<PAGE>
Filed Pursuant to Rule 424(b)(3)
File No. 333-13967
PROSPECTUS
LOGO
1,265,000 SHARES OF COMMON STOCK
---------------
Wilsons The Leather Experts Inc. (the "Company") is offering 1,265,000
shares of Common Stock, par value $.01, issuable upon exercise of the
Company's outstanding redeemable common stock purchase warrants ("Redeemable
Warrants"). Each Redeemable Warrant, which is transferrable and immediately
exercisable, entitles the holder to purchase, at any time until May 27, 2000,
one share of Common Stock at an exercise price of $13.50 per warrant, subject
to adjustment. The Redeemable Warrants are subject to redemption by the
Company for $.01 per warrant at any time, on 30 days written notice, provided
that the closing bid price of the Common Stock exceeds $14.50 per share
(subject to adjustment) for any 10 consecutive trading days prior to such
notice. See "Description of Securities."
The Common Stock and Redeemable Warrants are listed on The Nasdaq(R)
National Market under the symbols WLSN and WLSNW, respectively. On April 17,
1998, the last sale price of the Common Stock and Redeemable Warrants as
reported by The Nasdaq(R) National Market was $14.125 and $1.250,
respectively. See "Price Range of Common Stock and Dividend Policy."
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL
DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON
STOCK AND "DILUTION" ON PAGE 17.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REP-
RESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
WARRANT HOLDERS DISCOUNT COMPANY(1)(2)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............. $13.50 -- $13.50
- -------------------------------------------------------------------------------
Total................. $17,077,500 -- $17,077,500
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Assumes all Redeemable Warrants are exercised.
(2) Before deducting expenses estimated at $177,500.
---------------
The date of this Prospectus is May 1, 1998.
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information and consolidated financial
statements (including the notes thereto) 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.
("CVS") (formerly Melville Corporation) on May 26, 1996 (the "Acquisition").
The fiscal year of the Predecessor Companies prior to the Acquisition ended on
December 31. 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 January 31, 1998. Unless otherwise
indicated, references to 1996 in this Prospectus refer to the twelve months
ended February 1, 1997.
THE COMPANY
Wilsons is the leading specialty retailer of men's and women's leather
outerwear, apparel and accessories in the United States. As of January 31,
1998, the Company operated 460 retail stores located in 44 states and England.
These stores included 16 airport stores, which focus on selling accessories to
business travelers and tourists, and 444 mall-based stores. 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. The
Company supplements its mall-based operations with holiday stores and seasonal
kiosks during its peak selling period from October through December and
operated approximately 200 holiday stores and 100 kiosks in 1997. For the
twelve months ended January 31, 1998, the Company generated net sales of $418.1
million and adjusted earnings before interest, taxes, depreciation and
amortization ("Adjusted EBITDA") (as hereinafter defined) of $35.1 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.
Wilsons has increased its Adjusted EBITDA from $15.0 million for the year
ended December 31, 1994 to $35.1 million for the year ended January 31, 1998, a
compound annual growth rate of approximately 32%. Over the same period, the
Company's Adjusted EBITDA margin has increased from 3.2% to 8.4%, primarily as
a result of the Company's: (i) Restructuring (as defined below); (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
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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 1997, 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
customer purchase 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;
3
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. 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), Adventure Bound(R), Pelle Studio(R),
Maxima(R), Open Road(TM), M. Julian(R), Handcrafted by Wilsons The Leather
Experts(TM) and Vintage by Wilsons The Leather Experts(TM), 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 Kenneth Cole(R), Andrew Marc(R)
and Bosca(R), which brand names and registered trademarks are the property of
their respective holders, as well as licensed merchandise from the NBA(R),
NFL(R), NHL(R) and college teams. The combination of Wilsons' brands with these
designer brands and licensed merchandise 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, 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 Acquisition
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 has implemented programs designed to
increase 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 seasonal holiday stores and 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 20 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 16 airport locations since 1993 and
currently plans to open at least six airport stores per year for the
next several years.
4
<PAGE>
. Seasonal Concepts. Wilsons has developed the expertise required to
successfully open seasonal holiday stores and 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. Kiosks are generally designed to
complement and enhance the operation of the traditional Wilsons stores
in the same mall. Wilsons operated approximately 200 holiday stores and
100 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 wholesale 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 and Redeemable Warrants are traded on The Nasdaq(R)
National Market under the symbols "WLSN" and "WLSNW", respectively. As of April
17, 1998, the closing share price of the Common Stock was $14.125 per share,
and the closing price of the Redeemable Warrants was $1.250 per warrant.
5
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THE OFFERING
<TABLE>
<S> <C>
Securities offered.......... 1,265,000 shares of Common Stock issuable upon
exercise of the outstanding Redeemable Warrants
(the "Offering"). Each Redeemable Warrant, which
is transferable and immediately exercisable,
entitles the holder to purchase, at any time until
May 27, 2000, one share of Common Stock at an
exercise price of $13.50 per warrant, subject to
adjustment. The Redeemable Warrants are subject to
redemption by the Company for $.01 per warrant at
any time, on 30 days written notice, provided that
the closing bid price of the Common Stock exceeds
$14.50 per share (subject to adjustment) for any
10 consecutive trading days prior to such notice.
Common Stock outstanding
after the Offering,
assuming the exercise of
all outstanding Redeemable
Warrants................... 10,797,083 shares(1)
Use of proceeds............. The net proceeds will be used for anticipated
capital expenditures, including expenditures for
new stores, and for working capital purposes. See
"Use of Proceeds."
The Nasdaq(R) National
Market symbols............. Common Stock: WLSN
Warrants: WLSNW(2)
</TABLE>
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(1) Excludes (i) 1,138,495 shares of Common Stock issuable upon the exercise of
outstanding stock options at a weighted average exercise price of $8.18 per
share and 361,505 shares of Common Stock reserved for issuance pursuant to
the Company's 1996 Stock Option Plan (the "1996 Option Plan") and 1998
Stock Option Plan (the "1998 Option Plan," and together with the 1996
Option Plan, the "Option Plans"), as of January 31, 1998, and (ii) 110,000
shares of Common Stock issuable upon exercise of underwriter warrants
issued in connection with the Company's Initial Public Offering (as
hereinafter defined). See "Management" and "Description of Securities."
(2) Upon completion of the exercise, redemption and/or expiration of all
outstanding Redeemable Warrants, trading in these securities will cease.
----------------
Except as set forth in the consolidated financial statements or as otherwise
indicated herein, the information contained in this Prospectus reflects (i) a
0.9-for-one reverse split of the Company's Common Stock effected October 11,
1996, (ii) the exchange of all of the Company's outstanding Series A Preferred
Stock (the "Series A Preferred") for 617,083 shares of Common Stock, effected
May 27, 1997, (iii) the conversion 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 options under the 1996 Option Plan into a
single class of Common Stock of the Company, par value $.01 per share, that was
effected on June 2, 1997, (iv) the vesting of 1,080,000 shares of Common Stock
purchased by management as part of the Acquisition, and (v) the repurchase and
cancellation on March 27, 1998, of the warrant issued to CVS (the "CVS
Warrant"), which gave CVS the right to purchase a total of 1,350,000 shares of
Common Stock.
6
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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables present summary historical consolidated financial data
of the Company, which should be read in conjunction with the historical
consolidated 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 January 31, 1998, for the period from
inception (May 26, 1996) to February 1, 1997 and for the year ended January 31,
1998 have been derived from the historical consolidated financial statements of
the Company audited by Arthur Andersen LLP, independent public accountants. The
summary historical consolidated financial data for the years ended December 31,
1994 and 1995 and for the five-month period ended May 25, 1996 have been
derived from the historical consolidated financial statements of the
Predecessor Companies audited by KPMG Peat Marwick LLP, independent auditors.
The historical 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
historical consolidated financial data for the fifty-three week period ended
February 1, 1997 have been derived from the unaudited financial statements of
the Predecessor Companies for the seventeen weeks ended May 25, 1996 and from
the audited financial statements of the Company for the period from inception
(May 26, 1996) to February 1, 1997. The store operations 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 and for the period from inception (May 26,
1996) to February 1, 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.
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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
(IN MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS AND STORE DATA)
<TABLE>
<CAPTION>
COMBINED
PREDECESSOR COMPANIES COMPANY COMPANIES(/1/) COMPANY
------------------------------------------------ ----------- -------------- -----------
PERIOD FROM
YEARS ENDED FIVE MONTHS EIGHT INCEPTION
DECEMBER 31, ENDED MONTHS (MAY 26, FIFTY-THREE YEAR
---------------- ---------------- ENDED 1996) TO WEEKS ENDED ENDED
MAY 27, MAY 25, JANUARY 27, FEBRUARY 1, FEBRUARY 1, JANUARY 31,
1994 1995 1995 1996 1996 1997 1997 1998
------ ------- ------- ------- ----------- ----------- -------------- -----------
<S> <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 $424.8 $418.1
Costs and expenses:
Cost of goods sold,
buying and occupancy
costs.................. 329.4 317.0 99.9 86.2 238.5 222.1 286.9 282.3
Selling, general and
administrative
expenses.............. 130.2 114.9 45.9 34.8 76.4 75.8 103.2 100.7
Depreciation and
amortization.......... 22.3 21.4 9.0 4.7 13.3 1.0 4.8 2.3
Restricted stock
compensation expense.. -- -- -- -- -- 1.5 1.5 8.5
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 28.4 24.3
Interest expense, net... 8.4 10.4 3.4 1.6 7.4 5.3 6.5 6.5
------ ------- ------- ------- ------- ---------- ------ -----------
Income (loss) before
income taxes........... (15.7) (183.5) (33.5) (17.7) (150.2) 39.4 21.9 17.8
Income tax provision
(benefit).............. (3.1) (10.1) (5.5) (6.6) (4.6) 15.5 9.0 10.8
------ ------- ------- ------- ------- ---------- ------ -----------
Income (loss) before
extraordinary gain..... (12.6) (173.4) (28.0) (11.1) (145.6) 23.9 12.9 7.0
Extraordinary gain on
early extinguishment of
debt, net of tax of
$2.5................... -- -- -- -- -- -- -- 3.8
------ ------- ------- ------- ------- ---------- ------ -----------
Net income (loss)....... $(12.6) $(173.4) $ (28.0) $ (11.1) $(145.6) $ 23.9 $ 12.9 $ 10.8
====== ======= ======= ======= ======= ========== ====== ===========
BASIC NET INCOME PER
COMMON SHARE:
Income before
extraordinary item.... $ 3.12 $ 0.80
Extraordinary gain on
early extinguishment
of debt, net of tax... -- 0.42
---------- -----------
Basic net income per
common share.......... $ 3.12 $ 1.22
========== ===========
Weighted average common
shares outstanding.... 7,650,000 8,910,456
========== ===========
DILUTED NET INCOME PER
COMMON SHARE:
Income before
extraordinary item.... $ 2.67 $ 0.68
Extraordinary gain on
early extinguishment
of debt, net of tax... -- 0.36
---------- -----------
Diluted net income per
common share.......... $ 2.67 $ 1.04
========== ===========
Weighted average common
shares outstanding--
assuming dilution..... 8,970,337 10,397,665
========== ===========
OTHER DATA:
Adjusted EBITDA (/2/)... $15.0 $30.5 $(21.1) $(11.4) $52.7 $47.2 $34.7 $35.1
====== ======= ======= ======= ======= ========== ====== ===========
STORE DATA:
Traditional stores:
Open at end of period.. 628 548 567 480 494 461 461 460
Net sales per square
foot for stores open
entire year........... $340 $373 -- -- -- -- $389 $397
Change in comparable
store sales (/3/)..... (5.1)% (1.5)% 4.4% 3.9% (3.1)% (2.7)% (1.3)% 0.4%
Peak number of seasonal
stores during period... 135 227 -- -- 227 376 376 300
</TABLE>
<TABLE>
<CAPTION>
COMPANY
---------------------------------------------------
JANUARY 31, 1998
---------------------------------------------------
AS ADJUSTED FOR THE AS FURTHER
REPURCHASE OF THE ADJUSTED FOR EXERCISE OF
ACTUAL CVS WARRANT(4) REDEEMABLE WARRANTS(5)
------ ------------------- ------------------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............. $120.2 $110.2 $127.1
Total assets................ 227.7 217.7 234.6
Total long-term debt ....... 75.0 75.0 75.0
Total liabilities........... 155.0 155.0 155.0
Shareholders' equity........ 72.7 62.7 79.6
</TABLE>
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(1) Results for the fifty-three weeks ended February 1, 1997, include the
unaudited financial results of the Predecessor Companies for the seventeen
weeks ended May 25, 1996 and the audited financial results of the Company
for the period from inception (May 26, 1996) to February 1, 1997.
(2) EBITDA represents income (loss) from operations, before depreciation and
amortization. Adjusted EBITDA represents EBITDA before restricted stock
compensation expense and restructuring and asset impairment charges.
Adjusted EBITDA in 1995 and for the eight months ended January 27, 1996 is
before the restructuring and asset impairment charges of $182.2 million.
Adjusted EBITDA for the period from inception (May 26, 1996) to February 1,
1997, for the fifty-three week period ended February 1, 1997 and for the
year ended January 31, 1998 is before the restricted stock compensation
expense of $1.5 million, $1.5 million and $8.5 million, respectively.
EBITDA and Adjusted EBITDA are not intended to represent cash flow from
operations as defined by Generally Accepted Accounting Principles ("GAAP")
and should not be considered as an alternative to cash flow or as a measure
of liquidity or as an alternative to net income as indicative of operating
performance. Adjusted EBITDA is included in this Prospectus because
management believes that certain investors find it a useful tool for
measuring the Company's ability to service its debt.
(3) Comparable store sales means sales generated by stores open at least one
full year.
(4) As adjusted to give effect to the repurchase and cancellation of the CVS
Warrant for $9.99 million in cash on March 27, 1998.
(5) As further adjusted to reflect the exercise of all of the Redeemable
Warrants and the application of the net proceeds therefrom.
- ----------------
RECENT DEVELOPMENTS
On March 27, 1998, Wilsons repurchased and simultaneously cancelled the CVS
Warrant for $9.99 million in cash. The warrant had been issued to CVS in the
Acquisition and gave CVS the right to purchase a total of 1,350,000 shares of
the Company's Common Stock. See "Certain Transactions--Warrants Held by CVS."
9
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RISK FACTORS
An investment in the shares of Common Stock offered by this Prospectus
involves a high degree of risk. In addition, this Prospectus contains forward-
looking statements that involve risks and uncertainties. Discussions
containing such forward-looking statements may be found in the material set
forth under "Prospectus Summary," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business--
Overview, --Business Strategy, --Growth Strategy, --Vertically Integrated
Operations, --Store Formats, --Marketing and Advertising, --Distribution and
- --Management Information Systems," as well as in the Prospectus generally. The
Company's actual results could differ materially from those anticipated in
such forward-looking statements as a result of certain factors, including
those set forth in the following risk factors and elsewhere in this
Prospectus. Accordingly, prospective investors should consider carefully the
following risk factors, in addition to the other information contained in this
Prospectus concerning the Company and its business, before exercising their
Redeemable Warrants.
DECLINE IN COMPARABLE STORE SALES; LOSSES
The Company's comparable store sales increase was 0.4% during 1997 and
declines were 1.3%, 1.5%, 5.1% and 13.8% during 1996, 1995, 1994 and 1993,
respectively. The Company believes that the comparable store sales decline 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. An inability to continue to
generate comparable store increases could have a material adverse effect on
the Company's business, financial condition and results of operations.
As part of the Restructuring, the Company incurred non-recurring
restructuring and asset impairment charges aggregating $182.2 million in
October 1995, which resulted in a net loss of $173.4 million for 1995. 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. 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, 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 and results of operations.
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
10
<PAGE>
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 and results of operations.
SEASONALITY OF BUSINESS
A significant portion of the Company's sales is generated from October
through December (58.5% for the year ended January 31, 1998), which includes
the holiday selling season. During the period from the day after Thanksgiving
through January 3, 1998, the Company generated 38.2% 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 and results of operations. 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"
and "Business--Seasonality."
LEVERAGE AND DEBT SERVICE; CAPITAL REQUIREMENTS
The Company has and will continue to have substantial indebtedness and
significant debt service obligations, especially during periods of seasonal
borrowings under a three-year senior credit facility that expires in May 1999
(the "Senior Credit Facility"), which reached peaks of $30.8 million in
outstanding borrowings and $51.9 million in outstanding letters of credit
during the year ended January 31, 1998. The Company's consolidated
indebtedness as of January 31, 1998 was $81.5 million, which included $75.0
million of 11 1/4% Senior Notes (the "Senior Notes") and $6.5 million of
outstanding letters of credit. In addition, subject to the restrictions
contained in the Senior Credit Facility and the indenture governing the Senior
Notes (the "Indenture"), the Company may incur additional indebtedness from
time to time to finance acquisitions, for capital expenditures and for other
purposes.
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 its domestic subsidiaries 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.
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 risk factors set forth
in this Prospectus. Based upon the current and anticipated level of
operations, the Company believes, however, that its consolidated cash flow
from operations, together with 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
11
<PAGE>
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 and results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
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. 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 (as defined therein) 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 and results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
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 also 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 1997,
Wilsons sourced more than 55% 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. 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 and results of
operations. See "Business--Product Design, Development and Sourcing."
