6,371
Interest and other expense, net		—		—		(21,862	)		(21,862	)
Income (loss) from continuing operations before provision for (benefit from) income taxes		7,409		18,496		(41,396	)		(15,491	)


Twenty-Six Weeks Ended July 3, 2010	Retail		Wholesale		Unallocated/ Corporate/ Other			Balance per Condensed Consolidated Statements of Operations
Sales	$	145,388	$	120,954	$	—		$	266,342
Gross profit		93,553		54,896		(105	)		148,344
Selling expenses		77,973		12,650		7,203			97,826
Operating income (loss)		15,580		42,246		(38,767	)		19,059
Interest and other expense, net		—		—		(47,753	)		(47,753	)
Income (loss) from continuing operations before provision for (benefit from) income taxes		15,580		42,246		(86,520	)		(28,694	)

Twenty-Six Weeks Ended July 4, 2009	Retail		Wholesale		Unallocated/ Corporate / Other			Balance per Condensed Consolidated Statements of Operations
Sales	$	132,684	$	105,387	$	—		$	238,071
Gross profit		86,314		48,429		29			134,772
Selling expenses		73,098		9,509		8,016			90,623
Operating income (loss)		13,216		38,920		(39,664	)		12,472
Interest and other expense, net		—		—		(45,003	)		(45,003	)
Income (loss) from continuing operations before provision for (benefit from) income taxes		13,216		38,920		(84,667	)		(32,531	)

Sales for the Company’s international operations, which are included in the wholesale segment, were approximately $12,818 and $9,315 for the thirteen weeks ended July 3, 2010 and July 4, 2009, respectively. For the twenty-six weeks ended July 3, 2010 and July 4, 2009, sales for the Company’s international operations were approximately $29,405, and $19,738, respectively. Long lived assets of the Company’s international operations were approximately $1,369 and $1,537 as of July 3, 2010 and January 2, 2010, respectively.

14. COMMITMENTS AND CONTINGENCIES

In August 2009, in connection with the Linens ‘N Things bankruptcy proceedings, Linens Holding Co. and its affiliates (“Linens”) filed a lawsuit against the Company in United States Bankruptcy Court in the District of Delaware alleging that pursuant to the United States Bankruptcy Code Linens is entitled to recover from the Company the following amounts on the basis that they constitute “preferential transfers” under the Code: (i) approximately $5,500 in payments allegedly received by the Company from Linens during the 90-day period preceding the filing of the Linens bankruptcy cases in May 2008, (ii) approximately $1,500 in credits allegedly issued by Yankee Candle and redeemed by Linens during that 90-day period, and (iii) approximately $650 in credits allegedly issued by Yankee Candle but not yet redeemed by Linens. The Company has retained bankruptcy counsel and plans to vigorously defend this claim. The Company filed an Answer, including various affirmative defenses, in October 2009. Discovery has not yet commenced. While the Company believes it has a number of strong potential defenses to all or a significant portion of these claims, the Company cannot at this time predict with any degree of likelihood what the potential outcome of this matter may be, particularly due to the fact that discovery has not yet commenced. As of July 3, 2010, the Company did not record any amount related to these claims in its condensed consolidated statement of operations for these reasons. If this matter were to be decided in a manner adverse to the Company, it could materially adversely impact the Company’s results of operations.

15. FINANCIAL INFORMATION RELATED TO GUARANTOR SUBSIDIARIES

Obligations under the senior notes are guaranteed on an unsecured senior basis and obligations under the senior subordinated notes are guaranteed on an unsecured senior subordinated basis by the Parent and 100% of the issuer’s existing and future domestic subsidiaries. The senior notes are fully and unconditionally guaranteed by all of our 100% owned U.S. subsidiaries (the “Guarantor Subsidiaries”) on a senior unsecured basis. These guarantees are joint and several obligations of the Guarantors. The foreign subsidiary does not guarantee these notes.

The following tables present condensed consolidating supplementary financial information for the issuer of the notes, the Parent, the issuer’s domestic guarantor subsidiaries and the non guarantor together with eliminations as of and for the periods indicated. The issuer’s parent company is also a guarantor of the notes. Parent was a newly formed entity with no assets, liabilities or operations prior to the completion of the merger (the “Merger”) on February 6, 2007 of The Yankee Candle Company, Inc. with an affiliate of Madison Dearborn Partners, LLC or (“MDP” or “Madison Dearborn”). Separate complete financial statements of the respective guarantors would not provide additional material information that would be useful in assessing the financial composition of the guarantors.

Condensed consolidating financial information is as follows:

YANKEE HOLDING CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEETS

July 3, 2010

(in thousands)


	Parent		Issuer of Notes			Guarantor Subsidiaries		Non Guarantor Subsidiary			Intercompany Eliminations			Consolidated
ASSETS
CURRENT ASSETS:
Cash	$	—	$	(996	)	$	1,753	$	695		$	—		$	1,452
Accounts receivable, net		—		22,494			66		7,569			—			30,129
Inventory		—		73,040			86		10,524			—			83,650
Prepaid expenses and other current assets		—		21,524			250		1,645			—			23,419
Deferred tax assets		—		12,230			56		—			—			12,286


TOTAL CURRENT ASSETS		—		128,292			2,211		20,433			—			150,936
PROPERTY AND EQUIPMENT, NET		—		121,577			46		1,369			—			122,992
MARKETABLE SECURITIES		—		1,231			—		—			—			1,231
GOODWILL		—		643,570			—		—			—			643,570
INTANGIBLE ASSETS		—		287,570			—		332			—			287,902
DEFERRED FINANCING COSTS		—		16,844			—		—			—			16,844
OTHER ASSETS		—		665			—		—			—			665
INTERCOMPANY RECEIVABLES		—		19,292			450		—			(19,742	)		—
INVESTMENT IN SUBSIDIARIES		7,557		873			—		—			(8,430	)		—


TOTAL ASSETS	$	7,557	$	1,219,914		$	2,707	$	22,134		$	(28,172	)	$	1,224,140


LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:
Accounts payable	$	—	$	19,003		$	32	$	1,235		$	—		$	20,270
Accrued payroll		—		7,243			113		275			—			7,631
Accrued interest		—		17,742			—		—			—			17,742
Accrued purchases of property and equipment		—		2,752			—		—			—			2,752
Current portion of capital leases		—		520			—		—			—			520
Other accrued liabilities		—		39,262			1,327		1,244			—			41,833


TOTAL CURRENT LIABILITIES		—		86,522			1,472		2,754			—			90,748

DEFERRED COMPENSATION OBLIGATION		—		1,325			—		—			—			1,325
DEFERRED TAX LIABILITIES		—		92,825			—		—			—			92,825
LONG-TERM DEBT		—		1,017,125			—		—			—			1,017,125
DEFERRED RENT		—		10,900			—		—			—			10,900
CAPITAL LEASES, NET OF CURRENT PORTION		—		1,348			—		—			—			1,348
OTHER LONG-TERM LIABILITIES		—		2,312			—		—			—			2,312
INTERCOMPANY PAYABLES		—		—			—		19,742			(19,742	)		—
STOCKHOLDERS’ EQUITY		7,557		7,557			1,235		(362	)		(8,430	)		7,557


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	7,557	$	1,219,914		$	2,707	$	22,134		$	(28,172	)	$	1,224,140

YANKEE HOLDING CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEETS

January 2, 2010

(in thousands)


	Parent		Issuer of Notes		Guarantor Subsidiaries		Non Guarantor Subsidiary		Intercompany Eliminations			Consolidated
ASSETS
CURRENT ASSETS:
Cash	$	—	$	4,588	$	2,151	$	2,356	$	—		$	9,095
Accounts receivable, net		—		34,250		227		9,451		—			43,928
Inventory		—		51,377		79		8,074		—			59,530
Prepaid expenses and other current assets		—		11,198		262		634		—			12,094
Deferred tax assets		—		11,021		187		—		—			11,208


TOTAL CURRENT ASSETS		—		112,434		2,906		20,515		—			135,855

PROPERTY AND EQUIPMENT, NET		—		123,177		54		1,537		—			124,768
MARKETABLE SECURITIES		—		1,168		—		—		—			1,168
GOODWILL		—		643,570				—		—			643,570
INTANGIBLE ASSETS		—		293,789				412		—			294,201
DEFERRED FINANCING COSTS		—		18,731		—		—		—			18,731
OTHER ASSETS		—		782		—		5		—			787
INTERCOMPANY RECEIVABLES		—		14,799		561		—		(15,360	)		—
INVESTMENT IN SUBSIDIARIES		23,243		5,499		—		—		(28,742	)		—


TOTAL ASSETS	$	23,243	$	1,213,949	$	3,521	$	22,469	$	(44,102	)	$	1,219,080


LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES:
Accounts payable	$	—	$	20,943	$	88	$	617	$	—		$	21,648
Accrued payroll		—		15,357		29		227		—			15,613
Accrued interest		—		17,844		—		—		—			17,844
Accrued purchases of property and equipment		—		1,901		—		—		—			1,901
Other accrued liabilities		—		39,535		2,039		2,131		—			43,705


TOTAL CURRENT LIABILITIES		—		95,580		2,156		2,975		—			100,711

DEFERRED COMPENSATION OBLIGATION		—		1,369		—		—		—			1,369
DEFERRED TAX LIABILITIES		—		91,706		—		—		—			91,706
LONG-TERM DEBT		—		989,125		—		—		—			989,125
DEFERRED RENT		—		10,643		—		—		—			10,643
OTHER LONG-TERM LIABILITIES		—		2,283		—		—		—			2,283
INTERCOMPANY PAYABLES		—		—		—		15,360		(15,360	)		—
STOCKHOLDERS’ EQUITY		23,243		23,243		1,365		4,134		(28,742	)		23,243


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	23,243	$	1,213,949	$	3,521	$	22,469	$	(44,102	)	$	1,219,080

YANKEE HOLDING CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

For the Thirteen Weeks Ended July 3, 2010

(in thousands)


	Parent			Issuer of Notes			Guarantor Subsidiaries			Non Guarantor Subsidiary			Intercompany Eliminations			Consolidated
Sales	$	—		$	122,075		$	562		$	12,228		$	(9,497	)	$	125,368
Cost of sales		—			52,884			181			10,713			(8,091	)		55,687


Gross profit		—			69,191			381			1,515			(1,406	)		69,681
Selling expenses		—			44,551			505			3,263			(61	)		48,258
General and administrative expenses		—			13,908			—			—			44			13,952
Restructuring charges		—			29			—			—			—			29


Operating income (loss)		—			10,703			(124	)		(1,748	)		(1,389	)		7,442
Interest expense		—			18,462			—			—			—			18,462
Other expense		—			4,177			—			574			—			4,751


Loss from continuing operations before benefit from income taxes		—			(11,936	)		(124	)		(2,322	)		(1,389	)		(15,771	)
Benefit from income taxes		—			(4,431	)		(47	)		(650	)		(493	)		(5,621	)


Loss from continuing operations		—			(7,505	)		(77	)		(1,672	)		(896	)		(10,150	)
Loss from discontinued operations, net of income taxes		—			(38	)		—			—			—			(38	)


Loss before equity in losses of subsidiaries, net of tax		—			(7,543	)		(77	)		(1,672	)		(896	)		(10,188	)
Equity in losses of subsidiaries, net of tax		10,188			1,749			—			—			(11,937	)		—


Net loss	$	(10,188	)	$	(9,292	)	$	(77	)	$	(1,672	)	$	11,041		$	(10,188	)

YANKEE HOLDING CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

For the Thirteen Weeks Ended July 4, 2009

(in thousands)


	Parent			Issuer of Notes			Guarantor Subsidiaries			Non Guarantor Subsidiary			Intercompany Eliminations			Consolidated
Sales	$	—		$	116,915		$	558		$	9,035		$	(7,655	)	$	118,853
Cost of sales		—			49,492			168			8,349			(6,477	)		51,532


