<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 18, 1997
REGISTRATION NO. 333-13967
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 2 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.
FAEGRE & BENSON LLP ERIC O. MADSON, ESQ.
2200 NORWEST CENTER WINTHROP & WEINSTINE, P.A.
90 SOUTH SEVENTH STREET 3000 DAIN BOSWORTH PLAZA
MINNEAPOLIS, MINNESOTA 55402 60 SOUTH SIXTH STREET
MINNEAPOLIS, MINNESOTA 55402
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED PROPOSED
TITLE OF EACH CLASS OF MAXIMUM MAXIMUM
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE REGISTRATION FEE
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par
value per share....... 1,265,000(3) $8.99 $11,372,350 $3,447
- -------------------------------------------------------------------------------------
Redeemable Common Stock
Purchase Warrants..... 1,265,000(4) .01 $12,650 $4
- -------------------------------------------------------------------------------------
Common Stock, $.01 par
value per share....... 1,265,000(5) $13.50 $17,077,500 $5,175
- -------------------------------------------------------------------------------------
Total................ $28,462,500 $8,626(6)
- -------------------------------------------------------------------------------------
</TABLE>
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(1) Pursuant to Rule 416 under the Securities Act of 1933, as amended, this
Registration Statement also covers such additional securities as may
become issuable upon exercise of the Redeemable Warrants.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457 under the Securities Act of 1933, as amended. Of
the total Unit price of $9.00, $8.99 has been assigned to the share of
Common Stock and $.01 to the Redeemable Warrant included therein solely
for purposes of calculating the registration fee.
(3) Includes 165,000 shares of Common Stock subject to an option granted to
the Underwriter to cover over-allotments, if any.
(4) Includes 165,000 Warrants subject to an option granted to the Underwriter
to cover over-allotments, if any.
(5) Shares of Common Stock issuable upon exercise of the Warrants contained in
the Units offered hereby.
(6) In connection with the Company's original filing of this Registration
Statement on October 11, 1997, the Company paid a registration fee of
$16,656 and subsequently requested a refund for $2,019, leaving a net
registration fee paid of $14,637.
<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 APRIL 18, 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 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Unit............... $9.00 $.675 $8.325
- -------------------------------------------------------------------------------
Total (3)(4)........... $9,900,000 $742,500 $9,157,500
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(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.
----------
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 TRADING CO., 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 calls for annual openings of approximately eight to 15
traditional stores and ten 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 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
working capital and anticipated
capital expenditures, including
expenditures for new stores. See
"Use of Proceeds."
Proposed Nasdaq National Market symbol.... Common Stock: WLSN
Warrants: WLSNW
</TABLE>
- -------
(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") into 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, 1995. See "Pro Forma Unaudited Consolidated Statements 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 FORMA(1)
YEARS ENDED DECEMBER 31, ENDED MONTHS (MAY 26, YEARS ENDED
------------------------------------ ---------------- ENDED 1996) TO -----------------------
MAY 27, MAY 25, JANUARY 27, FEBRUARY 1, JANUARY 27, FEBRUARY 1,
1991 1992 1993 1994 1995 1995 1996 1996 1997 1996 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 $ 407.3 $ 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 86.2 238.5 222.1 275.2 285.2
Selling, general
and
administrative
expenses....... 104.8 117.2 120.1 130.2 114.9 45.9 34.8 76.4 75.8 99.6 102.4
Depreciation and
amortization... 14.8 17.4 20.7 22.3 21.4 9.0 4.7 13.3 1.0 1.1 1.4
Restricted stock
compensation
expense........ -- -- -- -- -- -- -- -- 1.5 -- 1.5
Restructuring
and asset
impairment
charges........ -- -- -- -- 182.2 -- -- 182.2 -- 0.3 --
------ ------ ------ ------ ------- ------ ------ ------- --------- ---------- ----------
Income (loss)
from operations. 47.2 47.4 17.2 (7.3) (173.1) (30.1) (16.1) (142.8) 44.7 31.1 32.1
Interest expense,
net............. 9.4 6.9 5.1 8.4 10.4 3.4 1.6 7.4 5.3 7.2 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 23.9 24.6
Income tax
provision
(benefit)....... 16.5 17.0 7.0 (3.1) (10.1) (5.5) (6.6) (4.6) 15.5 9.6 9.8
------ ------ ------ ------ ------- ------ ------ ------- --------- ---------- ----------
Net income
(loss).......... $ 21.3 $ 23.5 $ 5.1 $(12.6) $(173.4) $(28.0) $(11.1) $(145.6) $ 23.9 $ 14.3 $ 14.8
====== ====== ====== ====== ======= ====== ====== ======= ========= ========== ==========
Net income per common share...................................................... $ 2.49 $ 1.34 $ 1.38
========= ========== ==========
Weighted average common shares outstanding....................................... 9,587,460 10,687,460 10,687,460
========= ========== ==========
Other Data:
Income (loss)
from operations
before
depreciation,
amortization,
restricted
stock
compensation
expense and
restructuring
charges(2)..... $ 62.0 $ 64.8 $ 37.9 $ 15.0 $ 30.5 $(21.1) $(11.4) $ 52.7 $ 47.2 $ 32.5 $ 35.0
====== ====== ====== ====== ======= ====== ====== ======= ========= ========== ==========
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES COMPANY
-------------------------------------------------------------- -----------
PERIOD FROM
FIVE MONTHS EIGHT INCEPTION PRO FORMA(1)
YEARS ENDED DECEMBER 31, ENDED MONTHS (MAY 26, YEARS ENDED
-------------------------------- --------------- ENDED 1996) TO -------------------------
MAY 27, MAY 25, JANUARY 27, FEBRUARY 1, JANUARY 27, FEBRUARY 1,
1991 1992 1993 1994 1995 1995 1996 1996 1997 1996 1997
---- ---- ----- ---- ---- ------- ------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STORE DATA:
Traditional stores:
Open at end of
period............ 552 583 631 628 548 567 480 494 461 480 461
Net sales per
square foot for
stores open entire
year.............. $406 $415 $355 $340 $373 -- -- -- -- $387 $389
Change in
comparable store
sales(3).......... (3.1)% 2.1% (13.8)% (5.1)% (1.5)% 4.4% 3.9% (3.1)% (2.7)% (1.6)% (1.3)%
Peak number of
seasonal stores
during period...... 0 32 80 135 227 -- -- 227 376 227 376
</TABLE>
<TABLE>
<CAPTION>
COMPANY
-------------------------------
FEBRUARY 1, 1997
-------------------------------
AS FURTHER
AS ADJUSTED
ADJUSTED FOR FOR
ACTUAL WARRANTS(4) OFFERING(5)
------ ------------ -----------
<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>
- -------
(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, 1995. See "Pro Forma Unaudited
Consolidated Statements of Operations."
(2) See Note (2) under "Selected Historical and Pro Forma Consolidated
Financial Data" for a description of this data.
(3) Comparable store sales means sales generated by stores open at least one
full year.
(4) 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.
(5) As further adjusted to give effect to 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."
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 (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 Trading Co., 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 Trading Co., 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,
holders of 7,650,000 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 in excess of $20 million or
(ii) the termination of the Shareholder Agreement, which termination will be
no later than May 25, 1998. 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>
PRO FORMA UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
The following pro forma unaudited consolidated financial information
consists of Pro Forma Unaudited Consolidated Statements of Operations for the
years ended January 27, 1996 and February 1, 1997. The Pro Forma Unaudited
Consolidated Statements of Operations give effect to the Restructuring and the
Acquisition accounted for under the purchase method. The Pro Forma Unaudited
Consolidated Statements of Operations give effect to such transactions and
events as if they had occurred on January 28, 1995.
As part of the Restructuring, the Company closed 156 stores and wrote off
goodwill and certain other non-productive assets, recorded certain lease
obligations and adopted the provisions of SFAS No. 121. The Pro Forma
Unaudited Consolidated Statements of Operations give effect to certain
adjustments related to the Restructuring, including: (i) elimination of the
results of operations for the 156 closed stores which included only direct
costs associated with the stores; (ii) elimination of the restructuring and
asset impairment charges; and (iii) reflection of the associated tax effects
of the above transactions.
The Pro Forma Unaudited Consolidated Statements of Operations also give
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 Statements 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,
1995 or at any future date.
FOR THE YEAR ENDED JANUARY 27, 1996
(IN MILLIONS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA PRO FORMA PURCHASE
PREDECESSOR RESTRUCTURING FOR THE ACCOUNTING
COMPANIES ADJUSTMENTS (1) RESTRUCTURING ADJUSTMENTS PRO FORMA
----------- --------------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Net sales............... $ 456.5 $(49.2) $407.3 $ -- $407.3
Costs and expenses:
Cost of goods sold,
buying and occupancy
costs................. 312.6 (37.4) 275.2 -- 275.2
Selling, general and
administrative ex-
penses................ 110.8 (10.1) 100.7 (1.1) 99.6
Depreciation and amor-
tization.............. 20.5 (6.2)(2) 14.3 (13.2)(5) 1.1
Restructuring and asset
impairment charges.... 182.2 (181.9)(3) 0.3 -- 0.3
------- ------ ------ ----- ----------
Income (loss) from
operations......... (169.6) 186.4 16.8 14.3 31.1
Interest expense, net... 10.1 -- 10.1 (2.5)(6) 7.2
-- -- -- (.4)(7) --
------- ------ ------ ----- ----------
Income (loss) before
income taxes....... (179.7) 186.4 6.7 17.2 23.9
Income tax provision
(benefit).............. (9.5) 12.2(4) 2.7 6.9(8) 9.6
------- ------ ------ ----- ----------
Net income (loss)... $(170.2) $174.2 $ 4.0 $10.3 $ 14.3
======= ====== ====== ===== ==========
Net income per common share................................................... $ 1.34
==========
Weighted average common shares outstanding.................................... 10,687,460 (7)
==========
</TABLE>
13
<PAGE>
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 (9) ADJUSTMENTS (1) 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)(5) 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(6) 7.5
-- -- -- (0.3)(7) --
------ ----- ------ ---- ----------
Income (loss) before
income taxes........ 21.9 (0.1) 21.8 2.8 24.6
Income tax provision
(benefit).............. 9.0 (0.3)(4) 8.7 1.1(8) 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...................................... 10,687,460 (7)
==========
</TABLE>
- --------
(1) Reflects the elimination of the results of operations for the 156 closed
stores including all direct costs associated with the stores. No
corporate overhead or allocated selling expenses were eliminated.
(2) Reflects the elimination of the amortization of goodwill and other
intangibles of $6.2 million for the year ended January 27, 1996, which
were charged to operations prior to the asset impairment charge discussed
in Note (3) below.
(3) Reflects the elimination of the pre-tax restructuring charge of $134.0
million related to the anticipated costs associated with the closing of
the Predecessor Companies' stores and the write-off of goodwill and other
intangibles for the year ended January 27, 1996 (excludes reserves
established for stores which remain open as of May 25, 1996). Also
reflects the elimination of the pre-tax asset impairment charge of $47.9
million related to the write-off of certain assets upon the adoption of
SFAS No. 121 for the year ended January 27, 1996.
(4) Reflects the income tax effect of the pro forma restructuring adjustments
at a rate to equate the pro forma after restructuring income tax
provision to the Company's effective tax rate for the respective period.
(5) Reflects the reduction of depreciation expense due to the write-down of
depreciable property to $12.1 million through the application of purchase
accounting.
(6) 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>
YEARS ENDED
-----------------------
JANUARY 27, FEBRUARY 1,
1996 1997
----------- -----------
(IN MILLIONS)
<S> <C> <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%............. $(8.7) $(4.9)
Additional interest expense related to the Note.. 5.5 5.5
Amortization of deferred financing costs......... .7 .7
----- -----
$(2.5) $ 1.3
===== =====
</TABLE>
14
<PAGE>
(7) 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.
(8) Reflects the income tax effect of the pro forma purchase accounting
adjustments at the Company's effective tax rate for the respective
period.
(9) 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.
15
<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 Company intends to use such net proceeds to reduce seasonal borrowings
under the Revolving Credit Facility and to fund working capital and
anticipated capital expenditures, including developing and implementing new
information systems, building new stores, remodeling existing stores and
testing new business concepts, and for other general corporate purposes.
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 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."
16
<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 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. "Net
tangible book value" represents the total amount of the Company's total
tangible assets less the total amount of the Company's liabilities; "net
tangible book value per share" means such amount divided by the number of
shares of Common Stock outstanding. 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 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 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
Net tangible book value................................... $5.07
Decrease in net tangible book value attributable to
exercise of
CVS Warrant.............................................. (.63)
-----
Net adjusted tangible book value before the Offering...... 4.44
Increase in net tangible book value attributable to
purchase of Units by new investors....................... .32
-----
Net tangible book value as adjusted after the Offering...... 4.76
-----
Dilution to new investors................................... $4.24
=====
</TABLE>
The following table sets forth, on an 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."
17
<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 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. 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 ADJUSTED AS FURTHER
FOR WARRANT ADJUSTED FOR
ACTUAL(1) EXERCISE OFFERING
--------- ----------- ------------
(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; no
shares issued or outstanding.......... -- -- --
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)............. 83 96 107
Additional paid-in capital............. 19,900 20,698 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."
18
<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
(IN MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS AND STORE DATA)
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES COMPANY
------------------------------------------------------------------- ---------------------
FIVE MONTHS EIGHT
YEARS ENDED DECEMBER 31, ENDED MONTHS PERIOD FROM INCEPTION
------------------------------------ ---------------- ENDED (MAY 26, 1996) TO
MAY 27, MAY 25, JANUARY 27, FEBRUARY 1,
1991 1992 1993 1994 1995 1995 1996 1996 1997
------ ------ ------ ------ ------- ------- ------- ----------- ---------------------
<S> <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
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
Selling, general
and
administrative
expenses....... 104.8 117.2 120.1 130.2 114.9 45.9 34.8 76.4 75.8
Depreciation and
amortization... 14.8 17.4 20.7 22.3 21.4 9.0 4.7 13.3 1.0
Restricted stock
compensation
expense........ -- -- -- -- -- -- -- -- 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
Interest expense,
net............. 9.4 6.9 5.1 8.4 10.4 3.4 1.6 7.4 5.3
------ ------ ------ ------ ------- ------ ------ ------- ---------
Income (loss)
before income
taxes........... 37.8 40.5 12.1 (15.7) (183.5) (33.5) (17.7) (150.2) 39.4
Income tax
provision
(benefit)....... 16.5 17.0 7.0 (3.1) (10.1) (5.5) (6.6) (4.6) 15.5
------ ------ ------ ------ ------- ------ ------ ------- ---------
Net income
(loss).......... $ 21.3 $ 23.5 $ 5.1 $(12.6) $(173.4) $(28.0) $(11.1) $(145.6) $ 23.9
====== ====== ====== ====== ======= ====== ====== ======= =========
Net income per
common share.... $ 2.49
=========
Weighted average
common shares
outstanding..... 9,587,460
=========
Other data:
Income (loss)
from operations
before
depreciation,
amortization,
restricted
stock
compensation
expense and
restructuring
charges(2)..... $ 62.0 $ 64.8 $ 37.9 $ 15.0 $ 30.5 $(21.1) $(11.4) $ 52.7 $ 47.2
====== ====== ====== ====== ======= ====== ====== ======= =========
<CAPTION>
PRO FORMA(1)
YEARS ENDED
-----------------------
JANUARY 27, FEBRUARY 1,
1996 1997
----------- -----------
<S> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net sales........ $ 407.3 $ 422.6
Costs and
expenses:
Cost of goods
sold, buying
and occupancy
costs.......... 275.2 285.2
Selling, general
and
administrative
expenses....... 99.6 102.4
Depreciation and
amortization... 1.1 1.4
Restricted stock
compensation
expense........ -- 1.5
Restructuring
and asset
impairment
charges........ 0.3 --
----------- -----------
Income (loss)
from operations. 31.1 32.1
Interest expense,
net............. 7.2 7.5
----------- -----------
Income (loss)
before income
taxes........... 23.9 24.6
Income tax
provision
(benefit)....... 9.6 9.8
----------- -----------
Net income
(loss).......... $ 14.3 $ 14.8
=========== ===========
Net income per
common share.... $ 1.34 $ 1.38
=========== ===========
Weighted average
common shares
outstanding..... 10,687,460 10,687,460
=========== ===========
Other data:
Income (loss)
from operations
before
depreciation,
amortization,
restricted
stock
compensation
expense and
restructuring
charges(2)..... $ 32.5 $ 35.0
=========== ===========
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES COMPANY
-------------------------------------------------------------- ---------------------
FIVE MONTHS EIGHT PRO FORMA(1)
YEARS ENDED DECEMBER 31, ENDED MONTHS PERIOD FROM INCEPTION YEARS ENDED
-------------------------------- --------------- ENDED (MAY 26, 1996) TO -----------------------
MAY 27, MAY 25, JANUARY 27, FEBRUARY 1, JANUARY 27, FEBRUARY 1,
1991 1992 1993 1994 1995 1995 1996 1996 1997 1996 1997
---- ---- ----- ---- ---- ------- ------- ----------- --------------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STORE DATA:
Traditional
stores:
Open at end of
period......... 552 583 631 628 548 567 480 494 461 480 461
Net sales per
square foot for
stores open
entire year.... $406 $415 $355 $340 $373 -- -- -- -- $387 $389
Change in
comparable
store sales(3). (3.1)% 2.1% (13.8)% (5.1)% (1.5)% 4.4% 3.9% (3.1)% (2.7)% (1.6)% (1.3)%
Peak number of
seasonal stores
during period... 0 32 80 135 227 -- -- 227 376 227 376
</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(4)....... $ 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) 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, 1995. See "Pro Forma Unaudited
Consolidated Statements of Operations."
(2) 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."
(3) Comparable store sales means sales generated by stores open at least one
full year.
(4) The working capital calculation excludes amounts due to CVS as of December
31, 1991, 1992, 1993, 1994 and 1995.
20
<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
21
<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 PRO FORMA
DECEMBER 31, FIVE MONTHS ENDED MONTHS (MAY 26, 1996) YEARS ENDED
-------------------- ----------------- ENDED TO -----------------------
MAY 27, MAY 25, JANUARY 27, FEBRUARY 1, JANUARY 27, FEBRUARY 1,
1993 1994 1995 1995 1996 1996 1997 1996 1997
----- ----- ----- -------- -------- ----------- -------------- ----------- -----------
<S> <C> <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% 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 67.6 67.5
Selling, general and
administrative
expenses.............. 25.1 27.4 24.8 36.8 31.8 20.8 22.0 24.7 24.3
Income (loss) from
operations before
depreciation,
amortization,
restricted stock
compensation expense
and restructuring
charges............... 7.9 3.2 6.6 (16.9) (10.4) 14.3 13.7 8.0 8.3
Income (loss) from
operations............. 3.6 (1.5) (37.4) (24.1) (14.7) (38.8) 13.0 7.6 7.6
Interest expense, net... 1.1 1.8 2.3 2.8 1.4 2.0 1.6 1.8 1.8
Income tax provision
(benefit).............. 1.4 (0.6) (2.2) (4.4) (6.0) (1.2) 4.5 2.3 2.3
Net income (loss)....... 1.1% (2.7)% (37.5)% (22.5)% (10.1)% (39.6)% 6.9% 3.5% 3.5%
</TABLE>
22
<PAGE>
RECENT DEVELOPMENTS
Sales for the quarter ended May 3, 1997 are anticipated to decrease $11.6
million, or 17.5%, to $55.1 million compared with sales of $66.8 million
during the same quarter in 1996. The anticipated sales decrease is due to
operating an average of 30 fewer, or 6.1% fewer, stores during the current
quarter compared to the prior year as a result of closing underperforming
stores. In addition to operating fewer stores, the Company anticipates a
comparable store sales decline of 11.0% 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 is primarily attributable to less
lower-priced clearance merchandise than in the prior year when 55 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.
23
<PAGE>
Net interest expense from inception to February 1, 1997 was $5.3 million, or
1.5% 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.
24
<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
25
<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.
26
<PAGE>
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 plans to open approximately eight to 15 traditional stores, and ten 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" 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
27
<PAGE>
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 $10.0 million in
borrowings that bears interest at prime. 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. Income from operations before depreciation, amortization,
restricted stock compensation expense and restructuring charges decreased by
$5.5 million from $52.7 million for the eight months ended January 27, 1996 to
$47.2 million for the period from inception to February 1, 1997. 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.
28
<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 plans to open
approximately eight to 15 traditional stores and ten 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 cash provided from financing activities in 1996
resulted from proceeds 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
29
<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, each fiscal quarter of the year
ended January 27, 1996 on a pro forma basis, 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
Income (loss) from operations before
depreciation, amortization and
restructuring charges................... (10.0) (17.6) (13.4) 71.5
Loss from operations..................... (16.1) (22.6) (18.9) (115.5)
Net loss................................. (15.2) (20.8) (18.3) (119.1)
Year Ended January 27, 1996 (Pro Forma) (1)
Net sales................................ 61.2 39.7 74.4 232.0
Income (loss) from operations before
depreciation, amortization and
restructuring charges................... (10.5) (16.4) (3.4) 62.8
Income (loss) from operations............ (10.8) (16.7) (3.7) 62.6
Net income (loss)........................ (7.5) (11.1) (3.4) 36.3
Year Ended February 1, 1997 (2)(3)
Net sales................................ 66.8 41.4 86.4 230.2
Income (loss) from operations before
depreciation, amortization and
restricted stock compensation expense... (6.8) (17.2) 1.0 57.7
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)
(1)(2)(3)(4)
Net sales................................ 65.0 41.0 86.4 230.2
Income (loss) from operations before
depreciation, amortization and
restricted stock compensation expense... (6.7) (17.0) 1.0 57.7
Income (loss) from operations............ (6.9) (17.2) .9 55.3
Net income (loss)........................ (5.3) (11.9) (1.0) 33.0
</TABLE>
- --------
(1) See "Pro Forma Unaudited Consolidated Statements of Operations."
(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) 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.
30
<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 calls for annual openings of approximately eight to 15
traditional stores and ten 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
31
<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
32
<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 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
plans to open at least ten 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 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
33
<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).
34
<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>
35
<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. The Company currently
plans to open ten to 15 airport stores during 1997.
Holiday Stores.
In 1996, Wilsons operated 224 holiday stores in 43 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. Management estimates that there will
be approximately 100 seasonal kiosks during the Company's peak selling season
in 1997.
36
<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 24.5% 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.
37
<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
38
<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
41% 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.
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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.
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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.
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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.
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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 is also Chief
Executive Officer and Chairman of the Board of Directors of Stratosphere
Corporation, an amusement and recreation company, 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.
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<PAGE>
Thomas J. Brosig is a member of the Company's Board of Directors. Mr. Brosig
has served as President 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, President 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
either the President or a vice president 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." 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 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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<PAGE>
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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<PAGE>
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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<PAGE>
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 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), holders of a majority of the number
of outstanding shares of Common Stock initially held by the Partners will have
two demand registration rights for such 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 any
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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<PAGE>
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 the CVS Warrant, and with respect to all Parties other than the
Company, the Note to the Parties. 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 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 (as defined in the Shareholder Agreement), first Waller
and Rogers (to the extent they are not the selling Shareholder), then the
Company and finally the other Shareholders pro rata would
48
<PAGE>
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 in excess of $20 million or (ii) the termination of the Shareholder
Agreement.
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.
49
<PAGE>
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) claims related to employees and certain employee benefits matters.
Generally, the indemnifications by CVS, other than those referred to in
clauses (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."
50
<PAGE>
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 President, 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.
See also Note 12 of Notes to Consolidated Financial Statements.
51
<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
investments 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 investments 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.
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<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 of April 15, 1997, 8,267,083 shares of Common Stock were issued and
outstanding (including 880,982 shares of Restricted Stock) and were held by 49
shareholders. An additional 1,350,000 and 880,982 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. Each
holder of shares of Common Stock, including the shares of Common Stock 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. 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. 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 (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 a public offering with gross proceeds in excess of $20 million or the
termination of the Shareholder Agreement, which termination will be no later
than May 25, 1998. 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
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.
53
<PAGE>
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. After 90 days from 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.
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, reclassification, and any combination
of Common Stock, or the merger, consolidation, or disposition of substantially
all the assets of the Company.
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 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
54
<PAGE>
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 cost of each Unit will be allocable between each of its two elements
(one share of Common Stock and one Redeemable Warrant) in accordance with
their relative fair market values to determine the adjusted basis of each
element for federal income tax purposes. No gain or loss will be recognized by
a holder of a Redeemable Warrant upon purchase of Common Stock for cash
pursuant to the exercise of the Redeemable Warrant. The adjusted basis of a
share of Common Stock so acquired will equal the adjusted basis of the
Redeemable Warrant plus the exercise price. There may be other federal tax
considerations, and state, local, or foreign tax considerations. Investors
should consult their own tax advisors before determining whether to purchase
the Units or exercise the Redeemable Warrants.
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.
55
<PAGE>
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.
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.
56
<PAGE>
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
92,671 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 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.
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 Trading Co., 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
Trading Co., 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. Such options were granted on June 26, 1996,
October 10, 1996, February 27, 1997 and April 1, 1997, respectively, and 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.
57
<PAGE>
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, holders of 7,650,000 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 Trading Co., 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.
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 will direct 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
58
<PAGE>
consent of Equity Securities Trading Co., 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 Trading Co., 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 relevant. The offering price,
however, should not be considered as 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 Underwriters 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.
59
<PAGE>
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.
60
<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
</TABLE>
F-1
<PAGE>
After the exchange of preferred stock discussed in Note 14 to Wilsons The
Leather Experts Inc. and Subsidiaries consolidated financial statements is
effected, we expect to be in a position to render the following audit report.
