<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 19, 1997
REGISTRATION NO. 333-37055
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
<TABLE>
<S> <C> <C> <C>
WILSONS THE LEATHER EXPERTS INC. Minnesota 5651 41-1839933
GUARANTORS:
WILSONS LEATHER HOLDINGS INC. Minnesota 5651 41-1838394
WILSONS CENTER, INC. Minnesota 5651 41-1840154
ROSEDALE WILSONS, INC. Minnesota 5651 06-1240330
RIVER HILLS WILSONS, INC. Minnesota 5651 41-1711590
BERMANS THE LEATHER EXPERTS INC. Delaware 5651 41-1580755
WILSONS HOUSE OF SUEDE, INC. California 5651 95-1576546
WILSONS TANNERY WEST, INC. California 5651 95-4175734
WILSONS LEATHER OF ALABAMA INC. Alabama 5651 41-1712339
WILSONS LEATHER OF CONNECTICUT INC. Connecticut 5651 06-1112410
WILSONS LEATHER OF FLORIDA INC. Florida 5651 41-1728910
WILSONS LEATHER OF GEORGIA INC. Georgia 5651 36-3747480
WILSONS LEATHER OF INDIANA INC. Indiana 5651 62-1320269
WILSONS LEATHER OF IOWA INC. Iowa 5651 41-1714107
WILSONS LEATHER OF LOUISIANA INC. Louisiana 5651 72-1272462
WILSONS LEATHER OF MARYLAND INC. Maryland 5651 36-3788264
WILSONS LEATHER OF MASSACHUSETTS INC. Massachusetts 5651 95-3931368
WILSONS LEATHER OF MICHIGAN INC. Michigan 5651 36-3785904
WILSONS LEATHER OF NEW JERSEY INC. New Jersey 5651 41-1750883
WILSONS LEATHER OF NEW YORK INC. New York 5651 36-3886689
WILSONS LEATHER OF NORTH CAROLINA INC. North Carolina 5651 04-2634270
WILSONS LEATHER OF OHIO INC. Ohio 5651 95-4112843
WILSONS LEATHER OF PENNSYLVANIA INC. Pennsylvania 5651 95-3750365
WILSONS LEATHER OF RHODE ISLAND INC. Rhode Island 5651 06-1095955
WILSONS LEATHER OF TENNESSEE INC. Tennessee 5651 41-1750897
WILSONS LEATHER OF TEXAS INC. Texas 5651 75-2509217
WILSONS LEATHER OF VIRGINIA INC. Virginia 5651 62-1220241
WILSONS LEATHER OF WEST VIRGINIA INC. West Virginia 5651 95-3761888
WILSONS LEATHER OF WISCONSIN INC. Wisconsin 5651 41-1713169
WILSONS LEATHER OF ARKANSAS INC. Arkansas 5651 41-1754836
WILSONS LEATHER OF DELAWARE INC. Delaware 5651 52-1380392
WILSONS LEATHER OF MISSISSIPPI INC. Mississippi 5651 41-1848726
WILSONS LEATHER OF MISSOURI INC. Missouri 5651 41-1750899
WILSONS LEATHER OF SOUTH CAROLINA INC. South Carolina 5651 57-0993516
WILSONS LEATHER OF VERMONT INC. Vermont 5651 41-1689726
WILSONS INTERNATIONAL INC. Minnesota 5651 41-1577526
<CAPTION>
(Eact name of the Registrants x (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
asspecified in their charters) incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
7401 BOONE AVENUE NORTH
BROOKLYN PARK, MINNESOTA 55428
(612) 391-4000
(Address, including ZIP Code, and telephone number, including Area Code, of the
Registrants' 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
RAMONA L. BASKERVILLE
FAEGRE & BENSON LLP
2200 NORWEST CENTER
MINNEAPOLIS, MINNESOTA 55402
(612) 336-3000
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED NOVEMBER 19, 1997
PROSPECTUS
LOGO
OFFER TO EXCHANGE
11 1/4% SERIES B SENIOR NOTES DUE 2004
FOR ALL OUTSTANDING 11 1/4% SERIES A SENIOR NOTES DUE 2004
The Company has not issued, and does not have any current firm arrangments to
issue, any significant additional indebtedness to which the Senior Notes would
be senior. As noted below, the Senior Notes will be effectively subordinated to
all obligations under the Company's Senior Credit Facility and the guarantees
of such loans to the extent of the assets securing such loans and guarantees.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON , 1997 UNLESS EXTENDED
-----------
Wilsons The Leather Experts Inc. ("Wilsons" or the "Company") is hereby
offering (the "Exchange Offer"), upon the terms and subject to the conditions
set forth in this Prospectus and the accompanying Letter of Transmittal (the
"Letter of Transmittal"), to exchange $1,000 principal amount of its 11 1/4%
Series B Senior Notes due 2004 (the "Exchange Notes"), which exchange has been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
pursuant to a registration statement of which this Prospectus is a part (the
"Registration Statement"), for each $1,000 principal amount of its outstanding
11 1/4% Series A Senior Notes due 2004 (the "Private Notes"), of which
$75,000,000 in aggregate principal amount was issued on August 18, 1997 and is
outstanding as of the date hereof. The form and terms of the Exchange Notes are
the same as the form and terms of the Private Notes except that (i) the
exchange will have been registered under the Securities Act, and, therefore,
the Exchange Notes will not bear legends restricting the transfer thereof, and
(ii) holders of the Exchange Notes will generally not be entitled to certain
rights of holders of the Private Notes under the Registration Rights Agreement
(as defined herein), which rights will terminate upon the consummation of the
Exchange Offer. The Exchange Notes will evidence the same indebtedness as the
Private Notes (which they replace) and will be entitled to the benefits of an
Indenture (as defined) governing the Private Notes and the Exchange Notes. The
Private Notes and the Exchange Notes are sometimes referred to herein
collectively as the "Senior Notes." See "The Exchange Offer" and "Description
of Senior Notes."
The Exchange Notes will bear interest at the same rate and on the same terms
as the Private Notes. Consequently, the Exchange Notes will bear interest at
the rate of 11 1/4% per annum and the interest thereon will be payable semi-
annually in arrears on February 15 and August 15 of each year, commencing
February 15, 1998. The Exchange Notes will bear interest from and including the
date of issuance of the Private Notes (August 18, 1997). Holders whose Private
Notes are accepted for exchange will be deemed to have waived the right to
receive any interest accrued on the Private Notes.
-----------
SEE "RISK FACTORS" BEGINNING ON PAGE 19 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER AND AN
INVESTMENT IN THE EXCHANGE NOTES.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES 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.
-----------
The Company will accept for exchange any and all validly tendered Private
Notes not withdrawn prior to 5:00 P.M., New York City time, on , 1997,
unless the Exchange Offer is extended by the Company in its sole discretion
(the "Expiration Date"). Tenders of Private Notes may be withdrawn at any time
prior to 5:00 P.M., New York City Time, on the Expiration Date. The Exchange
Offer is not conditioned upon any minimum principal amount of Private Notes
being tendered for exchange. Private Notes may be tendered only in integral
multiples of $1,000. In the event the Company terminates the Exchange Offer and
does not accept for exchange any Private Notes, the Company will promptly
return all previously tendered Private Notes to the holders thereof.
-----------
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE>
(Continued from prior page)
The Senior Notes may be redeemed, in whole or in part, at any time on or
after August 15, 2001, at the option of the Company, at the redemption prices
set forth herein, plus, in each case, accrued and unpaid interest to the date
of redemption. In addition, at any time prior to August 15, 2000, the Company
may, at its option, redeem up to 25% of the aggregate principal amount of the
Senior Notes at a redemption price of 111.25% of the principal amount thereof,
plus accrued and unpaid interest to the date of redemption, with the net cash
proceeds of a public offering of the Company's common stock, provided that at
least 75% of the original aggregate principal amount of the Senior Notes
remains outstanding immediately after the occurrence of such redemption. See
"Description of Senior Notes--Optional Redemption."
The Senior Notes will be general unsecured obligations of the Company and
will rank senior in right of payment to all existing and future subordinated
Indebtedness (as defined herein) of the Company and will rank pari passu in
right of payment with all other current and future unsubordinated Indebtedness
of the Company. The Senior Notes will be fully and unconditionally guaranteed
on a senior basis (the "Guarantees"), jointly and severally, by each of the
Company's domestic Subsidiaries (as defined herein) (the "Guarantors"). The
Guarantees will be senior unsecured obligations and will rank senior in right
of payment to all existing and future Indebtedness of the Guarantors that is
subordinated to such Guarantees and will rank pari passu in right of payment
with all other current and future unsubordinated obligations of the
Guarantors. An indirect Subsidiary of the Company is the borrower under the
Senior Credit Facility (as defined herein), and the Company and its other
direct and indirect domestic Subsidiaries are guarantors under the Senior
Credit Facility. Such borrowings and guarantees are secured by substantially
all of the assets of the Company and the respective Guarantors. Accordingly,
the Senior Notes and the Guarantees will be effectively subordinated to all
obligations under the Senior Credit Facility and the guarantees of such loans
to the extent of the value of the assets securing such loans and guarantees.
The Senior Credit Facility provides for borrowings of up to $150.0 million in
aggregate principal amount, which amount includes a letter of credit facility
of up to $90.0 million. As of November 1, 1997, there was $53.2 million of
senior Indebtedness outstanding under the Senior Credit Facility (consisting
of $20.1 million of borrowings and $33.1 million of outstanding letters of
credit) and there would have been no other senior Indebtedness and no
subordinated Indebtedness outstanding. The terms of the Indenture (as defined
herein) will permit the Company and the Guarantors to incur additional
Indebtedness, subject to certain limitations. The Company has no current or
pending arrangements or agreements, other than the Senior Credit Facility, to
incur any additional significant indebtedness to which the Senior Notes would
be subordinated or rank pari passu in right of payment. See "Description of
Senior Notes."
In the event of a Change of Control (as defined herein), holders of the
Senior Notes will have the right to require the Company to make an offer to
purchase their Senior Notes, in whole or in part, at a price equal to 101% of
the aggregate principal amount thereof, plus accrued and unpaid interest to
the date of purchase. See "Description of Senior Notes--Repurchase at the
Option of Holders--Change of Control." If a Change of Control were to occur,
there can be no assurance that the Company would have sufficient financial
resources, or would be able to arrange financing, to pay the repurchase price
for all Senior Notes tendered by holders thereof. Further, the provisions of
the Indenture may not afford holders of Senior Notes protection in the event
of a highly leveraged transaction, reorganization, restructuring, merger or
similar transaction involving the Company that may adversely affect holders of
Senior Notes, if such transaction does not result in a Change of Control. See
"Risk Factors--Potential Inability to Fund Repurchase of Senior Notes Upon
Change of Control."
2
<PAGE>
(Continued from prior page)
Because the Company conducts substantially all of its operations through its
Subsidiaries, it is required to rely entirely upon payment from its
Subsidiaries for the funds necessary to meet its obligations, including the
payment of interest on and principal of the Senior Notes. The ability of the
Subsidiaries to make such payments will be subject to, among other things,
applicable state laws and the payment limitations in the Senior Credit
Facility. Claims of creditors of the Company's Subsidiaries will generally
have priority as to the assets of such Subsidiaries over the claims of
creditors of the Company. See "Risk Factors--Holding Company Structure."
Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third
parties, the Company believes that the Exchange Notes issued pursuant to the
Exchange Offer in exchange for Private Notes may be offered for resale, resold
and otherwise transferred by a holder thereof (other than (i) a broker-dealer
who purchases such Exchange Notes directly from the Company to resell pursuant
to Rule 144A or any other available exemption under the Securities Act or (ii)
a person that is an affiliate of the Company within the meaning of Rule 405
under the Securities Act), without compliance with the registration and
prospectus delivery provisions of the Securities Act; provided that the holder
is acquiring the Exchange Notes in the ordinary course of its business and is
not participating, and had no arrangement or understanding with any person to
participate, in the distribution of the Exchange Notes. Holders of Private
Notes wishing to accept the Exchange Offer must represent to the Company, as
required by the Registration Rights Agreement, that such conditions have been
met. Each broker-dealer that receives Exchange Notes for its own account in
exchange for Private Notes, where such Private Notes
were acquired by such broker-dealer as a result of market-making activities or
other trading activities, must acknowledge that it will deliver a prospectus
in connection with any resale of such Exchange Notes. The Company believes
that none of the registered holders of the Private Notes is an affiliate (as
such term is defined in Rule 405 under the Securities Act) of the Company.
Prior to the Exchange Offer, there has been no public market for the Senior
Notes. The Company does not intend to list the Exchange Notes on any
securities exchange, but the Private Notes are eligible for trading in the
National Association of Securities Dealers, Inc.'s Private Offerings, Resales
and Trading through Automatic Linkages (PORTAL) market. There can be no
assurance that an active market for the Senior Notes will develop. To the
extent that a market for the Senior Notes does develop, the market value of
the Senior Notes will depend on market conditions (such as yields on
alternative investments), general economic conditions, the Company's financial
condition and certain other factors. Such conditions might cause the Senior
Notes, to the extent that they are traded, to trade at a significant discount
from face value. See "Risk Factors--Absence of Established Public Market and
Restrictions on Resale."
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a broker-
dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Private Notes where
such Private Notes were acquired by such broker-dealer as a result of market-
making activities or other trading activities. The Company has indicated its
intention to make this Prospectus (as it may be amended or supplemented)
available to any broker-dealer for use in connection with any such resale for
a period of 180 days after the date of this Prospectus. See "Plan of
Distribution."
The Company will not receive any proceeds from, and has agreed to bear the
expenses of, the Exchange Offer. No underwriter is being used in connection
with the Exchange Offer. See "The Exchange Offer."
3
<PAGE>
(Continued from prior page)
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF PRIVATE NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE EXCHANGE OFFER TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR
THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE
ACCOMPANYING LETTER OF TRANSMITTAL, NOR ANY EXCHANGE MADE HEREUNDER, SHALL
UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
The Exchange Notes will be available initially only in book-entry form. The
Company expects that the Exchange Notes issued pursuant to the Exchange Offer
will be issued in the form of one or more fully registered global notes that
will be deposited with, or on behalf of, The Depository Trust Company ("DTC"
or the "Depository") and registered in its name or in the name of Cede & Co.,
as its nominee. Beneficial interests in each global note representing the
Exchange Notes will be shown on, and
transfers thereof will be effected only through, records maintained by the
Depository and its participants. After the initial issuance of any such global
note, Exchange Notes in certificated form will be issued in exchange for the
global note only in accordance with the terms and conditions set forth in the
Indenture. See "The Exchange Offer--Book-Entry Transfer" and "Description of
Senior Notes--Book Entry, Delivery and Form."
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). ALL STATEMENTS OTHER THAN
STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS PROSPECTUS, INCLUDING, WITHOUT
LIMITATION, STATEMENTS REGARDING THE COMPANY'S FUTURE FINANCIAL POSITION,
BUSINESS STRATEGY, BUDGETS, PROJECTED COSTS AND PLANS AND OBJECTIVES OF
MANAGEMENT FOR FUTURE OPERATIONS, ARE FORWARD-LOOKING STATEMENTS. IN ADDITION,
FORWARD-LOOKING STATEMENTS GENERALLY CAN BE IDENTIFIED BY THE USE OF FORWARD-
LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "EXPECT," "INTEND," "ESTIMATE,"
"ANTICIPATE," "BELIEVE," "SHOULD," "PLANS" OR "CONTINUE" OR THE NEGATIVE
THEREOF OR VARIATIONS THEREON OR SIMILAR TERMINOLOGY. ALTHOUGH THE COMPANY
BELIEVES THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS
ARE REASONABLE, IT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO
HAVE BEEN CORRECT. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THE COMPANY'S EXPECTATIONS ("CAUTIONARY STATEMENTS") ARE
DISCLOSED UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS, INCLUDING,
WITHOUT LIMITATION, IN CONJUNCTION WITH THE FORWARD-LOOKING STATEMENTS
INCLUDED IN THIS PROSPECTUS. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING
STATEMENTS ATTRIBUTABLE TO THE COMPANY, OR PERSONS ACTING ON ITS BEHALF, ARE
EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS.
4
<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 and pro forma financial information (including the notes thereto)
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
26, 1996 (the "Acquisition"). Unless otherwise indicated, references to the
Company's fiscal year refer to the year ended on the Saturday closest to
January 31, which for the most recent fiscal year end was February 1, 1997.
Unless indicated, references to 1996 in this Prospectus refer to the twelve
months ended February 1, 1997. The fiscal year of the Predecessor Companies
prior to the Acquisition ended on December 31. When information is indicated to
be on a "pro forma" basis, such information gives effect to: (i) the
Restructuring (as defined herein); (ii) the Acquisition, accounted for under
the purchase method of accounting; (iii) the initial public offering of the
Company's common stock and common stock purchase warrants consummated on June
2, 1997 (including the subsequent exercise of the underwriter's overallotment
option) and the application of the net proceeds therefrom; and (iv) the
offering of the Private Notes (the "Offering") and the application of the net
proceeds therefrom, in each case, with respect to statement of operations data,
as if such events had occurred on January 28, 1996 (except the Restructuring
which is as of the date it occurred) and, with respect to balance sheet data,
as of the date presented. See "Pro Forma Unaudited Consolidated Financial
Statements."
THE COMPANY
Wilsons is the leading specialty retailer of men's and women's leather
outerwear, apparel and accessories in the United States. The Company's
nationwide network of 452 retail stores is located in 44 states and the
District of Columbia and England. The Company offers quality leather products
under several formats: "Wilsons The Leather Experts," the Company's traditional
mall-based store, offers a full range of moderately priced merchandise, while
"Tannery West" and "Georgetown Leather Design" are mall-based stores offering a
more targeted line of upscale merchandise. As of August 2, 1997, Wilsons
operated 12 airport stores, which focus on selling accessories to business
travelers and tourists, and 440 mall-based stores. The Company supplements its
mall-based operations with holiday stores and seasonal kiosks during its peak
selling period from October through December and plans to open approximately
200 holiday stores and 100 kiosks in 1997. For the twelve months ended August
2, 1997, the Company generated net sales of $410.0 million and Adjusted EBITDA
(as defined herein) of $31.4 million.
Wilsons offers an extensive selection of quality merchandise at affordable
prices, with a consistent focus on customer service through its staff of sales
associates trained in leather types, quality and care. The Company offers more
than 6,000 stock keeping units ("SKUs") of men's and women's leather apparel
and leather accessories such as gloves, handbags, wallets, briefcases, planners
and computer cases. Wilsons offers quality merchandise at affordable prices to
provide value for its customers and to develop a loyal customer base. The
Company believes it can offer lower prices than its competitors for merchandise
of comparable quality due to its integrated global sourcing capability,
merchandising strategy, and efficient, cost-effective distribution system.
Wilsons' mall-based stores average approximately 2,000 square feet in size and
are located primarily in high-traffic regional shopping malls with a
merchandising strategy targeted to the demographics and buying patterns of the
surrounding population. Management believes the Company's global sourcing,
nationwide store network, value-based quality merchandise and strong customer
service combine to provide the Company with competitive advantages over other
mall-based leather retailers, and contribute to attractive cash flow margins.
5
<PAGE>
Wilsons has increased its Adjusted EBITDA from $15.0 million for the fiscal
year ended December 31, 1994 to $31.4 million for the twelve-month period ended
August 2, 1997, a compound annual growth rate of approximately 33%. Over the
same period, the Company's Adjusted EBITDA margin has increased from 3.2% to
7.7%, primarily as a result of the Company's: (i) Restructuring; (ii)
vertically-integrated global product sourcing; (iii) merchandising strategy;
and (iv) distribution system.
Restructuring. As part of a program to enhance the Company's profitability
and improve its portfolio of stores, management closed 156 stores, between
January 1, 1995 and May 25, 1996, that had not achieved targeted cash flow
levels, wrote off an amount of goodwill and certain other non-productive assets
and recorded charges for certain related lease obligations (the
"Restructuring"). As 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. Following the
Restructuring, the Company maintained its geographically diverse store base and
improved its financial results, which management believes positions the Company
for future revenue and cash flow growth.
Vertically-Integrated Global Product Sourcing. Wilsons' integrated global
product sourcing network allows the Company to design, purchase leather for,
and contract for the manufacturing of most of the apparel and accessories sold
in its stores. In 1996, Wilsons contracted for the manufacture of approximately
1.8 million leather garments, which management believes makes the Company the
largest leather apparel purchaser in the world. This volume purchasing and
vertical integration provides Wilsons with greater operational control and
flexibility resulting in reduced order lead times, increased responsiveness to
changing consumer preferences and fashion trends, and the ability to offer its
customers better value by providing quality products at competitive prices.
Merchandising Strategy. Since 1992, Wilsons has reduced its sourcing time
from approximately 120 days to approximately 90 days by more closely
integrating the Company's designers and merchandisers with its extensive
contract manufacturing sources. This reduced sourcing time results in more
successful product lines, efficient inventory management and the reduced need
for markdowns on merchandise at the end of the selling season. The benefits of
the reduced sourcing time are enhanced by the Company's newly implemented
merchandise information system. This system is designed to improve the quality
and availability of merchandising data to allow management to better analyze
merchandise trends and adjust its merchandising strategies.
Distribution System. Management believes the Company has a significant
competitive advantage by virtue of its ability to manage the flow of its
merchandise from the sourcing of leather through the sale of its apparel and
accessories in the Company's retail stores. Wilsons' merchandise is shipped
directly from the contract manufacturers to the Company's state-of-the-art
distribution center. Wilsons has also redesigned and automated its distribution
center to more efficiently process merchandise. As a result, approximately 40%
of the merchandise received in the distribution center is sent directly to the
Company's stores through cross-docking, which allows for more efficient
handling and more timely delivery of inventory and reduced distribution
expense.
BUSINESS STRATEGY
Wilsons' objectives are to gain additional market share, strengthen its
position as the largest specialty retailer of leather outerwear, apparel and
accessories in the United States and increase the cash flow and 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 merchandise and expertise in the unique
properties and care of leather merchandise. The Company provides ongoing
training for its sales
6
<PAGE>
associates in leather types, quality and care to develop the associates'
leather expertise and to deliver a high level of customer service.
Maximize Merchandising Opportunities Through Vertical Integration. Wilsons'
operations integrate the design of leather merchandise, the development and
sourcing 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 its vertical integration gives it several
competitive advantages over other mall-based leather retailers, including the
ability to:
. Reduce the amount of cash needed to maintain optimal inventory levels;
. 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; and
. 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 and registered
trademarks of the Company. These proprietary brand name products typically
generate higher gross margins than other products offered by the Company. This
branding permits the Company to provide unique 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 registered trademarks are the
property of their respective holders. The combination of Wilsons' brands with
these designer brands is intended to enhance the value of the Company's brands
and the breadth and depth of Wilsons' selection.
REVENUE AND CASH FLOW GROWTH STRATEGY
Wilsons seeks to strengthen its market position and improve its operating
results by focusing on higher margin products, further reducing costs,
increasing comparable store sales and selectively growing its store base. The
improved profitability of the Company's store base and stronger cash flow
margins following the Restructuring have positioned Wilsons to take advantage
of future growth opportunities. Key elements of Wilsons' growth strategy
include:
Continue to Enhance Profit Margins. Wilsons strives to increase its operating
margins by: (i) emphasizing higher margin accessories in its mall-based stores'
merchandise mix and opening additional airport stores that primarily focus on
accessories; (ii) fully utilizing the Company's recently upgraded merchandise
information system to better match store style allocations to customer
purchasing patterns and thereby reduce markdowns; (iii) increasing productivity
in the Company's distribution center and by further leveraging administrative
expenses; and (iv) improving the utilization of its outlet stores to
efficiently sell slower moving products.
Increase Comparable Store Sales. Wilsons is implementing programs to improve
its comparable store sales. These programs include: (i) maintaining a broad
assortment of classic, functional merchandise while offering merchandise
reflecting current fashion trends to attract customers into its stores; (ii)
improving sales associates' productivity by offering incentives to improve
their sales per hour and more closely monitoring their performance; and (iii)
altering display of merchandise in the stores during non-peak selling seasons
to emphasize accessories.
7
<PAGE>
Increase Store Base. The Company plans to increase the number of its stores
and continue to open and operate holiday stores and seasonal kiosks during its
peak selling season. The increase in stores is expected to come from the
opening of new stores utilizing the following formats:
. Mall-Based Stores. Wilsons currently plans to open 12 to 17 new
traditional mall-based stores per year in markets or regional malls that
management believes offer growth opportunities and significant profit
potential.
. Airport Stores. High traffic business traveler and tourist locations
offer significant growth opportunities for the Company. These locations
generally offer more accessories, including travel luggage and executive
accessories. These stores typically generate higher revenue per square
foot and are subject to less seasonal variation than traditional mall-
based stores. Wilsons has opened 12 airport locations since 1993 and
currently plans to open at least six airport stores per year for the
next several years.
. 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. Typically, holiday stores
temporarily occupy vacant store space in malls where the Company does
not operate a traditional store. Holiday stores allow the Company to
evaluate the potential of new markets and malls as permanent locations
for new Wilsons' mall-based stores. Seasonal kiosks are generally
designed to complement and enhance the operation of the traditional
Wilsons stores in the same mall. Wilsons currently plans to open
approximately 200 holiday stores and 100 seasonal kiosks in 1997.
The Company is also exploring the use of different store concepts, layouts and
merchandise offerings within its portfolio of mall-based stores and may also
consider wholesaling opportunities that fit its distribution strategy.
GENERAL
The Company was organized as a Minnesota corporation in May 1996 to acquire
all of the issued and outstanding capital stock of Wilsons Center, Inc. (the
"Wilsons Shares"), the holding company of the Predecessor Companies. On May 26,
1996, the Company, which was ultimately owned by management and an investor
group, acquired the Wilsons Shares from CVS, the parent company to the
Predecessor Companies. See "The Acquisition." 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.
Wilsons' common stock is traded on the Nasdaq National Market under the
symbol "WLSN." The closing share price of the common stock on November 18, 1997
was $9.75 per share.
8
<PAGE>
THE EXCHANGE OFFER
The Exchange Offer........ The Company is hereby offering to exchange $1,000
principal amount of Exchange Notes for each $1,000
principal amount of Private Notes that are properly
tendered and accepted. The Company will issue
Exchange Notes on or promptly after the Expiration
Date. As of the date hereof, there is $75,000,000
aggregate principal amount of Private Notes
outstanding. See "The Exchange Offer."
Based on an interpretation by the staff of the
Commission set forth in no-action letters issued to
third parties, the Company believes that the
Exchange Notes issued pursuant to the Exchange
Offer in exchange for Private Notes may be offered
for resale, resold and otherwise transferred by a
holder thereof (other than (i) a broker-dealer who
purchases such Exchange Notes directly from the
Company to resell pursuant to Rule 144A or any
other available exemption under the Securities Act
or (ii) a person that is an affiliate of the
Company within the meaning of Rule 405 under the
Securities Act) without compliance with the
registration and prospectus delivery provisions of
the Securities Act; provided that the holder is
acquiring Exchange Notes in the ordinary course of
its business and is not participating, and had no
arrangement or understanding with any person to
participate, in the distribution of the Exchange
Notes. (See, e.g., Exxon Capital Holdings Corp.,
SEC No-Action Letter (available April 13, 1989) and
Morgan Stanley & Co. Inc., SEC No-Action Letter
(available June 5, 1991), collectively, the "No-
Action Letters.") Holders who tender their Private
Notes in the Exchange Offer with the intention of
participating in a distribution of the Exchange
Notes will not be able to rely on the No-Action
Letters or similar no-action letters.
Each broker-dealer that receives Exchange Notes for
its own account in exchange for Private Notes,
where such Private Notes were acquired by such
broker-dealer as a result of market-making
activities or other trading activities, must
acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes.
See "The Exchange Offer--Resale of the Exchange
Notes."
Registration Rights The Private Notes were sold by the Company on
Agreement................. August 18, 1997 to BancAmerica Securities, Inc.
(the "Initial Purchaser") pursuant to a Purchase
Agreement, dated August 14, 1997, by and among the
Company, the Initial Purchaser and the Guarantors
(the "Purchase Agreement"). Pursuant to the
Purchase Agreement, the Company, the Initial
Purchaser and the Guarantors entered into a
Registration Rights Agreement, dated as of August
18, 1997 (the "Registration Rights Agreement"),
which grants the holders of the Private Notes
certain exchange and registration rights. The
Exchange Offer is intended to satisfy certain of
such rights, which, except as otherwise noted under
"Description of Senior Notes--Registration Rights;
Liquidated Damages," will terminate with regard to
Private Notes exchanged for Exchange Notes upon the
consummation of the Exchange Offer. See "The
Exchange Offer--Termination of Certain Rights."
9
<PAGE>
Expiration Date........... The Exchange Offer will expire at 5:00 p.m., New
York City time, on , 1997, unless the Exchange
Offer is extended by the Company in its sole
discretion, in which case the term "Expiration
Date" shall mean the latest date and time to which
the Exchange Offer is extended. See "The Exchange
Offer--Expiration Date; Extensions; Amendments."
Accrued Interest on the
Exchange Notes and the The Exchange Notes will bear interest from and
Private Notes............. including the date of issuance of the Private Notes
(August 18, 1997). Holders whose Private Notes are
accepted for exchange will be deemed to have waived
the right to receive any interest accrued on the
Private Notes. See "The Exchange Offer--Interest on
the Exchange Notes."
Conditions to the
Exchange Offer............ Notwithstanding any other terms of the Exchange
Offer, the Company shall not be required to accept
for exchange, or exchange the Exchange Notes for,
any Private Notes, and may terminate the Exchange
Offer as provided herein before the acceptance of
such Private Notes, if the Exchange Offer violates
applicable laws, rules or regulations or any
applicable interpretation of the staff of the
Commission. The Exchange Offer is not conditioned
upon any minimum aggregate principal amount of
Private Notes being tendered for exchange. See "The
Exchange Offer--Conditions."
Procedures for Tendering
Private Notes............. Each holder of Private Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile, together
with such Private Notes and any other required
documentation, to Norwest Bank Minnesota, National
Association, as exchange agent (the "Exchange
Agent"), at the address set forth herein. By
executing the Letter of Transmittal, the holder
will represent to and agree with the Company that,
among other things, (i) the Exchange Notes to be
acquired by such holder of Private Notes in
connection with the Exchange Offer are being
acquired by such holder in the ordinary course of
its business, (ii) such holder has no arrangement
or understanding with any person to participate in
a distribution of the Exchange Notes, (iii) that if
such holder is a broker-dealer registered under the
Exchange Act or is participating in the Exchange
Offer for the purposes of distributing the Exchange
Notes, such holder will comply with the
registration and prospectus delivery requirements
of the Securities Act in connection with a
secondary resale transaction of the Exchange Notes
acquired by such person and cannot rely on the
position of the staff of the Commission set forth
in the No-Action Letters (see "The Exchange Offer--
Resale of Exchange Notes"), (iv) such holder
understands that a secondary resale transaction
described in clause (iii) above and any resales of
Exchange Notes obtained by such holder in exchange
for Private Notes acquired by such holder directly
from the Company should be covered by an effective
registration statement containing the selling
securityholder
10
<PAGE>
information required by Item 507 or Item 508, as
applicable, of Regulation S-K of the Commission,
and (v) such holder is not an "affiliate," as
defined in Rule 405 under the Securities Act, of
the Company. Holders who tender their Private Notes
in the Exchange Offer with the intention of
participating in a distribution of the Exchange
Notes will not be able to rely on the No-Action
Letters or similar no-action letters. If the holder
is a broker-dealer that will receive Exchange Notes
for its own account in exchange for Private Notes
that were acquired as a result of market-making
activities or other trading activities, such holder
will be required to acknowledge in the Letter of
Transmittal that such holder will deliver a
prospectus in connection with any resale of such
Exchange Notes; however, by so acknowledging and by
delivering a prospectus, such holder will not be
deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. See "The
Exchange Offer--Procedures for Tendering."
Special Procedures for
Beneficial Owners......... Any beneficial owner whose Private Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and
who wishes to tender such Private Notes in the
Exchange Offer should contact such registered
holder promptly and instruct such registered holder
to tender on such beneficial owner's behalf. If
such beneficial owner wishes to tender on such
owner's own behalf, such owner must, prior to
completing and executing the Letter of Transmittal
and delivering such owner's Private Notes, either
make appropriate arrangements to register ownership
of the Private Notes in such owner's name or obtain
a properly completed bond power from the registered
holder. The transfer of registered ownership may
take considerable time and may not be able to be
completed prior to the Expiration Date. See "The
Exchange Offer--Procedures for Tendering."
Guaranteed Delivery Holders of Private Notes who wish to tender their
Procedures................ Private Notes and whose Private Notes are not
immediately available or who cannot deliver their
Private Notes, the Letter of Transmittal or any
other documentation required by the Letter of
Transmittal to the Exchange Agent prior to the
Expiration Date must tender their Private Notes
according to the guaranteed delivery procedures set
forth under "The Exchange Offer--Guaranteed
Delivery Procedures."
Acceptance of the Private
Notes and Delivery of the Subject to the satisfaction or waiver of the
Exchange Notes............ conditions to the Exchange Offer, the Company will
accept for exchange any and all Private Notes that
are properly tendered in the Exchange Offer prior
to the Expiration Date. The Exchange Notes issued
pursuant to the Exchange Offer will be delivered on
the earliest practicable date following the
Expiration Date. See "The Exchange Offer--Terms of
the Exchange Offer."
Withdrawal Rights......... Tenders of Private Notes may be withdrawn at any
time prior to the Expiration Date. See "The
Exchange Offer--Withdrawal of Tenders."
11
<PAGE>
Certain Federal Income
Tax Consequences..........
For a discussion of certain material federal income
tax considerations relating to the exchange of the
Exchange Notes for the Private Notes, based upon
the opinion of Faegre & Benson LLP, counsel to the
Company, see "Certain Federal Income Tax
Considerations."
Exchange Agent............
Norwest Bank Minnesota, National Association, is
serving as the Exchange Agent in connection with
the Exchange Offer.
12
<PAGE>
THE EXCHANGE NOTES
The Exchange Offer applies to $75,000,000 in aggregate principal amount of
the Private Notes. The form and terms of the Exchange Notes are the same as the
form and terms of the Private Notes except that (i) the exchange will have been
registered under the Securities Act and, therefore, the Exchange Notes will not
bear legends restricting the transfer thereof, and (ii) holders of the Exchange
Notes will not be entitled to certain rights of holders of the Private Notes
under the Registration Rights Agreement, which rights, except as otherwise
noted under "Description of Senior Notes--Registration Rights; Liquidated
Damages," will terminate upon consummation of the Exchange Offer. The Exchange
Notes will evidence the same indebtedness as the Private Notes (which they
replace) and will be issued under, and be entitled to the benefits of, the
Indenture. For further information and for definitions of certain capitalized
terms used below, see "Description of Senior Notes."
Issuer...................... Wilsons The Leather Experts Inc.
Securities Offered.......... $75,000,000 principal amount of 11 1/4% Series B
Senior Notes due 2004.
Maturity Date............... August 15, 2004.
Interest Payment Dates...... February 15 and August 15, commencing on February
15, 1998.
Mandatory Sinking Fund or
Redemption..................
None.
Optional Redemption.........
The Senior Notes may be redeemed, in whole or in
part, at any time on or after August 15, 2001, at
the option of the Company, at the redemption
prices set forth herein, plus, in each case,
accrued and unpaid interest to the date of
redemption. In addition, at any time prior to
August 15, 2000, the Company may, at its option,
redeem up to 25% of the aggregate principal
amount of the Senior Notes at a redemption price
of 111.25% of the principal amount thereof, plus
accrued and unpaid interest to the date of
redemption, with the net cash proceeds of a
public offering of the Company's common stock,
provided that at least 75% of the original
aggregate principal amount of the Senior Notes
remains outstanding immediately after the
occurrence of such redemption. See "Description
of Senior Notes--Optional Redemption."
Change of Control...........
In the event of a Change of Control, holders of
the Senior Notes will have the right to require
the Company to make an offer to purchase their
Senior Notes, in whole or in part, at a price
equal to 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest to the
date of purchase. If a Change of Control were to
occur, there can be no assurance that the Company
would have sufficient financial resources, or
would be able to arrange financing, to pay the
repurchase price for all Senior Notes tendered by
holders thereof. Further, the provisions of the
Indenture may not afford holders of Senior Notes
protection in the event of a highly leveraged
transaction, reorganization, restructuring,
merger or similar transaction involving the
Company that may adversely affect holders of
Senior Notes, if such transaction does not result
in a Change of Control. See "Risk Factors--
Potential Inability to Fund Repurchase of Senior
Notes Upon Change of Control" and "Description of
Senior Notes--Repurchase at the Option of
Holders."
Ranking/Guarantees.......... The Senior Notes will be general unsecured
obligations of the Company and will rank senior
in right of payment to all existing and future
subordinated Indebtedness of the Company and will
rank pari
13
<PAGE>
passu in right of payment with all other current
and future unsubordinated Indebtedness of the
Company. See "Description of Senior Notes--
General." The Company has not issued, and does
not have any current firm arrangements to issue,
any significant additional indebtedness to which
the Senior Notes would be senior. The payment of
principal and interest on the Senior Notes will
be fully and unconditionally guaranteed
(the "Guarantees") on a joint and several basis
by each of the Company's domestic Subsidiaries
(the "Guarantors"). The Guarantees will be senior
unsecured obligations and will rank senior in
right of payment to all existing and future
Indebtedness of the Guarantors that is
subordinated to such Guarantees and will rank
pari passu in right of payment with all other
current and future unsubordinated obligations of
the Guarantors. See "Description of Senior
Notes--Subsidiary Guarantees." An indirect
Subsidiary of the Company, Wilsons Leather
Holdings Inc. ("WLHI"), is the borrower under the
Senior Credit Facility, and the Company and its
other direct and indirect domestic Subsidiaries
are guarantors under the Senior Credit Facility.
Such borrowings and guarantees are secured by
substantially all of the assets of the Company
and the respective Guarantors. Accordingly, the
Senior Notes and the Guarantees will be
effectively subordinated to all obligations under
the Senior Credit Facility and the guarantees of
such loans to the extent of the value of the
assets securing such loans and guarantees. The
Senior Credit Facility provides for borrowings of
up to $150.0 million in aggregate principal
amount, which amount includes a letter of credit
facility of up to $90.0 million. As of November
1, 1997, there was $53.2 million of senior
Indebtedness outstanding under the Senior Credit
Facility (consisting of $20.1 million of
borrowings and $33.1 million of outstanding
letters of credit) and there would have been no
other senior Indebtedness and no subordinated
Indebtedness outstanding. See "Risk Factors--
Effective Subordination of Senior Notes,"
"Description of Senior Credit Facility" and
"Description of Senior Notes--General." The terms
of the Indenture pursuant to which the Senior
Notes will be issued will permit the Company and
the Guarantors to incur additional Indebtedness,
subject to certain limitations. See "Description
of Senior Notes--Certain Covenants." The Company
has no current or pending arrangements or
agreements, other than the Senior Credit
Facility, to incur any additional significant
indebtedness to which the Senior Notes would be
subordinated or rank pari passu in right payment.
Certain Covenants...........
The Indenture will, among other things, limit the
ability of the Company and its Subsidiaries to:
incur additional Indebtedness; make certain
restricted payments; make certain investments;
grant liens on assets; sell assets; enter into
transactions with Affiliates; issue Capital Stock
of Subsidiaries; and merge, consolidate or
transfer substantially all of their assets. See
"Description of Senior Notes--Certain Covenants."
Global Notes................ The Senior Notes initially will be represented by
a global note or notes in fully registered form
and will be deposited with a custodian
for, and registered in the name of a nominee of,
DTC. Beneficial
interests in a global note will be shown on, and
transfers thereof will
14
<PAGE>
be effected through, records maintained by DTC
and its participants.
Institutional "accredited investors" that are not
Qualified Institutional Buyers ("QIBs") will
receive certificates for the Senior Notes owned
by them, which cannot be transferred through the
facilities of DTC, except to QIBs and
institutional "accredited investors." See
"Description of Senior Notes--Book-Entry,
Delivery and Form."
Registration Rights;
Liquidated Damages..........
Under certain circumstances, the Company may be
required to cause to become effective under the
Securities Act a Shelf Registration Statement (as
defined in the Registration Rights Agreement)
with respect to the resale of the Senior Notes
and keep such Shelf Registration Statement
effective until two years after the effective
date thereof. In the event the registration
requirements are not met, a Registration Default
shall be deemed to have occurred and specified
Liquidated Damages will become payable with
respect to the Senior Notes until such
Registration Default has been cured. See
"Description of Senior Notes--Registration
Rights; Liquidated Damages."
Use of Proceeds.............
The Company will not receive proceeds from the
Exchange Offer. The net proceeds to the Company
from the issuance and sale of the Private Notes
were approximately $72.1 million. The Company
intends to use the net proceeds as follows: (i)
$56.5 million were used to repurchase its
outstanding 10.0% Senior Secured Subordinated
Note (the "CVS Note") and pay accrued interest
thereon; and (ii) $15.6 million will be used for
general corporate purposes, including capital
expenditures and additional store openings. See
"Use of Proceeds."
Risk Factors................
Prospective investors in the Exchange Notes
should consider carefully certain risk factors,
more specifically described under "Risk Factors,"
including the Company's leverage and debt service
and capital requirements; the effective
subordination of the Senior Notes; the dependence
of the Company on cash flow from its
Subsidiaries; the recent declines in the
Company's comparable store sales; the impact of
changing fashion trends, consumer preferences,
economic conditions and consumer shopping
patterns on the Company's business, financial
condition, results of operations and debt service
ability; the seasonality of the Company's sales;
the potential inability to fund required
repurchases of Senior Notes upon a Change of
Control; certain restrictions imposed by the
terms of the Senior Credit Facility and the
Indenture; the possible application of fraudulent
conveyance statutes with respect to the
enforceability of the Guarantees; the Company's
limited operating history as a stand-alone
company; the risks of foreign contract
manufacturing and importing; the threat of
competition; the risks associated with the future
growth of the Company; the price and availability
of certain raw materials; the dependence of the
Company on certain key persons; the absence of an
established public market for the Senior Notes;
the significant stock ownership position of the
Company's directors and executive officers; and
the possible adverse consequences to a holder of
Private Notes whose Private Notes are not
exchanged in the Exchange Offer.
15
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables present summary 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
summary historical 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 summary consolidated financial data as of December 31, 1994
and 1995, for the years ended December 31, 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 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
consolidated financial data for the twenty-seven week period ended August 3,
1996 have been derived from unaudited financial statements of the Predecessor
Companies (seventeen weeks ended May 25, 1996) and from financial statements of
the Company audited by Arthur Andersen LLP (ten weeks ended August 3, 1996).
The consolidated financial data for the twenty-six week period ended August 2,
1997 have been derived from unaudited consolidated financial statements of the
Company. The pro forma statement of operations data, the store operations data
and the balance sheet data as of and 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 27,
1995 and May 25, 1996, for the eight months ended January 27, 1996, for the
period from inception (May 26, 1996) to February 1, 1997, and for the twenty-
seven weeks and twenty-six weeks ended August 3, 1996 and August 2, 1997,
respectively, are not necessarily indicative of the results of operations for
the entire year. Prior to the Acquisition, the Predecessor Companies were
operated as part of CVS. The historical consolidated financial data presented
herein reflect certain periods during which the Company did not operate as an
independent company. Such information, therefore, may not 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 such earlier
reporting periods, and are not necessarily indicative of the Company's future
results or financial condition.
