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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended January 30, 1999
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-21543
Wilsons The Leather Experts Inc.
(Exact name of registrant as specified in its charter)
Minnesota 41-1839933
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7401 Boone Ave. N., Brooklyn Park, MN 55428
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (612) 391-4000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, $.01 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if the disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting common equity held by non-
affiliates of the registrant was $35,022,417, based on the closing sale price
for the common stock on April 1, 1999 as reported by The Nasdaq National
MarketSM. For purposes of determining such aggregate market value, all
executive officers and directors of the registrant are considered to be
affiliates of the registrant, as well as shareholders holding 10% or more of
the outstanding common stock as reflected on Schedules 13D or 13G filed with
the registrant.
This number is provided only for the purpose of this report on Form 10-K and
does not represent an admission by either the registrant or any such person as
to the status of such person.
The number of shares outstanding of the registrant's common stock, $.01 par
value, was 10,835,454 at April 1, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement of Wilsons The Leather Experts
Inc. for the Annual Meeting of Shareholders to be held on May 18, 1999 (the
Proxy Statement), which will be filed within 120 days after the registrant's
fiscal year ended January 30, 1999, are incorporated by reference into Part
III of this Annual Report on Form 10-K (Form 10-K). (The Compensation
Committee Report and the stock performance graph contained in the registrant's
Proxy Statement are expressly not incorporated by reference in this Form 10-
K.)
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WILSONS THE LEATHER EXPERTS INC.
FORM 10-K
For the fiscal year ended January 30, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Description Page
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<C> <S> <C>
PART I
Item 1. Business................................................... 2
Item 2. Properties................................................. 15
Item 3. Legal Proceedings.......................................... 15
Item 4. Submission of Matters to a Vote of Security Holders........ 15
Item 4a. Executive Officers of the Registrant....................... 16
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 18
Item 6. Selected Financial Data.................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 22
Item 7a. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 32
Item 8. Financial Statements and Supplementary Data................ 32
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 32
PART III
Item 10. Directors and Executive Officers of the Registrant......... 32
Item 11. Executive Compensation..................................... 32
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 32
Item 13. Certain Relationships and Related Transactions............. 32
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 33
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PART I
When we refer to the "Company" or "Wilsons", we mean Wilsons The Leather
Experts Inc. and its subsidiaries, including the Predecessor Companies. When
we refer to the "Predecessor Companies", we mean Wilsons Center Inc., Rosedale
Wilsons, Inc. and their subsidiaries prior to the Company's acquisition of
such companies from CVS New York, Inc. (CVS) (formerly Melville Corporation)
on May 26, 1996 (the Management Buyout). Unless otherwise indicated,
references to the Company's fiscal year mean the year ended on the Saturday
closest to January 31, which for the most recent fiscal year end was January
30, 1999, and references to 1998, 1997 and 1996 refer to the twelve-months
ended January 30, 1999, January 31, 1998 and February 1, 1997, respectively.
Before the Management Buyout, the Company's fiscal year ended on December 31.
Item 1. Business
Disclosure Regarding Forward-Looking Statements
The information presented in this Form 10-K under the headings "Item 1.
Business" and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains certain forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended (the Exchange Act). Such forward-looking statements are based
on the beliefs of the Company's management as well as on assumptions made by
and information currently available to the Company at the time such statements
were made. Although the Company believes these statements are reasonable,
readers of this Form 10-K should be aware that actual results could differ
materially from those projected by such forward-looking statements as a result
of a number of factors, many of which are outside of the Company's control,
including those set forth under "--Risk Factors," beginning on page 11 of this
Form 10-K. Readers of this Form 10-K should consider carefully the factors
listed under "--Risk Factors," as well as the other information and data
contained in this Form 10-K. All forward-looking statements attributable to
the Company or persons acting on its behalf are expressly qualified in their
entirety by the cautionary statements set forth under "--Risk Factors" in this
section. When used in this Form 10-K, the words "anticipate," "believe,"
"estimate," "expect," "intend," "plan" and similar expressions, as they relate
to the Company, are intended to identify such forward-looking statements.
Overview
Wilsons The Leather Experts is the leading specialty retailer of leather
outerwear, apparel and accessories in the United States. The Company operates
518 retail stores in 44 states, Canada and England, including 449 mall stores,
28 airport locations and 41 factory outlet stores. The Company also operates
holiday stores, numbering 215 in 1998, to better capitalize on its peak
selling season from October through December. Over 80% of the Company's
merchandise is designed and sold under Wilsons' proprietary labels, including
Adventure Bound(R), M. Julian(R), Maxima(R), Pelle Studio(R) and Wilsons The
Leather Experts(TM), with each label positioned to appeal to identified
customer lifestyle segments. Wilsons' mall stores average approximately 2,000
square feet and feature merchandise tailored to the demographics and buying
patterns of each store's local customer base. The Company generated net sales
of $459.4 million in 1998.
Wilsons designs, contracts for manufacture, imports, distributes and retails
more than 9,000 SKUs of leather merchandise, including coats, blazers, vests,
gloves, belts, handbags, wallets, briefcases, planners, computer cases and CD
cases. This vertical integration enables the Company to consistently provide
its customers high-quality products at attractive prices. In addition, the
Company is able to replenish faster-selling merchandise within the same
season, respond quickly to consumer preferences and rapidly increase
production capacity as the Company grows. Management believes its vertically
integrated operations, combined with its merchandising strategy of
strengthening brand recognition and tailoring its product assortment to
identified customer segments, provide it with a competitive advantage.
Management has extensive experience in the retail and leather industries and
led the Management Buyout in 1996. Prior to 1996, management initiated a
restructuring to improve the Company's portfolio of stores,
2
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enhance its profitability and position the Company for future growth.
Management closed 156 stores between January 1, 1995 and May 25, 1996 and
undertook a number of strategic initiatives to improve future operating
performance, including (i) repositioning the merchandise assortment to focus
on higher-margin accessories and target specific customer segments, (ii)
restructuring store management and staffing, (iii) upgrading critical
merchandising and financial information systems and (iv) reducing corporate
overhead. As a result of these and other initiatives, the Company's gross
profit as a percentage of net sales increased to 33.9% in 1998 from 30.6% in
1994, and selling, general and administrative expenses as a percentage of net
sales decreased to 24.7% from 27.4% over the same period.
Business Strategy
Wilsons intends to strengthen its position as the leading specialty retailer
of leather outerwear, apparel and accessories in the United States and to
increase profitability through the following strategic initiatives:
Strengthen Brand Recognition. The name and reputation of the Wilsons The
Leather Experts brand assures customers they are purchasing high-quality,
fashionable merchandise. Over 80% of the Company's merchandise is designed and
sold under Wilsons' proprietary labels, including Adventure Bound, M. Julian,
Maxima, Pelle Studio and Wilsons The Leather Experts. Wilsons promotes its
labels through in-store merchandise presentations, a targeted marketing and
advertising strategy and the extensive product knowledge of its sales
associates. Wilsons also selectively offers other designer brands such as Nine
West(R), Kenneth Cole(R), Andrew Marc(R) and Bosca(R) to highlight the value
of its proprietary labels and enhance its product offerings.
Tailor Product Assortment to Identified Customer Segments. Wilsons
identifies specific customer segments by lifestyle characteristics influenced
by factors such as age, fashion awareness, purchasing behavior, income and
other demographics. The Company markets to four key customer segments through
its proprietary labels: (i) Adventure Bound for the rugged, outdoor, casual
segment, (ii) M. Julian and Maxima for the peer- and trend-driven juniors
segment, (iii) Pelle Studio for the more sophisticated, confident and fashion-
aware segment and (iv) Wilsons The Leather Experts for the classic,
traditional, value-conscious segment. Within each store, Wilsons displays its
merchandise by lifestyle segments offering a broad variety of styles to its
many customer groups. Each Wilsons store features a core merchandise
assortment as well as complementary merchandise tailored to meet local
preferences based on market-specific characteristics and information from
Wilsons' five million customer database.
Capitalize on Vertical Integration. Wilsons' global operations vertically
integrate the development of new leather textures, colors and finishes, the
design of leather merchandise and the sourcing and distribution of goods. The
Company believes that its vertical integration and volume purchasing allow it
to realize economies of scale and other competitive advantages, including:
. Offering prices that are typically lower than those of its competitors
for merchandise of comparable quality;
. Purchasing leather and contracting for manufacturing capacity at
favorable prices;
. Effectively managing production cycles and delivery schedules;
. Responding more rapidly to market trends and consumer demand with changes
to its merchandise mix;
. Replenishing faster-selling merchandise within the same selling season;
and
. Rapidly increasing production capacity as the Company grows.
Enhance Profit Margins. The Company plans to continue to improve its
operating margins by (i) focusing on proprietary merchandise which typically
generates higher gross margins than other comparable nonproprietary
merchandise, (ii) increasing the percentage of sales from higher-margin
accessories in its mall stores, (iii) opening additional airport and factory
outlet stores that are less seasonal and offer primarily accessories and (iv)
tailoring merchandise assortments to meet local consumer preferences.
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Growth Strategy
Management plans to leverage Wilsons' successful restructuring efforts and
focused business strategy by implementing several growth initiatives:
Expand Existing Retail Concepts. The Company plans to expand existing retail
concepts as follows:
. Mall Stores. Mall stores represent the Company's core retail concept,
appealing to a broad base of consumers and showcasing the full range of
Wilsons' products. The Company believes it can continue to enhance
customer loyalty and gain market share by opening new mall stores in
underserved markets. Wilsons opened 25 new stores in 1998 and currently
plans to open at least 20 stores per year for the next several years,
while closing underperforming stores.
. Airport Stores. Airports with high passenger traffic represent attractive
growth opportunities for the Company. Airport stores offer accessories
for business travelers and tourists, including travel luggage,
briefcases, handbags, planners, wallets, computer cases and CD cases.
Airport locations average more than twice the revenue per square foot and
are subject to less seasonal variation in sales than mall stores. The
Company believes that airport stores increase brand recognition of
Wilsons The Leather Experts and present an effective entry vehicle into
international markets. Wilsons opened 10 new locations, including both
in-line stores and kiosks, in 1998 and plans to open at least seven
locations per year for the next several years.
. Factory Outlet Stores. In May 1998, through its acquisition of 40 Wallet
Works stores, Wilsons established a presence in factory outlet malls in
new markets. Factory outlet stores are subject to less seasonal variation
in sales than the Company's mall stores. Wilsons is utilizing this retail
concept to expand its higher-margin accessories offerings. The Company
opened three additional stores in 1998, and currently plans to open at
least five stores in 1999.
Develop New Selling Concepts. Wilsons anticipates future revenue growth from
new selling concepts. The Company will consider introducing new Wilsons stores
into international markets based on market opportunities and customer response
to current international airport locations. Additionally, the Company is
currently evaluating opportunities to initiate selling merchandise through the
Internet.
Pursue Strategic Acquisitions. Wilsons believes that its market leadership,
financial strength, economies of scale and experienced management team
position it to pursue strategic acquisitions. The Company seeks acquisition
candidates which can benefit from Wilsons' vertically integrated supply
strategy and expertise in merchandising leather outerwear, apparel and
accessories. The Company does not presently have any agreements or
understandings regarding a potential acquisition or business combination.
Store Formats and Locations
Wilsons operates 518 retail stores located in 44 states, Canada and England,
including 449 mall stores, 28 airport locations and 41 factory outlet stores.
The Company also operates holiday stores, numbering 215 in 1998, to better
capitalize on its peak selling season from October through December. In
selecting store locations, the Company utilizes customer lifestyle and
demographic data derived from its point-of-sale network as well as data from
outside sources relating to market potential and mall performance. The Company
analyzes projected occupancy costs and store performance to evaluate each
store's potential to achieve established return on investment and 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.
