Notes to the Condensed Consolidated Financial Statements
(unaudited)
(dollars in thousands, except per share and store data)
1. Business and Summary of Significant Accounting Policies
Nature of Business
Teavana Holdings, Inc. (the Company or Teavana) is a specialty retailer offering more than 100 varieties of premium loose-leaf teas, authentic artisanal teawares and other
tea-related merchandise. Teavana offers products through 301 company-owned stores in 41 states and Canada, 19 franchised stores primarily in Mexico, as well as through its website, www.teavana.com.
On June 11, 2012, the Company through its wholly owned subsidiary, Teavana Canada, Inc., completed the acquisition of Teaopia Limited
(Teaopia) for a purchase price of approximately $26,974, net of cash acquired (the Teaopia Acquisition). Through the acquisition, the Company acquired substantially all of the assets of Teaopia, which operated 46 retail store
locations in Canada that sold tea and tea-related merchandise.
Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with U.S. generally accepted accounting
principles (U.S. GAAP) for interim financial information and the Securities and Exchange Commissions (SEC) guidance for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the unaudited
condensed consolidated financial statements have been recorded in the interim periods presented. These unaudited condensed consolidated financial statements should be read in conjunction with the Companys audited consolidated financial
statements and related notes thereto for the fiscal year ended January 29, 2012 included in the Companys Annual Report on Form 10-K (File No. 001-35248). The accompanying unaudited condensed consolidated financial statements present
the results of operations for the thirteen weeks and thirty-nine weeks ended October 28, 2012 and October 30, 2011. These results are not necessarily indicative of the results that may be achieved for the fiscal year ending
February 3, 2013 or for any other period.
Principles of Consolidation
The condensed consolidated financial statements include all the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions
and balances have been eliminated in consolidation.
The financial statements of any foreign subsidiaries have been translated into U.S.
dollars in accordance with the Financial Accounting Standards Boards (FASB) Accounting Standards Codification (ASC) Topic No. 830-30-
Translation of Financial Statements
(ASC 830-30). Under ASC
830-30, the financial position and results of operations of the Companys foreign subsidiaries are measured using the subsidiarys local currency as the functional currency. Revenues and expenses have been translated into U.S. dollars at
average exchange rates prevailing during the period, and assets and liabilities have been translated at the exchange rates as of the balance sheet date. The resulting translation gain and loss adjustments are recorded as an element of other
comprehensive income in accordance with ASC Topic No. 220-
Comprehensive Income
.
Fiscal Year
The Companys fiscal year is 52 or 53 weeks ending on the Sunday nearest to January 31 of the following year. These condensed consolidated
financial statements include thirteen and thirty-nine weeks in each of the periods ended October 28, 2012 and October 30, 2011.
Seasonality
The Companys
business is seasonal and has historically realized a higher portion of net sales, net income and operating cash flows in the fourth fiscal quarter due primarily to the holiday selling season. As a result, the Companys working capital
requirements fluctuate during the year, increasing in the second and third fiscal quarters in anticipation of this peak selling season.
Use of Estimates
The preparation
of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the
financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Goodwill
Goodwill is an asset representing future economic benefits from assets
acquired in a business combination that are not individually identified and separately recognized. Goodwill is reviewed for impairment at least annually in accordance with the provisions of ASC Topic No. 350-
Intangible: Goodwill and Other
(ASC 350). The Company does not amortize goodwill. Management reviews goodwill for impairment annually on October 1 or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In
testing for impairment, management calculates the fair value of the reporting unit to which the goodwill relates based on the fair value of the Company as a whole. The fair value of the Company is the amount for which the Company could be sold in a
current transaction between willing parties. If the reporting units carrying value exceeds its fair value, goodwill is written down to its implied fair value. The Company has concluded that there was no impairment losses during the thirty-nine
weeks ended October 28, 2012.
Recently Adopted Accounting Pronouncements
In May 2011, the FASB issued ASU No. 2011-04-
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and
International Financial Reporting Standards
(IFRS) (ASU 2011-04), which amends ASC Topic No. 820-
Fair Value Measurements
(ASC 820). This update was issued to provide a consistent definition of fair
value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and IFRS. This standard update also changes certain fair value measurement principles and enhances disclosure requirements particularly for
Level 3 fair value measurements. The Company adopted ASU 2011-04 on January 30, 2012, and such adoption did not have a significant impact on the Companys results of operations, financial condition or disclosures.
7
In June 2011, the FASB issued ASU No. 2011-05-
Presentation of Comprehensive Income
(ASU
2011-05). ASU 2011-05 eliminates the option to report other comprehensive income and its components only within the statement of changes in equity. Under ASU 2011-05, an entity can elect to present items of net income and other comprehensive
income in one continuous statement or in two separate, but consecutive, statements. In addition, in December 2011, the FASB issued ASU No. 2011-12-
Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of
Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05
(ASU 2011-12)
.