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
12
<PAGE>
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 and results of
operations.
COMPETITION IN THE RETAIL INDUSTRY
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 and results of
operations. See "Business--Competition."
RISKS ASSOCIATED WITH FUTURE GROWTH
The Company's growth prospects are dependent upon a number of factors,
including, among other things, economic conditions, establishment and growth
of new selling channels, competition, 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."
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, and David Rogers,
President and Chief Operating Officer of Wilsons. 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. There is no assurance that Mr. Waller or Mr. Rogers will not
leave the Company. The loss of the services of these individuals could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company does not maintain key-man life insurance on
any of its executive officers. See "Management."
CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE WARRANTS;
POSSIBLE REDEMPTION OF WARRANTS
Holders of Redeemable Warrants ("Warrantholders") will be able to exercise
the Redeemable Warrants only if a current prospectus relating to the shares of
Common Stock underlying the Redeemable Warrants is then in effect and only if
such securities are qualified for sale or exempt from qualification under the
applicable securities laws of the states in which the various Warrantholders
reside. Although the Company will use its best efforts to maintain the
effectiveness of a current prospectus covering the shares of Common Stock
underlying the Redeemable Warrants, there can be no assurance that the Company
will be able to do so, or to get any required amendments declared effective by
federal or state authorities in a timely manner. The Company will be unable to
issue shares of Common Stock to those persons desiring to exercise their
Redeemable Warrants if a current prospectus covering the securities issuable
upon the exercise of the Redeemable Warrants is not kept effective or if such
securities are not qualified nor exempt from qualification in the states in
which the Warrantholders reside. The Redeemable Warrants are subject to
redemption at any time by the Company at $.01 per warrant, on 30 days prior
written notice, if the closing bid price of the Common Stock shall exceed
$14.50 per share (subject to adjustment), for 10 consecutive trading days, at
any time prior to such notice. If the
13
<PAGE>
Redeemable Warrants are redeemed, Warrantholders will lose their right to
exercise the Redeemable Warrants except during such 30-day redemption period.
Redemption of the Redeemable Warrants could force the Warrantholders to
exercise the Redeemable Warrants at a time when it may be disadvantageous for
them to do so or to sell the Redeemable Warrants at the then market price or
accept the redemption price, which will be substantially less than the market
value of the Redeemable Warrants at the time of redemption. See "Description
of Securities--Redeemable Warrants."
DILUTION
Purchasers of the Common Stock offered hereby will experience immediate and
substantial dilution in the net book value per share of their investment of
$6.48 per share, assuming all of the Redeemable Warrants are exercised.
Additional dilution is likely to occur upon exercise of stock options. See
"Dilution."
DIVIDEND POLICY
The Company has not paid any dividends on its Common Stock and does not
intend to pay dividends in the foreseeable future. The payment of dividends by
the Company is subject to certain restrictions and prohibitions contained in
the Senior Credit Facility and the Indenture. Any determination to pay cash
dividends in the future will be at the discretion of the Company's Board of
Directors (the "Board" or the "Board of Directors") and will be dependent upon
the Company's business, results of operations, financial condition,
contractual restrictions and other factors deemed relevant at the time by the
Company's Board of Directors. See "Price Range of Common Stock and Redeemable
Warrants and Dividend Policy."
SECURITIES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of the Company's Common Stock in the public
market subsequent to this Offering could adversely affect the market price of
the Common Stock and may impair the Company's ability to raise additional
capital by the sale of its equity securities. The Company currently has
9,532,083 shares of Common Stock outstanding. 8,267,083 shares of Common
Stock, which were sold in reliance on "private placement" exemptions under the
Securities Act of 1933, as amended (the "Act"), are eligible for sale subject
to the terms of a shareholder agreement which terminates in May 1998 and the
requirements of Rule 144 of the Securities and Exchange Commission (the
"Commission"). Assuming the exercise of all outstanding Redeemable Warrants,
the Company will have an additional 1,265,000 shares of Common Stock
outstanding. See "Securities Eligible for Future Sale."
ANTI-TAKEOVER CONSIDERATIONS; CONTROL BY CURRENT SHAREHOLDERS
The Board of Directors has the authority, without further shareholder
action, to fix the rights and preferences of any shares of the Company's
Preferred Stock to be issued from time to time. In addition, as a Minnesota
corporation, the Company is subject to certain anti-takeover provisions of the
Minnesota Business Corporation Act. Both the authority of the Board with
regard to the Preferred Stock and the provisions of the Minnesota statutes
could have the effect of delaying, deferring or preventing a change in control
of the Company, may discourage bids for the Company's Common Stock and may
adversely affect the market price of, and the voting and other rights of the
holders of, Common Stock. See "Description of Capital Stock--Preferred Stock"
and "--Anti-Takeover Provisions of the Minnesota Business Corporation Act."
The Company's directors and executive officers beneficially own, in the
aggregate, 55.9% of the Company's outstanding shares of Common Stock. Assuming
exercise of all of the Redeemable Warrants, the Company's directors and
executive officers will beneficially own, in the aggregate, 49.3% of the
Company's outstanding shares of Common Stock. If these shareholders vote
together as a group, they will be able to exert significant control over the
business and affairs of the Company, including the election of individuals to
the Company's Board of Directors, and to significantly affect 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.
14
<PAGE>
THE ACQUISITION
The Company was organized to acquire all of the issued and outstanding
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 the CVS Warrant exercisable for 1,350,000 shares of Common Stock,
with an exercise price of $.60 per share 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) a $55.8
million note due to CVS (the "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 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 in cash. 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 (as hereinafter defined), 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. As of February 1, 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. On March 27, 1998, the
Company repurchased the CVS Warrant for $9.99 million in cash and cancelled
it. See "Management" and "Certain Transactions."
15
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from this Offering, after
deducting estimated costs and expenses of the Offering, will be approximately
$16.9 million, assuming all of the Redeemable Warrants are exercised. The
Company plans to use the net proceeds to fund anticipated capital
expenditures, including, in the following priority, building new stores ($4.0
million), remodeling existing stores ($9.0 million), testing new business
concepts ($2.0 million), and for working capital purposes ($1.9 million).
PRICE RANGE OF COMMON STOCK AND REDEEMABLE WARRANTS AND DIVIDEND POLICY
The Company's initial public offering (the "Initial Public Offering") became
effective on May 27, 1997, with the Company issuing units consisting of one
share of the Company's Common Stock, par value $.01 per share, and one
Redeemable Warrant entitling the holder to purchase one share of Common Stock
at an exercise price of $13.50 per warrant, subject to adjustment. The Common
Stock and Redeemable Warrants trade on The Nasdaq(R) National Market under the
symbols WLSN and WLSNW, respectively. As of April 30, 1998, the closing market
price of the Company's Common Stock was $14.875, and the closing market price
of the Redeemable Warrants was $1.688.
The following table presents the Company's high and low market prices per
share of Common Stock and per Redeemable Warrant by quarter since the
effective date of its offering on May 27, 1997.
<TABLE>
<CAPTION>
QUARTERLY PRICE RANGES FOR FISCAL YEAR 1997
--------------------------------------------------------------------------
REDEEMABLE
COMMON STOCK WARRANTS
--------------- -------------
QUARTER HIGH LOW HIGH LOW
-------------------------------------------- ------- ------- ------ ------
<S> <C> <C> <C> <C>
Fiscal quarter ended August 2, 1997......... $11.625 $ 9.000 $2.000 $0.875
Fiscal quarter ended November 1, 1997....... 11.625 10.141 1.875 1.125
Fiscal quarter ended January 31, 1998....... 10.000 8.500 1.500 0.781
</TABLE>
As of April 30, 1998, there were approximately 67 and 6 recordholders of the
Company's Common Stock and Redeemable Warrants, respectively.
The Company has not declared or paid cash dividends on its stock since its
inception in May 1996. The Company anticipates that all of its earnings in the
foreseeable future, if any, will be retained to fund working capital and to
reduce reliance on the Senior Credit Facility and, therefore, has no plans to
pay cash dividends in the foreseeable future. In addition, the terms of the
Senior Credit Facility and the Indenture restrict and, in some cases, prohibit
the Company from declaring and paying dividends. Any determination to pay cash
dividends in the future will be at the discretion of the Company's Board of
Directors and will be dependent upon the Company's results of operations,
financial condition and capital requirements (including its cash needs),
market conditions, restrictions in financing agreements and other factors
deemed relevant at that time by the Company's Board of Directors. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
16
<PAGE>
DILUTION
The net adjusted tangible book value of the Company's Common Stock as of
January 31, 1998 (as adjusted to reflect the repurchase of the CVS Warrant for
$9.99 million in cash on March 27, 1998) was $58.9 million or $6.18 per share
of Common Stock. "Net adjusted tangible book value" represents the total
amount of the Company's total tangible assets less the total amount of the
Company's liabilities; "net adjusted tangible book value per share" means such
amount divided by the number of shares of Common Stock outstanding. After
giving effect to the exercise of the Redeemable Warrants and the application
of the net proceeds therefrom (assuming the exercise of all outstanding
Redeemable Warrants), the net adjusted tangible book value as further adjusted
of the Common Stock as of January 31, 1998 would have been $75.8 million, or
$7.02 per share. This represents an immediate increase in net adjusted
tangible book value of $.84 per share to existing shareholders and an
immediate dilution of $6.48 per share to new investors exercising the
Redeemable Warrants in the Offering.
The following table illustrates the dilution per share described above:
<TABLE>
<S> <C> <C>
Redeemable Warrants exercise price................................ $13.50
Net adjusted tangible book value before the Offering............ $6.18
Increase in net adjusted tangible book value attributable to the
exercise of the Redeemable Warrants by new investors........... .84
-----
Net adjusted tangible book value as further adjusted after the
Offering......................................................... 7.02
------
Dilution to new investors......................................... $ 6.48
======
</TABLE>
The following table sets forth as of January 31, 1998 the number of shares
of Common Stock purchased from the Company, the total cash consideration paid
to the Company and the average price per share paid by the existing
shareholders and by the new investors exercising Redeemable Warrants in the
Offering (assuming the exercise of all outstanding Redeemable Warrants), at a
price of $13.50 per Redeemable Warrant.
<TABLE>
<CAPTION>
TOTAL CASH AVERAGE
SHARES PURCHASED(1) CONSIDERATION COST
--------------------- ---------------------- PER
NUMBER PERCENTAGE AMOUNT PERCENTAGE SHARE
---------- ---------- ----------- ---------- -------
<S> <C> <C> <C> <C> <C>
Existing shareholders...... 9,532,083 88.3% $23,385,000 57.8% $ 2.45
New investors.............. 1,265,000 11.7 17,077,500 42.2 13.50
---------- ----- ----------- -----
Total.................... 10,797,083 100.0% $40,462,500 100.0%
========== ===== =========== =====
</TABLE>
- --------
(1) The above tables do not give effect to (i) the potential future issuance
of 1,500,000 shares of Common Stock reserved for issuance under the
Company's Option Plans, under which the Company had, as of January 31,
1998, options outstanding to purchase an aggregate of 1,138,495 shares of
Common Stock at a weighted average exercise price of $8.18 per share, and
(ii) 110,000 shares of Common Stock issuable upon exercise of underwriter
warrants issued in connection with the Company's Initial Public Offering.
17
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated cash and capitalization of
the Company (i) as of January 31, 1998, (ii) as adjusted to reflect the
repurchase of the CVS Warrant for $9.99 million in cash on March 27, 1998 and
(iii) as further adjusted to reflect the exercise of all of the Redeemable
Warrants and the application of the net proceeds therefrom. See "Use of
Proceeds." The information presented below should be read in conjunction with
the historical 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
Prospectus.
<TABLE>
<CAPTION>
JANUARY 31, 1998 (IN THOUSANDS)
---------------------------------------
AS FURTHER
ADJUSTED
AS ADJUSTED FOR EXERCISE OF
FOR REPURCHASE REDEEMABLE
ACTUAL OF CVS WARRANT WARRANTS
-------- -------------- ---------------
<S> <C> <C> <C>
Cash and cash equivalents.............. $112,975 $102,985 $119,885
======== ======== ========
Short-term debt:
Senior Credit Facility(/1/).......... $ -- $ -- $ --
======== ======== ========
Long-term debt:
Senior Notes due 2004................ 75,000 75,000 75,000
-------- -------- --------
Shareholders' equity(/2/):
Common Stock, $.01 par value;
45,000,000 shares authorized,
9,532,083 shares issued and
outstanding, actual and as adjusted;
10,797,083 shares issued and
outstanding, as further adjusted.... 95 95 108
Additional paid-in capital........... 37,850 37,850 54,737
Retained earnings.................... 34,744 24,754 24,754
Cumulative translation adjustment.... (37) (37) (37)
-------- -------- --------
Total shareholders' equity.......... 72,652 62,662 79,562
-------- -------- --------
Total capitalization................ $147,652 $137,662 $154,562
======== ======== ========
</TABLE>
- --------
(1) Does not include $6.5 million of outstanding letters of credit as of
January 31, 1998.
(2) Does not include: (i) 1,138,495 shares of Common Stock issuable upon the
exercise of outstanding stock options at a weighted average exercise price
of $8.18 per share and 361,505 shares of Common Stock reserved for
issuance pursuant to the Option Plans, as of January 31, 1998; (ii)
1,350,000 shares of Common Stock issuable upon exercise of the CVS
Warrant, which was outstanding as of January 31, 1998, but which was
simultaneously repurchased and cancelled by the Company on March 27, 1998;
and (iii) 110,000 shares of Common Stock issuable upon exercise of
underwriter warrants issued in the Company's Initial Public Offering. See
"Management" and "Certain Transactions."
18
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables present selected historical consolidated financial data
of the Company, which should be read in conjunction with the historical
consolidated 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 January 31, 1998 and
for the period from inception (May 26, 1996) to February 1, 1997 and for the
year ended January 31, 1998, have been derived from the historical
consolidated financial statements of the Company audited by Arthur Andersen
LLP, independent public accountants. The selected historical 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 historical consolidated financial statements
of the Predecessor Companies audited by KPMG Peat Marwick LLP, independent
auditors. The historical 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
historical consolidated financial data for the fifty-three week period ended
February 1, 1997 have been derived from unaudited financial statements of the
Predecessor Companies for the seventeen weeks ended May 25, 1996 and from the
audited financial statements of the Company for the period from inception (May
26, 1996) to February 1, 1997. The store operations 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, and for the period from inception (May
26, 1996) to February 1, 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.
19
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA (IN MILLIONS EXCEPT
SHARE AND PER SHARE AMOUNTS AND STORE DATA)
<TABLE>
<CAPTION>
COMBINED
PREDECESSOR COMPANIES COMPANY COMPANIES(/1/) COMPANY
----------------------------------------------------------------- ----------- -------------- -----------
EIGHT
MONTHS
ENDED PERIOD FROM
FIVE MONTHS JANUARY 27, INCEPTION
YEARS ENDED DECEMBER 31, ENDED 1996 (MAY 26, FIFTY-THREE YEAR
--------------------------------- ---------------- ----------- 1996) TO WEEKS ENDED ENDED
MAY 27, MAY 25, FEBRUARY 1, FEBRUARY 1, JANUARY 31,
1992 1993 1994 1995 1995 1996 1997 1997 1998
------ ------ ------ ------- ------- ------- ----------- -------------- -----------
<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 $424.8 $418.1
Costs and expenses:
Cost of goods
sold, buying and
occupancy costs.. 327.2 320.5 329.4 317.0 99.9 86.2 238.5 222.1 286.9 282.3
Selling, general
and
administrative
expenses......... 117.2 120.1 130.2 114.9 45.9 34.8 76.4 75.8 103.2 100.7
Depreciation and
amortization..... 17.4 20.7 22.3 21.4 9.0 4.7 13.3 1.0 4.8 2.3
Restricted stock
compensation
expense.......... -- -- -- -- -- -- -- 1.5 1.5 8.5
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 28.4 24.3
Interest expense,
net............... 6.9 5.1 8.4 10.4 3.4 1.6 7.4 5.3 6.5 6.5
------ ------ ------ ------- ------ ------ ------- ---------- ------ ----------
Income (loss)
before income
taxes............. 40.5 12.1 (15.7) (183.5) (33.5) (17.7) (150.2) 39.4 21.9 17.8
Income tax
provision
(benefit)......... 17.0 7.0 (3.1) (10.1) (5.5) (6.6) (4.6) 15.5 9.0 10.8
------ ------ ------ ------- ------ ------ ------- ---------- ------ ----------
Income (loss)
before
extraordinary
gain.............. 23.5 5.1 (12.6) (173.4) (28.0) (11.1) (145.6) 23.9 12.9 7.0
Extraordinary gain
on early
extinguishment of
debt, net of tax
of $2.5........... -- -- -- -- -- -- -- -- -- 3.8
------ ------ ------ ------- ------ ------ ------- ---------- ------ ----------
Net income (loss).. $ 23.5 $ 5.1 $(12.6) $(173.4) $(28.0) $(11.1) $(145.6) $ 23.9 $ 12.9 $ 10.8
====== ====== ====== ======= ====== ====== ======= ========== ====== ==========
BASIC NET INCOME
PER COMMON SHARE:
Income before
extraordinary
item.............. $ 3.12 $ 0.80
Extraordinary gain
on early
extinguishment of
debt, net of tax.. -- 0.42
---------- ----------
Basic net income
per common share.. $ 3.12 $ 1.22
========== ==========
Weighted average
common shares
outstanding....... 7,650,000 8,910,456
========== ==========
DILUTED NET INCOME
PER COMMON SHARE:
Income before
extraordinary
item.............. $ 2.67 $ 0.68
Extraordinary gain
on early
extinguishment of
debt, net of tax.. -- 0.36
---------- ----------
Diluted net income
per common share.. $ 2.67 $ 1.04
========== ==========
Weighted average
common shares
outstanding--
assuming
dilution.......... 8,970,377 10,397,665
========== ==========
OTHER DATA:
Adjusted EBITDA
(/2/)............. $64.8 $37.9 $15.0 $30.5 $(21.1) $(11.4) $52.7 $47.2 $34.7 $35.1
====== ====== ====== ======= ====== ====== ======= ========== ====== ==========
STORE DATA:
Traditional stores:
Open at end of
period........... 583 631 628 548 567 480 494 461 461 460
Net sales per
square foot for
stores open
entire year...... $415 $355 $340 $373 -- -- -- -- $389 $397
Change in
comparable store
sales (/3/)...... 2.1% (13.8)% (5.1)% (1.5)% 4.4% 3.9% (3.1)% (2.7)% (1.3)% 0.4%
Peak number of
seasonal stores
during period..... 32 80 135 227 -- -- 227 376 376 300
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES COMPANY
--------------------------- ---------------------------
DECEMBER 31,
---------------------------
FEBRUARY 1, JANUARY 31,
1992 1993 1994 1995 1997 1998
------ ------ ------ ------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital(/4/).... $ 36.7 $ 57.4 $ 77.1 $ 44.6 $ 83.8 $120.2
Total assets............ 376.6 401.0 392.7 182.4 172.4 227.7
Total long-term
debt(/5/).............. -- -- -- -- 59.6 75.0
Total liabilities....... 154.1 183.8 191.7 154.8 128.9 155.0
Shareholders' equity.... 222.5 217.2 201.0 27.6 43.5 72.7
</TABLE>
- --------
(1) Results for the fifty-three weeks ended February 1, 1997, include the
unaudited financial results of the Predecessor Companies for the seventeen
weeks ended May 25, 1996 and the audited financial results of the Company
for the period from inception (May 26, 1996) to February 1, 1997.