16
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL AND OTHER DATA
(IN MILLIONS EXCEPT STORE AND RATIO DATA)
<TABLE>
<CAPTION>
COMBINED
PREDECESSOR COMPANIES COMPANY COMPANIES(/3/) COMPANY
----------------------------------------------- ----------- -------------- ---------
PERIOD FROM TWENTY-
YEARS ENDED FIVE MONTHS EIGHT INCEPTION PRO SIX
DECEMBER 31, ENDED MONTHS (MAY 26, FORMA (/1/) WEEKS
---------------- ---------------- ENDED 1996) TO YEAR ENDED TWENTY-SEVEN ENDED
MAY 27, MAY 25, JANUARY 27, FEBRUARY 1, FEBRUARY 1, WEEKS ENDED AUGUST 2,
1994 1995 1995 1996 1996 1997 1997(/2/) AUGUST 3, 1996 1997
------- ------- ------- ------- ----------- ----------- ----------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales.............. $ 474.6 $ 462.4 $ 124.7 $ 109.6 $ 367.6 $ 345.1 $ 422.6 $108.2 $ 93.4
Costs and expenses:
Cost of goods sold,
buying and occupancy
costs................. 329.4 317.0 99.9 86.2 238.5 222.1 285.2 90.9 84.2
Selling, general and
administrative
expenses............. 130.2 114.9 45.9 34.8 76.4 75.8 102.4 41.3 36.5
Depreciation and
amortization......... 22.3 21.4 9.0 4.7 13.3 1.0 1.4 3.8 0.9
Restricted stock
compensation
expense.............. -- -- -- -- -- 1.5 10.0 -- 0.9
Restructuring and
asset impairment
charges.............. -- 182.2 -- -- 182.2 -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------ ------
Income (loss) from
operations............ (7.3) (173.1) (30.1) (16.1) (142.8) 44.7 23.6 (27.8) (29.1)
Interest expense, net.. 8.4 10.4 3.4 1.6 7.4 5.3 10.3 2.4 1.9
------- ------- ------- ------- ------- ------- ------- ------ ------
Income (loss) before
income taxes.......... (15.7) (183.5) (33.5) (17.7) (150.2) 39.4 13.3 (30.2) (31.0)
Income tax provision
(benefit)............. (3.1) (10.1) (5.5) (6.6) (4.6) 15.5 9.3 (11.1) (11.2)
------- ------- ------- ------- ------- ------- ------- ------ ------
Net income (loss)...... $ (12.6) $(173.4) $ (28.0) $ (11.1) $(145.6) $ 23.9 $ 4.0 $(19.1) $(19.8)
======= ======= ======= ======= ======= ======= ======= ====== ======
OTHER DATA:
Adjusted EBITDA (/4/).. $ 15.0 $ 30.5 $ (21.1) $ (11.4) $ 52.7 $ 47.2 $ 35.0 $(24.0) $(27.3)
Capital expenditures... 20.7 10.1 2.9 3.6 7.5 5.9 9.3 4.3 2.6
</TABLE>
<TABLE>
<CAPTION>
COMBINED ACTUAL PRO FORMA(/1/)
--------------- --------------
<S> <C> <C>
LATEST TWELVE MONTHS ENDED AUGUST 2, 1997:
Net sales...................................... $410.0 $410.0
Adjusted EBITDA (/4/).......................... 31.4 31.4
Cash interest expense (/5/).................... 2.0 9.9
Ratio of Adjusted EBITDA/cash interest expense
(/6/)......................................... 15.7x 3.2x
Ratio of total long-term debt/Adjusted EBITDA
(/7/)......................................... 2.0x 2.4x
</TABLE>
<TABLE>
<CAPTION>
COMBINED
PREDECESSOR COMPANIES COMPANY COMPANIES(/3/) COMPANY
----------------------------------------------------- ----------- -------------- ---------
PERIOD FROM TWENTY-
YEARS ENDED EIGHT INCEPTION PRO SIX
DECEMBER 31, FIVE MONTHS ENDED MONTHS (MAY 26, FORMA (/1/) WEEKS
--------------- -------------------- ENDED 1996) TO YEAR ENDED TWENTY-SEVEN ENDED
MAY 27, MAY 25, JANUARY 27, FEBRUARY 1, FEBRUARY 1, WEEKS ENDED AUGUST 2,
1994 1995 1995 1996 1996 1997 1997(/2/) AUGUST 3, 1996 1997
------ ------ -------- -------- ----------- ----------- ----------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STORE DATA:
Traditional stores:
Open at end of period.. 628 548 567 480 494 461 461 477 452
Net sales per square
foot for stores open
entire year........... $ 340 $ 373 -- -- -- -- $389 -- --
Change in comparable
store sales (/8/)..... (5.1)% (1.5)% 4.4% 3.9% (3.1)% (2.7)% (1.3)% 0.0% (5.8)%
Peak number of seasonal
stores during period... 135 227 -- -- 227 376 376 -- --
</TABLE>
<TABLE>
<CAPTION>
COMPANY
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AUGUST 2, 1997
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PRO
ACTUAL FORMA (/1/)(/9/)
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<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 24.1 $ 39.8
Working capital....................................... 76.3 90.4
Total assets.......................................... 140.0 158.6
Total long-term debt (/7/)............................ 62.5 75.0
Shareholders' equity.................................. 33.5 37.9
</TABLE>
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(1) See "Pro Forma Unaudited Consolidated Financial Statements."
(2) The pro forma period for the year ended February 1, 1997 includes results
of operations for 53 weeks.
(3) The twenty-seven weeks ended August 3, 1996 represent a period which
combines the results of operations of the Predecessor Companies prior to
the Acquisition from January 28, 1996 through May 25, 1996, and the Company
after the Acquisition from May 26, 1996 through August 3, 1996.
(4) EBITDA represents income (loss) from operations, plus depreciation and
amortization. Adjusted EBITDA represents EBITDA plus Restricted Stock (as
defined herein) compensation expense and Restructuring and asset impairment
charges. Adjusted EBITDA in 1995 and for the eight months ended January 27,
1996 includes the Restructuring and asset impairment charges of $182.2
million. Adjusted EBITDA for the period from inception (May 26, 1996) to
February 1, 1997, pro forma for the year ended February 1, 1997 and for the
twenty-six weeks ended August 2, 1997 includes the Restricted Stock
compensation expense of $1.5 million, $10.0 million and $0.9 million,
respectively. EBITDA and Adjusted EBITDA are not intended to represent cash
flow from operations as defined by GAAP and should not be considered as an
alternative to cash flow or as a measure of liquidity or as an alternative
to net earnings as indicative of operating performance. Adjusted EBITDA is
included herein because management believes that certain investors find it
a useful tool for measuring the Company's ability to service its debt.
(5) Cash interest expense represents net interest expense less non-cash
interest on the CVS Note and amortization of deferred financing fees.
(6) This ratio differs from the Fixed Charge Coverage Ratio as defined under
the Indenture. See "Description of Senior Notes."
(7) Actual total long-term debt includes $1.2 million of accrued interest on
the CVS Note that was paid upon repurchase of the CVS Note on August 18,
1997. Total long-term debt does not include $43.9 million of outstanding
letters of credit as of August 2, 1997.
(8) Comparable store sales means sales generated by stores open at least one
full year.
(9) The pro forma balance sheet data as of August 2, 1997 reflects the pro
forma adjustments for the Offering and the application of the net proceeds
therefrom.
- ----------------
RECENT DEVELOPMENTS
Sales for the quarter ended November 1, 1997 were $81.3 million compared to
$86.4 million during the same quarter in 1996, a decrease of $5.1 million or
5.9%. Comparable store sales decreased 7.5%. The comparable store sales
decrease was primarily attributable to the widespread unseasonably warm weather
in September and early October which resulted in sales of outerwear being down.
The Company's net loss for the third quarter, before certain nonrecurring
items, was $2.0 million, or $.19 per share. This compares with a net loss of
$1.0 million, or $.11 per share, a year ago. The after-tax nonrecurring items
consisted of a $3.8 million extraordinary gain on the early extinguishment of
the CVS Note, and a $7.6 million non-cash restricted stock compensation charge.
The net loss for the third quarter, including these nonrecurring items, was
$5.9 million, or $.54 per share. See "Risk Factors--Decline in Comparable Store
Sales; Losses."
Costs and expenses for the quarter ended November 1, 1997, excluding the
nonrecurring, non-cash restricted stock compensation charge, decreased $3.5
million, due to a reduction in variable expenses and operating on average 21
fewer stores than a year ago.
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RISK FACTORS
Prospective investors in the Exchange Notes should consider carefully the
following risk factors, in addition to the other information contained in this
Prospectus concerning the Company and its business, before investing in the
Exchange Notes offered hereby. 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," "--Management Information Systems" and "Pro Forma Unaudited
Consolidated Financial Statements," as well as in the Prospectus generally.
The Company's actual results could differ materially from those anticipated in
or suggested by such forward-looking statements as a result of certain
factors, including those set forth in the following risk factors and elsewhere
in this Prospectus.
LEVERAGE AND DEBT SERVICE; CAPITAL REQUIREMENTS
The Company and the Guarantors have and will continue to have substantial
Indebtedness and significant debt service obligations, especially during
periods of seasonal borrowings under the Senior Credit Facility, which reached
peaks of $22.0 million in outstanding borrowings and $51.9 million in
outstanding letters of credit during the third quarter of 1997. The Company's
consolidated Indebtedness and stockholders' equity as of November 1, 1997 was
$128.2 million (which includes the Senior Notes and $20.1 million of
borrowings under the Senior Credit Facility and $33.1 million of outstanding
letters of credit) and $36.1 million, respectively. Of such total debt, $53.2
million (outstanding borrowings and letters of credit) was secured
Indebtedness effectively ranking senior to Guarantees of the Senior Notes. In
addition, subject to the restrictions contained in the Senior Credit Facility
and the Indenture, the Company and the Guarantors may incur additional
Indebtedness from time to time to finance acquisitions, for capital
expenditures and for other purposes. At November 1, 1997; the restrictions
imposed under the Indenture would have permitted the Company and the
Guarantors to incur up to an additional $12.0 million in Indebtedness under
the Senior Credit Facility plus an additional $6.0 million of capital leases
or purchase money debt effectively ranking senior to the Senior Notes and the
Guarantees, immediately after consummation of the Offering. See
"Capitalization," "Pro Forma Unaudited Consolidated Financial Statements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The Company's level of consolidated Indebtedness will have several important
effects on its future operations, including: (i) a substantial portion of the
Company's consolidated cash flow from operations must be dedicated to the
payment of interest on its Indebtedness and will not be available for other
purposes; (ii) covenants contained in the Senior Credit Facility require the
Company and the Guarantors to meet certain financial tests; (iii) such
covenants, the Indenture and certain other restrictions may limit the
Company's ability to borrow additional funds or dispose of assets and may
affect the Company's flexibility in planning for, and reacting to, changes in
its business, including possible acquisition activities; and (iv) the
Company's ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions, general corporate or other
purposes may be impaired. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources," "Description of Senior Notes" and "Description of Senior Credit
Facility."
The Company's ability to meet its consolidated debt service obligations and
reduce its Indebtedness will be dependent upon the Company's future
performance, which will be subject to general economic conditions and
financial, business and other factors affecting the operations of the Company,
many of which are beyond its control, including those identified as "Risk
Factors" herein. Based upon the current and anticipated level of operations,
the Company believes, however, that its consolidated cash flow from
operations, together with
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amounts available under the Senior Credit Facility and remaining net proceeds
from the sale of the Senior Notes, should be adequate to meet its anticipated
requirements for working capital, capital expenditures and interest payments
until expiration of the facility in 1999, when the Company expects to extend
or replace such facility. There can be no assurance, however, that the
Company's business will continue to generate consolidated cash flow at or
above current levels. If the Company is unable to generate sufficient
consolidated cash flow from operations in the future to service its
consolidated debt, it may be required to refinance all or a portion of
existing debt, including the Senior Notes, or to obtain additional financing.
There can be no assurance that the Senior Credit Facility will be extended or
replaced upon expiration thereof, or that any such refinancing would be
possible, that any additional financing could be obtained or that any
refinancing or additional financing would be on terms which are favorable to
the Company. The inability to obtain additional financing or refinancing on
favorable terms could have a material adverse effect on the Company's
business, financial condition, results of operations and debt service ability.
EFFECTIVE SUBORDINATION OF SENIOR NOTES
WLHI has the ability to borrow up to $150.0 million on a revolving credit
basis under the Senior Credit Facility, subject to borrowing base limitations,
with a $90.0 million sublimit for letters of credit. As of November 1, 1997,
there was approximately $53.2 million outstanding under the Senior Credit
Facility, consisting of $20.1 million of borrowings and $33.1 million of
letters of credit. The Senior Credit Facility (including borrowings and
outstanding letters of credit) and guarantees thereof by the Company and its
domestic Subsidiaries are secured by liens on substantially all of the assets
of the Company and the Guarantors. Accordingly, the lenders under the Senior
Credit Facility will have claims with respect to the assets constituting
collateral for any Indebtedness (including outstanding letters of credit)
thereunder that will be satisfied prior to the unsecured claims of holders of
the Senior Notes. See "Description of Senior Credit Facility." In addition,
the Indenture does not prohibit, although it restricts, the Company and the
Guarantors from incurring additional secured Indebtedness. See "Description of
Senior Notes." The Senior Notes will be effectively subordinated to the Senior
Credit Facility and any other secured Indebtedness, to the extent of such
security interests. In the event of a default on the Senior Notes or a
bankruptcy, liquidation or reorganization of the Company or any Guarantor, the
assets subject to such security interests will be available to satisfy
obligations of the secured debt before any payment could be made on the Senior
Notes or the Guarantees. Accordingly, there may only be a limited amount of
assets available to satisfy any claims of the holders of Senior Notes upon an
acceleration of the Senior Notes. To the extent that the value of such
collateral is insufficient to satisfy such secured Indebtedness, amounts
remaining outstanding on such secured Indebtedness would be entitled to share
pari passu with the Senior Notes and other unsecured, unsubordinated claimants
(including trade creditors) with respect to any other assets of the Company
and the Guarantors. At November 1, 1997, the Senior Notes were effectively
subordinated to $53.2 million of secured Indebtedness, with increases in such
amounts expected as the Company approaches its peak seasonal consolidated
borrowings under the Senior Credit Facility.
HOLDING COMPANY STRUCTURE
Because the Company conducts substantially all of its operations through its
Subsidiaries, it is required to rely entirely upon payment from its
Subsidiaries for the funds necessary to meet its obligations, including the
payment of interest on and principal of the Senior Notes. The ability of the
Subsidiaries to make such payments will be subject to, among other things,
applicable state laws and the payment limitations in the Senior Credit
Facility. Claims of creditors of the Company's Subsidiaries will generally
have priority as to the assets of such Subsidiaries over the claims of
creditors of the Company.
Although the Guarantees provide the holders of the Senior Notes with a
direct claim against the assets of the Guarantors, enforcement of the
Guarantees against any Guarantor would be subject to certain "suretyship"
defenses available to guarantors generally, and such enforcement would also be
subject to certain defenses available to the Subsidiary Guarantors in certain
circumstances. See "--Fraudulent Conveyance Risks." Although the Indenture
contains waivers of most "suretyship" defenses, there can be no assurance that
those
20
<PAGE>
waivers would be enforced by a court in a particular case. To the extent that
the Guarantees are not enforceable for any reason, the Senior Notes and
Guarantees would be effectively subordinated to all liabilities of the
Guarantors, including trade payables of such Guarantors. In addition, the
Senior Credit Facility contains covenants limiting the Subsidiaries' ability
to pay dividends and make advances to the Company. Except with respect to the
Guarantees, none of the Subsidiaries are obligated or required to pay any
amounts due pursuant to the Senior Notes or to make funds available therefor
in the form of dividends or advances to the Company. The Senior Credit
Facility will generally permit Subsidiaries to pay dividends in amounts
sufficient to pay interest on the Senior Notes; however, such dividends may
not be paid in the event of a payment default under the Senior Credit
Facility. The payment of dividends to the Company by its Subsidiaries is also
contingent upon the earnings of those Subsidiaries and board approval of those
Subsidiaries.
DECLINE IN COMPARABLE STORE SALES; LOSSES
The Company's comparable store sales declines were 5.8% for the first two
quarters of 1997, and 1.3%, 1.5%, 5.1% and 13.8% during 1996, 1995, 1994 and
1993, respectively. The comparable store sales decrease for the twenty-six
week period ended August 2, 1997 was primarily attributable to less low-priced
clearance merchandise associated with fewer closed stores in the immediately
preceding quarter compared to the period one year earlier. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
Company believes that the comparable store sales decline for the year 1996 was
primarily the result of weak demand for the Company's current fashion
merchandise in the fourth quarter in the midwest area of the United States.
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. Continuation of comparable store sales declines
could have a material adverse effect on the Company's business, financial
condition, results of operations and debt service ability.
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. The
Company incurred a net loss of $12.6 million in 1994, due in large part to:
(i) decreases in comparable store sales; (ii) increases in cost of goods sold
and buying and occupancy costs; and (iii) an increase in operating expenses
associated with the 40 new stores opened in 1993 and the 31 Georgetown Leather
Design stores acquired in 1993.
As a result of the completion of the Offering and the immediate vesting of
the remaining shares of Restricted Stock, the Company will be required to
record a non-cash, after-tax charge of $8.5 million ($900,000 of which was
recorded in the twenty-six weeks ended August 2, 1997) that will be partially
offset by an extraordinary after-tax gain arising from the repurchase of the
CVS Note of $3.8 million. Such net charge will significantly and adversely
impact the Company's income (loss) from operations and net income (loss) for
the fiscal quarter ending November 1, 1997 and for the fiscal year ending
January 31, 1998. There can be no assurance that the Company will not incur
additional losses in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
CHANGING FASHION TRENDS AND 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. A decline in the demand for leather apparel and accessories or a
misjudgment in fashion trends by the Company could have a material adverse
effect on the Company's business, financial condition, results of operations
and debt service ability.
21
<PAGE>
ADVERSE ECONOMIC CONDITIONS AND CONSUMER SHOPPING PATTERNS
The Company's sales could be adversely affected by a weak retail
environment. Apparel retailers are subject to general economic conditions and
purchases of apparel may decline at any time, especially during recessionary
periods. In addition, the Company's financial performance is also sensitive to
changes in consumer spending trends and shopping patterns. Wilsons' stores are
located primarily in enclosed regional malls. Consequently, the ability of
Wilsons to sustain or increase its level of sales is dependent in part on the
continued popularity of malls as shopping destinations and the ability of
malls or tenants and other attractions to generate a high volume of customer
traffic. Mall traffic may be adversely affected by, among other things,
economic downturns, the closing of anchor department stores, weather,
accessibility to strip malls or alternative shopping formats (such as
catalogs) and changes in consumer preferences and shopping patterns, all of
which are beyond the Company's control. A decrease in the volume of mall
traffic and shifts in consumer discretionary spending to other products or a
general reduction in the level of such spending could adversely affect the
Company. The foregoing factors could have a material adverse effect on the
Company's business, financial condition, results of operations and debt
service ability.
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 holiday selling season. During the period from the day
after Thanksgiving through January 4, 1997, the Company generated 34.9% of its
sales. Net sales are generally lowest 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 a
material adverse effect on the Company's business, financial condition,
results of operations and debt service ability. The Company's results of
operations may also fluctuate significantly as a result of a variety of other
factors, including merchandise mix, the timing and level of markdowns and
promotions, the net sales contributed by seasonal stores, timing of certain
holidays and the number of shopping days and weekends between Thanksgiving and
Christmas. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Seasonality and Inflation."
POTENTIAL INABILITY TO FUND REPURCHASE OF SENIOR NOTES UPON CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of Senior Notes will
have the right to require the Company to repurchase all or a portion of such
holder's Senior Notes at 101% of the principal amount thereof, plus accrued
and unpaid interest to the date of repurchase. If a Change of Control were to
occur, there can be no assurance that the Company would have sufficient
financial resources, or would be able to arrange financing, to pay the
repurchase price for all Senior Notes tendered by holders thereof. Further,
the provisions of the Indenture may not afford holders of Senior Notes
protection in the event of a highly leveraged transaction, reorganization,
restructuring, merger or similar transaction involving the Company that may
adversely affect holders of Senior Notes, if such transaction does not result
in a Change of Control. In addition, the terms of the Senior Credit Facility
limit the ability of the Guarantors to pay dividends to the Company and
therefore would limit the Company's ability to purchase any Senior Notes and
also identify certain events that would constitute a Change of Control, as
well as certain other events with respect to the Company or certain of its
Subsidiaries, that would constitute an event of default under the Senior
Credit Facility. Any future credit agreements or other agreements relating to
other Indebtedness to which the Company or the Guarantors become a party may
contain similar restrictions and provisions. In the event a Change of Control
occurs at a time when the Company is prohibited from purchasing Senior Notes,
the Company could seek the consent of its lenders to the purchase of Senior
Notes or could attempt to refinance the borrowings that contain such
prohibition. If the Company does not obtain such consent or repay such
borrowing, the Company would remain effectively prohibited from purchasing
Senior Notes. In such case, the Company's failure to purchase tendered Senior
Notes would constitute an Event of
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Default (as defined) under the Indenture, which would, in turn, constitute a
further default under the Senior Credit Facility and may constitute a default
under the terms of other Indebtedness that the Company or the Guarantors may
enter into from time to time. See "Description of Senior Credit Facility" and
"Description of Senior Notes--Repurchase at the Option of Holders--Change of
Control."
RESTRICTIONS IMPOSED BY TERMS OF SENIOR CREDIT FACILITY AND INDENTURE
The Senior Credit Facility and the Indenture contain numerous operating
covenants that will limit the discretion of management with respect to certain
business matters, and which will place significant restrictions on, among
other things, the ability of the Company to incur additional indebtedness, to
create liens or other encumbrances, to make certain payments or investments,
loans and guarantees and to sell or otherwise dispose of assets and merge or
consolidate with another entity. The Senior Credit Facility also contains
financial covenants that require the Company to meet a minimum fixed charge
coverage ratio, maintain a minimum net worth and limit capital expenditures.
See "Description of Senior Credit Facility" and "Description of Senior Notes--
Certain Covenants." A failure to comply with the obligations contained in the
Senior Credit Facility or the Indenture could result in an event of default
under the Senior Credit Facility or an Event of Default under the Indenture
that, if not cured or waived, could permit acceleration of the relevant debt
and acceleration of debt under other instruments that may contain cross-
acceleration or cross-default provisions. Other indebtedness of the Company
could contain amortization and other prepayment provisions, or financial or
other covenants, more restrictive than those applicable to the Senior Credit
Facility and the Senior Notes. The foregoing factors could have a material
adverse effect on the Company's business, financial condition, results of
operations and debt service ability.
FRAUDULENT CONVEYANCE RISKS
If a court in a lawsuit brought by an unpaid creditor or representative of
creditors, such as a trustee in bankruptcy or any Guarantor as a debtor-in-
possession, were to find under relevant federal or state fraudulent conveyance
statutes that any Guarantor did not receive fair consideration or reasonably
equivalent value for issuing its Guarantee, and that, at the time of such
incurrence, such Guarantor (i) was insolvent; (ii) was rendered insolvent by
reason of such incurrence or grant; (iii) was engaged in a business or
transaction for which the assets remaining with the Guarantor constituted
unreasonably small capital; or (iv) intended to incur, or believed that it
would incur, debts beyond its ability to pay such debts as they matured, then
such court, subject to applicable statutes of limitation, could void such
Guarantor's obligations under its Guarantee, subordinate such Guarantee to
other Indebtedness of such Guarantor, or take other action detrimental to the
holders of the Senior Notes.
The measure of insolvency for these purposes will depend upon the governing
law of the relevant jurisdiction. Generally, however, a company will be
considered insolvent for these purposes if the sum of that company's debts
(including contingent obligations) is greater than the fair value of all of
that company's property or if the present fair salable value of that company's
assets is less than the amount that will be required to pay its probable
liability on its existing debts (including contingent obligations) as they
become absolute and matured. Moreover, regardless of solvency, a court could
void an incurrence of Indebtedness, including the Senior Notes and the
Guarantees, if it determined that such transaction was made with the intent to
hinder, delay or defraud creditors. In addition, a court could subordinate
Indebtedness, including the Senior Notes and the Guarantees, to the claims of
all existing and future creditors on similar grounds.
There can be no assurance as to what standard a court would apply in order
to determine whether a Guarantor was "insolvent" upon consummation of the sale
of the Senior Notes or whether one or more Guarantors were "insolvent" upon
the incurrence of the Guarantees or that, regardless of the method of
valuation, a court would not determine that or one or more Guarantors was
insolvent as a result of the foregoing.
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
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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, 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. Although
the United States recently renewed China's MFN status, the issue faces
minority opposition in the two major political parties in the United States.
Furthermore, China's MFN status must be renewed annually and there can be no
assurance that such MFN status will continue as political conditions in the
United States and China evolve. 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 such factors could have a material adverse
effect on the Company's business, financial condition, results of operations
and debt service ability. See "Business--Product Design, Development and
Sourcing."
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. The Company also competes for site
locations and sales associates in certain circumstances. 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, results of operations
and debt service ability. 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, consumer preferences and demand for
leather apparel, 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."
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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 primarily by the leather
shoe, furniture and auto upholstery markets. The availability and price of
leather may fluctuate significantly. Fluctuations in the availability and
price of leather or other raw materials used by the Company could have a
material adverse effect on the Company's business, financial condition,
results of operations and debt service ability.
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. Their experience and worldwide contacts in the
leather industry significantly benefit the Company. Although the Company has
entered into employment agreements with Messrs. Waller and Rogers, such
agreements do not contain any restrictions on competition. In addition, the
Restricted Stock held by management vested immediately upon repurchase of the
CVS Note, and these officers currently have no other long-term incentives in
place. The Company is evaluating other long-term incentives for key personnel,
but there is no assurance that Messrs. Waller, Rogers or other members of
executive management will not leave the Company. The loss of the services of
any of these individuals could have a material adverse effect on the Company's
business, financial condition, results of operations and debt service ability.
The Company does not maintain key-man life insurance on any of its executive
officers. See "Management."
ABSENCE OF ESTABLISHED PUBLIC MARKET AND RESTRICTIONS ON RESALE
As of the date hereof, the only registered holder of Private Notes is Cede &
Co., as the nominee of DTC. The Company believes that, as of the date hereof,
such holder is not an "affiliate" (as such term is defined in Rule 405 under
the Securities Act) of the Company. Prior to the Offering, there had been no
market for the Senior Notes and there can be no assurance that such a market
will develop or, if such a market develops, as to the liquidity of such
market. The Exchange Notes will not be listed on any securities exchange, but
the Private Notes are eligible for trading in the National Association of
Securities Dealers, Inc.'s Private Offering, Resales and Trading through
Automatic Linkages (PORTAL) market. The Exchange Notes are new securities for
which there is currently no market. The Exchange Notes may trade at a discount
from their initial offering price, depending upon prevailing interest rates,
the market for similar securities, the performance of the Company and other
factors. The Company has been advised by the Initial Purchaser that it intends
to make a market in the Exchange Notes, as well as the Private Notes, as
permitted by applicable laws and regulations; however, the Initial Purchaser
is not obligated to do so and any such market-making activities may be
discontinued at any time without notice. In addition, such market-making
activities may be limited during the Exchange Offer and the pendency of the
Shelf Registration Statement. Therefore, there can be no assurance that an
active market for the Notes will develop. See "The Exchange Offer" and "Plan
of Distribution."
CONTROL BY CURRENT SHAREHOLDERS
The Company's directors and executive officers beneficially own, in the
aggregate, 55.6% 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 defined herein)
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
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<PAGE>
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. Such voting
requirement shall terminate upon the earlier of: (i) the completion of an
underwritten public offering of the Company's common stock with gross proceeds
to the Company of at least $20.0 million or (ii) the general termination of
the Shareholder Agreement, which termination will be no later than May 25,
1998. Joel N. Waller, Chairman of the Board and Chief Executive Officer of the
Company, and David L. Rogers, President and Chief Operating Officer of the
Company, currently own a majority of the outstanding shares of common stock
held by the employees and their permitted transferees, and are therefore able
to nominate two directors. See "Certain Transactions--Shareholder Agreement."
FAILURE TO EXCHANGE PRIVATE NOTES
Exchange Notes will be issued in exchange for Private Notes only after
timely receipt by the Exchange Agent of such Private Notes, a properly
completed and duly executed Letter of Transmittal and all other required
documentation. Therefore, holders of Private Notes desiring to tender such
Private Notes in exchange for Exchange Notes should allow sufficient time to
ensure timely delivery. Neither the Exchange Agent nor the Company is under
any duty to give notification of defects or irregularities with respect to
tenders of Private Notes for exchange. Private Notes that are not tendered or
are tendered but not accepted will, following consummation of the Exchange
Offer, continue to be subject to the existing restrictions upon transfer
thereof. In addition, any holder of Private Notes who tenders in the Exchange
Offer for the purpose of participating in a distribution of the Exchange Notes
will be required to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Private Notes, where such Private Notes were acquired by such
broker-dealer as a result of market-making activities or any other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. To the extent that Private Notes are
tendered and accepted in the Exchange Offer, the trading market for untendered
and tendered but unaccepted Private Notes could be adversely affected due to
the limited amount, or "float," of the Private Notes that are expected to
remain outstanding following the Exchange Offer. Generally, a lower "float" of
a security could result in less demand to purchase such security and could,
therefore, result in lower prices for such security. For the same reason, to
the extent that a large amount of Private Notes are not tendered or are
tendered and not accepted in the Exchange Offer, the trading market for the
Exchange Notes could be adversely affected. See "Plan of Distribution" and
"The Exchange Offer."
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Private Notes were sold by the Company on August 18, 1997 (the "Closing
Date") to the Initial Purchaser pursuant to the Purchase Agreement. The
Initial Purchaser subsequently sold the Private Notes to "qualified
institutional buyers" ("QIBs"), as defined in Rule 144A under the Securities
Act ("Rule 144A"), in reliance on Rule 144A. As a condition to the sale of the
Private Notes, the Company and the Initial Purchaser entered into the
Registration Rights Agreement on August 18, 1997. Pursuant to the Registration
Rights Agreement, the Company agreed that, unless the Exchange Offer is not
permitted by applicable law or Commission policy, it would (i) file with the
Commission a Registration Statement under the Securities Act with respect to
the Exchange Notes within 60 days after the Closing Date, (ii) use its best
efforts to cause such Registration Statement to become effective under the
Securities Act within 150 days after the Closing Date, and (iii) use its best
efforts to consummate the Exchange Offer within 30 days after the date on
which the Registration Statement was declared effective by the Commission. A
copy of the Registration Rights Agreement has been filed as an exhibit to the
Registration Statement. The Registration Statement is intended to satisfy
certain of the Company's obligations under the Registration Rights Agreement
and the Purchase Agreement.
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<PAGE>
RESALE OF THE EXCHANGE NOTES
With respect to the Exchange Notes, based upon an interpretation by the
staff of the Commission set forth in certain no-action letters issued to third
parties, the Company believes that a holder (other than (i) a broker-dealer
who purchases such Exchange Notes directly from the Company to resell pursuant
to Rule 144A or any other available exemption under the Securities Act or (ii)
any such holder that is an "affiliate" of the Company within the meaning of
Rule 405 under the Securities Act) who exchanges Private Notes for Exchange
Notes in the ordinary course of business and who is not participating, does
not intend to participate, and has no arrangement with any person to
participate in a distribution of the Exchange Notes, will be allowed to resell
Exchange Notes to the public without further registration under the Securities
Act and without delivering to the purchasers of the Exchange Notes a
prospectus that satisfies the requirements of Section 10 of the Securities
Act. See, e.g., the No-Action Letters. However, if any holder acquires
Exchange Notes in the Exchange Offer for the purpose of distributing or
participating in the distribution of the Exchange Notes or is a broker-dealer,
such holder cannot rely on the position of the staff of the Commission
enumerated in such no-action letters and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction, unless an exemption from registration is otherwise
available. Each broker-dealer that receives Exchange Notes for its own account
in exchange for Private Notes, where such Private Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. The Letter of Transmittal states that
by so acknowledging and by delivering a prospectus, a broker-dealer will not
be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
Exchange Notes received in exchange for Private Notes where such Private Notes
were acquired by such broker-dealer as a result of market-making or other
trading activities. Pursuant to the Registration Rights Agreement, the Company
has agreed to make this Prospectus, as it may be amended or supplemented from
time to time, available to broker-dealers for use in connection with any
resale for a period of 180 days after the date of this Prospectus. See "Plan
of Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Private
Notes validly tendered and not withdrawn prior to the Expiration Date. The
Company will issue $1,000 principal amount of Exchange Notes in exchange for
each $1,000 principal amount of outstanding Private Notes surrendered pursuant
to the Exchange Offer. Private Notes may be tendered only in integral
multiples of $1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Private Notes except that (i) the exchange will be registered under the
Securities Act and, therefore, the Exchange Notes will not bear legends
restricting the transfer thereof and (ii) holders of the Exchange Notes will
generally not be entitled to any of the rights of holders of Private Notes
under the Registration Rights Agreement, which rights, except as otherwise
noted under "Description of Senior Notes--Registration Rights; Liquidated
Damages," will terminate upon the consummation of the Exchange Offer. The
Exchange Notes will evidence the same indebtedness as the Private Notes (which
they replace) and will be issued under, and be entitled to the benefits of,
the Indenture, which also authorized the issuance of the Private Notes, such
that both series of Senior Notes will be treated as a single class of debt
securities under the Indenture.
As of the date of this Prospectus, $75,000,000 in aggregate principal amount
of the Private Notes are outstanding and registered in the name of Cede & Co.,
as nominee for DTC. Only a registered holder of the Private Notes (or such
holder's legal representative or attorney-in-fact) as reflected on the records
of the Trustee under the Indenture may participate in the Exchange Offer.
There will be no fixed record date for determining registered holders of the
Private Notes entitled to participate in the Exchange Offer.
Holders of the Private Notes do not have any appraisal or dissenters' rights
under the Indenture in connection with the Exchange Offer. The Company intends
to conduct the Exchange Offer in accordance with
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<PAGE>
the provisions of the Registration Rights Agreement and the applicable
requirements of the Securities Act, the Exchange Act and the rules and
regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Private Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
of Private Notes for the purposes of receiving the Exchange Notes from the
Company.
Holders who tender Private Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Private
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "--Fees and Expenses" below.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
, 1997, unless the Company, in its sole discretion, extends the Exchange
Offer, in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will (i) notify the
Exchange Agent of any extension by oral or written notice, (ii) mail to the
registered holders an announcement thereof and (iii) issue a press release or
other public announcement which shall include disclosure of the approximate
number of Private Notes deposited to date, each prior to 9:00 a.m., New York
City time, on the next business day after the previously scheduled Expiration
Date. Without limiting the manner in which the Company may choose to make a
public announcement of any delay, extension, amendment or termination of the
Exchange Offer, the Company shall have no obligation to publish, advertise or
otherwise communicate any such public announcement, other than by making a
timely release to an appropriate news agency.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Private Notes, (ii) to extend the Exchange Offer or (iii) if any
conditions set forth below under "--Conditions" shall not have been satisfied,
to terminate the Exchange Offer by giving oral or written notice of such
delay, extension or termination to the Exchange Agent. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly
as practicable by oral or written notice thereof to the registered holders. If
the Exchange Offer is amended in a manner determined by the Company to
constitute a material change, the Company will promptly disclose such
amendment by means of a prospectus supplement that will be distributed to the
registered holders, and the Company will extend the Exchange Offer for a
period of five to ten business days, depending upon the significance of the
amendment and the manner of disclosure to the registered holders, if the
Exchange Offer would otherwise expire during such five to ten business day
period.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest at a rate equal to 11 1/4% per annum.
Interest on the Exchange Notes will be payable semi-annually in arrears on
each February 15 and August 15, commencing February 15, 1998. Holders of
Exchange Notes will receive interest on February 15, 1998 from the date of
initial issuance of the Exchange Notes, plus an amount equal to the accrued
interest on the Private Notes from the date of initial delivery to the date of
exchange thereof for Exchange Notes. Holders of Private Notes that are
accepted for exchange will be deemed to have waived the right to receive any
interest accrued on the Private Notes.
PROCEDURES FOR TENDERING
Only a registered holder of Private Notes may tender such Private Notes in
the Exchange Offer. To tender in the Exchange Offer, a holder of Private Notes
must complete, sign and date the Letter of Transmittal, or a facsimile
thereof, have the signatures thereon guaranteed if required by the Letter of
Transmittal, and mail or otherwise deliver such Letter of Transmittal or such
facsimile to the Exchange Agent at the address set forth
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<PAGE>
below under "--Exchange Agent" for receipt prior to the Expiration Date. In
addition, either (i) certificates for such Private Notes must be received by
the Exchange Agent along with the Letter of Transmittal, (ii) a timely
confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such
Private Notes, if such procedure is available, into the Exchange Agent's
account at the Depository pursuant to the procedure for book-entry transfer
described below, must be received by the Exchange Agent prior to the
Expiration Date, or (iii) the holder must comply with the guaranteed delivery
procedures described below.
The tender by a holder that is not withdrawn prior to the Expiration Date
will constitute an agreement between such holder and the Company in accordance
with the terms and subject to the conditions set forth herein and in the
Letter of Transmittal.
THE METHOD OF DELIVERY OF PRIVATE NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE, PROPERLY INSURED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR PRIVATE NOTES SHOULD
BE SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR SUCH HOLDERS.
Any beneficial owner(s) of the Private Notes whose Private Notes are
registered in the name of a broker, dealer, commercial bank, trust company or
other nominee and who wishes to tender should contact the registered holder
promptly and instruct such registered holder to tender on such beneficial
owner's behalf. If such beneficial owner wishes to tender on such owner's own
behalf, such owner must, prior to completing and executing the Letter of
Transmittal and delivering such owner's Private Notes, either make appropriate
arrangements to register ownership of the Private Notes in such owner's name
or obtain a properly completed bond power from the registered holder. The
transfer of registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below (see "--Withdrawal of Tenders"), as the case may be, must be guaranteed
by an Eligible Institution (as defined below) unless the Private Notes
tendered pursuant thereto are tendered (i) by a registered holder who has not
completed the box titled "Special Delivery Instructions" on the Letter of
Transmittal or (ii) for the account of an Eligible Institution. In the event
that signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, are required to be guaranteed, such guarantee must be made by a
member firm of a registered national securities exchange or of the National
Association of Securities Dealers, Inc., a commercial bank or trust company
having an office or correspondent in the United States or an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange
Act which is a member of one of the recognized signature guarantee programs
identified in the Letter of Transmittal (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Private Notes listed therein, such Private Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Private
Notes.
If the Letter of Transmittal or any Private Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
such persons should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority to so act
must be submitted with the Letter of Transmittal.
The Exchange Agent and the Depository have confirmed that any financial
institution that is a participant in the Depository's system may utilize the
Depository's Automated Tender Offer Program to tender Private Notes.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Private Notes will be
determined by the Company in its sole discretion, which determination will be
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<PAGE>
final and binding. The Company reserves the absolute right to reject any and
all Private Notes not properly tendered or any Private Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Private Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Private Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify holders of
defects or irregularities with respect to tenders of Private Notes, neither
the Company, the Exchange Agent nor any other person shall incur any liability
for failure to give such notification. Tenders of Private Notes will not be
deemed to have been made until such defects or irregularities have been cured
or waived.
While the Company has no present plan to acquire any Private Notes that are
not tendered in the Exchange Offer, the Company reserves the right in its sole
discretion to purchase or make offers for any Private Notes that remain
outstanding subsequent to the Expiration Date or, as set forth below under "--
Conditions," to terminate the Exchange Offer and, to the extent permitted by
applicable law, purchase Private Notes in the open market, in privately
negotiated transactions or otherwise. The terms of any such purchases or
offers could differ from the terms of the Exchange Offer.
By tendering, each holder of Private Notes will represent to the Company
that, among other things, (i) Exchange Notes to be acquired by such holder of
Private Notes in connection with the Exchange Offer are being acquired by such
holder in the ordinary course of business of such holder, (ii) such holder has
no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes, (iii) such holder acknowledges and agrees
that any person who is a broker-dealer registered under the Exchange Act or is
participating in the Exchange Offer for the purposes of distributing the
Exchange Notes must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction of the Exchange Notes acquired by such person and cannot rely on
the position of the staff of the Commission set forth in certain no-action
letters, (iv) such holder understands that a secondary resale transaction
described in clause (iii) above and any resales of Exchange Notes obtained by
such holder in exchange for Private Notes acquired by such holder directly
from the Company should be covered by an effective registration statement
containing the selling securityholder information required by Item 507 or Item
508, as applicable, of Regulation S-K of the Commission and (v) such holder is
not an "affiliate," as defined in Rule 405 under the Securities Act, of the
Company. If the holder is a broker-dealer that will receive Exchange Notes for
such holder's own account in exchange for Private Notes that were acquired as
a result of market-making activities or other trading activities, such holder
will be required to acknowledge in the Letter of Transmittal that such holder
will deliver a prospectus in connection with any resale of such Exchange
Notes; however, by so acknowledging and by delivering a prospectus, such
holder will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
RETURN OF PRIVATE NOTES
If any tendered Private Notes are not accepted for any reason set forth in
the terms and conditions of the Exchange Offer or if Private Notes are
withdrawn or are submitted for a greater principal amount than the holders
desire to exchange, such unaccepted, withdrawn or non-exchanged Private Notes
will be returned without expense to the tendering holder thereof (or, in the
case of Private Notes tendered by book-entry transfer into the Exchange
Agent's account at the Depository pursuant to the book-entry transfer
procedures described below, such Private Notes will be credited to an account
maintained with the Depository) as promptly as practicable.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Private Notes at the Depository for purposes of the Exchange Offer
within two business days after the date of this Prospectus, and any financial
institution that is a participant in the Depository's systems may make book-
entry delivery of Private
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Notes by causing the Depository to transfer such Private Notes into the
Exchange Agent's account at the Depository in accordance with the Depository's
procedures for transfer. However, although delivery of Private Notes may be
effected through book-entry transfer at the Depository, the Letter of
Transmittal or facsimile thereof, with any required signature guarantees and
any other required documents, must, in any case, be transmitted to and
received by the Exchange Agent at the address set forth below under "--
Exchange Agent" on or prior to the Expiration Date or pursuant to the
guaranteed delivery procedures described below.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Private Notes and (i) whose Private Notes
are not immediately available or (ii) who cannot deliver their Private Notes,
the Letter of Transmittal or any other required documents to the Exchange
Agent prior to the Expiration Date may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery substantially in the form provided by the Company (by
facsimile transmission, mail or hand delivery) setting forth the name and
address of the holder, the certificate number(s) of such Private Notes and
the principal amount of Private Notes tendered, stating that the tender is
being made thereby and guaranteeing that, within five New York Stock
Exchange trading days after the Expiration Date, the Letter of Transmittal
(or a facsimile thereof), together with the certificate(s) representing the
Private Notes in proper form for transfer or a Book-Entry Confirmation, as
the case may be, and any other documents required by the Letter of
Transmittal, will be deposited by the Eligible Institution with the
Exchange Agent; and
(c) such properly executed Letter of Transmittal (or facsimile thereof),
as well as the certificate(s) representing all tendered Private Notes in
proper form for transfer, and all other documents required by the Letter of
Transmittal are received by the Exchange Agent within five New York Stock
Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Private Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Tenders of Private Notes may be withdrawn at any time prior to the
Expiration Date.