ASU 2011-12 defers the requirement to present components of reclassifications of other comprehensive income by
income statement line item on the statement of comprehensive income, with all other requirements of ASU 2011-05 unaffected. The Company adopted ASU 2011-05 and ASU 2011-12 beginning January 30, 2012 and has elected to present items of net
income and other comprehensive income in one continuous statement at this time.
In September 2011, the FASB issued ASU
No. 2011-08
-Intangibles: Goodwill and Other
(ASU 2011-08). ASU 2011-08 provides companies the option to perform a qualitative assessment to first evaluate whether the fair value of a reporting unit is less than its carrying
value for purposes of the annual goodwill impairment test. If an entity determines it is more likely than not that the fair value of a reporting unit is less than the carrying value, then performing the two-step impairment test is necessary. The
Company adopted ASU 2011-08 on January 30, 2012, and such adoption did not have a significant impact on the Companys results of operations, financial condition or disclosures.
Accounting pronouncements not yet adopted by the Company
In July 2012, the FASB
issued ASU No. 2012-02-
Testing Indefinite-Lived Intangible Assets for Impairment
(ASU 2012-02). ASU 2012-02 amends existing guidance by giving an entity the option to first assess qualitative factors to determine whether it
is more likely than not that an indefinite-lived intangible asset is impaired. If this is the case, a more detailed fair value calculation will need to be performed to identify potential impairments and to subsequently measure the amount of
impairment loss, if any. To perform a qualitative assessment, an entity must identify and evaluate changes in economic, industry and entity-specific events and circumstances that could affect the significant inputs used to determine the fair value
of an indefinite-lived intangible asset. ASU 2012-02 is effective for annual and interim impairment tests performed by the Company for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company will adopt the
provisions of ASU 2012-02 effective February 3, 2013 and has elected to not adopt this ASU early. The Company did not perform any impairment tests related to indefinite-lived intangible assets during the thirteen or thirty-nine week periods
ended October 28, 2012, and does not expect that the adoption of ASU 2012-02 will have a material impact on the Companys future impairment tests or the results of operations, financial condition or disclosure.
The FASB issues ASUs to amend the authoritative literature in related ASCs. There have been a number of ASUs to date that amend the original text of
related ASCs. Except for the ASUs listed above, those issued to date either (i) provide supplemental guidance, (ii) are technical corrections, or (iii) are not applicable to the Company. Additionally, there were various other
accounting standards and interpretations issued during the thirteen weeks ended October 28, 2012 that the Company has not yet been required to adopt, none of which is expected to have a material impact on the Companys consolidated
financial statements and the notes thereto going forward.
2. Property and Equipment
Property and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
October 28, 2012
|
|
|
January 29, 2012
|
|
|
|
|
Leasehold improvements
|
|
$
|
74,184
|
|
|
$
|
52,872
|
|
Equipment
|
|
|
14,537
|
|
|
|
9,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88,721
|
|
|
|
62,164
|
|
Less - Accumulated depreciation
|
|
|
(25,211
|
)
|
|
|
(19,379
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
63,510
|
|
|
$
|
42,785
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $2,583 and $1,550 for the thirteen weeks ended October 28, 2012 and October 30, 2011,
respectively, and $6,526 and $4,242 for the thirty-nine weeks ended October 28, 2012 and October 30, 2011, respectively.
3. Long-term Debt
On June 12, 2008, the Company established a three-year revolving credit facility by entering into a loan and security agreement
(the Credit Agreement) with Fifth Third Bank. On April 22, 2011, the Company entered into an amendment to the Credit Agreement that, among other things, extended its term for five years through April 22, 2016. On
October 6, 2011, the Company entered into a second amendment to the Credit Agreement that, among other things, permitted the creation of a foreign subsidiary and certain intercompany transfers. Additionally, on April 15, 2012, the Company
entered into the third amendment (the Third Amendment) to the Credit Agreement. Among other things, the Third Amendment provided Fifth Thirds consent to the transaction contemplated by the asset purchase agreement, dated
April 15, 2012, relating to the Teaopia Acquisition. At the closing of the Teaopia Acquisition, which occurred on June 11, 2012, the Third Amendment also lowered the applicable margin for advances, permitted new store capital expenditures
for the stores acquired in the Teaopia Acquisition and increased the Maximum Revolving Facility (as defined). The Third Amendment provides for a revolving credit facility up to $50,000 from the date of the closing of the Teaopia Acquisition through
December 31, 2012 and $40,000 on and after January 1, 2013. On July 31, 2012, the Company and certain of its subsidiaries entered into Amendment No. 4 (the Fourth Amendment) to the Credit Agreement (as amended, the
Amended Credit Agreement). The Fourth Amendment provides for the creation of a subsidiary (Teavana LuxCo, a Luxembourg
société à responsabilité limitée
), establishes a cap on investments that may
be made into Teavana Canada, Inc., releases a pledge of 65% of the shares of Teavana Canada, Inc., grants a pledge of 65% of the shares of Teavana LuxCo and consents to certain transactions in connection with the formation of Teavana LuxCo. All
other material terms of the Credit Agreement remain the same.