Arthur Andersen LLP
April 17, 1997
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,
1994 1995 1997
-------- -------- -----------
ASSETS
------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.................................................................... $ 17,325 $ 14,286 $ 81,553
Accounts receivable, net..................................................................... 7,692 7,618 4,851
Inventories.................................................................................. 102,595 74,899 64,919
Prepaid expenses............................................................................. 3,140 2,317 1,246
Deferred income taxes........................................................................ 6,776 14,925 --
-------- -------- --------
Total current assets....................................................................... 137,528 114,045 152,569
Property and equipment, net.................................................................... 97,216 65,884 17,091
Goodwill, net of accumulated amortization of $27,468 in 1994................................... 152,522 -- --
Other assets, net.............................................................................. 5,404 462 1,555
Deferred income taxes.......................................................................... -- 1,979 1,173
-------- -------- --------
$392,670 $182,370 $172,388
======== ======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
Current liabilities:
Accounts payable............................................................................. $ 18,106 $ 11,728 $ 10,666
Due to CVS................................................................................... 124,245 78,771 --
Accrued expenses............................................................................. 41,502 52,623 34,517
Income taxes payable......................................................................... 857 5,120 20,345
Deferred income taxes........................................................................ -- -- 3,243
-------- -------- --------
Total current liabilities.................................................................. 184,710 148,242 68,771
Long-term debt................................................................................. -- -- 55,811
Other long-term liabilities.................................................................... 6,965 6,538 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, no shares issued or
outstanding in 1997 (see Note 14)........................................................... -- -- --
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)........................................................... -- -- 50
Class B common stock, $.01 par value; 6,750,000 shares authorized, 2,925,000 shares issued
and outstanding in 1997..................................................................... -- -- 29
Class C common stock, $.01 par value; 2,250,000 shares authorized, 405,000 shares issued and
outstanding in 1997......................................................................... -- -- 4
Additional paid-in capital................................................................... 135,452 135,452 19,900
Retained earnings (deficit).................................................................. 65,397 (108,018) 23,511
Cumulative translation adjustment............................................................ -- 10 (29)
-------- -------- --------
Total shareholders' equity................................................................. 200,995 27,590 43,465
-------- -------- --------
$392,670 $182,370 $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.............. 120,701 130,228 114,923 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
======== ======== ========= ======== ======== ========= =========
Net income per common share.............................................. $ 2.49
=========
Weighted average common shares outstanding............................... 9,587,460
=========
</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
------------------------------------------------
CLASS A CLASS B CLASS C
---------------- ---------------- --------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------ --------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Initial capitalization........ 4,937,083 $50 2,925,000 $29 405,000 $4
Net income.................. -- -- -- -- -- --
Restricted stock vested..... -- -- -- -- -- --
Accrued preferred stock
dividends.................. -- -- -- -- -- --
Currency translation
adjustment................. -- -- -- -- -- --
--------- --- --------- --- ------- ---
Balance, February 1, 1997..... 4,937,083 $50 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)..................... $18,415 $ -- $-- $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........ $19,900 $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 from CVS New York, Inc., a New York corporation
(formerly Melville Corporation--CVS), the parent company to the Predecessor
Companies (the Acquisition). 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.
Net Income (Loss) Per Common Share
Net income (loss) per common share is computed by dividing net income (loss)
by the weighted average number of common shares outstanding 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 Statement of
Financial Accounting Standards (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 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 .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
(as defined in the shareholder agreement), to remove or replace such
directors, until the shareholder agreement terminates, which termination will
be no later than May 25, 1998, if an underwritten public offering has been
completed prior to that date.
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. Subject to the rights of the holders of outstanding
classes of preferred stock and the Note, 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 25,000,000 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.
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 administered by a stock
option committee which has the discretion to determine the number and purchase
price
F-16
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 189,180 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 2.48
</TABLE>
During 1996, the Company granted 199,980 options, no options were exercised
or expired, and 10,800 shares 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 may match 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 may match 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 into Common Stock at an
exchange rate of $12.00 per share. The accompanying consolidated financial
statements reflect the exchange of all of the Series A Preferred into 617,083
shares of Common Stock as if the exchange had occurred as of inception (May
26, 1996).
F-19
<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
Pro Forma Unaudited Consolidated Statements of Operations................. 13
Use of Proceeds........................................................... 16
Dividend Policy........................................................... 16
Dilution.................................................................. 17
Capitalization............................................................ 18
Selected Historical and Pro Forma Consolidated Financial Data............. 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 21
Business.................................................................. 31
Management................................................................ 42
Certain Transactions...................................................... 46
Security Ownership of Certain Beneficial Owners and Management............ 52
Description of Securities................................................. 53
Securities Eligible for Future Sale....................................... 56
Underwriting.............................................................. 58
Legal Matters............................................................. 59
Experts................................................................... 59
Additional Information.................................................... 60
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
TRADING CO., 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 15. RECENT SALES OF UNREGISTERED SECURITIES
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.
3.5 Articles of Amendment of Amended Articles of Incorporation
of the Registrant dated October 11, 1997.
4.4 Form of Underwriter Warrants.
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.
10.13 *Amendment No. 3 to Credit Agreement.
10.14 Amendment No. 1 to Security Agreement.
11.1 Computation of per share income.
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).
27.1 Financial Data Schedule.
</TABLE>
--------
*To be filed by Amendment.
II-1
<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 APRIL 16, 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 APRIL 16, 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-2
<PAGE>
REGISTRATION NO. 33-13967
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
EXHIBITS
TO AMENDMENT NO. 1
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)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
1.1 Form of Underwriting Agreement................................
3.5 Articles of Amendment of Amended Articles of Incorporation of
the Registrant dated October 11, 1997.........................
4.4 Form of Underwriter Warrants..................................
4.9 Amendment to the Shareholder Agreement 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...........................
4.10 Form of Redeemable Warrant Agreement, including Form of Re-
deemable Warrant Certificate..................................
5.1 *Opinion of Faegre & Benson LLP...............................
10.13 *Amendment No. 3 to Credit Agreement..........................
10.14 Amendment No. 1 to Security Agreement.........................
11.1 Computation of per share income...............................
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)................................
27.1 Financial Data Schedule.......................................
</TABLE>
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*To be filed by Amendment
<PAGE>
Exhibit 1.1
WILSONS THE LEATHER EXPERTS INC.
1,100,000 Units/1/
Consisting of 1,100,000 shares of Common Stock and
1,100,000 Redeemable Common Stock Purchase Warrants
UNDERWRITING AGREEMENT
___________, 1997
Equity Securities Trading Co., Inc.
2820 IDS Center
80 South Eighth Street
Minneapolis, Minnesota 55402
Ladies and Gentlemen:
Wilsons The Leather Experts Inc., a Minnesota corporation (the
"Company"), hereby confirms its agreement to issue and sell to Equity Securities
Trading Co., Inc. (the "Underwriter") an aggregate of 1,100,000 Units, each Unit
consisting of one share of common stock, $.01 par value per Unit, of the Company
(the "Common Stock") and one redeemable common stock purchase warrant of the
Company (the "Redeemable Warrants"). Such 1,100,000 Units are collectively
referred to in this Agreement as the "Firm Units." The Company also hereby
confirms its agreement to grant to the Underwriter an option to purchase up to
165,000 additional Units (the "Option Units") on the terms and for the purposes
set forth in Section 2(b) hereof. As used in this Agreement, the term "Units"
shall consist of the Firm Units and the Option Units.
The Company also hereby confirms its agreement to issue to the
Underwriter warrants for the purchase of a total of 110,000 shares of Common
Stock as described in Section 6 hereof (the "Underwriter's Warrants"), assuming
purchase by the Underwriter of the Firm Units. The Shares issuable upon
exercise of the Underwriter's Warrants are referred to in this Agreement as the
"Warrant Shares."
1. Representations, Warranties and Agreements of the Company.
(a) The Company represents and warrants to and agrees with the
Underwriter as follows:
(i) A registration statement on Form S-1 (File No. 333-13967)
with respect to the Units, including a prospectus subject to completion,
has been prepared by the Company in conformity with the requirements of the
Securities Act of 1933, as amended (the "Securities Act"), and the rules
and regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "SEC") thereunder and has been filed with the SEC
under the Securities Act; one or more amendments to such registration
statement have also been so prepared and have been, or will be, so filed.
Copies of the registration statement and amendments and each related
preliminary prospectus to date have been delivered by the Company to the
Underwriter, and, to the extent applicable, were identical to the
electronically transmitted copies thereof filed with the SEC pursuant to
the SEC's Electronic Data Gathering Analysis and Retrieval System
("EDGAR"), except to the extent permitted by Regulation S-T under the
Securities Act. If the Company has elected not to rely upon Rule 430A of
the Rules and Regulations, the Company has prepared and will promptly file
an amendment to the registration statement
- ----------------------------
/1/ Plus an option to purchase up to 165,000 additional Units to cover over-
allotments.
<PAGE>
and an amended prospectus. If the Company has elected to rely upon Rule
430A of the Rules and Regulations, it will prepare and file a prospectus
pursuant to Rule 424(b) that discloses the information previously omitted
from the prospectus in reliance upon Rule 430A. Such registration statement
as amended at the time it is or was declared effective by the SEC and, in
the event of any amendment thereto after the effective date and prior to
the First Closing Date (as hereinafter defined), such registration
statement as so amended (but only from and after the effectiveness of such
amendment), including the information deemed to be part of the registration
statement at the time of effectiveness pursuant to Rule 430A(b), if
applicable, is hereinafter called the "Registration Statement." The
prospectus included in the Registration Statement at the time it is or was
declared effective by the SEC is hereinafter called the "Prospectus,"
except that if any prospectus filed by the Company with the SEC pursuant to
Rule 424(b) of the Rules and Regulations or any other prospectus provided
to the Underwriter by the Company for use in connection with the offering
of the Units (whether or not required to be filed by the Company with the
SEC pursuant to Rule 424(b) of the Rules and Regulations) differs from the
prospectus on file at the time the Registration Statement is or was
declared effective by the SEC, the term "Prospectus" shall refer to such
differing prospectus from and after the time such prospectus is filed with
the SEC or transmitted to the SEC for filing pursuant to such Rule 424(b)
or from and after the time it is first provided to the Underwriter by the
Company for such use. The term "Preliminary Prospectus" as used herein
means any preliminary prospectus included in the Registration Statement
prior to the time it becomes or became effective under the Securities Act
and any prospectus subject to completion as described in Rule 430A of the
Rules and Regulations. For purposes of this Agreement, all references to
the Registration Statement, any Preliminary Prospectus, the Prospectus, or
any amendment or supplement to any of the foregoing, shall be deemed to
include the respective copies thereof filed with the SEC pursuant to EDGAR.
(ii) At the time the Registration Statement is or was declared
effective by the SEC and at all times subsequent thereto up to the "First
Closing Date" and the "Second Closing Date" (as such terms are hereinafter
defined), the Registration Statement and Prospectus, and all amendments
thereof and supplements thereto, will comply or complied with the
provisions and requirements of the Securities Act and the Rules and
Regulations. Neither the SEC nor any state securities authority has issued
any order preventing or suspending the use of any Preliminary Prospectus or
requiring the recirculation of a Preliminary Prospectus, or issued a stop
order with respect to the offering of the Units (if the Registration
Statement has been declared effective), or instituted or, to the Company's
knowledge, threatened the institution of, proceedings for any of such
purposes. When the Registration Statement shall become effective and when
any post-effective amendment thereto shall become effective, the
Registration Statement (as amended, if the Company shall have filed with
the SEC any post-effective amendments thereto) will not or did not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances in which they were made, not misleading. When
the Registration Statement is or was declared effective by the SEC and at
all times subsequent thereto up to the First Closing Date and the Second
Closing Date, the Prospectus (as amended or supplemented, if the Company
shall have filed with the SEC any amendment thereof or supplement thereto)
will not or did not contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances in
which they were made, not misleading. When any Preliminary Prospectus was
first filed with the SEC and when any amendment thereof or supplement
thereto was first filed with the SEC, such Preliminary Prospectus and any
amendment thereof and supplement thereto complied in all material respects
with the applicable provisions of the Securities Act and the Rules and
Regulations and did not contain an untrue statement of a material fact and
did not omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading. None of
the representations and warranties in this Subsection 1(a) shall apply to
statements in, or omissions from, the Registration Statement or the
Prospectus, or any amendment thereof or supplement thereto, which are based
upon and conform to written information relating to the Underwriter
furnished to the Company by the Underwriter specifically for use in the
preparation of the Registration Statement or the Prospectus, or any such
amendment or supplement.
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<PAGE>
(iii) The Company has no subsidiaries other than those
identified in Exhibit 21.1 to the Registration Statement (each one a
"Subsidiary" and collectively the "Subsidiaries") and is not affiliated
with any other company or business entity, except as disclosed in the
Prospectus. The Company and each Subsidiary has been duly incorporated and
is validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, with full power and authority (corporate
and other) to own, lease and operate its properties and conduct its
business as described in the Registration Statement and Prospectus; the
Company owns all of the outstanding capital stock of each of the
Subsidiaries free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest; the Company and each Subsidiary
is duly qualified to do business as a foreign corporation and is in good
standing in each jurisdiction in which the ownership or lease of its
properties or the conduct of its business requires such qualification and
in which the failure to be qualified or in good standing would have a
material adverse effect on the condition (financial or otherwise),
earnings, operations or business of the Company; and no proceeding has been
instituted in any such jurisdiction revoking, limiting or curtailing, or
seeking to revoke, limit or curtail, such power and authority or
qualification.
(iv) The Company and each Subsidiary has and is operating in
material compliance with all authorizations, licenses, certificates,
consents, permits, approvals and orders of and from all state, federal and
other governmental regulatory officials and bodies necessary to own its
properties and to conduct its business as described in the Registration
Statement and Prospectus, all of which are, to the Company's knowledge,
valid and in full force and effect; the Company and each Subsidiary is
conducting its business in substantial compliance with all applicable laws,
rules and regulations of the jurisdictions in which it is conducting
business; and neither the Company nor any Subsidiary is in material
violation of any applicable law, order, rule, regulation, writ, injunction,
judgment or decree of any court, government or governmental agency or body,
domestic or foreign, having jurisdiction over the Company or any Subsidiary
or over their respective properties. Except as set forth in the
Registration Statement and Prospectus, (A) the Company is in material
compliance with all material rules, laws and regulations relating to the
use, treatment, storage and disposal of toxic substances and protection of
health or the environment (the "Environmental Laws") which are applicable
to its business, (B) the Company has received no notice from any
governmental authority or third party of an asserted claim under
Environmental Laws, which claim is required to be disclosed in the
Registration Statement and the Prospectus, (C) the Company will not be
required to make any future material capital expenditures to comply with
Environmental Laws, and (D) no property which is owned, leased or occupied
by the Company has been designated as a Superfund site pursuant to the
Comprehensive Response, Compensation and Liability Act of 1980, as amended
(42 U.S.C. (S) 9601, et seq.), or otherwise designated as a contaminated
site under applicable state or local law.
(v) Neither the Company nor any Subsidiary is in violation of
its respective articles of incorporation or bylaws or in default in the
performance or observance of any obligation, agreement, covenant or
condition contained in any bond, debenture, note or other evidence of
indebtedness or in any contract, lease, indenture, mortgage, loan
agreement, joint venture or other agreement or instrument to which it is a
party or by which it or its respective properties are bound, which default
is material to the business of the Company.
(vi) The Company has full requisite power and authority to
enter into this Agreement and perform the transactions contemplated hereby.
This Agreement has been duly authorized, executed and delivered by the
Company and is a valid and binding agreement on the part of the Company,
enforceable against the Company in accordance with its terms, except as
enforceability may be limited by the application of bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the rights of
creditors generally and by judicial limitations on the right of specific
performance, and except as the enforceability of the indemnification or
contribution provisions hereof may be affected by applicable federal or
state securities laws. The performance of this Agreement and the
consummation of the transactions herein contemplated will not result in a
material breach or violation of any of the terms and provisions of, or
constitute a material default under, (A) any indenture, mortgage, deed of
trust, loan agreement, bond, debenture, note, agreement or other evidence
of indebtedness, any lease, contract,
3
<PAGE>
indenture, mortgage, loan agreement, joint venture or other agreement or
instrument to which the Company or any Subsidiary is a party or by which
the Company or any Subsidiary or their respective properties may be bound,
(B) the respective articles of incorporation or bylaws of the Company or
any Subsidiary, or (C) any material applicable law, order, rule,
regulation, writ, injunction, judgment or decree of any court, government
or governmental agency or body, domestic or foreign, having jurisdiction
over the Company or any Subsidiary or over their respective properties. No
consent, approval, authorization or order of or qualification with any
court, governmental agency or body, domestic or foreign, having
jurisdiction over the Company or any Subsidiary or over their respective
properties is required for the execution and delivery of this Agreement and
the consummation by the Company of the transactions herein contemplated,
except such as may be required under the Securities Act, the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or under state or
other securities or Blue Sky laws, all of which requirements have been
satisfied.
(vii) Except as is otherwise expressly described in the
Registration Statement or Prospectus, there is not any pending or, to the
best of the Company's knowledge, threatened, any action, suit, claim or
proceeding against the Company, any Subsidiary or any of their respective
officers or any of their respective properties, assets or rights before any
court, government or governmental agency or body, domestic or foreign,
having jurisdiction over the Company or any Subsidiary or over their
respective officers or properties or otherwise which (i) might result in
any material adverse change in the condition (financial or otherwise),
earnings, operations or business of the Company or any Subsidiary or might
materially and adversely affect their respective properties, assets or
rights, or (ii) might prevent consummation of the transactions contemplated
hereby.
(viii) The Company has, and at the First Closing Date and
Second Closing Date (collectively, the "Closing Dates") will have, the duly
authorized and outstanding capitalization set forth in the Prospectus. All
outstanding shares of capital stock of the Company are duly authorized and
validly issued, fully paid and non-assessable, have been issued in
compliance with all federal and state securities laws, were not issued in
violation of or subject to any preemptive rights or other rights to
subscribe for or purchase securities, and the authorized and outstanding
capital stock of the Company conforms in all material respects with the
statements relating thereto contained in the Registration Statement and the
Prospectus; the shares of Common Stock included in the Units to be sold
hereunder by the Company have been duly authorized for issuance and sale to
the Underwriter pursuant to this Agreement and, when issued and delivered
by the Company against payment therefor in accordance with the terms of
this Agreement, will be duly and validly issued and fully paid and non-
assessable and will be sold free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest; and no preemptive
right, co-sale right, registration right, right of first refusal or other
similar right of shareholders exists with respect to any of the shares of
Common Stock included in the Units to be sold hereunder by the Company or
the issuance and sale thereof, or the issuance and sale or exercise of the
Redeemable Warrants, or the issuance and sale or exercise of the
Underwriter's Warrants, other than those that have been expressly waived
prior to the date hereof. Except as disclosed in the Prospectus, the
Company has no outstanding options to purchase, or any preemptive rights or
other rights to subscribe for or to purchase, any securities or obligations
convertible into, or any contracts or commitments to issue or sell, shares
of its capital stock or any such options, rights, convertible securities or
obligations. The certificates evidencing the shares of Common Stock and the
Redeemable Warrants comply as to form with all applicable provisions of the
laws of the State of Minnesota.
(ix) The Redeemable Warrants included in the Units to be sold
by the Company have been duly and validly authorized and, when
authenticated by Norwest Bank Minnesota, National Association (the "Warrant
Agent") and issued, delivered and sold in accordance with this Agreement
and the Warrant Agreement dated as of the date hereof, between the Company
and the Warrant Agent, will have been duly and validly executed,
authenticated, issued and delivered and will constitute valid and binding
obligations of the Company, enforceable against the Company in accordance
with their terms, except as enforceability may be limited by the
application of bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting the rights of creditors generally and by judicial
limitations on
4
<PAGE>
the right of specific performance. A sufficient number of shares of Common
Stock of the Company has been reserved for issuance by the Company upon
exercise of the Redeemable Warrants.
(x) The Underwriter's Warrants and the Warrant Shares have
been duly authorized. The Underwriter's Warrants, when issued and delivered
to the Underwriter, will constitute valid and binding obligations of the
Company in accordance with their terms, except as enforceability may be
limited by the application of bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting the rights of creditors
generally and by judicial limitations on the right of specific performance.
The Warrant Shares, when issued in accordance with the terms of this
Agreement and pursuant to the Underwriter's Warrants, will be fully paid
and non-assessable and subject to no preemptive rights or similar rights on
the part of any person or entity. A sufficient number of shares of Common
Stock of the Company has been reserved for issuance by the Company upon
exercise of the Underwriter's Warrants.
(xi) Arthur Andersen LLP and KPMG Peat Marwick LLP, each of
which has expressed its opinion with respect to financial statements filed
as part of the Registration Statement and included in the Registration
Statement and Prospectus, are independent accountants within the meaning of
the Securities Act and the Rules and Regulations. The financial statements
of the Company set forth in the Registration Statement and Prospectus
comply in all material respects with the requirements of the Securities Act
and fairly present the financial position and the results of operations of
the Company at the respective dates and for the respective periods to which
they apply in accordance with generally accepted accounting principles
consistently applied throughout the periods involved (subject, in the case
of unaudited financial statements, to normal year-end adjustments which in
the opinion of management of the Company are not material, and except as
otherwise stated therein); and the supporting schedules included in the
Registration Statement present fairly the information required to be stated
therein. The selected and summary financial and statistical data included
in the Registration Statement present fairly the information shown therein
and have been compiled on a basis consistent with the audited financial
statements presented therein. No other financial statements or schedules
are required by the Securities Act or the Rules and Regulations to be
included in the Registration Statement.
(xii) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, and at
each Closing Date, except as is otherwise disclosed in the Registration
Statement or Prospectus, there has not been: (A) any change in the capital
stock or long-term debt (including any capitalized lease obligation) or
material increase in the short-term debt of the Company or any Subsidiary;
(B) any issuance of options, warrants, convertible securities or other
rights to purchase the capital stock of the Company or any Subsidiary; (C)
any material adverse change, or any development involving a material
adverse change, in or affecting the condition (financial or otherwise),
earnings, operations, business, or business prospects, management,
financial position, stockholders' equity, results of operations or general
condition of the Company; (D) any material transaction entered into by the
Company or any Subsidiary; (E) any material obligation, direct or
contingent, incurred by the Company or any Subsidiary, except obligations
incurred in the ordinary course of business that, in the aggregate, are not
material; (F) any dividend or distribution of any kind declared, paid or
made on the capital stock of the Company; or (G) any loss or damage
(whether or not insured) to the property of the Company or any Subsidiary
which has been sustained which has a material adverse effect on the
condition (financial or otherwise), earnings, operations or business of the
Company.
(xiii) Except as is otherwise expressly disclosed in the
Registration Statement or Prospectus, (A) the Company and each Subsidiary
has good and marketable title to all of the property, real and personal,
and assets described in the Registration Statement or Prospectus as being
owned by it, free and clear of any and all pledges, liens, security
interests, encumbrances, equities, charges or claims, other than such as
would not have a material adverse effect on the condition (financial or
otherwise), earnings, operations or business of the Company, (B) the
agreements to which the Company or any Subsidiary is a party described in
the Registration Statement and Prospectus are valid agreements, enforceable
by the Company or the Subsidiary (as applicable), except as the enforcement
thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors'
5
<PAGE>
rights generally or by judicial limitations on the right of specific
performance, and (C) each of the Company and the Subsidiaries has valid and
enforceable leases for all properties described in the Registration
Statement and Prospectus as leased by it, except as the enforcement thereof
may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors' rights
generally or by judicial limitations on the right of specific performance.
Except as set forth in the Registration Statement and Prospectus, the
Company owns or leases all such properties as are necessary to its
operations as now conducted.
(xiv) The Company and each Subsidiary has timely filed (or has
timely requested an extension of time to file) all necessary federal and
state income and franchise tax returns and has paid all taxes shown thereon
as due; there is no tax deficiency that has been or, to the best of the
Company's knowledge, could be asserted against the Company or any
Subsidiary that might have a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or properties of
the Company; and all tax liabilities are adequately provided for in the
books of the Company.
(xv) No labor disturbance by the employees of the Company or
any Subsidiary exists or, to the best of the Company's knowledge, is
imminent. Except as disclosed in the Registration Statement and the
Prospectus, no collective bargaining agreement exists with any of the
employees of the Company or any Subsidiary and, to the best of the
Company's knowledge, no such agreement is imminent.
(xvi) The Company and each Subsidiary owns, or possesses
adequate rights to use, all patents, patent rights, inventions, trade
secrets, know-how, technology, service marks, trade names, copyrights,
trademarks and proprietary rights or information which are necessary for
the conduct of its present or intended business as described in the
Registration Statement or Prospectus; the expiration of any patents, patent
rights, trade secrets, trademarks, service marks, trade names or copyrights
would not have a material adverse effect on the condition (financial or
otherwise), earnings, operations or business of the Company; and the
Company has not received any notice of, and has no knowledge of, any
infringement of or conflict with the asserted rights of others with respect
to any patent, patent rights, inventions, trade secrets, know-how,
technology, trade marks, service marks, trade names or copyrights which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, might have a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or business
prospects of the Company. Except as disclosed in the Registration
Statement or Prospectus, the Company is not obligated or under any
liability whatsoever to make any payments by way of royalties, fees or
otherwise to any owner of, licensor of, or other claimant to, any patent,
patent rights, inventions, trade secrets, know-how, technology, service
marks, trade names, trademark, copyright or other intangible asset, with
respect to the use thereof or in connection with the conduct of its
business or otherwise.
(xvii) The Common Stock and the Redeemable Warrants have been
approved for quotation on The Nasdaq National Market.
(xviii) The Company has no defined benefit pension plan or other
pension benefit plan which is intended to comply with the provisions of the
Employee Retirement Income Security Act of 1974 as amended from time to
time, except as disclosed in the Registration Statement.
(xix) The Company has not taken and will not take, directly or
indirectly, any action (and does not know of any action by its directors,
officers, shareholders or others) which has constituted or is designed to,
or which might reasonably be expected to, cause or result in stabilization
or manipulation, as defined in the Exchange Act or otherwise, of the price
of any security of the Company to facilitate the sale or resale of the
Units. The Company has not distributed and will not distribute prior to
the later of (A) the First Closing Date or the Second Closing Date, as the
case may be, and (B) completion of the distribution of the Units, any
offering material in connection with the offering and sale of the Units
other than any Preliminary Prospectus, the Prospectus, the Registration
Statement and other materials, if any, permitted by the Securities Act.
Except as is otherwise disclosed in the Registration Statement or
Prospectus, and to the best of the Company's knowledge, no person is
entitled, directly or indirectly, to
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<PAGE>
compensation from the Company for services as a "finder" or otherwise in
connection with the transactions contemplated by this Agreement.
(xx) The Company and each Subsidiary maintains insurance,
which is in full force and effect, with insurers of recognized financial
responsibility of the types and in the amounts generally deemed adequate
for their respective businesses and, to the best of the Company's
knowledge, in line with the insurance maintained by similar companies and
businesses; and the Company has no reason to believe that it will not be
able to renew such existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not materially and
adversely affect the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company.