4
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518 Store Locations
^ Corporate Headquarters and Distribution Center
<TABLE>
<CAPTION>
Factory
Mall Airport Outlet Total
---- ------- ------- -----
<S> <C> <C> <C> <C>
Alabama......... 2 -- 1 3
Arizona......... 5 -- 3 8
Arkansas........ 1 -- -- 1
California...... 60 1 5 66
Colorado........ 8 -- 1 9
Connecticut..... 8 -- -- 8
Delaware........ 3 -- -- 3
Florida......... 4 2 2 8
Georgia......... 11 3 1 15
Idaho........... 1 -- -- 1
Illinois........ 35 -- -- 35
Indiana......... 11 1 -- 12
Iowa............ 6 -- 1 7
Kansas.......... 3 -- -- 3
Kentucky........ 4 -- 1 5
Louisiana....... 4 -- 2 6
Maine........... 3 -- -- 3
Maryland........ 14 2 1 17
Massachusetts... 16 1 -- 17
Michigan........ 21 -- 2 23
Minnesota....... 12 2 -- 14
Missouri........ 6 -- 2 8
Nebraska........ 3 -- -- 3
Nevada.......... 4 -- 1 5
</TABLE>
<TABLE>
<CAPTION>
Factory
Mall Airport Outlet Total
---- ------- ------- -----
<S> <C> <C> <C> <C>
New Hampshire............... 5 -- -- 5
New Jersey.................. 21 -- -- 21
New Mexico.................. 2 -- -- 2
New York.................... 33 -- -- 33
North Carolina.............. 8 2 1 11
North Dakota................ 4 -- -- 4
Ohio........................ 23 1 -- 24
Oklahoma.................... 1 -- -- 1
Oregon...................... 3 -- 3 6
Pennsylvania................ 21 3 4 28
Rhode Island................ 2 -- -- 2
South Carolina.............. 1 -- -- 1
South Dakota................ 2 -- -- 2
Tennessee................... 10 1 2 13
Texas....................... 17 2 2 21
Utah........................ 5 -- 1 6
Virginia.................... 12 2 -- 14
Washington.................. 17 -- -- 17
West Virginia............... 1 -- 1 2
Wisconsin................... 16 -- 4 20
Canada...................... -- 2 -- 2
England..................... -- 3 -- 3
--- --- --- ---
Total..................... 449 28 41 518
=== === === ===
</TABLE>
5
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Mall Stores
Wilsons operates 449 mall stores, which average approximately 2,000 square
feet and are primarily located in regional shopping malls. Mall stores are
designed to target a broad base of consumers and showcase the full range of
Wilsons' high-quality leather outerwear, apparel and accessories, including
coats, blazers, vests, gloves and handbags. In 1998, mall stores had sales of
$396.4 million, representing 86.3% of the Company's total sales. Comparable
store sales increased 6.7% compared to a 0.5% increase in 1997. Stores open
the entire year averaged sales of $888,000 and sales per square foot of $417
as compared to sales per store of $821,000 and sales per square foot of $390
in 1997.
Airport Stores
Wilsons operates 28 airport locations in 13 states, Canada and England under
the name Wilsons The Leather Experts. The airport stores average approximately
700 square feet in 1998 compared to 800 square feet in 1997 due to opening
kiosks which are smaller. These locations offer primarily accessories for
business travelers and tourists, including travel luggage, handbags,
briefcases, planners, wallets, computer cases and CD cases. Airport locations
typically generate more than twice the revenue per square foot and are less
seasonal, due to more even flows of customer traffic in airports during the
year as compared to malls and to an emphasis on accessories. In 1998, airport
stores had sales of $15.8 million, representing 3.4% of the Company's total
sales. Comparable store sales decreased 2.2% compared to a 7.7% decrease in
1997. Stores open the entire year averaged sales of $737,000 and sales per
square foot of $1,020 as compared to sales per store of $852,000 and sales per
square foot of $981 in 1997.
Factory Outlet Stores
Wilsons operates 41 factory outlet stores in 21 states under the name Wallet
Works. These stores average approximately 1,500 square feet and primarily sell
wallets and other small leather accessories. Wilsons purchased 40 Wallet Works
factory outlet stores in May 1998.
Holiday Stores
In 1998, Wilsons operated 215 holiday stores in 38 states and plans to
operate 230 holiday stores in 1999. A holiday store is a temporary, full-size
Wilsons store located in a vacant mall space and typically operated from
October through December, the Company's peak selling season. Wilsons usually
locates these stores in malls where there is not an existing Wilsons store.
These stores offer a merchandise selection and presentation similar to the
Wilsons The Leather Experts mall stores allowing the Company to leverage its
brand recognition and national reputation. These stores also offer the Company
the ability to test new malls where the Company is considering opening a
permanent store. Furthermore, this format provides an opportunity to develop
and assess the skills of employees being considered as future store managers
of the permanent stores. In 1998, holiday stores had sales of $33.4 million,
representing 7.3% of the Company's total sales. Stores averaged sales of
$155,000 as compared to $169,000 in 1997. In addition, Wilsons operates
seasonal kiosks which are generally 100 square-foot temporary units located in
the common area of malls where the Company has a permanent store. Wilsons
operated 50 kiosks in 1998, which had sales of $2.9 million, as compared to
100 kiosks in 1997, which had sales of $6.3 million, as the Company focuses on
more profitable holiday stores.
New Store Economics
The Company's average cost for leasehold improvements and fixtures for
stores opened in 1998 was approximately $140,000 per store, net of landlord
reimbursements. Wilsons' stores have an average return on investment of just
under three years. Working capital requirements consist primarily of
inventory, which averages $150,000 in mall locations.
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Merchandising
Wilsons' merchandising strategy is based on offering a broad assortment of
quality leather outerwear, apparel and accessories at affordable prices,
building strong brand recognition and tailoring its product assortment to
identified customer segments. Wilsons offers more than 9,000 SKUs of leather
outerwear, apparel and accessories such as coats, blazers, vests, gloves,
belts, handbags, wallets, briefcases, planners, computer cases and CD cases.
Key elements of the Company's merchandising strategy include:
. Selection--Wilsons offers its customers a broad and deep selection of
high-quality leather outerwear, apparel and accessories. Management
believes that the Company's mall stores offer significantly more SKUs of
leather outerwear, apparel and accessories than offered by its
competition (e.g., department stores, specialty stores and mass
merchandisers).
. Value--The Company strives to deliver its 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 its customers prices that are typically lower than
those of its competitors for merchandise of comparable quality.
. Style and Branding--The Company uses its proprietary labels to translate
identified market trends into highly-focused leather outerwear, apparel
and accessory assortments. The Company tests new designs and reorders
faster-selling merchandise for its peak selling season.
The name and reputation of Wilsons The Leather Experts assures customers
they are purchasing high-quality, fashionable merchandise. Over 80% of the
Company's merchandise is designed and sold under Wilsons' proprietary labels,
including Adventure Bound, M. Julian, Maxima, Pelle Studio and Wilsons The
Leather Experts. Wilsons promotes these labels through in-store merchandise
presentations, a targeted marketing and advertising strategy and the extensive
product knowledge of its sales associates. Wilsons also selectively offers
other designer brands such as Nine West, Kenneth Cole, Andrew Marc and Bosca
to highlight the value of its proprietary labels and enhance its product
offerings.
Wilsons identifies specific customer segments by lifestyle characteristics
influenced by factors such as age, fashion awareness, purchasing behavior,
income and other demographics. The Company markets to four key customer
segments through its proprietary labels: (i) Adventure Bound for the rugged,
outdoor, casual segment, (ii) M. Julian and Maxima for the peer- and trend-
driven juniors segment, (iii) Pelle Studio for the more sophisticated,
confident and fashion-aware segment and (iv) Wilsons The Leather Experts for
the classic, traditional, value-conscious segment. Within each store, Wilsons
displays its merchandise by lifestyle segments offering a broad variety of
styles to its many customer groups. Each Wilsons store features a core
merchandise assortment as well as complementary merchandise tailored to meet
local preferences based on market-specific characteristics and information
from Wilsons' five million customer database.
Wilsons has increased its emphasis on accessories including gloves,
handbags, belts, wallets, briefcases, planners, computer cases and CD cases,
due to their generally higher gross 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 grew as a percentage of the Company's sales to 28.9% in 1998 from 20.5%
in 1994. Over the same period, men's apparel sales decreased as a percentage
of the Company's sales to 36.1% from 44.3%, and women's apparel sales remained
relatively constant in the Company's merchandise mix.
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The following table sets forth the Company's percentages of net sales by
major merchandise category from 1994 to 1998.
<TABLE>
<CAPTION>
Merchandising Category 1998 1997 1996 1995 1994
---------------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Men's Apparel............................. 36.1% 38.9% 40.8% 42.4% 44.3%
Women's Apparel........................... 35.0% 35.3% 34.8% 34.4% 35.2%
Accessories............................... 28.9% 25.8% 24.4% 23.2% 20.5%
------ ------ ------ ------ ------
Total..................................... 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== ======
</TABLE>
Vertically Integrated Operations
The Company believes that a key competitive advantage is its ability to
integrate the functions of leather design and development, sourcing,
merchandising, marketing and retail sales.
Merchandise Design and Development
Wilsons' buyers and designers are trained to translate market trends into
leather products that appeal to Wilsons' customers. The Company's proprietary
merchandise is created and developed by its in-house design staff. Merchandise
designs are reviewed to ensure consistency with the Company's merchandise
themes and images. The designers and buyers also work closely with the
Company's suppliers to identify and develop leather colors and finishes.
In order to respond effectively to changing consumer preferences, the
Company monitors emerging lifestyle and market trends affecting outerwear,
apparel and accessories and utilizes information from the Company's customers
regarding the retail performance of its merchandise. As a market trend is
identified, the Company reviews its merchandise design decisions to ensure
that key features of successful merchandise are incorporated into future
designs. As part of the design process, the Company also analyzes and
considers the anticipated retail prices of and profit margins for the
merchandise, the availability of raw materials and the capabilities of the
factories that will manufacture the merchandise.
Product Sourcing
The Company believes that a significant competitive advantage is its
sourcing expertise. In 1998, Wilsons contracted for the manufacture of
approximately 2.0 million leather garments. Management believes that its
volume purchasing enables the Company to achieve economies of scale and to
secure sufficient manufacturing capacity.
The Company has developed a sourcing infrastructure that allows it to
control merchandise production without owning manufacturing facilities.
Company personnel 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. Their responsibilities include inspecting leather at the
tanneries, coordinating the production capacity, matching 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 its overseas
personnel to coordinate order fulfillment. Between 1990 and 1998, the Company
reduced its merchandise production cycle from approximately 180 days to
approximately 90 days. The reduced merchandise production cycle allows the
Company to control its production needs and to effectively reorder faster-
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 product sourcing to various
countries of the Far East, depending on labor availability and costs and
8
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availability of leather and other raw materials. In 1989, Wilsons sourced
approximately 90% of its leather garments from South Korean vendors. Since
that time the Company has shifted production to lower cost countries. In 1998,
of the 85% of the leather garments Wilsons contracted for manufacture, it
sourced 88% of its garments from China and approximately 8% and 3% of its
garments from Indonesia and India, respectively.
Distribution
Merchandise is shipped directly from merchandise vendors or contract
manufacturers to the Company's 289,000 square foot distribution center located
at its headquarters in Brooklyn Park, Minnesota. The distribution center is
equipped with high-speed, garment-sorting equipment and hand-held radio
frequency scanners for rapid bar code scanning and enhanced merchandise
control. 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 and 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.
The Company schedules merchandise replenishment to ensure that goods sold
during a weekend are replenished to the store before the next weekend. On
average, each store is shipped merchandise one to three times per week,
depending on the season and sales volume in each store.
During 1998, the Company signed a five-year lease for a facility with 45,600
square feet that services the distribution needs of the airport and factory
outlet stores. The distribution facility is located in Maple Grove, Minnesota
approximately two miles from the Company's distribution center in Brooklyn
Park, Minnesota.
Marketing and Advertising
Wilsons uses its marketing and advertising programs to highlight its
proprietary labels to identified customer segments. The Company's advertising
strategy focuses on strengthening the image of each particular label while
also promoting the Wilsons The Leather Experts name. The Company uses a
combination of direct mail, newspaper, radio and television advertising to
focus consumers on specific products and promote the Wilsons labels. In 1998,
the Company spent $4.8 million on national cable, local television and
advertising media. In the store, merchandising configuration, graphics
displays and signage enhances the customer's shopping experience and further
promotes the Company's proprietary labels.
Wilsons uses its in-house database of information on over five million
customers to identify key trends. Understanding the customer is a key element
to the success of Wilsons' merchandising and marketing programs. In addition,
Wilsons conducts marketing research of Wilsons and non-Wilsons leather
purchasing consumers to gain additional knowledge of consumer behavior.
Customer Service
Wilsons built its image as "The Leather Experts" by offering customers an
extensive selection of affordably priced leather merchandise and leather care
products. The Company emphasizes sales associate training to ensure each sales
associate's knowledge of Wilsons' merchandise and the customer segments that
the various labels are designed to serve. The associates receive on-going
training in the unique properties of leather, the appropriate methods of care
for the various leather finishes, Wilsons' standards of customer service and
selling techniques. In addition, the Company trains associates to perform
minor repairs in the store for the customer free of charge.