Under the revolving credit facility, the borrowing capacity is equal to
(i) the lesser of the Maximum Revolving Facility, less the undrawn face amount of any letters of credit outstanding and (ii) the Borrowing Base (as defined). The Maximum Revolving Facility was $50,000 as of October 28, 2012. The
Borrowing Base is defined as the sum of (i) 200% of Consolidated EBITDA (as defined) for the most recent twelve month trailing period for which financial statements are available, minus (ii) the aggregate undrawn face amount of any
outstanding letters of credit at the time a drawdown on the revolving credit facility is made, minus (iii) such reserves as may be established by the lender in its Permitted Discretion (as defined), but not to exceed 35% of the Borrowing Base.
The revolving credit facility includes a $5,000 sublimit for the issuance of letters of credit. The Amended Credit Agreement is secured by substantially all of the U.S. assets of the Company and 65% of the common stock of Teavana LuxCo. The
revolving credit facility under the Amended Credit Agreement had $19,627 outstanding, undrawn face amounts on letters of credit of $646 and availability of $29,727 on October 28, 2012.
8
Borrowings under the Amended Credit Agreement bear interest at either (i) LIBOR plus the applicable
margin of 4.00% through the First Amendment Date (as defined), and rates that range from 3.00% to 4.50% thereafter based on the Companys Consolidated Leverage Ratio (as defined) or (ii) the lenders base commercial lending rate, plus
the applicable margin of 1.0%. The balance outstanding under the revolving credit facility on October 28, 2012 was $19,627, bearing interest at 4.25% based upon the lenders base commercial lending rate option.
The Amended Credit Agreement specifies certain financial and non-financial covenants that the Company must meet. It is managements belief that the
Company was in compliance with these covenants on all respective measurement dates. The Amended Credit Agreement does not permit the payment of any dividends, and thus 100% of the Companys net income is restricted for purposes of dividend
payments. The restriction on the payment of dividends applies to the Company and all of its subsidiaries. The Amended Credit Agreement also restricts all of the subsidiaries of the Company from making loans or advances to the Company in excess of
certain specified limits and also limits annual net capital expenditures incurred by the Company. The restricted net assets of the subsidiaries are substantially the same as the consolidated net assets, as presented in the accompanying condensed
consolidated balance sheets. Teavana Holdings, Inc. has no operations or operating revenues, and the expenses of Teavana Holdings, Inc. are immaterial by virtue of the fact that the management and directors of the Company are compensated by its
subsidiary, Teavana Corporation. Teavana Holdings, Inc. has no assets outside of its investments in subsidiaries, and no other material liabilities other than as a co-obligor under the Amended Credit Agreement.
Deferred financing costs totaling $15 and $433 were incurred in connection with the Amendments to the Credit Agreement during the thirty-nine weeks ended
October 28, 2012 and October 30, 2011, respectively. These costs will be amortized to interest expense over the remaining term of the revolving credit facility using the straight-line method. The unamortized loan costs from the original
Credit Agreement will also continue to be amortized over the remaining term of the revolving credit facility. Interest expense relating to deferred financing costs and interest incurred on borrowings under the revolving credit facility totaled $238
and $122 for the thirteen weeks ended October 28, 2012 and October 30, 2011, respectively, and $441 and $327 for the thirty-nine weeks ended October 28, 2012 and October 30, 2011, respectively.
4. Net income per share
The following table sets forth the computation of basic and diluted net income per share in accordance with ASC 260
-Earnings per
Share
. Basic net income per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share is calculated by dividing net income by the weighted average
number of common shares outstanding plus potentially dilutive common shares, primarily consisting of the Companys non-qualified stock options, outstanding during the period. The treasury stock method was used to determine the dilutive effect
of the stock options. The following table details the calculation of basic and diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Thirty-Nine Weeks Ended
|
|
|
|
October 28, 2012
|
|
|
October 30, 2011
|
|
|
October 28, 2012
|
|
|
October 30, 2011
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income / (loss)
|
|
$
|
(1,415
|
)
|
|
$
|
936
|
|
|
$
|
1,940
|
|
|
$
|
5,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For basic net income / (loss) per share - weighted average shares basis
|
|
|
38,632,149
|
|
|
|
38,138,070
|
|
|
|
38,496,953
|
|
|
|
37,216,444
|
|
Effect of dilutive stock options
|
|
|
|
|
|
|
827,034
|
|
|
|
655,427
|
|
|
|
812,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For diluted net income / (loss) per share - adjusted weighted average shares basis
|
|
|
38,632,149
|
|
|
|
38,965,104
|
|
|
|
39,152,380
|
|
|
|
38,029,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income / (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.04
|
)
|
|
$
|
0.02
|
|
|
$
|
0.05
|
|
|
$
|
0.14
|
|
Diluted
|
|
$
|
(0.04
|
)
|
|
$
|
0.02
|
|
|
$
|
0.05
|
|
|
$
|
0.14
|
|
As of October 28, 2012, the Company had 38,685,783 shares of common stock outstanding. As of October 30, 2011,
the Company had 38,226,327 shares of common stock outstanding. Anti-dilutive common stock options totaling 534,679 were excluded from the weighted average number of common shares outstanding plus potentially dilutive common shares for the diluted
net income per share calculation as of October 28, 2012. There were no anti-dilutive securities as of October 30, 2011.
