UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
January 30, 2010
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number 1-12552
THE TALBOTS, INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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41-1111318
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State or other jurisdiction
of
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(I.R.S. Employer
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incorporation or
organization
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Identification No.)
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One
Talbots Drive, Hingham, Massachusetts 02043
(Address of principal executive
offices)
Registrants telephone number, including area code
781-749-7600
Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class
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Name of exchange on which registered
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Common stock, $.01 par value
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
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No
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Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes
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No
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Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes
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No
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Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes
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No
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K.
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Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes
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No
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The aggregate market value of the voting common stock held by
non-affiliates as of the last business day of the
registrants second fiscal quarter ended August 1,
2009 was $120.7 million.
As of April 8, 2010, 67,657,612 shares of the
registrants common stock were outstanding.
Documents
Incorporated by Reference
Portions of the registrants Proxy Statement to be filed in
connection with the 2010 Annual Meeting of Shareholders are
incorporated by reference into Part III of this
Form 10-K.
The
Talbots, Inc.
Annual
Report on
Form 10-K
for the Fiscal Year Ended January 30, 2010
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Page
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PART I
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Item 1.
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Business
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2
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Item 1A.
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Risk Factors
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10
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Item 1B.
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Unresolved Staff Comments
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Item 2.
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Properties
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Item 3.
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Legal Proceedings
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Item 4.
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Reserved
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PART II
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Item 5.
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Market for the Registrants Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity
Securities
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Item 6.
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Selected Financial Data
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Item 7.
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Managements Discussion and Analysis of
Financial Condition and Results of Operations
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Item 7A.
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Quantitative and Qualitative Disclosures About
Market Risk
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46
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Item 8.
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Financial Statements and Supplementary Data
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48
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Item 9.
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Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
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48
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Item 9A.
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Controls and Procedures
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48
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Item 9B.
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Other Information
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PART III
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Item 10.
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Directors, Executive Officers and Corporate
Governance
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Item 11.
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Executive Compensation
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Item 12.
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Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters
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Item 13.
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Certain Relationships and Related Transactions,
and Director Independence
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Item 14.
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Principal Accounting Fees and Services
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52
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PART IV
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Item 15.
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Exhibits, Financial Statement Schedules
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53
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Signatures
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62
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EX-10.108 Form of The Talbots, Inc. 2003 Executive Stock Based Incentive Plan Special Restricted Stock Unit Award Agreement
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EX-21.1 List of Subsidiaries of The Talbots, Inc
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EX-23.1 Consent of Independent Registered Public Accounting Firm, Deloitte & Touche LLP
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EX-31.1 Certification of Trudy F. Sullivan, President and Chief Executive Officer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a)
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EX-31.2 Certification of Michael Scarpa, Chief Operating Officer, Chief Financial Officer, and Treasurer of the Company, pursuant to Securities Exchange Act Rule 13a-14(a)
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EX-32.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002
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1
PART I
General
The Talbots, Inc., a Delaware corporation, together with its
wholly-owned subsidiaries (we, us,
our, Talbots or the Company), is a
specialty retailer and direct marketer of womens apparel,
accessories and shoes. We operate stores in the United States
and Canada. In addition, our customers may shop online or via
our catalogs.
In late 2007, we initiated a comprehensive review of our entire
business to develop a long-range strategy to strengthen the
Company, improve our operating performance and deliver increased
shareholder value. We began implementing the plan in 2008. Our
primary objectives were to reinvigorate the core Talbots brand
and streamline operations through a set of key initiatives. At
the same time, we were acutely focused on actions to stabilize
our liquidity and increase cash flow. Our main focus throughout
2009 was to execute against these critical initiatives, which
are outlined below.
Despite the challenges of the economic recession, which we
believe impacted our business throughout 2009, we made
considerable progress in achieving our objectives. Beginning
with product, we evolved our merchandise to be more relevant to
todays baby-boomer and generation-X consumer.
In conjunction with this effort, we re-vamped our marketing and
public relations strategy, offering new and innovative events
designed to maintain the loyalty of the core customer,
reactivate the lapsed customer and attract a new customer. We
developed a new mantra to describe our updated brand image,
tradition transformed, which is consistently
communicated through creative and visual enhancements to our
catalog, website and store windows.
Further, we re-engineered our business practices in 2009,
particularly in the areas of inventory management, sourcing and
supply chain, and store operations. We benchmarked against
industry
best-in-class
practices and developed more modern, efficient and flexible
methods of conducting business in a dynamic retail environment.
We made adjustments to our initiatives throughout the year in
response to the weak economic environment, including actions
designed to further streamline our organization, further reduce
our cost structure and better optimize gross margin performance
through stronger inventory management and improved initial
mark-ups
resulting from changes to our supply chain practices.
We also undertook a major cost cutting initiative beginning in
early 2009, identifying a two-year goal to eliminate
$150.0 million in annual expenses, in order to bring our
cost structure in line with our revenue stream. We substantially
achieved that goal in one year and continue to explore ways to
reduce our operating costs.
Although faced with a challenging retail economic environment
during this pivotal stage of orchestrating a turnaround, we
achieved operating income in the third and fourth quarters of
2009, following five consecutive quarters of operating losses.
A summary of our strategic initiatives and actions taken to date
intended to improve operating results, many of which we believe
will continue to provide benefits in 2010 and beyond are as
follows:
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Closed non-core businesses
In 2008, we
completed the closing of our Kids, Mens and U.K. businesses,
which resulted in significant restructuring and impairment
charges in 2008 and 2009.
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Sold J. Jill business
On July 2, 2009,
we sold certain J. Jill assets to Jill Acquisition LLC (the
Purchaser), an affiliate of Golden Gate Capital and
exited activities associated with the J. Jill business to focus
our time, resources and attention exclusively on rejuvenating
the core Talbots brand and return to profitable growth.
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Implemented a $150.0 million cost reduction
program
In 2009, we initiated a program to
achieve a $150.0 million annual expense reduction to be
completed by the end of fiscal 2010, and have substantially
achieved that goal as of January 30, 2010. Key components
are as follows:
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Reduced corporate headcount by approximately 17% in February
2009, and further again in June 2009, by approximately 20%
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Reduced hours worked in our stores, distribution center and call
center for 2009
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Eliminated matching contributions to our 401(k) plan for 2009,
increased employee health care contributions, eliminated merit
increases for 2009 and froze our defined benefit pension plans
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Implemented broad-based non-employee overhead actions resulting
in cost savings, primarily in the area of administration,
marketing and store operations
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Re-launched web-site
In the fall of 2009, we
re-launched our web-site with new functionality, features and
personalization. With a sophisticated look and easy navigation,
the updated site is designed to improve the online shopping
experience. In addition, the new web platform further allows us
to deliver targeted promotions and recommendations on timely,
relevant products to our customers.
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Introduced new upscale outlet concept
We
launched our upscale outlet concept in May 2009, offering
merchandise manufactured exclusively for this business at
attractive price points. With the addition of this concept, we
have the opportunity to gain market share, grow our top line and
increase profitability by introducing the Talbots brand to new
customers who value different price points. We ended the year
with a total of 18 upscale outlet stores, including 11 new
stores and 7 conversions. We expect to have the potential to
open at least 60 stores over the next three years.
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Enhanced operating efficiency
We made
considerable improvements in sourcing and merchandising
initiatives which resulted in significant merchandise gross
margin improvement in 2009. This was accomplished through
(i) better product flow and content, (ii) leaner
inventory posture and (iii) a strategic change in
promotional cadence to monthly markdowns versus our past
practice of having four clearance events annually. In the 2009
spring season, we began to implement a supply chain strategy,
with margin improvements coming from country migration,
competitive bidding and leveraging our vendors buying
power.
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Formed strategic partnership with Li &
Fung
While we made great strides in improving
our sourcing and merchandising practices, given the environment
and expense of building a first class supply chain operation, we
turned to industry leaders to outsource. In August 2009, we
entered into a buying agency agreement with an affiliate of
Li & Fung Limited, a Hong Kong-based global consumer
goods exporter (Li & Fung), to act as the
exclusive global apparel sourcing agent for substantially all
Talbots apparel effective September 2009. As a result of this
agreement, we closed our Hong Kong and India sourcing offices
and reduced our corporate sourcing headcount.
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By leveraging Li & Fungs position as a
best-in-class
sourcing agent, we expect to further simplify and centralize our
sourcing activities, which we anticipate will further reduce our
costs of goods sold and internal operating expenses, while
improving time to market. Together with Li & Fung, we
believe we can develop a single, world-class supply chain
organization that is expected to strengthen our competitive
position. Li & Fung will have assumed full
responsibility for the sourcing and manufacturing of
substantially all Talbots apparel beginning with our summer 2010
delivery.
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Store productivity initiative
We implemented
a set of key initiatives designed to further enhance customer
service and drive improved in-store productivity. In 2009, we
rolled-out to all stores a new selling skills program to
reinvigorate the selling culture and formalized the productivity
standard to measure store associates performance. These
actions are expected to foster a stronger relationship with
customers and create a positive and compelling shopping
environment that should positively impact our sales and
profitability.
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Implemented store segmentation initiative
In
the fourth quarter of 2009, we unveiled a strategic initiative
to improve our sales per square foot productivity by
rationalizing our existing square footage and embedding a
customer-centric segmentation approach that delivers a
customized assortment. This will be an ongoing business
philosophy centered on a refined understanding of the variations
in our customer and store base. Beginning with our fall and
holiday 2010 deliveries, we expect to allocate merchandise based
on location, customer shopping habits and climate, and
customize/coordinate our approach in marketing, direct channel
and retail channel to maintain a cohesive brand message. We
expect that this will allow us to further optimize
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our resource investment and increase store sales, inventory
turns, gross margin and customer loyalty. This is a key growth
and profit initiative for Talbots going forward.
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Comprehensive financing transaction
On
December 8, 2009, we announced a comprehensive financing
transaction to deleverage our balance sheet and position us for
future growth. It consists of three related transactions
(collectively, the BPW Transactions): (i) a
definitive agreement and plan of merger with BPW Acquisition
Corp. (BPW), a special purpose acquisition company
with approximately $350.0 million in cash held in a trust
account for the benefit of its shareholders, to be used in
connection with a business combination; (ii) the retirement
of all common stock held by AEON U.S.A. Inc, (AEON
(U.S.A.)), the issuance of warrants to purchase one
million of our common shares by AEON (U.S.A.), and the repayment
of all debt held by Talbots former majority stockholder,
AEON (U.S.A.) and its parent company, AEON Co., Ltd.
(AEON); and (iii) a commitment for a new senior
secured revolving credit facility from a third-party lender
which provides borrowing capacity up to $200.0 million,
subject to satisfaction of all borrowing conditions.
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We completed the BPW Transactions on April 7, 2010 and used
the proceeds from the merger combined with a drawdown under the
senior secured revolving credit facility to repay
$488.2 million of our outstanding indebtedness at its
principal value plus accrued interest and other costs.
Immediately following the repayment on April 7, 2010, we
had $125.0 million of total debt outstanding.
Description
of Operations
Talbots brand.
The Talbots brand, which began
operations in 1947 as a single store in Hingham, Massachusetts,
offers a distinctive collection of classic sportswear, casual
wear, dresses, coats, sweaters, accessories and shoes,
consisting almost exclusively of Talbots own branded merchandise
in misses, petites, woman and woman petite sizes.
Our merchandising strategy focuses on honoring the classics
which emphasizes modern classic, relevant, and updated
merchandise designed to appeal to todays baby-boomer and
generation-X consumer. Tradition transformed is our
brand vision. Our merchandise is offered in an extensive array
of sizes to fit almost every woman under the following business
concepts: Misses, Petites, and Woman. Our stores, catalogs and
website offer a variety of key basic and fashion items along
with a complementary assortment of accessories and shoes which
enable customers to assemble complete wardrobes. We believe that
a majority of our customers are high-income, college-educated
and employed primarily in professional and managerial
occupations, and are attracted to the brand by our focused
merchandising strategy, personalized customer service, and
continual flow of high quality, reasonably priced updated
classic merchandise.
As of January 30, 2010, we operated our business in two
segments: Retail Stores and Direct Marketing.
Retail Stores.
Our retail stores are located
in 46 states, the District of Columbia and Canada under the
Talbots name. In 2009, our retail stores accounted for 83% of
our total consolidated sales.
As of January 30, 2010, we operated a total of 580 stores
under the Talbots name. We operate stores in various location
types, including village, specialty centers, malls and urban
centers each representing 25%, 43%, 30% and 2% of store location
type, respectively. The unique range of our store portfolio,
both in location type and square footage, allows us to offer
product across a broad size range in order to better serve our
customers individual needs.
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Petites.
Virtually all apparel items are
offered in both misses and petites sizes. Petites sizes are
offered in our catalogs and all stores, with some store
locations offering our complete product assortment in both
misses and petites sizes. This allows us to better meet our
customers needs for those who fall into one size range, or
a combination.
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Woman.
Talbots Woman is our plus size concept
which offers the same classic styling, high quality and fit as
our misses and petites concepts to customers wearing sizes 14W
to 24W. We also offer Talbots Woman Petites, which focuses on
fuller figured women 54 in height and under. Talbots
Woman and Talbots Woman Petites are available in stores, through
our catalogs and online. At approximately 30% of our store
locations, our size offering incorporates plus size ranges,
allowing us to offer a range of sizes and styles to
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allow every customer to select from Talbots core product
offerings and customize her fit to her individual
body type. We believe our ability to service every woman,
every size sets us apart.
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Accessories & Shoes.
Beyond size
ranges, we offer product categories that allow our customer to
select items to complement her apparel selections. Whether
head-to-toe
wardrobe options, unique fashion jewelry, scarves, handbags or
footwear to update previous purchases, our goal is to service
all of her shopping needs
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Upscale Outlets.
In 2009, we entered the
upscale outlet market, operating 18 upscale outlets as of
January 30, 2010. This new sales channel allows the upscale
outlet customer to experience the brand in her preferred
shopping venue. Our value-driven offering is inspired by our
core misses business, but offers her a unique assortment that is
exclusively available at upscale outlet locations. We continue
to operate our
non-upscale
outlets, selling
end-of-season
excess inventory from our core misses locations at special value
prices. This enables us to bring new styles and offerings to our
core retail customer each month.
Our store portfolio as of January 30, 2010 is as follows:
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Number of
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Approximate Average Store
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Stores
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Size (Square Feet)
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United States
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Retail stores, including surplus and upscale outlets
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559
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7,209
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Canada
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Retail stores, including surplus outlets
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21
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5,327
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Total
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580
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Approximately 75%-80% of the floor area of our stores is devoted
to selling space (including fitting rooms), with the balance
allocated to stockroom and other non-selling space.
We continuously seek to enhance store productivity by management
of our real estate portfolio, aggressive expense management and
identification of operational efficiencies.
Direct Marketing.
Our direct marketing segment
includes our catalog and Internet channels.
Since 1948, we have used our direct marketing business to offer
customers convenience in ordering Talbots merchandise. In 2009,
our direct marketing business segment represented 17% of our
total sales, with the Internet channel comprising 70% of our
total direct marketing sales.
Our catalogs are designed to promote our brand image and drive
customers to their preferred shopping channel, including stores,
call centers and online. In 2009, we issued 19 separate Talbots
catalogs across all business concepts with a circulation of
approximately 36.6 million, a planned decrease of 33% in
circulation from 2008. We believe our efforts, in early fall
2009, yielded a solid response rate, especially with our
existing and lapsed customers.
We utilize computer applications which employ mathematical
models to improve the efficiency of our catalog mailings through
refinement of our customer list. A principal factor in improving
customer response has been the development of our own list of
active customers. We routinely monitor customer interest and
update and refine this list. Our customer list also provides
important demographic information and serves as an integral part
of our store portfolio management strategy by helping to
identify markets with the potential to support a new store or to
identify where a store is no longer warranted. We follow the
Direct Marketing Associations recommendations on consumer
privacy protection practices.
We strive to make catalog shopping as convenient as possible. We
maintain toll-free numbers, accessible seven days a week (except
Christmas Day), to accept requests for catalogs and to take
customer orders. We maintain a call center in Knoxville,
Tennessee designed to provide service to customers. Telephone
calls are answered by knowledgeable call center sales associates
who enter customer orders and retrieve information about
merchandise and its availability. These sales associates also
suggest and help to select merchandise and can provide detailed
information regarding size, color, fit, and other merchandise
features. We have achieved efficiencies in order entry and
fulfillment, which permit the shipment of most orders the next
business day.
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Our Internet channel is a natural extension of our existing
store and catalog channels, offering the same broad assortment
of our store and catalog merchandise. We also utilize our
Internet channel as an inventory clearance tool via our on-line
outlet vehicle. In fall 2009, we made major enhancements to our
Talbots website offering enhanced visuals and greater ease of
functionality, as well as ensuring that our brand image is fully
aligned and consistent with all of our channels.
Sales orders from our website are merged into the existing
catalog fulfillment system, allowing efficient shipping of
merchandise. Customers can check the availability of merchandise
at the time of purchase and the website will provide examples of
alternative merchandise if items are unavailable. Additionally,
the websites online chat feature allows
customers to communicate with customer service representatives.
Customers shopping online at www.talbots.com can also enjoy the
benefit of our find in a store feature allowing a
customer to select merchandise online and then reserve it at a
store of her choice. As with the catalog, customer online
purchases can be returned by mail or at our retail stores.
See Note 14,
Segment and Geographic Information
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our consolidated financial statements included in Item 15
for more detailed information regarding stores and direct
marketing sales.
Merchandising,
Inventory Control and Distribution
Merchandising
Our evolved merchandising strategy focuses on honoring the
classics, while infusing relevant and updated merchandise across
all product classifications for our brand. We deliver new and
compelling merchandise assortments with fresh floor sets on a
monthly basis. Our stores, catalogs and website offer a variety
of fashion and basic items, and a complementary assortment of
accessories and shoes which enable customers to assemble
complete outfits. Sales associates are trained to assist
customers in merchandise selection and wardrobe coordination,
helping them achieve the Talbots look from
head-to-toe.
Branded Merchandise Design and Purchasing.
Our
merchandise is designed and produced through the coordinated
efforts of our creative, merchandising and sourcing teams in
collaboration with our new exclusive global sourcing agent,
Li & Fung. By conceptualizing and designing in-house,
we have been able to realize higher average initial gross profit
margins for our clothing and accessories, while at the same time
provide value to our customers. Styles for our merchandise are
developed based upon analysis of historical, current and
anticipated future fashion trends that will appeal to our target
customers
Sourcing.
We currently procure merchandise
globally from a balanced and diversified manufacturing network.
Our products are produced by independent manufacturers to our
specifications and standards, primarily in the greater
Asia-Pacific region. The balance of our merchandise is purchased
from other sources based in the U.S. that may rely on their
own offshore sources for manufactured goods.
In August 2009, we entered into a buying agency agreement with
Li & Fung, which effective September 2009 is acting as
our exclusive global apparel sourcing agent for substantially
all Talbots apparel. The exclusive agency does not cover certain
other products (including swimwear, intimate apparel, sleepwear,
footwear, fashion accessories, jewelry and handbags) as to which
Li & Fung will act as our non-exclusive buying agent
at our discretion. As a result of this agreement, we have
reduced operating expenses, as we have downsized our internal
sourcing organization as well as closed our sourcing offices in
Hong Kong and India.
We frequently analyze our overall distribution of manufacturing
to ensure that no particular vendor or countryis responsible for
what we believe would be a disproportionate amount of our
merchandise. With the appointment of Li & Fung as our
exclusive buying agent for substantially all of our apparel
product and the access we gained access to their vast global
sourcing network, we expect to reduce the percentage of our
product sourced from China in 2010.
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The following is our sourcing activity by top-five countries for
2009:
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Percent of
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Country
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Sourcing
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China
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40.5
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Indonesia
|
|
|
12.9
|
%
|
Thailand
|
|
|
10.7
|
%
|
Vietnam
|
|
|
10.1
|
%
|
Brazil
|
|
|
4.2
|
%
|
Other
|
|
|
21.6
|
%
|
We currently do not maintain any long-term or exclusive
commitments or arrangements to purchase merchandise from any
vendor. We take measures to monitor our vendors for compliance
with the Fair Labor Standards Act, security procedures and rules
mandated by the U.S. Customs and Border Patrol.
Customer
Credit
We have extended credit to our Talbots customers through the use
of our proprietary Talbots charge card. The Talbots charge card
is managed through Talbots Classics National Bank, a national
banking association organized under the laws of the United
States with a main office and principal place of business in
Rhode Island, and Talbots Classics Finance Company, a
wholly-owned subsidiary. We believe that the offering of the
Talbots charge card enhances customer loyalty, in addition to
producing finance charge income and decreasing third-party bank
card fees.
U.S. Talbots charge card holders are automatically enrolled
in our customer loyalty program referred to as our Classic
Awards program, which rewards U.S. Talbots customers with a
twenty-five dollar appreciation award for every five hundred
points earned. Prior to January 2009, one point was earned for
every dollar of merchandise purchased on a Talbots charge card.
Commencing in January 2009, we launched a new expanded program
with three tiers: red, platinum, and black. The red tier is open
to all customers, regardless of whether they hold a Talbots
credit card, and accrues 0.5 points for every dollar of
merchandise purchased with a non-Talbots charge payment. The
platinum tier is the same as the prior program with one point
being earned for every dollar of merchandise purchased on a
Talbots charge card. The black tier is for Talbots credit card
holders who spend more than $1,000 per calendar year on their
Talbots charge card, and accrues 1.25 points for every dollar of
merchandise purchased on their Talbots charge card. The awards
can be redeemed against future purchases and expire one year
from the date of issuance. The Classic Awards program has led to
increased usage of the Talbots charge card, as customer usage
increased from 28% of total sales in 2000 to 49.2% of total
sales in 2009.
Management
Information Systems
Our management information systems and electronic data
processing systems are located at our systems center in Tampa,
Florida, and at our corporate facilities in Hingham,
Massachusetts. We also have a collections system at Talbots
Classics Finance Company located in Lincoln, Rhode Island. Our
systems consist of a full range of retail, catalog,
e-commerce,
financial and merchandising systems, including credit, inventory
distribution and control, sales reporting, product design,
budgeting and forecasting, financial reporting, merchandise
reporting and distribution. We seek to protect company-sensitive
information on our servers from unauthorized access using
industry standard network security systems in addition to
anti-virus and firewall protection. The website makes use of
encryption technology to help protect sensitive customer
information.
All of our stores have
point-of-sale
terminals that transmit information daily on sales by item,
color and size. Our stores are equipped with bar code scanning
programs for the recording of store sales, returns, inventories,
price changes, receipts and transfers. We evaluate this
information, together with weekly reports on trend analyses and
merchandise statistics, prior to making merchandising decisions
regarding allocation of merchandise and promotional activity.
7
Marketing
Our marketing initiatives have been focused on elevating brand
awareness and increasing customer acquisition and retention. Our
marketing programs consist of catalogs, customer mailing and
Internet advertising, and other marketing campaigns such as
direct promotional customer incentives. In an effort to maximize
the return on our marketing initiatives, we decided to eliminate
television and national print advertising in 2008 and 2009 and
redirect a portion of our marketing budget to enhance customer
outreach through reactivation, prospecting and web-based
marketing. In 2009, we increased our email marketing initiatives
and decreased our catalog distribution. We continue to pursue
innovative new strategies to increase contact with current and
potential customers, including Facebook, Twitter and other
social networking sites.
Seasonality
Historically, our business has had two distinct selling seasons,
spring and fall. The first and second quarters of the fiscal
year made up the spring season and the third and fourth quarters
of the fiscal year made up the fall season. Within the spring
season, direct marketing sales were typically stronger in the
first quarter, while store sales were slightly stronger in the
second quarter. Within the fall season, both retail and direct
marketing sales experienced holiday seasonality with retail and
direct sales generally stronger in the fourth quarter. We have
found that we have not experienced any significant seasonal
fluctuations in our net sales in 2008 and 2009. We believe this
is attributable to several factors, including but not limited to
changes in our promotional strategy, changes to our
merchandising and marketing strategies, and the effect of the
economic environment and consumer spending.
Our operating results may fluctuate quarter to quarter as a
result of the timing of holidays, weather, market acceptance of
our products, product mix, pricing and presentation of the
products offered and sold, the cost of goods sold, the
incurrence of other operating costs and factors beyond our
control, such as general economic conditions, and actions of
competitors.
Competition
The retail apparel industry is highly competitive. We believe
that the principal basis upon which we compete is fashion,
quality, value and service in offering modern classic apparel to
customers, through stores, catalogs and online.
We compete with national department stores, regional department
store chains, specialty retailers and catalog companies. We
believe that our focused apparel merchandise selection,
consistently branded merchandise, superior customer service,
store site selection resulting from the synergy between our
stores and direct marketing operations, and the availability of
our merchandise in multiple concepts, distinguish us from
department stores and other specialty retailers.
Employees
As of January 30, 2010, we had approximately
9,100 employees of whom approximately 2,200 were full-time
salaried employees, approximately 1,200 were full-time hourly
employees, and approximately 5,700 were part-time hourly
employees. In June 2008, as part of our strategic initiatives,
we reduced our corporate headcount by approximately 9% across
multiple locations and at all levels as part of our strategic
long-range plan. In February 2009, we reduced our corporate
headcount by approximately 370 positions, or approximately 17%.
Additionally, in June 2009, we reduced our corporate headcount
by approximately 330 positions, or approximately 20%. For a
discussion regarding reductions in workforce due to our
initiative to reduce costs and streamline our organization, see
Item 7.
Managements Discussion and Analysis of
Financial Condition and Results of Operations
Business Overview
.
8
Executive
Officers of the Company
The following table sets forth certain information regarding our
executive officers as of April 12, 2010:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Trudy F. Sullivan
|
|
|
60
|
|
|
President and Chief Executive Officer, and a Director
|
Michael Scarpa
|
|
|
54
|
|
|
Chief Operating Officer, Chief Financial Officer, and Treasurer
|
Michael Smaldone
|
|
|
45
|
|
|
Chief Creative Officer
|
Benedetta I. Casamento
|
|
|
43
|
|
|
Executive Vice President, Finance
|
John Fiske, III
|
|
|
46
|
|
|
Executive Vice President, Chief Stores Officer
|
Richard T. OConnell, Jr.
|
|
|
59
|
|
|
Executive Vice President, Real Estate, Legal, Store Planning
& Design and Construction, and Secretary
|
Gregory I. Poole
|
|
|
48
|
|
|
Executive Vice President, Chief Supply Chain Officer
|
Lori Wagner
|
|
|
45
|
|
|
Executive Vice President, Chief Marketing Officer
|
Lizanne Kindler
|
|
|
40
|
|
|
Executive Vice President, General Merchandise Manager
|
Ms. Sullivan joined The Talbots, Inc. as President and
Chief Executive Officer and as a director in August 2007. Prior
to joining the Company, Ms. Sullivan served as President of
Liz Claiborne, Inc. from January 2006 until July 2007.
Ms. Sullivan joined Liz Claiborne, Inc. in 2001 as Group
President of the companys Casual, Collections, and
Elisabeth businesses. She was named Executive Vice President in
March 2002 with added responsibilities for all non-apparel
business, all
direct-to-consumer
business (retail and outlet) and the International Alliances
business at Liz Claiborne, Inc. She served in this position
until she was named President of Liz Claiborne, Inc. in 2006.
Prior to joining Liz Claiborne, Inc., Ms. Sullivan served
as President of J. Crew Group, Inc. from 1997 until 2001.
Mr. Scarpa joined The Talbots, Inc. as Chief Operating
Officer in December 2008 and was also named Chief Financial
Officer and Treasurer in January 2009. Prior to joining the
Company, Mr. Scarpa served as Chief Operating Officer of
Liz Claiborne, Inc. from January 2007 until November 2008.
Mr. Scarpa joined Liz Claiborne in 1983 and served in many
senior leadership roles, including Senior Vice President, Chief
Financial Officer from July 2002 until May 2005; and Senior Vice
President, Finance and Distribution and Chief Financial Officer
from May 2005 until January 2007.
Mr. Smaldone joined The Talbots, Inc. as Chief Creative
Officer in December 2007. Prior to joining the Company,
Mr. Smaldone served as Senior Vice President of Design for
Ann Taylor Stores Corporation from September 2003 until December
2007. Mr. Smaldone also held senior leadership roles in
design at Anne Klein where he served as Chief Design Officer
from July 2001 to September 2003, and Elie Tahari from May 2000
to May 2001.
Ms. Casamento joined The Talbots, Inc. as Executive Vice
President, Finance in April 2009. Prior to joining the Company,
she spent nine years at Liz Claiborne, Inc., most recently as
President of Liz Claiborne, Claiborne and Monet brands from July
2007 until October 2008. Prior to that, Ms. Casamento
served in various other leadership roles within Liz Claiborne,
including President of Ellen Tracy and Dana Buchman brands from
January 2007 until July 2007, Vice President, Group Operating
Director, Better & Moderate Apparel from January 2004
until January 2007, Vice President, Financial Planning and
Analysis from November 2000 until January 2004, and prior to
that she was Vice President, Group Financial Director,
Retail & International Group. Ms. Casamento
started her career at Saks Fifth Avenue where she held roles of
increasing responsibility in accounting and finance, including
Controller of OFF 5th, Saks Fifth Avenue Outlet and the Folio
catalog division.
Mr. Fiske was promoted to Executive Vice President, Chief
Stores Officer in March 2009. Prior to his promotion,
Mr. Fiske served as Executive Vice President, Human
Resources and Administration since June 2008 and previously as
Senior Vice President, Human Resources since April 2007. Prior
to that, Mr. Fiske served as Senior Vice President, Human
Resources of the J. Jill Group, Inc. since 2005. Mr. Fiske
was Vice President, Human Resources of Abercrombie &
Fitch from 2002 to 2004. From 1999 to 2002, Mr. Fiske was
Corporate Vice President,
9
Human Resources and Organizational Development at Kenneth Cole
Productions. Mr. Fiske served in various Human Resource
positions at The Timberland Company from 1995 to 1999.
Mr. Fiske has also held positions in Human Resources at
Nike, TJX Companies, May Department Stores, and Federated
Department Stores.
Mr. OConnell was appointed Executive Vice President,
Real Estate, Legal, Store Planning & Construction, and
Secretary in June 2008. Previously he served as Executive Vice
President, Legal and Real Estate, and Secretary since November
2006. Mr. OConnell joined The Talbots, Inc. in 1988
as Vice President, Legal and Real Estate, and Secretary, and
became Senior Vice President, Legal and Real Estate, and
Secretary in 1989. Prior to joining the Company, he served as
Vice President, Group Counsel of the Specialty Retailing Group
at General Mills, Inc.
Mr. Poole joined The Talbots, Inc. as Executive Vice
President, Chief Supply Chain Officer in June 2008. Prior to
joining the Company, he was Senior Vice President, Chief
Procurement Officer for Ann Taylor Stores Corporation from June
2007. Mr. Poole held various leadership positions at The
Gap, Inc. from 1993 through 2006, including Senior Vice
President of Sourcing and Vendor Development from August 2004 to
February 2006, Senior Vice President of Corporate
Administration, Architecture & Construction from
August 2001 to August 2004, and Senior Vice President of
Corporate Architecture and Construction from July 2000 to August
2001. Mr. Poole has also held leadership positions in
supply chain management at Esprit de Corp. and The North Face,
Inc.
Ms. Wagner joined The Talbots, Inc. as Executive Vice
President, Chief Marketing Officer in March 2008.
Ms. Wagner previously held the position of Senior Vice
President, Chief Marketing Officer at Cole Haan, a division of
Nike, from 2006. Prior to joining Cole Haan, she served as
Senior Vice President of Marketing for Kenneth Cole Productions
from 2001 to 2006 and, before that, as Senior Vice President of
Brand Marketing and Creative for J. Crew from 1991.
Ms. Kindler was promoted to Executive Vice President,
General Merchandise Manager in March 2010. Prior to her
promotion, Ms. Kindler served as Senior Vice President of
Merchandising, General Merchandise Manager since joining the
Company in January 2008. Prior to that, she served as Senior
Vice President, General Merchandise Manager for the Loft brand,
a division of Ann Taylor Stores Corporation.
Available
Information
Our Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K,
and all amendments to these reports filed or furnished pursuant
to Section 13(a) of 15(d) of the Securities Exchange Act of
1934, are available free of charge on our website located at
www.thetalbotsinc.com, as soon as reasonably practicable after
they are filed with or furnished to the Securities and Exchange
Commission. These reports are also available at the Securities
and Exchange Commissions Internet website at www.sec.gov.
A copy of our Corporate Governance Guidelines, Code of Business
Conduct and Ethics, and the charters of the Audit Committee, the
Compensation Committee and the Corporate Governance and
Nominating Committee are posted on our website,
www.thetalbotsinc.com, under Investor Relations, and
are available in print to any person who requests copies by
contacting Talbots Investor Relations by calling
(781) 741-4500,
by writing to Investor Relations Department, The Talbots, Inc.,
One Talbots Drive, Hingham, Massachusetts, 02043, or by
e-mail
at
investor.relations@talbots.com. Information contained on the
website is not incorporated by reference or otherwise considered
part of this document.
Careful consideration should be given to the risk factors
discussed below and the other information set forth in this
Report, any of which could materially affect our business,
operations, financial position, liquidity and future results.
The risks described in this Report are important to an
understanding of the statements made in this Report, in our
other filings with the SEC, and in any other discussion of our
business. These risk factors, which contain forward-looking
information, should be read in conjunction with Item 7
,
Managements Discussion and Analysis of Financial Condition
and Results of Operations
and the consolidated financial
statements and related notes included in Item 15 of this
Report. The risks described in this Report are not intended to
be exhaustive and are not the only risks facing the Company.
10
The
uncertain economic conditions could materially adversely impact
our financial condition and results of operations.
The U.S. economy has weakened significantly as a result of
the recent global economic crisis and may remain depressed for
the foreseeable future. These economic conditions materially and
adversely impact consumer confidence and consumer spending; our
ability to forecast our continuing operations and operating
results; our ability to execute and achieve our strategic,
operational, restructuring and cost saving initiatives; our
vendors and suppliers and the risk of any disruption in the
supply of merchandise to us; our cash flows and other sources of
funding of our continuing operations, strategic initiatives,
restructure activities, debt service requirements, capital
expenditures and the obligations arising in the operation of our
business; and our ability to obtain additional or replacement
financing at the times and in the amounts as may be needed. We
are unable to predict the likely duration or ultimate severity
of the U.S. economic conditions, and if the current and
economic conditions further deteriorate, our business,
continuing operations, financial results, liquidity and
financial position could be increasingly materially and
adversely impacted. Further, a sustained economic downturn would
likely cause a number of the risks that we currently face to
increase in likelihood and scope.
Our
ability to continue to have the liquidity necessary through cash
flows from operations combined with our new senior secured
revolving credit facility may not be sufficient to support
operations.
On April 7, 2010, we completed our merger with BPW
Acquisition Corp., a special purpose acquisition corporation
(BPW), which resulted in net cash proceeds of
$333.1 million before our acquisition costs. We
simultaneously closed a senior secured revolving credit facility
with a third-party lender (the Credit Facility),
which provides borrowing capacity up to $200.0 million,
subject to satisfaction of all borrowing conditions.
As a specialty retailer dependent upon consumer discretionary
spending, we have been adversely affected by recent economic
conditions, which have impacted sales, margins, cash flows,
liquidity, results of operations and financial condition. While
the funding received through the merger with BPW and related
Credit Facility eliminated approaching debt maturities and
assisted in our recapitalization, it does not provide assurance
that the current economic environment will stabilize or improve
in the near future or that we will generate sufficient positive
cash flows from operations. Our ability to operate profitably
and to generate positive cash flows is dependent upon many
factors, including stabilization or improvement in economic
conditions and consumer spending and our ability to successfully
execute our long-term financial plan and strategic initiatives.
In the event cash flows are not sufficient to support
operations, it is uncertain whether the Credit Facility will be
able to provide levels of cash in the amounts or at the time
needed. As such, the merger and refinancing does not provide
assurance that our cash flows from operations will be sufficient
to support our Company without additional financing or credit
availability. There can be no assurance that alternatives, if
needed, would be successfully implemented, in which case it
could materially adversely affect our Company, its liquidity,
financial condition and results of operations.
Our Credit Facility contains a borrowing base that is determined
primarily by the level of our eligible accounts receivable and
inventory. If we do not have a sufficient borrowing base at any
given time, borrowing availability under our Credit Facility may
not be sufficient to support our liquidity needs. Insufficient
borrowing availability under our Credit Facility would likely
have a material adverse effect on our business, financial
condition, liquidity and results of operations.
Moreover, under the Credit Facility, we are subject to various
covenants and requirements. Should we be unable to comply with
any of the covenants and requirements in the Credit Facility, we
would be unable to borrow under such Credit Facility, and any
amounts outstanding would become immediately due and payable
unless we were able to secure a waiver or an amendment under the
Credit Agreement. Should we be unable to borrow under the Credit
Facility we may likely not have the cash resources for our
operations and if outstanding borrowings under the facility
become immediately due and payable we likely would not have the
cash resources to repay any such accelerated obligations, and in
each case, our liquidity would be significantly impaired, which
would have a material adverse effect on our business, financial
condition and results of operations.
As a result, the sufficiency and availability of our sources of
liquidity may be affected by a variety of factors, including,
without limitation: (i) the level of our operating cash
flows, which will be impacted by retailer and consumer
acceptance of our merchandise, general economic conditions and
the level of consumer discretionary
11
spending; and (ii) our ability to maintain required levels
of borrowing availability and to comply with applicable
covenants included in our Credit Facility.
We
cannot assure the successful implementation and results of our
long-term strategic initiatives and that we will continue to
improve our operating results and return to long-term
profitability.
Our ability to successfully implement our strategic initiatives
and continue to improve our operating results depends upon a
significant number of factors, many of which are beyond our
control, including:
|
|
|
|
|
sufficiency at all times of available cash flows and other
internal and external cash resources to satisfy all future
operating needs and all other cash requirements;
|
|
|
|
the continuation or any further worsening of economic conditions;
|
|
|
|
adequate and uninterrupted supply of merchandise and
continuation of merchandise purchases on open account purchase
terms from merchandise vendors at expected levels and at
acceptable accounts payable terms;
|
|
|
|
achieving our 2010 financial plan for operating results, working
capital, liquidity and cash flows;
|
|
|
|
whether our strategic initiatives and cost saving actions will
continue to improve our results, operating efficiencies and cash
flows;
|
|
|
|
effective inventory management and maintaining adequate levels
of customer-appropriate inventory;
|
|
|
|
our ability to adequately respond to greater competitive
pressures;
|
|
|
|
our ability to adequately respond to changing fashion trends and
consumers response to our merchandise; and
|
|
|
|
our ability to adjust our operating plans and cash expenditures
in response to changing conditions.
|
We cannot provide assurance that any of these or other factors,
plans and initiatives will be resolved or occur in our favor
and, if not, our business, financial results, liquidity, sales
and results of operations could be materially and adversely
impacted.
The
success of our business will depend on our ability to develop
merchandise offerings that resonate with our existing customers
and attract new customers as well as our ability to continue to
develop, evolve and promote our brand.
Our future success depends on our ability to consistently
anticipate, gauge and respond to our customers demands and
tastes in the design, pricing, style and production of our
merchandise. Our failure to anticipate, identify or react
appropriately and in a timely manner to changes in customer
preferences and economic conditions could lead to lower sales,
missed opportunities, excessive inventories and more frequent
markdowns, which could have a material adverse impact on our
business and our sales levels. Merchandise misjudgments could
also negatively impact our margins and markdown exposure, as
well as our image with our customers, and result in diminished
brand loyalty.
Our future success also depends upon our ability to effectively
define, evolve and promote our brand. The Talbots brand name and
tradition transformed niche is integral to the
success of our business. Maintaining, promoting and positioning
our brand will depend largely on the success of the brands
design, merchandising and marketing efforts, and the ability to
provide a consistent, high quality customer experience. We need
to continue to translate market trends into appropriate product
offerings while minimizing excess inventory positions, and
correctly balance the level of our merchandise commitments with
actual customer orders.
Our
2010 operating plan is based on a number of material assumptions
that may not occur.
Our fiscal 2010 operating plan is based on a number of
significant assumptions which we developed based on our
historical information, current and expected economic
conditions, and expectations and perceptions of our near-term
and longer-term sales, financial results and cost savings, as
well as many other assumptions. We have forecasted substantial
cost savings from the strategic initiatives we implemented in
the past, which if achieved
12
would improve cash flows and liquidity. The current economic
environment makes it difficult to project or forecast the costs
of and results to be achieved from these initiatives. There can
be no assurance that our assumptions or expectations will prove
to be accurate and it is possible that actual events, actions
taken and results actually achieved will be materially
different, and could be more costly, than what we have assumed
or forecasted, which could have a material adverse impact on our
results of operations, liquidity and financial position.
There
are risks associated with the recent appointment of and
transition to a new exclusive global merchandise buying
agent.
In August 2009, we reorganized our global sourcing activities
and entered into a long-term buying agency agreement with an
affiliate of Li & Fung Limited (Li &
Fung) pursuant to which Li & Fung was appointed
as exclusive global apparel sourcing agent for substantially all
of our apparel effective September 2009. There can be no
assurance that the anticipated benefits from this arrangement
will be realized or within the time periods expected. Moreover,
we cannot provide assurance that upon cessation of this
relationship for any reason we would be able to successfully
transition to an internal or other external sourcing function.
Our
overseas merchandise purchasing strategy makes it vulnerable to
certain risks and any disruption in our supply of merchandise
would materially impact us.
All of our merchandise is manufactured to our specifications by
third-party suppliers and intermediary vendors, most of whom are
located outside the United States. Our arrangements with foreign
suppliers and with our foreign buying agents are subject
generally to the risks of doing business abroad, including:
|
|
|
|
|
political and economic instability;
|
|
|
|
imposition of new legislation relating to import quotas that may
limit the quantity of goods that may be imported into the
U.S. from countries in a region where we do business;
|
|
|
|
imposition of duties, taxes and other charges on imports;
|
|
|
|
natural disasters and public health concerns;
|
|
|
|
potential delays or disruption in shipping and related pricing
impacts; and
|
|
|
|
local business practices and political issues, including issues
relating to compliance with domestic or international labor
standards.
|
Continued difficult macroeconomic conditions and uncertainties
in the global credit markets could negatively impact our
suppliers, which in turn, could have an adverse impact on our
business, financial position, liquidity and results of
operations. Moreover, there is a risk that our suppliers and
vendors could respond to any decrease or concern with our
liquidity or negative financial results by requiring or
conditioning their sale of merchandise to us on stringent
payment terms, such as requiring standby letters of credit,
earlier or advance payment of invoices or payment upon delivery,
or other assurances or credit support. There can be no assurance
that one or more of our suppliers may not slow or cease
shipments or require or condition their sale or shipment of
merchandise on more stringent payment terms. If this was to
occur and we did not or were not able to adequately respond, it
could materially disrupt our supply of merchandise.