Wilsons regularly evaluates its customer service performance through
customer comment cards, direct survey of customers who return merchandise and
annual mall intercept and telephone interview surveys. Wilsons also
periodically holds customer focus groups. Issues relating to policy, procedure
or merchandise are frequently reviewed to improve service and quality.
Management Information Systems
During 1997, the Company completed implementation of new merchandising,
financial and human resources information systems. Management believes the new
systems have improved inventory management,
9
<PAGE>
providing Wilsons with the opportunity to better control its merchandise flow
from overseas factories to the stores. The new systems provide broader and
quicker access to information at all relevant levels of the organization,
stronger analytical tools for understanding sales and operating trends and
greater flexibility in anticipating future business needs. In addition, the
new merchandising system has enhanced the Company's ability to customize
merchandise offerings by store to serve specific customer segments.
The Company's automated point-of-sale registers in all stores capture
transactions by SKU that are transmitted electronically to the headquarters'
computer, updating other systems with critical sales 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 communication system
that permits daily communications of advanced shipment notices and electronic
tracking of inventory transfers between locations. 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 analytical capabilities and flexibility in planning sales,
inventory and gross margin. The 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. The 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.
See "--Risk Factors--We May Be Affected by Unexpected Year 2000 Problems" and
"Item 7.--Management's Discussion and Analysis of Financial Condition and
Results of Operations--Effect of Year 2000 on Information Systems."
Competition
The retail leather industry is both highly competitive and fragmented.
Management believes that the principal bases upon which the Company competes
are selection, style, quality, price, value, store location and service.
Wilsons competes with a broad range of other retailers including specialty
retailers, department stores, mass merchandisers and discounters and other
retailers of leather outerwear, apparel and accessories. Major competitors
include, among others, J.C. Penney, The Limited, Eddie Bauer, The Gap, Coach,
The Leather Loft and Burlington Coat Factory.
Trademarks
Wilsons conducts its business under various trade names, brand names,
trademarks and service marks in the United States, including M. Julian(R),
Maxima(R), Pelle Studio(R), Adventure Bound(R), Wilsons The
LeatherExperts(TM), Tannery West(R), Georgetown Leather Design(R), the
WalletWorks(TM), Open Road(TM), Handcrafted by Wilsons The Leather Experts(TM)
and Vintage by Wilsons The Leather Experts(TM) and has registered several
tradenames and trademarks in England.
Employees
As of January 30, 1999, Wilsons had approximately 4,000 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.
10
<PAGE>
Risk Factors
Certain statements made in this Form 10-K are forward-looking statements that
involve risks and uncertainties, and actual results may differ. Factors that
could cause actual results to differ include, without limitation, those
identified below.
A Decrease in the Demand for Leather Goods or a Misjudgment in Fashion Trends
by Us Could Harm Our Business
A decline in demand for leather outerwear, apparel and accessories or a
misjudgment in fashion trends could have a material adverse effect on our
business, financial condition and results of operations. Our sales and
profitability depend upon the continued demand by our customers for leather
outerwear, apparel and accessories and our ability to anticipate, gauge and
respond in a timely manner to changing consumer demands and fashion trends.
When leather outerwear, apparel and accessories are not generally in fashion,
our results of operations are adversely affected. There can be no assurance
that demand for leather outerwear, apparel or accessories will not decline or
that we will be able to anticipate, gauge and respond to changes in fashion
trends.
Adverse Economic Conditions or a Change in Consumer Shopping Patterns Could
Harm Our Sales
A weak retail environment could adversely affect our sales. General economic
conditions impact apparel retailers, and purchases of apparel may decline at
any time, especially during recessionary periods. In addition, our financial
performance is sensitive to changes in consumer spending trends and shopping
patterns. Since our stores are located primarily in enclosed regional malls,
our ability to sustain or increase the level of sales depends in part on the
continued popularity of malls as shopping destinations and the ability of
malls, tenants and other attractions to generate a high volume of customer
traffic. Many factors beyond our control may decrease mall traffic including,
among other things, economic downturns, the closing of anchor department
stores, weather, accessibility to strip malls or alternative shopping formats
(such as catalogs or Internet commerce) and changes in consumer preferences and
shopping patterns. A decrease in the volume of mall traffic, shifts in consumer
discretionary spending to other products or a general reduction in the level of
such spending could adversely affect our business, financial condition and
results of operations. In addition, although our comparable store sales
increased 6.3% during 1998 and 0.4% during 1997, our comparable store sales
decreased 1.3%, 1.5%, 5.1% and 13.8% during 1996, 1995, 1994 and 1993,
respectively. There can be no assurance that we will continue to generate
comparable store sales increases. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The Seasonality of Our Business Could Affect Our Profitability
We generate a significant portion of our sales from October through December
(56.6% for the year ended January 30, 1999), which includes the holiday selling
season. During the period from the day after Thanksgiving through January 2,
1999, we generated 37.8% of our annual sales. Net sales are generally lowest
during the period from April through July. Historically, we have not become
profitable, if at all, until the fourth quarter of a given year. As a result,
our 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 our business, misjudgments in fashion trends or unseasonably
warm or severe weather during our peak selling season in a given year could
have a material adverse effect on our business, financial condition and results
of operations. Our 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 "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations--Seasonality and
Inflation."
We Could Have Difficulty Obtaining Merchandise From Our Foreign Suppliers
We import our leather garments and accessories from independent foreign
contract manufacturers located primarily in the Far East. We do not have long-
term contracts or formal arrangements with our contract manufacturers. Many of
our domestic vendors also import a substantial portion of their merchandise
from
11
<PAGE>
abroad. In 1998, of the 85% of the leather garments Wilsons contracted for
manufacture, we sourced more than 88% from contract manufacturers located in
The People's Republic of China, which currently has Most Favored Nation (MFN)
trading status with the United States. China's MFN status must be renewed
annually and the issue faces minority opposition in the two major political
parties in the United States. There can be no assurance that China's MFN status
will continue as political conditions in the United States and China evolve.
Additionally, in 1998 we contracted for the manufacture of approximately 8% and
3% of our leather garments from Indonesia and India, respectively. If China,
Indonesia, India or any other country from which we source goods loses its MFN
status, or if any imposition of new or additional duties, quotas or taxes, are
imposed on imports from these countries, leather purchase and production costs
could increase significantly, negatively impacting our profitability, sale
prices or the 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 restrictions on the transfer
of funds; and
. the possibility of boycotts or other actions prompted by domestic
concerns regarding foreign labor practices or other conditions beyond our
control.
We cannot predict whether any of the countries in which our products
currently are manufactured or may be manufactured in the future will be subject
to trade restrictions imposed by the U.S. government, including the likelihood,
type or effect of any such restrictions, or whether any other conditions having
an adverse effect on our ability to source products will occur. Any event
causing a sudden disruption of imports from China or other foreign countries,
including a disruption due to financial difficulties of a supplier, could have
a material adverse effect on our business, financial condition and results of
operations. The current financial instability in Asia is an example of the
instability that could affect some of our suppliers adversely. Although to date
the instability in Asia has not had a material adverse effect on our ability to
import leather goods, and therefore on our business, financial condition and
results of operations, no assurances can be given that it will not have such an
effect in the future.
We May be Affected by Unexpected Year 2000 Problems
Many existing computer programs use only two digits to identify a year in the
date field and may not be able to determine whether "00" means 1900 or 2000,
which may result in systems failures or the creation of erroneous results.
These programs often are highly dependent upon historical or dynamic financial
and other data that could be misreported or misinterpreted and cause
significant resulting errors. If not corrected, many computer applications
could fail when processing year 2000 data.
Our operations rely on computerized recordkeeping, financial reporting, and
other systems, including inventory management and distribution, point-of-sale
and internal accounting systems. In addition, many of our vendors and other
third parties with which we conduct business also utilize computer systems that
may be adversely affected by year 2000-related programming errors. We are
evaluating, remediating and testing our computer systems in order to identify
and correct year 2000-related problems and currently estimate that the cost of
our year 2000 initiative will be $1.5 million. There can be no assurance,
however, that we or such third parties will identify and correct all such
problems or that expenditures will not be significantly higher. In addition,
our business, financial condition and results of operations may be adversely
affected if we, our vendors, or other organizations with which we do business
do not complete the conversion to applications that can process year 2000 dates
in a timely manner, or if the cost of our year 2000 initiative is significantly
higher than estimated. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Effect of Year 2000 on
Information Systems."
12
<PAGE>
We May Have Difficulty Achieving Our Growth Objectives
Our growth prospects depend upon a number of factors, including, among other
things, economic conditions, establishment and growth of new selling concepts,
competition, consumer preferences and demand for leather merchandise, growth in
the leather outerwear, apparel and accessories market, the retail environment
in general, financing and working capital needs, our ability to negotiate store
leases on favorable terms, the extended lead times required to negotiate
airport store leases, the ability to develop new merchandise and the ability to
hire and train qualified sales associates. In addition, our growth depends upon
the availability of suitable new store locations, including airport locations
which historically have been more difficult to acquire than mall stores. During
times of strong demand for mall locations, we may not be able to secure as many
holiday store leases as we would otherwise seek. There can be no assurance that
we will be able to effectively realize our plans for future growth. See "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Loss of Our Current Chief Executive Officer or President Could Adversely
Affect Our Business
Our success depends 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 we have entered into
employment agreements with Messrs. Waller and Rogers, the agreements do not
contain any restrictions on competition and expire in May 2000. The loss of the
services of either of these individuals could have a material adverse effect on
our business, financial condition and results of operations. We do not maintain
key-man life insurance on any of our executive officers.
Our High Level of Debt and Debt Service Could Negatively Impact Our Business
As of January 30, 1999, our debt included $70.0 million of 11 1/4% senior
notes due 2004, no borrowings outstanding under our three-year $150.0 million
revolving credit facility that expires in May 1999 and $10.3 million of
outstanding letters of credit. Our peak borrowings under the revolving credit
facility and outstanding letters of credit in 1998 were $38.4 million and $48.7
million, respectively. Our ability to service, or refinance on favorable terms,
the indebtedness depends on future performance, which is subject to a number of
factors, some of which are beyond our control, including general economic and
market conditions and competition. Our high level of debt and debt service
requirements will have several important effects on future operations,
including:
. we must dedicate a portion of our consolidated cash flow from operations
to the payment of interest on our indebtedness, which, as a result, will
not be available for other purposes;
. because of covenants contained within the revolving credit facility, we
must meet certain financial tests and limit capital expenditures;
. certain covenants and restrictions under the revolving credit facility
and the indenture governing the 11 1/4% senior notes and certain other
restrictions may limit our ability to borrow additional funds or dispose
of assets and may affect our flexibility in planning for, and reacting
to, changes in our business, including possible acquisition activities;
and
. our ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions, general corporate or other
purposes may be impaired.
Further, if we are unable to comply with the terms and covenants under the
indenture, the 11 1/4% senior notes could be declared immediately due and
payable. The foregoing factors or the inability to obtain additional financing
or refinancing on favorable terms could have a material adverse effect on our
business, financial condition and results of operations. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
13
<PAGE>
The High Level of Competition in the Retail Industry May Lead to Reduced Sales
and Profits
The retail leather outerwear, apparel and accessories industry is highly
competitive and fragmented. If we are unable to compete effectively, our
business, financial condition and results of operations could be adversely
affected. We compete with a broad range of other retailers, including other
specialty retailers, department stores, mass merchandisers and discounters,
many of which have greater financial and other resources. Increased competition
may reduce sales, increase operating expenses and decrease profit margins. Our
management believes that the principal bases upon which we compete are
selection, style, quality, price, value, store location and service. We also
compete for site locations and sales associates in certain circumstances. There
can be no assurance that we will be able to compete successfully in the future.
See "--Competition."
A Decrease in the Availability of Leather or an Increase in Its Price Could
Harm Our Business
Leather comprises approximately two-thirds of the garment cost of leather
apparel. As a result, the price of leather influences our gross margin levels.
Worldwide meat consumption influences the supply of leather, and the leather
shoe, furniture and auto upholstery markets primarily influence the demand for
leather. The availability and price of leather may fluctuate significantly.
Fluctuations in the availability and price of leather or other raw materials
that we use could have a material adverse effect on our business, financial
condition and results of operations.
Failure to Attract Qualified Personnel Could Adversely Affect Our Business
A change in labor market conditions that either further reduces the
availability of employees or increases significantly the cost of labor could
have a material adverse effect on our business, financial condition and results
of operations. The retail business is labor intensive. We employ a large number
of hourly employees and incur substantial expenses for recruiting and training
new personnel. The current low unemployment rate in certain geographic areas in
which we operate has contracted the available labor pool in those areas. We
have historically experienced a high level of turnover in our stores as is
typical in the retail environment, and there can be no assurance that we will
be able to successfully attract and retain labor at current rates.