Gross profit		—			67,423			390			686			(1,178	)		67,321
Selling expenses		—			42,820			503			2,121			(60	)		45,384
General and administrative expenses		—			15,289			—			—			50			15,339
Restructuring charges		—			227			—			—			—			227


Operating income (loss)		—			9,087			(113	)		(1,435	)		(1,168	)		6,371
Interest income		—			(1	)		—			—			—			(1	)
Interest expense		—			21,824			—			—			—			21,824
Other (income) expense		—			(548	)		—			587			—			39


Loss from continuing operations before benefit from income taxes		—			(12,188	)		(113	)		(2,022	)		(1,168	)		(15,491	)
Benefit from income taxes		—			(5,883	)		(59	)		(567	)		(541	)		(7,050	)


Loss from continuing operations		—			(6,305	)		(54	)		(1,455	)		(627	)		(8,441	)
Loss from discontinued operations, net of income taxes		—			(4,081	)		—			—			—			(4,081	)


Loss before equity in losses of subsidiaries, net of tax		—			(10,386	)		(54	)		(1,455	)		(627	)		(12,522	)

Equity in losses of subsidiaries, net of tax		12,522			1,509			—			—			(14,031	)		—


Net loss	$	(12,522	)	$	(11,895	)	$	(54	)	$	(1,455	)	$	13,404		$	(12,522	)

YANKEE HOLDING CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

For the Twenty-Six Weeks Ended July 3, 2010

(in thousands)


	Parent			Issuer of Notes			Guarantor Subsidiaries			Non Guarantor Subsidiary			Intercompany Eliminations			Consolidated
Sales	$	—		$	256,027		$	1,076		$	28,165		$	(18,926	)	$	266,342
Cost of sales		—			110,324			326			24,123			(16,775	)		117,998


Gross profit		—			145,703			750			4,042			(2,151	)		148,344
Selling expenses		—			90,064			955			6,927			(120	)		97,826
General and administrative expenses		—			30,534			—			—			96			30,630
Restructuring charges		—			829			—			—			—			829


Operating income (loss)		—			24,276			(205	)		(2,885	)		(2,127	)		19,059
Interest expense		—			38,270			—			—			—			38,270
Other expense		—			9,052			—			431			—			9,483


Loss from continuing operations before benefit from income taxes		—			(23,046	)		(205	)		(3,316	)		(2,127	)		(28,694	)
Benefit from income taxes		—			(8,529	)		(75	)		(929	)		(765	)		(10,298	)


Loss from continuing operations		—			(14,517	)		(130	)		(2,387	)		(1,362	)		(18,396	)
Loss from discontinued operations, net of income taxes		—			(294	)		—			—			—			(294	)


Loss before equity in losses of subsidiaries, net of tax		—			(14,811	)		(130	)		(2,387	)		(1,362	)		(18,690	)
Equity in losses of subsidiaries, net of tax		18,690			2,517			—			—			(21,207	)		—


Net loss	$	(18,690	)	$	(17,328	)	$	(130	)	$	(2,387	)	$	19,845		$	(18,690	)

YANKEE HOLDING CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

For the Twenty-Six Weeks Ended July 4, 2009

(in thousands)


	Parent			Issuer of Notes			Guarantor Subsidiaries			Non Guarantor Subsidiary			Intercompany Eliminations			Consolidated
Sales	$	—		$	233,260		$	1,106		$	18,999		$	(15,294	)	$	238,071
Cost of sales		—			98,990			334			17,219			(13,244	)		103,299


Gross profit		—			134,270			772			1,780			(2,050	)		134,772
Selling expenses		—			85,262			959			4,522			(120	)		90,623
General and administrative expenses		—			30,600			—			—			102			30,702
Restructuring charges		—			975			—			—			—			975


Operating income (loss)		—			17,433			(187	)		(2,742	)		(2,032	)		12,472
Interest income		—			(3	)		—			(8	)		—			(11	)
Interest expense		—			43,539			—			—			—			43,539
Other (income) expense		—			(584	)		—			2,059			—			1,475


Loss from continuing operations before benefit from income taxes		—			(25,519	)		(187	)		(4,793	)		(2,032	)		(32,531	)
Benefit from income taxes		—			(11,818	)		(89	)		(1,342	)		(895	)		(14,144	)


Loss from continuing operations		—			(13,701	)		(98	)		(3,451	)		(1,137	)		(18,387	)
Loss from discontinued operations, net of income taxes		—			(5,623	)		—			—			—			(5,623	)


Loss before equity in losses of subsidiaries, net of tax		—			(19,324	)		(98	)		(3,451	)		(1,137	)		(24,010	)
Equity in losses of subsidiaries, net of tax		24,010			3,549			—			—			(27,559	)		—


Net loss	$	(24,010	)	$	(22,873	)	$	(98	)	$	(3,451	)	$	26,422		$	(24,010	)

YANKEE HOLDING CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

For the Twenty-Six Weeks Ended July 3, 2010

(in thousands)


	Parent			Issuer of Notes			Guarantor Subsidiaries			Non Guarantor Subsidiary			Intercompany Eliminations			Consolidated
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss	$	(18,690	)	$	(17,328	)	$	(130	)	$	(2,387	)	$	19,845		$	(18,690	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		—			20,925			6			244			—			21,175
Realized loss on derivative contracts		—			8,990			—			—			—			8,990
Unrealized loss on marketable securities		—			59			—			—			—			59
Share-based compensation expense		—			516			—			—			—			516
Deferred taxes		—			(2,455	)		131			—			—			(2,324	)
Non-cash adjustments related to restructuring		—			10			—			—			—			10
Loss on disposal and impairment of property and equipment		—			7			—			—			—			7
Investments in marketable securities		—			(423	)		—			—			—			(423	)
Equity in losses of subsidiaries		18,690			2,517			—			(1,362	)		(19,845	)		—
Changes in assets and liabilities
Accounts receivable, net		—			11,756			161			1,328			—			13,245
Inventory		—			(21,660	)		(7	)		(3,360	)		—			(25,027	)
Prepaid expenses and other assets		—			(940	)		12			(1,084	)		—			(2,012	)
Accounts payable		—			(1,941	)		(56	)		679			—			(1,318	)
Income taxes		—			(9,340	)		—			—			—			(9,340	)
Accrued expenses and other liabilities		—			(10,544	)		(628	)		25			—			(11,147	)


NET CASH USED IN OPERATING ACTIVITIES		—			(19,851	)		(511	)		(5,917	)		—			(26,279	)


CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchases of property and equipment		—			(8,632	)		—			(102	)		—			(8,734	)
Proceeds from the sale of property and equipment		—			192			—			—			—			192
Intercompany payables/receivables		—			(4,569	)		—			—			4,569			—


NET CASH USED IN INVESTING ACTIVITIES		—			(13,009	)		—			(102	)		4,569			(8,542	)


CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Borrowings under Credit Facility		—			39,000			—			—			—			39,000
Repayments under Credit Facility		—			(11,000	)		—			—			—			(11,000	)
Proceeds from issuance of common equity units		—			25			—			—			—			25
Repurchase of common equity units		—			(643	)		—			—			—			(643	)
Principal payments on capital lease		—			(106	)		—			—			—			(106	)
Intercompany payables/receivables		—			—			113			4,456			(4,569	)		—


NET CASH PROVIDED BY FINANCING ACTIVITIES		—			27,276			113			4,456			(4,569	)		27,276


EFFECT EXCHANGE RATE CHANGES ON CASH		—			—			—			(98	)		—			(98	)

NET DECREASE IN CASH		—			(5,584	)		(398	)		(1,661	)		—			(7,643	)


CASH, BEGINNING OF PERIOD		—			4,588			2,151			2,356			—			9,095


CASH, END OF PERIOD	$	—		$	(996	)	$	1,753		$	695		$	—		$	1,452

YANKEE HOLDING CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

For the Twenty-Six Weeks Ended July 4, 2009

(in thousands)


	Parent			Issuer of Notes			Guarantor Subsidiaries			Non Guarantor Subsidiary			Intercompany Eliminations			Consolidated
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss	$	(24,010	)	$	(22,872	)	$	(99	)	$	(3,451	)	$	26,422		$	(24,010	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		—			22,890			9			173			—			23,072
Gain on derivative contracts					(561	)		—			—			—			(561	)
Unrealized gain on marketable securities		—			(57	)		—			—			—			(57	)
Stock based compensation expense		—			411			—			—			—			411
Deferred taxes		—			2,515			334			—			—			2,849
Non-cash adjustments related to restructuring		—			(877	)		—			—			—			(877	)
Loss on disposal and impairment of property and equipment		—			538			—			—			—			538
Investments in marketable securities		—			(390	)		—			—			—			(390	)
Equity in earnings of subsidiaries		24,010			3,563			—			(1,151	)		(26,422	)		—
Changes in assets and liabilities
Accounts receivable, net		—			6,991			162			1,533			—			8,686
Inventory		—			(11,663	)		7			(2,115	)		—			(13,771	)
Prepaid expenses and other assets		—			942			8			(2,006	)		—			(1,056	)
Accounts payable		—			101			8			(148	)		—			(39	)
Income Taxes		—			(27,072	)		—			—			—			(27,072	)
Accrued expenses and other liabilities		—			(1,553	)		(813	)		2,348			—			(18	)

NET CASH USED IN OPERATING ACTIVITIES		—			(27,094	)		(384	)		(4,817	)		—			(32,295	)

CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment		—			(9,607	)		—			(125	)		—			(9,732	)
Intercompany payables/receivables		—			(5,322	)		—			—			5,322			—

NET CASH USED IN INVESTING ACTIVITIES		—			(14,929	)		—			(125	)		5,322			(9,732	)

CASH FLOWS (USED IN) PROVIDED BY FINANCING ACTIVITIES:
Net proceeds from issuance of common stock		—			35			—			—			—			35
Borrowings under Credit Facility		—			20,055			—			—			—			20,055
Repayments under Credit Facility		—			(101,726	)		—			—			—			(101,726	)
Repurchase of common stock		—			(364	)		—			—			—			(364	)
Intercompany payables/receivables		—			—			92			5,230			(5,322	)		—

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES		—			(82,000	)		92			5,230			(5,322	)		(82,000	)

EFFECT EXCHANGE RATE CHANGES ON CASH		—			—			—			63			—			63
NET (DECREASE) INCREASE IN CASH		—			(124,023	)		(292	)		351			—			(123,964	)

CASH, BEGINNING OF PERIOD		—			128,037			2,147			393			—			130,577

CASH, END OF PERIOD	$	—		$	4,014		$	1,855		$	744		$	—		$	6,613

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. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about operating results and the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies, among others, involve its more significant estimates and judgments and are therefore particularly important to an understanding of our results of operations and financial position.

Sales/receivables

We sell our products both directly to retail customers and through wholesale channels. Merchandise sales are recognized upon transfer of ownership, including passage of title to the customer and transfer of the risk of loss related to those goods. In our wholesale segment, products are shipped “free on board” shipping point; however revenue is recognized at the time the product is received by the customer due to our practice of absorbing risk of loss in the event of damaged or lost shipments. In our retail segment, transfer of title takes place at the point of sale (i.e., at our retail stores). There are no situations, either in our wholesale or retail segments, where legal risk of loss does not transfer immediately upon receipt by our customers. Although we do not provide a contractual right of return, in the course of arriving at practical business solutions to various claims, we have allowed sales returns and allowances. In these situations, customer claims for credit or return due to damage, defect, shortage or other reason must be pre-approved by us before credit is issued or such product is accepted for return. Such returns have not precluded sales recognition because we have a long history with such returns, which we use in establishing a reserve. In our wholesale segment, we have included a reserve in our financial statements representing our estimated obligation related to promotional marketing activities. In addition to returns, we bear credit risk relative to our wholesale customers. We have provided a reserve for bad debts in our financial statements based on our estimates of the creditworthiness of our customers. Changes in these reserves could affect our operating results.