5. Leases
The Company has entered into operating leases for its stores, distribution center and store support center. Initial lease terms for
stores are generally ten years with rent escalations and no renewal options. Rent expense for leases with rent escalations is recognized on a straight-line basis over the term of occupancy of the lease. The leases are net leases under which the
Company pays the taxes, insurance and common area maintenance costs. The leases may also provide for both minimum rent payments and contingent rental based on a percentage of sales in excess of specified amounts. In certain leases, the landlord also
charges the Company a portion of its marketing expense.
Total minimum and contingent rent expense for the thirteen and thirty-nine weeks
ended October 28, 2012 and October 30, 2011, respectively, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Thirty-Nine Weeks Ended
|
|
|
|
October 28, 2012
|
|
|
October 30, 2011
|
|
|
October 28, 2012
|
|
|
October 30, 2011
|
|
|
|
|
|
|
Minimum rentals
|
|
$
|
5,523
|
|
|
$
|
3,569
|
|
|
$
|
14,520
|
|
|
$
|
10,188
|
|
Contingent rentals
|
|
|
117
|
|
|
|
59
|
|
|
|
345
|
|
|
|
199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,640
|
|
|
$
|
3,628
|
|
|
$
|
14,865
|
|
|
$
|
10,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
Future minimum lease payments for non-cancelable operating leases with an initial term of one year or more
were as follows as of October 28, 2012:
|
|
|
|
|
Fiscal Year
|
|
Amount
|
|
|
|
2012 (remainder of fiscal year)
|
|
$
|
3,644
|
|
2013
|
|
|
22,939
|
|
2014
|
|
|
23,601
|
|
2015
|
|
|
23,488
|
|
2016
|
|
|
22,227
|
|
Thereafter
|
|
|
89,367
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
185,266
|
|
|
|
|
|
|
6. Stock-Based Compensation
Under the Companys 2004 Management Incentive Plan (the 2004 Plan), adopted on December 15, 2004, up to 1,851,471
stock options may be granted to certain employees and outside directors or advisors to purchase an equal number of shares of common stock at prices not less than 100% of the estimated fair market value at the date of grant. All stock-based awards
issued under the plan are non-qualified stock options. On July 18, 2011, the Board of Directors and stockholders authorized the establishment of the Teavana 2011 Equity Incentive Plan (the 2011 Plan), effective immediately after the
SECs declaration of effectiveness of the Registration Statement on Form S-1 (File No. 333-173775) and immediately prior to the pricing of the initial public offering (the Offering), both of which took place on July 27,
2011. Under the 2011 Plan, up to 750,000 shares of the Companys common stock have been reserved for issuance pursuant to the grant to certain employees and outside directors of equity awards, including stock options, stock appreciation rights,
restricted or unrestricted stock awards, restricted stock units, performance awards or other stock-based awards at prices not less than 100% of the estimated fair market value of the common stock at the date of grant. Share options forfeited or
cancelled under both plans are eligible for reissuance under the 2011 Plan.
The Company accounts for stock-based awards in accordance with
ASC Topic No. 718
-Compensation: Stock Compensation
(ASC 718). ASC 718 requires measurement of compensation cost for all stock-based awards at fair value on the grant date (or measurement date, if different) and recognition of
compensation expense, net of forfeitures, over the requisite service period for awards expected to vest. Stock-based compensation expense was $342 and $464 for the thirteen weeks ended October 28, 2012 and October 30, 2011, respectively
and $863 and $527 for the thirty-nine weeks ended October 28, 2012 and October 30, 2011, respectively.