We cannot predict whether the foreign countries in which our
apparel and accessories are currently manufactured, or any of
the foreign countries in which our apparel and accessories may
be manufactured in the future, will be subject to import
restrictions by the U.S. government, including the
likelihood, type or effect of any trade retaliation. Trade
restrictions, including increased tariffs or more restrictive
quotas, applicable to apparel items could affect the importation
of apparel and, in that event, could increase the cost or reduce
the supply of apparel available to us and adversely affect our
operations. We have an extensive, formal program requiring all
of our manufacturers to comply with applicable labor laws and
acceptable labor practices. Any failure to comply with
applicable labor laws and practices by any of these
manufacturers could materially harm our reputation with our
customers as well as disrupt our supply of merchandise.
13
If our
goodwill or other intangible assets become impaired, we may need
to record significant non-cash impairment charges.
We review the carrying value of our assets for potential
impairment using a combination of a discounted cash flow
approach and a market value approach. If an impairment charge is
identified, the carrying value is compared to our estimated fair
value and an impairment charge is recorded as appropriate.
Impairment losses are significantly impacted by estimates of
future operating cash flows and estimates of fair value. Our
estimates of future operating cash flows are based upon our
experience, knowledge and expectations; however, these estimates
can be affected by such factors as our future operating results,
future store profitability, and future economic conditions, all
of which can be difficult to predict. The carrying value of our
assets may also be impacted by such factors as declines in stock
price and in market capitalization. The recent macro-economic
conditions impacted our performance and our market
capitalization and it is difficult to predict how long these
economic conditions will continue, whether they will continue to
deteriorate, and which aspects of our business may be adversely
affected. These conditions and the continuation of these
conditions could impact the fair value of our goodwill and other
intangible assets and could result in future material impairment
charges, which would adversely impact our results of operations.
The
costs to close underperforming stores may be significant and may
negatively impact our cash flows and our results of
operations.
We regularly assess our portfolio of stores for profitability
and we close certain underperforming stores when appropriate
under the circumstances. Our strategic and realignment plans
include closing underperforming stores in order to reduce
operating losses and to achieve improved long-term profitability
of our store base. Economic conditions may require us to close
an increasing number of underperforming stores. Substantially
all of our stores are leased, with lease terms continuing for up
to ten years or more, and we have significant annual rent and
other amounts due under each lease. While in closing
underperforming stores we endeavor to negotiate with landlords
the amount of remaining lease obligations, there is no assurance
we will reach acceptable negotiated lease settlements,
particularly in the current economic environment. As a result,
costs to close underperforming stores may be significant and may
negatively impact our cash flows and our results of operations.
The estimated costs and charges associated with store closings
are also based on managements assumptions and projections
and actual amounts may vary materially from our forecasts and
expectations.
In
connection with the sale in 2009 of the J. Jill business we
remain contingently responsible for certain material risks and
obligations.
In July 2009, we completed the sale of the J. Jill brand
business. There can be no assurance that the anticipated
benefits from the sale of the J. Jill brand business will be
realized in the time or amounts anticipated. There also can be
no assurance that the estimated or anticipated costs, charges
and liabilities to settle and complete the transition and exit
from the J. Jill brand business, including both retained
obligations and contingent risk for assigned obligations, will
not be materially differ from or be materially greater than
anticipated. In connection with the sale of the J. Jill business
to J.Jill Acquisition LLC (Purchaser), the Purchaser
agreed to acquire and assume from us certain assets and
liabilities relating to the J. Jill business. Under the terms of
the Purchase Agreement, the Purchaser is obligated for
liabilities that arise after the closing under assumed
contracts, which include leases for 205 J. Jill stores assigned
to the Purchaser and a sublease through December 2014 of
approximately 63,943 square feet of space at the
Companys 126,869 square foot leased office facility
in Quincy, Massachusetts. Certain of our subsidiaries remain
contingently liable for obligations and liabilities transferred
to the Purchaser, including those related to leases and other
obligations transferred to and assumed by the Purchaser, as to
which obligations and liabilities we now rely on the
Purchasers creditworthiness as counterparty. If any
material defaults were to occur which the Purchaser does not
satisfy or fully indemnify us against, it could have a material
negative impact on our financial condition and results of
operations. We have accrued a guarantee liability for the
estimated exposure related to these guarantees, which is subject
to future adjustment and could vary materially from estimated
amounts.
14
We are
subject to credit risk and to potential increased defaults and
delinquencies on our customer charge card account
portfolio.
We extend credit to our customers for merchandise purchases
through our proprietary charge card facilities. While we monitor
our charge card account portfolio and we believe that our charge
card account portfolio continues to be sound, the deteriorated
economic environment and current high levels of unemployment may
lead to higher customer delinquencies and defaults. There can be
no assurance that our credit risk monitoring or our monitoring
of our charge card account portfolio will guard against or
enable us to adequately and timely respond to any increased risk
of or actual increased customer delinquencies or defaults, which
could materially and negatively impact the value of our charge
card portfolio, our results of operations and liquidity, and our
borrowing base under our Credit Facility.
Our
Credit Facility contains provisions which may restrict our
operations and proposed financing and strategic
transactions.
Under the terms of our Credit Facility, we cannot create, assume
or suffer to exist any lien securing indebtedness incurred after
the closing date of the Facility subject to certain limited
exceptions set forth in the Credit Facility. The Credit Facility
contains negative covenants prohibiting the Company and its
subsidiaries, with certain exceptions, from among other things,
incurring indebtedness and contingent obligations, making
investments, intercompany loans and capital contributions, and
disposing of property or assets. The Credit Facility Agreement
also contains customary representations, warranties and
covenants relating to the Company and its subsidiaries. The
agreement provides for events of default, including failure to
repay principal and interest when due and failure to perform or
violation of the provisions or covenants of the agreement.
Any of the above requirements or other restrictions and
limitations under the Credit Facility could reduce our
flexibility by limiting, without lender consent, our ability to
borrow additional funds or enter into dispositions or
collateralization transactions involving any of our assets or
other significant transactions. Further, if we default under our
Credit Facility, any amounts outstanding could become
immediately due and payable prior to the maturity date, in which
case absent replacement financing we would not have sufficient
liquidity to satisfy this debt.
Our
success also depends upon our ability to maintain proper
inventory levels.
Our success depends upon our ability to manage proper inventory
levels and respond quickly to shifts in consumer demand
patterns. If we overestimate customer demand for our
merchandise, this will likely result in inventory markdowns and
movement of the excessive inventory to our outlet facilities to
be sold at discount or closeout prices which would negatively
impact operating results and could impair our brand image. If we
underestimate customer demand for our merchandise, we may
experience inventory shortages which may result in missed sales
opportunities, negative impact on customer loyalty and loss of
revenues. The inability to fill customer orders efficiently
could lower customer satisfaction and could cause customers to
go to an alternate source for the desired products. This lowered
level of customer satisfaction and improper inventory levels
could adversely affect our operations.
We may
continue to experience fluctuations in operating
results.
Our annual and quarterly operating results have fluctuated, and
are expected to continue to fluctuate. Among the factors that
may cause our operating results to fluctuate are timing of
holidays, weather, market acceptance of our products, product
mix, pricing and presentation of the products offered and sold,
the timing of merchandise receipts, our cost of merchandise,
unanticipated operating costs, and other factors, many of which
are beyond our control, including the general economic
conditions experienced over the past two years as well as
actions of competitors. As a result,
period-to-period
comparisons of historical and future results will not
necessarily be meaningful and should not be relied on as an
indication of future performance.
Talented
personnel are critical to our success.
Our success and ability to properly manage our growth and to
further develop and promote our brand depends to a significant
extent on both the performance of our current executive and
senior management team and our ability to attract, hire,
motivate, and retain qualified and talented management personnel
in the future. In recent years, we
15
have added a significant number of key senior executives in the
areas of brand leadership, creative, merchandising, marketing,
finance and sourcing. There can be no assurance that we will be
able to retain these senior executives and other key personnel
or that these key hires will be successful in achieving or
maintaining better sales and improved operating results or
long-term profitability for us. Our operations could be
adversely affected if we cannot attract qualified personnel to
re-fill existing positions or build new positions and
departments within the organization and retain all of our key
personnel.
Our
dependence on a single distribution facility.
We handle merchandise distribution for all of our stores from a
single facility in Lakeville, Massachusetts. Independent
third-party transportation companies deliver our merchandise to
our stores and our clients. Any significant interruption in the
operation of the distribution facility or the domestic
transportation infrastructure due to natural disasters,
accidents, inclement weather, epidemics, system failures, work
stoppages, slowdowns or strikes by employees of the
transportation companies, or other unforeseen causes could delay
or impair our ability to distribute merchandise to our stores,
which could result in lower sales, a loss of loyalty to our
brands and excess inventory.
A
major failure of our information systems could harm the
business.
We depend on information systems to manage our operations. Our
information systems consist of a full range of retail,
financial, and merchandising systems, including credit,
inventory distribution and control, sales reporting, accounts
payable, budgeting and forecasting, financial reporting,
merchandise reporting and distribution. We regularly make
investments to upgrade, enhance or replace such systems and
believe they meet industry standards. Any delays or difficulties
in transitioning to these new systems, or in integrating these
systems with our current systems, or any disruptions affecting
our information systems, could have a material adverse impact on
our operations.
The
outcome of litigation and other claims is
unpredictable.
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 (U.S.A.), Inc.,
BPW, and certain other parties. 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
(DGCL) and Talbots by-laws. The plaintiff
originally sought injunctive, declaratory, and monetary relief,
including an order enjoining the consummation of the proposed
merger and related transactions.
On March 6, 2010, a Stipulation entered into by all parties
to the litigation was filed in the Court of Chancery, pursuant
to which plaintiff withdrew his motion for a preliminary
injunction and, in exchange, 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 Plaintiffs claims in the litigation, and
there is no assurance the parties will finally settle and
discharge such claims. The defendants have moved to dismiss the
complaint and intend to defend against the claims vigorously.
We are also subject to other litigation and claims and
administrative proceedings.
We cannot predict or determine the ultimate outcome of any legal
or administrative proceedings to which we are now subject or may
become subject in the future or to quantify the amount or
potential financial impact. Because of the inherent difficulty
of predicting the outcome of any legal claims and administrative
proceedings, we cannot provide assurance as to the outcome of
these or other pending or future matters, or if ultimately
determined adversely to us, the loss, expense or other amounts
attributable to any such matter. The resolution of such matter
or matters, if unfavorable, could have a material adverse effect
on our business, liquidity and results of operations.
The foregoing risk factors are not intended to be exhaustive. We
cannot assure that we have identified and discussed all of the
significant factors which might affect our operations, results
of operations or financial condition. Investors are urged to
review this entire Annual Report as well as all of our other
public disclosures and our filings with the SEC, all of which
may be found on our website at www.thetalbotsinc.com under
Investor Relations.
16
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
The table below presents certain information relating to our
properties at January 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Location
|
|
Square Feet
|
|
|
Primary Function
|
|
Interest
|
|
Hingham, Massachusetts
|
|
|
313,000
|
|
|
Talbots headquarters
|
|
Own (44 acres)
|
Lakeville, Massachusetts
|
|
|
933,000
|
|
|
Distribution and fullfilment center
|
|
Own (115 acres)
|
Tampa, Florida
|
|
|
28,304
|
|
|
Systems center
|
|
Lease
|
Knoxville, Tennessee
|
|
|
37,656
|
|
|
Telemarketing center
|
|
Lease
|
New York, New York
|
|
|
55,697
|
|
|
Creative studio
|
|
Lease
|
Lincoln, Rhode Island
|
|
|
9,645
|
|
|
Credit and banking facilities
|
|
Lease
|
Ontario, Canada
|
|
|
1,350
|
|
|
Canadian regional office
|
|
Lease
|
580 Talbots stores
throughout the U.S and
Canada
|
|
|
4,141,744
|
|
|
Retail stores
|
|
Own and lease (a)
|
Quincy, Massachusetts
|
|
|
126,869
|
|
|
Former subsidiary headquarters
|
|
Lease
|
|
|
|
(a)
|
|
We own the property for five of our 580 Talbots stores.
|
We believe that our operating facilities and sales offices are
adequate and suitable for our current needs.
The leases typically provide for an initial term between 10 and
15 years, with renewal options permitting us to extend the
term between five and 10 years thereafter. We generally
have been successful in renewing our store leases as they
expire. Under most leases, provisions include a fixed annual
base rent plus a contingent rent (percentage rent)
based on the stores annual sales in excess of specified
levels. In a majority of leases, we have a right to terminate
earlier than the specified expiration date if certain sales
levels are not achieved; such right is usually exercisable after
five years of operation. Most leases also require us to pay real
estate taxes, insurance and utilities and, in shopping center
locations, to make contributions toward the shopping
centers common area operating costs and marketing
programs. Most lease arrangements provide for an increase in
annual fixed rental payments during the lease term.
At January 30, 2010, the current terms of our store leases
(assuming solely for this purpose that we exercise all lease
renewal options) were as follows:
|
|
|
|
|
Years Lease
|
|
Number of
|
|
Terms Expire
|
|
Store Leases (a)(b)
|
|
|
2010-2011
|
|
|
95
|
|
2012-2014
|
|
|
111
|
|
2015-2017
|
|
|
104
|
|
2018- and later
|
|
|
323
|
|
|
|
|
(a)
|
|
Includes two Talbots executed leases related to future stores
not yet opened at January 30, 2010.
|
|
(b)
|
|
Includes certain stores that have multiple leases.
|
|
|
Item 3.
|
Legal
Proceedings
|
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 (the
Chancery Court) against Talbots; Talbots board
of directors; AEON (U.S.A.), Inc.; BPW Acquisition Corp.
(BPW); Perella Weinberg Partners LP, a financial
advisor to the audit committee of the Board of Directors of the
Company and an affiliate of Perella Weinberg Partners
Acquisition LP, one of the sponsors of BPW; and the Vice
17
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 violations of certain sections of the DGCL
and Talbots by-laws in connection with the negotiation and
approval of the merger agreement between Talbots and BPW. The
plaintiff originally sought injunctive, declaratory and monetary
relief, including an order to enjoin the consummation of the
merger and related transaction. On March 6, 2010, a
Stipulation (the Stipulation) entered into by
Talbots, the Talbots board of directors; AEON (U.S.A.),
Inc.; BPW, Perella Weinberg Partners LP, the Vice Chairman,
Chief Executive Officer, and Senior Vice President of BPW and
John C. Campbell (Plaintiff) was filed in the
Chancery Court with respect this action. Pursuant to the
Stipulation, Plaintiff withdrew his motion for a preliminary
injunction to enjoin consummation of the merger and related
transactions between Talbots and BPW. In exchange, Talbots
agreed to implement and maintain certain corporate governance
measures, subject to the terms and conditions specified in the
Stipulation. The Stipulation did not constitute dismissal,
settlement or withdrawal of Plaintiffs claims in the
litigation, and there is no assurance the parties will finally
settle and discharge such claims. Defendants have moved to
dismiss the complaint and intend to continue to defend against
the claims vigorously. Talbots cannot accurately predict the
likelihood of a favorable or unfavorable outcome or quantify the
amount or range of potential financial impact, if any.
Talbots is periodically named as a defendant in various
lawsuits, claims and pending actions and is exposed to tax
risks. If a potential loss arising from these lawsuits, claims
and pending actions is probable and reasonably estimable,
Talbots records the estimated liability based on circumstances
and assumptions existing at the time. While Talbots believes the
recorded liabilities are adequate, there are inherent
limitations in projecting the outcome of these matters and in
the estimation process whereby future actual liabilities may
exceed projected liabilities, which could have a material
adverse effect on the Talbots financial condition and
results of operations.
Talbots is subject to tax in various domestic and international
jurisdictions and, as a matter of course, is regularly audited
by federal, state and foreign tax authorities. During the third
quarter of 2009, the Massachusetts Appellate Tax Board rendered
an adverse decision on certain tax matters of Talbots. We are
actively appealing that decision. In order to pursue the appeal,
we were required to make a payment to the Massachusetts
Department of Revenue on the assessment rendered on those tax
matters. This payment did not have a material impact on our
third quarter 2009 earnings.
We are also subject to other litigation, claims and
administrative proceedings.
It is difficult to predict or determine the ultimate outcome of
any legal or administrative proceedings or to quantify the
amount or range of potential financial impact. Because of the
inherent difficulty of predicting the outcome of any legal
claims and administrative proceeding or other matters, we cannot
provide assurance as to the outcome of these or other pending or
future matters, or if ultimately determined adversely to us, the
loss, expense or other amounts attributable to any such matter.
The resolution of such matter or matters, if unfavorable, could
have a material adverse effect on our operating results.
18
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Our common stock is traded on the New York Stock Exchange under
the trading symbol TLB. Information regarding the
high and low sales prices per share of common stock in 2009 and
2008 is set forth in Note 19,
Unaudited Quarterly
Results
, to our consolidated financial statements included
in Item 15.
The payment of dividends and the amount thereof is determined by
the Board of Directors and depends upon, among other factors,
our earnings, operations, financial condition, sufficient line
of credit facilities, credit extended from merchandise vendors,
availability of letter of credit facilities, capital and other
cash requirements, and general business outlook at the time
payment is considered. Our Credit Facility prohibits the payment
of dividends without lender approval. In February 2009, our
Board of Directors approved the indefinite suspension of our
cash dividends. Information regarding our payment of dividends
for 2008 is set forth in Note 19,
Unaudited Quarterly
Results
, to our consolidated financial statements included
in Item 15.
The number of holders of record of our common stock at
April 8, 2010 was 8,385. Additional information concerning
our equity compensation plans is set forth in Item 12,
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters.
A summary of our repurchase activity under certain equity
programs for the thirteen weeks ended January 30, 2010 is
set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Dollar
|
|
|
|
|
|
|
|
|
|
Value of Shares
|
|
|
|
|
|
|
|
|
|
that May Yet Be
|
|
|
|
Total Number of
|
|
|
Average
|
|
|
Purchased under the
|
|
|
|
Shares
|
|
|
Price Paid
|
|
|
Equity Award
|
|
Period
|
|
Purchased(1)
|
|
|
per Share
|
|
|
Programs(2)
|
|
|
November 1, 2009 through November 28, 2009
|
|
|
19,362
|
|
|
$
|
0.25
|
|
|
$
|
12,859
|
|
November 29, 2009 through January 2, 2010
|
|
|
16,012
|
|
|
|
7.62
|
|
|
|
12,385
|
|
January 3, 2010 through January 30, 2010
|
|
|
32,857
|
|
|
|
0.96
|
|
|
|
12,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
68,231
|
|
|
$
|
2.94
|
|
|
$
|
12,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
We repurchased 48,825 shares in connection with stock
forfeited by employees upon termination prior to vesting under
our equity compensation plan, at an acquisition price of $0.01
per share.
|
|
|
|
Our equity program permits employees to tender shares in order
to satisfy the employees tax withholding obligations from
the vesting of their restricted stock. During the period, we
repurchased 19,406 shares of common stock from certain
employees to cover such tax withholding obligations, at a
weighted average acquisition price of $8.14 per share.
|
|
(2)
|
|
As of January 30, 2010, there were 1,200,890 shares of
nonvested stock that were subject to buy-back at $0.01 per
share, or $12,009 in the aggregate, that we have the option to
repurchase if employment is terminated prior to vesting.
|
We did not have any shares available to be repurchased under any
announced or approved repurchase program or authorization as of
January 30, 2010.
19
Stock
Performance Graph
The following graph compares the percentage change in the
cumulative total shareholders return on our common stock
on a year end basis, using the last day of trading prior to our
fiscal year end, with the cumulative total return on the
Standard & Poors 500 Stock Index (S&P
500 Index) and the Dow Jones U.S. General Retailers
Index for the same period. Returns are indexed to a value of
$100 and assume that all dividends were reinvested.
Comparison
of Cumulative Five-Year Total Return of The Talbots, Inc.,
S&P 500 Index, and Dow Jones General Retailers
Index
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base
|
|
Indexed Returns
|
|
|
Period
|
|
for The Years Ended
|
Company/Index
|
|
1/28/05
|
|
1/27/06
|
|
2/02/07
|
|
2/01/08
|
|
1/30/09
|
|
1/29/10
|
The Talbots, Inc.
|
|
$
|
100.00
|
|
|
$
|
111.54
|
|
|
$
|
96.75
|
|
|
$
|
38.87
|
|
|
$
|
9.15
|
|
|
$
|
50.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S&P 500 Index
|
|
$
|
100.00
|
|
|
$
|
111.63
|
|
|
$
|
128.37
|
|
|
$
|
126.05
|
|
|
$
|
76.43
|
|
|
$
|
101.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dow Jones U.S. General Retailers Index
|
|
$
|
100.00
|
|
|
$
|
105.92
|
|
|
$
|
116.37
|
|
|
$
|
104.54
|
|
|
$
|
72.14
|
|
|
$
|
102.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Performance Graph in this Item 5 is not deemed to be
soliciting material or to be filed with
the SEC or subject to Regulation 14A or 14C under the
Securities Exchange Act of 1934 or to the liabilities of
Section 18 of the Securities Exchange Act of 1934, and will
not be deemed to be incorporated by reference into any filing
under the Securities Act of 1933 or the Securities Exchange Act
of 1934, except to the extent we specifically incorporate it by
reference into such a filing.
20
|
|
Item 6.
|
Selected
Financial Data
|
The following selected financial data has been derived from our
consolidated financial statements. The information set forth
below should be read in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations
included under
Item 7 and with our consolidated financial statements and
notes thereto included in Item 15.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
February 2,
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(52 weeks)
|
|
|
(52 weeks)
|
|
|
(52 weeks)
|
|
|
(53 weeks)
|
|
|
(52 weeks)
|
|
|
|
(In thousands, except per share data)
|
|
|
Statement of Operations Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,235,632
|
|
|
$
|
1,495,170
|
|
|
$
|
1,708,115
|
|
|
$
|
1,772,306
|
|
|
$
|
1,703,014
|
|
Operating (loss) income
|
|
|
(8,690
|
)
|
|
|
(98,389
|
)
|
|
|
35,204
|
|
|
|
114,596
|
|
|
$
|
169,367
|
|
(Loss) income from continuing operations
|
|
|
(25,308
|
)(a)
|
|
|
(139,521
|
)(a)(b)
|
|
|
43
|
(a)
|
|
|
56,876
|
|
|
|
104,309
|
|
Net (loss) income
|
|
$
|
(29,412
|
)
|
|
$
|
(555,659
|
)(b)(c)
|
|
$
|
(188,841
|
)(c)
|
|
$
|
31,576
|
|
|
|
93,151
|
|
Per share data
(d)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.47
|
)
|
|
$
|
(2.63
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
1.06
|
|
|
$
|
1.94
|
|
Net (loss) income
|
|
$
|
(0.55
|
)
|
|
$
|
(10.41
|
)
|
|
$
|
(3.58
|
)
|
|
$
|
0.59
|
|
|
$
|
1.73
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.47
|
)
|
|
$
|
(2.63
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
1.05
|
|
|
$
|
1.91
|
|
Net (loss) income
|
|
$
|
(0.55
|
)
|
|
$
|
(10.41
|
)
|
|
$
|
(3.58
|
)
|
|
$
|
0.58
|
|
|
$
|
1.70
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
53,797
|
|
|
|
53,436
|
|
|
|
53,006
|
|
|
|
52,651
|
|
|
|
52,882
|
|
Diluted
|
|
|
53,797
|
|
|
|
53,436
|
|
|
|
53,006
|
|
|
|
53,092
|
|
|
|
53,876
|
|
Cash dividends per share(e)
|
|
$
|
|
|
|
$
|
0.52
|
|
|
$
|
0.52
|
|
|
$
|
0.51
|
|
|
$
|
0.47
|
|
Balance Sheet Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital (deficiency)
|
|
$
|
(261,942
|
)
|
|
$
|
(13,680
|
)
|
|
$
|
208,803
|
|
|
$
|
262,609
|
|
|
$
|
376,204
|
|
Total assets
|
|
|
825,818
|
|
|
|
971,293
|
|
|
|
1,502,979
|
|
|
|
1,748,688
|
|
|
|
1,146,144
|
|
Total long-term debt, including current portion(f)
|
|
|
|
|
|
|
328,377
|
|
|
|
389,027
|
|
|
|
469,643
|
|
|
|
100,000
|
|
Stockholders (deficit) equity
|
|
$
|
(185,636
|
)
|
|
$
|
(178,097
|
)
|
|
$
|
454,779
|
|
|
$
|
643,311
|
|
|
$
|
626,968
|
|
|
|
|
(a)
|
|
During 2009, 2008 and 2007, we recorded charges of
$10.3 million, $17.8 million and $3.7 million
relating to our restructuring activities, which are discussed in
Note 5,
Restructuring Charges
, to our consolidated
financial statements.
|
|
(b)
|
|
During 2008, we recorded a valuation allowance on substantially
all of our deferred tax assets, including $61.0 million
which is included in loss from continuing operations. We also
recorded a valuation allowance of $129.4 million which is
included in discontinued operations.
|
|
(c)
|
|
During 2008 and 2007, we recorded impairment charges relating to
the J. Jill brand of $318.4 million and
$149.6 million, respectively, which are included in
discontinued operations.
|
21
|
|
|
(d)
|
|
Effective February 1, 2009, we adopted new accounting
guidance regarding the calculation and reporting of earnings per
share when nonvested share-based awards have participation
rights to dividends. The new accounting guidance has been
applied retrospectively to prior periods. As a result, prior
period basic and diluted (loss) income per share amounts
presented in the above table have been adjusted as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
January 31,
|
|
February 2,
|
|
February 3,
|
|
January 28,
|
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share as currently reported
|
|
$
|
(2.63
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
1.06
|
|
|
$
|
1.94
|
|
as previously reported
|
|
|
(2.61
|
)
|
|
|
|
|
|
|
1.08
|
|
|
|
1.97
|
|
Diluted loss per share as currently reported
|
|
|
(2.63
|
)
|
|
|
(0.01
|
)
|
|
|
1.05
|
|
|
|
1.91
|
|
as previously reported
|
|
|
(2.61
|
)
|
|
|
|
|
|
|
1.06
|
|
|
|
1.93
|
|
Net loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share as currently reported
|
|
$
|
(10.41
|
)
|
|
$
|
(3.58
|
)
|
|
$
|
0.59
|
|
|
$
|
1.73
|
|
as previously reported
|
|
|
(10.40
|
)
|
|
|
(3.56
|
)
|
|
|
0.60
|
|
|
|
1.76
|
|
Diluted loss per share as currently reported
|
|
|
(10.41
|
)
|
|
|
(3.58
|
)
|
|
|
0.58
|
|
|
|
1.70
|
|
as previously reported
|
|
|
(10.40
|
)
|
|
|
(3.56
|
)
|
|
|
0.59
|
|
|
|
1.72
|
|
|
|
|
(e)
|
|
In February 2009, our Board of Directors approved the indefinite
suspension of our quarterly dividends.
|
|
(f)
|
|
Total long-term debt excludes notes payable to banks of
$148.5 million at January 31, 2009 and
$45.0 million at February 3, 2007.
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion and analysis of financial condition and
results of operations is based upon our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of
America and should be read in conjunction with these statements
and the notes thereto.
We follow the National Retail Federations fiscal calendar.
Where reference is made to a particular year or years, it is a
reference to our 52-week or 53-week fiscal year. References in
this Annual Report to 2009, 2008 and
2007 refer to the 52-week fiscal year ended
January 30, 2010, January 31, 2009 and
February 2, 2008, respectively.
Comparable stores are those that are open for at least 13 full
months. When the square footage of a store is increased or
decreased by at least 15%, the store is excluded from the
computation of comparable store sales for a period of 13 full
months.
Discontinued operations include the Talbots Kids, Mens and U.K.
businesses, all of which ceased operations in 2008, and the
J.Jill business, which was sold on July 2, 2009. The
operating results of these businesses have been classified as
discontinued operations for all periods presented.
Business
Overview
On April 7, 2010, we completed the BPW Transactions. The
acquisition resulted in net proceeds from BPW of
$333.1 million. Simultaneously, we borrowed
$125.0 million under our new Credit Facility and, combined
with our cash on hand, we repaid all of our outstanding debt
with our former majority shareholder. Immediately following the
combined transactions, our debt was reduced by
$361.5 million and our equity increased by approximately
$330.0 million before our acquisition costs. We believe the
completion of these transactions significantly strengthens our
balance sheet and positions us for future growth.
The following is a summary of our 2009 highlights:
|
|
|
|
|
Achieved total revenues of $1,235.6 million
|
|
|
|
Improved gross margin by approximately 370 basis points
|
22
|
|
|
|
|
Reduced expenses by $146.7 million as part of our
$150.0 million cost reduction program, including
$119.9 million in selling, general and administrative and
$26.8 million in cost of sales, buying and occupancy
|
|
|
|
Improved inventory management and reduced inventory levels by
31% compared to 2008
|
|
|
|
Formed strategic alliance with global sourcing partner,
Li & Fung
|
|
|
|
Re-launched Talbots Internet shopping site with enhanced
functionality, features and personalization
|
|
|
|
Launched upscale outlets in May offering merchandise
manufactured exclusively for this concept
|
|
|
|
Reduced operating loss from $98.4 million in 2008 to
$8.7 million in 2009
|
|
|
|
Improved brand and merchandise perception according to consumer
purchase plan study
|
Despite the continued economic challenges during 2009, we
achieved operating income in the third and fourth quarters of
2009 after five consecutive quarters of operating losses,
reflecting significant progress in executing our strategic plan.
In addition, during the fourth quarter our net sales increased
for the second consecutive quarter.
Looking
ahead to 2010 and beyond
We are very pleased with the improvement in our operating
performance over the course of 2009 particularly in the second
half of the year. We expect to carry this momentum from our
operating initiatives into 2010 with continued progress in
evolving our merchandise offering, inventory management and cost
control. We expect to continue to invest in our key growth
initiatives including upscale outlets, our merchandise
categories including accessories, our direct channel Internet
business and productivity improvements from store segmentation,
as well as our other store based productivity initiatives.
Results
of Operations
Cost of sales, buying and occupancy expenses are comprised
primarily of the cost of product merchandise, including duties;
inbound freight charges; shipping, handling and distribution
costs associated with our catalog operations; salaries and
expenses incurred by our merchandising and buying operations;
and occupancy costs associated with our retail stores. Occupancy
costs consist primarily of rent and associated depreciation,
maintenance, property taxes and utilities.
Selling, general and administrative expenses are comprised
primarily of the costs related to employee compensation and
benefits in the selling and administrative support functions;
catalog operation costs relating to catalog production and
telemarketing; advertising and marketing costs; the cost of our
customer loyalty program; costs related to management
information systems and support; and the costs and income
associated with our credit card operations. Additionally, costs
associated with our warehouse operations are included in
selling, general and administrative expenses and include costs
of receiving, inspection, warehousing and store distribution.
Warehouse operations costs for 2009, 2008 and 2007 were
approximately $20.2 million, $27.6 million and
$24.6 million, respectively.
Our gross margins may not be comparable to certain other
companies, as there is diversity in practice as to which costs
companies include in selling, general and administrative
expenses and cost of sales, buying and occupancy expenses.
Specifically, we include the majority of the costs associated
with our warehousing operations in selling, general and
administrative expenses, while other companies may include these
costs in cost of sales, buying and occupancy expenses.
23
The following table sets forth the percentage relationship to
net sales of certain items in our consolidated statements of
operations for the periods shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Cost of sales, buying and occupancy expenses
|
|
|
66.5
|
%
|
|
|
70.2
|
%
|
|
|
66.9
|
%
|
Selling, general and administrative expenses
|
|
|
32.6
|
%
|
|
|
35.0
|
%
|
|
|
30.6
|
%
|
Restructuring charges
|
|
|
0.8
|
%
|
|
|
1.2
|
%
|
|
|
0.2
|
%
|
Merger and related costs
|
|
|
0.7
|
%
|
|
|
|
|
|
|
|
|
Impairment of store assets
|
|
|
0.1
|
%
|
|
|
0.2
|
%
|
|
|
0.2
|
%
|
Operating (loss) income
|
|
|
(0.7
|
)%
|
|
|
(6.6
|
)%
|
|
|
2.1
|
%
|
Interest expense, net
|
|
|
2.3
|
%
|
|
|
1.4
|
%
|
|
|
2.0
|
%
|
(Loss) income before taxes
|
|
|
(3.0
|
)%
|
|
|
(8.0
|
)%
|
|
|
0.1
|
%
|
Income tax (benefit) expense
|
|
|
(1.0
|
)%
|
|
|
1.3
|
%
|
|
|
0.1
|
%
|
(Loss) income from continuing operations
|
|
|
(2.0
|
)%
|
|
|
(9.3
|
)%
|
|
|
(0.0
|
)%
|
2009
Compared to 2008
Net
Sales
The following is a comparison of net sales for 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
Decrease
|
|
|
|
2010
|
|
|
2009
|
|
|
$
|
|
|
%
|
|
|
|
(In millions)
|
|
|
Net store sales
|
|
$
|
1,027.9
|
|
|
$
|
1,261.6
|
|
|
$
|
(233.7
|
)
|
|
|
(18.5
|
)%
|
Net direct marketing sales
|
|
|
207.7
|
|
|
|
233.6
|
|
|
|
(25.9
|
)
|
|
|
(11.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,235.6
|
|
|
$
|
1,495.2
|
|
|
$
|
(259.6
|
)
|
|
|
(17.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores
Reflected in Talbots store sales was a $218.3 million, or
19.3%, decline in comparable store sales for 2009, which was
generally in line with our expectations due to the lackluster
customer shopping behaviors we experienced throughout the first
half of the year. We believe this was a carryover from the
latter part of 2008 as the difficult economic environment
significantly influenced consumers discretionary spending. When
our customer was shopping, key fashion items at entry level
price points were the main driver of sales. We remained
steadfast in managing on lean inventory while improving our flow
of merchandise, optimizing our markdowns and presenting our
customer with a stronger mix of full-price to markdown
merchandise.
Sales metrics for 2009 were as follows: customer traffic
declined 14.6% and the rate of converting traffic to
transactions declined 3.2%, resulting in a 17.8% decline in the
number of transactions. Additionally, units per transaction were
down 3.8%, with a 1.6% increase in average unit retail,
resulting in a 2.2% decline in dollars per transaction. We began
to see improvement in our sales metrics beginning in the third
quarter which continued through the end of the year. Although we
experienced a decline in fourth quarter traffic and
transactions, dollars per transaction increased 13% reflecting
an improvement in full-price selling.
Despite a year over year decline in sales and certain other
related metrics, we have reason to believe that customer
perception of our merchandise continued to improve. Market
research we conducted during the third quarter indicated that
our best customers, those who spend the most money shopping with
us, gave our merchandise its highest rating in recent years. Our
lower spenders also rated our merchandise at its highest levels
in recent years, although not as high as our best customers.
24
As of January 30, 2010, we operated a total of 580 stores
with gross and selling square footage of approximately
4.1 million square feet and 3.2 million square feet.
This represents a decrease of approximately 1.4% in gross and
selling square footage, respectively, from January 31,
2009, when we operated 587 retail stores with gross and selling
square footage of approximately 4.2 million square feet and
3.2 million square feet, respectively. The decrease in
square footage is due to the opening of 11 upscale outlets and
one retail store offset by the closing of 19 retail stores.
Direct
Marketing Sales
We experienced an 11.1% decline in direct marketing sales in
2009 compared to 2008 while the percentage of our net sales
derived from direct marketing increased to 16.8% in 2009 from
15.6% in 2008. The increase in the direct marketing as a percent
of total sales is partially due to more aggressive selling and
promoting of our direct marketing sales that originate in our
stores via red-line phones, which are direct lines to our
telemarketing center. Also contributing to the improvement,
beginning in the fall season, we presented our customer with a
stronger mix of full-price merchandise, achieved better
fulfillment and experienced lower returns. Direct marketing
sales in the third quarter were essentially flat compared to the
prior year and we experienced an 11.0% increase in the fourth
quarter on a
year-over-year
basis. Internet sales in 2009 represented 70.0% of our direct
marketing sales compared to 68.0% in 2008. We believe our
investment in our new Internet platform coupled with changing
trends in consumer purchasing behavior, contributed to the
increase in Internet sales as a percentage of direct marketing.
Cost of
Sales, Buying, and Occupancy Expenses
The following is a comparison of cost of sales, buying and
occupancy expense for 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Decrease
|
|
|
|
(In millions)
|
|
|
Cost of sales, buying and occupancy expense
|
|
$
|
821.3
|
|
|
$
|
1,049.8
|
|
|
$
|
(228.5
|
)
|
Percentage of net sales
|
|
|
66.5
|
%
|
|
|
70.2
|
%
|
|
|
(3.7
|
)%
|
The decrease in cost of sales, buying and occupancy expense
represents a 370 basis point improvement from the prior
year. The improvement includes a 620 basis point
improvement in product gross margin as a percent of sales. The
improvement in product gross margin was driven by changes to our
sourcing practices, disciplined inventory management and strong
full-price selling specifically in the second half of the year.
The improvement in cost of sales is offset by a 200 basis
point increase in occupancy costs and a 50 basis point
increase in buying costs, both of which rose as a percent of
sales despite reductions in actual costs. These increases as a
percent of sales are attributable to negative leverage from the
decline in sales for the year, as actual costs for occupancy and
buying were reduced from the prior year.
Selling,
General and Administrative Expenses
The following is a comparison of selling, general and
administrative expenses for 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Decrease
|
|
|
|
(In millions)
|
|
|
Selling, general and administrative expenses
|
|
$
|
403.2
|
|
|
$
|
523.1
|
|
|
$
|
(119.9
|
)
|
Percentage of net sales
|
|
|
32.6
|
%
|
|
|
35.0
|
%
|
|
|
(2.4
|
)%
|
In early 2009, we established a goal of reducing annual expenses
by $150.0 million by the end of fiscal 2010. Approximately
80% of this reduction was expected to be within selling, general
and administrative expenses. By the end of fiscal 2009, we
reduced expenses by $119.9 million, substantially achieving
our two-year goal in one year. Our expense reductions were
primarily realized in payroll and employee benefits and the
balance in other corporate overhead expenses as we reduced our
workforce by 32% during 2009.
25
Restructuring
Charges
The following is a comparison of restructuring charges for 2009
and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Decrease
|
|
|
|
(In millions)
|
|
|
Restructuring charges
|
|
$
|
10.3
|
|
|
$
|
17.8
|
|
|
$
|
(7.5
|
)
|
Percentage of net sales
|
|
|
0.8
|
%
|
|
|
1.2
|
%
|
|
|
(0.4
|
)%
|
The 2009 restructuring charges primarily relate to severance
costs due to the corporate headcount reductions in February 2009
and June 2009, and costs to settle lease liabilities for a
portion of our Tampa, Florida data center that is no longer
being used. Additionally, we reorganized our global sourcing
activities and entered into a buying agency agreement with
Li & Fung effective September 2009. Li &
Fung is now our exclusive global apparel sourcing agent for
substantially all Talbots apparel.
Merger
costs
In 2009, we incurred $8.2 million of merger costs in
connection with our acquisition of BPW. These costs primarily
consist of investment banking and professional services fees.
Approximately $30.0 million of additional
transaction-related costs including management and key employee
incentive and retention expenses are expected to be incurred
during 2010 and 2011.
Impairment
of Store Assets
The following is a comparison of impairment charges for 2009 and
2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Decrease
|
|
|
|
(In millions)
|
|
|
Impairment of store assets
|
|
$
|
1.4
|
|
|
$
|
2.8
|
|
|
$
|
(1.4
|
)
|
Percentage of net sales
|
|
|
0.1
|
%
|
|
|
0.2
|
%
|
|
|
(0.1
|
)%
|
We closely monitor our store portfolio to identify stores that
are underperforming and close stores when appropriate. When we
determine that a store is underperforming or is to be closed, we
reassess the expected future cash flows of the store, which in
some cases results in an impairment charge. During the third
quarter of 2009, we identified and recorded an impairment charge
of $1.4 million related to underperforming stores.
Net
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Increase
|
|
|
|
(In millions)
|
|
|
Net interest expense
|
|
$
|
28.1
|
|
|
$
|
20.3
|
|
|
$
|
7.8
|
|
Average debt outstanding
|
|
|
498.7
|
|
|
|
474.5
|
|
|
|
24.2
|
|
Average interest rate on borrowings
|
|
|
4.9
|
%
|
|
|
3.7
|
%
|
|
|
1.2
|
%
|
The increase in interest expense was primarily due to a higher
average outstanding debt levels combined with a higher average
interest rate on those borrowings. Interest expense in 2009 also
includes $0.5 million of amortization of the
$1.7 million loan fees paid to AEON in 2009 and
$1.1 million of breakage fees resulting from our early
repayment of the bank debt on December 29, 2009.
Income
Tax (Benefit) Expense
The following is a comparison of income tax (benefit) expense
for 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Decrease
|
|
|
|
(In millions)
|
|
|
Income tax (benefit) expense
|
|
$
|
(11.5
|
)
|
|
$
|
20.8
|
|
|
$
|
(32.3
|
)
|
26
The income tax benefit in 2009 resulted primarily from the
intraperiod tax allocation arising from other comprehensive
income recognized from the remeasurement of our Pension Plan and
SERP obligations due to our decision to freeze future benefits
under the plans effective as of May 1, 2009. This resulted
in a tax expense of approximately $10.5 million in other
comprehensive income and an offsetting benefit in continuing
operations. The income tax expense in 2008 is due to the
establishment of a valuation allowance of $61.0 million for
substantially all of our net deferred tax assets. During the
fourth quarter of 2008, we concluded there was insufficient
evidence that all of our deferred tax assets would be realized
in the future.