Condensed Consolidated Statement of Operations

Included within cost of sales on our condensed consolidated statements of operations are the cost of the merchandise we sell through our retail and wholesale segments, inbound and outbound freight costs, the operational costs of our distribution facilities (which include receiving costs, inspection and warehousing costs and salaries) and expenses incurred by the Company’s merchandising and buying operations.

Included within selling expenses are costs directly related to both wholesale and retail operations and primarily consist of payroll, occupancy, advertising and other operating costs, as well as pre–opening costs, which are expensed as incurred.

Included within general and administrative expenses are costs associated with corporate overhead departments, including senior management, accounting, information systems, human resources, legal, marketing, management incentive programs and bonus and other costs that are not readily allocable to either the retail or wholesale segments.

Inventory

We write down our inventory for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and the estimated market value, based upon assumptions about future demand and market conditions. If actual future demand or market conditions are less favorable than those projected by management, additional inventory write–downs may be required. We value our inventory at the lower of cost or market on a first–in first–out (“FIFO”) basis. Fluctuations in inventory levels along with the cost of raw materials could impact the carrying value of our inventory. Changes in the carrying value of inventory could affect our operating results.

Derivative instruments

The Company uses interest rate swaps to manage the variability of a portion of cash flows associated with the forecasted interest payments on its Term Facility. This is achieved through converting a portion of the floating rate Term Facility to a fixed rate by entering into pay-fixed interest rate swaps. During the second quarter of 2009 the Company changed the interest rate election on its Term Facility from the three-month LIBOR rate to the one-month LIBOR rate. As a result, the Company’s existing interest rate swaps were de-designated as cash flow hedges and the Company no longer accounts for these instruments using hedge accounting with changes in fair value recognized in other expense in the condensed consolidated statement of operations. The unrealized loss included in other comprehensive income (“OCI”) on the date the Company changed its interest rate election is being amortized to other expense over the remaining term of the respective interest rate swap agreements.

Income Taxes

We file income tax returns in the U.S. federal jurisdiction, various states, the United Kingdom and Germany. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business there are many transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties based on estimates of whether, and to what extent, additional taxes will be due. We adjust these reserves in light of changing facts and circumstances. The provision for income taxes includes the impact of our reserve positions and changes to those reserves when appropriate. We also recognize deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities using currently enacted tax rates in effect in the years in which the differences are expected to reverse.

We have significant deferred tax liabilities recorded on our financial statements, which are attributable to the effect of purchase accounting adjustments recorded as a result of the Merger. We also have a significant deferred tax asset recorded in our financial statements. This asset arose at the time of our recapitalization in 1998 and reflects the tax benefit of future tax deductions for us from the recapitalization. The recoverability of this future tax deduction is dependent upon our future profitability. We have made an assessment that this asset is likely to be recovered and no valuation allowance is required. Should we find that we are not able to utilize this deduction in the future we would have to record a valuation allowance for all or a part of this asset, which would adversely affect our operating results and cash flows.

Valuation of long-lived assets, including intangibles

Long-lived assets on our condensed consolidated balance sheets consist primarily of property and equipment, customer lists, tradenames and goodwill. An intangible asset with a finite useful life is amortized; an intangible asset with an indefinite useful life is not amortized, but is evaluated annually for impairment. Reaching a determination on useful life requires significant judgments and assumptions regarding the future effects of obsolescence, competition and other economic factors. We have determined that our tradenames have an indefinite useful life and, therefore, are not being amortized. We periodically review the carrying value of all of these assets. We undertake this review when facts and circumstances suggest that cash flows emanating from those assets may be diminished, and at least annually in the case of tradenames and goodwill.

For goodwill, the annual impairment evaluation compares the fair value of a reporting unit to its carrying value and consists of two steps. First, we determine the fair value of each of our reporting units and compare them to the corresponding carrying values. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of the goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with the Business Combinations Topic of the ASC. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill.

We perform our annual impairment testing at the reporting unit level. We reviewed the provisions of the Intangibles, Goodwill and Other Topic of the ASC with respect to the criteria necessary to evaluate the number of reporting units that exist. We also considered the way we manage our operations and the nature of those operations. As of November 7, 2009, the date of our annual impairment test, we had two reporting units: retail and wholesale.

Fair values of the reporting units are derived through a combination of market-based and income-based approaches, each of which were weighted at 50% for the impairment test performed as of November 7, 2009. The market-based approach estimates fair value by applying multiples of potential earnings, such as EBITDA and revenue, of publicly traded comparable companies. We believe this approach is appropriate because it provides a fair value using multiples from companies with operations and economic characteristics similar to our reporting units. The income-based approach is based on projected future debt-free cash flow that is discounted to present value using factors that consider the timing and risk of the future cash flows. We believe this approach is appropriate because it provides a fair value estimate based upon the reporting units expected long-term operations and cash flow performance. The income-based approach is based on a reporting unit’s future projections of operating results and cash flows. These projections are discounted to present value using a weighted average cost of capital for market participants, who are generally thought to be industry participants. The future projections are based on both past performance and the projections and assumptions used in our current operating plan. Such assumptions are subject to change as a result of changing economic and competitive conditions.

The income-based approach is based on future projections of operating results and cash flows. These projections are discounted to present value using a weighted average cost of capital for market participants, who are generally thought to be industry participants. Our future projections of operating results are based on both past performance and the projections and assumptions used in our current operating plan. Changes to our discount rate assumptions or our operating projections as a result of changing economic and competitive conditions could result in impairment charges. Further, if the economic market conditions continue to worsen and our estimated future discounted cash flows decrease further we may incur additional impairment charges. Impairment charges related to our goodwill, tradenames or other intangible assets could have a significant impact on our financial position and results of operations.

The Company completed its 2009 annual impairment testing of goodwill and indefinite-lived intangible assets as of November 7, 2009 and no impairment was recorded as a result of these tests.

PERFORMANCE MEASURES

We measure the performance of our retail and wholesale segments through a segment margin calculation, which specifically identifies not only gross profit on the sales of products through the two channels but also costs and expenses specifically related to each segment.

FLUCTUATIONS IN QUARTERLY OPERATING RESULTS

We have experienced, and will experience in the future, fluctuations in our quarterly operating results. There are numerous factors that can contribute to these fluctuations; however, the principal factors are seasonality, new store openings and store closings and wholesale activity.

Seasonality. We have historically realized higher revenues and operating income in our fourth quarter, particularly in our retail business. This has been primarily due to increased sales in the giftware industry during the holiday season of the fourth quarter.

Retail Store Openings and Closings. The timing of our new store openings and closings may have an impact on our quarterly results. First, we incur certain one-time expenses related to opening each new store. These expenses, which consist primarily of occupancy, salaries, supplies and marketing costs, are expensed as incurred. Second, most store expenses vary proportionately with sales, but there is a fixed cost component. This typically results in lower store profitability when a new store opens because new stores generally have lower sales than mature stores. Due to both of these factors, during periods when new store openings as a percentage of the base are higher, operating profit may decline in dollars and/or as a percentage of sales. As the overall store base matures, the fixed cost component of selling expenses is spread over an increased level of sales, assuming sales increase as stores age, resulting in a decrease in selling and other expenses as a percentage of sales.

Wholesale Account Activity. The timing of new wholesale accounts may have an impact on our quarterly results due to the size of initial opening orders and promotional programs associated with the roll-out of orders. In addition, the loss of wholesale accounts may impact our quarterly results.

OVERVIEW

General Business Information

We are the largest specialty branded premium scented candle company in the United States based on our annual sales and profitability. The strong brand equity of the Yankee Candle ^® brand, coupled with our vertically integrated multi-channel business model, have enabled us to be the market leader in the premium scented candle market for many years. We design, develop, manufacture, and distribute the majority of the products we sell which allows us to offer distinctive, trend-appropriate products for every season, every customer, and every room in the home. We have a 40-year history of category leadership and growth by marketing Yankee Candle products as affordable luxuries, consumable products, and valued gifts. We offer the broadest assortment of highly scented candles, innovative home fragrance products, and candle related home décor accessories in a variety of compelling fragrances, colors, styles, and price points.

Candle products are the foundation of our business, and are available in a wide range of fragrances and colors across a variety of jar candles, Samplers ^® votive candles, Tarts ^® wax potpourri, pillars and other candle products, the vast majority of which are marketed under the Yankee Candle ^® brand. Our candles are moderately-priced ranging from $1.99 for a Samplers ^® votive candle to $24.99 for a large 22 ounce jar candle. This variety ensures each customer can find Yankee Candle products appropriate for the consumer’s lifestyle and budget. In addition to our core candle business, we successfully have extended the Yankee Candle brand into the growing home fragrance market with a portfolio of innovative fragrance products for your home. Our assortment includes electric plug home fragrancers, decorative reed diffusers, room sprays, potpourri, and scented oils. Additionally, we offer products such as the Yankee Candle Car Jars ^® auto air fresheners to fragrance cars and small spaces. We

also offer a wide array of coordinated candle related and home decor accessories in dozens of exclusive patterns, colors and styles, and numerous giftsets. In addition to our “everyday” product offerings, we also offer seasonally-appropriate fragrances, products, home décor accessories, and giftsets on a limited edition, seasonal basis. These themed temporary programs occur four times a year: Spring, Summer, Fall, and the Christmas/Holiday season.

We sell our products in multiple channels of distribution across dozens of countries. Our customer touchpoints include our own company-operated retail stores and our direct-to-consumer catalogs and e-commerce/web business, as well as a global network of both national account and independent specialty gift customers and channels. We have an extensive and growing national and international wholesale segment with a diverse customer base that as of July 3, 2010 consisted of approximately 20,700 locations in North America, typically in non-shopping mall locations. We also have a growing retail store base primarily located in shopping malls and lifestyle centers. As of July 3, 2010 we operated 503 Yankee Candle retail stores. We operate two flagship stores, a 90,000-square-foot store in South Deerfield, Massachusetts, which is a major tourist destination in Massachusetts, and a second 42,000-square-foot flagship store in Williamsburg, Virginia. We also sell our products directly to consumers through our direct mail catalogs and our Internet web site at www.yankeecandle.com. Outside of North America, we sell our products primarily through our subsidiary, Yankee Candle Company (Europe), LTD, which has an international wholesale customer network of approximately 4,100 store locations and distributors covering a combined 46 countries.

Due to the seasonal nature of our business, interim results are not necessarily indicative of results for the entire fiscal year. Our revenue and earnings are typically greater during our fiscal fourth quarter, which includes the majority of the holiday selling season.

Discontinued Operations

RESULTS OF OPERATIONS

The following table sets forth the various components of our condensed consolidated statements of operations, expressed as a percentage of sales, for the periods indicated that are used in connection with the discussion herein.


	Thirteen Weeks Ended July 3, 2010		Thirteen Weeks Ended July 4, 2009		Twenty-Six Weeks Ended July 3, 2010		Twenty-Six Weeks Ended July 4, 2009
Statements of Operations Data:
Sales:
Wholesale	42.8	%	42.7	%	45.4	%	44.3	%
Retail	57.2		57.3		54.6		55.7


Total net sales	100.0		100.0		100.0		100.0
Cost of sales	44.4		43.4		44.3		43.4


Gross profit	55.6		56.6		55.7		56.6
Selling expenses	38.5		38.2		36.7		38.1
General and administrative expenses	11.1		12.9		11.5		12.9
Restructuring charges	—		0.2		0.3		0.4


Operating income	5.9		5.3		7.2		5.2


Other expense, net	18.5		18.3		17.9		18.9


Loss from continuing operations before benefit from income taxes	(12.6	)	(13.0	)	(10.8	)	(13.7	)
Benefit from income taxes	(4.5	)	(5.9	)	(3.9	)	(5.9	)


Loss from continuing operations	(8.1	)	(7.1	)	(6.9	)	(7.7	)
Loss from discontinued operations, net of taxes	—		(3.4	)	(0.1	)	(2.4	)


Net loss	(8.1	)%	(10.5	)%	(7.0	)%	(10.1	)%

The results of operations discussion that follows for the thirteen and the twenty-six weeks ended July 3, 2010 versus the thirteen and twenty-six weeks ended July 4, 2009, is for continuing operations only. The results of operations of the Aroma Naturals and the Illuminations divisions have been treated as discontinued operations for all periods presented and are not included in the discussion below.