(2) EBITDA represents income (loss) from operations, before depreciation and
amortization. Adjusted EBITDA represents EBITDA before restricted stock
compensation expense and restructuring and asset impairment charges.
Adjusted EBITDA in 1995 and for the eight months ended January 27, 1996 is
before the restructuring and asset impairment charges of $182.2 million.
Adjusted EBITDA for the period from inception (May 26, 1996) to February
1, 1997, for the fifty-three week period ended February 1, 1997 and for
the year ended January 31, 1998 is before the restricted stock
compensation expense of $1.5 million, $1.5 million and $8.5 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 income as indicative of operating performance. Adjusted
EBITDA is included in this Prospectus because management believes that
certain investors find it a useful tool for measuring the Company's
ability to service its debt.
(3) Comparable store sales means sales generated by stores open at least one
full year.
(4) The working capital calculation excludes amounts due to CVS as of December
31, 1992, 1993, 1994 and 1995.
(5) 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. Total long-term debt does not include $7.9 million
and $6.5 million of outstanding letters of credit as of February 1, 1997
and January 31, 1998, respectively.
21
<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 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 January
31, 1998. 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 156 stores between
January 1, 1995 and May 25, 1996 that had not achieved cash flow targets
established by management. 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.
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 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 January 31, 1998, the Company had no borrowings
outstanding under the Senior Credit Facility; however, it had outstanding
letters of credit in the amount of $6.5 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
$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.
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. For the period ended February 1,
22
<PAGE>
1997, the Company recorded a $1.5 million noncash compensation charge related
to the 198,018 shares earned pursuant to the restricted stock agreement dated
May 25, 1996, among the Company and certain managers of the Company (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 recorded an additional noncash compensation charge of $8.5 million
in the fiscal year ended January 31, 1998 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. Such
restricted stock compensation charge significantly impacted the Company's
income from operations and net income for the fiscal year ending January 31,
1998; however, such noncash charge did not impact the Company's cash position.
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(1) COMPANY
---------------------------------------- -------------- ------------ -----------
FIVE MONTHS
ENDED
---------------
EIGHT PERIOD FROM
YEAR MONTHS INCEPTION FIFTY-THREE
ENDED ENDED (MAY 26, 1996) WEEKS ENDED YEAR ENDED
DECEMBER 31, MAY 27, MAY 25, JANUARY 27, TO FEBRUARY 1, FEBRUARY 1, JANUARY 31,
1995 1995 1996 1996 1997 1997 1998
------------ ------- ------- ----------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... 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................. 68.6 80.1 78.6 64.9 64.3 67.5 67.5
Selling, general and
administrative
expenses.............. 24.8 36.8 31.8 20.8 22.0 24.3 24.1
Depreciation and
amortization.......... 4.6 7.2 4.3 3.6 0.3 1.1 0.6
Restricted stock
compensation expense.. -- -- -- -- 0.4 0.4 2.0
Restructuring and asset
impairment charges.... 39.4 -- -- 49.5 -- -- --
Income (loss) from
operations............. (37.4) (24.1) (14.7) (38.8) 13.0 6.7 5.8
Interest expense, net... 2.3 2.8 1.4 2.0 1.6 1.6 1.6
Income tax provision
(benefit).............. (2.2) (4.4) (6.0) (1.2) 4.5 2.1 2.5
Extraordinary gain on
early extinguishment of
debt, net of tax....... -- -- -- -- -- -- 0.9
Net income (loss)....... (37.5) (22.5) (10.1) (39.6) 6.9 3.0 2.6
Adjusted EBITDA......... 6.6 (16.9) (10.4) 14.3 13.7 8.2 8.4
</TABLE>
- --------
(1) Results for the fifty-three weeks ended February 1, 1997 include the
unaudited financial results of the Predecessor Companies for the seventeen
weeks ended May 25, 1996 and the audited financial results of the Company
for the period from inception (May 26, 1996) to February 1, 1997.
23
<PAGE>
FIFTY-TWO WEEKS ENDED JANUARY 31, 1998 COMPARED TO FIFTY-THREE WEEKS ENDED
FEBRUARY 1, 1997
Wilsons opened 22 stores and closed 23 stores in the fifty-two week period
ended January 31, 1998 compared to eight store openings and 41 store closings
in the fifty-three week period ended February 1, 1997. As of January 31, 1998,
Wilsons operated 460 stores compared to 461 stores at February 1, 1997. The
Company operated approximately 200 holiday stores and 100 kiosks during the
1997 holiday season compared to 224 holiday stores and 152 kiosks during the
prior year holiday season.
Sales for the fifty-two week period ended January 31, 1998 were $418.1
million compared to $424.8 million for the fifty-three week period ended
February 1, 1997, a decrease of $6.7 million, or 1.6%. The additional week for
the year ended February 1, 1997 accounted for $6.3 million of the sales
decrease. In addition, the Company operated on average 21 fewer stores in the
fifty-two weeks ended January 31, 1998 as the Company closed underperforming
stores. Offsetting the sales decline was a 0.4% increase in comparable store
sales and increased sales in the Company's temporary mall-based holiday
stores. The increase in comparable store sales was primarily due to a fourth
quarter comparable store sales increase of 7.5% generated by a strong customer
response to the merchandise styles introduced in the fall season. Comparable
store sales were negatively impacted in the first thirty-nine weeks of fiscal
1997 by less low-priced clearance merchandise in the spring as there were
fewer liquidations of closed stores compared to the prior year and by
unseasonably warm temperatures from September through mid-October.
Cost of goods sold, buying and occupancy costs for the fifty-two week period
ended January 31, 1998 were $282.3 million, or 67.5% of sales, compared to
$286.9 million, or 67.5% of sales, for the fifty-three week period of the
previous year. Gross margin net of occupancy costs decreased 0.4 points as a
percent of sales for the 1997 period as compared to the prior period due
primarily to additional markdowns required to liquidate clearance merchandise.
Occupancy costs for 1997 decreased $2.8 million due principally to operating
fewer stores. 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 January 31, 1998.
Selling, general and administrative expenses for the fifty-two week period
ended January 31, 1998, were $100.7 million, or 24.1% of sales, compared to
$103.2 million, or 24.3% of sales, for the fifty-three week period ended
February 1, 1997. Selling, general and administrative expenses decreased $2.5
million in 1997 due to reducing corporate expenses, controlling variable
expenses in the stores, operating on average 21 fewer locations and having one
less week in the 1997 period.
Depreciation and amortization for the fifty-two week period ended January
31, 1998 was $2.3 million, or 0.6% of sales, compared to $4.8 million, or 1.1%
of sales, for the fifty-three week period ended February 1, 1997. The $2.5
million depreciation and amortization expense decrease in fiscal year 1997 was
due to the purchase accounting adjustment as part of the Acquisition that
reduced the amounts assigned to property and equipment, thereby reducing
depreciation expense.
Operating expenses in the fifty-two week period ended January 31, 1998
include an $8.5 million noncash compensation charge associated with the
vesting of the remaining 881,982 shares of Restricted Stock. See "Consolidated
Historical Financial Statements of the Company, Note 9," beginning on page F-
16.
As a result of the above, Wilsons had income from operations, excluding
restricted stock compensation expense, of $32.8 million for the fifty-two
weeks ended January 31, 1998, compared to income from operations, excluding
restricted stock compensation expense, of $29.9 million for the fifty-three
week period ended February 1, 1997. Adjusted EBITDA for the fifty-two weeks
ended January 31, 1998 increased to $35.1 million as compared to $34.7 million
for the fifty-three weeks ended February 1, 1997. Income from operations,
including the restricted stock compensation expense, was $24.3 million in
fiscal year 1997 compared to $28.4 million for the fifty-three weeks ended
February 1, 1997.
Net interest expense for the fifty-two week period ended January 31, 1998
was $6.5 million, or 1.6% of sales, compared to $6.5 million, or 1.6% of
sales, for the fifty-three week period ended February 1, 1997.
24
<PAGE>
Income tax expense for the fifty-two week period ended January 31, 1998 was
$10.8 million, or 2.5% of sales, compared to a $9.0 million income tax
expense, or 2.1% of sales, for the fifty-three weeks ended February 1, 1997.
The effective tax rate increased in 1997 to a 60.4% tax rate from a 41.1% tax
rate in 1996 due primarily to the nondeductibility of the $8.5 million
restricted stock compensation expense.
The Company realized a $3.8 million extraordinary gain on the early
extinguishment of debt, net of tax, in the fifty-two weeks ended January 31,
1998. The extraordinary gain was the result of repurchasing the CVS Note at a
discount. The CVS Note had been issued in connection with the Acquisition. See
"Consolidated Historical Financial Statements of the Company, Note 7,"
beginning on page F-14.
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 compared to 494 stores at the end of the same
period in the previous year. The 33 fewer stores were a result of closing
unprofitable stores as part of the Restructuring. In addition, Wilsons
operated 224 holiday stores and 152 kiosks during the 1996 holiday season
compared to 98 holiday stores and 129 kiosks during the prior year holiday
season.
Sales from inception to February 1, 1997 decreased 6.1% to $345.1 million
compared with sales of $367.6 million during the same period in the previous
year, reflecting a decrease in both the number of stores operated and in
comparable 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 the reduction in the
number of open stores was partially offset by the sales increase from
operating 149 additional holiday stores and kiosks and by the $2.8 million in
sales generated in the additional week in the thirty-six week period from
inception (May 26, 1996) to February 1, 1997.
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 noncash 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 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
25
<PAGE>
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of."
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 was
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 prior year
period. 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 Restructuring.
FIVE MONTHS ENDED MAY 25, 1996 COMPARED TO FIVE MONTHS ENDED MAY 27, 1995
Wilsons closed 71 stores and opened three new stores in the five months
ended May 25, 1996, compared to 63 store closings and two store openings in
the five months ended May 27, 1995. The store closings in the first five
months of 1996 and in 1995 were a result of the Restructuring. Wilsons
operated 480 stores as of May 25, 1996, compared to 567 stores at the end of
the same period in 1995.
Sales for the five-month period in 1996 decreased 12.1% to $109.6 million
compared with sales of $124.7 million during the same period of the prior
year. While total sales decreased as a result of operating an average of 90
fewer stores, comparable store sales increased 3.9% in the 1996 period
compared to the same period in the previous year. The 3.9% comparable store
sales increase in the 1996 period was the result of strong merchandise sales
in the ladies and accessories areas due to the clearance of merchandise
associated with store closings and the closings of holiday stores and 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 in the prior year 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.
26
<PAGE>
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
nondeductible 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
holiday stores and 129 kiosks during the fourth quarter of 1995, compared to
59 holiday stores and 76 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 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. Noncomparable store
sales, other than holiday stores and 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
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
kiosks. Occupancy costs increased as a percent of sales in 1995 as compared to
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.
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<PAGE>
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, the Company recorded a pre-tax restructuring charge of $134.3
million during the fourth quarter of 1995 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 GAAP and is not meant to represent discretionary
funds available to management. See "Selected Historical Consolidated Financial
Data, footnote 3."
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.
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 kiosks during the fourth quarter
of 1994 compared to 25 holiday stores and 55 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 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.
Noncomparable store sales, other than holiday stores and kiosk sales, were up
$12.9 million from 1993 as the Company realized the full year sales impact of
the 1993 openings and acquisitions.
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<PAGE>
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
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 kiosks in 1994. Occupancy
costs decreased as a percent of sales in 1994 as compared to 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
stores opened or acquired during the last seven months of 1993.
Income from operations before depreciation, amortization, restructuring and
asset impairment charges was $15.0 million, or 3.2% of sales, in 1994 compared
to $37.9 million, or 7.9% of sales, in 1993 due to the factors described
above.
Loss from operations in 1994 was $7.3 million, or 1.5% of sales, compared to
income from operations of $17.2 million, or 3.6% of sales, in 1993. The $24.5
million decline was primarily due to a 5.1% comparable store sales decline
during 1994 and the full year impact of 71 new or acquired stores during 1993.
Historically, the Company has opened most of its stores during the last half
of the year. As a result, new stores opened just prior to the fourth quarter
produce profits in excess of their annualized profits since the stores
typically generate losses in the first six months of the year.
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% provision 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. The Company currently plans to open 12 to 20
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.
General Electric Capital Corporation and a syndicate of banks (the "Banks")
have provided the Company with the Senior Credit Facility, which will expire
in May 1999. The Senior Credit Facility provides for
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<PAGE>
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 January 31, 1998, the Company had $6.5 million of senior indebtedness
outstanding under its Senior Credit Facility consisting of no borrowings and
$6.5 million of outstanding letters of credit. 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 ability to make capital expenditures, pay cash
dividends or make other distributions. The Company plans to use the Senior
Credit Facility for its immediate and future working capital needs, including
capital expenditures. For the fiscal year ended January 31, 1998, the peak
borrowings and letters of credit outstanding under the Senior Credit Facility
were $30.8 million and $51.9 million, respectively. For the fiscal year ended
January 31, 1998, the average amounts of borrowings and the average amounts
covered by outstanding letters of credit were $3.6 million and $28.1 million,
respectively. 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. The Company is
highly dependent on the Senior Credit Facility to fund working capital and
letter of credit needs, and management believes that the net proceeds from the
Senior Credit Facility, together with current and anticipated cash flow from
operations and the remaining net proceeds from the Company's Offering (see
"Consolidated Historical Financial Statements of the Company, Note 7,"
beginning on page F-14) 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.
On August 18, 1997, the Company completed a private offering of the Senior
Notes to certain institutional buyers (the "Debt Offering"). Interest on the
Senior Notes is payable semi-annually in arrears on February 15 and August 15
of each year. 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 on equal terms in
right of payment with all other current and future unsubordinated indebtedness
of the Company. The Indenture dated as of August 18, 1997, among the Company,
the other corporations listed on the signature pages thereof, and Norwest Bank
Minnesota, National Association 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 approximately $56.5 million of the approximately $72.0 million net
proceeds from the Debt Offering to repurchase the outstanding CVS Note issued
to CVS in connection with the Acquisition and pay the accrued interest
thereon. The balance of the net proceeds has been and will be used for general
corporate purposes, including capital expenditures and additional store
openings. Such proceeds will reduce the total amount of borrowings and shorten
the length of time the Company will borrow under the Senior Credit Facility.
30
<PAGE>
On March 27, 1998, Wilsons repurchased and simultaneously cancelled the CVS
Warrant for $9.99 million in cash. The warrant had been issued to CVS in the
Acquisition and gave CVS the right to purchase a total of 1,350,000 shares of
the Company's Common Stock.
CASH FLOW ANALYSIS
Operating activities for the fifty-two week period ended January 31, 1998
resulted in cash provided of $16.1 million compared to cash provided of $19.0
million in the fifty-three week period ended February 1, 1997. The $16.1
million cash provided by operating activities in 1997 was primarily the result
of net income of $15.6 million, excluding the nonrecurring $3.8 million
extraordinary gain on early extinguishment of debt and the $8.5 million
noncash restricted stock compensation expense.