2008
Compared to 2007
Net
Sales
The following is a comparison of net sales for 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 2,
|
|
|
Decrease
|
|
|
|
2009
|
|
|
2008
|
|
|
$
|
|
|
%
|
|
|
|
(In millions)
|
|
|
Net retail store sales
|
|
$
|
1,261.6
|
|
|
$
|
1,445.4
|
|
|
$
|
(183.8
|
)
|
|
|
(12.7
|
)%
|
Net direct marketing sales
|
|
|
233.6
|
|
|
|
262.7
|
|
|
|
(29.1
|
)
|
|
|
(11.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,495.2
|
|
|
$
|
1,708.1
|
|
|
$
|
(212.9
|
)
|
|
|
(12.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
Stores
Reflected in Talbots retail store sales was a
$187.6 million, or 14.2%, decline in comparable store sales
for the period, driven by a 13.2% decline in transactions. We
believe that the negative sales results were impacted by a weak
customer response to the brands spring merchandise and
timing of promotional events earlier in the year, coupled with
the effects from the economic crisis and pressures on consumer
spending later in the year. We began to see a steep decline in
customer traffic in mid-September as the financial crisis
unfolded. Throughout the remainder of the year, it was more
challenging to drive customer traffic as we believe that our
customer was becoming more cautious and thoughtful regarding her
discretionary spending given the substantial economic
uncertainty. As a result, we were forced to become more
promotional than originally planned which negatively impacted
our margins. Despite the environment in the fall season, we did
see a positive response to our reinvigorated merchandise and
marketing efforts during that time. The third quarter marked the
first deliveries under the direction of our new creative,
merchandising and marketing teams. The new deliveries in the
fall season were complemented with new floor sets and major
redesigned catalogs. Although we believe our improvements to the
brand were received well by our customers, our sales could not
withstand the continued deterioration and uncertainty of the
U.S. economy. For the fourth quarter of 2008, our
comparable store sales declined 24.6%.
As of January 31, 2009, we operated a total of 587 retail
stores with gross and selling square footage of approximately
4.2 million square feet and 3.2 million square feet,
respectively. This represents a decrease of approximately 6% in
gross and selling square footage from February 2, 2008,
when we operated 590 retail stores with gross and selling square
footage of approximately 4.5 million square feet and
3.5 million square feet, respectively.
Direct
Marketing Sales
The decline in direct marketing sales was primarily due to the
effects of the economic environment and a misjudgment in
inventory commitments related to our Sale book that dropped in
December. The catalog received a positive response and we were
unable to fulfill approximately 39% of customer demand from the
Sale book. Additionally, we shifted the mailing of our key
holiday/gift catalog into November in 2008 versus October in the
prior year. We expected this change to benefit our fourth
quarter direct marketing sales. Because of the difficult
economic environment, our fourth quarter results did not benefit
from this change. Mainly because of these actions, we
experienced a $17.2 million decline in net sales in the
fourth quarter compared to the prior year.
27
In 2008, as part of our strategic initiatives, we increased
circulation for the Talbots brand and developed innovative
marketing strategies in order to strengthen relations with our
existing customer, prospect new customers and drive reactivation
of our existing lapsed customer in hopes to drive catalog and
Internet channel sales. We believe our efforts yielded a solid
increase in response rate, especially with our existing lapsed
customers.
The Internet channel continued to be an important component of
direct marketing sales, with Internet representing 68% of the
direct business in 2008 in comparison to 61% in 2007. We have
made enhancements to our website in 2008, offering enhanced
visuals and greater ease of functionality and plan to create a
fresh platform of our
e-commerce
site in 2009. The percentage of our net sales derived from
direct marketing increased slightly from 15.4% in 2007 to 15.6%
in 2008.
Cost of
Sales, Buying, and Occupancy Expenses
The following is a comparison of cost of sales, buying and
occupancy expense for 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 2,
|
|
|
Increase
|
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
|
(In millions)
|
|
|
Cost of sales, buying and occupancy expense
|
|
$
|
1,049.8
|
|
|
$
|
1,143.3
|
|
|
$
|
(93.5
|
)
|
Percentage of net sales
|
|
|
70.2
|
%
|
|
|
66.9
|
%
|
|
|
3.3
|
%
|
We experienced a 330 basis point increase in cost of sales,
buying and occupancy expenses as a percentage of net sales over
the prior year with product gross margin decreasing by
approximately 25 basis points. Despite the significant
decline in sales, especially in the fourth quarter, our efforts
in inventory management allowed us to maintain relatively flat
product margins with the prior year. Our efforts included
tighter control of inventory levels, improved initial mark-on,
the change to a monthly markdown cadence and a consistent flow
of new merchandise across channels.
Additionally, an approximate 235 basis point increase was
driven by higher occupancy costs as a percentage of sales. As
occupancy costs are primarily fixed costs, the basis point
increase is fully attributable to the decline in sales for the
period.
We also experienced an approximate 97 basis point increase
in merchandising costs as a percentage of sales, which is
attributable to the deleverage associated with the decline in
store sales for the period.
Selling,
General and Administrative Expenses
The following is a comparison of selling, general and
administration expenses for 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 2,
|
|
|
Increase
|
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
|
(In millions)
|
|
|
Selling, general and administrative expenses
|
|
$
|
523.1
|
|
|
$
|
523.3
|
|
|
$
|
(0.2
|
)
|
Percentage of net sales
|
|
|
35.0
|
%
|
|
|
30.6
|
%
|
|
|
4.4
|
%
|
We experienced a 440 basis point increase in selling,
general and administrative expenses as a percentage of net sales
over the prior year. While we believed that we made progress in
executing our strategic initiatives, including streamlining the
organization and reducing expenses for our overall cost
structure in 2008, we had not yet begun to benefit from the
implementations. In 2008, we spent approximately
$20.1 million in business development costs, or
approximately 130 basis points, relating to
non-restructuring initiatives. The costs were primarily relating
to professional services. Any savings that we were able to
achieve in 2008 were offset by negative leverage from the
decline in sales during the period. Our primary area of savings
in 2008 was due to our decision to eliminate television and
national print advertising. We spent $14.8 million less, or
approximately 70 basis points, during 2008 for marketing
programs in comparison to 2007. Additionally, we reduced our
vacation accrual by $7.3 million in 2008 due to a change in
our vacation policy that became effective on January 1,
2009.
28
Restructuring
Charges
The following is a comparison of restructuring charges for 2008
and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Increase
|
|
|
|
(In millions)
|
|
|
Restructuring charges
|
|
$
|
17.8
|
|
|
$
|
3.7
|
|
|
$
|
14.1
|
|
Percentage of net sales
|
|
|
1.2
|
%
|
|
|
0.2
|
%
|
|
|
1.0
|
|
We incurred $17.8 million and $3.7 million of expense
relating to our strategic business plan in 2008 and 2007. The
$17.8 million of restructuring charges in 2008 consisted of
$15.9 million of severance, $4.0 million of
professional services, offset by $2.2 million of non-cash
credits related to stock awards that will not vest. The
$3.7 million of restructuring charges in 2007 consisted of
$2.7 million of professional services, $0.7 million of
severance and $0.3 million of other non-cash charges.
Impairment
of Store Assets
The following is a comparison of impairment charges for 2008 and
2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Increase
|
|
|
|
(In millions)
|
|
|
Impairment of store assets
|
|
$
|
2.8
|
|
|
$
|
2.6
|
|
|
$
|
0.2
|
|
Percentage of net sales
|
|
|
0.2
|
%
|
|
|
0.2
|
%
|
|
|
0.0
|
|
We closely monitor our store portfolio to identify stores that
are underperforming and close stores when appropriate. When we
determine that a store is underperforming or is to be closed, we
reassess the expected future cash flows of the store, which in
some cases results in an impairment charge.
Goodwill
and Other Intangible Assets
Our policy is to evaluate goodwill and trademarks for impairment
on an annual basis at the reporting unit level on the first day
of each fiscal year, and more frequently, if events occur or
circumstances change which suggest that the goodwill or
trademarks should be evaluated. In the third quarter of 2008,
our operating results were lower than expected. Based on this
trend, we updated our forecasts during the third quarter and
management performed an interim impairment test on our goodwill
and trademarks. We determined that no impairment our goodwill or
trademarks existed for the Talbots brand.
As a result of the significant decline in our stock price and
market capitalization in the fourth quarter of 2008, we
performed an additional interim test for impairment. In the
fourth quarter, we finalized our 2009 budget and long term plan,
evaluating current industry trends, and the impact that the
uncertainty in the financial markets may have on our business
and our impairment analysis. We determined that no impairment of
our goodwill or trademarks existed for the Talbots brand. Our
industry continues to be materially impacted by the
deterioration of the U.S. economic environment and we
believe that the effects will continue. As such, we may be
required to perform additional tests of impairment on our
goodwill and intangible assets which may result in significant
charges.
Net
Interest Expense
The following is a comparison of net interest expense for 2008
and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Decrease
|
|
|
|
(In millions)
|
|
|
Net interest expense
|
|
$
|
20.3
|
|
|
$
|
34.1
|
|
|
$
|
(13.8
|
)
|
Average debt outstanding
|
|
|
474.5
|
|
|
|
541.2
|
|
|
|
(66.7
|
)
|
Average interest rate on borrowings
|
|
|
3.7
|
%
|
|
|
5.8
|
%
|
|
|
(2.1
|
)
|
The decrease in net interest expense was due to lower average
outstanding debt levels as well as lower average interest rates.
29
Income
Tax Expense
The following is a comparison of income tax expense for 2008 and
2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31,
|
|
February 2,
|
|
|
|
|
2009
|
|
2008
|
|
Increase
|
|
|
(In millions)
|
|
Income tax expense
|
|
$
|
20.8
|
|
|
$
|
1.1
|
|
|
$
|
19.7
|
|
The income tax expense in 2008 reflects the establishment of
valuation allowances for substantially all of our net deferred
tax assets. During the fourth quarter of 2008, we concluded
there was insufficient evidence that all of our deferred tax
assets would be realized in the future.
DISCONTINUED
OPERATIONS
Our discontinued operations include the Talbots Kids, Mens and
U.K. businesses, all of which ceased operations in 2008, and the
J. Jill business, which was sold on July 2, 2009. The
operating results of these businesses have been classified as
discontinued operations for all periods presented.
On June 7, 2009, we entered into a Purchase Agreement with
Jill Acquisition LLC (the Purchaser) for the sale of
the J. Jill business, pursuant to which the Purchaser agreed to
acquire and assume from us certain assets and liabilities
relating to the J. Jill business. On July 2, 2009, we
completed the sale for net proceeds of $64.3 million. The
75 J. Jill stores that were not sold were closed.
We recorded a $0.3 million loss on the sale and disposal of
the J. Jill business in 2009. Gains and losses recorded in
periods subsequent to the closing are due to working capital
adjustments and to adjustments to the estimated lease
liabilities relating to the 75 J. Jill stores that were not
sold, and the Quincy office space that is not being subleased or
used. As of January 30, 2010, we settled the lease
liabilities of 69 of the 75 stores not acquired by Purchaser.
Lease liabilities for four additional stores were settled
subsequent to January 30, 2010. Lease termination costs are
recorded at the time a store is closed or existing space is
vacated. Total cash expenditures to settle the lease liabilities
for the remaining two unsold stores cannot yet be finally
determined and will depend on the outcome of ongoing
negotiations with third parties. As a result, such costs may
vary materially from current estimates and managements
assumptions and projections may change materially. While we will
endeavor to negotiate the amount of remaining lease obligations,
there is no assurance it will reach acceptable negotiated lease
settlements. See Liquidity and Capital Resources below for
further discussion of lease liabilities.
The $4.1 million loss from discontinued operations in 2009
also includes $3.8 million of operating losses, primarily
due to adjustments to estimated lease liabilities relating to
the Talbots Kids and Mens businesses, and losses incurred by the
J. Jill business prior to ceasing operations in July 2009.
Liquidity
and Capital Resources
As described above, we merged with BPW on April 7, 2010. We
simultaneously closed a senior secured revolving credit facility
with a third party lender, which provides borrowing capacity up
to $200 million, subject to all borrowing conditions. The
merger transaction and the related financing provided us with
additional capital to strengthen our balance sheet,
significantly reduce our outstanding indebtedness and restore
positive stockholder equity.
We finance our working capital needs, operating costs, capital
expenditures, strategic initiatives and restructurings, and debt
and interest payment requirements through cash generated by
operations, access to working capital and other credit
facilities.
During 2008 and 2007, we incurred significant net losses
attributable to operations, most of which related to operations
being discontinued. Included in the losses from discontinued
operations were significant charges related to impairments of
intangible and tangible assets, the majority of which related to
our J. Jill business. In late 2007, we initiated a comprehensive
strategic review of our business including the following areas:
brand positioning, productivity, store growth and store
productivity, non-core concepts, distribution channels, the J.
Jill business and other operating matters, including
streamlining our organization and developing a plan to
strengthen and grow the business. In connection with
streamlining our organization, which was a major initiative of
our strategic plan, we
30
recorded restructuring charges of $17.8 million and
$3.7 million in 2008 and 2007, respectively. Our
restructuring charges primarily related to restructuring
activities intended to reduce costs.
The substantial deterioration in the U.S. economy and
decline in consumer discretionary spending began to
significantly impact our operations during 2008, especially
during the fourth quarter of 2008 in which sales declined by 23%
on a year over year basis. As of January 31, 2009, we were
in violation of certain financial covenants on our Acquisition
Debt and had substantial additional debt obligations coming due
in the next twelve months.
In response to these short-term liquidity needs, we took the
following actions during 2008 and 2009 in an effort to improve
our liquidity:
|
|
|
|
|
In July 2008, we entered into a $50.0 million subordinated
working capital term loan facility with AEON (U.S.A.) (the
AEON Facility) which was to mature in 2012 and was
interest-only until maturity. As of January 31, 2009, we
had drawn $20.0 million on this facility, and subsequent to
January 31, 2009, we borrowed the remaining
$30.0 million available under the facility.
|
|
|
|
In February 2009, we obtained a new $200.0 million term
loan facility from AEON (the AEON Loan) and borrowed
$200.0 million which was used to repay all of our
outstanding indebtedness under our Acquisition Debt Agreement
related to the 2006 J. Jill acquisition. The Acquisition Debt
Agreement required quarterly principal payments of
$20.0 million. The $200.0 million loan from AEON was
interest-only until maturity. The term loan facility initially
matured on August 31, 2009, but provided us with the option
to extend the maturity for additional six-month periods, up to
the third anniversary of the loan closing date, which was
February 27, 2012.
|
|
|
|
As of February 2009, we converted all of our working capital
lines of credit with our banks, amounting to $165.0 million
in the aggregate, to committed lines with maturities in December
2009.
|
|
|
|
In April 2009, AEON guaranteed our outstanding debt under our
then existing working capital facilities totaling
$165.0 million, our then existing revolving credit
facilities totaling $80.0 million, and our then existing
$20 million term loan facility. AEON also agreed
(i) that it would agree to continue to provide a guaranty
for a refinancing of any of that debt, which then matured at
various dates on and before April 16, 2010 and (ii) if
the lender failed to agree to refinance that debt on or before
the then existing maturity date, or if any other condition
occurred that required AEON to make a payment under its then
existing guaranty, AEON would make a loan to us, due on or after
April 16, 2010 and within the limits of AEONs then
existing loan guaranty, to avoid any lack of our financial
resources caused by any such failure of refinancing. In April
2009, AEON also confirmed its support for our working capital
improvements initiatives for our merchandise payables management
and that it would use commercially reasonable effort to provide
us with financial support through loan or guarantee up to
$25.0 million only if, and to the extent that, we fell
short in achieving our targeted cash flow improvement for fall
2009 merchandise payables.
|
|
|
|
In April 2009, we entered into a $150.0 million secured
revolving loan facility with AEON. The facility was to mature
upon the earlier of (i) April 17, 2010 or
(ii) one or more securitization programs or structured
loans by us or our subsidiaries in an aggregate equivalent
principal amount to the revolving loan commitment amount,
approved in advance by AEON as lender and in form and substance
satisfactory to the lender. The facility was secured by
(i) a first priority security interest in substantially all
of our consumer credit/charge card receivables and (ii) a
first lien mortgage on our Hingham, Massachusetts headquarters
and Lakeville, Massachusetts distribution facility. Amounts
could be borrowed, repaid and reborrowed under the facility and
could be used for working capital and other general corporate
purposes.
|
|
|
|
As of April 2009, we eliminated all financial covenant ratios
from our debt agreements.
|
|
|
|
On December 8, 2009, we entered into agreements for the
proposed BPW Transactions.
|
|
|
|
On December 28, 2009, we executed an Amended and Restated
Secured Revolving Loan Agreement with AEON (the Amended
Facility), which amended and restated the
$150.0 million secured revolving loan facility executed
with AEON in April 2009. Under the terms of the Amended
Facility, the principal amount of the earlier
$150.0 million secured credit facility was increased to
$250.0 million. We could use funds borrowed under the
Amended Facility solely (i) to repay our outstanding
third-party bank indebtedness plus
|
31
|
|
|
|
|
interest and other costs, (ii) to fund working capital and
other general corporate purposes up to $10.0 million
subject to satisfaction of all borrowing conditions and
availability under the Amended Facility, and (iii) to pay
related fees and expenses associated with the Amended Facility.
This Amended Facility was secured by substantially all of our
existing and after-acquired assets and properties, including the
assets and properties which were collateral under our earlier
$150.0 million AEON facility.
|
The Amended Facility had a scheduled maturity date of the
earlier to occur of (i) April 16, 2010 or
(ii) the consummation of
the BPW Transactions, provided that the merger transaction
together with any concurrent financing results in sufficient net
cash proceeds to enable us to make full repayment of our AEON
debt (including amounts owed under the Amended Facility).
|
|
|
|
|
On December 29, 2009, we borrowed $245.0 million under
the Amended Facility which we used to repay in full our
outstanding third party bank indebtedness, related interest, and
other costs and expenses. The Amended Facility was provided
pursuant to AEONs April 9, 2009 financial support
commitments, as referred to above, which were satisfied and
discharged in full upon the December 29, 2009 funding under
this Amended Facility for the repayment of all of our then
outstanding third-party bank indebtedness.
|
In addition to the short-term liquidity actions described above,
and with a focus on the Talbots brand, in late 2008, we began to
implement a series of key initiatives designed to streamline our
organization, reduce our cost structure and optimize our gross
margin performance through stronger inventory management and
improved initial
mark-ups
resulting from changes to our supply chain practices. We took
the following actions as part of our continuing strategic
initiatives in 2008 and 2009:
|
|
|
|
|
In June 2008, we reduced our corporate headcount by
approximately 9% across multiple locations at all levels.
|
|
|
|
During the third quarter of 2008, we completed the closing of
our Kids, Mens and U.K. business concepts which were not
considered strategic to ongoing operations.
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During the third quarter of 2008, our Board of Directors
approved a plan to sell the J. Jill business which was not
considered strategic to ongoing operations.
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During 2008, we eliminated advertising in television and
national print, contributing to $14.8 million less in
spending from 2007.
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During 2008 and 2009, we changed our promotional cadence to
monthly markdowns rather than our historical four clearance
sales events per year, held a leaner inventory position and
concentrated on better product flow and content. We also
decreased our inventory commitments for 2009.
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In 2008 and 2009, we reduced our annual gross capital
expenditures (excluding construction allowances received from
landlords) to $44.7 million and $21.0 million,
respectively, from $57.6 million in 2007.
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In 2009, we initiated a program to achieve a $150.0 million
annual expense reduction to be completed by the end of fiscal
2010, and have substantially achieved that goal as of
January 30, 2010, including a reduction of
$119.9 million in selling, general and administrative
expenses and $26.8 million in cost of sales, buying and
occupancy costs. Key components are as follows:
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Reduced corporate headcount by approximately 17% in February
2009, and further again in June 2009 by approximately 20%.
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Reduced hours worked in our stores, distribution center and call
center for 2009.
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Eliminated matching contributions to our 401(k) plan for 2009,
increased employee health care contributions, eliminated merit
increases for 2009 and froze our defined benefit pension plans.
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Implemented broad-based non-employee overhead actions resulting
in cost savings, primarily in the area of administration,
marketing and store operations
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In February 2009, our Board approved the indefinite suspension
of our quarterly dividend.
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32
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In July 2009, we completed the sale of the J. Jill business to
Purchaser for net cash proceeds of $64.3 million and closed
the 75 J. Jill stores not purchased in the transaction. As of
January 30, 2010, the lease liabilities for 69 of the 75
unsold stores are settled. Three additional store leases were
settled subsequent to January 30, 2010.
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In August 2009, we reorganized our global sourcing activities
and entered into a buying agency agreement with Li &
Fung whereby, effective September 2009, Li & Fung is
acting as our exclusive global sourcing agent for substantially
all Talbots apparel. In connection with the reorganization, we
closed our Hong Kong and India sourcing offices and reduced our
corporate sourcing headcount.
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In 2009, we successfully managed our fall 2009 merchandise
payables without the need to draw upon the $25.0 million
working capital financial support commitment provided by AEON in
April 2009
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In 2009, we closed 19 underperforming stores, some of which
relate to store leases that expired during 2009 and some of
which are pursuant to existing early termination right
provisions.
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In 2009, we decreased our catalog circulation to approximately
36.6 million catalogs, down from approximately
55.0 million in 2008.
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In connection with certain of the above activities, we recorded
additional restructuring charges of $10.3 million in 2009.
Because economic conditions and discretionary consumer spending
have not improved in the near term, we expect to continue to
consider further realignment and rationalization initiatives and
actions to further reduce and adjust our costs relative to our
sales and operating results. We will also continue to review
store performance and expect to continue to close
underperforming stores when we believe appropriate under the
circumstances.
As noted above, on July 2, 2009, we completed the sale of
the J. Jill business, pursuant to which the Purchaser agreed to
acquire and assume from us certain assets and liabilities
relating to the J. Jill business. Under the terms of the
Purchase Agreement, the Purchaser is obligated for liabilities
that arise after the closing under assumed contracts, which
include leases for 205 J. Jill stores assigned to the Purchaser
and a sublease through December 2014 of approximately
63,943 square feet of space at the Companys
126,869 square foot leased office facility in Quincy,
Massachusetts. Certain of our subsidiaries remain contingently
liable for obligations and liabilities transferred to the
Purchaser, including those related to leases and other
obligations transferred to and assumed by the Purchaser. If any
material defaults were to occur which the Purchaser does not
satisfy or fully indemnify us against, it could have a material
negative impact on our financial condition and results of
operations. We have accrued a guarantee liability for the
estimated exposure related to these guarantees, which is subject
to future adjustment and could vary materially from estimated
amounts.
The lease liabilities of three of the 75 stores not acquired by
the Purchaser have not yet been settled. Lease termination costs
are recorded at the time a store is closed or existing space is
vacated. Total cash expenditures to settle the lease liabilities
for the remaining three unsold stores cannot yet be finally
determined and will depend on the outcome of ongoing
negotiations with third parties. As a result, such costs may
vary materially from current estimates and managements
assumptions and projections may change materially. While the
Company will endeavor to negotiate the amount of remaining lease
obligations, there is no assurance it will reach acceptable
negotiated lease settlements.
All of our merchandise is manufactured to our specifications by
third-party suppliers and intermediary vendors, most of whom are
located outside the United States. Our merchandise purchases are
procured through a variety of payment terms with our vendors. In
order to more effectively manage our accounts payable and cash
positions due to our sales trends and cash needs, during the
second half of 2008 and into 2009, we extended many of our
accounts payable terms from secured letters of credit to open
account terms payable in approximately 60 days after
shipment. This has improved our cash position and accounts
payable management and we intend to seek to continue these
accounts payable and cash management practices going forward.
33
Debt
Facilities
At January 30, 2010, we had existing credit facilities
providing an aggregate of $491.5 million of financing
through the AEON Facility, AEON Loan and Amended Facility, all
of which are with related parties. Our outstanding borrowings
totaled $486.5 million at January 30, 2010, including
$50.0 million, $191.5 million and $245.0 million
outstanding under the AEON Facility, AEON Loan and Amended
Facility, respectively. At January 30, 2010, we had
$5.0 million available for future borrowing under the
Amended Facility.
The AEON Facility was an interest-only loan (5.25% at
January 30, 2010) which was to mature on
January 28, 2012. The AEON Loan was an interest-only loan
(6.77% at January 30, 2010) which was to mature on
August 26, 2010, but provided us with the option to extend
the maturity for additional six-month periods, up to the third
anniversary of the loan closing date, which was
February 27, 2012. The Amended Facility carried monthly
interest payments (6.23% at January 30, 2010) and had
a scheduled maturity date of the earlier to occur of
(i) April 16, 2010 or (ii) the consummation of
the BPW Transactions, provided that the merger transaction
together with any concurrent financing results in sufficient net
cash proceeds to enable us to make full repayment of our AEON
debt. For a more detail description of these facilities, please
see
Contractual Obligations Debt
below.
In connection with the consummation and closing of the BPW
Transactions, we repaid all outstanding indebtedness under our
AEON and AEON (U.S.A.) credit facilities on April 7, 2010.
As a result, all amounts due under these debt agreements have
been classified as current liabilities as of January 30,
2010. See Note 20, Subsequent Events, for further
information
BPW
Transactions
On December 8, 2009, we entered into agreements for the
proposed BPW Transactions which consist of three related
transactions: (i) an Agreement and Plan of Merger between
Talbots and BPW pursuant to which a wholly-owned subsidiary of
ours would merge with and into BPW with BPW surviving as a
wholly-owned subsidiary of ours, in exchange for our issuance of
Talbots common stock to BPW stockholders; (ii) the
retirement of all Talbots common stock held by AEON (U.S.A.),
the issuance of warrants to purchase 1 million of our
common shares by AEON (U.S.A.) and the repayment of all of our
outstanding AEON debt and outstanding bank debt; and
(iii) a third party loan commitment for a new senior
secured revolving credit facility (Credit Facility).
We completed the BPW Transactions on April 7, 2010 and used
the proceeds from the merger combined with a drawdown under the
Credit Facility to repay in full our $488.2 million of
outstanding indebtedness to AEON and AEON (U.S.A.) and accrued
interest and other costs. Immediately following the repayment on
April 7, 2010, we had $125.0 million of total debt
outstanding. In addition, our stockholders equity
increased by approximately $330.0 million, before our
acquisition costs, as a result of issuing 41.5 million
shares of Talbots common stock and 17.2 million warrants to
purchase Talbots common stock in the merger, and one million
warrants to purchase Talbots common stock to AEON (U.S.A.) to
repurchase the 29.9 million shares of Talbots common stock
held by AEON (U.S.A.). As a result of completing the BPW
Transactions, AEON and AEON (U.S.A.) no longer own any shares of
our common stock or are no longer a lender to us under any of
our financing agreements.
The Credit Facility is an asset-based revolving credit facility
(including a $25.0 million letter of credit
sub-facility)
that permits us to borrow up to the lesser of
(a) $200.0 million and (b) the borrowing base,
calculated as a percentage of the value of eligible credit card
receivables and the net orderly liquidation value of eligible
private label credit card receivables, the net orderly
liquidation value of eligible inventory in the United States and
the net orderly liquidation value of eligible in-transit
inventory from international vendors (subject to certain caps
and limitations), net of reserves as set forth in the agreement,
minus the lesser of (x) $20 million and (y) 10%
of the borrowing base. Loans made pursuant to the immediately
preceding sentence carry interest, at our election, at either
(a) the three-month LIBOR plus 4.00% to 4.50% depending on
availability thresholds or (b) the base rate plus 3.00% to
3.50%, depending on certain availability thresholds. Interest on
borrowings is payable monthly in arrears. We pay a fee on the
unused portion of the commitment and outstanding letters of
credit, if any, monthly in arrears in accordance with formulas
set forth in the agreement.
Amounts borrowed are repaid on a daily basis through a control
account arrangement. Cash received from customers is swept on a
daily basis into a control account in the name of the agent for
the lenders. We are permitted
34
to maintain a certain amount of cash in disbursement accounts,
including such amounts necessary to satisfy our current
liabilities incurred in the ordinary course of our business.
Amounts may be borrowed and reborrowed from time to time,
subject to the satisfaction or waiver of all borrowing
conditions, including without limitation perfected liens on
collateral, accuracy of all representations and warranties, the
absence of a default or an event of default, and other borrowing
conditions, all subject to certain exclusions as set forth in
the agreement.
The agreement matures on October 7, 2013, subject to
earlier termination as set forth in the agreement. The entire
principal amount of loans under the facility and any outstanding
letters of credit will be due on the maturity date. Loans may be
voluntarily prepaid at any time at our option, in whole or in
part, at par plus accrued and unpaid interest and any break
funding loss incurred. Upon any voluntary or mandatory
prepayment, we will reimburse the lenders for costs associated
with early termination of any currency hedging arrangements
related to such loan. Amounts voluntarily repaid prior to the
maturity date may be reborrowed.
The Company and certain of our subsidiaries have executed a
guaranty and security agreement pursuant to which all
obligations under the Credit Facility are fully and
unconditionally guaranteed on a joint and several basis.
Additionally, pursuant to the security agreement, all
obligations are secured by (i) a first priority perfected
lien and security interest in substantially all of our assets
and any guarantor from time to time and (ii) a first lien
mortgage on our Hingham, Massachusetts headquarters
facility and Lakeville, Massachusetts distribution
facility. In connection with the lenders security interest
in our proprietary Talbots charge card program, Talbots and
certain of our subsidiaries have also executed an access and
monitoring agreement that requires us to comply with certain
monitoring and reporting obligations to the agent with respect
to such program, subject to applicable law.
We may not create, assume or suffer to exist any lien securing
indebtedness incurred after the closing date of the Credit
Facility subject to certain limited exceptions set forth in the
agreement. The Credit Facility contains negative covenants
prohibiting us, with certain exceptions, from among other
things, incurring indebtedness and contingent obligations,
making investments, intercompany loans and capital
contributions, and disposing of property or assets. We have
agreed to keep the mortgaged properties in good repair,
reasonable wear and tear excepted. The agreement contains
customary representations, warranties and covenants relating to
Talbots and its subsidiaries. The agreement also provides for
events of default, including failure to repay principal and
interest when due and failure to perform or violation of the
provisions or covenants of the agreement. The agreement does not
contain any financial covenant tests.
Upon the consummation and closing of the BPW Transactions,
$125.0 million was outstanding under the Credit Facility.
Fiscal
2010
Our ability to obtain additional financing as needed depends
upon many factors, including our financial projections and our
prospects and creditworthiness, as well as external economic
conditions and general liquidity in the credit markets.
Based on our current assumptions, our forecast and operating and
cash flow plan for 2010, our borrowing availability under the
new senior secured revolving credit agreement and the
restructuring of the Companys capital structure, we
anticipate that the Company will have sufficient liquidity to
finance anticipated working capital and other expected cash
needs for at least the next twelve months. Our ability to meet
our cash needs and satisfy our operating and other non-operating
costs will depend upon, among other factors, our future
operating performance as well as general economic conditions.
Cash
Flows
During 2009, we generated net cash flows of $94.8 million,
including $29.7 million from discontinued operations,
versus a net use of cash of $7.5 million in 2008. The
$29.7 million of net cash flow from discontinued operations
in 2009 was due to the sale of our J. Jill business for net cash
proceeds of $64.3 million in July 2009.
35
The following is a summary of our cash flows from continuing
operations in 2009, 2008 and 2007 (in thousands):
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January 30,
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January 31,
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February 2,
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2010
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2009
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2008
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Net cash provided by operating activities
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$
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81,187
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$
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16,260
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$
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213,708
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Net cash used in investing activities
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(20,919
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)
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(42,143
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)
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(57,597
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)
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Net cash provided by (used in) financing activities
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4,327
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57,763
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(152,456
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)
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Cash
provided by operating activities
Cash provided by operating activities increased
$64.9 million to $81.2 million in 2009 due to the
lower operating loss and lower investment in working capital.
The lower investment in working capital was due primarily to
lower merchandise inventory levels and a $26.6 million
refund of prior years tax payments. The lower operating
loss, despite a 17% decline in revenues, and lower inventory
levels were the result of actions taken by us over 2008 and 2009
to reduce operating costs, maintain leaner inventories and
improve gross margins. We are comfortable with our merchandise
inventory levels with our improved product flow enabling us to
operate in 2009 on a lower inventory level compared to 2008.
Cash
used in investing activities
Cash used in investing activities decreased $21.2 million
to $20.9 million in 2009 due to our planned decline in
spending on new store openings, store renovations, and
information technology due to the uncertain economic
environment. During 2009, we opened 11 new upscale outlet stores
and converted seven existing stores into upscale outlet stores.
In addition, we also opened one new Talbots store, and
closed 19 others. The balance of our capital expenditures in
2009 was focused on a platform refresh of our
e-commerce
site and the renovation and refurbishment of certain of our
existing stores. We expect to increase our capital spending to
approximately $40.0 million in 2010 with capital outlays
expected to be focused on opening additional upscale outlet
stores and funding other growth initiatives.
Cash
provided by (used in) financing activities
Cash provided by financing activities decreased
$53.4 million to $4.3 million in 2009 from
$57.8 million in 2008. Our financing activities in 2009
were focused on improving our debt maturity schedule and terms
of our outstanding indebtedness. During 2009, we borrowed
$483.0 million, including $475.0 million from AEON and
AEON (U.S.A.), and repaid $473.4 million of outstanding
debt, including $464.9 million of third-party bank
indebtedness. In 2009, we paid AEON $8.5 million of the net
proceeds from sale of the J. Jill business in accordance with
the terms of the AEON Loan. Our outstanding debt totaled
$486.5 million at January 30, 2010 as compared to
$476.9 million at January 31, 2009.
Critical
Accounting Policies
The preparation of the our financial statements requires us to
make estimates and judgments that affect the reported amounts of
assets and liabilities and disclosures of contingent liabilities
at the date of the balance sheets and the reported amounts of
net sales and expenses during the reporting periods. On an
on-going basis, we evaluate our estimates, including those
related to inventories, product returns, customer programs and
incentives, retirement plans, impairment of long-lived assets,
impairment of goodwill and other intangible assets, income taxes
and stock-based compensation. The estimates are based on
historical experience and various other assumptions that we
believe are reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying
values of assets and liabilities. Actual results may differ
materially from these estimates if actual events or experience
were different from their assumptions.
We believe the following critical accounting policies require
the most significant judgments and estimates used in the
preparation of our consolidated financial statements. However,
there is no assurance that such judgments and estimates will
reflect actual results or that such estimates or their
underlying assumptions may not need to change materially in the
future to reflect actual experience.
36
Inventory Markdown Reserve.
Merchandise
inventory is a significant asset on our balance sheet,
representing approximately 17.3% of our total assets at
January 30, 2010. Historically, we managed our inventory
levels by typically holding four major sale events per year in
our stores and our catalog, consisting of two mid-season sales
and two
end-of-season
clearance sales. These events served to liquidate remaining
inventory at the end of each selling season after which
remaining goods were transferred to our outlet stores. In
November 2007, we changed our markdown cadence from our
historical four clearance events per year to markdowns on a
monthly basis.
Consistent with the retail inventory method, at the end of each
reporting period, reductions in gross margin and inventory are
recorded for estimated future markdowns necessary to liquidate
remaining markdown past-season inventory.
The key factors influencing the reserve calculation are the
overall level of past season inventory at the end of the
reporting period and the expectation of future markdowns on this
same merchandise. The future markdown rate is reviewed regularly
by comparing actual markdowns taken against previous estimates.
These results are then factored into future estimates.
Historically, the difference between managements estimates
and actual markdowns has not been significant.
If market conditions were to further decline or customer
acceptance of product was not favorable, we may have excess
inventory on hand and may be required to mark down inventory at
a greater rate than estimated, resulting in an incremental
charge to earnings. We believe that at January 30, 2010 and
January 31, 2009, the markdown reserve was appropriate
based on current past season inventory levels, historical
markdown trends, and forecasts of future sales of past season
inventory. The markdown reserve rate of past season inventory
was 62% and 58% at January 30, 2010 and January 31,
2009, respectively. A 100 basis point increase or decrease
in this rate would impact pre-tax income by approximately
$0.2 million and $0.3 million in 2009 and 2008,
respectively.
Sales Return Reserve.
As part of the normal
sales cycle, we receive customer merchandise returns through
both of our catalog and store locations. To account for the
financial impact of this process, management estimates future
returns on previously sold merchandise. Reductions in sales and
gross margin are recorded for estimated merchandise returns
based on return history, current sales levels and projected
future return levels. Our estimated sales returns are
periodically compared to actual sales returns. Historically, the
difference between the estimated sales returns and actual sales
returns has not been significant.
If customer acceptance of the product was not favorable or the
product quality were to deteriorate, future actual returns may
increase, resulting in a higher return rate and increased
charges to earnings. We believe that the reserve balances at
January 30, 2010 and January 31, 2009, of
$7.3 million and $4.7 million, respectively, were
appropriate based on current sales return trends and reasonable
return forecasts.
Customer Loyalty Program.
We maintain a
customer loyalty program referred to as our Classic Awards
Program in which Talbots U.S. customers receive
appreciation awards based on reaching specified
purchase levels. Our Classic Awards program was relaunched in
January 2009 with the addition of non-charge based loyalty
incentives and additional incentives for customers who spend
more than $1,000 per year on their Talbots charge card. Prior to
January 2009, our Classic Awards program was only available to
our customers who used Talbots charge cards for their purchases
and the incentives were the same for everyone, regardless of
annual spend.
Our Classic Awards program has three defined tiers of
participation, each of which enables our customers to earn
points for every purchase made with us, whether in-store, online
or via catalog. Once a customer earns 500 points, they receive a
$25 appreciation award to be redeemed on a future merchandise
purchase. Appreciation awards, by their terms, expire one year
from the date of issuance. Other benefits of Classic Awards
membership include birthday bonus percentage-off coupons and
other special offers and promotions such as double points. The
three tiers of our Classic Awards program include:
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Classic Awards Red
Purchases are not required
to be made on a Talbots charge card, and customers earn rewards
for merchandise purchases regardless of their method of payment.
Members receive a 0.5 point for every $1 spent.
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Classic Awards Platinum
Customers are
enrolled automatically when they open a Talbots charge card, and
customers earn rewards for merchandise purchases made with their
Talbots charge card. Members receive 1 point for every $1 spent.
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Classic Awards Black
Comprised of customers
who spend a minimum of $1,000 annually on their Talbots charge
card, and customers earn rewards for merchandise purchases made
with their Talbots charge card. Members receive 1.25 points for
every $1 spent.
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Customers who are Talbots charge card holders may enroll in
Classic Awards Red if they wish to earn points on purchases that
are not made using their Talbots charge card.
Appreciation award expense is recognized at the time of the
initial customer purchase and is charged to selling, general and
administrative expenses based on purchase levels, actual awards
issued, and historical redemption rates. Each month, we perform
an analysis of the accrual account balance for each of the three
tiers and factor in the outstanding unredeemed awards, actual
redemptions, and the level of award points earned, and based on
that analysis, adjust the respective liability and expense as
applicable by tier. We also perform a monthly analysis of
issuances and redemptions to identify trends in the redemption
rate. Several key statistics are monitored regularly, including
expense as a percentage of sales, redemptions as a percentage of
sales, and cumulative redemptions. Trends in these statistics
are then factored into both the initial expense and the analysis
of the liability account. Actual award grants and redemptions
may vary from estimates used in our liability analysis based on
actual customer responsiveness to the program and could result
in additional expense.
We believe that the accrual balances at January 30, 2010
and January 31, 2009 were appropriate based on recent
purchase levels and expected redemption levels. A 1% change in
redemptions or issuances would have changed pre-tax income by
approximately $0.1 million in 2009 and 2008, respectively.
Retirement Plans.
We sponsor a noncontributory
defined benefit pension plan (Pension Plan) covering
substantially all full-time Talbots brand and shared service
employees hired on or before December 31, 2007; two
non-qualified supplemental executive retirement plans
(collectively, the SERP) for certain Talbots brand
current and former key executives impacted by Internal Revenue
Code limits; and we provide certain medical benefits for most
Talbots brand retired employees under postretirement medical
plans. In calculating our retirement plan obligations and
related expense, we make various assumptions and estimates. The
annual determination of expense involves calculating the
estimated total benefit ultimately payable to our plan
participants and allocating this cost to the periods in which
services are expected to be rendered. Prior to 2008, the plans
were valued annually as of
December 31
st
.
In accordance with new accounting guidance, the measurement date
was changed to our fiscal year end effective January 31,
2009. In February 2009, we announced our decision to freeze the
Pension Plan and SERP effective May 1, 2009. As a result of
the decision made in February 2009 to freeze the plans, a
remeasurement occurred as of February 28, 2009. The
remeasurement resulted in a decrease to other liabilities of
$25.4 million and $2.0 million for the Pension Plan
and SERP, respectively, and an increase to other comprehensive
income of $15.2 million and $1.2 million, net of tax,
for the Pension Plan and SERP, respectively.
Significant assumptions related to the calculation of our
obligations include the discount rate used to calculate the
actuarial present value of benefit obligations to be paid in the
future, the expected long-term rate of return on assets held by
the Pension Plan, the average rate of compensation increase by
certain plan participants, and the assumed healthcare trend
rates on the postretirement medical plans. These assumptions are
reviewed annually based upon currently available information.
The assumed discount rate is based, in part, upon a discount
rate modeling process that involves applying a methodology which
matches the future benefit payment stream to a discount curve
yield for the plan. The discount rate is used principally to
calculate the actuarial present value of our obligation and
periodic expense attributable to our employee benefits plans. At
January 30, 2010 and January 31, 2009, the discount
rate used for the Pension Plan was 6.5%. The discount rates used
for the SERP were 6.5% and 6.25% at January 30, 2010 and
January 31, 2009, respectively. To the extent that the
discount rate increases or decreases, our obligations are
decreased or increased accordingly. A 25 basis point change
in the discount rates would have impacted our pre-tax income by
approximately $0.2 million and $1.3 million in 2009
and 2008, respectively.
38
The expected long-term rate of return on assets is the weighted
average rate of earnings expected on the funds invested or to be
invested to provide for the pension obligation. The expected
average long-term rate of return on assets is based on an
analysis which considers actual net returns for the Pension Plan
since inception, Ibbotson Associates historical investment
returns data for the three major classes of investments in which
we invest (debt, equity, and foreign securities) for the period
since the Pension Plans inception and for the longer
period commencing when the return data was first tracked, and
expectations of future market returns from outside sources for
the three major classes of investments in which we invest. This
rate is used primarily in estimating the expected return on plan
assets component of the annual pension expense. To the extent
the actual rate of return on assets is less than or more than
the assumed rate, that years annual pension expense is not
affected. Rather, this loss or gain adjusts future pension
expense over approximately five years. We used a rate of 8.5%
and 9.0% as the expected long-term rate of return on plan assets
at January 30, 2010 and January 31, 2009,
respectively. A 25 basis point change in the expected
long-term rate of return on plan assets would have impacted our
pre-tax income by $0.2 million and $0.3 million in
2009 and 2008, respectively.
The assumed average rate of compensation increase is the average
annual compensation increase expected over the remaining
employment periods for the participating employees and is based
on historical and expected compensation increases. We utilized a
rate of 4.0% for both periods beginning February 1, 2009
and January 1, 2008. This rate is used principally to
estimate the retirement obligation and annual expense. An
increase in the assumed average rate of compensation increase
from 4% to 5% would have decreased our pre-tax income by
$0.1 million in 2009 and $2.1 million in 2008.