Thirteen weeks ended July 3, 2010 versus the Thirteen weeks ended July 4, 2009

SALES

Sales increased 5.5% to $125.4 million for the thirteen weeks ended July 3, 2010 from $118.9 million for the thirteen weeks ended July 4, 2009.

Retail Sales

Retail sales increased 5.2% to $71.7 million for the thirteen weeks ended July 3, 2010, from $68.1 million for the thirteen weeks ended July 4, 2009. The increase in retail sales was primarily due to (i) sales attributable to stores opened in 2009 that have not yet entered the comparable store base (which in 2009 were open for less than a full year) of approximately $2.0 million, (ii) increased sales in our Yankee Candle Fundraising division of approximately $1.9 million, (iii) the addition of 10 new Yankee Candle retail stores opened in 2010 which increased sales by approximately $0.8 million and (iv) increased sales in our catalog and internet business of approximately $0.6 million, partially offset by decreased comparable store sales of approximately $1.7 million.

Comparable store and catalog and Internet sales for our Yankee Candle Retail business decreased 1.9% for the thirteen weeks ended July 3, 2010 compared to the thirteen weeks ended July 4, 2009. Yankee Candle comparable store sales for the thirteen weeks ended July 3, 2010 decreased 3.1% compared to the thirteen weeks ended July 4, 2009. Comparable store sales represent a comparison of sales during the corresponding fiscal periods on stores in our comparable stores sales base. A store first enters our comparable store sales base in the fourteenth fiscal month of operation. Permanently closed stores are excluded from the comparable store calculation beginning in the month in which the store closes. The decrease in comparable store sales was driven by decreased transactions and a decrease in average ticket. There were 473 stores included in the Yankee Candle comparable store base as of July 3, 2010 as compared to 437 stores included in the Yankee Candle comparable store base as of July 4, 2009. There were 503 total retail stores open as of July 3, 2010, compared to 485 total retail stores open as of July 4, 2009.

Wholesale Sales

Wholesale sales, including international operations, increased 5.8% to $53.7 million for the thirteen weeks ended July 3, 2010 from $50.7 million for the thirteen weeks ended July 4, 2009.

The increase in wholesale sales was primarily due to (i) increased sales in our international operations of approximately $3.5 million, (ii) increased sales to domestic wholesale locations opened during the last 12 months of approximately $0.9 million, partially offset by decreased sales in domestic wholesale locations in operation prior to July 4, 2009 of approximately $0.2 million and decreased sales from new product ventures of $1.2 million.

GROSS PROFIT

Gross profit is sales less cost of sales. Included within cost of sales are the cost of the merchandise we sell through our retail and wholesale segments, inbound and outbound freight costs, the operational costs of our distribution facilities, which include receiving costs, inspection and warehousing costs, and salaries and expenses incurred by the Company’s buying and merchandising operations.

Gross profit increased 3.5% to $69.7 million for the thirteen weeks ended July 3, 2010 from $67.3 million for the thirteen weeks ended July 4, 2009. As a percentage of sales, gross profit decreased to 55.6% for the thirteen weeks ended July 3, 2010 from 56.6% for the thirteen weeks ended July 4, 2009.

Retail Gross Profit

Retail gross profit dollars increased 2.0% to $45.2 million for the thirteen weeks ended July 3, 2010 from $44.3 million for the thirteen weeks ended July 4, 2009. The increase in gross profit dollars was primarily due to increased sales volume which increased gross profit by approximately $2.8 million driven largely by increased gross sales in our retail store operations, and increased profits in our Yankee Candle fundraising business of approximately $1.0 million, offset by approximately $2.6 million in increased promotional and marketing activity driven by the highly promotional retail environment and increased costs in our supply chain operations of approximately $0.3 million over the prior year quarter.

As a percentage of sales, retail gross profit decreased to 63.0% for the thirteen weeks ended July 3, 2010 from 65.0% for the thirteen weeks ended July 4, 2009. The decrease in retail gross profit rate was primarily driven by increased marketing and promotional activity of 1.3%, slightly unfavorable results in our supply chain operations relative to the prior year quarter of 0.5% and decreased profitability in our Yankee Candle Fundraising division of 0.2%.

Wholesale Gross Profit

Wholesale gross profit dollars increased 6.1% to $24.5 million for the thirteen weeks ended July 3, 2010 from $23.1 million for the thirteen weeks ended July 4, 2009. The increase in wholesale gross profit dollars was primarily attributable to sales volume increases primarily driven by our international operations, which increased gross profit by approximately $1.8 million, somewhat offset by decreases in new product ventures, which decreased gross profit by approximately $0.3 million and increased marketing and promotional activity of approximately $0.1 million.

As a percentage of sales, wholesale gross profit increased to 45.7% for the thirteen weeks ended July 3, 2010 from 45.5% for the thirteen weeks ended July 4, 2009. The increase in wholesale gross profit rate was the result of increased profitability in our new product ventures of 0.4%, offset by decreased productivity and increased costs in our supply chain of 0.1% and increased promotional and marketing activity which caused a decrease in gross profit of 0.1%.

SELLING EXPENSES

Selling expenses increased 6.3% to $48.3 million for the thirteen weeks ended July 3, 2010 from $45.4 million for the thirteen weeks ended July 4, 2009. 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 were 38.5% and 38.2% for the thirteen weeks ended July 3, 2010 and July 4, 2009, respectively.

Retail Selling Expenses

Retail selling expenses increased 3.7% to $39.1 million for the thirteen weeks ended July 3, 2010 from $37.8 million for the thirteen weeks ended July 4, 2009. As a percentage of retail sales, retail selling expenses were 54.6% and 55.4% for the thirteen weeks ended July 3, 2010 and July 4, 2009, respectively. The increase in retail selling expenses in dollars was primarily related to selling expenses incurred in the new Yankee Candle retail stores opened in 2010 and 2009, which together represented approximately $1.5 million. The decrease in selling expense rate was primarily due to a decrease in purchase accounting expense adjustments.

Wholesale Selling Expenses

Wholesale selling expenses increased 19.4% to $9.1 million for the thirteen weeks ended July 3, 2010 from $7.6 million for the thirteen weeks ended July 4, 2009. These expenses relate to payroll, advertising and other operating costs. As a percentage of wholesale sales, wholesale selling expenses were 17.0% and 15.0% for the thirteen weeks ended July 3, 2010 and July 4, 2009, respectively. The increase in selling expenses was primarily attributable to increased marketing costs and commissions of approximately $0.5 million, increased labor costs of approximately $0.4 million and increased occupancy expenses of approximately $0.2 million, all of which were mainly driven by growth in our international business. The increase in selling expenses as a percentage of sales was primarily driven by the de-leveraging of selling expenses in our international division mostly resulting from increased occupancy costs related to expansion in our concession business. These costs typically leverage during quarters with a higher seasonal sales base.

GENERAL AND ADMINISTRATIVE EXPENSES

administrative dollars year over year was driven primarily by decreased bonus accruals as a result of underperforming against internal plans relative to the prior year, a reduction in our labor related expenses as a result of reduced headcount and decreases in other administrative expenses as a result of continued focus on cost containment. The decrease in general and administrative expenses as a percentage of sales was primarily driven by leveraging general and administrative expenses against a larger sales base.

INTEREST AND OTHER EXPENSE, NET

Interest and other expense, net was $23.2 million for the thirteen weeks ended July 3, 2010 compared to $21.9 million for the thirteen weeks ended July 4, 2009. The primary component of this expense was interest expense, which was $18.5 million and $21.8 million for the thirteen weeks ended July 3, 2010 and July 4, 2009, respectively. The decrease in interest expense was primarily due to a decrease in our average debt outstanding during the period.

During second quarter of 2009, our existing interest rate swaps were de-designated as cash flow hedges, thus precluding us from applying hedge accounting. Starting with the second quarter of 2009, changes in the fair value of our derivative contracts are recognized in the condensed consolidated statement of operations. During the thirteen weeks ended July 3, 2010, we recognized $4.2 million in other expense related to our derivative contracts. During the thirteen weeks ended July 4, 2009, we recognized $0.5 million in other income related to a gain on our derivative contracts.

BENEFIT FROM INCOME TAXES

The benefit from income taxes for the thirteen weeks ended July 3, 2010 was $5.6 million compared to $7.1 million for the thirteen weeks ended July 4, 2009. The effective tax rates for the thirteen weeks ended July 3, 2010 and July 4, 2009 were 35.6% and 45.5%, respectively. The decrease in the effective tax rate for the thirteen weeks ended July 3, 2010 compared to the thirteen weeks ended July 4, 2009 is primarily attributable to an expected increase in the manufacturing deduction in the current year.

LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX

The discontinued operations of both the Illuminations and Aroma Naturals businesses are as follows:


	Thirteen Weeks Ended
	July 3, 2010			July 4, 2009
Sales	$	—		$	2,855

Loss from discontinued operations	$	(60	)	$	(6,704	)
Benefit from income taxes		(22	)		(2,623	)

Loss from discontinued operations, net of income taxes	$	(38	)	$	(4,081	)

Twenty-Six weeks ended July 3, 2010 versus the Twenty-Six weeks ended July 4, 2009

SALES

Sales increased 11.9% to $266.3 million for the twenty-six weeks ended July 3, 2010 from $238.1 million for the twenty-six weeks ended July 4, 2009.

Retail Sales

Retail sales increased 9.6% to $145.4 million for the twenty-six weeks ended July 3, 2010, from $132.7 million for the twenty-six weeks ended July 4, 2009. The increase in retail sales was primarily due to (i) sales attributable to stores opened in 2009 that have not yet entered the comparable store base (which in 2009 were open for less than a full year) of approximately $5.2 million, (ii) increased comparable store sales of $3.2 million, (iii) increased sales in our Yankee Candle Fundraising division of approximately $2.4 million, (iv) increased sales in our catalog and internet business of approximately $1.0 million and (v) the addition of 10 new Yankee Candle retail stores opened in 2010 which increased sales by approximately $0.9 million.

Comparable store and catalog and Internet sales for our Yankee Candle Retail business increased 3.5% for the twenty-six weeks ended July 3, 2010 compared to the twenty-six weeks ended July 4, 2009. Yankee Candle comparable store sales for the twenty-six weeks ended July 3, 2010 increased 2.9% compared to the twenty-six weeks ended July 4, 2009. Comparable store sales represent a comparison of sales during the corresponding fiscal periods on stores in our comparable stores sales base. A store first enters our comparable store sales base in the fourteenth fiscal month of operation. Permanently closed stores are excluded from the comparable store calculation beginning in the month in which the store closes. The increase in comparable store sales was driven by increased transactions at our retail stores, somewhat offset by a slight decrease in average ticket. There were 473 stores included in the Yankee Candle comparable store base as of July 3, 2010 as compared to 437 stores included in the Yankee Candle comparable store base as of July 4, 2009. There were 503 total retail stores open as of July 3, 2010, compared to 485 total retail stores open as of July 4, 2009.

Wholesale Sales

Wholesale sales, including international operations, increased 14.8% to $121.0 million for the twenty-six weeks ended July 3, 2010 from $105.4 million for the twenty-six weeks ended July 4, 2009.