Investing activity for the fifty-two weeks ended January 31, 1998 was
comprised of capital expenditures totaling $10.5 million. The capital
expenditures were primarily for the implementation of certain new information
systems, the renovation of and improvements to existing stores and the
construction of new stores. Capital expenditures for the fifty-three week
period ended February 1, 1997 totaled $9.3 million. The Company currently
plans to open 12 to 20 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.
Cash provided by financing activities for the fifty-two weeks ended January
31, 1998 was $25.8 million. The $25.8 million provided by financing activities
in 1997 was primarily the result of $9.5 million in net proceeds from the
Company's Initial Public Offering and $16.9 million in additional cash
proceeds from the Debt Offering after repayment of the CVS Note. Financing
activities in 1996 included the elimination of all prior indebtedness owed by
the Predecessor Companies to CVS and the sale of $12.0 million of Common Stock
and Series A Preferred. 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. See "Consolidated Historical
Financial Statements of the Company, Note 9," beginning on page F-16.
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
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<PAGE>
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 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
improvements to existing stores and enhancements to the Company's management
information systems. The decrease in cash used in investing activities in 1995
as compared to 1994 and 1993 was primarily due to five store openings in 1995
compared to 23 store openings in 1994 and 40 store openings in 1993. In
addition, the Company used approximately $6.4 million to purchase
substantially all of the assets of Georgetown Leather Design in June 1993.
Cash provided from financing activities for the period from inception to
February 1, 1997 was $16.2 million compared to cash used of $50.6 million in
the same period in 1995. The proceeds provided from financing activities in
1996 resulted from the sale of Common Stock and Series A Preferred 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 the Company's financial resources, including the
Senior Credit Facility, the remaining cash proceeds from the Debt Offering and
current and anticipated 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 58.5% of its 1997 sales in the peak
selling period. For 1997, 38.2% of the Company's sales were generated during
the period from the day after Thanksgiving through January 3, 1998. 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 mall-based 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 nine months of the year.
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The following table sets forth certain unaudited financial information for
Wilsons for each fiscal quarter of the year ended February 1, 1997 and the
year ended January 31, 1998. 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>
Year Ended February 1, 1997(1)(2)
Net sales................................. $66.8 $41.4 $86.4 $230.2
Gross margin.............................. 14.1 3.2 24.3 96.3
Income (loss) from operations............. (9.8) (18.0) 0.9 55.3
Net income (loss)......................... (7.2) (11.9) (1.0) 33.0
Year Ended January 31, 1998
Net sales................................. 56.9 36.5 81.3 243.4
Gross margin.............................. 9.7 (0.5) 23.8 102.8
Income (loss) from operations(3).......... (10.4) (18.7) (8.3) 61.7
Income (loss) before extraordinary
items(3)................................. (7.2) (12.6) (9.7) 36.5
Net income (loss)(3)...................... (7.2) (12.6) (5.9) 36.5
Net income (loss) per common share:(4)(5)
Basic................................... -- (1.41) (0.62) 3.84
Diluted................................. -- (1.41) (0.62) 3.35
</TABLE>
- --------
(1) 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.
(2) The year ended February 1, 1997 represented a fifty-three week period. The
first, third and fourth quarters were comprised of thirteen weeks and the
second quarter was comprised of fourteen weeks.
(3) Income (loss) from operations and net income (loss) for the third fiscal
quarter ending November 1, 1997 and for the fiscal year ended January 31,
1998 were significantly impacted by the net effect of certain non-
recurring charges of $3.8 million and $4.7 million, respectively.
(4) Net income (loss) per common share is only reported for quarters ending
subsequent to the effective date of the Company's Initial Public Offering
on May 27, 1997.
(5) As a result of the adoption of SFAS No. 128, "Earnings per Share," the
Company restated net loss per common share for the second quarter and
third quarter from the net loss per common share as reported in the
Company's quarterly reports on Form 10-Q for the corresponding quarters.
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.
YEAR 2000 ISSUE
The Company has recently implemented new merchandising, human resources and
financial systems that are year 2000 compliant. The Company is conducting a
comprehensive review of its other computer systems to identify the year 2000
impact and develop an implementation plan to address those issues identified.
The total cost of compliance and its effect on the Company's future results of
operations is being determined as part of the comprehensive review.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, "Reporting Comprehensive Income," effective beginning in 1998,
establishes standards of disclosure and financial statement display for
reporting total comprehensive income and the individual
33
<PAGE>
components thereof. Management believes the adoption of SFAS No. 130 will not
have a material impact on the Company's financial position or results of
operations.
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," effective in 1998, establishes new standards for determining
reportable segments and for disclosing information regarding each such
segment. Management believes the adoption of SFAS No. 131 will not have a
material impact on the Company's financial position or results of operations.
34
<PAGE>
BUSINESS
OVERVIEW
Wilsons, incorporated in Minnesota in 1996, is the leading specialty
retailer of men's and women's leather outerwear, apparel and accessories in
the United States. As of January 31, 1998, the Company operated 460 retail
stores in 44 states and England. These stores included 16 airport stores,
which focus on selling accessories to business travelers and tourists, and 444
mall-based stores. The Company offers 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. The Company supplements its mall-based operations
with seasonal holiday stores and kiosks during its peak selling period from
October through December and operated approximately 200 holiday stores and 100
kiosks in 1997. For the fiscal year ended January 31, 1998, the Company
generated net sales of $418.1 million and Adjusted EBITDA of $35.1 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.
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 year
ended December 31, 1994 to $35.1 million for the year ended January 31, 1998,
a compound annual growth rate of approximately 32%. Over the same period, the
Company's Adjusted EBITDA margin has increased from 3.2% to 8.4%, 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 initiated the Restructuring
and closed 156 stores between January 1, 1995 and May 25, 1996 that had not
achieved targeted cash flow levels, wrote off 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 1997, 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.
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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 recently implemented
merchandise information system. This system is designed to improve the quality
and availability of merchandising data to allow management to better analyze
customer purchase 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, Adventure Bound, Pelle Studio, Maxima, Open Road,
M. Julian, Handcrafted by Wilsons The Leather Experts and Vintage by
Wilsons The Leather Experts 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 Kenneth Cole, Andrew Marc and Bosca, which brand names and registered
trademarks are the property of their respective holders, as well as licensed
merchandise from the NBA, NFL, NHL and college teams. The combination of
Wilsons' brands with these designer and licensed brands is intended to enhance
the value of the Company's brands and the breadth and depth of Wilsons'
selection.
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REVENUE AND CASH FLOW GROWTH STRATEGY
Wilsons seeks to strengthen its market position and improve its operating
results by focusing on higher margin products, 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
Acquisition 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 further
leveraging administrative expenses; and (iv) improving the utilization of its
outlet stores to efficiently sell slower moving products.
Increase Comparable Store Sales. Wilsons has implemented programs designed
to increase 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
nonpeak selling seasons to emphasize accessories.
Increase Store Base. The Company plans to increase the number of its stores
and continue to open and operate seasonal holiday stores and 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 20 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 in sales than traditional
mall-based stores. Wilsons has opened 16 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 seasonal holiday stores and 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. Kiosks are generally designed to complement
and enhance the operation of the traditional Wilsons stores in the same
mall. Wilsons operated approximately 200 holiday stores and 100 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 wholesale 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
37
<PAGE>
lower prices to more consumers. Due in part to the popularity of the leather
"bomber" jacket, retail leather apparel sales reached a peak in 1989. Mass
merchandisers began selling leather during the early 1990s on a broader basis.
However, during the early 1990s, due to adverse conditions in the retail
apparel industry and changes in fashion trends, there was a 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 United States specialty retail leather apparel and accessories industry
following such consolidation.
COMPANY HISTORY
Wilsons House of Suede, Inc. ("House of Suede"), one of the subsidiaries
owned by CVS prior to the Acquisition, 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 sell leather products at an affordable price to the
average consumer. In implementing this strategy, House of Suede grew
successfully through the 1970s. 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 prior to the Acquisition 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 CVS's 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.
Although the Company is a retail company, certain of the Predecessor
Companies had previously been involved in manufacturing operations. Pursuant
to the sale agreement dated May 24, 1996 between the Company and CVS (the
"Sale Agreement"), 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 implemented information systems during 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.
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<PAGE>
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 customer preferences.
When the new system is fully operational, the Company believes its 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. As of January 31,
1998 the Company's nationwide network consisted of 460 retail stores located
in 44 states and England. These stores included 16 airport stores, which focus
on selling accessories to business travelers and tourists, and 444 mall-based
stores. The Company regularly supplements its mall-based operations with
holiday stores and kiosks during its peak selling period from October through
December. The Company operated approximately 200 holiday stores and 100 kiosks
in 1997.
39
<PAGE>
- --------------------------------------------------------------------------------
460 STORE LOCATIONS
- --------------------------------------------------------------------------------
LOGO
*Corporate Headquarters and Distribution Center
STORE COUNT AS OF JANUARY 31, 1998
<TABLE>
<CAPTION>
TRADITIONAL AIRPORT TOTAL
----------- ------- -----
<S> <C> <C> <C>
Alabama......... 2 -- 2
Arizona......... 5 -- 5
Arkansas........ 1 -- 1
California...... 62 -- 62
Colorado........ 8 -- 8
Connecticut..... 6 -- 6
Delaware........ 3 -- 3
Florida......... 4 -- 4
Georgia......... 11 3 14
Idaho........... 1 -- 1
Illinois........ 36 -- 36
Indiana......... 10 1 11
Iowa............ 7 -- 7
Kansas.......... 2 -- 2
Kentucky........ 4 -- 4
Louisiana....... 3 1 4
Maine........... 3 -- 3
Maryland........ 14 2 16
Massachusetts... 18 1 19
Michigan........ 20 -- 20
Minnesota....... 13 1 14
Missouri........ 5 -- 5
Nebraska........ 3 -- 3
</TABLE>
<TABLE>
<CAPTION>
TRADITIONAL AIRPORT TOTAL
----------- ------- -----
<S> <C> <C> <C>
Nevada.......... 4 -- 4
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 1 25
Oklahoma........ 1 -- 1
Oregon.......... 3 -- 3
Pennsylvania.... 22 2 24
Rhode Island.... 2 -- 2
South Carolina.. 1 -- 1
South Dakota.... 2 -- 2
Tennessee....... 7 1 8
Texas........... 16 -- 16
Utah............ 5 -- 5
Virginia........ 12 1 13
Washington...... 16 -- 16
West Virginia... 1 -- 1
Wisconsin....... 14 -- 14
England......... -- 2 2
--- --- ---
Total........... 444 16 460
=== === ===
</TABLE>
40
<PAGE>
MALL-BASED STORES
As of January 31, 1998, Wilsons operated 444 mall-based stores in 44 states
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
socioeconomic 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 1997, the mall-based stores
had sales of $367.8 million, representing 88.0% of the Company's total sales;
stores open the entire year averaged sales per store of $821,000 and sales per
square foot of $390 as compared to sales per store of $806,000 and sales per
square foot of $387 in 1996.
AIRPORT STORES
As of January 31, 1998, Wilsons operated 16 airport stores under the
"Wilsons The Leather Experts" name, with 14 locations in the United States and
two locations in England. These stores average approximately 800 square feet
in size and are designed to target business travelers and tourists. Airport
stores emphasize a wide assortment of leather accessories and carry a limited
assortment of leather apparel. Airport stores tend to be less seasonal, due in
part to a more even flow of customer traffic during the year as compared to
malls, and to an emphasis on accessories. In 1997, airport stores had sales of
$11.2 million, representing 2.7% of the Company's total sales; stores open the
entire year averaged sales per store of $852,000 and averaged sales per square
foot of $981 as compared to sales per store of $791,000 and sales per square
foot of $861 in 1996.
HOLIDAY STORES
In 1997, Wilsons operated approximately 200 holiday stores in 38 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. An additional benefit of holiday stores is the ability to test
new malls where the Company is considering opening a permanent store.
Merchandise purchased at holiday stores may be returned to any of the
Company's stores. In 1997, holiday stores had sales of $32.8 million,
representing 7.8% of the Company's total sales; such stores averaged sales per
store of $169,000 as compared to sales per store of $136,000 in 1996.
KIOSKS
In 1992, Wilsons began to use a "kiosk" concept in order to take further
advantage of the seasonality of the Company's business and provide a new
distribution channel to serve customers. In 1997, Wilsons operated
approximately 100 kiosks, 92.7% of which were in malls where Wilsons already
had a permanent store. A kiosk is generally a 100 square-foot temporary unit
located in the common area of a mall. Open primarily from 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 permanent Wilsons store in the same mall.
Merchandise purchased at kiosks may be returned to any of the Company's
stores. In 1997, seasonal kiosks had sales of $6.3 million, representing 1.5%
of the Company's total sales; such kiosks averaged sales per store of $57,000
as compared to sales per store of $55,000 in 1996.
41
<PAGE>
MERCHANDISING
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, Georgetown
Leather Design, Adventure Bound, Pelle Studio, Maxima, Open Road, M. Julian,
Handcrafted by Wilsons The Leather Experts and Vintage by Wilsons The Leather
Experts. Wilsons also complements its product mix by selling, on a non-
exclusive basis, current fashion designer merchandise, such as Kenneth Cole,
Andrew Marc and Bosca, as well as licensed merchandise from the NBA, NFL, NHL
and college teams. 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 the
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 25.8% in
1997. Over the same period, men's apparel sales have decreased as a percentage
of the Company's sales from 46.8% to 38.9%, and women's apparel sales have
decreased from 41.3% to 35.3%.
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 effectively source 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 1997, 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 allows the Company to benefit from
better pricing and faster delivery. Management believes that the volume of
finished goods purchased from the contract manufacturers enables the Company
to secure sufficient manufacturing capacity without having the added cost of
establishing its own manufacturing facilities.
42
<PAGE>
The Company has developed an infrastructure in the Far East that allows the
Company to control merchandise production without owning manufacturing
facilities or extensively utilizing third-party wholesalers. The Company's
contract manufacturing managers located in China, India, Indonesia, Hong Kong
and South Korea are primarily responsible for overseeing 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 55% of its leather apparel and accessories in 1997, and India and
Indonesia, from which the Company purchased approximately 38% and 6%,
respectively, of its leather apparel and accessories in 1997. 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.
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 1997,
Wilsons spent approximately $4.8 million on local television, radio and other
advertising media, including production costs.
The Company's layaway program is a key marketing strategy designed to build
sales. The layaway program represented 14.3% and 15.7% of the Company's net
sales in 1997 and 1996, respectively. The layaway program is designed to: (i)
commit the Company's customers to buy coats early in the season, frequently in
advance of when such coats will be 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
analyzes this data and attempts to identify key activities in the business
which should incorporate customer segmentation information (e.g., marketing,
merchandising and store locations). In addition, Wilsons conducts marketing
research of Wilsons' and non-Wilsons' leather purchasing consumers to gain
additional knowledge of consumer behavior. The Company's marketing department
plans to use the customer segment information to employ more tightly targeted
customer promotions. See "--Vertically Integrated Operations."
43
<PAGE>
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 to 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. Each store receives a shipment approximately 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. Wilsons believes it has substantially
completed its systems conversion to the client/server platform. 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 accessibility to such 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."
44
<PAGE>
The Company's automated point-of-sale registers in all stores capture
customer transactions by SKUs that are transmitted electronically to the
headquarters' computer, updating other systems with critical sales and
customer information to replenish stores and determine reorder quantities, to
modify merchandise allocation plans tailored to regional sales patterns and to
establish marketing promotions targeted to particular customer segments. To
assist in the operation of each store, the Company utilizes a PC-based
paperless communication system that permits daily communications of advanced
shipment notices, and electronic tracking of inventory transfers between
locations and supplies ordering. Each store uses computer-based interview
systems for new hiring.
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 utilizes a merchandise planning
application with strong analytical capabilities and 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 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 were replaced and upgraded to operate in a client/server environment.
PROPERTIES
As of January 31, 1998, Wilsons operated 459 leased store locations and one
owned store location. Substantially all of Wilsons' stores were located in
regional shopping malls or airport retail locations. 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 that
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 reasonable efforts to
remove the affilate 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 corporate offices and the land
on which they are located. The combined facility is approximately 343,530
square feet.
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.
45
<PAGE>
SEASONALITY
A significant portion of the Company's sales is generated in the period from
October through December (58.5% for the year ended January 31, 1998), which
includes the holiday selling season. During the period from the day after
Thanksgiving through January 3, 1998, the Company generated 38.2% 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. See "Risk Factors--
Seasonality of Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Seasonality and Inflation."
TRADEMARKS
Wilsons conducts its business under various trade names, trademarks and
service marks in the United States, including Wilsons the Leather Experts,
Tannery West, Georgetown Leather Design, Adventure Bound, Pelle Studio,
Maxima, Open Road, M. Julian, Handcrafted by Wilsons The Leather Experts and
Vintage by Wilsons the Leather Experts 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 January 31, 1998, Wilsons had approximately 3,500 employees. During
the Company's peak selling season (from October through December), Wilsons
employs approximately 3,500 additional seasonal employees. Wilsons considers
its relationships with its employees to be good. None of the Company's
employees are governed by collective bargaining agreements.
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.
