TLB Talbots (The)

SUMMARY

 

The following is a summary which highlights selected information contained in this document. It may not contain all of the information that is important to you. We urge you to carefully read this entire document and the other documents to which we refer in order to fully understand the Offer, including “Where You Can Find More Information” on page 93 and “Risk Factors” on page 26.

 

The Offer (See page 37)

 

Under the terms of the Offer, each BPW warrantholder may elect to receive, for each outstanding BPW Warrant validly tendered and not withdrawn in the Offer, at the election of such holder either:

 

 

 

 

subject in each case to the election procedures and to the proration procedures described in this document and the related letter of election and transmittal. The number of Talbots Warrants to be paid to holders of public BPW Warrants in the Offer is fixed, with 50% of public BPW Warrants (counting for these purposes BPW Warrants held by public warrantholders that do not elect to participate in the Offer) to be exchanged for shares of Talbots common stock and the remaining 50% to be exchanged for Talbots Warrants. Therefore, elections will be subject to proration if holders of BPW Warrants, in the aggregate, elect to receive more than the maximum amount of consideration to be paid in the form of Talbots common stock or Talbots Warrants, as the case may be. See “The Offer — Elections and Proration” for a detailed description of the proration procedure. In addition, instead of receiving any fractional shares of Talbots common stock or fractional Talbots Warrants to which BPW warrantholders otherwise would be entitled, tendering BPW warrantholders will receive an amount in cash (without interest) equal to such holder’s respective proportionate interest in the proceeds from the sale or sales in the open market by the exchange agent for the Offer, on behalf of all such holders, of the aggregate fractional shares of Talbots common stock and fractional Talbots Warrants issued pursuant to the Offer. See “The Offer — Cash Instead of Fractional Shares of Talbots Common Stock and Talbots Warrants” for a detailed description of the treatment of fractional shares and warrants.

 

Talbots’ Reasons for the Merger and the Offer (See page 35)

 

The audit committee of the Talbots board of directors concluded that the merger agreement, the amendment to the merger agreement, the merger, the stock issuance in connection therewith, the agreement among Talbots, BPW, AEON (U.S.A.), Inc. the majority stockholder of Talbots, which we refer to as AEON USA, and AEON Co., Ltd., the parent company of AEON USA (we refer to AEON USA and AEON Co., Ltd. as AEON, except where the context otherwise requires), which we refer to as the AEON agreement, the debt commitment letter with General Electric Capital Corporation, which we refer to as the GE Capital commitment letter or the GE Capital credit facility and the other transaction documents, and the transactions contemplated thereby or undertaken in connection therewith, including the Offer, are advisable and in the best interests of Talbots and its public stockholders because, among other factors, the transactions provide Talbots with access to a large pool of capital that will, among other things, provide a complete exit for AEON, permit Talbots to strengthen its balance sheet, reduce its outstanding indebtedness by approximately $330 million and eliminate negative stockholder equity prior to the April 17, 2010 maturity of the AEON debt and no alternative financings were available to Talbots in the current economic environment and within the time constraints imposed by the December 31, 2009 maturity of certain debt.

 

Description of Talbots Warrants (See page 77)

 

The Talbots Warrants have an exercise price equal to (i) if the Talbots common stock exchange ratio is calculated using the average Talbots price, $14.85, which is the product of 1.30 and the average Talbots price, or (ii) if the Talbots common stock exchange ratio is calculated using the Talbots closing average, the product of 1.30

and the Talbots closing average, subject to a maximum initial exercise price of $14.85 and a minimum initial exercise price of $11.05, and beginning after one year from the date of issuance are subject to accelerated expiration under certain conditions, including if the trading price of shares of Talbots common stock exceeds the redemption trading level, subject to a maximum initial redemption trading level of $19.98 and a minimum initial redemption trading level of $14.88, for any 20 trading days within a 30-trading-day period. See “Description of Talbots Warrants” for a detailed description of the terms of the Talbots Warrants.

 

Purpose of the Offer; The Merger (See page 46)

 

The purpose of the Offer is for Talbots to satisfy its obligations under the merger agreement. Pursuant to the merger agreement, the successful completion of the Offer is a precondition to the consummation of the merger. Promptly after completion of the Offer, Talbots intends to consummate a merger of Merger Sub with and into BPW, with BPW surviving the merger. After the merger, the Surviving Corporation will be a wholly owned subsidiary of Talbots and the former BPW warrantholders will no longer have any direct ownership interest in the Surviving Corporation. See “The Merger Agreement” for a more detailed description of the terms and conditions of the merger agreement.

 

In the merger, the BPW Warrants of warrantholders that did not participate in the Offer will, in accordance with the terms of the existing warrant agreement governing the BPW Warrants, be converted into warrants to purchase the number of shares of Talbots common stock as such warrantholder would have received in the merger had the BPW Warrants been converted to shares of BPW common stock immediately prior to the completion of the merger.

 

Pursuant to the terms of the merger agreement, if the merger is completed, shares of BPW common stock will be exchanged for Talbots common stock based on an exchange ratio equal to the greater of:

 

 

 

In comparison, under the terms of the Offer, each BPW warrantholder may elect to receive, for each outstanding BPW Warrant validly tendered and not withdrawn in the Offer, at the election of such holder either:

 

 

 

 

 

subject in each case to the election procedures and to the proration procedures described in this document and the related letter of election and transmittal.

 

Material United States Federal Income Tax Consequences of the Offer (See page 44)

 

If you are a BPW warrantholder, the Offer is generally expected to be treated as a taxable transaction to you, and you are generally expected to recognize gain or loss for United States federal income tax purposes in an amount equal to the difference, if any, between (i) the sum of the fair market value of the Talbots common stock and/or Talbots Warrants received in the Offer plus the amount of any cash received instead of fractional shares of Talbots common stock and/or fractional Talbots Warrants and (ii) your adjusted tax basis in the BPW Warrants exchanged in the Offer.