The increase in wholesale sales was primarily due to (i) increased sales in our international operations of approximately $9.7 million, (ii) increased sales in domestic wholesale locations in operation prior to July 4, 2009 of approximately $3.5 million, and (iii) increased sales to domestic wholesale locations opened during the last 12 months of approximately $2.6 million, offset by decreased sales from new product ventures of approximately $0.2 million. The increase in our international operations was fueled by increased sales volume and to a lesser extent, favorable exchange rates relative to the prior year. The increase in domestic wholesale sales was primarily driven by continued momentum with the Target® rollout.

GROSS PROFIT

Gross profit increased 10.1% to $148.3 million for the twenty-six weeks ended July 3, 2010 from $134.8 million for the twenty-six weeks ended July 4, 2009. As a percentage of sales, gross profit decreased to 55.7% for the twenty-six weeks ended July 3, 2010 from 56.6% for the twenty-six weeks ended July 4, 2009.

Retail Gross Profit

Retail gross profit dollars increased 8.3% to $93.5 million for the twenty-six weeks ended July 3, 2010 from $86.3 million for the twenty-six weeks ended July 4, 2009. The increase in gross profit dollars was primarily due to increased sales volume which increased gross profit by approximately $9.7 million driven largely by increased gross sales in our retail store operations, increased profitability in our Yankee Candle Fundraising division of approximately $1.2 million, favorable results in our supply chain operations of approximately $0.6 million, offset in part by increased promotional and marketing activity of approximately $4.3 million driven by the highly promotional retail environment.

As a percentage of sales, retail gross profit decreased slightly to 64.3% for the twenty-six weeks ended July 3, 2010 from 65.1% for the twenty-six weeks ended July 4, 2009. The decrease in retail gross profit rate was driven by increased marketing and promotional activity of 1.1% and decreased profitability in our Yankee Candle fundraising division of 0.2%, offset by favorable results from our supply chain operations of 0.5%.

Wholesale Gross Profit

Wholesale gross profit dollars increased 13.2% to $54.8 million for the twenty-six weeks ended July 3, 2010 from $48.4 million for the twenty-six weeks ended July 4, 2009. The increase in wholesale gross profit dollars was attributable to sales volume increases within our wholesale operations, which increased gross profit by approximately $7.4 million, offset by increased marketing and promotional activity of approximately $0.6 million, slightly unfavorable results in our supply chain operations relative to the prior year of approximately $0.2 million and decreased sales from new product ventures which decreased gross profit by approximately $0.1 million.

As a percentage of sales, wholesale gross profit decreased to 45.3% for the twenty-six weeks ended July 3, 2010 from 46.0% for the twenty-six weeks ended July 4, 2009. The decrease in wholesale gross profit rate was the result of increased promotional and marketing activity which caused a decrease in gross profit of 0.3%, slightly unfavorable supply chain operations relative to the prior year of 0.3%, and decreased profitability in our new product ventures of 0.1%.

SELLING EXPENSES

Selling expenses increased 8.0% to $97.8 million for the twenty-six weeks ended July 3, 2010 from $90.6 million for the twenty-six weeks ended July 4, 2009. 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 were 36.7% and 38.1% for the twenty-six weeks ended July 3, 2010 and July 4, 2009, respectively.

Retail Selling Expenses

Retail selling expenses increased 5.6% to $79.2 million for the twenty-six weeks ended July 3, 2010 from $75.0 million for the twenty-six weeks ended July 4, 2009. As a percentage of retail sales, retail selling expenses were 54.5% and 56.5% for the twenty-six weeks ended July 3, 2010 and July 4, 2009, respectively. The increase in retail selling expenses in dollars was primarily related to selling expenses incurred in the new Yankee Candle retail stores opened in 2010 and 2009, which together contributed approximately $3.5 million. The decrease in selling expense rate was primarily due to the leveraging of selling expenses by 1.1% as a result of increased comparable retail sales coupled with a decrease in purchase accounting expense adjustments, which contributed 0.5%.

Wholesale Selling Expenses

Wholesale selling expenses increased 19.1% to $18.7 million for the twenty-six weeks ended July 3, 2010 from $15.7 million for the twenty-six weeks ended July 4, 2009. As a percentage of wholesale sales, wholesale selling expenses were 15.4% and 14.9% for the twenty-six weeks ended July 3, 2010 and July 4, 2009, respectively. The increase in selling expenses was primarily attributable to increased marketing costs and commissions of approximately $1.0 million, increased labor costs of approximately $0.7 million and increased occupancy costs of approximately $0.5 million, all of which was mainly driven by growth in our international business. The increase in selling expenses as a percentage of sales was primarily driven by the de-leveraging of selling expenses in our international division mostly resulting from increased occupancy costs related to expansion in our concession business. These costs typically leverage during quarters with a higher seasonal sales base.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses consist primarily of personnel–related costs including senior management, accounting, information systems, human resources, legal, marketing, management incentive programs and bonus and other costs that are not readily allocable to either the retail or wholesale operations. General and administrative expenses remained relatively flat at $30.6 million for the twenty-six weeks ended July 3, 2010 compared to $30.7 million for the twenty-six weeks ended July 4, 2009. As a percentage of sales, general and administrative expenses were 11.5% and 12.9% for the twenty-six weeks ended July 3, 2010 and July 4, 2009, respectively. The decrease in general and administrative dollars year over year was driven primarily by decreased legal, consulting and other general and administrative expenses as a result of continued cost containment efforts, offset by increases in labor costs primarily related to bonus incentives within our retail division as a result of our favorable retail comparable sales. The decrease in general and administrative expenses as a percentage of sales was primarily driven by leveraging general and administrative expenses against a larger sales base.

INTEREST AND OTHER EXPENSE, NET

Interest and other expense, net was $47.8 million for the twenty-six weeks ended July 3, 2010 compared to $45.0 million for the twenty-six weeks ended July 4, 2009. The primary component of this expense was interest expense, which was $38.3 million and $43.5 million for the twenty-six weeks ended July 3, 2010 and July 4, 2009, respectively. The decrease in interest expense was primarily due to a decrease in our average debt outstanding during the period.

During second quarter of 2009, our existing interest rate swaps were de-designated as cash flow hedges, thus precluding us from applying hedge accounting. Starting with the second quarter of 2009, changes in the fair value of our derivative contracts are recognized in the condensed consolidated statement of operations. During the twenty-six weeks ended July 3, 2010, we recognized $9.0 million in other expense related to our derivative contracts. During the twenty-six weeks ended July 4, 2009, we recognized $0.6 million in other income related to a gain on our derivative contracts.

BENEFIT FROM INCOME TAXES

The benefit from income taxes for the twenty-six weeks ended July 3, 2010 was $10.3 million compared to $14.1 million for the twenty-six weeks ended July 4, 2009. The effective tax rates for the twenty-six weeks ended July 3, 2010 and July 4, 2009 were 35.9% and 43.5% respectively. The decrease in the effective tax rate for the twenty-six weeks ended July 3, 2010 compared to the twenty-six weeks ended July 4, 2009 is primarily attributable to an expected increase in the manufacturing deduction in the current year.

LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX

The discontinued operations of both the Illuminations and Aroma Naturals businesses are as follows:


	Twenty-Six Weeks Ended
	July 3, 2010			July 4, 2009
Sales	$	—		$	9,345

Loss from discontinued operations	$	(461	)	$	(9,235	)
Benefit from income taxes		(167	)		(3,612	)

Loss from discontinued operations, net of income taxes	$	(294	)	$	(5,623	)

LIQUIDITY AND CAPITAL RESOURCES

Senior Secured Credit Facility

Our senior secured credit facility (the “Credit Facility”) consists of a $650.0 million 7–year senior term loan facility (“Term Facility”) and a 6–year $125.0 million senior secured revolving credit facility (“Revolving Facility”). All borrowings under the Credit Facility bear interest at a rate per annum equal to an applicable margin, plus, at the Company’s option, (i) the higher of (x) the prime rate (as set forth on the British Banking Association Telerate Page 5) and (y) the federal funds effective rate, plus one-half percent (0.50%) per annum or (ii) the Eurodollar rate, and resets periodically. In addition to paying interest on outstanding principal under the Credit Facility, the Company is required to pay a commitment fee to the lenders in respect of unutilized loan commitments at a rate of 0.50% per annum. The Term Facility matures on February 6, 2014 and the Credit Facility matures on February 6, 2013.

As of July 3, 2010, we had outstanding letters of credit of $1.6 million and $39.0 million outstanding under our Revolving Facility, leaving $84.4 million in availability under the Revolving Facility. As of July 3, 2010, we were in compliance with all covenants under the Credit Facility. We believe that based on our current projections for fiscal 2010 that we will continue to be in compliance with our financial covenants during 2010.

We use interest rate swaps to manage the variability of a portion of cash flows associated with the forecasted interest payments on our Term Facility. This is achieved through converting a portion of the floating rate Term Facility to a fixed rate by entering into pay-fixed interest rate swaps. During the second quarter of 2009 we changed the interest rate election on our Term Facility from the three-month LIBOR rate to the one-month LIBOR rate. As a result, our existing interest rate swaps were de-designated as cash flow hedges and we no longer account for these instruments using hedge accounting whereby changes in fair value were recognized in the condensed consolidated statement of operations. The unrealized loss included in OCI on the date we changed the interest rate election is being amortized to other expense over the remaining term of the respective interest rate swap agreements.

Simultaneous with the de-designations, we entered into new interest rate swap agreements to further reduce the variability of cash flows associated with the forecasted interest payments on our Term Facility. These swaps are not designated as cash flow hedges and, are measured at fair value with changes in fair value recognized in the condensed consolidated statement of operations as a component of other income (expense).

As a result of these transactions, we effectively converted a portion of our Term Facility, which is floating-rate debt, to a blended fixed-rate up to the aggregate amortizing notional value of the swaps by having the Company pay fixed-rate amounts in exchange for the receipt of the floating-rate interest payments. As of July 3, 2010, the aggregate notional value of the swaps was $385.0 million, or 82.8% of our Term Facility, resulting in a blended fixed rate of 3.26%. The aggregate notional value amortizes over the life of the swaps. Under the terms of these agreements, a monthly net settlement is made for the difference between the average fixed rate and the variable rate based upon the one-month LIBOR rate on the aggregate notional amount of the interest rate swaps. One of our interest rate swaps terminated in March 2010 with the remaining swap agreement terminating in March 2011.

During the second and third quarters of 2009, we also entered into forward starting amortizing interest rate swaps in the aggregate notional amount of $320.7 million with a blended fixed rate of 3.49% to eliminate the variability in future interest payments by having the Company pay fixed-rate amounts in exchange for receipt of floating-rate interest payments. The effective date of the forward starting swaps is March 31, 2011, of which there are no settlements required until after that date. The forward starting swaps are not designated as cash flow hedges and, are measured at fair value with changes in fair value recognized in the condensed consolidated statements of operations as a component of other income (expense). The forward starting swap agreements terminate in March 2013.

All obligations under the Credit Facility are guaranteed by the Parent and each of the Company’s existing and future domestic subsidiaries. In addition, the senior secured credit facility is secured by first priority perfected liens on all of the Company’s capital stock and substantially all of the Company’s existing and future material assets and the existing and future material assets of the Company’s guarantors, except that only up to 66% of the voting capital stock of the first tier foreign subsidiaries and 100% of the non–voting capital stock of such foreign subsidiaries will be pledged in favor of the senior secured credit facility and each of the guarantor’s assets.

The Credit Facility permits all or any portion of the loans outstanding to be prepaid at any time and commitments to be terminated in whole or in part at our option without premium or penalty. The Company is required to repay amounts borrowed under the Term Facility in equal quarterly installments in an aggregate annual amount equal to one percent (1.0%) of the original principal amount of the Term Facility with the balance being payable on the maturity date of the Term Facility.