The assumed health care expense trend rates have a significant
effect on the amounts reported for the postretirement medical
plans. The healthcare cost escalation rate is used to determine
the postretirement obligation and annual expense. At
January 30, 2010 and January 31, 2009, we used 7.0%
and 9.0%, respectively, as initial cost escalation rates that
gradually trend down to 5.0%. To the extent that these rates
increase or decrease, our obligation and associated expense are
increased or decreased accordingly. A 1% increase in the assumed
health care trend rate would have no material impact on our
pre-tax income in 2009 or 2008.
We believe that the assumptions used in calculating the
liabilities under our retirement plans and postretirement
medical plan as of January 30, 2010 and January 31,
2009 were reasonable.
Long-lived Assets.
We periodically review the
depreciation and amortization periods of long-lived assets to
determine whether current circumstances indicate that the
carrying value may not be recoverable. We monitor our assets for
potential impairment by comparing the carrying value of the
asset to its undiscounted future cash flows. If impairment is
identified, a loss is recognized for the difference between the
carrying value of the asset and its estimated fair value.
The calculation of an impairment loss is significantly impacted
by estimates of future operating cash flows and estimates of
fair value. Our estimates of future operating cash flows are
based upon our experience, knowledge and expectations. However,
these estimates can be affected by factors that can be difficult
to predict, such as our future operating results, future store
profitability and future economic conditions. While we believe
that our estimates are reasonable, different assumptions
regarding items such as future cash flows could affect our
evaluations and result in impairment charges. Additionally, our
initiative to continue to critically assess individual store
profitability on an ongoing basis in an effort to restore
profitability could result in an increased number of closed
stores, resulting in larger impairment charges in future
periods. We recorded impairment charges of $1.4 million,
$2.8 million and $2.6 million relating to store assets
during 2009, 2008 and 2007.
Goodwill and Other Intangible Assets.
We test
our goodwill and trademarks for impairment at the reporting unit
level on the first day of each fiscal year, and between annual
tests if events occur or circumstances change which suggest that
the goodwill or trademarks should be evaluated.
We use a two-step process for determining whether goodwill is
impaired. In the first step, we compare the fair value of the
reporting unit to its carrying value. If the carrying value of
the reporting unit exceeds fair value, we perform a second step
to calculate the goodwill impairment. In the second step, we
determine the fair value of the individual assets and
liabilities of the reporting unit and calculate the implied fair
value of goodwill.
39
To determine fair value, we use a combination of the income
approach, which is based on the cash flows that the reporting
unit expects to generate in the future, and the market value
approach. The income approach requires significant
judgments and estimates to project future revenues and
expenses, changes in gross margins, cash flows and estimates of
future capital expenditures for the reporting unit over a
multi-year period, as well as determine the weighted-average
cost of capital to be used as a discount rate. We believe the
discount rate we used is consistent with the risks inherent in
our business and with the retail industry. We also use the
market approach to estimate fair value of our reporting units by
utilizing industry multiples of operating performance. The
multiples are derived from comparable publicly traded companies
with operating characteristics similar to the reporting units.
Our evaluation of goodwill inherently involves judgments as to
assumptions used to project these amounts and the impact of
market conditions on those assumptions. Our estimates may differ
from actual results due to, among other matters, economic
conditions, changes to our business model, or changes in
operating performance. Significant differences between these
estimates and actual results could result in future impairment
charges and could materially affect our future financial results.
We have performed a sensitivity analysis on our significant
assumptions and determined that a negative change in our
assumptions, namely a 1% increase in the discount rate, a 10%
decrease in the market approach multiple or a 10% decrease in
forecasted earnings, would not have resulted in a change in our
conclusions in 2009 and 2008. The computed fair value of the
stores reporting unit was in excess of its carrying value by a
significant margin.
We compare the fair value of the trademarks to their carrying
value to determine whether the asset is impaired. Fair value is
determined based on the income approach using the
relief-of-royalty
method. This methodology assumes that, in lieu of ownership, a
third party would be willing to pay a royalty in order to
exploit the related benefits of the asset. This approach is
dependent on a number of factors, including estimates of future
sales, royalty rates of intellectual property, discount rates
and other variables. Significant differences between these
estimates and actual results could result in future impairment
charges and could materially affect our future financial results.
We performed a sensitivity analysis on our significant
assumptions and determined that a negative change in our
assumptions, as follows, would have resulted in the following
additional impairment charges in 2009 and 2008:
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|
|
|
|
Additional Impairment Charge
|
|
|
2009
|
|
2008
|
|
1% Increase in discount rate
|
|
No effect
|
|
No effect
|
50 Basis point decrease in royalty rate
|
|
No effect
|
|
$3.0 million
|
1% Decrease in revenue growth rate
|
|
No effect
|
|
No effect
|
See Note 3,
Summary of Significant Accounting
Policies
, to our consolidated financial statements included
in Item 15 for further discussion of goodwill and
trademarks.
Income Taxes.
We record deferred income
taxes to recognize the effect of temporary differences between
tax and financial statement reporting. We calculate the deferred
taxes using enacted tax rates expected to be in place when the
temporary differences are realized. We record a valuation
allowance to reduce deferred tax assets if it is determined that
it is more likely than not that all or a portion of the deferred
tax asset will not be realized. If it is subsequently determined
that a deferred tax asset will more likely than not be realized,
we record a credit to earnings to reduce the allowance. In
determining the tax benefit resulting from a loss from
continuing operations we consider all sources of income
including discontinued operations, extraordinary items, other
comprehensive income and other components of equity.
We consider many factors when assessing the likelihood of future
realization of deferred tax assets, including recent earnings
results, expectations of future taxable income, carry forward
periods available, and other relevant factors. Changes in the
required valuation allowance are recorded in the period that the
determination is made. We determined in 2008 and 2009 that it is
more likely than not that we will not realize the benefits from
our deferred tax assets, and have recorded a valuation allowance
for substantially all of our net deferred tax assets, after
considering sources of taxable income from reversing deferred
tax liabilities.
There is inherent uncertainty in quantifying our income tax
positions. We assess our income tax positions and record tax
benefits for all years subject to examination based upon
managements evaluation of the facts, circumstances and
information available at the reporting date. For those tax
positions where it is more likely than not that a tax
40
benefit will be sustained, we record the largest amount of tax
benefit with a greater than 50 percent likelihood of being
realized upon ultimate settlement with a taxing authority having
full knowledge of all relevant information. For those income tax
positions where it is not more likely than not that a tax
benefit will be sustained, no tax benefit is recognized in the
financial statements. Where applicable, the associated interest
and penalties have also been recognized. We classify uncertain
tax positions as non-current income tax liabilities unless
expected to be resolved within one year. We classify interest on
uncertain tax positions in interest expense, interest income
from income tax refunds in interest income, and penalties in
selling, general and administrative expenses.
We are routinely under audit by various domestic and foreign tax
jurisdictions. There is significant judgment that is required in
determining our provision for income taxes, such as our mix and
level of earnings, changes in tax laws or rates, changes in the
expected outcome of audits, the expiration of the statute of
limitations on some tax positions, and obtaining new information
about particular tax positions that may cause us to change our
estimates. Changes in estimates may create volatility in our
effective tax rate in future periods and may materially affect
our results of operations. We believe that our accruals for
income taxes are appropriate at January 30, 2010,
January 31, 2009 and February 2, 2008.
Stock-Based Compensation.
We account for
stock-based compensation based on the fair value of the equity
awards at the date of grant. We recognize stock-based
compensation expense, less estimated forfeitures, on a
straight-line basis over the requisite service period of the
awards. Forfeitures are estimated at the time of grant and
revised in subsequent periods if actual forfeiture rates differ
from those estimates. To determine the fair value of options, we
use the Black-Scholes option-pricing model which requires us to
make subjective assumptions, including estimates of the expected
life of the option, estimates of the volatility of the our
common stock price over the expected life, expected dividend
rate, and the implied yield available on U.S. Treasury
zero-coupon bond issues with a term approximately equal to the
expected life of the options.
The expected life of the option represents the weighted average
period of time that share-based awards are expected to be
outstanding, giving consideration to vesting schedules,
historical exercise patterns, and expectations of future
exercise patterns. The expected volatility of our common stock
price is based primarily upon historical volatilities of our
stock from public data sources and also considers implied
factors that may influence our volatility. The expected dividend
yield is based on the anticipated annual payment of dividends.
The risk free interest rate is based on data derived from public
sources regarding U.S. Treasury zero-coupon bond issues.
Our estimates of expected volatility and expected life have the
greatest impact on determining the fair value of options
granted. If the expected volatility or expected life were to
increase, the fair value of the stock award would be higher
resulting in increased compensation charges. The assumptions
used in calculating the fair value of stock-based awards
represent our best estimates, but these estimates involve
inherent uncertainties and the application of management
judgment. As a result, if factors change and we utilized
different assumptions, the recorded stock-based compensation
expense could be materially different in the future.
The fair value of nonvested stock awards and restricted stock
units is based on the closing stock price on the date of grant
and the related stock-based compensation expense is recognized
on a straight-line basis over the vesting period. The vesting
period on awards granted as performance accelerated nonvested
stock is a five-year period, but can be accelerated to three
years after the grant date depending on the achievement of
certain corporate financial goals. If we determine that the
achievement of certain corporate financial goals is probable
where we previously concluded that achievement of the goals
would not occur, then the vesting period would be reduced at
that time and the related expense amounts would increase.
Certain shares of nonvested stock are time-vested generally
between periods of two to four years. Restricted stock units
generally vest over one year.
We estimate the forfeiture rate based on historical experience
as well as expected future behavior. We compare actual
forfeitures with estimates and revise our estimates if
differences occur. If actual forfeitures rates are lower than
our estimates, our compensation expense would increase.
Conversely, if actual forfeitures are greater than our
estimates, our compensation expense would decrease. Our results
of operations will be impacted by differences between estimated
and actual forfeitures. A 1% decrease in the assumed
forfeiture rate would have decreased our pre-tax income by less
than $0.1 million in 2009, $0.1 million in 2008 and
$0.2 in 2007.
41
The impact of share-based compensation expense on our results of
operations, including net income and earnings per diluted share,
will depend on, among other factors, the number of equity awards
granted, the market price of our shares at the date of grant and
the various other assumptions used in valuing such awards.
Contractual
Commitments.
The following summarizes our significant contractual commitments
as of January 30, 2010:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
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|
1 to 3
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|
|
3 to 5
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|
|
More than
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|
Contractual Obligations
|
|
Total
|
|
|
1 year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
|
Debt, including estimated interest payments*
|
|
$
|
492,600
|
|
|
$
|
492,600
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Operating leases:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
|
641,312
|
|
|
|
130,018
|
|
|
|
228,467
|
|
|
|
154,027
|
|
|
|
128,800
|
|
Equipment
|
|
|
8,131
|
|
|
|
3,997
|
|
|
|
4,017
|
|
|
|
117
|
|
|
|
|
|
Merchandise purchases
|
|
|
206,263
|
|
|
|
206,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction contracts
|
|
|
857
|
|
|
|
857
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|
|
|
|
|
|
|
|
|
|
|
|
|
Other contractual commitments
|
|
|
6,493
|
|
|
|
6,229
|
|
|
|
259
|
|
|
|
5
|
|
|
|
|
|
Long-term obligations:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-qualified retirement plans
|
|
|
23,858
|
|
|
|
2,775
|
|
|
|
4,780
|
|
|
|
4,422
|
|
|
|
11,881
|
|
Unrecognized tax benefits
|
|
|
6,192
|
|
|
|
3,473
|
|
|
|
2,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commitments
|
|
$
|
1,385,706
|
|
|
$
|
846,212
|
|
|
$
|
240,242
|
|
|
$
|
158,571
|
|
|
$
|
140,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
*
|
|
Interest payments were estimated using our current borrowing
rates as of January 30, 2010. The table above does not
include any debt payments related to our new Credit Facility
entered into on April 7, 2010. See
BPW Transactions
and Note 20,
Subsequent Events
, to our
consolidated financial statements for more information related
to the Credit Facility.
|
Debt. $250.0 Million Secured Revolving Loan
Facility with AEON
On December 28, 2009, we
executed an Amended and Restated Secured Revolving Loan
Agreement with AEON (the Amended Facility), which
amended and restated the $150.0 million secured revolving
loan facility executed with AEON in April 2009. Under the terms
of the Amended Facility, the principal amount of the earlier
$150.0 million secured credit facility was increased to
$250.0 million. We could use funds borrowed under the
Amended Facility solely (i) to repay our outstanding
third-party bank indebtedness plus interest and other costs,
(ii) to fund working capital and other general corporate
purposes up to $10.0 million subject to satisfaction of all
borrowing conditions and availability under the Amended
Facility, and (iii) to pay related fees and expenses
associated with the Amended Facility. The Amended Facility was
provided pursuant to AEONs April 9, 2009 financial
support commitments, which were satisfied and discharged in full
upon the December 29, 2009 funding under this Amended
Facility for the repayment of all of our outstanding third-party
bank indebtedness as described below.
Borrowings under the Amended Facility carried interest at a
variable rate equal to LIBOR plus 6.00% (LIBOR is the six-month
London interbank offer rate expressed as a percentage rate per
annum). Interest was payable monthly in arrears. At
January 30, 2010, the interest rate was 6.23%. The Amended
Facility had a scheduled maturity date of the earlier to occur
of (i) April 16, 2010 or (ii) the consummation of
the previously announced merger of our acquisition subsidiary
with and into BPW, the repurchase of AEONs equity interest
in us and repayment of all outstanding debt owed to AEON,
provided that the merger transaction together with any
concurrent financing results in sufficient net cash proceeds to
enable us to make full repayment of our AEON debt (including
under the Amended Facility).
Prior to being amended, the earlier facility was secured by
(i) a first priority security interest in substantially all
of our consumer credit/charge card receivables and (ii) a
first lien mortgage on our Hingham, Massachusetts headquarters
facility and Lakeville, Massachusetts distribution facility. The
Amended Facility was secured by a lien on substantially all of
our existing and after acquired assets and properties, including
the above-mentioned
42
credit/charge card receivables and mortgaged properties. As
under the earlier facility, obligations under the Amended
Facility were unconditionally guaranteed on a joint and several
basis by certain of our existing and future direct and indirect
subsidiaries.
As of December 28, 2009, we had outstanding short-term
indebtedness of approximately $221.0 million under
third-party bank credit facilities which were scheduled to
terminate between late December 2009 and April 2010, which had
not been extended or refinanced, as well as
$20.0 million of third party bank indebtedness due in 2012.
Entry into this Amended Facility required the consent or waiver
by each of the third party bank lenders under their outstanding
bank indebtedness; because such bank lender consents or waivers
were not provided, all of the facilities under which this
outstanding bank indebtedness was provided have been terminated.
On December 29, 2009, we borrowed $245.0 million under
the Amended Facility which we used to repay this outstanding
third-party bank indebtedness, related interest, and other costs
and expenses.
Under the Amended Facility, a fee of $1.7 million was due
and paid to AEON upon initial funding. Prior to being amended,
the earlier facility had called for an upfront fee of
$1.5 million upon any initial borrowing, which, because no
amounts had been borrowed under that earlier facility, had not
been previously paid.
In connection with the consummation and closing of the BPW
Transactions, we paid all outstanding indebtedness under the
Amended Facility on April 7, 2010. See Note 20,
Subsequent Events, for further information.
$200.0 Million Term Loan Facility with AEON
In February 2009, we entered into a $200.0 million term
loan facility agreement with AEON (AEON Loan). The
funds received from the AEON Loan were used to repay all of our
outstanding indebtedness under the Acquisition Debt agreement in
February 2009.
The AEON Loan was an interest-only loan until maturity.
Borrowings under the AEON Loan carried interest at a variable
rate equal to LIBOR plus 6.00%. Interest was payable
semi-annually in arrears. At January 30, 2010, the interest
rate was 6.77%. No loan facility fee was payable as part of the
AEON Loan. The AEON Loan initially matured on August 31,
2009. During the continuing term of the loan, we had the option
to extend the maturity for additional six-month periods, up to
the third anniversary of the loan closing date, which was
February 27, 2012. The AEON Loan was subject to mandatory
prepayment as follows: (a) 50% of excess cash flow (as
defined in the agreement), (b) 100% of net cash proceeds of
a sale of the J. Jill business and 75% of net cash proceeds on
any other asset sales or dispositions, and (c) 100% of net
cash proceeds of any non-related party debt issuances and 50% of
net cash proceeds of any equity issuances (subject to such
exceptions as to debt or equity issuances as the lender may
agree to). On December 14, 2009, we paid the
$8.5 million of net proceeds from the sale of the J. Jill
business to AEON in accordance with the AEON Loan. As of
January 30, 2010, outstanding borrowings under the AEON
Loan totaled $191.5 million. Upon any voluntary or
mandatory prepayment, we were to reimburse the lender for costs
associated with early termination of any currency hedging
arrangements related to the loan. The AEON loan contained no
financial covenants, but did contain certain restrictive
covenants.
In connection with the consummation and closing of the BPW
Transactions, we repaid all outstanding indebtedness under the
AEON Loan on April 7, 2010. See Note 20, Subsequent
Events, for further information.
Term Loan with AEON (U.S.A.)
In July 2008, we
finalized the terms of a $50.0 million unsecured
subordinated working capital term loan credit facility with AEON
(U.S.A.) (the AEON Facility). The AEON Facility was
to mature and AEON (U.S.A.)s commitment to provide
borrowings under the AEON Facility was to expire on
January 28, 2012, unless terminated earlier under the loan
terms. Under the terms of the AEON Facility, the financing was
an unsecured general obligation of ours. The AEON Facility was
available for use by us and our subsidiaries for general working
capital and other appropriate general corporate purposes.
Borrowings under the AEON Facility carried interest at a rate
equal to three-month LIBOR plus 5.0%. At January 30, 2010,
the interest rate was 5.25%. We paid an upfront commitment fee
of 1.5% (or $0.8 million) to AEON (U.S.A.) at the time of
execution and closing of the AEON Facility. We were required to
pay a fee of 0.5% per annum on the undrawn portion of the
commitment, payable quarterly in arrears. The AEON Facility
originally included covenants relating to us and our
subsidiaries that were substantially the same in all material
respects as under the Acquisition Debt. In March 2009, an
amendment was executed between us and AEON (U.S.A.) to remove
the financial covenants in their entirety from the facility. As
of January 30, 2010, we were fully borrowed under the AEON
Facility.
43
In connection with the consummation and closing of the BPW
Transactions, we repaid all outstanding indebtedness under the
AEON Facility on April 7, 2010. See Note 20,
Subsequent Events, for further information.
Operating Leases.
We conduct the major part of
our operations in leased premises with lease terms expiring at
various dates through fiscal 2023. Most store leases provide for
base rentals plus contingent rentals which are a function of
sales volume and also provide that we pay real estate taxes,
maintenance and other operating expenses applicable to the
leased premises. Most store leases also provide renewal options
and contain rent escalation clauses. We also lease store
computer and other corporate equipment with lease terms
generally between three and five years.
Included in the table above are two executed leases relating to
Talbots stores not yet opened at January 30, 2010. The
table also includes the remaining lease payments for eight
Talbots Kids and Mens stores, the Quincy facility and the former
J. Jill stores not purchased by the Purchaser for which we have
not yet reached lease settlements, whose terms expire at various
dates through fiscal 2016.
In connection with our disposition of the J. Jill business and
under the terms of the Purchase Agreement, the Purchaser is
obligated for liabilities that arise after the closing under
assumed contracts, which include leases for 205 J. Jill stores
assigned to the Purchaser as part of the transaction and a
sublease through December 2014 of approximately
63,943 square feet of space at the Companys
126,869 square foot leased office facility in Quincy,
Massachusetts. In connection with closing our U.K. stores in
2008, three store leases were assigned to a local retailer who
assumed the primary lease obligations. We remain secondarily
liable as a guarantor in the event the local retailer does not
fulfill its lease obligations. At January 30, 2010, the
future aggregate lease payments for which we remain contingently
obligated, as transferor or sublessor, total $143.3 million
extending to various dates in fiscal 2020. The table above
excludes these contingent liabilities.
Merchandise Purchases.
We generally make
merchandise purchase commitments up to six to nine months in
advance of the selling season. We do not maintain any long-term
or exclusive commitments or arrangements to purchase from any
vendor.
Construction Contracts.
We enter into
contracts to facilitate the build-out and renovation of our
stores. The table above summarizes commitments as of
January 30, 2010.
Other Contractual Commitments.
We routinely
enter into contracts with vendors for products and services in
the normal course of operation, including contracts for
insurance, maintenance on equipment, services and advertising.
These contracts vary in their terms but generally carry
30-day
to
three-year terms.
Long-Term Obligations.
We sponsor
non-qualified retirement benefit plans for certain employees.
This includes the SERP and a supplemental 401(k) plan for
certain executives impacted by Internal Revenue Code limits on
benefits and compensation. Additionally, we sponsor two deferred
compensation plans that allow certain members of our management
group to defer a portion of their compensation. We also provide
post retirement medical plans to our Talbots brand employees.
Included in this table are estimates of annual cash payments
under these non-qualified retirement plans. In 2009, our Board
of Directors decided to freeze accrual of future benefits under
our Pension Plan and SERP, and accordingly, participants receive
no further accruals attributable to earnings and service after
April 30, 2009 under these plans.
Our defined benefit pension plan obligations historically have
been excluded from the contractual obligation table above
because we have had no current requirements under the Employee
Retirement Security Act (ERISA) to contribute to the
plan as we historically have prepaid our liability for the
upcoming plan year. In 2010, however, we are required to
contribute to the plan as we did not prepay our liability in
2009 for the 2010 plan year. We expect to make a contribution to
the plan of approximately $4.6 million in 2010 and this
amount is not reflected in the table above.
Unrecognized Tax Benefits.
As we are unable to
reasonably predict the timing of settlement of our uncertain tax
positions, the above table does not include $42.4 million
of income tax, interest and penalties relating to unrecognized
tax benefits that are recorded as noncurrent liabilities.
44
Inflation
and Changing Prices
We believe that changes in revenues and net earnings that have
resulted from inflation or deflation have not been material
during the periods presented. There is no assurance, however,
that inflation or deflation will not materially affect us in the
future.
Exchange
Rates
Most foreign purchase orders are denominated in
U.S. dollars. As of January 30, 2010, we operated 22
Talbots stores in Canada which generate sales and incur expenses
in local currency. However, the local currency is generally
stable and these operations represent only a small portion of
our total operations. Accordingly, we have not experienced any
significant impact from changes in exchange rates.
New
Accounting Pronouncements
New accounting guidance recently adopted and recently issued is
discussed in Note 3
, Summary of Significant Accounting
Policies
, to our consolidated financial statements included
in Item 15.
Forward-looking
Information
This Report contains forward-looking information within the
meaning of The Private Securities Litigation Reform Act of 1995.
These statements may be identified by such forward-looking
terminology as expect, achieve,
plan, look, believe,
anticipate, outlook, will,
would, should, potential or
similar statements or variations of such terms. All of the
information concerning our future liquidity, future financial
performance and results, future credit facilities and
availability, future cash flows and cash needs, and other future
financial performance or financial position, as well as our
assumptions underlying such information, constitute
forward-looking information. Our forward-looking statements are
based on a series of expectations, assumptions, estimates and
projections about the Company, are not guarantees of future
results or performance, and involve substantial risks and
uncertainty, including assumptions and projections concerning
our liquidity, internal plan, regular-price and markdown
selling, operating cash flows, and credit availability for all
forward periods. Our business and our forward-looking statements
involve substantial known and unknown risks and uncertainties,
including the following risks and uncertainties:
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the continuing material impact of the deterioration in the
U.S. economic environment on our business, continuing
operations, liquidity, financing plans and financial results,
including substantial negative impact on consumer discretionary
spending and consumer confidence, substantial loss of household
wealth and savings, the disruption and significant tightening in
the U.S. credit and lending markets, and potential
long-term unemployment levels;
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satisfaction of all borrowing conditions under our credit
facilities including accuracy of all representations and
warranties, no events of default, absence of material adverse
effect or change, and all other borrowing conditions;
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|
|
any lack of sufficiency of available cash flows and other
internal cash resources to satisfy all future operating needs
and other cash requirements;
|
|
|
|
ability to access on satisfactory terms, or at all, adequate
financing and sources of liquidity necessary to fund our
business and continuing operations and to obtain further
increases in our credit facilities as may be needed from time to
time;
|
|
|
|
the success and customer acceptance of our new merchandise
offerings;
|
|
|
|
risks associated with our appointment of an exclusive global
merchandise buying agent, the anticipated benefits and cost
savings from this arrangement may not be realized or may take
longer to realize than expected and the risk that upon any
cessation of the relationship, for any reason, we would be
unable to successfully transition to an internal or other
external sourcing function;
|
45
|
|
|
|
|
ability to continue to purchase merchandise on open account
purchase terms at existing or future expected levels and with
acceptable payment terms and the risk that suppliers could
require earlier or immediate payment or other security due to
any payment or liquidity concerns;
|
|
|
|
risks and uncertainties in connection with any need to source
merchandise from alternate vendors;
|
|
|
|
any disruption in our supply of merchandise;
|
|
|
|
ability to successfully execute, fund, and achieve supply chain
initiatives, anticipated lower inventory levels, cost
reductions, and other initiatives;
|
|
|
|
the risk that anticipated benefits from the sale of the J. Jill
brand business may not be realized or may take longer to realize
than expected, and the risk that estimated or anticipated costs,
charges and liabilities to settle and complete the transition
and exit from and disposal of the J. Jill brand business,
including both retained obligations and contingent risk for
assigned obligations, may materially differ from or be
materially greater than anticipated;
|
|
|
|
continuing satisfaction of all conditions to funding under our
Credit Facility;
|
|
|
|
future store closings and success of and necessary funding for
closing underperforming stores;
|
|
|
|
ability to reduce spending as needed;
|
|
|
|
ability to achieve our 2010 financial plan for operating
results, working capital and cash flows;
|
|
|
|
any negative publicity concerning the specialty retail business
in general or our business in particular;
|
|
|
|
ability to accurately estimate and forecast future regular-price
and markdown selling, operating cash flows and other future
financial results and financial position;
|
|
|
|
risk of impairment of goodwill and other intangible and
long-lived assets;
|
|
|
|
the risk of continued compliance with NYSE continued-listing
conditions, including
thirty-day
average $1 trading price and $75 million market
capitalization and stockholders equity, and other
continued listing conditions;
|
|
|
|
the impact of the deterioration in investment return and net
asset values in the capital markets and the impact on increased
expense and funding for pension and other postretirement
obligations; and
|
|
|
|
risks and uncertainties associated with the outcome of
litigation, claims and proceedings and risk that actual
liabilities, assessments and financial impact will exceed any
estimated, accrued or expected amounts or outcomes.
|
All of our forward-looking statements are as of the date of this
Report only. In each case, actual results may differ materially
from such forward-looking information. We can give no assurance
that such expectations or forward-looking statements will prove
to be correct. An occurrence of or any material adverse change
in one or more of the risk factors or risks and uncertainties
referred to in this Report or included in our other public
disclosures or our other periodic reports or other documents or
filings filed or furnished with the SEC could materially and
adversely affect our continuing operations and our future
financial results, cash flows, prospects and liquidity. Except
as required by law, we do not undertake or plan to update or
revise any such forward-looking statements to reflect actual
results, changes in plans, assumptions, estimates or
projections, or other circumstances affecting such
forward-looking statements occurring after the date of this
Report, even if such results, changes or circumstances make it
clear that any forward-looking information will not be realized.
Any public statements or disclosures by us following this Report
which modify or impact any of the forward-looking statements
contained in this Report will be deemed to modify or supersede
such statements in this Report.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
The market risk inherent in our financial instruments and in our
financial position represents the potential loss arising from
adverse changes in interest rates. We do not enter into
financial instruments for trading purposes.
46
As of January 30, 2010, we had outstanding variable-rate
borrowings of $486.5 million under our $250.0 million
senior secured revolving loan facility, $200.0 million term
loan facility and our $50.0 million term loan. All of our
outstanding debt at January 30, 2010 was related party debt
with AEON. All of our interest rates were based on LIBOR (London
interbank offering rate expressed as a percentage rate per
annum) plus a fixed percentage. The impact of a hypothetical 10%
adverse change in interest rates for this variable rate debt
would have caused an additional pre-tax charge of
$1.9 million for the year ended January 30, 2010.
We enter into certain purchase obligations outside the United
States which are predominately settled in U.S. dollars and,
therefore, we have only minimal exposure to foreign currency
exchange risks. We do not hedge against foreign currency risks
and believe that the foreign currency exchange risk is not
material. In addition, we operated 21 stores in Canada as of
January 30, 2010. We believe our foreign currency
translation risk is minimal, as a hypothetical 10% strengthening
or weakening of the U.S. dollar relative to the applicable
foreign currency would not materially affect our results of
operations or cash flow.
47
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
The information required by this item may be found on pages F-2
through F-48 as listed below, including the quarterly
information required by this item.
INDEX
|
|
|
|
|
|
|
Page
|
|
Report of Independent Registered Public Accounting Firm
|
|
|
F-2
|
|
Consolidated Statements of Operations for the Years Ended
January 30, 2010, January 31, 2009 and
February 2, 2008
|
|
|
F-3
|
|
Consolidated Balance Sheets as of January 30, 2010 and
January 31, 2009
|
|
|
F-4
|
|
Consolidated Statements of Cash Flows for the Years Ended
January 30, 2010, January 31, 2009 and
February 2, 2008
|
|
|
F-5
|
|
Consolidated Statements of Stockholders (Deficit) Equity
for the Years Ended January 30, 2010, January 31, 2009
and February 2, 2008
|
|
|
F-6
|
|
Notes to Consolidated Financial Statements
|
|
|
F-7
|
|
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Disclosure
Controls and Procedures
We have established disclosure controls and procedures designed
to ensure at the reasonable assurance level that information
required to be disclosed in the reports that we file or submit
under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms and is
accumulated and communicated to management, including the
principal executive officer and principal financial officer, to
allow timely decisions regarding required disclosure.
In connection with the preparation of this Annual Report on
Form 10-K,
an evaluation was performed under the supervision, and with the
participation of, our management, including our principal
executive officer and principal financial officer, of the
effectiveness of the design and operation of our disclosure
controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended) as of
January 30, 2010. Management recognizes that any controls
and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving their objectives
and management necessarily applies its judgment in evaluating
the cost-benefit relationship of possible controls and
procedures. Based on such evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures were effective at the
reasonable assurance level as of January 30, 2010.
Managements
Annual Report on Internal Control Over Financial
Reporting
Our management, with the participation of our principal
executive officer and principal financial officer, is
responsible for establishing and maintaining adequate internal
control over financial reporting as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Securities Exchange Act of 1934, as amended. Our
internal control system is designed to provide reasonable
assurance to our management and Board of Directors regarding the
preparation and fair presentation of published financial
statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. In
addition, projections of any evaluation of effectiveness for
future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
48
Our management assessed the effectiveness of its internal
control over financial reporting as of January 30, 2010. In
making this assessment, we used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in
Internal Control-Integrated
Framework
. Management, with the participation of our
principal executive officer and principal financial officer,
assessed the effectiveness of the Companys internal
control over financial reporting as of January 30, 2010 and
concluded that it was effective as of that date.
Our independent registered public accounting firm,
Deloitte & Touche LLP, issued a report on our internal
control over financial reporting. Their report appears on
page 47 of this Annual Report on
Form 10-K.
Changes
in Internal Controls over Financial Reporting
Except as discussed below, no changes in our internal control
over financial reporting occurred during the quarter ended
January 30, 2010, that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
As previously disclosed in the Companys Annual Report on
Form 10-K
for the year ended January 31, 2009, management, with the
participation of our principal executive officer and principal
financial officer, concluded that our internal controls over
financial reporting were not effective. The Companys
controls to ensure non-routine, complex transactions and events
were properly accounted for in accordance with accounting
principles generally accepted in the United States of America
were not effective. This deficiency was a material weakness.
During the year ended January 30, 2010, the Company
implemented the following measures to address this material
weakness:
|
|
|
|
|
Expanded training for tax, accounting and finance personnel to
further develop the knowledge base resident within the Company
and ensured the adequacy of qualified, trained staff to address
complex, non-routine transactions;
|
|
|
|
Further enhanced procedures to help ensure that the proper
accounting for all complex, non-routine transactions were
researched, detailed in memoranda and reviewed by senior
management prior to recording;
|
|
|
|
Strengthened the communication and collaboration among the
various departments within the Company; and
|
|
|
|
Supplemented the Companys internal resources with external
advisors with specialized expertise as non-routine or complex
issues arose throughout the year.
|
Management believes that these actions have addressed the
material weakness identified above and concluded that such
control changes were effective in the fourth quarter upon
completion of managements assessment of the effectiveness
of these controls. Based on managements testing of the
enhancements to the controls relating to accounting for
non-routine, complex transactions, management determined that,
as of January 30, 2010, the Company had remediated the
material weakness in internal control over financial reporting
as disclosed in the Annual Report on
Form 10-K
for the year ended January 31, 2009.
49
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
The Talbots, Inc.
Hingham, Massachusetts
We have audited the internal control over financial reporting of
The Talbots, Inc. and subsidiaries (the Company) as
of January 30, 2010, based on criteria established in
Internal Control Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying
Managements Annual Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion
on the Companys internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of January 30, 2010, based on the criteria established in
Internal Control Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements as of and for the year ended
January 30, 2010 of the Company and our report dated
April 15, 2010 expressed an unqualified opinion on those
financial statements.
/s/ Deloitte &
Touche llp
Boston, Massachusetts
April 15, 2010
50
|
|
Item 9B.
|
Other
Information
|
In connection with our acquisition of BPW pursuant to the
Agreement and Plan of Merger, dated as of December 8, 2009,
by and among Talbots, Tailor Acquisition, Inc. and BPW, as
amended effective February 16, 2010, approval of the
issuance of our common stock by the holders of a majority of the
outstanding shares of Talbots common stock was required by the
rules of the New York Stock Exchange. On December 8, 2009,
AEON (U.S.A.), our former majority shareholder, executed a
written consent approving such issuance. On February 16,
2010, AEON (U.S.A.) executed a second written consent approving
the First Amendment to the Agreement and Plan of Merger. On
April 7, 2010, we completed the acquisition of BPW and
related transactions.
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information concerning our directors and nominees under the
captions Election of Directors and Corporate
Governance and Nominating Committee and the information
concerning the Audit Committee and the audit committee
financial expert under the caption Corporate
Governance in our Proxy Statement for the 2010 Annual
Meeting of Shareholders, information concerning our executive
officers set forth in Part I, Item 1 above under the
caption Executive Officers of the Company, and the
information under the caption Section 16(a)
Beneficial Ownership Reporting Compliance in the
Companys Proxy Statement for the 2010 Annual Meeting of
Shareholders, are incorporated herein by reference.
We have adopted a Code of Business Conduct and Ethics (the
Code of Ethics) that applies to our chief executive
officer, senior financial officers and all other employees,
officers and Board members. The Code of Ethics is available on
our website, www.thetalbotsinc.com, under Investor
Relations, and is available in print to any person who
requests a copy by contacting Talbots Investor Relations by
calling
(781) 741-4500,
by writing to Investor Relations Department, The Talbots Inc.,
One Talbots Drive, Hingham, MA 02043, or by
e-mail
at
investor.relations@talbots.com. Any substantive amendment to the
Code of Ethics and any waiver in favor of a Board member or an
executive officer may only be granted by the Board of Directors
and will be publicly disclosed on our website,
www.thetalbotsinc.com, under Investor Relations.
|
|
Item 11.
|
Executive
Compensation
|
The information set forth under the caption Executive
Compensation, the information concerning director
compensation under the caption Director
Compensation, the information concerning our compensation
policies and practices as they relate to risk management under
the caption Compensation Risk Assessment and the
information under the caption Corporate
Governance-Compensation Committee Interlocks and Insider
Participation in our Proxy Statement for the 2010 Annual
Meeting of Shareholders, are each incorporated herein by
reference. The information included under Compensation
Committee Report is incorporated herein by reference but
shall be deemed furnished with this report and shall
not be deemed filed with this report.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information set forth under the caption Beneficial
Ownership of Common Stock in our Proxy Statement for the
2010 Annual Meeting of Shareholders is incorporated herein by
reference.
51
The following table sets forth certain information about our
2003 Executive Stock Based Incentive Plan, as amended and the
Restated Directors Stock Plan as of January 30, 2010. These
plans are our only equity compensation plans and were both
previously approved by our shareholders.
Equity
Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
(a)
|
|
|
(b)
|
|
|
Remaining Available for
|
|
|
|
Number of Securities to
|
|
|
Weighted-Average
|
|
|
Future Issuance Under
|
|
|
|
be Issued Upon Exercise
|
|
|
Exercise Price of
|
|
|
Equity Compensation Plans
|
|
|
|
of Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
(Excluding Securities
|
|
Plan Category
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
Reflected in Column (a))
|
|
|
Equity compensation plans approved by security holders
|
|
|
11,732,909
|
|
|
$
|
22.76
|
|
|
|
2,396,712
|
|
Equity compensation plans not approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
11,732,909
|
|
|
$
|
22.76
|
|
|
|
2,396,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional information concerning our equity compensation plans
is set forth in Note 7,
Stock-Based Compensation
, to
our consolidated financial statements included in Item 15.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information set forth under the caption Transactions
with Related Persons and the information concerning
director independence under the caption Corporate
Governance in our Proxy Statement for the 2010 Annual
Meeting of Shareholders is incorporated herein by reference.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The information regarding auditors fees and services and our
pre-approval policies and procedures for audit and non-audit
services to be provided by our independent registered public
accounting firm set forth under the heading Ratification
of Appointment of Independent Registered Public Accounting
Firm in the Proxy Statement for the 2010 Annual Meeting of
Shareholders is incorporated herein by reference.
52
PART IV
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules
|
The following exhibits are filed herewith or incorporated by
reference:
(a)(1)
Financial Statements:
The
following Report of Independent Registered Public Accounting
Firm and Consolidated Financial Statements of Talbots are
included in this Report:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Operations for the Years Ended
January 30, 2010, January 31, 2009 and
February 2, 2008
Consolidated Balance Sheets as of January 30, 2010 and
January 31, 2009
Consolidated Statements of Cash Flows for the Years Ended
January 30, 2010, January 31, 2009 and
February 2, 2008
Consolidated Statements of Stockholders (Deficit) Equity
for the Years Ended January 30, 2010, January 31, 2009
and February 2, 2008
Notes to Consolidated Financial Statements
(a)(2)
Financial Statement Schedules:
All financial statement schedules have been omitted because the
required information is either presented in the consolidated
financial statements or the notes thereto or is not applicable
or required.
(a)(3) Exhibits:
The following exhibits are filed herewith or incorporated by
reference:
|
|
|
|
|
|
|
(2)
|
|
|
|
|
|
Plan of Acquisition, Reorganization, Arrangement, Liquidation
or Succession.
|
2.1
|
|
|
|
|
|
Asset Purchase Agreement, dated as of June 7, 2009, by and
among The Talbots, Inc., The Talbots Group, Limited Partnership,
J. Jill, LLC, Birch Pond Realty Corporation, and Jill
Acquisition LLC.(31)
|
2.2
|
|
|
|
|
|
Amendment No. 1 to Asset Purchase Agreement and Parent
Disclosure Schedule, dated as of July 2, 2009, by and among
The Talbots, Inc., The Talbots Group, Limited Partnership, J.
Jill, LLC, Birch Pond Realty Corporation, and Jill Acquisition
LLC.(88)
|
2.3
|
|
|
|
|
|
Amendment No. 2 to Asset Purchase Agreement, dated as of
September 30, 2009, by and among The Talbots, Inc., The
Talbots Group, Limited Partnership, J. Jill, LLC, Birch Pond
Realty Corporation, and Jill Acquisition LLC.(88)
|
2.4
|
|
|
|
|
|
Agreement and Plan of Merger, by and among The Talbots, Inc.,
Tailor Acquisition, Inc. and BPW Acquisition Corp., dated as of
December 8, 2009.(89)
|
2.5
|
|
|
|
|
|
First Amendment to the Agreement and Plan of Merger, dated as of
February 16, 2010, by and among The Talbots, Inc., Tailor
Acquisition, Inc. and BPW Acquisition Corp.(91)
|
2.6
|
|
|
|
|
|
Second Amendment to Agreement and Plan of Merger, dated as of
April 6, 2010, by and among The Talbots, Inc., Tailor
Acquisition, Inc. and BPW Acquisition Corp.(94)
|
(3)
|
|
|
|
|
|
Articles of Incorporation and By-laws.
|
3.1
|
|
|
|
|
|
Certificate of Incorporation, as amended, of Talbots.(1)(12)(15)
|
3.2
|
|
|
|
|
|
By-laws of Talbots and amendment thereto adopted on
April 6, 2010.(1)(97)
|
(4)
|
|
|
|
|
|
Instruments Defining the Rights of Security Holders,
including Indentures.
|
4.1
|
|
|
|
|
|
Form of Common Stock Certificate of Talbots.(1)
|
4.2
|
|
|
|
|
|
Form of Warrant Agreement, by and between The Talbots, Inc.,
Computershare Inc. and Computershare Trust Company, N.A.,
including Form of Warrant to purchase shares of Talbots common
stock(95)
|
4.3
|
|
|
|
|
|
Warrant Agreement, including Form of Warrant, dated as of
February 26, 2008, by and between BPW Acquisition Corp. and
Mellon Investor Services LLC, and the First Amendment thereto,
dated as of April 14, 2010, by and between The Talbots,
Inc. (as successor to BPW Acquisition Corp.) and Mellon Investor
Services LLC. (96)(98)
|
53
|
|
|
|
|
|
|
(10)
|
|
|
|
|
|
Material Contracts
|
10.1
|
|
|
|
|
|
Stockholders Agreement, dated as of November 18, 1993,
between Talbots and AEON (U.S.A.), Inc.(2)
|
10.2
|
|
|
|
|
|
Revolving Credit Agreement, dated as of January 25, 1994,
between Talbots and The Bank of Tokyo-Mitsubishi UFJ
Trust Company, as amended.(2)(4)(8)(19)(21)(26)(34)(44)
|
10.3
|
|
|
|
|
|
Termination Agreement dated as of April 13, 2007 between
The Talbots, Inc. and The Bank of Tokyo-Mitsubishi, Ltd.
regarding the Credit Agreement dated as of January 25,
1994.(49)
|
10.4
|
|
|
|
|
|
Credit Agreement between Talbots and The Bank of
Tokyo-Mitsubishi UFJ Trust Company, dated as of
April 17, 1998, as amended.(7)(10)(17)(22)(30)(36)
|
10.5
|
|
|
|
|
|
Termination Agreement dated as of April 13, 2007 between
The Talbots, Inc. and The Bank of Tokyo-Mitsubishi, Ltd.
regarding the Credit Agreement dated as of April 17,
1998.(49)
|
10.6
|
|
|
|
|
|
Credit Agreement dated as of March 28, 2007 between The
Talbots, Inc. and The Bank of Tokyo-Mitsubishi, Ltd., as
amended.(49)(65)
|
10.7
|
|
|
|
|
|
Revolving Credit Agreement, dated as of January 25, 1994,
between Talbots and The Norinchukin Bank, as
amended(2)(7)(8)(17)(21)(37)(49)
|
10.8
|
|
|
|
|
|
Revolving Credit Agreement, dated as of January 25, 1994,
between Talbots and Sumitomo Mitsui Banking Corporation
(formerly The Sakura Bank, Limited), as
amended.(2)(7)(11)(16)(19)(26)(34)(44)(62)(68)
|
10.9
|
|
|
|
|
|
Amendment, dated as of February 5, 2009, to Revolving
Credit Agreement between The Talbots, Inc. and Sumitomo Banking
Corporation.(80)
|
10.10
|
|
|
|
|
|
Third Amendment to Lease Agreement, made as of May 3, 2006,
by and between National Fire Protection Association and The J.