The fair values of stock
options granted under the 2004 and 2011 Plans are estimated at the date of grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options. Stock option
pricing models require the input of highly subjective assumptions, including the expected volatility of the stock price. The Companys stock has been publicly traded since July 28, 2011; therefore, changes in these subjective input
assumptions may affect the grant date fair value estimates. The assumptions used are based on managements best estimate and available information at the time of grant. The Company estimated the fair value of options granted during the
thirty-nine weeks ended October 28, 2012 under the 2011 Plan using the following assumptions:
|
|
|
|
|
October 28, 2012
|
|
|
Expected life (years)
(1)
|
|
6.25 Years
|
Risk-free interest rate
(2)
|
|
0.93% - 1.03%
|
Volatility
(3)
|
|
54.0%
|
Dividend yield
(4)
|
|
0%
|
1)
|
Represents the period of time stock options are expected to remain outstanding. As the Company has only awarded plain vanilla options as described in ASC
718-10-S99,
Compensation-Stock Compensation: Overall: SEC Materials
, the Company used the simplified method for determining the expected life of the options granted. The simplified method calculates the expected term as the sum of
the vesting term and the original contract term divided by two. The Company will continue to use the simplified method until such time that it has sufficient historical data for options to accurately estimate the expected term of stock-based awards.
|
2)
|
Based on the U.S. Treasury yield curve in effect at the time of grant with a term consistent with the expected life of stock options.
|
3)
|
Expected stock price volatility incorporated historical and implied volatility of similar entities whose share prices are publicly available. The Company plans to use
peer company volatility for the foreseeable future until sufficient historical data are available.
|
4)
|
The Company has not paid regular dividends on its common stock and does not expect to pay dividends on its common stock in the foreseeable future.
|
10
The following table represents stock options granted, exercised or forfeited under the 2004 Plan and the
2011 Plan during the thirty-nine weeks ended October 28, 2012:
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
Weighted Average
Exercise Price
|
|
|
|
|
Outstanding at January 29, 2012
|
|
|
1,907,305
|
|
|
$
|
5.77
|
|
Granted
|
|
|
73,000
|
|
|
|
12.97
|
|
Exercised
|
|
|
(403,947
|
)
|
|
|
1.29
|
|
Forfeited
|
|
|
(43,125
|
)
|
|
|
17.00
|
|
Expired
|
|
|
(1,877
|
)
|
|
|
17.00
|
|
|
|
|
|
|
|
|
|
|
Outstanding at October 28, 2012
|
|
|
1,531,356
|
|
|
$
|
6.97
|
|
|
|
|
|
|
|
|
|
|
Under the 2004 Plan and the 2011 Plan, options generally become exercisable over a four-year period and expire ten years
from the date of grant. Additionally, stock option grants generally vest 25% on each anniversary of the grant date, commencing with the first anniversary of the grant date (in the case of the 580,500 options granted under the 2011 Plan concurrent
with the pricing of the Offering, commencing with the first anniversary of the closing of the transaction on August 2, 2011). As of October 28, 2012, there was $3,266 of total unrecognized compensation cost related to non-vested stock
option awards expected to vest. This compensation cost is expected to be recognized through fiscal 2016 based on existing vesting terms, with the weighted average remaining expense recognition period being approximately 1.91 years.
The options outstanding as of October 28, 2012, by exercise price, are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Stock
Options
Outstanding
|
|
Stock Options
Exercisable
|
|
|
Exercise Price
|
|
|
Average
Remaining
Contractual
Life (in Years)
|
|
|
|
|
|
651,153
|
|
|
651,153
|
|
|
$
|
1.12
|
|
|
|
2.80
|
|
21,218
|
|
|
21,218
|
|
|
|
1.35
|
|
|
|
3.76
|
|
169,147
|
|
|
169,147
|
|
|
|
1.62
|
|
|
|
4.07
|
|
14,812
|
|
|
14,812
|
|
|
|
1.76
|
|
|
|
4.38
|
|
107,026
|
|
|
107,026
|
|
|
|
2.43
|
|
|
|
2.55
|
|
55,000
|
|
|
|
|
|
|
12.91
|
|
|
|
9.91
|
|
8,000
|
|
|
|
|
|
|
13.04
|
|
|
|
9.59
|
|
10,000
|
|
|
|
|
|
|
13.26
|
|
|
|
9.69
|
|
5,000
|
|
|
1,250
|
|
|
|
15.11
|
|
|
|
9.13
|
|
490,000
|
|
|
126,250
|
|
|
|
17.00
|
|
|
|
8.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,531,356
|
|
|
1,090,856
|
|
|
|
|
|
|
|
6.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were 1,090,856 options exercisable as of October 28, 2012 with a weighted average exercise price of $3.19 per
share and intrinsic value of $9,155. Additionally, 403,947 options were exercised during the thirty-nine weeks ended October 28, 2012 with an intrinsic value of approximately $6,453. The exercise of these stock options gave rise to a tax
benefit of $2,442.
The Company has calculated its additional paid-in capital pool (APIC Pool), the cumulative amount of excess
tax benefits from all awards accounted for under ASC 718, based on the actual income tax benefits received from exercises of stock options granted under ASC 718 using the long method. The APIC Pool is available to absorb future tax deficiencies.