46
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the directors
and executive officers of the Company as of April 1, 1998:
<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............ 55 President, Chief Operating Officer and
Director
Carol S. Lund.............. 45 Executive Vice President
John Serino................ 48 Executive Vice President, Store Sales
W. Michael Bode............ 53 Vice President, Manufacturing
Betty Goff................. 41 Vice President, Human Resources
Jed Jaffe.................. 43 Vice President, Real Estate
Jeffrey W. Orton........... 42 Vice President, Information Systems and
Strategies and Logistics
David B. Sharp............. 50 Vice President, Marketing
Daniel R. Thorson.......... 39 Treasurer and Director, Business Planning
and Analysis
Douglas J. Treff........... 40 Vice President, Finance, Chief Financial
Officer and Assistant Secretary
Thomas R. Wildenberg....... 40 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, and he served in such capacity until April 1992. 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
Wilsons since April 1992. In 1988, Mr. Rogers joined Wilsons as Executive Vice
President and Chief Operating Officer when Bermans was acquired by Wilsons,
and he served in such capacity until April 1992. 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 of the Company since
December 1997. Ms. Lund served as Executive Vice President and General
Merchandise Manager of Wilsons from 1994 to 1997, 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 Wilsons from 1987 to
1992 and as Vice President and General Merchandise Manager of Wilsons 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.
John Serino has served as Executive Vice President, Store Sales of the
Company since January 1998. Prior to rejoining Wilsons, Mr. Serino served as
President and Chief Operating Officer of Auto Palace, ADAP Inc., an auto parts
retail company, from 1995 to 1998 and as Senior Vice President and Executive
Vice President, Sales of Marshalls, Inc., a department store company, from
1992 to 1995. Mr. Serino previously served with Wilsons
47
<PAGE>
as Senior Vice President, Stores from 1989 to 1990 and as President of the
Tannery West division from 1990 to 1992.
W. Michael Bode has served as Vice President, Manufacturing of Wilsons 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 Wilsons from 1981 to 1982.
Betty Goff has served as Vice President, Human Resources of Wilsons since
February 1992. Ms. Goff served as Director of Executive Recruitment and
Placement of Wilsons from October 1987 to February 1992.
Jed Jaffe has served as Vice President, Real Estate of the Company since
March 1998. Mr. Jaffe served as Vice President, Store Sales of Wilsons from
January 1996 to March 1998, as Vice President Strategic Planning of Wilsons
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 Wilsons from February 1993 to August 1993, as
President of Tannery West from September 1992 to January 1993 and as Director
of Manufacturing of Wilsons 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.
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 Wilsons 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.
David B. Sharp has served as Vice President, Marketing of Wilsons 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 Wilsons 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.
Douglas J. Treff has served as Vice President, Finance since January 1993
and as Chief Financial Officer and Assistant Secretary of Wilsons since May
1996. Mr. Treff served as Controller of Wilsons from September 1992 to January
1993 and as Director of Financial Planning and Analysis of Wilsons from May
1990 to September 1992.
Thomas R. Wildenberg has served as Controller since October 1994 and as
Chief Accounting Officer of Wilsons 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 1992 to October 1994.
Lyle Berman is a member of the Company's Board of Directors. Mr. Berman has
served as Chairman of the Board of Grand Casinos, Inc., a gaming corporation,
since October 1990. Mr. Berman also served as Chief Executive Officer of Grand
Casinos, Inc. from October 1990 to March 1998. Mr. Berman has served 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 an executive officer and a director of Stratosphere
Corporation, an amusement and
48
<PAGE>
recreation company, from February 1993 to July 1997. 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, and was named Chief Executive Officer in March
1998. Mr. Brosig also served as Executive Vice President--Investor Relations
and Special Projects of Grand Casinos, Inc. from August 1994 to September
1996, as Secretary of Grand Casinos, Inc. from its inception until May 1995,
as its President from May 1993 to August 1994, as its Chief Operating Officer
from October 1991 until May 1993 and as its Chief Financial Officer from its
inception until January 1992. Mr. Brosig is also a director of G-III and
Famous Dave's of America, Inc.
Morris Goldfarb is a member of the Company's Board of Directors. Mr.
Goldfarb serves as Chief Executive Officer and Chairman of the Board of
Directors of G-III, a leather and non-leather apparel manufacturer and
distributor, as a director of Grand Casinos, Inc., as a director of Panasia
Bank and as a director of Smiles Amusement Company LLC. 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. 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 Chairman of the Board of
Directors of Grand Casinos, Inc. and the Chief Executive Officer and Chairman
of the Board of Directors of Rainforest Cafe, Inc. Mr. Brosig is the Chief
Executive Officer, 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.
49
<PAGE>
EXECUTIVE COMPENSATION
The Company was incorporated in May 1996. The following table sets forth the
compensation for the 1997 fiscal year ended January 31, 1998 and for the
thirty-six week period of the 1996 fiscal year from inception (May 26, 1996)
to February 1, 1997 of the Chief Executive Officer of the Company and the four
other most highly compensated executive officers of the Company (the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
- ----------------------------------------------------------------------------------
<CAPTION>
LONG-TERM
COMPENSATION
----------------
ANNUAL
NAME AND PRINCIPAL COMPENSATION SECURITIES
POSITION FISCAL ------------------ UNDERLYING ALL OTHER
- ------------------ YEAR SALARY BONUS OPTIONS (SHARES) COMPENSATION(1)
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
Joel N. Waller......... 1997 $380,000 $148,960 99,000 $9,567
Chairman and Chief
Executive Officer 1996 263,077 124,222 -- 9,915
David L. Rogers........ 1997 380,000 148,960 99,000 9,567
President and Chief
Operating Officer 1996 263,077 124,222 -- 10,107
Carol S. Lund.......... 1997 248,269 78,400 30,000 9,567
Executive Vice
President 1996 166,154 62,765 -- 9,388
David B. Sharp......... 1997 211,308 61,734 24,000 8,300
Vice President,
Marketing 1996 144,000 50,512 -- 4,841
Jed Jaffe.............. 1997 194,885 57,658 27,000 9,567
Vice President, Real
Estate(2) 1996 124,615 43,711 -- 7,892
- ----------------------------------------------------------------------------------
</TABLE>
(1) Includes profit sharing contributions and 401(k) matching contributions
under the Company's 401(k) Profit Sharing Plan.
(2) Jed Jaffe served as Vice President, Store Sales until March 1998, when he
was named Vice President, Real Estate.
50
<PAGE>
STOCK OPTIONS
The following table provides certain information concerning grants of stock
options during the fiscal year ended January 31, 1998 to the Named Executive
Officers. In accordance with the rules of the Commission, the table sets forth
the potential realizable value over the terms of the options (the period from
the grant date to the expiration date) based on assumed rates of stock
appreciation of five percent and ten percent, compounded annually. These
amounts do not represent the Company's estimate of future stock price. Actual
realizable values, if any, of stock options will depend on the future
performance of the Common Stock.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES
OF STOCK PRICE
APPRECIATION FOR OPTION
TERM(1)
INDIVIDUAL GRANTS ------------------------
- -----------------------------------------------------------------------------------------------
OPTION GRANTS IN LAST FISCAL YEAR
- -------------------------------------------------------------------------------
NUMBER OF % OF TOTAL
SHARES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION
NAME GRANTED FISCAL YEAR SHARE DATE 5% 10%
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Joel N. Waller.......... 99,000(2) 10.11% $8.75 1/28/08 $ 544,780 $ 1,380,579
David L. Rogers......... 99,000(2) 10.11 8.75 1/28/08 544,780 1,380,579
Carol S. Lund........... 30,000(2) 3.06 8.75 1/28/08 165,085 418,357
David B. Sharp.......... 24,000(2) 2.45 8.75 1/28/08 132,068 334,686
Jed Jaffe............... 27,000(2) 2.76 8.75 1/28/08 148,576 376,522
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) The potential realizable value is based on the term of the nonstatutory
stock options at the time of grant (ten years) and on the assumption that
the fair value of the Common Stock appreciates at the indicated rate for
the entire term of the option and that the option is exercised at the
exercise price and sold on the last day of its term at the appreciated
price.
(2) Represents nonstatutory stock options to purchase shares of Common Stock
granted on January 28, 1998 under the 1996 Option Plan. The listed options
become cumulatively exercisable with respect to one-third of the shares
covered thereby on each of the first three anniversaries of the date of
grant. The options each have a maximum term of ten years, subject to
earlier termination in the event of the optionee's cessation of service
with the Company. In the event of (i) a dissolution or liquidation of the
Company, (ii) a merger or consolidation of the Company with or into any
other entity, regardless of whether the Company is a surviving
corporation, or a proposed statutory share exchange with any other entity,
or (iii) a sale of substantially all of the assets of the Company, the
Compensation Committee may, but is not required to, arrange for the
substitution of other options for the listed options or declare that all
such options are immediately exercisable. If the Compensation Committee
makes a declaration that all such options are immediately exercisable,
then the options shall terminate at the date specified in such declaration
and the Company may, but is not required to, pay the holder of such
canceled options an amount equal to their equity therein. Upon an event
changing control of the Company (as defined in the 1996 Option Plan), the
listed options would become exercisable in full, provided that the
Compensation Committee, in its discretion, may provide that some or all of
such options will be canceled upon the change in control and the holders
of such canceled options will be paid an amount equal to their equity
therein.
51
<PAGE>
The following table summarizes option exercises during the fiscal year ended
January 31, 1998 and provides information regarding the number of all
unexercised stock options held by the Named Executive Officers as of January
31, 1998, the end of the Company's last fiscal year:
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
- -------------------------------------------------------------------------------------------------
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR- IN-THE-MONEY OPTIONS AT
SHARES END FISCAL YEAR-END(1)
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Joel N. Waller.......... 0 $ 0 0 99,000 $ 0 $ 0
David L. Rogers......... 0 0 0 99,000 0 0
Carol S. Lund........... 0 0 0 30,000 0 0
David B. Sharp.......... 0 0 0 24,000 0 0
Jed Jaffe............... 0 0 0 27,000 0 0
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) Calculated on the basis of the fair market value of the underlying shares
of Common Stock at January 30, 1998, the last trading day of the Company's
fiscal year, as reported by The Nasdaq(R) National Market, of $8.75 per
share, minus the per share exercise price, multiplied by the number of
shares underlying the option. All options listed in the table were granted
on January 28, 1998 at an exercise price of $8.75. On April 30, 1998, the
closing sale price of a share of the Common Stock was $14.875.
EMPLOYMENT CONTRACTS
The Company has entered into employment agreements with Joel Waller, as
Chairman and Chief Executive Officer, and David Rogers, as President and Chief
Operating Officer, 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 receive 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. Messrs. Waller and Rogers are
also entitled to participate in the Incentive Plan (as hereinafter defined),
making them 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."
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
rated 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."
There are no employment contracts with the other three Named Executive
Officers, Carol S. Lund, Jed Jaffe and David B. Sharp.
EMPLOYEE BENEFIT PLANS
The Company has the Executive and Key Management Incentive Plan (the
"Incentive Plan"), the 401(k) Profit Sharing Plan (the "401(k) Plan"), the
1996 Option Plan and the 1998 Option Plan for the benefit of its employees.
52
<PAGE>
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 $80,000) 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
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 Option Plans 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"). Options
granted under the 1998 Option Plan are NSOs. Subject to certain adjustments,
the maximum number of shares of Common Stock available for issuance under the
Option Plans is 1,500,000 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. Directors and officers are not eligible to receive
stock option grants under the 1998 Option Plan. As of January 31, 1998, the
Company had outstanding options under the Option Plans covering an aggregate
of 1,138,495 shares of Common Stock at a weighted average exercise price of
$8.18 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 the Restricted Stock Agreement
with certain managers of the Company, including the Named 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 Debt 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. Morris Goldfarb is reimbursed
for his travel expenses to the Company's headquarters for Board meetings.
The Company has granted stock options to the 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 rated basis on each of the first, second, and third
anniversaries of the date of grant if Mr. Brosig continues as a director,
subject to the possible acceleration of vesting in certain circumstances. As
of April 1, 1998, options for 3,600 shares had vested. In addition, on January
28, 1998, the Company granted a stock option for 33,000 shares of Common Stock
of the Company to each of Lyle Berman, Thomas J. Brosig and Morris Goldfarb.
Such options vest, cumulatively, on a pro rated basis, on each of the first,
second and third anniversaries of the date of grant if the optionee continues
as a director, subject to the possible acceleration of vesting in certain
circumstances.
53
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of April 1, 1998 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 Named 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>
AMOUNT AND NATURE OF PERCENTAGE OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP OUTSTANDING SHARES
------------------------------------ -------------------- ------------------
<S> <C> <C>
Neil I. Sell, as sole trustee of four
irrevocable trusts for the benefit of
Lyle Berman's children, and of two
irrevocable trusts for the benefit of
David Rogers' children and on behalf of
himself................................ 2,222,365.8(1) 23.3%
3300 Norwest Center
90 South Seventh Street
Minneapolis, MN 55402
Morris Goldfarb........................ 2,147,630.0(2) 22.5
G-III Apparel Group, Ltd.
512 Seventh Avenue
New York, NY 10018
Joel N. Waller......................... 1,115,285.3(3) 11.7
7401 Boone Avenue North
Brooklyn Park, MN 55428
David L. Rogers........................ 967,774.5 10.2
7401 Boone Avenue North
Brooklyn Park, MN 55428
Lyle Berman............................ 311,630.0 3.3
Thomas J. Brosig....................... 3,600.0(4) *
Carol S. Lund.......................... 149,833.8 1.6
David B. Sharp......................... 141,509.7 1.5
Jed Jaffe.............................. 124,861.5 1.3
All executive officers and directors
as a group (15 persons)............... 5,328,385.2 55.9
</TABLE>
- --------
* Represents less than 1%.
(1) 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 Rogers'
children. Mr. Sell has disclaimed beneficial ownership of such shares.
(2) Includes 172,800 shares of Common Stock owned by the Goldfarb Family
Partners L.L.C. of which Mr. Goldfarb is the manager.
(3) Includes 100,000 shares of Common Stock owned by the Waller Family Limited
Partnership of which Mr. Waller is a general partner; 3,000 shares of
Common Stock owned by Mr. Waller's spouse and Mr. Waller's mother jointly;
and 1,000 shares of Common Stock owned by Mr. Waller's spouse. 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. Mr. Waller disclaims
beneficial ownership of the shares and warrants owned by his spouse and
his mother.
(4) Represents options which are currently exercisable to purchase 3,600
shares of Common Stock.
54
<PAGE>
CERTAIN TRANSACTIONS
The following are summaries of the material terms of certain agreements.
Copies of these agreements are filed as exhibits to the Registration Statement
of which this Prospectus is a part. The following summaries do not purport to
be complete and are qualified in their entirety by the terms of such
agreements. See "Additional Information."
During fiscal year 1997, the Company was party to certain transactions
involving CVS. Until March 27, 1998, CVS had been an approximately 12.4%
shareholder of the Company. See "Warrants Held By CVS" below.
SALE AGREEMENT
On May 24, 1996, CVS, the Company and Wilsons Center, Inc., one of the
Predecessor Companies entered into the Sale Agreement, which provided for CVS
to sell the Wilsons Shares to the Company on May 25, 1996, 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 under which CVS
could purchase 1,350,000 shares of Common Stock at an exercise price of $.60
per share; (iv) the Manager Warrant under which certain officers could
purchase up to 1,080,000 shares of the Company's Common Stock at an exercise
price of $.60 per share; (v) 4,320,000 shares of the Company's Common Stock;
and (vi) 7,405 shares of the Company's Series A Preferred. Thereafter, Limited
Partnership I purchased from CVS the 4,320,000 shares of the Company's Common
Stock and Limited Partnership II purchased from CVS the 7,405 shares of the
Company's Series A Preferred for an aggregate consideration of $10.0 million
in cash. 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, which included the general partners
Lyle Berman and Morris Goldfarb, based on their respective interests in the
Limited Partnerships. Lyle Berman and Morris Goldfarb are directors of the
Company.
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, claims by the Company for indemnifications by CVS, other
than (a) those referred to in clauses (iii), (iv), (v) and (vi) above and (b)
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, claims
55
<PAGE>
by CVS for 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.
NOTE HELD BY CVS
On May 25, 1996, the Company issued the CVS Note to CVS for $55.8 million as
partial consideration for the Acquisition. $5.5 million of accrued interest
became a part of the principal balance on May 25, 1997. On August 18, 1997,
the Company paid $56.5 million to repurchase the CVS Note from CVS at a
discount and to pay accrued interest thereon.
RESTRICTED STOCK AGREEMENT
On May 25, 1996, the Company entered into the Restricted Stock Agreement
with certain managers of the Company (the "Managers"), including the Named
Executive Officers. 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 February 1, 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 noncash 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. See "--Note Held by CVS"
above. The Company recorded an additional noncash 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 price of the Restricted Stock,
which was $.60 per share; however, such charge did not impact the Company's
total shareholders' equity or cash balances. Each Manager was responsible for
any taxes and other sums required by law to be withheld by the Company in
connection with the Restricted Stock.
Pursuant to the Restricted Stock Agreement, 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. On
August 18, 1997, the remaining shares of Restricted Stock vested.