 

The United States federal income tax consequences described above may not apply to all BPW warrantholders. Your tax consequences will depend on your individual situation. Accordingly, we strongly urge you to consult your tax advisor for a full understanding of the particular tax consequences of the Offer to you, including the applicability and effect of state, local and non-United States tax laws.

 

Conditions That Must Be Satisfied or Waived for the Offer to Occur (See page 48)

 

The Offer is conditioned upon a number of conditions being satisfied or, where legally permissible, waived, including the following:

 

 

Subject to the provisions of the merger agreement, the conditions to the Offer are for the sole benefit of Talbots and may be asserted by Talbots regardless of the circumstances or may be waived by Talbots, by express and specific action to that effect, in whole or in part at any time and from time to time on or prior to the Expiration Date, except that the conditions relating to receipt of any approvals from any governmental entity may be asserted at any time prior to the Offeror’s acceptance of BPW Warrants for exchange pursuant to the Offer.

 

Expiration of the Offer (See page 40)

 

The Offer is scheduled to expire at 12:00 midnight, New York City time, at the end of March 26, 2010, which is the Initial Expiration Date, unless further extended by Offeror. Any extension, delay, termination, waiver or amendment of the Offer will be followed as promptly as practicable by public announcement thereof to be made no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date. “Expiration Date” means the Initial Expiration Date, unless and until Offeror has extended the period during which the Offer is open, in which event the term “Expiration Date” means the latest time and date at which the Offer, as so extended by Offeror, will expire.

 

Extension, Termination and Amendment (See page 40)

 

Subject to the provisions of the merger agreement and the applicable rules and regulations of the SEC, Offeror may from time to time extend the Offer for one or more periods, including if, at the scheduled Expiration Date, any of the conditions of the Offer shall not have been satisfied or waived until such time as such conditions are satisfied or waived. Offeror shall extend the Offer for any period required by any rule, regulation, interpretation or position of the SEC or the staff of the SEC applicable to the Offer.

 

Offeror will effect any extension, termination, amendment or delay by giving oral or written notice to the exchange agent and by making a public announcement as promptly as practicable thereafter as described under “The Offer — Extension, Termination and Amendment . ” In the case of an extension, any such announcement will be issued no later than 9:00 a.m., New York City time, on the next business day following the previously scheduled Expiration Date. Subject to applicable law (including Rules 14d-4(c) and 14d-6(d) under the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act, which require that any material change in the information published, sent or given to BPW warrantholders in connection with the Offer be promptly disseminated to warrantholders in a manner reasonably designed to inform them of such change) and without limiting the manner in which Offeror may choose to make any public announcement, Offeror assumes no obligation to publish, advertise or otherwise communicate any such public announcement of this type other than by issuing a press release to Business Wire. During any extension, BPW Warrants previously tendered and not properly

withdrawn will remain subject to the Offer, subject to the right of each BPW warrantholder to withdraw previously tendered BPW Warrants.

 

Subject to applicable SEC rules and regulations, Offeror also reserves the right at any time or from time to time on or prior to the Expiration Date to waive any condition identified as subject to waiver in “The Offer — Conditions of the Offer” by giving oral or written notice of such waiver to the exchange agent.

 

No subsequent offering period will be available following the expiration of the Offer.

 

Withdrawal Rights (See page 42)

 

Tendered BPW Warrants may be withdrawn at any time prior to the Expiration Date. Additionally, if Offeror has not agreed to accept the BPW Warrants for exchange on or prior to April 27, 2010, BPW warrantholders may thereafter withdraw their BPW Warrants from tender at any time after such date until Offeror accepts the BPW Warrants for exchange. Once Offeror accepts BPW Warrants for exchange pursuant to the Offer, all tenders not previously withdrawn become irrevocable.

 

Procedure for Tendering (See page 42)

 

To validly tender BPW Warrants pursuant to the Offer, BPW warrantholders must:

 

 

BPW warrantholders who hold BPW Warrants through a bank, broker or other nominee holder, and desire to tender their BPW Warrants pursuant to the Offer, should instruct the nominee holder to do so prior to the Expiration Date.

 

Exchange of BPW Warrants; Delivery of Shares of Talbots Common Stock and Talbots Warrants and Cash (See page 41)

 

Upon the terms and subject to the conditions of the Offer (including, if the Offer is extended or amended, the terms and conditions of any extension or amendment), promptly following the Expiration Date, Offeror will accept for exchange, and will exchange, all BPW Warrants validly tendered and not withdrawn prior to the Expiration Date.

 

Comparative Market Price Data (See page 89)

 

Shares of Talbots common stock are listed on the NYSE under the symbol “TLB.” The BPW Warrants trade on the NYSE Amex under the symbol “BPW.WS.” However, in connection with the completion of the Offer and the merger, BPW will make the appropriate filings to delist the BPW Warrants from trading on the NYSE Amex. The BPW Warrants that are not validly tendered in the Offer, if any, will cease to be eligible for trading on any public market. On December 8, 2009, the date of the public announcement of Talbots’ proposal to acquire BPW, the closing sales price of Talbots common stock on the NYSE was $8.23 and the closing sales price of BPW Warrants on the NYSE Amex was $10.32. On March 10, 2010 the last practicable trading day before the distribution of this document, the closing sales price of Talbots common stock on the NYSE was $11.45 and the closing sales price of BPW Warrants on the NYSE Amex was $1.60. BPW warrantholders should obtain current market quotations for Talbots common stock and BPW Warrants before deciding whether to tender BPW Warrants in the Offer and before electing the form of Offer consideration they wish to receive. See “Comparative Market Prices and Dividends” for a discussion of pro forma per share data and “Risk Factors — The liquidity of the BPW Warrants that are not exchanged will be reduced”. Application will be made to have the Talbots Warrants issued in the Offer approved for listing on the NYSE.

