<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 6, 1997
REGISTRATION NO. 333-13967
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 3 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
WILSONS THE LEATHER EXPERTS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
MINNESOTA 5651 41-1839933
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
7401 BOONE AVENUE NORTH
BROOKLYN PARK, MINNESOTA 55428
(612) 391-4000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
DAVID L. ROGERS
PRESIDENT
WILSONS THE LEATHER EXPERTS INC.
7401 BOONE AVENUE NORTH
BROOKLYN PARK, MINNESOTA 55428
(612) 391-4000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
KRIS SHARPE, ESQ. ERIC O. MADSON, ESQ.
FAEGRE & BENSON LLP WINTHROP & WEINSTINE, P.A.
2200 NORWEST CENTER 3000 DAIN BOSWORTH PLAZA
90 SOUTH SEVENTH STREET 60 SOUTH SIXTH STREET
MINNEAPOLIS, MINNESOTA 55402 MINNEAPOLIS, MINNESOTA 55402
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 6, 1997
[WILSON LEATHER LOGO]
1,100,000 UNITS CONSISTING OF 1,100,000 SHARES OF COMMON STOCK AND 1,100,000
REDEEMABLE COMMON STOCK PURCHASE WARRANTS
----------
Wilsons The Leather Experts Inc. (the "Company") is offering 1,100,000 Units
(the "Offering"), each Unit consisting of one share of the Company's Common
Stock and one redeemable Common Stock Purchase Warrant ("Redeemable Warrant").
The Redeemable Warrants are immediately exercisable and transferable separately
from the Common Stock. Each Redeemable Warrant entitles the holder to purchase,
at any time until three years following the date that the Registration
Statement relating to this Prospectus has been declared effective by the
Securities and Exchange Commission (the "Effective Date"), one share of Common
Stock at an exercise price of $13.50 per warrant, subject to adjustment. The
Redeemable Warrants are subject to redemption by the Company for $.01 per
warrant at any time 90 or more days after the Effective Date, on 30 days
written notice, provided that the closing bid price of the Common Stock exceeds
$14.50 per share (subject to adjustment) for any 10 consecutive trading days
prior to such notice. See "Description of Securities."
In addition to the Units offered hereby, this Prospectus also relates to the
registration for issuance by the Company of up to an aggregate of 1,100,000
shares of Common Stock to be issued upon exercise of the Redeemable Warrants.
See "Description of Securities."
Prior to the Offering, there has been no public market for any of the
Company's securities. The initial public offering price will be $9.00 per Unit.
See "Underwriting" for a discussion of the factors to be considered in
determining the initial offering price. The Company has applied to have the
shares of Common Stock and the Redeemable Warrants approved for quotation on
the Nasdaq National Market under the trading symbols "WLSN" and "WLSNW,"
respectively.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL
DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE UNITS AND
"DILUTION" ON PAGE 17.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURI-
TIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
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<S> <C> <C> <C>
Per Unit............... $9.00 $.675 $8.325
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Total (3)(4)........... $9,900,000 $742,500 $9,157,500
</TABLE>
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(1) The Company has agreed to pay the Underwriter a non-accountable expense
allowance equal to 1.5% of the gross proceeds to the Company or $148,500
($170,775 if the Underwriter's over-allotment option as described in Note
(3) below is exercised in full). The Company has also agreed to sell to the
Underwriter, for nominal consideration, a four-year warrant to purchase up
to 110,000 shares at 120% of the Per Unit Price to Public in the Offering.
In addition, the Company has agreed to indemnify the Underwriter against
certain liabilities. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
at $818,500, which includes the non-accountable expense allowance described
in Note (1) above, and assumes no exercise of the Underwriter's over-
allotment option.
(3) The Underwriter has been granted an option by the Company, exercisable
within 30 days of the date hereof, to purchase up to 165,000 additional
Units at the Price to Public per Unit, less the Underwriting Discount, for
the purpose of covering over-allotments, if any. If the Underwriter
exercises such option in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $11,385,000, $853,875 and
$10,531,125, respectively. See "Underwriting."
(4) At the request of the Company, up to 15% of the Units offered hereby may be
reserved for sale to persons designated by the Company at the Price to
Public. See "Underwriting."
----------
The Units are offered by the Underwriter on a "firm commitment" basis, when,
as and if delivered to and accepted by it, subject to the Underwriter's right
to reject orders in whole or in part and to certain other conditions. It is
expected that delivery of certificates representing the Units will be made on
or about , 1997 in Minneapolis, Minnesota.
----------
EQUITY SECURITIES INVESTMENTS, INC.
The date of this Prospectus is , 1997.
<PAGE>
1.MEN'S LEATHER JACKETS AND COATS (TOP ROW, LEFT TO RIGHT)
1.Lambskin Bomber, Shirt Collar with zip-out Thinsulate lining
2."Retro" Button Front Hipster, heavy-weight Cowhide with Thinsulate lining
3.Zip Front, Cow Hide Hipster, straight bottom with Thinsulate lining
2.WOMEN'S LEATHER JACKETS AND COATS (TOP ROW, FAR RIGHT)
1."Urban" belted City Wrap in smooth Lambskin
3.WOMEN'S LEATHER JACKETS AND COATS (BOTTOM ROW, LEFT TO RIGHT)
1. 3/4 length Sueded "Faux" Shearling, reversible to acrylic Leopard Print
with Hood and toggle closures
2.Printed Cowhide Hipster "Retro" with zip front
3."Retro" jacket in black Cow Dove with straight bottom
4.Fitted smooth Cowhide "Retro" jacket with side tab buckles and silver
hardware
4.WILSONS THE LEATHER EXPERTS STORE AT RIDGEDALE MALL, MINNEAPOLIS, MINNESOTA
(BOTTOM PHOTOGRAPH).
IN CONNECTION WITH THE OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information and consolidated financial
statements (including the notes thereto) and pro forma financial information
appearing elsewhere in this Prospectus. Unless otherwise indicated, all
references to the "Company" or "Wilsons" mean Wilsons The Leather Experts Inc.
and its subsidiaries, including the Predecessor Companies, and all references
to the "Predecessor Companies" mean Wilsons Center, Inc., Rosedale Wilsons,
Inc. and their subsidiaries prior to the acquisition of such companies by the
Company from CVS New York, Inc. (formerly Melville Corporation) ("CVS") on May
25, 1996 (the "Acquisition").
THE COMPANY
Wilsons is the leading specialty retailer of men's and women's leather
outerwear, apparel and accessories in the United States. For the year ended
February 1, 1997, the Company had, on a pro forma basis, net sales of $422.6
million. As of February 1, 1997, the Company operated 461 stores and, during
its peak selling season in 1996, the Company also operated 376 holiday stores
and seasonal kiosks.
Wilsons operates in 45 states, the District of Columbia and England under
several formats including "Wilsons The Leather Experts," the Company's
traditional mall-based concept which offers moderately priced merchandise, and
"Tannery West" and "Georgetown Leather Design," mall-based concepts which offer
more upscale merchandise. In addition to the traditional mall-based stores, as
of February 1, 1997, Wilsons also operated eleven airport stores that focus on
selling accessories, such as gloves, handbags, wallets, briefcases, planners
and computer cases, to business travelers and tourists.
Unlike many retailers, Wilsons designs, purchases leather for, and contracts
for the manufacturing of most of the apparel and accessories sold in its
stores. This vertical integration enables the Company to reduce its order lead
times, respond more quickly to changing consumer preferences and fashion
trends, and offer its customers a better value through consistently high
quality products at competitive prices.
In May 1996, an investor group, including management, formed the Company to
acquire the Predecessor Companies from CVS. As part of a program to enhance the
Company's profitability, between January 1, 1995 and May 25, 1996, management
closed 156 stores that had not achieved cash flow targets, wrote off an amount
of goodwill and certain other non-productive assets and recorded certain
related lease obligations. Such store closings and charges are referred to
herein as the "Restructuring." As a part of the Restructuring, in 1995 the
Company recorded a restructuring charge of $134.3 million related to store
closings and the write-off of goodwill and other intangibles, and an asset
impairment charge of $47.9 million related to the write-off of certain assets
upon the adoption of Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of" ("SFAS No. 121").
Upon completion of the Offering, Wilsons believes that it will have the
capital resources and management information systems to implement its long-term
growth strategy, which emphasizes store locations and products that offer
growth opportunities and higher profit margins. Specifically, this long-term
growth strategy currently calls for annual openings of eight to 15 traditional
stores and eight to 15 airport stores commencing in 1997. The Company is also
exploring the opening of additional stores outside of the United States and
wholesale opportunities.
The Company was incorporated as a Minnesota corporation in 1996. The
Company's principal executive offices are located at 7401 Boone Avenue North,
Brooklyn Park, Minnesota 55428 and its telephone number is (612) 391-4000.
Reports. The Company intends to furnish to its shareholders annual reports
containing audited financial statements and to make available quarterly reports
containing unaudited interim financial information for each of the first three
quarters of each fiscal year of the Company.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities offered........................ 1,100,000 Units, each Unit
consisting of one share of Common
Stock and one Redeemable Warrant.
Each Redeemable Warrant is
immediately exercisable and
transferable separately from the
Common Stock. Each Redeemable
Warrant entitles the holder to
purchase, at any time until three
years after the Effective Date, one
share of Common Stock at an exercise
price of $13.50 per warrant, subject
to adjustment. The Redeemable
Warrants are subject to redemption
by the Company for $.01 per warrant
at any time 90 or more days after
the Effective Date, on 30 days
written notice, provided that the
closing bid price of the Common
Stock exceeds $14.50 per
share (subject to adjustment) for
any 10 consecutive trading days
prior to such notice.
Common Stock outstanding after the
Offering................................. 10,717,083 shares(1)(2)
Use of proceeds........................... The net proceeds will be used for
anticipated capital expenditures,
including expenditures for new
stores, and for working capital
purposes. See "Use of Proceeds."
Nasdaq National Market symbols............ Common Stock: WLSN
Warrants: WLSNW
</TABLE>
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(1) Includes 1,350,000 shares of Common Stock issuable upon exercise of a
warrant issued to CVS, with an exercise price of $.60 per share (the "CVS
Warrant"); excludes (i) 195,060 shares of Common Stock issuable upon the
exercise of outstanding stock options at a weighted average exercise price
of $4.77 per share and 804,940 shares of Common Stock reserved for issuance
pursuant to the Company's 1996 Stock Option Plan (the "1996 Option Plan"),
as of April 15, 1997, (ii) 110,000 shares of Common Stock issuable upon
exercise of certain warrants issuable upon consummation of the Offering,
and (iii) 1,100,000 shares of Common Stock issuable upon exercise of the
Redeemable Warrants comprising a part of the Units in the Offering. See
"Management," "Certain Transactions," "Description of Securities" and
"Underwriting."
(2) Includes 1,080,000 shares of Common Stock purchased by management as part
of the Acquisition that are subject to vesting upon the occurrence of
certain events (the "Restricted Stock"). As of February 1, 1997, 198,018
shares of such Restricted Stock had vested. To the extent that any
remaining shares of Restricted Stock do not vest by April 30, 2001, such
shares will be repurchased by the Company at a price of $.60 per share (the
original purchase price paid by management for such shares), and will no
longer be outstanding. CVS holds a second warrant (the "Manager Warrant")
that will become exercisable commencing April 30, 2001, at $.60 per share,
for the same number of shares of Common Stock that do not vest. See
"Management," "Certain Transactions" and "Description of Securities."
--------------
Except as set forth in the consolidated financial statements or as otherwise
indicated herein, the information contained in this Prospectus (i) reflects the
conversion, upon completion of the Offering, of all of the Company's issued and
outstanding Class A Common Stock, Class B Common Stock and Class C Common Stock
(together, the "Class Stock") and all of the Class Stock to be issued and
outstanding upon exercise of the CVS Warrant and the Manager Warrant and
options under the 1996 Option Plan into a single class of common stock of the
Company, par value $.01 per share (the "Common Stock"), (ii) reflects a 0.9-
for-one reverse split of the Company's Common Stock effected October 11, 1996,
(iii) reflects the exchange of all of the Company's outstanding Series A
Preferred Stock (the "Series A Preferred") for 617,083 shares of Common Stock,
effected May , 1997, and (iv) assumes the Underwriter does not exercise its
over-allotment option.
When information herein is said to be on a "pro forma" basis, such
information gives effect to the Restructuring and the Acquisition accounted for
under the purchase method of accounting, as if such events had occurred on
January 28, 1996. See "Pro Forma Unaudited Consolidated Statement of
Operations." The fiscal year of the Predecessor Companies prior to the
Acquisition was the year ended on December 31. In February 1997, the Company
changed the end of its fiscal year to the Saturday closest to January 31, in
conformity with the general practice in the retail industry, which for the most
recent period was February 1, 1997. Unless otherwise indicated, references to
1996 in this Prospectus refer to the twelve months ended February 1, 1997. As a
result of the Acquisition, certain financial information for the five months
ended May 27, 1995 and May 25, 1996 and for the period from inception (May 26,
1996) to February 1, 1997 is presented in this Prospectus.
4
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
(IN MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS AND STORE DATA)
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES COMPANY
------------------------------------------------------------------- -----------
PERIOD FROM
FIVE MONTHS EIGHT INCEPTION PRO
YEARS ENDED DECEMBER 31, ENDED MONTHS (MAY 26, FORMA(1)
------------------------------------ ---------------- ENDED 1996) TO YEAR ENDED
MAY 27, MAY 25, JANUARY 27, FEBRUARY 1, FEBRUARY 1,
1991 1992 1993 1994 1995 1995 1996 1996 1997 1997
------ ------ ------ ------ ------- ------- ------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $456.7 $509.2 $478.5 $474.6 $ 462.4 $124.7 $109.6 $ 367.6 $ 345.1 $ 422.6
Costs and expenses:
Cost of goods sold,
buying and occupancy
costs................. 289.9 327.2 320.5 329.4 317.0 99.9 86.2 238.5 222.1 285.2
Selling, general and
administrative
expenses.............. 104.8 117.2 120.1 130.2 114.9 45.9 34.8 76.4 75.8 102.4
Depreciation and
amortization.......... 14.8 17.4 20.7 22.3 21.4 9.0 4.7 13.3 1.0 1.4
Restricted stock
compensation expense.. -- -- -- -- -- -- -- -- 1.5 1.5
Restructuring and asset
impairment charges.... -- -- -- -- 182.2 -- -- 182.2 -- --
------ ------ ------ ------ ------- ------ ------ ------- --------- ----------
Income (loss) from
operations............. 47.2 47.4 17.2 (7.3) (173.1) (30.1) (16.1) (142.8) 44.7 32.1
Interest expense, net... 9.4 6.9 5.1 8.4 10.4 3.4 1.6 7.4 5.3 7.5
------ ------ ------ ------ ------- ------ ------ ------- --------- ----------
Income (loss) before
income taxes........... 37.8 40.5 12.1 (15.7) (183.5) (33.5) (17.7) (150.2) 39.4 24.6
Income tax provision
(benefit).............. 16.5 17.0 7.0 (3.1) (10.1) (5.5) (6.6) (4.6) 15.5 9.8
------ ------ ------ ------ ------- ------ ------ ------- --------- ----------
Net income (loss)....... $ 21.3 $ 23.5 $ 5.1 $(12.6) $(173.4) $(28.0) $(11.1) $(145.6) $ 23.9 $ 14.8
====== ====== ====== ====== ======= ====== ====== ======= ========= ==========
Pro forma net income per common share(2)................................................ $ 2.49 $ 1.38
========= ==========
Weighted average common shares outstanding(2)........................................... 9,602,826 10,702,826
========= ==========
Other Data:
Income (loss) from
operations before
depreciation,
amortization,
restricted stock
compensation expense
and restructuring
charges(3)............ $ 62.0 $ 64.8 $ 37.9 $ 15.0 $ 30.5 $(21.1) $(11.4) $ 52.7 $ 47.2 $ 35.0
====== ====== ====== ====== ======= ====== ====== ======= ========= ==========
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES COMPANY
-------------------------------------------------------------- -----------
PERIOD FROM
FIVE MONTHS EIGHT INCEPTION
YEARS ENDED DECEMBER 31, ENDED MONTHS (MAY 26, PRO FORMA(1)
-------------------------------- --------------- ENDED 1996) TO YEAR ENDED
MAY 27, MAY 25, JANUARY 27, FEBRUARY 1, FEBRUARY 1,
1991 1992 1993 1994 1995 1995 1996 1996 1997 1997
---- ---- ----- ---- ---- ------- ------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STORE DATA:
Traditional stores:
Open at end of period.. 552 583 631 628 548 567 480 494 461 461
Net sales per square
foot for stores open
entire year........... $406 $415 $355 $340 $373 -- -- -- -- $389
Change in comparable
store sales(4)........ (3.1)% 2.1% (13.8)% (5.1)% (1.5)% 4.4% 3.9% (3.1)% (2.7)% (1.3)%
Peak number of seasonal
stores during period... 0 32 80 135 227 -- -- 227 376 376
</TABLE>
<TABLE>
<CAPTION>
COMPANY
-------------------------------
FEBRUARY 1, 1997
-------------------------------
AS FURTHER
ADJUSTED
FOR
AS OFFERING
ADJUSTED FOR AND
ACTUAL WARRANTS(5) EXCHANGE(6)
------ ------------ -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................. $ 83.8 $ 84.6 $ 92.9
Total assets.................................... 172.4 173.2 181.5
Total long-term debt............................ 55.8 55.8 55.8
Total liabilities............................... 128.9 128.9 128.9
Shareholders' equity............................ 43.5 44.3 52.6
</TABLE>
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(1) The unaudited pro forma data give effect to the Restructuring and the
Acquisition accounted for under the purchase method of accounting, as if
such events had occurred on January 28, 1996. See "Pro Forma Unaudited
Consolidated Statement of Operations."
(2) Computed on the basis described for pro forma net income per common share
in Note 2 of Notes to Consolidated Financial Statements.
(3) See Note (4) under "Selected Historical and Pro Forma Consolidated
Financial Data" for a description of this data.
(4) Comparable store sales means sales generated by stores open at least one
full year.
(5) As adjusted to give effect to the exercise of the CVS Warrant for 1,350,000
shares of Common Stock, at its exercise price of $.60 per share.
(6) As further adjusted to give effect to (i) the sale by the Company of
1,100,000 Units at an initial public offering price of $9.00 per Unit and
the application of the net proceeds therefrom as described in "Use of
Proceeds" and (ii) the exchange of the Series A Preferred for Common Stock,
effected May , 1997.
5
<PAGE>
RISK FACTORS
An investment in the securities being offered by this Prospectus involves a
high degree of risk. In addition, this Prospectus contains forward-looking
statements that involve risks and uncertainties. Discussions containing such
forward-looking statements may be found in the material set forth under
"Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Overview," "--
Business Strategy," "--Growth Strategy," "--Vertically Integrated Operations,"
"--Store Formats," "--Marketing and Advertising," "--Distribution" and "--
Management Information Systems," as well as in the Prospectus generally. The
Company's actual results could differ materially from those anticipated in
such forward-looking statements as a result of certain factors, including
those set forth in the following risk factors and elsewhere in this
Prospectus. Accordingly, prospective investors should consider carefully the
following risk factors, in addition to the other information contained in this
Prospectus concerning the Company and its business, before purchasing the
Units offered hereby.
DECLINE IN COMPARABLE STORE SALES; PRIOR LOSSES
The Company's comparable store sales declines were 1.3%, 1.5%, 5.1% and
13.8% during 1996, 1995, 1994 and 1993, respectively. The Company believes
that the comparable store sales decline in 1996 was primarily the result of
weak demand for the Company's fashion forward merchandise in the midwest area
of the United States as compared to the northeast and west coast markets where
comparable store sales increased. The Company believes that the declines from
1993 through 1995 were primarily attributable to an industry-wide decline in
sales of retail leather apparel, and outerwear in general, and due in part to
a shift in consumer discretionary spending away from apparel. An inability to
generate comparable store sales increases in the future would adversely affect
the Company's business, financial condition and results of operations.
As part of the Restructuring, the Company incurred non-recurring
restructuring and asset impairment charges aggregating $182.2 million in
October 1995, which resulted in a net loss of $173.4 million for 1995. Due in
large part to decreases in comparable store sales and increases in cost of
goods sold and buying and occupancy costs and an increase in operating
expenses associated with opening 40 new stores and acquiring 31 Georgetown
Leather Design stores in 1993, the Company incurred a net loss of $12.6
million in 1994. There can be no assurance that the Company will not incur
losses in the future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
FASHION TRENDS AND CHANGING CONSUMER PREFERENCES
The Company's sales and profitability depend upon the continued demand by
its customers for leather apparel and accessories. The Company believes that
its success depends in large part upon its ability to anticipate, gauge and
respond in a timely manner to changing consumer demands and fashion trends and
upon the appeal of leather to the Company's customers. When leather apparel is
not generally in fashion (as was the case in the early 1990s), the Company's
results of operations are adversely affected. There can be no assurance that
the demand for leather apparel or accessories will not decline or that the
Company will be able to anticipate, gauge and respond to changes in fashion
trends. If demand for leather apparel and accessories were to decline or if
the Company were to misjudge fashion trends, the Company's business, financial
condition and results of operations could be materially adversely affected.
ECONOMIC CONDITIONS
Wilsons' financial performance is also sensitive to changes in overall
economic conditions, which have an impact on consumer spending trends.
Wilsons' stores are located primarily in enclosed regional malls.
Consequently, the ability of Wilsons to sustain its level of sales is
dependent in part on a high volume of mall traffic. Mall traffic may be
adversely affected by, among other things, economic downturns, the closing of
anchor department stores or changes in consumer preferences, all of which are
beyond the Company's control. Shifts in consumer discretionary spending to
other products or a general reduction in the level of such spending could also
adversely affect the Company. There can be no assurance that the foregoing
factors will not adversely affect the Company's business, financial condition
and results of operations in the future.
6
<PAGE>
SEASONALITY
A significant portion of the Company's sales is generated in the period from
October through December (55.6% for the twelve months ended February 1, 1997),
which includes the Christmas selling season. 34.9% of the Company's sales were
generated during the period from the day after Thanksgiving through January 4,
1997. Net sales are generally lower during the period from April through July.
The Company typically does not become profitable, if at all, until the fourth
quarter of a given year. As a result, the Company's annual results of
operations have been, and will continue to be, heavily dependent on the
results of operations from October through December. Given the seasonality of
the business, misjudgments in fashion trends or unseasonably warm or severe
weather during the Company's peak selling season in a given year could have an
adverse impact on the Company's sales for the year. The Company's quarterly
results of operations may also fluctuate significantly as a result of a
variety of other factors, including the net sales contributed by seasonal
stores, merchandise mix and the timing and level of markdowns and promotions.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Seasonality and Inflation."
LEVERAGE; CAPITAL REQUIREMENTS; RESTRICTIONS IMPOSED BY LENDERS
As of February 1, 1997, the Company's debt consisted of the $55.8 million
Note to CVS, described below. The Company had no borrowings outstanding under
a $150 million revolving credit facility (the "Revolving Credit Facility")
with General Electric Capital Corporation ("GE Capital") and a syndicate of
banks (together with GE Capital, the "Banks") as of February 1, 1997; however,
the Company had $7.9 million of outstanding letters of credit at that date.
The Company typically finances its operations through internally generated
cash flow and seasonal borrowings. Due to the seasonality of the Company's
business, the Company has substantially greater needs for borrowings and
letters of credit from August through early December. The Company currently
plans to fund a substantial portion of its working capital and letter of
credit needs through the Revolving Credit Facility, and, as a result, the
Company is highly dependent on the Revolving Credit Facility. In addition, the
ability of the Company to meet its debt service obligations and borrow under
the Revolving Credit Facility will be dependent upon the future performance of
the Company, which is subject to general economic conditions, and to
financial, competitive, business and other factors, including factors beyond
the Company's control. The level of the Company's indebtedness could restrict
its ability to grow and respond to changing business and economic conditions.
If the Company at any time is unable to satisfy its working capital needs or
generate sufficient cash flow from operations to service its debt, it may be
required to seek refinancing for all or a portion of that debt or to obtain
additional financing. There can be no assurance that the Company will be able
to effect such a refinancing or obtain such additional financing, or obtain
such financing on terms acceptable to the Company. The inability of the
Company to obtain sufficient funds for working capital or letter of credit
needs would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and "Certain Transactions--Subordinated Note."
The Revolving Credit Facility and a 10% Senior Secured Subordinated Note of
the Company issued to CVS in the principal amount of $55.8 million, with
principal and accrued interest, compounded annually, payable on December 31,
2000 (the "Note"), impose restrictions and limitations on the Company. In
addition, the Revolving Credit Facility requires the Company to meet certain
financial tests. Such restrictions and limitations affect, and in many
respects limit or prohibit, among other things, the ability of the Company to
incur additional indebtedness, make capital expenditures (including
expenditures for new stores) above specified levels ($16.0 million for the
twelve months ending January 31, 1998), pay dividends or make other
distributions to shareholders, repay indebtedness, create liens, sell assets
or enter into mergers and certain other transactions above specified levels.
Obligations under the Revolving Credit Facility and the Note are secured by
liens on substantially all of the Company's assets other than real estate,
equipment and fixtures. If the Company is unable to comply with the terms and
covenants under the Revolving Credit Facility or the Note, such indebtedness
could be declared immediately due and payable, which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
7
<PAGE>
LIMITED OPERATING HISTORY AS A STAND-ALONE COMPANY
The Predecessor Companies were owned and controlled by CVS through May 25,
1996. Certain administrative functions, including treasury, tax, external
financial reporting, real estate, legal, risk management and employee benefits
administration, were performed by CVS prior to the Acquisition. In addition,
as a subsidiary of CVS, the Company borrowed and obtained letters of credit
under credit facilities obtained by CVS at better rates than the Company could
have obtained on its own. Accordingly, operation of Wilsons as an independent
company may involve certain additional risks, including risks associated with
managing such functions independently for the first time, the risk of
increased general, administrative and borrowing costs and the risk of
increased costs and difficulties in securing store locations and negotiating
store leases without guarantees by CVS or an affiliate of CVS. There can be no
assurance that such costs will not materially exceed historical levels or that
other unforeseen costs or difficulties in entering into leases will not arise
following the Acquisition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RISKS OF FOREIGN CONTRACT MANUFACTURING AND IMPORTING
The Company imports most of its products from independent foreign contract
manufacturers located primarily in the Far East. Many of the Company's
domestic vendors import a substantial portion of their merchandise from
abroad. Risks inherent in foreign sourcing include economic and political
instability, transportation delays and interruptions, restrictive actions by
foreign governments, the laws and policies of the United States affecting the
importation of goods, including duties, quotas and taxes, trade and foreign
tax laws, fluctuations in currency exchange rates, and the possibility of
boycotts or other actions prompted by domestic concerns regarding foreign
labor practices or other conditions beyond the Company's control. In 1996,
Wilsons sourced more than 60% of its leather apparel from contract
manufacturers located in The People's Republic of China, which currently has
Most Favored Nation ("MFN") trading status with the United States. Loss of MFN
status by China or by any other country from which Wilsons sources goods, or
any imposition of new or additional duties, quotas or taxes, could result in
significantly higher leather purchase and production costs for Wilsons and, as
a result, could negatively impact profitability, sale prices or demand for
leather merchandise. The Company's future performance will be subject to such
factors, which are beyond its control, and there can be no assurance that such
factors would not have a material adverse effect on the Company's business,
financial condition and results of operations.
COMPETITION
The retail leather apparel and accessories industry is highly competitive.
Wilsons competes with a broad range of other retailers, including other
specialty leather apparel and accessories stores, department stores, mass
merchandisers and discounters, many of which have greater financial and other
resources than Wilsons. Increased competition may reduce sales, increase
operating expenses and decrease profit margins. Management believes that the
principal bases upon which Wilsons competes are selection, price, style,
quality, store location and service. There can be no assurance that the
Company will be able to compete successfully in the future. The inability of
Wilsons to compete effectively could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Competition."
RISKS ASSOCIATED WITH FUTURE GROWTH
The Company's growth prospects are dependent upon a number of factors,
including, among other things, economic conditions, establishment and growth
of new selling channels, competition, growth in the leather apparel and
accessories market, the retail environment in general, financing and working
capital needs, the ability of the Company to negotiate store leases on
favorable terms, the extended lead times required to negotiate airport store
leases, the availability of suitable new store locations, the ability to
develop new merchandise and the ability to hire and train qualified sales
associates. There can be no assurance that the Company will be able to
effectively realize its plans for future growth. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business."
8
<PAGE>
PRICE AND AVAILABILITY OF RAW MATERIAL
Leather comprises approximately two-thirds of the garment cost of leather
apparel. As a result, the Company's gross margin levels are influenced by the
price of leather. The supply of leather is influenced by worldwide meat
consumption, and the demand for leather is influenced by the leather shoe,
furniture and auto upholstery markets. The availability and price of leather
may fluctuate significantly. There can be no assurance that fluctuations in
the availability and price of leather or other raw materials used by the
Company will not have a material adverse effect on the Company's profitability
or its ability to meet the demand of the Company's customers for its
merchandise.
CHARGES RELATING TO VESTING OF RESTRICTED STOCK
In connection with the Acquisition, management purchased 1,080,000 shares of
Restricted Stock. As of February 1, 1997, 198,018 shares of such Restricted
Stock had vested. The remaining shares will vest over the next four years if
the Company achieves specified earnings targets or as the Company repays the
Note. See "Certain Transactions--Restricted Stock Agreement." As the
Restricted Stock vests, the Company will be required to record compensation
charges equal to the difference between the fair market value of the
Restricted Stock on the date the shares vest and the original purchase price
of the Restricted Stock, which was $.60 per share. For the period ended
February 1, 1997, the Company recorded $1.5 million of compensation expense
based on the 198,018 shares earned pursuant to the Restricted Stock Agreement.
By way of example, if all of the remaining Restricted Stock were to vest at a
time when the fair market value of the Common Stock equaled $9.00 per share
(the initial public offering price set forth on the cover page of this
Prospectus), the Company would be required to record a non-cash, after-tax
charge of approximately $7.4 million; however, such charge would not impact
the Company's total shareholders' equity. The market price of the Company's
Common Stock, however, could be adversely affected when the Company reports
such future charges, if any.
DEPENDENCE ON KEY PERSONNEL
The success of the Company will be highly dependent upon the efforts of Joel
Waller, Chairman and Chief Executive Officer of Wilsons, David Rogers,
President and Chief Operating Officer of Wilsons, and other members of
Wilsons' senior management. The loss of the services of any of these
individuals could have a material adverse effect on the Company's business,
financial condition and results of operations.
NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for any of the
Company's securities, and there can be no assurance that an active public
market for the Common Stock or Redeemable Warrants will develop or be
sustained after the Offering, or that the price for the securities will not
decrease. Accordingly, there can be no assurance that purchasers will be able
to resell the securities offered hereby at the offering price, the exercise
price or at any price. The initial public offering price was determined solely
by negotiations between the Company and the Underwriter based on several
factors and may not necessarily reflect the market price of the securities
after the Offering. The market price of the securities could be subject to
significant fluctuations in response to the Company's financial performance,
competitive position and other factors relating to the Company and its
business, such as variations in quarterly operating results, government
regulations, litigation and other factors. In addition, the stock market has
from time to time experienced extreme price and volume volatility. These
fluctuations may be unrelated to the operating performance of particular
companies whose shares are traded and may adversely affect the market price of
the securities. Therefore, no assurance can be given that the market price of
the securities will not decline substantially below the initial public
offering price or the exercise price. See "Underwriting."
SECURITIES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of the Company's Common Stock in the public
market following the Offering could adversely affect the market price of the
Common Stock or Redeemable Warrants. The Company will have 9,367,083 shares of
Common Stock outstanding (9,532,083 shares if the Underwriter's over-allotment
option is
9
<PAGE>
exercised in full) immediately following the Offering (an additional 1,350,000
shares of Common Stock will be immediately issuable upon exercise of the CVS
Warrant at $.60 per share), of which the 1,100,000 shares included in the
Units offered hereby will be eligible for sale in the public market
immediately following the Offering. The remaining 8,267,083 currently
outstanding shares are held by the current shareholders of the Company,
including the Company's executive officers and directors. The holders of all
8,267,083 shares of Common Stock that are currently outstanding (including the
Company's executive officers and directors and the partners of Limited
Partnership I and Limited Partnership II (as hereinafter defined)) and CVS as
the holder of the CVS Warrant and the Manager Warrant have agreed not to sell,
contract to sell or otherwise dispose of any shares of Common Stock or
warrants to purchase shares of Common Stock without the consent of Equity
Securities Investments, Inc., (the "Underwriter") for a period of 180 days
after the date of this Prospectus. The Company has also agreed not to offer,
sell, contract to sell, or otherwise dispose of any shares of Common Stock or
any securities convertible into or exercisable or exchangeable for Common
Stock or any rights to acquire Common Stock (other than shares issuable upon
exercise of outstanding warrants, the Redeemable Warrants or options issued
under the 1996 Option Plan) for a period of 180 days after the date of this
Prospectus, without the prior written consent of Equity Securities
Investments, Inc., which in its sole discretion and at any time without notice
may release all or any portion of the securities subject to such agreements
not to sell. Additional shares may also become available for sale in the
public market from time to time in the future, including the shares of Common
Stock issued upon exercise of the Redeemable Warrants. In addition, the
holders of all 8,267,083 shares of Common Stock that are currently
outstanding, CVS as the holder of the CVS Warrant and the Manager Warrant and
holders of certain warrants to purchase up to 110,000 additional shares of
Common Stock, which warrants are issuable upon consummation of the Offering,
have certain registration rights under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to their Common Stock or warrants. See
"Certain Transactions--Restricted Stock Agreement," "--Registration Rights
Agreement," "Securities Eligible for Future Sale" and "Underwriting."
CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE WARRANTS;
POSSIBLE REDEMPTION OF WARRANTS
Purchasers of Units will be able to exercise the Redeemable Warrants only if
a current prospectus relating to the shares of Common Stock underlying the
Redeemable Warrants is then in effect and only if such securities are
qualified for sale or exempt from qualification under the applicable
securities laws of the states in which the various holders of Redeemable
Warrants reside. Although the Company will use its best efforts to maintain
the effectiveness of a current prospectus covering the shares of Common Stock
underlying the Redeemable Warrants, there can be no assurance that the Company
will be able to do so, or to get any required amendments declared effective by
federal or state authorities in a timely manner. The Company will be unable to
issue shares of Common Stock to those persons desiring to exercise their
Redeemable Warrants if a current prospectus covering the securities issuable
upon the exercise of the Redeemable Warrants is not kept effective or if such
securities are not qualified nor exempt from qualification in the states in
which the holders of the Redeemable Warrants reside. The Redeemable Warrants
are subject to redemption at any time by the Company at $.01 per warrant at
any time 90 days after the Effective Date, on 30 days prior written notice, if
the closing bid price of the Common Stock shall exceed $14.50 per share
(subject to adjustment), for 10 consecutive trading days, at any time prior to
such notice. If the Redeemable Warrants are redeemed, warrant holders will
lose their right to exercise the Redeemable Warrants except during such 30-day
redemption period. Redemption of the Redeemable Warrants could force the
holders to exercise the Redeemable Warrants at a time when it may be
disadvantageous for the holders to do so or to sell the Redeemable Warrants at
the then market price or accept the redemption price, which will be
substantially less than the market value of the Redeemable Warrants at the
time of redemption. See "Description of Securities--Redeemable Warrants."
DILUTION
Purchasers of the Common Stock included in the Units offered hereby will
experience immediate and substantial dilution in the net book value per share
of their investment of $4.24 per share, assuming exercise of the CVS Warrant
and an initial public offering price of $9.00 per Unit. Additional dilution is
likely to occur upon exercise of other outstanding warrants and stock options.
See "Dilution."
10
<PAGE>
DIVIDEND POLICY
The Company has not paid any dividends on its Common Stock and does not
intend to pay dividends in the foreseeable future. The payment of dividends by
the Company is subject to certain restrictions and prohibitions contained in
the Revolving Credit Facility and the Note. Any determination to pay cash
dividends in the future will be at the discretion of the Company's Board of
Directors (the "Board" or the "Board of Directors") and will be dependent upon
the Company's business, results of operations, financial condition,
contractual restrictions, restrictions in the Amended Articles of
Incorporation (the "Amended Articles of Incorporation") and other factors
deemed relevant at the time by the Company's Board of Directors. See
"Dividends."
ANTI-TAKEOVER CONSIDERATIONS; CONTROL BY CURRENT SHAREHOLDERS
The Board of Directors has the authority, without further shareholder
action, to fix the rights and preferences of any shares of the Company's
preferred stock to be issued from time to time. In addition, as a Minnesota
corporation, the Company is subject to certain anti-takeover provisions of the
Minnesota Business Corporation Act. Both the authority of the Board with
regard to the preferred stock and the provisions of the Minnesota statutes
could have the effect of delaying, deferring or preventing a change in control
of the Company, may discourage bids for the Company's Common Stock and may
adversely affect the market price of, and the voting and other rights of the
holders of, Common Stock. See "Description of Capital Stock--Preferred Stock"
and "--Anti-Takeover Provisions of the Minnesota Business Corporation Act."
Upon completion of the Offering, the Company's directors and executive
officers will beneficially own, in the aggregate, 46.7% of the Company's
outstanding shares of Common Stock. If these shareholders vote together as a
group, they will be able to control the business and affairs of the Company,
including the election of individuals to the Company's Board of Directors, and
to determine the outcome of certain actions that require shareholder approval,
including the adoption of amendments to the Company's Amended Articles of
Incorporation, and certain mergers, sales of assets and other business
acquisitions or dispositions. Each shareholder that is subject to the
Shareholder Agreement (as hereinafter defined) has agreed to vote all of the
voting shares of Common Stock held by such shareholder in favor of the
election to the Board of Directors of two individuals who will be nominated by
a vote of a majority of the outstanding shares of Common Stock held by the
Employees and their Permitted Transferees (as defined in the Shareholder
Agreement) and, upon the vote of a majority of the outstanding shares of
Common Stock held by the Employees and their Permitted Transferees, to remove
or replace such directors, until the earlier of (i) the completion of an
underwritten public offering with gross proceeds of at least $20 million or
(ii) the general termination of the Shareholder Agreement, which termination
will be no later than May 25, 1998. Joel N. Waller, Chairman of the Board and
Chief Executive Officer of the Company, and David L. Rogers, President and
Chief Operating Officer of the Company, currently own a majority of the
outstanding shares of Common Stock held by the Employees and their Permitted
Transferees, and are therefore able to nominate such two directors. See
"Certain Transactions--Shareholder Agreement."
11
<PAGE>
THE ACQUISITION
The Company was organized to acquire all of the issued and outstanding
capital stock of Wilsons Center, Inc., the holding company of the Predecessor
Companies (the "Wilsons Shares"). In May 1996, the Company, which was owned by
management and an investor group, acquired the Wilsons Shares for $67.8
million plus the CVS Warrant and the Manager Warrant described below in the
following two-step transaction. First, CVS received (i) $2.0 million in cash,
(ii) the $55.8 million Note, (iii) the CVS Warrant to purchase 1,350,000
shares of Common Stock of the Company, having an exercise price of $.60 per
share, and the Manager Warrant described below, (iv) 4,320,000 shares of
Common Stock, and (v) 7,405 shares of Series A Preferred in consideration for
the transfer to the Company of the Wilsons Shares. Thereafter, Leather
Investors Limited Partnership I, a Minnesota limited partnership ("Limited
Partnership I"), and Leather Investors Limited Partnership II, a Minnesota
limited partnership ("Limited Partnership II" and together with Limited
Partnership I, the "Limited Partnerships"), for each of which Lyle Berman and
Morris Goldfarb are the general partners, respectively purchased from CVS the
4,320,000 shares of Common Stock and the 7,405 shares of Series A Preferred
for an aggregate consideration of $10.0 million. On May , 1997, the 7,405
shares of Series A Preferred were exchanged for 617,083 shares of the
Company's Common Stock. Upon completion of the Offering, the Limited
Partnerships will automatically dissolve, and the shares of Common Stock held
by them will be distributed to their partners based on their respective
interests in the Limited Partnerships. See "Certain Transactions" and
"Description of Securities."
As part of the Acquisition, management purchased 1,080,000 shares of
Restricted Stock. As of February 1, 1997, 198,018 shares of such Restricted
Stock had vested. To the extent that any remaining shares of Restricted Stock
do not vest by April 30, 2001, such shares will be repurchased by the Company
at a price of $.60 per share and will no longer be outstanding. CVS holds the
Manager Warrant that will become exercisable commencing April 30, 2001, at
$.60 per share, for the same number of shares of Common Stock that do not
vest. See "Management," "Certain Transactions" and "Description of
Securities."
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,100,000 Units offered
hereby by the Company are estimated to be approximately $8.3 million
(approximately $9.7 million if the Underwriter's over-allotment option is
exercised in full), at a public offering price of $9.00 per Unit and after
deducting the underwriting discounts, the non-accountable expense allowance
and the estimated offering expenses payable by the Company.
The net proceeds will allow the Company to reduce seasonal borrowings under
the Revolving Credit Facility. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources" for information regarding interest payable on and the maturity date
of borrowings under the Revolving Credit Facility. Substantially all
indebtedness incurred under the Company's Revolving Credit Facility is used to
fund the Company's peak working capital needs which typically occur during the
period from August through early December. As of February 1, 1997, the Company
had no borrowings under the Revolving Credit Facility. The Company plans to
use the net proceeds to fund anticipated capital expenditures, including
building new stores ($2.5 million), remodeling existing stores ($2.0 million),
developing and implementing new information systems ($1.5 million), testing
new business concepts ($0.5 million), and for working capital purposes ($1.8
million).
In addition to the net proceeds to be derived from the sale of the Units,
the Company may derive as much as $17,077,500 or as little as nothing from the
exercise of the Redeemable Warrants included in the Units. Any amounts that
the Company derives from the exercise of such securities are expected to be
used to reduce seasonal borrowings under the Revolving Credit Facility and in
connection with the Company's then current business plan activities and/or
working capital requirements. See "Risk Factors--Current Prospectus and State
Registration Required to Exercise Warrants; Possible Redemption of Warrants."
DIVIDEND POLICY
The Company has not declared or paid cash dividends on its stock since its
inception in May 1996. The Company anticipates that all of its earnings in the
foreseeable future, if any, will be retained to fund working capital, to
reduce reliance on the Revolving Credit Facility and to repay the Note and,
therefore, has no plans to pay cash dividends in the foreseeable future. In
addition, the terms of the Revolving Credit Facility and the Note restrict
and, in some cases, prohibit the Company from declaring and paying dividends.
Any determination to pay cash dividends in the future will be at the
discretion of the Company's Board of Directors and will be dependent upon the
Company's results of operations, financial condition and capital requirements
(including its cash needs), market conditions, restrictions in financing
agreements and the Amended Articles of Incorporation and other factors deemed
relevant at that time by the Company's Board of Directors. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources" and "Certain Transactions--Subordinated
Note."
13
<PAGE>
DILUTION
For purposes of the following discussion, it is assumed that the entire
amount of each Unit's offering price is allocable to the share of Common Stock
included therein and that no amount is allocable to the Redeemable Warrant
included therein. The pro forma net tangible book value of the Company's
Common Stock as of February 1, 1997 was $41.9 million or $5.07 per share of
Common Stock. "Pro forma net tangible book value" represents the total amount
of the Company's total tangible assets less the total amount of the Company's
liabilities; "pro forma net tangible book value per share" means such amount
divided by the number of shares of Common Stock outstanding (adjusted to
reflect the exchange of the Series A Preferred for Common Stock, effected May
, 1997). After giving effect (i) to the exercise of the CVS Warrant for
1,350,000 shares of Common Stock, with an exercise price of $.60 per share,
and (ii) to the sale by the Company of the Units in the Offering at an initial
public offering price of $9.00 per Unit, and the application of the net
proceeds therefrom, the pro forma net tangible book value as adjusted of the
Common Stock as of February 1, 1997 would have been $51.1 million, or $4.76
per share. This represents an immediate decrease in pro forma net tangible
book value of $.31 per share to existing shareholders and an immediate
dilution of $4.24 per share to new investors purchasing Units in the Offering.
The following table illustrates the dilution per share described above:
<TABLE>
<S> <C> <C>
Initial public offering price............................... $9.00
Pro forma net tangible book value......................... $5.07
Decrease in pro forma net tangible book value attributable
to exercise of CVS Warrant............................... (.63)
-----
Pro forma net adjusted tangible book value before the
Offering................................................. 4.44
Increase in pro forma net tangible book value attributable
to purchase of Units by new investors.................... .32
-----
Pro forma net tangible book value as adjusted after the
Offering................................................... 4.76
-----
Dilution to new investors................................... $4.24
=====
</TABLE>
The following table sets forth, on a pro forma, as adjusted basis as of
February 1, 1997, the number of shares of Common Stock purchased from the
Company, the total cash consideration paid to the Company and the average
price per share paid by the existing shareholders and by the new investors
purchasing Units in the Offering, at an initial public offering price of $9.00
per Unit.
<TABLE>
<CAPTION>
TOTAL CASH
SHARES PURCHASED(1) CONSIDERATION AVERAGE
--------------------- ---------------------- COST
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
---------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders... 9,617,083 89.7% $12,811,000 56.4% $1.33
New investors........... 1,100,000 10.3 9,900,000 43.6 9.00
---------- ----- ----------- -----
Total............... 10,717,083 100.0% $22,711,000 100.0%
========== ===== =========== =====
</TABLE>
- --------
(1) The above table includes 1,350,000 shares of Common Stock issuable upon
exercise of the CVS Warrant, with an exercise price of $.60 per share;
such table does not include (i) 195,060 shares of Common Stock issuable
upon the exercise of outstanding stock options at a weighted average
exercise price of $4.77 per share and 804,940 shares of Common Stock
reserved for issuance pursuant to the 1996 Option Plan, as of April 15,
1997, (ii) 110,000 shares of Common Stock issuable upon exercise of
certain warrants issuable upon consummation of the Offering and (iii)
1,100,000 shares of Common Stock issuable upon exercise of the Redeemable
Warrants comprising a part of the Units in this Offering. See
"Management," "Certain Transactions," "Description of Securities" and
"Underwriting."
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
February 1, 1997; (ii) to reflect the exercise of the CVS Warrant for
1,350,000 shares of Common Stock, with an exercise price of $.60 per share;
and (iii) as further adjusted to reflect (a) the sale by the Company of the
1,100,000 Units offered hereby at an initial public offering price of $9.00
per Unit and the application of the net proceeds therefrom and (b) the
exchange of the Series A Preferred for Common Stock, effected May , 1997.
See "Use of Proceeds." The information presented below should be read in
conjunction with the consolidated financial statements and the related notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FEBRUARY 1, 1997
----------------------------------
AS FURTHER
AS ADJUSTED ADJUSTED FOR
FOR WARRANT OFFERING AND
ACTUAL(1) EXERCISE EXCHANGE
--------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash.................................... $81,553 $ 82,364 $ 90,703
======= ======== ========
Borrowings under Revolving Credit
Facility (2)........................... $ -- $ -- $ --
======= ======== ========
Long-term debt.......................... $55,811 $ 55,811 $ 55,811
------- -------- --------
Shareholders' equity:
Preferred Stock, $.01 par value;
10,000,000 shares authorized; 7,405
shares, $1,000 stated value issued
and outstanding, actual and as
adjusted for Warrant Exercise; no
shares issued or outstanding, as
further adjusted for Offering and
Exchange............................. 7,405 7,405 --
Common Stock, $.01 par value;
45,000,000 shares authorized;
8,267,083 shares issued and
outstanding; 9,617,083 shares issued
and outstanding, as adjusted for
warrant exercise; 10,717,083 shares
issued and outstanding, as further
adjusted for Offering (3)............ 77 90 107
Additional paid-in capital............ 12,501 13,299 29,026
Retained earnings..................... 23,511 23,511 23,511
Cumulative translation adjustment..... (29) (29) (29)
------- -------- --------
Total shareholders' equity.......... 43,465 44,276 52,615
------- -------- --------
Total capitalization................ $99,276 $100,087 $108,426
======= ======== ========
</TABLE>
- --------
(1) Reflects the conversion of all shares of Class Stock into an equal number
of shares of Common Stock of a single class concurrent with the Offering.
(2) Does not include $7.9 million of outstanding letters of credit as of
February 1, 1997.
(3) The above table does not include (i) 195,060 shares of Common Stock
issuable upon the exercise of outstanding stock options at a weighted
average exercise price of $4.77 per share and 804,940 shares of Common
Stock reserved for issuance pursuant to the 1996 Option Plan, as of April
15, 1997, (ii) 110,000 shares of Common Stock issuable upon exercise of
certain warrants issuable upon consummation of the Offering and (iii)
1,100,000 shares issuable upon exercise of the Redeemable Warrants
comprising a part of the Units in this Offering. See "Management,"
"Certain Transactions," "Description of Securities" and "Underwriting."
15
<PAGE>
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following tables present selected historical and pro forma consolidated
financial data of the Company, which should be read in conjunction with the
consolidated historical and pro forma financial statements and notes thereto
included elsewhere in this Prospectus and in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
selected consolidated financial data as of February 1, 1997 and for the period
from inception (May 26, 1996) to February 1, 1997 have been derived from the
consolidated financial statements of the Company audited by Arthur Andersen
LLP. The selected consolidated financial data as of December 31, 1993, 1994
and 1995, for the years ended December 31, 1993, 1994 and 1995 and for the
five-month period ended May 25, 1996 have been derived from the consolidated
financial statements of the Predecessor Companies audited by KPMG Peat Marwick
LLP. The consolidated financial data as of December 31, 1991 and 1992, for the
years ended December 31, 1991 and 1992, for the five-month period ended May
27, 1995 and for the eight months ended January 27, 1996 have been derived
from unaudited consolidated financial statements of the Predecessor Companies.
The pro forma statement of operations data and the store operations data for
the periods set forth below are unaudited. In the opinion of management, the
unaudited information contains all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of the financial
position and results of operations for the periods presented. The results of
operations for the five months ended May 25, 1996, for the eight months ended
January 27, 1996, and for the period from inception (May 26, 1996) to February
1, 1997 are not necessarily indicative of the results of operations for the
entire year.
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA(1)
(IN MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS AND STORE DATA)
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES COMPANY
------------------------------------------------------------------- ---------------------
FIVE MONTHS EIGHT PRO
YEARS ENDED DECEMBER 31, ENDED MONTHS PERIOD FROM INCEPTION FORMA(2)
------------------------------------ ---------------- ENDED (MAY 26, 1996) TO YEAR ENDED
MAY 27, MAY 25, JANUARY 27, FEBRUARY 1, FEBRUARY 1,
1991 1992 1993 1994 1995 1995 1996 1996 1997 1997
------ ------ ------ ------ ------- ------- ------- ----------- --------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net sales........ $456.7 $509.2 $478.5 $474.6 $ 462.4 $124.7 $109.6 $ 367.6 $ 345.1 $ 422.6
Costs and
expenses:
Cost of goods
sold, buying
and occupancy
costs.......... 289.9 327.2 320.5 329.4 317.0 99.9 86.2 238.5 222.1 285.2
Selling, general
and
administrative
expenses....... 104.8 117.2 120.1 130.2 114.9 45.9 34.8 76.4 75.8 102.4
Depreciation and
amortization... 14.8 17.4 20.7 22.3 21.4 9.0 4.7 13.3 1.0 1.4
Restricted stock
compensation
expense........ -- -- -- -- -- -- -- -- 1.5 1.5
Restructuring
and asset
impairment
charges........ -- -- -- -- 182.2 -- -- 182.2 -- --
------ ------ ------ ------ ------- ------ ------ ------- --------- ----------
Income (loss)
from operations. 47.2 47.4 17.2 (7.3) (173.1) (30.1) (16.1) (142.8) 44.7 32.1
Interest expense,
net............. 9.4 6.9 5.1 8.4 10.4 3.4 1.6 7.4 5.3 7.5
------ ------ ------ ------ ------- ------ ------ ------- --------- ----------
Income (loss)
before income
taxes........... 37.8 40.5 12.1 (15.7) (183.5) (33.5) (17.7) (150.2) 39.4 24.6
Income tax
provision
(benefit)....... 16.5 17.0 7.0 (3.1) (10.1) (5.5) (6.6) (4.6) 15.5 9.8
------ ------ ------ ------ ------- ------ ------ ------- --------- ----------
Net income
(loss).......... $ 21.3 $ 23.5 $ 5.1 $(12.6) $(173.4) $(28.0) $(11.1) $(145.6) $ 23.9 $ 14.8
====== ====== ====== ====== ======= ====== ====== ======= ========= ==========
Pro forma net
income per
common share(3). $ 2.49 $ 1.38
========= ==========
Weighted average
common shares
outstanding(3).. 9,602,826 10,702,826
========= ==========
Other data:
Income (loss)
from operations
before
depreciation,
amortization,
restricted
stock
compensation
expense and
restructuring
charges(4)..... $ 62.0 $ 64.8 $ 37.9 $ 15.0 $ 30.5 $(21.1) $(11.4) $ 52.7 $ 47.2 $ 35.0
====== ====== ====== ====== ======= ====== ====== ======= ========= ==========
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES COMPANY
-------------------------------------------------------------- ---------------------
FIVE MONTHS EIGHT PRO
YEARS ENDED DECEMBER 31, ENDED MONTHS PERIOD FROM INCEPTION FORMA(2)
-------------------------------- --------------- ENDED (MAY 26, 1996) TO YEAR ENDED
MAY 27, MAY 25, JANUARY 27, FEBRUARY 1, FEBRUARY 1,
1991 1992 1993 1994 1995 1995 1996 1996 1997 1997
---- ---- ----- ---- ---- ------- ------- ----------- --------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STORE DATA:
Traditional stores:
Open at end of period. 552 583 631 628 548 567 480 494 461 461
Net sales per square
foot for stores open
entire year.......... $406 $415 $355 $340 $373 -- -- -- -- $389
Change in comparable
store sales(5)....... (3.1)% 2.1% (13.8)% (5.1)% (1.5)% 4.4% 3.9% (3.1)% (2.7)% (1.3)%
Peak number of seasonal
stores during period.. 0 32 80 135 227 -- -- 227 376 376
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES COMPANY
---------------------------------- -----------
DECEMBER 31,
---------------------------------- FEBRUARY 1,
1991 1992 1993 1994 1995 1997
------ ------ ------ ------ ------ -----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital(6)....... $ 34.4 $ 36.7 $ 57.4 $ 77.1 $ 44.6 $ 83.8
Total assets............. 340.4 376.6 401.0 392.7 182.4 172.4
Total long-term debt..... -- -- -- -- -- 55.8
Total liabilities........ 155.5 154.1 183.8 191.7 154.8 128.9
Shareholders' equity..... 184.9 222.5 217.2 201.0 27.6 43.5
</TABLE>
- -------
(1) Prior to the Acquisition, the Predecessor Companies were operated as part
of CVS. The historical consolidated financial statements presented herein
reflect certain periods during which the Company did not operate as an
independent company. Such statements, therefore, may not necessarily
reflect the results of operations or the financial condition of the
Company which would have resulted had the Company operated as an
independent company during the reporting periods, and are not necessarily
indicative of the Company's future results or financial condition.
(2) The unaudited pro forma data give effect to the Restructuring and the
Acquisition accounted for under the purchase method of accounting, as if
such events had occurred on January 28, 1996. See "Pro Forma Unaudited
Consolidated Statement of Operations."
(3) Computed on the basis described for pro forma net income per common share
in Note 2 of Notes to Consolidated Financial Statements.
(4) Income (loss) from operations before depreciation, amortization,
restricted stock compensation expense and restructuring charges is not
intended to be a performance measure that should be regarded as an
alternative for other performance measures and should not be considered in
isolation. This measure of income (loss) is provided because it is a
measure commonly used in the retail industry. This measure of income
(loss) is not a measurement of financial performance under generally
accepted accounting principles and does not reflect all expenses of doing
business (e.g., interest expense, depreciation) and is not meant to
represent discretionary funds available to management. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation."
(5) Comparable store sales means sales generated by stores open at least one
full year.
(6) The working capital calculation excludes amounts due to CVS as of December
31, 1991, 1992, 1993, 1994 and 1995.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations
of Wilsons should be read in conjunction with the selected historical and pro
forma consolidated financial data and consolidated financial statements and
notes thereto appearing elsewhere in this Prospectus.
OVERVIEW
One of the Predecessor Companies was founded in the late 1940's. CVS acquired
such company in 1982. The Company was organized in May 1996 to acquire the
Predecessor Companies from CVS. See "Business--Company History." In May 1996,
management and an investor group, as the owners of the Company, acquired the
Wilsons Shares for $67.8 million plus the CVS Warrant and the Manager Warrant
described below in the following two-step transaction. First, CVS received (i)
$2.0 million in cash, (ii) the $55.8 million Note, (iii) the CVS Warrant to
purchase 1,350,000 shares of Common Stock of the Company, having an exercise
price of $.60 per share, and the Manager Warrant described below, (iv)
4,320,000 shares of Common Stock, and (v) 7,405 shares of Series A Preferred in
consideration for the transfer to the Company of the Wilsons Shares.
Thereafter, the 4,320,000 shares of Common Stock and 7,405 shares of Series A
Preferred were purchased from CVS by the Limited Partnerships for an aggregate
consideration of $10.0 million. On May , 1997, the 7,405 shares of Series A
Preferred were exchanged for 617,083 shares of the Company's Common Stock. The
Manager Warrant will become exercisable commencing April 30, 2001, at $.60 per
share, but only to the extent shares of Restricted Stock are repurchased by the
Company. See "The Acquisition," "Certain Transactions--Restricted Stock
Agreement" and "--Sale Agreement." The transaction was accounted for under the
purchase method of accounting. The carrying value of the net assets acquired
exceeded the purchase price by approximately $52.5 million. As a result, the
book value of property and equipment in the Company's consolidated financial
statements was reduced from $64.6 million to $12.1 million at May 26, 1996, and
initially will result in lower depreciation charges than would have been
experienced by the Predecessor Companies.
Prior to the Acquisition, the Predecessor Companies were operated as part of
CVS. The historical consolidated financial statements presented herein reflect
certain periods during which the Company did not operate as an independent
company. Such statements, therefore, may not necessarily reflect the results of
operations or the financial condition of the Company which would have resulted
had the Company operated as an independent company during the reporting
periods, and are not necessarily indicative of the Company's future results or
financial condition. Furthermore, the Company's net loss for the year ended
December 31, 1995, as reflected in the consolidated financial statements
included elsewhere in this Prospectus, was negatively impacted by the recording
of pre-tax charges aggregating $182.2 million in the fourth quarter of 1995 in
connection with the Restructuring.
Throughout the late 1980s and early 1990s, as part of the growth strategy of
CVS, the Company pursued a rapid store expansion program through acquisitions
and store openings, growing from 227 stores at the end of 1987 to a peak of 631
stores at the end of 1993. Beginning in 1993, the Company's business was
negatively affected by the difficult retail apparel market for mall-based
chains, competition and changes in consumer fashion preferences. These
conditions have led a large number of retailers, including a number of
specialty retailers, to close stores or cease operations. In 1995, the Company
initiated a store-closing program, which has resulted in a reduction of the
number of stores to 461 by February 1, 1997. The stores closed by the Company
had not achieved cash flow targets established by management.
In connection with the Acquisition, CVS eliminated all prior indebtedness
owed by the Predecessor Companies to CVS, assumed closed store lease
obligations and provided that Wilsons would have $85 million in working capital
upon closing of the Acquisition (before paying certain expenses associated with
the Acquisition). The Predecessor Companies' operations were funded primarily
by CVS. In order for the Company to fund its working capital and letter of
credit needs, the Company entered into the Revolving Credit Facility with the
Banks simultaneously with the closing of the Acquisition. The Revolving Credit
Facility provides the Company with a
18
<PAGE>
$150 million line of credit, which includes a $90 million letter of credit
subfacility. As of February 1, 1997, the Company had no borrowings outstanding
under the Revolving Credit Facility; however, it had outstanding letters of
credit in the amount of $7.9 million at that date. See "Liquidity and Capital
Resources" below.
In connection with the Acquisition, the Company sold 3,330,000 shares of
Common Stock, including 1,080,000 shares of Restricted Stock, to certain
managers of the Company. As of February 1, 1997, 198,018 shares of such
Restricted Stock had vested. The remaining shares of Restricted Stock will
vest over four years if the Company achieves specified earnings targets or as
the Company repays the Note. See "Certain Transactions--Restricted Stock
Agreement." As the Restricted Stock vests, the Company will be required to
record compensation charges equal to the difference between the fair market
value of the Restricted Stock on the date the shares vest and the original
purchase price of the Restricted Stock, which was $.60 per share. For the
period ended February 1, 1997, the Company recorded $1.5 million compensation
expense based on the 198,018 shares earned pursuant to the Restricted Stock
Agreement. By way of example, if the remaining Restricted Stock were to vest
at a time when the fair market value of the Common Stock equaled $9.00 per
share (the initial public offering price set forth on the cover page of this
Prospectus), the Company would be required to record a non-cash, after-tax
charge of approximately $7.4 million; however, such charge would not impact
the Company's total shareholders' equity.
RESULTS OF OPERATIONS
The following table sets forth information from the Company's historical and
pro forma consolidated statements of operations, expressed as a percentage of
net sales for the periods indicated:
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES COMPANY
---------------------------------------------------------- --------------
PERIOD FROM
YEARS ENDED EIGHT INCEPTION
DECEMBER 31, FIVE MONTHS ENDED MONTHS (MAY 26, 1996) PRO FORMA
-------------------- ----------------- ENDED TO YEAR ENDED
MAY 27, MAY 25, JANUARY 27, FEBRUARY 1, FEBRUARY 1,
1993 1994 1995 1995 1996 1996 1997 1997
----- ----- ----- -------- -------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of goods sold,
buying and occupancy
costs................. 67.0 69.4 68.6 80.1 78.6 64.9 64.4 67.5
Selling, general and
administrative
expenses.............. 25.1 27.4 24.8 36.8 31.8 20.8 22.0 24.3
Income (loss) from
operations............. 3.6 (1.5) (37.4) (24.1) (14.7) (38.8) 13.0 7.6
Interest expense, net... 1.1 1.8 2.3 2.8 1.4 2.0 1.6 1.8
Income tax provision
(benefit).............. 1.4 (0.6) (2.2) (4.4) (6.0) (1.2) 4.5 2.3
Net income (loss)....... 1.1% (2.7)% (37.5)% (22.5)% (10.1)% (39.6)% 6.9% 3.5%
</TABLE>
19
<PAGE>
RECENT DEVELOPMENTS
Sales for the quarter ended May 3, 1997 decreased approximately $9.8
million, or 14.7%, to approximately $57.0 million compared with sales of $66.8
million during the same quarter in 1996. The sales decrease is due to
operating an average of 31, or 6.3%, fewer stores during the current quarter
compared to the prior year as a result of closing underperforming stores. In
addition to operating fewer stores, comparable store sales declined
approximately 7.5% for the quarter, compared to a 6.7% comparable store sales
increase for the same quarter one year earlier. The decrease in comparable
store sales in 1997 was primarily attributable to less lower-priced clearance
merchandise than in the prior year when 73 stores had been closed in the
immediately preceding quarter.
PERIOD FROM INCEPTION (MAY 26, 1996) TO FEBRUARY 1, 1997 COMPARED TO EIGHT
MONTHS ENDED JANUARY 27, 1996
Wilsons opened five stores and closed 24 stores in the period from inception
(May 26, 1996) to February 1, 1997 compared to three store openings and 76
store closings in the same period one year earlier. As of February 1, 1997,
Wilsons operated 461 stores and 11 seasonal stores compared to 494 stores and
18 seasonal stores at the end of the same period in the previous year. The 33
fewer stores were a result of closing unprofitable stores as part of the
Restructuring. In addition, Wilsons operated 224 holiday stores and 152 kiosks
during the 1996 holiday season compared to 98 holiday stores and 129 kiosks
during the prior year holiday season.
Sales from inception to February 1, 1997 decreased 6.1% to $345.1 million
compared with sales of $367.6 million during the same period in the previous
year. A portion of the decrease in sales is attributable to a 2.7% decline in
comparable store sales. The comparable store sales decline was the result of
weak demand for the Company's fashion forward merchandise in the midwest area
of the country as compared to the northeast and west coast markets where
comparable store sales increased, as well as five fewer shopping days between
Thanksgiving and Christmas. In addition, Wilsons operated an average of 82
fewer stores from inception to February 1, 1997 compared to the same period
one year earlier, as Wilsons closed stores that did not meet cash flow
targets. The comparable store sales decline and a reduction in the number of
stores open was partially offset by a sales increase from operating 149
additional seasonal stores.
Cost of goods sold, buying and occupancy costs from inception to February 1,
1997 were $222.1 million, or 64.4% of sales, compared to $238.5 million, or
64.9% of sales, for the same period of the previous year. Gross margin net of
occupancy costs increased as a percent of sales from inception to February 1,
1997 as compared to the same period one year earlier due to additional
markdowns taken in the earlier period to liquidate merchandise in 76 stores
which were closed in conjunction with the Restructuring and to an increase in
the sales of accessories in the later period which generate a higher gross
margin.
Operating expenses before restructuring and asset impairment charges from
inception to February 1, 1997 were $78.3 million, or 22.7% of sales, compared
to $89.7 million, or 24.4% of sales, for the same period in 1995. The expense
decrease of $11.4 million was due mainly to the $12.3 million decrease in
depreciation and amortization expense resulting from the Restructuring and the
purchase accounting adjustment that reduced the amounts assigned to property
and equipment. In addition, operating expenses in the period from inception to
February 1, 1997 decreased $0.7 million from the same period one year earlier
due primarily to operating an average of 82 fewer stores and to reduced
headquarters expense. Offsetting the operating expense reductions were 149
additional holiday stores and kiosks compared to the same period one year
earlier and a $1.5 million charge associated with the vesting of Restricted
Stock.
Operating expenses after restructuring and asset impairment charges from
inception to February 1, 1997 were $78.3 million, or 22.7% of sales, compared
to $271.9 million, or 74.0% of sales, for the same period in 1995. In 1995 the
Company incurred a pre-tax restructuring charge of $134.3 million to reflect
the anticipated costs associated with closing approximately 100 Wilsons stores
and the write-off of goodwill and other intangibles, and a pre-tax asset
impairment charge of $47.9 million related to the write-off of certain assets
upon the adoption of SFAS No. 121.
20
<PAGE>
Net interest expense from inception to February 1, 1997 was $5.3 million, or
1.6% of sales, compared to $7.4 million, or 2.0% of sales, for the same period
in the previous year. The decrease in net interest expense is primarily due to
a decrease in the average amount of debt outstanding offset by higher interest
rates, the amortization of deferred financing costs and an increase in
interest income.
Income tax expense for the period from inception to February 1, 1997 was
$15.5 million compared to a $4.6 million tax benefit for the same period in
1995. The effective tax rate increased in 1996 to a 39.4% tax rate from a 3.1%
benefit rate in 1995. The higher effective tax rate was primarily due to the
impact of the write-off of nondeductible goodwill and other intangibles as
part of the 1995 Restructuring.
FIVE MONTHS ENDED MAY 25, 1996 COMPARED TO FIVE MONTHS ENDED MAY 27, 1995
Wilsons closed 71 stores and opened three new stores in the five months
ended May 25, 1996, compared to 63 store closings and two store openings in
the five months ended May 27, 1995. The store closings in the first five
months of 1996 and in 1995 were a result of the Restructuring. Wilsons
operated 480 stores as of May 25, 1996 compared to 567 stores at the end of
the same period in 1995.