(xxi) Each director and officer of the Company and each holder
of five percent (5%) or more of the shares of Common Stock of the Company
to be outstanding after the sale of the Firm Units has agreed pursuant to
the form of Lock-up Agreement attached hereto as Appendix A (the "Lock-up
Agreement") that such person will not, for a period of 180 days from the
date (the "Effective Date") that the Registration Statement is declared
effective by the SEC (the "Lock-up Period"), without the prior written
consent of the Underwriter, offer to sell, contract to sell, sell, pledge,
hypothecate, transfer or otherwise dispose of, or grant any rights with
respect to (collectively, a "Disposition"), any shares of Common Stock and
options, warrants and other rights to purchase any shares of Common Stock
or any securities convertible into or exchangeable or exercisable for
shares of Common Stock now owned or hereafter acquired by such person
(collectively, "Securities") or with respect to which such person has or
hereafter acquires the power of Disposition, other than as permitted by the
Lock-Up Agreement. The Company has provided to counsel for the Underwriter
("Underwriter's Counsel") true, accurate and complete copies of all of the
Lock-up Agreements. The Company has provided to Underwriter's Counsel a
complete and accurate list of all securityholders of the Company and the
number and type of securities held by each securityholder.
(xxii) Neither the Company nor any Subsidiary has at any time
during the last five (5) years (or, if less, since its inception) made any
unlawful contribution to any candidate for an office or failed to disclose
fully any contribution in violation of law, or made any payment to any
federal or state governmental officer or official, domestic or foreign, or
other person charged with similar public or quasi-public duties, other than
payments required or permitted by the laws of the United States or any
jurisdiction thereof. The Company maintains a system of internal
accounting controls sufficient to provide reasonable assurances that
transactions are executed in accordance with management's general or
specific authorizations, transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets, access to
assets is permitted only in accordance with management's general or
specific authorization, and the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(xxiii) Neither the Company nor any of its affiliates is
presently doing business with the government of Cuba or with any person or
affiliate located in Cuba.
(b) Any certificate signed by any officer of the Company and
delivered to you or to Underwriter's Counsel shall be deemed a representation
and warranty by the Company to the Underwriter as to the matters covered
thereby.
2. Purchase, Sale, Delivery and Payment.
(a) On the basis of the representations, warranties and agreements
herein contained, and subject to the terms and conditions herein set forth, the
Company agrees to sell to the Underwriter, and the Underwriter agrees to
purchase from the Company the 1,100,000 Firm Units at a purchase price of $_____
per Unit. The Underwriter will purchase all of the Firm Units if any are
purchased.
7
<PAGE>
The Firm Units will be delivered by the Company to the Underwriter for
the account of the Underwriter against payment of the purchase price therefor by
wire transfer or other same day funds payable to the order of the Company, at
the offices of Equity Securities Trading Co., Inc., 2820 IDS Center, 80 South
Eighth Street, Minneapolis, Minnesota 55402 (or at such other place as may be
agreed upon by the Underwriter and the Company), at 9:00 a.m., Minneapolis,
Minnesota time, on (i) the third (3rd) full business day following the date
hereof if the Registration Statement is declared effective before 3:30 p.m.,
Minneapolis, Minnesota time on the date hereof, (ii) the fourth (4th) full
business day following the date hereof if the Registration Statement is declared
effective after 3:30 p.m., Minneapolis, Minnesota time on the date hereof, or
(ii) such other time and date as the Underwriter and the Company may determine,
such time and date of payment and delivery being herein called the "First
Closing Date." Delivery of the Firm Units will be made by credit to "full fast"
transfer to the account or accounts at The Depository Trust Company designated
by the Underwriter.
(b) On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Company hereby grants an option to the Underwriter to purchase an aggregate of
up to 165,000 Option Units, at the same purchase price as the Firm Units, for
use solely in covering any over-allotments made by the Underwriter in the sale
and distribution of the Firm Units. The option granted hereunder may be
exercised by the Underwriter at any time (but not more than once), in whole or
in part, during the period of forty-five (45) days after the date of this
Agreement by giving written notice to the Company and the Company's Counsel,
which notice shall set forth the aggregate number of Option Units as to which
the Underwriter is exercising the option, the names and denominations in which
the certificates for the shares of Common Stock and Redeemable Warrants included
in the Option Units are to be registered, and the date and time, as determined
by the Underwriter, when the Option Units are to be delivered, such time and
date being herein referred to as the "Second Closing Date;" provided, however,
that the Second Closing Date shall not be earlier than the First Closing Date
nor earlier than the second business day after the date on which the option
shall have been exercised. No Option Units shall be sold and delivered unless
the Firm Units previously have been, or simultaneously are, sold and delivered.
The Option Units will be delivered by the Company to the Underwriter
for the account of the Underwriter against payment of the purchase price
therefor by wire transfer or other same day funds payable to the order of the
Company, at the offices of Equity Securities Trading Co., Inc., 2820 IDS Center,
80 South Eighth Street, Minneapolis, Minnesota 55402 (or at such other place as
may be agreed upon by the Underwriter and the Company) at 9:00 a.m.,
Minneapolis, Minnesota time, on the Second Closing Date. If the Underwriter so
elects, delivery of the Option Units may be made by credit to "full fast"
transfer to the account or accounts at The Depository Trust Company designated
by the Underwriter.
3. Covenants of the Company. The Company hereby covenants and agrees
with the Underwriter as follows:
(a) If the Registration Statement has not already been declared
effective by the SEC, the Company will use its best efforts to cause the
Registration Statement and any post-effective amendments thereto to become
effective as promptly as possible; the Company will notify the Underwriter
promptly of the time when the Registration Statement or any post-effective
amendment to the Registration Statement has become effective or any supplement
to the Prospectus has been filed and of any request by the SEC for any amendment
or supplement to the Registration Statement or Prospectus or additional
information; if the Company has elected to rely on Rule 430A of the Rules and
Regulations, the Company will file a Prospectus containing the information
omitted therefrom pursuant to such Rule 430A with the SEC within the time period
required by, and otherwise in accordance with the provisions of, Rules 424(b)
and 430A of the Rules and Regulations; the Company will prepare and file with
the SEC, promptly upon your request, any amendments or supplements to the
Registration Statement or Prospectus that, in your opinion, may be necessary or
advisable in connection with the distribution of the Units by the Underwriter;
and the Company will not file any amendment or supplement to the Registration
Statement or Prospectus to which the Underwriter shall reasonably object by
notice to the Company after having been furnished a copy a reasonable time prior
to the filing.
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(b) The Company will advise the Underwriter, promptly after it shall
receive notice or obtain knowledge thereof, of the issuance by the SEC of any
stop order suspending the effectiveness of the Registration Statement, of the
suspension of the qualification of the Units for offering or sale in any
jurisdiction, or of the initiation or threatening of any proceeding for any such
purpose; and the Company will promptly use its best efforts to prevent the
issuance of any stop order or to obtain its withdrawal if such a stop order
should be issued.
(c) Within the time during which a prospectus relating to the Units
is required to be delivered under the Securities Act, the Company will comply as
far as it is able with all requirements imposed upon it by the Securities Act,
as now and hereafter amended, and by the Rules and Regulations, as from time to
time in force, so far as necessary to permit the continuance of sales of or
dealings in the Units as contemplated by the provisions hereof and the
Prospectus. If, during such period, any event occurs as a result of which the
Prospectus would include an untrue statement of a material fact or omit to state
a material fact necessary to make the statements therein, in the light of the
circumstances then existing, not misleading, or if, during such period, it is
necessary to amend the Registration Statement or supplement the Prospectus to
comply with the Securities Act, the Company will promptly notify the Underwriter
and will amend the Registration Statement or supplement the Prospectus (at the
expense of the Company) so as to correct such statement or omission or effect
such compliance.
(d) The Company will use its best efforts to arrange for the
qualification of the Units for offering and sale under the securities laws of
such jurisdictions as the Underwriter may designate and to continue such
qualifications in effect for so long as may be required for purposes of the
distribution of the Units; provided, however, that in no event shall the Company
be obligated to qualify to do business in any jurisdiction where it is not now
so qualified or to take any action which would subject it to the service of
process in suits, other than those arising out of the offering or sale of the
Units, in any jurisdiction where it is not now so subject. In each jurisdiction
in which the Units shall have been qualified as herein provided, the Company
will make and file such statements and reports in each year as are or may be
reasonably required by the laws of such jurisdiction.
(e) The Company will furnish to the Underwriter copies of the
Registration Statement (two of which will be signed and will include all
exhibits), each Preliminary Prospectus, the Prospectus, and all amendments and
supplements to such documents, in each case as soon as available and in such
quantities as the Underwriter may from time to time reasonably request.
(f) For a period of five years from the Effective Date, the Company
will furnish directly to the Underwriter as soon as the same shall be sent to
its shareholders generally copies of all annual or interim shareholder reports
of the Company and will, for the same period, also furnish the Underwriter with
the following:
(i) One copy of any report, application or document (other
than exhibits, which, however, will be furnished on your request) filed by
the Company with the SEC, Nasdaq, the NASD or any securities exchange;
(ii) As soon as the same shall be sent to shareholders
generally, copies of each communication sent to shareholders; and
(iii) From time to time, such other information concerning the
Company as the Underwriter may reasonably and specifically request,
provided that the Company shall not be required to furnish any information
pursuant hereto that is not furnished to its shareholders or not otherwise
made publicly available.
(g) The Company will, for a period of two (2) years from the
Effective Date, furnish directly to the Underwriter quarterly profit and loss
statements, reports of the Company's cash flow, and statements of application of
the proceeds of the offering of the Units by the Company in such reasonable
detail as the Underwriter may request.
(h) The Company will make generally available to its security holders
as soon as practicable, but in any event not later than the fifteen (15) months
after the end of the Company's current fiscal
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quarter, an earnings statement (which will be in reasonable detail but need not
be audited) complying with the provisions of Section 11(a) of the Securities Act
and Rule 158 of the Rules and Regulations and covering a twelve (12)-month
period beginning after the Effective Date of the Registration Statement.
(i) The Company will prepare and file with the SEC any required
reports on Form SR in accordance with the Securities Act and the Rules and
Regulations.
(j) After completion of the offering of the Units, the Company will
make all filings required to maintain the quotation of the Common Stock and the
Redeemable Warrants on The Nasdaq National Market or any national stock
exchange.
(k) The Company will apply the net proceeds from the sale of the
Units being sold by it substantially in the manner set forth under the caption
"Use of Proceeds" in the Prospectus.
(l) During the Lock-Up Period, the Company will not, without the
prior written consent of the Underwriter, directly or indirectly effect the
Disposition of any securities including, without limitation, any securities that
are convertible into or exchangeable or exercisable for Common Stock, and shall
not accelerate the exercisability of any securities that are convertible into or
exchangeable or exercisable for Common Stock, except for the sale of Units by
the Company pursuant to this Agreement, the issuance and sale of Common Stock
upon exercise of the Redeemable Warrants, the exercise of options granted under
the Company's 1996 Stock Option Plan (the "Plan"), and the grant of options in
the ordinary course under the Plan.
(m) The Company will not take, and will use its best efforts to cause
each of its officers and directors not to take, directly or indirectly, any
action designed to or which might reasonably be expected to cause or result in
the stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Units.
(n) The Company will inform the Florida Department of Banking and
Finance at any time prior to the consummation of the distribution of the Units
by the Underwriter if it commences engaging in business with the government of
Cuba or with any person or affiliate located in Cuba. Such information shall be
provided within 90 days after the commencement thereof or after a change occurs
with respect to previously reported information.
4. Expenses.
(a) The Company agrees with the Underwriter that:
(i) Whether or not this Agreement becomes effective or is
terminated or cancelled or the sale of the Units hereunder is consummated,
and regardless of the reason for or cause of any such termination,
cancellation, or failure to consummate, the Company will pay or cause to be
paid (A) all expenses (including any transfer taxes) incurred in connection
with the delivery to the Underwriter of the Units, (B) all expenses and
fees (including, without limitation, fees and expenses of the Company's
accountants and of counsel to the Company, excluding, however, fees of the
Underwriter's Counsel) in connection with the preparation, printing,
filing, delivery, and shipping of the Registration Statement (including the
financial statements therein and all amendments, schedules, and exhibits
thereto), each Preliminary Prospectus, the Prospectus, and any amendment
thereof or supplement thereto, (C) all fees and reasonable expenses,
including all reasonable counsel fees of Underwriter's Counsel incurred in
connection with the qualification of the Units for offering and sale by the
Underwriter or by dealers under the securities or Blue Sky laws of the
states and other jurisdictions which the Underwriter may designate in
accordance with Section 3(a)(iv) hereof, (D) all costs and expenses
incident to qualification with The Nasdaq National Market, (E) postage and
express charges and other expenses in connection with delivery to the
Underwriter of the Preliminary Prospectus and Prospectus, and (F) all other
costs and expenses incident to the performance of its obligations hereunder
that are not otherwise specifically described herein. In addition to and
not in lieu of the foregoing, the Company shall pay to the Underwriter on
each
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Closing Date for out-of-pocket expenses (including fees of Underwriter's
Counsel, other fees and expenses incurred in connection with Blue sky
qualifications) a non-accountable expense allowance equal to one-and-one-
half percent (1.5%) of the aggregate Price to Public for all the Units sold
to the Underwriter on each Closing Date, including Units sold pursuant to
orders received through the Company. If the Underwriter withdraw from the
sale of the Units as herein proposed for any reason beyond their control
and through no fault of their own, or if the sale of the Units as herein
proposed is abandoned by the Company, the Company will pay to the
Underwriter the amount of all actual accountable expenses (including fees
and disbursements of Underwriter's Counsel) incurred by the Underwriter in
connection with the contemplated purchase, offer, and sale of the Units,
including, without limitation, expenses incurred in its investigation,
preparation to market, and marketing of the Units, and in contemplation of
performing and in performance of its obligations hereunder, up to a maximum
of $50,000.
(ii) In addition to its other obligations under Sections 7(a)
and 8 hereof, the Company agrees that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other proceeding
described in Section 7(a), it will reimburse the Underwriter on a monthly
basis for all reasonable legal or other expenses incurred in connection
with investigating or defending any such claim, action, investigation,
inquiry or other proceeding, notwithstanding the absence of a judicial
determination as to the propriety and enforceability of the Company's
obligation to reimburse the Underwriter for such expenses and the
possibility that such payments might later be held to have been improper by
a court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Underwriter
shall promptly return such payment to the Company together with interest,
compounded daily, determined on the basis of the prime rate (or other
commercial lending rate for borrowers of the highest credit standing)
listed from time to time in The Wall Street Journal which represents the
base rate on corporate loans posted by a substantial majority of the
nation's thirty (30) largest banks (the "Prime Rate"). Any such interim
reimbursement payments which are not made to the Underwriter within thirty
(30) days of a request for reimbursement shall bear interest at the Prime
Rate from the date of such request.
(b) It is agreed that any controversy rising out of the operation of
the interim reimbursement arrangements set forth in Section 4(a)(ii) hereof,
including the amounts of any requested reimbursement payments and the method of
determining such amounts, shall be settled by arbitration conducted pursuant to
the Code of Arbitration Procedure of the NASD. Any such arbitration must be
commenced by service of a written demand for arbitration or a written notice of
intention to arbitrate, therein electing the arbitration tribunal. If the party
demanding arbitration does not make such designation of an arbitration tribunal
in such demand or notice, then the party responding to said demand or notice is
authorized to do so. Any such arbitration will be limited to the operation of
the interim reimbursement provisions contained in Section 4(a)(ii) hereof and
will not resolve the ultimate propriety or enforceability of the obligation to
indemnify for expenses which is created by the provisions of Sections 7(a) and
7(b) hereof or the obligation to contribute to expenses which is created by the
provisions of Section 8(a) hereof.
5. Conditions of the Underwriter's Obligations. The obligation of the
Underwriter to purchase and pay for the Units as provided herein shall be
subject to the accuracy of the representations and warranties of the Company, in
the case of the Firm Units as of the date hereof and the First Closing Date (as
if made on and as of the First Closing Date), and in the case of the Option
Units as of the date hereof and the Second Closing Date (as if made on and as of
the Second Closing Date); to the performance by the Company of its obligations
hereunder; and to the satisfaction of the following additional conditions on or
before the First Closing Date in the case of the Firm Units and on or before the
Second Closing Date in the case of the Option Units:
(a) The Registration Statement shall have become effective not later
than 4:00 p.m. Minneapolis, Minnesota time on the date of this Agreement, or
such later date or time as shall be consented to in writing by you (the
"Effective Date"); and no stop order suspending the effectiveness thereof shall
have been issued and no proceedings for that purpose shall have been initiated
or, to the knowledge of the Company or the Underwriter, threatened by the SEC or
any state securities commission or similar regulatory body; and any request
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<PAGE>
of the SEC for additional information (to be included in the Registration
Statement or the Prospectus or otherwise) shall have been complied with to the
satisfaction of the Underwriter and Underwriter's Counsel.
(b) The Underwriter shall not have advised the Company that the
Registration Statement or Prospectus, or any amendment thereof or supplement
thereto, contains any untrue statement of a fact which is material or omits to
state a fact which is material and is required to be stated therein or is
necessary to make the statements contained therein, in light of the
circumstances under which they were made, not misleading; provided, however,
that this Section 5(b) shall not apply to statements in, or omissions from, the
Registration Statement or Prospectus, or any amendment thereof or supplement
thereto, which are based upon and conform to written information furnished to
the Company by the Underwriter specifically for use in the preparation of the
Registration Statement or the Prospectus, or any such amendment or supplement.
(c) Subsequent to the Effective Date and prior to each Closing Date,
there shall not have occurred any change, or any development involving a
prospective change, which materially and adversely affects the Company's
condition (financial or otherwise), earnings, operations, properties, business
or business prospects from that set forth in the Registration Statement or
Prospectus, and which, in the Underwriter's sole judgment, is material and
adverse and that makes it, in the Underwriter's sole judgment, impracticable or
inadvisable to proceed with the public offering of the Units as contemplated by
the Prospectus and this Agreement.
(d) All corporate proceedings and other legal matters in connection
with this Agreement, the form of Registration Statement and the Prospectus, and
the registration, authorization, issue, sale and delivery of the Units, shall
have been reasonably satisfactory to Underwriter's Counsel, and such counsel
shall have been furnished with such papers and information as it may reasonably
have requested to enable it to pass upon the matters referred to in this
Section.
(e) On each Closing Date, the Underwriter shall have received the
opinion of Faegre & Benson LLP, counsel for the Company, dated as of such
Closing Date, satisfactory in form and substance to the Underwriter and
Underwriter's Counsel, to the effect that:
(i) Each of the Company and the Subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation and has the
corporate power and authority to own, lease and operate its properties and
to conduct its business as currently being carried on and as described in
the Registration Statement and Prospectus.
(ii) Each of the Company and the Subsidiaries is duly
qualified to do business as a foreign corporation and is in good standing
in each jurisdiction, if any, in which the ownership or leasing of its
properties or the conduct of its business requires such qualification,
except where the failure to be so qualified or be in good standing would
not have a material adverse effect on the condition (financial or
otherwise), earnings, operations or business of the Company and the
Subsidiaries considered as one enterprise. To the best of such counsel's
knowledge, the Company does not own or control, directly or indirectly, any
corporation, association or other entity other than the Subsidiaries.
(iii) The capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus under the
caption "Description of Capital Stock." The issued and outstanding Units
of capital stock of the Company have been duly and validly issued and are
fully paid and non-assessable, and the holders thereof are not subject to
any personal liability by reason of being such holders.
(iv) The Units to be issued by the Company pursuant to the
terms of this Agreement have been duly authorized and, upon issuance and
delivery against payment therefor in accordance with the terms hereof, will
be duly and validly issued and fully paid and non-assessable, and the
holders thereof will not be subject to personal liability by reason of
being such holders. Except as otherwise stated in the Registration
Statement and Prospectus, there are no preemptive rights or other rights to
subscribe for or to purchase, or any restriction upon the voting or
transfer of, any shares of capital stock pursuant to the
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Company's articles of incorporation, bylaws or any agreement or other
instrument known to such counsel to which the Company is a party or by
which the Company is bound. To the best of such counsel's knowledge, except
as set forth in the Prospectus, neither the filing of the Registration
Statement nor the offering or sale of the Units as contemplated by this
Agreement gives rise to any rights for or relating to the registration of
any shares of capital stock or other securities of the Company and no such
rights exist, other than those rights that have been waived prior to the
date hereof. To the best of such counsel's knowledge, except as described
in the Registration Statement and Prospectus, there are no options,
warrants, agreements, contracts or rights in existence to purchase or
acquire from the Company any shares of capital stock of the Company.
(v) The Redeemable Warrants included in the Units to be sold
by the Company have been duly and validly authorized and, when
authenticated by Norwest Bank Minnesota, National Association (the "Warrant
Agent") and issued, delivered and sold in accordance with this Agreement
and the Warrant Agreement dated as of the date hereof, between the Company
and the Warrant Agent, will have been duly and validly executed,
authenticated, issued and delivered and will constitute valid and binding
obligations of the Company, enforceable against the Company in accordance
with their terms, except as enforceability may be limited by the
application of bankruptcy, insolvency, reorganization, moratorium or other
similar laws affecting the rights of creditors generally and by judicial
limitations on the right of specific performance. A sufficient number of
shares of Common Stock of the Company has been reserved for issuance by the
Company upon exercise of the Redeemable Warrants.
(vi) The Underwriter's Warrants and the Warrant Shares have
been duly authorized. The Underwriter's Warrants, when issued and delivered
to the Underwriter, will constitute valid and binding obligations of the
Company in accordance with their terms, except as enforceability may be
limited by the application of bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting the rights of creditors
generally and by judicial limitations on the right of specific performance.
The Warrant Shares, when issued in accordance with the terms of this
Agreement and pursuant to the Underwriter's Warrants, will be fully paid
and non-assessable and subject to no preemptive rights or similar rights on
the part of any person or entity. A sufficient number of shares of Common
Stock of the Company has been reserved for issuance by the Company upon
exercise of the Underwriter's Warrants.
(vii) The Company has the requisite corporate power and
authority to enter into this Agreement and to issue, sell and deliver to
the Underwriter the Units to be issued and sold by it hereunder. This
Agreement has been duly authorized by all necessary corporate action on the
part of the Company and has been duly executed and delivered by the Company
and, assuming due authorization, execution and delivery by the Underwriter,
is a valid, legal and binding agreement of the Company, enforceable in
accordance with its terms, except insofar as indemnification and
contribution provisions may be limited by applicable law and except as
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium, fraudulent conveyance or similar laws relating to or affecting
creditors' rights generally or by general equitable principles.
(viii) The Registration Statement has become effective under the
Securities Act and, to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement has been issued
and no proceedings for that purpose has been instituted or is pending or
threatened under the Securities Act.
(ix) The Registration Statement and the Prospectus, and each
amendment thereof or supplement thereto, (other than the financial
statements, including the notes thereto and the supporting schedules, and
other financial, numerical, statistical and accounting data derived
therefrom, as to which such counsel need express no opinion), comply as to
form in all material respects with the requirements of the Securities Act
and the Rules and Regulations.
(x) The forms of certificates evidencing the Common Stock and
the Redeemable Warrants and filed as exhibits to the Registration Statement
comply with Minnesota law.
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(xi) The description in the Registration Statement and the
Prospectus of the Company's articles of incorporation and bylaws and of
statutes, legal and governmental proceedings, contracts and other documents
are accurate in all material respects and fairly present the information
required to be presented by the Securities Act and the applicable Rules and
Regulations; and such counsel does not know of any statutes or legal or
governmental proceedings required to be described in the Prospectus that
are not described as required, or of any agreements, contracts, leases or
documents of a character required to be described or referred to in the
Registration Statement or Prospectus or to be filed as an exhibit to the
Registration Statement which are not described or referred to therein or
filed as required.
(xii) The execution, delivery and performance of this Agreement
and the consummation of the transactions herein contemplated (other than
performance of the Company's indemnification and contribution obligations
hereunder, concerning which no opinion need be expressed) do not result in
any violation of the Company's articles of incorporation or bylaws or
result in a breach or violation of any of the terms and provisions of, or
constitute a default under, any bond, debenture, note or other evidence of
indebtedness, or any material lease, contract, indenture, mortgage, deed of
trust, loan agreement, joint venture or other material agreement or
instrument known to such counsel to which the Company is a party or by
which its properties are bound, or any applicable statute, rule or
regulation known to such counsel or, to the best of such counsel's
knowledge, any order, writ or decree of any court, government or
governmental agency or body having jurisdiction over the Company or any of
its material properties or operations;
(xiii) No consent, approval, authorization or order of, or
filing with, or qualification with, any court, government or governmental
agency or body is necessary in connection with the execution, delivery and
performance of this Agreement or for the execution, delivery and
performance of this Agreement or for the consummation of the transactions
herein contemplated, except such as have been obtained under the Securities
Act or such as may be required under state or other securities or Blue Sky
laws in connection with the purchase and the distribution of the Units by
the Underwriter;
(xiv) To the best of such counsel's knowledge, there are no
legal or governmental proceedings pending or threatened against the Company
of a character required to be disclosed in the Registration Statement or
the Prospectus by the Securities Act or the Rules and Regulations, other
than those described therein.
(xv) To the best of such counsel's knowledge, the Company is
not presently (A) in material violation of its articles of incorporation or
bylaws, (B) in material breach or violation of any applicable statute, rule
or regulation known to such counsel or any order, writ or decree of any
court or governmental agency or body, or (C) in material breach of or
otherwise in default in the performance of any material obligation,
agreement or condition contained in any bond, debenture, note, loan
agreement or any other material contract, lease or other instrument to
which the Company is subject or by which it may be bound, or to which any
of the material assets or property of the Company is subject.
(xvi) To the best of such counsel's knowledge, the Company
holds, and is operating in compliance in all material respects with, all
franchises, grants, authorizations, licenses, permits, easements, consents,
certificates and orders of any government or self-regulatory body required
for the conduct of its business, and all such franchises, grants,
authorizations, licenses, permits, easements, consents, certifications and
orders are valid and in full force and effect.
(xvii) To the best of such counsel's knowledge, after due
inquiry, the Company has not received any notice of, and has no knowledge
of, any infringement of or conflict with the asserted rights of others with
respect to any patent, patent rights, inventions, trade secrets, know-how,
technology, trade marks, service marks, trade names or copyrights which,
singly or in the aggregate, if the subject of
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an unfavorable decision, ruling or finding, might have a material adverse
effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company.
(xviii) To the best of such counsel's knowledge, after due
inquiry, the Company owns, or possesses adequate rights to use, all
patents, patent rights, inventions, trade secrets, know-how, technology,
service marks, trade names, copyrights, trademarks and proprietary rights
or information which are necessary for the conduct of its present or
intended business as described in the Registration Statement or Prospectus.
(xix) On the basis of information obtained as a result of
discussions and meetings with officers and other representatives of the
Company, discussions with representatives of the independent public
accountants for the Company in connection with the preparation of the
Registration Statement and the Prospectus, and the examination of other
information and documents requested by such counsel, nothing has come to
such counsel's attention that has caused them to believe that the
Registration Statement and any amendment thereof, at the time it became
effective and at all times subsequent thereto up to and on that Closing
Date, contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary in order to make
the statements therein not misleading, or that the Prospectus, and any
amendment or supplement thereto, at the first date of its issuance and up
to and at all times subsequent thereto up to and on that Closing Date,
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading. Such counsel may further state that in making the
foregoing comments, such counsel does not intend them to include or cover
the financial statements and notes thereto and related schedules and other
financial, numerical, statistical and accounting data contained or omitted
from the Registration Statement and any amendment or supplement thereto and
the Prospectus.