The Market Price for Our Common Stock, Like Other Retail Stocks, May be
Volatile
Our stock price, like that of other companies in the retail industry, is
subject to volatility. If revenues or earnings in any quarter fail to meet the
investment community's expectations for any reason, there could be an immediate
adverse impact on our stock price. The stock price also may be affected by
broader market trends unrelated to our performance. Such volatility may limit
the Company's ability in the future to raise additional capital.
We Do Not Intend to Pay Dividends in the Foreseeable Future
We have not paid any dividends on our common stock and do not intend to pay
dividends in the foreseeable future. The revolving credit facility and the
indenture governing the 11 1/4% senior notes restrict any payment of dividends.
Any determination to pay cash dividends in the future will be at the discretion
of our board of directors and will be dependent upon our business, results of
operations, financial condition, contractual restrictions and other factors
deemed relevant at the time by our board.
Certain Provisions of Our Articles and of Minnesota Law May Make a Take-Over
More Difficult or Adversely Affect the Market Price of Our Common Stock
Our board of directors has the authority, without further shareholder action,
to fix the rights and preferences of any shares of our preferred stock to be
issued from time to time. In addition, as a Minnesota corporation, we are
subject to certain anti-takeover provisions of the Minnesota Business
Corporation Act. Both the authority of our 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, may discourage bids for
our common stock and may adversely affect the market price of, and the voting
and other rights of the holders of common stock.
14
<PAGE>
Ownership of Our Common Stock is Concentrated
Our directors and executive officers beneficially own, in the aggregate,
45.8% of the outstanding shares of our common stock. If these shareholders vote
together as a group, they will be able to exert significant control of our
business and affairs, including the election of individuals to our board of
directors and to significantly affect the outcome of certain actions that
require shareholder approval, including the adoption of amendments to our
Amended and Restated Articles of Incorporation, certain mergers, sales of
assets and other business acquisitions or dispositions.
Item 2. Properties
As of January 30, 1999, Wilsons operated 517 leased store locations and one
owned store location. Substantially all of Wilsons' stores were located in
regional shopping malls, airport retail locations or factory outlet malls.
Store leases with third parties are typically seven to ten years in duration.
In most cases, each store pays an annual base rent plus a contingent rent based
on the store's annual sales in excess of a specified threshold. Substantially
all leases which Wilsons entered into prior to the May 25, 1996 Management
Buyout 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 with CVS, to use
commercially reasonable efforts to remove the affiliate of CVS as a guarantor.
To date, Wilsons has not experienced any significant difficulty in obtaining
market rate leases without a CVS guarantee.
The Company owns its Brooklyn Park distribution center and corporate offices
and the land on which they are located. The combined Brooklyn Park distribution
center and corporate offices total is 343,500 square feet. During 1998, the
Company signed a five-year lease with a five-year renewal option for a facility
in Maple Grove, Minnesota that services the distribution needs of the airport
locations and factory outlet stores. This new facility is 45,600 square feet.
Item 3. Legal Proceedings
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
operation of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
None.
15
<PAGE>
Item 4a. Executive Officers of the Registrant
The following table sets forth certain information concerning the executive
officers of the Company as of April 1, 1999.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Joel N. Waller.......... 59 Chairman of the Board of Directors and Chief Executive Officer
David L. Rogers......... 56 President, Chief Operating Officer and Director
John Serino............. 49 Executive Vice President, Store Sales
W. Michael Bode......... 54 Senior Vice President--Wilsons, General Manager Outlet Division
John Fowler............. 43 Senior Vice President, General Merchandise Manager
Betty Goff.............. 42 Vice President, Human Resources
Jed Jaffe............... 45 Vice President, Real Estate
Jeffrey W. Orton........ 43 Vice President, Information Systems and Strategies and Logistics
Lisa Stanley............ 51 Vice President, Marketing
Daniel R. Thorson....... 40 Treasurer and Director, Business Planning and Analysis
Douglas J. Treff........ 41 Vice President, Finance, Chief Financial Officer and Assistant Secretary
</TABLE>
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 The Leather
Experts Inc. ("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
Lakes Gaming, 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 1988 and Chief Financial Officer of
Bermans from 1980 to 1984. Mr. Rogers currently serves on the Board of
Directors of Lakes Gaming, Inc. and Rainforest Cafe, Inc.
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 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 Senior Vice President--Wilsons, General
Manager Outlet Division since January 1999 and served as Vice President,
Manufacturing of Wilsons from 1987 to January 1999. Prior to joining Wilsons,
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 from 1981 to 1982 of Bermans.
John Fowler has served as Senior Vice President, General Merchandise Manager
of Wilsons since January 1999 and as Vice President, General Merchandise
Manager from May 1998 to January 1999. Mr. Fowler served as Overseas Merchant
for Wilsons from February 1993 to April 1998, as Vice President, General
Merchandise Manager of Tannery West from August 1989 to January 1993, and as
Divisional Merchandise Manager of Tannery West from October 1986 to July 1989.
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
16
<PAGE>
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.
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 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.
Lisa Stanley has served as Vice President, Marketing, of the Company since
January 1999. Ms. Stanley served as Vice President, Music Programming for
Audio Environments, Inc., a creator and producer of custom music for
retailers, from 1997 to 1999. From 1992 to 1997, Ms. Stanley served as the
Vice President of Marketing for the Structure division of The Limited, Inc., a
specialty retailer, and from 1991 to 1992, held various positions with the
Lane Bryant division of The Limited, Inc. Ms. Stanley served as Senior Vice
President, Sales Promotion Director for the Weinstocks division of Carter
Hawley Hale, a regional department store, from 1984 to 1991 and as Vice
President, Sales Promotion Director of The Broadway division of Carter Hawley
Hale from 1979 to 1984.
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 Chief Financial Officer and Assistant
Secretary of Wilsons since May 1996 and as Vice President, Finance since
January 1993. 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.
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.
17
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Information
The Company's common stock, $.01 par value, trades on The Nasdaq National
MarketSM under the symbol WLSN. As of April 1, 1999, the market price of the
common stock was $9.3125. The table presents the high and low market prices
since the effective date of the Company's initial public offering on May 27,
1997.
<TABLE>
<CAPTION>
Quarterly Common Stock Price Ranges
-------------------------------------------------
Quarter High Low
-------------------------------- ------- -------
<S> <C> <C>
Fiscal quarter ended August 2,
1997 (from May 27, 1997) $11.625 $ 9.000
Fiscal quarter ended November 1,
1997 11.625 10.141
Fiscal quarter ended January 31,
1998 10.000 8.500
Fiscal quarter ended May 2, 1998 16.000 8.500
Fiscal quarter ended August 1,
1998 16.750 14.375
Fiscal quarter ended October 31,
1998 15.438 9.625
Fiscal quarter ended January 30,
1999 12.188 9.250
</TABLE>
There were 45 recordholders of the Company's common stock as of April 1,
1999.
Dividends
The Company has not declared any cash dividends since its inception in May
1996. The Board of Directors currently intends to continue a policy of
retaining all earnings to finance the continued growth and development of the
Company's business and does not anticipate paying cash dividends in the
foreseeable future. Any future determination as to the payment of cash
dividends will be dependent upon the Company's financial condition, results of
operations and other factors deemed relevant by the Board. The Company's loan
agreements contain certain covenants limiting, among other things, the
Company's ability to pay cash dividends or make other distributions. See "Item
1. Business--Risk Factors--We Do Not Intend to Pay Dividends in the Forseeable
Future" and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
18
<PAGE>
Item 6. Selected Financial Data
The following tables present selected historical consolidated financial data
of the Company, which should be read in conjunction with "Item 7.--
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the "Consolidated Financial Statements of the Company",
beginning on page F-1. The selected historical consolidated financial data as
of January 30, 1999, January 31, 1998 and February 1, 1997, for the years
ended January 30, 1999 and January 31, 1998 and for the period from inception
(May 26, 1996) to February 1, 1997 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, 1995 and 1994, for the years then ended and
for the five months 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 year 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
historical consolidated financial data for the eight months ended January 27,
1996 and for the five months ended May 27, 1995, have been derived from the
unaudited consolidated financial statements of the Predecessor Companies. The
store 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.
Prior to the Management Buyout, the Predecessor Companies were operated as
part of CVS. The selected 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 DATA
(in millions except share and per share amounts and store data)
<TABLE>
<CAPTION>
Combined
Company Companies(/1/) Company Predecessor Companies
----------------------- -------------- -------------- -------------------------------------------------
Period From Eight Years Ended
Years Ended Year Inception Months Five Months Ended December 31,
----------------------- Ended (May 26, 1996) Ended ------------------- ---------------
January 30, January 31, February 1, to February 1, January 27, May 25, May 27,
1999 1998 1997 1997 1996 1996 1995 1995 1994
----------- ----------- -------------- -------------- ----------- -------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Net Sales........ $ 459.4 $ 418.1 $424.8 $ 345.1 $ 367.6 $ 109.6 $ 124.7 $ 462.4 $474.6
Costs and
expenses:
Costs of goods
sold, buying
and occupancy
costs.......... 303.5 282.3 286.9 222.1 238.5 86.2 99.9 317.0 329.4
Selling, general
and
administrative
expenses ...... 113.7 100.7 103.2 75.8 76.4 34.8 45.9 114.9 130.2
Depreciation and
amortization... 4.5 2.3 4.8 1.0 13.3 4.7 9.0 21.4 22.3
Restricted stock
compensation
expense (/2/).. -- 8.5 1.5 1.5 -- -- -- -- --
Restructuring
and asset
impairment
charges........ -- -- -- -- 182.2 -- -- 182.2 --
----------- ---------- ------ ---------- ------- -------- -------- ------- ------
Income (loss)
from
operations...... 37.7 24.3 28.4 44.7 (142.8) (16.1) (30.1) (173.1) (7.3)
Interest expense,
net............. 7.8 6.5 6.5 5.3 7.4 1.6 3.4 10.4 8.4
----------- ---------- ------ ---------- ------- -------- -------- ------- ------
Income (loss)
before income
taxes........... 29.9 17.8 21.9 39.4 (150.2) (17.7) (33.5) (183.5) (15.7)
Income tax
provision
(benefit)....... 11.7 10.8 9.0 15.5 (4.6) (6.6) (5.5) (10.1) (3.1)
----------- ---------- ------ ---------- ------- -------- -------- ------- ------
Income (loss)
before
extaordinary
gain............ 18.2 7.0 12.9 23.9 (145.6) (11.1) (28.0) (173.4) (12.6)
Extraordinary
gain on early
extinguishment
of debt, net of
tax of $2.5..... -- 3.8 -- -- -- -- -- -- --
----------- ---------- ------ ---------- ------- -------- -------- ------- ------
Net income
(loss).......... $ 18.2 $ 10.8 $ 12.9 $ 23.9 $(145.6) $ (11.1) $ (28.0) $(173.4) $(12.6)
=========== ========== ====== ========== ======= ======== ======== ======= ======
Basic net income
per common
share:
Income before
extraordinary
item............ $ 1.75 $ 0.80 $ 3.12
Extraordinary
gain on early
extinguishment
of debt, net of
tax............. -- 0.42 --
----------- ---------- ----------
Basic net income
per common
share........... $ 1.75 $ 1.22 $ 3.12
=========== ========== ==========
Weighted average
common shares
outstanding..... 10,357,455 8,910,456 7,650,000
=========== ========== ==========
Diluted net
income per
common share:
Income before
extraordinary
item............ $ 1.66 $ 0.68 $ 2.67
Extraordinary
gain on early
extinguishment
of debt, net of
tax............. -- 0.36 --
----------- ---------- ----------
Diluted net
income per
common share.... $ 1.66 $ 1.04 $ 2.67
=========== ========== ==========
Weighted average
common shares
outstanding--
assuming
dilution........ 10,920,437 10,397,665 8,970,377
=========== ========== ==========
Other data:
Adjusted
EBITDA(/3/)..... $ 42.2 $ 35.1 $ 34.7 $ 47.2 $ 52.7 $ (11.4) $ (21.1) $ 30.5 $ 15.0
=========== ========== ====== ========== ======= ======== ======== ======= ======
Store Data:
Traditional
stores:
Open at end of
period......... 518 460 461 461 494 480 567 548 628
Net sales per
square foot for
stores open
entire year.... $ 426 $ 393 $ 389 -- -- -- -- $ 373 $ 340
Change in
comparable
store sales
(/4/).......... 6.3% 0.4% (1.3%) (2.7%) (3.1%) 3.9% 4.4% (1.5%) (5.1%)
Peak number of
seasonal stores
during period... 265 297 376 376 227 -- -- 227 135
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Predecessor
Company Companies
----------------------------------- -------------
December 31,
-------------
January 30, January 31, February 1,
1999 1998 1997 1995 1994
----------- ----------- ----------- ------ ------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (/5/)........ $131.5 $120.2 $ 83.8 $ 44.6 $ 77.1
Total assets................. 248.8 227.7 172.4 182.4 392.7
Total long-term debt (/6/)... 70.0 75.0 59.6 -- --
Total liabilities............ 150.6 155.0 128.9 154.8 191.7
Shareholders' equity......... 98.2 72.7 43.5 27.6 201.0
</TABLE>
- ---------------
(1) Results for the year 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, which
periods together contain 53 weeks.