Sales for the five-month period in 1996 decreased 12.1% to $109.6 million
compared with sales of $124.7 million during the same period of the prior
year. While total sales decreased as a result of operating an average of 90
fewer stores, comparable store sales increased 3.9% in the 1996 period
compared to the same period in the previous year. The 3.9% comparable store
sales increase in the 1996 period was the result of strong merchandise sales
in the ladies and accessories areas due to the clearance of merchandise
associated with store closings and the closings of holiday stores and seasonal
kiosks combined with unseasonably cool weather within Wilsons' areas of
operation during the first three months of 1996.
Cost of goods sold, buying and occupancy costs for the five-month period in
1996 were $86.2 million, or 78.6% of sales, as compared to $99.9 million, or
80.1% of sales, for the same period of the prior year. Gross margin net of
occupancy costs increased as a percent of sales in the five-month period of
1996 primarily due to closing 22 Snyder Leather stores, an off-price strip
center concept which carried lower margin merchandise in the 1995 period, and
an increase in the sale of accessories which produced a higher gross margin in
the 1996 period. Occupancy costs decreased as a percent of sales for the five
months ended May 25, 1996 as compared to the same period one year ago as the
Company closed unprofitable stores as part of the Restructuring.
Operating expenses in the five-month period in 1996 were $39.5 million, or
36.0% of sales, as compared to $54.9 million, or 44.0% of sales, for the same
period of the prior year. The expense decrease of $15.4 million was a result
of store closings and realizing the benefits of profit enhancement measures
initiated in 1995 that increased operational efficiencies in the stores and
the administrative departments. These included store sales productivity gains
as a result of revised store staffing patterns and levels to achieve
productivity increases, revising the layaway and check acceptance policies,
and reductions in headquarters expense. Operating expenses were also lower
than the same period in 1995 as a result of the Restructuring which reduced
Wilsons' 1996 depreciation and amortization expenses by $4.3 million.
Net interest expense for the five months ended May 25, 1996, was $1.6
million, or 1.4% of sales, compared to $3.4 million, or 2.8% of sales, for the
five months ended May 27, 1995. The average outstanding loan balance with CVS
was reduced by $56.0 million from $118.1 million to $62.1 million in the 1996
five-month period. The decrease is primarily attributable to a $124.0 million
capital contribution made by CVS to facilitate the Acquisition.
Income tax benefit for the 1996 five-month period was $6.6 million compared
to $5.5 million in the 1995 five-month period. The effective tax rate
increased in the five-month period in 1996 to 37.2% from 16.4% in the 1995
five-month period. The increase was primarily due to the elimination of
goodwill and other amortization expenses in 1996 which in 1995 created non-
deductible expenses for tax purposes.
21
<PAGE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
During 1995, Wilsons opened five new stores and closed 85 stores, of which
19 were closed in the fourth calendar quarter, compared to 23 store openings
and 26 store closings in 1994. The large number of store closings in 1995 was
a result of the Restructuring. At the end of 1995, Wilsons operated 548
stores, comprised of 546 stores in 46 states and the District of Columbia and
two stores in England, compared to 626 stores in 46 states and the District of
Columbia and two stores in England at the end of 1994. Wilsons also operated
98 holiday stores and 129 seasonal kiosks during the fourth quarter of 1995,
compared to 59 holiday stores and 76 seasonal kiosks during the fourth quarter
of 1994.
Sales decreased 2.6% in 1995 to $462.4 million from $474.6 million in 1994.
The decrease reflected a 1.5%, or $6.2 million, decline in comparable store
sales due primarily to a decline in demand for leather apparel. Wilsons
operated an average of 49 fewer stores during 1995 compared to 1994, as
Wilsons closed 85 stores that did not meet cash flow targets. These declines
were partially offset by the expansion of holiday stores and seasonal kiosks,
which were open in 39 and 53 more locations, respectively, than in 1994,
accounting for an increase in sales of $8.0 million compared to 1994. Non-
comparable store sales, other than holiday stores and seasonal kiosk sales,
were down $14.0 million from 1994 as the Company opened 18 fewer stores during
1995 compared to 1994.
Cost of goods sold, buying and occupancy costs in 1995 were $317.0 million,
or 68.6% of sales, as compared to $329.4 million, or 69.4% of sales, for the
same period of the prior year. Gross margin net of occupancy costs increased
as a percent of sales in 1995 due partially to closing 22 Snyder Leather
stores during the first quarter of 1995. In addition, in 1995 the Company also
increased its accessory sales, which have a higher gross profit margin, to
23.1% of total sales from 20.6% in 1994 as a result of increased emphasis on
accessories in the stores and opening 53 additional seasonal kiosks, which
primarily sell accessories. The Company also achieved stronger sales in 1995
of styles with higher fashion content and higher margins. Partially offsetting
these gross profit margin improvements in 1995 were additional markdowns
required to liquidate merchandise in 73 stores that were closed during
December 1995 and January 1996 in conjunction with the Restructuring and to
liquidate merchandise from the 98 holiday stores and 129 seasonal kiosks.
Occupancy costs increased as a percent of sales in 1995 as compared to the
same period one year earlier as Wilsons' occupancy costs, which are primarily
fixed rents associated with store leases, did not decline at the same rate as
the decline in comparable store sales.
Operating expenses in 1995, before restructuring and asset impairment
charges, were $136.3 million, or 29.5% of sales, compared to $152.5 million,
or 32.1% of sales, in 1994. Of the $16.2 million decrease in operating
expenses, approximately $10 million was attributable to the strategic
initiative to close unprofitable stores. The Company implemented certain
profit enhancement measures during the second quarter of 1995 that accounted
for the majority of the remaining expense reductions. These profit enhancement
measures included store sales productivity gains as a result of revising store
staffing patterns and levels, improving expense control and revising the
layaway and check acceptance policies while simultaneously introducing
debit/ATM cards as an additional form of payment in a number of markets.
Operating expenses in 1995, after restructuring and asset impairment
charges, were $318.5 million, or 68.9% of sales, as compared to $152.5
million, or 32.1% of sales, in the previous year. As part of the
Restructuring, during the fourth quarter of 1995 the Company recorded a pre-
tax restructuring charge of $134.3 million to reflect the anticipated costs
associated with closing approximately 100 of Wilsons' stores and the write-off
of goodwill and other intangibles, and a pre-tax asset impairment charge of
$47.9 million related to the write-off of certain assets upon the adoption of
SFAS No. 121.
Income from operations before depreciation, amortization, restructuring and
asset impairment charges was $30.5 million, or 6.6% of sales, in 1995 compared
to $15.0 million, or 3.2% of sales, in 1994 due to the factors
22
<PAGE>
described above. This measure of net income (loss) is provided because it is a
measure commonly used in the retail industry; however, it is not a measurement
of financial performance under generally accepted accounting principles and is
not meant to represent discretionary funds available to management. See Note
(2) under "Selected Historical and Pro Forma Consolidated Financial Data".
Income from operations in 1995, before restructuring and asset impairment
charges, was $9.1 million, or 2.0% of sales, compared to a loss of $7.3
million, or 1.5% of sales, in 1994. The $16.4 million improvement was
primarily due to discontinuing the Snyder Leather off-price concept during the
first quarter of 1995 and profit enhancement measures introduced during the
second quarter of 1995. Loss from operations in 1995, after restructuring and
asset impairment charges, was $173.1 million compared to a loss of $7.3
million in 1994.
Net interest expense in 1995 was $10.4 million, or 2.3% of sales, compared
to $8.4 million, or 1.8% of sales, during the prior year. The Company's
average annual interest rate paid on outstanding loan amounts to CVS in 1995
was 6.4% compared to 4.7% in 1994. This increase was partially offset by a
reduction in the average outstanding loan balance with CVS to $151.9 million
in 1995 compared to $165.1 million in 1994 as a result of lower inventory
levels due to store closings and a higher inventory turn rate.
Income tax benefit in 1995 was $10.1 million compared to $3.1 million in
1994. The effective tax rate declined in 1995 to 5.5% from 19.8% in 1994. The
decline was primarily due to the effective tax rate impact of nondeductible
goodwill in 1995 compared to 1994.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
During 1994, Wilsons opened 23 new stores and closed 26 existing stores,
compared to 40 new store openings, 31 store acquisitions and 23 store closings
in 1993. At the end of 1994, Wilsons operated 628 stores comprised of 626
stores in 46 states and the District of Columbia and two stores in England,
compared to 631 stores in 44 states and the District of Columbia at the end of
1993. Wilsons also operated 59 holiday and 76 seasonal kiosks during the
fourth quarter of 1994 compared to 25 holiday stores and 55 seasonal kiosks
during the fourth quarter of 1993.
Sales decreased 0.8% in 1994 to $474.6 million from $478.5 million in 1993.
The decrease reflected a 5.1%, or $23.1 million, decline in comparable store
sales due primarily to a decline in demand for all outerwear and leather
apparel during the fall of 1994. This decline was partially offset by
operating an average of 22 more stores in 1994 compared to 1993, reflecting
the full year impact of the 71 store openings and acquisitions in 1993, which
had a positive effect on 1994 sales. In addition, the comparable store sales
decline was partially offset by the expansion of holiday stores and seasonal
kiosks, which were open in 34 and 21 more locations, respectively, than in
1993, accounting for an increase in sales of $6.3 million compared to 1993.
Non-comparable store sales, other than holiday stores and seasonal kiosk
sales, were up $12.9 million from 1993 as the Company realized the full year
sales impact of the 1993 openings and acquisitions.
Cost of goods sold, buying and occupancy costs in 1994 were $329.4 million,
or 69.4% of sales, as compared to $320.5 million, or 67.0% of sales, for the
same period of the prior year. Gross margin net of occupancy costs decreased
as a percent of sales in 1994. The decrease in gross margin net of occupancy
costs as a percentage of sales was primarily attributable to increased
markdowns resulting from high year end inventory levels as a result of
sluggish demand for leather apparel during the fourth quarter of 1994. At the
same time, however, the Company increased its mix of accessory sales, which
have a higher gross profit margin, to 20.6% of sales in 1994 from 16.8% in
1993. The increase in accessory sales was a result of increased accessory
emphasis in the stores due to the acquisition of Georgetown Leather Design
during June 1993 and opening 21 additional seasonal kiosks in 1994. Occupancy
costs decreased as a percent of sales in 1994 as compared to the same period
one year earlier as Wilsons occupancy costs increased due to the full-year
rent impact of the store openings and acquisitions in 1993 combined with the
effect of the decline in comparable store sales.
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Operating expenses in 1994 were $152.5 million, or 32.1% of sales, compared
to $140.8 million, or 29.4% of sales, in 1993. The $11.7 million increase in
operating expenses was primarily attributable to the full year impact of 63
traditional stores opened or acquired during the last seven months of 1993.
Income from operations before depreciation, amortization, restructuring and
asset impairment charges was $15.0 million, or 3.2% of sales, in 1994 compared
to $37.9 million, or 7.9% of sales, in 1993 due to the factors described
above.
Loss from operations in 1994 was $7.3 million, or 1.5% of sales, compared to
income from operations of $17.2 million, or 3.6% of sales, in 1993. The $24.5
million decline was primarily due to a 5.1% comparable store sales decline
during 1994 and the full year impact of 71 new or acquired stores during 1993.
Historically, the Company has opened most of its stores during the last half
of the year. As a result, new stores opened just prior to the fourth quarter
produce profits in excess of their annualized profits since the stores
typically generate losses in the first six months of the year.
Net interest expense in 1994 was $8.4 million, or 1.8% of sales, compared to
$5.1 million, or 1.1% of sales, during the prior year. The average outstanding
loan balance with CVS increased to $165.1 million in 1994 compared to $147.1
million in 1993 due to operating an average of 22 more stores during 1994. The
Company's average annual interest rate paid on outstanding loan amounts to CVS
in 1994 was 4.7% compared to 3.3%
in 1993.
Income tax benefit in 1994 was $3.1 million compared to an income tax
provision of $7.0 million in 1993. The effective tax rate declined in 1994 to
a 19.8% benefit from a 58.2% tax in 1993. The decline was primarily due to the
effective rate impact of nondeductible goodwill and state income taxes in 1994
compared to 1993.
LIQUIDITY AND CAPITAL RESOURCES
Wilsons' primary capital requirements have been to support capital
investment to open new stores, to remodel existing stores, to update
information systems and to meet seasonal working capital needs. The Company's
peak working capital needs typically occur during the period from August
through early December as inventory levels are increased in advance of the
Company's peak selling season of October through December. In 1997, the
Company currently plans to open eight to 15 traditional stores and eight to
15 airport stores. Such stores are part of the Company's long-term strategy
intended to provide growth opportunities and higher profit margins. See
"Business--Business Strategy" and "--Growth Strategy."
Historically, the primary sources of the Company's cash for working capital
and capital expenditures have been net cash flows from operating activities
and borrowings from CVS. Prior to the Acquisition, the Company had
participated in CVS's centralized cash management system whereby cash received
from operations was transferred to CVS's centralized cash accounts and cash
disbursements were funded from the centralized cash accounts on a daily basis.
The receipt and disbursement of cash was tracked through an intercompany cash
management account. Accordingly, cash required for operating and capital
expenditures during the year was met from this source.
The Banks have provided the Company with a three-year Revolving Credit
Facility. The Revolving Credit Facility provides for borrowings of up to $150
million in aggregate principal amount, which amount includes a letter of
credit subfacility of up to $90 million. The maximum amount available under
the Revolving Credit Facility, however, is further subject to a borrowing base
limitation (less certain reserves) of 65% of eligible inventory, plus a
seasonal advance. The Company's borrowing availability is also reduced by
outstanding letters of credit. Interest is payable on borrowings at one or
more variable rates determined by reference to the "prime" rate plus .25%
("prime" plus 0.0% for the first $10.0 million of borrowings), or LIBOR plus
1.75%. The spreads are subject to possible changes based upon the Company's
financial results. As of February 1, 1997, the Company had no borrowings
outstanding under its Revolving Credit Facility. The Company pays a monthly
fee equal to .375% per annum on the unused amount of the Revolving Credit
Facility and on that portion of the first
24
<PAGE>
$10.0 million in borrowings that bears interest at prime plus a spread. For
letters of credit, the Company pays a monthly fee in an amount equal to 1.25%
per annum times the daily average of the amount of letters of credit
outstanding during each month, which percentage is subject to possible changes
based on the Company's financial results. The Revolving Credit Facility
contains certain covenants limiting, among other things, the Company's ability
to make capital expenditures, pay cash dividends or make other distributions.
The Company plans to use the Revolving Credit Facility for its immediate and
future working capital needs, including capital expenditures. As of February
1, 1997, the Company had $7.9 million in outstanding letters of credit. From
inception through February 1, 1997, the peak borrowings and letters of credit
outstanding under the Revolving Credit Facility were $48.2 million and $60.9
million, respectively. During 1995, the highest amounts borrowed by the
Company from CVS, net of the prior indebtedness eliminated as part of the
Acquisition, to fund working capital expenditures and covered by outstanding
letters of credit were $112.7 million and $97.4 million, respectively, and the
average amounts of such borrowings and amounts covered by outstanding letters
of credit for such year were $51.9 million and $58.9 million, respectively.
The Company is highly dependent on the Revolving Credit Facility to fund
working capital and letter of credit needs, and management believes that the
Revolving Credit Facility will be sufficient to meet the Company's working
capital and capital expenditure requirements for the foreseeable future. There
can be no assurance, however, that the Revolving Credit Facility will be
sufficient to fund such needs, or, if the Revolving Credit Facility is
insufficient to meet such needs, that the Company will be able to obtain any
additional financing or obtain such financing on terms acceptable to the
Company.
The Company also has outstanding the Note payable to CVS, which is a
subordinated secured note for $55.8 million. $55.0 million of the principal
amount of the Note bears interest at the rate of 10% per annum, compounded
annually, with all such principal and interest due and payable on December 31,
2000. The remaining principal balance of the Note ($0.8 million) does not bear
interest and is due and payable on December 31, 2000. See "Certain
Transactions--Subordinated Note."
CASH FLOW ANALYSIS
Operating activities for the period from inception (May 26, 1996) to
February 1, 1997 resulted in cash generated of $34.2 million compared to cash
generated of $63.0 million for the eight-month period ended January 27, 1996.
The $28.8 million decrease in cash provided by operating activities in the
1996 period compared to the same period in 1995 resulted from several
different factors. The net loss for the eight months ended January 27, 1996 of
$145.6 million was offset by a noncash restructuring charge of $182.2 million
and depreciation and amortization of $13.3 million. Inventories also increased
from $53.1 million at May 26, 1996 to $64.9 million at February 1, 1997. This
increase was due primarily to an overall increase in the carrying level of
inventories after the Acquisition. In addition, prepaid expenses were higher
in the most recent period due to the timing of rent payments which occurred
after the period ended on January 27, 1996 and before the period ended on
February 1, 1997.
Operating activities in the first five months of 1996 prior to the
Acquisition resulted in cash used of $16.0 million compared to cash used of
$11.5 million in the same period of 1995. The $4.5 million increase in cash
used by operating activities in the first five months of 1996 compared to the
same period in 1995 resulted primarily from negotiated settlements with
landlords for stores closed prior to their natural lease expiration dates
during the 1996 period. In addition, the net loss for the five-month period in
1996 declined by $16.9 million compared to the same period in 1995 as a result
of lower operating expenses associated with operating an average of 90 fewer
stores during the first five months of 1996, partially offset by $7.7 million
less cash generated by the reduction of inventory during that same period.
Operating activities in 1995 resulted in cash provided of $53.1 million
compared to cash provided of $12.2 million in 1994 and $12.0 million in 1993.
The increase in cash provided from operating activities in 1995 as compared to
1994 and 1993 was primarily generated by a $27.7 million decrease in inventory
resulting primarily from the liquidation of inventory from the closed stores
which exceeded the associated decrease in accounts payable.
25
<PAGE>
Investing activity for the period from inception to February 1, 1997 was
comprised of capital expenditures totaling $5.9 million. The capital
expenditures were primarily for enhancements to the Company's management
information systems, five store openings, and the renovation of and
improvements to existing stores. Capital expenditures for the same period in
1995 totaled $7.5 million. Commencing in 1997, the Company currently plans to
open eight to 15 traditional stores and eight to 15 airport stores. The cost
to open a store is currently estimated to range from $130,000 to $200,000.
Investing activities in 1996 include the Acquisition of the Predecessor
Companies, net of cash acquired, for $37.1 million. Capital expenditures for
the year ending January 31, 1998 are anticipated to be approximately $15.6
million.
Investing activity was comprised primarily of capital expenditures totaling
$3.6 million, $2.9 million, $10.1 million, $20.7 million and $26.6 million
during the five months ended May 25, 1996, and May 27, 1995, and the years
1995, 1994, and 1993, respectively. These expenditures were primarily for the
addition of the new stores, which cost, on average, $182,000 and $173,000 to
construct in 1995 and 1994, respectively, renovations of and improvements to
existing stores and enhancements to the Company's management information
systems. The decrease in cash used in investing activities in 1995 as compared
to 1994 and 1993 was primarily due to five store openings in 1995 compared to
23 store openings in 1994 and 40 store openings in 1993. In addition, the
Company used approximately $6.4 million to purchase substantially all of the
assets of Georgetown Leather Design in June 1993.
Cash provided from financing activities for the period from inception to
February 1, 1997 was $16.2 million compared to cash used of $50.6 million in
the same period in 1995. The proceeds provided from financing activities in
1996 resulted from the sale of common and preferred stock of $12.0 million and
a $4.2 million increase in book overdrafts. The $50.6 million used in
financing activities in the eight-month period ended January 27, 1996 was a
result of decreased intercompany borrowings of $57.8 million from CVS offset
by a $7.2 million increase in book overdrafts. As part of the Acquisition, CVS
eliminated all prior indebtedness owed to it by the Predecessor Companies.
Cash used for financing activities was $46.0 million in 1995 compared to
cash provided from financing activities of $20.4 million in 1994 and $20.9
million in 1993. The cash used for financing activities in 1995 resulted from
paying down outstanding intercompany debt to CVS. Wilsons' loan balance to CVS
was $78.8 million at the end of 1995 compared to $124.2 million at the end of
1994 and $100.3 million at the end of 1993. As part of the Acquisition, CVS
eliminated all prior indebtedness owed by the Predecessor Companies to CVS.
Management believes that Wilsons' financial resources, including the
Revolving Credit Facility, the net proceeds from the Offering and estimated
cash flow from operations, will be adequate to fund the Company's operations
for the foreseeable future.
RECENTLY ISSUED ACCOUNTING STANDARDS--NEW ACCOUNTING PRONOUNCEMENT
The Company will adopt in the fiscal year ending January 31, 1998 the
Statement of Financial Accounting Standards No. 128, "Earnings per Share "
("SFAS No. 128"), which was issued in February 1997. SFAS No. 128 requires
disclosure of basic earnings per share ("EPS") and diluted EPS, which replaces
the existing primary EPS and fully diluted EPS, as defined by APB No. 15.
Basic EPS is computed by dividing net income by the weighted average number of
shares of common stock outstanding during the year. Dilutive EPS is computed
similar to EPS as previously reported provided that, when applying the
treasury stock method to common equivalent shares, the Company must use its
average share price for the period rather than the more dilutive greater of
the average share price or end-of-period share price required by APB No. 15.
SEASONALITY AND INFLATION
A majority of the Company's net sales and operating profit is generated in
the peak selling period from October through December, which includes the
Christmas selling season. Wilsons recorded 55.6% of its total 1996 sales in
the peak selling period. For 1996, 34.9% of the Company's sales were generated
during the period from the day after Thanksgiving through January 4, 1997. As
a result, the Company's annual operating results
26
<PAGE>
have been, and will continue to be, heavily dependent on the results of its
peak selling period. Net sales are generally lowest during the period from
April through July, and the Company typically does not become profitable until
the fourth quarter of a given year. Most of the Company's stores are
unprofitable during the first three quarters. Conversely, nearly all of the
Company's stores are profitable during the fourth quarter, even those that may
be unprofitable for the full year. Historically, the Company has opened most
of its stores during the last half of the year. As a result, new stores opened
just prior to the fourth quarter produce profits in excess of their annualized
profits since the stores typically generate losses in the first six months of
the year.
The following table sets forth certain unaudited financial information for
Wilsons for each calendar quarter of 1995 and each fiscal quarter of the year
ended February 1, 1997 (and pro forma for such periods). This quarterly
information has been prepared on a basis consistent with the Company's audited
financial statements appearing elsewhere in this Prospectus and reflects
adjustments which, in the opinion of management, consist of normal recurring
adjustments, necessary for a fair presentation of such unaudited quarterly
results when read in conjunction with the audited financial statements and
notes thereto.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Calendar 1995
Net sales............................ $93.4 $47.3 $62.4 $ 259.3
Loss from operations................. (16.1) (22.6) (18.9) (115.5)(1)
Net loss............................. (15.2) (20.8) (18.3) (119.1)(1)
Year Ended February 1, 1997 (2)(3)
Net sales............................ 66.8 41.4 86.4 230.2
Income (loss) from operations........ (9.8) (18.0) .9 55.3
Net income (loss).................... (7.2) (11.9) (1.0) 33.0
Year Ended February 1, 1997 (Pro Forma)
(2)(3)(4)(5)
Net sales............................ 65.0 41.0 86.4 230.2
Income (loss) from operations........ (6.9) (17.2) .9 55.3
Net income (loss).................... (5.3) (11.9) (1.0) 33.0
</TABLE>
- --------
(1) Includes a pre-tax restructuring charge of $134.3 million related to the
anticipated costs associated with the closing of the Predecessor
Companies' stores and the write-off of goodwill and other intangibles
during the fourth quarter of 1995. Also includes a pre-tax asset
impairment charge of $47.9 million related to the write-off of certain
assets upon the adoption of SFAS No. 121 during the fourth quarter of
1995.
(2) The fourteen weeks ended August 3, 1996 represent a period which combines
the results of operations of the Predecessor Companies prior to the
Acquisition from April 28, 1996 through May 25, 1996, and the Company
after the Acquisition from May 26, 1996 through August 3, 1996.
(3) The year ended February 1, 1997 represented a 53-week period. The first,
third and fourth quarters were comprised of 13 weeks and the fourth
quarter was comprised of 14 weeks.
(4) See "Pro Forma Unaudited Consolidated Statement of Operations."
(5) The third and fourth quarter pro forma results are the same as the third
and fourth quarter actual results for the year ended February 1, 1997,
because the periods represent only the results of operations of the
Company and contain no results of operations of the Predecessor Companies.
The Company does not believe that inflation has had a material adverse
effect on the results of operations during the past three years; however,
there can be no assurance that the Company's business will not be affected by
inflation in the future.
27
<PAGE>
BUSINESS
OVERVIEW
Wilsons is the leading specialty retailer of men's and women's leather
outerwear, apparel and accessories in the United States. For the year ended
February 1, 1997 the Company had, on a pro forma basis, net sales of $422.6
million. As of February 1, 1997, the Company operated 461 stores and, during
its peak selling season in 1996 from October through December, the Company
also operated 376 holiday stores and seasonal kiosks.
Wilsons operates in 45 states, the District of Columbia and England under
several formats including "Wilsons The Leather Experts," the Company's
traditional mall-based concept which offers moderately priced merchandise, and
"Tannery West" and "Georgetown Leather Design," mall-based concepts which
offer more upscale merchandise. In addition to the traditional mall-based
stores, as of February 1, 1997, Wilsons also operated eleven airport stores
that focus on selling accessories, such as gloves, handbags, wallets,
briefcases, planners and computer cases, to business travelers and tourists.
Unlike many retailers, Wilsons designs, purchases leather for, and contracts
for the manufacturing of most of the apparel and accessories sold in its
stores. This vertical integration enables the Company to reduce its order lead
times, respond more quickly to changing consumer preferences and fashion
trends, and offer its customers a better value through consistently high
quality products at competitive prices.
On May 25, 1996, an investor group, including management, acquired the
Predecessor Companies from CVS. As part of the Restructuring, management
closed 156 stores that had not achieved financial return targets and recorded
certain related lease obligations and, in 1995, the Company recorded a
restructuring charge of $134.3 million related to store closings and the
write-off of goodwill and other intangibles, and an asset impairment charge of
$47.9 million related to the write-off of certain assets upon the adoption of
SFAS No. 121.
Upon completion of the Offering, Wilsons believes that it will have the
capital resources and management information systems to implement its long-
term growth strategy, which emphasizes store locations and products that offer
growth opportunities and higher profit margins. Specifically, this long-term
growth strategy currently calls for annual openings of eight to 15 traditional
stores and eight to 15 airport stores commencing in 1997. The Company is also
exploring the opening of additional stores outside of the United States and
wholesale opportunities.
BUSINESS STRATEGY
Wilsons' objectives are to expand its position as the largest specialty
retailer of leather outerwear, apparel and accessories in the United States
and to increase the profitability of the Company. Key elements of the
Company's business strategy include:
Promote the Company's Leather Expertise. The Company has built its image as
"The Leather Experts" by offering its customers an extensive selection of
affordably priced quality leather products, demonstrated by the availability
of over 6,000 stock keeping units ("SKUs"). The Company believes that its
image as "The Leather Experts" is enhanced when a customer enters a Wilsons
store and experiences the fragrance, feel and fit of leather. The experience
is further enhanced by the detailed knowledge that the Wilsons sales
associates provide the customer regarding leather types, quality and care.
Maximize Merchandising Opportunities Through Vertical Integration. Unlike
many retailers, Wilsons designs, purchases leather for and contracts for the
overseas manufacturing of most of the apparel and accessories sold in its
stores. Wilsons' operations integrate the design of leather merchandise, the
development and sourcing
28
<PAGE>
of new leather textures, colors and finishes, and the contract manufacturing
and importation of goods to efficiently deliver merchandise to its stores. The
Company believes that this vertical integration gives it several competitive
advantages, including the enhanced ability to:
. Better manage order lead times and delivery schedules
. Change its merchandise mix and respond more rapidly to fashion trends and
consumer demand
. Purchase leather and contract for manufacturing at favorable prices
. Schedule promotions to coincide with merchandise availability
. Reorder faster selling merchandise within the same selling season
Create Brand Recognition. Over 80% of Wilsons' products are sold under its
proprietary brand names, including Wilsons The Leather Experts(TM), Tannery
West(R), Georgetown Leather Design(R), Berman Buckskin(TM), Adventure Bound(R),
Maxima(R), Open Road(TM) and M. Julian(R), which are trademarks of the Company.
This branding permits the Company to provide merchandise not sold by other
retailers. In addition to its own brands, Wilsons also selectively offers
designer brands such as Guess?(R), Jones New York(R), Kenneth Cole(R), Andrew
Marc(R) and Bosca(R), which brand names and trademarks are the property of
their respective holders. The combination of the Wilsons brands with these
designer brands highlights to the customer the value of the Company's brands
and the breadth and depth of the Wilsons selection.
Maximize Usage of Distribution and Integrated Information Systems. The
Company supports its stores with highly automated, sophisticated and integrated
information systems in areas such as distribution, merchandising, marketing,
human resources and finance. Management in all of these areas works closely
together to make decisions on overall merchandise mix, order quantity and
marketing efforts. The Company's information systems allow it to integrate its
leather design and development, contract manufacturing management,
merchandising, marketing and retail sales functions. The Company spent $12.6
million between 1992 and 1994 to design a highly automated distribution center
which relies on high-speed sorting equipment, bar code scanning and radio
frequency technologies to maintain detailed current inventory records and
quickly ship products to the Company's stores. Since January 1995, the Company
has spent $3.6 million to transfer its information systems from the Company's
current mainframe platform to a client/server platform. The Company expects to
spend approximately $2.4 million to complete the upgrade of its information
systems by the end of 1997. Through utilization of the Company's information
systems, the Company expects to improve the product manufacturing cycle to
reduce the amount of time necessary to deliver products to the Company's
customers and to be able to allocate merchandise more effectively among the
Company's stores.
GROWTH STRATEGY
Wilsons seeks to improve its operating results by enhancing customer loyalty
and by gaining market share from its competitors, thereby increasing comparable
store sales. The Company also intends to increase the number of its stores,
improve its profitability by emphasizing higher margin products, and utilize
its information systems to identify opportunities to reduce costs and more
efficiently manage its merchandising, marketing and contract manufacturing
programs. Key elements of this growth strategy include:
Increase Comparable Store Sales. Wilsons has implemented programs to increase
its comparable store sales. These programs include (i) utilizing fashion
forward merchandise to draw customers to its stores while maintaining a very
broad assortment of basic products; (ii) training the Company's sales
associates as leather experts, in order to provide customers with a high level
of service and knowledge and improve sales associate productivity; (iii)
developing ongoing sales promotion and pricing strategies to provide customers
with the opportunity to buy quality products at value prices; (iv) utilizing
layaway programs to encourage customers to purchase merchandise earlier in the
season, allowing the Company to determine early what merchandise will be
popular, and to offer alternative financing for customers; (v) remerchandising
the stores during non-peak selling seasons to emphasize accessories; and
(vi) selectively offering designer brand name merchandise such as Guess?, Jones
New York, Kenneth Cole, Andrew Marc and Bosca, to highlight the value of
Wilsons' proprietary brands.
Enhance Profit Margins. Wilsons strives to increase its operating margins by
(i) shifting its product mix towards higher margin products such as
accessories; (ii) utilizing the Company's information systems to improve
29
<PAGE>
merchandising and marketing, reduce order lead times and minimize markdowns,
while offering a broad product selection; (iii) selectively utilizing more
fashion forward, higher margin products to increase store traffic;
(iv) reducing operating costs through the closing of underperforming stores and
the creation of greater purchasing and operating efficiencies; and (v)
utilizing its outlet stores to efficiently sell slower moving products.
Increase Store Base. The Company plans to increase the number of its stores
and to continue to open and operate holiday stores and seasonal kiosks during
its peak selling season. The increase in stores is expected to come from the
opening of new stores utilizing the following formats:
. Mall-Based Stores. Wilsons currently plans to open eight to 15 new mall-
based stores per year in markets or regional malls that offer growth
opportunities and higher profit margins.
. Airport Stores. High traffic business traveler and tourist locations
offer significant growth opportunities for the Company. These locations
generally offer more accessories and are less seasonal than traditional
mall-based stores. Wilsons has opened 11 airport locations since 1994 and
currently plans to open at least eight airport stores per year.
. Seasonal Concepts. Wilsons has developed the expertise required to
successfully open holiday stores and seasonal kiosks that operate in
malls for three to four months each year. In 1996, Wilsons operated 224
holiday stores and 152 seasonal kiosks. Holiday stores temporarily occupy
vacant store space in malls where the Company has no traditional store.
Seasonal kiosks are generally designed to complement and enhance the
operation of the traditional Wilsons store in the same mall. In 1997,
Wilsons currently plans to open approximately 200 holiday stores and 100
seasonal kiosks. Holiday stores present the Company with opportunities to
test new markets and malls to evaluate their potential as locations for
new Wilsons' mall-based stores.
. New Retail and Non-Retail Channels. Wilsons is exploring the opening of
additional stores outside of the United States, primarily in Western
Europe and the Pacific Rim. Wilsons is also exploring wholesale
opportunities to be developed either internally or through acquisitions.
INDUSTRY BACKGROUND
The retail leather apparel and accessories markets are well established in
the United States. Management believes that retail sales of leather apparel and
accessories in the United States have experienced significant growth in the
past twenty years. Management believes that a significant factor in the growth
of the leather apparel and accessories industry is the increase in foreign
manufacturing, particularly in the Far East. The increase in foreign sourcing,
along with technical advances in hide tanning in the early 1980s, have allowed
the Company to offer high-quality merchandise at lower prices to more
consumers. Due in part to the popularity of the leather "bomber" jacket, retail
leather apparel sales reached a peak in 1989. Mass merchandisers began selling
leather during the early 1990s on a broader basis.