Subject to certain exceptions, the Credit Facility requires that 100% of the net proceeds from certain asset sales, casualty insurance, condemnations and debt issuances, and 50% (subject to step downs) from excess cash flow, as defined, for each fiscal year must be used to pay down outstanding borrowings. The calculation to determine if the Company has excess cash flow per the Credit Facility is on an annual basis at the end of each fiscal year.

Consolidated Adjusted EBITDA Ratio

The Credit Facility contains a financial covenant which requires that we maintain at the end of each fiscal quarter, commencing with the quarter ended January 2, 2010 through the quarter ending October 2, 2010, a consolidated total secured debt (net of cash and cash equivalents not to exceed $30.0 million) to consolidated EBITDA ratio of no more than 3.75 to 1.00. The consolidated total secured debt to consolidated EBITDA ratio will step down to no more than 3.25 to 1.00 for the fourth quarter ending January 1, 2011. As of July 3, 2010, our actual secured leverage ratio was 2.71 to 1.00, as defined. As of July 3, 2010, total secured debt (including our capital lease obligations of $1.9 million) was approximately $504.5 million (net of $1.5 million in cash). Under the Credit Facility, EBITDA is defined as net income plus, interest, taxes, depreciation and amortization, further adjusted to add back extraordinary, unusual or non-recurring losses, non-cash stock option expense, fees and expenses related to the Transaction, fees and expenses under the Management Agreement with our equity sponsor, restructuring charges or reserves, as well as other non-cash charges, expenses or losses, and further adjusted to subtract extraordinary, unusual or non-recurring gains, other non-cash income or gains, and certain cash contributions to our common equity. Set forth below is a reconciliation of Consolidated Adjusted EBITDA, as calculated under the Credit Facility, to EBITDA and net income for the four quarters ended July 3, 2010 (in thousands):


Net income	$	21,692
Income tax benefit		20,391
Interest expense, net (excluding amortization of deferred financing fees)		91,220
Depreciation and amortization		44,823


EBITDA		178,126
Extraordinary, unusual or non-recurring charges		2,366
Share-based compensation expense		962
Restructuring charges		1,735
Fees paid pursuant to management agreement		1,500
Other non-cash expenses		1,346


Consolidated Adjusted EBITDA under the Credit Facility	$	186,035

The Credit Facility also contains certain other limitations on the Company’s and certain of the Company’s restricted subsidiaries’, as defined in the credit agreement related to our Credit Facility, ability to incur additional debt, guarantee other obligations, grant liens on assets, make investments or acquisitions, dispose of assets, make optional payments or modifications of other debt instruments, pay dividends or other payments on capital stock, engage in mergers or consolidations, enter into sale and leaseback transactions, enter into arrangements that restrict the Company’s ability to pay dividends or grant liens and engage in transactions with affiliates.

The Consolidated Adjusted EBITDA ratio is a material component of the Credit Facility. Non-compliance with the maximum Consolidated Adjusted EBITDA ratio could prevent us from borrowing under our Revolving Facility and would result in a default under the credit agreement related to our Credit Facility. If there were an event of default under the credit agreement related to our Credit Facility that was not cured or waived, the lenders under our Credit Facility could cause all amounts outstanding under our Credit Facility to be due and payable immediately, which would have a material adverse effect on our financial position and cash flows.

Cash Flows and Funding of our Operations

The Company’s cash includes interest-bearing and non-interest bearing accounts. The Company maintains cash balances at several financial institutions. Cash as of July 3, 2010, was $1.5 million compared to $9.1 million as of January 2, 2010. Cash used in operating activities for the twenty-six weeks ended July 3, 2010 was $26.3 million as compared to cash used in operations of $32.3 million for the twenty-six weeks ended July 4, 2009. Cash used in operating activities during the twenty-six weeks ended July 3, 2010 includes total payments of $1.2 million of taxes and cash paid for interest of $36.3 million. Cash used in operating activities during the twenty-six weeks ended July 4, 2009 includes total payments of $6.6 million of taxes primarily related to fiscal 2008 and cash paid for interest of $41.0 million.

Net cash used in investing activities was $8.5 million for the twenty-six weeks ended July 3, 2010 and was used for the purchase of property and equipment, primarily related to new stores and store renovations and supply chain initiatives. Net cash provided by financing activities for the twenty-six weeks ended July 3, 2010, was $27.3 million, of which $28.0 million is related to net borrowings under the Revolving Facility. Net cash used by financing activities was $82.0 million for the twenty-six weeks ended July 4, 2009, of which $81.7 million was used to pay down the credit facility. The fluctuation in financing activities year over year relates to a change in our cash management strategy where we held on to our cash at the end of fiscal 2008 versus using our cash to pay down $103.3 million of our Term Facility at the end of fiscal 2009.

We fund our operations through a combination of internally generated cash from operations and from borrowings under the Credit Facility. Our primary uses of cash are working capital requirements, new store expenditures, new store inventory purchases and debt service requirements. We anticipate that cash generated from operations together with amounts available under the Credit Facility will be sufficient to meet our future working capital requirements, new store expenditures, new store inventory purchases and debt service obligations as they become due over the next twelve months. However, our ability to fund future operating expenses and capital expenditures and our ability to make scheduled payments of interest on, to pay principal on or refinance indebtedness and to satisfy any other present or future debt obligations will depend on future operating performance which will be affected by general economic, financial and other factors beyond our control. While we have limited visibility to the 2010 retail environment, based upon current trends and our budget expectations we remain confident that for the foreseeable future we will have sufficient cash flow and liquidity to fund our working capital requirements and meet our debt service obligations. In addition, borrowings under our Credit Facility are dependent upon our continued compliance with the financial and other covenants contained therein.

Due to the seasonality of the business, we typically do not generate positive cash flow from operations through the first three quarters of our fiscal year. As such, we draw on the revolver portion of our Credit Facility during these times to fund operations. In the fourth quarter, these borrowings are typically repaid in full using cash generated from operations during the fourth quarter holiday season. We typically reach our peak borrowings of approximately $90.0 million during the latter part of the third quarter. We review and forecast our cash flow on a daily basis for the current year and on a quarterly basis for the upcoming year to ensure we have adequate liquidity to fund our business. We believe that we will, for the foreseeable future, be able to meet our debt service obligations, fund our working capital requirements, fund our capital expenditures and be in compliance with our covenants under our Credit Facility.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Our market risks relate primarily to changes in interest rates. At July 3, 2010, we had $504.1 million of floating rate debt and $513.0 million of fixed rate debt. For fixed rate debt, interest rate changes affect the fair market value, but do not impact earnings or cash flows. Conversely for floating rate debt, interest rate changes do not affect the fair market value but do impact future earnings and cash flows, assuming other factors are held constant. The $504.1 million outstanding under our Credit Facility bears interest at variable rates. All borrowings under the Credit Facility bear interest at a rate per annum equal to an applicable margin, plus, at the Company’s option, (i) the higher of (a) the prime rate (as set forth on the British Banking Association Telerate Page 5) and (b) the federal funds effective rate, plus one-half percent (0.50%) per annum or (ii) the Eurodollar rate, and resets periodically. As of July 3, 2010, the weighted average combined interest rate on the Term Facility and Revolving Facility was 2.31%. This Credit Facility is intended to fund operating needs. Because this Credit Facility bears a variable interest rate based on market indices, our results of operations and cash flows will be exposed to changes in interest rates.

The variable nature of our obligations under the Credit Facility creates interest rate risk. In order to mitigate this risk we use interest rate swaps to manage the variability of a portion of cash flows associated with the forecasted interest payments on our Term Facility. This is achieved through converting a portion of the floating rate Term Facility to a fixed rate by entering into pay-fixed interest rate swaps. In essence, we convert our Term Facility, which is floating-rate debt, to a fixed-rate up to the aggregate notional value of the swaps by paying fixed-rate amounts in exchange for the receipt of floating-rate interest payments. As of July 3, 2010, the aggregate

notional value of the swaps was $385.0 million, or 82.8% of our Term Facility, resulting in a blended fixed rate of 3.26%. Based on our outstanding floating rate debt and the notional amount of our interest rate swaps, as of July 3, 2010, a 1.00% increase or decrease in current market interest rates would have the effect of causing an approximately $1.2 million additional annual pre–tax charge or benefit to the Company’s results of operations.

We buy a variety of raw materials for inclusion in our products. The only raw material that is considered to be of a commodity nature is wax. Wax is a petroleum based product. Its market price has not historically fluctuated with the movement of oil prices and has instead generally moved with inflation. However, in the past several years the price of wax has increased at a rate significantly above the rate of inflation. Future increases in wax prices could have an adverse affect on our cost of goods sold and could lower our margins.

Item 4.

Controls and Procedures

Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of July 3, 2010. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of July 3, 2010, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

No change in our internal control over financial reporting (as defined in Rules 13a–15(f) and 15d–15(f) under the Exchange Act) occurred during the fiscal quarter ended July 3, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

In August 2009, in connection with the Linens ‘N Things bankruptcy proceedings, Linens Holding Co. and its affiliates (“Linens”) filed a lawsuit against the Company in United States Bankruptcy Court in the District of Delaware alleging that pursuant to the United States Bankruptcy Code Linens is entitled to recover from the Company the following amounts on the basis that they constitute “preferential transfers” under the Code: (i) approximately $5.5 million in payments allegedly received by the Company from Linens during the 90-day period preceding the filing of the Linens bankruptcy cases in May 2008, (ii) approximately $1.5 million in credits allegedly issued by Yankee Candle and redeemed by Linens during that 90-day period, and (iii) approximately $0.7 million in credits allegedly issued by Yankee Candle but not yet redeemed by Linens. The Company has retained bankruptcy counsel and plans to vigorously defend this claim. The Company filed an Answer, including various affirmative defenses, in October 2009. Discovery has not yet commenced. While the Company believes it has a number of strong potential defenses to all or a significant portion of these claims, the Company cannot at this time predict with any degree of likelihood what the potential outcome of this matter may be, particularly due to the fact that discovery has not yet commenced. As of July 3, 2010, the Company did not record any amount related to these claims in its condensed consolidated statement of operations. If this matter were to be decided in a manner adverse to the Company, it could materially adversely impact the Company’s results of operations.

We are also party to various other litigation matters, in most cases involving ordinary and routine claims incidental to our business. We cannot estimate with certainty our ultimate legal and financial liability with respect to such pending litigation matters. However, we believe, based on our examination of such matters, that our ultimate liability will not have a material adverse effect on our financial position, results of operations or cash flows.

Item 1A.

Risk Factors

This report on Form 10-Q contains forward-looking statements. Statements that are not historical or current facts, including statements about our expectations, anticipated financial results, projected capital expenditures, and future business prospects, are forward-looking statements. You can identify these statements by our use of words such as “may,” “will,” “expect,” “believe,” “should,” “plan,” “anticipate,” and other similar expressions. You can find examples of these statements throughout this report, including “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” 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. You should review carefully the risk factors listed in “Item 1A. Risk Factors” in our 2009 Form 10-K, as well as those factors listed in other documents we file with the Securities and Exchange Commission. In addition, you should consider the following factors before investing in our Company. We do not assume an obligation to update any forward-looking statement.

The current economic conditions and uncertain future outlook, including the credit and liquidity crisis in the financial markets and the continued deterioration in consumer confidence and spending, may continue to negatively impact our business and results of operations.

As widely reported, since the latter part of 2008 financial and credit markets in the United States and globally have experienced significant volatility and disruption, which has resulted in, among other things, diminished liquidity and credit availability and a widespread reduction in business activity and consumer spending and confidence. Since 2008, these economic conditions have negatively impacted our business and our results of operations and continue to do so. Any continuation or deterioration in the current economic conditions, or any prolonged global, national or regional recession, may materially adversely affect our results of operations and financial condition.