To withdraw a tender of Private Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to the Expiration Date. Any such
notice of withdrawal must (i) specify the name of the person having deposited
the Private Notes to be withdrawn (the "Depositor"), (ii) identify the Private
Notes to be withdrawn (including the certificate number or numbers and
principal amount of such Private Notes) and (iii) be signed by the holder in
the same manner as the original signature on the Letter of Transmittal by
which such Private Notes were tendered (including any required signature
guarantees). All questions as to the validity, form and eligibility (including
time of receipt) of such notices will be determined by the Company in its sole
discretion, whose determination shall be final and binding on all parties. Any
Private Notes so withdrawn will be deemed not to have been validly tendered
for purposes of the Exchange Offer and no Exchange Notes will be issued with
respect thereto unless the Private Notes so withdrawn are validly retendered.
Properly withdrawn Private Notes may be retendered by following one of the
procedures described above under "--Procedures for Tendering" at any time
prior to the Expiration Date.
CONDITIONS
Notwithstanding any other terms of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange the Exchange Notes for, any
Private Notes, and may terminate the Exchange Offer as
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provided herein before the acceptance of such Private Notes, if the Exchange
Offer violates applicable law, rules or regulations or an applicable
interpretation of the staff of the Commission.
If the Company determines in its sole discretion that any of these
conditions are not satisfied, the Company may (i) refuse to accept any Private
Notes and return all tendered Private Notes to the tendering holders, (ii)
extend the Exchange Offer and retain all Private Notes tendered prior to the
expiration of the Exchange Offer, subject, however, to the rights of holders
to withdraw such Private Notes (see "--Withdrawal of Tenders") or (iii) waive
such unsatisfied conditions with respect to the Exchange Offer and accept all
properly tendered Private Notes that have not been withdrawn. If any such
waiver pursuant to clause (iii) above constitutes a material change to the
Exchange Offer, the Company will promptly disclose such waiver by means of a
prospectus supplement that will be distributed to the registered holders of
the Private Notes, and the Company will extend the Exchange Offer for a period
of five to ten business days, depending upon the significance of the waiver
and the manner of disclosure to the registered holders, if the Exchange Offer
would otherwise expire during such five to ten business day period.
TERMINATION OF CERTAIN RIGHTS
Generally, and except as noted under "Description of Senior Notes--
Registration Rights; Liquidated Damages," all rights under the Registration
Rights Agreement (including registration rights) of holders of the Private
Notes who participate in the Exchange Offer will terminate upon consummation
of the Exchange Offer except with respect to the Company's continuing
obligations (i) to indemnify such holders (including any broker-dealers) and
certain parties related to such holders against certain liabilities (including
liabilities under the Securities Act), (ii) to provide, upon the request of
any holder of a transfer-restricted Private Note, the information required by
Rule 144A(d)(4) under the Securities Act in order to permit resales of such
Private Notes pursuant to Rule 144A, (iii) to use its best efforts to keep the
Registration Statement effective to the extent necessary to ensure that it is
available for resales of transfer-restricted Private Notes by broker-dealers
for a period of up to 180 days from the date of this Prospectus and (iv) to
provide copies of the latest version of this Prospectus to broker-dealers upon
their request for a period of up to 180 days after the date of this
Prospectus.
LIQUIDATED DAMAGES
In the event of a Registration Default (as defined in the Registration
Rights Agreement), the Company is required to pay Liquidated Damages (as
defined in the Registration Rights Agreement) to each holder of Transfer
Restricted Securities (as defined below), during the first 90-day period
immediately following the occurrence of such Registration Default, in an
amount equal to $.05 per week per $1,000 principal amount of Senior Notes
constituting Transfer Restricted Securities held by such holder. The amount of
the Liquidated Damages will increase by an additional $.05 per week per $1,000
principal amount of Senior Notes with respect to each subsequent 90-day period
during which the Registration Default continues, up to a maximum amount of
Liquidated Damages of $.50 per week per $1,000 principal amount of Senior
Notes. Transfer Restricted Securities shall mean each Senior Note until (i)
the date on which such Senior Note has been exchanged by a person other than a
broker-dealer for an Exchange Note in the Exchange Offer, (ii) following the
exchange by a broker-dealer in the Exchange Offer of a Senior Note for an
Exchange Note, the date on which such Exchange Note is sold to a purchaser who
receives from such broker-dealer on or prior to the date of such sale a copy
of this Prospectus, (iii) the date on which such Senior Note has been
effectively registered under the Securities Act and disposed of in accordance
with the Shelf Registration Statement or (iv) the date on which such Senior
Note is distributed to the public pursuant to Rule 144 under the Securities
Act. Except as otherwise noted under "Description of Senior Notes--
Registration Rights; Liquidated Damages," the filing and effectiveness of the
Registration Statement of which this Prospectus is a part and the consummation
of the Exchange Offer will eliminate all rights of the holders of Senior Notes
eligible to participate in the Exchange Offer to receive damages that would
have been payable if such actions had not occurred.
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EXCHANGE AGENT
Norwest Bank Minnesota, National Association, has been appointed as Exchange
Agent of the Exchange Offer. Questions and requests for assistance, requests
for additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
<TABLE>
<S> <C>
By Registered or Certified Mail: In Person:
Norwest Bank Minnesota, National Association Corporate Trust Services
Corporate Trust Operations Northstar East Building
P.O. Box 1517 12th Floor
Minneapolis, MN 55488-1517 608 Second Avenue South
Minneapolis, Minnesota
By Hand or Overnight Delivery: By Facsimile (for Eligible Institutions only):
Norwest Bank Minnesota, National Association (612) 667-4927
Corporate Trust Operations
Norwest Center Confirm Receipt of Guaranteed
Sixth and Marquette Delivery by Telephone:
Minneapolis, MN 55479-0113 (612) 667-9764
</TABLE>
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by facsimile, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection
therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company and are estimated in the aggregate to be approximately
$200,000. Such expenses include registration fees, fees and expenses of the
Exchange Agent and the Trustee, accounting and legal fees and printing costs,
among others.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Private Notes pursuant to the Exchange Offer. If, however, a transfer tax
is imposed for any reason other than the exchange of the Private Notes
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered holder or any other persons) will be
payable by the tendering holder. If satisfactory evidence of payment of such
taxes or exemption therefrom is not submitted with the Letter of Transmittal,
the amount of such transfer taxes will be billed directly to such tendering
holder.
CONSEQUENCE OF FAILURES TO EXCHANGE
Participation in the Exchange Offer is voluntary. Holders of the Private
Notes are urged to consult their financial and tax advisors in making their
own decisions on what action to take.
The Private Notes that are not exchanged for the Exchange Notes pursuant to
the Exchange Offer will remain restricted securities. Accordingly, such
Private Notes may be resold only (i) to a person whom the seller
33
<PAGE>
reasonably believes is a QIB in a transaction meeting the requirements of Rule
144A, (ii) in a transaction meeting the requirements of Rule 144 under the
Securities Act, (iii) outside the United States to a foreign person in a
transaction meeting the requirements of Rule 905 under the Securities Act,
(iv) in accordance with another exemption from the registration requirements
of the Securities Act (and based upon an opinion of counsel if the Company so
requests), (v) to the Company or (vi) pursuant to an effective registration
statement and, in each case, in accordance with any applicable securities laws
of any state of the United States or any other applicable jurisdiction.
ACCOUNTING TREATMENT
For accounting purposes, the Company will recognize no gain or loss as a
result of the Exchange Offer. The expenses of the Exchange Offer will be
amortized over the term of the Exchange Notes.
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
ultimately owned by management and an investor group, acquired the Wilsons
Shares for $67.8 million plus a warrant issued to CVS exercisable for
1,350,000 shares of common stock, with an exercise price of $.60 per share
(the "CVS Warrant") and a second warrant issued to CVS exercisable for up to
1,080,000 shares of common stock, with an exercise price of $.60 per share,
(the "Manager Warrant") in the following two-step transaction. First, CVS
received: (i) $2.0 million in cash; (ii) the $55.8 million CVS Note; (iii) the
CVS Warrant; (iv) the Manager Warrant; (v) 4,320,000 shares of common stock;
and (vi) 7,405 shares of Series A Preferred Stock ("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 were 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
27, 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 Company's initial
public offering, the Limited Partnerships automatically dissolved, and the
shares of common stock held by them were distributed to their partners based
on their respective interests in the Limited Partnerships. See "Certain
Transactions" and "Security Ownership of Certain Beneficial Owners and
Management."
As part of the Acquisition, management purchased 1,080,000 shares of
restricted stock (the "Restricted Stock"). As of August 2, 1997, 198,018
shares of such Restricted Stock had vested. The remaining shares of Restricted
Stock vested immediately upon repurchase of the CVS Note and accrued interest
thereon on August 18, 1997, and the Manager Warrant lapsed at the same time.
See "Use of Proceeds," "Management" and "Certain Transactions."
USE OF PROCEEDS
The Company will not receive proceeds from the Exchange Offer.
The net proceeds to the Company from the issuance and sale of the Private
Notes were approximately $72.1 million. The Company intends to use the net
proceeds as follows: (i) on August 18, 1997, $56.5 million were used to
repurchase the CVS Note and pay accrued interest thereon and (ii) $15.6
million will be used for general corporate purposes, including capital
expenditures and additional store openings. The Company acquired the CVS Note
at a discount from its principal amount. See "Certain Transactions--
Subordinated CVS Note."
34
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated cash and capitalization of
the Company as of August 2, 1997 and the pro forma consolidated cash and
capitalization of the Company as of August 2, 1997 adjusted to reflect the
issuance of the Senior Notes and the application of the net proceeds
therefrom. See "Use of Proceeds."
The information presented below should be read in conjunction with the
historical and pro forma consolidated financial statements and the related
notes thereto, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Use of Proceeds" included elsewhere in this
Offering Memorandum.
<TABLE>
<CAPTION>
AUGUST 2, 1997
-------------------
ACTUAL PRO FORMA
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................. $ 24,091 $ 39,800
======== ========
Short-term debt:
Senior Credit Facility(/1/)............................. $ 0 $ 0
======== ========
Long-term debt:
CVS Note................................................ 61,311 --
Accrued interest on CVS Note............................ 1,160 --
Senior Notes due 2004................................... -- 75,000
-------- --------
Total long-term debt................................... 62,471 75,000
-------- --------
Shareholders' equity(/2/)(/3/):
Common stock, $.01 par value; 45,000,000 shares
authorized, 9,532,083 shares issued and outstanding.... 95 95
Additional paid-in capital(/4/)......................... 29,339 37,850
Retained earnings(/4/).................................. 4,062 25
Cumulative translation adjustment....................... (43) (43)
-------- --------
Total shareholders' equity............................. 33,453 37,927
-------- --------
Total capitalization................................... $ 95,924 $112,927
======== ========
</TABLE>
- --------
(1) Does not include $43.9 million of outstanding letters of credit as of
August 2, 1997. For the period from inception (May 26, 1996) through
February 1, 1997, the peak borrowings and letters of credit outstanding
under the Senior Credit Facility were $48.2 million and $60.9 million,
respectively.
(2) Except as set forth in the consolidated financial statements or as
otherwise indicated herein, the share and per share data contained in this
Prospectus, in addition to the pro forma adjustments referred to
elsewhere, (i) reflect the conversion as of June 2, 1997 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 options under the Company's 1996 Stock Option Plan (the "1996
Option Plan") into a single class of common stock of the Company as a
result of the Company's initial public offering, and (ii) reflect a 0.9-
for-one reverse split of the Company's common stock, effected October 11,
1996.
(3) Does not include: (i) 197,900 shares of common stock issuable upon the
exercise of outstanding stock options at a weighted average exercise price
of $4.88 per share and 802,100 shares of common stock reserved for
issuance pursuant to the 1996 Option Plan, as of August 2, 1997; (ii)
1,350,000 shares of common stock issuable upon exercise of the CVS
Warrant; (iii) 110,000 shares of common stock issuable upon exercise of
underwriter warrants issued in the Company's initial public offering; and
(iv) 1,265,000 shares issuable upon exercise of the redeemable common
stock purchase warrants issued in the Company's initial public offering
(the "Redeemable Warrants"). See "Management" and "Certain Transactions."
(4) Pro forma retained earnings reflects the $3.8 million extraordinary gain
on the early extinguishment of debt, net of tax, which will be recorded as
a result of the repurchase of the CVS Note. Pro forma retained earnings
and additional paid-in capital also reflect the $8.5 million Restricted
Stock compensation charge that will be recorded as a result of the vesting
of the remaining shares of Restricted Stock upon the repurchase of the CVS
Note ($900,000 of such charge was recorded in the twenty-six weeks ended
August 2, 1997).
35
<PAGE>
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL AND OTHER 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 historical 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, 1992,
for the year ended December 31, 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
consolidated financial data for the twenty-seven week period ended August 3,
1996 have been derived from unaudited financial statements of the Predecessor
Companies (seventeen weeks ended May 25, 1996) and from financial statements
of the Company audited by Arthur Andersen LLP (ten weeks ended August 3,
1996). The consolidated financial data for the twenty-six week period ended
August 2, 1997 have been derived from unaudited consolidated financial
statements of the Company. The pro forma statement of operations data, the
store operations data and the balance sheet data as of and 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 27, 1995 and May 25, 1996, for the eight months
ended January 27, 1996, for the period from inception (May 26, 1996) to
February 1, 1997, and for the twenty-seven weeks and twenty-six weeks ended
August 3, 1996 and August 2, 1997, respectively, are not necessarily
indicative of the results of operations for the entire year. Prior to the
Acquisition, the Predecessor Companies were operated as part of CVS. The
historical consolidated financial data presented herein reflect certain
periods during which the Company did not operate as an independent company.
Such information, therefore, may not 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 such earlier reporting periods, and
are not necessarily indicative of the Company's future results or financial
condition.
36
<PAGE>
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL AND OTHER DATA (IN
MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS AND STORE AND RATIO DATA)
<TABLE>
<CAPTION>
COMBINED
PREDECESSOR COMPANIES COMPANY COMPANIES(/3/)
----------------------------------------------------------------- ----------- --------------
COMPANY
------------
EIGHT
MONTHS
ENDED PERIOD FROM
FIVE MONTHS JANUARY 27, INCEPTION PRO
YEARS ENDED DECEMBER 31, ENDED 1996 (MAY 26, FORMA(/1/)
--------------------------------- ---------------- ----------- 1996) TO YEAR ENDED TWENTY-SEVEN
MAY 27, MAY 25, FEBRUARY 1, FEBRUARY 1, WEEKS ENDED
1992 1993 1994 1995 1995 1996 1997 1997(/2/) AUGUST 3, 1996
------ ------ ------ ------- ------- ------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net sales........ $509.2 $478.5 $474.6 $ 462.4 $124.7 $109.6 $ 367.6 $345.1 $422.6 $108.2
Costs and
expenses:
Cost of goods
sold, buying
and occupancy
costs 327.2 320.5 329.4 317.0 99.9 86.2 238.5 222.1 285.2 90.9
Selling, general
and
administrative
expenses....... 117.2 120.1 130.2 114.9 45.9 34.8 76.4 75.8 102.4 41.3
Depreciation and
amortization... 17.4 20.7 22.3 21.4 9.0 4.7 13.3 1.0 1.4 3.8
Restricted stock
compensation
expense........ -- -- -- -- -- -- -- 1.5 10.0 --
Restructuring
and asset
impairment
charges........ -- -- -- 182.2 -- -- 182.2 -- -- --
------ ------ ------ ------- ------ ------ ------- --------- ---------- -------
Income (loss)
from
operations...... 47.4 17.2 (7.3) (173.1) (30.1) (16.1) (142.8) 44.7 23.6 (27.8)
Interest expense,
net............. 6.9 5.1 8.4 10.4 3.4 1.6 7.4 5.3 10.3 2.4
------ ------ ------ ------- ------ ------ ------- --------- ---------- -------
Income (loss)
before income
taxes........... 40.5 12.1 (15.7) (183.5) (33.5) (17.7) (150.2) 39.4 13.3 (30.2)
Income tax
provision
(benefit)....... 17.0 7.0 (3.1) (10.1) (5.5) (6.6) (4.6) 15.5 9.3 (11.1)
------ ------ ------ ------- ------ ------ ------- --------- ---------- -------
Net income
(loss).......... $ 23.5 $ 5.1 $(12.6) $(173.4) $(28.0) $(11.1) $(145.6) $ 23.9 $ 4.0 $ (19.1)
====== ====== ====== ======= ====== ====== ======= ========= ========== =======
Pro forma net
income (loss)
per common
share(/3/)...... $ 2.49 $ 0.37
========= ==========
Weighted average
common shares
outstanding(/4/).. 9,602,826 10,867,826
========= ==========
OTHER DATA:
Adjusted EBITDA(/5/) $ 64.8 $ 37.9 $ 15.0 $ 30.5 $(21.1) $(11.4) $ 52.7 $ 47.2 $ 35.0 $ (24.0)
Capital
expenditures... $ 22.9 $ 26.6 $ 20.7 $ 10.1 $ 2.9 $ 3.6 $ 7.5 $ 5.9 $ 9.3 $ 4.3
Ratio of
earnings to
fixed
charges(/6/)... 3.4x 1.7x 0.3x -- -- -- -- 3.5x 1.6x --
STORE DATA:
Traditional
stores:
Open at end of
period......... 583 631 628 548 567 480 494 461 461 477
Net sales per
square foot for
stores open
entire year.... $415 $355 $340 $373 -- -- -- -- $389 --
Change in
comparable
store
sales(/7/)..... 2.1% (13.8)% (5.1)% (1.5)% 4.4% 3.9% (3.1)% (2.7)% (1.3)% 0.0%
Peak number of
seasonal stores
during period... 32 80 135 227 -- -- 227 376 376 --
</TABLE>
<TABLE>
<CAPTION>
TWENTY-SIX
WEEKS
ENDED
AUGUST 2,
1997
------------
<S> <C>
STATEMENT OF
OPERATIONS DATA:
Net sales........ $ 93.4
Costs and
expenses:
Cost of goods
sold, buying
and occupancy
costs 84.2
Selling, general
and
administrative
expenses....... 36.5
Depreciation and
amortization... 0.9
Restricted stock
compensation
expense........ 0.9
Restructuring
and asset
impairment
charges........ --
------------
Income (loss)
from
operations...... (29.1)
Interest expense,
net............. 1.9
------------
Income (loss)
before income
taxes........... (31.0)
Income tax
provision
(benefit)....... (11.2)
------------
Net income
(loss).......... $ (19.8)
============
Pro forma net
income (loss)
per common
share(/3/)...... $ (1.98)
============
Weighted average
common shares
outstanding(/4/).. 10,036,978
============
OTHER DATA:
Adjusted EBITDA(/5/) $ (27.3)
Capital
expenditures... $ 2.6
Ratio of
earnings to
fixed
charges(/6/)... --
STORE DATA:
Traditional
stores:
Open at end of
period......... 452
Net sales per
square foot for
stores open
entire year.... --
Change in
comparable
store
sales(/7/)..... (5.8)%
Peak number of
seasonal stores
during period... --
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES COMPANY
--------------------------- ---------------------------
DECEMBER 31, AUGUST 2, 1997
--------------------------- ---------------
FEBRUARY 1, PRO
1992 1993 1994 1995 1997 ACTUAL FORMA(/1/)(/1//0/)
------ ------ ------ ------ ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 5.5 $ 5.4 $ 17.3 $ 14.3 $ 81.6 $ 24.1 $ 39.8
Working capital(/8/).... 36.7 57.4 77.1 44.6 83.8 76.3 90.4
Total assets............ 376.6 401.0 392.7 182.4 172.4 140.0 158.6
Total long-term
debt(/9/).............. -- -- -- -- 59.6 62.5 75.0
Shareholders' equity.... 222.5 217.2 201.0 27.6 43.5 33.5 37.9
</TABLE>
37
<PAGE>
- -------
(1) See "Pro Forma Unaudited Consolidated Financial Statements."
(2) The pro forma period for the year ended February 1, 1997 includes results
of operations for 53 weeks.
(3) The twenty-seven weeks ended August 3, 1996 represent a period which
combines the results of operations of the Predecessor Companies prior to
the Acquisition from January 28, 1996 through May 25, 1996, and the
Company after the Acquisition from May 26, 1996 through August 3, 1996.
(4) Computed on the basis described for pro forma net income per common share
in Note 2 of Notes to Consolidated Financial Statements.
(5) EBITDA represents income (loss) from operations, plus depreciation and
amortization. Adjusted EBITDA represents EBITDA plus Restricted Stock
compensation expense and Restructuring and asset impairment charges.
Adjusted EBITDA in 1995 and for the eight months ended January 27, 1996
includes the Restructuring and asset impairment charges of $182.2 million.
Adjusted EBITDA for the period from inception (May 26, 1996) to February
1, 1997, pro forma for the year ended February 1, 1997 and for the twenty-
six weeks ended August 2, 1997 includes the Restricted Stock compensation
expense of $1.5 million, $10.0 million and $0.9 million, respectively.
EBITDA and Adjusted EBITDA are not intended to represent cash flow from
operations as defined by GAAP and should not be considered as an
alternative to cash flow or as a measure of liquidity or as an alternative
to net earnings as indicative of operating performance. Adjusted EBITDA is
included herein because management believes that certain investors find it
a useful tool for measuring the Company's ability to service its debt.
(6) For purposes of computing this ratio, earnings consist of income (loss)
before income taxes plus fixed charges. Fixed charges consist of interest
expense, amortization of deferred financing fees and one-third of the rent
expense from operating leases, which management believes is a reasonable
approximation of the interest factor of the rent. Earnings were inadequate
to cover fixed charges by $159.2 million, $24.4 million, $11.4 million,
$133.6 million, $21.9 million and $21.8 million for the year ended
December 31, 1995, for the five months ended May 27, 1995 and May 25,
1996, for the eight months ended January 27, 1996 and for the twenty-seven
weeks ended August 3, 1996 and the twenty-six weeks ended August 2, 1997,
respectively.
(7) Comparable store sales means sales generated by stores open at least one
full year.
(8) The working capital calculation excludes amounts due to CVS as of December
31, 1992, 1993, 1994 and 1995.
(9) Actual total long-term debt as of February 1, 1997 includes accrued
interest of $3.8 million which became a portion of the principal balance
of the CVS Note on May 25, 1997 and actual total long-term debt as of
August 2, 1997 includes $1.2 million of accrued interest on the CVS Note
that was paid upon repurchase of the CVS Note on August 18, 1997. Total
long-term debt does not include $7.9 million and $43.9 million of
outstanding letters of credit as of February 1, 1997 and August 2, 1997,
respectively.
(10) The pro forma balance sheet data as of August 2, 1997 reflects the pro
forma adjustments for the Offering and the application of the net
proceeds therefrom.
38
<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.
The fiscal year of the Predecessor Companies prior to the Acquisition 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.
OVERVIEW
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 the Restructuring, which included the closing of stores that had not
achieved cash flow targets established by management and resulted in a
reduction of the number of stores to 452 by August 2, 1997. 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.
Prior to the Acquisition in 1996, the Predecessor Companies operated as part
of CVS and 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. See "The Acquisition."
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 $85.0 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 Senior Credit
Facility simultaneously with the closing of the Acquisition. The Senior Credit
Facility provides the Company through WHLI with a $150.0 million line of
credit, which includes a $90.0 million letter of credit subfacility, subject
to borrowing base limitations. As of August 2, 1997, such Guarantor had no
borrowings outstanding under the Senior Credit Facility; however, it had
outstanding letters of credit in the amount of $43.9 million at that date. See
"--Liquidity and Capital Resources."
The Acquisition 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.
39
<PAGE>
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 August 2, 1997, 198,018 shares of such
Restricted Stock had vested. For the period ended February 1, 1997, the
Company recorded a $1.5 million non-cash compensation charge related to the
198,018 shares earned pursuant to the Restricted Stock Agreement. The
remaining 881,982 shares of Restricted Stock vested on August 18, 1997 as a
result of the repurchase of the CVS Note. The Company will be required to
record an additional non-cash compensation charge of $8.5 million related to
such shares which is equal to the difference between the fair market value of
the Restricted Stock on the date the shares vested, which was $10.25 per
share, and the original purchase price of the Restricted Stock, which was $.60
per share. $900,000 of such additional charge was recorded for the twenty-six
weeks ended August 2, 1997. Such Restricted Stock compensation charge will
significantly impact the Company's income (loss) from operations and net
income (loss) for the fiscal quarter ending November 1, 1997 and for the
fiscal year ending January 31, 1998; however, such charges do not impact the
Company's total shareholders' equity or cash balances. As a result of the
completion of the Offering, the Company will record an extraordinary gain on
the early extinguishment of debt, net of tax, for the repurchase of the CVS
Note of $3.8 million. Such net gain will partially offset the Restricted Stock
compensation charge. See "Certain Transactions--Restricted Stock Agreement."
RESULTS OF OPERATIONS
The following table sets forth selected information from the Company's
historical consolidated statements of operations, expressed as a percentage of
net sales for the periods indicated:
<TABLE>
<CAPTION>
COMBINED
PREDECESSOR COMPANIES COMPANY COMPANIES COMPANY
------------------------------------------------ ----------- ------------ ----------
PERIOD
FROM
YEARS ENDED FIVE MONTHS EIGHT INCEPTION TWENTY-SEVEN TWENTY-SIX
DECEMBER 31, ENDED MONTHS (MAY 26, WEEKS WEEKS
------------------- --------------- ENDED 1996) TO ENDED ENDED
MAY 27, MAY 25, JANUARY 27, FEBRUARY 1, AUGUST 3, AUGUST 2,
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 84.0 90.2
Selling, general and
administrative
expenses.............. 25.1 27.4 24.8 36.8 31.8 20.8 22.0 38.2 39.1
Income (loss) from
operations............. 3.6 (1.5) (37.4) (24.1) (14.7) (38.8) 13.0 (25.7) (31.2)
Interest expense, net... 1.1 1.8 2.3 2.8 1.4 2.0 1.6 2.2 2.0
Income tax provision
(benefit).............. 1.4 (0.6) (2.2) (4.4) (6.0) (1.2) 4.5 (10.2) (12.0)
Net income (loss)....... 1.1 (2.7) (37.5) (22.5) (10.1) (39.6) 6.9 (17.7) (21.2)
Adjusted EBITDA......... 7.9 3.2 6.6 (16.9) (10.4) 14.3 13.7 (22.2) (29.2)
</TABLE>
TWENTY-SIX WEEKS ENDED AUGUST 2, 1997 COMPARED TO TWENTY-SEVEN WEEKS ENDED
AUGUST 3, 1996
Wilsons opened one store and closed ten stores in the twenty-six week period
ended August 2, 1997, compared to four store openings and 21 store closings in
the twenty-seven week period ended August 3, 1996. As of August 2, 1997,
Wilsons operated 452 stores compared to 477 stores at August 3, 1996. The 25
fewer stores were a result of closing stores that did not achieve cash flow
targets established by management.
Sales for the twenty-six week period ended August 2, 1997 were $93.4 million
compared with $108.2 million in the twenty-seven weeks ended August 3, 1996, a
decrease of $14.8 million, or 13.7%. Approximately
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$6.3 million of the sales decrease was due to one less week in the 1997 period
compared to the 1996 period. In addition, the Company operated on average 29,
or 6.0%, fewer stores in the twenty-six weeks ended August 2, 1997 as the
Company closed underperforming stores. Comparable store sales for the 1997
period declined 5.8%. The comparable store sales decrease was primarily
attributable to less low-priced clearance merchandise associated with fewer
closed stores in the immediately preceding quarter compared to the period one
year earlier.
Cost of goods sold, buying and occupancy costs for the twenty-six week
period ended August 2, 1997 were $84.2 million, or 90.2% of sales, compared to
$90.9 million, or 84.0% of sales, for the twenty-seven week period of the
pervious year. Gross margin net of occupancy costs decreased 3.4 points as a
percent of sales for the twenty-six week period as compared to the period one
year ago due to additional markdowns required to liquidate clearance
merchandise. Occupancy costs for the 1997 period decreased $2.0 million due to
operating fewer stores; however, they increased as a percent of sales in 1997
as comparable store sales declined while fixed rents associated with store
leases remained flat. The Company's inventories are valued under the retail
inventory method using the last-in, first-out (LIFO) basis. The difference in
inventories between LIFO and the first-in, first-out (FIFO) method was not
material as of August 2, 1997. Interim period inventory determinations are
partially based on assumptions as to future inventory levels at the end of the
fiscal year and expected rates of inflation for the year which may impact
future financial results.
Operating expenses for the twenty-six week period ended August 2, 1997 were
$38.3 million, or 41.0% of sales, compared to $45.1 million, or 41.7% of
sales, for the twenty-seven week period ended August 3, 1996. The expense
decrease of $6.8 million was partially due to the $2.9 million decrease in
depreciation and amortization expense resulting from the purchase accounting
adjustment that reduced the amounts assigned to property and equipment. The
remaining expense decrease is due to reductions in corporate expenses,
continued control of variable expenses in the stores, operating on average 29
fewer locations, and having one less week in the 1997 period. Offsetting the
operating expense reductions was a $0.9 million accrued expense associated
with the vesting of Restricted Stock.
As a result of the above, Wilsons had a loss from operations of $29.1
million for the twenty-six week period ended August 2, 1997, compared to a
loss from operations of $27.8 million for the twenty-seven week period ended
August 3, 1996.
Adjusted EBITDA for the twenty-six week period ended August 2, 1997 was
$(27.3) million compared to $(24.0) million for the twenty-seven week period
ended August 3, 1996. This represents a 13.8% decrease, primarily due to the
reasons set forth above.
Net interest expense for the twenty-six week period ended August 2, 1997 was
$1.9 million, or 2.1% of sales, compared to $2.4 million, or 2.2% of sales,
for twenty-seven week period ended August 3, 1996. The decrease in net
interest expense is primarily due to a decrease in the average amount of debt
outstanding and an increase in interest income offset by an increase in
borrowing rates and the amortization of deferred financing costs. See "--
Liquidity and Capital Resources."
Income tax benefit for the twenty-six week period ended August 2, 1997 was
$11.2 million, or 12.0% of sales, compared to an $11.1 million income tax
benefit, or 10.3% of sales, for the twenty-seven weeks ended August 3, 1996.
The effective tax rate decreased in 1997 to a 36.1% tax rate from a 36.8% tax
rate in 1996 due primarily to the impact of state income taxes.
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
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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, reflecting a decrease in both the number of stores operated and in same
store sales. 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 latest fashion 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 holiday stores and kiosks.
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. Accessories typically generate
higher gross margins than apparel.
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 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").
Adjusted EBITDA for the period from inception to February 1, 1997 was $47.2
million compared to $52.7 million for the eight months ended January 27, 1996.
This represents a 10.4% decrease in Adjusted EBITDA, primarily due to the
reasons set forth above.
Net interest expense from inception to February 1, 1997 was $5.3 million, or
1.6% of sales, compared to $7.4 million, or 2.0% of sales, for the same period
in the previous year. The decrease in net interest expense is primarily due to
a decrease in the average amount of debt outstanding offset by higher interest
rates, the amortization of deferred financing costs and an increase in
interest income.
Income tax expense for the period from inception to February 1, 1997 was
$15.5 million compared to a $4.6 million tax benefit for the same period in
1995. The effective tax rate increased in 1996 to a 39.4% tax rate from a 3.1%
benefit rate in 1995. The higher effective tax rate was primarily due to the
impact of the write-off of nondeductible goodwill and other intangibles as
part of the 1995 Restructuring.
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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, 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.
Adjusted EBITDA for the five months ended May 25, 1996 was $(11.4) million
compared to $(21.1) million for the five months ended May 27, 1995. This
represents a 46.0% increase in Adjusted EBITDA, primarily due to the reasons
set forth above.
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.
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
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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 generally have higher gross profit
margins than apparel, 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 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 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
(5) 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.
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Adjusted EBITDA for the year ended December 31, 1995 was $30.5 million
compared to $15.0 million for the year ended December 31, 1994. This
represents a 103.3% increase in Adjusted EBITDA, primarily due to the reasons
set forth above.
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
generally have higher gross profit margins than apparel, 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.
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.
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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.
Adjusted EBITDA for the year ended December 31, 1994 was $15.0 million
compared to $37.9 million for the year ended December 31, 1993. This
represents a 60.4% decrease in Adjusted EBITDA, primarily due to the reasons
set forth above.
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 are driven by the Company's strategy
to open new stores, remodel existing stores, update information systems and
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
from October through December. Commencing in 1997, the Company currently plans
to open 12 to 17 traditional stores and at least six airport stores annually
for the next several years. Such stores are part of the Company's long-term
strategy to identify new growth opportunities and increase profit margins. See
"Business--Business Strategy" and "--Growth Strategy."
Prior to the Acquisition, the primary sources of the Predecessor Companies'
cash for working capital and capital expenditures were net cash flows from
operating activities and borrowings from CVS. The Predecessor Companies
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.
General Electric Capital Corporation and a syndicate of banks (the "Banks")
have provided WLHI with a three-year Senior Credit Facility that expires in
May 1999. The Senior Credit Facility provides for borrowings of up to $150.0
million in aggregate principal amount, which amount includes a letter of
credit subfacility of up to $90.0 million. The maximum amount available under
the Senior Credit Facility, however, is further subject to a borrowing base
limitation (less certain reserves) of 65% of eligible inventory. The Company's
borrowing availability is also reduced by outstanding letters of credit.
Interest is payable on borrowings at one or more variable rates determined by
reference to the "prime" rate plus .25% ("prime" plus 0.0% for the first $10.0
million of borrowings), or LIBOR plus 1.75%. The spreads are subject to
possible changes based upon the Company's financial results. As of August 2,
1997, the Company had no consolidated borrowings outstanding under its Senior
Credit Facility. The Company pays a monthly fee equal to .375% per annum on
the unused amount of the Senior Credit Facility and on that portion of the
first $10.0 million in borrowings that bears interest at prime plus a spread.
For letters of credit, the Company pays a monthly fee in an amount equal to
1.25% per annum times the daily average of the amount of letters of credit
outstanding during each month, which percentage is subject to possible changes
based on the Company's financial results. The Senior
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Credit Facility contains certain covenants limiting, among other things, the
Company's and each Guarantor's ability to make capital expenditures, pay cash
dividends or make other distributions. Specifically, the Guarantors are
prohibited from paying upstream dividends in excess of the amounts required to
service the Senior Notes and for taxes and other limited operating expenses.
The Company plans to use the Senior Credit Facility for its immediate and
future working capital needs, including capital expenditures. As of August 2,
1997, there was $43.9 million in outstanding letters of credit under the
Senior Credit Facility. From inception through February 1, 1997, the peak
borrowings and letters of credit outstanding under the Senior Credit Facility
were $48.2 million and $60.9 million, respectively, and the average amounts of
such borrowings and amounts covered by outstanding letters of credit for such
period were $15.8 million and $40.1 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 Senior Credit Facility to fund working capital and letter of credit needs,
and management believes that the Senior Credit Facility, together with current
and anticipated cash flow from operations and remaining net proceeds from the
sale of the Senior Notes, should be adequate to meet the Company's anticipated
working capital and capital expenditure requirements until the Senior Credit
Facility expires in 1999, when the Company expects to extend or replace such
facility. There can be no assurance, however, that the Senior Credit Facility
will be sufficient to fund such needs, or, if the Senior 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. See "Description of Senior Credit Facility."
As of August 2, 1997, the Company also had outstanding the CVS Note, which
was a senior secured subordinated note for $61.3 million. $60.5 million of the
principal amount of the note bore 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 August 2, 1997, $1.2 million in interest had accrued
on the CVS Note. The remaining principal balance of the note ($0.8 million)
did not bear interest. On August 18, 1997 the Company repurchased the CVS Note
with a portion of the proceeds of the Offering discussed below.
On August 18, 1997, the Company completed the Offering of $75.0 million of
the Senior Notes to certain institutional buyers. Interest on the Senior Notes
at the rate of 11 1/4% per annum is payable semi-annually in arrears on
February 15 and August 15 of each year, commencing on February 15, 1998. The
Senior Notes mature on August 15, 2004, unless previously redeemed, and the
Company is not required to make any mandatory redemption or sinking fund
payment prior to maturity. The Senior Notes are general unsecured obligations
of the Company and rank senior in right of payment to all existing and future
subordinated indebtedness of the Company and rank pari passu in right of
payment with all other current and future unsubordinated indebtedness of the
Company. The Indenture governing the Senior Notes contains numerous operating
covenants that limit the discretion of management with respect to certain
business matters, and which place significant restrictions on, among other
things, the ability of the Company to incur additional indebtedness, to create
liens or other encumbrances, to declare or pay any dividend, to make certain
payments or investments, loans and guarantees and to sell or otherwise dispose
of assets and merge or consolidate with another entity. See "Description of
Senior Notes." The Company used $56.5 million of the approximately $72.1
million in net proceeds from the Offering to repurchase the CVS Note. The
balance of the net proceeds will be used for general corporate purposes,
including capital expenditures and additional store openings. See "Use of
Proceeds." Such proceeds will reduce the total amount of borrowings under the
Senior Credit Facility.
CASH FLOW
Operating activities for the twenty-six week period ended August 2, 1997
resulted in cash used of $61.5 million compared to cash used of $56.0 million
in the twenty-seven week period ended August 3, 1996. The $61.5 million cash
used in operating activities in the twenty-six week period ended August 2,
1997 was primarily a result of the $19.8 million net loss, the $22.3 million
seasonal increase in inventories, and the $17.0 million
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<PAGE>
decrease in income taxes payable and other liabilities (resulting from the
$11.2 million tax benefit generated by the year-to-date net loss and the $7.4
million tax payments made in the twenty-six weeks ended August 2, 1997).
Fluctuations in certain balance sheet accounts between February 1, 1997 and
August 2, 1997 reflect normal seasonal variations within the retail industry.
The levels of cash and cash equivalents, inventories and accounts receivable
fluctuate due to the seasonal nature of the retail business. Along with the
fluctuations in these current assets, there is also a corresponding
fluctuation in trade accounts payable and certain accrued expenses.
Operating activities for the period from inception (May 26, 1996) to
February 1, 1997 resulted in cash provided of $34.2 million compared to cash
provided of $63.0 million for the eight-month period ended January 27, 1996.
The $28.8 million decrease in cash provided by operating activities in the
1996 period compared to the same period in 1995 resulted from several
different factors. The net loss for the eight months ended January 27, 1996 of
$145.6 million was offset by a noncash Restructuring charge of $182.2 million
and depreciation and amortization of $13.3 million. Inventories also increased
from $53.1 million at May 26, 1996 to more normal seasonal levels of $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 scheduled 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 provided 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.
Investing activity for the twenty-six weeks ended August 2, 1997 was
comprised of capital expenditures totaling $2.6 million. The capital
expenditures were primarily for the implementation of certain new information
systems and the renovation of and improvements to existing stores. Capital
expenditures for the twenty-seven week period ended August 3, 1996 totaled
$4.3 million. Commencing in 1997, the Company currently plans to open 12 to 17
traditional mall-based stores and at least six airport stores annually for the
next several years. The cost to open a traditional mall-based store is
currently estimated to range from $130,000 to $200,000. The cost to open an
airport store is currently estimated to range from $125,000 to $175,000.
Capital expenditures for the year ending January 31, 1998 are anticipated to
be approximately $13.0 million.
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. Investing activity in 1996 included the Acquisition
of the Predecessor Companies, net of cash acquired, for $37.1 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
48
<PAGE>
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 by financing activities for the twenty-six weeks ended August
2, 1997 was $6.6 million. The $6.6 million provided by financing activities
was the result of $9.5 million in net proceeds from the Company's initial
public offering offset by a $2.9 million decrease in book overdrafts which
occur as outstanding checks exceed funds on deposit in noninvestment accounts.
The proceeds from the initial public offering enable the Company to reduce
seasonal borrowings under the Senior Credit Facility. In addition, on May 27,
1997, the holders of the 7,405 shares of Series A Preferred exchanged their
entire holdings of such shares for common stock in a noncash transaction.
Financing activities in the twenty-seven weeks ended August 3, 1996 included
the elimination of all prior indebtedness owed by the Predecessor Companies to
CVS and the sale of $12.0 million of common and preferred stock in connection
with the Acquisition. See "Certain Transactions."
Cash provided from financing activities for the period from inception to
February 1, 1997 was $16.2 million compared to cash used of $50.6 million in
the same period in 1995. The proceeds provided from financing activities in
1996 resulted from the sale of common and preferred stock of $12.0 million and
a $4.2 million increase in book overdrafts. The $50.6 million used in
financing activities in the eight-month period ended January 27, 1996 was a
result of decreased intercompany borrowings of $57.8 million from CVS offset
by a $7.2 million increase in book overdrafts. As part of the Acquisition, CVS
eliminated all prior indebtedness owed to it by the Predecessor Companies.
Cash used for financing activities was $46.0 million in 1995 compared to
cash provided from financing activities of $20.4 million in 1994 and $20.9
million in 1993. The cash used for financing activities in 1995 resulted from
paying down outstanding intercompany debt to CVS. Wilsons' loan balance to CVS
was $78.8 million at the end of 1995 compared to $124.2 million at the end of
1994 and $100.3 million at the end of 1993. As part of the Acquisition, CVS
eliminated all prior indebtedness owed by the Predecessor Companies to CVS.
Management believes that Wilsons' financial resources, including the Senior
Credit Facility, the net proceeds from the Company's initial public offering,
the net proceeds from the Offering and estimated cash flow from operations,
will be adequate to fund the Company's operations until the Senior Credit
Facility expires in 1999, when the Company expects to extend or replace such
facility.
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
holiday 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 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, if at all, 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.
49
<PAGE>
The following table sets forth certain unaudited financial information for
Wilsons for each calendar quarter of 1995, each fiscal quarter of the year
ended February 1, 1997 (and pro forma for such periods) and the first two
fiscal quarters for the year ending January 31, 1998 (and pro forma for such
periods). This quarterly information has been prepared on a basis consistent
with the Company's audited financial statements appearing elsewhere in this
Prospectus and reflects adjustments which, in the opinion of management,
consist of normal recurring adjustments, necessary for a fair presentation of
such unaudited quarterly results when read in conjunction with the audited
financial statements and notes thereto.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Calendar 1995
Net sales....................... $ 93.4 $ 47.3 $ 62.4 $ 259.3
Loss from operations............ (16.1) (22.6) (18.9) (115.5)(/1/)
Net loss........................ (15.2) (20.8) (18.3) (119.1)(/1/)
Year Ended February 1, 1997
(/2/)(/3/)
Net sales....................... 66.8 41.4 86.4 230.2
Income (loss) from operations... (9.8) (18.0) .9 55.3
Net income (loss)............... (7.2) (11.9) (1.0) 33.0
Year Ended February 1, 1997 (Pro
Forma) (/2/)(/3/)(/4/)
Net sales....................... 65.0 41.0 86.4 230.2
Income (loss) from operations... (16.9) (17.2) .9 56.8
Net income (loss)............... (15.8) (11.6) (1.1) 32.5
Year Ending January 31, 1998
Net sales....................... 56.9 36.5 -- --
Loss from operations (/5/)...... (10.4) (18.7) -- --
Net loss (/5/).................. (7.2) (12.6) -- --
Year Ending January 31, 1998 (Pro
Forma) (/4/)
Net sales....................... 56.9 36.5 -- --
Loss from operations............ (9.9) (18.3) -- --
Net loss........................ (6.9) (12.1) -- --
</TABLE>
- --------
(1) Includes a pre-tax Restructuring charge of $134.3 million related to the
anticipated costs associated with the closing of the Predecessor
Companies' stores and the write-off of goodwill and other intangibles
during the fourth quarter of 1995. Also includes a pre-tax asset
impairment charge of $47.9 million related to the write-off of certain
assets upon the adoption of SFAS No. 121 during the fourth quarter of
1995.