However, during the early 1990s, due to adverse conditions in the retail
apparel industry and changes in fashion trends, there was a downtrend in
industry sales of leather apparel and outerwear in general and a consolidation
of retailers selling leather apparel. The Company has emerged as the leader in
the U.S. specialty retail leather apparel and accessories industry following
such consolidation.
COMPANY HISTORY
Wilsons House of Suede, Inc. ("House of Suede"), one of the Predecessor
Companies, was founded in the late 1940s as a family business which established
a reputation for quality leather, innovative fashion and a commitment to
customer service. In the mid-1960s, House of Suede developed a strategy to make
leather products an affordable purchase for the mass market. In implementing
this strategy, House of Suede grew successfully through the 1970's. By 1982,
when House of Suede was acquired by CVS, it had grown to a 42-store chain.
Through the 1980s, CVS pursued an aggressive expansion strategy for the
Predecessor Companies in order to achieve market penetration in the highly
fragmented leather apparel industry. Under CVS's ownership, the Predecessor
Companies opened or acquired between 30 and 60 stores per year and made
strategic acquisitions of
30
<PAGE>
small regional chains, including Leather Loft and Tannery West. Through its
acquisition of Bermans The Leather Experts, Inc. ("Bermans") in 1988, the
Predecessor Companies became the leading specialty retailers of leather apparel
and accessories operating nationwide. Founded in 1899, Bermans originally
specialized in purchasing and selling hides and furs, and subsequently
diversified into retailing. Lyle Berman, a director of the Company and a
general partner of Limited Partnership I and Limited Partnership II, had an
ownership interest in Bermans at various times until it was sold to CVS. When
CVS acquired Bermans, the result was a company with expertise in all areas of
the leather apparel business, from design and contract manufacturing to the
retail sale of quality leather apparel. By 1989, the Predecessor Companies had
established a national presence as the leading specialty retailer of leather
apparel, with over 500 traditional stores, covering substantially all of the
major regional malls in the United States. This position was further reinforced
by the acquisition of two additional regional chains: Snyder Leather in 1992
and Georgetown Leather Design in 1993. The Company was organized in May 1996 to
acquire the Predecessor Companies from CVS. See "The Acquisition," "Certain
Transactions" and "Description of Securities."
VERTICALLY INTEGRATED OPERATIONS
The Company believes that a key competitive advantage is its ability to
integrate the functions of its leather design and development, contract
manufacturing management, merchandising, marketing and retail sales
departments. These departments work closely together to make decisions on
overall merchandise mix, order quantity and marketing efforts. The Company is
testing information systems, which it believes will be fully operational by the
end of 1997, to further integrate its key management functions. The Company
believes that its integrated management and information systems give it the
ability to bring leather from raw material to finished product quickly and
efficiently.
The Company intends to enhance the integration of its functions by utilizing
the Company's information systems and data on customer lifestyles and
merchandise preferences. The Company currently collects point-of-sale
information on its customers' names, addresses and purchase histories, which
has resulted in the compilation of information on more than five million
customers. The Company intends to use its new information systems to analyze
this data for the purpose of grouping such customers into one or more customer
segments. These segments are defined by demographic and socioeconomic
guidelines and lifestyle characteristics, which also relate to merchandise
preference. The Company's merchants will be able to use customer segment
information to help design merchandise and plan orders, and make distribution
and reorder decisions for each store. Wilsons' manufacturing managers located
in the Far East will also be integrated into this process to ensure that new
styles are tested and brought to market quickly and that strong selling
merchandise is given priority within the production pipeline and sent promptly
to the stores. The Company's marketing department will be able to use the
customer segment information to design targeted customer promotions.
STORE FORMATS
Wilsons is the leading specialty retailer of leather apparel and accessories
in the United States. As of February 1, 1997, the Company had 461 store
locations in 45 states, the District of Columbia and England, covering
substantially all of the major regional malls in the United States. These
stores are operated under two formats: traditional mall-based stores (450
locations), including "Wilsons The Leather Experts," "Tannery West" and
"Georgetown Leather Design" and airport stores (11 locations). Wilsons also
operates two seasonal formats which are generally open during the Company's
peak selling season of October through December: holiday stores (224 locations
operated in 1996) and seasonal kiosks (152 locations operated in 1996).
31
<PAGE>
- --------------------------------------------------------------------------------
461 Store Locations
- --------------------------------------------------------------------------------
LOGO
^ Corporate Headquarters and
Distribution Center
STORE COUNT AS OF FEBRUARY 1, 1997
<TABLE>
<CAPTION>
TRADITIONAL AIRPORT TOTAL
----------- ------- -----
<S> <C> <C> <C>
Alabama 2 - 2
Arizona 4 - 4
Arkansas 1 - 1
California 65 - 65
Colorado 7 - 7
Connecticut 7 - 7
Delaware 2 - 2
Florida 5 - 5
Georgia 8 3 11
Idaho 1 - 1
Illinois 36 - 36
Indiana 11 1 12
Iowa 8 - 8
Kansas 2 - 2
Kentucky 4 - 4
Louisiana 3 - 3
Maine 3 - 3
Maryland 15 2 17
Massachusetts 18 - 18
Michigan 21 - 21
Minnesota 13 1 14
Missouri 5 - 5
Nebraska 4 - 4
Nevada 3 - 3
</TABLE>
<TABLE>
<CAPTION>
TRADITIONAL AIRPORT TOTAL
----------- ------- -----
<S> <C> <C> <C>
New Hampshire 5 - 5
New Jersey 21 - 21
New Mexico 1 - 1
New York 35 - 35
North Carolina 8 - 8
North Dakota 4 - 4
Ohio 24 - 24
Oklahoma 1 - 1
Oregon 3 - 3
Pennsylvania 23 2 25
Rhode Island 3 - 3
South Carolina 1 - 1
South Dakota 2 - 2
Tennessee 7 - 7
Texas 14 - 14
Utah 5 - 5
Vermont 1 - 1
Virginia 12 - 12
Washington 16 - 16
Washington, D.C. 1 - 1
West Virginia 1 - 1
Wisconsin 14 - 14
England - 2 2
--- --- ---
Total 450 11 461
=== === ===
</TABLE>
32
<PAGE>
Traditional Mall-Based Stores
As of February 1, 1997, Wilsons operated 450 stores in 45 states and the
District of Columbia under the names "Wilsons The Leather Experts," "Tannery
West" and "Georgetown Leather Design." These stores average approximately 2,000
square feet in size and are located nationwide, primarily in regional shopping
malls. The Wilsons The Leather Experts stores are designed to target a broad
base of consumers, showcase the full range of Wilsons products, from men's and
women's leather apparel (including coats, jackets and sportswear) to leather
accessories (including gloves, handbags, wallets, briefcases, planners and
computer cases). The Tannery West and Georgetown Leather Design stores, located
primarily in higher-end malls, target a slightly more upscale market and focus
more on leather accessories than traditional Wilsons The Leather Experts
stores. In 1996, the traditional mall-based stores had, on a pro forma basis,
sales of $374.8 million, representing 88.7% of the Company's total sales;
stores open the entire year averaged sales per store of $806 thousand and sales
per square foot of $390.
Airport Stores.
As of February 1, 1997, Wilsons operated eleven airport stores under the
"Wilsons The Leather Experts" name, with nine locations in the United States
and two locations in England. These stores average approximately 800 square
feet in size and are designed to target business travelers and tourists.
Airport stores emphasize a wide assortment of leather accessories and carry a
limited assortment of leather apparel. Airport stores tend to be less seasonal,
due in part to a more even flow of customer traffic during the year as compared
to malls, and to an emphasis on accessories. In 1996, the airport stores had,
on a pro forma basis, sales of $8.0 million, representing 1.9% of the Company's
total sales; stores open the entire year averaged sales per store of $791
thousand and averaged sales per square foot of $871.
Holiday Stores.
In 1996, Wilsons operated 224 holiday stores in 42 states. A holiday store is
a temporary, full-size Wilsons store which is located in a vacant mall space
and is operated only during October through December, the Company's peak
selling season. Wilsons typically locates these stores in malls where there is
not already an existing Wilsons store. These stores offer a merchandise
selection similar to the traditional Wilsons The Leather Experts stores in a
facility closely resembling the traditional store. Lower occupancy costs as a
percent of sales result in higher operating margins for the holiday stores as
compared to the full year margins of the Company's traditional stores. An
additional benefit of holiday stores is the ability to test new malls where the
Company is considering opening a traditional store. Merchandise purchased at
holiday stores may be returned to any of the Company's stores. In 1996, holiday
stores had, on a pro forma basis, sales of $31.3 million, representing 7.4% of
the Company's total sales; such stores averaged sales per store of $136
thousand.
Seasonal Kiosks.
In 1992, Wilsons began to use a seasonal "kiosk" concept in order to take
further advantage of the seasonality of the Company's business and provide a
new distribution channel for future growth. In 1996, Wilsons operated 152
seasonal kiosks, 92% of which were in malls where Wilsons already had a
traditional store. A seasonal kiosk is generally a 100 square-foot temporary
unit located in the common area of a mall. Open primarily during October
through December, the Company's peak holiday selling season, these locations
generally offer a selected assortment of leather accessory gift items and are
designed to complement and enhance the traditional Wilsons store in the same
mall. Merchandise purchased at seasonal kiosks may be returned to any of the
Company's stores. In 1996, seasonal kiosks had, on a pro forma basis, sales of
$8.5 million, representing 2.0% of the Company's total sales; such kiosks
averaged sales per store of $55 thousand.
33
<PAGE>
MERCHANDISING
The Company's merchandising strategy is based on an understanding of its
customer base. Wilsons' merchandising strategy focuses on increasing its market
share by offering a broad assortment of quality leather apparel and accessories
at affordable prices. Wilsons offers more than 6,000 SKUs of men's and women's
leather apparel and leather accessories such as gloves, handbags, wallets,
briefcases, planners and computer cases. The Company emphasizes proprietary
brands, which generally carry higher margins than other merchandise sold by the
Company, including Wilsons The Leather Experts, Tannery West, Berman Buckskin,
Georgetown Leather Design, Adventure Bound, Open Road, Maxima and M. Julian.
Wilsons also complements its product mix by selling, on a non-exclusive basis,
fashion forward designer merchandise, such as Guess?, Jones New York, Kenneth
Cole, Andrew Marc and Bosca. The Company anticipates that its merchants will be
able to use customer segment information (see "Vertically Integrated
Operations" above) to help design merchandise and plan orders, and make
distribution and reorder decisions for each store.
Key elements of the Company's merchandising strategy include:
. Selection--Wilsons offers its customers an extremely broad and deep
selection of leather apparel and accessories. Management believes that
the Company's traditional stores offer significantly more SKUs than do
those of its competition (e.g., department stores, specialty stores, mass
merchandisers).
. Style--The Company's use of proprietary brands is designed to translate
identified market trends into highly-focused leather apparel and
accessory assortments. The Company tests new designs on a limited basis
and reorders fast-selling goods in time for the peak weeks of its selling
season.
. Value--The Company strives to deliver its fashion-oriented, high-quality
merchandise at affordable prices, creating a strong sense of value. The
Company believes that its integrated product sourcing capability enables
it to offer lower prices than its competitors for merchandise of
comparable quality.
Wilsons has increased its emphasis on accessories including gloves, handbags,
wallets, briefcases, planners and computer cases, due in part to their higher
margins as compared to leather apparel, and has increased both the number of
SKUs and the amount of floor space allocated to accessory presentation in the
stores. As a result, accessories sales have grown as a percentage of the
Company's sales from 11.9% in 1991 to 24.4% in 1996. Over the same period,
men's apparel sales have decreased as a percentage of the Company's sales from
46.8% to 40.8%, and women's apparel sales have decreased from 41.3% to 34.8%.
PRODUCT DESIGN, DEVELOPMENT AND SOURCING
Wilsons' product offerings are highly dependent on the Company's ability to
identify fashion trends for Wilsons' customers, develop new leather finishes
and closely monitor the sourcing of its merchandise. Wilsons' buyers and
designers are trained to anticipate fashion trends and to translate such trends
into leather products appealing to the Wilsons customer. Such designers and
buyers also work closely with tanneries in identifying and developing leather
colors and finishes. Technical advancements in leather tanning have allowed the
Company to use a variety of leathers to achieve the look and feel of more
expensive leathers.
In addition to its leather development expertise, the Company believes that a
significant competitive advantage is its expertise and ability in managing the
sourcing of its leather apparel and accessories. In 1996, Wilsons contracted
for the manufacture of approximately 1.8 million leather garments, making it
the largest leather apparel purchaser in the world. The high volume of leather
purchased by the Company and its contract manufacturers, and the volume of
merchandise acquired by the Company from its contract manufacturers, allow the
Company to benefit from better pricing and faster delivery. Management believes
that the volume of finished goods purchased from the contract manufacturers
enables the Company to secure sufficient manufacturing capacity without having
the added cost of establishing its own manufacturing facilities.
34
<PAGE>
The Company has developed an infrastructure in the Far East that allows the
Company to control merchandise production without owning manufacturing
facilities or extensively utilizing third-party wholesalers. The Company's
contract manufacturing managers located in China, Indonesia, Hong Kong and
South Korea, and contract agents in India, are primarily responsible for
managing the production and quality control process in overseas factories and
the shipping of the merchandise to the United States. Such management includes
inspecting leather at the tanneries, coordinating the production capacity,
matching of product samples to Wilsons' technical specifications and providing
technical assistance and quality control through inspection in the factories.
The Company's merchandising department works closely with the Company's
contract manufacturing managers to make order and reorder decisions on
merchandise. Since 1992, the Company has reduced its sourcing time from
approximately 120 days to approximately 90 days. The reduced time allows the
Company to analyze sales of certain merchandise and reorder better selling
merchandise in time for the weeks of its peak selling season. Management
believes that this strategy results in more efficient inventory management and
reduced need for markdowns on merchandise at the end of the Company's peak
selling season.
Due in large part to its overseas infrastructure, the Company has developed
the technology and capability to shift its contract manufacturing to various
countries of the Pacific Rim, depending on labor availability and costs and the
availability of leather and other raw materials. In 1989, Wilsons received
approximately 90% of its leather apparel sourced overseas from South Korean
vendors. Since that time, the Company implemented its strategy of shifting
production to lower cost countries, such as China, from which the Company
sourced over 60% of its leather apparel in 1996, and India and Indonesia, from
which the Company purchased approximately 26% and 12%, respectively, of its
leather apparel in 1996. However, South Korean tanneries continue to provide a
substantial portion of the Company's tanned leather which is used in the
manufacturing process.
MARKETING AND ADVERTISING
Wilsons targets promotions to its customers through a combination of in-store
graphics displays, direct mail pieces and newspaper, radio and television
advertising. These event-driven promotional activities are designed to
emphasize Wilsons' broad assortment of quality, fashionable merchandise and to
build consumer awareness of Wilsons as "The Leather Experts." In 1996, Wilsons
spent approximately $5.2 million on local television and radio advertising and
other media in an attempt to reach a majority of its target audience at least
three times during its key selling season.
The Company's layaway program is a key marketing strategy designed to build
sales. The layaway program represented 15.7% and 15.1% of the Company's net
sales in 1996 and 1995, respectively. The layaway program is designed to: (i)
commit the Company's customers to buy coats early in the season, frequently
before such coats are needed; (ii) allow the Company to receive an early read
on fast-selling styles and important sales trends, enabling the Company to
reorder these styles and capitalize on the trends during its key holiday
selling season; (iii) make purchases of the Company's leather apparel
affordable to a wider range of customers; and (iv) bring the customer back to
the store several times before the layaway merchandise is picked up, offering
the Company multiple selling opportunities.
In addition, the marketing department uses the Company's in-house database
which includes data on over five million customers. The marketing department
regularly analyzes these data and attempts to identify key activities in the
business which should incorporate customer segmentation information (e.g.,
marketing, merchandising and store locations). In addition, Wilsons conducts
marketing research of Wilsons' and non-Wilsons' leather purchasing consumers to
gain additional knowledge of consumer behavior. It is anticipated that the
Company's marketing department will be able to use the customer segment
information (see "Vertically Integrated Operations" above) to employ more
tightly targeted customer promotions.
DISTRIBUTION
The Company's merchandise is shipped directly from the Company's contract
manufacturers located in the Far East to the Company's state-of-the-art 289,000
square foot distribution center located at the Company's headquarters in
Brooklyn Park, Minnesota. Between 1992 and 1994, the Company spent
approximately $12.6
35
<PAGE>
million to redesign and automate its distribution center. The distribution
center is equipped with high speed sorting equipment and radio frequency hand-
held computer scanners for bar code scanning and merchandise control. The
distribution center is owned by the Company.
The distribution center is designed to receive 200,000 garments and one
million units of accessories and ship in excess of 500,000 combined units of
garments and accessories per week in a single shift operation. Approximately
40% of the merchandise that is received in the distribution center is directly
sent out to the Company's stores through cross-docking, which allows for
minimal handling, storage and reduced expense. Additional merchandise is stored
in the distribution center to replenish merchandise, to build inventory for the
Company's peak selling season and stock key styles. On average, each store is
shipped merchandise one to three times a week, depending on the season and
sales volume in each store. Airport stores are shipped merchandise daily. Each
store receives a shipment approximately two to three days after the merchandise
is shipped from the distribution center. The Company believes that the
distribution center will enable it to service its stores and needs for the
foreseeable future.
CUSTOMER SERVICE
In addition to advertising and promotions which are designed in part to
reinforce Wilsons image with its customers as "The Leather Experts," the
Company emphasizes sales associate training and customer service. Wilsons'
associates are trained on an ongoing basis through the use of merchandise
videos and information packets, customer service tip cards and on-the-job sales
evaluations. The training is designed to develop each sales associate's
knowledge of Wilsons' service standards, the different kinds of leather and
leather finishes, how to best care for the different types of leather, and how
to perform many minor repairs in the store for the customer, free of charge.
Wilsons monitors customer service through a customer comment card program,
direct survey of customers who return merchandise and a system that tracks
calls and letters sent to the corporate office. Wilsons periodically holds
customer focus group sessions with customers nationwide. Issues relating to
policy, procedure or merchandise are frequently reviewed to improve service and
quality.
Wilsons offers many services that are important to its customers. Key
services include a 14-day price guarantee, alterations service for major
alterations and repairs, a layaway program and a return policy on unworn
merchandise. Merchandise purchased at holiday stores and seasonal kiosks may be
returned to any of the Company's stores.
MANAGEMENT INFORMATION SYSTEMS
As part of the Company's strategic plan, Wilsons made a significant
commitment to upgrade its information systems and computer hardware and to
improve the computer skills of its associates. The major components of the plan
include converting from the Company's existing mainframe platform to a
client/server platform, and implementing new merchandising, financial and human
resources information systems. By the end of 1997, Wilsons believes it will
have completed its systems conversion to the client/server platform. Once fully
operational, management believes that these systems will allow greater
flexibility in anticipating future business needs, broader and quicker access
to information at all relevant levels of the organization, stronger analytical
tools for understanding sales and operating trends, and increased customer
information and availability to such information (see "Vertically Integrated
Operations" above with regard to the anticipated use of customer segment
information that the new information systems will facilitate). Management
believes that system integrity will be enhanced and, as a result, inventory
accuracy and management will improve, providing Wilsons with the opportunity to
better control its merchandise flow from the factories to the stores. In
conjunction with the foregoing, Wilsons has spent $3.6 million since January
1995 on such upgrades and improvements and expects to spend an additional $2.4
million to complete the upgrades by the end of 1997.
36
<PAGE>
The Company's automated point-of-sale registers in all stores capture
customer transactions by SKUs that are transmitted electronically to the
headquarters' computer, updating other systems with critical sales and customer
information to replenish stores and determine reorder quantities, to modify
merchandise allocation plans tailored to regional sales patterns and to
establish marketing promotions targeted to particular customer segments. To
assist in the operation of each store, the Company utilizes a PC-based
paperless communication system that permits daily communications of advanced
shipment notices, and electronic tracking of inventory transfers between
locations and supplies ordering. Each store uses computer-based interview
systems for new hiring.
Pending full implementation of the new information systems during 1997,
certain financial and human resource information systems are based on a
mainframe computer platform. Merchandise information systems receive
information daily from the point-of-sale registers and are updated with order
information from the production department on the progress and timing of orders
and merchandise received in the Company's distribution center. Wilsons recently
implemented a new merchandise planning application that enhances analytical
capabilities and increases flexibility in planning sales, inventory and gross
margin. Wilsons' merchandising department utilizes an international computer
network to communicate purchase order information from the Company's
merchandising system to its overseas personnel, in order to provide continual
information updates to allow for managing leather inventories and contract
manufacturing capacity planning. Garment design and specifications are
controlled through a product data manager system that distributes pattern and
specification information to the Company's contract manufacturing managers and
designers to ensure production consistency among the Company's contract
manufacturers. Wilsons' financial control systems provide daily information on
store point-of-sale transactions, inventory transfers and cash deposits and
disbursements.
COMPETITION
The retail leather apparel and accessory industry is highly competitive.
Management believes that the principal bases upon which the Company competes
are selection, price, style, quality, store location and service. Wilsons' most
significant competitor is J.C. Penney in addition to other specialty retailers
(e.g., The Limited and The Gap), department stores (e.g., Macy's, Dayton's and
Nordstroms), mass merchandisers (e.g., Sears) and discounters (e.g., Wal-Mart
and Kmart).
Wilsons believes that its broad merchandise selection, value and customer
service enable it to compete effectively. Many of the Company's competitors
are, however, larger and have greater financial resources than Wilsons, and
there can be no assurance that the Company will be able to compete successfully
in the future. Furthermore, while Wilsons believes it competes effectively for
favorable site locations and lease terms, competition for prime locations
within successful malls is intense.
PROPERTY
As of February 1, 1997, Wilsons operated 460 leased store locations and one
owned store location. Substantially all of Wilsons' stores were located in
regional shopping malls. Store leases with third parties are typically seven to
ten years in duration. In most cases, each store pays an annual base rent plus
a contingent rent based on the store's annual sales in excess of a specified
threshold. Substantially all leases which Wilsons has previously entered into
have been guaranteed by an affiliate of CVS. New store leases which Wilsons is
currently entering into or will enter into in the future will not be guaranteed
by CVS or an affiliate of CVS, and, with respect to existing store leases,
Wilsons is obligated, pursuant to the Sale Agreement (as hereinafter defined),
to use commercially reasonable efforts to remove the affiliate of CVS as a
guarantor.
The Company owns its distribution center.
LITIGATION
The Company is involved in various routine legal proceedings incidental to
the conduct of its business. Although the outcome of these matters cannot be
determined, management does not believe that any of these legal proceedings
will have a material adverse effect on the financial condition or results of
operations of the Company.
37
<PAGE>
TRADEMARKS
Wilsons conducts its business under various trade names, trademarks and
service marks in the U.S., including Wilsons The Leather Experts, Tannery West,
Georgetown Leather Design, Berman Buckskin, Adventure Bound, Maxima, Open Road
and M. Julian, and has registered several trade names and trademarks in the
United Kingdom. Although Wilsons does not believe that its operations are
dependent upon any of its service marks or its trade names, Wilsons considers
its "Wilsons The Leather Experts" name to be valuable to its business.
EMPLOYEES
As of April 15, 1997, Wilsons had approximately 4,000 employees. During the
Company's peak selling season (from November through December), Wilsons will
employ approximately 3,500 seasonal employees. Wilsons considers its
relationships with its employees to be good.
38
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the directors
and executive officers of the Company as of April 15, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Joel N. Waller........................ 57 Chairman of the Board of Directors and
Chief Executive Officer
David L. Rogers....................... 54 President, Chief Operating Officer and Di-
rector
Carol S. Lund......................... 44 Executive Vice President and General Mer-
chandise Manager
W. Michael Bode....................... 52 Vice President, Manufacturing
Betty Goff............................ 40 Vice President, Human Resources
Jed Jaffe............................. 43 Vice President, Store Sales
David B. Sharp........................ 49 Vice President, Marketing
Daniel R. Thorson..................... 38 Treasurer and Director, Business Planning
and Analysis
David J. Tidmarsh..................... 45 Vice President, Information Systems and
Strategies, Chief Information Officer and
Logistics
Douglas J. Treff...................... 39 Vice President, Finance, Chief Financial
Officer and Assistant Secretary
Thomas R. Wildenberg.................. 39 Chief Accounting Officer and Controller
Lyle Berman........................... 55 Director
Thomas J. Brosig...................... 47 Director
Morris Goldfarb....................... 46 Director
</TABLE>
All of the above-named officers have held the noted office with the Company,
and all directors have served in that capacity, since May 1996.
Joel N. Waller has served as Chairman and Chief Executive Officer of the
Company since April 1992. In 1983, CVS hired Mr. Waller as President of
Wilsons. Prior to joining Wilsons, Mr. Waller served in several capacities at
Bermans, including Senior Vice President-General Merchandise Manager from 1980
to 1983, Division Merchandise Manager from 1978 to 1980 and Buyer from 1976 to
1978. He currently serves on the Board of Directors of Grand Casinos, Inc.,
Rainforest Cafe, Inc. and Damark International, Inc.
David L. Rogers has served as President and Chief Operating Officer of the
Company since April 1992. In 1989, Mr. Rogers joined Wilsons as Executive Vice
President and Chief Operating Officer when Bermans was acquired by Wilsons. Mr.
Rogers served as Chief Operating Officer of Bermans from 1984 to 1989 and Chief
Financial Officer of Bermans from 1980 to 1984. Mr. Rogers currently serves on
the Board of Directors of Grand Casinos, Inc. and Rainforest Cafe, Inc.
Carol S. Lund has served as Executive Vice President and General Merchandise
Manager of the Company since March 1994. Ms. Lund served as Executive Vice
President for the Snyder Leather division from 1992 to 1994, as Senior Vice
President and General Merchandise Manager of the Company from 1987 to 1992 and
as Vice President and General Merchandise Manager of the Company from 1983 to
1987. Prior to joining Wilsons, she was Divisional Merchandise Manager for
Bermans from 1981 to 1983 and a buyer for Bermans from 1976 to 1981.
39
<PAGE>
W. Michael Bode has served as Vice President, Manufacturing of the Company
since 1987. Mr. Bode served as Director of Manufacturing from 1985 to 1987, as
Divisional Merchandise Manager of Outerwear from 1982 to 1985 and as Regional
Director of Stores of the Company from 1981 to 1982.
Betty Goff has served as Vice President, Human Resources of the Company since
February 1992. Ms. Goff served as Director of Executive Recruitment and
Placement of the Company from October 1987 to February 1992.
Jed Jaffe has served as Vice President, Store Sales of the Company since
January 1996. Mr. Jaffe served as Vice President Strategic Planning from
February 1995 to December 1995, as Vice President/General Merchandise Manager
of Snyder Leather from August 1993 to January 1995, as Eastern Zone Sales Vice
President of the Company from February 1993 to August 1993, as President of
Tannery West from September 1992 to January 1993 and as Director of
Manufacturing of the Company from October 1991 to September 1992. Prior to
joining Wilsons, Mr. Jaffe served as General Merchandise Manager of Henry Birks
Jewelers, a jewelry store chain, from 1990 to 1991.
David B. Sharp has served as Vice President, Marketing of the Company since
May 1995. Prior to joining Wilsons, Mr. Sharp held several positions from 1981
to 1995 at Lever Brothers Company, a consumer products company, most recently
as Senior Vice President of Marketing from 1989 to 1995.
Daniel R. Thorson has served as Treasurer of the Company since May 1996 and
as Director of Business Planning since October 1995. Prior to joining Wilsons,
Mr. Thorson held several positions from 1981 through 1995 at Northwest
Airlines, Inc., an airline company, most recently as Director of Finance and
Administration, Pacific Division, based in Tokyo, Japan from July 1991 to June
1995.
David J. Tidmarsh has served as Vice President, Information Systems and
Strategies of the Company and Chief Information Officer since February 1994 and
as Vice President, Logistics since May 1996. Mr. Tidmarsh served as Director of
Business Systems Process Engineering of the Company from September 1993 to
February 1994. Prior to joining Wilsons, he served as Chief Operating Officer
for Page-Com Inc., a direct mail marketing and telecommunications company, from
May 1992 to September 1993 and Vice President of Logistics for Pier 1 Imports,
Inc., a retail home furniture, furnishings and equipment store, from 1989 to
1992.
Douglas J. Treff has served as Vice President, Finance since January 1993 and
as Chief Financial Officer and Assistant Secretary of the Company since May
1996. Mr. Treff served as Controller of the Company from September 1992 to
January 1993 and as Director of Financial Planning and Analysis of the Company
from May 1990 to September 1992.
Thomas R. Wildenberg has served as Controller since October 1994 and as Chief
Accounting Officer of the Company since May 1996. Prior to joining Wilsons, Mr.
Wildenberg held several positions from 1990 through 1994 at Woman's World
Shops, Inc., a retail apparel company, most recently as Director of
Finance/Controller from June 1990 to October 1994.
Lyle Berman is a member of the Company's Board of Directors. Mr. Berman has
served as Chief Executive Officer and Chairman of the Board of Directors of
Grand Casinos, Inc., a gaming company, since October 1990, and as Chief
Executive Officer and Chairman of the Board of Directors of Rainforest Cafe,
Inc., a restaurant/retail company, since February 1994. From January 1989
through September 1991, Mr. Berman served as a consultant to Wilsons. Mr.
Berman served as the President and Chief Executive Officer of Bermans from 1978
until it was acquired by Wilsons in 1988. Mr. Berman also serves as the
Chairman of the Board of Directors of Stratosphere Corporation, an amusement
and recreation company, and served as its Chief Executive Officer from July
1994 to October 1996. In January 1997, Stratosphere Corporation filed for
reorganization under Chapter 11 of the U.S. Bankruptcy Code. Mr. Berman is also
the Chairman of the Board of Directors of Innovative Gaming Corporation of
America and a director of G-III Apparel Group, Ltd. ("G-III") and New Horizon
Kids Quest, Inc.
40
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Thomas J. Brosig is a member of the Company's Board of Directors. Mr. Brosig
has served as President and a director of Grand Casinos, Inc., a gaming
company, since September 1996. Mr. Brosig also served as Executive Vice
President--Investor Relations and Special Projects of Grand Casinos, Inc. from
August 1994 to September 1996, as Secretary of Grand Casinos, Inc. from its
inception until May 1995, as its President from May 1993 to August 1994, as
its Chief Operating Officer from October 1991 until May 1993 and as its Chief
Financial Officer from its inception until January 1992. Mr. Brosig is also a
director of G-III and Famous Dave's of America, Inc.
Morris Goldfarb is a member of the Company's Board of Directors. Mr.
Goldfarb serves as director and Chief Executive Officer of G-III, a leather
and non-leather apparel manufacturer and distributor, a director of Grand
Casinos, Inc. and a director of Panasia Bank. Mr. Goldfarb has served as an
executive officer of G-III and its predecessors since its formation in 1974.
Directors of the Company are elected by the shareholders at each annual
meeting to serve until the next annual meeting of the shareholders or until
their successors are duly elected and qualified. See "Certain Transactions--
Shareholder Agreement" for a description of an arrangement which currently
permits Joel N. Waller and David L. Rogers to nominate two directors of the
Company. Executive officers of the Company are chosen by and serve at the
discretion of the Board of Directors. There are no family relationships among
any of the directors or executive officers of the Company.
BOARD COMMITTEES
The Company's Board of Directors has established compensation and audit
committees (respectively, the "Compensation Committee" and the "Audit
Committee") whose members are appointed by the Company's Board of Directors.
The Compensation Committee has the responsibility and authority to review and
determine the Company's executive compensation objectives and policies and
administer the Company's stock option and other employee benefit plans. The
Compensation Committee members are Thomas Brosig and Lyle Berman. The Audit
Committee has the responsibility and authority to review the accounting and
auditing principles and procedures of the Company with a view toward providing
for adequate internal controls and reliable financial records, to recommend to
the full Board the engagement of independent auditors, to review with the
independent auditors the plans and results of the auditing engagement, and to
consider the independence of the Company's auditors. The Audit Committee
members are Morris Goldfarb, Thomas Brosig and David Rogers.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Lyle Berman and Thomas Brosig, directors of the Company, are members of the
Board's Compensation Committee. Mr. Berman is the Chief Executive Officer and
Chairman of the Board of Directors of both Grand Casinos, Inc. and Rainforest
Cafe, Inc. Mr. Brosig is the President and a director of Grand Casinos, Inc.
Joel N. Waller, Chief Executive Officer and Chairman of the Board of Directors
of the Company, and David L. Rogers, President and Chief Operating Officer and
a director of the Company, are both members of the Compensation Committee of
the Board of Directors of Grand Casinos, Inc. and Rainforest Cafe, Inc.
EXECUTIVE COMPENSATION AND EMPLOYMENT CONTRACTS
The Company was incorporated in May 1996. Therefore, the requirement for
prior years' information regarding executive compensation for the Chief
Executive Officer of the Company, and the next four most highly compensated
executives of the Company, is not applicable. The Company has entered into
employment agreements with Joel Waller, as Chairman and Chief Executive
Officer, and David Rogers, as President, reporting to the Board of Directors,
through May 25, 2000 (the "Employment Agreements"). The Employment Agreements
are identical in all material respects, except for job responsibilities which
are consistent with Messrs. Waller's and Rogers' titles. Under the terms of
the Employment Agreements, Mr. Waller and Mr. Rogers each receives a base
salary of $380,000 per year, or such higher amount as is determined by the
Board (prorated for any partial employment year). In no event may the Board of
Directors reduce Messrs. Waller's and Rogers' base salary for any year below
the greater of $380,000 or the amount of base salary paid by the Company to
Messrs.