7. Income Taxes
For interim financial reporting, the Company estimates the annual effective tax rate based on projected taxable income for the full
year and adjusts as necessary for discrete events occurring in a particular period. The quarterly income tax provision is recorded in accordance with the estimated annual effective rate. The Company refines the estimates of taxable income throughout
the year as new information, including year-to-date financial results, becomes available, and adjusts the annual effective tax rate, if necessary, during the quarter in which the change in estimate occurs. Significant judgment is required in
determining the Companys effective tax rate and in evaluating its tax positions.
The effective tax rate differs from the federal
statutory rate primarily due to state income tax and foreign tax expense, and to a lesser extent, certain nondeductible expenses and discrete adjustments.
11
In assessing whether to realize deferred tax assets, the Company considers whether it is more likely than
not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become
deductible. The Company considers projections of future taxable income, tax planning strategies and the reversal of temporary differences in making this assessment. The Company has determined that no such valuation allowance was necessary as of
October 28, 2012 and October 30, 2011.
The Company recognizes income tax liabilities related to unrecognized tax benefits in
accordance with ASC Topic No. 740-10
-Accounting for Income Taxes,
and adjusts for such liabilities when its judgment changes as the result of the evaluation of new information. As of October 28, 2012, there were no uncertain tax
positions, and the Company does not anticipate any tax positions generating a significant change in this balance for unrecognized tax benefits within 12 months of this reporting date.
The Company and its subsidiaries are subject to U.S. federal income tax regulations, as well as income tax regulations of multiple state and foreign jurisdictions with varying statutes of limitations. The
Companys tax years for fiscal 2009 through 2011 generally remain subject to examination by federal and most state taxing authorities.
8. Segments
ASC Topic No. 280-
Segment Reporting
(ASC 280) establishes standards for reporting information about a
companys operating segments. The Company determines its operating segments on the same basis used to evaluate performance internally. The Companys reportable segments include the operation of company-owned stores and its e-commerce
website, which have been aggregated into one reportable financial segment. Management bases this aggregation on the following factors: (i) the merchandise offered at company-owned stores and through the e-commerce business is largely the
same, (ii) the majority of e-commerce customers are also customers of retail locations, (iii) the product margins and sales mix of the stores and the e-commerce business are similar and (iv) the distribution methods are the same for
both revenue streams. As of October 28, 2012, all of the Companys significant identifiable assets were located in the United States and Canada.
The following tables present summarized geographical information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Thirty-Nine Weeks Ended
|
|
|
|
October 28, 2012
|
|
|
October 30, 2011
|
|
|
October 28, 2012
|
|
|
October 30, 2011
|
|
|
|
|
|
|
|
|
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
41,063
|
|
|
|
89
|
%
|
|
$
|
33,426
|
|
|
|
100
|
%
|
|
$
|
125,458
|
|
|
|
94
|
%
|
|
$
|
99,679
|
|
|
|
100
|
%
|
Canada
|
|
|
4,974
|
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
|
|
7,978
|
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
46,037
|
|
|
|
|
|
|
$
|
33,426
|
|
|
|
|
|
|
$
|
133,436
|
|
|
|
|
|
|
$
|
99,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 28, 2012
|
|
|
January 29, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
54,344
|
|
|
|
86
|
%
|
|
$
|
42,317
|
|
|
|
99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
|
9,166
|
|
|
|
14
|
%
|
|
|
468
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
63,510
|
|
|
|
|
|
|
$
|
42,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9. Commitments and Contingencies
From time to time, in the normal course of business, the Company is involved in legal proceedings. The Company evaluates the need for
loss accruals under the requirements of ASC Topic No. 450
-Contingencies.
The Company records an estimated loss for any claim, lawsuit, investigation or proceeding when it is probable that a liability has been incurred and the amount of
loss can be reasonably estimated. If the reasonable estimate of a probable loss is a range, and no amount within the range is a better estimate, then the Company records the minimum amount in the range as the loss accrual. If a loss is not probable
or a probable loss cannot be reasonably estimated, no liability is recorded.
On December 28, 2011, a putative class action lawsuit
styled
Chavez v. Teavana Corp.
alleging wage and hour violations of the California Labor Code for General Managers in California was filed in the Superior Court of California, County of Los Angeles. The plaintiff seeks on behalf of herself
and other putative class members, compensatory damages, restitution, putative and exemplary damages, penalties, interest and other relief. The Company disputes the material allegations in the complaint and intends to defend the action vigorously.
Due to inherent uncertainties of litigation and because the lawsuit is in early procedural stages, the Company cannot at this time accurately predict the ultimate outcome, or any potential liability, of the matter.
The Company is also subject to other legal proceedings and claims that arise in the ordinary course of its business. These include claims resulting from
slip and fall accidents, employment related claims and claims from guests or team members alleging illness or injury or other operational concerns. To date, no claims of these types of litigation, certain of which are covered by
insurance policies, have had a material effect on the Company. While it is not possible to predict the outcome of these other suits, legal proceedings and claims with certainty, management does not believe that they would have a material adverse
effect on the Companys financial position and results of operations.