Counsel rendering the foregoing opinion may rely as to questions of
law not involving the laws of the United States or the State of Minnesota, upon
opinions of local counsel, and, as to questions of fact, upon representations or
certificates of officers of the Company and of government officials, in which
case their opinion is to state the extent of such reliance. Copies of any
opinion, representation or certificate so relied upon shall be delivered to the
Underwriter and to Underwriter's Counsel.
(f) The Underwriter shall have received from Winthrop & Weinstine,
P.A., Underwriter's Counsel, such opinion or opinions as the Underwriter may
reasonably require, dated as of the First Closing Date and the Second Closing
Date, which are satisfactory in form and substance to the Underwriter, with
respect to the sufficiency of corporate proceedings and other legal matters
relating to this Agreement and the transactions contemplated hereby, and the
Company shall have furnished to Underwriter's Counsel such documents as it may
have requested for the purpose of enabling it to pass upon such matters. In
connection with such opinion, as to matters of fact relevant to conclusions of
law, Underwriter's Counsel may rely, to the extent that it deems proper, upon
representations or certificates of public officials and of responsible officers
of the Company.
(g) At the time of execution of this Agreement, the Underwriter shall
have received from Arthur Andersen LLP a letter dated the date of such
execution, in form and substance satisfactory to the Underwriter, to the effect
that they are independent accountants with respect to the Company within the
meaning of the Securities Act and the applicable published instructions, and the
Rules and Regulations thereunder, and further stating in effect that:
(i) In their opinion, the audited financial statements
included in the Registration Statement and Prospectus covered by their
report included therein comply as to form in all material respects with the
applicable requirements of the Securities Act, the published instructions
and the Rule and Regulations.
(ii) On the basis of (A) a reading of the minutes of the
shareholders' and directors' meetings of the Company since
_________________, (B) inquiries of certain officials of the Company
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responsible for financial and accounting matters, (C) a reading of the
Company's monthly operating statements for the _______ periods ended
___________, and (D) other specified procedures and inquiries (but not an
audit in accordance with generally accepted accounting principles), nothing
came to their attention causing them to believe that:
(1) the unaudited consolidated financial statements of
the Company contained in the Prospectus and any amendment thereof or
supplement thereto do not comply as to form, in all material respects,
with the applicable accounting requirements of the Securities Act and
the published Rules and Regulations or were not prepared in conformity
with generally accepted accounting principles and practices applied on
a basis consistent in all material respects with those followed in the
preparation of the audited consolidated financial statements of the
Company included therein; or
(2) the unaudited consolidated amounts of revenues,
income before provision for income taxes, net income and ratio of
earnings to fixed charges of the Company, if any, contained in the
Prospectus, or any amendment thereof or supplement thereto, were not
derived from consolidated financial statements prepared in conformity
with generally accepted accounting principles and practices applied on
a basis consistent in all material respects with those followed in the
preparation of the audited consolidated financial statements of the
Company included therein; or
(3) the unaudited pro forma consolidated financial
statements of the Company and recently-acquired companies, if any,
contained in the Prospectus or any amendment thereof or supplement
thereto, were not properly compiled in accordance with generally
accepted accounting principles or did not provide for all adjustments
necessary for a fair presentation of the information purported to be
shown thereby; or
(4) with respect to the period subsequent to ________,
there were, at a specified date, not more than five (5) business days
prior to the date of the letter, any changes or any material increases
or decreases in capital stock, long-term or short-term debt or
shareholders' equity, decreases in net assets, net current assets, or
net worth or any material decrease, as compared with the corresponding
period of the prior year, in revenues or net income of the Company as
compared with the amounts shown in the consolidated balance sheet
included in the Registration Statement, except as disclosed or
referred to in the Prospectus and Registration Statement.
(iii) Certain information set forth on the cover of the
Prospectus and in the Prospectus under the headings "Prospectus Summary"
(including the subheading "Summary Financial Data"), "Risk Factors," "Use
of Proceeds," "Capitalization," "Dilution," "Selected Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business," "Management," "Certain Transactions," "Principal
Stockholders," "Description of Securities" and "Units Eligible for Future
Sale" and that are expressed in dollars (or percentages derived from dollar
amounts) or numbers have been compared to accounting records of the Company
which were subject to the internal accounting controls of the Company and
are in agreement with such records or computations made therefrom,
excluding any questions of legal interpretation.
(h) The Underwriter shall have received from Arthur Andersen LLP a
letter dated as of each Closing Date to the effect that such accountants
reaffirm, as of such Closing Date, and as though made on such Closing Date, the
statements made in the letter furnished by such accountants pursuant to Section
5(h), except that the specified date referred to in such letter will be a date
not more than five (5) business days prior to such Closing Date.
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<PAGE>
(i) The Underwriter shall have received from the Company a
certificate, dated as of the First Closing Date and the Second Closing Date, of
the principal executive officer and the principal financial or accounting
officer of the Company, to the effect that:
(i) The representations and warranties of the Company in
this Agreement are true and correct as if made on and as of such Closing
Date, and the Company has complied with all the agreements and satisfied
all the conditions on its part to be performed or satisfied at, or prior
to, such Closing Date;
(ii) No stop order or other order suspending the
effectiveness of the Registration Statement or any amendment thereof or the
qualification of the Units for offering or sale has been issued, and no
proceedings for that purpose has been instituted or, to the best of their
knowledge, is contemplated by the SEC or any state or regulatory body; and
(iii) The signers of said certificate have carefully examined
the Registration Statement and the Prospectus and any amendments thereof or
supplements thereto, and (A) such documents contain all statements and
information required to be included therein; the Registration Statement, or
any amendment thereof, does not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading; and the
Prospectus, as amended or supplemented, does not include any untrue
statement of material fact or omit to state a material fact necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading; (B) since the Effective Date of the Registration
Statement, there has occurred no event required to be set forth in an
amended or supplemented Prospectus which has not been so set forth; (C)
subsequent to the respective dates as of which information is given in the
Registration Statement and the Prospectus, the Company has not incurred any
material liabilities or material obligations, direct or contingent, or
entered into any material transactions, not in the ordinary course of
business consistent with past practice, or declared or paid any dividends
or made any distribution of any kind with respect to its capital stock, and
except as disclosed in the Prospectus, there has not been any change in the
capital stock (other than a change in the number of outstanding shares of
Common Stock due to the issuance of Units upon the exercise of outstanding
options or warrants or pursuant to employee benefit plans described to in
the Registration Statement), or any material increase in the short-term
debt or long-term debt, or in the issuance of options, warrants,
convertible securities or other rights to purchase the capital stock, of
the Company, or any material adverse change or any development involving a
prospective material adverse change (whether or not arising in the ordinary
course of business) in the general affairs, condition (financial or
otherwise), business, key personnel, property, prospects, net worth or
results of operations of the Company, and (D) except as stated in the
Registration Statement and Prospectus, there is not pending or, to their
knowledge, threatened or contemplated, any action, suit or proceeding to
which the Company is a party before or by any court or governmental agency,
authority or body, or any arbitrator, which might result in any material
adverse change of the condition, (financial or otherwise), business,
prospects, or results of operations of the Company.
(j) On each Closing Date, there shall have been furnished to you a
certificate of Secretary of the Company, dated as of such Closing Date, with the
documents listed herein attached, and to the effect and certifying as follows:
(i) Attached thereto are true and correct copies of the
articles of incorporation of the Company, as amended to the date of the
certificate, and stating that there have been no changes or amendments to
the attached articles of incorporation of the Company, and no resolutions
have been adopted by the Board of Directors or shareholders of the Company
relating to (A) the amendment of said articles of incorporation, (B) the
merger, consolidation or dissolution of the Company, or (C) the sale of all
or substantially all of the assets or business of the Company, and that the
Company is in good standing in the State of Minnesota and has paid all of
its corporate franchise taxes due as of the date of such certificate.
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<PAGE>
(ii) Attached thereto is a true and correct copy of the
bylaws of the Company as in effect as of the date of such certificate and
no resolutions have been adopted by the Board of Directors or shareholders
of the Company relating to changes or amendments to the attached Bylaws.
(iii) Attached thereto are true and correct copies of the
resolutions of the Board of Directors of the Company relating to the
preparation and signing of the Registration Statement and this Agreement,
the issuance and sale of the Units and other related matters, and such
resolutions have not been amended, modified or rescinded and are in full
force and effect as of the date of such certificate and are the only
resolutions adopted by the Board of Directors of the Company with respect
to the offering contemplated by the Registration Statement.
(iv) Attached thereto are true and correct copies of all
material correspondence with respect to the Registration Statement and
Prospectus and related matters between the Company, its counsel, Arthur
Andersen LLP and the SEC.
(v) This Agreement, as executed and delivered by the
Company, is in the form presented to and approved by officers authorized to
do so by the Board of Directors of the Company.
(vi) Attached thereto are specimens of the certificates for
the Common Stock and Redeemable Warrants in the form authorized and
approved for use by the Board of Directors of the Company.
(vii) The persons who have signed the Registration Statement
and all amendments thereto were duly elected at the respective times of
such signing and duly acting as officers and directors of the Company or as
an attorney-in-fact therefor, as set forth in the Registration Statement.
(k) The Underwriter shall have received from each of the officers and
directors of the Company a written agreement in the form of Appendix A hereto
whereby each such person agrees that during the Lock-up Period such person will
not, without the Underwriter's prior written consent, effect the Disposition of
any Securities now owned or hereafter acquired directly or indirectly by such
person other than by gift to donees who agree to be bound by the same
restriction or by will or the laws of descent.
(l) The Common Stock of the Company shall be included and quoted on
the Nasdaq National Market.
(m) Winthrop & Weinstine, P.A., shall deliver to the Underwriter a
Blue Sky Memorandum reasonably satisfactory to the Underwriter confirming that
all requisite actions for the offer and sale of the Units in all jurisdictions
requested by the Underwriter have been taken.
(n) The Company shall have furnished to the Underwriter and to
Underwriter's Counsel such additional certificates, documents and evidence as
the Underwriter shall reasonably request.
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to the Underwriter and Underwriter's Counsel. All statements contained in any
certificate, letter or other document delivered pursuant hereto by, or on behalf
of, the Company shall be deemed to constitute representations and warranties of
the Company.
The Underwriter may waive in writing the performance of any one or
more of the conditions specified in this Section 5 or extend the time for their
performance.
If any of the conditions specified in this Section 5 shall not have
been fulfilled when and as required by this Agreement to be fulfilled and if the
fulfillment of said condition has not been waived by the Underwriter, this
Agreement and all obligations of the Underwriter hereunder may be canceled at,
or at any time
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prior to, each Closing Date by the Underwriter. Any such cancellation shall be
without liability of the Underwriter to the Company and shall not relieve the
Company of its obligations under Section 4(a) hereof. Notice of such
cancellation shall be given to the Company at the address specified in Section
11 hereof in writing, or by telegraph or telephone confirmed in writing.
6. Underwriter's Warrants. In consideration of the agreement of the
Underwriter to act as the Underwriter, and upon payment of a purchase price of
$100.00, on the First Closing Date the Company will issue and deliver to the
Underwriter, for its account, the Underwriter's Warrants to purchase shares of
Common Stock in an amount equal to ten percent (10%) of the number of Firm Units
sold by the Company and purchased by the Underwriter in the offering. Such
Underwriter's Warrants shall be issued on the First Closing Date and shall be
dated as of the Effective Date. The Underwriter's Warrants shall be exercisable
commencing one year after the Effective Date for a period of three years
thereafter at a price equal to 120% of the Price to Public per Unit set forth on
the cover page of the Prospectus. As to other terms, the Underwriter's Warrants
shall be in form and substance substantially the same as Appendix B hereto. The
Company represents and warrants that the Underwriter's Warrants have been duly
authorized and, when granted and delivered in accordance wit the terms hereof,
will be valid, binding and enforceable obligations of the Company; the
securities issuable upon exercise of the Underwriter's Warrants have been duly
authorized and reserved for issuance upon exercise; and upon receipt by the
Company of the consideration for such securities in accordance with the terms of
the Underwriter's Warrants, the Warrant Shares shall have been duly and validly
issued, fully paid and non-assessable.
7. Indemnification.
(a) The Company hereby agrees to indemnify and hold harmless the
Underwriter and each person, if any, who controls the Underwriter within the
meaning of Section 15 of the Securities Act, against any losses, claims, damages
or liabilities, joint or several, to which the Underwriter or each such
controlling person may become subject under the Securities Act, the Exchange
Act, the common law or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of, or are based upon, (i)
any breach of any representation, warranty, agreement or covenant of the Company
contained in this Agreement, (ii) any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement or any
amendment thereof or supplement thereto, or the omission or alleged omission to
state in the Registration Statement or any amendment thereof or supplement
thereto a material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading; (iii) any untrue
statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, if used prior to the Effective Date of the Registration
Statement, or in the Prospectus (as amended or as supplemented, if the Company
shall have filed with the SEC any amendment thereof or supplement thereto), or
the omission or alleged omission to state therein a material fact necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading; or (iv) any untrue statement or alleged untrue
statement of a material fact contained in any application or other statement
executed by the Company or based upon written information furnished by the
Company filed in any jurisdiction in order to qualify the Units under, or exempt
the Units or the sale thereof from qualification under, the securities laws of
such jurisdiction, or the omission or alleged omission to state in such
application or statement a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. The Company will reimburse the
Underwriter and each such controlling person for any legal or other expenses
reasonably incurred by the Underwriter or such controlling person in connection
with investigating or defending against any such loss, claim, damage, liability
or action; provided, however, that the Company will not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in reliance upon and in conformity with written
information relating to the Underwriter furnished to the Company by the
Underwriter specifically for use in the preparation of the Registration
Statement or any such post-effective amendment thereof, any such Preliminary
Prospectus, or the Prospectus, or any such amendment thereof or supplement
thereto, or in any application or other statement executed by the Company or the
Underwriter filed in any jurisdiction in order to qualify the Units under, or
exempt the Units or the sale thereof from qualification under, the securities
laws of such jurisdiction; and provided further that the foregoing indemnity
agreement is subject to the condition that, insofar as it relates to any untrue
statement, alleged untrue statement, omission or alleged omission made in any
Preliminary Prospectus but eliminated or remedied in
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<PAGE>
the Prospectus, such indemnity agreement shall not inure to the benefit of the
Underwriter (or to the benefit of any person who controls the Underwriter) if
the person asserting any loss, claim, damage or liability purchased the Units
from the Underwriter, if a copy of the Prospectus was not sent or given to such
person with, or prior to, the written confirmation of the sale of such Units to
such person. This indemnity agreement is in addition to any liability which the
Company may otherwise have.
(b) The Underwriter agrees to indemnify and hold harmless the
Company, each of its directors, each of its officers who has signed the
Registration Statement, and each person who controls the Company within the
meaning of Section 15 of the Securities Act, against any losses, claims, damages
or liabilities to which the Company or any such director, officer or controlling
person may become subject under the Securities Act, the Exchange Act, the common
law or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of, or are based upon, (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement or any amendment thereof or supplement thereto, or the
omission or alleged omission to state in the Registration Statement or any
amendment thereof or supplement thereto, a material fact required to be stated
therein or necessary to make the statements therein not misleading; (ii) any
untrue statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, if used prior to the Effective Date of the Registration
Statement, or in the Prospectus (as amended or as supplemented, if the Company
shall have filed with the SEC any amendment thereof or supplement thereto), or
the omission or alleged omission to state therein a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading; or (iii) any
untrue statement or alleged untrue statement of a material fact contained in any
application or other statement executed by the Company or by the Underwriter and
filed in any jurisdiction in order to qualify the Units under, or exempt the
Units or the sale thereof from qualification under, the securities laws of such
jurisdiction, or the omission or alleged omission to state in such application
or statement a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading; in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in reliance upon and in conformity with written information
furnished to the Company by, or on behalf of, the Underwriter specifically for
use in the preparation of the Registration Statement or any such post-effective
amendment thereof, any such Preliminary Prospectus, or the Prospectus or any
such amendment thereof or supplement thereto, or in any application or other
statement executed by the Company or by the Underwriter and filed in any
jurisdiction; and the Underwriter will reimburse any legal or other expenses
reasonably incurred by the Company or any such director, officer, or controlling
person in connection with investigating or defending against any such loss,
claim, damage, liability or action. This indemnity agreement is in addition to
any liability which the Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
7 of notice of the commencement of any action, such indemnified party shall, if
a claim in respect thereof is to be made against any indemnifying party under
this Section 7, notify in writing the indemnifying party of the commencement
thereof. The omission so to notify the indemnifying party will relieve it from
any liability under this Section 7 as to the particular item for which
indemnification is then being sought, but not from any other liability which it
may have to any indemnified party. In case any such action is brought against
any indemnified party, and the indemnified party notifies an indemnifying party
of the commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel who shall be reasonably satisfactory to such indemnified party; and
after notice from the indemnifying party to such indemnified party of the
indemnifying party's election so to assume the defense thereof, the indemnifying
party will not be liable to such indemnified party under this Section 7 for any
legal or other expenses subsequently incurred by such indemnified party in
connection with the defense thereof other than reasonable costs of
investigation; provided, however, that if the defendants in any such action
include both the indemnified party and the indemnifying party, and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties which are different
from or additional to those available to the indemnifying party, the indemnified
party or parties shall have the right to select separate counsel to assume such
legal defenses and to otherwise participate in the defense of such action on
behalf of such indemnified party or parties, in which event the fees and
expenses of such separate counsel shall be
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borne by the indemnifying party. Any such indemnifying party shall not be liable
to any such indemnified party on account of any settlement of any claim or
action effected without the consent of such indemnifying party.
8. Contribution.
(a) In order to provide for just and equitable contribution in any
action in which the Underwriter or the Company (or any person who controls the
Underwriter or the Company within the meaning of Section 15 of the Securities
Act) makes claim for indemnification pursuant to Section 7 hereof, but such
indemnification is unavailable or insufficient to hold harmless and indemnify a
party under Section 7, then each indemnifying party shall contribute to the
amount paid or payable by such indemnified party as a result of the losses,
claims, damages or liabilities referred to in Section 7 above (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Underwriter on the other from the offering of
the Units hereunder or (ii) if the allocation provided by the foregoing clause
(i) is not permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in such clause (i) but also
the relative fault of the Company on the one hand and the Underwriter on the
other in connection with the statements or omissions that resulted in such
losses, claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and the Underwriter on the other shall be deemed to be in the same proportion as
the total net proceeds from the offering of the Units (before the deducting
expenses) received by the Company bear to the total underwriting discounts and
commissions received by the Underwriter, in each case as set forth in the table
on the cover page of the Prospectus. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Underwriter and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such untrue statement or omission. The Company and the
Underwriter agree that it would not be just and equitable if contributions
pursuant to this Section 8 were to be determined by pro rata allocation or by
any other method of allocation which does not take into account the equitable
considerations referred to in the first sentence of this Section 8. The amount
paid by an indemnified party as a result of the losses, claims, damages or
liabilities referred to in the first sentence of this Section 8 shall be deemed
to include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending against any action or claim
which is the subject of this Section 8. Notwithstanding the provisions of this
Section 8, the Underwriter shall not be required to contribute any amount in
excess of the amount by which the total price at which the Units underwritten by
it and distributed to the public were offered to the public exceeds the amount
of any damages that the Underwriter has otherwise been required to pay by reason
of such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who is not guilty of such fraudulent misrepresentation.
(b) Promptly after receipt by a party to this Agreement of notice of
the commencement of any action, suit or proceeding, such person will, if a claim
for contribution in respect thereof is to be made against another party (the
"Contributing Party"), notify the Contributing Party of the commencement
thereof; but the omission so to notify the Contributing Party will not relieve
the Contributing Party from any liability which it may have to any party other
than under this Section 8. Any notice given pursuant to Section 7 hereof shall
be deemed to be like notice hereunder. In case any such action, suit or
proceeding is brought against any party, and such person notifies a Contributing
Party of the commencement thereof, the Contributing Party will be entitled to
participate therein with the notifying party and any other Contributing Party
similarly notified.
9. Effective Date of this Agreement and Termination.
(a) This Agreement shall become effective at immediately after the
time at which the Registration Statement shall become effective under the
Securities Act upon the Effective Date of the Registration Statement.
(b) Until the First Closing Date, this Agreement may be terminated by
the Underwriter on behalf of the Underwriter, at its option, by giving notice to
the Company, and the option referred to in Section 2(b),
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if exercised, may be cancelled at any time prior to the Second Closing Date, if
(i) the Company shall have failed, refused, or been unable, at or prior to such
Closing Date, to perform any agreement on its part to be performed hereunder,
(ii) any other condition of the Underwriter's obligations hereunder is not
fulfilled or waived by the Underwriter, (iii) trading in securities generally on
the New York Stock Exchange, the American Stock Exchange or in the over-the-
counter market shall have been suspended, (iv) minimum or maximum prices for
trading shall have been fixed, or maximum ranges for prices for securities shall
be required, on the New York Stock Exchange, the American Stock Exchange, or in
the over-the-counter market, by such Exchange or by Nasdaq or by order of the
SEC or any other governmental authority having jurisdiction, (v) a banking
moratorium shall have been declared by federal, New York, or Minnesota
authorities, (vi) there shall have been such a serious, unusual and material
change in general economic, monetary, political or financial conditions, or the
effect of international conditions on the financial markets in the United States
shall be such as, in the judgment of the Underwriter, makes it inadvisable to
proceed with the delivery of the Units, (vii) the enactment, publication, decree
or other promulgation of any federal or state statute, regulation, rule or order
of any court or other governmental authority which, in the judgment of the
Underwriter, materially and adversely affects or will materially and adversely
affect the business or operations of the Company, or (viii) there shall be a
material outbreak of hostilities or material escalation and deterioration in the
political and military situation between the United States and any foreign
power, or a formal declaration of war by the United States of America shall have
occurred. Any such termination shall be without liability of any party to any
other party, except as provided in Sections 7 and 8 hereof; provided, however,
that the Company shall remain obligated to pay costs and expenses to the extent
provided in Section 4 hereof.
(c) If the Underwriter elects to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section 9, it shall
notify the Company and the Company's Counsel promptly by telegram or telephone,
confirmed by letter sent to the address specified in Section 11 hereof. If the
Company shall elect to prevent this Agreement from becoming effective, it shall
notify the Underwriter and the Underwriter's Counsel promptly by telegram or
telephone, confirmed by letter sent to the addresses specified in Section 11
hereof.
10. Survival of Indemnities, Contribution Agreements, Warranties and
Representations. The respective indemnity and contribution agreements of the
Company and the Underwriter contained in Sections 7 and 8, the representations
and warranties of the Company set forth in Section 1 hereof, and the covenants
and agreements of the Company set forth in Section 3 hereof, shall remain
operative and in full force and effect, regardless of any investigation made by,
or on behalf of, the Underwriter, the Company, any of its officers and
directors, or any controlling person referred to in Sections 7 and 8, and shall
survive the delivery of and payment for the Units. The aforesaid indemnity and
contribution agreements shall also survive any termination or cancellation of
this Agreement. Any successor of any party or of any such controlling person,
or any legal representative of such controlling person, as the case may be,
shall be entitled to the benefit of the respective indemnity and contribution
agreements.
11. Notices. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and shall be mailed,
delivered or telegraphed, and confirmed, as follows:
If to the Underwriter, to: Equity Securities Trading Co., Inc.
2820 IDS Center
80 South Eighth Street
Minneapolis, Minnesota 55402
Attention: Mr. Nathan Newman
with a copy to: Winthrop & Weinstine, P.A.
3000 Dain Bosworth Plaza
60 South Sixth Street
Minneapolis, Minnesota 55402
Attention: Eric O. Madson, Esq.
If to the Company, to: Wilsons The Leather Experts Inc.
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7401 Boone Avenue North
Brooklyn Park, Minnesota 55428
Attention: Mr. Joel N. Waller
with a copy to: Faegre & Benson LLP
2200 Norwest Center
90 South Seventh Street
Minneapolis, Minnesota 55402
Attention: Kris Sharpe, Esq.
12. Information Furnished by the Underwriter. The statements relating to
the stabilization activities of the Underwriter and the statements under the
caption "Underwriting" in any Preliminary Prospectus and in the Prospectus
constitute the written information furnished by, or on behalf of, the
Underwriter specifically for use with reference to the Underwriter referred to
in Section 1(a)(ii) and Sections 7(a) and 7(b) hereof.
13. Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon the Underwriter, the Company and their respective successors
and assigns, and the officers, directors and controlling persons referred to in
Sections 7 and 8. Nothing expressed in this Agreement is intended or shall be
construed to give any person or corporation, other than the parties hereto,
their respective successors and assigns, and the controlling persons, officers
and directors referred to in Sections 7 and 8 any legal or equitable right,
remedy or claim under, or in respect of, this Agreement or any provision herein
contained, this Agreement and all conditions and provisions hereof being
intended to be and being for the sole and exclusive benefit of the parties
hereto and their respective executors, administrators, successors, assigns and
such controlling persons, officers and directors, and for the benefit of no
other person or corporation. No purchaser of any Units from the Underwriter
shall be construed a successor or assign merely by reason of such purchase.
14. Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of the State of Minnesota.
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If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us the enclosed counterpart of this
Agreement, whereupon it will become a binding agreement between the Company and
the Underwriter in accordance with its terms.
Very truly yours,
WILSONS THE LEATHER EXPERTS INC.
By ___________________________________
Signature
Its___________________________________
ACCEPTANCE
The foregoing Underwriting Agreement
is hereby confirmed and accepted by
us as of the date first above written.
EQUITY SECURITIES TRADING CO., INC.
By ___________________________________
Signature
Its___________________________________
MPL1: 89632-3
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APPENDIX A
Form of "Lock-Up" Agreement for
Directors, Officers and Certain shareholders
LOCK-UP AGREEMENT
Equity Securities Trading Co., Inc.
2820 IDS Center
80 South Eighth Street
Minneapolis, Minnesota 55402
Re: Wilsons The Leather Experts Inc.