(2) The fourteen weeks ended August 3, 1996 (second quarter) 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 second
quarter was comprised of 14 weeks.
(4) See "Pro Forma Unaudited Consolidated Financial Statements."
(5) Income (loss) from operations and net income (loss) for the fiscal quarter
ending November 1, 1997 and for the fiscal year ending January 31, 1998
will be significantly impacted by the net effect ($3.8 million net
expense) of certain non-recurring, non-cash charges and gains arising from
the Offering. See "--Overview."
The Company does not believe that inflation has had a material 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.
50
<PAGE>
BUSINESS
OVERVIEW
Wilsons is the leading specialty retailer of men's and women's leather
outerwear, apparel and accessories in the United States. The Company's
nationwide network of 452 retail stores is located in 44 states and the
District of Columbia and England. The Company offers quality leather products
under several formats: "Wilsons The Leather Experts," the Company's
traditional mall-based store, offers a full range of moderately priced
merchandise, while "Tannery West" and "Georgetown Leather Design" are mall-
based stores offering a more targeted line of upscale merchandise. As of
August 2, 1997, Wilsons operated 12 airport stores, which focus on selling
accessories to business travelers and tourists, and 440 mall-based stores. The
Company supplements its mall-based operations with holiday stores and seasonal
kiosks during its peak selling period from October through December and plans
to open approximately 200 holiday stores and 100 kiosks in 1997. For the
twelve months ended August 2, 1997, the Company generated net sales of $410.0
million and Adjusted EBITDA of $31.4 million.
Wilsons offers an extensive selection of quality merchandise at affordable
prices, with a consistent focus on customer service through its staff of sales
associates trained in leather types, quality and care. The Company 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.
Wilsons offers quality merchandise at affordable prices to provide value for
its customers and to develop a loyal customer base. The Company believes it
can offer lower prices than its competitors for merchandise of comparable
quality due to its integrated global sourcing capability, merchandising
strategy, and efficient, cost-effective distribution system. Wilsons' mall-
based stores average approximately 2,000 square feet in size and are located
primarily in high-traffic regional shopping malls with a merchandising
strategy targeted to the demographics and buying patterns of the surrounding
population. Management believes the Company's global sourcing, nationwide
store network, value-based quality merchandise and strong customer service
combine to provide the Company with competitive advantages over other mall-
based leather retailers, and contribute to attractive cash flow margins.
Wilsons has increased its Adjusted EBITDA from $15.0 million for the fiscal
year ended December 31, 1994 to $31.4 million for the twelve-month period
ended August 2, 1997, a compound annual growth rate of approximately 33%. Over
the same period, the Company's Adjusted EBITDA margin has increased from 3.2%
to 7.7%, primarily as a result of the Company's: (i) Restructuring; (ii)
vertically-integrated global product sourcing; (iii) merchandising strategy;
and (iv) distribution system.
Restructuring. As part of a program to enhance the Company's profitability
and improve its portfolio of stores, management closed 156 stores, between
January 1, 1995 and May 25, 1996, that had not achieved targeted cash flow
levels, wrote off an amount of goodwill and certain other non-productive
assets and recorded charges for certain related lease obligations. As 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. Following the Restructuring, the Company
maintained its geographically diverse store base and improved its financial
results, which management believes positions the Company for future revenue
and cash flow growth.
Vertically-Integrated Global Product Sourcing. Wilsons' integrated global
product sourcing network allows the Company to design, purchase leather for,
and contract for the manufacturing of most of the apparel and accessories sold
in its stores. In 1996, Wilsons contracted for the manufacture of
approximately 1.8 million leather garments, which management believes makes
the Company the largest leather apparel purchaser in the world. This volume
purchasing and vertical integration provides Wilsons with greater operational
control and flexibility resulting in reduced order lead times, increased
responsiveness to changing consumer preferences and fashion trends, and the
ability to offer its customers better value by providing quality products at
competitive prices.
51
<PAGE>
Merchandising Strategy. Since 1992, Wilsons has reduced its sourcing time
from approximately 120 days to approximately 90 days by more closely
integrating the Company's designers and merchandisers with its extensive
contract manufacturing sources. This reduced sourcing time results in more
successful product lines, efficient inventory management and the reduced need
for markdowns on merchandise at the end of the selling season. The benefits of
the reduced sourcing time are enhanced by the Company's newly implemented
merchandise information system. This system is designed to improve the quality
and availability of merchandising data to allow management to better analyze
merchandise trends and adjust its merchandising strategies.
Distribution System. Management believes the Company has a significant
competitive advantage by virtue of its ability to manage the flow of its
merchandise from the sourcing of leather through the sale of its apparel and
accessories in the Company's retail stores. Wilsons' merchandise is shipped
directly from the contract manufacturers to the Company's state-of-the-art
distribution center. Wilsons has also redesigned and automated its
distribution center to more efficiently process merchandise. As a result,
approximately 40% of the merchandise received in the distribution center is
sent directly to the Company's stores through cross-docking, which allows for
more efficient handling and more timely delivery of inventory and reduced
distribution expense.
BUSINESS STRATEGY
Wilsons' objectives are to gain additional market share, strengthen its
position as the largest specialty retailer of leather outerwear, apparel and
accessories in the United States and increase the cash flow and 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 merchandise and expertise in the unique
properties and care of leather merchandise. The Company provides ongoing
training for its sales associates in leather types, quality and care to
develop the associates' leather expertise and to deliver a high level of
customer service.
Maximize Merchandising Opportunities Through Vertical Integration. Wilsons'
operations integrate the design of leather merchandise, the development and
sourcing 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 its vertical integration gives it
several competitive advantages over other mall-based leather retailers,
including the ability to:
. Reduce the amount of cash needed to maintain optimal inventory levels;
. 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; and
. 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, Tannery West,
Georgetown Leather Design, Berman Buckskin, Adventure Bound, Maxima, Open Road
and M. Julian, which are trademarks and registered trademarks of the Company.
These proprietary brand name products typically generate higher gross margins
than other products offered by the Company. This branding permits the Company
to provide unique merchandise not sold by other retailers. In addition to its
own brands, Wilsons also selectively offers designer brands such as Guess?,
Jones New York, Kenneth Cole, Andrew Marc and Bosca, which brand names and
registered trademarks are the property of their respective holders. The
combination of Wilsons' brands with these designer brands is intended to
enhance the value of the Company's brands and the breadth and depth of
Wilsons' selection.
52
<PAGE>
REVENUE AND CASH FLOW GROWTH STRATEGY
Wilsons seeks to strengthen its market position and improve its operating
results by focusing on higher margin products, further reducing costs,
increasing comparable store sales and selectively growing its store base. The
improved profitability of the Company's store base and stronger cash flow
margins following the Restructuring have positioned Wilsons to take advantage
of future growth opportunities. Key elements of Wilsons' growth strategy
include:
Continue to Enhance Profit Margins. Wilsons strives to increase its
operating margins by: (i) emphasizing higher margin accessories in its mall-
based stores' merchandise mix and opening additional airport stores that
primarily focus on accessories; (ii) fully utilizing the Company's recently
upgraded merchandise information system to better match store style
allocations to customer purchasing patterns and reduce markdowns;
(iii) increasing productivity in the Company's distribution center and by
further leveraging administrative expenses; and (iv) improving the utilization
of its outlet stores to efficiently sell slower moving products.
Increase Comparable Store Sales. Wilsons is implementing programs to improve
its comparable store sales. These programs include: (i) maintaining a broad
assortment of classic, functional merchandise while offering merchandise
reflecting current fashion trends to attract customers into its stores; (ii)
improving sales associates' productivity by offering incentives to improve
their sales per hour and more closely monitoring their performance; and (iii)
altering display of merchandise in the stores during non-peak selling seasons
to emphasize accessories.
Increase Store Base. The Company plans to increase the number of its stores
and continue to open and operate holiday stores and seasonal kiosks during its
peak selling season. The increase in stores is expected to come from the
opening of new stores utilizing the following formats:
. Mall-Based Stores. Wilsons currently plans to open 12 to 17 new
traditional mall-based stores per year in markets or regional malls that
management believes offer growth opportunities and significant profit
potential.
. Airport Stores. High traffic business traveler and tourist locations
offer significant growth opportunities for the Company. These locations
generally offer more accessories, including travel luggage and executive
accessories. These stores typically generate higher revenue per square
foot and are subject to less seasonal variation than traditional mall-
based stores. Wilsons has opened 12 airport locations since 1993 and
currently plans to open at least six airport stores per year for the
next several years.
. 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. Typically, holiday stores
temporarily occupy vacant store space in malls where the Company does
not operate a traditional store. Holiday stores allow the Company to
evaluate the potential of new markets and malls as permanent locations
for new Wilsons' mall-based stores. Seasonal kiosks are generally
designed to complement and enhance the operation of the traditional
Wilsons stores in the same mall. Wilsons currently plans to open
approximately 200 holiday stores and 100 seasonal kiosks in 1997.
The Company is also exploring the use of different store concepts, layouts and
merchandise offerings within its portfolio of mall-based stores and may also
consider wholesaling opportunities that fit its distribution strategy.
INDUSTRY BACKGROUND
The retail leather apparel and accessories markets are well established in
the United States. Management believes that these markets are substantially
larger than they were twenty years ago. Management believes that a significant
factor in the growth of the leather apparel and accessories industry over that
twenty-year period 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 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
53
<PAGE>
changes in fashion trends, there was a downward trend 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 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, 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 Georgetown Leather
Design in 1993. The Company was organized in May 1996 to acquire the
Predecessor Companies from CVS. See "The Acquisition" and "Certain
Transactions."
Although the Company is a retail company, certain of the Predecessor
Companies had previously been involved in manufacturing operations. Pursuant
to the Sale Agreement (as defined herein), the Company is indemnified by CVS
for certain potential environmental liabilities disclosed therein that relate
to the Predecessor Companies. The Company, however, is still subject to
applicable international, national, state and local environmental laws, rules
and regulations that can impose strict liability upon the Company; therefore,
although the Company is currently not aware of any third-party claims relating
to such disclosed potential environmental liabilities or of any other
potential environmental liabilities for its current operations or past
operations of the Predecessor Companies, the Company could be exposed to
potential liability for such operations in the future.
VERTICALLY INTEGRATED OPERATIONS
The Company believes that a key competitive advantage over most other mall-
based leather retailers 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 implementing 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, socioeconomic and
lifestyle characteristics, which also correlate with
54
<PAGE>
customer preferences. When the new system is fully operational, the Company's
merchants will be better 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 men's and women's leather
outerwear, apparel and accessories in the United States. The Company's
nationwide network of 452 retail stores is located in 44 states and the
District of Columbia and England. The Company offers quality leather products
under several formats: "Wilsons The Leather Experts," the Company's
traditional mall-based store, offers a full range of moderately priced
merchandise, while "Tannery West" and "Georgetown Leather Design" are mall-
based stores offering a more targeted line of upscale merchandise. As of
August 2, 1997, Wilsons operated 12 airport stores, which focus on selling
accessories to business travelers and tourists, and 440 mall-based stores. The
Company regularly supplements its mall-based operations with holiday stores
and seasonal kiosks during its peak selling period from October through
December and plans to open approximately 200 holiday stores and 100 kiosks in
1997.
55
<PAGE>
- --------------------------------------------------------------------------------
452 STORE LOCATIONS
- --------------------------------------------------------------------------------
LOGO
*Corporate Headquarters and Distribution Center
STORE COUNT AS OF AUGUST 2, 1997
<TABLE>
<CAPTION>
TRADITIONAL AIRPORT TOTAL
----------- ------- -----
<S> <C> <C> <C>
Alabama......... 2 -- 2
Arizona......... 4 -- 4
Arkansas........ 1 -- 1
California...... 63 -- 63
Colorado........ 7 -- 7
Connecticut..... 6 -- 6
Delaware........ 2 -- 2
Florida......... 4 -- 4
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........ 13 2 15
Massachusetts... 17 -- 17
Michigan........ 21 -- 21
Minnesota....... 13 1 14
Missouri........ 5 -- 5
Nebraska........ 3 -- 3
</TABLE>
<TABLE>
<CAPTION>
TRADITIONAL AIRPORT TOTAL
----------- ------- -----
<S> <C> <C> <C>
Nevada.......... 3 -- 3
New Hampshire... 5 -- 5
New Jersey...... 21 -- 21
New Mexico...... 1 -- 1
New York........ 34 -- 34
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
Virginia........ 12 -- 12
Washington...... 16 -- 16
Washington,
D.C............ 1 1 2
West Virginia... 1 -- 1
Wisconsin....... 14 -- 14
England......... -- 2 2
--- --- ---
Total........... 440 12 452
=== === ===
</TABLE>
56
<PAGE>
Traditional Mall-Based Stores
As of August 2, 1997, Wilsons operated 440 stores in 44 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 and 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. The Company utilizes customer
lifestyle, demographic and socio-economic data derived from its point-of-sale
network as well as data from outside sources relating to market potential and
mall performance to select possible new store locations. In addition, the
Company analyzes projected occupancy costs and store performance for planned
achievement of management-established cash flow objectives prior to finalizing
site selection and negotiating final lease terms. Wilsons has also established
a cross-functional review committee that approves all proposed store projects
including new sites and lease renewals, prior to commitments. 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 $806,000 and sales per square foot of
$387.
Airport Stores
As of August 2, 1997, Wilsons operated twelve airport stores under the
"Wilsons The Leather Experts" name, with ten 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. The airport stores
generate substantially higher sales per square foot than the traditional mall-
based stores, but with higher rent expense per square foot. 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 $791,000 and averaged sales per square foot of $861.
Holiday Stores
In 1996, Wilsons operated 224 holiday stores in 42 states. A holiday store
is a temporary, full-size Wilsons store located in a vacant mall space and
generally operated from 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
and presentation similar to the traditional Wilsons The Leather Experts
stores. 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 $136,000.
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, 92.0% 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
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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 $55,000.
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, current fashion designer merchandise, such
as Guess?, Jones New York, Kenneth Cole, Andrew Marc and Bosca. The Company
anticipates that its merchants will be able to better use customer segment
information to help design merchandise and plan orders, and make distribution
and reorder decisions for each store. See "--Vertically Integrated
Operations."
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
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 certain fast-selling merchandise for its peak selling
season.
. Value--The Company strives to deliver its fashion-oriented, high-quality
merchandise at affordable prices, in order to provide value for its
customers. The Company believes that its integrated global 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 generally higher margins as compared to leather apparel, and has
increased both the number of SKUs and the amount of floor space allocated to
accessory presentation in the stores. As a result, accessories sales have
grown as a percentage of the Company's sales from 11.9% in 1991 to 24.4% in
1996. Over the same period, men's apparel sales have decreased as a percentage
of the Company's sales from 46.8% to 40.8%, and women's apparel sales have
decreased from 41.3% to 34.8%.
PRODUCT DESIGN, DEVELOPMENT AND SOURCING
Wilsons' product offerings are highly dependent on the Company's ability to
identify fashion trends for Wilsons' customers, develop new leather finishes
and closely monitor the sourcing of its merchandise. Wilsons' buyers and
designers are trained to anticipate fashion trends and to translate such
trends into leather products appealing to the Wilsons customer. Such designers
and buyers also work closely with tanneries in identifying and developing
leather colors and finishes. Technical advancements in leather tanning have
allowed the Company to use a variety of leathers to achieve the look and feel
of more expensive leathers.
In addition to its leather development expertise, the Company believes that
a significant competitive advantage is its expertise and ability in managing
the sourcing of its leather apparel and accessories. In 1996, Wilsons
contracted for the manufacture of approximately 1.8 million leather garments,
which management believes makes the Company 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
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Company to secure sufficient manufacturing capacity without having the added
cost of establishing its own manufacturing facilities.
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 reorder better selling merchandise for 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. The United States recently renewed China's MFN status,
but there is no assurance that such status, which must be renewed annually,
will continue. The loss of MFN status by China or by any other country from
which Wilsons sources goods could result in higher leather purchase and
production costs. See "Risk Factors--Risks of Foreign Contract Manufacturing
and Importing."
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-
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Wilsons' leather purchasing consumers to gain additional knowledge of consumer
behavior. The Company's marketing department plans to use the customer segment
information to employ more tightly targeted customer promotions. See "--
Vertically Integrated Operations."
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 million to redesign and automate its distribution center.
The distribution center is equipped with high speed sorting equipment and
hand-held radio frequency scanners for bar code scanning and merchandise
control.
The distribution center is designed to receive 200,000 garments and one
million units of accessories and ship in excess of 500,000 combined units of
garments and accessories per week in a single shift operation. Approximately
40% of the merchandise received in the distribution center is sent directly 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
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information. 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. See "--Vertically Integrated Operations."
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.
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. During
1997, certain financial and human resource information systems have been
replaced and upgraded to operate in a client-server environment.
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 Company, Inc. in addition to other
specialty retailers (e.g., The Limited, Inc. and The Gap, Inc.), department
stores (e.g., Federated Department Stores, Inc., Dayton Hudson Corporation and
Nordstrom, Inc.), mass merchandisers (e.g., Sears, Roebuck and Co.) and
discounters (e.g., Wal-Mart Stores, Inc. and Kmart Corporation).
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. In some markets, the
Company and its competitors also compete for permanent and seasonal sales
associates, who may be in limited supply during periods of economic
prosperity.
PROPERTY
As of August 2, 1997, Wilsons operated 451 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 had entered into
prior to the Acquisition are 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, to use commercially
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reasonable efforts to remove the affiliate of CVS as a guarantor. To date,
Wilsons has not experienced any significant difficulty in obtaining market
rate leases without a CVS guarantee.
The Company owns its distribution center and the land on which it is
located.
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. The Company is also indemnified by CVS pursuant to
the Sales Agreement for certain disclosed legal proceedings involving the
Predecessor Companies. See "Certain Transactions--Sale Agreement."
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 August 2, 1997, Wilsons had approximately 3,500 employees. During the
Company's peak selling season (from October through December), Wilsons plans
to employ approximately 3,500 seasonal employees. Wilsons considers its
relationships with its employees to be good. None of the Company's employees
are governed by collective bargaining agreements.
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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 November 1, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Joel N. Waller............. 58 Chairman of the Board of Directors and
Chief Executive Officer
David L. Rogers............ 54 President, Chief Operating Officer and
Director
Carol S. Lund.............. 45 Executive Vice President and General
Merchandise Manager
W. Michael Bode............ 52 Vice President, Manufacturing
Betty Goff................. 41 Vice President, Human Resources
Jed Jaffe.................. 43 Vice President, Store Sales
David B. Sharp............. 50 Vice President, Marketing
Daniel R. Thorson.......... 38 Treasurer and Director, Business Planning
and Analysis
Jeffrey W. Orton........... 41 Vice President, Information Systems and
Strategies and Logistics
Douglas J. Treff........... 40 Vice President, Finance, Chief Financial
Officer and Assistant Secretary
Thomas R. Wildenberg....... 39 Chief Accounting Officer and Controller
Lyle Berman................ 56 Director
Thomas J. Brosig........... 48 Director
Morris Goldfarb............ 47 Director
</TABLE>
All of the above-named 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 and General Manager 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.
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.
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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.
Jeffrey W. Orton has served as Vice President, Information Systems and
Strategies and Logistics since October 1997. Mr. Orton served as Director of
Strategic Analysis of the Company from March 1997 to October 1997 and as
Director of Business Process Reengineering of the Company from September 1993
to March 1997. Prior to joining Wilsons, Mr. Orton held various management
positions from 1986 to 1993 at The United States Shoe Corporation, a
manufacturing and retail apparel and footwear company, most recently as
Director of Footwear Retail Systems from June 1992 to September 1993.
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 the Chairman
of the Board of Directors of Innovative Gaming Corporation of America and a
director of G-III Apparel Group, Ltd. ("G-III") and New Horizon Kids Quest,
Inc. Mr. Berman was formerly an executive officer and a director of
Stratosphere Corporation, an amusement and recreation company. In January
1997, Stratosphere Corporation filed for reorganization under Chapter 11 of
the U.S. Bankruptcy Code.
Thomas J. Brosig is a member of the Company's Board of Directors. Mr. Brosig
has served as President and a director of Grand Casinos, Inc., a gaming
company, since September 1996. Mr. Brosig also served as Executive Vice
President--Investor Relations and Special Projects of Grand Casinos, Inc. from
August 1994 to
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September 1996, as Secretary of Grand Casinos, Inc. from its inception until
May 1995, as its President from May 1993 to August 1994, as its Chief
Operating Officer from October 1991 until May 1993 and as its Chief Financial
Officer from its inception until January 1992. Mr. Brosig is also a director
of G-III and Famous Dave's of America, Inc.
Morris Goldfarb is a member of the Company's Board of Directors. Mr.
Goldfarb serves as director and Chief Executive Officer of G-III, a leather
and non-leather apparel manufacturer and distributor, a director of Grand
Casinos, Inc. and a director of Panasia Bank. Mr. Goldfarb has served as an
executive officer of G-III and its predecessors since its formation in 1974.
Directors of the Company are elected by the shareholders at each annual
meeting to serve until the next annual meeting of the shareholders or until
their successors are duly elected and qualified. See "Certain Transactions--
Shareholder Agreement" for a description of an arrangement which currently
permits Joel N. Waller and David L. Rogers to nominate two directors of the
Company. Executive officers of the Company are chosen by and serve at the
discretion of the Board of Directors. There are no family relationships among
any of the directors or executive officers of the Company.
BOARD COMMITTEES
The Company's Board of Directors has established compensation and audit
committees (respectively, the "Compensation Committee" and the "Audit
Committee") whose members are appointed by the Company's Board of Directors.
The Compensation Committee has the responsibility and authority to review and
determine the Company's executive compensation objectives and policies and
administer the Company's stock option and other employee benefit plans. The
Compensation Committee members are Thomas Brosig and Lyle Berman. The Audit
Committee has the responsibility and authority to review the accounting and
auditing principles and procedures of the Company with a view toward providing
for adequate internal controls and reliable financial records, to recommend to
the full Board the engagement of independent auditors, to review with the
independent auditors the plans and results of the auditing engagement, and to
consider the independence of the Company's auditors. The Audit Committee
members are Morris Goldfarb, Thomas Brosig and David Rogers.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Lyle Berman and Thomas Brosig, directors of the Company, are members of the
Board's Compensation Committee. Mr. Berman is the Chief Executive Officer and
Chairman of the Board of Directors of both Grand Casinos, Inc. and Rainforest
Cafe, Inc. Mr. Brosig is the President and a director of Grand Casinos, Inc.
Joel N. Waller, Chief Executive Officer and Chairman of the Board of Directors
of the Company, and David L. Rogers, President and Chief Operating Officer and
a director of the Company, are both members of the Compensation Committee of
the Board of Directors of Grand Casinos, Inc. and Rainforest Cafe, Inc.
EXECUTIVE COMPENSATION AND EMPLOYMENT CONTRACTS
The Company was incorporated in May 1996. Therefore, the requirement for
prior years' information regarding executive compensation for the Chief
Executive Officer of the Company, and the next four most highly compensated
executives of the Company, is not applicable. The Company has entered into
employment agreements with Joel Waller, as Chairman and Chief Executive
Officer, and David Rogers, as President, reporting to the Board of Directors,
through May 25, 2000 (the "Employment Agreements"). The Employment Agreements
are identical in all material respects, except for job responsibilities which
are consistent with Messrs. Waller's and Rogers' titles. Under the terms of
the Employment Agreements, Mr. Waller and Mr. Rogers each receives a base
salary of $380,000 per year, or such higher amount as is determined by the
Board (prorated for any partial employment year). In no event may the Board of
Directors reduce Messrs. Waller's and Rogers' base salary for any year below
the greater of $380,000 or the amount of base salary paid by the Company to
Messrs. 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.
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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. The Employment Agreements also include confidentiality and non-
solicitation provisions, but do not contain any restrictions on competition.
See "--Employee Benefit Plans."
The next three most highly compensated executives are Carol S. Lund, David
B. Sharp and Jed Jaffe. Ms. Lund, Mr. Sharp and Mr. Jaffe were paid base
salaries at the annual rate of approximately $240,000, $208,000 and $180,000
per year, respectively, and for the period from inception (May 26, 1996) to
February 1, 1997, they received base salaries of $166,154, $144,000 and
$124,615, respectively. Ms. Lund, Mr. Sharp and Mr. Jaffe were also eligible
to receive 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, and for the bonus period ended February 1, 1997, they
received bonuses of $62,765, $50,512 and $43,711, respectively. See "--
Employee Benefit Plans."
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. The remaining Restricted Stock vested immediately upon
repurchase of the CVS Note on August 18, 1997. 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 are made by the Company, which vest after five years of service,
or at age 65 regardless of service, or upon the
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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 August 2, 1997, the
Company had granted options covering an aggregate of 197,900 shares of common
stock at a weighted average exercise price of $4.88 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. As a result of the completion of the Offering and
the use of proceeds therefrom to repurchase the CVS Note, the remaining shares
of Restricted Stock vested on August 18, 1997. See "Certain Transactions--
Restricted Stock Agreement."
DIRECTOR COMPENSATION
The Company does not currently pay cash compensation to members of the Board
of Directors for their services as directors. On June 26, 1996, the Company
granted options for 10,800 shares of common stock to Thomas J. Brosig at an
exercise price of $4.44 per share. Such options 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. As of August 2, 1997,
options for 3,600 shares had vested.
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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 August 2, 1997 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>
SHARES OF PERCENTAGE
COMMON STOCK OF
BENEFICIALLY COMMON STOCK
NAME OF BENEFICIAL OWNER OWNED OUTSTANDING
------------------------ ------------ ------------
<S> <C> <C>
Morris Goldfarb................................ 2,147,631.1(/1/) 22.5%
G-III Apparel Group, Ltd.
512 Seventh Avenue
New York, NY 10018
Lyle Berman.................................... 311,631.1 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............. 23.3
3300 Norwest Center 2,222,365.0(/2/)
90 South Seventh Street
Minneapolis, MN 55402
CVS New York, Inc. (formerly Melville 1,350,000.0(/3/) 12.4
Corporation)..................................
One CVS Drive
Woonsocket, RI 02895
Joel N. Waller................................. 1,106,961.2(/4/) 11.6
7401 Boone Avenue North
Brooklyn Park, MN 55428
David L. Rogers................................ 959,450.4 10.1
7401 Boone Avenue North
Brooklyn Park, MN 55428
Carol S. Lund.................................. 149,833.8 1.6
David Sharp.................................... 141,509.7 1.5
Jed Jaffe...................................... 124,861.5 1.3
Thomas J. Brosig............................... 3,600.0(/5/) *
All directors and executive officers as a group
(14 persons).................................. 5,303,415.1 55.6
</TABLE>
- --------
* Represents beneficial ownership of less than one percent of the common
stock.
(1) Includes 172,800 shares of common stock owned by Goldfarb Family Partners
L.L.C. of which Mr. Goldfarb is the manager.
(2) 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.
(3) Includes 1,350,000 shares of common stock issuable to CVS upon the
exercise of the CVS Warrant, which is currently exercisable in full.
(4) Includes 100,000, 3,000 and 1,000 shares of common stock owned by the
Waller Family Limited Partnership of which Mr. Waller is a general
partner, Mr. Waller's spouse and Mr. Waller's mother jointly, and Mr.
Waller's spouse, respectively. Also includes 3,000 and 1,000 Redeemable
Warrants owned by Mr. Waller's spouse and Mr. Waller's mother jointly and
Mr. Waller's spouse, respectively. The Redeemable Warrants are currently
fully exercisable.
(5) Includes options which are currently exercisable to purchase 3,600 shares
of common stock.
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CERTAIN TRANSACTIONS
The following are summaries of the material terms of certain agreements.
Copies of these agreements are filed as exhibits to the Company's Registration
Statement on Form S-1 under the Securities Act. The following summaries do not
purport to be complete and are qualified in their entirety by the terms of
such agreements. See "Available Information."
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 provided that 1,080,000 shares of the Company's
common stock (herein called the "Restricted Stock") purchased by the Managers
for $.60 per share would vest, among other circumstances, (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), or (ii) immediately upon payment or
prepayment of the CVS Note in full at any time on or prior to December 31,
2000. As of August 2, 1997, 198,018 shares of such Restricted Stock had vested
and for the period ended February 1, 1997, the Company recorded a $1.5 million
non-cash compensation charge related to such shares. The remaining 881,982
shares of Restricted Stock vested on August 18, 1997 upon repayment of the CVS
Note with proceeds of the Offering. The Company will be required to record an
additional non-cash compensation charge of $8.5 million related to such shares
which is equal to the difference between the fair market value of the
Restricted Stock on the date the shares vested, which was $10.25 per share,
and the original purchase price of the Restricted Stock, which was $.60 per
share ($900,000 of such additional charge was recorded in the twenty-six weeks
ended August 2, 1997); however, such charge will not impact the Company's
total shareholders' equity or cash balances. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Overview."
The Restricted Stock is subject to the terms of the Shareholder Agreement.
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.
REGISTRATION RIGHTS AGREEMENTS
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 CVS Note, 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, respectively, each will have three demand
registration rights for the CVS 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 Company's initial public offering (but no
later than May 25, 2007), the Partners and certain of their permitted
transferees will have two demand registration rights for their shares of
common stock, and unlimited demands for registration on Form S-3, if the
Company can use that form, for registration of such shares under the
Securities Act. (The foregoing registration rights as they apply to the CVS
Note and the shares underlying the Manager Warrant were effectively terminated
by the August 18, 1997 repurchase of the CVS Note by the Company, at which
time the CVS Note was cancelled and the Manager Warrant lapsed.) The Company
is prohibited from granting to any other holder of its securities (other than
holders of common stock), whether currently outstanding or issued in the
future, any incidental (piggyback) registration rights with respect to any
registration statement filed pursuant to any such demand registration. Subject
to certain limitations and customary cutbacks as reasonably determined by the
managing underwriter, if the Company proposes to register any of its common
stock or the CVS Warrant under the Securities Act, the Company will provide
the Warrant Holders and
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certain holders of its common stock (the Managers, 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 CVS Warrant to a third party in a bona fide arm's
length transaction or proposes to register all or part of 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 the Partners and to the Company (the "Parties"). Such written
notice will constitute an offer by CVS to sell to the Parties that portion of
the CVS Warrant proposed to be transferred or registered. If the Parties fail
to accept CVS's offer after a set time, CVS will then have the right to effect
a transfer to a third party of, or to require the registration of, all of the
CVS Warrant subject to such offer, subject to certain terms and conditions.
Certain underwriter warrants were issued by the Company in connection with
its initial public offering. The holders of these warrants have certain
registration rights with respect to the common stock of the Company issuable
upon exercise of such warrants.
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 other 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 had 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 had 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). As a result of completion of the Offering and the use
of proceeds therefrom to repurchase the CVS Note, the remaining shares of
Restricted Stock vested on August 18, 1997. Such shares are no longer
Restricted Stock, but remain subject to the Shareholder Agreement pursuant to
the terms applicable to unrestricted stock.
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.
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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 to
any Third Party (as defined in the Shareholder Agreement) other than a
Permitted Transferee, first Waller and Rogers (to the extent they are not the
selling Shareholder), then the Company and finally the other Shareholders pro
rata would have the option to buy such shares at the price such Third Party is
willing to pay (if the transfer is for value) or at the original purchase
price (if the transfer is other than for value); provided that (i) if Waller
and Rogers desire to Dispose of any Subjected Shares, Messrs. Berman and
Goldfarb would have the opportunity to purchase such stock before the Company,
(ii) if CVS, after becoming subject to the Shareholder Agreement pursuant to
the terms of the CVS Warrant, 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.
Each Shareholder that is subject to the Shareholder Agreement has agreed to
vote all of the voting shares of common stock held by such Shareholder in
favor of the election to the Board of Directors of two individuals who will be
nominated by a vote of a majority of the outstanding shares of common stock
held by the Employees and their Permitted Transferees and, upon the vote of a
majority of the outstanding shares of common stock held by the Employees and
their Permitted Transferees, to remove or replace such directors, until the
earlier of (i) the completion of an underwritten public offering with gross
proceeds of at least $20.0 million or (ii) the general termination of the
Shareholder Agreement. Joel N. Waller and David L. Rogers currently own a
majority of the outstanding shares of common stock held by the Employees and
their Permitted Transferees, and are therefore able to nominate such two
directors.
Generally, the Shareholder Agreement will terminate with respect to all
Subjected Shares upon the first to occur of: (i) a Control Transaction (as
defined in the Shareholder Agreement), or (ii) May 25, 1998. The Co-Sale
Rights would remain in effect upon the occurrence of a Control Transaction but
would expire on May 25, 1998.
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
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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 CVS 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 27, 1997, the 7,405 shares of Series A
Preferred were exchanged for 617,083 shares of the Company's common stock. On
June 2, 1997, upon completion of the Company's initial public offering, the
Limited Partnerships automatically dissolved, and the shares of common stock
held by them were distributed to their partners based on their respective
interests in the Limited Partnership.
Pursuant to the Sale Agreement, CVS agreed, subject to certain limitations
set forth therein, to indemnify the Company and its affiliates (and their
respective officers and directors) against and to hold them harmless from any
and all Damages (as defined in the Sale Agreement) incurred or suffered by any
such indemnified party arising out of, among other things: (i) certain
misrepresentations or breaches of warranties or covenants or agreements to be
performed by CVS or Wilsons Center, Inc. pursuant to the Sale Agreement; (ii)
claims relating to certain disclosed and undisclosed liabilities of the
Predecessor Companies; (iii) claims relating to the Closed Store Leases (as
defined in the Sale Agreement) and the Excluded Subsidiaries (as defined in
the Sale Agreement); (iv) claims related to certain taxes, primarily income
taxes; (v) claims related to certain recalled leather protector sprays; and
(vi) certain claims related to employees and certain employee benefits
matters. Generally, the indemnifications by CVS, other than those referred to
in clauses (iii), (iv), (v) and (vi) above and those for breaches of covenants
and for certain disclosed liabilities, which will survive indefinitely or
until the expiration of the applicable statute of limitations and have no
dollar limit, had to have been asserted on or prior to August 25, 1997. No
such claims that had to have been asserted on or prior to August 25, 1997 were
asserted on or prior to such date.
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, among other things, 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.
Generally, the indemnifications by the Company relating to misrepresentations
or breaches of warranties had to have been asserted on or prior to August 25,
1997. No such claims that had to have been asserted on or prior to August 25,
1997 were asserted on or prior to such date.
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 lapsed
upon repurchase of the CVS Note on August 18, 1997. See "The Acquisition" and
"--Restricted Stock Agreement" above. The exercise price and number of shares
of common stock for which the CVS Warrant is exercisable will be
proportionately adjusted to reflect any stock dividend, distribution,
subdivision, split, combination, issuance or reclassification. Upon exercise
of such warrant 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 is also subject to certain registration rights.
See "--Registration Rights Agreement" and "--Shareholder Agreement."
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SUBORDINATED CVS NOTE
On May 25, 1996, the Company issued the CVS Note to CVS for $55.8 million as
partial consideration for the Acquisition. As of May 3, 1997, the Company had
recorded $5.2 million of accrued interest expense on the CVS Note. The $5.2
million along with the $0.3 million of interest accrued from May 4, 1997
through May 25, 1997 became a part of the principal balance on May 25, 1997.
On August 18, 1997, the Company repurchased the CVS Note from CVS, using $56.5
million of the net proceeds from the Offering to effect such repurchase (the
principal (including capitalized interest) of, and non-capitalized accrued
interest on, which totaled $62.7 million).
OTHER RELATIONSHIPS
The Company regularly conducts business with G-III, of which Morris
Goldfarb, a director of Wilsons, is the Chief Executive Officer and a
director. Purchases from G-III totaled $5.0 million, $4.7 million and $9.9
million for the 13-month period ended February 1, 1997 and the 12-month
periods ended December 31, 1995 and 1994, respectively. The Company believes
that transactions with G-III are on terms no less favorable to the Company
than those obtainable in arms-length transactions with unaffiliated third
parties.
For a discussion of related party transactions involving the Predecessor
Companies, see also Note 12 of Notes to Consolidated Financial Statements.
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DESCRIPTION OF SENIOR CREDIT FACILITY
The Banks have provided WLHI with a three-year Senior Credit Facility that
expires May 1999. The Senior Credit Facility provides for borrowings of up to
$150.0 million in aggregate principal amount, which amount includes a letter
of credit subfacility of up to $90.0 million. The maximum amount available
under the Senior Credit Facility, however, is further subject to a borrowing
base limitation (less certain reserves) of 65% of eligible inventory. The
Company's borrowing availability is also reduced by outstanding letters of
credit. The Company plans to use the Senior Credit Facility for its immediate
and future working capital needs, including capital expenditures. As of
November 1, 1997, the Company had $20.1 million of consolidated borrowings
outstanding under the Senior Credit Facility and $33.1 million in outstanding
letters of credit.
Interest is payable on borrowings at one or more variable rates determined
by reference to the "prime" rate plus .25% ("prime" plus 0.0% for the first
$10.0 million of borrowings), or LIBOR plus 1.75%. The spreads are subject to
possible changes based upon the Company's financial results. The Company pays
a monthly fee equal to .375% per annum on the unused amount of the Senior
Credit Facility and on that portion of the first $10.0 million in borrowings
that bears interest at prime plus a spread. For letters of credit, the Company
pays a monthly fee in an amount equal to 1.25% per annum times the daily
average of the amount of letters of credit outstanding during each month,
which percentage is subject to possible changes based on the Company's
financial results.
The Senior Credit Facility contains certain covenants limiting, among other
things, the Company's and each Subsidiary's ability to pay cash dividends or
make other distributions, change its business, merge, consolidate or dispose
of assets, incur liens, make loans and investments, incur indebtedness and
engage in certain transactions with affiliates. The Senior Credit Facility
also contains financial covenants that require the Company to meet a minimum
fixed charge coverage ratio, maintain a minimum net worth and limit capital
expenditures.
The Senior Credit Facility contains events of default customary for
facilities of its type, including without limitation, the Company's failure to
pay principal, interest, fees or other amounts when due; the Company's breach
of any covenants, representations or warranties; cross-default and cross
acceleration; bankruptcy, insolvency or similar events involving the Company
or its Subsidiaries; the unenforceability of any of the agreements or liens
securing payment of the obligations under the Senior Credit Facility; and the
occurrence or existence of any event or circumstance which has a material
adverse effect upon the Company.
WLHI, an indirect Subsidiary of the Company (and Guarantor of the Senior
Notes), is the borrower under the Senior Credit Facility. Loans, if any, under
the Company's Senior Credit Facility are guaranteed by the Company and each of
its current and future domestic Subsidiaries, which guarantees are secured by
substantially all of the assets of the Company and its current and future
domestic Subsidiaries.
In connection with the issuance of the Senior Notes, the Company and the
Banks have executed and delivered an amendment to the Senior Credit Facility
to: (i) eliminate a seasonal advance; (ii) permit the Senior Notes and
Guarantees in lieu of the CVS Note and its collateral; (iii) provide that a
Change of Control under the Indenture will constitute a change of control
(and, therefore, an event of default) under the Senior Credit Facility; and
(iv) permit dividends sufficient to allow the Company to service the current
interest obligations on the Senior Notes and for taxes and other limited
operating expenses provided that no payment default then exists under the
Senior Credit Facility.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Faegre & Benson LLP, counsel to the Company, the following
are the material federal income tax consequences expected to result to holders
whose Private Notes are exchanged for Exchange Notes in the Exchange Offer.
Such opinion is based upon current provisions of the Internal Revenue Code of
1986, as amended (the "Code"), applicable Treasury regulations, judicial
authority and administrative rulings and practice. There can be no assurance
that the Internal Revenue Service (the "Service") will not take a contrary
view, and no ruling from the Service has been or will be sought with respect
to the Exchange Offer. Legislative, judicial or administrative changes or
interpretations may be forthcoming that could alter or modify the statements
and conclusions set forth herein. Any such changes or interpretations may or
may not be retroactive and could affect the tax consequences to holders.
Certain holders (including insurance companies, tax-exempt organizations,
financial institutions, broker-dealers, foreign corporations and persons who
are not citizens or residents of the United States) may be subject to special
rules not discussed below. EACH HOLDER OF PRIVATE NOTES SHOULD CONSULT ITS OWN
TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES OF EXCHANGING PRIVATE NOTES
FOR EXCHANGE NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL
OR FOREIGN LAWS.
The exchange of Private Notes for Exchange Notes will be treated as a "non-
event" for federal income tax purposes because the Exchange Notes will not be
considered to differ materially in kind or extent from the Private Notes. As a
result, no material federal income tax consequences will result to holders
exchanging Private Notes for Exchange Notes.
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DESCRIPTION OF SENIOR NOTES
GENERAL
The Exchange Notes will be issued pursuant to an Indenture (the "Indenture")
dated as of August 18, 1997 among the Company, the Guarantors and Norwest
Bank, Minnesota, National Association, as trustee (the "Trustee"). The
Exchange Notes will evidence the same indebtedness as the Private Notes (which
they replace) and will be entitled to the benefits of the Indenture. The form
and terms of the Exchange Notes are the same as the form and terms of the
Private Notes except that (i) the Exchange Notes will have been registered
under the Securities Act, and, therefore, the Exchange Notes will not bear
legends restricting the transfer thereof and (ii) Holders of the Exchange
Notes will not be entitled to certain rights of Holders of Private Notes under
the Registration Rights Agreement, which rights will terminate upon the
consummation of the Exchange Offer. The terms of the Exchange Notes include
those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939 (the "Trust Indenture Act"). The
Exchange Notes are subject to all such terms, and holders of Exchange Notes
("Holders") are referred to the Indenture and the Trust Indenture Act for a
statement thereof. The following summary of the material provisions of the
Indenture does not purport to be complete and is qualified in its entirety by
reference to the Indenture, including the definitions therein of certain terms
used below. Copies of the Indenture and Registration Rights Agreement are
available as set forth below under "--Additional Information." The definitions
of certain terms used in the following summary are set forth below under "--
Certain Definitions." For purposes of this summary, the term "Company" refers
only to Wilsons The Leather Experts Inc. and not to any of its Subsidiaries;
the term "Senior Notes" refers to both the Exchange Notes and the Private
Notes; and the term "Holders" refers to holders of Senior Notes.