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Waller and Rogers for the immediately preceding year. For the period from
inception (May 26, 1996) to February 1, 1997, Messrs. Waller and Rogers
received base salaries of $263,077 and $263,077, respectively. Messrs. Waller
and Rogers are also entitled to participate in the Incentive Plan (as
hereinafter defined). Mr. Waller and Mr. Rogers are each eligible to receive
an annual bonus based on the Company's performance. Pursuant to the provisions
of the Incentive Plan, their respective bonuses for a fiscal year could range
from 0% to 70% of their base salary. See "Employee Benefit Plans" below. For
the period from inception (May 26, 1996) to February 1, 1997, Messrs. Waller
and Rogers received bonuses of $124,222 and $124,222, respectively. The
employment of each of Mr. Waller and Mr. Rogers under their respective
Employment Agreements will end only upon termination by the Company with or
without Cause (as defined in the Employment Agreements), upon death or
Disability (as defined in the Employment Agreements), upon expiration of the
employment term or upon resignation. Upon termination of employment, Mr.
Waller or Mr. Rogers generally will be entitled to receive his base salary
through the date of termination (or through the end of the employment period
if termination by the Company occurred without Cause or resignation by the
employee occurred with Good Reason (as defined in the Employment Agreements)),
any amounts earned but not paid under the Incentive Plan for a completed Plan
Year (as defined in the Incentive Plan) and, in certain circumstances, a pro
rata portion of his Incentive Plan payment for the year in which termination
occurs, plus continuation of certain health, life and disability insurance
benefits. See "Employee Benefit Plans" below. The Employment Agreements also
include confidentiality and non-solicitation provisions, but do not contain
any restrictions on competition.
The next three most highly compensated executives are Carol S. Lund, David
B. Sharp and Jed Jaffe. Ms. Lund, Mr. Sharp and Mr. Jaffe are expected to be
paid base salaries at the annual rate of approximately $240,000, $208,000 and
$180,000 per year, respectively, and annual bonuses ranging from zero to
$134,400, $108,160, and $93,600, respectively, depending on the Company's
performance in relation to set performance targets. For the period from
inception (May 26, 1996) to February 1, 1997, Ms. Lund, Mr. Sharp and Mr.
Jaffe received base salaries of $166,154, $144,000 and $124,615, respectively,
and bonuses of $62,765, $50,512 and $43,711, respectively. See "Employee
Benefit Plans" below.
Pursuant to the Restricted Stock Agreement dated as of May 25, 1996, Joel N.
Waller, David L. Rogers, Carol S. Lund, David B. Sharp and Jed Jaffe
purchased, respectively, 338,869.8, 338,869.8, 48,594.6, 45,894.6 and 40,495.5
shares of the Company's Restricted Stock at its then fair market value of $.60
per share. For the period from inception (May 26, 1996) to February 1, 1997,
Mr. Waller, Mr. Rogers, Ms. Lund, Mr. Sharp and Mr. Jaffe had 62,131.7,
62,131.7, 8,908.8, 8,414.8 and 7,424.8 shares of their Restricted Stock vest,
respectively. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Overview" and "Certain Transactions--Restricted
Stock Agreement." No options have been granted to these five most highly
compensated executive officers.
EMPLOYEE BENEFIT PLANS
The Company has an Executive and Key Management Incentive Plan (the
"Incentive Plan"), a 401(k) defined contribution Profit Sharing Plan (the
"401(k) Plan") and the 1996 Option Plan for the benefit of its employees.
The Incentive Plan provides for an annual incentive award designed to
motivate and reward key home office and distribution center associates.
Eligible participants include the Chairman, President, all Vice Presidents and
certain other key personnel. Cash awards, which range from 0% to 200% of the
payout level, are based on actual results measured generally against pre-
established corporate financial objectives for consolidated earnings, before
federal and state income taxes, of the Company and its direct and indirect
subsidiaries.
Under the 401(k) Plan, employees are entitled to make vested contributions
of up to 15% of their compensation (10% for those employees whose compensation
in the previous year exceeded $55,000) in lieu of receiving such amounts as
taxable compensation, subject to statutory limitations. Certain matching
contributions
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are made by the Company, which vest after five years of service, or at age 65
regardless of service, or upon the death of the employee. The 401(k) Plan also
allows the Company to make discretionary profit sharing contributions, which
are also subject to the vesting requirements.
The purpose of the 1996 Option Plan is to aid in maintaining and developing
personnel capable of assuring the future success of the Company by affording
them an opportunity to acquire a proprietary interest in the Company through
stock options. Options granted under the 1996 Option Plan may be either
incentive stock options ("ISOs"), as defined in the Internal Revenue Code of
1986, as amended (the "Code"), or nonstatutory stock options ("NSOs"). Subject
to certain adjustments, the maximum number of shares of Common Stock available
for issuance under the 1996 Option Plan is 1,000,000 shares. Employees of the
Company, or any parent or subsidiary thereof, including employees who are
directors or officers, are eligible to receive ISOs and NSOs under the 1996
Option Plan. Directors of, and consultants and advisors to, the Company who
are not employees of the Company, or any parent or subsidiary thereof, are
eligible to receive NSOs under the 1996 Option Plan. As of April 15, 1997, the
Company had granted options covering an aggregate of 195,060 shares of Common
Stock at a weighted average exercise price of $4.77 per share. Such options
will vest in accordance with the option agreements entered into at the time of
grant and are subject to the possible acceleration of vesting in certain
circumstances.
RESTRICTED STOCK AGREEMENT
On May 25, 1996, the Company entered into a restricted stock agreement (the
"Restricted Stock Agreement") with certain managers of the Company, including
all of the five most highly compensated executive officers. The Restricted
Stock Agreement sets forth the vesting schedule for the Restricted Stock
purchased by such managers. See "Certain Transactions--Restricted Stock
Agreement."
DIRECTOR COMPENSATION
The Company does not anticipate paying cash compensation in the near term to
members of the Board of Directors for their services as directors. On June 26,
1996, the Company granted an option for 10,800 shares of Common Stock to
Thomas J. Brosig at an exercise price of $4.44 per share. Such option will
vest, cumulatively, on a pro rata basis on each of the first, second and third
anniversaries of the date of grant if such optionee continues as a director,
subject to the possible acceleration of vesting in certain circumstances.
CERTAIN TRANSACTIONS
The following are summaries of the material terms of certain agreements.
Copies of these agreements are filed as exhibits to the Registration Statement
of which this Prospectus is a part. The following summaries do not purport to
be complete and are qualified in their entirety by the terms of such
agreements.
RESTRICTED STOCK AGREEMENT
On May 25, 1996, the Company entered into the Restricted Stock Agreement
with certain managers of the Company (the "Managers"), including Joel N.
Waller, the Chairman, Chief Executive Officer and a director of the Company,
and David L. Rogers, the President and a director of the Company. The
Restricted Stock Agreement provides that 1,080,000 shares of the Company's
Common Stock (herein called the "Restricted Stock") purchased by the Managers
for $.60 per share will vest (i) up to 20 percent each year during the
performance period, commencing with the period ended February 1, 1997 and
continuing through and including the period ending on February 3, 2001, if the
Company achieves certain earnings targets that are determined by the Board
(plus potential catch-up vesting for years in which the Company fails to
achieve its targets); (ii) immediately upon payment or prepayment of the Note
in full at any time on or prior to December 31, 2000; (iii) immediately upon
any partial prepayment of the Note at any time prior to December 31, 2000, but
only that portion of the originally purchased shares of Restricted Stock equal
to the portion of the Note that has been repaid
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as of such date will vest; (iv) immediately upon the death, Disability (as
defined in the Restricted Stock Agreement) or Retirement (as defined in the
Restricted Stock Agreement) of the Manager that purchased such Restricted
Stock; and (v) upon the occurrence of a Change in Control (as defined in the
Restricted Stock Agreement), subject to the written consent of CVS to such
Change in Control as long as the Note remains outstanding. Additionally,
Messrs. Waller's and Rogers' Restricted Stock will vest upon the termination
without Cause (as defined in the Restricted Stock Agreement) of Mr. Waller or
Mr. Rogers, or the termination by Mr. Waller or Mr. Rogers of his employment
as a result of the Company breaching terms of their respective Employment
Agreements.
The Company, to the extent it has funds legally available therefor, will
purchase from the Managers any shares of Restricted Stock that have not vested
by the end of the performance period at a price per share equal to the $.60
per share. To the extent any shares of Restricted Stock have not vested by the
end of the performance period, the Manager Warrant held by CVS becomes
exercisable for such number of unvested shares.
The Restricted Stock is subject to the terms of the Shareholder Agreement,
which, among other restrictions, includes prohibitions on transfers of
Restricted Stock prior to vesting. Except for these restrictions, each Manager
and his or her permitted transferees have all rights of a shareholder and
record owner. Each Manager is responsible for any taxes and other sums
required by law to be withheld by the Company in respect of the Restricted
Stock.
The Company did not recognize any compensation deduction for tax purposes in
connection with the issuance of the Restricted Stock. For accounting purposes,
the Company will be required to record charges to earnings equal to the
difference between the fair market value of the Restricted Stock on the date
such Restricted Stock vests and the original purchase price of the Restricted
Stock, which was $.60 per share. For the period from inception (May 26, 1996)
to February 1, 1997, 198,018 shares of such Restricted Stock had vested,
resulting in the Company recording compensation expense of $1.5 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
REGISTRATION RIGHTS AGREEMENT
On May 25, 1996, the Company entered into a registration rights agreement
(the "Registration Rights Agreement") with the Managers, CVS and Limited
Partnership I and its partners (the "Partners"). The Registration Rights
Agreement provides that, subject to certain limitations, (i) at the expense of
the holders thereof, holders of a majority of the aggregate principal amount
of the Note (the "Note Holders"), holders of a majority of the CVS Warrant
(the "Warrant Holders"), and, to the extent exercisable, after April 30, 2001,
holders of a majority of the Manager Warrant (the "Manager Warrant Holders"),
respectively, each will have three demand registration rights for the Note,
the CVS Warrant and the shares underlying the Manager Warrant, for
registration of such securities under the Securities Act, and (ii) at the
Company's expense, at any time after six months following the closing of the
Offering (but no later than May 25, 2007), the Partners and certain of their
transferees will have two demand registration rights for their shares of
Common Stock, and unlimited demands for registration on Form S-3, if the
Company can use that form, for registration of such shares under the
Securities Act. The Company is prohibited from granting to any other holder of
its securities (other than holders of Common Stock), whether currently
outstanding or issued in the future, any incidental (piggyback) registration
rights with respect to any registration statement filed pursuant to any such
demand registration. Subject to certain limitations and customary cutbacks as
reasonably determined by the managing underwriter, if the Company proposes to
register any of its Common Stock or the CVS Warrant under the Securities Act,
the Company will provide the Warrant Holders and certain holders of its Common
Stock (the Managers, Limited Partnership I, the Partners and certain permitted
transferees) with the opportunity, pursuant to piggyback registration rights,
to participate in such public offering. Registration rights relating to the
Common Stock expire upon (i) certain transfers of such stock to a third party,
and (ii) such Common Stock becoming available for sale pursuant to Rule 144(k)
of the Securities Act.
The Registration Rights Agreement further provides that, if CVS desires to
transfer all or part of the Note or the CVS Warrant to a third party in a bona
fide arm's length transaction or proposes to register all or part of
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the Note or the CVS Warrant pursuant to the Registration Rights Agreement, CVS
must give written notice to Joel N. Waller and David L. Rogers, individually
and on behalf of the other Managers, to Limited Partnership I and the Partners
and, in the case of a proposed sale or registration of the CVS Warrant, to the
Company (the "Parties"). Such written notice will constitute an offer by CVS
to sell to the Parties that portion of the CVS Warrant and, with respect to
all Parties other than the Company, the Note proposed to be transferred or
registered. If the Parties fail to accept CVS's offer after a set time, CVS
will then have the right to effect a transfer to a third party of, or to
require the registration of, all of the Notes or CVS Warrant subject to such
offer, subject to certain terms and conditions.
SHAREHOLDER AGREEMENT
On May 25, 1996, the Company entered into a shareholder agreement (as
amended, the "Shareholder Agreement") with Limited Partnership I, Limited
Partnership II, the Partners, Waller and Rogers (as defined in the Shareholder
Agreement) and the Managers (other than Waller and Rogers, each a "Manager
Shareholder") (all parties to the Shareholder Agreement other than the Company
being collectively referred to as the "Shareholders"). The Shareholder
Agreement subjects the shares of the Company's Common Stock (the "Subjected
Shares") held by the Shareholders to significant restrictions on transfer.
Generally, except as otherwise provided in the Shareholder Agreement, no
Shareholder is permitted, directly or indirectly, to Dispose (as defined in
the Shareholder Agreement) of any Subjected Shares.
Generally, upon the occurrence of the Termination (as defined in the
Shareholder Agreement) of a Manager Shareholder without Cause (as defined in
the Shareholder Agreement), first Waller and Rogers, then the Company and
finally the other Shareholders pro rata would have the option (or obligation
in the case of the Company to the extent it has funds legally available
therefor) to purchase such Manager Shareholder's unvested Restricted Stock at
the original purchase price. Upon the occurrence of a Termination by Waller or
Rogers without Good Reason (as defined in the Shareholder Agreement), a
Termination by a Manager Shareholder, or a Termination of Waller, Rogers or a
Manager Shareholder with Cause, first Waller and Rogers (to the extent they
are not the terminated or resigning parties), then the Company and finally the
other Shareholders pro rata would have the option to purchase such Manager's
unvested Restricted Stock at the lower of the original purchase price or the
Fair Market Value (as defined in the Shareholder Agreement).
Upon the occurrence of a Repurchase Event (as hereinafter defined) with
respect to a Manager, first Waller and Rogers (to the extent they are not such
Manager), then the Company and finally the other Shareholders pro rata would
have the option to purchase such Manager's unrestricted stock at the Fair
Market Value, provided that, if the Repurchase Event occurs as a result of the
Termination by a Manager Shareholder on or prior to May 25, 2001, or a
Termination by Waller or Rogers without Good Reason on or prior to May 25,
2001, or a Termination of Waller, Rogers or a Manager Shareholder with Cause,
the purchase price of such unrestricted stock would be the lower of the
original purchase price or Fair Market Value on the date of such Repurchase
Event. "Repurchase Event" means the death, Disability, Retirement (as such
terms are defined in the Shareholder Agreement) or Termination of or by a
Manager Shareholder, or the Termination by Waller or Rogers without Good
Reason on or before May 25, 2001, or the Termination of Waller or Rogers with
Cause.
Upon the occurrence of the death, Disability or Retirement of Waller or
Rogers, the termination of Waller or Rogers without Cause, the Termination by
Waller or Rogers with Good Reason or the Termination by Waller or Rogers after
May 25, 2001 with or without Good Reason, Waller or Rogers (or such
individual's estate) would have the right either to retain his Common Stock or
to offer to sell his Common Stock first to Waller (if Rogers or his estate is
selling such stock) or Rogers (if Waller or his estate is selling such stock),
then the Company and finally the other Shareholders pro rata, who would each,
in order, have the option to purchase such Common Stock at Fair Market Value.
Generally, if any Shareholder desires to Dispose of any Subjected Shares
(other than Dispositions of unvested Restricted Stock, which are prohibited)
to any Third Party (as defined in the Shareholder Agreement) other than a
Permitted Transferee, first Waller and Rogers (to the extent they are not the
selling Shareholder),
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then the Company and finally the other Shareholders pro rata would have the
option to buy such shares at the price such Third Party is willing to pay (if
the transfer is for value) or at the original purchase price (if the transfer
is other than for value); provided that (i) if Waller and Rogers desire to
Dispose of any Subjected Shares, Messrs. Berman and Goldfarb would have the
opportunity to purchase such stock before the Company, (ii) if CVS, after
becoming subject to the Shareholder Agreement pursuant to the terms of the CVS
and Manager Warrants, desires to Dispose of any Subjected Shares, the Company,
then Waller and Rogers and finally the other Shareholders pro rata would have
the option to purchase such Subjected Shares, and (iii) Waller and Rogers would
have the right to Dispose of a limited number of Subjected Shares to employees
of the Company. If no one chooses to purchase the securities, then such
Shareholder would be permitted to Dispose of the securities to such Third Party
on substantially the same terms and at a price at least equal to the price such
Third Party was originally willing to pay for such securities, provided that
such Disposition is completed within 90 days and the Third Party agrees in
writing to be subject to the Shareholder Agreement. Such right of first refusal
would not apply to sales of unrestricted stock in a public offering or sales by
Shareholders other than the Manager Shareholders of unrestricted stock in open
market transactions.
Generally, subject to the terms of the Shareholder Agreement, no Shareholder
would be permitted to sell shares of Common Stock (other than to a Permitted
Transferee, in a public offering or, in the case of Shareholders other than the
Manager Shareholders, in an open market transaction) without providing all
other Shareholders the right to participate in such sale (the "Co-Sale
Rights"); provided that Waller and Rogers would have the right to sell a
limited number of shares of Common Stock to employees of the Company. Each
Shareholder who exercises such Shareholder's Co-Sale Rights would be permitted
to sell a percentage of the shares that the prospective buyer is willing to
purchase equal to such Shareholder's percentage ownership of the outstanding
shares of unrestricted stock owned by all of the Shareholders wishing to
participate in such sale. Shares of Restricted Stock that have not yet vested
could not be sold pursuant to the Co-Sale Rights.
Each Shareholder that is subject to the Shareholder Agreement has agreed to
vote all of the voting shares of Common Stock held by such Shareholder in favor
of the election to the Board of Directors of two individuals who will be
nominated by a vote of a majority of the outstanding shares of Common Stock
held by the Employees and their Permitted Transferees and, upon the vote of a
majority of the outstanding shares of Common Stock held by the Employees and
their Permitted Transferees, to remove or replace such directors, until the
earlier of (i) the completion of an underwritten public offering with gross
proceeds of at least $20 million or (ii) the general termination of the
Shareholder Agreement. Joel N. Waller and David L. Rogers currently own a
majority of the outstanding shares of Common Stock held by the Employees and
their Permitted Transferees, and are therefore able to nominate such two
directors.
Generally, except as set forth in the Shareholder Agreement, the Shareholder
Agreement will terminate with respect to all Subjected Shares (other than
shares of Restricted Stock which have not yet vested) upon the first to occur
of (i) a Control Transaction (as defined in the Shareholder Agreement), or (ii)
assuming completion of the Offering, May 25, 1998. The Co-Sale Rights would
remain in effect upon the occurrence of a Control Transaction but, assuming
completion of the Offering, would expire on May 25, 1998. The Shareholder
Agreement will remain in effect for all shares of Restricted Stock that have
not vested until such shares vest or are purchased by the Company.
SALE AGREEMENT
On May 24, 1996, CVS, the Company and Wilsons Center, Inc., one of the
Predecessor Companies, entered into a sale agreement (the "Sale Agreement"),
which provided for CVS to sell the Wilsons Shares to the Company on May 25,
1996 (the "Closing"), subject to various conditions typically found in
transactions of this nature. In consideration for the Wilsons Shares, the
Company delivered to CVS (i) $2.0 million in cash, (ii) the $55.8 million Note,
(iii) the CVS Warrant, (iv) the Manager Warrant, (v) 4,320,000 shares of the
Company's Common Stock, and (vi) 7,405 shares of the Company's Series A
Preferred. As part of the Acquisition, Limited Partnership I subsequently
purchased from CVS the 4,320,000 shares of the Company's Common Stock and
Limited Partnership II subsequently purchased from CVS the 7,405 shares of the
Company's Series A Preferred for an aggregate consideration of $10.0 million.
On May , 1997, the 7,405 shares of Series A Preferred were exchanged for
617,083 shares of the Company's Common Stock.
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Pursuant to the Sale Agreement, CVS agreed, subject to certain limitations
set forth therein, to indemnify the Company and its affiliates (and their
respective officers and directors) against and to hold them harmless from any
and all Damages (as defined in the Sale Agreement) incurred or suffered by any
such indemnified party arising out of, among other things, (i) certain
misrepresentations or breaches of warranties or covenants or agreements to be
performed by CVS or Wilsons Center, Inc. pursuant to the Sale Agreement; (ii)
claims relating to certain disclosed and undisclosed liabilities of the
Predecessor Companies; (iii) claims relating to the Closed Store Leases (as
defined in the Sale Agreement) and the Excluded Subsidiaries (as defined in
the Sale Agreement); (iv) claims related to certain taxes, primarily income
taxes; (v) claims related to certain recalled leather protector sprays; and
(vi) certain claims related to employees and certain employee benefits
matters. Generally, the indemnifications by CVS, other than those referred to
in clauses (iii), (iv), (v) and (vi) above, which will survive until the
expiration of the applicable statute of limitations and have no dollar limit,
must be asserted on or prior to August 25, 1997, and may not be recovered
except to the extent they exceed $1.2 million in the aggregate, with such
recoveries generally limited to $12 million in the aggregate. Of the claims
that must be asserted on or prior to August 25, 1997, none have accrued as of
February 1, 1997.
The Company and its affiliates have also, subject to certain limitations set
forth in the Sale Agreement, agreed to indemnify CVS and its affiliates (and
their respective officers and directors) against and to hold them harmless
from any and all Damages incurred or suffered by any such indemnified party
arising out of certain misrepresentations or breaches of warranties or
covenants or agreements to be performed by the Company or, after May 25, 1996,
by Wilsons Center, Inc. pursuant to the Sale Agreement. The indemnifications
by the Company relating to misrepresentations or breaches of warranties must
be asserted on or prior to August 25, 1997, and may not be recovered except to
the extent they exceed $1.2 million in the aggregate, with such recoveries
generally limited to $12 million in the aggregate.
WARRANTS HELD BY CVS
As of February 1, 1997, the Company had issued and outstanding (i) the CVS
Warrant to purchase 1,350,000 shares of the Company's Common Stock, at an
exercise price of $.60 per share, and (ii) the Manager Warrant to purchase up
to 1,080,000 shares of the Company's Common Stock, at an exercise price of
$.60 per share. The CVS Warrant is immediately exercisable, in whole or in
part, and remains exercisable until May 25, 2006. The Manager Warrant is
exercisable in whole or in part at any time from April 30, 2001 through April
30, 2003, subject to reduction in an amount equal to the number of shares of
Restricted Stock that have vested as of April 30, 2001. As of February 1,
1997, 198,018 shares of such Restricted Stock had vested. The remaining shares
of Restricted Stock will vest over the next four years if the Company achieves
specified earnings targets or as the Company repays the Note. See "The
Acquisition" and "Restricted Stock Agreement" above. The exercise price and
number of shares of Common Stock for which each of the CVS Warrant and the
Manager Warrant is exercisable will be proportionately adjusted to reflect any
stock dividend, distribution, subdivision, split, combination, issuance or
reclassification. Upon exercise of such warrants and receipt of the Company's
Common Stock, each holder of such stock agrees to enter into the Shareholder
Agreement, as long as the Shareholder Agreement is in effect with respect to
any shares of the Company's Common Stock. The CVS Warrant and the Manager
Warrant are also subject to certain registration rights. See "Registration
Rights Agreement" and "Shareholder Agreement" above.
SUBORDINATED NOTE
On May 25, 1996, the Company issued the Note to CVS (along with subsequent
registered transferees, the "Holder(s)") for $55.8 million as partial
consideration for the Acquisition. $55.0 million of the principal amount of
the Note bears interest at the rate of 10% per annum, compounded annually,
with all such principal and interest due and payable on December 31, 2000. As
of February 1, 1997, the Company had recorded $3.8 million of accrued interest
expense on the Note. The remaining principal balance of the Note ($0.8
million) does not bear interest and is due and payable on December 31, 2000.
The Company may prepay without premium or penalty all or any portion of the
principal amount of the Note, together with accrued interest thereon to the
date of such prepayment. The Note is secured by a lien on substantially all of
the Company's assets other than real estate, equipment and fixtures, but is
subordinated to the Revolving Credit Facility. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
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If an Event of Default occurs (as defined in the Note, including, among
others, if (i) the Company defaults in the payment of the principal or
interest when the same becomes due and payable and such default continues for
a period of 30 days, (ii) the Company defaults in the performance of or
breaches certain covenants of the Company in the Note (as described below) and
such default continues for a period of 30 days, (iii) a court enters an order
for relief in respect of the Company in an involuntary case under applicable
bankruptcy law or appoints a receiver and such order remains in effect for a
period of 60 consecutive days, (iv) the Company commences a voluntary case
under any applicable bankruptcy law, or (v) there is a default under any
senior debt of the Company or its subsidiaries), the principal amount of the
Note and accrued interest becomes immediately due and payable upon written
notice of the Holders of at least 25% of the aggregate principal amount of the
Note then outstanding. The Note also contains covenants limiting, among other
things, the Company's ability to (i) liquidate the Company or sell 5% or more
of the Company's consolidated assets, (ii) generally declare or make dividends
or repurchase the Company's capital stock, (iii) sell 5% or less of the total
consolidated assets of the Company or make a public offering of the Company's
capital stock without reinvesting the proceeds of the sale or offering in the
Company's business or applying the proceeds against debt, (iv) purchase any
property or assets of any other entity in excess of five percent of the total
consolidated assets of the Company, and (v) make any material change in the
scope of the business of the Company.
Subject to certain limitations, the Holder may transfer or assign the Note,
in whole or in part, to any person without the prior written consent of the
Company. See "Registration Rights Agreement" above.
OTHER RELATIONSHIPS
The Company regularly conducts business with G-III, of which Morris
Goldfarb, a director of Wilsons, is the Chief Executive Officer and a
director. Purchases from G-III totaled $5.0 million, $4.7 million and $9.9
million for the 13-month period ended February 1, 1997 and the 12-month
periods ended December 31, 1995 and 1994, respectively. The Company believes
that transactions with G-III are on terms no less favorable to the Company
than those obtainable in arms-length transactions with unaffiliated third
parties.
For a discussion of related party transactions involving the Predecessor
Companies, see also Note 12 of Notes to Consolidated Financial Statements.
48
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of April 15, 1997 and as adjusted
to reflect the sale of shares offered by this Prospectus by (i) each person
known by the Company to be the beneficial owner of 5% or more of the Company's
outstanding shares of Common Stock, (ii) each director of the Company and each
of the five most highly compensated executive officers, and (iii) all
directors and executive officers as a group. Except as otherwise indicated in
the footnotes to this table, each person named in this table has sole voting
and investment power with respect to all shares of Common Stock shown as
beneficially owned by such person.
<TABLE>
<CAPTION>
% BENEFICIALLY OWNED
------------------------
NUMBER OF SHARES PRIOR TO AFTER
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
------------------------ ------------------ ---------- ----------
<S> <C> <C> <C>
Morris Goldfarb......... 1,240,431.1(1)(2) 15.0% 13.2%
G-III Apparel Group,
Ltd.
512 Seventh Avenue
New York, NY 10018
Goldfarb Family Partners 907,200.0(1) 11.0 9.7
L.L.C. ................
G-III Apparel Group,
Ltd.
512 Seventh Avenue
New York, NY 10018
Lyle Berman............. 311,631.1(1)(2) 3.8 3.3
Neil I. Sell, as sole
trustee of four
irrevocable trusts for
the benefit of Lyle
Berman's children and
of two irrevocable
trusts for the benefit
of David Rogers'
children and on behalf
of himself............. 2,222,365.0(1)(2)(3) 26.9 23.7
3300 Norwest Center
90 South Seventh Street
Minneapolis, MN 55402
CVS New York, Inc. 1,350,000.0(4) 14.0 12.6
(formerly Melville
Corporation)...........
One CVS Drive
Woonsocket, RI 02895
Joel N. Waller.......... 1,044,855.0 12.6 11.2
7401 Boone Avenue North
Brooklyn Park, MN 55428
David L. Rogers......... 905,343.3 11.0 9.7
7401 Boone Avenue North
Brooklyn Park, MN 55428
Carol S. Lund........... 149,833.8 1.8 1.6
David Sharp............. 141,509.7 1.7 1.5
Jed Jaffe............... 124,861.5 1.5 1.3
Thomas J. Brosig........ -- -- --
All directors and
executive
officers as a group (14
persons)............... 4,376,291.0 52.9 46.7
</TABLE>
- --------
* Represents beneficial ownership of less than one percent of the Common
Stock.
(1) Limited Partnership I, of which Messrs. Berman, Goldfarb and Sell are
partners, currently owns 4,320,000 shares of Common Stock. Upon the
consummation of the Offering, Limited Partnership I by its terms will
dissolve, leaving the partners and the related family trusts and limited
liability company noted above, to which Messrs. Berman and Goldfarb,
respectively, have assigned certain interests in Limited Partnership I,
with direct ownership of the Common Stock in proportion to their interests
in Limited Partnership I.
(2) Limited Partnership II, of which Messrs. Berman, Goldfarb and Sell are
partners, currently owns 617,083 shares of Common Stock. Upon the
consummation of the Offering, Limited Partnership II by its terms will
dissolve, leaving the partners with direct ownership of the Common Stock
in proportion to their interests in Limited Partnership II.
(3) Includes 1,836,000 shares of Common Stock held in four irrevocable trusts
for the benefit of Lyle Berman's children and 139,510.8 shares of Common
Stock held in two irrevocable trusts for the benefit of David L. Rogers'
children. Mr. Sell has disclaimed beneficial ownership of such shares.
(4) Includes 1,350,000 shares of Common Stock issuable to CVS upon the
exercise of the CVS Warrant, which is currently exercisable in full.
49
<PAGE>
DESCRIPTION OF SECURITIES
GENERAL
The Company's Amended Articles of Incorporation authorize the issuance of up
to 45,000,000 shares of Common Stock, $0.01 par value, and 10,000,000 shares
of Preferred Stock, $0.01 par value, the rights and preferences of which may
be established from time to time by the Company's Board of Directors.
UNITS
Each Unit offered hereby consists of one share of Common Stock and one
Redeemable Warrant. The Redeemable Warrants are immediately exercisable and
separately transferable from the Common Stock. Each Redeemable Warrant
entitles the holder the right to purchase at any time until redemption or
three years following the Effective Date one share of Common Stock at an
exercise price of $13.50 per warrant, subject to adjustment.
COMMON STOCK
As earlier noted, upon completion of the Offering, all of the Company's
issued and outstanding Class A Common Stock, Class B Common Stock and Class C
Common Stock, and all of such Class Stock to be issued and outstanding upon
exercise of the CVS Warrant and the Manager Warrant and outstanding options
under the 1996 Option Plan, will be converted into a single class of Common
Stock of the Company. The following description reflects that conversion.
As of April 15, 1997, 8,267,083 shares of Common Stock were issued and
outstanding (including 881,982 shares of Restricted Stock) and were held by 49
shareholders. An additional 1,350,000 and 881,982 shares of Common Stock,
respectively, are reserved for issuance upon exercise of the CVS Warrant and
the Manager Warrant and 1,000,000 shares of Common Stock are reserved for
issuance upon exercise of options pursuant to the 1996 Option Plan. Except as
noted in the following sentence, each holder of shares of Common Stock,
including the shares of Common Stock offered hereby, will have equal rights in
all respects, including the right to one vote on all matters submitted to
shareholders for each share of Common Stock standing in the name of such
holder on the books of the Company. Each shareholder that is subject to the
Shareholder Agreement has agreed to vote all of the voting shares of Common
Stock held by such shareholder in favor of the election to the Board of
Directors of two individuals who will be nominated by a vote of a majority of
the outstanding shares of Common Stock held by the Employees and their
Permitted Transferees (Joel N. Waller and David L. Rogers currently own a
majority of such shares) and, upon the vote of a majority of the outstanding
shares of Common Stock held by the Employees and their Permitted Transferees,
to remove or replace such directors, until the earlier of (i) the completion
of a public offering with gross proceeds of at least $20 million or (ii) the
general termination of the Shareholder Agreement, which termination will be no
later than May 25, 1998. There are no cumulative voting rights for the
election of directors, which means that the holders of more than 50% of such
outstanding shares voting for the election of directors can elect all of the
directors of the Company standing for election. Shares of Common Stock do not
have subscription or conversion rights and there are no redemption or sinking
fund provisions applicable thereto. Holders of Common Stock have no preemptive
rights to purchase pro rata portions of new issues of Common Stock or
Preferred Stock. The outstanding shares of Common Stock are, and the shares of
Common Stock offered hereby will be, when issued and sold hereunder, fully
paid and non-assessable.
PREFERRED STOCK
As of April 15, 1997, 7,405 shares of Series A Preferred Stock were issued
and outstanding. On May , 1997, the 7,405 shares of Series A Preferred were
exchanged for 617,083 shares of the Company's Common Stock, leaving no shares
of Preferred Stock issued or outstanding. The Board of Directors may from time
to time issue the shares of authorized Preferred Stock in one or more series,
each of such series to have such relative rights, voting power, preferences,
qualifications, limitations and restrictions as are adopted by the Board of
50
<PAGE>
Directors, including dividend rights, redemption and liquidation preferences,
conversion rights and voting rights, any or all of which may be greater than
the rights of the Common Stock. The Board of Directors, without shareholder
approval, can issue Preferred Stock with voting, conversion or other rights
that could adversely affect the voting power and other rights of the holders of
Common Stock. Preferred Stock could thus be issued quickly with terms
calculated to delay or prevent a change in control of the Company or make
removal of management more difficult. Additionally, the issuance of Preferred
Stock may have the effect of decreasing the market price of the Common Stock,
and may adversely affect the voting and other rights of the holders of Common
Stock.
REDEEMABLE WARRANTS
WARRANT AGREEMENT
The Redeemable Warrants included as part of the Units offered hereby will be
issued under and governed by the provisions of the Warrant Agreement between
the Company and Norwest Bank Minnesota, N.A., as Warrant Agent. A copy of the
Warrant Agreement has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part. The following statements are summaries of
certain provisions contained therein, are not complete, and are qualified in
their entirety by reference to the Warrant Agreement.