These economic developments affect businesses such as ours in a number of ways. The current adverse market conditions, including the tightening of credit in financial markets, negatively impacts the discretionary spending of our consumers and may result in a decrease in sales or demand for our products. Similarly, these conditions may negatively impact the financial and operating condition of our wholesale customer base, or their ability to obtain credit, either of which in turn could cause them to reduce or delay their purchases of our products and increase our exposure to losses from bad debts. Similarly, these conditions could also increase the likelihood that one or more of our wholesale customers may file for bankruptcy or similar protection from creditors, which also may result in a loss of sales and increase our exposure to bad debt.

From a financing perspective, we believe that we currently have sufficient liquidity to support the ongoing activities of our business, service our existing debt and invest in future growth opportunities. While the existing conditions have therefore not currently impacted our ability to finance our operations, the continuation or further tightening of the credit markets may adversely affect our ability to access the credit market and to obtain any additional financing or refinancing on satisfactory terms or at all.

We are unable to predict the likely duration and severity of the ongoing economic downturn in the United States and the economies of other countries, nor are we able to predict the long-term impact of these conditions on our operations.

Counterparties to our secured credit facility and interest rate swaps may not be able to fulfill their obligations due to disruptions in the global financial and credit markets.

As a result of concerns about the stability of the financial and credit markets and the strength of counterparties during this challenging global macroeconomic environment, many financial institutions have reduced, and in some instances ceased to provide, funding to borrowers. Based upon information available to us, we have no indication that financial institutions syndicated under our Revolving Facility would be unable to fulfill their commitments to us. However, if certain counterparties were to become unable to fulfill those obligations, it may adversely affect our results of operations, financial condition and liquidity.

Additionally, we have entered into interest rate swap agreements to hedge the variability of interest payments associated with our Credit Facility. We may be exposed to losses in the event of nonperformance by counterparties on these instruments. Continued turbulence in the global credit markets and the U.S. economy may adversely affect our results of operations and financial condition.

We have been required to recognize a pre-tax, non-cash impairment charge related to goodwill and other intangible assets, and we may be required to recognize additional impairment charges against goodwill or intangible assets in the future.

At July 3, 2010, the net carrying value of our goodwill and intangible assets totaled approximately $643.6 million and $287.9 million, respectively. Our amortizing intangible assets are subject to impairment testing in accordance with the Property Plant and Equipment Topic of the ASC, and our non-amortizing goodwill and trade names are subject to impairment tests in accordance with the Intangibles, Goodwill and Other Topic of the ASC. We review the carrying value of our intangible assets and goodwill for impairment whenever events or circumstances indicate that their carrying value may not be recoverable, at least annually for our goodwill and trade names. Significant negative industry or economic trends, including disruptions to our business, unexpected significant changes or planned changes in the use of our intangible assets, and mergers and acquisitions could result in an impairment charge for any of our intangible assets, goodwill or other long-lived assets. We completed our 2009 annual impairment testing of goodwill and indefinite-lived intangible assets as of November 7, 2009 and no impairment was recorded as a result of these tests.

In the impairment analyses we used certain estimates and assumptions, including a combination of market-based and income-based approaches, each of which were weighted at 50% for the impairment test performed as of November 7, 2009. The market-based approach estimates fair value by applying multiples of potential earnings, such as EBITDA and revenue, of publicly traded comparable companies. We believe this approach is appropriate because it provides a fair value using multiples from companies with operations and economic characteristics similar to our reporting units. The income-based approach is based on projected future debt-free cash flow that is discounted to present value using factors that consider the timing and risk of the future cash flows. We believe this approach is appropriate because it provides a fair value estimate based upon the reporting units expected long-term operations and cash flow performance. The income-based approach is based on future projections of operating results and cash flows. These projections are discounted to present value using a weighted average cost of capital for market participants, who are generally thought to be industry participants. The future projections are based on both past performance and the projections and assumptions used in our current operating plan. Such assumptions are subject to change as a result of changing economic and competitive conditions and could result in additional impairment charges. Further, if the economic market conditions were to worsen and our estimated future discounted cash flows decrease further we may incur additional impairment charges. Additional impairment charges related to our goodwill, tradenames or other intangible assets could have a significant impact on our financial position and results of operations.

Our substantial indebtedness could have a material adverse effect on our financial condition and operations.

After giving effect to the Merger and related use of proceeds, we have a substantial amount of debt, which requires significant interest and principal payments. Subject to the limits contained in the indentures governing our senior notes and our senior subordinated notes and our senior secured credit facility, we may be able to incur additional debt from time to time, including drawing on our senior secured revolving credit facility, to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. If we do so, the risks related to our business associated with our high level of debt could intensify. Specifically, our high level of debt could have important consequences to the holders of the notes, including the following:

•

making it more difficult for us to satisfy our obligations with respect to the notes and our other debt;

•

requiring us to dedicate a substantial portion of our cash flow from operations to debt service payments on our and our subsidiaries’ debt, which would reduce the funds available for working capital, capital expenditures, acquisitions and other general corporate purposes;

•

limiting our flexibility in planning for, or reacting to, changes in the industry in which we operate;

•

placing us at a competitive disadvantage compared to any of our less leveraged competitors;

•

increasing our vulnerability to both general and industry–specific adverse economic conditions; and

•

limiting our ability to obtain additional financing to fund future working capital, capital expenditures, acquisitions or other general corporate requirements and increasing our cost of borrowing.

We and/or our subsidiaries may be able to incur substantial additional debt in the future in addition to our notes and our senior secured credit facility. The addition of further debt to our current debt levels could intensify the leverage–related risks that we now face.

Our debt agreements contain restrictions on our ability to operate our business and to pursue our business strategies, and our failure to comply with these covenants could result in an acceleration of our repayment terms.

The credit agreement governing our senior secured credit facility and the indentures governing our notes contain, and agreements governing future debt issuances may contain, covenants that restrict our ability to finance future operations or capital needs, to respond to changing business and economic conditions or to engage in other transactions or business activities that may be important to our growth strategy or otherwise important to us. The credit agreement and the indentures restrict, among other things, our ability and the ability of our subsidiaries to:

•

incur additional debt;

•

pay dividends or make other distributions on our capital stock or repurchase our capital stock or subordinated indebtedness;

•

make investments or other specified restricted payments;

•

create liens;

•

sell assets and subsidiary stock;

•

enter into transactions with affiliates; and

•

enter into mergers, consolidations and sales of substantially all assets.

In addition, the credit agreement related to our senior secured credit facility requires us to satisfy a senior secured leverage ratio and to repay outstanding borrowings under such facility with proceeds we receive from certain sales of property or assets and specified future debt offerings. We cannot assure you that we will be able to maintain compliance with such covenants in the future and, if we fail to do so, that we will be able to obtain waivers from the lenders and/or amend the covenants.

Any breach of the covenants in the credit agreement or the indentures could result in a default of the obligations under such debt and cause a default under other debt. If there were an event of default under the credit agreement related to our senior secured credit facility that was not cured or waived, the lenders under our senior secured credit facility could cause all amounts outstanding with respect to the borrowings under our senior secured credit facility to be due and payable immediately. Our assets and cash flow may not be sufficient to fully repay borrowings under our senior secured credit facility and our obligations under the notes if accelerated upon an event of default. If, as or when required, we are unable to repay, refinance or restructure our indebtedness under, or amend the covenants contained in, our senior secured credit facility, the lenders under our senior secured credit facility could institute foreclosure proceedings against the assets securing borrowings under our senior secured credit facility.

We may not be able to generate sufficient cash flows to meet our debt service obligations.

Our ability to make payments on and to refinance our indebtedness and to fund planned capital expenditures depends on our ability to generate cash from our future operations. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Our business may not generate sufficient cash flow from operations, or future borrowings under our senior secured credit facility, or from other sources, may not be available to us in an amount sufficient, to enable us to repay our indebtedness or to fund our other liquidity needs, including capital expenditure requirements. If we cannot service our indebtedness, we may have to take actions such as selling assets, seeking additional equity or reducing or delaying capital expenditures, strategic acquisitions, investments or alliances. Our senior secured credit facility and the indentures governing the notes restrict our ability to sell assets and use the proceeds from such sales. Additionally, we may not be able to refinance any of our indebtedness on commercially reasonable terms, or at all. If we cannot service our indebtedness, it could impede the implementation of our business strategy or prevent us from entering into transactions that would otherwise benefit our business.

The interests of our controlling stockholders may conflict with the interests of the noteholders.

Private equity funds managed by Madison Dearborn indirectly own substantially all of our common stock. The interests of these funds as equity holders may conflict with the interests of the noteholders. The controlling stockholders may have an incentive to increase the value of their investment or cause us to distribute funds to the detriment of our financial condition and affect our ability to make payments on the outstanding notes. In addition, these funds have the power to elect a majority of our Board of Directors and appoint new officers and management and, therefore, effectively control many other major decisions regarding our operations. Three of our directors are employed by Madison Dearborn. Additionally, our controlling stockholders are in the business of making investments in companies and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. Our controlling stockholders may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us.

If we fail to grow our business as planned, our future operating results may suffer. It will be difficult to maintain our historical growth rates.

We intend to continue to pursue a long-term business strategy of increasing sales and earnings by expanding our retail and wholesale operations both in the United States and internationally. However, our ability to grow these businesses in the short-term, including during 2010, may be negatively impacted by the current economic conditions. Our ability to implement our long-term growth strategy successfully will also be dependent in part on several factors beyond our control, including consumer preferences, and the competitive environment in the markets in which we compete, and we may not be able to achieve our planned growth or sustain our financial performance. Our ability to anticipate changes in the candle, home fragrance and giftware industries, and identify industry trends, will be critical factors in our ability to remain competitive.

We expect that it will become more difficult to maintain our historical growth rate, which could negatively impact our operating margins and results of operations. New stores typically generate lower operating margin contributions than mature stores because fixed costs, as a percentage of sales, are higher and because pre-opening costs are fully expensed in the year of opening. In addition, our retail sales generate lower segment margins than our wholesale sales. Over the past several years, our wholesale business has grown by increasing sales to existing customers and by adding new customers. If we are not able to continue this, our sales and profitability could be adversely affected. In addition, as we expand our wholesale business into new channels of trade that we believe to be appropriate, sales in some of these new channels may, for competitive reasons within the channels, generate lower margins than do our existing wholesale sales. Similarly, as we continue to broaden our product offerings in order to meet consumer demand, we may do so in part by adding products that have lower product margins than those of our core candle products.

We may be unable to continue to open new stores successfully.

Our retail strategy depends in large part on our ability to successfully open new stores in both existing and new geographic markets. For our strategy to be successful, we must identify and lease favorable store sites on favorable economic terms, hire and train managers and associates and adapt management and operational systems to meet the needs of our expanded operations. These tasks may be difficult to accomplish successfully and any changes in the availability of suitable real estate locations on acceptable terms could adversely impact our retail growth. If we are unable to open new stores as quickly as planned, then our future sales and profits could be materially adversely affected. Even if we succeed in opening new stores, these new stores may not achieve the same sales or profit levels as our existing stores. Also, our retail strategy includes opening new stores in markets where we already have a presence so we can take advantage of economies of scale in marketing, distribution and supervision costs, or the opening of new malls or centers in the market. However, these new stores may result in the loss of sales in existing stores in nearby areas, thereby negatively impacting our comparable store sales. A decrease in our retail comparable store sales will have an adverse impact on our cash flows and earnings. This is due to the fact that a significant portion of our expenses are comprised of fixed costs, such as lease payments, and our ability to decrease expenses in response to negative comparable store sales is limited in the short term. If comparable store sales decline it will negatively impact earnings. Our retail strategy also depends upon our ability to successfully renew the expiring leases of our profitable existing stores. If we are unable to do so at planned levels and upon favorable economic terms, then our future sales and profits could be negatively affected.