 

Interests of Certain BPW Directors and Officers (See page 49)

 

PWPA and BNYH are the sponsors of BPW and collectively hold warrants to acquire 14,372,089 shares of BPW common stock as of March 10, 2010. In connection with the entry into the merger agreement, PWPA and

BNYH have entered into the BNYH agreement, pursuant to which PWPA and an affiliate will acquire BNYH upon the completion of the merger, and BNYH granted PWPA a proxy to vote its shares of BPW stock at the BPW special meeting. PWPA and BNYH have also entered into the BPW sponsors’ agreement with BPW and Talbots under which, subject to the terms and conditions of that agreement, PWPA, on behalf of itself and BNYH, has agreed to, among other things, exchange all of its BPW Warrants in the Offer for shares of Talbots common stock based on the Talbots common stock exchange ratio.

 

The non-sponsor founders have entered into an agreement with BPW and Talbots, pursuant to which they have agreed to, among other things, exchange all of their BPW Warrants in the Offer for shares of Talbots common stock based on the Talbots common stock exchange ratio.

 

In connection with BPW’s initial public offering, BPW entered into letter agreements with each of PWPA and BNYH upon the completion of BPW’s initial public offering pursuant to which they agreed that none of PWPA, BNYH, nor any of their respective affiliates would be entitled to receive any fees or other compensation of any kind in connection with BPW’s initial business combination (other than reimbursement of out-of-pocket expenses). Perella Weinberg Partners LP, or Perella Weinberg, an affiliate of PWPA, was engaged by Talbots in February 2009 to advise on refinancing Talbots’ existing indebtedness and on related strategic alternatives in general. For services rendered with respect to strategic alternatives between February 2009 and September 2009 Talbots paid Perella Weinberg compensation of $2,500,000. In September 2009, following AEON’s notice to Talbots that AEON desired to divest its debt and equity interests in Talbots assuming AEON could identify and structure an appropriate transaction, Perella Weinberg was separately engaged by the Talbots audit committee to assist in exploring strategic alternatives for Talbots. The total compensation payable by Talbots to Perella Weinberg as a result of the BPW transaction, including the merger and GE Capital credit facility, is approximately $9,000,000 for services with respect to strategic alternatives. Such compensation is contingent upon the closing of the applicable transactions or any similar transactions engaged in by Talbots. The fee arrangements between Talbots and Perella Weinberg apply equally to any similar transactions engaged in by Talbots whether or not involving BPW. BPW is not a party to these engagements and will not pay any fees to Perella Weinberg in connection with the merger or the related transactions. BPW and BNYH have acknowledged Talbots’ engagement of Perella Weinberg and consented to the payment of such fees in the BPW sponsors’ agreement. Joseph R. Perella, the Vice Chairman of the BPW board of directors, and Gary Barancik, the Chief Executive Officer of BPW, are partners of Perella Weinberg. Some of BPW’s other officers are also partners or employees of Perella Weinberg. This payment will be made following the completion of the merger.

 

Interests of Certain Talbots Directors and Officers (See page 50)

 

The completion of the Offer is a precondition under the merger agreement to the consummation of the merger. When you consider the Offer, you should also keep in mind that the directors and officers of Talbots have interests in the merger, including in certain cases as individuals, that are different from, or in addition to, your interests as a holder of BPW Warrants.

 

Following entry into the merger agreement, Talbots management and BPW began discussions concerning possible 2009 annual incentive and retention arrangements for management. Based on these discussions and the agreement of BPW, Talbots management proposed, and on February 25, 2010 at its regularly-scheduled meeting the Compensation Committee of the Talbots board of directors approved, a 2009 annual incentive and retention program for certain employees, including executive officers. A portion of the 2009 annual incentive awards is to be made contingent on the completion of the merger (“financing incentive award”) and a portion of the 2009 annual incentive awards is based on Talbots having achieved improved 2009 operating financial results (“operating performance incentive award”). The aggregate anticipated 2009 annual bonus and retention payments to Talbots executive officers that would be made under the financing incentive award is $5,000,000, one-third of which would be expected to be awarded in cash and two-thirds of which would be awarded in the form of a grant of special restricted stock units. The operating performance incentive award portion of the 2009 incentive program was approved by the Talbots Compensation Committee as a result of Talbots’ improved operating performance for 2009, but payment is subject to the completion of the merger. An incentive pool of $4,000,000 is to be allocated as follows: (i) 50% of the total pool is payable to those management-level employees eligible under Talbots’ annual incentive program and (ii) 50% of the total pool is payable to all other Talbots associates.

 

Comparison of Rights of Talbots and BPW Stockholders (See page 81)

 

Upon the completion of the merger, BPW warrantholders will become Talbots stockholders and/or holders of warrants exercisable in accordance with their terms for shares of Talbots common stock. The rights associated with Talbots common stock are different from the rights associated with BPW common stock, and the rights associated with Talbots Warrants are different from the rights associated with BPW Warrants. The differences are described in more detail under “Comparison of Rights of Talbots and BPW Stockholders” and “Comparison of Rights of Talbots and BPW Warrantholders”, respectively.

 

The Companies

 

The Talbots, Inc. (See page 29)

 

The Talbots, Inc. is a leading specialty retailer and direct marketer of women’s apparel, shoes and accessories. At the end of first quarter 2009, Talbots operated 586 Talbots brand stores in 47 states, the District of Columbia, and Canada. As of January 31, 2009, Talbots operated its business in two segments: retail stores and direct marketing. As of January 31, 2009, Talbots operated a total of 587 stores under the Talbots brand name. Talbots’ direct marketing segment includes Talbots’ catalog and Internet channels. Since 1948, Talbots has used its direct marketing business to offer customers convenience in ordering Talbots brand merchandise. As of January 31, 2009, Talbots had approximately 12,100 Talbots brand employees of whom approximately 2,900 were full-time salaried employees, approximately 1,300 were full-time hourly employees, and approximately 7,900 were part-time hourly employees.