WARRANTS HELD BY CVS
The CVS Warrant was repurchased by the Company on March 27, 1998, for $9.99
million in cash, and, upon the repurchase, the warrant was canceled. The
purchase price of the CVS Warrant equaled $7.40 for each of the 1,350,000
shares of the Company's Common Stock subject to the CVS Warrant ($8.00 per
share minus a $.60 per share exercise price). The Manager Warrant
automatically lapsed upon repurchase of the CVS Note on August 18, 1997. See
"Note Held by CVS" above.
OTHER RELATIONSHIP
The Company regularly conducts business with G-III of which Morris Goldfarb,
a director of the Company, is the Chief Executive Officer and Chairman of its
board of directors. Purchases from G-III totaled $7.5 million, $5.0 million,
and $4.7 million for the fiscal year ended January 31, 1998, the 13-month
period ended February 1, 1997 and the 12-month period ended December 31, 1995,
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.
56
<PAGE>
DESCRIPTION OF SECURITIES
GENERAL
The Company's Amended Articles of Incorporation authorize the issuance of up
to 45,000,000 shares of Common Stock, $0.01 par value, and 10,000,000 shares
of Preferred Stock, $0.01 par value, the rights and preferences of which may
be established from time to time by the Company's Board of Directors. If all
of the Redeemable Warrants are exercised, there will be issued and outstanding
10,797,083 shares of Common Stock.
COMMON STOCK
As of January 31, 1998, 9,532,083 shares of Common Stock were issued and
outstanding. An additional 1,000,000 and 500,000 shares of Common Stock are
reserved for issuance upon exercise of options pursuant to the 1996 Option
Plan and 1998 Option Plan, respectively. Each holder of shares of Common
Stock, including the shares of Common Stock offered hereby, will have equal
rights in all respects, including the right to one vote on all matters
submitted to shareholders for each share of Common Stock standing in the name
of such holder on the books of the Company. There are no cumulative voting
rights for the election of directors, which means that the holders of more
than 50% of such outstanding shares voting for the election of directors can
elect all of the directors of the Company standing for election. Shares of
Common Stock do not have subscription or conversion rights and there are no
redemption or sinking fund provisions applicable thereto. Holders of Common
Stock have no preemptive rights to purchase pro rata portions of new issues of
Common Stock or Preferred Stock. The outstanding shares of Common Stock are,
and the shares of Common Stock offered hereby will be, when issued and sold
hereunder, fully paid and non-assessable.
As of April 1, 1998, the Company's directors and executive officers as a
group beneficially own 55.9% of the outstanding Common Stock of the Company.
If all of the Redeemable Warrants are exercised, such persons will
beneficially own 49.3% of the outstanding shares. See "Security Ownership of
Certain Beneficial Owners and Management." Accordingly, such persons will
continue to be able to substantially control the Company's affairs.
The rights of holders of the shares of Common Stock may become subject in
the future to prior and superior rights and preferences in the event the Board
of Directors establishes one or more additional classes of Common Stock, or
one or more additional series of Preferred Stock. The Board of Directors has
no present plan to establish any such additional class or series.
PREFERRED STOCK
As of January 31, 1998, 15,000 shares were authorized as Series A Preferred
with no such shares outstanding. 7,595 shares of Series A Preferred are
available for future issuance at the discretion of the Company's Board of
Directors. On April 28, 1998, however, the Board of Directors approved,
subject to shareholder approval at the Company's annual meeting on June 16,
1998, proposed Amended and Restated Articles of Incorporation of the Company,
which effect the cancellation of the remaining designated Series A Preferred.
The Board of Directors may from time to time issue the shares of authorized
Preferred Stock in one or more series, each of such series to have such
relative rights, voting power, preferences, qualifications, limitations and
restrictions as are adopted by the Board of Directors, including dividend
rights, redemption and liquidation preferences, conversion rights and voting
rights, any or all of which may be greater than the rights of the Common
Stock. The Board of Directors, without shareholder approval, can issue
Preferred Stock with voting, conversion or other rights that could adversely
affect the voting power and other rights of the holders of Common Stock.
Preferred Stock could thus be issued quickly with terms calculated to delay or
prevent a change in control of the Company or make removal of management more
difficult. Additionally, the issuance of Preferred Stock may have the effect
of decreasing the market price of the Common Stock, and may adversely affect
the voting and other rights of the holders of Common Stock.
57
<PAGE>
REDEEMABLE WARRANTS
WARRANT AGREEMENT
As of January 31, 1998, 1,265,000 Redeemable Warrants were issued and
outstanding. The Redeemable Warrants are governed by the provisions of the
Warrant Agreement between the Company and Norwest Bank Minnesota, National
Association, as Warrant Agent. A copy of the Warrant Agreement has been filed
as an exhibit to the Registration Statement of which this Prospectus is a
part. The following statements are summaries of certain provisions contained
therein, are not complete, and are qualified in their entirety by reference to
the Warrant Agreement.
One Redeemable Warrant entitles the Warrantholder thereof to purchase one
share of Common Stock until May 27, 2000. Each Warrant is exercisable at a
price equal to $13.50 per share, subject to adjustment as a result of certain
events. The Redeemable Warrants are redeemable, in whole, by the Company at a
redemption price of $.01 per Redeemable Warrant, on not less than 30 days
written notice, provided that the closing bid price of the Common Stock
exceeds $14.50 per share (subject to adjustment) for any 10 consecutive
trading days prior to such notice. Holders of Redeemable Warrants may exercise
their rights until the close of business on the date fixed for redemption,
unless extended by the Company. Redemption of the Redeemable Warrants is
subject to the provisions in the Senior Credit Facility and the Indenture
restricting distributions to security holders.
Warrantholders as such are not entitled to vote, receive dividends, or
exercise any of the rights of holders of shares of Common Stock for any
purpose until such Redeemable Warrants have been duly exercised and payment of
the purchase price has been made. The Redeemable Warrants are in registered
form and may be presented for transfer, exchange, or exercise at the corporate
office of the Warrant Agent.
The Warrant Agreement provides for adjustment of the exercise price and the
number of shares of Common Stock purchasable upon exercise of the Redeemable
Warrants to protect Warrantholders against dilution in certain events,
including stock dividends, stock splits and any combinations or
reclassifications of Common Stock. In the event of a merger, consolidation,
reclassification or disposition of substantially all the assets of the
Company, the Warrantholders are entitled to receive, upon payment of the
exercise price, the securities or property of the Company or the successor
corporation resulting from such transaction that they would have received had
they exercised the Redeemable Warrants immediately prior to such transaction.
REGISTRATION
The Company has sufficient shares of Common Stock authorized and reserved
for issuance upon exercise of the Redeemable Warrants, and such shares when
issued will be fully paid and nonassessable. The Company must have a current
registration statement on file with the Commission and, unless exempt
therefrom, with the securities commission of the state in which the
Warrantholder resides in order for the Warrantholder to exercise his or her
Redeemable Warrants and obtain shares of Common Stock free of any transfer
restrictions. The shares so reserved for issuance upon exercise of the
Redeemable Warrants are registered pursuant to the Registration Statement of
which this Prospectus is a part. Furthermore, the Company has agreed to use
its best efforts to maintain an effective registration statement (by filing
any necessary post-effective amendments or supplements to the Registration
Statement) throughout the term of the Redeemable Warrants with respect to the
shares of Common Stock issuable upon exercise thereof. The Company will incur
significant legal and other related expenses in order to keep the Registration
Statement current. However, there can be no assurance that the Company will be
able to keep the Registration Statement current or that such Registration
Statement will be effective at the time the Warrantholder desires to exercise
his or her Redeemable Warrants. Additionally, the Company has agreed to use
its best efforts to maintain qualifications in those jurisdictions where the
Redeemable Warrants, as part of the Initial Public Offering, were originally
qualified for sale to permit exercise of the Redeemable Warrants and issuance
of shares of Common Stock upon such exercise. However, there can be no
assurance that any such qualification will be effective at the time the
Warrantholder desires to exercise his or her Redeemable Warrants. If for any
reason the Company's Registration Statement is not kept current, or if the
Company is unable to qualify its Common Stock underlying the Redeemable
Warrants for sale in particular states, Warrantholders in those states will,
absent an applicable exemption, have no choice but to either sell such
Warrants or let them expire.
58
<PAGE>
EXERCISE
The Redeemable Warrants may be exercised upon surrender of the certificate
therefor on or prior to the expiration date (or earlier redemption date) at
the offices of the Company's Warrant Agent, with the form of "Election to
Purchase" on the reverse side of the certificate filled out and executed as
indicated, accompanied by payment of the full exercise price (by certified or
cashier's check payable to the order of the Company) for the number of
Redeemable Warrants being exercised.
For the term of the Redeemable Warrants, the Warrantholders are given the
opportunity to profit from a rise in the market price of the Company's Common
Stock with a resulting dilution in the interest of the Company's shareholders.
During such term, the Company may be deprived of opportunities to sell
additional equity securities at a favorable price. The Warrantholders may be
expected to exercise their Redeemable Warrants at a time when the Company
would, in all likelihood, be able to obtain equity capital by a sale or a new
offering on terms more favorable to the Company than the terms of the
Redeemable Warrants.
TAX CONSIDERATIONS
The following summary is the opinion of Faegre & Benson LLP, counsel to the
Company, and is based on present federal income tax law and interpretations
thereof, all of which are subject to change or modification. The discussion is
limited to the federal income tax matters discussed below and does not include
all of the federal income tax considerations relevant to each investor's
personal tax situation. Investors should consult their own tax advisers with
respect to the matters discussed below and with respect to other federal and
state tax considerations that may be applicable to their own personal tax
situation.
The cost basis of the Redeemable Warrants is the purchase price allocated to
the Redeemable Warrants. If the Redeemable Warrants are exercised for Common
Stock, the cost basis of the Common Stock thus acquired will be the original
purchase price allocable to the Redeemable Warrants plus any additional amount
paid upon the exercise. No gain or loss will be recognized by such holder upon
exercise of the Redeemable Warrants. However, gain or loss will be recognized
upon the subsequent sale or exchange of the Common Stock acquired by the
exercise of the Redeemable Warrants. Gain or loss will also be recognized upon
the sale or exchange of the Redeemable Warrants. Generally, gain or loss will
be long- or short-term capital gain or loss, depending on whether the Common
Stock or the Redeemable Warrants are held for more than one year. Under
recently enacted tax legislation, individual investors may be eligible for
more favorable capital gains tax rates if their holding period for the Common
Stock or Redeemable Warrants, as appropriate, is more than eighteen months. If
the Redeemable Warrants are exercised, the holding period of the Common Stock
will not include the period during which the Redeemable Warrants were held.
OTHER WARRANTS
The Company has issued to the underwriters of the Company's Initial Public
Offering in exchange for nominal consideration four-year warrants to purchase
an aggregate of 110,000 shares of Common Stock at $10.80 per share. These
warrants are not transferable (except to certain officers or other employees
of the underwriters) and may be exercised commencing May 27, 1998. The
exercise price and the number of shares may, under certain circumstances, be
subject to adjustment pursuant to anti-dilution provisions. The holders will
have certain registration rights with respect to the Common Stock issuable
upon exercise of these warrants.
ANTI-TAKEOVER PROVISIONS OF THE MINNESOTA BUSINESS CORPORATION ACT
Certain provisions of Minnesota law described below could have an anti-
takeover effect. These provisions are intended to provide a Minnesota
corporation's management flexibility to enhance the likelihood of continuity
and stability in the composition of the board of directors and in the policies
formulated by a board of directors
59
<PAGE>
and to discourage an unsolicited takeover of a Minnesota corporation if its
board determines that such a takeover is not in the best interests of the
Company and its shareholders. However, these provisions could have the effect
of discouraging certain attempts to acquire the Company that could deprive the
Company's shareholders of opportunities to sell their shares of Common Stock
at prices higher than prevailing market prices.
Section 302A.671 of the Minnesota Statutes, applying to certain control
share acquisitions, is inapplicable to the Company and its shareholders under
the By-laws of the Company.
Section 302A.673 of the Minnesota Statutes generally prohibits any business
combination by a publicly held Minnesota corporation, or, in certain
circumstances, any subsidiary of the corporation, with any shareholder who
beneficially owns 10% or more of the voting power of the corporation's
outstanding shares (an "Interested Shareholder") within four years following
such Interested Shareholder's acquisition of such 10% or greater interest,
unless the business combination or the acquisition of the 10% or greater
interest is approved by a committee of all of the disinterested members of the
board of directors of the corporation before the Interested Shareholder's
acquisition of such 10% or greater interest. This statute is inapplicable to
the Company's pre-public 10% beneficial owners and, to the extent permitted by
law, the affiliates and associates of such pre-public 10% beneficial owners,
under the By-laws of the Company.
Section 302A.675 of the Minnesota Statutes generally prohibits an offeror
from acquiring shares of a publicly held Minnesota corporation within two
years following the offeror's last purchase of the corporation's shares
pursuant to a takeover offer with respect to that class, unless the
corporation's shareholders are able to sell their shares to the offeror upon
substantially equivalent terms as those provided in the earlier takeover
offer. This statute will not apply if the acquisition of shares is approved by
a committee of all of the disinterested members of the Board of Directors of
the Company before the purchase of any shares by the offeror pursuant to a
takeover offer.
TRANSFER AGENT AND REGISTRAR
Norwest Bank Minnesota, National Association, serves as the Transfer Agent
and Registrar for the Common Stock offered hereby and as the Warrant Agent for
the Redeemable Warrants.
SECURITIES ELIGIBLE FOR FUTURE SALE
The Company can make no prediction as to the effect, if any, that sales of
shares of Common Stock or the availability of Common Stock for sale will have
on the market price prevailing from time to time. Nevertheless, sales of
substantial amounts of Common Stock in the public markets or the perception
that such sales will occur could adversely affect the market price or the
future ability of the Company to raise capital through an offering of its
equity securities.
The Company currently has outstanding an aggregate of 9,532,083 shares of
Common Stock, of which 1,265,000 shares of Common Stock are freely tradable
without restriction or further registration under the Securities Act, unless
purchased by an "affiliate" of the Company, as that term is defined by Rule
144 promulgated under the Act (an "Affiliate"), whose sales would be subject
to certain volume limitations and other restrictions described below.
The 8,267,083 shares of Common Stock originally issued and sold by the
Company in private transactions in reliance upon exemptions from the Act are
"restricted securities" as that term is defined in Rule 144 under the
Securities Act, and may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least
one year (including the holding period of any prior owner except an Affiliate
of the Company) is entitled to sell, in "brokers' transactions" or to market
makers, within any three-
60
<PAGE>
month period, a number of shares that does not exceed the greater of (i) one
percent of the then outstanding shares of Common Stock (approximately 107,971
shares immediately after the Offering, assuming the exercise of all
outstanding Redeemable Warrants and no exercise of options or other
outstanding warrants), or (ii) generally, the average weekly trading volume in
the Common Stock during the four calendar weeks preceding the required filing
of a Form 144 with respect to such sale, subject to certain other limitations
or restrictions. Sales under Rule 144 are generally subject to the
availability of current public information about the Company. Under Rule
144(k), a person who is not deemed to have been an Affiliate of the Company at
any time during the 90 days preceding a sale, and who has beneficially owned
the shares proposed to be sold for at least two years (including the holding
period of any prior owner except an Affiliate), is entitled to sell such
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. As a result, up to 7,650,000
shares of Common Stock originally issued and sold by the Company on May 25,
1996 and up to 617,083 shares of Common Stock issued in exchange for the
Series A Preferred are eligible for sale under Rule 144, subject to the other
requirements of Rule 144 having been satisfied and the terms of a shareholder
agreement that terminates in May 1998. Additional shares may also become
available for sale in the public market from time to time in the future,
including the shares of Common Stock issued upon exercise of the Redeemable
Warrants.
The Company has adopted the 1996 Option Plan and has reserved up to
1,000,000 shares of Common Stock for issuance thereunder. The Company has
registered these shares under the Securities Act on Form S-8. Shares issued
under the 1996 Option Plan, other than shares issued to Affiliates of the
Company, are freely tradable in the public market, subject to any applicable
vesting restrictions with the Company or other contractual restrictions. As of
January 31, 1998, the Company had options outstanding to purchase an aggregate
of 169,560, 4,500, 8,000, 13,000, 5,000, 11,000, 15,000, 12,000 and 539,250
shares of Common Stock granted on June 26, 1996, October 10, 1996, February
27, 1997, April 1, 1997, May 23, 1997, August 20, 1997 October 8, 1997,
January 6, 1998 and January 28, 1998, respectively, that generally will vest,
cumulatively, on a pro rata basis on each of the first, second and third
anniversaries of the date of grant, subject to the possible acceleration of
vesting in certain circumstances.
The Company has adopted the 1998 Option Plan and has reserved up to 500,000
shares of Common Stock for issuance thereunder. The Company intends to
register these shares under the Securities Act on Form S-8, which registration
statement will automatically become effective upon filing. Shares issued under
the 1998 Option Plan after the effective date of such registration statement,
other than shares issued to Affiliates of the Company, will be freely
tradeable in the public market, subject to any applicable vesting restrictions
with the Company or other contractual restrictions. As of January 31, 1998,
the Company had options outstanding to purchase an aggregate of 375,685 shares
of Common Stock granted on January 28, 1998 that generally will vest,
cumulatively, on a pro rata basis on each of the first, second and third
anniversaries of the date of grant, subject to the possible acceleration of
vesting in certain circumstances.