The Senior Notes will rank senior in right of payment to all subordinated
Indebtedness of the Company issued in the future, if any. The Senior Notes
will be general unsecured obligations of the Company and will rank pari passu
in right of payment with all current and future unsecured senior Indebtedness
of the Company. However, Wilsons Leather Holdings Inc. ("WLHI"), an indirect
Subsidiary of the Company, is the borrower and the Company and its other
domestic Subsidiaries are guarantors under the Senior Credit Facility, and all
borrowings and guarantees under the Senior Credit Facility are secured by a
first priority Lien on substantially all of the assets of the Company and such
Subsidiaries. The Senior Credit Facility provides for borrowings of up to
$150.0 million in aggregate principal amount, which amount includes a letter
of credit facility of up to $90.0 million. As of November 1, 1997,
approximately $53.2 million was outstanding (consisting of $20.1 million of
borrowings and $33.1 million of outstanding letters of credit) under the
Senior Credit Facility, which typically reaches peak borrowings in October and
November of each year, consistent with the Company's and its Subsidiaries'
seasonal working capital needs. The Indenture will permit additional
borrowings under the Senior Credit Facility in the future. The Company has no
current or pending arrangements or agreements, other than the Senior Credit
Facility, to incur any additional significant indebtedness to which the Senior
Notes would be subordinated or rank pari passu in right of payment. See "Risk
Factors--Effective Subordination of Senior Notes."
The operations of the Company are conducted through its Subsidiaries and,
therefore, the Company is dependent upon the cash flow of its Subsidiaries to
meet its obligations, including its obligations under the Senior Notes. The
ability of the Subsidiaries to make payments to the Company is limited by the
Senior Credit Facility, which permits distributions to the Company only to the
extent of interest payments on the Senior Notes and for other limited purposes
in the absence of a payment default thereunder, and applicable state law
governing payment of dividends. See "Risk Factors--Holding Company Structure."
As of the date of the Indenture, all of the Company's Subsidiaries were
Restricted Subsidiaries. However, under certain circumstances, the Company
will be able to designate current or future Subsidiaries as Unrestricted
Subsidiaries. Unrestricted Subsidiaries will not be subject to many of the
restrictive covenants set forth in the Indenture.
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SUBSIDIARY GUARANTEES
The Company's payment obligations under the Senior Notes will be fully and
unconditionally guaranteed, on a joint and several basis, by the Guarantors.
The obligations of each Guarantor under its Guarantee are unsecured, and will
be limited so as not to constitute a fraudulent conveyance under applicable
law. See, however, "Risk Factors--Fraudulent Conveyance Risks." The Guarantees
will rank pari passu in right of payment with all current and future unsecured
senior Indebtedness of the Guarantors, and senior in right of payment to all
future subordinated Indebtedness (if any) of the Guarantors. However, the
Guarantees are effectively subordinated to the obligations of WLHI under the
Senior Credit Facility and the guarantees thereof by the Company and its other
domestic Subsidiaries, by reason of the first priority Liens granted for the
benefit of the lenders thereunder.
The Indenture will provide that no Guarantor may consolidate with or merge
with or into (whether or not such Guarantor is the surviving Person), another
corporation, Person or entity whether or not affiliated with such Guarantor
unless (a) the consolidation or merger is with another Guarantor or the
Company or (b) (i) subject to the provisions of the following paragraph, the
Person formed by or surviving any such consolidation or merger (if other than
such Guarantor) assumes, pursuant to a supplemental indenture in form and
substance reasonably satisfactory to the Trustee, all the obligations of such
Guarantor under the Senior Notes and the Indenture; (ii) immediately after
giving effect to such transaction, no Default or Event of Default exists;
(iii) such Guarantor, or any Person formed by or surviving any such
consolidation or merger, would have Consolidated Net Worth (immediately after
giving effect to such transaction), equal to or greater than the Consolidated
Net Worth of such Guarantor immediately preceding the transaction; and (iv)
the Company would be permitted by virtue of the Company's pro forma Fixed
Charge Coverage Ratio, immediately after giving effect to such transaction, to
incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge
Coverage Ratio test set forth in the covenant described below under the
caption "--Incurrence of Indebtedness and Issuance of Preferred Stock."
The Indenture will provide that in the event of a sale or other disposition
of all of the assets of any Guarantor, by way of merger, consolidation or
otherwise, or a sale or other disposition of all of the capital stock of any
Guarantor, in each case, other than such a sale or disposition to another
Guarantor or to the Company, then such Guarantor (in the event of a sale or
other disposition, by way of such a merger, consolidation or otherwise, of all
of the capital stock of such Guarantor) or the corporation acquiring the
property (in the event of a sale or other disposition of all of the assets of
such Guarantor) will be released and relieved of any obligations under its
Subsidiary Guarantee; provided that the Net Proceeds of such sale or other
disposition are applied in accordance with the applicable provisions of the
Indenture. See "--Repurchase at the Option of Holders--Asset Sales."
PRINCIPAL, MATURITY AND INTEREST
The Senior Notes will be limited in aggregate principal amount to $75.0
million and will mature on August 15, 2004. Interest on the Senior Notes will
accrue at the rate of 11 1/4% per annum and will be payable semi-annually in
arrears on February 15 and August 15, commencing on February 15, 1998, to
Holders of record on the immediately preceding February 1 and August 1.
Interest on the Senior Notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from the date of
original issuance. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months. Principal, premium, if any, and interest on
the Senior Notes will be payable at the office or agency of the Company
maintained for such purpose within the City and State of New York or, at the
option of the Company, payment of interest may be made by check mailed to the
Holders of the Senior Notes at their respective addresses set forth in the
register of Holders of Senior Notes; provided that all payments of principal,
premium and interest with respect to Senior Notes the Holders of which have
given wire transfer instructions to the Company will be required to be made by
wire transfer of immediately available funds to the accounts specified by the
Holders thereof. Until otherwise designated by the Company, the Company's
office or agency in New York will be the office of the Trustee maintained for
such purpose. The Senior Notes will be issued in denominations of $1,000 and
integral multiples thereof.
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OPTIONAL REDEMPTION
The Senior Notes will not be redeemable at the Company's option prior to
August 15, 2001. Thereafter, the Senior Notes will be subject to redemption at
any time at the option of the Company, in whole or in part, upon not less than
30 nor more than 60 days' notice, at the redemption prices (expressed as
percentages of principal amount) set forth below plus accrued and unpaid
interest thereon to the applicable redemption date, if redeemed during the
twelve-month period beginning on August 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2001............................................................ 105.625%
2002............................................................ 102.813%
2003 (and thereafter)........................................... 100.000%
</TABLE>
Notwithstanding the foregoing, the Company may on one occasion prior to
August 15, 2000 redeem up to an aggregate of 25% of the original aggregate
principal amount of Senior Notes at a redemption price of 111.25% of the
principal amount thereof, plus accrued and unpaid interest thereon, if any, to
the redemption date, with the net cash proceeds of an offering of common stock
of the Company; provided that 75% of the original aggregate principal amount
of Senior Notes remains outstanding immediately after the occurrence of such
redemption; and provided, further, that such redemption shall occur within 45
days of the date of the closing of such offering.
SELECTION AND NOTICE
If less than all of the Senior Notes are to be redeemed at any time,
selection of Senior Notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities
exchange, if any, on which the Senior Notes are listed, or, if the Senior
Notes are not so listed, on a pro rata basis, by lot or by such method as the
Trustee shall deem fair and appropriate; provided that no Senior Note of
$1,000 or less shall be redeemed in part. Notices of redemption shall be
mailed by first class mail at least 30 but not more than 60 days before the
redemption date to each Holder of Senior Notes to be redeemed at its
registered address. Notices of redemption may not be conditional. If any
Senior Note is to be redeemed in part only, the notice of redemption that
relates to such Senior Note shall state the portion of the principal amount
thereof to be redeemed. A new Senior Note in principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof
upon cancellation of the original Senior Note. Senior Notes called for
redemption become due on the date fixed for redemption. On and after the
redemption date, interest ceases to accrue on Senior Notes or portions of them
called for redemption.
MANDATORY REDEMPTION
Except as set forth below under "--Repurchase at the Option of Holders," the
Company is not required to make mandatory redemption or sinking fund payments
with respect to the Senior Notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, each Holder of Senior Notes will
have the right to require the Company to repurchase all or any part (equal to
$1,000 or an integral multiple thereof) of such Holder's Senior Notes pursuant
to the offer described below (the "Change of Control Offer") at an offer price
in cash equal to 101% of the aggregate principal amount thereof plus accrued
and unpaid interest and Liquidated Damages thereon, if any, to the date of
purchase (the "Change of Control Payment"). Within ten days following any
Change of Control, the Company will mail a notice to each Holder describing
the transaction or transactions that constitute the Change of Control and
offering to repurchase Senior Notes on the date specified in such notice,
which date shall be no earlier than 30 days and no later than 60 days from the
date such notice is mailed (the "Change of Control Payment Date"), pursuant to
the procedures required by the Indenture and described in such notice. The
Company will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other
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securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Senior
Notes as a result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (i) accept for payment all Senior Notes or portions thereof properly
tendered pursuant to the Change of Control Offer, (ii) deposit with the Paying
Agent an amount equal to the Change of Control Payment in respect of all
Senior Notes or portions thereof so tendered and (iii) deliver or cause to be
delivered to the Trustee the Senior Notes so accepted together with an
Officers' Certificate stating the aggregate principal amount of Senior Notes
or portions thereof being purchased by the Company. The Paying Agent will
promptly mail to each Holder of Senior Notes so tendered the Change of Control
Payment for such Senior Notes, and the Trustee will promptly authenticate and
mail (or cause to be transferred by book entry) to each Holder a new Senior
Note equal in principal amount to any unpurchased portion of the Senior Notes
surrendered, if any; provided that each such new Senior Note will be in a
principal amount of $1,000 or an integral multiple thereof. The Company will
publicly announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. If a Change of
Control were to occur, there can be no assurance that the Company would have
sufficient financial resources, or would be able to arrange financing, to pay
the repurchase price for all Senior Notes tendered by holders thereof.
Further, the provisions of the Indenture may not afford holders of Senior
Notes protection in the event of a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction involving the
Company that may adversely affect holders of Senior Notes, if such transaction
does not result in a Change of Control. See "Risk Factors--Potential Inability
to Fund Repurchase of Senior Notes Upon Change of Control."
The Senior Credit Facility contains prohibitions of certain events that
would constitute a Change of Control. In addition, the exercise by the Holders
of Senior Notes of their right to require the Company to repurchase the Senior
Notes could cause a default under the Senior Credit Facility, even if the
Change of Control itself does not, due to the financial effect of such
repurchases on the Company. Finally, the Company's ability to pay cash to the
Holders of Senior Notes upon a repurchase may be restricted by the dividend
limitations of the Senior Credit Facility. See "Risk Factors--Potential
Inability to Fund Repurchase of Senior Notes Upon Change of Control."
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Indenture applicable to a Change of Control Offer made by the
Company and purchases all Senior Notes validly tendered and not withdrawn
under such Change of Control Offer.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation or the grant of mortgages, security interests or
liens), in one or a series of related transactions, of all or substantially
all of the assets of the Company and its Subsidiaries taken as a whole to any
"person" (as such term is used in Section 13(d)(3) of the Exchange Act) other
than the Company and/or one or more Subsidiaries, (ii) the adoption of a plan
relating to the complete liquidation or dissolution of the Company, (iii) the
consummation of any transaction (including, without limitation, any merger or
consolidation) the result of which is that any "person" (as defined above
except that no two or more individuals or entities shall be deemed to be a
single "person" solely by reason of being parties to the Shareholder
Agreement), other than the Principals and their Related Parties, becomes the
"beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under
the Exchange Act, except that a person shall be deemed to have "beneficial
ownership" of all securities that such person has the right to acquire,
whether such right is currently exercisable or is exercisable only upon the
occurrence of a subsequent condition and except that no individual or entity
shall be deemed to "beneficially own" any Voting Stock beneficially owned by
any other individual or entity solely by reason of being a party to the
Shareholder Agreement), directly or indirectly, of more than 40% of the Voting
Stock of the Company (measured by voting power rather than number of shares),
provided that a Change of Control shall not occur as a result of a merger,
consolidation or other transaction in which the persons who beneficially owned
the Voting Stock of the Company immediately
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prior to the transaction continue to own, directly or indirectly, at least 60%
of the Voting Stock of the Corporation surviving such transaction or its
parent corporation (measured by voting power rather than number of shares) in
substantially the same percentage relative to each other as they owned before
the transaction (except as affected by cashing out fractional shares or
dissenting shareholders) or (iv) the first day on which a majority of the
members of the Board of Directors of the Company are not Continuing Directors.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected or appointed to such Board of Directors by the Board of Directors at a
time when a majority of the Board consisted of Continuing Directors.
"Principals" means Joel N. Waller and David L. Rogers.
"Related Party" with respect to any Principal means (A) any spouse or
immediate family member of such Principal or (B) any trust, corporation,
partnership, limited liability company or other entity, a majority of the
beneficial interest or voting interest in which is held, directly or
indirectly, by such Principal and/or such other Persons referred to in the
immediately preceding clause (A) with respect to such Principal.
Asset Sales
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value (evidenced by a resolution of the Board of Directors set forth in an
Officers' Certificate delivered to the Trustee) of the assets or Equity
Interests issued or sold or otherwise disposed of and (ii) at least 75% of the
consideration therefor received by the Company or such Restricted Subsidiary
is in the form of cash; provided that the amount of (x) any liabilities (as
shown on the Company's or such Restricted Subsidiary's most recent balance
sheet) of the Company or any Restricted Subsidiary (other than contingent
liabilities and liabilities that are by their terms subordinated to the Senior
Notes or any guarantee thereof) that are assumed by the transferee of any such
assets pursuant to a customary novation agreement that releases the Company or
such Restricted Subsidiary from further liability and (y) any securities,
notes or other obligations received by the Company or any such Restricted
Subsidiary from such transferee that are converted by the Company or such
Restricted Subsidiary into cash (to the extent of the cash received) within
five Business Days after such Asset Sale, shall be deemed to be cash for
purposes of this provision.
Subject to the provisions relating to Excess Proceeds set forth below,
within 360 days after the receipt of any Net Proceeds from an Asset Sale, the
Company may apply such Net Proceeds, at its option, (a) to repay Indebtedness
under the Senior Credit Facility (and to correspondingly permanently reduce
commitments with respect thereto), or (b) to the acquisition of a controlling
interest in another business, the making of a capital expenditure or the
acquisition of other long-term assets, in each case, in a Permitted Business.
Pending the final application of any such Net Proceeds, the Company may
temporarily reduce Indebtedness under the Senior Credit Facility or otherwise
invest such Net Proceeds in any manner that is not prohibited by the
Indenture. Any Net Proceeds from Asset Sales that are not applied or invested
as provided in the first sentence of this paragraph will be deemed to
constitute "Excess Proceeds." When the aggregate amount of Excess Proceeds
exceeds $10.0 million, the Company will be required to make an offer to all
Holders of Senior Notes (an "Asset Sale Offer") to purchase the maximum
principal amount of Senior Notes and pari passu Indebtedness (to the extent
the terms thereof require an asset sale offer) that may be purchased out of
the Excess Proceeds, at an offer price in cash in an amount equal to 100% of
the principal amount thereof plus accrued and unpaid interest thereon, if any,
to the date of purchase, in accordance with the procedures set forth in the
Indenture. To the extent that the aggregate amount of Senior Notes and pari
passu Indebtedness tendered pursuant to an Asset Sale Offer (and any such
required asset sale offer) is less than the Excess Proceeds, the Company may
use any remaining Excess Proceeds for general corporate purposes. If the
aggregate principal amount of Senior Notes and pari passu Indebtedness
permitted by the Indenture surrendered by holders thereof exceeds the amount
of Excess Proceeds, such Senior Notes and pari passu Indebtedness shall be
purchased on a pro rata basis. Upon completion of such offer to purchase, the
amount of Excess Proceeds shall be reset at zero. Unless a consent is
obtained, the Senior Credit
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Facility would not permit the Company's Subsidiaries to distribute cash to the
Company in an amount sufficient to satisfy the Asset Sale Offer requirement
summarized above, and the failure to satisfy such obligation would constitute
an Event of Default under the Indenture.
CERTAIN COVENANTS
Restricted Payments
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly: (i) declare or
pay any dividend or make any other payment or distribution on account of the
Company's or any of its Restricted Subsidiaries' Equity Interests (including,
without limitation, any payment in connection with any merger or consolidation
involving the Company) or to the direct or indirect holders of the Company's
or any of its Restricted Subsidiaries' Equity Interests in their capacity as
such (other than dividends or distributions payable in Equity Interests (other
than Disqualified Stock) of the Company); (ii) purchase, redeem or otherwise
acquire or retire for value (including without limitation, in connection with
any merger or consolidation involving the Company) any Equity Interests of the
Company or any direct or indirect parent of the Company or other Affiliate of
the Company (other than any such Equity Interests owned by the Company or any
Wholly Owned Restricted Subsidiary of the Company); (iii) make any payment on
or with respect to, or purchase, redeem, defease or otherwise acquire or
retire for value any Indebtedness that is pari passu with or subordinated to
the Senior Notes (other than under the Senior Credit Facility and the Senior
Notes), except a payment of interest or principal at Stated Maturity; or (iv)
make any Restricted Investment (all such payments and other actions set forth
in clauses (i) through (iv) above being collectively referred to as
"Restricted Payments"), unless, at the time of and after giving effect to such
Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
described below under caption "--Incurrence of Indebtedness and Issuance of
Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after the date of the Indenture (excluding Restricted Payments
permitted by clause (ii), (iii), (iv), (vi), or (vii) of the next
succeeding paragraph), is less than the sum of (i) 50% of the Consolidated
Net Income of the Company for the period (taken as one accounting period)
from the beginning of the first fiscal quarter commencing after the date of
the Indenture to the end of the Company's most recently ended fiscal
quarter for which internal financial statements are available at the time
of such Restricted Payment (or, if such Consolidated Net Income for such
period is a deficit, less 100% of such deficit), plus (ii) 100% of the
aggregate net cash proceeds received by the Company from the issue or sale
since the date of the Indenture of Equity Interests of the Company (other
than Disqualified Stock) or of Disqualified Stock or debt securities of the
Company that have been converted into such Equity Interests (other than
Equity Interests (or Disqualified Stock or convertible debt securities)
sold to a Subsidiary of the Company and other than Disqualified Stock or
convertible debt securities that have been converted into Disqualified
Stock), plus (iii) to the extent that any Restricted Investment that was
made after the date of the Indenture is sold for cash or otherwise
liquidated or repaid for cash, the lesser of (A) the cash return of capital
with respect to such Restricted Investment (less the cost of disposition,
if any) and (B) the initial amount of such Restricted Investment, plus (iv)
50% of any dividends received by the Company or a Wholly Owned Restricted
Subsidiary after the date of the Indenture from an Unrestricted Subsidiary
of the Company, to the extent that such dividends were not otherwise
included in Consolidated Net Income of the Company for such period, plus
(v) $5.0 million.
The foregoing provisions will not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
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Indenture; (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any pari passu or subordinated Indebtedness or Equity Interests
of the Company in exchange for, or out of the net cash proceeds of the
substantially concurrent sale (other than to a Subsidiary of the Company) of,
other Equity Interests of the Company (other than any Disqualified Stock);
provided that the amount of any such net cash proceeds that are utilized for
any such redemption, repurchase, retirement, defeasance or other acquisition
shall be excluded from clause (c)(ii) of the preceding paragraph; (iii) the
defeasance, redemption, repurchase or other acquisition of pari passu or
subordinated Indebtedness with the net cash proceeds from an incurrence of
Permitted Refinancing Indebtedness; (iv) the payment of any dividend by a
Subsidiary of the Company to the holders of its Equity Interests on a pro rata
basis; (v) the repurchase, redemption or other acquisition or retirement for
value of any Equity Interests of the Company or any Subsidiary of the Company
held by any member of the Company's (or any of its Subsidiaries') management
pursuant to any management equity subscription agreement, stock option
agreement or shareholder agreement; provided that the aggregate price paid for
all such repurchased, redeemed, acquired or retired Equity Interests shall not
exceed $500,000 in any twelve-month period and no Default or Event of Default
shall have occurred and be continuing immediately after such transaction; (vi)
if an Asset Sale Offer is required in respect of the Senior Notes pursuant to
the Indenture, the making and consummation of an asset sale offer in
accordance with the provisions of an indenture governing pari passu
Indebtedness permitted by the Indenture; or (vii) if a Change of Control Offer
is required in respect of the Senior Notes pursuant to the Indenture, the
making and consummation of a change of control offer as required by the
provisions of an indenture governing pari passu Indebtedness permitted by the
Indenture, provided that the definition of "change of control" and the terms
and timing of a change of control offer applicable to such pari passu
Indebtedness are substantially identical to the definition of Change of
Control and the terms and timing of a Change of Control Offer under the
Indenture.
If the Company or any Wholly Owned Restricted Subsidiary of the Company
sells or otherwise disposes of any Equity Interests of any direct or indirect
Subsidiary of the Company such that, after giving effect to any such sale or
disposition, such Person is no longer a Wholly Owned Restricted Subsidiary of
the Company, the Company shall be deemed to have made an Investment on the
date of any such sale or disposition equal to the fair market value of the
Equity Interests of such Subsidiary not sold or disposed of in an amount
determined as provided in the second succeeding paragraph below.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default,
provided that in no event shall the business currently operated by WLHI be
transferred to or held by an Unrestricted Subsidiary. For purposes of making
such determination, all outstanding Investments by the Company and its
Restricted Subsidiaries (except to the extent repaid in cash) in the
Subsidiary so designated will be deemed to be Restricted Payments at the time
of such designation and will reduce the amount available for Restricted
Payments under the first paragraph of this covenant. All such outstanding
Investments will be deemed to constitute Investments in an amount equal to the
greatest of (x) the net book value of such Investments at the time of such
designation, (y) the fair market value of such Investments at the time of such
designation and (z) the original fair market value of such Investments at the
time they were made. Such designation will only be permitted if such
Restricted Payment would be permitted at such time and if such Restricted
Subsidiary otherwise meets the definition of an Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Company or such
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any non-cash Restricted Payment shall be determined by the
Board of Directors whose resolution with respect thereto shall be delivered to
the Trustee, such determination to be based upon an opinion or appraisal
issued by an accounting, appraisal or investment banking firm of national
standing if such fair market value exceeds $1.0 million. Not later than the
date of making any Restricted Payment, the Company shall deliver to the
Trustee an Officers' Certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
the covenant "Restricted Payments" were computed, together with a copy of any
fairness opinion or appraisal required by the Indenture.
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Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Debt) and that the Company will not issue any
Disqualified Stock and will not permit any of its Subsidiaries to issue any
shares of preferred stock; provided, however, that the Company or any
Guarantor may incur Indebtedness (including Acquired Debt) and the Company may
issue shares of Disqualified Stock if the Fixed Charge Coverage Ratio for the
Company's most recently ended four full fiscal quarters for which internal
financial statements are available immediately preceding the date on which
such additional Indebtedness is incurred or such Disqualified Stock is issued
would have been at least 2.5 to 1, determined on a pro forma basis (including
a pro forma application of the net proceeds therefrom), as if the additional
Indebtedness had been incurred, or the Disqualified Stock had been issued, as
the case may be, at the beginning of such four-quarter period.
The Indenture will also provide that the Company and each Guarantor will not
incur any Indebtedness that is contractually subordinated to any other
Indebtedness of the Company or such Guarantor, as the case may be, unless such
Indebtedness is also contractually subordinated to the Notes or the Guarantee
of such Guarantor, as applicable, on substantially identical terms; provided,
however, that no Indebtedness of the Company or such Guarantor, as the case
may be, shall be deemed to be contractually subordinated to any other
Indebtedness of the Company or such Guarantor, as the case may be, solely by
virtue of being unsecured.
The provisions of the first paragraph of this covenant will not apply to the
incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
(i) the incurrence by the Company and any Guarantor of Indebtedness and
letters of credit pursuant to the Senior Credit Facility; provided,
however, that the aggregate principal amount of all Indebtedness (with
letters of credit being deemed to have a principal amount equal to the
maximum potential liability of the Company and its Subsidiaries thereunder)
outstanding under the Senior Credit Facility does not exceed the greater of
$150.0 million or the amount of the Borrowing Base; provided, further, that
any acquisition of capital stock or substantially all of the assets of any
business (including by way of any merger, consolidation or similar
transaction and including any Permitted Investment permitted by clause (c)
of the definition of such term) may be financed with borrowings under the
Senior Credit Facility only to the extent that the Company would, at the
time of such borrowings and after giving pro forma effect thereto as if
such borrowings and such acquisition had occurred at the beginning of the
applicable four-quarter period, have been permitted to incur at least $1.00
of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test
set forth in the first paragraph of this covenant;
(ii) the incurrence by the Company and its Restricted Subsidiaries of the
Existing Indebtedness;
(iii) the incurrence by the Company of Indebtedness represented by the
Senior Notes and the incurrence by the Guarantors of the Guarantees;
(iv) the incurrence by the Company or any of its Restricted Subsidiaries
of Indebtedness represented by Capital Lease Obligations, mortgage
financings or purchase money obligations, in each case incurred for the
purpose of financing all or any part of the purchase price or cost of
construction or improvement of property, plant or equipment used in the
business of the Company or such Restricted Subsidiary, in an aggregate
principal amount not to exceed $6.0 million at any time outstanding;
(v) the incurrence by the Company or any of its Restricted Subsidiaries
of Permitted Refinancing Indebtedness in exchange for, or the net proceeds
of which are used to refund, refinance or replace Indebtedness that was
permitted by the Indenture to be incurred; provided, however, that
Permitted Refinancing Indebtedness with respect to clauses (iv), (vi) and
(vii) (and any Existing Indebtedness of like character outstanding on the
Issue Date) would otherwise be permitted to be incurred pursuant to such
clauses, as applicable;
(vi) the incurrence by the Company or any of its Restricted Subsidiaries
of intercompany Indebtedness between or among the Company and/or any of its
Wholly Owned Restricted Subsidiaries; provided,
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however, that (i) if the Company or any Guarantor is the obligor on, and
the lender is not a Guarantor of, such Indebtedness, such Indebtedness is
expressly subordinated to the prior payment in full in cash of all
Obligations with respect to the Senior Notes or the Guarantee of such
Guarantor as applicable and (ii)(A) any subsequent issuance or transfer of
Equity Interests that results in any such Indebtedness being held by a
Person other than the Company or a Wholly Owned Restricted Subsidiary and
(B) any sale or other transfer of any such Indebtedness to a Person that is
not either the Company or a Wholly Owned Restricted Subsidiary shall be
deemed, in each case, to constitute an incurrence of such Indebtedness by
the Company or such Restricted Subsidiary, as the case may be;
(vii) the incurrence by the Company or any of its Restricted Subsidiaries
of Hedging Obligations that are incurred for the purpose of fixing or
hedging interest rate risk with respect to any floating rate Indebtedness
that is permitted by the terms of the Indenture to be outstanding;
(viii) the guarantee by the Company or any of the Guarantors of
Indebtedness of the Company or a Restricted Subsidiary of the Company that
was permitted to be incurred by another provision of this covenant;
(ix) the incurrence by the Company or any of the Restricted Subsidiaries
of additional Indebtedness (which may, but need not, be incurred under the
Senior Credit Facility) in an aggregate principal amount (or accreted
value, as applicable) at any time outstanding, including all Permitted
Refinancing Indebtedness incurred to refund, refinance or replace any other
Indebtedness incurred pursuant to this clause (ix), not to exceed $12.0
million; provided, however that no more than $2.0 million of such
outstanding Indebtedness may be incurred by Restricted Subsidiaries that
are not Guarantors; and
(x) the incurrence by the Company's Unrestricted Subsidiaries of Non-
Recourse Debt, provided, however, that if any such Indebtedness ceases to
be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be
deemed to constitute an incurrence of Indebtedness by a Restricted
Subsidiary of the Company.
For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness meets the criteria of more than one of the categories
of Permitted Debt described in clauses (i) through (x) above or is entitled to
be incurred pursuant to the first paragraph of this covenant, the Company
shall, in its sole discretion, classify such item of Indebtedness in any
manner that complies with this covenant and such item of Indebtedness will be
treated as having been incurred pursuant to only one of such clauses or
pursuant to the first paragraph hereof. Accrual of interest, the accretion of
accreted value and the payment of interest in the form of additional
Indebtedness will not be deemed to be an incurrence of Indebtedness for
purposes of this covenant.
Liens
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create, incur,
assume or suffer to exist any Lien on any asset now owned or hereafter
acquired, or any income or profits therefrom or assign or convey any right to
receive income therefrom, except Permitted Liens.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any encumbrance or
restriction on the ability of any Restricted Subsidiary to (i)(a) pay
dividends or make any other distributions to the Company or any of its
Restricted Subsidiaries (1) on its Capital Stock or (2) with respect to any
other interest or participation in, or measured by, its profits, or (b) pay
any Indebtedness owed to the Company or any of its Restricted Subsidiaries,
(ii) make loans or advances to the Company or any of its Restricted
Subsidiaries or (iii) transfer any of its properties or assets to the Company
or any of its Restricted Subsidiaries, except for such encumbrances or
restrictions existing under or by reason of (a) Existing Indebtedness as in
effect on the date of the Indenture (b) the Senior Credit Facility as in
effect as of the date of the Indenture (after giving effect to
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amendments thereto effective on such date) and any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings thereof, provided that such amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacement or
refinancings are no more restrictive with respect to such dividend and other
payment restrictions than those contained in the Indebtedness refinanced, (c)
the Indenture and the Senior Notes, (d) applicable law, (e) any instrument
governing Indebtedness or Capital Stock of a Person acquired by the Company or
any of its Restricted Subsidiaries as in effect at the time of such
acquisition (except to the extent such Indebtedness was incurred in connection
with or in contemplation of such acquisition), which encumbrance or
restriction is not applicable to any Person, or the properties or assets of
any Person, other than the Person, or the property or assets of the Person, so
acquired, provided that, in the case of Indebtedness, such Indebtedness was
permitted by the terms of the Indenture to be incurred, (f) by reason of
customary non-assignment provisions in leases entered into in the ordinary
course of business and consistent with past practices, (g) Capital Lease
Obligations and purchase money obligations for property acquired in the
ordinary course of business that impose restrictions of the nature described
in clause (iii) above on the property so acquired, (h) Permitted Refinancing
Indebtedness, provided that the restrictions contained in the agreements
governing such Permitted Refinancing Indebtedness are no more restrictive than
those contained in the agreements governing the Indebtedness being refinanced,
or (i) customary limitations of the nature described in clause (iii) above
imposed by any agreement entered into in connection with an Asset Sale (or
transaction that would be an Asset Sale but for the size of the transaction)
prior to the consummation thereof, provided that such limitations apply only
to the assets to be sold in such Asset Sale.
Merger, Consolidation, or Sale of Assets
The Indenture will provide that the Company may not consolidate or merge
with or into (whether or not the Company is the surviving corporation), or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its properties or assets in one or more related
transactions to, another corporation, Person or entity unless (i) the Company
is the surviving corporation or the entity or the Person formed by or
surviving any such consolidation or merger (if other than the Company) or to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made is a corporation organized or existing under the laws of
the United States, any state thereof or the District of Columbia; (ii) the
entity or Person formed by or surviving any such consolidation or merger (if
other than the Company) or the entity or Person to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made assumes all the obligations of the Company under the Senior Notes and the
Indenture pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee; (iii) immediately after such transaction no
Default or Event of Default exists; and (iv) except in the case of a merger of
the Company with or into a Wholly Owned Restricted Subsidiary of the Company,
the Company or the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company), or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made (A) will have Consolidated Net Worth immediately after the transaction
equal to or greater than the Consolidated Net Worth of the Company immediately
preceding the transaction and (B) will, at the time of such transaction and
after giving pro forma effect thereto as if such transaction had occurred at
the beginning of the applicable four-quarter period, be permitted to incur at
least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage
Ratio test set forth in the first paragraph of the covenant described above
under the caption "--Incurrence of Indebtedness and Issuance of Preferred
Stock."
Transactions with Affiliates
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, make any payment to, or sell, lease,
transfer or otherwise dispose of any of its properties or assets to, or
purchase any property or assets from, or enter into or make or amend any
transaction, contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate (each of the foregoing, an
"Affiliate Transaction"), unless (i) such Affiliate Transaction is on terms
that are no less favorable to the Company or the relevant Restricted
Subsidiary than those that would have been obtained in a comparable
transaction by the Company or such Restricted Subsidiary with an unrelated
Person and (ii) the Company
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delivers to the Trustee (a) with respect to any Affiliate Transaction or
series of related Affiliate Transactions involving aggregate consideration in
excess of $1.0 million, a resolution of the Board of Directors set forth in an
Officers' Certificate certifying that such Affiliate Transaction complies with
clause (i) above and that such Affiliate Transaction has been approved by a
majority of the disinterested members of the Board of Directors and (b) with
respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate consideration in excess of $5.0 million
(other than any purchase from a leather goods wholesaler made in the ordinary
course of business and consistent with past practices), an opinion as to the
fairness to the Holders of such Affiliate Transaction from a financial point
of view issued by an accounting, appraisal or investment banking firm of
national standing; provided that (w) any employment agreement entered into by
the Company or any of its Restricted Subsidiaries in the ordinary course of
business, (x) payment of reasonable directors' fees to directors of the
Company who are not employees, officers or Affiliates of the Company or any of
its Affiliates, (y) transactions between or among the Company and/or its
Restricted Subsidiaries, and (z) Restricted Payments that are permitted by the
provisions of the Indenture described above under the caption "--Restricted
Payments," in each case, shall not be deemed Affiliate Transactions.
Limitation on Issuances and Sales of Capital Stock of Wholly Owned Restricted
Subsidiaries
The Indenture will provide that the Company (i) will not, and will not
permit any Wholly Owned Restricted Subsidiary of the Company to, transfer,
convey, sell, lease or otherwise dispose of any Capital Stock of any Wholly
Owned Restricted Subsidiary of the Company to any Person (other than the
Company or a Wholly Owned Restricted Subsidiary of the Company), unless (a)
such transfer, conveyance, sale, lease or other disposition is of all the
Capital Stock of such Wholly Owned Restricted Subsidiary and (b) the cash Net
Proceeds from such transfer, conveyance, sale, lease or other disposition are
applied in accordance with the covenant described above under the caption "--
Asset Sales," and (ii) will not permit any Wholly Owned Restricted Subsidiary
of the Company to issue any of its Equity Interests (other than, if necessary,
shares of its Capital Stock constituting directors' qualifying shares) to any
Person other than to the Company or a Wholly Owned Restricted Subsidiary of
the Company.
Limitations on Issuances of Guarantees of Indebtedness
The Indenture will provide that the Company will not permit any Subsidiary,
directly or indirectly, to Guarantee or pledge any assets to secure the
payment of any other Indebtedness of the Company unless such Subsidiary
simultaneously executes and delivers a supplemental indenture to the Indenture
providing for the Guarantee of the payment of the Senior Notes by such
Subsidiary, which Guarantee shall be senior to or pari passu with such
Subsidiary's guarantee of or pledge to secure such other Indebtedness;
provided, however, that, with respect to any Subsidiary's guarantee of the
Senior Credit Facility, the Guarantee of the Senior Notes shall not be secured
notwithstanding the delivery of a secured guarantee by such Subsidiary to
secure the Senior Credit Facility; and provided, further, that nothing herein
shall prohibit the grant of such security securing obligations under the
Senior Credit Facility by such Subsidiary. Notwithstanding the foregoing, any
such Guarantee by a Subsidiary of the Senior Notes shall provide by its terms
that it shall be automatically and unconditionally released and discharged
upon any sale, exchange or transfer, to any Person not an Affiliate of the
Company, of all of the Company's stock in, or all or substantially all the
assets of, such Subsidiary, which sale, exchange or transfer is made in
compliance with the applicable provisions of the Indenture. The form of such
Guarantee will be attached as an exhibit to the Indenture.
Business Activities
The Company will not, and will not permit any Restricted Subsidiary to,
engage in any business other than Permitted Businesses, except to such extent
as would not be material to the Company and its Restricted Subsidiaries taken
as a whole.
Payments for Consent
The Indenture will provide that neither the Company nor any of its
Subsidiaries will, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any Holder of
any
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Senior Notes for or as an inducement to any consent, waiver or amendment of
any of the terms or provisions of the Indenture or the Senior Notes unless
such consideration is offered to be paid or is paid to all Holders of the
Senior Notes that consent, waive or agree to amend in the time frame set forth
in the solicitation documents relating to such consent, waiver or agreement.
Reports
The Indenture will provide that, whether or not required by the rules and
regulations of the Securities and Exchange Commission (the "Commission"), so
long as any Senior Notes are outstanding, the Company will furnish to the
Trustee for provision to the Holders of Senior Notes (i) all quarterly and
annual financial information that would be required to be contained in a
filing with the Commission on Forms 10-Q and 10-K if the Company were required
to file such Forms, including a "Management's Discussion and Analysis of
Financial Condition and Results of Operations" that describes the financial
condition and results of operations of the Company and its consolidated
Subsidiaries (showing in reasonable detail, either on the face of the
financial statements or in the footnotes thereto and in Management's
Discussion and Analysis of Financial Condition and Results of Operations, the
financial condition and results of operations of the Company and its
Restricted Subsidiaries separate from the financial condition and results of
operations of the Unrestricted Subsidiaries of the Company) and, with respect
to the annual information only, a report thereon by the Company's certified
independent accountants and (ii) all current reports that would be required to
be filed with the Commission on Form 8-K if the Company were required to file
such reports. In addition, whether or not required by the rules and
regulations of the Commission, the Company will file a copy of all such
information and reports with the Commission for public availability (unless
the Commission will not accept such a filing). In addition, the Company and
the Guarantors have agreed that, for so long as any Senior Notes remain
outstanding that cannot be sold except pursuant to an exemption from or in a
transaction not subject to the requirements of the Securities Act, they will
furnish to the Holders and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture will provide that each of the following constitutes an Event
of Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the Senior Notes; (ii) default in payment
when due of the principal of or premium, if any, on the Senior Notes; (iii)
failure by the Company to comply with the provisions described under the
captions "--Change of Control," "--Asset Sales," "--Restricted Payments," "--
Incurrence of Indebtedness and Issuance of Preferred Stock" or "--Merger,
Consolidation, or Sale of Assets"; (iv) failure by the Company for 60 days
after notice to comply with any of its other agreements in the Indenture or
the Senior Notes; (v) default under any mortgage, indenture or instrument
under which there may be issued or by which there may be secured or evidenced
any Indebtedness for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or any of
its Restricted Subsidiaries) whether such Indebtedness or guarantee now
exists, or is created after the date of the Indenture, which default (a) is
caused by a failure to pay principal of or premium, if any, or interest on
such Indebtedness prior to the expiration of the grace period provided in such
Indebtedness on the date of such default (a "Payment Default") or (b) results
in the acceleration of such Indebtedness prior to its express maturity and, in
each case, the principal amount of any such Indebtedness, together with the
principal amount of any other such Indebtedness under which there has been a
Payment Default or the maturity of which has been so accelerated, aggregates
$5.0 million or more; (vi) failure by the Company or any of its Restricted
Subsidiaries to pay final judgments aggregating in excess of $5.0 million,
which judgments are not paid, discharged or stayed for a period of 60 days;
(vii) certain events of bankruptcy or insolvency with respect to the Company
or any of its Restricted Subsidiaries; and (viii) except as permitted by the
Indenture, any Guarantee shall be held in any judicial proceeding to be
unenforceable or invalid or shall cease for any reason to be in full force and
effect or any Guarantor, or any Person acting on behalf of any Guarantor,
shall deny or disaffirm its obligations under its Guarantee.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the then outstanding Senior Notes may
declare all the Senior Notes to be due and payable
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immediately, provided that, so long as any Indebtedness permitted to be
incurred pursuant to the Senior Credit Facility shall be outstanding, such
acceleration shall not be effective until the earlier of (i) an acceleration
of any such Indebtedness under the Senior Credit Facility or (ii) five
business days after receipt by the Company of written notice of such
acceleration of the Senior Notes. Notwithstanding the foregoing, in the case
of an Event of Default arising from certain events of bankruptcy or
insolvency, with respect to the Company, any Restricted Subsidiary that is a
Significant Subsidiary or any group of Restricted Subsidiaries that, taken
together, would constitute a Significant Subsidiary, all outstanding Senior
Notes will become due and payable without further action or notice. Holders of
the Senior Notes may not enforce the Indenture or the Senior Notes except as
provided in the Indenture. Subject to certain limitations, Holders of a
majority in principal amount of the then outstanding Senior Notes may direct
the Trustee in its exercise of any trust or power. The Trustee may withhold
from Holders of the Senior Notes notice of any continuing Default or Event of
Default (except a Default or Event of Default relating to the payment of
principal or interest) if it determines that withholding notice is in their
interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have
had to pay if the Company then had elected to redeem the Senior Notes pursuant
to the optional redemption provisions of the Indenture, an equivalent premium
shall also become and be immediately due and payable to the extent permitted
by law upon the acceleration of the Senior Notes. If an Event of Default
occurs prior to August 15, 2001 by reason of any willful action (or inaction)
taken (or not taken) by or on behalf of the Company with the intention of
avoiding the prohibition on redemption of the Senior Notes prior to August 15,
2001, then the premium specified in the Indenture shall also become
immediately due and payable to the extent permitted by law upon the
acceleration of the Senior Notes.
The Holders of a majority in aggregate principal amount of the Senior Notes
then outstanding by notice to the Trustee may on behalf of the Holders of all
of the Senior Notes waive any existing Default or Event of Default and its
consequences under the Indenture except a continuing Default or Event of
Default in the payment of interest on, or the principal of, the Senior Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required, upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND SHAREHOLDERS
No director, officer, employee, incorporator or shareholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Senior Notes, the Indenture or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each Holder of Senior Notes by
accepting a Senior Note waives and releases all such liability. The waiver and
release are part of the consideration for issuance of the Senior Notes. Such
waiver may not be effective to waive liabilities under the federal securities
laws and it is the view of the Commission that such a waiver is against public
policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Senior Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Senior Notes
to receive payments in respect of the principal of, premium, if any, interest
and Liquidated Damages, if any, on such Senior Notes when such payments are
due from the trust referred to below, (ii) the Company's obligations with
respect to the Senior Notes concerning issuing temporary Senior Notes,
registration of Senior Notes, mutilated, destroyed, lost or stolen Senior
Notes and the maintenance of an office or agency for payment and money for
security payments held in trust, (iii) the rights, powers, trusts, duties and
immunities of the Trustee, and the Company's obligations in connection
therewith and (iv) the Legal Defeasance provisions of the Indenture. In
addition, the Company may, at its option and at any time, elect to have the
obligations of the
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Company released with respect to certain covenants that are described in the
Indenture ("Covenant Defeasance") and thereafter any omission to comply with
such obligations shall not constitute a Default or Event of Default with
respect to the Senior Notes. In the event Covenant Defeasance occurs, certain
events (not including non-payment, bankruptcy, receivership, rehabilitation
and insolvency events) described under "Events of Default" will no longer
constitute an Event of Default with respect to the Senior Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Senior Notes, cash in U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of, premium, if any, and interest and
Liquidated Damages, if any, on the outstanding Senior Notes on the stated
maturity or on the applicable redemption date, as the case may be, and the
Company must specify whether the Senior Notes are being defeased to maturity
or to a particular redemption date; (ii) in the case of Legal Defeasance, the
Company shall have delivered to the Trustee an opinion of counsel in the
United States reasonably acceptable to the Trustee confirming that (A) the
Company has received from, or there has been published by, the Internal
Revenue Service a ruling or (B) since the date of the Indenture, there has
been a change in the applicable federal income tax law, in either case to the
effect that, and based thereon such opinion of counsel shall confirm that, the
Holders of the outstanding Senior Notes will not recognize income, gain or
loss for federal income tax purposes as a result of such Legal Defeasance and
will be subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such Legal Defeasance had
not occurred; (iii) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that the Holders of the outstanding
Senior Notes will not recognize income, gain or loss for federal income tax
purposes as a result of such Covenant Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not
occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event of
Default resulting from the borrowing of funds to be applied to such deposit)
or insofar as Events of Default from bankruptcy or insolvency events are
concerned, at any time in the period ending on the 91st day after the date of
deposit; (v) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under any material agreement
or instrument (other than the Indenture) to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries is
bound; (vi) the Company must have delivered to the Trustee an opinion of
counsel to the effect that after the 91st day following the deposit, the trust
funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally; (vii) the Company must deliver to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the
intent of preferring the Holders of Senior Notes over the other creditors of
the Company with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or others; and (viii) the Company must deliver to the
Trustee an Officers' Certificate and an opinion of counsel, each stating that
all conditions precedent provided for relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Senior Notes in accordance with the
Indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a Holder to pay any taxes and fees required by law or
permitted by the Indenture. The Company is not required to transfer or
exchange any Senior Note selected for redemption. Also, the Company is not
required to transfer or exchange any Senior Note for a period of 15 days
before a selection of Senior Notes to be redeemed.