Jill Group, Inc.(35)
|
10.11
|
|
|
|
|
|
Guarantee of Lease, made as of May 3, 2006, by The Talbots,
Inc. to National Fire Protection Association.(35)
|
10.12
|
|
|
|
|
|
Revolving Loan Credit Agreement, dated April 17, 2003,
between Mizuho Corporate Bank, Ltd. and
Talbots.(17)(18)(21)(38)(48)(71)
|
10.13
|
|
|
|
|
|
Revolving Loan Credit Agreement, dated January 28, 2004,
between Talbots and Mizuho Corporate Bank,
Ltd.(19)(26)(28)(44)(63)
|
10.14
|
|
|
|
|
|
Revolving Loan Credit Agreement by and between The Talbots, Inc.
and Mizuho Corporation, Ltd. dated February 2, 2006.(29)
|
10.15
|
|
|
|
|
|
Term Loan Agreement, dated as of July 24, 2006, among The
Talbots, Inc., the lenders from time to time party thereto and
Mizuho Corporate Bank, Ltd., as arranger and administrative
agent, as amended.(40)(51)(59)(66)
|
10.16
|
|
|
|
|
|
Guaranty (in connection with the Term Loan Agreement dated as of
July 24, 2006) dated December 31, 2007, made by
The Talbots Group, Limited Partnership, in favor of each of the
Lenders and Mizuho Corporate Bank, Ltd., as arranger and
administrative agent for the Lenders.(66)
|
10.17
|
|
|
|
|
|
General Financing Agreement between The Talbots, Inc. and Mizuho
Corporate Bank, Ltd., dated as of August 24, 2007.(56)
|
10.18
|
|
|
|
|
|
Amended and Restated Promissory Note between The Talbots, Inc.
and Mizuho Corporate Bank, Ltd., dated January 28, 2008.(64)
|
10.19
|
|
|
|
|
|
Uncommitted Letter of Credit Facility dated June 28, 2006
between The Talbots, Inc., The J. Jill Group, Inc., J.J.
Company, Inc., J. Jill LLC, and J. Jill GP (collectively
Talbots) and Bank of America.(39)
|
10.20
|
|
|
|
|
|
Uncommitted Lines of Credit Letter dated February 15, 2006
between The Talbots, Inc. and Bank of America.(27)
|
10.21
|
|
|
|
|
|
Uncommitted Line of Credit Facility dated March 26, 2007
between The Talbots, Inc. and Bank of America.(47)(60)
|
10.22
|
|
|
|
|
|
Uncommitted Letter of Credit Facility dated March 26, 2007
between The Talbots, Inc., The J. Jill Group, Inc., J.J.
Company, Inc., J. Jill LLC, J. Jill GP and Bank of America.(47)
|
10.23
|
|
|
|
|
|
Stock Purchase Agreement, dated as of November 26, 1993,
between Talbots and AEON (U.S.A.), Inc.(2)
|
10.24
|
|
|
|
|
|
Amended Repurchase Program, dated as of April 29, 2005,
between Talbots and AEON (U.S.A.), Inc.(20)
|
54
|
|
|
|
|
|
|
10.25
|
|
|
|
|
|
Trademark Purchase and License Agreement, dated as of
November 26, 1993, between AEON Co. Ltd., (as successor in
interest to JUSCO (Europe) B.V.) and The Classics Chicago,
Inc.(2)
|
10.26
|
|
|
|
|
|
License Agreement, dated as of November 26, 1993, between
The Classics Chicago, Inc., Talbots, Talbots International
Retailing Limited, Inc., Talbots (Canada), Inc. and Talbots
(U.K.) Retailing Limited.(2)
|
10.27
|
|
|
|
|
|
Amendment to License Agreement, dated January 29, 1997,
among The Classics Chicago, Inc., Talbots, Talbots International
Retailing Limited, Inc., Talbots (Canada), Inc., and Talbots
(U.K.) Retailing, Ltd.(6)
|
10.28
|
|
|
|
|
|
Tax Allocation Agreement, dated as of November 18, 1993,
between AEON (U.S.A.), Inc., Talbots, Talbots International
Retailing Limited, Inc., Talbots (U.K.) Retailing Limited and
The Classics Chicago, Inc.(2)
|
10.29
|
|
|
|
|
|
Services Agreement, dated as of November 18, 1993, between
Talbots Japan Co., Ltd. and Talbots.(2)
|
10.30
|
|
|
|
|
|
Consulting and Advisory Services Contract between AEON (U.S.A.),
Inc. and Talbots dated as of November 1, 1999.(9)
|
10.31
|
|
|
|
|
|
The Talbots, Inc. Supplemental Retirement Plan, as amended and
restated effective January 1, 2009. (70)(82)*
|
10.32
|
|
|
|
|
|
The Talbots, Inc. Supplemental Savings Plan, as amended and
restated effective January 1, 2009.(82)*
|
10.33
|
|
|
|
|
|
The Talbots, Inc. Deferred Compensation Plan, as amended and
restated effective January 1, 2009.(82)*
|
10.34
|
|
|
|
|
|
The Talbots, Inc. Amended and Restated 1993 Executive Stock
Based Incentive Plan.(15)*
|
10.35
|
|
|
|
|
|
The Talbots, Inc. 2003 Executive Stock Based Incentive Plan, as
amended through February 28, 2008.(50)*
|
10.36
|
|
|
|
|
|
Form of The Talbots, Inc. 2003 Executive Stock Based Incentive
Plan Nonqualified Stock Option Agreement.(67)*
|
10.37
|
|
|
|
|
|
Form of The Talbots, Inc. 2003 Executive Stock Based Incentive
Plan Restricted Stock Agreement.(67)*
|
10.38
|
|
|
|
|
|
Form of The Talbots, Inc. 2003 Executive Stock Based Incentive
Plan Restricted Stock Agreement (prior form).(24)*
|
10.39
|
|
|
|
|
|
Form of The Talbots, Inc. 2003 Executive Stock Based Incentive
Plan Nonqualified Stock Option Agreement (prior form).(24)*
|
10.40
|
|
|
|
|
|
The Talbots, Inc. Directors Deferred Compensation Plan restated
as of May 27, 2004.(23)*
|
10.41
|
|
|
|
|
|
The Talbots, Inc. Restated Directors Stock Plan as amended
through March 5, 2005.(13)*
|
10.42
|
|
|
|
|
|
Form of Restricted Stock Unit Award under The Talbots, Inc.
Restated Directors Stock Plan.(33)*
|
10.43
|
|
|
|
|
|
Form of Option Agreement pursuant to The Talbots, Inc. Restated
Directors Stock Plan (prior form).(45)*
|
10.44
|
|
|
|
|
|
Form of Performance Accelerated Option Agreement pursuant to The
Talbots, Inc. Restated Directors Stock Plan.(76)*
|
10.45
|
|
|
|
|
|
Form of Option Agreement pursuant to The Talbots, Inc. Restated
Directors Stock Plan.(82)*
|
10.46
|
|
|
|
|
|
Director Compensation Arrangements, adopted September 25,
2008. (76)(82)*
|
10.47
|
|
|
|
|
|
The Talbots, Inc. Management Incentive Plan Performance
Criteria.(52)*
|
10.48
|
|
|
|
|
|
Summary of executive officer annual cash incentive program
(Management Incentive Plan and Turnaround Incentive Plan) and
long-term equity incentive program structure for 2008.(67)*
|
10.49
|
|
|
|
|
|
Employment Agreement by and between The Talbots, Inc. and Trudy
F. Sullivan, dated August 6, 2007, and Amendment
No. 1, dated as of June 16, 2009, thereto. (55)(86)*
|
10.50
|
|
|
|
|
|
Stock Option Agreement by and between The Talbots, Inc. and
Trudy F. Sullivan, dated August 7, 2007.(55)*
|
10.51
|
|
|
|
|
|
Offer Letter between The Talbots, Inc. and Paula Bennett, dated
January 3, 2008.(69)*
|
10.52
|
|
|
|
|
|
Change in Control Agreement between The Talbots, Inc. and Paula
Bennett, dated January 28, 2008.(69)*
|
10.53
|
|
|
|
|
|
Severance Agreement between The Talbots, Inc. and Paula Bennett,
dated January 28, 2008.(69)*
|
10.54
|
|
|
|
|
|
Retention Agreement between The Talbots, Inc. and Paula Bennett
dated November 11, 2008.(82)*
|
55
|
|
|
|
|
|
|
10.55
|
|
|
|
|
|
Offer Letter between The Talbots, Inc. and Basha Cohen, dated
December 11, 2007.(69)*
|
10.56
|
|
|
|
|
|
Change in Control Agreement between The Talbots, Inc. and Basha
Cohen, dated December 17, 2007.(69)*
|
10.57
|
|
|
|
|
|
Severance Agreement between The Talbots, Inc. and Basha Cohen,
dated December 17, 2007.(69)*
|
10.58
|
|
|
|
|
|
Offer Letter between The Talbots, Inc. and Lori Wagner, dated
February 19, 2008.(69)*
|
10.59
|
|
|
|
|
|
Change in Control Agreement between The Talbots, Inc. and Lori
Wagner, dated March 31, 2008.(69)*
|
10.60
|
|
|
|
|
|
Severance Agreement between The Talbots, Inc. and Lori Wagner,
dated March 31, 2008.(69)*
|
10.61
|
|
|
|
|
|
Change in Control Agreements between Talbots and certain
officers of Talbots.(2)(3)*
|
10.62
|
|
|
|
|
|
Letter Agreement between The Talbots, Inc. and Edward L. Larsen,
dated December 5, 2008.(82)*
|
10.63
|
|
|
|
|
|
Offer Letter between The Talbots, Inc. and Michael Scarpa, dated
December 4, 2008.(82)*
|
10.64
|
|
|
|
|
|
Severance Agreement between The Talbots, Inc. and Michael
Scarpa, dated December 4, 2008.(82)*
|
10.65
|
|
|
|
|
|
Change in Control Agreement between The Talbots, Inc. and
Michael Scarpa, dated December 4, 2008.(82)*
|
10.66
|
|
|
|
|
|
Term Loan Agreement, dated as of July 16, 2008, between The
Talbots, Inc. (as Borrower) and AEON (U.S.A.), Inc. (as
Lender).(74)
|
10.67
|
|
|
|
|
|
First Amendment, dated as of March 12, 2009, to the Term
Loan Agreement between The Talbots, Inc. and AEON (U.S.A.),
Inc., dated as of July 16, 2008.(81)
|
10.68
|
|
|
|
|
|
Second Amendment, dated as of December 28, 2009, to the
Term Loan Agreement between The Talbots, Inc. and AEON (U.S.A.),
Inc., dated as of July 16, 2008.(90)
|
10.69
|
|
|
|
|
|
Annex I, dated as of July 31, 2008, to the General
Financing Agreement between The Talbots, Inc. and Mizuho
Corporate Bank, Ltd., dated as of August 24, 2007.(75)
|
10.70
|
|
|
|
|
|
Offer Letter between The Talbots, Inc. and Gregory I. Poole,
dated June 5, 2008.(75)*
|
10.71
|
|
|
|
|
|
Change in Control Agreement between The Talbots, Inc. and
Gregory I. Poole, dated June 5, 2008.(82)*
|
10.72
|
|
|
|
|
|
Severance Agreement between The Talbots, Inc. and Gregory I.
Poole, dated June 5, 2008.(75)*
|
10.73
|
|
|
|
|
|
Revolving Credit Agreement, dated as of December 29, 2008,
between The Talbots, Inc. and Mizuho Corporate Bank, Ltd.(77)
|
10.74
|
|
|
|
|
|
Revolving Credit Agreement, dated as of December 30, 2008,
between The Talbots, Inc. and Sumitomo Mitsui Banking
Corporation.(77)
|
10.75
|
|
|
|
|
|
Revolving Credit Agreement, dated as of January 2, 2009,
between The Talbots, Inc. and The Norinchukin Bank.(77)
|
10.76
|
|
|
|
|
|
Revolving Credit Agreement, dated as of February 26, 2009,
between The Talbots, Inc. and The Bank of Tokyo-Mitsubishi UFJ,
Ltd.(79)
|
10.77
|
|
|
|
|
|
Commitment Letter and Summary of Proposed $200,000,000 Loan
Facility Agreement between The Talbots, Inc. (as Borrower) and
AEON Co., Ltd. (as Lender), dated February 5, 2009.(78)
|
10.78
|
|
|
|
|
|
Term Loan Facility Agreement between The Talbots, Inc. and AEON
Co., Ltd., dated as of February 25, 2009.(79)
|
10.79
|
|
|
|
|
|
First Amendment, dated as of December 28, 2009, to the Term
Loan Facility Agreement between The Talbots, Inc. and AEON
(U.S.A.), Inc., dated as of February 25, 2009.(90)
|
10.80
|
|
|
|
|
|
Form of 409A Letter Agreement, dated December 31, 2008,
between The Talbots, Inc. and Richard T. OConnell, Jr.,
John Fiske, III, Michael Smaldone, Lori Wagner, Basha Cohen
and Gregory I. Poole.(82)*
|
10.81
|
|
|
|
|
|
Offer Letter between The Talbots, Inc. and Michael Smaldone,
dated December 13, 2007.(82)*
|
10.82
|
|
|
|
|
|
Severance Agreement between The Talbots, Inc. and Michael
Smaldone, dated December 17, 2007.(82)*
|
10.83
|
|
|
|
|
|
Change in Control Agreement between The Talbots, Inc. and
Michael Smaldone, dated December 17, 2007.(82)*
|
10.84
|
|
|
|
|
|
Letter Agreement between the Talbots, Inc. and Michelle M.
Mandell, dated April 10, 2009.(82)*
|
10.85
|
|
|
|
|
|
Offer Letter between The Talbots, Inc. and Benedetta I.
Casamento, dated March 6, 2009.(82)*
|
56
|
|
|
|
|
|
|
10.86
|
|
|
|
|
|
Severance Agreement between The Talbots, Inc. and Benedetta I.
Casamento, dated April 6, 2009.(82)*
|
10.87
|
|
|
|
|
|
Change in Control Agreement between The Talbots, Inc. and
Benedetta I. Casamento, dated April 6, 2009.(82)*
|
10.88
|
|
|
|
|
|
Support Letters from AEON Co., Ltd., dated April 9,
2009.(82)
|
10.89
|
|
|
|
|
|
Secured Revolving Credit Agreement dated as of April 10,
2009 between Talbots and AEON Co., Ltd.(83)
|
10.90
|
|
|
|
|
|
Amended and Restated Secured Revolving Credit Agreement dated as
of December 28, 2009 between The Talbots, Inc. and AEON
Co., Ltd.(90)
|
10.91
|
|
|
|
|
|
Amended and Restated Security Agreement dated as of
December 28, 2009 entered into by The Talbots, Inc. in
favor of AEON Co., Ltd.(90)
|
10.92
|
|
|
|
|
|
Short Term Loan Agreement by and between The Talbots, Inc. and
The Norinchukin Bank, dated as of April 17, 2009.(84)
|
10.93
|
|
|
|
|
|
Amendments to Compensation Arrangements of Richard T.
OConnell, Jr., effective April 30, 2009.(85)*
|
10.94
|
|
|
|
|
|
Severance Agreement between The Talbots, Inc. and Richard T.
OConnell, Jr., effective as of April 30, 2009.(87)*
|
10.95
|
|
|
|
|
|
Summary of The Talbots, Inc. Executive Medical Plan dated
June 19, 2007.(88)*
|
10.96
|
|
|
|
|
|
Offer Letter between The Talbots, Inc. and John Fiske, III,
dated as of March 20, 2009, executed on September 20,
2009.(88)*
|
10.97
|
|
|
|
|
|
Severance Agreement between The Talbots, Inc. and John
Fiske, III, dated as of March 20, 2009, executed on
September 20, 2009.(88)*
|
10.98
|
|
|
|
|
|
Change in Control Agreement by and between The Talbots, Inc. and
John Fiske, III, effective April 1, 2007.(51)*
|
10.99
|
|
|
|
|
|
Repurchase, Repayment and Support Agreement, by and among The
Talbots, Inc., BPW Acquisition Corp., AEON (U.S.A.), Inc. and
AEON Co., Ltd., dated as of December 8, 2009.(89)
|
10.100
|
|
|
|
|
|
Sponsors Agreement, by and among Perella Weinberg Partners
Acquisition LP, BPW BNYH Holdings LLC, The Talbots, Inc. and BPW
Acquisition Corp., dated as of December 8, 2009.(89)
|
10.101
|
|
|
|
|
|
Commitment Letter, by and between General Electric Capital
Corporation and The Talbots, Inc., dated as of December 7,
2009.(89)
|
10.102
|
|
|
|
|
|
Secured Revolving Credit Agreement, dated April 7, 2010, by
and among The Talbots, Inc., Talbots Classics Finance Company,
Inc., The Talbots Group Limited Partnership, each as a borrower,
the subsidiaries of the Company from time to time party thereto,
as guarantors, and General Electric Capital Corporation, as
agent, for the financial institutions from time to time party
thereto, and as a lender. (97)
|
10.103
|
|
|
|
|
|
Guaranty and Security Agreement, dated as of April 7, 2010,
by The Talbots, Inc., The Talbots Group, Limited Partnership,
Talbots Classics Finance Company, Inc., and certain other
parties thereto, in favor of General Electric Capital
Corporation, as administrative agent for the lenders and each
other secured party. (97)
|
10.104
|
|
|
|
|
|
Private Label Credit Card Access and Monitoring Agreement, dated
as of April 7, 2010, by and among The Talbots, Inc., each
other Credit Party as defined in the Credit Agreement, Talbots
Classics National Bank, and General Electric Capital
Corporation. (97)
|
10.105
|
|
|
|
|
|
Summary of financing incentive awards and operating performance
incentive awards approved on February 25, 2010.(92)*
|
10.106
|
|
|
|
|
|
Stipulation with respect to the action captioned
Campbell v. The Talbots, Inc., et al., dated March 6,
2010.(93)
|
10.107
|
|
|
|
|
|
Amended and Restated Registration Rights Agreement, dated as of
April 7, 2010, by and among The Talbots, Inc., BPW
Acquisition Corp., Perella Weinberg Partners Acquisition LP,
BNYH BPW Holdings LLC, Roger W. Einiger, J. Richard Fredericks
and Wolfgang Schoellkopf.(97)
|
10.108
|
|
|
|
|
|
Form of The Talbots, Inc. 2003 Executive Stock Based Incentive
Plan Special Restricted Stock Unit Award Agreement.(99)*
|
|
|
|
*
|
|
Management contract and compensatory plan or arrangement.
|
57
|
|
|
(11)
|
|
Statement re: Computation of Per Share Earnings.
|
|
11.1
|
|
Incorporated by reference to Note 17, Loss Per
Share, of the Companys consolidated financial
statements for the fiscal year ended January 30, 2010,
included in this Report.
|
|
(21)
|
|
Subsidiaries.
|
|
21.1
|
|
List of Subsidiaries of The Talbots, Inc.(99)
|
|
(23)
|
|
Consents of Experts and Counsel.
|
|
23.1
|
|
Consent of Independent Registered Public Accounting Firm,
Deloitte & Touche LLP.(99)
|
|
(31)
|
|
Rule 13a-14(a)/15d-14(a)
Certifications.
|
|
|
|
31.1
|
|
Certification of Trudy F. Sullivan, President and Chief
Executive Officer of the Company, pursuant to Securities
Exchange Act
Rule 13a-14(a).(99)
|
|
31.2
|
|
Certification of Michael Scarpa, Chief Operating Officer, Chief
Financial Officer, and Treasurer of the Company, pursuant to
Securities Exchange Act
Rule 13a-14(a).(99)
|
|
|
|
(32)
|
|
Section 1350 Certifications.
|
|
|
|
32.1
|
|
Certifications pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of The Sarbanes-Oxley Act
of 2002, by Trudy F. Sullivan, President and Chief Executive
Officer of the Company and Michael Scarpa, Chief Operating
Officer, Chief Financial Officer, and Treasurer of the
Company.(99)
|
|
|
|
1
|
|
Incorporated by reference to the exhibits filed with Talbots
Registration Statement on
Form S-1
(No. 33-69082),
which Registration Statement became effective November 18,
1993.
|
|
2
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated April 26, 1994 (SEC file number reference
001-12552).
|
|
3
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated April 27, 1995 (SEC file number reference
001-12552).
|
|
4
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated December 23, 1995 (SEC file number reference
001-12552).
|
|
5
|
|
Intentionally omitted.
|
|
6
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated May 1, 1997 (SEC file number reference
001-12552).
|
|
7
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated May 1, 1998 (SEC file number reference
001-12552).
|
|
8
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated April 29, 1999 (SEC file number reference
001-12552).
|
|
9
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated July 1, 1999 (SEC file number reference
001-12552).
|
|
10
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated November 24, 1999 (SEC file number reference
001-12552).
|
|
11
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated April 25, 2000 (SEC file number reference
001-12552).
|
|
12
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated May 24, 2000 (SEC file number reference
001-12552).
|
|
13
|
|
Incorporated by reference to the 2005 Proxy Statement
(Exhibit A) dated April 21, 2005 (SEC file number
reference
001-12552).
|
|
14
|
|
Intentionally omitted.
|
|
15
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated September 6, 2001 (SEC file number reference
001-12552).
|
|
16
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated March 13, 2003 (SEC file number reference
001-12552).
|
58
|
|
|
17
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated July 24, 2003 (SEC file number reference
001-12552).
|
|
18
|
|
Incorporated by reference to the Current Report on
Form 8-K
dated April 9, 2008.
|
|
19
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated February 24, 2004 (SEC file number reference
001-12552).
|
|
20
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated April 29, 2005.
|
|
21
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated April 12, 2005 (SEC file number reference
001-12552).
|
|
22
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated June 4, 2004 (SEC file number reference
001-12552).
|
|
23
|
|
Incorporated by reference to the exhibits filed with Quarterly
Report on
Form 10-Q
for the period ended July 31, 2004 (SEC file number
reference
001-12552).
|
|
24
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated November 18, 2004 (SEC file number reference
001-12552).
|
|
25
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated December 23, 2004 (SEC file number reference
001-12552).
|
|
26
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated January 26, 2005 (SEC file number reference
001-12552).
|
|
27
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated February 22, 2006.
|
|
28
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated January 20, 2006.
|
|
29
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated February 2, 2006.
|
|
30
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated April 6, 2005 (SEC file number reference
001-12552).
|
|
31
|
|
Incorporated by reference to the exhibit filed with Current
Report on
Form 8-K
filed on June 8, 2009.
|
|
32
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated August 17, 2005.
|
|
33
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated March 3, 2005 (SEC file number reference
001-12552).
|
|
34
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated January 26, 2006.
|
|
35
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated May 3, 2006.
|
|
36
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated April 7, 2006.
|
|
37
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated April 17, 2006.
|
|
38
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated April 18, 2006.
|
|
39
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated July 7, 2006.
|
|
40
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated July 24, 2006.
|
|
41
|
|
43 Intentionally omitted.
|
|
44
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated January 24, 2007.
|
|
|
|
45
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated May 25, 2005.
|
|
|
|
46
|
|
Intentionally omitted.
|
|
|
|
47
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated March 26, 2007.
|
|
|
|
48
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated March 22, 2007.
|
|
49
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated April 16, 2007.
|
|
50
|
|
Incorporated by reference to the 2008 Proxy Statement
(Appendix A) dated April 25, 2008.
|
|
|
|
51
|
|
Incorporated by reference to the exhibits filed with Quarterly
Report on
Form 10-Q
for the period ended May 5, 2007.
|
|
|
|
52
|
|
Incorporated by reference to the Current Report on
Form 8-K
dated March 1, 2007.
|
59
|
|
|
53
|
|
Intentionally omitted.
|
|
54
|
|
Incorporated by reference to the Current Report on
Form 8-K
dated August 6, 2007.
|
|
55
|
|
Incorporated by reference to the exhibits filed with Quarterly
Report on
Form 10-Q
for the period ended August 4, 2007.
|
|
56
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated August 27, 2007.
|
|
57
|
|
Incorporated by reference to the exhibits filed with Quarterly
Report on
Form 10-Q
for the period ended November 3, 2007.
|
|
58
|
|
Intentionally omitted.
|
|
59
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated November 26, 2007.
|
|
60
|
|
Incorporated by reference to the Current Report on
Form 8-K
dated December 5, 2007.
|
|
61
|
|
Intentionally omitted.
|
|
62
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated February 1, 2008.
|
|
63
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated January 23, 2008.
|
|
64
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated January 28, 2008.
|
|
65
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated January 4, 2008.
|
|
66
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated December 31, 2007.
|
|
67
|
|
Incorporated by reference to the Current Report on
Form 8-K
dated February 28, 2008 and the exhibits filed therewith.
|
|
68
|
|
Incorporated by reference to the Current Report on
Form 8-K
dated March 13, 2008.
|
|
69
|
|
Incorporated by reference to the exhibits filed with Annual
Report on
Form 10-K
for the period ended February 2, 2008.
|
|
70
|
|
Incorporated by reference to the Current Report on
Form 8-K
dated February 25, 2009.
|
|
71
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated April 9, 2008.
|
|
72
|
|
73 Intentionally omitted.
|
|
74
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated July 18, 2008.
|
|
75
|
|
Incorporated by reference to the exhibits filed with Quarterly
Report on
Form 10-Q
for the period ended August 2, 2008.
|
|
76
|
|
Incorporated by reference to the exhibits filed with Quarterly
Report on
Form 10-Q
for the period ended November 1, 2008.
|
|
77
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated December 29, 2008.
|
|
78
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated February 5, 2009.
|
|
79
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated February 25, 2009.
|
|
80
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated March 3, 2009.
|
|
81
|
|
Incorporated by reference to the exhibits filed with Current
Report on
Form 8-K
dated March 12, 2009.
|
|
82
|
|
Incorporated by reference to the exhibits filed with the Annual
Report on
Form 10-K
dated April 16, 2009.
|
|
83
|
|
Incorporated by reference to the exhibit filed with the Current
Report on
Form 8-K
dated April 10, 2009.
|
|
84
|
|
Incorporated by reference to the exhibit filed with the Current
Report on
Form 8-K
filed on April 23, 2009.
|
|
85
|
|
Incorporated by reference to the Current Report on
Form 8-K
filed on May 6, 2009.
|
|
86
|
|
Incorporated by reference to the exhibit filed with the Current
Report on
Form 8-K
filed on June 18, 2009.
|
|
87
|
|
Incorporated by reference to the exhibits filed with the
Quarterly Report on
Form 10-Q
filed on September 10, 2009.
|
|
88
|
|
Incorporated by reference to the exhibits filed with the
Quarterly Report on
Form 10-Q
filed on December 10, 2009.
|
60
|
|
|
89
|
|
Incorporated by reference to the exhibits filed with the Current
Report on
Form 8-K
filed on December 10, 2009.
|
|
90
|
|
Incorporated by reference to the exhibits filed with the Current
Report on
Form 8-K
filed on January 4, 2010.
|
|
91
|
|
Incorporated by reference to the exhibit filed with the Current
Report on
Form 8-K
filed on February 17, 2010.
|
|
92
|
|
Incorporated by reference to the Current Report on
Form 8-K
filed on March 3, 2010.
|
|
93
|
|
Incorporated by reference to the exhibit filed with the Current
Report on
Form 8-K
filed on March 9, 2010.
|
|
94
|
|
Incorporated by reference to the exhibits filed with the Current
Report on
Form 8-K
filed on April 6, 2010.
|
|
95
|
|
Incorporated by reference to Appendix H to the document
included in the Registration Statement on
Form S-4
filed on March 1, 2010.
|
|
96
|
|
Incorporated by reference to Appendix A to the proxy
statement filed by BPW Acquisition Corp. on April 6, 2010.
|
|
97
|
|
Incorporated by reference to the Current Report on
Form 8-K
filed on April 8, 2010.
|
|
98
|
|
Incorporated by reference to the exhibit filed with the Current
Report on Form 8-K filed on April 14, 2010.
|
|
99
|
|
Filed with this
Form 10-K.
|
61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
The Talbots, Inc.
Michael Scarpa
Chief Operating Officer,
Chief Financial Officer, and Treasurer
(Principal Financial and Accounting Officer)
Dated: April 15, 2010
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities indicated as
of April 15, 2010.
|
|
|
|
|
/s/
Trudy
F. Sullivan
Trudy
F. Sullivan
President and
Chief Executive Officer (Principal Executive Officer)
|
|
/s/
John
W. Gleeson
John
W. Gleeson
Director
|
|
|
|
/s/
Gary
M. Pfeiffer
Gary
M. Pfeiffer
Director
|
|
|
|
|
|
/s/
Susan
M. Swain
Susan
M. Swain
Director
|
|
|
62
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of The Talbots, Inc.
Hingham, Massachusetts
We have audited the accompanying consolidated balance sheets of
The Talbots, Inc. and subsidiaries (the Company) as
of January 30, 2010 and January 31, 2009, and the
related consolidated statements of operations,
stockholders (deficit) equity, and cash flows for each of
the three years in the period ended January 30, 2010. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of The
Talbots, Inc. and subsidiaries as of January 30, 2010 and
January 31, 2009, and the results of their operations and
their cash flows for each of the three years in the period ended
January 30, 2010, in conformity with accounting principles
generally accepted in the United States of America.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
January 30, 2010, based on the criteria established in
Internal Control Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated April 15, 2010 expressed an
unqualified opinion on the Companys internal control over
financial reporting.
/s/
Deloitte
& Touche LLP
Boston, Massachusetts
April 15, 2010
F-2
THE
TALBOTS, INC. AND SUBSIDIARIES
Amounts
in thousands except per share data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net Sales
|
|
$
|
1,235,632
|
|
|
$
|
1,495,170
|
|
|
$
|
1,708,115
|
|
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, buying and occupancy
|
|
|
821,278
|
|
|
|
1,049,785
|
|
|
|
1,143,309
|
|
Selling, general and administrative
|
|
|
403,204
|
|
|
|
523,136
|
|
|
|
523,286
|
|
Restructuring charges
|
|
|
10,273
|
|
|
|
17,793
|
|
|
|
3,710
|
|
Merger costs
|
|
|
8,216
|
|
|
|
|
|
|
|
|
|
Impairment of store assets
|
|
|
1,351
|
|
|
|
2,845
|
|
|
|
2,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (Loss) Income
|
|
|
(8,690
|
)
|
|
|
(98,389
|
)
|
|
|
35,204
|
|
Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
28,394
|
|
|
|
20,589
|
|
|
|
35,400
|
|
Interest income
|
|
|
271
|
|
|
|
299
|
|
|
|
1,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense net
|
|
|
28,123
|
|
|
|
20,290
|
|
|
|
34,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income Before Taxes
|
|
|
(36,813
|
)
|
|
|
(118,679
|
)
|
|
|
1,093
|
|
Income Tax (Benefit) Expense
|
|
|
(11,505
|
)
|
|
|
20,842
|
|
|
|
1,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income from Continuing Operations
|
|
|
(25,308
|
)
|
|
|
(139,521
|
)
|
|
|
43
|
|
Loss from Discontinued Operations, net of tax
|
|
|
(4,104
|
)
|
|
|
(416,138
|
)
|
|
|
(188,884
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(29,412
|
)
|
|
$
|
(555,659
|
)
|
|
$
|
(188,841
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Loss Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.47
|
)
|
|
$
|
(2.63
|
)
|
|
$
|
(0.01
|
)
|
Discontinued operations
|
|
|
(0.08
|
)
|
|
|
(7.78
|
)
|
|
|
(3.57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(0.55
|
)
|
|
$
|
(10.41
|
)
|
|
$
|
(3.58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Loss Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.47
|
)
|
|
$
|
(2.63
|
)
|
|
$
|
(0.01
|
)
|
Discontinued operations
|
|
|
(0.08
|
)
|
|
|
(7.78
|
)
|
|
|
(3.57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(0.55
|
)
|
|
$
|
(10.41
|
)
|
|
$
|
(3.58
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
53,797
|
|
|
|
53,436
|
|
|
|
53,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
53,797
|
|
|
|
53,436
|
|
|
|
53,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-3
THE
TALBOTS, INC. AND SUBSIDIARIES
Amounts
in thousands except share data
|
|
|
|
|
|
|
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
112,775
|
|
|
$
|
16,718
|
|
Customer accounts receivable net
|
|
|
163,587
|
|
|
|
169,406
|
|
Merchandise inventories
|
|
|
142,696
|
|
|
|
206,593
|
|
Deferred catalog costs
|
|
|
6,685
|
|
|
|
4,795
|
|
Due from related party
|
|
|
959
|
|
|
|
376
|
|
Prepaid and other current assets
|
|
|
48,139
|
|
|
|
35,277
|
|
Income tax refundable
|
|
|
2,006
|
|
|
|
26,646
|
|
Assets held for sale current
|
|
|
|
|
|
|
109,966
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
476,847
|
|
|
|
569,777
|
|
Property and equipment net
|
|
|
220,404
|
|
|
|
277,363
|
|
Goodwill
|
|
|
35,513
|
|
|
|
35,513
|
|
Trademarks
|
|
|
75,884
|
|
|
|
75,884
|
|
Other assets
|
|
|
17,170
|
|
|
|
12,756
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
825,818
|
|
|
$
|
971,293
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIT
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
104,118
|
|
|
$
|
122,034
|
|
Accrued liabilities
|
|
|
148,177
|
|
|
|
148,356
|
|
Current portion of related party debt
|
|
|
486,494
|
|
|
|
|
|
Notes payable to banks
|
|
|
|
|
|
|
148,500
|
|
Current portion of long-term debt
|
|
|
|
|
|
|
70,377
|
|
Liabilities held for sale current
|
|
|
|
|
|
|
94,190
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
738,789
|
|
|
|
583,457
|
|
Related party debt less current portion
|
|
|
|
|
|
|
20,000
|
|
Long-term debt less current portion
|
|
|
|
|
|
|
238,000
|
|
Deferred rent under lease commitments
|
|
|
111,137
|
|
|
|
115,282
|
|
Deferred income taxes
|
|
|
28,456
|
|
|
|
28,456
|
|
Other liabilities
|
|
|
133,072
|
|
|
|
164,195
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders Deficit:
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 200,000,000 authorized;
81,473,215 shares
|
|
|
|
|
|
|
|
|
and 81,125,526 shares issued, respectively; and
55,000,142 shares
|
|
|
|
|
|
|
|
|
and 55,376,371 shares outstanding, respectively
|
|
|
815
|
|
|
|
811
|
|
Additional paid-in capital
|
|
|
499,457
|
|
|
|
492,932
|
|
Retained deficit
|
|
|
(48,690
|
)
|
|
|
(19,278
|
)
|
Accumulated other comprehensive loss
|
|
|
(51,179
|
)
|
|
|
(67,079
|
)
|
Treasury stock, at cost: 26,473,073 shares and
25,749,155 shares, respectively
|
|
|
(586,039
|
)
|
|
|
(585,483
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders deficit
|
|
|
(185,636
|
)
|
|
|
(178,097
|
)
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders Deficit
|
|
$
|
825,818
|
|
|
$
|
971,293
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-4
THE
TALBOTS, INC. AND SUBSIDIARIES
Amounts
in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(29,412
|
)
|
|
$
|
(555,659
|
)
|
|
$
|
(188,841
|
)
|
Loss from discontinued operations, net of tax
|
|
|
(4,104
|
)
|
|
|
(416,138
|
)
|
|
|
(188,884
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
|
(25,308
|
)
|
|
|
(139,521
|
)
|
|
|
43
|
|
Adjustments to reconcile (loss) income from continuing
operations to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
74,309
|
|
|
|
84,526
|
|
|
|
88,940
|
|
Compensation expense related to stock-based awards
|
|
|
6,423
|
|
|
|
8,562
|
|
|
|
17,522
|
|
Amortization of debt issuance costs
|
|
|
2,335
|
|
|
|
399
|
|
|
|
271
|
|
Impairment of store assets
|
|
|
1,351
|
|
|
|
2,845
|
|
|
|
2,606
|
|
Deferred rent
|
|
|
(11,559
|
)
|
|
|
(242
|
)
|
|
|
944
|
|
Deferred income taxes
|
|
|
(12,116
|
)
|
|
|
44,769
|
|
|
|
(22,732
|
)
|
Loss (gain) on disposal of property and equipment
|
|
|
223
|
|
|
|
(28
|
)
|
|
|
1,113
|
|
Tax benefit from options exercised
|
|
|
|
|
|
|
76
|
|
|
|
347
|
|
Excess tax benefit from options exercised
|
|
|
|
|
|
|
|
|
|
|
(347
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer accounts receivable
|
|
|
5,950
|
|
|
|
41,156
|
|
|
|
(6,119
|
)
|
Merchandise inventories
|
|
|
64,311
|
|
|
|
41,325
|
|
|
|
40,469
|
|
Deferred catalog costs
|
|
|
(1,890
|
)
|
|
|
1,453
|
|
|
|
(148
|
)
|
Due from related party
|
|
|
(583
|
)
|
|
|
2,664
|
|
|
|
2,632
|
|
Prepaid and other current assets
|
|
|
(9,257
|
)
|
|
|
(2,653
|
)
|
|
|
5,425
|
|
Income tax refundable
|
|
|
24,640
|
|
|
|
(26,646
|
)
|
|
|
|
|
Accounts payable
|
|
|
(17,275
|
)
|
|
|
(20,898
|
)
|
|
|
38,085
|
|
Accrued income taxes
|
|
|
|
|
|
|
(4,308
|
)
|
|
|
15,659
|
|
Accrued liabilities
|
|
|
(14,016
|
)
|
|
|
(3,665
|
)
|
|
|
18,126
|
|
Other assets
|
|
|
(1,285
|
)
|
|
|
13,047
|
|
|
|
(2,265
|
)
|
Other liabilities
|
|
|
(5,066
|
)
|
|
|
(26,601
|
)
|
|
|
13,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
81,187
|
|
|
|
16,260
|
|
|
|
213,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property and equipment
|
|
|
(20,980
|
)
|
|
|
(44,698
|
)
|
|
|
(57,597
|
)
|
Proceeds from disposal of property and equipment
|
|
|
61
|
|
|
|
2,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(20,919
|
)
|
|
|
(42,143
|
)
|
|
|
(57,597
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from related party borrowings
|
|
|
475,000
|
|
|
|
20,000
|
|
|
|
|
|
Payments on related party borrowings
|
|
|
(8,506
|
)
|
|
|
|
|
|
|
|
|
Payments on long-term borrowings
|
|
|
(308,351
|
)
|
|
|
(80,502
|
)
|
|
|
(80,469
|
)
|
Payments on working capital notes payable
|
|
|
(156,500
|
)
|
|
|
(15,000
|
)
|
|
|
|
|
Proceeds from working capital notes payable
|
|
|
8,000
|
|
|
|
57,000
|
|
|
|
|
|
Proceeds from (payments on) working capital notes payable, net
|
|
|
|
|
|
|
106,500
|
|
|
|
(45,000
|
)
|
Payment of debt issuance costs
|
|
|
(4,760
|
)
|
|
|
(866
|
)
|
|
|
|
|
Proceeds from options exercised
|
|
|
|
|
|
|
888
|
|
|
|
1,550
|
|
Excess tax benefit from options exercised
|
|
|
|
|
|
|
|
|
|
|
347
|
|
Purchase of treasury stock
|
|
|
(556
|
)
|
|
|
(1,505
|
)
|
|
|
(521
|
)
|
Cash dividends
|
|
|
|
|
|
|
(28,752
|
)
|
|
|
(28,363
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
4,327
|
|
|
|
57,763
|
|
|
|
(152,456
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH
|
|
|
503
|
|
|
|
(464
|
)
|
|
|
1,424
|
|
CASH FLOWS FROM DISCONTINUED OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
(34,110
|
)
|
|
|
(20,119
|
)
|
|
|
11,677
|
|
Investing activities
|
|
|
63,827
|
|
|
|
(18,684
|
)
|
|
|
(27,215
|
)
|
Effect of exchange rate changes on cash
|
|
|
23
|
|
|
|
(154
|
)
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,740
|
|
|
|
(38,957
|
)
|
|
|
(15,526
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
94,838
|
|
|
|
(7,541
|
)
|
|
|
(10,447
|
)
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
16,551
|
|
|
|
24,280
|
|
|
|
34,819
|
|
DECREASE (INCREASE) IN CASH AND CASH EQUIVALENTS OF
DISCONTINUED OPERATIONS
|
|
|
1,386
|
|
|
|
(188
|
)
|
|
|
(92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF YEAR
|
|
$
|
112,775
|
|
|
$
|
16,551
|
|
|
$
|
24,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-5
THE
TALBOTS, INC. AND SUBSIDIARIES
Amounts
in thousands except share data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Retained
|
|
|
Other
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Earnings
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
(Deficit)
|
|
|
Loss
|
|
|
Stock
|
|
|
Loss
|
|
|
(Deficit) Equity
|
|
|
BALANCE AT FEBRUARY 3, 2007
|
|
|
78,567,387
|
|
|
$
|
786
|
|
|
$
|
464,701
|
|
|
$
|
787,483
|
|
|
$
|
(26,202
|
)
|
|
$
|
(583,457
|
)
|
|
|
|
|
|
$
|
643,311
|
|
Adoption of accounting guidance related to accounting for
uncertainty in income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,674
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,674
|
)
|
Cash dividends paid
|
|
|
|
|
|
|
|
|
|
|
(200
|
)
|
|
|
(28,163
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,363
|
)
|
Common stock issued as stock awards
|
|
|
1,014,336
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
Compensation expense related to stock options
|
|
|
|
|
|
|
|
|
|
|
10,946
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,946
|
|
Compensation expense related to nonvested common stock awards
|
|
|
|
|
|
|
|
|
|
|
8,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,296
|
|
Stock options exercised, including tax benefit
|
|
|
173,720
|
|
|
|
1
|
|
|
|
1,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,887
|
|
Purchase of 265,540 shares of vested and nonvested common
stock awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(521
|
)
|
|
|
|
|
|
|
(521
|
)
|
Comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(188,841
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(188,841
|
)
|
|
|
(188,841
|
)
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,528
|
|
|
|
|
|
|
|
2,528
|
|
|
|
2,528
|
|
Change in pension and postretirement liabilities, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,200
|
|
|
|
|
|
|
|
10,200
|
|
|
|
10,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(176,113
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT FEBRUARY 2, 2008
|
|
|
79,755,443
|
|
|
|
797
|
|
|
|
485,629
|
|
|
|
565,805
|
|
|
|
(13,474
|
)
|
|
|
(583,978
|
)
|
|
|
|
|
|
|
454,779
|
|
Adoption of accounting guidance related to changing the
measurement date of the benefit plans to January 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(897
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(897
|
)
|
Cash dividends paid
|
|
|
|
|
|
|
|
|
|
|
(225
|
)
|
|
|
(28,527
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,752
|
)
|
Common stock issued as stock awards
|
|
|
1,298,415
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
|
|
Compensation expense related to stock options
|
|
|
|
|
|
|
|
|
|
|
4,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,677
|
|
Compensation expense related to nonvested common stock awards
|
|
|
|
|
|
|
|
|
|
|
4,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,178
|
|
Tax deficiency on vested stock awards
|
|
|
|
|
|
|
|
|
|
|
(2,277
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,277
|
)
|
Stock options exercised, including tax benefit
|
|
|
71,668
|
|
|
|
1
|
|
|
|
950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
951
|
|
Purchase of 915,489 shares of vested and nonvested common
stock awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,505
|
)
|
|
|
|
|
|
|
(1,505
|
)
|
Comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(555,659
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(555,659
|
)
|
|
|
(555,659
|
)
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,216
|
)
|
|
|
|
|
|
|
(1,216
|
)
|
|
|
(1,216
|
)
|
Change in pension and postretirement liabilities, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(52,389
|
)
|
|
|
|
|
|
|
(52,389
|
)
|
|
|
(52,389
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(609,264
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT JANUARY 31, 2009
|
|
|
81,125,526
|
|
|
|
811
|
|
|
|
492,932
|
|
|
|
(19,278
|
)
|
|
|
(67,079
|
)
|
|
|
(585,483
|
)
|
|
|
|
|
|
|
(178,097
|
)
|
Common stock issued as stock awards
|
|
|
347,689
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Compensation expense related to stock options
|
|
|
|
|
|
|
|
|
|
|
2,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,574
|
|
Compensation expense related to nonvested common stock awards
|
|
|
|
|
|
|
|
|
|
|
3,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,951
|
|
Purchase of 723,918 shares of vested and nonvested common
stock awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(556
|
)
|
|
|
|
|
|
|
(556
|
)
|
Comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,412
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(29,412
|
)
|
|
|
(29,412
|
)
|
Translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
895
|
|
|
|
|
|
|
|
895
|
|
|
|
895
|
|
Change in pension and postretirement liabilities, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,005
|
|
|
|
|
|
|
|
15,005
|
|
|
|
15,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(13,512
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT JANUARY 30, 2010
|
|
|
81,473,215
|
|
|
$
|
815
|
|
|
$
|
499,457
|
|
|
$
|
(48,690
|
)
|
|
$
|
(51,179
|
)
|
|
$
|
(586,039
|
)
|
|
|
|
|
|
$
|
(185,636
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-6
THE
TALBOTS, INC.
|
|
1.
|
Description
of Business
|
The Talbots, Inc., a Delaware corporation, together with its
wholly-owned subsidiaries (the Company), is a
specialty retailer and direct marketer of womens apparel,
accessories and shoes. The Companys products are sold
through its 580 stores, its circulation of approximately
36.6 million catalogs in 2009 and online through its
website.