 

The mailing address of Talbots’ principal executive offices is One Talbots Drive, Hingham, Massachusetts 02043 and its telephone number is (781) 749-7600.

 

BPW Acquisition Corp. (See page 29)

 

BPW is a blank check company that was organized under the laws of the State of Delaware on October 12, 2007. BPW was formed to effect a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination, with one or more operating businesses, which we refer to as an initial business combination or a business combination. In accordance with BPW’s Amended and Restated Certificate of Incorporation, as amended by the Amendment to the Amended and Restated Certificate of Incorporation filed with the Secretary of State of the state of Delaware on February 24, 2010 and attached to this document as Appendix B, which we refer to in this document as BPW’s certificate of incorporation, if BPW is unable to complete a business combination by April 26, 2010 (or obtain the approval of an extension by BPW stockholders), its corporate existence will automatically terminate and it will dissolve and liquidate and promptly distribute to its stockholders holding shares issued in its initial public offering the amount then in its trust account. In the event of its liquidation, all BPW Warrants will expire worthless.

 

The BPW common stock is currently listed on the NYSE Amex under the symbol “BPW.” Following completion of the merger, the BPW common stock will cease trading on the NYSE Amex and BPW will file the appropriate forms with the SEC to suspend its reporting obligations under the Exchange Act. In connection with the completion of the Offer and the merger, BPW will make the appropriate filings to delist the BPW Warrants from trading on the NYSE Amex. The BPW Warrants that are not validly tendered in the Offer, if any, will cease to be eligible for trading on any public market. Please see “Risk Factors — The liquidity of the BPW Warrants that are not exchanged will be reduced.”

 

The mailing address of BPW’s principal executive office is 750 Washington Street, Stamford, Connecticut 06901 and its telephone number is (203) 653-5800.

 

Tailor Acquisition, Inc. (See page 29)

 

Tailor Acquisition, Inc., or Merger Sub, a Delaware corporation, is a direct, wholly owned subsidiary of Talbots. Merger Sub was formed by Talbots to complete the merger. In the merger, Merger Sub will merge with and into BPW and Merger Sub will cease to exist.

 

The mailing address of Merger Sub’s principal executive office is One Talbots Drive, Hingham, Massachusetts 02043 and its telephone number is (781) 749-7600.

 

Litigation (See page 55)

 

On January 12, 2010, a purported Talbots common shareholder filed a putative class and derivative action captioned Campbell v. The Talbots, Inc., et al., C.A. No. 5199-VCS, in the Court of Chancery of the State of Delaware against Talbots; the Talbots board of directors; AEON USA; BPW; Perella Weinberg, an affiliate of PWPA (one of the sponsors of BPW); and the Vice Chairman, Chief Executive Officer, and Senior Vice President of BPW. Among other things, the complaint asserts claims for breaches of fiduciary duties, aiding and abetting breaches of fiduciary duties, and violation of certain sections of the Delaware General Corporation Law and Talbots’ bylaws. The Plaintiff originally sought injunctive, declaratory, and monetary relief, including an order enjoining the consummation of the proposed merger and related transactions. On February 4, 2010, the Court entered a Scheduling Stipulation and Order providing for expedited discovery and proceedings, which set a hearing on Plaintiff’s motion for a preliminary injunction for March 12, 2010.

 

On March 6, 2010, a Stipulation entered into by all parties to the litigation was filed in the Court of Chancery, pursuant to which (i) Plaintiff withdrew his motion for a preliminary injunction and, in exchange, (ii) Talbots agreed to implement and maintain certain corporate governance measures, subject to the terms and conditions specified in the Stipulation. The Stipulation does not constitute dismissal, settlement, or withdrawal of Plaintiff’s claims in the litigation, and there is no assurance the parties will finally settle and discharge such claims. The defendants believe the litigation is without merit. They have moved to dismiss the complaint and intend to defend against the claims vigorously.

 

Questions about the Offer

 

BPW warrantholders should contact Morrow & Co., LLC, Talbots’ information agent, at the following address and telephone number with any questions about the Offer, or to request additional copies of this document or other documents:

 

Morrow & Co., LLC
470 West Avenue
Stamford, CT 06902
Banks and Brokers Call: (203) 658-9400
Warrantholders Please Call Toll-free: (800) 662-5200

 

Set forth below are highlights from Talbots’ consolidated financial data as of and for the periods indicated. The selected historical consolidated financial data presented below for each of the five fiscal years through the period ended January 31, 2009, are derived from the selected financial data included in the Talbots’ Annual Report on Form 10-K for the year ended January 31, 2009. Talbots’ consolidated financial data for the nine months ended October 31, 2009 and November 1, 2008 are derived from Talbots’ unaudited interim financial statements, which have been incorporated in this document by reference.

 

You should read this information in conjunction with Talbots’ consolidated financial statements and the related notes to those statements included in Talbots’ Annual Report on Form 10-K for the year ended January 31, 2009 and Talbots’ Quarterly Report on Form 10-Q for the nine-month period ended October 31, 2009 filed with the SEC, which are incorporated by reference into this document and from which this information is derived. See “Where You Can Find More Information” on page 93.

 

Interim results are not necessarily indicative of results for the full fiscal year and historical results are not necessarily indicative of results to be expected in any future period.