The registered Holder of a Senior Note will be treated as the owner of it
for all purposes.
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AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Senior Notes may be amended or supplemented with the consent of the
Holders of at least a majority in principal amount of the Senior Notes then
outstanding (including, without limitation, consents obtained in connection
with a purchase of, or tender offer or exchange offer for, Senior Notes), and
any existing default or compliance with any provision of the Indenture or the
Senior Notes may be waived with the consent of the Holders of a majority in
principal amount of the then outstanding Senior Notes (including consents
obtained in connection with a tender offer or exchange offer for Senior
Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Senior Notes held by a non-consenting Holder): (i) reduce
the principal amount of Senior Notes whose Holders must consent to an
amendment, supplement or waiver, (ii) reduce the principal of or change the
fixed maturity of any Senior Note or alter the provisions with respect to the
redemption of the Senior Notes (other than provisions relating to the
covenants described above under the caption "--Repurchase at the Option of
Holders"), (iii) reduce the rate of or change the time for payment of interest
on any Senior Note, (iv) waive a Default or Event of Default in the payment of
principal of or premium, if any, or interest on the Senior Notes (except a
rescission of acceleration of the Senior Notes by the Holders of at least a
majority in aggregate principal amount of the Senior Notes and a waiver of the
payment default that resulted from such acceleration), (v) make any Senior
Note payable in money other than that stated in the Senior Notes, (vi) make
any change in the provisions of the Indenture relating to waivers of past
Defaults or the rights of Holders of Senior Notes to receive payments of
principal of or premium, if any, or interest or Liquidated Damages, if any, on
the Senior Notes, (vii) waive a redemption payment with respect to any Senior
Note (other than a payment required by one of the covenants described above
under the caption "--Repurchase at the Option of Holders") or (viii) make any
change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of Senior
Notes, the Company and the Trustee may amend or supplement the Indenture or
the Senior Notes to cure any ambiguity, defect or inconsistency, to provide
for uncertificated Senior Notes in addition to or in place of certificated
Senior Notes (provided that the uncertificated Notes are issued in registered
form for purposes of Section 163(f) of the Code, or in a manner such that the
uncertificated Notes are described in Section 162(f)(2)(B) of the Code), to
provide for the assumption of the Company's or any Guarantor's obligations to
Holders of Senior Notes in the case of a merger or consolidation, to make any
change that would provide any additional rights or benefits to the Holders of
Senior Notes or that does not adversely affect the legal rights under the
Indenture of any such Holder, or to comply with requirements of the Commission
in order to effect or maintain the qualification of the Indenture under the
Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage
in other transactions; however, if it acquires any conflicting interest it
must eliminate such conflict within 90 days, apply to the Commission for
permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding Senior
Notes will have the right to direct the time, method and place of conducting
any proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the
Indenture at the request of any Holder of Senior Notes, unless such Holder
shall have offered to the Trustee security and indemnity satisfactory to it
against any loss, liability or expense.
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ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to Wilsons The Leather
Experts Inc., 7401 Boone Avenue North, Brooklyn Park, Minnesota 55248,
Attention: Chief Financial Officer.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth in the next paragraph, the Senior Notes will initially
be issued in the form of one or more Global Notes (each a "Global Note"). Each
Global Note will be deposited with, or on behalf of, The Depository Trust
Company (the "Depositary") and registered in the name of Cede & Co., as
nominee of the Depositary (such nominee being referred to herein as the
"Global Note Holder").
Senior Notes that are issued as described below under "--Certificated
Securities" will be issued in the form of registered definitive certificates
(the "Certificated Securities"). Upon the transfer of Certificated Securities,
such Certificated Securities may, unless the Global Notes have previously been
exchanged for Certificated Securities, be exchanged for an interest in a
Global Note representing the principal amount of Senior Notes being
transferred.
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the
"Participants" or the "Depositary's Participants") and to facilitate the
clearance and settlement of transactions in such securities between
Participants through electronic book-entry changes in accounts of its
Participants. The Depositary's Participants include securities brokers and
dealers (including the Initial Purchaser), banks and trust companies, clearing
corporations and certain other organizations. Access to the Depositary's
system is also available to other entities such as banks, brokers, dealers and
trust companies (collectively, the "Indirect Participants" or the
"Depositary's Indirect Participants") that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly.
Persons who are not Participants may beneficially own securities held by or on
behalf of the Depositary only thorough the Depositary's Participants or the
Depositary's Indirect Participants.
The Company expects that pursuant to procedures established by the
Depositary (i) upon deposit of a Global Note, the Depositary will credit the
accounts of designated Participants with portions of the principal amount of
the Global Note and (ii) ownership of the Senior Notes evidenced by the Global
Note will be shown on, and the transfer of ownership thereof will be effected
only through, records maintained by the Depositary (with respect to the
interests of the Depositary's Participants), the Depositary's Participants and
the Depositary's Indirect Participants. Prospective purchasers are advised
that the laws of some states require that certain persons take physical
delivery in definitive form of securities that they own. Consequently, the
ability to transfer Senior Notes evidenced by a Global Note will be limited to
such extent.
So long as a Global Note Holder is the registered owner of any Senior Notes,
the Global Note Holder will be considered the sole Holder under the Indenture
of any Senior Notes evidenced by the Global Note. Beneficial owners of Senior
Notes evidenced by a Global Note will not be considered the owners or Holders
thereof under the Indenture for any purpose, including with respect to the
giving of any directions, instructions or approvals to the Trustee thereunder.
Neither the Company nor the Trustee will have any responsibility or liability
for any aspect of the records of the Depositary or for maintaining,
supervising or reviewing any records of the Depositary relating to the Senior
Notes.
Payments in respect of the principal of, premium, if any, interest, if any,
on any Senior Notes registered in the name of the Global Note Holder on the
applicable record date will be payable by the Trustee to or at the direction
of the Global Note Holder in its capacity as the registered Holder under the
Indenture. Under the terms of the Indenture, the Company and the Trustee may
treat the persons in whose names Senior Notes, including a Global Senior Note,
are registered as the owners thereof for the purpose of receiving such
payments. Consequently, neither the Company nor the Trustee has or will have
any responsibility or liability for the
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payment of such amounts to beneficial owners of Senior Notes. The Company
believes, however, that it is currently the policy of the Depositary to
immediately credit the accounts of the relevant Participants with such
payments, in amounts proportionate to their respective holdings of beneficial
interests in the relevant security as shown on the records of the Depositary.
Payments by the Depositary's Participants and the Depositary's Indirect
Participants to the beneficial owners of Senior Notes will be governed by
standing instructions and customary practice and will be the responsibility of
the Depositary's Participants or the Depositary's Indirect Participants.
Certificated Securities
Subject to certain conditions, any person having a beneficial interest in a
Global Note may, upon request to the Trustee, exchange such beneficial
interest for Senior Notes in the form of Certificated Securities. Upon any
such issuance, the Trustee is required to register such Certificated
Securities in the name of, and cause the same to be delivered to, such person
or persons (or the nominee of any thereof). In addition, if (i) the Company
notifies the Trustee in writing that the Depositary is no longer willing or
able to act as a depositary and the Company is unable to locate a qualified
successor within 90 days or (ii) the Company, at its option, notifies the
Trustee in writing that it elects to cause the issuance of Senior Notes in the
form of Certificated Securities under the Indenture, then, upon surrender by
the Global Note Holder of its Global Note, Senior Notes in such form will be
issued to each person that the Global Note Holder and the Depositary identify
as being the beneficial owner of the related Senior Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or the Depositary in identifying the beneficial owners of
Senior Notes and the Company and the Trustee may conclusively rely on, and
will be protected in relying on, instructions from the Global Note Holder or
the Depositary for all purposes.
Next Day Settlement and Payment
The Indenture will require that payments in respect of the Senior Notes
represented by a Global Note (including principal, premium, if any, interest
and Liquidated Damages, if any) be made by wire transfer of immediately
available next day funds to the accounts specified by the Global Note Holder.
With respect to Certificated Securities, the Company will make all payments of
principal, premium, if any, interest and Liquidated Damages, if any, by wire
transfer of immediately available next day funds to the accounts specified by
the Holders thereof or, if no such account is specified, by mailing a check to
each such Holder's registered address. The Company expects that secondary
trading in the Certificated Securities will also be settled in immediately
available funds.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The Company, the Guarantors and the Initial Purchaser entered into the
Registration Rights Agreement on August 18, 1997. The Registration Statement
was filed with the Commission pursuant to the requirements of the Registration
Rights Agreement. If (i) the Company is not permitted to consummate the
Exchange Offer because the Exchange Offer is not permitted by applicable law
or Commission policy or (ii) any Holder of Transfer Restricted Securities
notifies the Company prior to the 20th day following consummation of the
Exchange Offer that (A) it is prohibited by law or Commission policy from
participating in the Exchange Offer or (B) that it may not resell the Exchange
Notes acquired by it in the Exchange Offer to the public without delivering a
prospectus and this Prospectus is not appropriate or available for such
resales or (C) that it is a broker-dealer and owns Senior Notes acquired
directly from the Company or an affiliate of the Company, the Company will
file with the Commission a Shelf Registration Statement to cover resales of
the Senior Notes by the Holders thereof who satisfy certain conditions
relating to the provision of information in connection with the Shelf
Registration Statement. The Company will use its best efforts to cause such
Shelf Registration Statement to be declared effective as promptly as possible
by the Commission. For purposes of the foregoing, "Transfer Restricted
Securities" means each Senior Note until (i) the date on which such Senior
Note has been exchanged by a person other than a broker-dealer for an Exchange
Note in the Exchange Offer, (ii) following the exchange by a broker-
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dealer in the Exchange Offer of a Senior Note for an Exchange Note, the date
on which such Exchange Note is sold to a purchaser who receives from such
broker-dealer on or prior to the date of such sale a copy of this Prospectus,
(iii) the date on which such Senior Note has been effectively registered under
the Securities Act and disposed of in accordance with the Shelf Registration
Statement or (iv) the date on which such Senior Note is distributed to the
public pursuant to Rule 144 under the Securities Act.
The Registration Rights Agreement provides that, if obligated to file the
Shelf Registration Statement, the Company will use its best efforts to file
the Shelf Registration Statement with the Commission on or prior to 60 days
after such filing obligation arises and to cause the Shelf Registration
Statement to be declared effective by the Commission on or prior to 120 days
after such obligation arises. If (a) the Company fails to file the Shelf
Registration Statement required by the Registration Rights Agreement on or
before the date specified for such filing, (b) such Shelf Registration
Statement is not declared effective by the Commission on or prior to the date
specified for such effectiveness (the "Effectiveness Target Date"), or (c) the
Shelf Registration Statement is declared effective but thereafter ceases to be
effective or usable in connection with resales of Transfer Restricted
Securities during the period specified in the Registration Rights Agreement
(each such event referred to in clauses (a) through (c) above a "Registration
Default"), then the Company will pay Liquidated Damages to each Holder of
Senior Notes, with respect to the first 90-day period immediately following
the occurrence of the first Registration Default in an amount equal to $.05
per week per $1,000 principal amount of Senior Notes held by such Holder. The
amount of the Liquidated Damages will increase by an additional $.05 per week
per $1,000 principal amount of Senior Notes with respect to each subsequent
90-day period until all Registration Defaults have been cured, up to a maximum
amount of Liquidated Damages of $.50 per week per $1,000 principal amount of
Senior Notes. All accrued Liquidated Damages will be paid by the Company to
the Global Note Holder by wire transfer of immediately available funds or by
federal funds check and to Holders of Certificated Securities by wire transfer
to the accounts specified by them or by mailing checks to their registered
addresses if no such accounts have been specified. Liquidated Damages will be
payable at the same time and in the same manner as interest is payable.
Following the cure of all Registration Defaults, the accrual of Liquidated
Damages will cease.
Holders of Senior Notes will be required to deliver information to be used
in connection with the Shelf Registration Statement and to provide comments on
the Shelf Registration Statement within the time periods set forth in the
Registration Rights Agreement in order to have their Senior Notes included in
the Shelf Registration Statement and benefit from the provisions regarding
Liquidated Damages set forth above.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled
by" and "under common control with"), as used with respect to any Person,
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of such Person, whether
through the ownership of voting securities, by agreement or otherwise;
provided that beneficial ownership of 10% or more of the Voting Stock of a
Person shall be deemed to be control.
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"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than sales of inventory in the ordinary course of business
consistent with past practices; (provided that the sale, lease, conveyance or
other disposition of all or substantially all of the assets of the Company and
its Subsidiaries taken as a whole will be governed by the provisions of the
Indenture described above under the caption "--Change of Control" and/or the
provisions described above under the caption "--Merger, Consolidation or Sale
of Assets" and not by the provisions of the Asset Sale covenant), and (ii) the
issue or sale by the Company or any of its Restricted Subsidiaries of Equity
Interests of any of the Company's Restricted Subsidiaries, in the case of
either clause (i) or (ii), whether in a single transaction or a series of
related transactions (a) that have a fair market value in excess of $1.0
million or (b) for net proceeds in excess of $1.0 million. Notwithstanding the
foregoing: (i) a transfer of assets by the Company to a Wholly Owned
Restricted Subsidiary or by a Wholly Owned Restricted Subsidiary to the
Company or to another Wholly Owned Restricted Subsidiary, (ii) an issuance of
Equity Interests by a Wholly Owned Restricted Subsidiary to the Company or to
another Wholly Owned Restricted Subsidiary, and (iii) a Restricted Payment
that is permitted by the covenant described above under the caption "--
Restricted Payments" will not be deemed to be Asset Sales.
"Borrowing Base" means, as of any date, an amount equal to the sum of (i)
sixty-five percent (65%) of the book value of Eligible Inventory, other than
Lay Away Inventory (as such terms are defined in the Senior Credit Facility)
valued on a first-in, first-out basis (at the lower of cost or market), plus
(ii) sixty-five percent (65%) of Lay Away Inventory valued as follows: (unpaid
purchase price / .625) x .50, minus (iii) Reserves (as defined in the Senior
Credit Facility on the Issue Date). To the extent that information is not
available to calculate the amount of Eligible Inventory, Lay Away Inventory or
Reserves, as of a specific date, the Company may utilize the most recent
available information for purposes of calculating the Borrowing Base.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership (whether general or
limited) or limited liability company, partnership or membership interests and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of,
the issuing Person, other than interests or participations in the nature of
compensation.
"Cash Equivalents" means (i) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency
thereof maturing within one year from the date of acquisition thereof, (ii)
commercial paper maturing no more than one year from the date of creation
thereof and having an investment rating of A-2 or P-2 or better from either
Standard & Poor's Corporation or Moody's Investors Service, Inc., (iii) time
deposits, demand deposits and certificates of deposit, maturing no more than
one year from the date of creation thereof, issued by commercial banks
incorporated under the laws of the United States of America, each having
combined capital, surplus and undivided profits of not less than $300,000,000
and having a senior secured rating of "A" or better by a nationally recognized
rating agency (an "A Bank"), (iv) time deposits, maturing no more than 30 days
from the date of creation thereof with an A Bank, and (v) overnight repurchase
obligations issued by an A Bank.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with
an Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Subsidiaries for such period, to the extent
that such provision for taxes was included in computing such Consolidated Net
Income, plus (iii) consolidated interest expense of such Person and its
Subsidiaries for such period, whether paid or accrued and whether or not
capitalized (including, without limitation, amortization of debt issuance
costs and
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original issue discount, non-cash interest payments, the interest component of
any deferred payment obligations, the interest component of all payments
associated with Capital Lease Obligations, commissions, discounts and other
fees and charges incurred in respect of letter of credit or bankers'
acceptance financings, and net payments (if any) pursuant to Hedging
Obligations), to the extent that any such expense was deducted in computing
such Consolidated Net Income, plus (iv) depreciation, amortization (including
amortization of goodwill and other intangibles but excluding amortization of
prepaid cash expenses that were paid in a prior period) and other non-cash
expenses (including non-cash compensation expenses associated with vesting of
restricted stock or other equity compensation but excluding any non-cash
expense to the extent that it represents an accrual of or reserve for cash
expenses in any future period or amortization of a prepaid cash expense that
was paid in a prior period) of such Person and its Subsidiaries for such
period to the extent that such depreciation, amortization and other non-cash
expenses were deducted in computing such Consolidated Net Income, minus (v)
non-cash items increasing such Consolidated Net Income for such period, in
each case, on a consolidated basis and determined in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Wholly Owned Restricted
Subsidiary thereof that is a Guarantor, (ii) the Net Income of any Person
acquired in a pooling of interests transaction for any period prior to the
date of such acquisition shall be excluded, (iii) the cumulative effect of a
change in accounting principles shall be excluded and, (iv) solely with
respect to clause (i) of paragraph (c) of the covenant described in "--
Restricted Payments," the Net Income of any Restricted Subsidiary shall be
excluded to the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at the
date of determination permitted without any prior governmental approval (that
has not been obtained), directly or indirectly, by operation of the terms of
its charter or any agreement, instrument, judgment, decree, order, statute,
rule or governmental regulation applicable to that Restricted Subsidiary or
its stockholders.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such
Person and its Restricted Subsidiaries as of such date plus (ii) the
respective amounts reported on such Person's balance sheet as of such date
with respect to any series of preferred stock (other than Disqualified Stock)
that by its terms is not entitled to the payment of dividends unless such
dividends may be declared and paid only out of net earnings in respect of the
year of such declaration and payment, but only to the extent of any cash
received by such Person upon issuance of such preferred stock, less (x) all
write-ups (other than write-ups resulting from foreign currency translations
and write-ups of tangible assets of a going concern business made within 12
months after the acquisition of such business) subsequent to the date of the
Indenture in the book value of any asset owned by such Person or a Restricted
Subsidiary of such Person, (y) all Investments as of such date in
unconsolidated Restricted Subsidiaries and in Persons that are not Restricted
Subsidiaries (except, in each case, Permitted Investments), and (z) all
unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable
at the option of the Holder thereof, in whole or in part, on or prior to the
date that is 91 days after the date on which the Senior Notes mature.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
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"Existing Indebtedness" means Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the Senior Credit Facility) in
existence on the date of the Indenture, until such amounts are repaid.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person
and its Restricted Subsidiaries for such period, whether paid or accrued
(including, without limitation, amortization of debt issuance costs and
original issue discount, non-cash interest payments, the interest component of
any deferred payment obligations, the interest component of all payments
associated with Capital Lease Obligations, commissions, discounts and other
fees and charges incurred in respect of letter of credit or bankers'
acceptance financings, and net payments (if any) pursuant to Hedging
Obligations) and (ii) the consolidated interest expense of such Person and its
Restricted Subsidiaries that was capitalized during such period, and (iii) any
interest expense on Indebtedness of another Person that is Guaranteed by such
Person or one of its Restricted Subsidiaries or secured by a Lien on assets of
such Person or one of its Restricted Subsidiaries (whether or not such
Guarantee or Lien is called upon), and (iv) the product of (a) all dividend
payments, whether or not in cash, on any series of preferred stock of such
Person or any of its Restricted Subsidiaries, other than dividend payments on
Equity Interests payable solely in Equity Interests of the Company, times (b)
a fraction, the numerator of which is one and the denominator of which is one
minus the then current combined federal, state and local statutory tax rate of
such Person, expressed as a decimal, in each case, on a consolidated basis and
in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person and its
Restricted Subsidiaries for any period, the ratio of the Consolidated Cash
Flow of such Person and its Restricted Subsidiaries for such period to the
Fixed Charges of such Person and its Restricted Subsidiaries for such period.
In the event that the Company or any of its Restricted Subsidiaries incurs,
assumes, Guarantees or redeems any Indebtedness (other than revolving credit
borrowings) or issues preferred stock subsequent to the commencement of the
period for which the Fixed Charge Coverage Ratio is being calculated but prior
to the date on which the event for which the calculation of the Fixed Charge
Coverage Ratio is made (the "Calculation Date"), then the Fixed Charge
Coverage Ratio shall be calculated giving pro forma effect to such incurrence,
assumption, Guarantee or redemption of Indebtedness, or such issuance or
redemption of preferred stock, as if the same had occurred at the beginning of
the applicable four-quarter reference period. In addition, for purposes of
making the computation referred to above, (i) acquisitions that have been made
by the Company or any of its Restricted Subsidiaries, including through
mergers or consolidations and including any related financing transactions,
during the four-quarter reference period or subsequent to such reference
period and on or prior to the Calculation Date shall be deemed to have
occurred on the first day of the four-quarter reference period and
Consolidated Cash Flow for such reference period shall be calculated without
giving effect to clause (ii) of the proviso set forth in the definition of
Consolidated Net Income, and (ii) the Consolidated Cash Flow attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of (including, without limitation, in any Asset Sale)
prior to the Calculation Date, shall be excluded, and (iii) the Fixed Charges
attributable to discontinued operations, as determined in accordance with
GAAP, and operations or businesses disposed of prior to the Calculation Date,
shall be excluded, but only to the extent that the obligations giving rise to
such Fixed Charges will not be obligations of the referent Person or any of
its Restricted Subsidiaries following the Calculation Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Guarantors" means each of (i) Subsidiaries of the Company in existence on
the date of the Indenture (except Wilsons (UK) Limited, Wilsons Leather
Gatsair Limited and Wilsons Leather Gatsland Limited) and (ii)
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any other Subsidiary that executes a Subsidiary Guarantee in accordance with
the provisions of the Indenture, and their respective successors and assigns
to the extent not released pursuant to the terms of the Indenture.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced
by bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any property or representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable,
if and to the extent any of the foregoing indebtedness (other than letters of
credit and Hedging Obligations) would appear as a liability upon a balance
sheet of such Person prepared in accordance with GAAP, as well as all
indebtedness of others secured by a Lien on any asset of such Person (whether
or not such indebtedness is assumed by such Person) and, to the extent not
otherwise included, the Guarantee by such Person of any indebtedness of any
other Person. The amount of any Indebtedness outstanding as of any date shall
be (i) the accreted value thereof, in the case of any Indebtedness that does
not require current payments of interest, and (ii) the principal amount
thereof, together with any interest thereon that is more than 30 days past
due, in the case of any other Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If the Company or any Restricted Subsidiary of the Company sells or otherwise
disposes of any Equity Interests of any direct or indirect Restricted
Subsidiary of the Company such that, after giving effect to any such sale or
disposition, such Person is no longer a Restricted Subsidiary of the Company,
the Company shall be deemed to have made an Investment on the date of any such
sale or disposition equal to the fair market value of the Equity Interests of
such Restricted Subsidiary not sold or disposed of in an amount determined as
provided in the final paragraph of the covenant described above under the
caption "--Restricted Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but
not loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b)
the disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any
of its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain
(but not loss), together with any related provision for taxes on such
extraordinary or nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of
any non-cash consideration received in any Asset Sale), net of the direct
costs relating to such Asset Sale (including, without limitation, legal,
accounting and investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied
to the repayment of Indebtedness (other than the Senior Credit Facility)
secured by a Lien on the asset
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or assets that were the subject of such Asset Sale and any reserve for
adjustment in respect of the sale price of such asset or assets established in
accordance with GAAP.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise), or (c) constitutes the lender, and (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness (other
than the Senior Credit Facility) of the Company or any of its Restricted
Subsidiaries to declare a default on such other Indebtedness or cause the
payment thereof to be accelerated or payable prior to its stated maturity; and
(iii) as to which the lenders have been notified in writing that they will not
have any recourse to the stock or assets of the Company or any of its
Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Business" means any business conducted by the Company or any of
its Subsidiaries on the Issue Date and any other clothing or accessories
retailing or wholesaling business.
"Permitted Investments" means (a) any Investment in the Company or in a
Wholly Owned Restricted Subsidiary of the Company that is a Guarantor; (b) any
Investment in Cash Equivalents; (c) any Investment by the Company or any
Restricted Subsidiary of the Company in a Person, if as a result of such
Investment (i) such Person becomes a Wholly Owned Restricted Subsidiary of the
Company and a Guarantor that is engaged in a Permitted Business, or (ii) such
Person is merged, consolidated or amalgamated with or into, or transfers or
conveys substantially all of its assets to, or is liquidated into, the Company
or a Wholly Owned Restricted Subsidiary of the Company that is a Guarantor and
that is engaged in the same or a similar line of business as the Company and
its Restricted Subsidiaries were engaged in on the date of the Indenture; (d)
any Restricted Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in compliance
with the covenant described above under the caption "--Repurchase at the
Option of Holders--Asset Sales"; (e) any acquisition of assets solely in
exchange for the issuance of Equity Interests (other than Disqualified Stock)
of the Company; and (f) other Investments in any Person having an aggregate
fair market value (measured on the date each such Investment was made and
without giving effect to subsequent changes in value), when taken together
with all other Investments made pursuant to this clause (f) that are at the
time outstanding, not to exceed $5.0 million.
"Permitted Liens" means (i) Liens securing Obligations of the Company or any
Restricted Subsidiary under the Senior Credit Facility; (ii) Liens in favor of
the Company and liens by any store Subsidiary in favor of Wilsons Leather
Holdings Inc. deemed to arise by reason of the consignment of inventory to
such store Subsidiary; (iii) Liens on property of a Person existing at the
time such Person is merged into or consolidated with the Company or any
Restricted Subsidiary of the Company; provided that such Liens were in
existence prior to the contemplation of such merger or consolidation and do
not extend to any assets other than those of the Person merged into or
consolidated with the Company; (iv) Liens on property existing at the time of
acquisition thereof by the Company or any Restricted Subsidiary of the
Company, provided that such Liens were in existence prior to the contemplation
of such acquisition; (v) Liens to secure the performance of statutory
obligations, surety or appeal bonds, performance bonds or other obligations of
a like nature including pledges or deposits to secure bids, tender contracts
(other than contracts for the payment of money) or leases incurred in the
ordinary course of business; (vi) Liens to secure Indebtedness (including
Capital Lease Obligations) permitted by clause (iv) of the second paragraph of
the covenant entitled "Incurrence of Indebtedness and Issuance of Preferred
Stock" covering only the assets acquired with such Indebtedness; (vii) Liens
existing on the date of the Indenture; (viii) Liens for taxes, assessments or
governmental charges or claims that are not yet delinquent or that are being
contested in good faith by appropriate proceedings promptly instituted and
diligently concluded, provided that any reserve or other appropriate provision
as shall be required in conformity with GAAP shall have been made therefor;
(ix) zoning restrictions, easements, licenses or other restrictions on the use
of any real estate or other minor irregularities in the title thereto, so long
as the same do not materially impair the use, value
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or marketability of such real estate; (x) Liens on assets of Unrestricted
Subsidiaries that secure Non-Recourse Debt of Unrestricted Subsidiaries and
(xi) Liens incurred in the ordinary course of business of the Company or any
Restricted Subsidiary of the Company with respect to obligations that do not
exceed $5.0 million at any one time outstanding and that (a) are not incurred
in connection with the borrowing of money or the obtaining of advances or
credit (other than trade credit in the ordinary course of business) and (b) do
not in the aggregate materially detract from the value of the property or
materially impair the use thereof in the operation of business by the Company
or such Restricted Subsidiary.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries
(other than under the Senior Credit Facility, the extension, refinancing,
renewal, replacement, defeasance or refunding of which is governed by the
definition of such term); provided that: (i) the principal amount (or accreted
value, if applicable) of such Permitted Refinancing Indebtedness does not
exceed the principal amount of (or accreted value, if applicable), plus
accrued interest on, the Indebtedness so extended, refinanced, renewed,
replaced, defeased or refunded (plus the amount of reasonable expenses
incurred in connection therewith); (ii) such Permitted Refinancing
Indebtedness has a final maturity date later than the final maturity date of,
and has a Weighted Average Life to Maturity equal to or greater than the
Weighted Average Life to Maturity of, the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; (iii) if the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded is
subordinated in right of payment to the Senior Notes, such Permitted
Refinancing Indebtedness has a final maturity date later than the final
maturity date of, and is subordinated in right of payment to, the Senior Notes
on terms at least as favorable to the Holders of Senior Notes as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and (iv) such
Indebtedness is incurred either by the Company or by the Restricted Subsidiary
who is the obligor on the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government or other agency or political subdivision thereof.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Senior Credit Facility" means that certain Senior Credit Facility, dated as
of May 25, 1996, by and among Wilsons Leather Holdings Inc. (as borrower), the
Company and certain of its Subsidiaries (as guarantors) and the lenders party
thereto, providing for up to $150.0 million of revolving credit borrowings and
a $90.0 million letter of credit subfacility (as such amount may be increased
as permitted under the provisions in the Indenture described in "Description
of Senior Notes--Certain Covenants--Issuance of Indebtedness and Preferred
Stock"), including any related notes, guarantees, collateral documents,
instruments and agreements executed in connection therewith, and in each case
as amended, modified, extended, renewed, refunded, replaced or refinanced from
time to time (including, without limitation, any refinancing in which the
Company replaces Wilsons Leather Holdings Inc. as borrower). Indebtedness
under the Senior Credit Facility outstanding on the date on which Notes are
first issued and authenticated under the Indenture shall be deemed to have
been incurred on such date in reliance on the exception provided by clause (i)
of the second paragraph of the description of the covenant entitled
"Incurrence of Indebtedness and Issuance of Preferred Stock."
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original
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documentation governing such Indebtedness, and shall not include any
contingent obligations to repay, redeem or repurchase any such interest or
principal prior to the date originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total
voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers
or trustees thereof is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person (or a combination thereof) and (ii) any partnership (a) the sole
general partner or the managing general partner of which is such Person or a
Subsidiary of such Person or (b) the only general partners of which are such
Person or of one or more Subsidiaries of such Person (or any combination
thereof).
"Unrestricted Subsidiary" means (i) any Subsidiary (other than WLHI or any
of its parents or any successor to any of them) that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution; but only to the extent that such Subsidiary: (a) has no
Indebtedness other than Non-Recourse Debt; (b) is not party to any agreement,
contract, arrangement or understanding with the Company or any Restricted
Subsidiary of the Company unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Company or such
Restricted Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of the Company; (c) is a Person with respect to
which neither the Company nor any of its Restricted Subsidiaries has any
direct or indirect obligation (x) to subscribe for additional Equity Interests
or (y) to maintain or preserve such Person's financial condition or to cause
such Person to achieve any specified levels of operating results; (d) has not
guaranteed or otherwise directly or indirectly provided credit support for any
Indebtedness of the Company or any of its Restricted Subsidiaries; and (e) has
at least one director on its board of directors that is not a director or
executive officer of the Company or any of its Restricted Subsidiaries and has
at least one executive officer that is not a director or executive officer of
the Company or any of its Restricted Subsidiaries. Any such designation by the
Board of Directors shall be evidenced to the Trustee by filing with the
Trustee a certified copy of the Board Resolution giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing conditions and was permitted by the covenant
described above under the caption "--Certain Covenants--Restricted Payments."
If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing
requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an
Unrestricted Subsidiary for purposes of the Indenture and any Indebtedness of
such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of
the Company as of such date (and, if such Indebtedness is not permitted to be
incurred as of such date under the covenant described under the caption
"Incurrence of Indebtedness and Issuance of Preferred Stock," the Company
shall be in default of such covenant). The Board of Directors of the Company
may at any time designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided that such designation shall be deemed to be an incurrence
of Indebtedness by a Restricted Subsidiary of the Company of any outstanding
Indebtedness of such Unrestricted Subsidiary and such designation shall only
be permitted if (i) such Indebtedness is permitted under the covenant
described under the caption "--Certain Covenants--Incurrence of Indebtedness
and Issuance of Preferred Stock," calculated on a pro-forma basis as if such
designation had occurred at the beginning of the four-quarter reference
period, and (ii) no Default or Event of Default would be in existence
following such designation.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall
at the time be owned by such Person and/or by one or more Wholly Owned
Subsidiaries of such Person.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may
be amended or supplemented from time to time, may be used by a broker-dealer
in connection with the resales of Exchange Notes received in exchange for
Private Notes where such Private Notes were acquired as a result of market-
making activities or other trading activities. The Company has agreed that,
for a period of up to 180 days after the date of this Prospectus, it will make
this Prospectus, as amended or supplemented, available to any broker-dealer
that requests such document in the Letter of Transmittal for use in connection
with any such resale.
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers or any other persons. Exchange Notes received by broker-dealers
for their own account pursuant to the Exchange Offer may be sold from time to
time in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Exchange Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such
Exchange Notes. Any broker-dealer that resells Exchange Notes that were
received by it for its own account pursuant to the Exchange Offer and any
broker or dealer that participates in a distribution of such Exchange Notes
may be deemed to be an "underwriter" within the meaning of the Securities Act
and any profit on any such resale of Exchange Notes and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that,
by acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act.
The Company has agreed to pay all expenses incident to the Company's
performance of, or compliance with, the Registration Rights Agreement and will
indemnify the holders of Transfer Restricted Securities (including any broker-
dealers), and certain parties related to such holders, against certain
liabilities, including liabilities under the Securities Act.
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LEGAL MATTERS
The validity of the Exchange Notes offered hereby and certain other legal
matters will be passed upon for the Company by Faegre & Benson LLP,
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 here 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.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 under the Securities Act with respect to the Exchange Notes offered
hereby. As permitted by the rules and regulations of the Commission, this
Prospectus omits certain information, exhibits and undertakings contained in
the Registration Statement. For further information with respect to the
Company and the Exchange Notes offered hereby, reference is made to the
Registration Statement, including the exhibits thereto and the financial
statements, notes and schedules filed as a part thereof. The Company is
subject to the informational requirements of the Exchange Act. The
Registration Statement (and the exhibits and schedules thereto), as well as
the periodic reports and other information filed by the Company with the
Commission, may be inspected and copied at the Public Reference Section of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the Commission located at Room 1300,
7 World Trade Center, New York, New York 10048 and Suite 1400, Citicorp
Center, 500 West Madison Street, Chicago, Illinois 60661-2511. Copies of such
materials may be obtained from the Public Reference Section of the Commission,
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and its public reference facilities in New York, New York and Chicago,
Illinois at the prescribed rates. The Commission maintains a web site
(http://www.sec.gov), that contains periodic reports, proxy and information
statements and other information regarding registrants that file documents
electronically with the Commission. Statements contained in this Prospectus as
to the contents of any contract or other document are not necessarily
complete, and in each instance reference is 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.
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WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
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PAGE
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<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>
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 27, 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, AUGUST 2,
1994 1995 1997 1997
---------- ---------- ----------- -----------
(UNAUDITED)
ASSETS
------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.................................................... $ 17,325 $ 14,286 $ 81,553 $ 24,091
Accounts receivable, net..................................................... 7,692 7,618 4,851 7,491
Inventories.................................................................. 102,595 74,899 64,919 87,177
Prepaid expenses............................................................. 3,140 2,317 1,246 819
Deferred income taxes........................................................ 6,776 14,925 -- --
---------- ---------- -------- --------
Total current assets....................................................... 137,528 114,045 152,569 119,578
Property and equipment, net.................................................... 97,216 65,884 17,091 18,711
Goodwill, net of accumulated amortization of $27,468 in 1994................... 152,522 -- -- --
Other assets, net.............................................................. 5,404 462 1,555 1,222
Deferred income taxes.......................................................... -- 1,979 1,173 530
---------- ---------- -------- --------
$392,670 $ 182,370 $172,388 $140,041
========== ========== ======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C> <C>
Current liabilities:
Accounts payable............................................................. $ 18,106 $ 11,728 $ 10,666 $ 12,735
Due to CVS................................................................... 124,245 78,771 -- --
Accrued expenses............................................................. 41,502 52,623 34,517 26,083
Income taxes payable......................................................... 857 5,120 20,345 175
Deferred income taxes........................................................ -- -- 3,243 4,288
---------- ---------- -------- --------
Total current liabilities.................................................. 184,710 148,242 68,771 43,281
Long-term debt................................................................. -- -- 55,811 61,311
Other long-term liabilities.................................................... 6,965 6,538 4,341 1,996
---------- ---------- -------- --------
Commitments and contingencies (Notes 9, 10, 11 and 13)
Shareholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized, 7,405 ($1,000
stated value) shares issued and outstanding on February 1, 1997............. -- -- 7,405 --
Common stock, no par value; 100 shares authorized, issued and outstanding on
December 31, 1994 and 1995.................................................. 146 146 -- --
Common stock, $.01 par value; 45,000,000 shares authorized, 7,650,000 and
9,532,083 shares issued and outstanding on February 1, 1997 and August 2,
1997, respectively.......................................................... -- -- 77 95
Additional paid-in capital................................................... 135,452 135,452 12,501 29,339
Retained earnings (deficit).................................................. 65,397 (108,018) 23,511 4,062
Cumulative translation adjustment............................................ -- 10 (29) (43)
---------- ---------- -------- --------
Total shareholders' equity................................................. 200,995 27,590 43,465 33,453
---------- ---------- -------- --------
$392,670 $ 182,370 $172,388 $140,041
- --------------------------------------------------
========== ========== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES COMPANY
--------------------------------------------------------------- -----------
PERIOD
FROM
EIGHT INCEPTION
YEARS ENDED DECEMBER 31, FIVE MONTHS ENDED MONTHS (MAY 26,
---------------------------- -------------------- ENDED 1996) TO
MAY 27, MAY 25, JANUARY 27, FEBRUARY 1,
1993 1994 1995 1995 1996 1996 1997
-------- -------- --------- ----------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales....... $478,475 $474,623 $ 462,394 $124,700 $109,640 $ 367,639 $ 345,121
Costs and
expenses:
Cost of goods
sold, buying
and occupancy
costs......... 320,540 329,430 316,946 99,849 86,213 238,558 222,131
Selling,
general and
administrative
expenses...... 120,071 130,227 114,923 45,918 34,868 76,442 75,806
Depreciation
and
amortization.. 20,668 22,273 21,393 9,002 4,722 13,294 994
Restricted
stock
compensation
expense....... -- -- -- -- -- -- 1,485
Restructuring
and asset
impairment
charges....... -- -- 182,184 -- -- 182,184 --
-------- -------- --------- -------- -------- --------- ---------
Income (loss)
from
operations.... 17,196 (7,307) (173,052) (30,069) (16,163) (142,839) 44,705
Interest
expense, net... 5,102 8,393 10,463 3,396 1,581 7,400 5,271
-------- -------- --------- -------- -------- --------- ---------
Income (loss)
before income
taxes......... 12,094 (15,700) (183,515) (33,465) (17,744) (150,239) 39,434
Income tax
provision
(benefit)...... 7,038 (3,109) (10,100) (5,461) (6,603) (4,681) 15,528
-------- -------- --------- -------- -------- --------- ---------
Net income
(loss)........ $ 5,056 $(12,591) $(173,415) $(28,004) $(11,141) $(145,558) $ 23,906
======== ======== ========= ======== ======== ========= =========
Pro forma net income (loss) per common share (Note 2)............ $ 2.49
=========
Weighted average common shares outstanding....................... 9,602,826
=========
<CAPTION>
PREDECESSOR COMBINED
COMPANIES COMPANY COMPANIES COMPANY
----------- --------- ----------- ------------
TWENTY-
SEVENTEEN TEN SEVEN TWENTY-SIX
WEEKS WEEKS WEEKS WEEKS
ENDED ENDED ENDED ENDED
MAY 25, AUGUST 3, AUGUST 3, AUGUST 2,
1996 1996 1996 1997
----------- --------- ----------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales....... $ 79,695 $ 28,518 $ 108,213 $ 93,422
Costs and
expenses:
Cost of goods
sold, buying
and occupancy
costs......... 64,737 26,199 90,936 84,222
Selling,
general and
administrative
expenses...... 27,448 13,832 41,280 36,491
Depreciation
and
amortization.. 3,814 2 3,816 942
Restricted
stock
compensation
expense....... -- -- -- 900
Restructuring
and asset
impairment
charges....... -- -- -- --
----------- --------- ----------- ------------
Income (loss)
from
operations.... (16,304) (11,515) (27,819) (29,133)
Interest
expense, net... 1,250 1,148 2,398 1,919
----------- --------- ----------- ------------
Income (loss)
before income
taxes......... (17,554) (12,663) (30,217) (31,052)
Income tax
provision
(benefit)...... (6,561) (4,556) (11,117) (11,208)
----------- --------- ----------- ------------
Net income
(loss)........ $(10,993) $ (8,107) $(19,100) $ (19,844)
=========== ========= =========== ============
Pro forma net income (loss) per common share (Note 2)............ $ (1.98)
============
Weighted average common shares outstanding....................... 10,036,978
============
</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
--------------------------------
PREFERRED
STOCK COMMON STOCK
-------------- ----------------
SHARES AMOUNT SHARES AMOUNT
------ ------ --------- ------
<S> <C> <C> <C> <C>
Initial capitalization......................... 7,405 $7,405 7,650,000 $ 77
Net income................................... -- -- -- --
Restricted stock vested...................... -- -- -- --
Accrued preferred stock dividends............ -- -- -- --
Currency translation adjustment.............. -- -- -- --
------ ------ --------- -----
Balance, February 1, 1997...................... 7,405 7,405 7,650,000 77
Net loss (unaudited)......................... -- -- -- --
Series A Preferred exchange.................. (7,405) (7,405) 617,083 6
Initial public offering...................... -- -- 1,265,000 12
Accrued preferred stock dividends............ -- -- -- --
Currency translation adjustment.............. -- -- -- --
------ ------ --------- -----
Balance, August 2, 1997 (unaudited)............ -- $ -- 9,532,083 $ 95
====== ====== ========= =====
</TABLE>
<TABLE>
<CAPTION>
COMPANY
----------------------------------------------
ADDITIONAL CUMULATIVE TOTAL
PAID-IN RETAINED TRANSLATION SHAREHOLDERS'
CAPITAL EARNINGS ADJUSTMENT EQUITY
---------- -------- ----------- -------------
<S> <C> <C> <C> <C>
Initial capitalization
(continued)................... $11,016 $ -- $ -- $ 18,498
Net income................... -- 23,906 -- 23,906
Restricted stock vested...... 1,485 -- -- 1,485
Accrued preferred stock
dividends................... -- (395) -- (395)
Currency translation
adjustment.................. -- -- (29) (29)
------- ------- -------- ---------
Balance, February 1, 1997...... 12,501 23,511 (29) 43,465
Net loss (unaudited)......... -- (19,844) -- (19,844)
Series A Preferred exchange.. 7,399 -- -- --
Initial public offering...... 9,439 -- -- 9,451
Accrued preferred stock
dividends................... -- 395 -- 395
Currency translation
adjustment.................. -- -- (14) (14)
------- ------- -------- ---------
Balance, August 2, 1997
(unaudited)................... $29,339 $ 4,062 $ (43) $ 33,453
======= ======= ======== =========
</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
--------------------------------------------------------------- ---------
<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
1993 1994 1995 1995 1996 1996 1, 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
--------------------------------------------------
======= ======== ========= ======== ======== ========= ========
SEVENTEEN TEN TWENTY-SIX
WEEKS WEEKS WEEKS
ENDED ENDED ENDED
MAY 25, AUGUST 3, AUGUST 2,
1996 1996 1997
----------- --------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Operating
activities:
Net income
(loss)......... $(10,993) $(8,107) $(19,844)
Adjustments to
reconcile net
income (loss)
to net cash
provided by
(used in)
operating
activities--
Restructuring
and asset
impairment
charges....... -- -- --
Restructuring
charges
paid.......... (5,957) -- --
Depreciation
and
amortization.. 3,814 2 942
Amortization
of deferred
financing
costs......... -- 111 333
Restricted
stock
compensation
expense....... -- -- 900
Loss on
disposal of
assets........ 184 -- --
Deferred
income
taxes......... 5,115 (4,939) 1,688
Changes in
operating
assets and
liabilities,
net of assets
and
liabilities
acquired:
Accounts
receivable,
net.......... (222) (2,709) (2,640)
Inventories... 14,410 (24,526) (22,258)
Prepaid
expenses..... 114 (4,494) 612
Other
noncurrent
assets....... 4 -- --
Accounts
payable and
accrued
expenses..... (9,689) 2,625 (4,197)
Income taxes
payable and
other
liabilities.. (11,965) 1,180 (17,015)
----------- --------- -----------
Net cash
provided by
(used in)
operating
activities.. (15,185) (40,857) (61,479)
----------- --------- -----------
Investing
activities:
Additions to
property,
equipment and
other
noncurrent
assets......... (3,430) (823) (2,562)
Acquisitions,
net of cash
acquired....... -- 37,072 --
----------- --------- -----------
Net cash
provided by
(used in)
investing
activities.. (3,430) 36,249 (2,562)
----------- --------- -----------
Financing
activities:
Change in due
to/from CVS.... (105,013) -- --
Dividends paid
to CVS......... -- -- --
Capital
contributed by
CVS............ 124,000 -- --
Change in book
overdrafts..... (4,360) 2,051 (2,873)
Proceeds from
sale of common
and preferred
stock.......... -- 12,000 9,452
----------- --------- -----------
Net cash
provided by
(used in)
financing
activities.. 14,627 14,051 6,579
----------- --------- -----------
Net increase
(decrease) in
cash and cash
equivalents.... (3,988) 9,443 (57,462)
Cash and cash
equivalents,
beginning of
period......... 7,270 -- 81,553
----------- --------- -----------
Cash and cash
equivalents,
end of period.. $ 3,282 $ 9,443 $ 24,091
=========== ========= ===========
Supplemental
cash flow
information:
Cash paid
during the
period for--
Interest....... $ 1,580 $ 210 $ 388
=========== ========= ===========
Income taxes... $ 204 $ -- $ 7,420
=========== ========= ===========
Noncash
investing and
financing
activities--
Liabilities
assumed for
acquisition
of business... $ -- $46,927 $ --
=========== ========= ===========
Issuance of
long-term
debt.......... $ -- $55,811 $ --
=========== ========= ===========
Accrued
preferred
stock
dividends..... $ -- $ -- $ (395)
--------------------------------------------------
=========== ========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
1. NATURE OF ORGANIZATION AND ACQUISITION:
Wilsons The Leather Experts Inc., a Minnesota corporation (Wilsons), was
formed to acquire 100% of the common stock of Wilsons Center, Inc. and its
subsidiaries (the Predecessor Companies prior to the Acquisition) in a
management-led buyout (Acquisition) from CVS New York, Inc., a New York
corporation (CVS; formerly Melville Corporation, the parent company to the
Predecessor Companies). Wilsons and Wilsons Center, Inc. are collectively
referred to as the Company. In May 1996, pursuant to a sale agreement dated
May 24, 1996 between Wilsons and CVS, Wilsons acquired the common stock for
(i) $2 million, (ii) a 10% senior secured subordinated note due December 31,
2000 in the principal amount of $55.8 million, (iii) a warrant to purchase
1,350,000 shares of common stock, (iv) a warrant to purchase 1,080,000 shares
of common stock (reduced by terms of the Restricted Stock Agreement--see Note
9), (v) 4,320,000 shares of common stock, and (vi) 7,405 shares of preferred
stock. As part of the Acquisition, the Leather Investors Limited Partnerships
I and II (LILP) in turn purchased from CVS the 4,320,000 shares of common
stock and the 7,405 shares of Preferred Stock for $10 million.