The shares of Common Stock and the Redeemable Warrants offered as part of the
Units are detachable and are separately transferable following their issuance.
One Redeemable Warrant entitles the holder ("Warrantholder") thereof to
purchase one share of Common Stock during the three years following the
Effective Date of this Prospectus. Each Warrant will be exercisable at a price
equal to $13.50 per share, subject to adjustment as a result of certain events.
Any time 90 or more days after the Effective Date of this Prospectus, the
Redeemable Warrants are redeemable, in whole, by the Company at a redemption
price of $.01 per Redeemable Warrant on not less than 30 days written notice,
provided that the closing bid price of the Common Stock exceeds $14.50 per
share (subject to adjustment) for any 10 consecutive trading days prior to such
notice. Holders of Redeemable Warrants may exercise their rights until the
close of business on the date fixed for redemption, unless extended by the
Company. Redemption of the Redeemable Warrants is subject to the provisions in
the Revolving Credit Facility restricting distributions to security holders.
Warrantholders as such are not entitled to vote, receive dividends, or
exercise any of the rights of holders of shares of Common Stock for any purpose
until such Redeemable Warrants have been duly exercised and payment of the
purchase price has been made. The Redeemable Warrants are in registered form
and may be presented for transfer, exchange, or exercise at the corporate
office of the Warrant Agent. Although the Company has applied for listing of
the Redeemable Warrants on the Nasdaq National Market, there is currently no
established market for the Redeemable Warrants, and there is no assurance that
any such market will develop.
The Warrant Agreement provides for adjustment of the exercise price and the
number of shares of Common Stock purchasable upon exercise of the Redeemable
Warrants to protect Warrantholders against dilution in certain events,
including stock dividends, stock splits and any combination of Common Stock. In
the event of the merger, consolidation, reclassification or disposition of
substantially all the assets of the Company, the holders of the Redeemable
Warrants are entitled to receive, upon payment of the exercise price, the
securities or property of the Company or the successor corporation resulting
from such transaction that such holders would have received had they exercised
such Redeemable Warrants immediately prior to such transaction.
REGISTRATION
The Company has sufficient shares of Common Stock authorized and reserved for
issuance upon exercise of the Redeemable Warrants, and such shares when issued
will be fully paid and nonassessable. The Company must have a current
registration statement on file with the Securities and Exchange Commission (the
"Commission") and, unless exempt therefrom, with the securities commission of
the state in which the Warrantholder resides in order for the Warrantholder to
exercise his or her Redeemable Warrants and obtain shares of Common Stock free
of any transfer restrictions. The shares so reserved for issuance upon exercise
of
51
<PAGE>
the Redeemable Warrants are registered pursuant to the Registration Statement
of which this Prospectus is a part. Furthermore, the Company has agreed to use
its best efforts to maintain an effective registration statement (by filing
any necessary post-effective amendments or supplements to the Registration
Statement) throughout the term of the Redeemable Warrants with respect to the
shares of Common Stock issuable upon exercise thereof. The Company will incur
significant legal and other related expenses in order to keep such
registration statement current. However, there can be no assurance that the
Company will be able to keep any such registration statement current or that
such registration statement will be effective at the time the Warrantholder
desires to exercise his or her Redeemable Warrants. Additionally, the Company
has agreed to use its best efforts to maintain qualifications in those
jurisdictions where the Units were originally qualified for sale to permit
exercise of the Redeemable Warrants and issuance of shares of Common Stock
upon such exercise. However, there can be no assurance that any such
qualification will be effective at the time the Warrantholder desires to
exercise his or her Redeemable Warrants. If for any reason the Company's
registration statement is not kept current, or if the Company is unable to
qualify its Common Stock underlying the Redeemable Warrants for sale in
particular states, Warrantholders in those states will, absent an applicable
exemption, have no choice but to either sell such Warrants or let them expire.
EXERCISE
The Redeemable Warrants may be exercised upon surrender of the certificate
therefor on or prior to the expiration date (or earlier redemption date) at
the offices of the Company's Warrant Agent, with the form of "Election to
Purchase" on the reverse side of the certificate filled out and executed as
indicated, accompanied by payment of the full exercise price (by certified or
cashier's check payable to the order of the Company) for the number of
Redeemable Warrants being exercised.
For the term of the Redeemable Warrants, the Warrantholders are given the
opportunity to profit from a rise in the market price of the Company's Common
Stock with a resulting dilution in the interest of the Company's shareholders.
During such term, the Company may be deprived of opportunities to sell
additional equity securities at a favorable price. The Warrantholders may be
expected to exercise their Redeemable Warrants at a time when the Company
would, in all likelihood, be able to obtain equity capital by a sale or a new
offering on terms more favorable to the Company than the terms of the
Redeemable Warrants.
TAX CONSIDERATIONS
The following summary is the opinion of Faegre & Benson LLP, counsel to the
Company, and is based on present federal income tax law and interpretations
thereof, all of which are subject to change or modification. The discussion is
limited to the federal income tax matters discussed below and does not include
all of the federal income tax considerations relevant to each investor's
personal tax situation. Investors should consult their own tax advisers with
respect to the matters discussed below and with respect to other federal and
state tax considerations that may be applicable to their own personal tax
situation.
The cost basis of the Units will be the purchase price paid by each
investor. Purchasers of Units will be required to allocate the price paid for
such Units between the Common Stock and the Redeemable Warrants based on their
relative fair market values on the date of purchase. If the Redeemable
Warrants are exercised for Common Stock, the cost basis of the holder of a
Redeemable Warrant in the Common Stock thus acquired will be the original
purchase price allocable to the Redeemable Warrants plus any additional amount
paid upon the exercise. No gain or loss will be recognized by such holder upon
exercise of the Redeemable Warrants. However, gain or loss will be recognized
upon the subsequent sale or exchange of the Common Stock acquired by the
exercise of the Redeemable Warrants. Gain or loss will also be recognized upon
the sale or exchange of the Redeemable Warrants. Generally, gain or loss will
be long- or short-term capital gain or loss, depending on whether the Common
Stock or the Redeemable Warrants are held for more than one year. If the
Redeemable Warrants are exercised, the holding period of the Common Stock will
not include the period during which the Redeemable Warrants were held.
52
<PAGE>
OTHER WARRANTS
The Company has issued to CVS the CVS Warrant to purchase 1,350,000 shares of
Common Stock at an exercise price of $.60 per share. The CVS Warrant is
immediately exercisable and remains exercisable until May 25, 2006. Subject to
certain limitations, the CVS Warrant may be transferred or assigned to any
person without the prior written consent of the Company and is subject to anti-
dilution provisions. The CVS Warrant is subject to certain registration rights.
See "Certain Transactions--Registration Rights Agreement" and "--Warrants."
The Company has also issued to CVS the Manager Warrant to purchase up to
1,080,000 shares of Common Stock at an exercise price of $.60 per share. The
number of shares subject to the Manager Warrant will be reduced by an amount
equal to the number of shares of Restricted Stock that vest pursuant to the
terms of the Restricted Stock Agreement. As of February 1, 1997, 198,018 shares
of such Restricted Stock had vested. To the extent any shares of Restricted
Stock have not vested after the close of business on the last Measuring Date
(as defined in the Restricted Stock Agreement), the Manager Warrant becomes
exercisable for such number of unvested shares. The Manager Warrant cannot be
exercised prior to April 30, 2001, if at all. See "The Acquisition" and
"Certain Transactions--Restricted Stock Agreement."
The Company has agreed to issue to the Underwriter in exchange for nominal
consideration four-year warrants to purchase an aggregate of 110,000 shares of
Common Stock at a price per share initially equal to 120% of the public
offering price per Unit set forth on the cover page of this Prospectus. These
warrants are not transferable (except to certain officers or other employees of
the Underwriter) and may be exercised commencing one year after the date of
this Prospectus. The exercise price and the number of shares may, under certain
circumstances, be subject to adjustment pursuant to anti-dilution provisions.
The holders will have certain registration rights with respect to the Common
Stock issuable upon exercise of these warrants.
ANTI-TAKEOVER PROVISIONS OF THE MINNESOTA BUSINESS CORPORATION ACT
Certain provisions of Minnesota law described below could have an anti-
takeover effect. These provisions are intended to provide a Minnesota
corporation's management flexibility to enhance the likelihood of continuity
and stability in the composition of the board of directors and in the policies
formulated by a board of directors and to discourage an unsolicited takeover of
a Minnesota corporation if its board determines that such a takeover is not in
the best interests of the Company and its shareholders. However, these
provisions could have the effect of discouraging certain attempts to acquire
the Company that could deprive the Company's shareholders of opportunities to
sell their shares of Common Stock at prices higher than prevailing market
prices.
Section 302A.671 of the Minnesota Statutes, applying to certain control share
acquisitions, is inapplicable to the Company and its shareholders under the By-
laws of the Company.
Section 302A.673 of the Minnesota Statutes generally prohibits any business
combination by a publicly held Minnesota corporation, or, in certain
circumstances, any subsidiary of the corporation, with any shareholder who
beneficially owns 10% or more of the voting power of the corporation's
outstanding shares (an "Interested Shareholder") within four years following
such Interested Shareholder's acquisition of such 10% or greater interest,
unless the business combination or the acquisition of the 10% or greater
interest is approved by a committee of all of the disinterested members of the
board of directors of the corporation before the Interested Shareholder's
acquisition of such 10% or greater interest. This statute is inapplicable to
the Company's pre-public 10% beneficial owners and, to the extent permitted by
law, the affiliates and associates of such pre-public 10% beneficial owners,
under the By-laws of the Company.
Section 302A.675 of the Minnesota Statutes generally prohibits an offeror
from acquiring shares of a publicly held Minnesota corporation within two years
following the offeror's last purchase of the corporation's shares pursuant to a
takeover offer with respect to that class, unless the corporation's
shareholders are able to sell their shares to the offeror upon substantially
equivalent terms as those provided in the earlier takeover offer. This statute
will not apply if the acquisition of shares is approved by a committee of all
of the disinterested members of the Board of Directors of the Company before
the purchase of any shares by the offeror pursuant to a takeover offer.
53
<PAGE>
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock of the Company is
Norwest Bank Minnesota, N.A.
SECURITIES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no public market for any of the
Company's securities. The Company can make no prediction as to the effect, if
any, that sales of shares of Common Stock or the availability of Common Stock
for sale will have on the market price prevailing from time to time.
Nevertheless, sales of substantial amounts of Common Stock in the public
markets or the perception that such sales will occur could adversely affect the
market price or the future ability of the Company to raise capital through an
offering of its equity securities.
Upon completion of the Offering, based on the number of shares outstanding as
of April 15, 1997, the Company will have outstanding an aggregate of 9,367,083
shares of Common Stock (assuming the issuance of 1,100,000 Units offered by the
Company hereby and assuming no exercise of the Underwriter's over-allotment
option and no exercise of outstanding options or warrants), of which the
1,100,000 shares of Common Stock included in the Units offered hereby
(1,265,000 if the Underwriter's over-allotment option is exercised in full)
will be freely tradable without restriction or further registration under the
Securities Act, unless purchased by an "affiliate" of the Company, as that term
is defined by Rule 144 promulgated under the Securities Act (an "Affiliate"),
whose sales would be subject to certain volume limitations and other
restrictions described below.
The 8,267,083 shares of Common Stock originally issued and sold by the
Company in private transactions in reliance upon exemptions from the Securities
Act upon the consummation of the Offering will be "restricted securities" as
that term is defined in Rule 144 under the Securities Act, and may be sold in
the public market only if registered or if they qualify for an exemption from
registration under Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons whose
shares are aggregated) who has beneficially owned shares for at least one year
(including the holding period of any prior owner except an Affiliate of the
Company) is entitled to sell, in "brokers' transactions" or to market makers,
within any three-month period commencing 90 days after the date of this
Prospectus, a number of shares that does not exceed the greater of (i) one
percent of the then outstanding shares of Common Stock (approximately 93,671
shares immediately after the Offering, assuming no exercise of options,
warrants or the Underwriter's over-allotment option), or (ii) generally, the
average weekly trading volume in the Common Stock during the four calendar
weeks preceding the required filing of a Form 144 with respect to such sale,
subject to certain other limitations or restrictions. Sales under Rule 144 are
generally subject to the availability of current public information about the
Company. Under Rule 144(k), a person who is not deemed to have been an
Affiliate of the Company at any time during the 90 days preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least two
years (including the holding period of any prior owner except an Affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. As a result,
up to 7,650,000 shares of Common Stock originally issued and sold by the
Company on May 25, 1996 and up to 617,083 shares of Common Stock issued in
exchange for the Series A Preferred will become eligible for sale under Rule
144 on May 25, 1997, subject to the other requirements of Rule 144 having been
satisfied, the terms of the Shareholder Agreement and the terms of the "lock-
up" agreements described below. See "Certain Transactions--Shareholder
Agreement." Additional shares may also become available for sale in the public
market from time to time in the future, including the shares of Common Stock
issued upon exercise of the Redeemable Warrants.
Any employee, officer or director of or consultant to the Company who
purchases his or her shares pursuant to a written compensatory plan or contract
is entitled to rely on the resale provisions of Rule 701, which permit non-
Affiliates to sell their Rule 701 shares without complying with the public
information, holding period, volume limitation or notice provisions of Rule 144
and which permit Affiliates to sell their Rule 701 shares without complying
with the Rule 144 holding period restrictions, in each case commencing 90 days
after the date of this Prospectus.
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<PAGE>
The holders of all 8,267,083 shares of Common Stock that are currently
outstanding, and CVS as the holder of the CVS Warrant, have agreed not to sell,
offer to sell or otherwise dispose of or grant any rights with respect to any
shares of Common Stock, any options or warrants to purchase shares of Common
Stock, or any securities convertible into or exchangeable for shares of Common
Stock, now owned or hereafter acquired directly by such holders or with respect
to which they have the power of disposition, without the prior consent of
Equity Securities Investments, Inc., for a period of 180 days from the date of
this Prospectus. The Company has also agreed, pursuant to the Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), not to offer,
sell, contract to sell, or otherwise dispose of any shares of Common Stock or
any securities convertible into or exercisable or exchangeable for Common Stock
or any rights to acquire Common Stock (other than shares issuable upon exercise
of the Redeemable Warrants, other outstanding warrants or options issued under
the 1996 Option Plan) for a period of 180 days after the date of this
Prospectus, without the prior written consent of Equity Securities Investments,
Inc., which may in its sole discretion and at any time without notice release
all or any portion of the securities subject to such arrangements not to sell.
The Company has adopted the 1996 Option Plan and has reserved up to 1,000,000
shares of Common Stock for issuance thereunder. The Company intends to register
these shares under the Securities Act on Form S-8 as soon as practicable after
the closing of the Offering, which registration statement will automatically
become effective upon filing. Shares issued under the 1996 Option Plan after
the effective date of such registration statement, other than shares issued to
Affiliates of the Company, will be freely tradable in the public market,
subject to any applicable vesting restrictions with the Company or other
contractual restrictions. As of April 15, 1997, the Company had options
outstanding to purchase an aggregate of 169,560, 4,500, 8,000 and 13,000 shares
of Common Stock granted on June 26, 1996, October 10, 1996, February 27, 1997
and April 1, 1997, respectively, that will vest, cumulatively, on a pro rata
basis on each of the first, second and third anniversaries of the date of
grant, subject to the possible acceleration of vesting in certain
circumstances.
The Company has also issued the CVS Warrant to purchase 1,350,000 shares of
Common Stock at $.60 per share. The CVS Warrant is immediately exercisable. If
the CVS Warrant is exercised, such Common Stock will be eligible for sale one
year from the date the full purchase price or other consideration is paid or
given by the holder of the Warrant acquiring such Common Stock from the
Company.
The Company has also agreed to issue to the Underwriter (as hereinafter
defined) in exchange for nominal consideration four-year warrants to purchase
an aggregate of 110,000 shares of Common Stock at a price per share initially
equal to 120% of the public offering price per Unit set forth on the cover page
of this Prospectus. These warrants are not transferable (except to certain
officers or other employees of the Underwriter) and may be exercised commencing
one year after the date of this Prospectus. The exercise price and the number
of shares may, under certain circumstances, be subject to adjustment pursuant
to anti-dilution provisions. The holders will have certain registration rights
with respect to the Common Stock issuable upon exercise of these warrants. See
"Underwriting."
In addition, after the Offering, the holders of all 8,267,083 shares of
Common Stock that are currently outstanding, CVS as the holder of the CVS
Warrant and the holders of certain warrants to purchase up to 110,000
additional shares of Common Stock referred to in the immediately preceding
paragraph will be entitled to certain rights to cause the Company to register
the sale of such shares or warrants under the Securities Act. See "Certain
Transactions--Registration Rights Agreement" and "Underwriting."
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to Equity Securities Investments, Inc. (the
"Underwriter") and the Underwriter has agreed to purchase from the Company, the
Units offered hereby. The Underwriting Agreement provides that the Underwriter
will be obligated to purchase all of the 1,100,000 Units offered hereby on a
"firm commitment" basis, if any are purchased.
55
<PAGE>
The Underwriter proposes to offer the Units directly to the public initially
at the public offering price set forth on the cover page of this Prospectus and
in part to certain securities dealers at such price less a concession, which
concessions will not exceed $ per Unit. After the Units are released for
sale to the public, the offering price and other selling terms may from time to
time be changed by the Underwriter.
The Company has granted the Underwriter an option, exercisable for up to 30
days after the date of this Prospectus, to purchase up to an aggregate of
165,000 additional Units at the same price per Unit that the Company will
receive for the 1,100,000 Units purchased by the Underwriter, as described
above, to cover over-allotments, if any. The Underwriter may exercise such
option only to cover over-allotments made in connection with the sale of the
Units offered hereby.
The Company may direct the Underwriter with respect to the sale of up to
165,000 Units in this Offering to persons selected by the Company. The price of
the directed Units will be the public offering price set forth on the cover
page of this Prospectus. Although the Company will recommend and urge the
Underwriter to confirm all such directed sales, the Underwriter will have the
final and absolute discretion to accept or reject any such sales in whole or in
part. In addition, any other individuals who express directly to the Company a
desire to purchase Units in this Offering will be referred by the Company to
the Underwriter. The Underwriter has informed the Company that the Underwriter
does not intend to confirm sales to any account over which it exercises
discretionary authority.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including, without limitation, liabilities under the Securities
Act or to contribute to payments that the Underwriter may be required to make
in respect thereof.
The holders of all 8,267,083 shares of Common Stock that are currently
outstanding, and CVS as the holder of the CVS Warrant, have agreed not to sell,
offer to sell, contract to sell, pledge or grant any option to purchase or
otherwise dispose of such securities for 180 days after the date of this
Prospectus without the prior written consent of Equity Securities Investments,
Inc. The Company has also agreed not to offer, sell, contract to sell, or
otherwise dispose of any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock or any rights to acquire
Common Stock (other than shares issuable upon exercise of Redeemable Warrants,
outstanding warrants, and options issued under the 1996 Option Plan and shares
issued upon exercise thereof) for a period of 180 days after the date of this
Prospectus, without the prior written consent of Equity Securities Investments,
Inc. See "Securities Eligible for Future Sale."
The Company has agreed to pay the Underwriter a non-accountable expense
allowance equal to 1.5% of the aggregate offering price of the Units or
$148,500 ($170,775 if the Underwriter's over-allotment option is exercised in
full). The Company has also agreed to issue to the Underwriter in exchange for
nominal consideration four-year warrants to purchase an aggregate of 110,000
shares of Common Stock at a price per share initially equal to 120% of the
public offering price per Unit set forth on the cover page of this Prospectus.
These warrants are not transferable (except to certain officers or other
employees of the Underwriter) and may be exercised commencing one year after
the date of this Prospectus. The exercise price and the number of shares may,
under certain circumstances, be subject to adjustment pursuant to anti-dilution
provisions. The holders will have certain registration rights with respect to
the Common Stock issuable upon exercise of these warrants.
The Underwriter will not receive any commissions, expense reimbursement or
other compensation as a result of the exercise of the Redeemable Warrants
included in the Units offered hereby.
Prior to the Offering, there has been no public market for any of the
Company's securities. The initial public offering price has been determined by
negotiations between the Company and the Underwriter. The principal factors
considered in such negotiations were prevailing market conditions, the results
of operations of the Company in recent periods, market valuations of companies
that the Company and the Underwriter believe to be comparable to the Company,
estimates of the business potential of the Company, the history of and
prospects for the industry in which the Company competes, and such other
factors as the Company and the Underwriter deem
56
<PAGE>
relevant. The offering price, however, should not be considered as an
indication of the actual value of the Units. After the completion of the
Offering, the market price is subject to change as a result of market
conditions and other factors.
The foregoing is a brief summary of the provisions of the Underwriting
Agreement and Underwriter's warrants and does not purport to be a complete
statement of their respective terms and conditions. Copies of the Underwriting
Agreement and Underwriter's warrants have been filed as exhibits to the
Registration Statement of which this Prospectus is part.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby and
certain other legal matters will be passed upon for the Company by Faegre &
Benson LLP, Minneapolis, Minnesota. Certain legal matters will be passed upon
for the Underwriter by Winthrop & Weinstine, P.A., Minneapolis, Minnesota.
EXPERTS
The consolidated financial statements of the Company as of February 1, 1997
and for the period from inception (May 26, 1996) to February 1, 1997 have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said report.
The consolidated financial statements of the Predecessor Companies as of
December 31, 1994 and 1995 and for each of the years in the three-year period
ended December 31, 1995 and for the five-month period ended May 25, 1996 have
been included herein and in the Registration Statement in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form S-
1 (the "Registration Statement") under the Securities Act, and the rules and
regulations thereunder, with respect to the Common Stock offered hereby. This
Prospectus which forms part of the Registration Statement does not contain all
of the information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and such
Common Stock, reference is made to the Registration Statement and the schedules
and exhibits filed as a part thereof. Statements contained in this Prospectus
regarding the contents of any contract or any other document are not
necessarily complete and, where such document is an exhibit to the Registration
Statement, in each instance, reference is hereby made to the copy of such
contract or document filed as an exhibit to the Registration Statement, each
such statement being qualified in all respects by such reference. The
Registration Statement, including exhibits thereto, may be inspected without
charge at the public reference facilities maintained by the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549; Northwestern
Atrium Center, 500 West Madison, Suite 1400, Chicago, Illinois 60661; and 7
World Trade Center, New York, New York 10048. Copies of all or any part thereof
may be obtained from the Public Reference Section, Securities and Exchange
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of the
prescribed fees. In addition, the Commission maintains a World Wide Web Site on
the Internet at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission.
57
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants................................... F-2
Independent Auditors' Report............................................... F-3
Consolidated Balance Sheets................................................ F-4
Consolidated Statements of Operations...................................... F-5
Consolidated Statements of Shareholders' Equity............................ F-6
Consolidated Statements of Cash Flows...................................... F-7
Notes to Consolidated Financial Statements................................. F-8
Pro Forma Unaudited Consolidated Statement of Operations................... F-20
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Wilsons The Leather Experts Inc.:
We have audited the accompanying consolidated balance sheet of Wilsons The
Leather Experts Inc. (a Minnesota corporation) and Subsidiaries as of February
1, 1997, and the related consolidated statements of operations, shareholders'
equity and cash flows for the period from inception (May 26, 1996) to February
1, 1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Wilsons
The Leather Experts Inc. and Subsidiaries as of February 1, 1997, and the
results of their operations and their cash flows for the period from inception
(May 26, 1996) to February 1, 1997 in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Minneapolis, Minnesota
March 11, 1997 (except with respect to matters discussed in
Note 14 as to which the date is May , 1997)
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Wilsons Center, Inc.:
We have audited the accompanying consolidated balance sheets of Wilsons
Center, Inc. d.b.a. Wilsons The Leather Experts (a subsidiary of Melville
Corporation) and Subsidiaries as of December 31, 1994 and 1995, and the
related consolidated statements of operations, shareholder's equity, and cash
flows for each of the years in the three-year period ended December 31, 1995
and for the five-month period ended May 25, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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.
As discussed in Note 12 to the consolidated financial statements, Wilsons
Center, Inc. d.b.a. Wilsons The Leather Experts has been dependent on Melville
Corporation for a significant portion of its working capital financing.
Subsequent to the close of business on May 25, 1996, Melville Corporation sold
Wilsons Center, Inc. to Wilsons The Leather Experts Inc., a newly formed
company owned by members of management of Wilsons Center, Inc. d.b.a. Wilsons
The Leather Experts and other investors.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Wilsons
Center, Inc. d.b.a. Wilsons The Leather Experts and Subsidiaries as of
December 31, 1994 and 1995, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1995
and for the five-month period ended May 25, 1996 in conformity with generally
accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, Wilsons
Center, Inc. d.b.a. Wilsons The Leather Experts adopted Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, effective October 1, 1995.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
July 19, 1996
F-3
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREDECESSOR
COMPANIES COMPANY
----------------- -------------------
DECEMBER 31 FEBRUARY 1, 1997
----------------- -------------------
PRO FORMA
1994 1995 ACTUAL (NOTE 14)
-------- -------- -------- ---------
ASSETS
------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents............................................................ $ 17,325 $ 14,286 $ 81,553 $ 81,553
Accounts receivable, net............................................................. 7,692 7,618 4,851 4,851
Inventories.......................................................................... 102,595 74,899 64,919 64,919
Prepaid expenses..................................................................... 3,140 2,317 1,246 1,246
Deferred income taxes................................................................ 6,776 14,925 -- --
-------- -------- -------- --------
Total current assets............................................................... 137,528 114,045 152,569 152,569
Property and equipment, net............................................................ 97,216 65,884 17,091 17,091
Goodwill, net of accumulated amortization of $27,468 in 1994........................... 152,522 -- -- --
Other assets, net...................................................................... 5,404 462 1,555 1,555
Deferred income taxes.................................................................. -- 1,979 1,173 1,173
-------- -------- -------- --------
$392,670 $182,370 $172,388 $172,388
======== ======== ======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C> <C>
Current liabilities:
Accounts payable..................................................................... $ 18,106 $ 11,728 $ 10,666 $ 10,666
Due to CVS........................................................................... 124,245 78,771 -- --
Accrued expenses..................................................................... 41,502 52,623 34,517 34,122
Income taxes payable................................................................. 857 5,120 20,345 20,345
Deferred income taxes................................................................ -- -- 3,243 3,243
-------- -------- -------- --------
Total current liabilities.......................................................... 184,710 148,242 68,771 68,376
Long-term debt......................................................................... -- -- 55,811 55,811
Other long-term liabilities............................................................ 6,965 6,538 4,341 4,341
-------- -------- -------- --------
Commitments and contingencies (Notes 9, 10, 11 and 13)
Shareholders' equity:
Series A preferred stock, $1,000 stated value; 15,000 shares authorized, 7,405 shares
issued and outstanding in 1997 (see Note 14)........................................ -- -- 7,405 --
Common stock, no par value; 100 shares authorized, issued and outstanding in 1994 and
1995................................................................................ 146 146 -- --
Class A common stock, $.01 par value; 13,500,000 shares authorized, 4,937,083 issued
and outstanding in 1997 (see Note 14)............................................... -- -- 44 50
Class B common stock, $.01 par value; 6,750,000 shares authorized, 2,925,000 shares
issued and outstanding in 1997...................................................... -- -- 29 29
Class C common stock, $.01 par value; 2,250,000 shares authorized, 405,000 shares
issued and outstanding in 1997...................................................... -- -- 4 4
Additional paid-in capital........................................................... 135,452 135,452 12,501 19,900
Retained earnings (deficit).......................................................... 65,397 (108,018) 23,511 23,906
Cumulative translation adjustment.................................................... -- 10 (29) (29)
-------- -------- -------- --------
Total shareholders' equity......................................................... 200,995 27,590 43,465 43,860
-------- -------- -------- --------
$392,670 $182,370 $172,388 $172,388
- --------------------------------------------------
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES COMPANY
--------------------------------------------------------------- -----------
PERIOD
FROM
EIGHT INCEPTION
YEARS ENDED DECEMBER 31 FIVE MONTHS ENDED MONTHS (MAY 26,
---------------------------- -------------------- ENDED 1996) TO
MAY 27, MAY 25, JANUARY 27, FEBRUARY 1,
1993 1994 1995 1995 1996 1996 1997
-------- -------- --------- ----------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $478,475 $474,623 $ 462,394 $124,700 $109,640 $ 367,639 $ 345,121
Costs and expenses:
Cost of goods sold,
buying and occupancy
costs................. 320,540 329,430 316,946 99,849 86,213 238,558 222,131
Selling, general and
administrative
expenses.............. 120,071 130,227 114,923 45,918 34,868 76,442 75,806
Depreciation and
amortization.......... 20,668 22,273 21,393 9,002 4,722 13,294 994
Restricted stock
compensation expense.. -- -- -- -- -- -- 1,485
Restructuring and asset
impairment charges.... -- -- 182,184 -- -- 182,184 --
-------- -------- --------- -------- -------- --------- ---------
Income (loss) from
operations........... 17,196 (7,307) (173,052) (30,069) (16,163) (142,839) 44,705
Interest expense, net... 5,102 8,393 10,463 3,396 1,581 7,400 5,271
-------- -------- --------- -------- -------- --------- ---------
Income (loss) before
income taxes......... 12,094 (15,700) (183,515) (33,465) (17,744) (150,239) 39,434
Income tax provision
(benefit).............. 7,038 (3,109) (10,100) (5,461) (6,603) (4,681) 15,528
-------- -------- --------- -------- -------- --------- ---------
Net income (loss)..... $ 5,056 $(12,591) $(173,415) $(28,004) $(11,141) $(145,558) $ 23,906
======== ======== ========= ======== ======== ========= =========
Pro forma net income per common share (Note 2)........................... $ 2.49
=========
Weighted average common shares outstanding............................... 9,602,826
=========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES
-------------------------------------------------------------
COMMON STOCK ADDITIONAL RETAINED CUMULATIVE TOTAL
------------- PAID-IN EARNINGS TRANSLATION SHAREHOLDERS'
SHARES AMOUNT CAPITAL (DEFICIT) ADJUSTMENT EQUITY
------ ------ ---------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1992................... 100 $146 $135,311 $ 87,066 $-- $ 222,523
Net income............ -- -- -- 5,056 -- 5,056
Dividends paid to CVS. -- -- -- (10,406) -- (10,406)
--- ---- -------- --------- ---- ---------
Balance, December 31,
1993................... 100 146 135,311 81,716 -- 217,173
Net loss.............. -- -- -- (12,591) -- (12,591)
Dividends paid to CVS. -- -- -- (3,728) -- (3,728)
Capital contributed by
CVS.................. -- -- 141 -- -- 141
--- ---- -------- --------- ---- ---------
Balance, December 31,
1994................... 100 146 135,452 65,397 -- 200,995
Net loss.............. -- -- -- (173,415) -- (173,415)
Currency translation
adjustment........... -- -- -- -- 10 10
--- ---- -------- --------- ---- ---------
Balance, December 31,
1995................... 100 146 135,452 (108,018) 10 27,590
Net loss.............. -- -- -- (11,141) -- (11,141)
Capital contributed by
CVS.................. -- -- 124,000 -- -- 124,000
Currency translation
adjustment........... -- -- -- -- 12 12
Other................. -- -- (141) 139 (10) (12)
--- ---- -------- --------- ---- ---------
Balance, May 25, 1996... 100 $146 $259,311 $(119,020) $ 12 $ 140,449
=== ==== ======== ========= ==== =========
</TABLE>
<TABLE>
<CAPTION>
COMPANY
--------------------------------------------------------------
COMMON STOCK
PREFERRED ------------------------------------------------
STOCK CLASS A CLASS B CLASS C
------------- ---------------- ---------------- --------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ --------- ------ --------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial capitalization.. 7,405 $7,405 4,320,000 $44 2,925,000 $29 405,000 $4
Net income............ -- -- -- -- -- -- -- --
Restricted stock
vested............... -- -- -- -- -- -- -- --
Accrued preferred
stock dividends...... -- -- -- -- -- -- -- --
Currency translation
adjustment........... -- -- -- -- -- -- -- --
----- ------ --------- --- --------- --- ------- ---
Balance, February 1,
1997................... 7,405 $7,405 4,320,000 $44 2,925,000 $29 405,000 $4
===== ====== ========= === ========= === ======= ===
</TABLE>
<TABLE>
<CAPTION>
COMPANY
----------------------------------------------
ADDITIONAL CUMULATIVE TOTAL
PAID-IN RETAINED TRANSLATION SHAREHOLDERS'
CAPITAL EARNINGS ADJUSTMENT EQUITY
---------- -------- ----------- -------------
<S> <C> <C> <C> <C>
Initial capitalization
(continued)..................... $11,016 $ -- $-- $18,498
Net income..................... -- 23,906 -- 23,906
Restricted stock vested........ 1,485 -- -- 1,485
Accrued preferred stock
dividends..................... -- (395) -- (395)
Currency translation
adjustment.................... -- -- (29) (29)
------- ------- ---- -------
Balance, February 1, 1997........ $12,501 $23,511 $(29) $43,465
======= ======= ==== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES COMPANY
--------------------------------------------------------------- --------------
PERIOD FROM
EIGHT INCEPTION
YEARS ENDED DECEMBER 31 FIVE MONTHS ENDED MONTHS (MAY 26, 1996)
---------------------------- -------------------- ENDED TO
MAY 27, MAY 25, JANUARY 27, FEBRUARY 1,
1993 1994 1995 1995 1996 1996 1997
------- -------- --------- ----------- -------- ----------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)......................... $ 5,056 $(12,591) $(173,415) $(28,004) $(11,141) $(145,558) $ 23,906
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities--
Restructuring and asset impairment
charges.................................. -- -- 182,184 -- -- 182,184 --
Restructuring charges paid................ -- -- (338) -- (5,958) (1,412) --
Depreciation and amortization............. 20,668 22,273 21,393 9,002 4,722 13,294 994
Amortization of deferred financing costs.. -- -- -- -- -- -- 444
Restricted stock compensation expense..... -- -- -- -- -- -- 1,485
Loss on disposal of assets................ 5,417 9,899 4,498 3,616 113 882 --
Deferred income taxes..................... 1,302 (965) (11,233) -- 5,116 (11,233) (4,928)
Changes in operating assets and
liabilities, net of assets and
liabilities acquired:
Accounts receivable, net................. (4,224) 4,832 74 4,120 3,395 (430) (941)
Inventories.............................. (11,859) 1,931 27,696 27,070 19,344 5,559 (11,779)
Prepaid expenses......................... 1,979 5,257 669 5,309 5,253 232 (4,740)
Other noncurrent assets.................. 12 1,668 (196) 12 145 508 --
Accounts payable and accrued expenses.... 4,426 (14,537) (3,167) (26,444) (25,035) 7,809 9,074
Income taxes payable and other
liabilities............................. (10,765) (5,531) 4,941 (6,204) (11,926) 11,197 20,684
------- -------- --------- -------- -------- --------- --------
Net cash provided by (used in) operating
activities............................. 12,012 12,236 53,106 (11,523) (15,972) 63,032 34,199
------- -------- --------- -------- -------- --------- --------
Investing activities:
Additions to property, equipment and other
noncurrent assets........................ (26,641) (20,720) (10,117) (2,852) (3,566) (7,473) (5,915)
Acquisitions, net of cash acquired........ (6,373) -- -- -- -- -- 37,072
------- -------- --------- -------- -------- --------- --------
Net cash provided by (used in) investing
activities............................. (33,014) (20,720) (10,117) (2,852) (3,566) (7,473) 31,157
------- -------- --------- -------- -------- --------- --------
Financing activities:
Change in due to/from CVS................. 31,054 23,966 (45,474) 9,923 (107,442) (57,826) --
Dividends paid to CVS..................... (10,406) (3,728) -- -- -- -- --
Capital contributed by CVS................ -- 141 -- -- 124,000 -- --
Change in book overdrafts................. 234 11 (554) (10,581) (8,024) 7,245 4,197
Proceeds from sale of common and preferred
stock.................................... -- -- -- -- -- -- 12,000
------- -------- --------- -------- -------- --------- --------
Net cash provided by (used in) financing
activities............................. 20,882 20,390 (46,028) (658) 8,534 (50,581) 16,197
------- -------- --------- -------- -------- --------- --------
Net increase (decrease) in cash and cash
equivalents............................... (120) 11,906 (3,039) (15,033) (11,004) 4,978 81,553
Cash and cash equivalents, beginning of
period.................................... 5,539 5,419 17,325 17,325 14,286 2,292 --
------- -------- --------- -------- -------- --------- --------
Cash and cash equivalents, end of period... $ 5,419 $ 17,325 $ 14,286 $ 2,292 $ 3,282 $ 7,270 $ 81,553
======= ======== ========= ======== ======== ========= ========
Supplemental cash flow information:
Cash paid during the period for--
Interest.................................. $ 4,910 $ 7,865 $ 10,650 $ 3,853 $ 2,035 $ 7,727 $ 1,678
======= ======== ========= ======== ======== ========= ========
Income taxes.............................. $17,545 $ 4,959 $ 1,735 $ 828 $ 208 $ 962 $ 1,008
======= ======== ========= ======== ======== ========= ========
Noncash investing and financing
activities--
Liabilities assumed for acquisition of
business................................. $ 3,226 $ -- $ -- $ -- $ -- $ -- $ 46,627
======= ======== ========= ======== ======== ========= ========
Issuance of long-term debt................ $ -- $ -- $ -- $ -- $ -- $ -- $ 55,811
======= ======== ========= ======== ======== ========= ========
Accrued preferred stock dividends......... $ -- $ -- $ -- $ -- $ -- $ -- $ 395
- --------------------------------------------------
======= ======== ========= ======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
1. NATURE OF ORGANIZATION AND ACQUISITION:
Wilsons The Leather Experts Inc., a Minnesota corporation (Wilsons), was
formed to acquire 100% of the Common Stock of Wilsons Center, Inc. and its
subsidiaries (the Predecessor Companies prior to the Acquisition) in a
management-led buyout (Acquisition) from CVS New York, Inc., a New York
corporation (CVS; formerly Melville Corporation, the parent company to the
Predecessor Companies). Wilsons and Wilsons Center, Inc. are collectively
referred to as the Company. In May 1996, pursuant to a sale agreement dated
May 24, 1996 between Wilsons and CVS, Wilsons acquired the Common Stock for
(i) $2 million, (ii) a 10% senior secured subordinated note due December 31,
2000 in the principal amount of $55.8 million, (iii) a warrant to purchase
1,350,000 shares of Common Stock, (iv) a warrant to purchase 1,080,000 shares
of Common Stock (reduced by terms of the Restricted Stock Agreement--see Note
9), (v) 4,320,000 shares of Common Stock, and (vi) 7,405 shares of Preferred
Stock. As part of the Acquisition, the Leather Investors Limited Partnerships
I and II (LILP) in turn purchased from CVS the 4,320,000 shares of Common
Stock and the 7,405 shares of Preferred Stock for $10 million.