 

 

 

 

 

 

Due to the loss before taxes from continuing operations in the thirty-nine weeks ended October 31, 2009 and the year ended January 31, 2009, we had deficiencies in the pro forma combined ratio of earnings to fixed charges in the thirty-nine weeks ended October 31, 2009 and the year ended January 31, 2009 of $23.5 million and $113.8 million, respectively. Certain summarized pro forma combined balance sheet data at October 31, 2009 was as follows: working capital of $34.1 million, total assets of $811.3 million, total long-term debt, including current portion of $160.0 million, and total stockholders’ equity of $114.4 million.

 

The following selected historical financial data has been derived from BPW’s audited financial statements and the related notes to those statements incorporated in this document by reference. The following selected historical financial data should be read in conjunction with BPW’s “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and its financial statements and the related notes to those statements incorporated in this document by reference. See “Where You Can Find More Information” on page 93.

 

Historical results are not necessarily indicative of results to be expected in any future period.

 

 

 

The following unaudited pro forma condensed combined balance sheet as of October 31, 2009 and the unaudited pro forma condensed combined statements of operations for the year ended January 31, 2009 and the thirty-nine weeks ended October 31, 2009 are based on the separate historical consolidated financial statements of Talbots and BPW after giving effect to the merger.

 

The unaudited pro forma condensed combined balance sheet as of October 31, 2009 combines the balance sheet of Talbots as of October 31, 2009 with the balance sheet of BPW as of December 31, 2009. The unaudited pro forma condensed combined statements of operations for the year ended January 31, 2009 includes Talbots’ results of operations for the year ended January 31, 2009 and BPW’s results of operations for the year ended December 31, 2008. The unaudited pro forma condensed combined statements of operations for the thirty-nine weeks ended October 31, 2009 includes Talbots’ results of operations for the thirty-nine weeks ended October 31, 2009 with BPW’s results of operations for the nine months ended December 31, 2009. BPW’s results of operations for the nine months ended December 31, 2009 were derived from full year results as contained in its Current Report on Form 8-K, filed on February 26, 2010, less the results of operations for the first quarter ended March 31, 2009. The computation reflects the most recent information comparable to Talbots thirty-nine weeks ended October 31, 2009.

 

The unaudited pro forma condensed combined balance sheet as of October 31, 2009 assumes the merger and related events had been consummated on October 31, 2009. The unaudited pro forma condensed combined statements of operations for the year ended January 31, 2009 and the thirty-nine weeks ended October 31, 2009 give pro forma effect to the merger and related events as if they had been consummated on February 3, 2008, the beginning of Talbots 2008 fiscal year.

 

The merger will be accounted for as an acquisition by Talbots and Talbots was determined to be the accounting acquirer — see the section entitled “The Offer — Accounting Treatment” for more information. In summary, Talbots has concluded that Talbots is the accounting acquirer based on its evaluation of the facts and circumstances of the acquisition. The purpose of the merger was to assist Talbots with the refinancing and recapitalization of its business and Talbots initiated the transaction. Talbots is the larger of the two entities and is the operating company within the combining companies. Talbots’ continuing board members will continue to hold a majority of the seats on the Talbots board of directors and BPW stockholders will not have any continuing board appointment rights after the initial consent to 3 additional board members appointed to serve after the merger. Talbots’ senior management will be continuing as senior management of the combined company. In addition, the terms of the exchange provide BPW stockholders with a premium (subject to a formula related to Talbots’ common stock price over a defined period) over the market value of shares of BPW common stock prior to the merger announcement. Although a larger portion of the voting rights in the combined entity will be held by former BPW stockholders, this was not considered determinative, as all other important elements considered in determining which party has control, including board of directors representation and management continuity were not aligned with this voting interest. Additionally, the BPW stockholders are expected to represent a diverse group of stockholders at completion of the merger and we are not aware of any voting or other agreements that suggest that they can act as one party.

 

On February 24, 2010, BPW held a special meeting of stockholders to vote on (i) the approval and adoption of the merger agreement, (ii) an amendment to BPW’s certificate of incorporation to extend BPW’s corporate existence by two months, (iii) an amendment and restatement of BPW’s certificate of incorporation, conditional upon the merger, to provide for BPW’s perpetual existence and (iv) certain other matters. All of the matters voted on were approved by the BPW stockholders. The completion of the merger is subject to various closing conditions, including, among others, the accuracy of the representations and warranties of BPW and Talbots, subject to materiality standards described in the section of this document entitled “The Merger Agreement” and the performance by BPW and Talbots in all material respects of their respective obligations under the merger agreement.

 

In addition, the merger is conditioned upon the completion of the Offer, which requires participation of at least 90% of the BPW warrants that were issued in BPW’s initial public offering (which offer may be completed at the same time as the merger is completed) and Talbots having obtained and borrowed under debt financing in an amount sufficient to repay in full all indebtedness owed to AEON and third parties and to have, after such repayment, cash on hand or available to be borrowed in an amount sufficient to fund ordinary course working capital.

The unaudited pro forma condensed combined financial statements assume that (i) the merger proposal is approved by 100% of the BPW stockholders; (ii) none of the BPW stockholders exercise conversion rights with respect to their shares of BPW common stock; (iii) all of the funds held in the trust account are available for the payment of transaction obligations and costs; and (iv) all other merger-related transactions (i.e., the transactions contemplated by the AEON agreement and Talbots having obtained the debt financing as described above) are consummated.

 

Refer to Note 3 to the Notes to the Unaudited Pro Forma Condensed Combined Financial Statements for a description of the results of the vote at the special meeting of BPW stockholders.

 

There are a number of factors that may affect the liquidity position of Talbots following the consummation of the merger, assuming the merger is consummated. Under circumstances where Talbots has the right under the merger agreement not to consummate the merger, Talbots would make such determination taking into account various relevant factors as of that time, such as Talbots’ stock price, the expected consequences of not consummating the merger, the availability and terms of third party financing, the status of the credit markets, general economic conditions, the results of operations and cash on hand, upcoming debt maturities and other obligations, and other material variables. Depending on such factors, Talbots may determine to consummate the transaction under circumstances where Talbots would have to devote a substantial amount of its cash from operations to meet its obligations and there is no assurance that such cash on hand together with other available sources of funding would be sufficient to meet its obligations for any minimum period of operation following the closing. For more information, see “Debt Commitment Letter.”