The Acquisition was accounted for using the purchase method. The basis of
CVS's 15% equity interest in the Predecessor Companies was carried over to its
equity interest in the Company in accordance with Emerging Issues Task Force
discussion 88-16. Accordingly, the purchase price of $67.8 million and CVS's
carryover basis has been allocated on a preliminary basis to the assets
acquired and liabilities assumed based on their estimated fair values. This
resulted in the carrying value of the net assets acquired exceeding the new
basis by approximately $52.5 million, which was applied to reduce the amounts
assigned to property and equipment.
The Company operates a chain of 452 retail stores as of August 2, 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, for the eight-month period ended January 27, 1996 and for
the twenty-seven week period ended August 3, 1996 (derived from unaudited
financial statements of the Predecessor Companies (seventeen weeks ended May
25, 1996) and from audited financial statements of the Company (ten weeks
ended August 3, 1996)) and the twenty-six week
F-8
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
period ended August 2, 1997 has been prepared on the same basis as the audited
consolidated financial statements 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.
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 and August 2,
1997. The Predecessor Companies determined cost using the retail inventory
method on the FIFO basis.
F-9
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 and markdowns 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.
F-10
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 store operations (London,
England) is the applicable local currency. The translation from the applicable
foreign currency to U.S. dollars is performed for balance sheet accounts using
the current exchange rate in effect at the balance sheet date and for revenue
and expense accounts using a weighted average exchange rate during the period.
The gains or losses resulting from such translation were included in
shareholders' equity. Transaction gains and losses are reflected in income.
The Company has not entered into any significant hedging transactions.
Pro Forma Net Income Per Common Share
Pro forma net income per common share is computed by dividing net income by
the weighted average number of common shares outstanding, including the effect
of the exchange of Preferred Stock for common stock (see Note 14), and
dilutive common equivalent shares assumed to be outstanding during each
period. Common equivalent shares consist of dilutive options and warrants to
purchase common stock. However, pursuant to certain rules of the Securities
and Exchange Commission, the calculation also includes equity securities,
including options and warrants, issued within one year of an initial public
offering with an issue price less than the initial public offering price, even
if the effect is anti-dilutive. The treasury stock method was used in
determining the effect of such issuances.
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
F-11
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
were to be terminated. As of February 1, 1997, approximately 590 store
employees have been terminated. The significant components of the
restructuring charge and the reserves remaining at December 31, 1995 were as
follows (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES
-------------------------
FOR THE YEAR
ENDED AS OF
DECEMBER 31, DECEMBER 31,
1995 1995
------------ ------------
<S> <C> <C>
Goodwill and other intangibles write-offs..... $112,361 $ --
Lease obligations and asset write-offs for
store and other facility closings............ 21,121 8,000
Severance..................................... 476 448
Other......................................... 378 179
-------- ------
Total..................................... $134,336 $8,627
======== ======
</TABLE>
The reserves remaining at May 25, 1996 were retained by CVS as part of the
Acquisition.
Effective October 1, 1995, the Predecessor Companies adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of" and recorded a pre-tax asset impairment charge of $47.9
million related to the write-off of fixed and intangible assets on all stores
that had generated negative cash flow in 1994. Certain of these assets relate
to stores which were closed and the assets that were disposed of on a future
store closing date subsequent to October 1, 1995. These assets accounted for
$37.7 million of the asset impairment charge.
4. ACCOUNTS RECEIVABLE:
Accounts receivable consisted of the following (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
COMPANIES COMPANY
----------------- -----------------------
DECEMBER 31,
----------------- FEBRUARY 1, AUGUST 2,
1994 1995 1997 1997
-------- ------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Layaway receivables.............................................................. $ 15,904 $ 6,214 $ 6,118 $ 8,019
Trade receivables................................................................ 3,320 5,226 2,425 4,003
Other receivables................................................................ 1,918 1,206 875 312
-------- ------- -------- --------
21,142 12,646 9,418 12,334
Less:
Layaway return reserves........................................................ (12,000) (4,000) (3,365) (4,400)
Allowance for doubtful accounts................................................ (1,450) (1,028) (1,202) (443)
-------- ------- -------- --------
Total..................................................................... $ 7,692 $ 7,618 $ 4,851 $ 7,491
======== ======= ======== ========
</TABLE>
F-12
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
COMPANIES COMPANY
------------------ -----------------------
DECEMBER 31,
------------------ FEBRUARY 1, AUGUST 2,
1994 1995 1997 1997
-------- -------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Land............................................................................ $ 1,340 $ 1,340 $ 1,340 $ 1,340
Buildings and improvements...................................................... 10,799 4,693 778 786
Equipment and furniture......................................................... 99,903 74,363 15,048 16,732
Leasehold improvements.......................................................... 60,565 46,332 919 1,764
-------- -------- ------- -------
Total....................................................................... 172,607 126,728 18,085 20,622
Less: Accumulated depreciation and amortization................................. (75,391) (60,844) (994) (1,911)
-------- -------- ------- -------
Total....................................................................... $ 97,216 $ 65,884 $17,091 $18,711
======== ======== ======= =======
6. ACCRUED EXPENSES:
Accrued expenses consisted of the following (in thousands):
<CAPTION>
PREDECESSOR
COMPANIES COMPANY
------------------ -----------------------
DECEMBER 31,
------------------ FEBRUARY 1, AUGUST 2,
1994 1995 1997 1997
-------- -------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Taxes other than Federal and state income taxes................................. $ 11,843 $ 12,062 $ 7,334 $ 6,278
Salaries and compensated absences............................................... 4,667 8,158 4,131 3,027
Current portion of lease obligations for closed stores.......................... 126 8,032 2,678 2,712
Advertising..................................................................... 4,670 5,072 4,328 230
Other........................................................................... 20,196 19,299 16,046 13,836
-------- -------- ------- -------
Total....................................................................... $ 41,502 $ 52,623 $34,517 $26,083
--------------------------------------------------
======== ======== ======= =======
</TABLE>
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 was accrued annually at
10% on $55 million of the Note and was payable on the maturity date of the
Note at December 31, 2000. The remaining $0.8 million of the Note was
noninterest-bearing and was payable on the Note's maturity date. The Note was
collateralized by substantially all assets of the Company and was subordinate
to borrowings under the revolving credit agreement. The Note was repurchased
by the Company on August 18, 1997 (see Note 15).
In conjunction with the Acquisition, the Company obtained a $150 million
revolving credit agreement (the Revolver) with certain banks, which extends
through May 24, 1999 and includes a $90 million letter of credit subfacility.
The Revolver is collateralized by substantially all assets of the Company.
Interest on cash borrowings under the Revolver is at the bank reference rate
plus 0%-1.25%, or LIBOR plus 1.75%-2.75%. The interest rate is dependent upon
the amount and term of the borrowings as well as the Company's earnings before
income taxes/cash interest coverage ratio for the trailing four quarters. The
Company pays a monthly fee equal to .375% per annum on the unused amount of
the Revolver and on that portion of the
F-13
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
first $10.0 million in borrowings that bears interest at prime plus 0%-.875%.
During the twenty-six week period ended August 2, 1997 there were no cash
borrowings under the Revolver, and as of August 2, 1997, $43.9 million in
letters of credit were outstanding.
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
YEARS ENDED DECEMBER MONTHS (MAY 26,
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>
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>
F-14
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
9. CAPITAL STOCK:
Common Stock
The Company's Amended Articles of Incorporation provide that 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. On June 2, 1997, upon completion of the initial public
offering (see Note 14), all shares of all classes of common stock were
converted to a single class of common stock. After the Conversion, such shares
of common stock 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, 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
F-15
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
be nominated by a vote of a majority of the outstanding shares of common stock
held by the Employees and their Permitted Transferees (as defined in the
shareholder agreement) and, upon the vote of a majority of the outstanding
shares of common stock held by the Employees and their Permitted Transferees,
to remove or replace such directors, until the earlier of (i) the completion
of an underwritten public offering with gross proceeds of at least $20 million
or (ii) the general termination of the shareholder agreement, which
termination will be no later than May 25, 1998.
Holders of the Class A common stock and Class B common stock (including
holders of the Restricted Stock--as defined below) and all other common stock
(other than Class C common stock) will have one vote on all matters submitted
to shareholders for each share outstanding in the name of such holder on the
books of the Company. Except as required by law, the Class C common stock will
have no voting rights. Each share of common stock (including holders of the
Restricted Stock) will be entitled to share in dividends (when and if such
dividends are declared and paid) and liquidation distributions ratably with
all other shares of common stock then outstanding.
As long as shares of Class B common stock are outstanding, (i) the Board of
Directors (the Board) will consist of not more than five members, (ii) the
holders of the Class B common stock, exclusively and voting as a single class,
will be entitled, by a vote of a majority of the outstanding shares of Class B
common stock, to elect two directors to the Board (requirement is eliminated
upon the Company's completion of a $20 million or greater initial public
offering), and (iii) the holders of the Class A common stock, Class B common
stock and all other common stock (except Class C common stock), exclusively
and voting as a single class without regard to whether such common stock is
Class A common stock, Class B common stock or any other common stock (except
Class C common stock), will be entitled, by a vote of a majority of the sum of
the outstanding shares of Class A common stock, Class B common stock and all
other common stock (except Class C common stock) held by such holders, to
elect three of the directors to the Board. All the outstanding Class B and
Class C common stock was purchased by management for $.60 per share.
All shares of Class C common stock will automatically be converted into an
equal number of shares of Class B common stock without any action by any
holder thereof at such time as the number of shares of Class A common stock
over which selected shareholders shall, directly or indirectly as partners in
a partnership or a limited partnership or otherwise, have the power to vote be
reduced to less than 4,275,000 (appropriately adjusted to reflect stock
splits, dividends or combinations, reorganizations, consolidations and similar
changes hereafter effected).
As of February 1, 1997, 4,320,000, 2,925,000 and 405,000 shares of Class A,
Class B and Class C common stock, respectively, were issued and outstanding.
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 Company recorded $1,485,000 in compensation expense based on the number of
shares (198,018) earned pursuant to the Restricted Stock Agreement. See Note
15.
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
F-16
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 and as of May 3, 1997, the Company has accrued
$395,000 and $543,000, respectively, in dividends. See Note 14 for discussion
regarding the Series A Preferred exchange.
In the event of an involuntary or voluntary liquidation or dissolution of
the Company at any time, the holders of shares of Series A Preferred will be
entitled to receive out of the assets of the Company an amount equal to $1,000
per share (appropriately adjusted to reflect stock splits, dividends or
combinations, reorganizations, consolidations and similar changes hereafter
effected), plus all per-share dividends unpaid and accumulated or accrued
thereon (whether or not earned or declared) to the date of such distribution,
prior to any common stock distributions.
The Company also has authorized 9,985,000 shares of undesignated, $.01 par
preferred stock of which no shares are issued or outstanding as of February 1,
1997.
Warrants
As part of the Acquisition, the Company issued to CVS a warrant to purchase
1,350,000 Class A shares at an exercise price of $.60 per share (the CVS
Warrant). The CVS Warrant is immediately exercisable and remains exercisable
until the tenth anniversary of the date of grant.
The Company also issued to CVS a warrant to purchase 1,080,000 Class A
shares at an exercise price of $.60 per share (the Manager Warrant). The
Manager Warrant lapsed upon the repurchase of the Note on August 18, 1997. See
Note 15.
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
compensation committee which has the discretion to determine the number and
purchase price of shares subject to stock options, the term of each option,
and the time or times during its term when the option becomes exercisable. As
of August 2, 1997, the Company has granted options on 197,900 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
F-17
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the
Company's net income and earnings per share would have been reduced to the
following pro forma amounts for the period from inception (May 26, 1996) to
February 1, 1997:
<TABLE>
<S> <C> <C>
Net income (in thousands): As reported $23,906
Pro forma 23,734
Net income per common share: As reported $ 2.49
Pro forma 2.47
</TABLE>
During 1996, the Company granted 199,980 options which vest over a three
year period, no options were exercised or expired, and 17,280 options were
forfeited during the period from inception (May 26, 1996) to February 1, 1997.
The weighted average fair value of the options granted was $4.40. The fair
value of each option granted is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used: risk-free interest rate of 6.4%, no expected dividend
yields, expected life of three years, and expected volatility of 53.5%.
During the twenty-six week period ended August 2, 1997 the Company granted
26,000 options and 10,800 options were forfeited.
11. EMPLOYEE BENEFIT PLANS:
401(k) Profit Sharing Plan
The Company has a defined contribution 401(k) profit sharing plan for
eligible employees which is qualified under sections 401(a) and 401(k) of the
Internal Revenue Code of 1986. Employees are entitled to make tax-deferred
contributions of up to 15% of their eligible compensation (10% for those
employees whose compensation in the previous year exceeded $55,000). For
employees who have worked less than three years, the Company matches 25% of
contributions, up to a maximum of 4% of the employee's eligible compensation.
For employees who have worked more than three years, the Company matches 50%
of contributions up to a maximum of 4% of the employee's eligible
compensation. The Company may also, at its discretion, make a profit sharing
contribution to the 401(k) Plan for each plan year. The Company's
contributions vest after five years of service, or at age 65 regardless of
service, or upon the death of the employee.
The Predecessor Companies' contributions to the 401(k) profit sharing plan
were $0.7 million, $0.6 million, $0.6 million, $0.3 million, $1.0 million,
$0.3 million and $1.0 million for the years ended December 31, 1993, 1994 and
1995, for the five months ended May 27, 1995 and May 25, 1996, for the eight
months ended January 27, 1996 and for the seventeen weeks ended May 25, 1996,
respectively. The Company's contributions to the 401(k) profit sharing plan
were $1.1 million, $0.1 million and $0.3 million for the period from inception
(May 26, 1996) to February 1, 1997, from inception (May 26, 1996) to August 3,
1996 and for the twenty-six weeks ended August 2, 1997, respectively.
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, $2.0 million and $0.2 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, for the eight months ended January 27, 1996 and for
the seventeen weeks ended May 25, 1996.
F-18
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 ended May 27, 1995 and May 25, 1996, for
the eight months ended January 27, 1996 and for the seventeen weeks ended May
25, 1996, was 3.3%, 4.7%, 6.4%, 5.6%, 5.8%, 6.2% and 5.7%, 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, for the eight months ended January 27,
1996 and for the seventeen weeks ended May 25, 1996, were $1.3 million, $1.3
million, $1.5 million, $0.6 million, $0.5 million, $1.0 million and $0.4
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, $0.5 million and $0.2 million for the
years ended December 31, 1993, 1994 and 1995, for the five months ended May
27, 1995 and May 25, 1996, for the eight months ended January 27, 1996 and for
the seventeen weeks ended May 25, 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
YEARS ENDED DECEMBER EIGHT INCEPTION
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>
F-19
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
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 and August 2, 1997, the Company had outstanding
letters of credit of approximately $7.9 million and $43.9 million,
respectively, (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 and $0.4 million of these supplies on an
as-needed basis as of February 1, 1997 and August 2, 1997, respectively. 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, $0.9 million,
$0.4 million, $0.1 million and $0.4 million for the years ended December 31,
1994 and 1995, for the five months ended May 27, 1995 and May 25, 1996, for
the eight months ended January 27, 1996, for the period from inception (May
26, 1996) to February 1, 1997, for the seventeen weeks ended May 25, 1996, for
the period from inception (May 26, 1996) to August 3, 1996 and for the twenty-
six weeks ended August 2, 1997, respectively.
14. REVERSE STOCK SPLIT, INITIAL 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).
F-20
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On May 27, 1997, the Securities and Exchange Commission declared effective
the Company's Registration Statement on Form S-1 relating to the initial
public offering of 1,100,000 units. In addition, the Underwriter exercised its
over-allotment option to purchase 165,000 units. Each unit consisted of one
share of common stock and one redeemable warrant to purchase one share of
common stock for $13.50 per share. The Company received net proceeds of
approximately $9.5 million after payment of related underwriting discount and
offering costs. 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.
As of May 27, 1997, the holders of the 7,405 shares of Series A Preferred
exchanged their entire holdings of such shares for common stock at an exchange
rate of $12.00 per share. In connection with such exchange, the holders of the
Series A Preferred waived their rights to receive any accrued dividends in
respect of such Series A Preferred.
15. OFFERING OF SENIOR NOTES (UNAUDITED):
On August 18,1997, the Company completed a private offering of $75.0 million
of 11 1/4% Series A senior notes due 2004 (Senior Notes) to certain qualified
institutional buyers. Interest on the Senior Notes is payable semi-annually in
arrears on February 15 and August 15 of each year, commencing on February 15,
1998. The Senior Notes mature on August 15, 2004, unless previously redeemed,
and the Company is not required to make any mandatory redemption or sinking
fund payment prior to maturity. The Senior Notes are general unsecured
obligations of the Company and rank senior in right of payment to all existing
and future subordinated indebtedness of the Company and rank pari passu in
right of payment with all other current and future unsubordinated indebtedness
of the Company. The Indenture governing the Senior Notes contains numerous
operating covenants that limit the discretion of management with respect to
certain business matters, and which place significant restrictions on, among
other things, the ability of the Company to incur additional indebtedness, to
create liens or other encumbrances, to declare or pay any dividend, to make
certain payments or investments, loans and guarantees and to sell or otherwise
dispose of assets and merge or consolidate with another entity. The Company
used $56.5 million of the net proceeds from the offering to repurchase the
outstanding senior secured subordinated Note issued to CVS in connection with
the Acquisition. The balance of the net proceeds, approximately $15.6 million,
will be used for general corporate purposes, including capital expenditures
and additional store openings.
In conjunction with the offering of Senior Notes on August 18, 1997, the
remaining 881,982 shares of Restricted Stock vested. The Company will be
required to record an additional non-cash compensation charge in the quarter
ended November 1, 1997 of $8.5 million related to such shares which is equal
to the difference between the fair market value of the Restricted Stock on the
date the shares vested, which was $10.25 per share, and the original purchase
price of the Restricted Stock, which was $.60 per share. $900,000 of such
additional charge was recorded in the twenty-six weeks ended August 2, 1997.
F-21
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
INDEX TO PRO FORMA UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Pro Forma Consolidated Balance Sheet....................................... P-3
Notes to Pro Forma Consolidated Balance Sheet.............................. P-4
Pro Forma Consolidated Statements of Operations............................ P-5
Notes to Pro Forma Consolidated Statements of Operations................... P-8
</TABLE>
P-1
<PAGE>
PRO FORMA UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following pro forma unaudited consolidated financial information
consists of Pro Forma Unaudited Consolidated Statements of Operations for the
year ended February 1, 1997 and for the twenty-six weeks ended August 2, 1997
and the twenty-seven weeks ended August 3, 1996 and a Pro Forma Unaudited
Consolidated Balance Sheet as of August 2, 1997. The Pro Forma Unaudited
Consolidated Financial Statements give effect to: (i) the Restructuring and
the Acquisition accounted for under the purchase method; (ii) the initial
public offering of common stock and redeemable warrants (Units); and (iii) the
issuance of the Senior Notes (the Senior Notes Offering) and the application
of the net proceeds therefrom. The Pro Forma Unaudited Consolidated Statements
of Operations give effect to such transactions and events as if they had
occurred on January 28, 1996 (except for the Restructuring which is reflected
as of the date it occurred). The Pro Forma Unaudited Consolidated Balance
Sheet gives effect to such transactions and events as if they had occurred on
August 2, 1997.
As part of the Restructuring, the Company closed 156 stores during 1995 and
1996 and wrote off goodwill and certain other non-productive assets, recorded
certain lease obligations and adopted the provisions of SFAS No. 121 in 1995.
The Pro Forma Unaudited Consolidated Statements of Operations give effect to
certain adjustments related to the Restructuring, including: (i) elimination
of the results of operations for the portion of the 156 stores not closed
until 1996 which included only direct costs associated with the stores; and
(ii) reflection of the associated tax effects.
The Pro Forma Unaudited Consolidated 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 Financial Statements give effect to the
sale by the Company of 1,265,000 Units (including 165,000 Units issued upon
the exercise of the underwriter's over-allotment option), each Unit consisting
of one share of common stock and one redeemable warrant, in its initial public
offering consummated on June 2, 1997. The Company received net proceeds of
$9.5 million after payment of related underwriting discount and offering
costs. The Pro Forma Unaudited Consolidated Statements of Operations give
effect to the reduction in interest expense attributable to the portion of the
Revolving Credit Facility which would have been paid off with the net proceeds
of the initial public offering.
The Pro Forma Unaudited Consolidated Statements of Operations do not reflect
the nonrecurring, pre-tax gain of $6.3 million on the early extinguishment of
the CVS Note upon consummation of the Senior Notes Offering. The Pro Forma
Unaudited Consolidated Balance Sheet gives effect to this extraordinary gain,
net of tax effect, for the early repurchase of debt.
The Pro Forma Unaudited Consolidated Financial Statements and accompanying
notes should be read in conjunction with the consolidated financial statements
and notes thereto appearing elsewhere in this Prospectus. The Pro Forma
Unaudited Consolidated Financial Statements do not purport to represent what
the results of operations of Wilsons would actually have been if the
aforementioned transactions or events had occurred on January 28, 1996 or on
August 2, 1997 or at any future date.
P-2
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF AUGUST 2, 1997
(IN MILLIONS)
<TABLE>
<CAPTION>
PRO FORMA
OFFERING
COMPANY ADJUSTMENTS PRO FORMA
--------------------------------------------
<S> <C> <C> <C>
A S S E T S
-----------
Current Assets:
Cash and cash equivalents.......$ 24.1 $ 72.1 (/1/) $ 39.8
(56.4)(/2/)
Accounts receivable, net........ 7.5 -- 7.5
Inventories..................... 87.2 -- 87.2
Prepaid expenses................ 0.8 -- 0.8
--------- ----------- ----------
Total current assets.......... 119.6 15.7 135.3
Property and equipment, net....... 18.7 -- 18.7
Deferred financing costs, net of
accumulated amortization......... 1.2 2.9 (/1/) 4.1
Deferred income taxes............. 0.5 -- 0.5
--------- ----------- ----------
$ 140.0 $ 18.6 $ 158.6
========= =========== ==========
L I A B I L I T I E S A N D S H A R E H O L D E R S' E Q U I T Y
- ----------------------------------------------------------------
Current liabilities:
Accounts payable................$ 12.7 $ -- $ 12.7
Accrued expenses................ 26.1 (0.9)(/4/) 25.2
Income taxes payable............ 0.2 2.5 (/3/) 2.7
Deferred income taxes........... 4.3 -- 4.3
--------- ----------- ----------
Total current liabilities..... 43.3 1.6 44.9
--------- ----------- ----------
Long-term debt:
Due to CVS...................... 61.3 (61.3)(/2/) --
Accrued interest on CVS Note.... 1.2 (1.2)(/2/) --
Senior Notes due 2004........... -- 75.0 (/1/) 75.0
--------- ----------- ----------
Total long-term debt.......... 62.5 12.5 75.0
Other long-term liabilities....... 0.8 -- 0.8
--------- ----------- ----------
Shareholders' equity:
Common stock, $.01 par value;
45,000,000 shares authorized,
9,532,083 shares issued and
outstanding.................... 0.1 -- 0.1
Additional paid-in capital...... 29.3 8.5 (/4/) 37.8
Retained earnings (deficit)..... 4.1 3.8 (/3/) 0.1
(7.8)(/4/)
Cumulative translation
adjustment..................... (0.1) -- (0.1)
--------- ----------- ----------
Total shareholders' equity.... 33.4 4.5 37.9
--------- ----------- ----------
$ 140.0 $ 18.6 $ 158.6
========= =========== ==========
</TABLE>
P-3
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET
AUGUST 2, 1997
(1) Reflects net proceeds received from the Senior Notes Offering and before
estimated use of proceeds. Individual adjustments consist of (in
millions):
<TABLE>
<S> <C>
Senior Notes offered hereby........................................... $75.0
Deferred financing fees and Offering costs............................ (2.9)
-----
$72.1
=====
</TABLE>
(2) Reflects use of net proceeds from the Senior Notes Offering. Individual
adjustments consist of (in millions):
<TABLE>
<S> <C>
Repayment of CVS Note:
Principal balance.................................................. $(61.3)
Accrued interest................................................... (1.4)
Tender offer discount.............................................. 6.3
------
$(56.4)
======
</TABLE>
(3) Reflects the extraordinary gain on the early extinguishment of debt, net
of tax (assuming a 40% effective tax rate). These net charges will be
reflected in the Company's consolidated statement of operations as an
extraordinary item when the Senior Notes Offering is consummated. The
components of the gain consist of (in millions):
<TABLE>
<S> <C>
Tender offer discount.................................................. $6.3
Less: income tax effect................................................ 2.5
----
Net effect on retained earnings...................................... $3.8
====
</TABLE>
(4) Reflects the compensation expense relating to the remaining shares of the
Restricted Stock vesting upon consummation of the Senior Notes Offering.
The compensation charge is computed based on the fair market value of the
Company's common stock (the fair market value as of August 18, 1997 being
$10.25) and the original purchase price of $0.60 per share. The total
compensation charge for the vesting of the remaining shares of Restricted
Stock as of August 2, 1997 is approximately $8.5 million. $900,000 of such
charge was recorded in the twenty-six weeks ended August 2, 1997.
P-4
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED FEBRUARY 1, 1997
(IN MILLIONS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA FOR
THE
PRO FORMA RESTRUCTURING,
PRO FORMA INITIAL ACQUISITION
RESTRUCTURING AND PUBLIC AND INITIAL PRO FORMA
COMBINED ACQUISITION OFFERING PUBLIC OFFERING
COMPANIES (/1/) ADJUSTMENTS (/2/) ADJUSTMENTS OFFERING ADJUSTMENTS
--------------- ----------------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Net sales................... $ 424.8 $ (2.2) $ -- $ 422.6 $ --
Costs and expenses:
Cost of goods sold, buying
and occupancy costs...... 286.9 (1.7) -- 285.2 --
Selling, general and
administrative expenses.. 103.2 (0.8) -- 102.4 --
Depreciation and
amortization............. 4.8 (3.4)(/3/) -- 1.4 --
Restricted stock
compensation expense..... 1.5 -- -- 1.5 8.5 (/7/)
--------- ---------- -------- ---------- --------
Income (loss) from
operations............. 28.4 3.7 -- 32.1 (8.5)
Interest expense, net....... 6.5 1.3 (/4/) (0.3)(/6/) 7.5 2.8 (/8/)
--------- ---------- -------- ---------- --------
Income (loss) before
income taxes........... 21.9 2.4 0.3 24.6 (11.3)
Income tax provision
(benefit).................. 9.0 0.7 (/5/) 0.1 (/5/) 9.8 (0.5)(/5/)
--------- ---------- -------- ---------- --------
Net income (loss)....... $ 12.9 $ 1.7 $ 0.2 $ 14.8 $ (10.8)
========= ========== ======== ========== ========
Net income per common
share......................
Weighted average common
shares outstanding.........
OTHER DATA:
Adjusted EBITDA (/1//0/).. $ 34.7 $ 0.3 $ -- $ 35.0 $ --
<CAPTION>
PRO FORMA
----------------
<S> <C>
Net sales................... $ 422.6
Costs and expenses:
Cost of goods sold, buying
and occupancy costs...... 285.2
Selling, general and
administrative expenses.. 102.4
Depreciation and
amortization............. 1.4
Restricted stock
compensation expense..... 10.0
----------------
Income (loss) from
operations............. 23.6
Interest expense, net....... 10.3
----------------
Income (loss) before
income taxes........... 13.3
Income tax provision
(benefit).................. 9.3
----------------
Net income (loss)....... $ 4.0
================
Net income per common
share...................... $ 0.37
================
Weighted average common
shares outstanding......... 10,867,826(/9/)
================
OTHER DATA:
Adjusted EBITDA (/1//0/).. $ 35.0
</TABLE>
P-5
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE TWENTY-SIX WEEKS ENDED AUGUST 2, 1997
(IN MILLIONS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
FOR THE
PRO FORMA PRO FORMA RESTRUCTURING,
RESTRUCTURING INITIAL ACQUISITION
AND PUBLIC AND INITIAL PRO FORMA
ACQUISITION OFFERING PUBLIC OFFERING
COMPANY ADJUSTMENTS(/2/) ADJUSTMENTS OFFERING ADJUSTMENTS PRO FORMA
------- ---------------- ----------- -------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 93.4 $ -- $ -- $ 93.4 $ -- $ 93.4
Costs and expenses:
Cost of goods sold,
buying and occupancy
costs................ 84.2 -- -- 84.2 -- 84.2
Selling, general and
administrative
expenses............. 36.5 -- -- 36.5 -- 36.5
Depreciation and
amortization......... 0.9 -- -- 0.9 -- 0.9
Restricted stock
compensation
expense.............. 0.9 -- -- 0.9 (0.9)(/7/) --
------ --------- -------- ---------- -------- ----------
Income (loss) from
operations......... (29.1) -- -- (29.1) 0.9 (28.2)
Interest expense, net... 1.9 -- -- 1.9 1.5 (/8/) 3.4
------ --------- -------- ---------- -------- ----------
Loss before income
taxes.............. (31.0) -- -- (31.0) (0.6) (31.6)
Income tax benefit...... (11.2) -- -- (11.2) (1.4)(/5/) (12.6)
------ --------- -------- ---------- -------- ----------
Net income (loss)... $(19.8) $ -- $ -- $ (19.8) $ 0.8 $ (19.0)
====== ========= ======== ========== ======== ==========
Net loss per common
share.................. $ (1.74)
==========
Weighted average common
shares outstanding..... 10,893,709 (/9/)
==========
OTHER DATA:
Adjusted EBITDA
(/1//0/)............. $(27.3) $ -- $ -- $ (27.3) $ -- $ (27.3)
</TABLE>
P-6
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE TWENTY-SEVEN WEEKS ENDED AUGUST 3, 1996
(IN MILLIONS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
FOR THE
PRO FORMA RESTRUCTURING,
PRO FORMA INITIAL ACQUISITION
RESTRUCTURING AND PUBLIC AND INITIAL PRO FORMA
PREDECESSOR ACQUISITION OFFERING PUBLIC OFFERING
COMPANIES ADJUSTMENTS (/2/) ADJUSTMENTS OFFERING ADJUSTMENTS PRO FORMA
----------- ----------------- ----------- -------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $ 108.2 $ (2.2) $ -- $ 106.0 $ -- $ 106.0
Costs and expenses:
Cost of goods sold,
buying and occupancy
costs................ 90.9 (1.7) -- 89.2 -- 89.2
Selling, general and
administrative
expenses............. 41.3 (0.8) -- 40.5 -- 40.5
Depreciation and
amortization......... 3.8 (3.4)(/3/) -- 0.4 -- 0.4
Restricted stock
compensation
expense.............. -- -- -- -- 10.0 (/7/) 10.0
-------- ---------- -------- ---------- -------- ----------
Income (loss) from
operations......... (27.8) 3.7 -- (24.1) (10.0) (34.1)
Interest expense, net... 2.4 1.0(/4/) -- 3.4 1.5 (/8/) 4.9
-------- ---------- -------- ---------- -------- ----------
Income (loss) before
income taxes....... (30.2) 2.7 -- (27.5) (11.5) (39.0)
Income tax provision
(benefit).............. (11.1) 0.8(/5/) -- (10.3) (1.3)(/5/) (11.6)
-------- ---------- -------- ---------- -------- ----------
Net income (loss)... $ (19.1) $ 1.9 $ -- $ (17.2) $ (10.2) $ (27.4)
======== ========== ======== ========== ======== ==========
Net loss per common
share.................. $ (2.52)
==========
Weighted average common
shares outstanding..... 10,893,709(/9/)
==========
OTHER DATA:
Adjusted
EBITDA(/1//0/)....... $ (24.0) $ 0.3 $ -- $ (23.7) $ -- $ (23.7)
</TABLE>
P-7
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS YEAR ENDED FEBRUARY
1, 1997 AND THE TWENTY-SIX WEEKS ENDED AUGUST 2, 1997 AND TWENTY-SEVEN WEEKS
ENDED AUGUST 3, 1996
(1) Reflects the combination of results of operations of the Predecessor
Companies for the period from January 28, 1996 to May 25, 1996 and the
results of operations of the Company for the period from inception (May
26, 1996) to February 1, 1997.
(2) Reflects the elimination of the results of operations for the portion of
the 156 stores not closed until 1996 including all direct costs
associated with the stores. No corporate overhead or allocated selling
expenses were eliminated.
(3) Reflects the reduction of depreciation expense due to the write-down of
depreciable property to $12.1 million through the application of purchase
accounting.
(4) 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 $85.0 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 CVS Note from
the Acquisition financing, the interest rate on the Senior Credit
Facility, and the associated amortization for the related deferred
financing costs.
<TABLE>
<CAPTION>
YEAR ENDED TWENTY-SEVEN WEEKS
FEBRUARY 1, ENDED AUGUST 3,
1997 1996
----------- ------------------
(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 Senior Credit Facility at an
average rate of 9.5%..................... $ (4.9) $ (2.1)
Additional interest expense related to the
CVS Note................................. 5.5 2.8
Amortization of deferred financing costs.. .7 0.3
-------- ----------
$ 1.3 $ 1.0
======== ==========
</TABLE>
(5) Represents adjustments to reconcile income taxes to an effective income
tax rate of 40% after the effect of the nondeductible restricted stock
compensation expense, where applicable.
(6) Reflects the elimination of the interest expense on the portion of the
Senior Credit Facility which would have been paid off with the net
proceeds of the initial public offering.
(7) Reflects the compensation expense relating to the remaining shares of the
Restricted Stock vesting upon consummation of the Senior Notes Offering.
The compensation charge is computed based on the fair market value of the
Company's common stock (the fair market value as of August 18, 1997 at
$10.25) and the original purchase price of $0.60 per share. The total
compensation charge for the vesting of all shares of Restricted Stock is
approximately $10.0 million. Also reflects the elimination of the
Restricted Stock compensation expense in the twenty-six weeks ended
August 2, 1997 as such vesting is assumed to have occurred on January 28,
1996.
P-8
<PAGE>
(8) Reflects the change in interest expense related to the Offering (in
millions):
<TABLE>
<CAPTION>
TWENTY-SIX TWENTY-SEVEN
PRINCIPAL AMOUNT YEAR ENDED WEEKS ENDED WEEKS ENDED
OF DEBT FEBRUARY 1, 1997 AUGUST 2, 1997 AUGUST 3, 1996
---------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C>
Pro forma interest ex-
pense:
Senior Notes at an
assumed
rate of 11 1/4%...... $ 75.0 $ 8.4 $ 4.2 $ 4.2
Senior Credit
Facility............. 0.5 -- --
Letters of credit..... 0.5 0.2 0.2
Other................. 0.5 0.3 0.3
----------- -------- ---------
Cash interest
expense.............. 9.9 4.7 4.7
Amortization of
deferred financing
costs................ 1.1 0.5 0.5
----------- -------- ---------
Total pro forma interest
expense................ 11.0 5.2 5.2
Less: historical
interest............... 8.2 3.7 3.7
----------- -------- ---------
Total pro forma interest
adjustment............. $ 2.8 $ 1.5 $ 1.5
=========== ======== =========
</TABLE>
(9) Includes the 1,265,000 shares of common stock sold in the initial public
offering and 617,083 shares of common stock issued upon the Series A
Preferred exchange.
(10) EBITDA represents income (loss) from operations, plus depreciation and
amortization. Adjusted EBITDA represents EBITDA plus Restricted Stock
compensation expense and Restructuring and asset impairment charges.
EBITDA and Adjusted EBITDA are not intended to represent cash flow from
operations as defined by GAAP and should not be considered as an
alternative to cash flow or as a measure of liquidity or as an
alternative to net earnings as indicative of operating performance.
Adjusted EBITDA is included herein because management believes that
certain investors find it a useful tool for measuring the Company's
ability to service its debt.
P-9
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED IN CONNECTION
WITH THIS EXCHANGE OFFER TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTA-
TIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER 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 SOLICITATION 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 DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CURRENT 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....................................................... 5
Risk Factors............................................................. 19
The Exchange Offer....................................................... 26
The Acquisition.......................................................... 34
Use of Proceeds.......................................................... 34
Capitalization........................................................... 35
Selected Historical and Pro Forma Consolidated Financial and Other Data.. 36
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 39
Business................................................................. 51
Management............................................................... 63
Security Ownership of Certain Beneficial Owners and Management........... 68
Certain Transactions..................................................... 69
Description of Senior Credit Facility.................................... 74
Certain Federal Income Tax Considerations................................ 75
Description of Senior Notes.............................................. 76
Plan of Distribution..................................................... 101
Legal Matters............................................................ 102
Experts.................................................................. 102
Available Information.................................................... 102
Index to Consolidated Financial Statements............................... F-1
Index to Pro Forma Unaudited Consolidated Financial Statements........... P-1
</TABLE>
UNTIL , 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECU-
RITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DE-
LIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UN-
SOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
LOGO
$75,000,000
OFFER TO EXCHANGE ITS
11 1/4% SERIES B SENIOR NOTESDUE 2004
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, FOR
ANY AND ALL OF ITS OUTSTANDING 11 1/4% SERIES A SENIOR NOTES DUE 2004
-------------------
PROSPECTUS
-------------------
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Article V of the Company's By-laws, the Company indemnifies its
directors and officers to the extent permitted by Minnesota Statutes Section
302A.521. Section 302A.521 requires the Company to indemnify a person made or
threatened to be made a party to a proceeding, by reason of the former or
present official capacity of the person with respect to the Company, against
judgments, penalties, fines, including without limitation, excise taxes
assessed against the person with respect to an employee benefit plan,
settlement, and reasonable expenses, including attorneys' fees and
disbursements, if, with respect to the acts or omissions of the person
complained of in the proceeding, such person (1) has not been indemnified by
another organization or employee benefit plan for the same judgments,
penalties, fines, including without limitation excise taxes assessed against
the person with respect to an employee benefit plan, settlements, and
reasonable expenses, including attorneys' fees and disbursements, incurred by
the person in connection with the proceeding with respect to the same acts or
omissions; (2) acted in good faith; (3) received no improper personal benefit,
and statutory procedure has been followed in the case of any conflict of
interest by a director; (4) in the case of a criminal proceeding, had no
reasonable cause to believe the conduct was unlawful; and (5) in the case of
acts or omissions occurring in the person's performance in the official
capacity of director or, for a person not a director, in the official capacity
of officer, committee member, employee or agent, reasonably believed that the
conduct was in the best interests of the Company, or, in the case of
performance by a director, officer, employee or agent of the Company as a
director, officer, partner, trustee, employee or agent of another organization
or employee benefit plan, reasonably believed that the conduct was not opposed
to the best interests of the Company. In addition, Section 302A.521, subd. 3
requires payment by the Company, upon written request, of reasonable expenses
in advance of final disposition in certain instances. A decision as to
required indemnification is made by a majority of the disinterested Board of
Directors present at a meeting at which a disinterested quorum is present, or
by a designated committee of disinterested directors, by special legal
counsel, by the disinterested shareholders, or by a court.