The Acquisition was accounted for using the purchase method. The basis of
CVS's 15% equity interest in the Predecessor Companies was carried over to its
equity interest in the Company in accordance with Emerging Issues Task Force
discussion 88-16. Accordingly, the purchase price of $67.8 million and CVS's
carryover basis has been allocated on a preliminary basis to the assets
acquired and liabilities assumed based on their estimated fair values. This
resulted in the carrying value of the net assets acquired exceeding the new
basis by approximately $52.5 million, which was applied to reduce the amounts
assigned to property and equipment.
The Company operates a chain of 461 retail stores as of February 1, 1997,
all but two of which are located in the United States, specializing in the
retail sales of leather apparel and accessories. The Company operates under
several formats, including Wilsons The Leather Experts, the traditional
business, specializing in moderately priced merchandise and Tannery
West/Georgetown Leather Design, which provides a more upscale merchandise
offering. The Company also operates airport stores that focus on selling
accessories and holiday stores and seasonal kiosks, primarily during the
November and December peak selling season. The Company is the leading national
specialty retailer of leather apparel and accessories in the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
Consolidated financial statements and footnote disclosures prior to May 26,
1996 relate to the Predecessor Companies before the Acquisition and are not
comparable to the period presented subsequent to the acquisition date due to
the effects of certain purchase accounting adjustments and the acquisition
financing. The accompanying consolidated financial statements include those of
the Company and all of its subsidiaries. All intercompany balances and
transactions between the entities have been eliminated in consolidation.
Year-End
Wilsons' fiscal year ends on the Saturday closest to January 31. The
Predecessor Companies' year-end was December 31.
Interim Financial Statements
The unaudited consolidated financial information for the five-month period
ended May 27, 1995 and for the eight-month period ended January 27, 1996 has
been prepared on the same basis as the audited consolidated financial
statements of the Predecessor Companies and, in the opinion of management,
includes all adjustments (consisting only of normal recurring adjustments)
necessary to state fairly the financial information set forth therein. The
Company's business is seasonal and, accordingly, interim results are not
indicative of full-year results.
F-8
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Sources of Supply
The Company imports most of its products from independent foreign contract
manufacturers located primarily in the Far East. The Company purchases such
foreign sourced inventory in U.S. dollars. In 1996, the Company sourced more
than 60% of its leather apparel and accessories from contract manufacturers
located in The People's Republic of China, which currently has Most Favored
Nation (MFN) trading status with the United States. Loss of MFN status by China
or by any other country from which the Company sources goods could result in
significantly higher leather purchase and production costs for the Company and,
as a result, could negatively impact profitability, sale prices or demand for
leather merchandise. Other risks inherent in foreign sourcing include economic
and political instability, transportation delays and interruptions, restrictive
actions by foreign governments, the laws and policies of the United States
affecting the importation of goods, including duties, quotas and taxes, trade
and foreign tax laws, fluctuations in currency exchange rates, and the
possibility of boycotts or other actions prompted by foreign labor practices or
conditions beyond the Company's control. In addition, many of the Company's
domestic vendors also import a substantial portion of their merchandise from
abroad.
Cash and Cash Equivalents
Cash equivalents consist principally of short-term investments with original
maturities of three months or less and are recorded at cost, which approximates
fair value. The Company's cash management program utilizes zero balance
accounts. Accordingly, all book overdrafts have been reclassified to current
asset or current liability accounts.
Fair Values of Financial Instruments
The carrying value of the Company's current financial assets and liabilities,
because of their short-term nature, approximates fair value. The carrying value
of the Company's long-term debt, related to the recent financing for the
Acquisition, approximates fair value.
Inventories
Inventories, principally finished goods, consist of merchandise purchased
from domestic and foreign vendors and are carried at the lower of cost or
market value, determined by the retail inventory method on the last-in, first-
out (LIFO) basis. The difference in inventories between the LIFO and first-in,
first-out (FIFO) method was not material as of February 1, 1997. The
Predecessor Companies determined cost using the retail inventory method on the
FIFO basis.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization of
property, equipment and leasehold improvements is computed on a straight-line
basis, generally over the estimated useful lives of the assets ranging from
five to forty years. Property and equipment retired or disposed of are removed
from cost and related accumulated depreciation accounts. Maintenance and
repairs are charged directly to expense as incurred. Major renewals or
replacements are capitalized after making the necessary adjustment to the asset
and accumulated depreciation accounts for the items renewed or replaced. When
changes in circumstances warrant measurement, impairment losses for store fixed
assets are calculated by the Company by comparing projected cash flows over the
lease terms to the asset carrying values.
Debt Issuance Costs
Debt issuance costs are amortized over the terms of the related financing
using the interest method and are included in other assets in the accompanying
consolidated balance sheets.
F-9
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Goodwill
The excess of acquisition cost over the fair value of net assets acquired
was being amortized on a straight-line basis over periods not exceeding 40
years. In connection with CVS's decision to sell the Predecessor Companies,
all remaining goodwill was written off in the fourth quarter of 1995 (see Note
3).
The Predecessor Companies recorded $4.8 million, $4.8 million and $4.4
million of goodwill amortization for the years ended December 31, 1993, 1994
and 1995, respectively.
During 1994, the Predecessor Companies made the decision to close the
majority of the stores in the Predecessor Companies' Snyder Leather off-price
discount chain. This resulted in a write-off of goodwill of $3.9 million,
which is included in selling, general and administrative expenses.
Store Opening and Closing Costs
New store opening costs are charged to expense as incurred. In the event a
store is planned to close before its lease has expired, the total lease
obligation less sublease income is provided for in the period the decision to
close the store is made.
Advertising Costs
Advertising costs are generally charged to operations in the year incurred.
Layaway Sales
Layaway sales are recorded in full on the date of the layaway transaction.
Allowances for estimated returns are established as appropriate.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates in effect for the year in which those temporary differences are expected
to reverse.
The Predecessor Companies were included in the consolidated federal income
tax return and, where applicable, group state and local returns of CVS prior
to May 26, 1996 in accordance with a tax sharing agreement with CVS. The tax
sharing agreement allowed for current recognition of benefits for losses and
deferred tax benefits which may only have been realized by CVS in connection
with filing consolidated federal and state returns.
Foreign Currency Translation
The functional currency for the Company's foreign operations is the
applicable local currency. The translation from the applicable foreign
currency to U.S. dollars is performed for balance sheet accounts using the
current exchange rate in effect at the balance sheet date and for revenue and
expense accounts using a weighted average exchange rate during the period. The
gains or losses resulting from such translation were included in shareholders'
equity. Transaction gains and losses are reflected in income. The Company has
not entered into any significant hedging transactions.
Pro Forma Net Income Per Common Share
Pro forma net income per common share is computed by dividing net income by
the weighted average number of common shares outstanding, including the effect
of the exchange of Preferred Stock for Common Stock (see Note 14), and
dilutive common equivalent shares assumed to be outstanding during each
period. Common equivalent shares consist of dilutive options and warrants to
purchase Common Stock. However, pursuant to certain rules of the Securities
and Exchange Commission, the calculation also includes equity securities,
including options and warrants, issued within one year of an initial public
offering with an issue price less than the initial public offering price, even
if the effect is anti-dilutive. The treasury stock method was used in
determining the effect of such issuances.
F-10
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
New Accounting Pronouncement
The Company will adopt in the fiscal year ending January 31, 1998, Statement
of Financial Accounting Standards No. 128 "Earnings per Share" (SFAS No. 128),
which was issued in February 1997. SFAS No. 128 requires disclosure of basic
earnings per share (EPS) and diluted EPS, which replaces the existing primary
EPS and fully diluted EPS, as defined by APB No. 15. Basic EPS is computed by
dividing net income by the weighted average number of shares of Common Stock
outstanding during the year. Dilutive EPS is computed similar to EPS as
previously reported provided that, when applying the treasury stock method to
common equivalent shares, the Company must use its average share price for the
period rather than the more dilutive greater of the average share price or end-
of-period share price required by APB No. 15.
Reclassifications
Certain reclassifications have been made to the consolidated financial
statements of the prior years to conform to the 1996 presentation.
3. RESTRUCTURING AND ASSET IMPAIRMENT CHARGES:
On October 24, 1995, CVS announced a comprehensive restructuring plan,
including the planned sale of the Predecessor Companies. As a result, the
Predecessor Companies recorded a pre-tax restructuring charge of $134.3 million
to reflect the anticipated costs associated with closing approximately 100 of
the Predecessor Companies' stores and the write-off of goodwill and other
intangibles. The permanent impairment decision was based upon an analysis of
the historical operating results and anticipated selling price of the
Predecessor Companies, an investment banking firm's analysis of comparable
companies' selling prices, current market multiples and discounted future cash
flows of the Predecessor Companies. Stores impacted by the plan represented
$49.9 million in sales and $6.9 million in operating losses in 1995 and $4.5
million in sales and $0.8 million in operating losses for the five-month period
ended May 25, 1996. In connection with the plan, approximately 600 store
employees will be terminated. As of February 1, 1997, approximately 590 store
employees have been terminated. The significant components of the restructuring
charge and the reserves remaining at December 31, 1995 were as follows (in
thousands):
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES
-------------------------
FOR THE YEAR
ENDED AS OF
DECEMBER 31, DECEMBER 31,
1995 1995
------------ ------------
<S> <C> <C>
Goodwill and other intangibles write-offs...... $112,361 $ --
Lease obligations and asset write-offs for
store and other facility closings............. 21,121 8,000
Severance...................................... 476 448
Other.......................................... 378 179
-------- ------
Total...................................... $134,336 $8,627
======== ======
</TABLE>
The reserves remaining at May 25, 1996 were retained by CVS as part of the
Acquisition.
Effective October 1, 1995, the Predecessor Companies adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of" and recorded a pre-tax asset impairment charge of $47.9
million related to the write-off of fixed and intangible assets on all stores
that had generated negative cash flow in 1994. Certain of these assets relate
to stores that will be closed and the assets that will be disposed of on the
store closing date. These assets accounted for $37.7 million of the asset
impairment charge.
F-11
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. ACCOUNTS RECEIVABLE:
Accounts receivable consisted of the following (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
COMPANIES COMPANY
----------------- -----------
DECEMBER 31
----------------- FEBRUARY 1,
1994 1995 1997
-------- ------- -----------
<S> <C> <C> <C>
Layaway receivables........................................................................ $ 15,904 $ 6,214 $ 6,118
Trade receivables.......................................................................... 3,320 5,226 2,425
Other receivables.......................................................................... 1,918 1,206 875
-------- ------- -------
21,142 12,646 9,418
Less:
Layaway return reserves.................................................................. (12,000) (4,000) (3,365)
Allowance for doubtful accounts.......................................................... (1,450) (1,028) (1,202)
-------- ------- -------
Total.................................................................................. $ 7,692 $ 7,618 $ 4,851
======== ======= =======
</TABLE>
5. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
COMPANIES COMPANY
------------------ -----------
DECEMBER 31
------------------ FEBRUARY 1,
1994 1995 1997
-------- -------- -----------
<S> <C> <C> <C>
Land...................................................................................... $ 1,340 $ 1,340 $ 1,340
Buildings and improvements................................................................ 10,799 4,693 778
Equipment and furniture................................................................... 99,903 74,363 15,048
Leasehold improvements.................................................................... 60,565 46,332 919
-------- -------- -------
Total................................................................................. 172,607 126,728 18,085
Less: Accumulated depreciation and amortization........................................... (75,391) (60,844) (994)
-------- -------- -------
Total................................................................................. $ 97,216 $ 65,884 $17,091
======== ======== =======
</TABLE>
6. ACCRUED EXPENSES:
Accrued expenses consisted of the following (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
COMPANIES COMPANY
----------------- -----------
DECEMBER 31
----------------- FEBRUARY 1,
1994 1995 1997
-------- -------- -----------
<S> <C> <C> <C>
Taxes other than Federal and state income taxes........................................... $ 11,843 $ 12,062 $ 7,334
Salaries and compensated absences......................................................... 4,667 8,158 4,131
Current portion of lease obligations for closed stores.................................... 126 8,032 2,678
Advertising............................................................................... 4,670 5,072 4,328
Other..................................................................................... 20,196 19,299 16,046
-------- -------- -------
Total................................................................................. $ 41,502 $ 52,623 $34,517
======== ======== =======
</TABLE>
F-12
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. LONG-TERM DEBT:
As part of the Acquisition, the Company issued a $55.8 million senior
secured subordinated note (the Note) to CVS. Interest is accrued annually at
10% on $55 million of the Note and is payable on the maturity date of the Note
at December 31, 2000. The remaining $0.8 million of the Note is noninterest-
bearing and is payable on the Note's maturity date. The Note is collateralized
by substantially all assets of the Company and is subordinate to borrowings
under the revolving credit agreement.
In conjunction with the Acquisition, the Company obtained a $150 million
revolving credit agreement (the Revolver) with certain banks, which extends
through May 24, 1999 and includes a $90 million letter of credit subfacility.
The Revolver is collateralized by substantially all assets of the Company.
Interest on cash borrowings under the Revolver is at the bank reference rate
plus 0%-1.25%, or LIBOR plus 1.75%-2.75%. The interest rate is dependent upon
the amount and term of the borrowings as well as the Company's earnings before
income taxes/cash interest coverage ratio for the trailing four quarters. The
Company pays a monthly fee equal to .375% per annum on the unused amount of
the Revolver and on that portion of the first $10.0 million in borrowings that
bears interest at prime plus 0%-.875%. As of February 1, 1997, there were no
cash borrowings under the Revolver, and $7.9 million in letters of credit were
outstanding. For the period from inception (May 26, 1996) to February 1, 1997,
the weighted average interest rate was 8.9%.
The Note and the Revolver contain covenants, which among other things,
restrict the ability of the Company to, above certain thresholds, incur
indebtedness; to make capital expenditures, acquisitions, investments, stock
redemptions and dispositions of assets; and to pay dividends. The Revolver
also requires the Company to maintain certain financial covenants. At February
1, 1997, the Company was in compliance with all covenants of the Note and the
Revolver.
Prior to the Acquisition, the Predecessor Companies' operations were funded
primarily by CVS (see Note 12).
8. INCOME TAXES:
The income tax provision (benefit) is comprised of the following (in
thousands):
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES COMPANY
---------------------------------- -----------
PERIOD FROM
FIVE INCEPTION
MONTHS (MAY 26,
YEARS ENDED DECEMBER 31 ENDED 1996) TO
------------------------ MAY 25, FEBRUARY 1,
1993 1994 1995 1996 1997
------ ------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
Current:
Federal............................................................. $5,333 $(2,869) $ 1,137 $(11,731) $17,642
State............................................................... 981 (1,286) 608 -- 2,814
Deferred.............................................................. 724 1,046 (11,845) 5,128 (4,928)
------ ------- -------- -------- -------
Total............................................................. $7,038 $(3,109) $(10,100) $ (6,603) $15,528
====== ======= ======== ======== =======
</TABLE>
F-13
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Reconciliations of the U.S. federal statutory income tax rate to the
effective tax rate are as follows:
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES COMPANY
----------------------------- -----------
PERIOD FROM
FIVE INCEPTION
YEARS ENDED MONTHS (MAY 26,
DECEMBER 31 ENDED 1996) TO
------------------- MAY 25, FEBRUARY 1,
1993 1994 1995 1996 1997
---- ----- ----- ------- -----------
<S> <C> <C> <C> <C> <C>
U.S. federal statutory income tax (benefit) rate ........................... 35.0% (35.0)% (35.0)% (35.0)% 35.0%
Goodwill amortization....................................................... 13.4 19.8 29.4 -- --
State income taxes, net of federal tax effect............................... 9.3 (5.0) -- (2.3) 3.0
Other, net.................................................................. 0.5 0.4 0.1 0.1 1.4
---- ----- ----- ----- ----
Effective tax rate...................................................... 58.2% (19.8)% (5.5)% (37.2)& 39.4%
==== ===== ===== ===== ====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the deferred tax asset and liability were as follows (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
COMPANIES COMPANY
---------------- -----------
DECEMBER 31
---------------- FEBRUARY 1,
1994 1995 1997
------- ------- -----------
<S> <C> <C> <C>
Deferred tax asset:
Inventories............................................................................. $ 2,545 $ 327 $ --
Property and equipment.................................................................. 687 11,835 --
Accrued liabilities..................................................................... 3,785 4,501 3,649
Net operating loss carryforwards........................................................ 1,678 1,678 3,587
Other................................................................................... -- 241 491
------- ------- -------
8,695 18,582 7,727
Less--Valuation allowance............................................................... (1,678) (1,678) --
------- ------- -------
Total................................................................................. 7,017 16,904 7,727
------- ------- -------
Deferred tax liability:
Layaway and sales return reserve........................................................ 1,121 -- 347
Inventories............................................................................. -- -- 7,264
Property and equipment.................................................................. -- -- 1,981
Other................................................................................... 225 -- 205
------- ------- -------
Total................................................................................. 1,346 -- 9,797
------- ------- -------
Net deferred tax asset (liability).................................................... $ 5,671 $16,904 $(2,070)
======= ======= =======
</TABLE>
As of December 31, 1995, the Predecessor Companies had a federal net
operating loss carryforward of $4.8 million expiring in the year 2002 which
was available to offset future taxable income in the retail subsidiaries that
generated the loss. A valuation allowance was provided for the full amount of
the deferred tax benefit related to this carryforward.
No valuation allowance was provided by the Company as it anticipates it will
be able to utilize the benefits of the net deferred tax asset during future
periods.
F-14
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. CAPITAL STOCK:
Common Stock
All shares of Common Stock, regardless of class, will automatically be
converted into an equal number of shares of Common Stock of a single class
without class designation (the Conversion) without any action by any holder
thereof immediately upon the occurrence of the closing of the first public
offering by the Company of shares of Common Stock of the Company registered
under the Securities Act. After the Conversion, such shares of Common Stock
will have equal rights in all respects, including the right to one vote per
share of Common Stock for all matters submitted to holders of Common Stock for
a vote. However, if such public offering occurs before May 25, 1998 and the
gross proceeds are less than $20.0 million, each shareholder that is subject
to the shareholder agreement dated May 25, 1996 agrees to vote all of the
voting shares of Common Stock held by such shareholder in favor of the
election to the Board of Directors (the Board) of two individuals who shall be
nominated by a vote of a majority of the outstanding shares of Common Stock
held by the Employees and their Permitted Transferees (as defined in the
shareholder agreement) and, upon the vote of a majority of the outstanding
shares of Common Stock held by the Employees and their Permitted Transferees,
to remove or replace such directors, until the earlier of (i) the completion
of an underwritten public offering with gross proceeds of at least $20 million
or (ii) the general termination of the shareholder agreement, which
termination will be no later than May 25, 1998.
Holders of the Class A Common Stock and Class B Common Stock (including
holders of the Restricted Stock--as defined below) and all other Common Stock
(other than Class C Common Stock) will have one vote on all matters submitted
to shareholders for each share outstanding in the name of such holder on the
books of the Company. Except as required by law, the Class C Common Stock will
have no voting rights. Each share of Common Stock (including holders of the
Restricted Stock) will be entitled to share in dividends (when and if such
dividends are declared and paid) and liquidation distributions ratably with
all other shares of Common Stock then outstanding.
As long as shares of Class B Common Stock are outstanding, (i) the Board of
Directors (the Board) will consist of not more than five members, (ii) the
holders of the Class B Common Stock, exclusively and voting as a single class,
will be entitled, by a vote of a majority of the outstanding shares of Class B
Common Stock, to elect two directors to the Board (requirement is eliminated
upon the Company's completion of a $20 million or greater initial public
offering), and (iii) the holders of the Class A Common Stock, Class B Common
Stock and all other Common Stock (except Class C Common Stock), exclusively
and voting as a single class without regard to whether such Common Stock is
Class A Common Stock, Class B Common Stock or any other Common Stock (except
Class C Common Stock), will be entitled, by a vote of a majority of the sum of
the outstanding shares of Class A Common Stock, Class B Common Stock and all
other Common Stock (except Class C Common Stock) held by such holders, to
elect three of the directors to the Board. All the outstanding Class B and
Class C Common Stock was purchased by management for $.60 per share.
All shares of Class C Common Stock will automatically be converted into an
equal number of shares of Class B Common Stock without any action by any
holder thereof at such time as the number of shares of Class A Common Stock
over which selected shareholders shall, directly or indirectly as partners in
a partnership or a limited partnership or otherwise, have the power to vote be
reduced to less than 4,275,000 (appropriately adjusted to reflect stock
splits, dividends or combinations, reorganizations, consolidations and similar
changes hereafter effected).
The Company has authorized 22,500,000 shares of undesignated, $.01 par
Common Stock of which no shares are issued or outstanding as of February 1,
1997.
In conjunction with the Acquisition, certain members of management of the
Company purchased 1,080,000 shares of Common Stock with restrictions (the
Restricted Stock) at $.60 per share under a restricted stock agreement (the
Restricted Stock Agreement). The Restricted Stock vests over a five-year
performance period based on the Company achieving certain performance targets,
the paydown of the Note (see Note 7) or the occurrence of other defined
events, pursuant to the Restricted Stock Agreement. As of February 1, 1997,
the
F-15
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company recorded $1,485,000 in compensation expense based on the number of
shares (198,018) earned pursuant to the Restricted Stock Agreement.
Preferred Stock
The Series A preferred stock (Series A Preferred) will not have voting
rights, except as required by law or as set forth below. Without the
affirmative vote of the holders of at least a majority of the shares of Series
A Preferred at the time outstanding, the Company is generally prohibited from
(i) issuing additional shares of preferred stock on parity with or superior to
the Series A Preferred, (ii) declaring or paying dividends or making any other
distribution on any shares of capital stock of the Company at any time created
and issued ranking junior to the Series A Preferred, or (iii) amending the
Articles of Incorporation of the Company so as to materially alter any
existing provision relating to the terms of the Series A Preferred or waive
any of the rights granted to the holders of the Series A Preferred by the
Articles of Incorporation of the Company or otherwise alter the rights or
preferences of the Series A Preferred. See Note 14 for discussion regarding
the Series A Preferred exchange.
After the repayment in full of the Note plus accrued interest thereon (the
date of which such repayment is made being hereinafter referred to as the Note
Repayment Date), the Series A Preferred will be entitled to receive, when and
as duly declared by the Board in the manner provided in the Articles of
Incorporation, cash dividends at the annual rate of $80 per share
(appropriately adjusted to reflect stock splits, dividends or combinations,
reorganizations, consolidations and similar changes hereafter effected) from
the date of issuance of such Series A Preferred, which dividends will be
cumulative (whether or not there shall be funds of the Company legally
available for the payment of such dividends) and will accrue (whether or not
earned or declared) from the date of issuance of such shares of Series A
Preferred, and, to the extent accrued and unpaid as of May 31 of any year,
will be payable before any dividends on any shares of Common Stock shall be
declared or paid or set apart for payment during the 12 months following such
May 31. As of February 1, 1997, the Company has accrued $395,000 in dividends.
See Note 14 for discussion regarding the Series A Preferred exchange.
In the event of an involuntary or voluntary liquidation or dissolution of
the Company at any time, the holders of shares of Series A Preferred will be
entitled to receive out of the assets of the Company an amount equal to $1,000
per share (appropriately adjusted to reflect stock splits, dividends or
combinations, reorganizations, consolidations and similar changes hereafter
effected), plus all per-share dividends unpaid and accumulated or accrued
thereon (whether or not earned or declared) to the date of such distribution,
prior to any Common Stock distributions.
The Company also has authorized 9,985,000 shares of undesignated, $.01 par
preferred stock of which no shares are issued or outstanding as of February 1,
1997.
Warrants
As part of the Acquisition, the Company issued to CVS a warrant to purchase
1,350,000 Class A shares at an exercise price of $.60 per share (the CVS
Warrant). The CVS Warrant is immediately exercisable and remains exercisable
until the tenth anniversary of the date of grant.
The Company also issued to CVS a warrant to purchase 1,080,000 Class A
shares at an exercise price of $.60 per share (the Manager Warrant). The
number of shares subject to the Manager Warrant will be reduced by an amount
equal to the number of shares of Restricted Stock that vest over a five-year
period, pursuant to the terms of the Restricted Stock Agreement. To the extent
any shares of the Restricted Stock have not vested after the fifth year, the
Manager Warrant becomes exercisable for such number of unvested shares. As of
February 1, 1997, 198,018 shares are vested pursuant to the Restricted Stock
Agreement.
10. STOCK OPTIONS:
During June 1996, Wilsons adopted the 1996 Stock Option Plan (the Plan),
pursuant to which options to acquire an aggregate of 1,000,000 shares of the
Company's Common Stock may be granted. The Plan is
F-16
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
administered by a compensation committee which has the discretion to determine
the number and purchase price of shares subject to stock options, the term of
each option, and the time or times during its term when the option becomes
exercisable. As of February 1, 1997, the Company has granted options on
182,700 shares.
The Company accounts for the Plan under APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation cost for the Plan been
determined consistent with Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," the Company's net income and
earnings per share would have been reduced to the following pro forma amounts
for the period from inception (May 26, 1996) to February 1, 1997:
<TABLE>
<S> <C> <C>
Net income (in thousands): As reported $23,906
Pro forma 23,734
Net income per common share: As reported $ 2.49
Pro forma 2.47
</TABLE>
During 1996, the Company granted 199,980 options, no options were exercised
or expired, and 17,280 options were forfeited during the period from inception
(May 26, 1996) to February 1, 1997. The weighted average fair value of the
options granted was $4.40. The fair value of each option granted is estimated
on the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used: risk-free interest rate of 6.4%,
no expected dividend yields, expected life of three years, and expected
volatility of 53.5%.
11. EMPLOYEE BENEFIT PLANS:
401(k) Profit Sharing Plan
The Company has a defined contribution 401(k) profit sharing plan for
eligible employees which is qualified under sections 401(a) and 401(k) of the
Internal Revenue Code of 1986. Employees are entitled to make tax-deferred
contributions of up to 15% of their eligible compensation (10% for those
employees whose compensation in the previous year exceeded $55,000). For
employees who have worked less than three years, the Company matches 25% of
contributions, up to a maximum of 4% of the employee's eligible compensation.
For employees who have worked more than three years, the Company matches 50%
of contributions up to a maximum of 4% of the employee's eligible
compensation. The Company may also, at its discretion, make a profit sharing
contribution to the 401(k) Plan for each plan year. The Company's
contributions vest after five years of service, or at age 65 regardless of
service, or upon the death of the employee.
The Predecessor Companies' contributions to the 401(k) profit sharing plan
were $0.7 million, $0.6 million, $0.6 million, $0.3 million, $1.0 million and
$0.3 million for the years ended December 31, 1993, 1994 and 1995, for the
five months ended May 27, 1995 and May 25, 1996 and for the eight months ended
January 27, 1996, respectively. The Company's contributions to the 401(k)
profit sharing plan were $1.1 million for the period from inception (May 26,
1996) to February 1, 1997.
Employee Stock Ownership Plan
The Predecessor Companies' employees participated in CVS's Employee Stock
Ownership Plan (ESOP). The ESOP was a defined contribution plan for all
employees meeting certain eligibility requirements. The Company elected not to
provide for a similar plan for its employees after the Acquisition.
Compensation expense of $2.1 million, $1.4 million, $2.0 million, $0.1
million, $0.2 million and $2.0 million was recognized during the years ended
December 31, 1993, 1994 and 1995 for the five months ended May 27, 1995 and
May 25, 1996 and for the eight months ended January 27, 1996.
12. TRANSACTIONS WITH CVS:
The Predecessor Companies' operations were funded primarily by CVS. Under an
agreement with CVS, the Predecessor Companies received cash necessary to fund
their daily operations. The Predecessor Companies were dependent on CVS to
provide a significant portion of their working capital financing. The weighted
average interest rate on borrowings from CVS for the years ended December 31,
1993, 1994 and 1995, the five months
F-17
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
ended May 27, 1995 and May 25, 1996, and for the eight months ended January
27, 1996 was 3.3%, 4.7%, 6.4%, 5.6%, 5.8% and 6.2%, respectively. Prior to the
Acquisition, in anticipation of the sale, CVS contributed $124 million to the
Predecessor Companies, which was reflected as a capital contribution in the
accompanying consolidated financial statements.
CVS allocated administrative expenses and employee benefits to the
Predecessor Companies. Allocations were based on the Predecessor Companies'
ratable share of expense paid by CVS on behalf of the Predecessor Companies
for combined programs. The total costs allocated to the Predecessor Companies
for the years ended December 31, 1993, 1994 and 1995, for the five months
ended May 27, 1995 and May 25, 1996 and for the eight months ended January 27,
1996 were $1.3 million, $1.3 million, $1.5 million, $0.6 million, $0.5 million
and $1.0 million, respectively, and are included in selling, general and
administrative expenses.