Ladies and Gentlemen:
The undersigned, a beneficial owner of common stock, $.01 par value per
Unit (the "Common Stock") of Wilsons The Leather Experts Inc. (the "Company"),
understands and acknowledges that the Company has filed with the Securities and
Exchange Commission a Registration Statement on Form S-1 (the "Registration
Statement") for the registration of the offer and sale of 1,100,000 Units, each
Unit consisting of one share of Common Stock and one Redeemable Warrant (plus up
to an additional 165,000 Units subject to the Underwriter's over-allotment
option) (collectively, the "Units"). The undersigned further understands that
the Company, as issuer, and Equity Securities Trading Co., Inc., as the
underwriter (the "Underwriter") named in that certain proposed underwriting
agreement expected to be entered into in connection with the public offering of
the Units by the Underwriter (the "Underwriting Agreement"), contemplate
entering into such Underwriting Agreement.
In order to induce the Underwriter to proceed with the public offering, the
undersigned agrees, for the benefit of the Company and the Underwriter, that
should such public offering be effectuated, the undersigned will not, without
the prior written consent of the Underwriter, during the 180 day period
commencing on the effective date of the Registration Statement:
(i) offer to sell, contract to sell, sell, pledge, hypothecate,
transfer or otherwise dispose of, grant any rights with respect to
(collectively, a "Disposition"), any shares of Common Stock of the Company,
and options, warrants and other rights to purchase any shares of Common
Stock or any securities convertible into or exchangeable or exercisable for
shares of Common Stock now owned or hereafter acquired by the undersigned
(collectively, "Securities") or with respect to which the undersigned has
or hereafter acquires the power of Disposition; or
(ii) effect any Disposition of any of the Securities
other than by gifts to donees who agree in writing to be bound by the same
restriction, or by will or the laws of descent.
The undersigned hereby agrees to the entry of stop transfer instructions with
the Company's transfer agent against the transfer of the Securities except in
compliance with this Agreement.
Dated: ___________, 1997 Very truly yours,
----------------------------------------
Signature
----------------------------------------
Name Typed or Printed
A-1
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APPENDIX B
Form of Underwriter's Warrants
COMMON STOCK PURCHASE WARRANT
No. _____ _______ Shares
FOR GOOD AND VALUABLE CONSIDERATION, Wilsons The Leather Experts Inc.,
a Minnesota corporation (the "Company"), hereby certifies that Equity Securities
Trading Co., Inc., Minneapolis, Minnesota (the "Underwriter"), or its registered
assigns, is entitled to subscribe for and purchase from the Company at any time
or from time to time after [ONE YEAR FROM EFFECTIVE DATE], to and including
[FOUR YEARS FROM EFFECTIVE DATE], One Hundred Ten Thousand (110,000) fully paid
and non-assessable shares of the Common Stock of the Company at the purchase
price of $_____ per share (the "Warrant Exercise Price"), subject to adjustment
as provided herein.
This Warrant is one of the Underwriter's Warrants referred to in the
Underwriting Agreement dated ___________, 1997 by and between the Company and
the Underwriter.
As used herein, (i) this warrant and all warrants hereafter issued in
exchange or substitution for this warrant are referred to as the "Warrants;"
(ii) the shares which may be acquired upon exercise of the Warrants are referred
to herein as the "Warrant Shares;" (iii) the term "Holder" means the
Underwriter, any party who acquires all or a part of this Warrant as a
registered transferee of the Underwriter, or any record holder or holders of the
Warrant Shares issued upon exercise, whether in whole or in part, of the
Warrant; (iv) the term "Common Stock" means and includes the Company's presently
authorized common stock, no par value, together with any other equity securities
which may be issued by the Company with respect thereto or in substitution
therefor; and (v) the term "Convertible Securities" means any stock or other
securities convertible into, or exchangeable for, Common Stock.
This Warrant is subject to the following provisions, terms and
conditions, to which each Holder hereof consents and agrees:
1. Exercise; Transferability.
(a) The rights represented by this Warrant may be exercised by the
Holder hereof, in whole or in part (but not as to a fractional share of Common
Stock) by written notice of exercise (in the form attached hereto) delivered to
the Company at the principal office of the Company prior to the expiration of
this Warrant and accompanied or preceded by the surrender of this Warrant along
with a check in payment of the Warrant Exercise Price for the Warrant Shares
being acquired upon such exercise.
(b) Until exercisable, this Warrant may not be sold, assigned,
hypothecated, or otherwise transferred (other than by will, pursuant to the
operation of law, or where directed by a court of competent jurisdiction upon
the dissolution or liquidation of a corporate Holder hereof), except to (i) a
person who is both an officer and a shareholder of the Underwriter, (ii) a
successor in interest to the business of the Underwriter, (iii) a person who is
both an officer and a shareholder of a successor, or (iv) a person who is an
employee of the Underwriter or a successor, but only if such employee is also an
officer of the Underwriter or successor; such transfer to be by endorsement (by
the Holder hereof executing the form of assignment attached hereto) and delivery
in the same manner as in the case of a negotiable instrument transferable by
endorsement and delivery. Further, this Warrant may not be sold, transferred,
assigned, hypothecated or divided into two or more Warrants of smaller
denominations, nor may any Warrant Shares issued pursuant to exercise of this
Warrant be transferred, except as provided in Section 7 hereof.
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2. Exchange and Replacement. Subject to Sections 1 and 7 hereof, this
Warrant is exchangeable upon the surrender hereof by the Holder to the Company
at its office for new Warrants of like tenor and date representing in the
aggregate the right to purchase the number of Warrant Shares purchasable
hereunder, each of such new Warrants to represent the right to purchase such
number of Warrant Shares (not to exceed the aggregate total number purchasable
hereunder) as shall be designated by the Holder at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of the
loss, theft, destruction, or mutilation of this Warrant, and, in case of loss,
theft or destruction, of indemnity or security reasonably satisfactory to it,
and upon surrender and cancellation of this Warrant, if mutilated, the Company
will make and deliver a new Warrant of like tenor, in lieu of this Warrant;
provided, however, that if the Underwriter shall be such Holder, an agreement of
indemnity by such Holder shall be sufficient for all purposes of this Section 2.
This Warrant shall be promptly canceled by the Company upon the surrender hereof
in connection with any exchange or replacement. The Company shall pay all
expenses, taxes (other than stock transfer taxes), and other charges payable in
connection with the preparation, execution, and delivery of Warrants pursuant to
this Section 2.
3. Issuance of the Warrant Shares.
(a) The Company agrees that the shares of Common Stock purchased upon
exercise of this Warrant shall be and are deemed to be issued to the Holder as
of the close of business on the date on which this Warrant shall have been
surrendered and the payment made for such Warrant Shares as aforesaid. Subject
to the provisions of Section 3(b), the Company shall deliver or cause to be
delivered to the Holder within a reasonable time, not exceeding fifteen (15)
days after the rights represented by this Warrant shall have been so exercised,
certificates for the Warrant Shares so purchased, and, unless this Warrant has
expired, a new Warrant representing the right to purchase the number of Warrant
Shares, if any, with respect to which this Warrant shall not then have been
exercised shall also be delivered to the Holder within such time.
(b) Notwithstanding the foregoing, the Company shall not be required
to deliver any certificate for Warrant Shares upon exercise of this Warrant
except in accordance with exemptions from the applicable securities registration
requirements or registrations under applicable securities laws. Nothing herein,
however, shall obligate the Company to effect registrations under federal or
state securities laws, except as provided in Section 9. If registrations are
not in effect and if exemptions are not available when the Holder seeks to
exercise the Warrant, the Warrant exercise period will be extended, if need be,
to prevent the Warrant from expiring, until such time as either registrations
become effective or exemptions are available, and the Warrant shall then remain
exercisable for a period of at least 30 calendar days from the date the Company
delivers to the Holder written notice of the availability of such registrations
or exemptions. The Holder agrees to execute such documents and make such
representations, warranties, and agreements as may be reasonably required solely
to comply with the exemptions relied upon by the Company, or the registrations
made, for the issuance of the Warrant Shares.
4. Covenants of the Company. The Company covenants and agrees that all
Warrant Shares will, upon issuance, be duly authorized and issued, fully paid,
non-assessable and free from all taxes, liens and charges with respect to the
issue thereof. The Company further covenants and agrees that during the period
within which the rights represented by this Warrant may be exercised, the
Company will at all times have authorized and reserved for the purpose of issue
or transfer upon exercise of the subscription rights evidenced by this Warrant a
sufficient number of shares of Common Stock to provide for the exercise of the
rights represented by this Warrant.
5. Anti-dilution Adjustments. The provisions of this Warrant are subject
to adjustment as provided in this Section 5.
(a) The Warrant Exercise Price shall be adjusted from time to time
such that in case the Company shall hereafter:
(i) pay any dividends on any class of stock of the Company
payable in Common Stock or securities convertible into Common Stock;
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(ii) subdivide its then outstanding shares of Common Stock
into a greater number of shares; or
(iii) combine outstanding shares of Common Stock, by
reclassification or otherwise;
then, in any such event, the Warrant Exercise Price in effect immediately prior
to such event shall (until adjusted again pursuant hereto) be adjusted
immediately after such event to a price (calculated to the nearest full cent)
determined by dividing (A) the number of shares of Common Stock outstanding
immediately prior to such event, multiplied by the then existing Warrant
Exercise Price, by (B) the total number of shares of Common Stock outstanding
immediately after such event (including in each case the maximum number of
shares of Common Stock issuable in respect of any securities convertible into
Common Stock), and the resulting quotient shall be the adjusted Warrant Exercise
Price per share. An adjustment made pursuant to this subsection shall become
effective immediately after the record date in the case of a dividend or
distribution and shall become effective immediately after the effective date in
the case of a subdivision, combination, reclassification or other event. If, as
a result of an adjustment made pursuant to this subsection, the Holder of any
Warrant thereafter surrendered for exercise shall become entitled to receive
shares of two or more classes of capital stock or shares of Common Stock and
other capital stock of the Company, the Board of Directors (whose determination
shall be conclusive) shall determine the allocation of the adjusted Warrant
Exercise Price between or among shares of such classes of capital stock or
shares of Common Stock and other capital stock. All calculations under this
subsection shall be made to the nearest cent or to the nearest 1/100 of a share,
as the case may be. In the event that at any time as a result of an adjustment
made pursuant to this subsection, the holder of any Warrant thereafter
surrendered for exercise shall become entitled to receive any shares of the
Company other than shares of Common Stock, thereafter the Warrant Exercise Price
of such other shares so receivable upon exercise of any Warrant shall be subject
to adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to Common Stock contained in this
subsection.
(b) Upon each adjustment of the Warrant Exercise Price pursuant to
Section 5(a) above, the Holder of each Warrant shall thereafter (until another
such adjustment) be entitled to purchase at the adjusted Warrant Exercise Price
the number of shares, calculated to the nearest full share, obtained by
multiplying the number of shares specified in such Warrant (as adjusted as a
result of all adjustments in the Warrant Exercise Price in effect prior to such
adjustment) by the Warrant Exercise Price in effect prior to such adjustment and
dividing the product so obtained by the adjusted Warrant Exercise Price.
(c) In case of any consolidation or merger to which the Company is a
party other than a merger or consolidation in which the Company is the
continuing corporation, or in case of any sale or conveyance to another
corporation of the property of the Company as an entirety or substantially as an
entirety, or in the case of any statutory exchange of securities with another
corporation (including any exchange effected in connection with a merger of a
third corporation into the Company), there shall be no adjustment under
Subsection (a) of this Section above but the Holder of each Warrant then
outstanding shall have the right thereafter to convert such Warrant into the
kind and amount of shares of stock and other securities and property which he
would have owned or have been entitled to receive immediately after such
consolidation, merger, statutory exchange, sale, or conveyance had such Warrant
been converted immediately prior to the effective date of such consolidation,
merger, statutory exchange, sale, or conveyance and in any such case, if
necessary, appropriate adjustment shall be made in the application of the
provisions set forth in this subsection with respect to the rights and interests
thereafter of any Holders of the Warrant, to the end that the provisions set
forth in this subsection shall thereafter correspondingly be made applicable, as
nearly as may reasonably be, in relation to any shares of stock and other
securities and property thereafter deliverable on the exercise of the Warrant.
The provisions of this subsection shall similarly apply to successive
consolidations, mergers, statutory exchanges, sales or conveyances.
(d) Upon any adjustment of the Warrant Exercise Price, then and in
each such case, the Company shall (i) give written notice thereof, by first-
class mail, postage prepaid, within ten (10) calendar days after the date when
the circumstances giving rise to the adjustment occurred, addressed to the
Holder as shown on the books of the Company, which notice shall state the
Warrant Exercise Price resulting from such adjustment and the increase or
decrease, if any, in the number of shares of Common Stock purchasable at such
price upon the
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exercise of this Warrant, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based; and (ii) prepare
and retain on file a statement describing in reasonable detail the method used
in arriving at the new Warrant Exercise Price.
6. No Voting Rights. This Warrant shall not entitle the Holder to any
voting rights or other rights as a shareholder of the Company.
7. Notice of Transfer of Warrant or Resale of the Warrant Shares.
(a) Subject to the sale, assignment, hypothecation, or other transfer
restrictions set forth in Section 1 hereof, the Holder, by acceptance hereof,
agrees to give written notice to the Company before transferring this Warrant or
transferring any Warrant Shares of such Holder's intention to do so, describing
briefly the manner of any proposed transfer. Promptly upon receiving such
written notice, the Company shall present copies thereof to the Company's
counsel and to counsel to the original purchaser of this Warrant. If, in the
opinion of each such counsel, the proposed transfer may be effected without
registration or qualification (under any federal or state securities laws), the
Company, as promptly as practicable, shall notify the Holder of such opinion,
whereupon the Holder shall be entitled to transfer this Warrant or to dispose of
Warrant Shares received upon the previous exercise of this Warrant, all in
accordance with the terms of the notice delivered by the Holder to the Company;
provided that an appropriate legend may be endorsed on this Warrant or the
certificates for such Warrant Shares describing restrictions upon transfer
thereof necessary or advisable in the opinion of counsel and satisfactory to the
Company to prevent further transfers which would be in violation of Section 5 of
the Securities Act of 1933, as amended (the "Securities Act") and applicable
state securities laws; and provided further that the prospective transferee or
purchaser shall execute such documents and make such representations,
warranties, and agreements as may be required solely to comply with the
exemptions relied upon by the Company for the transfer or disposition of the
Warrant or Warrant Shares.
(b) If, in the opinion of either of the counsel referred to in this
Section 7, the proposed transfer or disposition of this Warrant or such Warrant
Shares described in the written notice given pursuant to this Section 7 may not
be effected without registration or qualification of this Warrant or such
Warrant Shares, the Company shall promptly give written notice thereof to the
Holder, and the Holder will limit its activities in respect to such transfer or
disposition as, in the opinion of both such counsel, are permitted by law.
(c) Until this Warrant is duly transferred on the books of the
Company, the Company shall treat the registered Holder of this Warrant as
absolute owner hereof for all purposes without being affected by any notice to
the Company.
8. Fractional shares. Fractional shares shall not be issued upon the
exercise of this Warrant, but in any case where the holder would, except for the
provisions of this Section, be entitled under the terms hereof to receive a
fractional share, the Company shall, upon the exercise of this Warrant for the
largest number of whole shares then called for, pay a sum in cash equal to the
sum of (a) the excess, if any, of the "Fair Market Value" (as defined in Section
10(d) hereof) of such fractional share over the proportional part of the Warrant
Exercise Price represented by such fractional share, plus (b) the proportional
part of the Warrant Exercise Price represented by such fractional share.
9. Registration Rights.
(a) The Company agrees that, if at any time (but on a one-time basis
only) during the period commencing one year from the date of this Warrant and
ending four (4) years from [DATE OF EFFECTIVENESS], the Holder of this Warrant
and/or the Holders of any other Warrants and/or Warrant Shares who collectively
shall hold not less than 50% of the Warrants and/or Warrant Shares outstanding
at such time and not previously sold pursuant to this Section 9, shall request
that the Company file a registration statement covering all or any part of the
Warrant Shares:
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(i) the Company will promptly notify the Holder and all other
registered Holders, if any, of other Warrants and/or Warrant Shares that
such registration statement will be filed and that the Warrant Shares which
are then held and/or which may be acquired upon the exercise of the
Warrants by the Holder and such other Holders will be included in such
registration statement at the Holder's and such Holders' request; and
(ii) the Company will cause such registration statement to
include all Warrant Shares which it has been so requested to include, will
take all necessary steps to register or qualify such Warrant Shares under
the Securities Act and the securities laws of such states as the holders
may reasonably request, and will use its best efforts to cause such
registration statement and qualifications to become effective as soon as
practicable.
The Company shall keep effective and maintain any registration, qualification,
notification, or approval specified in this Section 9(a) for such period as may
be reasonably necessary for such Holder or Holders of such Warrant Shares to
dispose thereof and from time to time shall amend or supplement the prospectus
used in connection therewith to the extent necessary in order to comply with
applicable law; provided, that the Company need not maintain the effectiveness
of any such registration, qualification, notification or approval, whether or
not at the request of the Holders, more than nine (9) months following the
effective date thereof.
(b) The Company agrees that, if at any time and from time to time
during the period commencing one year from the date of this Warrant and ending
two (2) years after complete exercise of this Warrant (but not more than six (6)
years from the date of this Warrant), the Company proposes to file a
registration statement under the Securities Act (other than a Form S-4 or Form
S-8 Registration Statement or any successor forms thereto) or qualify for a
public distribution under Section 3(b) of the Securities Act, any of its
securities in connection with the proposed offer of such securities by the
Company or any of its shareholders:
(i) the Company will promptly notify the Holder and all other
registered Holders, if any, of other Warrants and/or Warrant Shares, at
least thirty (30) days prior to each such filing, that it intends to file
such registration statement or effect such qualification, and that the
Warrant Shares which are then held and/or which may be acquired upon the
exercise of the Warrants by the Holder and such other Holders will be
included in such registration statement or qualification at the Holder's
and such Holders' request; and
(ii) the Company will use its best efforts to cause such
registration statement or qualification to include all Warrant Shares which
it has been so requested to include; provided, however, that if a greater
number of Warrant Shares is offered for participation in the proposed
offering than in the reasonable opinion of the managing underwriter of the
proposed offering can be accommodated without adversely affecting the
proposed offering, then the amount of Warrant Shares proposed to be offered
by such Holders for registration, as well as the number of securities of
any other selling shareholders participating in the registration, shall be
excluded or proportionately reduced to a number deemed satisfactory by the
managing underwriter.
The Holder and such other Holders may request that their Warrant Shares be
included in such registration statement or qualification by making written
request to the Company specifying the number of Warrant Shares to be so
included. Such request shall be made within twenty (20) days after receipt from
the Company of notice of such intended registration or qualification.
(c) With respect to each inclusion of securities in a registration or
qualification pursuant to this Section 9, the Company shall bear all fees,
costs, and expenses thereof, including, without limitation, all filing fees,
fees imposed by the National Association of Securities Dealers, Inc., printing
expenses, fees and disbursements of counsel and accountants for the Company,
fees and disbursements of counsel for the underwriter or Underwriter of such
securities (if the Company is required to bear such fees and disbursements), all
internal expenses, the premiums and other costs of policies of insurance against
liability arising out of the public offering, and legal fees and disbursements
and other expenses of complying with state securities laws of any jurisdictions
in
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which the securities to be offered are to be registered or qualified. Fees
and disbursements of special counsel and accountants for the selling Holders,
underwriting discounts and commissions, and transfer taxes for selling Holders
shall be borne by the selling Holders.
(d) The Company will furnish the Holders whose Warrant Shares are
included in a registration or qualification pursuant to this Section 9 with a
reasonable number of copies of any prospectus and/or other offering materials
included in such filings and will amend or supplement the same as required
during the period of required use thereof. In connection with any registration
filed or qualification made pursuant to this Section 9 in which Warrant Shares
are included, and to the extent permissible under the Securities Act and
controlling precedent thereunder, the Company and each Holder whose Warrant
Shares are so included in such registration or qualification shall provide
cross-indemnification agreements to each other in customary scope covering the
accuracy and completeness of the information furnished by each in connection
therewith.
(e) Each Holder of Warrant Shares included in a registration or
qualification pursuant to this Section 9 agrees to cooperate with the Company in
the preparation and filing of any such registration statement or other offering
materials and in the furnishing of information concerning the Holder for
inclusion therein, or in any efforts by the Company to establish that the
proposed sale is exempt under the Securities Act as to any proposed
distribution.
10. Miscellaneous. The Company shall not, by amendment of its articles of
incorporation or through reorganization, consolidation, merger, dissolution or
sale of assets, or by any other voluntary act or deed, avoid or seek to avoid
the observance or performance of any of the covenants, stipulations or
conditions to be observed or performed hereunder by the Company, but will, at
all times in good faith, assist, insofar as it is able, in the carrying out of
all provisions hereof and in the taking of all other action which may be
necessary in order to protect the rights of the Holders against dilution.
Upon written request of the Holder of this Warrant, the Company will
promptly provide such Holder with a then current written list of the names and
addresses of all Holders of warrants originally issued under the terms of, and
concurrent with, this Warrant.
The representations, warranties and agreements herein contained shall
survive the exercise of this Warrant. This Warrant shall be interpreted under
the laws of the State of Minnesota.
IN WITNESS WHEREOF, Wilsons The Leather Experts Inc. has caused this
Warrant to be signed by its duly authorized officer and to be dated ___________,
1997.
WILSONS THE LEATHER EXPERTS INC.
By______________________________________
Signature
Its_____________________________________
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NOTICE OF EXERCISE OF WARRANT
(To be signed upon the exercise of the Warrant for cash or by check)
The undersigned hereby irrevocably elects to exercise the attached Warrant
and to purchase thereunder, for cash, ________________ of the shares of Common
Stock of Wilsons The Leather Experts Inc. issuable upon the exercise of such
Warrant, herewith makes payment of $___________ therefor in cash or by check,
and requests that certificates for such shares (together with a new Warrant to
purchase the number of shares, if any, with respect to which this Warrant is not
exercised) be issued in the name set forth below and be delivered to the address
set forth below.
Dated: ________________
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(Signature)
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(Name Typed or Printed)
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(Address)
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(Social Security or Tax Ident. No.)
* The signature on the Notice of Exercise of Warrant must exactly correspond
to the name as written upon the face of the Warrant in every particular
without alteration or any change whatsoever. When signing on behalf of a
corporation, partnership, trust or other entity, PLEASE indicate your
position(s) and title(s) with such entity.
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ASSIGNMENT OF WARRANT
(To be signed only upon authorized transfer of the Warrant)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers
unto _________________________________ the right to purchase _______________
shares of the Common Stock of Wilsons The Leather Experts Inc. to which the
within Warrant relates and appoints _________________________________, as
attorney-in-fact, to transfer said right on the books of Wilsons The Leather
Experts Inc. with full power of substitution in the premises.
Dated: ________________
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(Signature)
---------------------------------------
(Name Typed or Printed)
---------------------------------------
(Address)
---------------------------------------
(Social Security or Tax Ident. No.)
* The signature on the Assignment of Warrant must exactly correspond to the
name as written upon the face of the Warrant in every particular without
alteration or any change whatsoever. When signing on behalf of a
corporation, partnership, trust or other entity, PLEASE indicate your
position(s) and title(s) with such entity.
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RESTRICTION ON TRANSFER
The securities evidenced hereby have not been registered under the
Securities Act of 1933 or any state securities laws and may not be sold,
transferred, assigned, offered, pledged or otherwise distributed for value
unless there is an effective registration statement under such act or laws
covering such security or the Company receives an opinion of counsel for the
Company stating that such sale, transfer, assignment, pledge or distribution is
exempt from the registration and prospectus delivery requirements of the
Securities Act of 1933 and all applicable state securities laws.
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Exhibit 3.5
ARTICLES OF AMENDMENT
OF
AMENDED ARTICLES OF INCORPORATION
OF
WILSONS THE LEATHER EXPERTS INC.
The undersigned, Philip S. Garon, Secretary of Wilsons The Leather Experts
Inc., a Minnesota corporation (the "Corporation"), hereby certifies that Section
1(a) of Article 3 of the Corporation's Amended Articles of Incorporation has
been amended, effective at the close of business on the date of filing of these
Articles of Amendment with the Secretary of State of the State of Minnesota (the
"Effective Time"), to read in its entirety as follows:
ARTICLE 3 - AUTHORIZED SHARES
-----------------------------
Section 1. Authorized Capital Stock.
-------------------------
(a) Total Number of Shares.
----------------------
The aggregate number of shares of stock which the corporation is
authorized to issue is 55,000,000 shares, consisting of 45,000,000 shares
of common stock, par value $.01 (the "Common Stock"), of which 22,500,000
shares shall be undesignated as to class, 13,500,000 shares shall be Class
A Common Stock ("Class A Common Stock"), 6,750,000 shares shall be Class B
Common Stock ("Class B Common Stock") and 2,250,000 shares shall be Class C
Common Stock ("Class C Common Stock"), and 10,000,000 shares of preferred
stock, par value $.01 (the "Preferred Stock"). The shares of Preferred
Stock and Common Stock are sometimes collectively referred to herein as the
"capital stock".
The undersigned further certifies (i) that the remainder of the Amended Articles
of Incorporation of the Corporation, including Section 1(b) of Article 3, is
hereby unchanged, (ii) that such amendment to Section 1(a) of Article 3 has been
adopted in accordance with the requirements of, and pursuant to, Chapter 302A of
the Minnesota Statutes; (iii) that such amendment was adopted pursuant to
Section 302A.402, Subd. 3, of the Minnesota Statutes in connection with a .90-
for-one combination of the Corporation's Common Stock; and (iv) that such
amendment will not adversely affect the rights or preferences of the holders of
outstanding shares of any class or series of the Corporation and will not result
in the percentage of authorized shares of any class or series that remains
unissued after such combination exceeding the percentage of authorized shares of
that class or series that were unissued before the combination.
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The combination giving rise to the amendment set forth above concerns a
.90-for-one combination of the Common Stock of the Corporation. Such
combination is being effected as follows:
(i) Effective at the Effective Time, each share of Common Stock of each class
outstanding immediately prior to the Effective Time shall be combined into
and become .90 shares of the same class of Common Stock, par value $.01 per
share, that is being combined, all of which shares shall be validly issued,
fully paid and nonassessable.