10. Business Combination
On June 11, 2012, the Company completed the Teaopia Acquisition for an adjusted purchase price of approximately $26,974, net of
cash acquired. The Teaopia Acquisition was completed to accelerate the Companys expansion into Canada. Through the acquisition, the Company acquired substantially all of the net assets of Teaopia, which at the time of acquisition operated 46
retail store locations throughout Canada and sold loose-leaf tea and tea-related merchandise. The combined operational results for Teavana and Teaopia are included in the Companys consolidated results of operations beginning June 11,
2012. The transaction was financed with $19,102 in cash on hand and $7,872 from the Companys revolving credit facility. The Company incurred transaction costs of $1,084 associated with the transaction, of which $42 and $1,084 were incurred in
the thirteen and thirty-nine weeks ended October 28, 2012, respectively, and are reported in selling, general and administrative expense in the Companys accompanying Condensed Consolidated Statements of Operations and Comprehensive Income
/ (Loss). There were no transaction costs related to this transaction incurred in fiscal 2011. From June 11, 2012, the date of the Teaopia Acquisition, through October 28, 2012, the combined operational results for Teavana and Teaopia,
excluding Teaopia transaction and integration expenses, include Teaopia-related revenue of $6,188 and a Teaopia-related net loss of $1,321.
12
The Teaopia Acquisition was accounted for as a purchase business combination in accordance with ASC
805-
Business Combinations
(ASC 805), whereby the purchase price paid to complete the Teaopia Acquisition was allocated to the recognized acquired assets and liabilities at fair value. The Company recorded acquired assets,
liabilities assumed, and intangible assets, including goodwill, determined as the excess of purchase price over the estimated fair value of assets acquired and liabilities assumed. Goodwill arising from the acquisition is not subject to amortization
and up to 75% of the acquired goodwill is expected to be deductible for tax purposes.
The following table summarizes the allocation of the
purchase price at the date of acquisition:
|
|
|
|
|
Inventory
|
|
$
|
1,550
|
|
Property and Equipment
|
|
|
6,851
|
|
Intangible assets - Favorable leases
|
|
|
1,204
|
|
Goodwill
|
|
|
17,786
|
|
Other assets acquired and liabilities assumed, net
|
|
|
(417
|
)
|
|
|
|
|
|
Totals
|
|
$
|
26,974
|
|
|
|
|
|
|
As part of the purchase price allocation, the Company determined that Teaopias only separately identifiable
intangible asset was its favorable store leases. The Company estimated the fair value of the favorable lease terms by discounting the amount by which the stated lease payments differ from current estimated market rates at the acquisition date over
the remaining lease term. Additionally, other long-term liabilities consist of certain store leases that have been identified as unfavorable. The intangible arising from the favorable leases and liability arising from the unfavorable leases will be
amortized to rent expense over a weighted average useful life of 6.9 years. The fair value of the favorable and unfavorable leases acquired, as well as the fair value of the property and equipment acquired, were measured using significant inputs not
observable in the open market. As such, the Company categorizes these as Level 3 inputs under ASC 820.
The financial information in the table
below summarizes the consolidated results of operations of the Company on a pro forma basis, as though the Teaopia Acquisition had occurred on January 31, 2011. The pro forma financial information is presented for informational purposes only
and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of the earliest period presented. Such pro forma information is based on the historical financial statements of the
Company combined with other estimates and assumptions to show the effect of the transaction as if it had taken place on January 31, 2011. As such, the pro forma results include adjustments to reflect additional interest expense associated with
funding of the acquisition assuming that the acquisition related debt was incurred on January 31, 2011, in addition to incremental depreciation due to the increase in the fair value of property and equipment and incremental rent expense related
to the amortization of unfavorable and favorable leases acquired. Finally, adjustments of $306 and $1,369 were made to selling, general and administrative expenses related to adjustments for certain transaction and integration costs incurred
directly related to the acquisition for the thirteen weeks and thirty-nine weeks ended October 28, 2012, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
|
Thirty-Nine Weeks Ended
|
|
|
|
October 28, 2012
|
|
|
October 30, 2011
|
|
|
October 28, 2012
|
|
|
October 30, 2011
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Net sales
|
|
$
|
46,037
|
|
|
$
|
36,705
|
|
|
$
|
139,288
|
|
|
$
|
109,193
|
|
Net income / (loss)
|
|
$
|
(975
|
)
|
|
|
313
|
|
|
|
2,942
|
|
|
|
3,977
|
|
|
|
|
|
|
Net income / (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.03
|
)
|
|
$
|
0.01
|
|
|
$
|
0.08
|
|
|
$
|
0.11
|
|
Diluted
|
|
$
|
(0.03
|
)
|
|
$
|
0.01
|
|
|
$
|
0.08
|
|
|
$
|
0.10
|
|
11. Subsequent Events
On November 14, 2012, the Company, Starbucks Corporation (Starbucks) and Taj Acquisition Corp. (Merger
Sub), a wholly-owned subsidiary of Starbucks, entered into an Agreement and Plan of Merger (Merger Agreement), whereby each outstanding share of Teavana common stock, will automatically be converted into the right to receive $15.50
in cash, without interest (the Merger Consideration). Each Company option outstanding immediately prior to the merger, whether or not then vested and exercisable, will be cancelled and converted into the right to receive, for each share
of common stock subject to such stock option, an amount in cash, without interest, equal to the excess, if any, of the Merger Consideration over the per share exercise price of such option. The consummation of the Merger is subject to customary
closing conditions, including (i) receiving the required approval of Teavanas stockholders, which approval was effected after execution of the Merger Agreement, by written consent of holders of Teavana common stock representing
approximately 74% of the outstanding shares of common stock, (ii) 20 days having elapsed since the mailing to Teavanas stockholders of a definitive information statement with respect to adoption of the Merger Agreement, and (iii) the
expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the HSR Act). The information statement with respect to adoption of the Merger Agreement was mailed to
Teavanas stockholders on December 7, 2012. Early termination of the waiting period under the HSR Act was granted on November 27, 2012.