(2) Represents a noncash compensation charge related to the vesting of
restricted stock purchased by certain managers of the Company in
connection with the Management Buyout.
(3) 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 year ended January 31, 1998, for the fifty-three
week period ended February 1, 1997 and for the period from inception (May
26, 1996) to February 1, 1997, is before the restricted stock compensation
expense of $8.5 million, $1.5 million and $1.5 million, respectively.
EBITDA and Adjusted EBITDA are not intended to represent cash flow from
operations as defined by generally accepted accounting principles and
should not be considered as an alternative to cash flow or as a measure of
liquidity or as an alternative to net earnings as indicative of operating
performance. Adjusted EBITDA is included in this Form 10-K because
management believes that certain investors find it a useful tool for
measuring the Company's ability to service its debt.
(4) Comparable store sales means sales generated by stores open at least one
full year.
(5) The working capital calculation excludes amounts due to CVS as of December
31, 1995 and 1994.
(6) 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 $55.8
million note issue to CVS by the Company in connection with the Management
Buyout on May 25, 1997.
21
<PAGE>
Item 7. 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 Form 10-K.
The fiscal year of the Predecessor Companies before the Management Buyout
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 30, 1999. Unless otherwise indicated, references to 1998, 1997 and
1996 in this Form 10-K refer to the twelve months ended January 30, 1999,
January 31, 1998 and February 1, 1997, respectively. As a result of the
Management Buyout, certain financial information for the five months ended May
27, 1996 and May 25, 1995 is presented in this Form 10-K.
Overview
The Company operates 518 retail stores under one segment using various
formats including mall stores, airport locations and factory outlet stores.
The Company also operates holiday stores to better capitalize on its peak
selling season from October through December.
Prior to 1996, management initiated a restructuring to improve the Company's
portfolio of stores, enhance its profitability and position the Company for
future growth (the Restructuring). Management closed 156 stores between
January 1, 1995 and May 25, 1996 and undertook a number of strategic
initiatives to improve future operating performance, including (i)
repositioning the merchandise assortment to focus on higher-margin accessories
and target specific customer segments, (ii) restructuring store management and
staffing, (iii) upgrading critical merchandising and financial information
systems and (iv) reducing corporate overhead. As a result of these and other
initiatives, the Company's gross profit as a percentage of sales increased to
33.9% in 1998 from 30.6% in 1994, and selling, general and administrative
expenses as a percentage of sales decreased to 24.7% from 27.4% over the same
period.
For 1998, 37.8% of the Company's sales were generated during the period from
the day after Thanksgiving through January 2, 1999. As part of the Company's
strategy to improve operating margins and maximize revenue and profitability
during nonpeak selling seasons, the Company has increased the number of less
seasonal airport and factory outlet locations and modified its product mix to
emphasize accessories. The Company intends to continue to grow accessory sales
by increasing the number of SKUs offered and the amount of floor space
allocated to accessories in its mall stores. As a result of these initiatives,
accessories grew as a percentage of sales to 28.9% in 1998 from 20.5% in 1994.
Over the same period, men's apparel sales decreased as a percentage of sales
to 36.1% from 44.3%, and women's apparel sales remained relatively constant in
the Company's merchandise mix.
22
<PAGE>
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
Company Companies Company Predecessor Companies
----------------------- ----------- ----------- ---------------------------
Period from
Inception Eight Five Months
Years Ended (May 26, Months Ended
----------------------- Year Ended 1996) to Ended ---------------
January 30, January 31, February 1, February 1, January 27, May 25, May 27,
1999 1998 1997 (/1/) 1997 1996 1996 1995
----------- ----------- ----------- ----------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales..................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold, buying and occupancy
costs........................................ 66.1 67.5 67.5 64.4 64.9 78.6 80.1
------ ------ ------ ------ ------- ------- -------
Gross margin.................................. 33.9 32.5 32.5 35.6 35.1 21.4 19.9
Costs and expenses:
Selling, general and administrative
expenses..................................... 24.7 24.1 24.3 21.9 20.8 31.8 36.8
Depreciation and amortization................. 1.0 0.6 1.1 0.3 3.6 4.3 7.2
Restricted stock compensation charge.......... -- 2.0 0.4 0.4 -- -- --
Restructuring and asset impairment charges.... -- -- -- -- 49.5 -- --
------ ------ ------ ------ ------- ------- -------
Income (loss) from operations................. 8.2 5.8 6.7 13.0 (38.8) (14.7) (24.1)
Interest expense, net......................... 1.7 1.5 1.5 1.6 2.0 1.4 2.8
Income tax provision (benefit)................ 2.5 2.6 2.2 4.5 (1.2) (6.0) (4.4)
Extraordinary gain on early debt
extinguishment, net of tax................... -- 0.9 -- -- -- -- --
------ ------ ------ ------ ------- ------- -------
Net income (loss)............................. 4.0% 2.6% 3.0% 6.9% (39.6)% (10.1)% (22.5)%
====== ====== ====== ====== ======= ======= =======
</TABLE>
- ----------------
(1) Results for the year 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.
Year Ended January 30, 1999 Compared to Year Ended January 31, 1998.
Net sales increased 9.9% to $459.4 million in 1998 from $418.1 million in
1997. Contributing to the $41.3 million sales increase were: (i) a $23.2
million increase associated with a 6.3% comparable store sales increase,
driven primarily by strong sales of women's and accessories merchandise in
mall stores, (ii) a $12.7 million increase in non-comparable store sales due
to 40 new store openings offset by 22 store closings plus the annual effect of
1997 openings and (iii) a $10.4 million increase resulting from the
acquisition of the 40-store Wallet Works factory outlet chain in May 1998.
Partially offsetting the sales increase was a $5.0 million decrease in
seasonal stores sales due primarily to lower average sales volumes.
Wilsons opened 40 stores, acquired 40 stores and closed 22 stores in 1998
compared to 22 store openings and 23 store closings in 1997. As of January 30,
1999, Wilsons operated 518 stores compared to 460 stores at January 31, 1998.
The Company operated 215 holiday stores and 50 kiosks during the 1998 holiday
season compared to 197 holiday stores and 100 kiosks during the prior year
holiday season.
Cost of goods sold, buying and occupancy costs decreased to 66.1% of sales,
or $303.5 million, in 1998 from 67.5% of sales, or $282.3 million, in 1997.
Gross margin net of occupancy costs increased 0.8 points as a percent of sales
in 1998 due to strong comparable store sales increases that reduced the mark-
down rate on merchandise compared to 1997. Occupancy costs for the current
year increased $3.0 million due to operating additional stores and the effect
of lease renewals. Occupancy costs declined as a percent of sales due to
leverage
23
<PAGE>
from the comparable store sales increase. 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 30, 1999.
Selling, general and administrative expenses increased to $113.7 million in
1998 from $100.7 million in 1997, and increased as a percentage of net sales
to 24.7% in 1998 from 24.1% in 1997. The increase was primarily due to the
addition of 58 new stores net of closings, increased expenses resulting from
the 6.3% comparable store sales increase, higher selling expenses in the
Company's non-mall businesses and increased infrastructure to support the
growth of the Company's airport and factory outlet businesses.
Depreciation and amortization increased to $4.5 million in 1998 from $2.3
million in 1997, and increased as a percentage of net sales to 1.0% from 0.6%.
The increase resulted from the acquisition of the 40-store Wallet Works
factory outlet chain and $16.0 million in capital expenditures for new store
construction and the renovation of existing stores.
Income from operations increased 55.2% to $37.7 million in 1998 from $24.3
million in 1997. The 1997 period included an $8.5 million noncash compensation
charge associated with the vesting of all remaining shares of restricted
stock. See "Consolidated Financial Statements of the Company, Note 9."
Excluding the restricted stock compensation expense, income from operations
increased 15.0% in 1998.
Net interest expense increased to $7.8 million from $6.5 million in 1997.
The increase was due to a higher average short and long-term debt outstanding,
higher interest rates on the long-term debt and additional deferred financing
cost amortization related to the issuance of the 11 1/4% senior notes due
2004. This increase was partially offset by an increase in interest income.
Income tax expense increased to $11.7 million in 1998 from $10.8 million in
1997. The effective tax rate decreased to 39.2% in 1998 from 60.4% in 1997 due
primarily to the non-deductibility of the $8.5 million restricted stock
compensation expense in 1997.
The Company realized a $3.8 million extraordinary gain on the early
extinguishment of debt, net of tax, in 1997. The extraordinary gain was the
result of repurchasing the senior secured subordinated note issued to CVS in
connection with the Acquisition at a discount. See "Consolidated Financial
Statements of the Company, Note 7."
Year Ended January 31, 1998 Compared to Year Ended February 1, 1997
Net sales decreased 1.6% to $418.1 million in 1997 from $424.8 million in
1996. Contributing to the $6.7 million sales decrease were: (i) a $6.3 million
decrease associated with the additional week in 1996 and (ii) the operation of
21 fewer stores on average as the Company closed underperforming stores.
Partially offsetting the sales decline were: (i) a 0.4% increase in comparable
store sales and (ii) increased sales in the Company's 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 nine months of 1997 by a
reduced level of clearance merchandise for sale 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.
Wilsons opened 22 stores and closed 23 stores in 1997 compared to eight
store openings and 41 store closings in 1996. As of January 31, 1998, Wilsons
operated 460 stores compared to 461 stores at February 1, 1997. The Company
operated 197 holiday stores and 100 kiosks during the 1997 holiday season
compared to 224 holiday stores and 152 kiosks during the prior year holiday
season.
Cost of goods sold, buying and occupancy costs remained constant at 67.5% of
sales, or $282.3 million, in 1997, compared to 67.5% of sales, or $286.9
million, for 1996. Gross margin net of occupancy costs decreased 0.4 points as
a percent of sales in 1997 from 1996 due primarily to additional markdowns
required to liquidate
24
<PAGE>
clearance merchandise. In 1997, occupancy costs decreased $2.8 million due
principally to operating fewer stores. The difference in inventory between
LIFO and the FIFO method was not material as of January 31, 1998.
Selling, general and administrative expenses for 1997 decreased to $100.7
million from $103.2 million in 1996, and decreased as a percentage of net
sales to 24.1% in 1997 from 24.3% in 1996. The decrease was 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 fiscal year.
Depreciation and amortization decreased to $2.3 million in 1997 from $4.8
million in 1996. The decrease resulted from the purchase accounting adjustment
as part of the Management Buyout that reduced the amounts assigned to property
and equipment, thereby reducing depreciation expense.
Operating expenses for 1997 included an $8.5 million noncash compensation
charge associated with the vesting of the remaining 881,982 shares of
restricted stock. Operating expenses for 1996 included a $1.5 million noncash
compensation charge associated with the vesting of 198,018 shares of
restricted stock. See "Consolidated Financial Statements of the Company, Note
9."
Income from operations, excluding restricted stock compensation expense,
increased 9.8% to $32.8 million in 1997 from $29.9 million in 1996. Income
from operations, including the restricted stock compensation expense,
decreased 14.5% to $24.3 million in 1997 from $28.4 million in 1996.
Net interest expense for 1997 decreased to $6.5 million in 1997 from $6.5
million in 1996.
Income tax expense increased to $10.8 million in 1997 from $9.0 million in
1996. The effective tax rate increased to 60.4% in 1997 from 41.0% 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 1997. The extraordinary gain was the
result of the repurchase at a discount of the CVS Note. See "Consolidated
Financial Statements of the Company, Note 7."
Period from Inception (May 26, 1996) to February 1, 1997 Compared to Eight
Months Ended January 27, 1996
Net sales from inception to February 1, 1997 decreased 6.1% to $345.1
million from $367.6 million during the same period in the previous year.