(ii) Upon surrender by a shareholder of a stock certificate or certificates
outstanding immediately prior to the Effective Time, together with such
other documents, if any, as the Chief Executive Officer or the President of
the Corporation may reasonably request on behalf of the Corporation, a
stock certificate or certificates representing .90 shares of Common Stock,
par value $.01 per share, for each share of Common Stock represented by the
stock certificate or certificates so surrendered shall be mailed or
delivered after the Effective Time to the holder of record of the Common
Stock represented by the surrendered stock certificate or certificates,
which shares represented by such stock certificate or certificates so
mailed or delivered shall be of the same class as the shares represented by
the stock certificate or certificates being surrendered, except as
hereinafter provided; provided, however, that until such time as a holder
of a stock certificate outstanding immediately prior to the Effective Time
surrenders such stock certificate, the stock certificate shall be deemed to
represent the number of shares of Common Stock, of the same class
previously represented by such stock certificate (except as hereinafter
provided), to which such holder would be entitled upon the surrender
thereof after giving effect to the reverse stock split and combination. In
the event that Common Stock of the Corporation shall be transferred after
the Effective Time, the stock certificate or certificates mailed or
delivered to the transferee shall reflect the reverse stock split and
combination regardless of whether the stock certificate or certificates
held by the transferor representing such Common Stock reflected the reverse
stock split and combination. In the event that a Conversion (as defined in
Section 2(e) of Article 3 of the Corporation's Amended Articles of
Incorporation) shall have occurred before the mailing or delivery of a
stock certificate or certificates issued upon the surrender of stock
certificates outstanding immediately prior to the Effective Time or before
the surrender of stock certificates outstanding immediately prior to the
Effective Time, the shares represented by the stock certificate or
certificates that are mailed or delivered, or that were not surrendered,
shall be shares of Common Stock of a single class without class
designation.
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(iii) Fractional shares of Common Stock resulting from the reverse stock split
and combination shall remain outstanding following the Effective Time.
/s/ Philip S. Garon
---------------------------------
Philip S. Garon
M1:0186137.02
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Exhibit 4.4
Form of Underwriter's Warrants
COMMON STOCK PURCHASE WARRANT
No. _____ _______ Shares
FOR GOOD AND VALUABLE CONSIDERATION, Wilsons The Leather Experts Inc.,
a Minnesota corporation (the "Company"), hereby certifies that Equity Securities
Trading Co., Inc., Minneapolis, Minnesota (the "Underwriter"), or its registered
assigns, is entitled to subscribe for and purchase from the Company at any time
or from time to time after [ONE YEAR FROM EFFECTIVE DATE], to and including
[FOUR YEARS FROM EFFECTIVE DATE], One Hundred Ten Thousand (110,000) fully paid
and non-assessable shares of the Common Stock of the Company at the purchase
price of $_____ per share (the "Warrant Exercise Price"), subject to adjustment
as provided herein.
This Warrant is one of the Underwriter's Warrants referred to in the
Underwriting Agreement dated ___________, 1997 by and between the Company and
the Underwriter.
As used herein, (i) this warrant and all warrants hereafter issued in
exchange or substitution for this warrant are referred to as the "Warrants;"
(ii) the shares which may be acquired upon exercise of the Warrants are referred
to herein as the "Warrant Shares;" (iii) the term "Holder" means the
Underwriter, any party who acquires all or a part of this Warrant as a
registered transferee of the Underwriter, or any record holder or holders of the
Warrant Shares issued upon exercise, whether in whole or in part, of the
Warrant; (iv) the term "Common Stock" means and includes the Company's presently
authorized common stock, no par value, together with any other equity securities
which may be issued by the Company with respect thereto or in substitution
therefor; and (v) the term "Convertible Securities" means any stock or other
securities convertible into, or exchangeable for, Common Stock.
This Warrant is subject to the following provisions, terms and
conditions, to which each Holder hereof consents and agrees:
1. Exercise; Transferability.
(a) The rights represented by this Warrant may be exercised by the
Holder hereof, in whole or in part (but not as to a fractional share of Common
Stock) by written notice of exercise (in the form attached hereto) delivered to
the Company at the principal office of the Company prior to the expiration of
this Warrant and accompanied or preceded by the surrender of this Warrant along
with a check in payment of the Warrant Exercise Price for the Warrant Shares
being acquired upon such exercise.
(b) Until exercisable, this Warrant may not be sold, assigned,
hypothecated, or otherwise transferred (other than by will, pursuant to the
operation of law, or where directed by a court of competent jurisdiction upon
the dissolution or liquidation of a corporate Holder hereof), except to (i) a
person who is both an officer and a shareholder of the Underwriter, (ii) a
successor in interest to the business of the Underwriter, (iii) a person who is
both an officer and a shareholder of a successor, or (iv) a person who is an
employee of the Underwriter or a successor, but only if such employee is also an
officer of the Underwriter or successor; such transfer to be by endorsement (by
the Holder hereof executing the form of assignment attached hereto) and delivery
in the same manner as in the case of a negotiable instrument transferable by
endorsement and delivery. Further, this Warrant may not be sold, transferred,
assigned, hypothecated or divided into two or more Warrants of smaller
denominations, nor may any Warrant Shares issued pursuant to exercise of this
Warrant be transferred, except as provided in Section 7 hereof.
2. Exchange and Replacement. Subject to Sections 1 and 7 hereof,
this Warrant is exchangeable upon the surrender hereof by the Holder to the
Company at its office for new Warrants of like tenor and date
<PAGE>
representing in the aggregate the right to purchase the number of Warrant Shares
purchasable hereunder, each of such new Warrants to represent the right to
purchase such number of Warrant Shares (not to exceed the aggregate total number
purchasable hereunder) as shall be designated by the Holder at the time of such
surrender. Upon receipt by the Company of evidence reasonably satisfactory to it
of the loss, theft, destruction, or mutilation of this Warrant, and, in case of
loss, theft or destruction, of indemnity or security reasonably satisfactory to
it, and upon surrender and cancellation of this Warrant, if mutilated, the
Company will make and deliver a new Warrant of like tenor, in lieu of this
Warrant; provided, however, that if the Underwriter shall be such Holder, an
agreement of indemnity by such Holder shall be sufficient for all purposes of
this Section 2. This Warrant shall be promptly canceled by the Company upon the
surrender hereof in connection with any exchange or replacement. The Company
shall pay all expenses, taxes (other than stock transfer taxes), and other
charges payable in connection with the preparation, execution, and delivery of
Warrants pursuant to this Section 2.
3. Issuance of the Warrant Shares.
(a) The Company agrees that the shares of Common Stock purchased upon
exercise of this Warrant shall be and are deemed to be issued to the Holder as
of the close of business on the date on which this Warrant shall have been
surrendered and the payment made for such Warrant Shares as aforesaid. Subject
to the provisions of Section 3(b), the Company shall deliver or cause to be
delivered to the Holder within a reasonable time, not exceeding fifteen (15)
days after the rights represented by this Warrant shall have been so exercised,
certificates for the Warrant Shares so purchased, and, unless this Warrant has
expired, a new Warrant representing the right to purchase the number of Warrant
Shares, if any, with respect to which this Warrant shall not then have been
exercised shall also be delivered to the Holder within such time.
(b) Notwithstanding the foregoing, the Company shall not be required
to deliver any certificate for Warrant Shares upon exercise of this Warrant
except in accordance with exemptions from the applicable securities registration
requirements or registrations under applicable securities laws. Nothing herein,
however, shall obligate the Company to effect registrations under federal or
state securities laws, except as provided in Section 9. If registrations are
not in effect and if exemptions are not available when the Holder seeks to
exercise the Warrant, the Warrant exercise period will be extended, if need be,
to prevent the Warrant from expiring, until such time as either registrations
become effective or exemptions are available, and the Warrant shall then remain
exercisable for a period of at least 30 calendar days from the date the Company
delivers to the Holder written notice of the availability of such registrations
or exemptions. The Holder agrees to execute such documents and make such
representations, warranties, and agreements as may be reasonably required solely
to comply with the exemptions relied upon by the Company, or the registrations
made, for the issuance of the Warrant Shares.
4. Covenants of the Company. The Company covenants and agrees that
all Warrant Shares will, upon issuance, be duly authorized and issued, fully
paid, non-assessable and free from all taxes, liens and charges with respect to
the issue thereof. The Company further covenants and agrees that during the
period within which the rights represented by this Warrant may be exercised, the
Company will at all times have authorized and reserved for the purpose of issue
or transfer upon exercise of the subscription rights evidenced by this Warrant a
sufficient number of shares of Common Stock to provide for the exercise of the
rights represented by this Warrant.
5. Anti-dilution Adjustments. The provisions of this Warrant are subject
to adjustment as provided in this Section 5.
(a) The Warrant Exercise Price shall be adjusted from time to time
such that in case the Company shall hereafter:
(i) pay any dividends on any class of stock of the Company
payable in Common Stock or securities convertible into Common Stock;
(ii) subdivide its then outstanding shares of Common Stock into
a greater number of shares; or
2
<PAGE>
(iii) combine outstanding shares of Common Stock, by
reclassification or otherwise;
then, in any such event, the Warrant Exercise Price in effect immediately prior
to such event shall (until adjusted again pursuant hereto) be adjusted
immediately after such event to a price (calculated to the nearest full cent)
determined by dividing (A) the number of shares of Common Stock outstanding
immediately prior to such event, multiplied by the then existing Warrant
Exercise Price, by (B) the total number of shares of Common Stock outstanding
immediately after such event (including in each case the maximum number of
shares of Common Stock issuable in respect of any securities convertible into
Common Stock), and the resulting quotient shall be the adjusted Warrant Exercise
Price per share. An adjustment made pursuant to this subsection shall become
effective immediately after the record date in the case of a dividend or
distribution and shall become effective immediately after the effective date in
the case of a subdivision, combination, reclassification or other event. If, as
a result of an adjustment made pursuant to this subsection, the Holder of any
Warrant thereafter surrendered for exercise shall become entitled to receive
shares of two or more classes of capital stock or shares of Common Stock and
other capital stock of the Company, the Board of Directors (whose determination
shall be conclusive) shall determine the allocation of the adjusted Warrant
Exercise Price between or among shares of such classes of capital stock or
shares of Common Stock and other capital stock. All calculations under this
subsection shall be made to the nearest cent or to the nearest 1/100 of a share,
as the case may be. In the event that at any time as a result of an adjustment
made pursuant to this subsection, the holder of any Warrant thereafter
surrendered for exercise shall become entitled to receive any shares of the
Company other than shares of Common Stock, thereafter the Warrant Exercise Price
of such other shares so receivable upon exercise of any Warrant shall be subject
to adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to Common Stock contained in this
subsection.
(b) Upon each adjustment of the Warrant Exercise Price pursuant to
Section 5(a) above, the Holder of each Warrant shall thereafter (until another
such adjustment) be entitled to purchase at the adjusted Warrant Exercise Price
the number of shares, calculated to the nearest full share, obtained by
multiplying the number of shares specified in such Warrant (as adjusted as a
result of all adjustments in the Warrant Exercise Price in effect prior to such
adjustment) by the Warrant Exercise Price in effect prior to such adjustment and
dividing the product so obtained by the adjusted Warrant Exercise Price.
(c) In case of any consolidation or merger to which the Company is a
party other than a merger or consolidation in which the Company is the
continuing corporation, or in case of any sale or conveyance to another
corporation of the property of the Company as an entirety or substantially as an
entirety, or in the case of any statutory exchange of securities with another
corporation (including any exchange effected in connection with a merger of a
third corporation into the Company), there shall be no adjustment under
Subsection (a) of this Section above but the Holder of each Warrant then
outstanding shall have the right thereafter to convert such Warrant into the
kind and amount of shares of stock and other securities and property which he
would have owned or have been entitled to receive immediately after such
consolidation, merger, statutory exchange, sale, or conveyance had such Warrant
been converted immediately prior to the effective date of such consolidation,
merger, statutory exchange, sale, or conveyance and in any such case, if
necessary, appropriate adjustment shall be made in the application of the
provisions set forth in this subsection with respect to the rights and interests
thereafter of any Holders of the Warrant, to the end that the provisions set
forth in this subsection shall thereafter correspondingly be made applicable, as
nearly as may reasonably be, in relation to any shares of stock and other
securities and property thereafter deliverable on the exercise of the Warrant.
The provisions of this subsection shall similarly apply to successive
consolidations, mergers, statutory exchanges, sales or conveyances.
(d) Upon any adjustment of the Warrant Exercise Price, then and in
each such case, the Company shall (i) give written notice thereof, by first-
class mail, postage prepaid, within ten (10) calendar days after the date when
the circumstances giving rise to the adjustment occurred, addressed to the
Holder as shown on the books of the Company, which notice shall state the
Warrant Exercise Price resulting from such adjustment and the increase or
decrease, if any, in the number of shares of Common Stock purchasable at such
price upon the exercise of this Warrant, setting forth in reasonable detail the
method of calculation and the facts upon which such calculation is based; and
(ii) prepare and retain on file a statement describing in reasonable detail the
method used in arriving at the new Warrant Exercise Price.
3
<PAGE>
6. No Voting Rights. This Warrant shall not entitle the Holder to any
voting rights or other rights as a shareholder of the Company.
7. Notice of Transfer of Warrant or Resale of the Warrant Shares.
(a) Subject to the sale, assignment, hypothecation, or other transfer
restrictions set forth in Section 1 hereof, the Holder, by acceptance hereof,
agrees to give written notice to the Company before transferring this Warrant or
transferring any Warrant Shares of such Holder's intention to do so, describing
briefly the manner of any proposed transfer. Promptly upon receiving such
written notice, the Company shall present copies thereof to the Company's
counsel and to counsel to the original purchaser of this Warrant. If, in the
opinion of each such counsel, the proposed transfer may be effected without
registration or qualification (under any federal or state securities laws), the
Company, as promptly as practicable, shall notify the Holder of such opinion,
whereupon the Holder shall be entitled to transfer this Warrant or to dispose of
Warrant Shares received upon the previous exercise of this Warrant, all in
accordance with the terms of the notice delivered by the Holder to the Company;
provided that an appropriate legend may be endorsed on this Warrant or the
certificates for such Warrant Shares describing restrictions upon transfer
thereof necessary or advisable in the opinion of counsel and satisfactory to the
Company to prevent further transfers which would be in violation of Section 5 of
the Securities Act of 1933, as amended (the "Securities Act") and applicable
state securities laws; and provided further that the prospective transferee or
purchaser shall execute such documents and make such representations,
warranties, and agreements as may be required solely to comply with the
exemptions relied upon by the Company for the transfer or disposition of the
Warrant or Warrant Shares.
(b) If, in the opinion of either of the counsel referred to in this
Section 7, the proposed transfer or disposition of this Warrant or such Warrant
Shares described in the written notice given pursuant to this Section 7 may not
be effected without registration or qualification of this Warrant or such
Warrant Shares, the Company shall promptly give written notice thereof to the
Holder, and the Holder will limit its activities in respect to such transfer or
disposition as, in the opinion of both such counsel, are permitted by law.
(c) Until this Warrant is duly transferred on the books of the
Company, the Company shall treat the registered Holder of this Warrant as
absolute owner hereof for all purposes without being affected by any notice to
the Company.
8. Fractional shares. Fractional shares shall not be issued upon the
exercise of this Warrant, but in any case where the holder would, except for the
provisions of this Section, be entitled under the terms hereof to receive a
fractional share, the Company shall, upon the exercise of this Warrant for the
largest number of whole shares then called for, pay a sum in cash equal to the
sum of (a) the excess, if any, of the "Fair Market Value" (as defined in Section
10(d) hereof) of such fractional share over the proportional part of the Warrant
Exercise Price represented by such fractional share, plus (b) the proportional
part of the Warrant Exercise Price represented by such fractional share.
9. Registration Rights.
(a) The Company agrees that, if at any time (but on a one-time basis
only) during the period commencing one year from the date of this Warrant and
ending four (4) years from [DATE OF EFFECTIVENESS], the Holder of this Warrant
and/or the Holders of any other Warrants and/or Warrant Shares who collectively
shall hold not less than 50% of the Warrants and/or Warrant Shares outstanding
at such time and not previously sold pursuant to this Section 9, shall request
that the Company file a registration statement covering all or any part of the
Warrant Shares:
(i) the Company will promptly notify the Holder and all other
registered Holders, if any, of other Warrants and/or Warrant Shares that
such registration statement will be filed and that the Warrant Shares which
are then held and/or which may be acquired upon the exercise of the
Warrants by
4
<PAGE>
the Holder and such other Holders will be included in such registration
statement at the Holder's and such Holders' request; and
(ii) the Company will cause such registration statement to
include all Warrant Shares which it has been so requested to include, will
take all necessary steps to register or qualify such Warrant Shares under
the Securities Act and the securities laws of such states as the holders
may reasonably request, and will use its best efforts to cause such
registration statement and qualifications to become effective as soon as
practicable.
The Company shall keep effective and maintain any registration, qualification,
notification, or approval specified in this Section 9(a) for such period as may
be reasonably necessary for such Holder or Holders of such Warrant Shares to
dispose thereof and from time to time shall amend or supplement the prospectus
used in connection therewith to the extent necessary in order to comply with
applicable law; provided, that the Company need not maintain the effectiveness
of any such registration, qualification, notification or approval, whether or
not at the request of the Holders, more than nine (9) months following the
effective date thereof.
(b) The Company agrees that, if at any time and from time to time
during the period commencing one year from the date of this Warrant and ending
two (2) years after complete exercise of this Warrant (but not more than six (6)
years from the date of this Warrant), the Company proposes to file a
registration statement under the Securities Act (other than a Form S-4 or Form
S-8 Registration Statement or any successor forms thereto) or qualify for a
public distribution under Section 3(b) of the Securities Act, any of its
securities in connection with the proposed offer of such securities by the
Company or any of its shareholders:
(i) the Company will promptly notify the Holder and all other
registered Holders, if any, of other Warrants and/or Warrant Shares, at
least thirty (30) days prior to each such filing, that it intends to file
such registration statement or effect such qualification, and that the
Warrant Shares which are then held and/or which may be acquired upon the
exercise of the Warrants by the Holder and such other Holders will be
included in such registration statement or qualification at the Holder's
and such Holders' request; and
(ii) the Company will use its best efforts to cause such
registration statement or qualification to include all Warrant Shares which
it has been so requested to include; provided, however, that if a greater
number of Warrant Shares is offered for participation in the proposed
offering than in the reasonable opinion of the managing underwriter of the
proposed offering can be accommodated without adversely affecting the
proposed offering, then the amount of Warrant Shares proposed to be offered
by such Holders for registration, as well as the number of securities of
any other selling shareholders participating in the registration, shall be
excluded or proportionately reduced to a number deemed satisfactory by the
managing underwriter.
The Holder and such other Holders may request that their Warrant Shares be
included in such registration statement or qualification by making written
request to the Company specifying the number of Warrant Shares to be so
included. Such request shall be made within twenty (20) days after receipt from
the Company of notice of such intended registration or qualification.
(c) With respect to each inclusion of securities in a registration or
qualification pursuant to this Section 9, the Company shall bear all fees,
costs, and expenses thereof, including, without limitation, all filing fees,
fees imposed by the National Association of Securities Dealers, Inc., printing
expenses, fees and disbursements of counsel and accountants for the Company,
fees and disbursements of counsel for the underwriter or Underwriter of such
securities (if the Company is required to bear such fees and disbursements), all
internal expenses, the premiums and other costs of policies of insurance against
liability arising out of the public offering, and legal fees and disbursements
and other expenses of complying with state securities laws of any jurisdictions
in which the securities to be offered are to be registered or qualified. Fees
and disbursements of special counsel and accountants for the selling Holders,
underwriting discounts and commissions, and transfer taxes for selling Holders
shall be borne by the selling Holders.
5
<PAGE>
(d) The Company will furnish the Holders whose Warrant Shares are
included in a registration or qualification pursuant to this Section 9 with a
reasonable number of copies of any prospectus and/or other offering materials
included in such filings and will amend or supplement the same as required
during the period of required use thereof. In connection with any registration
filed or qualification made pursuant to this Section 9 in which Warrant Shares
are included, and to the extent permissible under the Securities Act and
controlling precedent thereunder, the Company and each Holder whose Warrant
Shares are so included in such registration or qualification shall provide
cross-indemnification agreements to each other in customary scope covering the
accuracy and completeness of the information furnished by each in connection
therewith.
(e) Each Holder of Warrant Shares included in a registration or
qualification pursuant to this Section 9 agrees to cooperate with the Company in
the preparation and filing of any such registration statement or other offering
materials and in the furnishing of information concerning the Holder for
inclusion therein, or in any efforts by the Company to establish that the
proposed sale is exempt under the Securities Act as to any proposed
distribution.
10. Miscellaneous. The Company shall not, by amendment of its articles of
incorporation or through reorganization, consolidation, merger, dissolution or
sale of assets, or by any other voluntary act or deed, avoid or seek to avoid
the observance or performance of any of the covenants, stipulations or
conditions to be observed or performed hereunder by the Company, but will, at
all times in good faith, assist, insofar as it is able, in the carrying out of
all provisions hereof and in the taking of all other action which may be
necessary in order to protect the rights of the Holders against dilution.
Upon written request of the Holder of this Warrant, the Company will
promptly provide such Holder with a then current written list of the names and
addresses of all Holders of warrants originally issued under the terms of, and
concurrent with, this Warrant.
The representations, warranties and agreements herein contained shall
survive the exercise of this Warrant. This Warrant shall be interpreted under
the laws of the State of Minnesota.
IN WITNESS WHEREOF, Wilsons The Leather Experts Inc. has caused this
Warrant to be signed by its duly authorized officer and to be dated ___________,
1997.
WILSONS THE LEATHER EXPERTS INC.
By__________________________________________
Signature
Its_________________________________________
6
<PAGE>
NOTICE OF EXERCISE OF WARRANT
(To be signed upon the exercise of the Warrant for cash or by check)
The undersigned hereby irrevocably elects to exercise the attached Warrant
and to purchase thereunder, for cash, ________________ of the shares of Common
Stock of Wilsons The Leather Experts Inc. issuable upon the exercise of such
Warrant, herewith makes payment of $___________ therefor in cash or by check,
and requests that certificates for such shares (together with a new Warrant to
purchase the number of shares, if any, with respect to which this Warrant is not
exercised) be issued in the name set forth below and be delivered to the address
set forth below.
Dated: ________________
--------------------------------------------
(Signature)
--------------------------------------------
(Name Typed or Printed)
--------------------------------------------
(Address)
--------------------------------------------
(Social Security or Tax Ident. No.)
* The signature on the Notice of Exercise of Warrant must exactly correspond
to the name as written upon the face of the Warrant in every particular
without alteration or any change whatsoever. When signing on behalf of a
corporation, partnership, trust or other entity, PLEASE indicate your
position(s) and title(s) with such entity.
7
<PAGE>
ASSIGNMENT OF WARRANT
(To be signed only upon authorized transfer of the Warrant)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers
unto _________________________________ the right to purchase _______________
shares of the Common Stock of Wilsons The Leather Experts Inc. to which the
within Warrant relates and appoints _________________________________, as
attorney-in-fact, to transfer said right on the books of Wilsons The Leather
Experts Inc. with full power of substitution in the premises.
Dated: ________________
--------------------------------------------
(Signature)
--------------------------------------------
(Name Typed or Printed)
--------------------------------------------
(Address)
--------------------------------------------
(Social Security or Tax Ident. No.)
* The signature on the Assignment of Warrant must exactly correspond to the
name as written upon the face of the Warrant in every particular without
alteration or any change whatsoever. When signing on behalf of a
corporation, partnership, trust or other entity, PLEASE indicate your
position(s) and title(s) with such entity.
8
<PAGE>
RESTRICTION ON TRANSFER
The securities evidenced hereby have not been registered under the
Securities Act of 1933 or any state securities laws and may not be sold,
transferred, assigned, offered, pledged or otherwise distributed for value
unless there is an effective registration statement under such act or laws
covering such security or the Company receives an opinion of counsel for the
Company stating that such sale, transfer, assignment, pledge or distribution is
exempt from the registration and prospectus delivery requirements of the
Securities Act of 1933 and all applicable state securities laws.
9
<PAGE>
Exhibit 4.9
AMENDMENT TO SHAREHOLDER AGREEMENT
THIS AMENDMENT TO SHAREHOLDER AGREEMENT is made and entered into as of the
25th day of November, 1996, by and among Wilsons The Leather Experts Inc., a
Minnesota corporation (the "Company"), Leather Investors Limited Partnership I,
a Minnesota limited partnership (the "First Limited Partnership"), Leather
Investors Limited Partnership II, a Minnesota limited partnership (the "Second
Limited Partnership" and, together with the First Limited Partnership,
collectively, the "Limited Partnerships"), Joel Waller ("Waller"), David Rogers
("Rogers") and Neil I. Sell, as Trustee for the Trusts (the "Trusts") of Melissa
Diane Rogers U/A dated September 16, 1996 and Brian David Rogers U/A dated
September 16, 1996 (in such capacity as Trustee of the Trusts, "Sell").
WHEREAS, as of the date of this Agreement, the Company has outstanding (i)
4,320,000 shares of Class A Common Stock, par value $.01 per share (the "Class A
Common Stock"), 2,925,000 shares of Class B Common Stock, par value $.01 per
share (the "Class B Common Stock"), and 405,000 shares of Class C Common Stock,
par value $.01 per share (the "Class C Common Stock" and, together with the
Class A Common Stock, the Class B Common Stock and the common stock of the
Company undesignated as to class, herein collectively called the "Common
Stock"), and (ii) 7,405 shares of Series A Preferred Stock, par value $.01 per
share (the "Preferred Stock") (the outstanding shares of Common Stock and
Preferred Stock of the Company being hereinafter referred to as the "Shares");
and
WHEREAS, the Company, the Limited Partnerships, the holders of all of the
general and limited partnership interests in the Limited Partnerships, Waller,
Rogers and, as Permitted Transferee, Sell, and certain other employees of the
Company are parties to a Shareholder Agreement dated as of May 25, 1996 (as
previously amended, the "Shareholder Agreement"), which, among other things,
governs the transfer of the Shares and the outstanding general and limited
partnership interests in the Limited Partnerships; and
WHEREAS, Section 2.3 of the Shareholder Agreement, among other things,
permits transfers of limited partnership interests in the Limited Partnerships
to "Permitted Transferees" (which for purposes of the Shareholder Agreement is
defined to include the spouse of a limited partner in the Limited Partnerships
or trusts solely for the benefit of one or more of such a limited partner or his
or her Family Members (as defined in the Shareholder Agreement); and
WHEREAS, Morris Goldfarb, a partner in the First Limited Partnership
desires to transfer certain of his limited partnership interests in the First
Limited Partnership to Goldfarb Family Partners L.L.C., a Georgia limited
liability company (the "Goldfarb L.L.C."), the members of which would include
only Goldfarb and persons whom would be either Permitted Transferees or Family
Members, as defined in the Shareholder Agreement; and
<PAGE>
WHEREAS, the Goldfarb L.L.C. would not be expressly included as a Permitted
Transferee under the Shareholder Agreement in the absence of an amendment to the
Shareholder Agreement; and
WHEREAS, Section 12.4 of the Shareholder Agreement provides that it may be
amended by a writing signed by the Company, the holders of at least 80% of the
Shares of Common Stock then outstanding and the holders of a majority of the
Shares of Preferred Stock then outstanding; and
WHEREAS, the First Limited Partnership, Waller, Rogers and Sell hold at
least 80% of the outstanding Shares of Common Stock, and the Second Limited
Partnership holds all of the outstanding Shares of Preferred Stock; and
WHEREAS, the Company, the Limited Partnerships, Waller, Rogers and Sell
desire to amend the Shareholder Agreement to provide that the Goldfarb L.L.C.
would constitute a Permitted Transferee.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. The definition of Permitted Transferee in the Shareholder Agreement is
hereby expanded to include the Goldfarb L.L.C. as long as each member of the
Goldfarb L.L.C. other than Morris Goldfarb is either a Permitted Transferee or a
Family Member, as those terms are defined in the Shareholder Agreement.