AEON (U.S.A.), Inc. (AEON (U.S.A.)), a wholly-owned
subsidiary of AEON Co., Ltd. (AEON), was the
Companys majority shareholder as of January 30, 2010,
owning approximately 54% of the Companys outstanding
common stock.
On December 8, 2009, the Company entered into agreements
(collectively, the BPW Transactions) which, in the
aggregate, and subject to satisfaction of all conditions to and
consummation of these transactions, would substantially reduce
its indebtedness and significantly deleverage its balance sheet,
consisting of three related transactions: (i) an Agreement
and Plan of Merger between Talbots and BPW Acquisition Corp.
(BPW) pursuant to which a wholly-owned subsidiary of
the Company will merge with and into BPW with BPW surviving as a
wholly-owned subsidiary of the Company, in exchange for the
Companys issuance of Talbots common stock to BPW
stockholders; (ii) the retirement of all Talbots common
stock currently held by AEON (U.S.A.), the issuance of warrants
to purchase one million shares of Talbots common stock and the
repayment of all of the Companys outstanding AEON debt and
outstanding bank debt; and (iii) a third party loan
commitment for a new senior secured revolving credit facility.
On April 7, 2010, the BPW Transactions were completed. See
Note 2,
Recent Events and Managements Plan
,
Note 12,
Debt,
and Note 20,
Subsequent
Events,
for further information.
|
|
2.
|
Recent
Events and Managements Plan
|
The Company believes that the economic recession has had a
significant impact on its business during 2008 and 2009, and
anticipates that macroeconomic pressures will continue to impact
consumer spending into 2010 and potentially beyond. Despite the
challenging retail economic environment, the Company achieved
operating income in the third and fourth quarters of 2009
following five consecutive quarters of operating losses.
In late 2007, the Company initiated a comprehensive strategic
review of its entire operations to develop a long-range plan to
strengthen the business and to improve its operating
performance. The Companys primary objective was to
reinvigorate its core Talbots brand and streamline its
operations. These strategic initiatives resulted in
restructuring and impairment charges in 2007. During 2008 and
2009, the Company monitored progress against its strategic
initiatives and undertook additional measures primarily related
to activities intended to reduce costs. As part of these
initiatives, the Company made the decision to exit its Talbots
Kids, Mens and U.K. operations, and these businesses ceased
operations in 2008.
Implementation of the Companys strategic plan began before
the significant economic downturn that occurred in the fourth
quarter of 2008, in which sales declined 23% on a
year-over-year
basis. In late 2008 and early 2009, the Company made adjustments
to its initiatives in response to the weakening economic
environment, including actions designed to further streamline
its organization, further reduce its cost structure and better
optimize gross margin performance through stronger inventory
management and improved initial
mark-ups
resulting from changes to its supply chain practices. As part of
these initiatives, the Company also decided to exit the J. Jill
business. The Talbots Kids, Mens and U.K. businesses, and the J.
Jill business have been classified as discontinued operations
for all periods presented. See Note 4,
Discontinued
Operations
, for further information.
A summary of the Companys initiatives and actions taken to
date intended to improve operating results, many of which the
Company believes will continue to provide benefits into 2010 are
as follows:
|
|
|
|
|
In June 2008, management reduced corporate headcount by
approximately 9% across multiple locations at all levels.
|
F-7
THE
TALBOTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
During the third quarter of 2008, management completed the
closing of its Kids, Mens and U.K. businesses which were not
considered strategic to ongoing operations.
|
|
|
|
During the third quarter of 2008, the Board of Directors
approved a plan to sell the J. Jill business which was not
considered strategic to ongoing operations.
|
|
|
|
During 2008, management eliminated advertising in television and
national print, contributing to $14.8 million less in
spending from 2007.
|
|
|
|
During 2008 and 2009, management changed its promotional cadence
to monthly markdowns rather than its historical four clearance
sales events per year, held a leaner inventory position and
concentrated on better product flow and content. Management also
decreased its inventory commitments in 2009.
|
|
|
|
In 2008 and 2009, management reduced its annual gross capital
expenditures (excluding construction allowances received from
landlords) to $44.7 million and $21.0 million,
respectively, from $57.6 million in 2007.
|
|
|
|
In 2009, management initiated a program to achieve a
$150.0 million annual expense reduction to be completed by
the end of fiscal 2010, and has substantially achieved that goal
as of January 30, 2010, including a reduction of
$119.9 million in selling, general and administrative
expenses and $26.8 million in cost of sales, buying and
occupancy costs. Key components are as follows:
|
|
|
|
|
|
Reduced corporate headcount by approximately 17% in February
2009, and again in June 2009, by approximately 20%
|
|
|
|
Reduced hours worked in the Companys stores, distribution
center and call center for 2009
|
|
|
|
Eliminated matching contributions to the 401(k) plan for 2009,
increased employee health care contributions for 2009,
eliminated merit increases for 2009 and froze the Companys
defined benefit pension plans
|
|
|
|
Implemented broad-based non-employee overhead actions resulting
in cost savings, primarily in the area of administration,
marketing and store operations.
|
|
|
|
|
|
In February 2009, the Board approved the indefinite suspension
of the quarterly dividend.
|
|
|
|
In July 2009, management completed the sale of the J. Jill
business to Jill Acquisition LLC (the Purchaser) for
net cash proceeds of $64.3 million and closed the 75 J.
Jill stores not purchased in the transaction. As of
January 30, 2010, the lease liabilities for 69 of the 75
unsold stores are settled. Four additional store leases were
settled subsequent to January 30, 2010.
|
|
|
|
In August 2009, management reorganized the Companys global
sourcing activities and entered into a buying agency agreement
with an affiliate of Li & Fung Limited, a Hong
Kong-based global consumer goods exporter (Li &
Fung) which, effective September 2009, is acting as the
Companys exclusive global sourcing agent for substantially
all Talbots apparel. In connection with the reorganization,
management closed its Hong Kong and India sourcing offices and
reduced its corporate sourcing headcount.
|
|
|
|
In 2009, the Company managed its fall 2009 merchandise payables
without the need to draw upon the $25.0 million working
capital financial support commitment provided by AEON in April
2009.
|
|
|
|
In 2009, management closed 19 underperforming stores, some of
which relate to store leases that expired during 2009 and some
of which were pursuant to existing early termination right
provisions.
|
|
|
|
In 2009, management decreased its catalog circulation to
approximately 36.6 million catalogs, down from
approximately 55.0 million in 2008.
|
F-8
THE
TALBOTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company recorded restructuring charges of
$10.3 million, $17.8 million and $3.7 million in
2009, 2008 and 2007, respectively. See Note 5,
Restructuring Charges
, for further information.
At January 31, 2009, the Company was in violation of
certain financial covenants on its Acquisition Debt and had
substantial additional debt obligations coming due in the next
twelve months. In response to these short-term liquidity needs,
management undertook the following actions during 2008 and 2009
in an effort to improve liquidity:
|
|
|
|
|
In July 2008, the Company entered into a $50.0 million
subordinated working capital term loan facility with AEON
(U.S.A.) (the AEON Facility) which was to mature in
2012 and was interest-only until maturity. As of
January 31, 2009, the Company had drawn $20.0 million
on this facility and borrowed the remaining $30.0 million
in early February 2009.
|
|
|
|
In February 2009, the Company obtained a $200.0 million
term loan facility from AEON (the AEON Loan) and
borrowed $200.0 million which was used to repay all
outstanding indebtedness under the Acquisition Debt Agreement
related to the 2006 J. Jill acquisition. The Acquisition Debt
Agreement required quarterly principal payments of
$20.0 million. The new $200.0 million loan from AEON
was interest-only until maturity. The term loan facility
initially matured on August 31, 2009, but provided the
Company with the option to extend the maturity for additional
six-month periods, up to the third anniversary of the loan
closing date, which was February 27, 2012, subject to
earlier termination under the loan terms.
|
|
|
|
In April 2009, AEON guaranteed the Companys outstanding
debt under its then existing working capital facilities totaling
$165.0 million, its then existing revolving credit
facilities totaling $80.0 million, and its then existing
$20 million term loan facility. AEON also agreed
(i) that it would continue to provide a guaranty for a
refinancing of any of that debt, which then matured at various
dates on and before April 16, 2010 and (ii) if the
lender failed to agree to refinance that debt on or before the
then existing maturity date, or if any other condition occurred
that required AEON to make a payment under its then existing
guaranty, AEON would make a loan to the Company, due on or after
April 16, 2010 and within the limits of AEONs then
existing loan guaranty, to avoid any lack of the Companys
financial resources caused by any such failure of refinancing.
In April 2009, AEON also confirmed its support for the
Companys working capital improvement initiatives for its
merchandise payables management and that it would use
commercially reasonable effort to provide the Company with
financial support through loan or guarantee up to
$25.0 million only if, and to the extent that, the Company
may possibly fall short in achieving its targeted cash flow
improvement for fall 2009 merchandise payables.
|
|
|
|
In April 2009, the Company entered into a $150.0 million
secured revolving loan facility with AEON. The facility was to
mature upon the earlier of (i) April 17, 2010 or
(ii) one or more securitization programs or structured
loans by the Company or its subsidiaries in an aggregate
equivalent principal amount to the revolving loan commitment
amount, approved in advance by AEON as lender and in form and
substance satisfactory to the lender. The facility was secured
by (i) a first priority security interest in substantially
all of the Companys consumer credit/charge card
receivables and (ii) a first lien mortgage on the
Companys Hingham, Massachusetts headquarters and
Lakeville, Massachusetts distribution facility. Amounts could be
borrowed, repaid and reborrowed under the facility and could be
used for working capital and other general corporate purposes.
|
|
|
|
On December 8, 2009, the Company entered into agreements
for the proposed BPW Transactions.
|
|
|
|
On December 28, 2009, the Company executed an Amended and
Restated Secured Revolving Loan Agreement with AEON (the
Amended Facility), which amended and restated the
$150.0 million secured revolving loan facility executed
with AEON in April 2009. Under the terms of the Amended
Facility, the principal amount of the earlier
$150.0 million secured credit facility was increased to
$250.0 million. The Company could use funds borrowed under
the Amended Facility solely (i) to repay its outstanding
third-
|
F-9
THE
TALBOTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
party bank indebtedness plus interest and other costs,
(ii) to fund working capital and other general corporate
purposes up to $10.0 million subject to satisfaction of all
borrowing conditions and availability under the Amended
Facility, and (iii) to pay related fees and expenses
associated with the Amended Facility.
The Amended Facility had a scheduled maturity date of the
earlier to occur of (i) April 16, 2010 or
(ii) the consummation of the BPW Transactions, provided
that the merger transaction together with any concurrent
financing resulted in sufficient net cash proceeds to enable the
Company to make full repayment of its AEON debt (including
amounts owed under the Amended Facility).
|
|
|
|
|
On December 29, 2009, the Company borrowed
$245.0 million under the Amended Facility which was used to
repay in full the Companys outstanding third-party bank
indebtedness, related interest, and other costs and expenses.
The Amended Facility was provided pursuant to AEONs
April 9, 2009 financial support commitments, which were
satisfied and discharged in full upon the December 29, 2009
funding under this Amended Facility for the repayment of all of
the Companys outstanding third-party bank indebtedness.
|
As of January 30, 2010, the Company had material debt
obligations coming due in April 2010 under the Amended Facility.
See Note 12,
Debt
, for further information and
descriptions of the AEON debt.
On April 7, 2010, the Company completed the BPW
Transactions. In connection with the consummation and closing of
the BPW Transactions, the Company executed a new senior secured
revolving credit agreement with a third-party lender, repaid all
AEON and AEON (U.S.A.) outstanding indebtedness at its principal
value plus accrued interest and other costs for total cash
consideration of $488.2 million, and repurchased and
retired 29.9 million shares of Talbots common stock owned
by AEON (U.S.A.) by issuing warrants to AEON (U.S.A.) to
purchase one million shares of Talbots common stock. See
Note 20
, Subsequent Events
, for further information.
Based on its current assumptions, its forecast and operating and
cash flow plan for 2010, its borrowing availability under the
new senior secured revolving credit agreement and the related
restructuring of the Companys capital structure,
management anticipates that the Company will have sufficient
liquidity to finance anticipated working capital and other
expected cash needs for at least the next twelve months.
Managements ability to meet its cash needs and satisfy its
operating and other non-operating costs will depend upon, among
other factors, the Companys future operating performance
as well as general economic conditions.
|
|
3.
|
Summary
of Significant Accounting Policies
|
Use of Estimates
The preparation of
these consolidated financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of
the balance sheets and the reported amounts of net sales and
expenses during the reporting periods. The Companys
significant estimates within the consolidated financial
statements include those related to inventory markdown reserves,
product returns, customer programs and incentives, retirement
plans, valuation of long-lived assets, valuation of intangibles,
income taxes, and stock-based compensation. Actual results could
differ materially from those estimates.
Subsequent Events
The Company
considers events or transactions that occur after the balance
sheet date but before the financial statements are issued to
provide additional evidence relative to certain estimates or to
identify matters that require additional disclosures. See
Note 20,
Subsequent Events,
for further information.
Principles of Consolidation
The
consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All intercompany
balances and transactions have been eliminated in consolidation.
Fiscal Year
The Company conforms to
the National Retail Federations fiscal calendar. The years
ended January 30, 2010, January 31, 2009 and
February 2, 2008 were 52-week reporting periods. References
to 2009, 2008 and 2007 are
for the fiscal years ended January 30, 2010,
January 31, 2009 and February 2, 2008, respectively.
F-10
THE
TALBOTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Cash and Cash Equivalents
The Company
considers all highly liquid instruments with a purchased
maturity of three months or less to be cash equivalents. The
majority of payments due from credit card processors and banks
for third-party credit card and debit card transactions are
processed within one to five business days. The Company
classifies all credit card and debit card transactions as cash
and cash equivalents. Amounts due from banks for these
transactions, classified as cash and cash equivalents, totaled
$4.2 million and $3.8 million at January 30, 2010
and January 31, 2009, respectively.
Customer Accounts Receivable
Customer
accounts receivable are amounts due from customers as a result
of customer purchases on the Talbots proprietary charge card,
net of an allowance for doubtful accounts. The Talbots charge
card program is administered through Talbots Classics National
Bank and Talbots Classics Finance Company, Inc., both
wholly-owned subsidiaries. Concentration of credit risk with
respect to customer accounts receivable is limited due to the
large number of customers to whom the Company extends credit.
Ongoing credit evaluation of customers financial positions
is performed and collateral is not required as a condition of
credit. The allowance for doubtful accounts is maintained for
estimated losses from the inability of customers to make
required payments and is based on a percentage of outstanding
balances, historical charge-offs and charge-off forecasts.
Delinquent accounts are generally written off after a period of
180 days. Accounts are written off sooner in the event of
customer bankruptcy or other circumstances that make
collectability unlikely.
Customer Loyalty Program
The Company
maintains a customer loyalty program referred to as the Classic
Awards Program in which Talbots U.S. customers receive
appreciation awards based on reaching specified
purchase levels. The Classic Awards program was relaunched in
January 2009 with the addition of non-charge-based loyalty
incentives and additional incentives for customers who spend
more than a $1,000 per year on their Talbots charge card.
Appreciation awards may be applied to future merchandise
purchases and expire one year after issuance. The cost of the
appreciation award is recognized at the time of the initial
customer purchase and is charged to selling, general and
administrative expenses based on purchase levels, actual awards
issued and historical redemption rates. The related liability is
included in accrued liabilities.
Merchandise Inventories
Inventories
are stated at the lower of average cost or market using the
retail inventory method on a FIFO
(first-in,
first-out) basis. Under the retail inventory method, the
valuation of inventories at cost and the resulting gross margins
are adjusted for estimated future markdowns on currently held
past-season merchandise in advance of selling the marked-down
merchandise. Estimated future markdowns are calculated based on
information related to inventory levels, historical markdown
trends and forecasted markdown levels. Certain distribution
costs, warehousing costs and purchasing costs are capitalized in
inventory.
Property and Equipment
Property and
equipment are recorded at cost. Depreciation and amortization
are calculated using the straight-line method over the following
estimated useful lives:
|
|
|
Description
|
|
Years
|
|
Buildings
|
|
10-50
|
Fixtures and equipment
|
|
3-10
|
Software
|
|
3-7
|
Leasehold improvements
|
|
3-10 or term of lease, if shorter
|
Expenditures for new properties and improvements to existing
facilities are capitalized, while the cost of maintenance is
charged to expense. The cost of property retired, or otherwise
disposed of, and the accumulated depreciation is eliminated from
the related accounts, and the resulting gain or loss is
reflected in operations.
Preopening Expenses
Costs associated
with the opening of new stores are expensed as incurred.
Fair Value Measurements
The Company
discloses information about the fair value of assets and
liabilities recognized in its financial statements in periods
subsequent to initial recognition. See Note 18,
Fair
Value Measurements
for further information. Fair value is
the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the date of measurement. The Company
F-11
THE
TALBOTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
determines fair value based on a three-tier valuation hierarchy
that prioritizes the inputs used to measure fair value. The
three levels of inputs used to measure fair value are as follows:
|
|
|
|
|
Level 1 Quoted market prices in active markets
for identical assets or liabilities,
|
|
|
|
Level 2 Observable inputs other than quoted
market prices included in Level 1, such as quoted market prices
for markets that are not active; or other inputs that are
observable or can be corroborated by observable market
data, and
|
|
|
|
Level 3 Unobservable inputs that are supported
by little or no market activity and that are significant to the
fair value of the assets or liabilities, including certain
pricing models, discounted cash flow methodologies and similar
techniques that use significant unobservable inputs.
|
The Company maximizes the use of observable inputs
(Levels 1 and 2) and minimizes the use of unobservable
inputs (Level 3).
Goodwill and Indefinite-lived Trademarks
Goodwill and trademarks are not being amortized. The
Company evaluates goodwill and trademarks for impairment at the
reporting unit level on the first day of each fiscal year, and
between annual tests if events occur or circumstances change
which suggest that the goodwill or trademarks should be
evaluated.
The Company uses a two-step process for determining whether
goodwill is impaired. The first step is to compare the fair
value of the reporting unit to its carrying value. For purposes
of assessing impairment, the entire $35.5 million of
goodwill is allocated to the Stores Segment. If the carrying
value of the reporting unit exceeds fair value, a second step is
followed to calculate the goodwill impairment. The second step
involves determining the fair value of the individual assets and
liabilities of the reporting unit and calculating the implied
fair value of goodwill.
To determine fair value, the Company uses a combination of the
income approach, which is based on the cash flows that the
reporting unit expects to generate in the future, and the market
value approach. The income approach requires significant
management judgments and estimates to project future revenues
and expenses, changes in gross margins, cash flows and estimates
of future capital expenditures for the reporting unit over a
multi-year period, as well as determine the weighted-average
cost of capital to be used as a discount rate. The Company also
uses the market approach to estimate fair value of its reporting
units by utilizing industry multiples of operating performance.
The multiples are derived from comparable publicly traded
companies with operating characteristics similar to the
reporting units. The evaluation of goodwill inherently involves
management judgments as to assumptions used to project these
amounts and the impact of market conditions on those
assumptions. The Companys estimates may differ from actual
results due to, among other matters, economic conditions,
changes to its business model, or changes in operating
performance. Significant differences between these estimates and
actual results could result in future impairment charges and
could materially affect the Companys future financial
results.
The Company compares the fair value of the trademarks to their
carrying value to determine whether the asset is impaired. For
purposes of assessing impairment, trademarks with a carrying
value of $64.5 million are allocated to the Stores Segment
and trademarks with a carrying value of $11.4 million are
allocated to the Direct Marketing Segment. Fair value is
determined based on the income approach using the
relief-of-royalty
method. This methodology assumes that, in lieu of ownership, a
third party would be willing to pay a royalty in order to
exploit the related benefits of the asset. This approach is
dependent on a number of factors, including estimates of future
sales, royalty rates of intellectual property, discount rates
and other variables. Significant differences between these
estimates and actual results could result in future impairment
charges and could materially affect the Companys future
financial results.
Based on the impairment tests completed in 2009, 2008 and 2007,
the Company concluded that goodwill and trademarks were not
impaired. There have been no changes to the Companys
Talbots related goodwill balance in 2008 or 2009.
F-12
THE
TALBOTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Long-Lived Assets
Long-lived assets
are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying value may not be
recoverable. Recoverability is evaluated by comparing the
carrying value of the assets to the undiscounted cash flows
attributable to the asset or asset group. When this comparison
indicates that the carrying value of the asset is greater than
its undiscounted future cash flows, a loss is recognized for the
difference between the carrying value and estimated fair value.
The Company recorded impairment losses on its store assets of
$1.4 million, $2.8 million and $2.6 million in
2009, 2008 and 2007, respectively.
Grantor Trust
The Company maintains an
irrevocable grantors trust (Rabbi Trust) to
hold assets intended to fund benefit obligations under the
Companys Supplemental Retirement Savings Plan and Deferred
Compensation Plan. The assets held in the Rabbi Trust consist of
money market investments and insurance policies (in which the
Company is the owner and designated beneficiary) which are
recorded at the cash surrender value. At January 30, 2010
and January 31, 2009, the values were $12.2 million
and $14.4 million, respectively. The Company includes its
assets held in the Rabbi Trust in other assets in the
consolidated balance sheets unless the benefits are expected to
be paid within the next year, in which case the assets are
included in prepaid and other current assets. As of
January 30, 2010 and January 31, 2009,
$1.3 million and $5.5 million, respectively, were
included in prepaid and other current assets. The Companys
obligation related to the Supplemental Retirement Savings Plan
and Deferred Compensation Plan was $9.3 million and
$14.5 million at January 30, 2010 and January 31,
2009, respectively. The Company includes its obligation in other
liabilities in its consolidated balance sheets unless the
benefits are expected to be paid within the next year, in which
case, the obligation is included in accrued liabilities. As of
January 30, 2010 and January 31, 2009,
$1.3 million and $5.5 million, respectively, were
included in accrued liabilities.
Deferred Rent Obligations
Deferred
rent obligations consist of step rent and allowances from
landlords related to the Companys retail stores. Step rent
represents the difference between actual operating lease
payments due and straight-line rent expense, which is recorded
by the Company over the term of the lease, including the
build-out period (which typically ranges from 90 to
120 days prior to the store opening). This amount is
recorded as a deferred credit in the early years of the lease,
when cash payments are generally lower than straight-line rent
expense, and reduced in the later years of the lease when
payments begin to exceed the straight-line expense. Landlord
allowances are generally comprised of amounts pledged to the
Company by landlords in the form of cash or rent abatements.
These allowances are part of the negotiated terms of the lease.
In situations where cash is to be received, the Company records
an asset for the full amount of the allowance when certain
performance criteria articulated in the lease are met, typically
when the store opens, and a liability is concurrently
established.
Foreign Currency Translation
The
functional currency of the Companys foreign operations is
the local currency. The translation of the foreign currency into
U.S. dollars is performed for balance sheet accounts using
current exchange rates in effect at the balance sheet date, and
for revenue and expense accounts using average exchange rates in
effect during the reporting period. Adjustments resulting from
translation are included as a separate component of accumulated
other comprehensive loss. Foreign currency transaction gains or
losses are included in earnings.
Revenue Recognition
The Company
recognizes revenue at the
point-of-sale
or, in the case of catalog and online sales, upon estimated
receipt by the customer. Amounts charged to customers for
shipping and handling are included in net sales. The Company
provides for estimated returns based on return history, current
sales levels and projected future return levels. The Company
does not include sales tax collected from its customers in
revenue.
Gift Cards and Merchandise Credits
Upon the sale of a gift card or the issuance of a
merchandise credit, the Company records a liability representing
the purchase price of the gift card or the retail value of the
merchandise credit. The liability is relieved and revenue is
recognized when the gift card or merchandise credit is redeemed
by a customer in exchange for merchandise. Unredeemed gift cards
and merchandise credits are escheated to the appropriate
jurisdiction.
Cost of Sales, Buying and Occupancy
Cost of sales, buying and occupancy expenses are
comprised primarily of the cost of product merchandise,
including duties; inbound freight charges; shipping, handling
and distribution
F-13
THE
TALBOTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
costs associated with the Companys catalog operations;
salaries and expenses incurred by the Companys
merchandising and buying operations; and occupancy costs
associated with the Companys retail stores. Occupancy
costs consist primarily of rent and associated depreciation,
maintenance, property taxes and utilities.
Selling, General and Administrative Expenses
Selling, general and administrative expenses are
comprised primarily of the costs related to employee
compensation and benefits in the selling and administrative
support functions; catalog operation costs relating to catalog
production and telemarketing; advertising and marketing costs;
the cost of the Companys customer loyalty program; costs
related to the Companys management information systems and
support; and the costs and income associated with the
Companys credit card operations. Additionally, costs
associated with the Companys warehouse operations are
included in selling, general and administrative expenses and
include costs of receiving, inspection, warehousing and store
distribution. Warehouse operations costs in 2009, 2008 and 2007
were approximately $20.2 million, $27.6 million and
$24.6 million, respectively.
Finance Charge Income
Finance charge
income on customer accounts receivable is treated as a reduction
of selling, general and administrative expense and includes
interest and late fees.
Advertising
Advertising costs, which
include media, production and catalogs, totaled
$44.2 million, $60.2 million and $64.1 million in
2009, 2008 and 2007, respectively. Media and production costs
are expensed in the period in which the advertising first takes
place, while catalog costs are amortized over the estimated
productive selling life of the catalog, which is generally two
to four months.
Income Taxes
Deferred income taxes are
provided to recognize the effect of temporary differences
between tax and financial statement reporting. Such taxes are
provided for using enacted tax rates expected to be in place
when the temporary differences are realized. A valuation
allowance is recorded to reduce deferred tax assets if it is
determined that it is more likely than not that all or a portion
of the deferred tax asset will not be realized. If it is
subsequently determined that a deferred tax asset will more
likely than not be realized, a credit to earnings is recorded to
reduce the allowance. In determining the tax benefit resulting
from a loss from continuing operations, the Company considers
all sources of income including discontinued operations,
extraordinary items, other comprehensive income and other
components of equity.
The Company assesses its income tax positions and records tax
benefits for all years subject to examination based upon
managements evaluation of the facts, circumstances and
information available at the reporting date. For those tax
positions where it is more likely than not that a tax benefit
will be sustained, the Company records the largest amount of tax
benefit with a greater than 50 percent likelihood of being
realized upon ultimate settlement with a taxing authority having
full knowledge of all relevant information. For those income tax
positions where it is not more likely than not that a tax
benefit will be sustained, no tax benefit is recognized in the
financial statements. The Company classifies liabilities for
uncertain tax positions as non-current liabilities unless
expected to be resolved within one year. The Company classifies
interest on uncertain tax positions in interest expense,
interest income from income tax refunds in interest income, and
penalties in selling, general and administrative expenses.
Stock-Based Compensation
The Company
accounts for stock-based compensation based on the fair value of
the equity award at the grant date. The Company recognizes
stock-based compensation expense, less estimated forfeitures, on
a straight-line basis over the requisite service period of the
awards. Forfeitures are estimated at the time of grant and
revised in subsequent periods if actual forfeiture rates differ
from those estimates.
Comprehensive (Loss) Income
The
Companys comprehensive (loss) income is comprised of
reported net (loss) income plus the impact of changes in the
cumulative foreign currency translation adjustment, net of tax,
and changes in the pension and postretirement plan liabilities,
net of tax. Accumulated other comprehensive loss, which is a
component of stockholders (deficit) equity, is comprised
of cumulative foreign currency translation adjustments, net of
taxes, and cumulative changes in the pension and postretirement
plan liabilities, net of taxes, as detailed below.
F-14
THE
TALBOTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Cumulative translation adjustment, net of tax benefit of
$0.2 million, $0.7 million and $0 million,
respectively
|
|
$
|
(230
|
)
|
|
$
|
(1,125
|
)
|
|
$
|
91
|
|
Pension and postretirement plan liabilities, net of tax
(expense) benefit of $(1.0) million, $9.0 million and
$9.0 million, respectively
|
|
|
(50,949
|
)
|
|
|
(65,954
|
)
|
|
|
(13,565
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
$
|
(51,179
|
)
|
|
$
|
(67,079
|
)
|
|
$
|
(13,474
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2008, the Company established a valuation allowance for
substantially all of its deferred tax assets. The valuation
allowance of $21.3 million relating to the Companys
pension and postretirement plans in 2009 and 2008 is included in
the Pension and postretirement plan liabilities, net of tax
amounts within accumulated other comprehensive loss.
Loss Per Share
Basic loss per share is
computed by dividing loss associated with common stockholders by
the weighted average number of common shares outstanding. During
periods of income, participating securities are allocated a
proportional share of income determined by dividing total
weighted average participating securities by the sum of the
total weighted average common shares and participating
securities (the two-class method). Participating
securities have the effect of diluting both basic and diluted
income per share during periods of earnings. During periods of
loss, no loss is allocated to participating securities since
they have no contractual obligation to share in the losses of
the Company. Diluted income per share is computed after giving
consideration to the dilutive effect of stock options that are
outstanding during the period. See Note 17,
Loss Per
Share
, for further information.
Supplemental Cash Flow Information
Interest paid in 2009, 2008 and 2007 was
$18.2 million, $17.7 million and $30.8 million,
respectively. Income tax payments in 2009, 2008 and 2007 were
$8.1 million, $13.6 million and $12.1 million,
respectively.
Recently Adopted Accounting Pronouncements
Effective February 1, 2009, the Company adopted new
accounting guidance on fair value measurements with respect to
non-financial assets and liabilities measured on a non-recurring
basis. See Note 18,
Fair Value Measurements,
for
further information. The application of the fair value framework
to these fair value measurements did not have a material impact
on the Companys financial position, results of operations
or cash flows.
Effective February 1, 2009, the Company adopted new
accounting guidance regarding the calculation and reporting of
earnings per share when nonvested share-based awards have
participation rights to dividends. The new accounting guidance
has been applied retrospectively to prior periods. Adoption of
the new guidance impacted the reported loss per share for 2008
and 2007. See Note 17,
Loss Per Share
, for further
information.
In the fourth quarter of 2009, the Company adopted new
accounting guidance requiring more detailed disclosures about
the assets of defined benefit pension or other postretirement
plans. The adoption of this guidance did not impact the
Companys financial statements, but did require additional
disclosures. See Note 15,
Benefit Plans,
for further
information.
Effective February 1, 2009, the Company adopted new
accounting guidance regarding the accounting for business
combinations. Under this guidance, acquisition costs are
expensed as incurred with approximately $8.2 in such costs
recorded in 2009. See Note 20,
Subequent Events
, for
further information.
F-15
THE
TALBOTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
4.
|
Discontinued
Operations
|
The Companys discontinued operations include the Talbots
Kids, Mens and U.K. businesses, all of which ceased operations
in 2008, and the J. Jill business, which was sold on
July 2, 2009. The operating results of these businesses
have been classified as discontinued operations for all periods
presented.
On June 7, 2009, the Company entered into a Purchase
Agreement with the Purchaser for the sale of the J. Jill
business, pursuant to which the Purchaser agreed to acquire and
assume from the Company certain assets and liabilities relating
to the J. Jill business. During 2009, the Company completed the
sale for a cash purchase price of $75.0 million less
$8.8 million of adjustments based on final working capital
at closing and other adjustments as provided in the Purchase
Agreement, resulting in cash received from the Purchaser of
$66.2 million. The Purchaser was entitled to
$1.9 million of cash and cash equivalents held by the J.
Jill business at closing which was part of the assets acquired
by the Purchaser, resulting in net cash proceeds to the Company
of $64.3 million.
Under the terms of the Purchase Agreement, the Purchaser is
obligated for liabilities that arise after the closing under
assumed contracts, which include leases for 205 J. Jill stores
assigned to the Purchaser and a sublease through December 2014
of approximately 63,943 square feet of space at the
Companys 126,869 square foot leased office facility
in Quincy, Massachusetts. Certain subsidiaries of the Company
remain contingently liable for obligations and liabilities
transferred to the Purchaser, including those related to leases
and other obligations transferred to and assumed by the
Purchaser. If any material defaults were to occur which the
Purchaser does not satisfy or fully indemnify us against, it
could have a material negative impact on the Companys
financial condition and results of operations. The Company has
accrued a guarantee liability for the estimated exposure related
to these guarantees, which is subject to future adjustment and
could vary materially from estimated amounts.
During 2009, the Company recorded a $0.3 million loss on
the sale and disposal of the J. Jill business. Gains and losses
recorded in periods subsequent to the closing are due to working
capital adjustments and to adjustments to the estimated lease
liabilities relating to the 75 J. Jill stores that were not
sold, and the Quincy office space that is not being subleased or
used. As of January 30, 2010, the Company has settled the
lease liabilities of 69 of the 75 stores not acquired by the
Purchaser. Four additional store leases were settled subsequent
to January 30, 2010. Lease termination costs are recorded
at the time a store is closed or existing space is vacated.
Total cash expenditures to settle the lease liabilities for the
remaining two unsold stores will depend on the outcome of
ongoing negotiations with third parties. As a result, such costs
may vary materially from current estimates and managements
assumptions and projections may change materially. While the
Company will endeavor to negotiate the amount of remaining lease
obligations, there is no assurance it will reach acceptable
negotiated lease settlements.
The calculation of estimated lease liabilities includes the
discounted effects of future minimum lease payments from the
date of closure to the end of the remaining lease term, net of
estimated sublease income that could be reasonably obtained for
the properties, or through lease termination settlements. The
Company recorded estimated lease termination liabilities
relating to exit activities associated with its discontinued
operations, including the Quincy office space not being
subleased or used, J. Jill stores not sold, and closed Kids and
Mens stores, of $41.4 million as of August 1, 2009.
During the second half of 2009, the Company made cash payments
of approximately $18.9 million, recorded charges of
$4.8 million including accretion of interest and increases
in reserves, and recorded other income due to favorable
settlements of lease liabilities of $10.6 million,
resulting in a total estimated liability of $16.7 million
as of January 30, 2010. Of this liability, approximately
$9.4 million is expected to be paid within the next
12 months and is included within accrued liabilities as of
January 30, 2010.
Under the terms of AEON Loan, the Company was subject to certain
mandatory prepayment obligations including payment of net sale
proceeds after selling costs and amounts for other costs to
settle obligations and liabilities related to the sale and
disposal of the J. Jill business. On December 14, 2009, the
Company paid the net proceeds of approximately $8.5 million
from the sale to AEON in accordance with the loan agreement.
F-16
THE
TALBOTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The operating results of the J. Jill business and the Talbots
Kids, Mens and U.K. businesses were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Net sales
|
|
$
|
178,297
|
|
|
$
|
470,815
|
|
|
$
|
581,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(3,818
|
)
|
|
|
(416,138
|
)
|
|
|
(222,050
|
)
|
Income tax benefit
|
|
|
|
|
|
|
|
|
|
|
(33,166
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(3,818
|
)
|
|
|
(416,138
|
)
|
|
|
(188,884
|
)
|
Loss on disposal
|
|
|
(286
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of taxes
|
|
$
|
(4,104
|
)
|
|
$
|
(416,138
|
)
|
|
$
|
(188,884
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The $4.1 million loss in 2009 includes $3.8 million of
loss before income taxes, primarily due to adjustments to
estimated lease liabilities relating to the Talbots Kids and
Mens businesses and losses incurred by the J. Jill business
prior to ceasing operations in July 2009.
The 2008 loss before income taxes includes an impairment charge
of $318.4 million, reflecting the difference between J.
Jills carrying value and its estimated fair value. The
Company also included an estimate of direct costs to sell of
$1.9 million. Management determined the estimated fair
value of the J. Jill business as the amount of proceeds expected
to be received upon a sale of the business as a whole in a
transaction between market participants as of January 31,
2009. In determining fair value, the Company made assumptions
and estimates including the use of forward looking projections
to estimate the future operating results of the J. Jill
business, while also considering current market conditions.
Management used a combination of an income and a market approach
to determine the fair value of the J. Jill long-lived asset
group, which included the related goodwill. Of the
$318.4 million impairment charge recorded in 2008, the
Company allocated $78.0 million of the charge to goodwill,
reflecting a full impairment of the associated goodwill,
$68.9 million to other intangibles, $138.2 million to
property, plant, and equipment, and $33.3 million to
trademarks. The Company estimated the fair value of its
trademark based on an income approach using the
relief-from-royalty method. Amortization and depreciation of the
assets classified as held for sale ceased upon their
classification to held for sale.
The 2007 loss before income taxes of J. Jill includes an
impairment charge of $149.6 million, of which $134.0
related to goodwill and $15.6 million related to trademarks.
Discontinued operations in 2009 and 2008 do not reflect an
income tax benefit, as the Company recorded a valuation
allowance for substantially all of its deferred taxes and
incurred losses in both continuing and discontinued operations.
Income tax benefits allocated to discontinued operations during
2007 represent the incremental effect of tax benefits
attributable to these operations.
F-17
THE
TALBOTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The assets and liabilities of the J. Jill business at
January 31, 2009 are stated at estimated fair value less
estimated costs to sell, and are classified in the consolidated
balance sheet as current assets and current liabilities held for
sale as follows:
|
|
|
|
|
|
|
January 31,
|
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Merchandise inventories
|
|
$
|
50,250
|
|
Other current assets
|
|
|
9,217
|
|
Property and equipment net
|
|
|
15,899
|
|
Trademarks
|
|
|
30,200
|
|
Other intangible assets net
|
|
|
4,400
|
|
|
|
|
|
|
Assets held for sale current
|
|
$
|
109,966
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
30,262
|
|
Accrued liabilities
|
|
|
26,890
|
|
Deferred rent under lease commitments
|
|
|
35,327
|
|
Other liabilities
|
|
|
1,711
|
|
|
|
|
|
|
Liabilities held for sale current
|
|
$
|
94,190
|
|
|
|
|
|
|
In October 2007, the Company initiated a comprehensive strategic
review of its business and engaged a leading global consulting
firm to assist management in developing a long-range plan. This
review included the following areas: brand positioning,
productivity, store growth and store productivity, non-core
concepts, distribution channels, the J. Jill business, and other
operating matters. The consulting firm completed its review in
the first quarter of 2008, from which the Company developed a
three-year strategic business plan to strengthen and grow the
business. During 2008 and 2009, the Company made continued
progress in streamlining its organization, which was a major
initiative of its strategic business plan. The actions taken
during 2007, 2008 and 2009 included reducing headcount and
employee benefit costs, shuttering non-core businesses, and
reducing office space among others. In June 2008, the Company
reduced its corporate headcount by 9%, or 88 positions, and in
February 2009, further reduced its corporate headcount by an
additional 17%, or approximately 370 positions. In June 2009,
the Company reduced its corporate headcount by an additional 20%
including the elimination of open positions. In August 2009, the
Company reorganized its global sourcing activities and entered
into a buying agency agreement with Li & Fung, whereby
effective September 2009, Li & Fung is acting as the
exclusive global apparel sourcing agent for substantially all
Talbots apparel. In connection with this reorganization, the
Company closed its Hong Kong and India sourcing offices and
reduced its corporate sourcing headcount.