We face significant competition in the giftware industry. This competition could cause our revenues or margins to fall short of expectations which could adversely affect our future operating results, financial condition and liquidity and our ability to continue to grow our business.

We compete generally for the disposable income of consumers with other producers and retailers in the giftware industry. The giftware industry is highly competitive with a large number of both large and small participants and relatively low barriers to entry.

Our products compete with other scented and unscented candle, home fragrance and personal care products and with other gifts within a comparable price range, like boxes of candy, flowers, wine, fine soap and related merchandise. Our retail stores compete primarily with specialty candle retailers and a variety of other retailers including department stores, gift stores and national specialty retailers that carry candles along with personal care items, giftware and houseware. In addition, while we focus primarily on the premium scented candle segment, scented and unscented candles are also sold outside of that segment by a variety of retailers, including mass

merchandisers. In our wholesale business, we compete with numerous manufacturers and importers of candles, home fragrance products and other home decor and gift items for the limited space available in our wholesale customer locations for the display and sale of such products to consumers. Some of our competitors are part of large, diversified companies which have greater financial resources and a wider range of product offerings than we do. Many of our competitors source their products from low cost manufacturers outside of the United States. This competitive environment could adversely affect our future revenues and profits, financial condition and liquidity and our ability to continue to grow our business.

A material decline in consumers’ discretionary income could cause our sales and income to decline.

Our results depend on consumer spending, which is influenced by general economic conditions and the availability of discretionary income. Accordingly, we may experience declines in sales during periods of significant economic volatility and disruption such as the one we are currently experiencing, or during other economic downturns or periods of uncertainty like that which followed the September 11, 2001 terrorist attacks on the United States or which result from the threat of war or the possibility of further terrorist attacks. Any material decline in the amount of discretionary spending could have a material adverse effect on our sales and income.

Because we are not a diversified company and are primarily dependent upon one industry, we have less flexibility in reacting to unfavorable consumer trends, adverse economic conditions or business cycles.

We rely primarily on the sale of premium scented candles and related products in the giftware industry. In the event that sales of these products decline or do not meet our expectations, we cannot rely on the sales of other products to offset such a shortfall. As a significant portion of our expenses is comprised of fixed costs, such as lease payments, our ability to decrease expenses in response to adverse business conditions is limited in the short term. As a result, unfavorable consumer trends, adverse economic conditions or changes in the business cycle could have a material and adverse impact on our earnings.

If we lose our senior executive officers, or are unable to attract and retain the talent required for our business, our business could be disrupted and our financial performance could suffer.

Our success is in part dependent upon the retention of our senior executive officers. If our senior executive officers become unable or unwilling to participate in our business, our future business and financial performance could be materially affected. In addition, as our business grows in size and complexity we must be able to continue to attract, develop and retain qualified personnel sufficient to allow us to adequately manage and grow our business. If we are unable to do so, our operating results could be negatively impacted. We cannot guarantee that we will be able to attract and retain personnel as and when necessary in the future.

Many aspects of our manufacturing and distribution facilities are customized for our business; as a result, the loss of one of these facilities would disrupt our operations.

Approximately 73% of our 2009 sales were generated by products we manufactured at our manufacturing facility in Whately, Massachusetts and we rely primarily on our distribution facilities in South Deerfield, Massachusetts to distribute our products. Because most of our machinery is designed or customized by us to manufacture our products, and because we have strict quality control standards for our products, the loss of our manufacturing facility, due to natural disaster or otherwise, would materially affect our operations. Similarly, our distribution facilities rely upon customized machinery, systems and operations, the loss of which would materially affect our operations. Although our manufacturing and distribution facilities are adequately insured, if our facilities were destroyed we believe it would take up to twelve months to resume operations at a level equivalent to current operations.

Seasonal, quarterly and other fluctuations in our business, and general industry and market conditions, could affect the market for our results of operations.

Our sales and operating results vary from quarter to quarter. We have historically realized higher sales and operating income in our fourth quarter, particularly in our retail business, which accounts for a larger portion of our sales. We believe that this has been due primarily to an increase in giftware industry sales during the holiday season of the fourth quarter. In addition, in anticipation of increased holiday sales activity, we incur certain significant incremental expenses, including the hiring of a substantial number of temporary employees to supplement our existing workforce. As a result of this seasonality, we believe that quarter to quarter comparisons of our operating results are not necessarily meaningful and that these comparisons cannot be relied upon as indicators of future performance. In addition, we may also experience quarterly fluctuations in our sales and income depending on various factors, including, among other things, the number of new retail stores we open in a particular quarter, changes in the ordering patterns of our wholesale customers during a particular quarter, pricing and promotional activities of our competitors, and the mix of products sold. Most of our operating expenses, such as rent expense, advertising and promotional expense and employee wages and salaries, do not vary directly with sales and are difficult to adjust in the short term. As a result, if sales for a particular quarter are below our expectations, we might not be able to proportionately reduce operating expenses for that quarter, and therefore a sales shortfall could have a disproportionate effect on our operating results for that quarter. Further, our comparable store sales from our retail business in a particular quarter could be adversely affected by competition, the opening nearby of new retail stores or wholesale locations, economic or other general conditions or our inability to execute a particular business strategy. As a result of these factors, we may report in the future sales, operating results or comparable store sales that do not match the expectations of analysts and investors. This could cause the price of the notes to decline.

Sustained interruptions in the supply of products from overseas may affect our operating results.

We source various accessories and other products from Asia. A sustained interruption of the operations of our suppliers, as a result of economic difficulties, the impact of global shipping capacity constraints, the impact of health epidemics, natural disasters or other factors, could have an adverse effect on our ability to receive timely shipments of certain of our products, which might in turn negatively impact our sales and operating results.

Further increases in wax prices above the rate of inflation may negatively impact our cost of goods sold and margins. Any shortages in refined oil supplies could impact our wax supply.

In the past several years significant increases in the price of crude oil have adversely impacted our transportation and freight costs and have contributed to significant increases in the cost of various raw materials, including wax which is a petroleum-based product. These price increases have continued in 2010. This in turn negatively impacts our cost of goods sold and margins. In addition, we believe that rising oil prices and corresponding increases in raw materials and transportation costs negatively impact not only our business but consumer sentiment and the economy at large. Continued weakness in consumer confidence and the macro-economic environment could negatively impact our sales and earnings. Future significant increases in wax prices could have an adverse affect on our cost of goods sold and could lower our margins.

In addition to the impact of increased wax prices, any shortages in refined oil supplies may impact our wax supply. The closing or disruption of oil refineries could significantly limit our ability to source wax and negatively impact our operations. While we experienced no supply issues in 2009, any future prolonged interruption or reduction in wax supplies could negatively impact our operations, sales and earnings.

The loss or significant deterioration in the financial condition of a significant wholesale customer could negatively impact our sales and operating results.

A significant deterioration in the financial condition of one of our major customers, or the loss of such a customer, could have a material adverse effect on our sales,

profitability and cash flow to the extent that we are unable to offset any revenue losses with additional revenue from existing customers or by opening new accounts. We continually monitor and evaluate the credit status of our customers and attempt to adjust trade and credit terms as appropriate. However, a bankruptcy filing by a key customer could have a material adverse effect on our business, results of operations and financial condition.

There are also various potential claims which may arise in connection with bankruptcy proceedings that, if filed and adversely decided, could potentially negatively impact our operating results and financial condition. For example, in August 2009, in connection with the Linens ‘N Things bankruptcy proceedings, Linens Holding Co. and its affiliates (“Linens”) filed a lawsuit against the Company in United States Bankruptcy Court in the District of Delaware alleging that pursuant to the United States Bankruptcy Code Linens is entitled to recover from the Company the following amounts on the basis that they constitute “preferential transfers” under the Code: (i) approximately $5.5 million in payments allegedly received by the Company from Linens during the 90-day period preceding the filing of the Linens bankruptcy cases in May 2008, (ii) approximately $1.5 million in credits allegedly issued by Yankee Candle and redeemed by Linens during that 90-day period, and (iii) approximately $0.7 million in credits allegedly issued by Yankee Candle but not yet redeemed by Linens. The Company has retained bankruptcy counsel and plans to vigorously defend this claim. The Company filed an Answer, including various affirmative defenses, in October 2009. Discovery has not yet commenced. While the Company believes it has a number of strong potential defenses to all or a significant portion of these claims, the Company cannot at this time predict with any degree of likelihood what the potential outcome of this matter may be, particularly due to the fact that discovery has not yet commenced. As of July 3, 2010, the Company did not record any amount related to these claims in its consolidated statement of operations. If this matter were to be decided in a manner adverse to the Company, it could materially adversely impact the Company’s results of operations.

Given the current economic environment, there is an increased risk that additional wholesale customers could be forced to declare bankruptcy or significantly reduce their operations or purchases from us. The loss of one or more significant wholesale customers, or a significant reduction in their operations, could materially adversely impact our results of operations and financial condition.

An outbreak of certain public health issues, including epidemics, pandemics and other contagious diseases, such as the H1N1 influenza virus, could have a significant adverse impact on our sales and operating results.

An outbreak of certain public health issues, including epidemics, pandemics and other contagious diseases such as the H1N1 influenza virus, commonly referred to as the “swine flu” could cause a significant disruption in our operations due to staffing shortages as well as disruption of services and products provided by third-party providers. In addition, to the extent that our customers become infected by such diseases, or feel uncomfortable visiting public locations due to a perceived risk of exposure to contagious diseases, we could experience a reduction in customer traffic which could in turn adversely impact our financial results. Any significant disruption in our operations or customer traffic could have a significant adverse impact on our business, financial condition, results of operations and cash flows.

Other factors may also cause our actual results to differ materially from our estimates and projections.

In addition to the foregoing, there are other factors which may cause our actual results to differ materially from our estimates and projections. Such factors include the following:

•

changes in the general economic conditions in the United States including, but not limited to, consumer debt levels, financial market performance, interest rates, consumer sentiment, inflation, commodity prices, unemployment and other factors that impact consumer confidence and spending;

•

changes in levels of competition from our current competitors and potential new competition from both retail stores and alternative methods or channels of distribution;

•

loss of a significant vendor or prolonged disruption of product supply;

•

the successful introduction of new products and technologies in our product categories, including the frequency of such introductions, the level of consumer acceptance of new products and technologies, and their impact on demand for existing products and technologies;

•

the impact of changes in pricing and profit margins associated with our sourced products or raw materials;

•

changes in income tax laws or regulations, or in interpretations of existing income tax laws or regulations;

•

adverse outcomes from significant litigation matters;

•

changes in the interpretation or enforcement of laws and regulations regarding our business or the sale of our products, or the ingredients contained in our products; or the imposition of new or additional restrictions or regulations regarding the same;

•

changes in our ability to attract, retain and develop highly-qualified employees or changes in the cost or availability of a sufficient labor force to manage and support our operations;

•

changes in our ability to meet objectives with regard to business acquisitions or new business ventures;

•

the occurrence of severe weather events prohibiting or discouraging consumers from traveling to retail or wholesale locations;

•

the disruption of global, national or regional transportation systems;

•

the occurrence of certain material events including natural disasters, acts of terrorism, the outbreak of war or other significant national or international events;

•

our ability to react in a timely manner and maintain our critical business processes and information systems capabilities in a disaster recovery situation; and

•

changes in our ability to manage our existing computer systems and technology infrastructures, and our ability to implement successfully new computer systems and technology infrastructures.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

Not Applicable

Item 3.

Defaults Upon Senior Securities.

Not Applicable

Item 5.

Other Information.

Not Applicable

Item 6.

Exhibits

31.1	Certification of Harlan M. Kent Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, dated August 12, 2010

31.2	Certification of Gregory W. Hunt Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, dated August 12, 2010

32.1	Certification of Harlan M. Kent Pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, dated August 12, 2010

32.2	Certification of Gregory W. Hunt Pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934, dated August 12, 2010.

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.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller Reporting Company