2. The Shareholder Agreement shall continue in full force and effect,
unmodified except as expressly amended hereby.
3. This Amendment may be executed in two or more counterparts, each of
which shall be an original, but all of which shall constitute but one agreement,
and shall be effective only if executed by each of the parties hereto and
consented to in writing by Melville Corporation.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first written above.
WILSONS THE LEATHER EXPERTS INC.
By /s/ Joel N. Waller
----------------------------
Its Chairman
------------------------
LEATHER INVESTORS LIMITED PARTNERSHIP I
By /s/ Lyle Berman
----------------------------
Name: Lyle Berman
Title: General Partner
And /s/ Morris Goldfarb
---------------------------
Name: Morris Goldfarb
Title: General Partner
LEATHER INVESTORS LIMITED PARTNERSHIP II
By /s/ Lyle Berman
----------------------------
Name: Lyle Berman
Title: General Partner
And /s/ Morris Goldfarb
---------------------------
Name: Morris Goldfarb
Title: General Partner
/s/ Joel N. Waller
----------------------------
Joel Waller
/s/ David L. Rogers
----------------------------
David Rogers
/s/ Neil I. Sell
----------------------------
Neil I. Sell, Trustee,
Melissa Diane Rogers
1996 Irrevocable Trust U/A dated 9/16/96
/s/ Neil I. Sell
----------------------------
Neil I. Sell, Trustee,
Brian David Rogers
1996 Irrevocable Trust U/A dated 9/16/96
-2-
<PAGE>
Exhibit 4.10
WARRANT AGREEMENT
DATE: ________, 1997
PARTIES: Wilsons The Leather Experts Inc.
7401 Boone Avenue North
Brooklyn Park, Minnesota 55428
Norwest Bank Minnesota, National Association
Stock Transfer
161 North Concord Exchange
P.O. Box 738
South Saint Paul, Minnesota 55075-0738
RECITALS:
A. Wilsons The Leather Experts Inc., a Minnesota corporation (the
"Company"), proposes to issue at least 1,100,000 and up to 1,265,000 Redeemable
Common Stock Purchase Warrants (the "Warrants") evidencing the right to purchase
an aggregate of up to 1,265,000 authorized but previously unissued shares of
Common Stock, $.01 par value, of the Company (the "Common Stock"). The Warrants
would be issued in connection with the issuance by the Company of at least
1,100,000 and up to 1,265,000 Units, each Unit consisting of one share of Common
Stock and one Warrant, in connection with the Company's Registration Statement
on Form S-1.
B. The Company desires Norwest Bank Minnesota, National Association
(the "Warrant Agent") to act on behalf of the Company, and the Warrant Agent
desires so to act, in connection with the issuance, registration, transfer,
exchange and exercise of the Warrants.
AGREEMENT:
The Company and the Warrant Agent, each intending to be legally bound,
hereby covenant and agree as follows:
ARTICLE I.
APPOINTMENT OF WARRANT AGENT;
ISSUANCE, FORM AND EXECUTION OF WARRANT CERTIFICATES
Section 1.1. Appointment of Warrant Agent. The Company hereby
appoints the Warrant Agent to act as agent for the Company, and the Warrant
Agent hereby accepts the
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agency established herein and agrees to perform its agency duties in accordance
with the terms and conditions of this Warrant Agreement.
Section 1.2. Warrant Certificates. The Company shall execute and deliver to
the Warrant Agent certificates which the Company has authorized to represent the
Warrants ("Warrant Certificates"). The Warrant Certificates shall be
substantially as set forth in Exhibit A hereto and may have such legends,
summaries or endorsements printed, lithographed or engraved thereon as the
Company may deem appropriate and as are not inconsistent with the provisions of
this Warrant Agreement, or as may be required to comply with any law or with any
rule or regulation relating to listing of the Warrants on the NASDAQ system,
including the National Market System, or on any stock exchange or to conform to
usage. The Warrant Certificates shall be dated with the date of their issuance.
Section 1.3. Execution of Warrant Certificates. The Warrant Certificates
shall be executed on behalf of the Company by a duly authorized officer of the
Company, either manually or by facsimile signature printed thereon. The Warrant
Certificates shall be manually countersigned by the Warrant Agent and shall not
be valid for any purpose unless so countersigned. Any Warrant Certificate may be
signed on behalf of the Company by the person who at the actual date of the
signing of such Warrant Certificate shall have been the proper officer of the
Company, although at the date of issuance of such Warrant Certificate any such
person has ceased to be such officer of the Company.
ARTICLE II.
EXERCISE OF WARRANTS
Section 2.1. Exercise. Any or all of the Warrants represented by each
Warrant Certificate may be exercised by the holder thereof on or before 5:00
p.m., Minneapolis time, on ___________, 2000 unless extended by the Company, by
surrender of the Warrant Certificate with the Purchase Form, which is printed on
the reverse thereof (or a reasonable facsimile thereof), duly executed by such
holder, to the Warrant Agent at its principal office in Minneapolis, Minnesota,
accompanied by payment, in cash or by certified or official bank check payable
to the order of the Company, in an amount equal to the product of the number of
shares of Common Stock issuable upon exercise of the Warrant represented by such
Warrant Certificate, as adjusted pursuant to the provisions of Article III
hereof, multiplied by the exercise price of $13.50, as adjusted pursuant to the
provisions of Article III hereof (such price as so adjusted from time to time
being herein called the "Purchase Price"), and such holder shall be entitled to
receive such number of fully paid and nonassessable shares of Common Stock, as
so adjusted, at the time of such exercise.
Section 2.2. Time of Exercise. Each exercise of Warrants shall be deemed to
have been effective immediately prior to the close of business on the business
day on which the Warrant Certificate relating to such Warrants shall have been
surrendered to the Warrant Agent as provided in Section 2.1, and at such time
the person or persons in whose name or names any
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certificate or certificates for shares of Common Stock shall be issuable upon
such exercise as provided in Section 2.3, shall be deemed to have become the
holder or holders of record thereof.
Section 2.3. Issuance of Shares of Common Stock; No Fractional Shares. As
soon as practicable after the exercise of any Warrant, and in any event within
ten (10) days after receipt by the Company of the notice of exercise under
Section 2.1, the Company at its expense (including the payment by it of any
applicable issue taxes) will cause to be issued in the name of and delivered to
the holder thereof or as such holder (upon payment by such holder of any
applicable transfer taxes) may direct,
(a) a certificate or certificates for the number of fully paid and
nonassessable shares of Common Stock to which such holder shall be entitled
upon such exercise plus, in lieu of any fractional share to which such
holder would otherwise be entitled, an amount in cash equal to such
fraction multiplied by the then current value of a share of Common Stock,
such current value to be determined as follows:
(i) if the Common Stock shall be listed or admitted to
unlisted trading privileges on any single national securities
exchange, then such current value shall be computed on the basis of
the last reported sale price of the Common Stock on such exchange on
the last business day prior to the date of the exercise of such
Warrant upon which a sale shall have been effected; or
(ii) if the Common Stock shall not be so listed or admitted
to unlisted trading privileges and bid and asked prices therefor in
the over-the-counter market shall be reported by NASDAQ, including the
National Market System, then such current value shall be computed on
the basis of the Last Reported Sale Valuation Method or, in the event
such method is not then used by NASDAQ, the average of the closing bid
and asked prices on the last business day prior to the date of the
exercise of such Warrant as so reported; or
(iii) if the Common Stock shall be listed or admitted to
unlisted trading privileges on more than one national securities
exchange or one or more national securities exchanges and in the over-
the-counter market, then such current value shall, if different as a
result of calculation under the applicable method(s) described above
in this Section, be deemed to be the higher number calculated in
connection therewith; or
(iv) if the Common Stock shall not be so listed or admitted
to unlisted trading privileges and such bid and asked prices shall not
be so reported, then such current value shall be computed on the basis
of the book value of Common Stock as of the close of business on the
last day of the month immediately preceding the date upon which such
Warrant was exercised, as determined by the Company; and
(b) in case such exercise includes only part of the Warrants
represented by any Warrant Certificate, a new Warrant Certificate or
Warrant Certificates of like tenor, calling in the aggregate on the face or
faces thereof for the number of shares of Common Stock
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equal (without giving effect to any adjustment therein) to the number of
such shares called for on the face of such Warrant Certificate minus the
number of such shares designated by the holder for such exercise as
provided in Section 2.1. Warrants represented by a properly assigned
Warrant Certificate may be exercised by a new holder without first having a
new Warrant Certificate issued.
Section 2.4. Extension of Exercise Period; Change of Exercise Price. The
Company may, upon notice given to the Warrant Agent, and without the consent of
the holders of the Warrant Certificates, (a) reduce the Purchase Price during
all or any portion of the originally stated exercise period or (b) extend the
period over which the Warrants are exercisable beyond __________, 2000 and
increase or decrease the Purchase Price for any period the Warrant exercise
period is extended. In the case of the extension of the exercise period or a
change in the Purchase Price, the Company must provide the Warrant Agent and the
Warrantholders of record notice of such extension of the exercise period,
specifying, as the case may be, the time to which such exercise period is
extended, or specifying the new Purchase Price and the periods for which such
new Purchase Price is in effect, a reasonable time prior to the date such
extension or new Purchase Price is to take effect, such reasonable time to be
commercially reasonable and consistent with applicable securities laws and
regulations.
ARTICLE III.
ANTIDILUTION PROVISIONS
Section 3.1. Adjustment of Purchase Price.
(a) The Purchase Price shall be subject to the following
adjustments. In the event that:
(i) any dividends on any class of stock of the Company
payable in Common Stock or securities convertible into Common Stock
shall be paid by the Company;
(ii) the Company shall subdivide its then outstanding
shares of Common Stock into a greater number of shares; or
(iii) the Company shall combine outstanding shares of
Common Stock, by reclassification or otherwise;
then, in any such event, the Purchase Price in effect immediately prior to
such event shall (until adjusted again pursuant hereto) be adjusted
immediately after such event to a price (calculated to the nearest full
cent) determined by dividing (A) the number of shares of Common Stock
outstanding immediately prior to such event, multiplied by the then
existing Purchase Price, by (B) the total number of shares of Common Stock
outstanding immediately after such event (including the maximum number of
shares of Common Stock issuable in respect of any securities convertible
into Common Stock), and the resulting quotient shall be the adjusted
Purchase Price per share.
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(b) No adjustment of the Purchase Price shall be made if the amount
of such adjustments shall be less than $.05 per share, but in such case any
adjustment that would otherwise be required then to be made shall be
carried forward and shall be made at the time and together with the next
subsequent adjustment which, together with any adjustment or adjustments so
carried forward, shall amount to not less than $.05 per share.
Section 3.2. Adjustment of Number of Shares Purchasable on Exercise of
Warrants. Upon each adjustment of the Purchase Price pursuant to Section 3.1
above, the registered holder of each Warrant shall thereafter (until another
such adjustment) be entitled to purchase at the adjusted Purchase Price the
number of shares, calculated to the nearest full share, obtained by multiplying
the number of shares specified in such Warrant (as adjusted as a result of all
adjustments in the Purchase Price in effect prior to such adjustment) by the
Purchase Price in effect prior to such adjustment and dividing the product so
obtained by the adjusted Purchase Price.
Section 3.3. Notice as to Adjustment. Upon any adjustment of the Purchase
Price and an increase or decrease in the number of shares of Common Stock
purchasable upon the exercise of the Warrants, then, and in each such case, the
Company shall within ten (10) days after the effective date of such adjustment
give written notice thereof, by first class mail, postage prepaid, addressed to
each registered Warrantholder at the address of such Warrantholder as shown on
the books of the Company, which notice shall state the adjusted Purchase Price
and the increased or decreased number of shares purchasable upon the exercise of
the Warrants, setting forth in reasonable detail the method of calculation and
the facts upon which such calculation is based.
Section 3.4. Effect of Reorganization, Reclassification, Merger, Etc. If
at any time while any Warrant is outstanding there should be any capital
reorganization or reclassification of the capital stock of the Company (other
than the issue of any shares of Common Stock in subdivision of outstanding
shares of Common Stock by reclassification or otherwise and other than a
combination of shares provided for in Section 3.1 hereof) or any consolidation
or merger of the Company with another corporation or any sale, conveyance, lease
or other transfer by the Company of all or substantially all of its property to
any other corporation, the holder of any Warrant shall, during the remainder of
the period such Warrant is exercisable, be entitled to receive, upon payment of
the Purchase Price, the number of shares of stock or other securities or
property of the Company, or of the successor corporation resulting from such
consolidation or merger, or of the corporation to which the property of the
Company has been sold, conveyed, leased or otherwise transferred, as the case
may be, to which the Common Stock (and any other securities and property) of the
Company, deliverable upon the exercise of such Warrant, would have been entitled
upon such capital reorganization, reclassification of capital stock,
consolidation, merger, sale, conveyance, lease or other transfer if such Warrant
had been exercised immediately prior to such capital reorganization,
reclassification of capital stock, consolidation, merger, sale, conveyance,
lease or other transfer; and, in any such case, appropriate adjustment (as
determined by the Board of Directors of the Company) shall be made in the
application of the provisions set forth in this Warrant Agreement with respect
to the rights and interests thereafter of the Warrantholders to the end that the
provisions set forth in this Warrant Agreement (including the adjustment of the
Purchase Price and the number of shares issuable upon the exercise of the
Warrants) shall thereafter be applicable, as near as may be reasonably
practicable, in relation to any shares or other property thereafter deliverable
upon the exercise of the Warrants as if the Warrants had been exercised
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immediately prior to such capital reorganization, reclassification of capital
stock, consolidation, merger, sale, conveyance, lease or other transfer and the
Warrantholders had carried out the terms of the exchange as provided for by such
capital reorganization, reclassification, consolidation or merger. The Company
shall not effect any such capital reorganization, consolidation, merger or
transfer unless, upon or prior to the consummation thereof, the successor
corporation or the corporation to which the property of the Company has been
sold, conveyed, leased or otherwise transferred shall assume by written
instrument the obligation to deliver to the holder of each Warrant such shares
of stock, securities, cash or property as in accordance with the foregoing
provisions such holder shall be entitled to purchase.
Section 3.5. Prior Notice as to Certain Events. In case at any time:
(a) the Company shall pay any dividend upon its Common Stock payable
in stock or make any distribution (other than cash dividends) to the
holders of its Common Stock; or
(b) the Company shall offer for subscription pro rata to the holders
of its Common Stock any additional shares of stock of any class or any
other rights; or
(c) there shall be any capital reorganization or reclassification of
the capital stock of the Company, or consolidation or merger of the Company
with, or sale, conveyance, lease or other transfer of all or substantially
all of its assets to, another corporation; or
(d) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then in any one or more of such cases, the Company shall give prior written
notice, by first class mail, postage prepaid, addressed to each registered
Warrantholder at the address of such Warrantholder as shown on the books of the
Company, of the date on which (x) the books of the Company shall close or a
record shall be taken for such stock dividend, distribution or subscription
rights or (y) such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding up shall take place, as the case may
be. Such notice shall also specify the date as of which the holders of the
Common Stock of record shall participate in such dividend, distribution or
subscription rights or shall be entitled to exchange their Common Stock for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation, or
winding up, as the case may be. Such written notice shall be given at least
twenty (20) days prior to the action in question and not less than twenty (20)
days prior to the record date or the date on which the Company's transfer books
are closed in respect thereto.
Section 3.6. Certain Obligations of the Company. The Company will not, by
amendment of its articles of incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms of this Warrant Agreement or the Warrant
Certificate, but will at all times in good faith assist in the carrying out of
all such terms.
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Without limiting the generality of the foregoing, the Company (a) will take all
such action as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and nonassessable shares of such stock upon
the exercise of all Warrants from time to time outstanding, and (b) will not (i)
transfer all or substantially all of its properties and assets to any other
person or entity, or (ii) consolidate with or merge into any other entity where
the Company is not the continuing or surviving entity, or (iii) permit any other
entity to consolidate with or merge into the Company where the Company is the
continuing or surviving entity but, in connection with such consolidation or
merger, the Common Stock then issuable upon the exercise of the Warrants shall
be changed into or exchanged for shares or other securities or property of any
other entity unless, in any such case, the other entity acquiring such
properties and assets, continuing or surviving after such consolidation or
merger or issuing or distributing such shares or other securities or property,
as the case may be, shall expressly assume in writing and be bound by all the
terms of this Warrant Agreement and the Warrant Certificates.
Section 3.7. Reservation and Listing of Common Stock. The Company will at
all times reserve and keep available, solely for issuance and delivery upon the
exercise of the Warrants, all shares of Common Stock from time to time issuable
upon such exercise. All such shares shall be authorized and, when issued upon
such exercise, shall be validly issued, fully paid and nonassessable with no
liability on the part of the holder thereof. The Company, at its expense, will
list on the NASDAQ system, including the National Market System, if applicable,
and on each national securities exchange on which any Common Stock may at any
time be listed, subject to official notice of issuance, and will maintain such
listing of, the shares of Common Stock from time to time issuable upon the
exercise of the Warrants.
Section 3.8. Registration or Exemption for Common Stock. The Company will
use its best efforts (a) at all times the Warrants are exercisable to maintain
an effective registration statement under the Securities Act of 1933, as amended
(the "Act"), covering Common Stock issuable upon exercise of the Warrants, (b)
from time to time to amend or supplement the prospectus contained in such
registration statement to the extent necessary in order to comply with
applicable law, (c) to qualify for exemption from the registration requirements
of the Act the Common Stock issuable upon exercise of the Warrants, and (d) to
maintain exemptions or qualifications, in those jurisdictions in which the
original registration statement relating to the Warrants was initially
qualified, to permit the exercise of the Warrants and the issuance of the Common
Stock pursuant to such exercise. The Warrant Agent shall have no responsibility
for the maintenance of such exemptions or qualifications or for liabilities
arising from the exercise or attempted exercise of Warrants in jurisdictions
where exemptions or qualifications have not been maintained or are otherwise
unavailable.
ARTICLE IV.
REDEMPTION OF WARRANTS
Section 4.1. Redemption Price. The Warrants may be redeemed at the option
of the Company in whole, at any time on or after ________, 1997, and on or
before __________, 2000, upon notice as set forth in Section 4.2, and at a
redemption price equal to $.01 per Warrant, provided that (a) the last reported
sale price of the Common Stock on a national securities
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exchange, if the Common Stock shall be listed or admitted to unlisted trading
privileges on a national securities exchange, or (b) the closing bid price of
the Common Stock on the NASDAQ system, if the Common Stock is not so listed or
admitted to unlisted trading privileges, exceeds $14.50 per share (such price
subject to adjustment from time to time in the same manner as the Purchase Price
pursuant to the provisions of Article III hereof) for any 10 consecutive trading
days prior to the date such notice of redemption is given.
Section 4.2. Notice of Redemption. In the case of any redemption of
Warrants, the Company or, at its request, the Warrant Agent in the name of and
at the expense of the Company, shall give notice of such redemption to the
holders of the Warrants to be redeemed as hereinafter provided in this Section
4.2. Notice of redemption to the holders of Warrants shall be given by mailing
by first-class mail a notice of such redemption not less than 30 days prior to
the date fixed for redemption. Any notice which is given in the manner herein
provided shall be conclusively presumed to have been duly given, whether or not
the holder receives the notice. In any case, failure duly to give such notice,
or any defect in such notice, to the holder of any Warrant Certificate shall not
affect the validity of the proceedings for the redemption of Warrants
represented by any other Warrant Certificate. Each such notice shall specify the
date fixed for redemption, the place of redemption and the redemption price of
$.01 at which each Warrant is to be redeemed, and shall state that payment of
the redemption price of the Warrants will be made on surrender of the Warrants
at such place of redemption, and that if not exercised by the close of business
on the date fixed for redemption, the exercise rights of the Warrants identified
for redemption shall expire unless extended by the Company. Such notice shall
also state the current Purchase Price and the date on which the right to
exercise the Warrants will expire unless extend ed by the Company.
Section 4.3. Payment of Warrants on Redemption; Deposit of Redemption
Price. If notice of redemption shall have been given as provided in Section 4.2,
the redemption price of $.01 per Warrant shall, unless the Warrant is
theretofore exercised pursuant to the terms hereof, become due and payable on
the date and at the place stated in such notice. On and after such date of
redemption, provided that cash sufficient for the redemption thereof shall then
be deposited by the Company with the Warrant Agent for that purpose, the
exercise rights of the Warrants identified for redemption shall expire. On
presentation and surrender of Warrant Certificates at such place of payment
specified in such notice, the Warrants identified for redemption shall be paid
and redeemed at the redemption price of $.01 per Warrant. Prior to the date
fixed for redemption, the Company shall deposit with the Warrant Agent an amount
of money sufficient to pay the redemption price of all the Warrants identified
for redemption. Any monies which shall have been deposited with the Warrant
Agent for redemption of Warrants and which are not required for that purpose by
reason of exercise of Warrants shall be repaid to the Company upon delivery to
the Warrant Agent of evidence satisfactory to it of such exercise.
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ARTICLE V.
CERTAIN OTHER PROVISIONS RELATING TO
RIGHTS OF HOLDERS OF WARRANT CERTIFICATES
Section 5.1. No Rights of Shareholders. The Warrant Certificates shall be
issued in registered form only. No Warrant Certificate shall entitle the holder
thereof to any of the rights of a holder of shares of Common Stock of the
Company, including, without limitation, the right to vote, to receive dividends
and other distributions, or to receive any notice of, or to attend, meetings of
holders of Common Stock or any other proceedings of the Company.
Section 5.2. Loss, Theft, Destruction or Mutilation of Warrant
Certificates. Upon receipt by the Warrant Agent of evidence reasonably
satisfactory to the Warrant Agent of the loss, theft, destruction or mutilation
of any Warrant Certificate, and (a) in the case of any such loss, theft, or
destruction, upon delivery to the Warrant Agent of an indemnity bond in form and
amount, and issued by a bonding company, reasonably satisfactory to the Company,
or (b) in the case of any such mutilation, upon surrender to and cancellation by
the Warrant Agent of such Warrant Certificate, the Company at its expense will
execute and cause the Warrant Agent to countersign and deliver, in lieu thereof,
a new Warrant Certificate of like tenor.
Section 5.3. Transfer Agent; Cancellation of Warrant Certificates;
Unexercised Warrants. Norwest Bank Minnesota, National Association (and any
successor), as transfer agent (the "Transfer Agent"), is hereby irrevocably
authorized and directed at all times to reserve such number of authorized and
unissued shares of Common Stock as shall be sufficient to permit the exercise in
full of all Warrants from time to time outstanding. The Company will keep a copy
of this Agreement on file with the Transfer Agent. The Warrant Agent, and any
successor thereto, is hereby irrevocably authorized to requisition from time to
time from the Transfer Agent certificates for shares of Common Stock required
for exercise of Warrants. The Company will supply the Transfer Agent with duly
executed certificates for shares of Common Stock for such purpose and will make
available any cash required in settlement of fractional share interests. All
Warrant Certificates surrendered upon the exercise or redemption of Warrants
shall be cancelled by the Warrant Agent and shall thereafter be delivered to the
Company; such cancelled Warrant Certificates, with the Purchase Form on the
reverse thereof duly filled in and signed, shall constitute conclusive evidence
as between the parties hereto of the numbers of shares of Common Stock which
shall have been issued upon exercises of Warrants. Promptly after the last day
on which the Warrants are exercisable (set forth in Section 2.1 above), the
Warrant Agent shall certify to the Company the aggregate number of Warrants then
outstanding and unexercised. No shares of Common Stock shall be subject to
reservation with respect to Warrants not exercised prior to the time and date
identified in Section 2.1 above as the last time and date at which Warrants may
be exercised.
ARTICLE VI.
TRANSFER AND EXCHANGE OF WARRANT CERTIFICATES
Section 6.1. Warrant Register; Transfer or Exchange of Warrant
Certificates. The Warrant Agent shall cause to be kept at the principal office
of the Warrant Agent a register (the
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"Warrant Register") in which, subject to such reasonable regulations as the
Company may prescribe, provisions shall be made for the registration of
transfers and exchanges of Warrant Certificates. Upon surrender for transfer or
exchange of any Warrant Certificates, properly endorsed, to the Warrant Agent,
the Warrant Agent at the Company's expense will issue and deliver to or upon the
order of the holder thereof a new Warrant Certificate or Warrant Certificates of
like tenor, in the name of such holder or as such holder (upon payment by such
holder of any applicable transfer taxes) may direct, calling in the aggregate on
the face or faces thereof for the number of shares of Common Stock called for on
the face of the Warrant Certificate so surrendered. Any Warrant Certificate
surrendered for transfer or exchange shall be cancelled by the Warrant Agent and
shall thereafter be delivered to the Company.
Section 6.2. Identity of Warrantholders. Until a Warrant Certificate is
transferred in the Warrant Register, the Company and the Warrant Agent may treat
the person in whose name the Warrant Certificate is registered as the absolute
owner thereof and of the Warrants represented thereby for all purposes,
notwithstanding any notice to the contrary, except that, if and when any Warrant
Certificate is properly assigned in blank, the Company and the Warrant Agent may
(but shall not be obligated to) treat the bearer thereof as the absolute owner
of the Warrant Certificate and of the Warrants represented thereby for all
purposes, notwithstanding any notice to the contrary.
ARTICLE VII.
CONCERNING THE WARRANT AGENT
Section 7.1. Taxes. The Company will, from time to time, promptly pay to
the Warrant Agent, or make provision satisfactory to the Warrant Agent for the
payment of, all taxes and charges that may be imposed by the United States or
any State upon the Company or the Warrant Agent upon the transfer or delivery of
shares of Common Stock upon the exercise of Warrants, but the Company shall not
be obligated to pay any tax imposed in connection with any transfer involved in
the delivery of a certificate for shares of Common Stock in any name other than
that of the registered holder of the Warrant Certificate surrendered in
connection with the purchase thereof.
Section 7.2. Replacement of Warrant Agent in Certain Circumstances.