Contributing to the $22.5 million decrease were: (i) a 2.7% decline in
comparable store sales due to weak demand for the Company's fashion
merchandise in the Midwest area of the country as compared to the northeast
and west coast markets where comparable store sales increased, (ii) five fewer
shopping days between Thanksgiving and Christmas and (iii) operating 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. Partially offsetting the decrease was: (i) a sales increase from
operating 149 additional holiday stores and kiosks and (ii) $2.8 million in
sales generated in the additional week in the period from inception (May 26,
1996) to February 1, 1997.
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 reduction of 33 stores was 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.
Cost of goods sold, buying and occupancy costs from inception to February 1,
1997 decreased to 64.4% of sales, or $222.1 million, from 64.9% of sales, or
$238.5 million, for the same period of the previous year. Gross margin net of
occupancy costs increased for the period from inception to February 1, 1997 as
compared to the
25
<PAGE>
same period one year earlier due to additional markdowns taken in the earlier
period to liquidate merchandise in 76 stores that 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 decreased to $78.3 million from $89.7 million
for the same period in 1995, and decreased as a percentage of net sales to
22.6% from 24.4% for the same period in 1995. The $11.4 million decrease 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.
Offsetting the operating expense reduction 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, decreased to $78.3 million from $271.9 million
for the same period in 1995, and decreased as a percentage of net sales to
22.6% from 73.9% 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
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."
Net interest expense from inception to February 1, 1997, decreased to $5.3
million from $7.4 million 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,
increased to $15.5 million from a $4.7 million tax benefit for the prior year
period. The effective tax rate increased to 39.4% in the 1996 period from 3.1%
in the 1995 period, due primarily 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
Net sales for the five-month period in 1996 decreased 12.1% to $109.6
million from $124.7 million during the same period of the prior year.
Contributing to the $15.1 million decrease was the sales decrease resulting
from operating an average of 90 fewer stores. Partially offsetting the sales
decrease was a 3.9% comparable store sales increase in the 1996 period as a
result of strong merchandise sales in the women's 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.
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.
Cost of goods sold, buying and occupancy costs for the five-month period in
1996 decreased to 78.6% of sales, or $86.2 million, from 80.1% of sales, or
$99.9 million, for the same period of the prior year. As a percent of sales,
gross margin net of occupancy costs increased in the five-month period of 1996
as compared to the same period one year earlier 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. For the
five months ended May 25, 1996, occupancy costs as a percent of sales
decreased as the Company closed unprofitable stores as part of the
Restructuring.
Operating expenses in the five-month period in 1996 decreased to $39.5
million from $54.9 million for the same period of 1995, and decreased as a
percentage of net sales to 36.1% from 44.0% for the same period in 1995. The
$15.4 million decrease was a result of store closings and realizing the
benefits of profit enhancement
26
<PAGE>
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,
revisions of the layaway and check acceptance policies, and reductions in
headquarters expense. Operating expenses were also lower than the same period
in 1995 as a result of the Restructuring which reduced Wilsons' 1996
depreciation and amortization expenses by $4.3 million.
Net interest expense for the five months ended May 25, 1996 decreased to
$1.6 million from $3.4 million 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
was primarily attributable to a $124.0 million capital contribution made by
CVS to facilitate the Management Buyout.
Income tax benefit for the 1996 five-month period increased to $6.6 million
from $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 16.3% 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.
Liquidity And Capital Resources
Wilsons' capital requirements are primarily driven by the Company's seasonal
working capital needs and its strategy to open new stores, remodel existing
stores and update information systems. 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 at least 20
mall stores and at least seven 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 have provided
the Company with a three-year senior credit facility (the Senior Credit
Facility), which expires in May 1999. The Senior Credit Facility provides for
borrowings of up to $150.0 million in aggregate principal amount, which amount
includes a letter of credit subfacility of up to $90.0 million. The maximum
amount available under the Senior Credit Facility, however, is further subject
to a borrowing base limitation (less certain reserves) of 65.0% 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 0.25% ("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 30, 1999, the Company had no borrowings under the
Senior Credit Facility and $10.3 million of outstanding letters of credit. The
Company pays a monthly fee equal to 0.375% 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 1998, the peak borrowings
and letters of credit outstanding under the Senior Credit Facility were $38.4
million and $48.7 million, respectively, and the average amount of borrowings
and the average amounts covered by outstanding letters of credit were $6.1
million and $27.5 million, respectively. For 1997, the peak borrowings and
letters of credit outstanding under the Senior Credit Facility were $30.8
million and $51.9 million, respectively, and 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 borrowings and the average amounts covered by outstanding
letters of credit were $15.8 million and $40.1 million, respectively. The
Company is dependent on the Senior Credit Facility to fund working capital and
letter of credit needs, and management believes that borrowing capacity under
the Senior Credit Facility, together with current and anticipated cash flow
from operations should be adequate to meet the Company's anticipated working
capital and capital expenditure requirements until the
27
<PAGE>
Senior Credit Facility expires in May 1999, when the Company expects to
replace such facility. The Company estimates that capital expenditures during
1999 will total approximately $25.0 million.
On August 18, 1997, the Company completed a private offering of 11 1/4%
senior notes (the Senior Notes) to certain institutional buyers. 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, 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 private offering of
the Senior Notes to repurchase the outstanding note issued to CVS in
connection with the Management Buyout and pay the accrued interest thereon.
The balance of the net proceeds has been used for general corporate purposes,
including capital expenditures and additional store openings.
On March 27, 1998, Wilsons repurchased and simultaneously cancelled the
warrant issued to CVS for $10.0 million in cash. The warrant had been issued
to CVS in the Management Buyout and gave CVS the right to purchase a total of
1,350,000 shares of the Company's common stock.
On May 13, 1998, the Company acquired certain assets of Wallet Works, Inc.
for a purchase price of $5.2 million. The purchase enabled the Company to
expand its leather accessories business into factory outlet malls, a new
distribution channel for the Company. See "Consolidated Financial Statements
of the Company, Note 7."
On June 16, 1998, the Company completed the redemption of its outstanding
redeemable common stock purchase warrants that were issued in the Company's
initial public offering. The net proceeds received by the Company from the
exercise of such warrants prompted by such warrant redemption, after deducting
costs and expenses, were approximately $17.0 million. See "Consolidated
Financial Statements of the Company, Note 9."
On January 21, 1999 and March 9, 1999, the Company repurchased $5.0 million
and $4.5 million, respectively, of Senior Notes. See "Consolidated Financial
Statements of the Company, Note 7."
Cash Flow Analysis
Operating activities for 1998 resulted in cash provided of $21.0 million
compared to cash provided of $16.1 million in 1997. The $21.0 million cash
provided by operating activities in 1998 was primarily a result of net income
of $18.2 million.
Investing activity for 1998 was comprised of capital expenditures of $16.0
million and the purchase of Wallet Works for $5.2 million. The capital
expenditures were primarily for the implementation of certain new information
systems, the renovation of and improvements to existing stores and
constructing new stores. Capital expenditures for 1997 totaled $10.5 million.
The Company currently plans to open at least 20 traditional mall stores and at
least seven airport stores annually for the next several years. The cost to
open a typical mall store ranges from $130,000 to $200,000. The cost to open
an airport store is currently estimated to range from $75,000 for kiosks to
$175,000 for larger stores.
Cash provided by financing activities for 1998 was $3.4 million. The $3.4
million provided by financing activities was primarily the result of $17.2
million net proceeds received by the Company from the exercise of the common
stock redeemable purchase warrants and employee stock options and a $1.2
million increase in book overdrafts which occur as outstanding checks exceed
funds on deposit in noninvestment accounts offset by $10.0 million used to
repurchase the warrant issued to CVS and $5.0 million used to repurchase
Senior Notes. Financing activities in 1997 included proceeds of $9.5 million
from the Company's initial public offering and $16.9 million in additional
cash proceeds from the issuance of long-term debt after repayment of the CVS
note. See "Consolidated Financial Statements of the Company, Note 9."
28
<PAGE>
Management believes that the Company's financial resources, including the
Senior Credit Facility 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 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 56.6% of its 1998 sales in the peak
selling period. For 1998, 37.8% of the Company's sales were generated during
the period from the day after Thanksgiving through January 2, 1999. 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 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.
The following table sets forth certain unaudited financial information from
the Company's historical consolidated statements of operations for each fiscal
quarter of 1998, 1997 and 1996. This quarterly information has been prepared
on a basis consistent with the Company's audited financial statements
appearing elsewhere in this Form 10-K 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>
1998 1997 1996(/1/)
------------------------------- ------------------------------- ------------------------------------
First Second Third Fourth First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter(/2/) Quarter Quarter
------- ------- ------- ------- ------- ------- ------- ------- ------- ------------ ------- -------
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales....... $68.0 $45.7 $87.5 $258.2 $56.9 $36.5 $81.3 $243.4 $66.8 $41.4 $86.4 $230.2
Costs of goods
sold, buying
and occupancy
costs.......... 51.4 41.3 61.4 149.4 47.2 37.0 57.5 140.6 52.7 38.2 62.1 133.9
----- ----- ----- ------ ----- ----- ----- ------ ----- ----- ----- ------
Gross profit
(loss)......... 16.6 4.4 26.1 108.8 9.7 (0.5) 23.8 102.8 14.1 3.2 24.3 96.3
Selling, general
and
administrative
expense........ 21.9 20.9 25.4 45.5 19.2 17.2 23.9 40.4 21.0 20.3 23.3 38.6
Depreciation and
amortization... 0.8 1.0 1.2 1.5 0.5 0.5 0.6 0.7 2.9 0.9 0.1 0.9
Restricted stock
compensation
charge......... -- -- -- -- 0.4 0.5 7.6 -- -- -- -- 1.5
----- ----- ----- ------ ----- ----- ----- ------ ----- ----- ----- ------
Income (loss)
from
operations..... (6.1) (17.5) (0.5) 61.8 (10.4) (18.7) (8.3) 61.7 (9.8) (18.0) 0.9 55.3
Income (loss)
before
extraordinary
items.......... (4.5) (11.9) (2.0) 36.6 (7.2) (12.6) (9.7) 36.5 (7.2) (11.9) (1.0) 33.0
<CAPTION>
1998 1997 1996(/1/)
------------------------------- ------------------------------- ------------------------------------
First Second Third Fourth First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter(/2/) Quarter Quarter
------- ------- ------- ------- ------- ------- ------- ------- ------- ------------ ------- -------
(as a percentage of net sales)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales....... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Costs of goods
sold, buying
and occupancy
costs.......... 75.6 90.4 70.2 57.9 83.0 101.4 70.7 57.8 78.9 92.3 71.9 58.2
----- ----- ----- ------ ----- ----- ----- ------ ----- ----- ----- ------
Gross margin.... 24.4 9.6 29.8 42.1 17.0 (1.4) 29.3 42.2 21.1 7.7 28.1 41.8
Selling, general
and
administrative
expense........ 32.2 45.7 29.0 17.6 33.7 47.1 29.4 16.6 31.4 49.0 27.0 16.8
Depreciation and
amortization... 1.2 2.2 1.4 0.6 0.9 1.4 0.7 0.3 4.3 2.2 0.1 0.4
Restricted stock
compensation
charge......... -- -- -- -- 0.7 1.4 9.3 -- -- -- -- 0.7
----- ----- ----- ------ ----- ----- ----- ------ ----- ----- ----- ------
Income (loss)
from
operations..... (9.0) (38.3) (0.6) 23.9 (18.3) (51.2) (10.2) 25.3 (14.7) (43.5) 1.0 24.0
Income (loss)
before
extraordinary
items.......... (6.6) (26.0) (2.3) 14.2 (12.7) (34.5) (11.9) 15.0 (10.8) (28.7) (1.2) 14.3
</TABLE>
- ---------------
(1) 1996 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.
(2) The second quarter of 1996 combines the results of the Predecessor
Companies prior to the Management Buyout from April 28, 1996 through May
25, 1996, and the Company after the Management Buyout from May 26, 1996
through August 3, 1996.
29
<PAGE>
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.
Effect Of Year 2000 On Information Systems
The Company's operations are highly dependent on computerized record
keeping, financial reporting, and other systems, including inventory
management and distribution, point-of-sale and internal accounting systems. In
addition, many of the Company's vendors and other third parties with which the
Company conducts business also utilize computer systems that may be adversely
affected by year 2000-related programming errors.