The Company also maintains a director and officer insurance policy to cover
the Company, its directors and certain of its officers against certain
liabilities.
The directors and officers of the Guarantors are provided broad
indemnification by the laws of their respective states of incorporation, their
corporate charters or their By-laws. Such directors and officers are also
covered by the director and officer insurance policy referred to above.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S> <C>
2.1 Sale Agreement dated as of May 24, 1996 by and among CVS
New York, Inc., Wilsons Center, Inc., and Wilsons The
Leather Experts Inc. (1)
3.1 Amended Articles of Incorporation of the Registrant dated
May 24, 1996. (1)
3.2 Restated By-laws of the Registrant. (2)
3.3 Articles of Amendment of Amended Articles of Incorporation
of the Registrant dated October 11, 1997. (3)
3.4 Articles of Incorporation of Wilsons Leather Holdings
Inc.*
3.5 By-laws of Wilsons Leather Holdings Inc.*
3.6 Articles of Incorporation, and all amendments thereto, of
Wilsons Center, Inc.*
3.7 By-laws of Wilsons Center, Inc.*
3.8 Articles of Incorporation, and all amendments thereto, of
Rosedale Wilsons, Inc.*
3.9 Amended and Restated By-laws of Rosedale Wilsons, Inc.*
3.10 Articles of Incorporation, and all amendments thereto, of
River Hills Wilsons, Inc.*
3.11 Amended and Restated By-laws of River Hills Wilsons, Inc.*
3.12 Certificate of Incorporation, and all amendments thereto,
of Bermans The Leather Experts Inc.*
3.13 Amended and Restated By-laws of Bermans The Leather Ex-
perts Inc.*
3.14 Articles of Incorporation, and all amendments thereto, of
Wilsons House of Suede, Inc.*
3.15 Amended and Restated Bylaws of Wilsons House of Suede,
Inc.*
3.16 Articles of Incorporation of Wilsons Tannery West, Inc.*
3.17 Amended and Restated Bylaws of Wilsons Tannery West, Inc.*
3.18 Articles of Incorporation, and all amendments thereto, of
Wilsons Leather of Alabama Inc.*
3.19 Amended and Restated Bylaws of Wilsons Leather of Alabama
Inc.*
3.20 Certificate of Incorporation, and all amendments thereto,
of Wilsons Leather of Connecticut Inc.*
3.21 Amended and Restated Bylaws of Wilsons Leather of Connect-
icut Inc.*
3.22 Articles of Incorporation, and all amendments thereto, of
Wilsons Leather of Florida Inc.*
3.23 Amended and Restated Bylaws of Wilsons Leather of Florida
Inc.*
3.24 Articles of Incorporation, and all amendments thereto, of
Wilsons Leather of Georgia Inc.*
3.25 Amended and Restated Bylaws of Wilsons Leather of Georgia
Inc.*
3.26 Articles of Incorporation, and all amendments thereto, of
Wilsons Leather of Indiana Inc.*
3.27 Amended and Restated Bylaws of Wilsons Leather of Indiana
Inc.*
3.28 Articles of Incorporation, and all amendments thereto, of
Wilsons Leather of Iowa Inc.*
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S> <C>
3.29 Amended and Restated Bylaws of Wilsons Leather of Iowa
Inc.*
3.30 Articles of Incorporation, and all amendments thereto, of
Wilsons Leather of Louisiana Inc.*
3.31 Amended and Restated Bylaws of Wilsons Leather of Louisi-
ana Inc.*
3.32 Articles of Incorporation, and all amendments thereto, of
Wilsons Leather of Maryland Inc.*
3.33 Amended and Restated Bylaws of Wilsons Leather of Maryland
Inc.*
3.34 Articles of Organization, and all amendments thereto, of
Wilsons Leather of Massachusetts Inc.*
3.35 Amended and Restated Bylaws of Wilsons Leather of Massa-
chusetts Inc.*
3.36 Articles of Incorporation, and all amendments thereto, of
Wilsons Leather of Michigan Inc.*
3.37 Amended and Restated Bylaws of Wilsons Leather of Michigan
Inc.*
3.38 Certificate of Incorporation, and all amendments thereto,
of Wilsons Leather of New Jersey Inc.*
3.39 Amended and Restated Bylaws of Wilsons Leather of New Jer-
sey Inc.*
3.40 Certificate of Incorporation, and all amendments thereto,
of Wilsons Leather of New York Inc.*
3.41 Amended and Restated Bylaws of Wilsons Leather of New York
Inc.*
3.42 Articles of Incorporation, and all amendments thereto, of
Wilsons Leather of North Carolina Inc.*
3.43 Amended and Restated Bylaws of Wilsons Leather of North
Carolina Inc.*
3.44 Articles of Incorporation, and all amendments thereto, of
Wilsons Leather of Ohio Inc.*
3.45 Amended and Restated Regulations of Wilsons Leather of
Ohio Inc.*
3.46 Articles of Incorporation, and all amendments thereto, of
Wilsons Leather of Pennsylvania Inc.*
3.47 Amended and Restated Bylaws of Wilsons Leather of Pennsyl-
vania Inc.*
3.48 Articles of Incorporation, and all amendments thereto, of
Wilsons Leather of Rhode Island Inc.*
3.49 Amended and Restated Bylaws of Wilsons Leather of Rhode
Island Inc.*
3.50 Charter, and all amendments thereto, of Wilsons Leather of
Tennessee Inc.*
3.51 Amended and Restated Bylaws of Wilsons Leather of Tennes-
see Inc.*
3.52 Articles of Incorporation, and all amendments thereto, of
Wilsons Leather of Texas Inc.*
3.53 Amended and Restated Bylaws of Wilsons Leather of Texas
Inc.*
3.54 Articles of Incorporation, and all amendments thereto, of
Wilsons Leather of Virginia Inc.*
3.55 Amended and Restated Bylaws of Wilsons Leather of Virginia
Inc.*
3.56 Articles of Incorporation, and all amendments thereto, of
Wilsons Leather of West Virginia Inc.*
3.57 Amended and Restated Bylaws of Wilsons Leather of West
Virginia Inc.*
3.58 Articles of Incorporation, and all amendments thereto, of
Wilsons Leather of Wisconsin Inc.*
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S> <C>
3.59 Amended and Restated Bylaws of Wilsons Leather of Wiscon-
sin Inc.*
3.60 Articles of Incorporation, and all amendments thereto, of
Wilsons Leather of Arkansas Inc.*
3.61 Amended and Restated Bylaws of Wilsons Leather of Arkansas
Inc.*
3.62 Certificate of Incorporation, and all amendments thereto,
of Wilsons Leather of Delaware Inc.*
3.63 Amended and Restated By-laws of Wilsons Leather of Dela-
ware Inc.*
3.64 Articles of Incorporation of Wilsons Leather of Missis-
sippi Inc.*
3.65 By-laws of Wilsons Leather of Mississippi Inc.*
3.66 Articles of Incorporation, and all amendments thereto, of
Wilsons Leather of Missouri Inc.*
3.67 Amended and Restated Bylaws of Wilsons Leather of Missouri
Inc.*
3.68 Articles of Incorporation, and all amendments thereto, of
Wilsons Leather of South Carolina Inc.*
3.69 Amended and Restated Bylaws of Wilsons Leather of South
Carolina Inc.*
3.70 Articles of Association, and all amendments thereto, of
Wilsons Leather of Vermont Inc.*
3.71 Amended and Restated Bylaws of Wilsons Leather of Vermont
Inc.*
3.72 Articles of Incorporation of Wilsons International Inc.*
3.73 By-laws of Wilsons International Inc.*
4.1 Specimen of Common Stock certificate. (4)
4.2 Warrant No. 1 issued to CVS New York, Inc. for the Pur-
chase of 1,350,000 shares of Common Stock of Wilsons The
Leather Experts Inc., dated May 25, 1996. (1)
4.3 Indenture dated as of August 18, 1997, by and among
Wilsons The Leather Experts Inc., the other corporations
listed on the signature pages thereof, and Norwest Bank
Minnesota, National Association, including Specimen Cer-
tificate of 11% Series A Senior Notes due 2004 (the "Pri-
vate Notes") and Specimen Certificate of 11% Series B Se-
nior Notes due 2004 (the "Exchange Notes"). (5)
4.4 Underwriter Warrants.*
4.5 Shareholder Agreement dated as of May 25, 1996 among
Leather Investors Limited Partnership I, Leather Invest-
ors Limited Partnership II, the Other Investors Named on
the Signature Pages thereto and Wilsons The Leather Ex-
perts Inc. (1)
4.6 Amendment to the Shareholder Agreement among Leather In-
vestors Limited Partnership I, Leather Investors Limited
Partnership II, the Other Investors Named on the Signa-
ture Pages thereto and Wilsons The Leather Experts Inc.
(1)
4.7 Amendment to the Shareholder Agreement among Leather In-
vestors Limited Partnership I, Leather Investors Limited
Partnership II, the Other Investors Named on the Signa-
ture Pages thereto and Wilsons The Leather Experts Inc.
(6)
4.8 Registration Rights Agreement dated as of May 25, 1996, by
and among CVS New York, Inc., Wilsons The Leather Experts
Inc., the Managers Listed on the Signature Pages thereto,
Leather Investors Limited Partnership I and the Partners
Listed on the Signature Pages thereto. (1)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S> <C>
4.10 Redeemable Warrant Agreement, including form of Redeemable
Warrant Certificate.*
4.11 Amendment to the Shareholder Agreement among Leather In-
vestors Limited Partnership I, Leather Investors Limited
Partnership II, the Other Investors Named on the Signa-
ture Pages thereto and Wilsons The Leather Experts Inc.*
4.12 Purchase Agreement dated as of August 14, 1997, by and
among Wilsons The Leather Experts Inc., the Subsidiary
Guarantors party thereto, and BancAmerica Securities,
Inc. (7)
4.13 Registration Rights Agreement dated as of August 18, 1997
by and among Wilsons The Leather Experts Inc., the Sub-
sidiary Guarantors party thereto, and BancAmerica Securi-
ties, Inc. (8)
5.1 Opinion of Faegre & Benson LLP.*
8.1 Opinion of Faegre & Benson LLP regarding Federal Income
Tax Consequences.*
10.1 Parent Guaranty dated as of May 25, 1996, by Wilsons The
Leather Experts Inc., Wilsons Center, Inc., Rosedale
Wilsons, Inc. and River Hills Wilsons, Inc. in favor of
General Electric Capital Corporation. (9)
10.2 Wilsons The Leather Experts Inc. Executive and Key Manage-
ment Incentive Plan. (1)
10.3 Wilsons The Leather Experts Inc. 401(k) Plan. (1)
10.4 Employment Agreement dated as of May 25, 1996 between
Wilsons The Leather Experts Inc. and Joel N. Waller. (1)
10.5 Employment Agreement dated as of May 25, 1996 between
Wilsons The Leather Experts Inc. and David L. Rogers. (1)
10.6 Credit Agreement dated as of May 25, 1996 among Wilsons
Leather Holdings Inc., as Borrower, the Lenders signatory
thereto from time to time, as Lenders, and General Elec-
tric Capital Corporation, as Agent, Lender and Swing Line
Lender. (1)
10.7 Security Agreement dated as of May 25, 1996 by Wilsons
Leather Holdings Inc. and the other grantors listed on
the signature pages thereto, in favor of General Electric
Capital Corporation, in its capacity as Agent for Lend-
ers. (1)
10.8 Security Agreement dated as of May 25, 1996 by Wilsons
Leather Holdings Inc. and the other grantors listed on
the signature pages thereto, in favor of CVS New York,
Inc. (1)
10.9 Store Guarantors' Guaranty dated as of May 25, 1996, by
Bermans The Leather Experts, Inc., Wilsons House of
Suede, Inc., Wilsons Tannery West, Inc., the Georgetown
Subsidiaries that are signatories thereto and the Indi-
vidual Store Subsidiaries that are signatories thereto,
in favor of General Electric Capital Corporation. (10)
10.10 Wilsons The Leather Experts Inc. Amended 1996 Stock Option
Plan. (4)
10.11 Amendment No. 1 to Credit Agreement. (4)
10.12 Amendment No. 2 to Credit Agreement. (4)
10.13 Amendment No. 3 to Credit Agreement. (11)
10.14 Amendment No. 1 to Security Agreement. (12)
10.15 Stock Exchange Agreement. (13)
10.16 Pledge Agreement, dated as of May 25, 1996, between
Wilsons The Leather Experts Inc. and CVS New York, Inc.
(14)
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S> <C>
10.17 Pledge Agreement, dated as of May 25, 1996, between
Wilsons Center, Inc. and CVS New York, Inc. (14)
10.18 Pledge Agreement, dated as of May 25, 1996, between
Rosedale Wilsons, Inc. and CVS New York, Inc. (14)
10.19 Pledge Agreement, dated as of May 25, 1996, between River
Hills Wilsons, Inc. and CVS New York, Inc. (14)
10.20 Amendment No. 1 to Pledge Agreement dated as of December
19, 1996, between River Hills Wilsons, Inc. and CVS New
York, Inc. (14)
10.21 Pledge Agreement, dated as of May 25, 1996, between
Wilsons The Leather Experts Inc. and General Electric
Capital Corporation, individually and as agent for the
lenders signatory to the Credit Agreement. (14)
10.22 Pledge Agreement, dated as of May 25, 1996, between
Wilsons Center, Inc. and General Electric Capital Corpo-
ration, individually and as agent for the lenders signa-
tory to the Credit Agreement. (14)
10.23 Pledge Agreement, dated as of May 25, 1996, between
Rosedale Wilsons, Inc. and General Electric Capital Cor-
poration, individually and as agent for the lenders sig-
natory to the Credit Agreement. (14)
10.24 Pledge Agreement, dated as of May 25, 1996, between River
Hills Wilsons, Inc. and General Electric Capital Corpora-
tion, individually and as agent for the lenders signatory
to the Credit Agreement. (14)
10.25 Amendment No. 4 to Credit Agreement. (15)
10.26 Repurchase Agreement dated as of August 13, 1997, by and
between Wilsons The Leather Experts Inc. and CVS New
York, Inc. (16)
10.27 Amendment No. 2 to Pledge Agreement dated as of July 31,
1997, between River Hills Wilsons, Inc. and General Elec-
tric Capital Corporation. (17)
10.28 Joinder Agreement dated as of July 31, 1997, by and be-
tween Wilsons International Inc. and General Electric
Capital Corporation. (18)
10.29 Reaffirmation of Guaranty dated as of July 31, 1997, by
Wilsons The Leather Experts Inc., Wilsons Center, Inc.,
Rosedale Wilsons, Inc. and River Hills Wilsons, Inc., in
favor of General Electric Capital Corporation. (19)
11.1 Computation of per share loss. (20)
12.1 Computation of ratios.*
21.1 Subsidiaries of the Company.*
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of KPMG Peat Marwick LLP.
23.3 Consent of Faegre & Benson LLP (included in Exhibits No.
5.1 and 8.1 to the Registration Statement).*
24.1 Powers of Attorney of officers and directors of the Compa-
ny.*
24.2 Powers of Attorney of officers and directors of the Guar-
antors.*
25.1 Statement of Eligibility of Trustee.*
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S> <C>
27.1 Financial Data Schedule. (20)
99.1 Letter of Transmittal and related documents to be used in
conjunction with the Exchange Offer.*
99.2 Notice of Guaranteed Delivery.*
99.3 Guidelines For Certification of Taxpayer Identification
Number on Substitute Form W-9.*
99.4 Letter to Brokers, Dealers, Commercial Banks, Trust Compa-
nies and other Nominees.*
99.5 Letter to Clients.*
</TABLE>
- --------
Share figures above have been adjusted for the 0.9-for-1 reverse stock
split that was effected on October 11, 1996.
* Previously filed as an Exhibit to this Registration Statement.
(1) Incorporated by reference to the same numbered exhibit to the Company's
Registration Statement on Form S-1 (333-13967) filed with the Securities
and Exchange Commission (the "Commission") on October 11, 1996.
(2) Incorporated by reference to Exhibit No. 3.4 to Amendment No. 1 to the
Company's Registration Statement on Form S-1 (333-13967) filed with the
Commission on December 24, 1996.
(3) Incorporated by reference to Exhibit No. 3.5 to Amendment No. 2 to the
Company's Registration Statement on Form S-1 (333-13967) filed with the
Commission on April 18, 1997.
(4) Incorporated by reference to the same numbered exhibit to Amendment No. 1
to the Company's Registration Statement on Form S-1 (333-13967) filed
with the Commission on October 11, 1996.
(5) Incorporated by reference to Exhibit 10.3 to the Company's Report on Form
10-Q for the quarter ended August 2, 1997 filed with the Commission.
(6) Incorporated by reference to Exhibit 4.9 to Amendment No. 2 to the
Company's Registration Statement on Form S-1 (333-13967) filed with the
Commission on April 18, 1997.
(7) Incorporated by reference to Exhibit 10.4 to the Company's Report on Form
10-Q for the quarter ended August 2, 1997 filed with the Commission.
(8) Incorporated by reference to Exhibit 10.5 to the Company's Report on Form
10-Q for the quarter ended August 2, 1997 filed with the Commission.
(9) Incorporated by reference to Exhibit 10.8 to the Company's Report on Form
10-Q for the quarter ended August 2, 1997 filed with the Commission.
(10) Incorporated by reference to Exhibit 10.10 to the Company's Report on
Form 10-Q for the quarter ended August 2, 1997 filed with the Commission.
(11) Incorporated by reference to Exhibit 10.1 to the Company's Report on Form
10-Q for the quarter ended May 3, 1997 filed with the Commission.
(12) Incorporated by reference to the same numbered exhibit to Amendment No. 2
to the Company's Registration Statement on Form S-1 (333-13967) filed
with the Commission on April 18, 1997.
(13) Incorporated by reference to Exhibit 10.2 to the Company's Report on Form
10-Q for the quarter ended May 3, 1997 filed with the Commission.
(14) Incorporated by reference to the same numbered exhibit to Amendment No. 4
to the Company's Registration Statement on Form S-1 (333-13967) filed
with the Commission on May 27, 1997.
(15) Incorporated by reference to Exhibit 10.1 to the Company's Report on Form
10-Q for the quarter ended August 2, 1997 filed with the Commission.
(16) Incorporated by reference to Exhibit 10.2 to the Company's Report on Form
10-Q for the quarter ended August 2, 1997 filed with the Commission.
II-7
<PAGE>
(17) Incorporated by reference to Exhibit 10.6 to the Company's Report on Form
10-Q for the quarter ended August 2, 1997 filed with the Commission.
(18) Incorporated by reference to Exhibit 10.7 to the Company's Report on Form
10-Q for the quarter ended August 2, 1997 filed with the Commission.
(19) Incorporated by reference to Exhibit 10.9 to the Company's Report on Form
10-Q for the quarter ended August 2, 1997 filed with the Commission.
(20) Incorporated by reference to the same numbered exhibit to the Company's
Report on Form 10-Q for the quarter ended August 2, 1997 filed with the
Commission.
(B) FINANCIAL STATEMENT SCHEDULES
None required.
(C) REPORTS, OPINIONS OR APPRAISALS
None required.
ITEM 22. UNDERTAKINGS
The undersigned Registrants hereby undertake:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933, (ii)
to reflect in the prospectus any facts or events arising after the
effective date of this Registration Statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement, and (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the
Registration Statement or any material change to such information in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrants pursuant to the foregoing provisions, or otherwise, the
Registrants have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrants of expenses incurred or paid by a director, officer
or controlling person of any of the Registrants in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrants will, unless in the opinion of counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by them is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
The undersigned Registrants hereby undertake to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of this Registration Statement through
the date of responding to the request.
The undersigned Registrants hereby undertake to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
this Registration Statement when it became effective.
II-8
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, 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 NOVEMBER 19, 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 NOVEMBER 19, 1997.
SIGNATURE TITLE
* Chairman of the Board of
- ------------------------------------- Directors and Chief Executive
JOEL N. WALLER Officer (Principal Executive
Officer)
/s/ Douglas J. Treff Vice President, Finance and
- ------------------------------------- Chief Financial Officer
DOUGLAS J. TREFF (Principal Financial and
Accounting Officer)
LYLE BERMAN
THOMAS J. BROSIG
MORRIS GOLDFARB BOARD OF DIRECTORS*
DAVID L. ROGERS
JOEL N. WALLER
- --------
* 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-9
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
UNDERSIGNED REGISTRANTS HAVE DULY CAUSED THIS AMENDMENT TO THE REGISTRATION
STATEMENT TO BE SIGNED ON THEIR BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF MINNEAPOLIS, STATE OF MINNESOTA, ON NOVEMBER 19,
1997.
WILSONS LEATHER HOLDINGS INC. WILSONS LEATHER OF NEW YORK, INC.
WILSONS CENTER, INC. WILSONS LEATHER OF NORTH CAROLINA INC.
ROSEDALE WILSONS, INC. WILSONS LEATHER OF OHIO INC.
RIVER HILLS WILSONS, INC. WILSONS LEATHER OF PENNSYLVANIA INC.
BERMANS THE LEATHER EXPERTS INC. WILSONS LEATHER OR RHODE ISLAND INC.
WILSONS TANNERY WEST, INC. WILSONS LEATHER OF TENNESSEE INC.
WILSONS LEATHER OF ALABAMA INC. WILSONS LEATHER OF TEXAS INC.
WILSONS LEATHER OF CONNECTICUT INC. WILSONS LEATHER OF VIRGINIA INC.
WILSONS LEATHER OF FLORIDA INC. WILSONS LEATHER OF WEST VIRGINIA INC.
WILSONS LEATHER OF GEORGIA INC. WILSONS LEATHER OF WISCONSIN INC.
WILSONS LEATHER OF INDIANA INC. WILSONS LEATHER OF ARKANSAS INC.
WILSONS LEATHER OF IOWA INC. WILSONS LEATHER OF DELAWARE INC.
WILSONS LEATHER OF LOUISIANA INC. WILSONS LEATHER OF MISSISSIPPI INC.
WILSONS LEATHER OF MARYLAND INC. WILSONS LEATHER OF SOUTH CAROLINA INC.
WILSONS LEATHER OF MASSACHUSETTS INC. WILSONS LEATHER OF VERMONT INC.
WILSONS LEATHER OF MICHIGAN INC. WILSONS INTERNATIONAL INC.
WILSONS LEATHER OF NEW JERSEY 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 NOVEMBER 19, 1997.
SIGNATURE TITLE
* Chairman of the Board of
- ------------------------------------- Directors and Chief Executive
JOEL N. WALLER Officer (Principal Executive
Officer)
/s/ Douglas J. Treff Vice President, Finance and
- ------------------------------------- Chief Financial Officer
DOUGLAS J. TREFF (Principal Financial and
Accounting Officer)
BOARD OF DIRECTORS*
DAVID L. ROGERS
- -------- JOEL N. WALLER
* 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-10
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
UNDERSIGNED REGISTRANTS HAVE DULY CAUSED THIS AMENDMENT TO THE REGISTRATION
STATEMENT TO BE SIGNED ON THEIR BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF MINNEAPOLIS, STATE OF MINNESOTA, ON NOVEMBER 19,
1997.
WILSONS HOUSE OF SUEDE, INC.
WILSONS LEATHER OF MISSOURI 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 NOVEMBER 19, 1997.
SIGNATURE TITLE
* Chairman of the Board of
- ------------------------------------- Directors and Chief Executive
JOEL N. WALLER Officer (Principal Executive
Officer)
/s/ Douglas J. Treff Vice President, Finance, Chief
- ------------------------------------- Financial Officer (Principal
DOUGLAS J. TREFF Financial and Accounting
Officer) and member of the
Board of Directors
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-11
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION METHOD OF FILING
------- ----------- ----------------
<C> <S> <C>
2.1 Sale Agreement dated as of May 24, 1996 by and among CVS
New York, Inc., Wilsons Center, Inc., and Wilsons The
Leather Experts Inc. (1).................................. Incorporated by Reference
3.1 Amended Articles of Incorporation of the Registrant dated
May 24, 1996. (1)......................................... Incorporated by Reference
3.2 Restated Bylaws of the Registrant. (2)..................... Incorporated by Reference
3.3 Articles of Amendment of Amended Articles of Incorporation
of the Registrant dated October 11, 1997. (3)............. Incorporated by Reference
3.4 Articles of Incorporation of Wilsons Leather Holdings Inc.*
3.5 Bylaws of Wilsons Leather Holdings Inc.*
3.6 Articles of Incorporation, and all amendments thereto, of
Wilsons Center, Inc.*
3.7 Bylaws of Wilsons Center, Inc.*
3.8 Articles of Incorporation, and all amendments thereto, of
Rosedale Wilsons, Inc.*
3.9 Amended and Restated Bylaws of Rosedale Wilsons, Inc.*
3.10 Articles of Incorporation, and all amendments thereto, of
River Hills Wilsons, Inc.*
3.11 Amended and Restated Bylaws of River Hills Wilsons, Inc.*
3.12 Certificate of Incorporation, and all amendments thereto,
of Bermans The Leather Experts Inc.*
3.13 Amended and Restated Bylaws of Bermans The Leather Experts
Inc.*
3.14 Articles of Incorporation, and all amendments thereto, of
Wilsons House of Suede, Inc.*
3.15 Amended and Restated Bylaws of Wilsons House of Suede,
Inc.*
3.16 Articles of Incorporation of Wilsons Tannery West, Inc.*
3.17 Amended and Restated Bylaws of Wilsons Tannery West, Inc.*
3.18 Articles of Incorporation, and all amendments thereto, of
Wilsons Leather of Alabama Inc.*
3.19 Amended and Restated Bylaws of Wilsons Leather of Alabama
Inc.*
3.20 Certificate of Incorporation, and all amendments thereto,
of Wilsons Leather of Connecticut Inc.*
3.21 Amended and Restated Bylaws of Wilsons Leather of
Connecticut Inc.*
3.22 Articles of Incorporation, and all amendments thereto, of
Wilsons Leather of Florida Inc.*
3.23 Amended and Restated Bylaws of Wilsons Leather of Florida
Inc.*
3.24 Articles of Incorporation, and all amendments thereto, of
Wilsons Leather of Georgia Inc.*
3.25 Amended and Restated Bylaws of Wilsons Leather of Georgia
Inc.*
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION METHOD OF FILING
------- ----------- ----------------
<C> <S> <C>
3.26 Articles of Incorporation, and all amendments thereto, of
Wilsons Leather of Indiana Inc.*
3.27 Amended and Restated Bylaws of Wilsons Leather of Indiana
Inc.*
3.28 Articles of Incorporation, and all amendments thereto, of
Wilsons Leather of Iowa Inc.*
3.29 Amended and Restated Bylaws of Wilsons Leather of Iowa
Inc.*
3.30 Articles of Incorporation, and all amendments thereto, of
Wilsons Leather of Louisiana Inc.*
3.31 Amended and Restated Bylaws of Wilsons Leather of Louisiana
Inc.*
3.32 Articles of Incorporation, and all amendments thereto, of
Wilsons Leather of Maryland Inc.*
3.33 Amended and Restated Bylaws of Wilsons Leather of Maryland
Inc.*
3.34 Articles of Organization, and all amendments thereto, of
Wilsons Leather of Massachusetts Inc.*
3.35 Amended and Restated Bylaws of Wilsons Leather of
Massachusetts Inc.*
3.36 Articles of Incorporation, and all amendments thereto, of
Wilsons Leather of Michigan Inc.*
3.37 Amended and Restated Bylaws of Wilsons Leather of Michigan
Inc.*
3.38 Certificate of Incorporation, and all amendments thereto,
of Wilsons Leather of New Jersey Inc.*
3.39 Amended and Restated Bylaws of Wilsons Leather of New
Jersey Inc.*
3.40 Certificate of Incorporation, and all amendments thereto,
of Wilsons Leather of New York Inc.*
3.41 Amended and Restated Bylaws of Wilsons Leather of New
York Inc.*
3.42 Articles of Incorporation, and all amendments thereto, of
Wilsons Leather of North Carolina Inc.*
3.43 Amended and Restated Bylaws of Wilsons Leather of North
Carolina Inc.*
3.44 Articles of Incorporation, and all amendments thereto, of
Wilsons Leather of Ohio Inc.*
3.45 Amended and Restated Regulations of Wilsons Leather of Ohio
Inc.*
3.46 Articles of Incorporation, and all amendments thereto, of
Wilsons Leather of Pennsylvania Inc.*
3.47 Amended and Restated Bylaws of Wilsons Leather of
Pennsylvania Inc.*
3.48 Articles of Incorporation, and all amendments thereto, of
Wilsons Leather of Rhode Island Inc.*
3.49 Amended and Restated Bylaws of Wilsons Leather of Rhode
Island Inc.*
3.50 Charter, and all amendments thereto, of Wilsons Leather of
Tennessee Inc.*
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION METHOD OF FILING
------- ----------- ----------------
<C> <S> <C>
3.51 Amended and Restated Bylaws of Wilsons Leather of
Tennessee Inc.*
3.52 Articles of Incorporation, and all amendments thereto, of
Wilsons Leather of Texas Inc.*
3.53 Amended and Restated Bylaws of Wilsons Leather of Texas
Inc.*
3.54 Articles of Incorporation, and all amendments thereto, of
Wilsons Leather of Virginia Inc.*
3.55 Amended and Restated Bylaws of Wilsons Leather of Virginia
Inc.*
3.56 Articles of Incorporation, and all amendments thereto, of
Wilsons Leather of West Virginia Inc.*
3.57 Amended and Restated Bylaws of Wilsons Leather of West
Virginia Inc.*
3.58 Articles of Incorporation, and all amendments thereto, of
Wilsons Leather of Wisconsin Inc.*
3.59 Amended and Restated Bylaws of Wilsons Leather of
Wisconsin Inc.*
3.60 Articles of Incorporation, and all amendments thereto, of
Wilsons Leather of Arkansas Inc.*
3.61 Amended and Restated Bylaws of Wilsons Leather of Arkansas
Inc.*
3.62 Certificate of Incorporation, and all amendments thereto,
of Wilsons Leather of Delaware Inc.*
3.63 Amended and Restated Bylaws of Wilsons Leather of Delaware
Inc.*
3.64 Articles of Incorporation of Wilsons Leather of Mississippi
Inc.*
3.65 Bylaws of Wilsons Leather of Mississippi Inc.*
3.66 Articles of Incorporation, and all amendments thereto, of
Wilsons Leather of Missouri Inc.*
3.67 Amended and Restated Bylaws of Wilsons Leather of Missouri
Inc.*
3.68 Articles of Incorporation, and all amendments thereto, of
Wilsons Leather of South Carolina Inc.*
3.69 Amended and Restated Bylaws of Wilsons Leather of South
Carolina Inc.*
3.70 Articles of Association, and all amendments thereto, of
Wilsons Leather of Vermont Inc.*
3.71 Amended and Restated Bylaws of Wilsons Leather of Vermont
Inc.*
3.72 Articles of Incorporation of Wilsons International Inc.*
3.73 Bylaws of Wilsons International Inc.*
4.1 Specimen of Common Stock certificate. (4).................. Incorporated by
Reference
4.2 Warrant No. 1 issued to CVS New York, Inc. for the Purchase
of 1,350,000 shares of Common Stock of Wilsons The Leather Incorporated by
Experts Inc., dated May 25, 1996. (1)......... Reference
4.3 Indenture dated as of August 18, 1997, by and among Wilsons
The Leather Experts Inc., the other corporations listed on
the signature pages thereof, and Norwest Bank Minnesota,
National Association, including Specimen Certificate of 11
1/4% Series A Senior Notes due 2004 (the "Private Notes")
and Specimen Certificate of 11 1/4% Series B Senior Notes
due 2004 (the "Exchange Notes"). Incorporated by
(5)....................................................... Reference
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION METHOD OF FILING
------- ----------- ----------------
<C> <S> <C>
4.4 Underwriter Warrants*
4.5 Shareholder Agreement dated as of May 25, 1996 among
Leather Investors Limited Partnership I, Leather Investors
Limited Partnership II, the Other Investors Named on the
Signature Pages thereto and Wilsons The Leather Experts Incorporated by
Inc. (1).................................. Reference
4.6 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. Incorporated by
(1).................................................. Reference
4.7 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. Incorporated by
(6).................................................. Reference
4.8 Registration Rights Agreement dated as of May 25, 1996, by
and among CVS New York, Inc., Wilsons The Leather Experts
Inc., the Managers Listed on the Signature Pages thereto,
Leather Investors Limited Partnership I and the Partners Incorporated by
Listed on the Signature Pages thereto. (1)................ Reference
4.10 Redeemable Warrant Agreement, including form of Redeemable
Warrant Certificate.*
4.11 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.*
4.12 Purchase Agreement dated as of August 14, 1997, by and
among Wilsons The Leather Experts Inc., the Subsidiary
Guarantors party thereto, and BancAmerica Securities, Inc. Incorporated by
(7).................................................. Reference
4.13 Registration Rights Agreement dated as of August 18, 1997
by and among Wilsons The Leather Experts Inc., the
Subsidiary Guarantors party thereto, and BancAmerica Incorporated by
Securities, Inc. (8)...................................... Reference
5.1 Opinion of Faegre & Benson LLP.*
8.1 Opinion of Faegre & Benson LLP regarding Federal Income Tax
Consequences*
10.1 Parent Guaranty dated as of May 25, 1996, by Wilsons The
Leather Experts Inc., Wilsons Center, Inc., Rosedale
Wilsons, Inc. and River Hills Wilsons, Inc. in favor of Incorporated by
General Electric Capital Corporation. (9)................. Reference
10.2 Wilsons The Leather Experts Inc. Executive and Key Incorporated by
Management Incentive Plan. (1)............................ Reference
10.3 Wilsons The Leather Experts Inc. 401(k) Plan. (1).......... Incorporated by
Reference
10.4 Employment Agreement dated as of May 25, 1996 between
Wilsons The Leather Experts Inc. and Joel N. Waller. Incorporated by
(1)....................................................... Reference
10.5 Employment Agreement dated as of May 25, 1996 between
Wilsons The Leather Experts Inc. and David L. Rogers. Incorporated by
(1)....................................................... Reference
10.6 Credit Agreement dated as of May 25, 1996 among Wilsons
Leather Holdings Inc., as Borrower, the Lenders signatory
thereto from time to time, as Lenders, and General
Electric Capital Corporation, as Agent, Lender and Swing Incorporated by
Line Lender. (1).......................................... Reference
</TABLE>
iv
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION METHOD OF FILING
------- ----------- ----------------
<C> <S> <C>
10.7 Security Agreement dated as of May 25, 1996 by Wilsons
Leather Holdings Inc. and the other grantors listed on the
signature pages thereto, in favor of General Electric
Capital Corporation, in its capacity as Agent for Lenders. Incorporated by
(1).............................................. Reference
10.8 Security Agreement dated as of May 25, 1996 by Wilsons
Leather Holdings Inc. and the other grantors listed on the
signature pages thereto, in favor of CVS New York, Inc. Incorporated by
(1).................................................. Reference
10.9 Store Guarantors' Guaranty dated as of May 25, 1996, by
Bermans The Leather Experts, Inc., Wilsons House of Suede,
Inc., Wilsons Tannery West, Inc., the Georgetown
Subsidiaries that are signatories thereto and the
Individual Store Subsidiaries that are signatories
thereto, in favor of General Electric Capital Corporation. Incorporated by
(10)......................................... Reference
10.10 Wilsons The Leather Experts Inc. Amended 1996 Stock Option Incorporated by
Plan. (4)................................................. Reference
10.11 Amendment No. 1 to Credit Agreement. (4)................... Incorporated by
Reference
10.12 Amendment No. 2 to Credit Agreement. (4)................... Incorporated by
Reference
10.13 Amendment No. 3 to Credit Agreement. (11).................. Incorporated by
Reference
10.14 Amendment No. 1 to Security Agreement. (12)................ Incorporated by
Reference
10.15 Stock Exchange Agreement. (13)............................. Incorporated by
Reference
10.16 Pledge Agreement, dated as of May 25, 1996, between Wilsons
The Leather Experts Inc. and CVS New York, Inc. Incorporated by
(14)...................................................... Reference
10.17 Pledge Agreement, dated as of May 25, 1996, between Wilsons Incorporated by
Center, Inc. and CVS New York, Inc. (14).......... Reference
10.18 Pledge Agreement, dated as of May 25, 1996, between Incorporated by
Rosedale Wilsons, Inc. and CVS New York, Inc. (14)........ Reference
10.19 Pledge Agreement, dated as of May 25, 1996, between River Incorporated by
Hills Wilsons, Inc. and CVS New York, Inc. (14)........... Reference
10.20 Amendment No. 1 to Pledge Agreement dated as of December
19, 1996, between River Hills Wilsons, Inc. and CVS New Incorporated by
York, Inc. (14)........................................... Reference
10.21 Pledge Agreement, dated as of May 25, 1996, between Wilsons
The Leather Experts Inc. and General Electric Capital
Corporation, individually and as agent for the lenders Incorporated by
signatory to the Credit Agreement. (14)........... Reference
10.22 Pledge Agreement, dated as of May 25, 1996, between Wilsons
Center, Inc. and General Electric Capital Corporation,
individually and as agent for the lenders signatory to the Incorporated by
Credit Agreement. (14)................... Reference
10.23 Pledge Agreement, dated as of May 25, 1996, between
Rosedale Wilsons, Inc. and General Electric Capital
Corporation, individually and as agent for the lenders Incorporated by
signatory to the Credit Agreement. (14)................... Reference
10.24 Pledge Agreement, dated as of May 25, 1996, between River
Hills Wilsons, Inc. and General Electric Capital
Corporation, individually and as agent for the lenders Incorporated by
signatory to the Credit Agreement. (14)................... Reference
10.25 Amendment No. 4 to Credit Agreement. (15).................. Incorporated by
Reference
10.26 Repurchase Agreement dated as of August 13, 1997, by and
between Wilsons The Leather Experts Inc. and CVS New York, Incorporated by
Inc. (16)........................................... Reference
</TABLE>
v
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION METHOD OF FILING
------- ----------- ----------------
<C> <S> <C>
10.27 Amendment No. 2 to Pledge Agreement dated as of July 31,
1997, between River Hills Wilsons, Inc. and General Incorporated by
Electric Capital Corporation. (17)........................ Reference
10.28 Joinder Agreement dated as of July 31, 1997, by and between
Wilsons International Inc. and General Electric Capital Incorporated by
Corporation. (18)................................. Reference
10.29 Reaffirmation of Guaranty dated as of July 31, 1997, by
Wilsons The Leather Experts Inc., Wilsons Center, Inc.,
Rosedale Wilsons, Inc. and River Hills Wilsons, Inc., in Incorporated by
favor of General Electric Capital Corporation. (19)....... Reference
11.1 Computation of per share loss (20)......................... Incorporated by
Reference
12.1 Computation of ratios.*
21.1 Subsidiaries of the Company.*
23.1 Consent of Arthur Andersen LLP............................. Filed Electronically
23.2 Consent of KPMG Peat Marwick LLP........................... Filed Electronically
23.3 Consent of Faegre & Benson LLP (included in Exhibits No.
5.1 and 8.1 to the Registration Statement).*
24.1 Powers of Attorney of officers and directors of the
Company.*
24.2 Powers of Attorney of officers and directors of the
Guarantors.*
25.1 Statement of Eligibility of Trustee.*
27.1 Financial Data Schedule (20)............................... Incorporated by
Reference
99.1 Letter of Transmittal and related documents to be used in
conjunction with the Exchange Offer.*
99.2 Notice of Guaranteed Delivery*
99.3 Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9*
99.4 Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees*
99.5 Letter to Clients*
</TABLE>
- --------
Share figures above have been adjusted for the 0.9-for-1 reverse stock
split that was effected on October 11, 1996.
* Previously filed as an Exhibit to this Registration Statement.
(1) Incorporated by reference to the same numbered exhibit to the Company's
Registration Statement on Form S-1 (333-13967) filed with the Securities
and Exchange Commission (the "Commission") on October 11, 1996.
(2) Incorporated by reference to Exhibit No. 3.4 to Amendment No. 1 to the
Company's Registration Statement on Form S-1 (333-13967) filed with the
Commission on December 24, 1996.
(3) Incorporated by reference to Exhibit No. 3.5 to Amendment No. 2 to the
Company's Registration Statement on Form S-1 (333-13967) filed with the
Commission on April 18, 1997.
(4) Incorporated by reference to the same numbered exhibit to Amendment No. 1
to the Company's Registration Statement on Form S-1 (333-13967) filed
with the Commission on October 11, 1996.
(5) Incorporated by reference to Exhibit 10.3 to the Company's Report on Form
10-Q for the quarter ended August 2, 1997 filed with the Commission.
(6) Incorporated by reference to Exhibit 4.9 to Amendment No. 2 to the
Company's Registration Statement on Form S-1 (333-13967) filed with the
Commission on April 18, 1997.
vi
<PAGE>
(7) Incorporated by reference to Exhibit 10.4 to the Company's Report on Form
10-Q for the quarter ended August 2, 1997 filed with the Commission.
(8) Incorporated by reference to Exhibit 10.5 to the Company's Report on Form
10-Q for the quarter ended August 2, 1997 filed with the Commission.
(9) Incorporated by reference to Exhibit 10.8 to the Company's Report on Form
10-Q for the quarter ended August 2, 1997 filed with the Commission.
(10) Incorporated by reference to Exhibit 10.10 to the Company's Report on
Form 10-Q for the quarter ended August 2, 1997 filed with the Commission.
(11) Incorporated by reference to Exhibit 10.1 to the Company's Report on Form
10-Q for the quarter ended May 3, 1997 filed with the Commission.
(12) Incorporated by reference to the same numbered exhibit to Amendment No. 2
to the Company's Registration Statement on Form S-1 (333-13967) filed
with the Commission on April 18, 1997.
(13) Incorporated by reference to Exhibit 10.2 to the Company's Report on Form
10-Q for the quarter ended May 3, 1997 filed with the Commission.
(14) Incorporated by reference to the same numbered exhibit to Amendment No. 4
to the Company's Registration Statement on Form S-1 (333-13967) filed
with the Commission on May 27, 1997.
(15) Incorporated by reference to Exhibit 10.1 to the Company's Report on Form
10-Q for the quarter ended August 2, 1997 filed with the Commission.
(16) Incorporated by reference to Exhibit 10.2 to the Company's Report on Form
10-Q for the quarter ended August 2, 1997 filed with the Commission.
(17) Incorporated by reference to Exhibit 10.6 to the Company's Report on Form
10-Q for the quarter ended August 2, 1997 filed with the Commission.
(18) Incorporated by reference to Exhibit 10.7 to the Company's Report on Form
10-Q for the quarter ended August 2, 1997 filed with the Commission.
(19) Incorporated by reference to Exhibit 10.9 to the Company's Report on Form
10-Q for the quarter ended August 2, 1997 filed with the Commission.
(20) Incorporated by reference to the same numbered exhibit to the Company's
Report on Form 10-Q for the quarter ended August 2, 1997 filed with the
Commission.
vii
<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
November 18, 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 references to our
firm under the headings "Summary Historical and Pro Forma Consolidated Financial
and Other Data," "Selected Historical and Pro Forma Consolidated Financial and
Other Data," and "Experts" in the prospectus.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
November 18, 1997