(a) The Warrant Agent may resign its duties and be discharged from
all further duties and liabilities hereunder after giving thirty (30) days
notice in writing to the Company, except that such shorter notice may be
given as the Company shall, in writing, accept as sufficient. The Company
may discharge the Warrant Agent at any time with or without reason,
effective upon thirty (30) days written notice to the Warrant Agent or such
shorter period as the Warrant Agent shall, in writing, accept as
sufficient. If the office of Warrant Agent becomes vacant by resignation,
discharge, incapacity to act or otherwise, the Company shall appoint in
writing a new Warrant Agent, the principal office of which shall be in
Minnesota. If the Company shall fail to make such appointment within a
period of thirty (30) days after it has been notified in writing of such
resignation or incapacity by the resigning or incapacitated Warrant Agent
or by the holder of a Warrant Certificate, then the holder of any Warrant
Certificate may apply to any court of competent jurisdiction for the
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appointment of a new Warrant Agent. Any new Warrant Agent, whether
appointed by the Company or by such a court, shall be a corporation
organized and doing business under the laws of the United States or of the
State of Minnesota, of good standing, and having its principal office in
Minnesota, which is authorized under such laws to exercise corporate trust
powers and is subject to supervision or examination by Federal or State
authority. Any new Warrant Agent appointed hereunder shall execute,
acknowledge and deliver to the Company an instrument accepting such
appointment hereunder and thereupon such new Warrant Agent without any
further act or deed shall become vested with all the rights, powers, duties
and responsibilities of the Warrant Agent hereunder with like effect as if
it had been named as the Warrant Agent; but if for any reason it becomes
necessary or expedient to have the former Warrant Agent execute and deliver
any further assurance, conveyance, act or deed, the same shall be done and
shall be legally and validly executed and delivered by the former Warrant
Agent. Not later than the effective date of any such appointment the
Company shall file notice thereof with the former Warrant Agent. The
Company shall promptly give notice of any such appointment to the holders
of the Warrant Certificates by mail to their addresses as shown in the
Warrant Register. Failure to file or give such notice, or any defect
therein, shall not affect the legality or validity of the appointment of
the successor Warrant Agent.
(b) Any company into which the Warrant Agent or any new Warrant Agent
may be merged or converted or with which it may be consolidated or any
company resulting from any merger, conversion or consolidation to which the
Warrant Agent or any new Warrant Agent shall be a party shall be the
successor Warrant Agent under this Warrant Agreement without any further
act; provided that if such company would not be eligible for appointment as
a successor Warrant Agent under the provisions of paragraph (a) of this
Section 7.2 the Company shall forthwith appoint a new Warrant Agent in
accordance with such provisions. Any such successor Warrant Agent may adopt
the prior countersignature of any predecessor Warrant Agent and deliver
Warrant Certificates countersigned and not delivered by such predecessor
Warrant Agent or may countersign Warrant Certificates either in the name of
any predecessor Warrant Agent or the name of the successor Warrant Agent.
Section 7.3. Remuneration of Warrant Agent. The Company will pay the
Warrant Agent reasonable remuneration for its services as Warrant Agent
hereunder and will reimburse the Warrant Agent upon demand for all expenditures
that the Warrant Agent may reasonably incur in the execution of its duties
hereunder.
Section 7.4. Further Assurances. The Company will perform, exercise,
acknowledge and deliver or cause to be performed, executed, acknowledged and
delivered all such further and other acts, instruments and assurances as may
reasonably be required by the Warrant Agent for the carrying out or performing
by the Warrant Agent of the provisions of this Warrant Agreement.
Section 7.5. Limitations on Liabilities of the Warrant Agent.
(a) The Warrant Agent may consult with legal counsel (who may be
legal counsel for the Company), and the opinion of such counsel shall be
full and complete
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authorization and protection of the Warrant Agent as to any action taken or
omitted by it in good faith and in accordance with such opinion.
(b) Whenever, in the performance of its duties under this Warrant
Agreement, the Warrant Agent shall deem it necessary or desirable that any
matter be proved or established, or that any instructions with respect to
the performance of its duties hereunder be given, by the Company prior to
taking or suffering any action hereunder, such matter (unless other
evidence in respect thereof be herein specifically prescribed) may be
deemed to be conclusively proved and established, or such instructions may
be given, by a certificate or instrument signed by an officer of the
Company and delivered to the Warrant Agent; and such certificate or
instrument shall be full authorization to the Warrant Agent for any action
taken or suffered in good faith by it under the provisions of this Warrant
Agreement in reliance upon such certificate or instrument; but in its
discretion the Warrant Agent may in lieu thereof accept other evidence of
such matter or may require such further or additional evidence as it may
deem reasonable.
(c) The Warrant Agent shall be liable hereunder only for its own
negligence or willful misconduct. The Warrant Agent shall act hereunder
solely as agent, and its duties shall be determined solely by the
provisions hereof. The Company agrees to indemnify the Warrant Agent and
save it harmless against any and all liabilities, including judgments,
costs and counsel fees, for anything done or omitted by the Warrant Agent
in the execution of this Warrant Agreement except as a result of the
Warrant Agent's negligence or willful misconduct.
(d) The Warrant Agent shall not be liable for or by reason of any of
the statements of fact or recitals contained in this Warrant Agreement or
in the Warrant Certificates (except its countersignature thereof) or be
required to verify the same, but all such statements and recitals are and
shall be deemed to have been made by the Company only.
(e) The Warrant Agent shall not be under any responsibility in
respect to the validity or execution of any Warrant Certificate (except its
countersignature thereof); nor shall it be responsible for any breach by
the Company of any covenant or condition contained in this Warrant
Agreement or in any Warrant Certificate; nor shall it be responsible for
the making of any adjustment in the Purchase Price, or number of shares
issuable upon exercise of the Warrant Certificates or responsible for the
manner, method or amount of any such adjustment or the facts that would
require any such adjustment; nor shall it by any act hereunder be deemed to
make any representation or warranty as to the authorization or reservation
of any shares of Common Stock to be issued pursuant to this Warrant
Agreement or any Warrant Certificate or as to whether any shares of Common
Stock or other securities are or will be validly authorized and issued and
fully paid and nonassessable.
Section 7.6. Amendment and Modification. The Warrant Agent may, without
the consent or concurrence of the holders of the Warrant Certificates, by
supplemental agreement or otherwise, join with the Company in making any changes
or corrections in this Warrant Agreement
-12-
<PAGE>
that they shall have been advised by counsel (a) are required to cure any
ambiguity or to correct any defective or inconsistent provision or clerical
omission or mistake or manifest error herein contained, (b) add to the
obligations of the Company in this Warrant Agreement further obligations
thereafter to be observed by it, or surrender any right or power reserved to or
conferred upon the Company in this Warrant Agreement, or (c) do not or will not
adversely affect, alter or change the rights, privileges or immunities of the
holders of Warrant Certificates not provided for under this Warrant Agreement;
provided, however, that any term of this Warrant Agreement or any Warrant
Certificate may be changed, waived, discharged or terminated by an instrument in
writing signed by each party against which enforcement of such change, waiver,
discharge or termination is sought, or by which the same is to be performed or
observed.
ARTICLE VIII.
OTHER MATTERS
Section 8.1. Successors and Assigns. All the covenants and provisions of
this Warrant Agreement by or for the benefit of the Company or the Warrant Agent
shall bind and inure to the benefit of their respective successors and assigns.
Section 8.2. Notices. Any notice or demand authorized by this Warrant
Agreement to be given or made by the Warrant Agent or by the holder of any
Warrant Certificate to or on the Company shall be sufficiently given or made if
sent by first class or registered mail, postage prepaid, addressed (until
another address is filed in writing by the Company with the Warrant Agent) as
follows:
Wilsons The Leather Experts Inc.
7401 Boone Avenue North
Brooklyn Park, Minnesota 55428
Attention: Chief Financial Officer
Any notice or demand authorized by this Warrant Agreement to be given or made by
the holder of any Warrant Certificate or by the Company to or on the Warrant
Agent shall be sufficiently given or made if sent by first class or registered
mail, postage prepaid, addressed (until another address is filed in writing by
the Warrant Agent with the Company) as follows:
Norwest Bank Minnesota, National Association
Stock Transfer
161 North Concord Exchange
P.O. Box 738
South Saint Paul, Minnesota 55075-0738
Sections 8.3. Governing Law. This Warrant Agreement and the Warrant
Certificates are being delivered in the State of Minnesota and shall be
construed and enforced in accordance with and governed by the laws of such
State.
-13-
<PAGE>
Section 8.4. No Benefits Conferred. Nothing in this Warrant Agreement
expressed and nothing that may be implied from any of the provisions hereof is
intended, or shall be construed, to confer upon, or give to, any person or
corporation other than the Company, the Warrant Agent, and the holders of the
Warrant Certificates, any right, remedy or claim under or by reason of this
Agreement or of any covenant, condition, stipulation, promise or agreement
herein; and all covenants, conditions, stipulations, promises and agreements in
this Warrant Agreement contained shall be for the sole and exclusive benefit of
the Company, the Warrant Agent, their respective successors and the holders of
the Warrant Certificates.
Section 8.5. Headings. The descriptive headings used in this Warrant
Agreement are inserted for convenience only and shall not control or affect the
meaning or construction of any of the provisions hereof.
IN WITNESS WHEREOF, this Warrant Agreement has been duly executed by the
parties hereto as of the day and year first above written.
WILSONS THE LEATHER EXPERTS INC.
By___________________________________
Its__________________________________
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
By___________________________________
Its__________________________________
-14-
<PAGE>
EXHIBIT A
---------
THIS WARRANT CERTIFICATE MAY BE
TRANSFERRED SEPARATELY FROM THE COMMON STOCK CERTIFICATE
WITH WHICH IT IS INITIALLY ISSUED
EXERCISABLE ON OR BEFORE, AND VOID AFTER
5:00 P.M. MINNEAPOLIS TIME, _____________, 2000
No. W - ________ Certificate for ________ Warrants
----------------------------------
UNIT CUSIP
WARRANT CUSIP
----------------------------------
WARRANTS TO PURCHASE COMMON STOCK OF
WILSONS THE LEATHER EXPERTS INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF MINNESOTA
THIS CERTIFIES that ___________________________________________ or assigns,
is the owner of the number of Warrants set forth above, each of which represents
the right to purchase from Wilsons The Leather Experts Inc., a Minnesota
corporation (the "Company"), at any time on or before 5:00 p.m., Minneapolis
time, ___________, 2000, upon compliance with and subject to the conditions set
forth herein and in the Warrant Agreement hereinafter referred to, one share
(subject to adjustments referred to below) of the Common Stock of the Company
(such shares or other securities or property purchasable upon exercise of the
Warrants being herein called the "Shares"), by surrendering this Warrant
Certificate, with the Purchase Form on the reverse side duly executed, at the
principal office of Norwest Bank Minnesota, National Association, or its
successor, as warrant agent (the "Warrant Agent"), and by paying in full, in
cash or by certified or official bank check payable to the order of the Company,
the purchase price of $13.50 per share.
Upon any exercise of less than all the Warrants evidenced by this Warrant
Certificate, there shall be issued to the holder a new Warrant Certificate in
respect of the Warrants as to which this Warrant Certificate was not exercised.
Upon the surrender for transfer or exchange hereof, properly endorsed, to
the Warrant Agent, the Warrant Agent at the Company's expense will issue and
deliver to the order of the holder hereof, a new Warrant Certificate or Warrant
Certificates of like tenor, in the name of such holder or as such holder (upon
payment by such holder of any applicable transfer taxes) may
A-1
<PAGE>
direct, calling in the aggregate on the face or faces thereof for the number of
shares of Common Stock called for on the face hereof.
The Warrant Certificates are issued only as registered Warrant
Certificates. Until this Warrant Certificate is transferred in the Warrant
Register, the Company and the Warrant Agent may treat the person in whose name
this Warrant Certificate is registered as the absolute owner hereof and of the
Warrants represented hereby for all purposes, notwithstanding any notice to the
contrary.
This Warrant Certificate is issued under the Warrant Agreement dated as of
__________, 1997, between the Company and the Warrant Agent and is subject to
the terms and provisions contained in said Warrant Agreement, to all of which
terms and provisions the registered holder of this Warrant Certificate consents
by acceptance hereof. Copies of said Warrant Agreement are on file at the
principal office of the Warrant Agent in Minneapolis, Minnesota, and may be
obtained by writing to the Warrant Agent.
The number of Shares receivable upon the exercise of the Warrants
represented by this Warrant Certificate and the purchase price per share are
subject to adjustment upon the happening of certain events specified in the
Warrant Agreement (which provisions are contained in Article III of the Warrant
Agreement and are hereby incorporated by reference).
No fractional Shares of the Company's Common Stock will be issued upon the
exercise of Warrants. As to any final fraction of a share which a holder of
Warrants exercised in the same transaction would otherwise be entitled to
purchase on such exercise, the Company shall pay a cash adjustment in lieu of
any fractional Share determined as provided in the Warrant Agreement.
The Warrants may be redeemed by the Company, in whole, at any time on or
after __________, 1997, and on or before __________, 2000, at a redemption price
of $.01 per Warrant, upon notice of such redemption as set forth below, provided
that (a) the last reported sale price of the Common Stock on a national
securities exchange, if the Common Stock shall be listed or admitted to unlisted
trading privileges on a national securities exchange, or (b) the closing bid
price of the Common Stock on the NASDAQ system, if the Common Stock is not so
listed or admitted to unlisted trading privileges, exceeds $14.50 per share
(subject to adjustment as provided in the Warrant Agreement) for any 10
consecutive trading days prior to the date such notice of redemption is given.
Notice of redemption shall be mailed not less than thirty (30) days prior to the
date fixed for redemption to the holders of Warrants at their last registered
addresses. If notice of redemption shall have been given as provided in the
Warrant Agreement and cash sufficient for the redemption be deposited by the
Company for that purpose, the exercise rights of the Warrants identified for
redemption shall expire at the close of business on such date of redemption
unless extended by the Company.
This Warrant Certificate shall not entitle the holder hereof to any of the
rights of a holder of Common Stock of the Company, including, without
limitation, the right to vote, to receive dividends and other distributions, to
exercise any preemptive right, or to receive any notice of, or to attend
meetings of holders of Common Stock or any other proceedings of the Company.
A-2
<PAGE>
This Warrant Certificate shall be void and the Warrants and any rights
represented hereby shall cease unless exercised on or before 5:00 P.M.
Minneapolis time on __________, 2000, unless extended by the Company.
This Warrant Certificate shall not be valid for any purpose until it shall
have been countersigned by the Warrant Agent.
WITNESS the facsimile signatures of the Company's duly authorized officers.
Dated: WILSONS THE LEATHER EXPERTS INC.
By______________________________
Its_____________________________
Attest:
______________________________
Secretary
COUNTERSIGNED AND REGISTERED:
NORWEST BANK MINNESOTA, NATIONAL
ASSOCIATION, as Warrant Agent
By_____________________________
Authorized Signature
A-3
<PAGE>
[REVERSE OF WARRANT CERTIFICATE]
THE ARTICLES OF INCORPORATION OF THE CORPORATION GRANT TO THE BOARD OF DIRECTORS
THE POWER TO ESTABLISH MORE THAN ONE CLASS OR SERIES OF SHARES AND TO FIX THE
RELATIVE RIGHTS AND PREFERENCES OF ANY SUCH DIFFERENT CLASS OR SERIES. THE
CORPORATION WILL FURNISH TO ANY SHAREHOLDER UPON REQUEST AND WITHOUT CHARGE A
FULL STATEMENT OF THE DESIGNATIONS, PREFERENCES, LIMITATIONS AND RELATIVE RIGHTS
OF THE SHARES OF EACH CLASS OR SERIES AUTHORIZED TO BE ISSUED, SO FAR AS THEY
HAVE BEEN DETERMINED, AND THE AUTHORITY OF THE BOARD TO DETERMINE THE RELATIVE
RIGHTS AND PREFERENCES OF SUBSEQUENT CLASSES OR SERIES.
TO: Wilsons The Leather Experts Inc.
c/o Norwest Bank Minnesota, National Association
Warrant Agent
PURCHASE FORM
(To be Executed by the Registered Holder in Order to Exercise Warrant
Certificates)
The undersigned hereby irrevocably elects to exercise _____________* of the
Warrants represented by the Warrant Certificate and to purchase for cash the
Shares issuable upon the exercise of said Warrants, and herewith makes payment
of $__________ therefor, and requests that certificates for such Shares shall be
issued in the name of
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER OF
REGISTERED HOLDER OF CERTIFICATE
- ---------------------------
- ---------------------------
------------------------------------
(Print Name)
------------------------------------
(Address)
------------------------------------
Dated: Signature(s)
------------------------
------------------------
- -------------------
* Insert here the number of Warrants evidenced on the face of this Warrant
Certificate (or, in the case of a partial exercise, the portion thereof being
exercised), in either case without making any adjustment for additional Common
Stock or any other securities or property or cash which, pursuant to the
adjustment provisions referred to in this Warrant Certificate, may be
deliverable upon exercise.
A-4
<PAGE>
ASSIGNMENT FORM
(To be Executed by the Registered Holder in Order to Transfer Warrant
Certificates)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers
____________________** of the Warrants represented by this Warrant Certificate
unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF ASSIGNEE
- -----------------------------
- -----------------------------
-------------------------------------
(Print name)
-------------------------------------
(Address)
-------------------------------------
and does hereby irrevocably constitute and appoint _________________________
Attorney to transfer this Warrant Certificate on the records of the Company with
full power of substitution in the premises.
Dated:_______________________ Signature(s)_________________________
_________________________
Signature(s)
Guaranteed:____________________________________
- --------------------
** Insert here the number of Warrants evidenced on the face of this Warrant
Certificate (or, in the case of a partial assignment, the portion thereof being
assigned), in either case without making any adjustment for additional Common
Stock or any other securities or property or cash which, pursuant to the
adjustment provisions referred to in this Warrant Certificate, may be
deliverable upon exercise.
NOTICE
The Signature(s) to the Purchase Form or the Assignment Form must
correspond to the name(s) as written upon the face of this Warrant Certificate
in every particular without alteration or enlargement or any change whatsoever.
A-5
<PAGE>
Exhibit 10.14
AMENDMENT NO. 1 TO
SECURITY AGREEMENT
This Amendment No. 1 to SECURITY AGREEMENT (this "Amendment") is entered
into as of this 19th day of December, 1996 by and among WILSONS THE LEATHER
EXPERTS INC., a Minnesota corporation ("Issuer") and the other grantors listed
on the signature pages hereto (collectively "Grantors"), in favor of CVS NEW
YORK, INC., a New York corporation (formerly known as Melville Corporation) (the
"Secured Party").
RECITALS
WHEREAS, Issuer and the grantors signatory thereto have entered into that
certain Security Agreement dated as of May 25, 1996 in favor of the Secured
Party (the "Security Agreement");
WHEREAS, certain signatories to the Security Agreement have undergone a
reorganization and/or changed their legal name; and
WHEREAS, the Issuer, the Secured Party and the Grantors desire to enter
into this Amendment and to be bound by the terms of such Security Agreement.
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
agreements contained herein, and for other good and valuable consideration, the
parties hereto agree as follows:
1. The following entities are successors to original signatories to the
Security Agreement and have agreed to be bound by the terms and conditions
thereof as if they were original signatories thereto:
Wilsons Leather of Alabama Inc., an Alabama corporation
Wilsons Leather of Connecticut Inc., a Connecticut corporation
Wilsons Leather of Florida Inc., a Florida corporation
Wilsons Leather of Georgia Inc., a Georgia corporation
Wilsons Leather of Indiana Inc., an Indiana corporation
Wilsons Leather of Iowa Inc., an Iowa corporation
Wilsons Leather of Louisiana Inc., a Louisiana corporation
Wilsons Leather of Maryland Inc., a Maryland corporation
Wilsons Leather of Massachusetts Inc., a Massachusetts corporation
Wilsons Leather of Michigan Inc., a Michigan corporation
Wilsons Leather of New Jersey Inc., a New Jersey corporation
Wilsons Leather of New York Inc., a New York corporation
Wilsons Leather of North Carolina Inc., a North Carolina corporation
Wilsons Leather of Ohio Inc., an Ohio corporation
Wilsons Leather of Pennsylvania Inc., a Pennsylvania corporation
Wilsons Leather of Rhode Island Inc., a Rhode Island corporation
<PAGE>
Wilsons Leather of Tennessee Inc., a Tennessee corporation
Wilsons Leather of Texas Inc., a Texas corporation
Wilsons Leather of Virginia Inc., a Virginia corporation
Wilsons Leather of West Virginia Inc., a West Virginia corporation
Wilsons Leather of Wisconsin Inc., a Wisconsin corporation
2. The following grantors acknowledge and reaffirm all of their
respective obligations under the Security Agreement:
Wilsons Leather of Arkansas Inc. (f/k/a Park Plaza Wilsons, Inc.), an
Arkansas corporation
Wilsons Leather of Delaware Inc. (f/k/a Christiana Wilsons, Inc.), a
Delaware corporation
Wilsons Leather of Missouri Inc. (f/k/a Wilsons/Georgetown Leather Design
of St. Louis, MO., Inc.), a Missouri corporation
Wilsons Leather of South Carolina Inc. (f/k/a Haywood Wilsons, Inc.), a
South Carolina corporation
Wilsons Leather of Vermont Inc. (f/k/a Burlington Wilsons, Inc.), a Vermont
corporation
Wilsons The Leather Experts Inc., a Minnesota corporation
Wilsons Center, Inc., a Minnesota corporation
Rosedale Wilsons, Inc., a Minnesota corporation
River Hills Wilsons, Inc., a Minnesota corporation
Bermans The Leather Experts, Inc., a Delaware corporation
Wilsons House of Suede, Inc., a California corporation
Wilsons Tannery West, Inc., a California corporation
Wilsons Leather Holdings Inc., a Minnesota corporation
3. The following grantor was formed after the execution and delivery of
the Security Agreement, has reviewed the Security Agreement, and, by its
execution of this Amendment, agrees to be a Grantor thereunder and bound by the
terms and conditions thereof as fully as if it were an original signatory
thereto:
Wilsons Leather of Mississippi Inc., a Mississippi corporation
4. This Amendment may be executed in counterparts with each such
counterpart considered an original and all such counterparts constituting one
and the same document. THE TERMS OF THIS AMENDMENT SHALL BE GOVERNED BY, AND
SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF
ILLINOIS (EXCLUSIVE OF ANY RULES AS TO CONFLICT OF LAWS) AND THE LAWS OF THE
UNITED STATES APPLICABLE THEREIN.
[signature pages follow]
-2-
<PAGE>
IN WITNESS WHEREOF, the Grantors have executed and delivered this Amendment
as of the date first written above.
WILSONS LEATHER OF ALABAMA INC.
WILSONS LEATHER OF CONNECTICUT INC.
WILSONS LEATHER OF FLORIDA INC.
WILSONS LEATHER OF GEORGIA INC.
WILSONS LEATHER OF INDIANA INC.
WILSONS LEATHER OF IOWA INC.
WILSONS LEATHER OF LOUISIANA INC.
WILSONS LEATHER OF MARYLAND INC.
WILSONS LEATHER OF MASSACHUSETTS INC.
WILSONS LEATHER OF MICHIGAN INC.
WILSONS LEATHER OF MISSISSIPPI INC.
WILSONS LEATHER OF NEW JERSEY INC.
WILSONS LEATHER OF NEW YORK INC.
WILSONS LEATHER OF NORTH CAROLINA INC.
WILSONS LEATHER OF OHIO INC.
WILSONS LEATHER OF PENNSYLVANIA INC.
WILSONS LEATHER OF RHODE ISLAND INC.
WILSONS LEATHER OF TENNESSEE INC.
WILSONS LEATHER OF TEXAS INC.
WILSONS LEATHER OF VIRGINIA INC.
WILSONS LEATHER OF WEST VIRGINIA INC.
WILSONS LEATHER OF WISCONSIN INC.
WILSONS LEATHER OF ARKANSAS INC.
-3-
<PAGE>
WILSONS LEATHER OF DELAWARE INC.
WILSONS LEATHER OF MISSOURI INC.
WILSONS LEATHER OF SOUTH CAROLINA INC.
WILSONS LEATHER OF VERMONT INC.
WILSONS THE LEATHER EXPERTS INC.
WILSONS CENTER, INC.
ROSEDALE WILSONS, INC.
RIVER HILLS WILSONS, INC.
BERMANS THE LEATHER EXPERTS, INC.
WILSONS HOUSE OF SUEDE, INC.
WILSONS TANNERY WEST, INC.
-4-
<PAGE>
WILSONS THE LEATHER
EXPERTS INC.
By: /s/ Douglas J. Treff
-----------------------------
Title: Vice President
--------------------------
The authorized officer of each
of the foregoing corporations
Accepted and Acknowledged by:
CVS NEW YORK, INC.
By: /s/ Zenon P. Lankowsky
----------------------------------
Title: General Counsel
-------------------------------
M1:0246921.01
-5-
<PAGE>
Exhibit 11.1
Wilsons The Leather Experts Inc.
Computation Of Net Income Per Common Share
Period From Inception (May 26, 1996) to February 1, 1997
<TABLE>
<S> <C>
Weighted average number of issued shares outstanding 7,650,000
Effect of:
1996 Stock Option Plan 78,377
Melville Warrant to purchase common stock 1,242,000
Conversion of Series A Preferred Stock 617,083
-----------
Weighted average shares outstanding 9,587,460
===========
Net income $23,906,000
===========
Net income per common share $2.49
====
</TABLE>
<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
April 17, 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
April 17, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary consolidated financial information
extracted from Wilsons The Leather Experts Inc. and Subsidiaries as of February
1, 1997 and for the period from inception (May 26, 1996) to February 1, 1997 and
is qualified in its entirety by reference to such consolidated financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 8-MOS
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-START> MAY-26-1996
<PERIOD-END> FEB-01-1997
<CASH> 81,553
<SECURITIES> 0
<RECEIVABLES> 9,418
<ALLOWANCES> (4,567)
<INVENTORY> 64,919
<CURRENT-ASSETS> 152,569
<PP&E> 18,085
<DEPRECIATION> (994)
<TOTAL-ASSETS> 172,388
<CURRENT-LIABILITIES> 68,771
<BONDS> 55,811
<COMMON> 83
0
0
<OTHER-SE> 43,382
<TOTAL-LIABILITY-AND-EQUITY> 172,388
<SALES> 345,121
<TOTAL-REVENUES> 345,121
<CGS> 222,131
<TOTAL-COSTS> 297,937
<OTHER-EXPENSES> 2,479
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,271
<INCOME-PRETAX> 39,434
<INCOME-TAX> 15,528
<INCOME-CONTINUING> 23,906
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,906
<EPS-PRIMARY> 2.49
<EPS-DILUTED> 0
</TABLE>