CVS Realty Company, Inc., a subsidiary of CVS, guaranteed the payment of the
lease obligations of certain stores operated by the Predecessor Companies and
charged a fee for that service. These fees are included in selling, general
and administrative expenses and amounted to $0.6 million, $0.7 million, $0.7
million, $0.3 million, $0.3 million and $0.5 million for the years ended
December 31, 1993, 1994 and 1995, for the five months ended May 27, 1995 and
May 25, 1996 and for the eight months ended January 27, 1996, respectively.
13. COMMITMENTS AND CONTINGENCIES:
Leases
The Company has noncancelable operating leases, primarily for retail stores,
which expire through 2007. A limited number of the leases contain renewal
options for periods ranging from four to six years. These leases generally
require the Company to pay costs, such as real estate taxes, common area
maintenance costs and contingent rentals, based on sales. Net rental expense
for all operating leases was as follows (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES COMPANY
--------------------------------------------------------- -------------
PERIOD FROM
EIGHT INCEPTION
YEARS ENDED DECEMBER 31 FIVE MONTHS ENDED MONTHS (MAY 26, 1996)
----------------------- ------------------- ENDED TO
MAY 27, MAY 25, JANUARY 27, FEBRUARY 1,
1993 1994 1995 1995 1996 1996 1997
------- ------- ------- ----------- ------- ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Minimum rentals......... $38,724 $43,268 $42,894 $17,436 $14,917 $28,598 $26,972
Contingent rentals...... 1,893 1,368 1,092 353 449 942 1,924
------- ------- ------- ------- ------- ------- -------
40,617 44,636 43,986 17,789 15,366 29,540 28,896
Less--Sublease rentals.. -- -- (18) -- (122) (24) (207)
------- ------- ------- ------- ------- ------- -------
Total............... $40,617 $44,636 $43,968 $17,789 $15,244 $29,516 $28,689
======= ======= ======= ======= ======= ======= =======
</TABLE>
As of February 1, 1997, the future rental payments due under operating
leases and future minimum sublease rental income, excluding lease obligations,
for closed stores were as follows (in thousands):
<TABLE>
<S> <C>
Fiscal years ending:
1998.......................................................... $ 30,941
1999.......................................................... 27,483
2000.......................................................... 23,960
2001.......................................................... 20,552
2002.......................................................... 16,608
Thereafter...................................................... 29,935
--------
Total....................................................... $149,479
========
Total future minimum sublease rental income..................... $ 1,511
========
</TABLE>
F-18
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of February 1, 1997, a significant number of the existing lease
obligations continue to be guaranteed by CVS. Any leases entered into
subsequent to the Acquisition will no longer be guaranteed by CVS.
Litigation
The Company is involved in various legal actions arising in the ordinary
course of business. In the opinion of management, the ultimate disposition of
these matters will not have a material adverse effect on the Company's
consolidated financial position and results of operations.
Pursuant to the sale agreement, CVS has agreed to indemnify the Company for
certain claims. For certain other claims, CVS's indemnification liability is
limited to claims in the aggregate which exceed $1.2 million but not to exceed
$12 million.
Guarantees
As of February 1, 1997, the Company had outstanding letters of credit of
approximately $7.9 million (see Note 7) which were primarily used to guarantee
foreign purchase orders.
Purchase Commitments
The Company has a contingent liability with respect to an unconditional
contractual obligation for the purchase of supplies. The Company had a
commitment to purchase $0.5 million of these supplies on an as-needed basis as
of February 1, 1997. Total payments under this agreement, which was entered
into in 1994, were $1.8 million, $1.6 million, $0.9 million, $0.5 million,
$0.8 million and $0.9 million for the years ended December 31, 1994 and 1995,
for the five months ended May 27, 1995 and May 25, 1996 and for the eight
months ended January 27, 1996 and for the period from inception (May 26, 1996)
to February 1, 1997.
14. REVERSE STOCK SPLIT, PROPOSED PUBLIC OFFERING AND EXCHANGE OF STOCK:
On October 11, 1996, the Company declared a .9-for-1 reverse split of Common
Stock which has been retroactively reflected in the accompanying consolidated
financial statements as if the split had occurred as of inception (May 26,
1996).
The Company has filed with the Securities and Exchange Commission a Form S-1
Registration Statement regarding the proposed sale of 1,100,000 units, each
unit consisting of one share of Common Stock and one redeemable warrant to
purchase one share of Common Stock for $13.50 per share (excluding the
underwriter's overallotment option to purchase an additional 165,000 units).
The proceeds from this proposed public offering will be used to reduce future
seasonal borrowings under the Revolver and to fund working capital and capital
expenditures. There can be no assurance that the Company will complete this
proposed public offering. Supplemental pro forma income per common share for
the period from inception (May 26, 1996) to February 1, 1997 was $2.27, which
reflects the offering as if it had occurred as of inception, with the proceeds
used to repay any outstanding borrowings on the Revolving Credit Facility
during the period and the related interest expense eliminated.
As of May , 1997, the holders of the 7,405 shares of Series A Preferred
exchanged their entire holdings of such shares for Common Stock at an exchange
rate of $12.00 per share. The accompanying pro forma balance sheet as of
February 1, 1997 reflects the exchange of all of the Series A Preferred for
617,083 shares of Common Stock as if the exchange had occurred as of February
1, 1997. In connection with such exchange, the holders of the Series A
Preferred waived their rights to receive any accrued dividends in respect of
such Series A Preferred.
F-19
<PAGE>
PRO FORMA UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
The following pro forma unaudited consolidated financial information consists
of a Pro Forma Unaudited Consolidated Statement of Operations for the year
ended February 1, 1997. The Pro Forma Unaudited Consolidated Statement of
Operations gives effect to the Restructuring and the Acquisition accounted for
under the purchase method. The Pro Forma Unaudited Consolidated Statement of
Operations gives effect to such transactions and events as if they had occurred
on January 28, 1996.
As part of the Restructuring, the Company closed 156 stores during 1995 and
1996 and wrote off goodwill and certain other non-productive assets, recorded
certain lease obligations and adopted the provisions of SFAS No. 121 in 1995.
The Pro Forma Unaudited Consolidated Statement of Operations gives effect to
certain adjustments related to the Restructuring, including: (i) elimination of
the results of operations for the portion of the 156 stores not closed until
1996 which included only direct costs associated with the stores and (ii)
reflection of the associated tax effects.
The Pro Forma Unaudited Consolidated Statement of Operations also gives
effect to certain adjustments related to the Acquisition, including: (i)
reduction of depreciation expense through the effect of purchase accounting
adjustments; (ii) reduction in interest expense attributable to the elimination
of all prior indebtedness owed to CVS and increase in interest expense
attributable to the Acquisition financing; and (iii) reflection of the
associated tax effects of the above transactions.
The Pro Forma Unaudited Consolidated Statement of Operations and accompanying
notes should be read in conjunction with the consolidated financial statements
and notes thereto appearing elsewhere in this Prospectus. The Pro Forma
Unaudited Consolidated Statements of Operations do not purport to represent
what the results of operations of Wilsons would actually have been if the
aforementioned transactions or events had occurred on January 28, 1996 or at
any future date.
FOR THE YEAR ENDED FEBRUARY 1, 1997
(IN MILLIONS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA PRO FORMA PURCHASE
COMBINED RESTRUCTURING FOR THE ACCOUNTING
COMPANIES (1) ADJUSTMENTS (2) RESTRUCTURING ADJUSTMENTS PRO FORMA
------------- --------------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Net sales............... $424.8 $(2.2) $422.6 $ -- $422.6
Costs and expenses:
Cost of goods sold,
buying and occupancy
costs................. 286.9 (1.7) 285.2 -- 285.2
Selling, general and
administrative ex-
penses................ 103.2 (0.4) 102.8 (0.4) 102.4
Depreciation and amor-
tization.............. 4.8 -- 4.8 (3.4)(4) 1.4
Restricted stock com-
pensation expense..... 1.5 -- 1.5 -- 1.5
Restructuring and asset
impairment charges.... -- -- -- -- --
------ ----- ------ ---- ----------
Income (loss) from
operations.......... 28.4 (0.1) 28.3 3.8 32.1
Interest expense, net... 6.5 -- 6.5 1.3(5) 7.5
-- -- -- (0.3)(6) --
------ ----- ------ ---- ----------
Income (loss) before
income taxes........ 21.9 (0.1) 21.8 2.8 24.6
Income tax provision
(benefit).............. 9.0 (0.3)(3) 8.7 1.1(7) 9.8
------ ----- ------ ---- ----------
Net income........... $ 12.9 $ 0.2 $ 13.1 $1.7 $ 14.8
====== ===== ====== ==== ==========
Net income per common share..................................................... $ 1.38
==========
Weighted average common shares outstanding...................................... 10,702,826 (6)
==========
</TABLE>
F-20
<PAGE>
- --------
(1) Reflects the combination of the pro forma results of operations for the
period from January 28, 1996 to May 25, 1996 and the actual results of
operations for the period from inception (May 26, 1996) to February 1,
1997.
(2) Reflects the elimination of the results of operations for the portion of
the 156 stores not closed until 1996 including all direct costs associated
with the stores. No corporate overhead or allocated selling expenses were
eliminated.
(3) Reflects the income tax effect of the pro forma restructuring adjustments
at a rate to equate the pro forma income tax provision after restructuring
to the Company's effective tax rate for the respective period.
(4) Reflects the reduction of depreciation expense due to the write-down of
depreciable property to $12.1 million through the application of purchase
accounting.
(5) Reflects the reduction in interest expense attributable to the elimination
of all prior indebtedness owed by the Predecessor Companies to CVS and
certain capital contributions by CVS which resulted in Wilsons having $85
million in working capital upon the closing of the Acquisition (less
Acquisition-related expenses). Also reflects an increase in interest
expense arising from the $55.8 million Note from the Acquisition
financing, the interest rate on the Revolving Credit Facility, and the
associated amortization for the related deferred financing costs.
<TABLE>
<CAPTION>
YEAR ENDED
FEBRUARY 1,
1997
-------------
(IN MILLIONS)
<S> <C>
Elimination of interest expense related to the repayment
of intercompany indebtedness and additional capital
contribution, net of the higher interest rate on the
Revolving Credit Facility at an average rate of 9.5%.... $(4.9)
Additional interest expense related to the Note.......... 5.5
Amortization of deferred financing costs................. .7
-----
$ 1.3
=====
</TABLE>
(6) Reflects the elimination of the interest expense on the portion of the
Revolving Credit Facility which is to be paid off with the proceeds of the
Offering. Included in weighted average common shares outstanding are the
shares of Common Stock to be sold to repay the Revolving Credit Facility
as if such shares had been outstanding as of the beginning of the
respective periods presented.
(7) Reflects the income tax effect of the pro forma purchase accounting
adjustments at the Company's effective tax rate for the respective period.
F-21
<PAGE>
1.VINTAGE COLLECTION (UPPER-LEFT)
1.computer bag
2.port-hole, triple gusset, pull-through handle briefcase
3.ultimate notebook with 3-ring binder and organizer
4.men's bag with organizer
2.HANDCRAFTED COLLECTION (UPPER-RIGHT)
1.triple gusset briefcase
2.extra large backpack
3.top-handle men's bag
4.2-in-1 brief/backpack
3.WILSONS THE LEATHER EXPERTS AIRPORT STORE AT THE MINNEAPOLIS/ST. PAUL AIRPORT
(BOTTOM PHOTOGRAPH)
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED IN CONNECTION
WITH THIS OFFERING TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH IN-
FORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OF-
FER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE
SECURITIES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLIC-
ITATION OF AN OFFER TO BUY THE SECURITIES BY ANY PERSON IN ANY JURISDICTION
WHERE SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON
TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIV-
ERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUM-
STANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CUR-
RENT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THE PROSPECTUS OR THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
The Acquisition........................................................... 12
Use of Proceeds........................................................... 13
Dividend Policy........................................................... 13
Dilution.................................................................. 14
Capitalization............................................................ 15
Selected Historical and Pro Forma Consolidated Financial Data............. 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 18
Business.................................................................. 28
Management................................................................ 39
Certain Transactions...................................................... 43
Security Ownership of Certain Beneficial Owners and Management............ 49
Description of Securities................................................. 50
Securities Eligible for Future Sale....................................... 54
Underwriting.............................................................. 55
Legal Matters............................................................. 57
Experts................................................................... 57
Additional Information.................................................... 57
Index to Consolidated Financial Statements................................ F-1
</TABLE>
---------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEAL-
ERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PAR-
TICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACT-
ING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1,100,000 UNITS
EACH UNIT CONSISTING OF
ONE SHARE OF COMMON STOCK
AND
ONE REDEEMABLE
COMMON STOCK PURCHASE WARRANT
[WILSON LEATHER LOGO]
---------------
PROSPECTUS
---------------
EQUITY SECURITIES
INVESTMENTS, INC.
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Expenses in connection with the issuance and distribution of the shares of
Common Stock being registered hereunder, other than underwriting commissions
and expenses, are estimated below.
<TABLE>
<S> <C>
SEC registration fee............................................ $ 16,656
NASD filing fee................................................. 5,330
Nasdaq listing fee.............................................. 44,125
Legal fees and expenses......................................... 290,000
Accounting fees and expenses.................................... 150,000
Non-accountable expense allowance............................... 148,500
Blue Sky fees and expenses...................................... 25,000
Printing expenses............................................... 100,000
Transfer agent fees and expenses................................ 15,000
Miscellaneous expenses.......................................... 23,889
--------
Total....................................................... $818,500
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Article V of the Company's By-laws, the Company indemnifies its
directors and officers to the extent permitted by Minnesota Statutes Section
302A.521. Section 302A.521 requires the Company to indemnify a person made or
threatened to be made a party to a proceeding, by reason of the former or
present official capacity of the person with respect to the Company, against
judgments, penalties, fines, including without limitation, excise taxes
assessed against the person with respect to an employee benefit plan,
settlement, and reasonable expenses, including attorneys' fees and
disbursements, if, with respect to the acts or omissions of the person
complained of in the proceeding, such person (1) has not been indemnified by
another organization or employee benefit plan for the same judgments,
penalties, fines, including without limitation, excise taxes assessed against
the person with respect to an employee benefit plan, settlements, and
reasonable expenses, including attorneys' fees and disbursements, incurred by
the person in connection with the proceeding with respect to the same acts or
omissions; (2) acted in good faith; (3) received no improper personal benefit,
and statutory procedure has been followed in the case of any conflict of
interest by a director; (4) in the case of a criminal proceeding, had no
reasonable cause to believe the conduct was unlawful; and (5) in the case of
acts or omissions occurring in the person's performance in the official
capacity of director or, for a person not a director, in the official capacity
of officer, committee member, employee or agent, reasonably believed that the
conduct was in the best interests of the Company, or in the case of
performance by a director, officer, employee or agent of the Company as a
director, officer, partner, trustee, employee or agent of another organization
or employee benefit plan, reasonably believed that the conduct was not opposed
to the best interests of the Company. In addition, Section 302A.521, subd. 3
requires payment by the Company, upon written request, of reasonable expenses
in advance of final disposition in certain instances. A decision as to
required indemnification is made by a majority of the disinterested Board of
Directors present at a meeting at which a disinterested quorum is present, or
by a designated committee of disinterested directors, by special legal
counsel, by the disinterested shareholders, or by a court.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers or persons controlling the Company pursuant
to the foregoing provisions, the Company has been informed that in the opinion
of the Commission, such indemnification is against public policy as expressed
in the Act, and is therefore unenforceable.
Under the terms of the form of Underwriting Agreement filed as Exhibit 1.1
hereto, the Underwriter has agreed to indemnify, under certain conditions, the
Company, its directors, certain of its officers and persons who control the
Company within the meaning of the Act, against certain liabilities.
The Company also maintains a director and officer insurance policy to cover
the Company, its directors and certain of its officers against certain
liabilities.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the Company has sold the following securities
pursuant to exemptions from registration under the Act. All such sales were
made in reliance upon the exemptions from registration provided under Section
4(2) of the Act for transactions not involving a public offering or pursuant to
Rule 701 under the Act for securities sold pursuant to certain compensatory
benefit plans and contracts relating to compensation, and related state
securities laws. Unless otherwise stated, all shares were issued directly by
the Company, no underwriters were involved and, except as otherwise noted
below, no discount, commission or other transaction-related remuneration was
paid. Share figures have been adjusted for the 0.9-for-1 reverse stock split
that was effective on October 11, 1996.
1. On May 25, 1996, the Company issued 4,320,000 shares of its Class A
Common Stock to CVS New York, Inc., valued at $2.6 million or $.60 per
share, as partial consideration for the Acquisition.
2. On May 25, 1996, the Company sold an aggregate of 2,925,000 shares of
its Class B Common Stock, of which 1,080,000 shares are Restricted
Stock, to Company employees for $1,755,000 or $.60 per share.
3. On May 25, 1996, the Company sold an aggregate of 405,000 shares of its
Class C Common Stock to Company employees for $243,000 or $.60 per
share.
4. On May 25, 1996, the Company issued 7,405 shares of its Series A
Preferred Stock to CVS New York, Inc., valued at $7.4 million or $1,000
per share, as partial consideration for the Acquisition.
5. On May 25, 1996, the Company issued a warrant to purchase 1,350,000
shares of its Class A Common Stock at a price per share of $.60 (with
both number of shares and price per share subject to periodic
adjustment) to CVS New York, Inc., as partial consideration for the
Acquisition.
6. On May 25, 1996, the Company issued a warrant to purchase 1,080,000
shares of its Class A Common Stock at a price per share of $.60 (with
both number of shares and price per share subject to periodic
adjustment) to CVS New York, Inc., as partial consideration for the
Acquisition.
7. On June 26, 1996, the Company issued options to purchase an aggregate
of 184,680 shares of Class C Common Stock at an exercise price of $4.44
per share to 74 Company employees.
8. On June 26, 1996, the Company issued an option to purchase 10,800
shares of Class C Common Stock at an exercise price of $4.44 per share
to Thomas J. Brosig, a director of the Company.
9. On October 10, 1996, the Company issued an option to purchase 4,500
shares of Class C Common Stock at an exercise price of $4.44 per share
to an employee of the Company.
10. On February 27, 1997, the Company issued options to purchase an
aggregate of 8,000 shares of Class C Common Stock at an exercise price
of $7.50 per share to four Company employees.
11. On April 1, 1997, the Company issued options to purchase an aggregate
of 13,000 shares of Class C Common Stock at an exercise price of $7.50
per share to eleven Company employees.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S> <C>
1.1 *Form of Underwriting Agreement.
2.1 *Sale Agreement dated as of May 24, 1996 by and among CVS
New York, Inc., Wilsons Center, Inc., and Wilsons The
Leather Experts Inc.
3.1 *Amended Articles of Incorporation of the Registrant dated
May 24, 1996.
3.2 **Amended and Restated Articles of Incorporation of the
Registrant, adopted subject to completion of the Offering.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S> <C>
3.3 *By-laws of the Registrant.
3.4 *Restated By-laws of the Registrant, adopted subject to
completion of the Offering.
3.5 *Articles of Amendment of Amended Articles of Incorpora-
tion of the Registrant dated October 11, 1997.
4.1 *Specimen of Common Stock certificate.
4.2 *Warrant No. 1 issued to CVS New York, Inc. for the Pur-
chase of 1,350,000 shares of Common Stock of Wilsons The
Leather Experts Inc., dated May 25, 1996.
4.3 *Warrant No. 2 issued to CVS New York, Inc. for the Pur-
chase of 1,080,000 shares of Common Stock of Wilsons The
Leather Experts Inc., dated May 25, 1996.
4.4 *Form of Underwriter Warrants.
4.5 *Shareholder Agreement dated as of May 25, 1996 among
Leather Investors Limited Partnership I, Leather Investors
Limited Partnership II, the Other Investors Named on the
Signature Pages thereto and Wilsons The Leather Experts
Inc.
4.6 *Amendment to the Shareholder Agreement among Leather In-
vestors Limited Partnership I, Leather Investors Limited
Partnership II, the Other Investors Named on the Signature
Pages thereto and Wilsons The Leather Experts Inc.
4.7 *Restricted Stock Agreement dated as of May 25, 1996, by
and among Wilsons The Leather Experts Inc. and the Indi-
viduals Named on the Signature Pages thereto.
4.8 *Registration Rights Agreement dated as of May 25, 1996,
by and among CVS New York, Inc., Wilsons The Leather Ex-
perts Inc., the Managers Listed on the Signature Pages
thereto, Leather Investors Limited Partnership I and the
Partners Listed on the Signature Pages thereto.
4.9 *Amendment to the Shareholder Agreement among Leather In-
vestors Limited Partnership I, Leather Investors Limited
Partnership II, the Other Investors Named on the Signature
Pages thereto and Wilsons The Leather Experts Inc.
4.10 *Form of Redeemable Warrant Agreement, including Form of
Redeemable Warrant Certificate.
5.1 ***Opinion of Faegre & Benson LLP.
10.1 *Wilsons The Leather Experts Inc. 1996 Stock Option Plan.
10.2 *Wilsons The Leather Experts Inc. Executive and Key Man-
agement Incentive Plan.
10.3 *Wilsons The Leather Experts Inc. 401(k) Plan.
10.4 *Employment Agreement dated as of May 25, 1996 between
Wilsons The Leather Experts Inc. and Joel N. Waller.
10.5 *Employment Agreement dated as of May 25, 1996 between
Wilsons The Leather Experts Inc. and David L. Rogers
10.6 *Credit Agreement dated as of May 25, 1996 among Wilsons
Leather Holdings Inc., as Borrower, the Lenders signatory
thereto from time to time, as Lenders, and General Elec-
tric Capital Corporation, as Agent, Lender and Swing Line
Lender.
10.7 *Security Agreement dated as of May 25, 1996 by Wilsons
Leather Holdings Inc. and the other grantors listed on the
signature pages thereto, in favor of General Electric Cap-
ital Corporation, in its capacity as Agent for Lenders.
10.8 *Security Agreement dated as of May 25, 1996 by Wilsons
Leather Holdings Inc. and the other grantors listed on the
signature pages thereto, in favor of CVS New York, Inc.
10.9 *Subordinated Promissory Note dated May 25, 1996.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S> <C>
10.10 *Wilsons The Leather Experts Inc. Amended 1996 Stock Op-
tion Plan.
10.11 *Amendment No. 1 to Credit Agreement.
10.12 *Amendment No. 2 to Credit Agreement.
10.13 ***Amendment No. 3 to Credit Agreement.
10.14 *Amendment No. 1 to Security Agreement.
10.15 ***Stock Exchange Agreement.
11.1 *Computation of per share income.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of KPMG Peat Marwick LLP.
23.3 ***Consent of Faegre & Benson LLP (included in Exhibit No.
5.1 to the Registration Statement).
24.1 *Powers of Attorney.
27.1 *Financial Data Schedule.
99.1 Withdrawal Request for Exhibit 3.2.
</TABLE>
- --------
*Previously filed.
**Exhibit 3.2 has been withdrawn pursuant to the Company's withdrawal
request set forth hereto as Exhibit 99.1.
***To be filed by Amendment.
Share figures above have been adjusted for the 0.9-for-1 reverse stock split
that was effected on October 11, 1996.
(b)FINANCIAL STATEMENT SCHEDULES
None required.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers, and controlling persons of the Company
pursuant to the provisions summarized in Item 14 above, or otherwise, the
Company has been advised that, in the opinion of the Commission, such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by a director, officer or controlling person of the Company in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities
being registered, the Company will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act, and will be governed by the
final adjudication of such issue.
The undersigned Company hereby undertakes to provide to the Underwriter, at
the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
II-4
<PAGE>
The undersigned Company hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Company under Rule 424(b)(1) or (4) or 497(h)
under the Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
The undersigned Company hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE COMPANY HAS
DULY CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
MINNEAPOLIS, STATE OF MINNESOTA, ON MAY 5, 1997.
Wilsons The Leather Experts Inc.
*
By __________________________________
Joel N. Waller
Chairman and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON MAY 5, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Chairman of the Board of Directors and
___________________________________________ Chief Executive Officer (Principal
Joel N. Waller Executive Officer)
/s/ Douglas J. Treff Vice President, Finance and Chief Financial
___________________________________________ Officer (Principal Financial and
Douglas J. Treff Accounting Officer)
</TABLE>
Lyle Berman Thomas J. Brosig Morris Goldfarb David L. Rogers Joel
N. Waller
Board of Directors*
- --------
* Douglas J. Treff, by signing his name hereto, does hereby sign this
document on behalf of each of the above-named officers and/or directors of
the Company pursuant to powers of attorney duly executed by such persons.
/s/ Douglas J. Treff
By __________________________________
Douglas J. Treff, Attorney-in-fact
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
1.1 *Form of Underwriting Agreement.
2.1 *Sale Agreement dated as of May 24, 1996 by and among CVS New
York, Inc., Wilsons Center, Inc., and Wilsons The Leather Ex-
perts Inc.
3.1 *Amended Articles of Incorporation of the Registrant dated
May 24, 1996.
3.2 **Amended and Restated Articles of Incorporation of the Reg-
istrant, adopted subject to completion of the Offering.
3.3 *By-laws of the Registrant.
3.4 *Restated By-laws of the Registrant, adopted subject to com-
pletion of the Offering.
3.5 *Articles of Amendment of Amended Articles of Incorporation
of the Registrant dated October 11, 1997.
4.1 *Specimen of Common Stock certificate.
4.2 *Warrant No. 1 issued to CVS New York, Inc. for the Purchase
of 1,350,000 shares of Common Stock of Wilsons The Leather
Experts Inc., dated May 25, 1996.
4.3 *Warrant No. 2 issued to CVS New York, Inc. for the Purchase
of 1,080,000 shares of Common Stock of Wilsons The Leather
Experts Inc., dated May 25, 1996.
4.4 *Form of Underwriter Warrants.
4.5 *Shareholder Agreement dated as of May 25, 1996 among Leather
Investors Limited Partnership I, Leather Investors Limited
Partnership II, the Other Investors Named on the Signature
Pages thereto and Wilsons The Leather Experts Inc.
4.6 *Amendment to the Shareholder Agreement among Leather Invest-
ors Limited Partnership I, Leather Investors Limited Partner-
ship II, the Other Investors Named on the Signature Pages
thereto and Wilsons The Leather Experts Inc.
4.7 *Restricted Stock Agreement dated as of May 25, 1996, by and
among Wilsons The Leather Experts Inc. and the Individuals
Named on the Signature Pages thereto.
4.8 *Registration Rights Agreement dated as of May 25, 1996, by
and among CVS New York, Inc., Wilsons The Leather Experts
Inc., the Managers Listed on the Signature Pages thereto,
Leather Investors Limited Partnership I and the Partners
Listed on the Signature Pages thereto.
4.9 *Amendment to the Shareholder Agreement among Leather Invest-
ors Limited Partnership I, Leather Investors Limited Partner-
ship II, the Other Investors Named on the Signature Pages
thereto and Wilsons The Leather Experts Inc.
4.10 *Form of Redeemable Warrant Agreement, including Form of Re-
deemable Warrant Certificate.
5.1 ***Opinion of Faegre & Benson LLP.
10.1 *Wilsons The Leather Experts Inc. 1996 Stock Option Plan.
10.2 *Wilsons The Leather Experts Inc. Executive and Key Manage-
ment Incentive Plan.
10.3 *Wilsons The Leather Experts Inc. 401(k) Plan.
10.4 *Employment Agreement dated as of May 25, 1996 between
Wilsons The Leather Experts Inc. and Joel N. Waller.
10.5 *Employment Agreement dated as of May 25, 1996 between
Wilsons The Leather Experts Inc. and David L. Rogers.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
10.6 *Credit Agreement dated as of May 25, 1996 among Wilsons
Leather Holdings Inc., as Borrower, the Lenders signatory
thereto from time to time, as Lenders, and General Electric
Capital Corporation, as Agent, Lender and Swing Line Lender.
10.7 *Security Agreement dated as of May 25, 1996 by Wilsons
Leather Holdings Inc. and the other grantors listed on the
signature pages thereto, in favor of General Electric Capital
Corporation, in its capacity as Agent for Lenders.
10.8 *Security Agreement dated as of May 25, 1996 by Wilsons
Leather Holdings Inc. and the other grantors listed on the
signature pages thereto, in favor of CVS New York, Inc.
10.9 *Subordinated Promissory Note dated May 25, 1996.
10.10 *Wilsons The Leather Experts Inc. Amended 1996 Stock Option
Plan.
10.11 *Amendment No. 1 to Credit Agreement.
10.12 *Amendment No. 2 to Credit Agreement.
10.13 ***Amendment No. 3 to Credit Agreement.
10.14 *Amendment No. 1 to Security Agreement.
10.15 ***Stock Exchange Agreement.
11.1 *Computation of per share income.
21.1 Subsidiaries of the Registrant.................Filed Electronically
23.1 Consent of Arthur Andersen LLP.................Filed Electronically
23.2 Consent of KPMG Peat Marwick LLP...............Filed Electronically
23.3 ***Consent of Faegre & Benson LLP (included in Exhibit No.
5.1 to the Registration Statement).
24.1 *Powers of Attorney.
27.1 *Financial Data Schedule.
99.1 Withdrawal Request for Exhibit 3.2.............Filed Electronically
</TABLE>
- --------
*Previously filed.
**Exhibit 3.2 has been withdrawn pursuant to the Company's withdrawal request
set forth hereto as Exhibit 99.1.
***To be filed by Amendment.
Share figures above have been adjusted for the 0.9-for-1 reverse stock split
that was effected on October 11, 1996.
<PAGE>
Exhibit 21.1
SUBSIDIARIES
OF
WILSONS THE LEATHER EXPERTS INC.
(1) Wilsons Center, Inc., a Minnesota corporation;
(2) Rosedale Wilsons, Inc., a Minnesota corporation;
(3) River Hills Wilsons, Inc., a Minnesota corporation;
(4) Bermans The Leather Experts, Inc., a Delaware corporation;
(5) Wilsons House of Suede, Inc., a California corporation;
(6) Wilsons Tannery West, Inc., a California corporation;
(7) Wilsons Leather Holdings Inc., a Minnesota corporation;
(8) Wilsons International Inc., a Minnesota corporation;
(9) Melville (UK) Holdings Limited;
(10) Wilsons Leather Gatsland Limited;
(11) Wilsons Leather Gatsair Limited;
(12) Wilsons Leather of Vermont Inc., a Vermont corporation;
(13) Wilsons Leather of Delaware Inc., a Delaware corporation;
(14) Wilsons Leather of South Carolina Inc., a South Carolina corporation;
(15) Wilsons Leather of Arkansas Inc., an Arkansas corporation;
(16) Wilsons Leather of Missouri Inc., a Missouri corporation;
(17) Wilsons Leather of Alabama Inc., an Alabama corporation;
(18) Wilsons Leather of Connecticut Inc., a Connecticut corporation;
<PAGE>
(19) Wilsons Leather of Florida Inc., a Florida corporation;
(20) Wilsons Leather of Georgia Inc., a Georgia corporation;
(21) Wilsons Leather of Indiana Inc., an Indiana corporation;
(22) Wilsons Leather of Iowa Inc., an Iowa corporation;
(23) Wilsons Leather of Louisiana Inc., a Louisiana corporation;
(24) Wilsons Leather of Maryland Inc., a Maryland corporation;
(25) Wilsons Leather of Massachusetts Inc., a Massachusetts corporation;
(26) Wilsons Leather of Michigan Inc., a Michigan corporation;
(27) Wilsons Leather of Mississippi Inc., a Mississippi corporation;
(28) Wilsons Leather of New Jersey Inc., a New Jersey corporation;
(29) Wilsons Leather of New York Inc., a New York corporation;
(30) Wilsons Leather of North Carolina Inc., a North Carolina corporation;
(31) Wilsons Leather of Ohio Inc., an Ohio corporation;
(32) Wilsons Leather of Pennsylvania Inc., a Pennsylvania corporation;
(33) Wilsons Leather of Rhode Island Inc., a Rhode Island corporation;
(34) Wilsons Leather of Tennessee Inc., a Tennessee corporation;
(35) Wilsons Leather of Texas Inc., a Texas corporation;
(36) Wilsons Leather of Virginia Inc., a Virginia corporation;
(37) Wilsons Leather of West Virginia Inc., a West Virginia corporation; and
(38) Wilsons Leather of Wisconsin Inc., a Wisconsin corporation.
-2-
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and to all references to our firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
May 5, 1997
<PAGE>
Exhibit 23.2
Auditors' Consent
-----------------
The Board of Directors
Wilsons Center, Inc.:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
May 5, 1997
<PAGE>
Exhibit 99.1
FAEGRE & BENSON LLP
2200 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402-3901
May 5, 1997
via EDGAR
- ---------
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
Attn: Jennifer R. Hardy
Re: Wilsons The Leather Experts Inc.
Withdrawal of Exhibit 3.2 -- Amended and Restated Articles of
Incorporation, adopted subject to completion of the Offering
File No. 333-13967
--------------------------------------------------------------
Ladies and Gentlemen:
On behalf of Wilsons The Leather Experts Inc., a Minnesota corporation (the
"Registrant"), we are hereby requesting the withdrawal of Exhibit 3.2 (Amended
and Restated Articles of Incorporation, adopted subject to completion of the
Offering) to the Registrant's Registration Statement on Form S-1 (File No. 333-
13967) ("Form S-1"). The Form S-1, which was originally filed pursuant to the
Electronic Data Gathering, Analysis and Retrieval System on October 11, 1996,
registers Common Stock and Redeemable Common Stock Purchase Warrants of the
Registrant under the Securities Act of 1933, as amended.
If you have any questions in connection with this request for withdrawal of
Exhibit 3.2 to the Registrant's Form S-1, please telephone the undersigned at
(612) 336-3396.
Very truly yours,
/s/ Ramona L. Baskerville
Ramona L. Baskerville
RLB:jj
cc: Douglas J. Treff
Kris Sharpe
Steven E. Suckow