The Company has also agreed to issue to the underwriter of the Initial
Public Offering in exchange for nominal consideration four-year warrants to
purchase an aggregate of 110,000 shares of Common Stock at $10.80 per share.
These warrants are not transferable, except to certain officers or other
employees of the underwriter, and may be exercised commencing May 27, 1998.
The exercise price and the number of shares may, under certain circumstances,
be subject to adjustment pursuant to anti-dilution provisions. The holders
will have certain registration rights with respect to the Common Stock
issuable upon exercise of these warrants.
61
<PAGE>
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
and certain other legal matters have been 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 January 31, 1998, for the period from inception (May 26, 1996) to February
1, 1997 and for the year ended January 31, 1998 have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in its report with
respect thereto, and are included in this Prospectus in reliance upon the
authority of the firm as experts in giving its 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 auditors, appearing elsewhere in
this Prospectus, and upon the authority of the firm as experts in accounting
and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act, and the rules and regulations thereunder, with
respect to the Common Stock offered hereby. This Prospectus which forms part
of the Registration Statement does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto.
For further information with respect to the Company and its Common Stock,
reference is made to the Registration Statement and the schedules and exhibits
filed as a part thereof. Statements contained in this Prospectus regarding the
contents of any contract or any other document are not necessarily complete
and, where such document is an exhibit to the Registration Statement, in each
instance, reference is hereby made to the copy of such contract or document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. The Company is subject to the
informational requirements of the Securities and Exchange Act of 1934, as
amended. 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 without charge at the public reference
facilities maintained by the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at its Regional Offices located at Citicorp
Center, 500 West Madison, Suite 1400, Chicago, Illinois 60661-2511, and Seven
World Trade Center, Suite 1300, New York, New York 10048. Copies of such
materials may be obtained from the Public Reference Section, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, upon
payment of the prescribed fees. In addition, the Commission maintains a Web
site (http://www.sec.gov) that contains periodic reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission.
62
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants................................... F-2
Independent Auditors' Report............................................... F-3
Consolidated Balance Sheets................................................ F-4
Consolidated Statements of Operations...................................... F-5
Consolidated Statements of Shareholders' Equity............................ F-6
Consolidated Statements of Cash Flows...................................... F-7
Notes to Consolidated Financial Statements................................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Wilsons The Leather Experts Inc.:
We have audited the accompanying consolidated balance sheets of Wilsons The
Leather Experts Inc. (a Minnesota corporation) and Subsidiaries as of January
31, 1998 and February 1, 1997, and the related consolidated statements of
operations, shareholders' equity and cash flows for the year ended January 31,
1998 and 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 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.
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 January 31, 1998 and
February 1, 1997, and the results of their operations and their cash flows for
the year ended January 31, 1998 and 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 3, 1998
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder
Wilsons Center, Inc.:
We have audited the accompanying consolidated statements of operations,
shareholder's equity, and cash flows of Wilsons Center, Inc. d.b.a. Wilsons
The Leather Experts (a subsidiary of Melville Corporation) and Subsidiaries
for the five-month period ended May 25, 1996 and for the year ended December
31, 1995. 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 results of the operations and
cash flows of Wilsons Center, Inc. d.b.a. Wilsons The Leather Experts and
Subsidiaries for the five-month period ended May 25, 1996 and for the year
ended December 31, 1995, 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>
JANUARY 31, FEBRUARY 1,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $112,975 $ 81,553
Accounts receivable, net............................. 7,010 4,851
Inventories.......................................... 77,911 64,919
Prepaid expenses..................................... 835 1,246
-------- --------
Total current assets............................. 198,731 152,569
PROPERTY AND EQUIPMENT, net............................ 25,182 17,091
OTHER ASSETS, net...................................... 3,759 1,555
DEFERRED INCOME TAXES.................................. -- 1,173
-------- --------
$227,672 $172,388
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................................... $ 11,598 $ 10,666
Accrued expenses..................................... 39,740 34,517
Income taxes payable................................. 22,418 20,345
Deferred income taxes................................ 4,770 3,243
-------- --------
Total current liabilities........................ 78,526 68,771
LONG-TERM DEBT......................................... 75,000 55,811
OTHER LONG-TERM LIABILITIES............................ 1,494 4,341
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTES 10 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, $.01 par value; 45,000,000 shares
authorized, 9,532,083 and 7,650,000 shares issued
and outstanding on January 31, 1998 and February 1,
1997, respectively.................................. 95 77
Additional paid-in capital........................... 37,850 12,501
Retained earnings.................................... 34,744 23,511
Cumulative translation adjustment.................... (37) (29)
-------- --------
Total shareholders' equity....................... 72,652 43,465
-------- --------
$227,672 $172,388
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMPANY PREDECESSOR COMPANIES
-------------------------- ---------------------------------------------
PERIOD FROM
INCEPTION EIGHT MONTHS FIVE MONTHS ENDED
YEAR ENDED (MAY 26, 1996) ENDED ------------------ YEAR ENDED
JANUARY 31, TO FEBRUARY 1, JANUARY 27, MAY 25, MAY 27, DECEMBER 31,
1998 1997 1996 1996 1995 1995
----------- -------------- ------------ -------- -------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
NET SALES......................................... $418,140 $345,121 $ 367,639 $109,640 $124,700 $ 462,394
COSTS AND EXPENSES:
Cost of goods sold, buying and occupancy costs... 282,369 222,131 238,558 86,213 99,849 316,946
Selling, general and administrative expenses..... 100,691 75,806 76,442 34,868 45,918 114,923
Depreciation and amortization.................... 2,277 994 13,294 4,722 9,002 21,393
Restricted stock compensation expense............ 8,511 1,485 -- -- -- --
Restructuring and asset impairment charges....... -- -- 182,184 -- -- 182,184
-------- -------- --------- -------- -------- ---------
Income (loss) from operations.................... 24,292 44,705 (142,839) (16,163) (30,069) (173,052)
Interest expense, net............................ 6,434 5,271 7,400 1,581 3,396 10,463
-------- -------- --------- -------- -------- ---------
Income (loss) before income taxes................ 17,858 39,434 (150,239) (17,744) (33,465) (183,515)
Income tax provision (benefit)................... 10,783 15,528 (4,681) (6,603) (5,461) (10,100)
-------- -------- --------- -------- -------- ---------
Income (loss) before extraordinary gain.......... 7,075 23,906 (145,558) (11,141) (28,004) (173,415)
Extraordinary gain on early extinguishment of
debt, net of tax of $2,509...................... 3,763 -- -- -- -- --
-------- -------- --------- -------- -------- ---------
Net income (loss)................................ $ 10,838 $ 23,906 $(145,558) $(11,141) $(28,004) $(173,415)
======== ======== ========= ======== ======== =========
BASIC NET INCOME PER COMMON SHARE:
Income before extraordinary item................. $ 0.80 $ 3.12
Extraordinary gain on early extinguishment of
debt, net of tax................................ 0.42 --
-------- --------
Basic net income per common share................. $ 1.22 $ 3.12
======== ========
Weighted average common shares outstanding........ 8,910 7,650
======== ========
DILUTED NET INCOME PER COMMON SHARE:
Income before extraordinary item................. $ 0.68 $ 2.67
Extraordinary gain on early extinguishment of
debt, net of tax................................ 0.36 --
-------- --------
Diluted net income per common share............... $ 1.04 $ 2.67
======== ========
Weighted average common shares outstanding--
assuming dilution................................ 10,398 8,970
- --------------------------------------------------
======== ========
</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>
COMPANY
-----------------------------------------------------------------------------------
PREFERRED STOCK COMMON STOCK ADDITIONAL CUMULATIVE TOTAL
----------------- ---------------- PAID-IN RETAINED TRANSLATION SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT EQUITY
------- -------- --------- ------ ---------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INITIAL CAPITALIZATION.. 7,405 $ 7,405 7,650,000 $ 77 $ 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................... 7,405 7,405 7,650,000 77 12,501 23,511 (29) 43,465
Net income............. -- -- -- -- -- 10,838 -- 10,838
Series A Preferred
exchange.............. (7,405) (7,405) 617,083 6 7,399 -- -- --
Initial public
offering.............. -- -- 1,265,000 12 9,439 -- -- 9,451
Restricted stock
vested................ -- -- -- -- 8,511 -- -- 8,511
Accrued preferred stock
dividends cancelled... -- -- -- -- -- 395 -- 395
Currency translation
adjustment............ -- -- -- -- -- -- (8) (8)
------- -------- --------- ---- -------- --------- ---- ---------
BALANCE, January 31,
1998................... -- $ -- 9,532,083 $ 95 $ 37,850 $ 34,744 $(37) $ 72,652
======= ======== ========= ==== ======== ========= ==== =========
<CAPTION>
PREDECESSOR COMPANIES
----------------------------------------------------------------
COMMON STOCK ADDITIONAL RETAINED CUMULATIVE TOTAL
---------------- PAID-IN EARNINGS TRANSLATION SHAREHOLDER'S
SHARES AMOUNT CAPITAL (DEFICIT) ADJUSTMENT EQUITY
--------- ------ ---------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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>
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>
COMPANY PREDECESSOR COMPANIES
----------------------- --------------------------------------------
PERIOD
FROM
INCEPTION EIGHT
YEAR (MAY 26, MONTHS FIVE MONTHS ENDED YEAR
ENDED 1996) TO ENDED ------------------ ENDED
JANUARY 31, FEBRUARY 1, JANUARY 27, MAY 25, MAY 27, DECEMBER 31,
1998 1997 1996 1996 1995 1995
----------- ----------- ----------- -------- -------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)...... $ 10,838 $ 23,906 $(145,558) $(11,141) $(28,004) $(173,415)
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operating activities-
Extraordinary gain on
early extinguishment
of debt............... (3,763) -- -- -- -- --
Restructuring and asset
impairment charges.... -- -- 182,184 -- -- 182,184
Restructuring charges
paid.................. -- -- (1,412) (5,958) -- (338)
Depreciation and
amortization.......... 2,277 994 13,294 4,722 9,002 21,393
Amortization of
deferred financing
costs................. 870 444 -- -- -- --
Restricted stock
compensation expense.. 8,511 1,485 -- -- -- --
Loss on disposal of
assets................ 106 -- 882 113 3,616 4,498
Deferred income taxes.. 3,081 (4,928) (11,233) 5,116 -- (11,233)
Changes in operating
assets and
liabilities, net of
assets and liabilities
acquired:
Accounts receivable,
net.................. (2,159) (941) (430) 3,395 4,120 74
Inventories........... (12,992) (11,779) 5,559 19,344 27,070 27,696
Prepaid expenses...... 267 (4,740) 232 5,253 5,309 669
Other noncurrent
assets............... -- -- 508 145 12 (196)
Accounts payable and
accrued expenses..... 7,224 9,074 7,809 (25,035) (26,444) (3,167)
Income taxes payable
and other
liabilities.......... 1,836 20,684 11,197 (11,926) (6,204) 4,941
-------- -------- --------- -------- -------- ---------
Net cash provided by
(used in) operating
activities.......... 16,096 34,199 63,032 (15,972) (11,523) 53,106
-------- -------- --------- -------- -------- ---------
INVESTING ACTIVITIES:
Additions to property,
equipment and other
noncurrent assets..... (10,519) (5,915) (7,473) (3,566) (2,852) (10,117)
Acquisitions, net of
cash acquired......... -- 37,072 -- -- -- --
-------- -------- --------- -------- -------- ---------
Net cash provided by
(used in) investing
activities.......... (10,519) 31,157 (7,473) (3,566) (2,852) (10,117)
-------- -------- --------- -------- -------- ---------
FINANCING ACTIVITIES:
Change in due to/from
CVS................... -- -- (57,826) (107,442) 9,923 (45,474)
Capital contributed by
CVS................... -- -- -- 124,000 -- --
Change in book
overdrafts............ (540) 4,197 7,245 (8,024) (10,581) (554)
Proceeds from sale of
common and preferred
stock................. 9,452 12,000 -- -- -- --
Proceeds from issuance
of long-term debt..... 71,972 -- -- -- -- --
Repayment of long-term
debt.................. (55,039) -- -- -- -- --
-------- -------- --------- -------- -------- ---------
Net cash provided by
(used in) financing
activities.......... 25,845 16,197 (50,581) 8,534 (658) (46,028)
-------- -------- --------- -------- -------- ---------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............ 31,422 81,553 4,978 (11,004) (15,033) (3,039)
CASH AND CASH
EQUIVALENTS, beginning
of period.............. 81,553 -- 2,292 14,286 17,325 17,325
-------- -------- --------- -------- -------- ---------
CASH AND CASH
EQUIVALENTS, end of
period................. $112,975 $ 81,553 $ 7,270 $ 3,282 $ 2,292 $ 14,286
======== ======== ========= ======== ======== =========
SUPPLEMENTAL CASH FLOW
INFORMATION:
Cash paid during the
period for-
Interest............... $ 8,032 $ 1,678 $ 7,727 $ 2,035 $ 3,853 $ 10,650
======== ======== ========= ======== ======== =========
Income taxes........... $ 8,400 $ 1,008 $ 962 $ 208 $ 828 $ 1,735
======== ======== ========= ======== ======== =========
Noncash investing and
financing activities-
Liabilities assumed for
acquisition of
business.............. $ -- $ 46,627
======== ========
Issuance of long-term
debt.................. $ -- $ 55,811
======== ========
Accrued preferred stock
dividends............. $ (395) $ 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. (Wilsons), a Minnesota corporation, 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 (the Acquisition) from CVS New York, Inc. (CVS)
(formerly Melville Corporation, the parent company to the Predecessor
Companies), a New York corporation. 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 (Series A Preferred). 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 Series A Preferred for $10 million in cash.
On May 27, 1997, the 7,405 shares of Series A Preferred were exchanged for
617,083 shares of Wilsons' common stock. On August 18, 1997, the warrant for
1,080,000 shares of common stock was cancelled with the vesting of the
remaining Restricted Stock (see Note 9).
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 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 460 retail stores as of January 31, 1998,
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 seasonal holiday stores and kiosks, that operate 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 periods 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.
F-8
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
Interim Financial Statements
The unaudited consolidated financial information for the five-month period
ended May 27, 1995 and the eight-month period ended January 27, 1996 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. Matters of significance in which management relies on these
estimates relate primarily to the realizability of assets, such as accounts
receivable and inventory, and the adequacy of certain accrued liabilities.
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 1997, the Company sourced more
than 55% 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. The short-term investments
consist primarily of commercial paper and money market funds. Interest income
of $2.6 million and $0.7 million for the year ended January 31, 1998 and for
the period from inception (May 26, 1996) to February 1, 1997, respectively,
are included in interest expense, net. The Predecessor Companies did not have
any short-term investments.
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 issued in August 1997
approximates fair value.
F-9
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
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 January 31, 1998 and February
1, 1997. The Predecessor Companies determined cost using the retail inventory
method on the FIFO basis.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization of
property, equipment and leasehold improvements is computed on a straight-line
basis, generally over the estimated useful lives of the assets ranging from
five to forty years. Property and equipment retired or disposed of are removed
from cost and related accumulated depreciation accounts. Maintenance and
repairs are charged directly to expense as incurred. Major renewals or
replacements are capitalized after making the necessary adjustment to the
asset and accumulated depreciation accounts for the items renewed or replaced.
When changes in circumstances warrant measurement, impairment losses for store
fixed assets are calculated by the Company by comparing projected cash flows
over the lease terms to the asset carrying values.
Debt Issuance Costs
Debt issuance costs are amortized over the terms of the related financing
using the interest method and are included in other assets in the accompanying
consolidated balance sheets.
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 $4.4 million of goodwill amortization for
the year ended December 31, 1995.
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.
F-10
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
Deferred tax assets and liabilities are measured using enacted tax rates in
effect for the year in which those temporary differences are expected to
reverse.
The Predecessor Companies were included in the consolidated federal income
tax return and, where applicable, group state and local returns of CVS prior
to May 26, 1996, in accordance with a tax sharing agreement with CVS. The tax
sharing agreement allowed for current recognition of benefits for losses and
deferred tax benefits which may only have been realized by CVS in connection
with filing consolidated federal and state returns.
Foreign Currency Translation
The functional currency for the Company's foreign 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 are included in
shareholders' equity. Transaction gains and losses are reflected in income.
The Company has not entered into any significant hedging transactions.
Earnings Per Common Share
In the fiscal year ended January 31, 1998, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 128 "Earnings per Share," which
requires disclosure of basic earnings per share (EPS) and diluted EPS, which
replaces the existing primary EPS and fully diluted EPS, as defined by
Accounting Principles Board (APB) Opinion No. 15. Basic EPS is computed by
dividing net income by the weighted average number of shares of common stock
outstanding during the year. Diluted EPS is computed similarly 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.