In connection with these initiatives, the Company incurred
restructuring charges of $10.3 million, $17.8 million
and $3.7 million during 2009, 2008 and 2007, respectively.
F-18
THE
TALBOTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is a summary of the activity and liability
balances related to restructuring actions taken in 2009, 2008
and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate - Wide
|
|
|
|
|
|
|
Strategic Initiatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
|
|
|
|
|
|
|
Severance
|
|
|
Lease-Related
|
|
|
Consulting
|
|
|
Charges (Income)
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance at February 3, 2007
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Charges
|
|
|
714
|
|
|
|
|
|
|
|
2,732
|
|
|
|
264
|
|
|
|
3,710
|
|
Cash payments
|
|
|
(36
|
)
|
|
|
|
|
|
|
(1,200
|
)
|
|
|
|
|
|
|
(1,236
|
)
|
Non-cash items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(264
|
)
|
|
|
(264
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 2, 2008
|
|
|
678
|
|
|
|
|
|
|
|
1,532
|
|
|
|
|
|
|
|
2,210
|
|
Charges (income)
|
|
|
15,921
|
|
|
|
|
|
|
|
4,042
|
|
|
|
(2,170
|
)
|
|
|
17,793
|
|
Cash payments
|
|
|
(5,717
|
)
|
|
|
|
|
|
|
(5,574
|
)
|
|
|
|
|
|
|
(11,291
|
)
|
Non-cash items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,170
|
|
|
|
2,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 31, 2009
|
|
|
10,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,882
|
|
Charges (income)
|
|
|
8,704
|
|
|
|
2,247
|
|
|
|
161
|
|
|
|
(839
|
)
|
|
|
10,273
|
|
Cash payments
|
|
|
(16,497
|
)
|
|
|
(835
|
)
|
|
|
(148
|
)
|
|
|
|
|
|
|
(17,480
|
)
|
Non-cash items
|
|
|
|
|
|
|
(641
|
)
|
|
|
|
|
|
|
839
|
|
|
|
198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 30, 2010
|
|
$
|
3,089
|
|
|
$
|
771
|
|
|
$
|
13
|
|
|
$
|
|
|
|
$
|
3,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The non-cash items primarily consist of adjustments to
stock-based compensation expense related to terminated employees
and, in 2009, also include the write-off of certain leasehold
improvements. Of the $3.9 million of restructuring
liabilities at January 30, 2010, $3.3 million,
expected to be paid during 2010, is included in accrued
liabilities and the remaining $0.6 million, expected to be
paid in years 2011 through 2016, is included in other
liabilities.
At January 30, 2010 and January 31, 2009, the Company
held 26,473,073 and 25,749,155 shares, respectively, as
treasury shares. The treasury shares include the repurchase of
shares under approved stock repurchase programs as well as the
repurchase of shares awarded under the Companys 1993 Stock
Based Incentive Plan (the 1993 Plan), the Amended
2003 Executive Stock Based Incentive Plan (the 2003
Plan), and the Amended and Restated Directors Plan (the
Directors Plan).
During 2009, 2008 and 2007, the Company repurchased 148,193,
158,314 and 20,965 shares of its common stock,
respectively, from employees to cover minimum statutory tax
withholding obligations associated with the vesting of common
stock awarded under the 2003 Plan. The shares are purchased at
the closing market price of the Companys common stock on
the date of purchase. The average purchase price paid per share
in 2009, 2008 and 2007 was $3.71, $9.46 and $24.71, respectively.
The Company also repurchased 575,725, 757,175 and 244,575
nonvested common shares at $0.01 per share in 2009, 2008 and
2007, respectively, which were forfeited upon employee
terminations.
In February 2009, the Company announced that its Board of
Directors approved the suspension of the Companys
quarterly dividend payment indefinitely in an effort to improve
its liquidity position. Accordingly, no dividends were declared
or paid in 2009. The Company declared and paid dividends
totaling $0.52 per share in 2008 and 2007, respectively.
F-19
THE
TALBOTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
7.
|
Stock-Based
Compensation
|
Amended
2003 Executive Stock Based Incentive Plan
The 2003 Plan provides for grants of stock options and nonvested
stock awards to certain key members of management. The stock
options are granted at an exercise price equal to the fair
market value at the date of grant, generally vest over a
three-year period at each anniversary date and expire no later
than ten years from the grant date.
Holders of nonvested stock awards have voting rights and are
entitled to dividends equivalent to those paid on common stock.
Upon the grant of nonvested stock, the recipient or the Company
on the recipients behalf is required to pay the par value
of $0.01 per share. If the employee terminates employment prior
to the vesting date, the nonvested stock awards are generally
forfeited to the Company through the repurchase of the shares at
the $0.01 par value. Certain shares granted as performance
accelerated nonvested stock vest at the end of a five-year
service period, however, all or a portion of the vesting may be
accelerated to three years depending on the achievement of
certain corporate financial goals. Certain other shares of
nonvested stock are time vested and generally vest between two
and four years.
The Company has reserved 9,500,000 shares of common stock
under the 2003 Plan for issuance. Any authorized but unissued
shares of common stock available for future awards under the
Companys previous 1993 Executive Stock Based Incentive
Plan were added to the 2003 Plan together with any shares under
outstanding awards under the 1993 Plan which are forfeited,
settled in cash, expired, cancelled or otherwise become
available to the Company. At January 30, 2010, there were
2,030,196 shares available for future grant under the 2003
Plan.
Amended
and Restated Directors Plan
The Directors Plan provides for grants of stock options and
restricted stock units (RSUs) to non-management
members of the Companys Board of Directors. During 2009
and 2008, the Company granted 21,000 and 84,000 stock options to
non-management directors. The 2009 grants vest over a three-year
period and expire no later than ten years from the date of
grant. The 2008 grants vest on the last day of fiscal year 2012,
with possible acceleration for certain levels of Talbots stock
performance and expire no later than ten years from grant date.
No stock options were granted under the Directors Plan during
2007.
The Company granted 28,000 RSUs annually in 2009, 2008 and 2007
to non-management directors. The RSUs generally vest over one
year, and may be mandatorily or electively deferred, in which
case the RSUs will be issued as common stock to the holder upon
departing from the Board, but not before vesting. If the RSUs
are not deferred, the RSUs will be issued as common stock upon
vesting. Holders of RSUs are entitled to dividends equivalent to
those paid on common stock but RSUs have no voting rights.
The number of shares reserved for issuance under the Directors
Plan is 1,060,000. At January 30, 2010, 366,516 shares
were available for future grant.
The Company intends to issue shares upon exercises of stock
options and future issuances of share-based awards from its
unissued reserved shares under its 2003 Plan and Directors Plan.
F-20
THE
TALBOTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Compensation
Expense
Total stock-based compensation expense related to stock options,
nonvested stock awards and RSUs was $6.4 million,
$8.6 million and $17.5 million in 2009, 2008 and 2007,
respectively. The compensation expense was classified in the
consolidated statements of operations as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Cost of sales, buying and occupancy
|
|
$
|
692
|
|
|
$
|
(129
|
)
|
|
$
|
1,603
|
|
Selling, general, and administrative
|
|
|
6,570
|
|
|
|
10,861
|
|
|
|
15,919
|
|
Restructuring charges
|
|
|
(839
|
)
|
|
|
(2,170
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,423
|
|
|
$
|
8,562
|
|
|
$
|
17,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due to greater than expected terminations, the Company revised
its forfeiture rates in 2009, 2008 and 2007 and recognized
reductions to compensation expense of $2.1 million,
$4.3 million and $2.3 million, respectively, as a
result of a change to the estimated forfeiture rates.
Compensation expense in 2008 includes $0.9 million of
additional expense due to accelerated vesting of stock awards as
a result of terminations, primarily in connection with
restructuring activities. Compensation expense in 2007 includes
$0.3 million of additional compensation expense as a result
of a modification that was made to stock options held by the
former President and Chief Executive Officer upon his retirement.
The income tax benefit recognized for stock-based compensation
was $0.0 million, $0.0 million and $7.0 million
for 2009, 2008 and 2007, respectively.
Approximately $0.0 million, $0.0 million and
$0.3 million of benefits from tax deductions in excess of
recognized compensation costs were reported as cash from
financing activities during 2009, 2008 and 2007, respectively.
The tax benefit of any realized excess tax deduction will
increase the Additional Paid In Capital (APIC) pool;
any resulting tax deficiency will be deducted from the APIC pool
to the extent available and then income tax expense will be
recognized for any remaining tax deficiency. Excess tax benefits
are recognized when realized through a reduction in taxes
payable.
Stock
Options
The Company uses the Black-Scholes option-pricing model to
measure the fair value of stock option awards on the date of
grant. Key assumptions used to apply this pricing model were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
January 30,
|
|
January 31,
|
|
February 2,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Risk-free interest rate
|
|
|
2.0%
|
|
|
|
2.6%
|
|
|
|
4.5%
|
|
Expected life of options
|
|
|
4.8 years
|
|
|
|
5.3 years
|
|
|
|
4.6 years
|
|
Expected volatility of underlying stock
|
|
|
83.9%
|
|
|
|
50.8%
|
|
|
|
38.5%
|
|
Expected dividend yield
|
|
|
0.0%
|
|
|
|
7.8%
|
|
|
|
2.4%
|
|
The risk-free interest rate represents the implied yield
available on U.S. Treasury zero-coupon bond issues with a
term approximately equal to the expected life of the option. The
expected life of an option is based on the historical experience
for the population of option holders. Expected volatility is
based on the Companys historical volatility over the
period that matches the expected life of the option. Expected
dividend yield is based on the expected annual payment of
dividends divided by the exercise price of the option award at
the date of the award. In determining the assumptions to be
used, when the Company has relied on historical data or trends,
the Company has also considered,
F-21
THE
TALBOTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
if applicable, any expected future trends that could differ from
historical results and has modified its assumptions as
applicable.
A summary of stock option activity during the year ended
January 30, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
per Share
|
|
|
(In Years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Outstanding at beginning of year
|
|
|
9,410,953
|
|
|
$
|
27.24
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,784,500
|
|
|
|
2.66
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(441,230
|
)
|
|
|
11.20
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(352,204
|
)
|
|
|
16.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
10,402,019
|
|
|
$
|
24.06
|
|
|
|
3.2
|
|
|
$
|
14,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
8,316,536
|
|
|
$
|
28.66
|
|
|
|
1.7
|
|
|
$
|
397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2009, 2008 and 2007, the Company granted 1,784,500,
628,650 and 1,695,200 stock options, with a weighted average
fair value per share of $1.75, $2.84 and $7.58, respectively.
The total grant date fair value of options that vested during
2009, 2008 and 2007 was $3.4 million, $10.6 million
and $12.3 million, respectively. The aggregate intrinsic
value of stock options exercised during 2009, 2008 and 2007 was
$0.0 million, $0.1 million and $0.9 million,
respectively.
As of January 30, 2010, there was $2.8 million of
unrecognized compensation cost related to stock options that are
expected to vest. These costs are expected to be recognized over
a weighted average period of 1.8 years.
Nonvested
Stock Awards and RSUs
The fair value of nonvested stock awards and RSUs is based on
the closing price of the Companys common stock on the date
of grant. A summary of nonvested stock awards and RSU activity
for the year ended January 30, 2010 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average Grant
|
|
|
|
Number of
|
|
|
Date Fair Value
|
|
|
|
Shares
|
|
|
per Share
|
|
|
Nonvested at beginning of year
|
|
|
2,003,660
|
|
|
$
|
16.28
|
|
Granted
|
|
|
369,689
|
|
|
|
3.04
|
|
Vested
|
|
|
(466,734
|
)
|
|
|
17.65
|
|
Forfeited
|
|
|
(575,725
|
)
|
|
|
15.11
|
|
|
|
|
|
|
|
|
|
|
Nonvested at end of year
|
|
|
1,330,890
|
|
|
$
|
12.62
|
|
|
|
|
|
|
|
|
|
|
During 2009, 2008 and 2007, the Company granted 369,689,
1,318,415 and 1,036,336 shares of nonvested stock and RSUs
with a weighted average fair value per share of $3.04, $9.05 and
$21.04, respectively. The intrinsic value of nonvested stock
awards and RSUs that vested during 2009, 2008 and 2007 was
$1.8 million, $4.3 million and $1.6 million,
respectively.
As of January 30, 2010, there was $4.2 million of
unrecognized compensation cost related to nonvested stock awards
and RSUs that are expected to vest. These costs are expected to
be recognized over a weighted average period of 1.6 years.
F-22
THE
TALBOTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
8.
|
Related
Party Transactions
|
AEON (U.S.A.) and AEON have provided financing to the Company at
times to enable it to meet its working capital and other general
and corporate needs. In addition, AEON (U.S.A.) and AEON are
party to the BPW Transactions. See Note 2,
Recent Events
and Managements Plan
, Note 12,
Debt,
and
Note 20, S
ubsequent Events,
for further information.
AEON also owns and operates Talbots stores in Japan through its
wholly-owned subsidiary, Talbots Japan Co., Ltd. (Talbots
Japan). The Company provides certain services and
purchases merchandise for Talbots Japan. The Company is
reimbursed for expenses incurred and the cost of merchandise.
During 2009, 2008 and 2007, the total charges for services and
merchandise purchases were $4.8 million, $4.4 million
and $14.8 million, respectively. At January 30, 2010
and January 31, 2009, the Company was owed
$1.0 million and $0.4 million, respectively, for these
service costs and for merchandise inventory purchases made on
behalf of Talbots Japan. Interest at a rate equal to the
Internal Revenue Service monthly short-term applicable federal
rate accrues on amounts outstanding more than 30 days after
the original invoice date. During 2009, 2008 and 2007, the
Company charged Talbots Japan interest of $0.0 million,
$0.1 million and $0.1 million, respectively.
As of January 30, 2010, the Company had an advisory
services agreement with AEON (U.S.A.) under which AEON provided
advice and services to the Company with respect to strategic
planning and other related issues concerning the Company.
Additionally, AEON (U.S.A.) maintained on behalf of the Company,
a working relationship with Japanese banks and other financial
institutions. AEON (U.S.A.) received an annual fee of
$0.25 million plus any expenses incurred, which were not
material. At January 30, 2010 and January 31, 2009,
there were no amounts owed under this agreement. The Company
also provided tax and accounting services to AEON (U.S.A.) which
were immaterial in amount.
|
|
9.
|
Customer
Accounts Receivable
|
Customer accounts receivable are as follows:
|
|
|
|
|
|
|
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Due from customers
|
|
$
|
168,887
|
|
|
$
|
173,406
|
|
Less allowance for doubtful accounts
|
|
|
(5,300
|
)
|
|
|
(4,000
|
)
|
|
|
|
|
|
|
|
|
|
Customer accounts receivable-net
|
|
$
|
163,587
|
|
|
$
|
169,406
|
|
|
|
|
|
|
|
|
|
|
Finance charge income (including interest and late fee income)
during 2009, 2008 and 2007 was $42.1 million,
$44.9 million and $41.8 million, respectively.
Changes in the allowance for doubtful accounts are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Balance, beginning of year
|
|
$
|
4,000
|
|
|
$
|
2,700
|
|
|
$
|
2,200
|
|
Charges to costs and expenses
|
|
|
8,097
|
|
|
|
5,987
|
|
|
|
3,443
|
|
Charge-offs, net of recoveries
|
|
|
(6,797
|
)
|
|
|
(4,687
|
)
|
|
|
(2,943
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
5,300
|
|
|
$
|
4,000
|
|
|
$
|
2,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-23
THE
TALBOTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
10.
|
Property
and Equipment
|
Property and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Land
|
|
$
|
10,817
|
|
|
$
|
10,817
|
|
Buildings
|
|
|
69,198
|
|
|
|
69,279
|
|
Fixtures and equipment
|
|
|
375,692
|
|
|
|
379,895
|
|
Software
|
|
|
57,508
|
|
|
|
56,140
|
|
Leasehold improvements
|
|
|
307,123
|
|
|
|
312,797
|
|
Construction in progress
|
|
|
5,292
|
|
|
|
12,715
|
|
|
|
|
|
|
|
|
|
|
Property and equipment-gross
|
|
|
825,630
|
|
|
|
841,643
|
|
Less accumulated depreciation and amortization
|
|
|
(605,226
|
)
|
|
|
(564,280
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment-net
|
|
$
|
220,404
|
|
|
$
|
277,363
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense during 2009, 2008 and 2007 was
$74.3 million, $84.5 million and $88.9 million,
respectively.
Accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Gift cards, merchandise credits, sales return reserve and other
customer related liabilities
|
|
$
|
56,032
|
|
|
$
|
55,022
|
|
Employee compensation, related tax and benefits
|
|
|
21,018
|
|
|
|
29,453
|
|
Taxes other than income and withholding
|
|
|
10,997
|
|
|
|
5,422
|
|
Accrued interest due to related party
|
|
|
6,106
|
|
|
|
31
|
|
Other accrued liabilities
|
|
|
54,024
|
|
|
|
58,428
|
|
|
|
|
|
|
|
|
|
|
Total accrued liabilities
|
|
$
|
148,177
|
|
|
$
|
148,356
|
|
|
|
|
|
|
|
|
|
|
Changes in the sales return reserve are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Balance, beginning of year
|
|
$
|
4,737
|
|
|
$
|
9,486
|
|
|
$
|
8,961
|
|
Provision for merchandise returns
|
|
|
300,737
|
|
|
|
348,359
|
|
|
|
379,788
|
|
Merchandise returned
|
|
|
(298,224
|
)
|
|
|
(353,108
|
)
|
|
|
(379,263
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
7,250
|
|
|
$
|
4,737
|
|
|
$
|
9,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-24
THE
TALBOTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of outstanding debt is as follows:
|
|
|
|
|
|
|
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Related Party Debt
|
|
$
|
486,494
|
|
|
$
|
20,000
|
|
Acquisition Debt
|
|
|
|
|
|
|
200,000
|
|
Working Capital Lines of Credit (Notes Payable to banks)
|
|
|
|
|
|
|
148,500
|
|
Revolving Credit Agreements
|
|
|
|
|
|
|
80,000
|
|
Term Loan
|
|
|
|
|
|
|
20,000
|
|
Tilton Facility Loan
|
|
|
|
|
|
|
8,377
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
486,494
|
|
|
|
476,877
|
|
Less current maturities
|
|
|
(486,494
|
)
|
|
|
(218,877
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current portion
|
|
$
|
|
|
|
$
|
258,000
|
|
|
|
|
|
|
|
|
|
|
Related
Party Debt
$250.0 Million Secured Revolving Loan Facility with
AEON
On December 28, 2009, the Company
executed an Amended and Restated Secured Revolving Loan
Agreement with AEON (the Amended Facility), which
amended and restated the $150.0 million secured revolving
loan facility executed with AEON in April 2009. Under the terms
of the Amended Facility, the principal amount of the earlier
$150.0 million secured credit facility was increased to
$250.0 million. Talbots could use funds borrowed under the
Amended Facility solely to (i) repay its outstanding
third-party bank indebtedness plus interest and other costs,
(ii) fund working capital and other general corporate
purposes up to $10.0 million subject to satisfaction of all
borrowing conditions and availability under the Amended
Facility, and (iii) pay related fees and expenses
associated with the Amended Facility. The Amended Facility was
provided pursuant to AEONs April 9, 2009 financial
support commitments, which were satisfied and discharged in full
upon the December 29, 2009 funding under this Amended
Facility for the repayment of all of the Companys
outstanding third-party bank indebtedness as described below.
Borrowings under the Amended Facility carried interest at a
variable rate equal to LIBOR plus 6.00% (LIBOR is the six-month
London interbank offer rate expressed as a percentage rate per
annum). Interest was payable monthly in arrears. At
January 30, 2010, the interest rate was 6.23%. The Amended
Facility had a scheduled maturity date of the earlier to occur
of (i) April 16, 2010 or (ii) the consummation of
the BPW Transactions, provided that the merger transaction
together with any concurrent financing results in sufficient net
cash proceeds to enable the Company to make full repayment of
its AEON debt (including under the Amended Facility).
Prior to being amended, the earlier facility was secured by
(i) a first priority security interest in substantially all
of the Companys consumer credit/charge card receivables
and (ii) a first lien mortgage on the Companys
Hingham, Massachusetts headquarters facility and Lakeville,
Massachusetts distribution facility. The Amended Facility was
secured by a lien on substantially all of the Companys
existing and after acquired assets and properties, including the
above-mentioned credit/charge card receivables and mortgaged
properties. As under the earlier facility, obligations under the
Amended Facility were unconditionally guaranteed on a joint and
several basis by certain of the Companys existing and
future direct and indirect subsidiaries.
As of December 28, 2009, the Company had outstanding
short-term indebtedness of approximately $221.0 million
under third-party bank credit facilities which were scheduled to
terminate between late December 2009 and April 2010, which had
not been extended or refinanced, as well as $20.0 million
of third-party bank indebtedness due in 2012. Entry into this
Amended Facility required the consent or waiver by each of the
third-party bank lenders under their outstanding bank
indebtedness; because such bank lender consents or waivers were
not provided, all of the
F-25
THE
TALBOTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
facilities under which this outstanding bank indebtedness was
provided have been terminated. On December 29, 2009, the
Company borrowed $245.0 million under the Amended Facility
which was used to repay this outstanding third-party bank
indebtedness, related interest and other costs and expenses.
Under the Amended Facility, a fee of $1.7 million was due
and paid to AEON upon initial funding. Prior to being amended,
the earlier facility had called for an upfront fee of
$1.5 million upon any initial borrowing, which, because no
amounts had been borrowed under that earlier facility, had not
been previously incurred.
In connection with the consummation and closing of the BPW
Transactions, the Company repaid all outstanding indebtedness
under the Amended Facility on April 7, 2010. See
Note 20,
Subsequent Events,
for further information.
$200.0 Million Term Loan Facility with
AEON
In February 2009, the Company entered
into a $200.0 million term loan facility agreement with
AEON (AEON Loan). The funds received from the AEON
Loan were used to repay all of the outstanding indebtedness
under the Acquisition Debt agreement in February 2009 as
described below.
The AEON Loan was an interest-only loan until maturity.
Borrowings under the AEON Loan carried interest at a variable
rate equal to LIBOR plus 6.00%. Interest was payable
semi-annually in arrears. At January 30, 2010, the interest
rate was 6.77%. No loan facility fee was payable as part of the
AEON Loan. The AEON Loan contained no financial covenants but
did contain certain restrictive covenants. The AEON Loan
initially matured on August 31, 2009. During the continuing
term of the loan, the Company had the option to extend the
maturity for additional six-month periods, up to the third
anniversary of the loan closing date, which was
February 27, 2012, subject to earlier termination under the
loan terms. The AEON Loan was subject to mandatory prepayment as
follows: (a) 50% of excess cash flow (as defined in the
agreement), (b) 100% of net cash proceeds of a sale of the
J. Jill business and 75% of net cash proceeds on any other asset
sales or dispositions, and (c) 100% of net cash proceeds of
any non-related party debt issuances and 50% of net cash
proceeds of any equity issuances (subject to such exceptions as
to debt or equity issuances as the lender may agree to). On
December 14, 2009, the Company paid the $8.5 million
of net proceeds from the sale of the J. Jill business to AEON in
accordance with the AEON Loan. As of January 30, 2010,
outstanding borrowings under the AEON Loan totaled
$191.5 million.
In connection with the consummation and closing of the BPW
Transactions, the Company repaid all outstanding indebtedness
under the AEON Loan on April 7, 2010. As a result of the
amended debt agreement dated December 28, 2009 and the
subsequent repayment of the debt, all amounts due have been
classified as a current liability as of January 30, 2010.
See Note 20,
Subsequent Events,
for further
information.
Term Loan with AEON (U.S.A.)
In July
2008, the Company finalized the terms of a $50.0 million
unsecured subordinated working capital term loan credit facility
with AEON (U.S.A.) (the AEON Facility). The AEON
Facility was to mature and AEON (U.S.A.)s commitment to
provide borrowings under the AEON Facility was to expire on
January 28, 2012, unless terminated earlier under the loan
terms. Under the terms of the AEON Facility, the financing was
an unsecured general obligation of the Company. The AEON
Facility was available for use by the Company and its
subsidiaries for general working capital and other appropriate
general corporate purposes. Borrowings under the AEON Facility
carried interest at a rate equal to three-month LIBOR plus 5.0%.
At January 30, 2010, the interest rate was 5.25%. The
Company paid an upfront commitment fee of 1.5% (or
$0.8 million) to AEON (U.S.A.) at the time of execution and
closing of the AEON Facility. The Company was required to pay a
fee of 0.5% per annum on the undrawn portion of the commitment,
payable quarterly in arrears. The AEON Facility originally
included covenants relating to the Company and its subsidiaries
that were substantially the same in all material respects as
under the Acquisition Debt. In March 2009, an amendment was
executed between the Company and AEON (U.S.A.) to remove the
financial covenants in their entirety from the facility. As of
January 30, 2010, the Company was fully borrowed under the
AEON Facility.
In connection with the consummation and closing of the BPW
Transactions, the Company repaid all outstanding indebtedness
under the AEON Facility on April 7, 2010. As a result of
the amended debt agreement dated
F-26
THE
TALBOTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 28, 2009 and the subsequent repayment of the debt,
all amounts due have been classified as a current liability as
of January 30, 2010. See Note 20,
Subsequent
Events,
for further information.
Third-Party
Bank Debt
Acquisition Debt
In February 2006, the
Company entered into a $400.0 million bridge loan agreement
in connection with its acquisition of J. Jill. Pursuant to the
Acquisition Debt agreement, the Company borrowed
$400.0 million to be repaid no later than July 27,
2011. On July 27, 2006, the bridge loan was converted into
a term loan (the Acquisition Debt). The Acquisition
Debt was a senior unsecured obligation of the Company. As of
January 31, 2009, the Company was not in compliance with
all of its financial covenants under the Acquisition Debt. In
February 2009, the Company entered into the AEON Loan and
borrowings under the AEON Loan were used to repay all of the
outstanding indebtedness under the Acquisition Debt agreement in
February 2009.
Working Capital Lines of Credit (Notes Payable to
Banks)
As of January 31, 2009, the
Company had $148.5 million outstanding under working
capital lines of credit with four banks. The lines were
committed through December 31, 2009. The
$148.5 million outstanding under the lines were paid in
full on December 29, 2009 using borrowings under the
Amended Facility as described above.
Revolving Credit Agreements
As of
January 31, 2009, the Company had revolving credit
agreements with three banks that provided for maximum available
borrowings of $80.0 million. Of the $80.0 million
outstanding at January 31, 2009, $28.0 million was due
in December 2009, $34.0 million was due in January 2010 and
$18.0 million was due in April 2010. The $80.0 million
outstanding under the revolving credit agreements were paid in
full on December 29, 2009 using borrowings under the
Amended Facility as described above.
Term Loan
As of January 31, 2009,
the Company had a $20.0 million term loan outstanding with
a bank that matured in April 2012. The term loan was paid in
full on December 29, 2009 using borrowings under the
Amended Facility as described above.
Tilton Loan Facility
As part of the J.
Jill acquisition, the Company assumed a real estate loan (the
Tilton Facility Loan) which was collateralized by a
mortgage lien on the operations, fulfillment and distribution
center in Tilton, New Hampshire. The Tilton Facility Loan was
paid in full in June 2009, and the Tilton facility was sold as
part of the sale to the Purchaser.
Letters of Credit
At January 31,
2009, the Company had outstanding letters of credit totaling
$31.3 million, including $16.5 million supported by a
working capital line of credit with one bank. The Company had no
letters of credit outstanding or letter of credit facilities at
January 30, 2010.
(Loss) income before taxes for 2009, 2008 and 2007, consists of
the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Domestic
|
|
$
|
(35,089
|
)
|
|
$
|
(118,749
|
)
|
|
$
|
(3,293
|
)
|
Foreign
|
|
|
(1,724
|
)
|
|
|
70
|
|
|
|
4,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(36,813
|
)
|
|
$
|
(118,679
|
)
|
|
$
|
1,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-27
THE
TALBOTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The (benefit) expense for income taxes for 2009, 2008 and 2007
consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Current (benefit) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(2,006
|
)
|
|
$
|
(24,104
|
)
|
|
$
|
19,284
|
|
State
|
|
|
4,665
|
|
|
|
398
|
|
|
|
3,610
|
|
Foreign
|
|
|
(2,308
|
)
|
|
|
|
|
|
|
1,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
351
|
|
|
|
(23,706
|
)
|
|
|
24,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred (benefit) expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(10,543
|
)
|
|
|
42,651
|
|
|
|
(17,918
|
)
|
State
|
|
|
(1,313
|
)
|
|
|
1,897
|
|
|
|
(5,108
|
)
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(11,856
|
)
|
|
|
44,548
|
|
|
|
(23,060
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(11,505
|
)
|
|
$
|
20,842
|
|
|
$
|
1,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of federal statutory income tax rate to the
Companys effective income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Tax at federal statutory rate
|
|
$
|
(12,885
|
)
|
|
$
|
(41,538
|
)
|
|
$
|
382
|
|
Adjustments resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal tax benefit
|
|
|
3,402
|
|
|
|
(706
|
)
|
|
|
(2,478
|
)
|
Foreign tax
|
|
|
(1,704
|
)
|
|
|
(361
|
)
|
|
|
|
|
Valuation allowance
|
|
|
6,447
|
|
|
|
60,975
|
|
|
|
|
|
Employment related obligations
|
|
|
1,354
|
|
|
|
2,541
|
|
|
|
1,640
|
|
Merger costs
|
|
|
2,800
|
|
|
|
|
|
|
|
|
|
Intraperiod tax allocation from other comprehensive income
|
|
|
(10,500
|
)
|
|
|
|
|
|
|
|
|
Foreign income inclusion
|
|
|
|
|
|
|
|
|
|
|
3,529
|
|
In-kind donations
|
|
|
|
|
|
|
(1,138
|
)
|
|
|
(1,248
|
)
|
Other
|
|
|
(419
|
)
|
|
|
1,069
|
|
|
|
(775
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) expense
|
|
$
|
(11,505
|
)
|
|
$
|
20,842
|
|
|
$
|
1,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The foreign income inclusion in 2007 represents a cash
distribution from the Canadian operations.
F-28
THE
TALBOTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred
tax assets (liabilities)
Net deferred tax assets or liabilities recognized in the
Companys consolidated balance sheets consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Merchandise inventories
|
|
$
|
11,993
|
|
|
$
|
16,191
|
|
Deferred rent
|
|
|
18,787
|
|
|
|
14,224
|
|
Lease commitments
|
|
|
27,184
|
|
|
|
|
|
Accrued vacation pay
|
|
|
65
|
|
|
|
3,139
|
|
Deferred compensation
|
|
|
5,543
|
|
|
|
23,917
|
|
Stock-based compensation
|
|
|
10,863
|
|
|
|
16,208
|
|
Pension and postretirement liabilities
|
|
|
32,416
|
|
|
|
30,348
|
|
Charitable contribution carryforward
|
|
|
6,755
|
|
|
|
6,423
|
|
Net operating loss carryforwards
|
|
|
54,271
|
|
|
|
31,318
|
|
Tax credit carryforwards
|
|
|
|
|
|
|
2,006
|
|
Depreciation and amortization
|
|
|
|
|
|
|
35,388
|
|
Deferred interest
|
|
|
7,172
|
|
|
|
|
|
Deferred unrecognized tax benefits
|
|
|
24,001
|
|
|
|
26,414
|
|
Restructuring charges
|
|
|
3,242
|
|
|
|
13,580
|
|
Bad debts
|
|
|
1,995
|
|
|
|
1,440
|
|
Other
|
|
|
10,579
|
|
|
|
6,633
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
214,866
|
|
|
|
227,229
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Prepaid costs
|
|
|
(2,728
|
)
|
|
|
(2,918
|
)
|
Depreciation and amortization
|
|
|
(11,890
|
)
|
|
|
|
|
Identifiable intangibles
|
|
|
(28,456
|
)
|
|
|
(41,019
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(43,074
|
)
|
|
|
(43,937
|
)
|
|
|
|
|
|
|
|
|
|
Less: Valuation allowance
|
|
|
(200,248
|
)
|
|
|
(211,748
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset (liability)
|
|
$
|
(28,456
|
)
|
|
$
|
(28,456
|
)
|
|
|
|
|
|
|
|
|
|
As a result of the significant losses in 2008, the Company
incurred cumulative losses as measured by the results for the
three most-recent fiscal years. The Company concluded there was
insufficient positive evidence that all of its deferred tax
assets will be realized in the future and accordingly, the
Company recorded a valuation allowance of $211.7 million in
2008. Of the $211.7 million, $61.0 million was
recorded in continuing operations, $21.3 million was
recorded in other comprehensive loss and $129.4 million was
in discontinued operations. The sources of income to recover the
net deferred tax assets for purposes of determining the
valuation allowance excludes deferred tax liabilities related to
the Talbots brand trademarks. Because these tax deductible
indefinite-lived intangibles are not amortized for book
purposes, it is inappropriate to assume the reversal of these
deferred tax liabilities was available to support recovery of
deferred tax assets. During 2009, the Company continued to
experience operating losses, and concluded it is not more likely
than not that its deferred tax assets will be realized in the
future. As of January 30, 2010, the Company provided a
valuation allowance of $200.2 million for its deferred tax
assets.
F-29
THE
TALBOTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As a result of the Companys decision in 2009 to freeze all
future benefits under its Pension Plans, comprehensive income
was recognized with the related tax expense of approximately
$10.5 million. As a result of the Companys
intraperiod tax allocation, the tax expense recognized in other
comprehensive income resulted in a tax benefit being recognized
in continuing operations.
As of January 30, 2010, the Company has approximately
$129.4 million of gross domestic net operating loss
carryforwards that will reduce future taxable income. The
federal and state tax effected net operating loss was
approximately $44.6 million and $9.7 million
respectively. The net operating loss for federal income tax
purposes will expire in 2029 through 2030. The state net
operating loss carryforwards will expire in 2013 through 2030.
Additionally, the Company has charitable contribution
carryforwards that begin to expire in 2012.
Uncertain
tax positions
Effective February 4, 2007, the Company adopted new
accounting guidance related to uncertain tax positions and
recognized a $4.7 million increase in its reserve for
uncertain tax positions. The charge was recorded as a reduction
to retained earnings. The Company classifies reserved for
uncertain tax positions as non-current income tax liabilities
unless expected to be resolved in one year. Upon adoption, the
Company elected to classify interest on uncertain tax positions
in interest expense, interest income from income tax refunds in
other interest income, and penalties in selling, general and
administrative expenses.
The following table summarizes the activity related to the
Companys gross unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Balance, beginning of year
|
|
$
|
38,520
|
|
|
$
|
37,908
|
|
|
|
41,545
|
|
Increases related to prior year tax positions
|
|
|
7,666
|
|
|
|
3,704
|
|
|
|
|
|
Decreases related to prior year tax positions
|
|
|
(1,946
|
)
|
|
|
(2,243
|
)
|
|
|
(3,293
|
)
|
Increases related to current year tax positions
|
|
|
293
|
|
|
|
1,597
|
|
|
|
711
|
|
Decreases related to settlements with taxing authorities
|
|
|
(7,979
|
)
|
|
|
(2,166
|
)
|
|
|
(761
|
)
|
Decreases related to lapsing of statute of limitations
|
|
|
(1,524
|
)
|
|
|
(280
|
)
|
|
|
(294
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
35,030
|
|
|
$
|
38,520
|
|
|
$
|
37,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had gross unrecognized tax benefits of approximately
$35.0 million, $38.5 million and $37.9 million as
of January 30, 2010, January 31, 2009 and
February 2, 2008, respectively, of which
$25.7 million, $33.5 million and $37.9 million,
respectively, if recognized, would impact the effective tax
rate. As of January 30, 2010, January 31, 2009 and
February 2, 2008, the total amount of accrued tax-related
interest and penalties included in other liabilities was as
follows: tax-related interest of $20.0 million,
$20.0 million and $17.7 million, respectively; and
penalties of $2.6 million, $4.4 million and
$3.4 million, respectively.
During 2009, 2008 and 2007, the amount of tax-related interest
accrued was $1.9 million, $2.3 million and
$4.0 million, respectively. In 2009, 2008 and 2007, the
amount of tax-related penalties recorded as expense (benefit)
was ($1.6) million, $1.0 million and
$0.3 million, respectively.
The Company is subject to U.S. federal income tax as well
as income tax in multiple state and foreign jurisdictions. The
Company has closed all U.S. federal income tax matters for
years through 2005. The tax years ended February 3, 2007
through January 31, 2009 are currently under
U.S. federal examination. Currently, tax years beginning in
1993 remain open to examination and are examined by various
state and foreign taxing jurisdictions. Except as described in
Note 20,
Subsequent Events
, the outcome of these
matters cannot currently be reasonably determined. The Company
believes adequate provision has been made for any potential
unfavorable financial impact.
F-30
THE
TALBOTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
14.
|
Segment
and Geographic Information
|
The Company has two separately-managed and reported business
segments which reflects how its chief operating decision-maker
reviews the results of the operations that comprise the
consolidated entity. The Company reports its operations in two
reportable segments as follows:
|
|
|
|
|
Stores derives revenues from the sale of
womens apparel, accessories and shoes through its Talbots
specialty retail and outlet stores in the United States and
Canada, and
|
|
|
|
Direct Marketing derives revenues from the sale of
womens apparel, accessories and shoes through its catalog
and Internet operations (online at www.talbots.com).
Approximately 19 distinct catalog mailings are conducted per
year.
|
The Company evaluates the operating performance of its segments
based on a direct profit measure which is calculated as net
sales less cost of goods sold and direct expenses, such as
payroll, occupancy and other direct costs.
Indirect expenses are not allocated on a segment basis,
therefore, no measure of segment income or loss is available.
Indirect expenses consist of general and administrative expenses
such as corporate costs and management information systems and
support, finance charge income, merchandising costs, costs of
oversight of the Companys Talbots charge card operations,
certain general warehousing costs, depreciation related to
corporate held assets, and corporate-wide restructuring charges.
Assets, with the exception of goodwill and trademarks, are not
allocated between segments. Therefore, no measure of segment
assets is available.
The following is certain segment information for 2009, 2008 and
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 30, 2010
|
|
|
Stores
|
|
Direct Marketing
|
|
Total
|
|
|
(In thousands)
|
|
Net sales
|
|
$
|
1,027,887
|
|
|
$
|
207,745
|
|
|
$
|
1,235,632
|
|
Direct profit
|
|
|
81,219
|
|
|
|
40,559
|
|
|
|
121,778
|
|
Depreciation and amortization
|
|
|
61,855
|
|
|
|
3,303
|
|
|
|
65,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended January 31, 2009
|
|
|
Stores
|
|
Direct Marketing
|
|
Total
|
|
|
(In thousands)
|
|
Net sales
|
|
$
|
1,261,536
|
|
|
$
|
233,634
|
|
|
$
|
1,495,170
|
|
Direct profit
|
|
|
65,866
|
|
|
|
24,689
|
|
|
|
90,555
|
|
Depreciation and amortization
|
|
|
70,957
|
|
|
|
983
|
|
|
|
71,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended February 2, 2008
|
|
|
Stores
|
|
Direct Marketing
|
|
Total
|
|
|
(In thousands)
|
|
Net sales
|
|
$
|
1,445,406
|
|
|
$
|
262,709
|
|
|
$
|
1,708,115
|
|
Direct profit
|
|
|
154,499
|
|
|
|
43,329
|
|
|
|
197,828
|
|
Depreciation and amortization
|
|
|
74,300
|
|
|
|
1,036
|
|
|
|
75,336
|
|
Indirect expenses include depreciation and amortization of
$9.1 million, $12.6 million and $13.6 million in
2009, 2008 and 2007, respectively.
F-31
THE
TALBOTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is a reconciliation of direct profit to (loss)
income from continuing operations for 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Direct profit for reportable segments
|
|
$
|
121,778
|
|
|
$
|
90,555
|
|
|
$
|
197,828
|
|
Less: Indirect expenses
|
|
|
122,252
|
|
|
|
188,944
|
|
|
|
162,624
|
|
Merger
costs
|
|
|
8,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(8,690
|
)
|
|
|
(98,389
|
)
|
|
|
35,204
|
|
Interest expense-net
|
|
|
28,123
|
|
|
|
20,290
|
|
|
|
34,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before taxes
|
|
|
(36,813
|
)
|
|
|
(118,679
|
)
|
|
|
1,093
|
|
Income tax (benefit) expense
|
|
|
(11,505
|
)
|
|
|
20,842
|
|
|
|
1,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
$
|
(25,308
|
)
|
|
$
|
(139,521
|
)
|
|
$
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has no single customer who accounts for greater than
10% of the Companys consolidated net sales.
The following is certain geographical information as of and for
the years ended January 30, 2010, January 31, 2009 and
February 2, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,200,973
|
|
|
$
|
1,449,399
|
|
|
$
|
1,653,576
|
|
Canada
|
|
|
34,659
|
|
|
|
45,771
|
|
|
|
54,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,235,632
|
|
|
$
|
1,495,170
|
|
|
$
|
1,708,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
218,167
|
|
|
$
|
274,962
|
|
|
|
|
|
Canada
|
|
|
2,237
|
|
|
|
2,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
220,404
|
|
|
$
|
277,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Plan
The Company sponsors a non-contributory defined benefit pension
plan (Pension Plan) covering substantially all
Talbots brand and shared service salaried and hourly employees
in the U.S. hired on or before December 31, 2007.
Eligible employees were enrolled in the Pension Plan after one
year of service (with at least 1,000 hours worked) and
reaching age 21. Benefits for eligible employees vest over
five years. The benefit formula for salaried and hourly
corporate employees is a final average pay benefit formula and
the benefit formula for store employees is a career pay formula.
In February 2009, the Company announced its decision to
discontinue future benefits being earned under the Pension Plan
effective May 1, 2009, and accordingly, participant benefit
accruals and additional years of credited service ceased as of
May 1, 2009. Hours of service will continue to be taken
into account for purposes of vesting and eligibility for early
retirement benefits under the Pension Plan.