 

We present the unaudited pro forma condensed combined financial statements for informational purposes only. The unaudited pro forma condensed combined financial statements are not necessarily indicative of what our financial position or results of operations actually would have been had we completed the merger as of the dates indicated. In addition, the unaudited pro forma condensed combined financial statements do not purport to project the future financial position or operating results of the combined company. You should read this information together with the following:

 

THE TALBOTS, INC. AND SUBSIDIARIES

 

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

OCTOBER 31, 2009

 

THE TALBOTS, INC. AND SUBSIDIARIES

 

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

FOR THE THIRTY-NINE WEEKS ENDED OCTOBER 31, 2009

 

THE TALBOTS, INC. AND SUBSIDIARIES

 

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED JANUARY 31, 2009

 

NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS

 

 

On December 8, 2009, Talbots and BPW entered into the merger agreement (as amended by the First Amendment to the Agreement and Plan of Merger, dated as of February 16, 2010), pursuant to which BPW will merge with and into a wholly owned subsidiary of Talbots, with BPW continuing as the surviving corporation and a wholly owned subsidiary of Talbots after the merger. The transaction is to be accounted for using the acquisition method of accounting — see the section entitled “The Offer — Accounting Treatment” for more information. For purposes of these unaudited pro forma condensed combined financial statements, Talbots has assumed that (i) the merger is approved by 100% of BPW’s stockholders and the total purchase consideration in the merger is equal to the fair value of BPW’s net assets acquired in the merger, or $341.2 million as of December 31, 2009 and (ii) the total transaction costs and payments related to the merger, financing and acquisition to be paid by Talbots or BPW will approximate $49.0 million, of which approximately $31.3 million are estimated to be expensed as transaction costs, $2.0 million are estimated to be charged against additional paid-in capital as costs of raising equity, $8.0 million are estimated to be capitalized as debt issuance costs and $7.7 million relates to the payment of BPW’s deferred underwriting liabilities. The pro forma adjustments to the unaudited pro forma condensed combined financial statements reflect Talbots management’s estimates based on information available as of the time this document was prepared and are subject to revision as actual costs become known.

 

Under the terms of the merger agreement, as amended, the shares of BPW common stock held by BPW stockholders that do not exercise their conversion rights will be converted into the right to receive the number of shares of Talbots common stock equal to the greater of:

 

 

In addition, the BPW warrantholders hold an aggregate of 49.8 million warrants to purchase shares of BPW common stock, of which 14.8 million are held by the sponsors and the non-sponsor founders and 35.0 million are held by public warrantholders. In the Offer, subject to the effect of any prorations, the 14.8 million warrants held by the sponsors and non-sponsor founders and 50% of the warrants held by the public warrantholders (including for these purposes warrants held by the public warrantholders that are not exchanged in the Offer) will be converted into shares of Talbots common stock at an exchange ratio of one warrant to purchase shares of BPW common stock for one tenth of the stock consideration received for each share of BPW common stock based on the floating exchange ratio in the merger. The remaining 50% of the warrants held by the public warrantholders will be exchanged for new warrants to purchase Talbots common stock, which new warrants will have an exercise price equal to (i) if the Talbots common stock exchange ratio is calculated using the average Talbots price, $14.85, which is the product of 1.30 and the average Talbots price, or (ii) if the Talbots common stock exchange ratio is calculated using the Talbots closing average, the product of 1.30 and the Talbots closing average, in each case subject to a maximum initial exercise price of $14.85 and a minimum initial exercise price of $11.05. The warrants will be immediately exercisable, have a stated term of 5 years from the completion of the merger, and beginning after one year from the date of issuance will be subject to accelerated expiration under certain conditions, including if the trading price of shares of Talbots common stock exceeds (i) if the Talbots common stock exchange ratio is calculated using the average Talbots price, $19.98, which is the product of 1.75 and the average Talbots price, or (ii) if the Talbots common stock exchange ratio is calculated using the Talbots closing average, the product of 1.75 and the Talbots closing average, for any 20 trading days within a 30-trading-day period, which product we refer to as the redemption

trading level, in each case subject to a maximum initial redemption trading level of $19.98 and a minimum initial redemption trading level of $14.88. The number of new Talbots Warrants will be determined by multiplying the remaining 50% of the warrants held by the public BPW warrantholders by the floating exchange ratio in the merger.

 

The number of shares of Talbots common stock to be issued to BPW stockholders will change based on changes in the Talbots common stock price through application of the exchange ratio. Depending upon the calculated exchange ratio, Talbots will issue a minimum of 41.9 million shares of common stock and 17.2 million warrants and a maximum of 56.3 million shares of common stock and 23.2 million warrants to the BPW shareholders (e.g., if the Talbots share price is $8.50 or less per share). Changes in the fair value of the assets acquired and liabilities assumed are not expected to change in a way that affects merger consideration given.

 

In conjunction with the merger, Talbots will utilize net cash proceeds from the BPW trust account, borrowings under the debt financing described in “The Debt Commitment Letter” and other available cash balances to fund the repayment in full of all amounts due or outstanding in respect of (i) all financing agreements between AEON and Talbots, (ii) the Support Letter (Financial), dated as of April 9, 2009, from AEON Co., Ltd. to Talbots, and the Letter of Support, dated as of April 9, 2009, from AEON Co., Ltd. to Talbots (which we refer to as the support letters) and (iii) all Third Party Credit Facilities (as defined in the AEON agreement in Appendix D to this document), and to pay related fees and expenses. Under the AEON agreement, AEON has also agreed to sell to Talbots all of the shares of Talbots common stock owned by AEON USA for an aggregate of one million warrants to purchase shares of Talbots common stock on terms and conditions substantially the same as the Offer; provided, that the exercise price of such warrants will be the closing price of Talbots common stock on the date of the completion of the merger (or, if not available on such date, the closing price on the business day immediately preceding such date).