On November 19, 2012, a putative class action, entitled Rosenblum v. Teavana Holdings, Inc., et al., Case No. 2012CV224005,
was filed against the Company, the members of its Board of Directors, Starbucks and Merger Sub in the Superior Court of Fulton County, State of Georgia. The complaint purports to be brought on behalf of all the Companys stockholders (excluding
the defendants and their affiliates). The complaint alleges that the members of the Board of Directors breached their fiduciary obligations to the Companys stockholders in approving the Merger Agreement and by failing to make adequate
disclosures to the Companys stockholders, and that the other named defendants aided and abetted the breach of those duties. More specifically, the complaint alleges, among other things, that (i) the consideration to be paid to the
Companys stockholders in the proposed transaction is inadequate; (ii) the non-solicitation, termination fee and matching rights provisions of the Merger Agreement will hinder and deter other potential acquirers from seeking to acquire the
Company on better terms than the proposed transaction; and (iii) the members of the Board of Directors are conflicted. The complaint seeks various forms of relief, including injunctive relief that would, if granted, prevent the completion of
the Merger, and an award of attorneys fees and expenses.
On November 27, 2012, a putative class action, entitled
Rubin v.
Teavana Holdings, Inc., et al.
, Case No. 8069-VCN, was filed against the Company, the members of its Board of Directors, SKM Partners, LLC (SKM), Starbucks and Merger Sub in the Court of Chancery of the State of Delaware. The
complaint purports to be brought on behalf of all the Companys stockholders (excluding the defendants and their affiliates). The complaint alleges that the members of the Board of Directors breached their
13
fiduciary obligations to the Companys stockholders in approving the Merger Agreement and by failing to make adequate disclosures to the Companys stockholders, and that the Company,
Starbucks and Merger Sub aided and abetted the breach of those duties. The complaint also alleges that several large stockholders of the Company, including the Companys Chief Executive Officer and SKM, breached their fiduciary obligations to
the Companys stockholders by executing the written consent approving the Merger Agreement. More specifically, the complaint alleges, among other things, that (i) the Merger Consideration is inadequate; (ii) the execution of the
written consent and the non-solicitation, termination fee and matching rights provisions of the Merger Agreement restrict the Company from soliciting other offers on more favorable terms than the proposed transaction; and (iii) the members of
the Board of Directors are conflicted. The complaint seeks various forms of relief, including injunctive relief that would, if granted, prevent the completion of the Merger, and an award of attorneys fees and expenses.
On December 4, 2012, a putative class action, entitled
Bekkerman, et. al. v. Teavana Holdings, Inc. et al.,
Case No. 12A-10148-2, was filed
against the Company, the members of its Board of Directors, Starbucks and Merger Sub in the Superior Court of Gwinnett County of the State of Georgia. The complaint purports to be brought on behalf of all the Companys stockholders (excluding
the defendants and their affiliates). The complaint alleges that the members of the Board of Directors breached their fiduciary obligations to the Companys stockholders in approving the Merger Agreement and related agreements and by failing to
make adequate disclosures to the Companys stockholders, and that the Company, Starbucks and Merger Sub aided and abetted the breach of those duties. More specifically, the complaint alleges, among other things, that (i) the Merger
Consideration is inadequate; (ii) the termination fee, no-solicitation, and matching rights provisions of the Merger Agreement restrict the Company from soliciting other offers on more favorable terms than the proposed transaction; and (iii) the
members of the Board of Directors are conflicted. The complaint seeks various forms of relief, including injunctive relief that would, if granted, prevent the completion of the Merger and an award of attorneys fees and expenses.
14