F-32
THE
TALBOTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Supplemental
Executive Retirement Plans
The Company has two unfunded, non-qualified supplemental
executive retirement plans (collectively, the SERP)
for certain Talbots brand key executives impacted by Internal
Revenue Code limits on benefits, and certain current and former
key executives who defer compensation into the Companys
Deferred Compensation Plan. In February 2009, the Company
announced its decision to discontinue future benefits being
earned under the SERP effective May 1, 2009. Under the
Chief Executive Officers original employment agreement
entered into upon her 2007 hiring, the CEO has a contractual
right to an equivalent replacement benefit in the event of a
material reduction or termination of the SERP. Due to the
decision to discontinue future benefits being earned under the
SERP, the Company paid $1.2 million to the CEO during 2009
to satisfy its contractual obligation.
Postretirement
Medical Plans
Retirees are eligible for certain limited postretirement health
care benefits (Postretirement Medical Plan) if they
have met certain service and minimum age requirements. Under the
Postretirement Plan, participants pay an amount which is less
than the current actuarial cost to the Company. However, the
amounts charged to the participants are being gradually
increased such that, by 2011, participants will be charged an
amount that fully offsets the actuarial projected liability.
Three current and former executive officers of the Company
participate in a separate executive postretirement medical plan
(Executive Postretirement Medical Plan). Under the
Executive Postretirement Medical Plan, the participants and
their eligible dependents are not required to pay deductible or
co-pay amounts or contribute toward insurance premiums. Each of
the participants and their spouses will continue to be covered
under this plan upon retirement for life.
The Postretirement Medical Plan and the Executive Postretirement
Medical Plan are collectively referred to as the
Postretirement Medical Plans. The benefit costs
under these plans are accrued during the years in which the
employees provide service. The plans are not funded.
Plan
Remeasurements
Prior to fiscal 2008, the benefit plans were valued annually as
of December 31st. In accordance with new accounting
guidance in 2008, the measurement date was changed to the
Companys fiscal year end effective January 31, 2009.
Accordingly, the benefit plans were remeasured as of
January 31, 2009, resulting in a charge of
$0.9 million to retained deficit in 2008.
As a result of the decision in February 2009 to discontinue
future benefits being earned under the Pension Plan and the SERP
effective May 1, 2009, the assets and liabilities under
these plans were remeasured as of February 28, 2009. The
remeasurement resulted in a decrease to other liabilities of
$25.4 million and $2.0 million for the Pension Plan
and SERP, respectively, in 2009 and an increase to other
comprehensive income of $15.2 million and
$1.2 million, net of tax, respectively.
F-33
THE
TALBOTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the changes in the benefit
obligations and assets of the plans as of January 30, 2010
and January 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
|
|
|
|
Pension Plan
|
|
|
SERP
|
|
|
Medical Plans
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
January 30,
|
|
|
January 31,
|
|
|
January 30,
|
|
|
January 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Change in benefit obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligations at beginning of year
|
|
$
|
161,398
|
|
|
$
|
146,691
|
|
|
$
|
19,179
|
|
|
$
|
20,122
|
|
|
$
|
1,235
|
|
|
$
|
1,231
|
|
Service cost
|
|
|
|
|
|
|
9,494
|
|
|
|
|
|
|
|
398
|
|
|
|
|
|
|
|
1
|
|
Interest cost
|
|
|
9,009
|
|
|
|
9,636
|
|
|
|
1,165
|
|
|
|
1,270
|
|
|
|
74
|
|
|
|
70
|
|
Actuarial loss (gain)
|
|
|
14,725
|
|
|
|
3,103
|
|
|
|
3,415
|
|
|
|
(335
|
)
|
|
|
64
|
|
|
|
46
|
|
Curtailment
|
|
|
(25,359
|
)
|
|
|
(5,905
|
)
|
|
|
(2,035
|
)
|
|
|
(709
|
)
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
(4,016
|
)
|
|
|
(3,215
|
)
|
|
|
(1,661
|
)
|
|
|
(1,709
|
)
|
|
|
(116
|
)
|
|
|
(114
|
)
|
Adoption of January 31, 2009 measurement date
|
|
|
|
|
|
|
1,594
|
|
|
|
|
|
|
|
142
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligations at end of year
|
|
$
|
155,757
|
|
|
$
|
161,398
|
|
|
$
|
20,063
|
|
|
$
|
19,179
|
|
|
$
|
1,257
|
|
|
$
|
1,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at beginning of year
|
|
$
|
73,070
|
|
|
$
|
110,150
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Actual return (loss) on plan assets
|
|
|
24,063
|
|
|
|
(45,379
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer contributions
|
|
|
4,116
|
|
|
|
11,514
|
|
|
|
1,661
|
|
|
|
1,709
|
|
|
|
116
|
|
|
|
114
|
|
Benefits paid
|
|
|
(4,016
|
)
|
|
|
(3,215
|
)
|
|
|
(1,661
|
)
|
|
|
(1,709
|
)
|
|
|
(116
|
)
|
|
|
(114
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at end of year
|
|
$
|
97,233
|
|
|
$
|
73,070
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-34
THE
TALBOTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the funded status of the plans
and the amounts recognized in the Companys consolidated
balance sheets as of January 30, 2010 and January 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
|
|
|
|
Pension Plan
|
|
|
SERP
|
|
|
Medical Plans
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
January 30,
|
|
|
January 31,
|
|
|
January 30,
|
|
|
January 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Funded status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligations in excess of plan assets
|
|
$
|
58,524
|
|
|
$
|
88,329
|
|
|
$
|
20,063
|
|
|
$
|
19,179
|
|
|
$
|
1,257
|
|
|
$
|
1,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amounts recognized in the consolidated balance sheet:
|
|
$
|
58,524
|
|
|
$
|
88,329
|
|
|
$
|
20,063
|
|
|
$
|
19,179
|
|
|
$
|
1,257
|
|
|
$
|
1,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amounts recognized in the consolidated balance sheet
consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities (current)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,450
|
|
|
$
|
1,300
|
|
|
$
|
33
|
|
|
$
|
55
|
|
Other liabilities (non-current)
|
|
|
58,524
|
|
|
|
88,329
|
|
|
|
18,613
|
|
|
|
17,879
|
|
|
|
1,224
|
|
|
|
1,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amounts recognized in the consolidated balance sheets
|
|
$
|
58,524
|
|
|
$
|
88,329
|
|
|
$
|
20,063
|
|
|
$
|
19,179
|
|
|
$
|
1,257
|
|
|
$
|
1,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amounts recognized in accumulated other comprehensive
income consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
$
|
50,233
|
|
|
$
|
67,123
|
|
|
$
|
1,234
|
|
|
$
|
123
|
|
|
$
|
114
|
|
|
$
|
408
|
|
Prior service cost (credit)
|
|
|
|
|
|
|
78
|
|
|
|
|
|
|
|
13
|
|
|
|
(632
|
)
|
|
|
(1,809
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amounts recognized in accumulated other comprehensive loss
(income)
|
|
$
|
50,233
|
|
|
$
|
67,201
|
|
|
$
|
1,234
|
|
|
$
|
136
|
|
|
$
|
(518
|
)
|
|
$
|
(1,401
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the projected benefit obligation,
accumulated benefit obligation and fair value of plan assets for
the Pension Plan and SERP as of January 30, 2010 and
January 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan
|
|
SERP
|
|
|
January 30,
|
|
January 31,
|
|
January 30,
|
|
January 31,
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
(In thousands)
|
|
Projected benefit obligation
|
|
$
|
155,757
|
|
|
$
|
161,398
|
|
|
$
|
20,063
|
|
|
$
|
19,179
|
|
Accumulated benefit obligation
|
|
$
|
155,757
|
|
|
$
|
136,059
|
|
|
$
|
20,063
|
|
|
$
|
18,017
|
|
Fair value of plan assets
|
|
$
|
97,233
|
|
|
$
|
73,070
|
|
|
$
|
|
|
|
$
|
|
|
F-35
THE
TALBOTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of net pension expense for the Pension Plan are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Service expense-benefits earned during the period
|
|
$
|
|
|
|
$
|
9,494
|
|
|
$
|
9,742
|
|
Interest expense on projected benefit obligation
|
|
|
9,009
|
|
|
|
9,636
|
|
|
|
8,615
|
|
Expected return on plan assets
|
|
|
(7,474
|
)
|
|
|
(10,263
|
)
|
|
|
(9,331
|
)
|
Curtailment loss
|
|
|
124
|
|
|
|
17
|
|
|
|
|
|
Prior service cost net amortization
|
|
|
5
|
|
|
|
69
|
|
|
|
69
|
|
Net amortization and deferral
|
|
|
978
|
|
|
|
1,254
|
|
|
|
2,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension expense
|
|
$
|
2,642
|
|
|
$
|
10,207
|
|
|
$
|
11,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of net SERP expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Service expense-benefits earned during the period
|
|
$
|
|
|
|
$
|
398
|
|
|
$
|
478
|
|
Interest expense on projected benefit obligation
|
|
|
1,165
|
|
|
|
1,270
|
|
|
|
1,140
|
|
Curtailment (gain) loss
|
|
|
(451
|
)
|
|
|
15
|
|
|
|
|
|
Prior service cost net amortization
|
|
|
2
|
|
|
|
26
|
|
|
|
901
|
|
Net amortization and deferral
|
|
|
|
|
|
|
21
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net SERP expense
|
|
$
|
716
|
|
|
$
|
1,730
|
|
|
$
|
2,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of net postretirement medical expense are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Service expense-benefits earned during the period
|
|
$
|
|
|
|
$
|
1
|
|
|
$
|
2
|
|
Interest expense on accumulated postretirement benefit obligation
|
|
|
74
|
|
|
|
70
|
|
|
|
82
|
|
Curtailment gain
|
|
|
(442
|
)
|
|
|
|
|
|
|
|
|
Prior service cost net amortization
|
|
|
(1,519
|
)
|
|
|
(1,696
|
)
|
|
|
(1,696
|
)
|
Net amortization and deferral
|
|
|
555
|
|
|
|
633
|
|
|
|
606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net postretirement medical credit
|
|
$
|
(1,332
|
)
|
|
$
|
(992
|
)
|
|
$
|
(1,006
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-36
THE
TALBOTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components recognized in other comprehensive (income) loss
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
|
|
|
|
Pension Plan
|
|
|
SERP
|
|
|
Medical Plans
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
January 30,
|
|
|
January 31,
|
|
|
January 30,
|
|
|
January 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Net (gain) loss
|
|
$
|
(16,890
|
)
|
|
$
|
52,291
|
|
|
$
|
1,111
|
|
|
$
|
(1,047
|
)
|
|
$
|
(294
|
)
|
|
$
|
(622
|
)
|
Prior service (credit) cost
|
|
|
(78
|
)
|
|
|
(55
|
)
|
|
|
(13
|
)
|
|
|
(26
|
)
|
|
|
1,177
|
|
|
|
1,838
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in other comprehensive (income) loss
|
|
|
(16,968
|
)
|
|
|
52,236
|
|
|
|
1,098
|
|
|
|
(1,073
|
)
|
|
|
883
|
|
|
|
1,216
|
|
Total expense (credit)
|
|
|
2,642
|
|
|
|
10,207
|
|
|
|
716
|
|
|
|
1,730
|
|
|
|
(1,332
|
)
|
|
|
(992
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in net periodic (benefit) cost and other
comprehensive (income) loss
|
|
$
|
(14,326
|
)
|
|
$
|
62,443
|
|
|
$
|
1,814
|
|
|
$
|
657
|
|
|
$
|
(449
|
)
|
|
$
|
224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company makes various assumptions and estimates to calculate
its retirement plan obligations and related expense. The Company
estimates the total benefit ultimately payable to plan
participants and allocates the costs to the periods in which
services are expected to be rendered. The Company reviews its
actuarial assumptions annually based upon currently available
information.
F-37
THE
TALBOTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The key assumptions used in calculating the projected benefit
obligations and plan expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
January 30,
|
|
January 31,
|
|
February 2,
|
|
|
2010
|
|
2009
|
|
2008
|
|
Pension Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.75
|
%
|
|
|
6.50
|
%
|
|
|
6.00
|
%
|
Discount rate used to determine projected benefit obligation at
end of year
|
|
|
6.00
|
%
|
|
|
6.50
|
%
|
|
|
6.50
|
%
|
Expected long-term rate of return on plan assets
|
|
|
8.50
|
%
|
|
|
9.00
|
%
|
|
|
9.00
|
%
|
Rate of future compensation increases
|
|
|
N/A
|
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
Rate of future compensation increases used to determine
projected benefit obligation at end of year
|
|
|
N/A
|
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
SERP:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.75
|
%
|
|
|
7.00
|
%
|
|
|
6.00
|
%
|
Discount rate used to determine projected benefit obligation at
end of year
|
|
|
5.50
|
%
|
|
|
6.50
|
%
|
|
|
6.25
|
%
|
Rate of future compensation increases
|
|
|
N/A
|
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
Rate of future compensation increases used to determine
projected benefit obligation at end of year
|
|
|
N/A
|
|
|
|
4.00
|
%
|
|
|
4.00
|
%
|
Postretirement Medical Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.50
|
%
|
|
|
6.25
|
%
|
|
|
6.00
|
%
|
Discount rate used to determine projected benefit obligation at
end of year
|
|
|
5.50
|
%
|
|
|
6.50
|
%
|
|
|
6.25
|
%
|
Initial healthcare cost trend rate-projected benefit obligations
|
|
|
7.00
|
%
|
|
|
9.00
|
%
|
|
|
10.00
|
%
|
Initial healthcare cost trend rate-periodic expense
|
|
|
8.00
|
%
|
|
|
10.00
|
%
|
|
|
11.00
|
%
|
Ultimate health care cost trend rate
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
|
|
5.00
|
%
|
The assumed discount rate is based, in part, upon a discount
rate modeling process that applies a methodology which matches
the future benefit payment stream to a discount yield curve for
the plan. The discount rate is principally used to calculate the
actuarial present value of the Companys obligation and
expense for the period. To the extent the discount rate
increases or decreases, the Companys obligation and
expense is decreased or increased accordingly.
The expected long-term rate of return on assets is the weighted
average rate of earnings expected to be received on the funds
invested or to be invested to satisfy the pension obligation.
The expected long-term rate of return on assets is based on an
analysis which considers actual net returns for the Pension Plan
since inception, Ibbotson Associates historical investment
returns data for the major classes of investments in which the
Company invests (debt, equity, and foreign securities) for the
period since the Pension Plans inception and for the
longer commencing periods when the return data was first
tracked, and expectations of future market returns from outside
sources. To the extent the actual rate of return on assets is
less than or more than the assumed rate, the annual pension
expense is not immediately affected. Rather, the loss or gain
adjusts future pension expense over approximately five years.
The market related value of plan assets is a calculated value
that recognizes the changes in fair value by adjusting the
current market value of plan assets by the difference between
actual investment return versus expected investment return over
the last five years at a rate of twenty percent per year. The
market related value of plan assets is determined consistently
for all classes of assets.
F-38
THE
TALBOTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The rate of future compensation increases is the average annual
compensation increase expected over the remaining employment
periods for the participating employees. This rate is
principally used to estimate the pension obligation and annual
pension expense. Due to the decision in February 2009 to
discontinue future benefits being earned under the Pension Plan
and SERP, the average rate of future compensation increases is
no longer applicable.
The long-term strategic investment objectives of the Pension
Plan include preserving the funded status of the plan and
balancing risk and return. The Company does not allow the plan
to invest in the common stock of the Company, AEON or other soft
goods retailers. The Company periodically evaluates its asset
allocation.
Information regarding allocation of Pension Plan assets is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target
|
|
|
January 30, 2010
|
|
|
January 31, 2009
|
|
|
|
Allocation
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(In thousands)
|
|
|
Equity securites, including foreign securities of $10,892 and
$5,967 at January 30, 2010 and January 31, 2009,
respectively
|
|
|
70
|
%
|
|
$
|
68,344
|
|
|
|
70
|
%
|
|
$
|
55,445
|
|
|
|
76
|
%
|
Debt securities
|
|
|
30
|
%
|
|
|
27,105
|
|
|
|
28
|
%
|
|
|
13,992
|
|
|
|
19
|
%
|
Cash and money market investments
|
|
|
|
|
|
|
1,784
|
|
|
|
2
|
%
|
|
|
3,633
|
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
97,233
|
|
|
|
100
|
%
|
|
$
|
73,070
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 30, 2010, the fair value of the Pension Plan
assets was $97.2 million. The plans investments were
classified as 48% Level 1, 52% Level 2 and 0%
Level 3 based on inputs used to determine their fair value.
There were no fair value measurements classified as Level 3
at January 31, 2009, therefore, there are no changes in
Level 3 measurements in 2009.
Expected benefit payments under the benefit plans are as follows
at January 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
|
Postretirement
|
|
|
Plan
|
|
SERP
|
|
Medical Plans
|
|
|
(In thousands)
|
|
Expected benefit payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
$
|
3,915
|
|
|
$
|
1,447
|
|
|
$
|
34
|
|
2011
|
|
|
4,926
|
|
|
|
1,461
|
|
|
|
|
|
2012
|
|
|
4,739
|
|
|
|
1,550
|
|
|
|
|
|
2013
|
|
|
5,214
|
|
|
|
1,569
|
|
|
|
|
|
2014
|
|
|
5,790
|
|
|
|
1,606
|
|
|
|
|
|
2015 to 2019
|
|
|
37,712
|
|
|
|
8,021
|
|
|
|
|
|
When required to fund the Pension Plan, the Companys
policy is to contribute amounts that are deductible for federal
income tax purposes. Based upon current available information,
the Company is required to contribute approximately
$4.6 million to the Pension Plan in 2010. During 2009 and
2008, the Company made required contributions of
$4.1 million and $11.5 million, respectively. No
voluntary contributions were made in 2009 or 2008, and the
Company does not expect to make a voluntary contribution in 2010.
In 2010, the Company expects to contribute $1.4 million and
$0.0 million to the SERP and the Postretirement Medical
Plans, respectively.
F-39
THE
TALBOTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The amounts that will be amortized from accumulated other
comprehensive (income) loss to net period expense in 2010 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
|
Postretirement
|
|
|
Plan
|
|
SERP
|
|
Medical Plans
|
|
|
(In thousands)
|
|
Net actuarial loss
|
|
$
|
418
|
|
|
$
|
|
|
|
$
|
400
|
|
Prior service cost
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(1,520
|
)
|
The Company has a qualified defined contribution 401(k) plan
which covers substantially all Talbots employees. Eligible
employees may elect to invest, at their discretion, up to 50% of
their total investment in the Companys common stock. In
2009, the Company discontinued its contributions to the 401(k)
and nonqualified defined contribution plans indefinitely as part
of a cost savings initiative effective February 2009. The
Company resumed contributions to the 401(k), matching 50% of an
employees contribution up to a maximum of 3% of the
participants compensation, effective January 2010. In 2008
and 2007, the Company made matching contributions of 50% of an
employees contribution up to a maximum of 6% of the
participants compensation. Company contributions to the
401(k) plan totaled $0.3 million, $4.2 million and
$3.7 million in 2009, 2008 and 2007, respectively.
|
|
16.
|
Commitments
and Contingencies
|
Commitments
The following table summarizes the Companys contractual
commitments as of January 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
|
|
Total
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
Thereafter
|
|
|
|
(In thousands)
|
|
|
Operating leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
$
|
641,312
|
|
|
$
|
130,018
|
|
|
$
|
123,804
|
|
|
$
|
104,663
|
|
|
$
|
86,486
|
|
|
$
|
67,541
|
|
|
$
|
128,800
|
|
Equipment
|
|
|
8,131
|
|
|
|
3,997
|
|
|
|
2,233
|
|
|
|
1,784
|
|
|
|
117
|
|
|
|
|
|
|
|
|
|
Merchandise purchases
|
|
|
206,263
|
|
|
|
206,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction contracts
|
|
|
857
|
|
|
|
857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other contractual commitments
|
|
|
6,493
|
|
|
|
6,229
|
|
|
|
233
|
|
|
|
26
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
863,056
|
|
|
$
|
347,364
|
|
|
$
|
126,270
|
|
|
$
|
106,473
|
|
|
$
|
86,608
|
|
|
$
|
67,541
|
|
|
$
|
128,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
The Company conducts the
major part of its operations in leased premises with lease terms
expiring at various dates through fiscal 2023. Most store leases
provide for base rentals plus contingent rentals which are a
function of sales volume and also provide that the Company pay
real estate taxes, maintenance and other operating expenses
applicable to the leased premises. Most store leases also
provide renewal options and contain rent escalation clauses. The
Company also leases store computer and other corporate equipment
with lease terms generally ranging between three and five years.
Included in the schedule above are two executed leases relating
to Talbots stores not yet opened at January 30, 2010. The
schedule also includes the remaining lease payments for eight
Talbots Kids and Mens stores, the Quincy facility and the former
J. Jill stores not purchased by the Purchaser for which the
Company has not reached lease settlements, whose terms expire at
various dates through fiscal 2016.
Rent expense during 2009, 2008 and 2007 was $126.0 million,
$127.7 million and $121.8 million, respectively. This
includes $2.0 million, $2.1 million and
$1.8 million, respectively, of percentage rent and
contingent rental expense and $0.6 million,
$0.2 million and $0.2 million, respectively, of
sublease rental income. As of January 30, 2010, the
F-40
THE
TALBOTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Company expects to receive rental income under existing
noncancelable subleases of $0.5 million in 2010,
$0.5 million in 2011, $0.5 million in 2012,
$0.4 million in 2013, $0.4 million in 2014 and
$1.2 million thereafter.
Merchandise Purchases
The Company generally
makes purchase commitments up to six to nine months in advance
of its selling season. The Company does not maintain any
long-term or exclusive commitments or arrangements to purchase
from any vendor.
Construction Contracts
The Company enters
into contracts to facilitate the build-out and renovation of its
stores.
Other Contractual Commitments
The Company
routinely enters into contracts with vendors for products and
services in the normal course of operation, including contracts
for insurance, maintenance on equipment, services and
advertising. These contracts vary in their terms but generally
carry
30-day
to three-year terms.
Guarantees
As described in Note 4,
Discontinued Operations
,
under the terms of the Purchase Agreement, the Purchaser is
obligated for liabilities that arise after the closing under
assumed contracts, which include leases for 205 J. Jill stores
assigned to the Purchaser as part of the transaction and a
sublease through December 2014 of approximately
63,943 square feet of space at the Companys
126,869 square foot leased office facility in Quincy,
Massachusetts. In connection with closing the Companys
U.K. stores in 2008, three store leases were assigned to a local
retailer who assumed the primary lease obligations. The Company
remains secondarily liable as a guarantor in the event the local
retailer does not fulfill its lease obligations. The Company has
accrued a guarantee liability for the estimated exposure related
to these guarantees.
At January 30, 2010, the future aggregate lease payments
for which the Company remains contingently obligated, as
transferor or sublessor, total $143.3 million extending to
various dates in fiscal 2020. The table above excludes these
contingent liabilities.
Legal
Proceedings
On January 12, 2010, a 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 (the
Chancery Court) against the Company, the
Companys board of directors; AEON (U.S.A.), Inc.; BPW
Acquisition Corp. (BPW); Perella Weinberg Partners
LP, a financial advisor to the audit committee of the Board of
Directors of the Company and an affiliate of Perella Weinberg
Partners Acquisition LP, 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 violations of certain sections
of the Delaware General Corporation Law and Talbots bylaws
in connection with the negotiation and approval of the merger
agreement between Talbots and BPW. The complaint sought
injunctive, declaratory and monetary relief, including an order
to enjoin the consummation of the merger and related
transaction. On March 6, 2010, a Stipulation (the
Stipulation) entered into by the Company, the
Companys board of directors; AEON (U.S.A.), Inc.; BPW,
Perella Weinberg Partners LP, the Vice Chairman, Chief Executive
Officer, and Senior Vice President of BPW and John C. Campbell
(Plaintiff) was filed in the Chancery Court with
respect this action. Pursuant to the Stipulation, Plaintiff
withdrew its motion for a preliminary injunction to enjoin
consummation of the merger and related transactions between the
Company and BPW. In exchange, the Company agreed to implement
and maintain certain corporate governance measures, subject to
the terms and conditions specified in the Stipulation. The
Stipulation did not constitute dismissal, settlement or
withdrawal of Plaintiffs claims in the litigation and
there is no assurance the parties will finally settle and
discharge such claims. Defendants have moved to dismiss the
complaint and intend to continue to defend against the claims
vigorously. The Company cannot accurately predict the likelihood
of a favorable or unfavorable outcome or quantify the amount or
range of potential financial impact, if any.
F-41
THE
TALBOTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As described in Note 3,
Summary of Significant
Accounting Policies
, effective February 1, 2009, the
Company adopted new accounting guidance regarding the
calculation and reporting of (loss) income per share when
nonvested restricted stock and RSUs are participating securities
as a result of their right to participate in dividends prior to
vesting. The new guidance has been applied retrospectively to
prior periods.
The calculation of loss per share under the two-class method and
changes to the previously reported basic and diluted loss per
share in 2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
January 30,
|
|
|
January 31,
|
|
|
February 2,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except per share data)
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income
|
|
$
|
(25,308
|
)
|
|
$
|
(139,521
|
)
|
|
$
|
43
|
|
Dividends paid to participating securities
|
|
|
|
|
|
|
(850
|
)
|
|
|
(673
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss associated with common stockholders
|
|
$
|
(25,308
|
)
|
|
$
|
(140,371
|
)
|
|
$
|
(630
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
53,797
|
|
|
|
53,436
|
|
|
|
53,006
|
|
Basic loss per share as currently reported
|
|
$
|
(0.47
|
)
|
|
$
|
(2.63
|
)
|
|
$
|
(0.01
|
)
|
as previously reported
|
|
|
|
|
|
$
|
(2.61
|
)
|
|
$
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income
|
|
$
|
(25,308
|
)
|
|
$
|
(139,521
|
)
|
|
$
|
43
|
|
Dividends paid to participating securities
|
|
|
|
|
|
|
(850
|
)
|
|
|
(673
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss associated with common stockholders
|
|
$
|
(25,308
|
)
|
|
$
|
(140,371
|
)
|
|
$
|
(630
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
53,797
|
|
|
|
53,436
|
|
|
|
53,006
|
|
Diluted loss per share as currently reported
|
|
$
|
(0.47
|
)
|
|
$
|
(2.63
|
)
|
|
$
|
(0.01
|
)
|
as previously reported
|
|
|
|
|
|
$
|
(2.61
|
)
|
|
$
|
|
|
Net loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(29,412
|
)
|
|
$
|
(555,659
|
)
|
|
$
|
(188,841
|
)
|
Dividends paid to participating securities
|
|
|
|
|
|
|
(850
|
)
|
|
|
(673
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss associated with common stockholders
|
|
$
|
(29,412
|
)
|
|
$
|
(556,509
|
)
|
|
$
|
(189,514
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
53,797
|
|
|
|
53,436
|
|
|
|
53,006
|
|
Basic loss per share as currently reported
|
|
$
|
(0.55
|
)
|
|
$
|
(10.41
|
)
|
|
$
|
(3.58
|
)
|
as previously reported
|
|
|
|
|
|
$
|
(10.40
|
)
|
|
$
|
(3.56
|
)
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(29,412
|
)
|
|
$
|
(555,659
|
)
|
|
$
|
(188,841
|
)
|
Dividends paid to participating securities
|
|
|
|
|
|
|
(850
|
)
|
|
|
(673
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss associated with common stockholders
|
|
$
|
(29,412
|
)
|
|
$
|
(556,509
|
)
|
|
$
|
(189,514
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
53,797
|
|
|
|
53,436
|
|
|
|
53,006
|
|
Diluted loss per share as currently reported
|
|
$
|
(0.55
|
)
|
|
$
|
(10.41
|
)
|
|
$
|
(3.58
|
)
|
as previously reported
|
|
|
|
|
|
$
|
(10.40
|
)
|
|
$
|
(3.56
|
)
|
F-42
THE
TALBOTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The computation of diluted loss per share excludes outstanding
stock options of 10.4 million, 9.4 million and
9.5 million in 2009, 2008 and 2007, respectively, since the
effect of including these securities would have been
antidilutive.
|
|
18.
|
Fair
Value Measurements
|
As discussed in Note 3,
Summary of Significant
Accounting Policies
, the Company uses a three-tier valuation
hierarchy to measure fair value.
The Companys financial instruments at January 30,
2010 consist primarily of cash and cash equivalents, accounts
receivable, investments in the Rabbi Trust, pension plan assets,
accounts payable and long-term debt. The Company believes the
carrying value of cash and cash equivalents, accounts receivable
and accounts payable approximates their fair values due to their
short-term nature. The money market investments in the Rabbi
Trust are recorded at fair value based on quoted market prices
in active markets for identical assets (Level 1
Measurements), and the Trusts investments in life
insurance policies are recorded at their cash surrender values,
which is consistent with settlement value and is not a fair
value mesurement. See Note 15,
Benefit Plans
, for
information regarding the fair value of the Companys
pension plan assets.
We monitor our store portfolio to identify stores that are
underperforming and close stores when appropriate. When we
determine that a store is underperforming or is to be closed, we
reassess the expected future cash flows of the store, which in
some cases results in an impairment charge.
The following table summarizes the non-financial assets for the
year ended January 30, 2010 that were measured at fair
value on a nonrecurring basis in periods subsequent to initial
recognition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
Net
|
|
|
Quoted Prices
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
in Active
|
|
|
Other
|
|
|
Significant
|
|
|
Total Losses
|
|
|
|
Value at
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
Year Ended
|
|
|
|
January 30,
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
January 30,
|
|
|
|
2010
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Long-lived assets held and used
|
|
$
|
2,493
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,493
|
|
|
$
|
1,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,493
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,493
|
|
|
$
|
1,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-43
THE
TALBOTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
19.
|
Unaudited
Quarterly Results
|
Unaudited quarterly financial information for 2009 and 2008 is
set forth below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 Quarter Ended
|
|
|
|
May 2,
|
|
|
August 1,
|
|
|
October 31,
|
|
|
January 30,
|
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
Net sales
|
|
$
|
306,175
|
|
|
$
|
304,641
|
|
|
$
|
308,891
|
|
|
$
|
315,925
|
|
Gross profit
|
|
|
95,019
|
|
|
|
84,402
|
|
|
|
123,300
|
|
|
|
111,633
|
|
(Loss) income from continuing operations
|
|
|
(18,818
|
)
|
|
|
(20,481
|
)
|
|
|
15,464
|
|
|
|
(1,473
|
)
|
(Loss) income from discontinued operations, net of tax
|
|
|
(4,752
|
)
|
|
|
(4,004
|
)
|
|
|
(911
|
)
|
|
|
5,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(23,570
|
)
|
|
$
|
(24,485
|
)
|
|
$
|
14,553
|
|
|
$
|
4,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.35
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
0.29
|
|
|
$
|
(0.03
|
)
|
Discontinued operations
|
|
|
(0.09
|
)
|
|
|
(0.07
|
)
|
|
|
(0.02
|
)
|
|
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(0.44
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
0.27
|
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.35
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
0.28
|
|
|
$
|
(0.03
|
)
|
Discontinued operations
|
|
|
(0.09
|
)
|
|
|
(0.07
|
)
|
|
|
(0.02
|
)
|
|
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(0.44
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
0.26
|
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
53,621
|
|
|
|
53,827
|
|
|
|
53,856
|
|
|
|
53,884
|
|
Diluted
|
|
|
53,621
|
|
|
|
53,827
|
|
|
|
55,081
|
|
|
|
54,497
|
|
Market price data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
4.57
|
|
|
$
|
6.96
|
|
|
$
|
11.80
|
|
|
$
|
11.26
|
|
Low
|
|
$
|
2.01
|
|
|
$
|
2.05
|
|
|
$
|
5.10
|
|
|
$
|
6.61
|
|
F-44
THE
TALBOTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008 Quarter Ended
|
|
|
|
May 3,
|
|
|
August 2,
|
|
|
November 1,
|
|
|
January 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
|
(In thousands)
|
|
|
Net sales
|
|
$
|
414,774
|
|
|
$
|
395,209
|
|
|
$
|
357,275
|
|
|
$
|
327,912
|
|
Gross profit
|
|
|
168,062
|
|
|
|
116,708
|
|
|
|
112,771
|
|
|
|
47,844
|
|
Income (loss) from continuing operations
|
|
|
18,506
|
|
|
|
(11,951
|
)
|
|
|
(14,763
|
)
|
|
|
(131,313
|
)(b)
|
Loss from discontinued operations, net of tax
|
|
|
(16,865
|
)
|
|
|
(13,057
|
)
|
|
|
(155,996
|
)(a)
|
|
|
(230,220
|
)(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,641
|
|
|
$
|
(25,008
|
)
|
|
$
|
(170,759
|
)
|
|
$
|
(361,533
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.35
|
|
|
$
|
(0.22
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(2.45
|
)
|
Discontinued operations
|
|
|
(0.32
|
)
|
|
|
(0.25
|
)
|
|
|
(2.92
|
)
|
|
|
(4.30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
0.03
|
|
|
$
|
(0.47
|
)
|
|
$
|
(3.20
|
)
|
|
$
|
(6.75
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.35
|
|
|
$
|
(0.22
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(2.45
|
)
|
Discontinued operations
|
|
|
(0.32
|
)
|
|
|
(0.25
|
)
|
|
|
(2.92
|
)
|
|
|
(4.30
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
0.03
|
|
|
$
|
(0.47
|
)
|
|
$
|
(3.20
|
)
|
|
$
|
(6.75
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
53,302
|
|
|
|
53,442
|
|
|
|
53,489
|
|
|
|
53,512
|
|
Diluted
|
|
|
53,505
|
|
|
|
53,442
|
|
|
|
53,489
|
|
|
|
53,512
|
|
Cash dividends declared per share:
|
|
$
|
0.13
|
|
|
$
|
0.13
|
|
|
$
|
0.13
|
|
|
$
|
0.13
|
|
Market price data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
14.11
|
|
|
$
|
14.70
|
|
|
$
|
15.48
|
|
|
$
|
9.21
|
|
Low
|
|
$
|
7.26
|
|
|
$
|
7.08
|
|
|
$
|
7.67
|
|
|
$
|
1.19
|
|
|
|
|
(a)
|
|
In the third quarter of 2008, the Company recorded impairment
charges related to J. Jill of $185.9 million, which are
included in the loss from discontinued operations, net of tax.
|
|
(b)
|
|
In the fourth quarter of 2008, the Company recorded a valuation
allowance of $61.0 million for substantially all of its net
deferred tax assets and restructuring charges of
$7.6 million, which are included in the loss from
continuing operations. The Company also recorded an additional
impairment charge related to J. Jill of $131.7 million and
a valuation allowance of $129.4 million which are included
in the loss from discontinued operations, net of tax.
|
Merger
with BPW and Related Transactions
At a special meeting of BPW stockholders on February 24,
2010, the stockholders approved the merger proposal and the BPW
Transactions were completed on April 7, 2010. Under the
terms of the merger proposal, BPW was merged with and into a
wholly-owned subsidiary of Talbots. Talbots was determined to be
the accounting acquirer and the merger has been accounted for as
an acquisition by Talbots as of April 7, 2010. The Company
acquired BPW and entered into the BPW Transactions in order
satisfy its maturing outstanding indebtedness to AEON and AEON
(U.S.A.), and to substantially reduce the Companys level
of outstanding indebtedness and significantly deleverage its
balance sheet.
F-45
THE
TALBOTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
BPW was a special purpose acquisition company, and as such, has
no significant commercial operations. Its only significant
pre-combination assets are cash and cash equivalents which are
already recognized at fair value. No goodwill or intangible
assets will arise through the accounting for this transaction.
Talbots will record its shares of common stock and warrants
issued in the merger at the fair value of BPWs net
monetary assets received as of April 7, 2010, estimated to
be $333.1 million, as follows:
|
|
|
|
|
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
Cash and cash equivalents
|
|
$
|
112
|
|
Prepaid expenses
|
|
|
84
|
|
Investment in trust account
|
|
|
333,448
|
|
|
|
|
|
|
Total assets acquired at fair value
|
|
|
333,644
|
|
Less liabilities assumed:
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
544
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
333,100
|
|
|
|
|
|
|
In connection with the merger, the Company issued
(i) 38.6 million shares of Talbots common stock in
exchange for all outstanding shares of BPW common stock,
(ii) 2.8 million shares of Talbots common stock in
exchange for 28.8 million outstanding BPW warrants and
(iii) 17.2 million Talbots warrants in exchange for
17.5 million outstanding BPW warrants. The Talbots warrants
issued to the BPW warrantholders are immediately exercisable at
$14.85 per share, have a stated term of five years from
completion of the merger, and beginning after one year from the
date of issuance, are subject to accelerated expiration under
certain conditions. As of the closing date of the BPW
Transactions, 3.5 million BPW warrants remained outstanding
and are exercisable for 0.9853 shares of Talbots common
stock at an exercise price of $7.50 per share.
In connection with the consummation and closing of the BPW
Transactions, the Company repaid all outstanding AEON and AEON
(U.S.A.) indebtedness on April 7, 2010 at its principal
value plus accrued interest and other costs for total cash
consideration of $488.2 million, and repurchased and
retired 29.9 million shares of Talbots common stock owned
by AEON (U.S.A.) by issuing warrants to AEON (U.S.A.) to
purchase one million shares of Talbots common stock. The one
million warrants issued to AEON (U.S.A.) are immediately
exercisable at $13.47 per share, the closing market price of
Talbots common stock on April 7, 2010, have a stated term
of five years from completion of the merger, and beginning after
one year from the date of issuance, are subject to accelerated
expiration under certain conditions.
Since the debt extinguishment transaction was between related
parties, the Company recorded no gain or loss on the
extinguishment and the difference between the reacquisition
price and the net carrying value of the debt, consisting of
$1.6 million of unamortized deferred financing costs, was
recorded as a capital transaction by a charge to additional
paid-in capital. As a result of the BPW Transactions, the
Company will become subject to annual limitations on the use of
its existing net operating losses (NOL) and create
an uncertain tax position that may reduce a portion of the
Companys NOL. The computation of the annual limitation and
uncertain tax position has not been finalized. Based on the
Companys current estimates, there will be an increase in
unrecognized tax benefits of approximately $20.0 million
that will result in a reduction in net deferred tax assets
before consideration of any valuation allowance.
Immediately following the closing of the BPW Transactions,
stockholders equity was increased by approximately
$330.0 million, before our acquisition costs, and
outstanding borrowings decreased by $361.5 million.
In connection with the merger, the Company executed a new senior
secured revolving credit agreement with a third-party lender
which provides borrowing capacity up to $200 million,
subject to availability and satisfaction of all borrowing
conditions. The Credit Facility is an asset-based revolving
credit facility that permits the Company to borrow up to the
lesser of (a) $200.0 million and (b) the
borrowing base, calculated as a percentage of the value of
F-46
THE
TALBOTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
eligible credit card receivables and the net orderly liquidation
value of eligible private label credit card receivables,
eligible inventory in the United States and eligible in-transit
inventory from international vendors (subject to certain caps
and limitations), as set forth in the agreement, minus the
lesser of (x) $20.0 million and (y) 10% of the
borrowing base. Loans made pursuant to the immediately preceding
sentence carry interest, at the Companys election, at
either (a) the three-month LIBOR plus 4.00% to 4.50%
depending on availability thresholds or (b) the base rate
plus 3.00% to 3.50%. The agreement matures in October 2013,
subject to earlier termination as set forth in the agreement.
All outstanding amounts, including principal and related accrued
interest, are due on the maturity date.
All obligations are secured by (i) a first priority
perfected lien and security interest in substantially all of the
Companys assets and any guarantor from time to time and
(ii) a first lien mortgage on the Companys Hingham,
Massachusetts headquarters facility and Lakeville, Massachusetts
distribution facility. The Credit Facility contains certain
restrictive covenants but does not contain financial covenants
separate from the borrowing base computation. The Credit
Facility contains negative covenants prohibiting the Company and
its subsidiaries, with certain exceptions, from among other
things, incurring indebtedness and contingent obligations,
making investments, intercompany loans and capital
contributions, and disposing of property or assets. Borrowings
under this Credit Facility will be classified as a current
liability as the Credit Facility requires repayment of
outstanding borrowings with substantially all cash collected by
the Company and the existence of a subjective acceleration
clause. Such provisions do not affect the final maturity date of
the Credit Facility. On the closing date, the Company borrowed
$125.0 million under the Credit Facility.
The Company estimates transaction costs and expenses in
connection with the BPW Transactions of approximately
$47.7 million. Of the total transaction costs and expenses,
approximately $8.2 million was expensed as merger costs in
2009. Approximately $30.0 million of merger costs and
related charges are estimated to be expensed in 2010 and 2011.
Approximately $7.5 million of the transaction costs and
expenses relate to the new senior secured revolving credit
facility and were recorded as deferred financing costs which
will be amortized to interest expense over the 3.5-year life of
the facility. Approximately $2.0 million of the transaction
costs and expenses relate to the registration and issuance of
the common stock and warrants which were charged to additional
paid-in capital.
A detail of the merger costs incurred in 2009 is as follows:
|
|
|
|
|
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
Merger costs:
|
|
|
|
|
Investment banking
|
|
$
|
4,941
|
|
Accounting and legal
|
|
|
2,598
|
|
Other costs
|
|
|
677
|
|
|
|
|
|
|
Total merger costs
|
|
$
|
8,216
|
|
|
|
|
|
|
The following unaudited pro-forma summary financial information
presents the operating results of the combined company assuming
the merger and related events, including the BPW Transactions,
had been completed on February 3, 2008, the beginning of
Talbots fiscal year ended January 31, 2009. The estimated
future transaction costs are not reflected in the following pro
forma information in accordance with the rules for preparation
of pro forma statement of operations data.
F-47
THE
TALBOTS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Year Ended
|
|
|
January 30, 2010
|
|
January 31, 2009
|
|
|
Actual
|
|
Pro Forma
|
|
Actual
|
|
Pro Forma
|
|
|
(In thousands, except per share amounts)
|
|
Net sales
|
|
$
|
1,235,632
|
|
|
$
|
1,235,632
|
|
|
$
|
1,495,170
|
|
|
$
|
1,495,170
|
|
Operating loss
|
|
|
(8,690
|
)
|
|
|
(10,370
|
)
|
|
|
(98,389
|
)
|
|
|
(98,858
|
)
|
Loss from continuing operations
|
|
|
(25,308
|
)
|
|
|
(8,133
|
)
|
|
|
(139,521
|
)
|
|
|
(132,523
|
)
|
Loss from continuing operations per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.47
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(2.63
|
)
|
|
$
|
(2.05
|
)
|
Diluted
|
|
$
|
(0.47
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
(2.63
|
)
|
|
$
|
(2.05
|
)
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
53,797
|
|
|
|
65,344
|
|
|
|
53,436
|
|
|
|
64,983
|
|
Diluted
|
|
|
53,797
|
|
|
|
65,344
|
|
|
|
53,436
|
|
|
|
64,983
|
|
F-48
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