 

The unaudited pro forma condensed combined financial statements have been prepared assuming (i) the greater of the average Talbots price and the Talbots closing average equals its recent closing market price of $10.40 per share on February 23, 2010; (ii) the BPW common stock and BPW Warrants to be converted into shares of Talbots common stock and new warrants to purchase shares of Talbots common stock are converted at an exchange ratio based on the $10.40 per share price of Talbots common stock; and (iii) the new warrants to be issued to AEON USA under the AEON agreement have an assumed exercise price of $10.40 per share.

 

BPW, which is a special purpose acquisition company, is merging with and into a wholly owned subsidiary of Talbots, and Talbots was determined to be the acquirer for accounting purposes. The accounting for the transaction will be similar to that of a capital infusion as the only significant pre-combination asset of BPW is the cash and cash equivalents, which are already recognized by BPW at fair value, obtained from BPW’s investors. No intangibles or goodwill will arise through the accounting for the transaction. The accounting is the equivalent of Talbots issuing shares of common stock for the net monetary assets of BPW. Accordingly, Talbots will record the equity issued in exchange for BPW based on the value of the net monetary assets received as of the closing date. For purposes of these unaudited pro forma condensed combined financial statements, the estimated purchase price paid by Talbots has been allocated to BPW’s asset and liabilities based on their fair values as of December 31, 2009 as follows (in thousands):

 

 

Adjustments included in the column under the heading “Pro Forma Adjustments” in the unaudited pro forma condensed combined financial statements correspond to the following descriptions:

 

Notes to the Unaudited Pro Forma Condensed Combined Balance Sheet

 

(A) To record the release of BPW’s restricted cash equivalents held in a trust account and transfer to cash and cash equivalents. This pro forma presentation assumes that no stockholder of BPW exercises their conversion rights, which would convert their common shares for a pro rata share of the cash then held in the trust account, including their pro rata portion of the deferred underwriters’ fee and other adjustments, prior to the effectiveness of the merger. The holders of up to 35% (minus one share) of the outstanding BPW common stock could properly exercise this conversion right and the merger could still be approved by the BPW stockholders.

 

(B) To remove the historical equity accounts of BPW and common stock subject to possible redemption.

 

(C) To record the payment of $7.7 million related to deferred underwriters’ fees related to BPW’s initial public offering which is payable upon completion of the merger.

 

(D) To record the issuance of Talbots common stocks and warrants to BPW stockholders and warrantholders as a result of the merger and Offer. The exchange ratio in the merger was assumed to be based on the $10.40 per share price of Talbots common stock on February 23, 2010. Adjustments also assumed the exchange of 50% of the outstanding public BPW Warrants for Talbots common stock, and the exchange of 50% of the outstanding public BPW Warrants for new warrants to purchase Talbots common stock. The terms of the new Talbots Warrants were accounted for based on an agreed term sheet, which does not indicate any further adjustments to the number of shares of Talbots common stock underlying the new Talbots Warrants, and indicates that new Talbots Warrants will be immediately exercisable upon completion of the merger, and will settle only in shares of Talbots common stock.

 

Based on the assumptions in the paragraph above and the approval by 100% of BPW’s stockholders, approximately 46.0 million shares of Talbots’ common stock with a par value of $0.01 per share would be issued in the merger. As described above, the estimated purchase price is equal to the net monetary assets of BPW, or $341.2 million. Accordingly, the 46.0 million shares of Talbots’ common stock would be estimated at $341.2, with $0.5 million recorded as common stock and $340.7 recorded as an increase in paid-in capital.

 

(E) To record the payment to AEON for its existing debt arrangements with Talbots, deferred financing costs, accrued interest, third party borrowings, and repurchase of Talbots common stock held by AEON USA.

 

(F) To record the cash paid for merger transaction costs.

 

(G) To record a valuation allowance on the deferred tax assets of BPW (see pro forma adjustment (D) above).

 

(H) To record the borrowing by Talbots in immediately available funds under the revolving credit facility contemplated by the GE Capital commitment letter.

 

The maximum borrowing availability under the GE Capital commitment letter and the draft revolving credit agreement is equal to the lesser of $200.0 million or a borrowing base based upon eligible accounts receivable and inventory, which can vary over the term of the facility and is subject to the adjustments by the lender under certain conditions. Talbots’ initial borrowing is subject to a maximum borrowing of $160.0 million at the date of completion of the merger.

 

Outstanding revolver borrowings are being reflected as a current liability in the accompanying unaudited pro forma condensed combined balance sheet as of October 31, 2009 due to the revolving credit agreement requiring a repayment of such obligations with substantially all cash collected by Talbots and the existence of a subjective acceleration clause. Such provisions do not affect the final maturity date of the revolving credit facility. The draft revolving credit agreement will be finalized and executed on the date of completion of the merger. Such reclassification as a current obligation could be subject to change based on the provisions of the final revolving credit agreement.

 

(I) To record the payment of related financing costs associated the revolving credit facility contemplated by the GE Capital commitment letter.

 

(J) To record the cash paid for registering and issuing new securities.

Notes to the Unaudited Condensed Combined Statement of Operations

 

(K) In connection with the merger, Talbots anticipates incurring non recurring merger expenses of $31.3 million (see pro forma adjustment (F) above), which are not reflected in the pro forma adjustments in the statement of operations.