State of Readiness. In 1995, the Company began replacing its legacy
mainframe software systems with the goal of upgrading the functionality of the
Company's business systems. Certain business systems that were not year 2000
compliant were replaced with off-the-shelf vendor packaged software solutions.
By the end of 1997, merchandising, financial and human resource software was
implemented, replacing the Company's noncompliant, legacy mainframe software
systems. These vendor software packages, with certain upgrades planned for the
first quarter of 1999, have been certified by the vendors as year 2000
compliant, but will be further tested for compliance.
In order to support these new software packages, the Company's systems
infrastructure continues to be upgraded to become fully year 2000 compliant.
The Company completed its migration to year 2000 compliant servers, operating
systems and related data base software during 1998.
In 1998, the Company created a Year 2000 Project Committee responsible for
planning and monitoring the Company's overall year 2000 program and for
reporting to the Company's senior management and Board of Directors. The
Company's year 2000 program encompasses both information and non-information
systems within the Company as well as investigation of the readiness of the
Company's significant business partners. The Company engaged an outside
consulting firm to assess Wilsons' readiness for the year 2000 and develop
project plans for remediation of year 2000 issues.
The Company has nearly completed its assessment of hardware, software,
embedded systems (including facilities), goods suppliers, service providers
and date sensitive components. This assessment has resulted in a complete
inventory of all of the Company's date-sensitive components. In addition, key
suppliers of goods have been sent surveys and one-third have been returned.
This assessment has resulted in the identification of areas of risk and the
development of project plans to ensure year 2000 compliance in areas that
present the greatest business risk.
The Company has communicated with many of its key suppliers and other
business partners or vendors seeking assurances they will be year 2000
compliant. Although no method exists for achieving certainty that any
business' significant partners will function without disruption in the year
2000, the Company's goal is to identify those companies which appear to pose a
significant risk of failure to perform their obligations to the Company as a
result of year 2000 problems. The Company is planning, where appropriate, to
review significant partners throughout 1999 to confirm their level of
preparedness for the year 2000 and to make adjustments where necessary to
avoid utilization of those partners who present an unacceptable level of risk.
Wilsons is currently implementing project plans to remediate non-compliant
systems identified in its assessment of year 2000 risks. The Company is
implementing its year 2000 solutions in three phases:
1. Remediation is underway to repair or replace components determined to
pose significant risks. Replacement is scheduled to be completed in the
third quarter of fiscal 1999. Key projects in progress include the
remediation of distribution center systems, the upgrade and/or replacement
of store point-of-sale registers and store communications systems, the
upgrades to certain merchandising and financial systems, and the
development of a test environment.
30
<PAGE>
2. Testing will include validation of the solutions identified in
remediation of internal systems and interfaces and off-the-shelf vendor
packages. System-wide testing is planned for the second quarter of fiscal
1999. In addition, contingency plans will be tested at the same time.
3. The final implementation of all remediated and tested components is
anticipated to be completed by October 1999.
Costs to Address the Year 2000 Issue. The Company is expensing costs for
modifications as incurred. These expenses are not expected to have a material
adverse impact on the Company's results of operations or cash flows. The
Company is funding the cost of its year 2000 program with cash flows from
operations. The Company's total year 2000 expenditures are estimated to be
approximately $1.5 million. The largest single year 2000 expenditure to date
has been consulting fees incurred in the assessment of our year 2000
readiness. To date, the Company has spent $0.3 million, all of which has been
expensed. This amount should not be taken as an indication of the Company's
degree of completion of its year 2000 program.
Risks Presented by the Year 2000 Issue. The Company faces significant risk
that would result from (a) the disruption of the merchandise supply chain,
including ports, transportation vendors, and the Company's distribution
centers due to system failures or loss of necessary infrastructure support
such as electricity or telecommunications, (b) the inability of primary
suppliers to be year 2000 compliant, which could cause delays in product
availability and (c) general failure of in store systems or landlord
infrastructure support systems such as utilities which could severely limit
the Company's ability to conduct business in its stores.
Contingency Plans. The Company is preparing contingency plans to minimize
disruption to its operations in the event of a year 2000 failure. The Company
is formulating plans to handle a variety of failure scenarios, including
failures of its internal systems, as well as failures of significant business
partners. The Company anticipates contingency planning will be completed by
November 1999.
While the Company believes its planning efforts are adequate to address its
year 2000 concerns, the year 2000 readiness of the Company's suppliers and
business partners may lag behind the Company's efforts. Although the Company
does not believe that the year 2000 matters discussed above will have a
material impact on its business, financial condition and results of
operations, it is uncertain as to what extent the Company may be affected by
such matters.
There can be no assurance that all year 2000 problems will, in fact, be
identified and corrected by the Company or third parties or that expenditures
will not be significantly higher. In addition, the Company's business,
financial condition and results of operations may be adversely affected if the
Company and/or other organizations with which the Company does business are
unsuccessful in completing in a timely manner the conversion to applications
that can process year 2000 dates or if the cost of the Company's year 2000
initiative is significantly higher than estimated.
Recently Issued Accounting Pronouncements
In February 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards of disclosure and financial statement
display for reporting total comprehensive income and the individual components
thereof. Foreign currency translation adjustment is the only component of
other comprehensive income and is presented on the consolidated statements of
shareholders' equity.
In February 1998, the Company adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which establishes new
standards for determining reportable segments and for disclosing information
regarding each such segment. The adoption of SFAS No. 131 did not have a
material impact on the financial statements or the disclosures contained
therein.
31
<PAGE>
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's short-term investments, short-term borrowings and
long-term debt obligations. The Company does not use derivative financial
instruments in its available for sale securities. As stated in its policy, the
Company is averse to principal loss and ensures the safety and preservation of
its investments by limiting default risk and market risk.
The Company mitigates default risk by investing in high credit quality
securities consisting primarily of cash and cash equivalents. Market risk is
limited by including only securities with active markets in our portfolio. All
short-term investments mature, by policy, within one year.
At January 30, 1999, Wilsons had cash and cash equivalents totaling $116.2
million. The effect of a 100 basis point change in interest rates would have
an approximate $450,000 pre-tax earnings and cash flow impact, assuming other
variables are held constant.
The Company's Senior Credit Facility carries interest rate risk that is
generally related to either LIBOR or the prime rate. If either of those rates
were to change while Wilsons was borrowing under the facility, interest
expense would increase or decrease accordingly. As of January 30, 1999, there
were no outstanding borrowings under the Senior Credit Facility.
The Company has no earnings or cash flow exposure due to market risks on its
long-term debt obligations as a result of the fixed-rate nature of the debt.
However, interest rate changes would affect the fair market value of the debt.
At January 30, 1999, Wilsons had fixed rate debt of $70.0 million maturing in
August 2004.
Item 8. Financial Statements and Supplementary Data
Financial statements and supplementary data required pursuant to this Item
begin on page F-1 of this Form 10-K. Pursuant to the applicable accounting
regulations of the Securities and Exchange Commission, the Company is not
required to provide supplementary data.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Certain information required by Part III is incorporated by reference from
the Company's definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on May 18, 1999 (the Proxy Statement), which will be
filed with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days after January 30, 1999.
Except for those portions specifically incorporated in this Form 10-K by
reference to the Company's Proxy Statement, no other portions of the Proxy
Statement are deemed to be filed as part of this Form 10-K.
Item 10. Directors and Executive Officers of the Registrant
Incorporated herein by reference is the information appearing under the
headings "Election of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's Proxy Statement. For information
concerning executive officers, see "Item 4a. Executive Officers of the
Registrant" in this Form 10-K.
Item 11. Executive Compensation
Incorporated herein by reference is the information appearing under the
headings "Executive Compensation--Summary Compensation Table,--Stock
Options,--Option Grants in Last Fiscal Year,--Aggregate Option Exercises in
Last Fiscal Year and Fiscal Year-End Option Values,--Employment Contracts
and--Compensation Committee Interlocks and Insider Participation" in the
Company's Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated herein by reference is the information appearing under the
heading "Security Ownership of Principal Shareholders and Management" in the
Company's Proxy Statement.
Item 13. Certain Relationships and Related Transactions
Incorporated herein by reference is the information appearing under the
heading "Certain Relationships and Related Transactions" in the Company's
Proxy Statement.
32
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this report:
1. Financial Statements:
Report of Independent Public Accountants
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
Financial Statement Schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore have
been omitted.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the fourth quarter
of 1998.
(c) Exhibits:
The following exhibits are filed as part of this Form 10-K for the year
ended January 30, 1999.
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
------- ------------------------------------------ -------------------------
<C> <S> <C>
2.1 Sale Agreement dated as of May 24, 1996 by
and among CVS New York, Inc., Wilsons
Center, Inc. and the Registrant.(1)....... Incorporated by Reference
3.1 Amended and Restated Articles of
Incorporation of the Registrant adopted
June 16, 1998............................. Electronic Transmission
3.2 Restated Bylaws of the Registrant as
amended June 16, 1998..................... Electronic Transmission
4.1 Specimen of common stock certificate.(2).. Incorporated by Reference
4.2 Indenture dated as of August 18, 1997, by
and among Wilsons The Leather Experts
Inc., the other corporations listed on the
signature pages thereof, and Norwest Bank
Minnesota, National Association, including
specimen Certificate of 11 1/4% Series A
Senior Notes due 2004 and specimen
Certificate of 11 1/4% Series B Senior
Notes due 2004.(3)........................ Incorporated by Reference
4.3 Purchase Agreement dated as of August 14,
1997, by and among Wilsons The Leather
Experts Inc., the Subsidiary Guarantors
party thereto, and BancAmerica Securities,
Inc.(4)................................... Incorporated by Reference
4.4 Underwriter Warrants.(5).................. Incorporated by Reference
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
------- ----------------------------------------- -------------------------
<C> <S> <C>
4.5 Registration Rights Agreement dated as of
May 25, 1996, by and among CVS New York,
Inc., the Company, the Managers listed on
the signature pages thereto, Leather
Investors Limited Partnership I and the
Partners listed on the signature pages
thereto.(6).............................. Incorporated by Reference
10.1 Parent Guaranty dated as of May 25, 1996,
by Wilsons The Leather Experts Inc.,
Wilsons Center, Inc., Rosedale Wilsons,
Inc. and River Hills Wilsons, Inc. in
favor of General Electric Capital
Corporation.(7).......................... Incorporated by Reference
*10.2 Wilsons The Leather Experts Inc. Amended
Executive and Key Management Incentive
Plan..................................... Electronic Transmission
*10.3 Wilsons The Leather Experts Inc. 401(k)
Plan.(1)................................. Incorporated by Reference
*10.4 Employment Agreement dated as of May 25,
1996 between Wilsons The Leather Experts
Inc. and Joel N. Waller.(1).............. Incorporated by Reference
*10.5 Employment Agreement dated as of May 25,
1996 between Wilsons The Leather Experts
Inc. and David L. Rogers.(1)............. Incorporated by Reference
10.6 Credit Agreement dated as of May 25, 1996
among Wilsons Leather Holdings Inc., as
Borrower, the Lenders signatory thereto
from time to time, as Lenders, and
General Electric Capital Corporation, as
Agent, Lender and Swing Line Lender.(1).. Incorporated by Reference
10.7 Security Agreement dated as of May 25,
1996 by Wilsons Leather Holdings Inc. and
other grantors listed on the signature
pages thereto, in favor of General
Electric Capital Corporation, in its
capacity as Agent for Lenders.(1)........ Incorporated by Reference
10.8 Stock Exchange Agreement.(8)............. Incorporated by Reference
10.9 Store Guarantors' Guaranty dated as of
May 25, 1996, by Bermans The Leather
Experts, Inc., Wilsons House of Suede,
Inc., Wilsons Tannery West, Inc., the
Georgetown Subsidiaries that are
signatories thereto and the Individual
Store Subsidiaries that are signatories
thereto, in favor of General Electric
Capital Corporation.(9).................. Incorporated by Reference
*10.10 Wilsons The Leather Experts Inc. Amended
1996 Stock Option Plan.(2)............... Incorporated by Reference
10.11 Amendment No. 1 to Credit Agreement.(2).. Incorporated by Reference
10.12 Amendment No. 2 to Credit Agreement.(2).. Incorporated by Reference
10.13 Amendment No. 3 to Credit
Agreement.(10)........................... Incorporated by Reference
10.14 Pledge Agreement, dated as of May 25,
1996, between Wilsons The Leather Experts
Inc. and General Electric Capital
Corporation, individually and as agent
for the lenders signatory to the Credit
Agreement.(11)........................... Incorporated by Reference
10.15 Pledge Agreement, dated as of May 25,
1996, between Wilsons Center, Inc. and
General Electric Capital Corporation,
individually and as agent for the lenders
signatory to the Credit Agreement.(12)... Incorporated by Reference
10.16 Pledge Agreement, dated as of May 25,
1996, between Rosedale Wilsons, Inc. and
General Electric Capital Corporation,
individually and as agent for the lenders
signatory to the Credit Agreement.(13)... Incorporated by Reference
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
------- ----------------------------------------- -------------------------
<C> <S> <C>
10.17 Pledge Agreement, dated as of May 25,
1996, between River Hills Wilsons, Inc.