As a result of the adoption of SFAS No. 128, the Company's reported earnings
per share for the period from inception (May 26, 1996) to February 1, 1997 was
restated. The effect of this accounting change on previously reported EPS data
was as follows:
<TABLE>
<S> <C>
Primary EPS as reported............................................ $2.67
Effect of SFAS No. 128............................................. .45
-----
Basic EPS as restated.............................................. $3.12
=====
Fully-diluted EPS as reported...................................... $2.67
Effect of SFAS No. 128............................................. --
-----
Diluted EPS as restated............................................ $2.67
=====
</TABLE>
F-11
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
A reconciliation of EPS calculations under SFAS No. 128 is as follows:
<TABLE>
<CAPTION>
PERIOD FROM
FOR THE YEAR INCEPTION
ENDED (MAY 26, 1996)
JANUARY 31, TO FEBRUARY 1,
1998 1997
------------ --------------
<S> <C> <C>
Net income................................... $10,838 $23,906
======= =======
Weighted average common shares outstanding... 8,910 7,650
Effect of options granted.................... 218 78
Effect of warrant............................ 1,270 1,242
------- -------
Weighted average common shares outstanding--
assuming dilution........................... 10,398 8,970
======= =======
Basic net income per common share............ $ 1.22 $ 3.12
======= =======
Diluted net income per common share.......... $ 1.04 $ 2.67
======= =======
</TABLE>
Reclassifications
Certain reclassifications have been made to the consolidated financial
statements of the prior years to conform to the 1997 presentation.
Recently Issued Accounting Pronouncements
SFAS No. 130, "Reporting Comprehensive Income," effective beginning in 1998,
establishes standards of disclosure and financial statement display for
reporting total comprehensive income and the individual components thereof.
Management believes the adoption of SFAS No. 130 will not have a material
impact on the Company's financial position or results of operations.
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," effective in 1998, establishes new standards for determining
reportable segments and for disclosing information regarding each such
segment. Management believes the adoption of SFAS No. 131 will not have a
material impact on the Company's financial position or results of operations.
3. RESTRUCTURING AND ASSET IMPAIRMENT CHARGES:
On October 24, 1995, CVS announced a comprehensive restructuring plan,
including the planned sale of the Predecessor Companies. As a result, the
Predecessor Companies recorded a pre-tax restructuring charge of $134.3
million to reflect the anticipated costs associated with closing approximately
100 of the Predecessor Companies' stores and the write-off of goodwill and
other intangibles. The permanent impairment decision was based upon an
analysis of the historical operating results and anticipated selling price of
the Predecessor Companies, an investment banking firm's analysis of comparable
companies' selling prices, current market multiples and discounted future cash
flows of the Predecessor Companies. Stores impacted by the plan represented
$49.9 million in sales and $6.9 million in operating losses in 1995, and $4.5
million in sales and $0.8 million in operating losses for the five-month
period ended May 25, 1996. In connection with the plan, approximately 590
store employees were terminated. The significant components of the
restructuring charge and the reserves remaining at December 31, 1995 were as
follows (in thousands):
F-12
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES
-------------------------
FOR THE YEAR
ENDED AS OF
DECEMBER 31, DECEMBER 31,
1995 1995
------------ ------------
<S> <C> <C>
Goodwill and other intangible 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>
JANUARY 31, FEBRUARY 1,
1998 1997
----------- -----------
<S> <C> <C>
Layaway receivables............................... $ 5,657 $ 6,118
Trade receivables................................. 4,083 2,425
Other receivables................................. 1,197 875
------- -------
10,937 9,418
Less:
Layaway return reserves......................... (2,972) (3,365)
Allowance for doubtful accounts................. (955) (1,202)
------- -------
Total......................................... $ 7,010 $ 4,851
======= =======
</TABLE>
5. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1,
1998 1997
----------- -----------
<S> <C> <C>
Land........................ $ 1,340 $ 1,340
Buildings and improvements.. 922 778
Equipment and furniture..... 21,711 15,048
Leasehold improvements...... 4,446 919
------- -------
Total................... 28,419 18,085
Less--Accumulated deprecia-
tion and amortization...... (3,237) (994)
------- -------
Total................... $25,182 $17,091
======= =======
</TABLE>
F-13
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
6. ACCRUED EXPENSES:
Accrued expenses consisted of the following (in thousands):
<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1,
1998 1997
----------- -----------
<S> <C> <C>
Taxes other than federal and state income tax-
es............................................. $ 6,621 $ 7,334
Salaries and compensated absences............... 5,953 4,131
Interest........................................ 3,879 62
Advertising..................................... 3,618 4,328
Lease obligations for closed stores............. 1,945 2,678
Other........................................... 17,724 15,984
------- -------
Total....................................... $39,740 $34,517
======= =======
</TABLE>
7. LONG-TERM DEBT:
On August 18, 1997, the Company completed an offering of $75.0 million of 11
1/4% senior notes due 2004 (Senior Notes). 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 that rank senior in
right of payment to all existing and future subordinated indebtedness of the
Company, and rank on equal terms 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 (including accrued interest) issued to CVS in
connection with the Acquisition. The balance of the net proceeds,
approximately $15.5 million, was used for general corporate purposes,
including capital expenditures and additional store openings. In connection
with the Senior Notes offering, the Company incurred $3.0 million in debt
issuance costs which is included in other assets (see Note 2).
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. As a result of the completion of the
repurchase of the Note, the Company realized an extraordinary gain on the
early extinguishment of debt of $3.8 million, net of tax, in the third quarter
of fiscal 1997.
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
F-14
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
Company's earnings before income taxes/cash interest coverage ratio for the
trailing four quarters. The Company pays a monthly fee equal to .375% per
annum on the unused amount of the Revolver and on that portion of the first
$10.0 million in borrowings that bears interest at prime plus 0%-.875%. As of
January 31, 1998, there were no cash borrowings under the Revolver, and there
was $6.5 million in letters of credit outstanding.
The Revolver contains 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 January 31, 1998, the
Company was in compliance with all covenants of the Senior Notes 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>
COMPANY PREDECESSOR COMPANIES
-------------------------- ------------------------
PERIOD FROM
INCEPTION FIVE MONTHS
YEAR ENDED (MAY 26, 1996) ENDED YEAR ENDED
JANUARY 31, TO FEBRUARY 1, MAY 25, DECEMBER 31,
1998 1997 1996 1995
----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Current:
Federal................... $ 6,912 $17,642 $(11,731) $ 1,137
State..................... 790 2,814 -- 608
Deferred.................... 3,081 (4,928) 5,128 (11,845)
------- ------- -------- --------
Total................... $10,783 $15,528 $ (6,603) $(10,100)
======= ======= ======== ========
</TABLE>
Reconciliations of the U.S. federal statutory income tax rate to the
effective tax rate are as follows:
<TABLE>
<CAPTION>
COMPANY PREDECESSOR COMPANIES
-------------------------- ------------------------
PERIOD FROM
INCEPTION FIVE MONTHS
YEAR ENDED (MAY 26, 1996) ENDED YEAR ENDED
JANUARY 31, TO FEBRUARY 1, MAY 25, DECEMBER 31,
1998 1997 1996 1995
----------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
U.S. federal statutory in-
come tax (benefit) rate... 35.0% 35.0% (35.0)% (35.0)%
Goodwill amortization...... -- -- -- 29.4
Restricted stock compensa-
tion expense.............. 18.6 1.3 -- --
State income taxes, net of
federal tax effect........ 4.0 3.0 (2.3) --
Other, net................. 2.8 0.1 0.1 0.1
---- ---- ----- -----
Effective tax rate..... 60.4% 39.4% (37.2)% (5.5)%
==== ==== ===== =====
</TABLE>
F-15
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
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>
JANUARY 31, FEBRUARY 1,
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax asset:
Accrued liabilities............................. $4,650 $3,649
Net operating loss carryforwards................ 2,201 3,587
Other........................................... 413 491
------ ------
Total......................................... 7,264 7,727
------ ------
Deferred tax liability:
Inventories..................................... 9,546 7,264
Property and equipment.......................... 2,450 1,981
Layaway and sales return reserve................ 193 347
Other........................................... 225 205
------ ------
Total......................................... 12,414 9,797
------ ------
Net deferred tax liability.................... $5,150 $2,070
====== ======
</TABLE>
9. CAPITAL STOCK:
Common Stock and Initial Public Offering
On May 27, 1997, the Company completed an initial public offering of
1,100,000 units at $9.00 per unit. In addition, the underwriter exercised its
overallotment option to purchase 165,000 units. Each unit consisted of one
share of common stock and one redeemable warrant. Each redeemable warrant
entitles the holder to purchase, at any time until May 27, 2000, one share of
common stock at an exercise price of $13.50. The redeemable warrants are
subject to redemption by the Company for $.01 per warrant at any time on 30
days written notice, provided that the closing bid price of the common stock
exceeds $14.50 per share for any 10 consecutive trading days prior to such
notice. The Company received net proceeds of approximately $9.5 million after
payment of related underwriting discount and offering costs. The proceeds from
the public offering were used to reduce seasonal borrowings under the Revolver
and to fund working capital and capital expenditures.
The Company's Amended Articles of Incorporation provide that all shares of
common stock, regardless of class, would 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, 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.
F-16
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
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.
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).
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 vested over a five-year
performance period based on the Company achieving certain performance targets,
the paydown of the Note or the occurrence of other defined events, pursuant to
the Restricted Stock Agreement. As of February 1, 1997, the Company had
recorded $1,485,000 in compensation expense based on the number of shares
(198,018) earned pursuant to the Restricted Stock Agreement.
Upon the repurchase of the Note on August 18, 1997, the remaining 881,982
shares of Restricted Stock vested. The Company recorded a noncash compensation
charge in the year ended January 31, 1998 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.
Series A Preferred Exchange
On May 27, 1997, the holders of the 7,405 shares of Series A Preferred
exchanged their entire holdings of such shares for 617,083 shares of 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.
Other Warrants
As part of the Acquisition, the Company issued to CVS a warrant to purchase
1,350,000 shares of common stock 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 (see Subsequent
Event, Note 15).
The Company also issued to CVS a warrant to purchase 1,080,000 shares of
common stock 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.
10. STOCK OPTIONS:
During June 1996, Wilsons adopted the 1996 Stock Option Plan, pursuant to
which options to acquire an aggregate of 1,000,000 shares of the Company's
common stock may be granted. During January 1998, Wilsons adopted the 1998
Stock Option Plan, pursuant to which options to acquire an aggregate of
500,000 shares of the Company's common stock may be granted. The Company's
Compensation Committee is responsible for administering the Company's stock
option plans and approves grants in connection therewith. Stock options are
granted at an option price equal to the fair market value of the common stock
on the date of grant and generally vest, cumulatively, on a prorated basis on
the first, second and third anniversaries from the date of grant.
F-17
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
A summary of the status of the Company's two stock option plans at year-end,
with the changes during the period ended, is presented in the table below:
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
YEAR ENDED (MAY 26, 1996) TO
JANUARY 31, 1998 FEBRUARY 1, 1997
-------------------------- -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- -------------- ------- --------------
<S> <C> <C> <C> <C>
Outstanding, beginning of
period..................... 182,700 $4.44 -- $ --
Granted................... 978,935 8.79 199,980 4.44
Exercised................. -- -- -- --
Forfeited................. (23,140) 4.44 (17,280) 4.44
Expired................... -- -- -- --
---------- ----- ------- -----
Outstanding, end of period.. 1,138,495 $8.18 182,700 $4.44
========== ===== ======= =====
Exercisable, end of period.. 53,187 $4.44 -- $ --
========== ===== ======= =====
Weighted average fair value
of options granted......... $ 3.62 $ 4.40
</TABLE>
The Company accounts for the stock option plans under APB Opinion No. 25,
under which no compensation cost has been recognized. Had compensation cost
for the stock option plans been determined consistent with SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company's net income and net
income per common share would have been reduced to the following pro forma
amounts:
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
YEAR ENDED (MAY 26, 1996)
JANUARY 31, TO FEBRUARY 1,
1998 1997
----------- --------------
<S> <C> <C>
Net income (in thousands):
As reported.................................. $10,838 $23,906
Pro forma.................................... 10,638 23,734
Diluted net income per common share:
As reported.................................. $ 1.04 $ 2.67
Pro forma.................................... 1.02 2.65
</TABLE>
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 for grants in the year ended January 31, 1998, and
for the period from inception (May 26, 1996) to February 1, 1997,
respectively: risk-free interest rates of 5.1% and 6.4%, no expected dividend
yields, expected lives of three years, and expected volatility of 32.1% and
53.5%.
F-18
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
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 $80,000). 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) profit sharing 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 $0.3 million, $1.0 million, $0.3 million and $0.6 million for the eight
months ended January 27, 1996, for the five months ended May 25, 1996 and May
27, 1995, and for the year ended December 31, 1995, respectively. The
Company's contributions to the 401(k) profit sharing plan were $1.5 million
and $1.1 million for the year ended January 31, 1998, and for the period from
inception (May 26, 1996) to February 1, 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 $2.0 million, $0.2 million, $0.1 million and $2.0
million was recognized for the eight months ended January 27, 1996, for the
five months ended May 25, 1996 and May 27, 1995, and during the year ended
December 31, 1995.
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 eight months ended
January 27, 1996, the five months ended May 25, 1996 and May 27, 1995, and for
the year ended December 31, 1995, was 6.2%, 5.8%, 5.6% and 6.4%, 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 eight months ended January 27, 1996, for the five months ended May 25,
1996 and May 27, 1995, and for the year ended December 31, 1995, were $1.0
million, $0.5 million, $0.6 million and $1.5 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
F-19
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
selling, general and administrative expenses and amounted to $0.5 million,
$0.3 million, $0.3 million, and $0.7 million for the eight months ended
January 27, 1996, for the five months ended May 25, 1996 and May 27, 1995, and
for the year ended December 31, 1995, respectively.
13. COMMITMENTS AND CONTINGENCIES:
Leases
The Company has noncancelable operating leases, primarily for retail stores,
which expire through 2008. A limited number of the leases contain renewal
options for periods ranging from six months to five 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>
COMPANY PREDECESSOR COMPANIES
-------------------------- ----------------------------------------------
PERIOD FROM
INCEPTION EIGHT MONTHS FIVE MONTHS ENDED
YEAR ENDED (MAY 26, 1996) ENDED -------------------- YEAR ENDED
JANUARY 31, TO FEBRUARY 1, JANUARY 27, MAY 25, MAY 27, DECEMBER 31,
1998 1997 1996 1996 1995 1995
----------- -------------- ------------ ------- ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Minimum rentals......... $37,326 $26,972 $28,598 $14,917 $17,436 $42,894
Contingent rentals...... 3,058 1,924 942 449 353 1,092
------- ------- ------- ------- ------- -------
40,384 28,896 29,540 15,366 17,789 43,986
Less--Sublease rentals.. (588) (207) (24) (122) -- (18)
------- ------- ------- ------- ------- -------
Total............... $39,796 $28,689 $29,516 $15,244 $17,789 $43,968
======= ======= ======= ======= ======= =======
</TABLE>
As of January 31, 1998, 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:
1999........................................................... $ 31,089
2000........................................................... 27,473
2001........................................................... 24,041
2002........................................................... 19,995
2003........................................................... 16,558
Thereafter...................................................... 30,346
--------
Total......................................................... $149,502
========
Total future minimum sublease rental income..................... $ 941
========
</TABLE>
As of January 31, 1998, 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.
F-20
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
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 January 31, 1998 and February 1, 1997, the Company had outstanding
letters of credit of approximately $6.5 million and $7.9 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 $0.4 million and $0.5 million of these supplies on an
as-needed basis as of January 31, 1998 and February 1, 1997, respectively.
Total payments under this agreement, which was entered into in 1994, were $0.8
million, $0.9 million, $0.8 million, $0.5 million, $0.9 million and $1.6
million for the year ended January 31, 1998, for the period from inception
(May 26, 1996) to February 1, 1997, for the eight months ended January 27,
1996, for the five months ended May 25, 1996 and May 27, 1995, and for the
year ended December 31, 1995.
14. RELATED PARTY TRANSACTION:
The Company regularly conducts business with G-III Apparel Group, Ltd. (G-
III), of which Morris Goldfarb, a director of Wilsons, is the Chief Executive
Officer and Chairman of its Board of Directors. Purchases from G-III totaled
$7.5 million, $5.0 million and $4.7 million for the year ended January 31,
1998, the thirteen-month period ended February 1, 1997, and the year ended
December 31, 1995, 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.
15. SUBSEQUENT EVENT:
On March 27, 1998, the Company repurchased the CVS Warrant for $9.99 million
in cash and simultaneously cancelled the warrant. The warrant gave CVS the
right to purchase 1,350,000 shares of common stock at $.60 per share.
F-21
<PAGE>
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NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED IN CONNECTION
WITH THIS OFFERING TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED 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 COM-
PANY SINCE SUCH DATE.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 2
Risk Factors.............................................................. 10
The Acquisition........................................................... 15
Use of Proceeds........................................................... 16
Price Range of Common Stock and Redeemable Warrants and Dividend Policy... 16
Dilution.................................................................. 17
Capitalization............................................................ 18
Selected Historical Consolidated Financial and Other Data................. 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 22
Business.................................................................. 35
Management................................................................ 47
Security Ownership of Certain Beneficial Owners and Management............ 54
Certain Transactions...................................................... 55
Description of Securities................................................. 57
Securities Eligible for Future Sale....................................... 60
Legal Matters............................................................. 62
Experts................................................................... 62
Additional Information.................................................... 62
Index to Consolidated Financial Statements................................ F-1
</TABLE>
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1,265,000 SHARES
LOGO
COMMON STOCK
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PROSPECTUS
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May 1, 1998
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