 

(L) To reverse interest expense and amortization of deferred financing cost related to the AEON related party term loan and third party debt eliminated upon the completion of the merger and related transactions. To reflect interest expense and amortization of deferred financing cost related to the new credit facility based on the initial borrowing under this facility upon the merger. Interest expense under the new credit facility will be at a floating rate based on LIBOR or the prime rate at Talbots’ option. The pro forma interest expense is based on the prime rate option of 3.25% and 6.12%, respectively, in 2009 and 2008. A one-eighth (1/8) fluctuation in the interest rate will result in an increase or decrease of $200,000 in annual interest expense based on the assumed borrowing of $160.0 million at closing.

 

(M) To reverse the effect of interest income associated with the BPW assets used to repay debt obligations upon completion of the merger.

 

(N) To provide a valuation allowance on deferred tax benefit for the period.

 

(O) To adjust the weighted average shares outstanding for the 46,027,608 shares issued to BPW’s common stockholders (assuming 100% of BPW’s stockholders approve the merger), net of the 29,921,829 shares repurchased from AEON USA. As a result of the loss from continuing operations, the 19.9 million warrants to purchase shares of Talbots common stock assumed to be issued in the merger did not impact the loss from continuing operations per share, as these securities would be antidilutive for all periods presented.

 

 

On December 28, 2009, Talbots executed an Amended and Restated Secured Revolving Loan Agreement with AEON, Co., Ltd., Talbots’ indirect majority shareholder, which amends and restates the $150 million secured revolving loan agreement with AEON Co., Ltd. dated April 10, 2009. Pursuant to the agreement, the principal amount of the earlier $150 million secured credit facility has been increased to $250 million (which we refer to as the amended facility).

 

On December 29, 2009, Talbots borrowed $245 million under the amended facility which was used to repay all of Talbots’ outstanding third party bank indebtedness, related interest, and other costs and expenses.

 

A portion of the proceeds of the amended facility was used to pay off debt of Talbots that AEON had guaranteed and, in addition, the support letters were terminated in their entirety.

 

The amended facility has a scheduled maturity date of the earlier to occur of (i) April 16, 2010 or (ii) the consummation of the merger with BPW, the repurchase of AEON USA’s equity interest in the Talbots and repayment of all outstanding debt owed to AEON, provided that the merger transaction together with any concurrent financing result in sufficient net cash proceeds to enable Talbots to make full repayment of its AEON debt.

 

Interest on the loan made pursuant to the amended facility remains at a variable rate equal to LIBOR plus 6.00%. LIBOR refers to the one-month London interbank offer rate expressed as a percentage rate per annum. Interest on the loan will be payable monthly in arrears.

 

On February 24, 2010, BPW held a special meeting of stockholders to vote on (i) the approval and adoption of the merger agreement, (ii) an amendment to BPW’s certificate of incorporation to extend BPW’s corporate existence by two months, (iii) an amendment and restatement of BPW’s certificate of incorporation, conditional upon the merger, to provide for BPW’s perpetual existence and (iv) certain other matters. All of the matters voted on were approved by the BPW stockholders. Holders of less than 1% of outstanding shares of BPW common stock elected to exercise their conversion rights, which will require a cash payment of less than $1,000,000. The cash payment will reduce the net assets acquired by Talbots.

 

Talbots common stock is quoted on the NYSE under the symbol “TLB.” BPW common stock is quoted on the NYSE Amex under the symbol “BPW” and BPW Warrants are quoted on the NYSE Amex under the symbol “BPW.WS.” The following table shows the closing prices of Talbots common stock, BPW common stock and BPW Warrants as reported on December 7, 2009, the last trading day prior to public announcement of the merger, on December 8, 2009, the date of the public announcement of the merger, and on March 10, 2010, the last practicable date prior to the date of this document. This table also shows the implied value of the merger consideration proposed for each share of BPW common stock, which was calculated by multiplying the closing price of Talbots common stock on the relevant date by the exchange ratio.

 

 

 

 

The market price of Talbots common stock, BPW common stock, and BPW Warrants will fluctuate prior to the Expiration Date and before the merger is completed, which will affect the implied value of the merger consideration to BPW stockholders and implied value of Talbots Warrants. You should obtain current market quotations for the shares and BPW Warrants.

 

The following table shows, for the nine months ended December 31, 2009 and the year ended December 31, 2008, selected per share information for BPW common stock on a historical and pro forma equivalent basis, and for the thirty-nine weeks ended October 31, 2009 and the year ended January 31, 2009, selected per share information for Talbots common stock on a historical and pro forma combined basis. Except for the historical information as of December 31, 2009 and as of and for the year ended December 31, 2008, in the case of BPW, and as of and for the year ended January 31, 2009, in the case of Talbots, the historical information in the table is derived from unaudited information. You should read the data with the historical consolidated financial statements and related notes of Talbots contained in its Annual Report on Form 10-K for the year ended January 31, 2009, and the historical financial statements and related notes of BPW contained in its Current Report on Form 8-K filed on February 26, 2010, in each case which have been incorporated in this document by reference, as well as the unaudited pro forma condensed combined financial statements and related notes contained in the section entitled “Unaudited Pro Forma Condensed Combined Financial Information” beginning on page 15. The following data is not necessarily indicative of future operations of the combined company.

 

The pro forma equivalent data for BPW are calculated by multiplying the pro forma combined (loss) income from continuing operations per share, pro forma dividends declared per share and pro forma book value by the exchange ratio so that the per share amounts are equated to the respective values for one share of BPW common stock. Based on the recent closing market price of Talbots common stock on February 23, 2010, the assumed exchange ratio in the merger is 1.0817 shares of Talbots common stock for one (1) share of BPW common stock. The pro forma combined statement of operations data assumes the merger and related events were consummated on February 3, 2008, the beginning of Talbots’ 2008 fiscal year. The pro forma combined balance sheet data assumes the merger was consummated on the respective balance sheet date.