and General Electric Capital Corporation,
individually and as agent for the lenders
signatory to the Credit Agreement.(14)... Incorporated by Reference
10.18 Amendment No. 4 to Credit
Agreement.(15)........................... Incorporated by Reference
10.19 Amendment No. 2 to Pledge Agreement dated
as of July 31, 1997, between River Hills
Wilsons, Inc. and General Electric
Capital Corporation.(16)................. Incorporated by Reference
10.20 Joinder Agreement dated as of July 31,
1997, by and between Wilsons
International Inc. and General Electric
Capital Corporation.(17)................. Incorporated by Reference
10.21 Reaffirmation of Guaranty dated as of
July 31, 1997, by Wilsons The Leather
Experts Inc., Wilsons Center, Inc.,
Rosedale Wilsons, Inc. and River Hills
Wilsons, Inc., in favor of General
Electric Capital Corporation.(18)........ Incorporated by Reference
10.22 Repurchase Agreement dated as of March
27, 1998, between Wilsons The Leather
Experts Inc. and CVS New York, Inc.(19).. Incorporated by Reference
10.23 Wilsons The Leather Experts Inc. 1998
Stock Option Plan.(20)................... Incorporated by Reference
10.24 Consent to Credit Agreement dated March
27, 1998.(21)............................ Incorporated by Reference
10.25 Consent and Amendment to Credit Agreement
dated May 6, 1998.(22)................... Incorporated by Reference
10.26 Consent and Amendment to Credit Agreement
dated January 19, 1999................... Electronic Transmission
11.1 Computation of per share income.......... Electronic Transmission
12.1 Computation of ratios.................... Electronic Transmission
21.1 Subsidiaries of Wilsons The Leather
Experts Inc. ............................ Electronic Transmission
23.1 Consent of Arthur Andersen LLP........... Electronic Transmission
23.2 Consent of KPMG Peat Marwick LLP......... Electronic Transmission
27.1 Financial Data Schedule.................. Electronic Transmission
27.2 Financial Data Schedule for the quarter
ended August 1, 1998..................... Electronic Transmission
27.3 Restated Financial Data Schedule for the
quarter ended August 2, 1997............. Electronic Transmission
</TABLE>
- --------
* Management contract or compensation plan or arrangement required to be
filed as an exhibit to this Form 10-K.
(1) Incorporated by reference to the same numbered exhibit to the Company's
Registration Statement on Form S-1 (333-13967) filed with the Commission
on October 11, 1996.
(2) Incorporated by reference to the same numbered exhibit to Amendment No. 1
to the Company's Registration Statement on Form S-1 (333-13967) filed
with the Commission on December 24, 1996.
(3) Incorporated by reference to Exhibit 10.3 to the Company's Report on Form
10-Q for the quarter ended August 2, 1997 filed with the Commission.
(4) Incorporated by reference to Exhibit 10.4 to the Company's Report on Form
10-Q for the quarter ended August 2, 1997 filed with the Commission.
(5) Incorporated by reference to the same numbered exhibit to the Company's
Registration Statement on Form S-4 (333-37055) filed with the Commission
on October 2, 1997.
(6) Incorporated by Reference to Exhibit 4.8 to the Company's Registration
Statement on Form S-1 (333-13967) filed with the Commission on October
11, 1996.
(7) Incorporated by reference to Exhibit 10.8 to the Company's Report on Form
10-Q for the quarter ended August 2, 1997 filed with the Commission.
(8) Incorporated by reference to Exhibit 10.2 to the Company's Report on Form
10-Q for the quarter ended May 3, 1997 filed with the Commission.
35
<PAGE>
(9) Incorporated by reference to Exhibit 10.10 to the Company's Report on
Form 1O-Q for the quarter ended August 2, 1997 filed with the Commission.
(10) Incorporated by reference to Exhibit 10.1 to the Company's Report on Form
10-Q for the quarter ended May 3, 1997 filed with the Commission.
(11) Incorporated by reference to Exhibit 10.21 to Amendment No. 4 to the
Company's Registration Statement on Form S-1 (333-13967) filed with the
Commission on May 27, 1997.
(12) Incorporated by reference to Exhibit 10.22 to Amendment No. 4 to the
Company's Registration Statement on Form S-1 (333-13967) filed with the
Commission on May 27, 1997.
(13) Incorporated by reference to Exhibit 10.23 to Amendment No. 4 to the
Company's Registration Statement on Form S-1 (333-13967) filed with the
Commission on May 27, 1997.
(14) Incorporated by reference to Exhibit 10.24 to Amendment No. 4 to the
Company's Registration Statement on Form S-1 (333-13967) filed with the
Commission on May 27, 1997.
(15) Incorporated by reference to Exhibit 10.1 to the Company's Report on Form
10-Q for the quarter ended August 2, 1997 filed with the Commission.
(16) Incorporated by reference to Exhibit 10.6 to the Company's Report on Form
10-Q for the quarter ended August 2, 1997 filed with the Commission.
(17) Incorporated by reference to Exhibit 10.7 to the Company's Report on Form
10-Q for the quarter ended August 2, 1997 filed with the Commission.
(18) Incorporated by reference to Exhibit 10.9 to the Company's Report on Form
10-Q for the quarter ended August 2, 1997 filed with the Commission.
(19) Incorporated by reference to Exhibit 10.30 to the Company's Report on
Form 10-K for the fiscal year ended January 31, 1998 filed with the
Commission.
(20) Incorporated by reference to Exhibit 10.31 to the Company's Report on
Form 10-K for the fiscal year ended January 31, 1998 filed with the
Commission.
(21) Incorporated by reference to Exhibit 10.1 to the Company's Report on Form
10-Q for the quarter ended August 1, 1998 filed with the Commission.
(22) Incorporated by reference to Exhibit 10.2 to the Company's Report on Form
10-Q for the quarter ended August 1, 1998 filed with the Commission.
36
<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
30, 1999 and January 31, 1998, and the related consolidated statements of
operations, shareholders' equity and cash flows for the years ended January
30, 1999 and 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 30, 1999 and January
31, 1998, and the results of their operations and their cash flows for the
years ended January 30, 1999 and 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 5, 1999
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. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
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, 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 30, January 31,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $116,160 $112,975
Accounts receivable, net............................. 6,325 7,010
Inventories.......................................... 84,971 77,911
Prepaid expenses..................................... 1,595 835
-------- --------
Total current assets............................. 209,051 198,731
PROPERTY AND EQUIPMENT, net............................ 36,195 25,182
OTHER ASSETS, net...................................... 3,532 3,759
-------- --------
$248,778 $227,672
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................................... $ 17,328 $ 17,270
Accrued expenses..................................... 33,033 34,068
Income taxes payable................................. 22,894 22,418
Deferred income taxes................................ 4,247 4,770
-------- --------
Total current liabilities........................ 77,502 78,526
LONG-TERM DEBT......................................... 70,000 75,000
OTHER LONG-TERM LIABILITIES............................ 3,099 1,494
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTES 10 AND 13):
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 100,000,000 shares
authorized; 10,833,424 and 9,532,083 shares issued
and outstanding on January 30, 1999 and January 31,
1998, respectively.................................. 108 95
Additional paid-in capital........................... 55,180 37,850
Retained earnings.................................... 42,931 34,744
Cumulative other comprehensive loss.................. (42) (37)
-------- --------
Total shareholders' equity....................... 98,177 72,652
-------- --------
$248,778 $227,672
======== ========
</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 Five Months
Inception Eight Months Periods Ended
Year Ended Year Ended (May 26, 1996) Period Ended ---------------------
January 30, January 31, to February 1, January 27, May 25, May 27,
1999 1998 1997 1996 1996 1995
----------- ----------- -------------- ------------ -------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
NET SALES........................................ $459,372 $418,140 $345,121 $ 367,639 $109,640 $124,700
COSTS AND EXPENSES:
Cost of goods sold, buying and occupancy costs.. 303,501 282,369 222,131 238,558 86,213 99,849
Selling, general and administrative expenses.... 113,706 100,691 75,806 76,442 34,868 45,918
Depreciation and amortization................... 4,454 2,277 994 13,294 4,722 9,002
Restricted stock compensation expense........... -- 8,511 1,485 -- -- --
Restructuring and asset impairment charges...... -- -- -- 182,184 -- --
-------- -------- -------- --------- -------- --------
Income (loss) from operations................... 37,711 24,292 44,705 (142,839) (16,163) (30,069)
Interest expense, net........................... 7,815 6,434 5,271 7,400 1,581 3,396
-------- -------- -------- --------- -------- --------
Income (loss) before income taxes............... 29,896 17,858 39,434 (150,239) (17,744) (33,465)
Income tax provision (benefit).................. 11,719 10,783 15,528 (4,681) (6,603) (5,461)
-------- -------- -------- --------- -------- --------
Income (loss) before extraordinary gain......... 18,177 7,075 23,906 (145,558) (11,141) (28,004)
Extraordinary gain on early extinguishment of
debt, net of tax of $2,509..................... -- 3,763 -- -- -- --
-------- -------- -------- --------- -------- --------
Net income (loss)............................... $ 18,177 $ 10,838 $ 23,906 $(145,558) $(11,141) $(28,004)
======== ======== ======== ========= ======== ========
BASIC NET INCOME PER COMMON SHARE:
Income before extraordinary item................ $ 1.75 $ 0.80 $ 3.12
Extraordinary gain on early extinguishment of
debt, net of tax............................... -- 0.42 --
-------- -------- --------
Basic net income per common share................ $ 1.75 $ 1.22 $ 3.12
======== ======== ========
Weighted average common shares outstanding....... 10,357 8,910 7,650
======== ======== ========
DILUTED NET INCOME PER COMMON SHARE:
Income before extraordinary item................ $ 1.66 $ 0.68 $ 2.67
Extraordinary gain on early extinguishment of
debt, net of tax............................... -- 0.36 --
-------- -------- --------
Diluted net income per common share.............. $ 1.66 $ 1.04 $ 2.67
======== ======== ========
Weighted average common shares
outstanding--assuming dilution.................. 10,920 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 Cumulative
Stock Common Stock Additional Other Total
--------------- ----------------- Paid-In Retained Comprehensive Shareholders'
Shares Amount Shares Amount Capital Earnings Income (Loss) 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
Other comprehensive
income--Foreign
currency translation
adjustment............ -- -- -- -- -- -- (29) (29)
--------
Comprehensive income... -- -- -- -- -- -- -- 23,877
--------
Restricted Stock
vested................ -- -- -- -- 1,485 -- -- 1,485
Accrued preferred stock
dividends............. -- -- -- -- -- (395) -- (395)
------ ------- ---------- ---- -------- --------- ---- --------
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
Other comprehensive
income--Foreign
currency translation
adjustment............ -- -- -- -- -- -- (8) (8)
--------
Comprehensive income... -- -- -- -- -- -- -- 10,830
--------
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 canceled.... -- -- -- -- -- 395 -- 395
------ ------- ---------- ---- -------- --------- ---- --------
BALANCE, January 31,
1998................... -- -- 9,532,083 95 37,850 34,744 (37) 72,652
Net income............. -- -- -- -- -- 18,177 -- 18,177
Other comprehensive
income--Foreign
currency translation
adjustment............ -- -- -- -- -- -- (5) (5)
--------
Comprehensive income... -- -- -- -- -- -- -- 18,172
--------
Repurchase of CVS
warrant............... -- -- -- -- -- (9,990) -- (9,990)
Stock options
exercised............. -- -- 38,441 -- 311 -- -- 311
Exercise of redeemable
warrants.............. -- -- 1,262,900 13 17,019 -- -- 17,032
------ ------- ---------- ---- -------- --------- ---- --------
BALANCE, January 30,
1999................... -- $ -- 10,833,424 $108 $ 55,180 $ 42,931 $(42) $ 98,177
====== ======= ========== ==== ======== ========= ==== ========
<CAPTION>
Predecessor Companies
-------------------------------------------------------------------
Cumulative
Common Stock Additional Retained Other Total
----------------- Paid-In Earnings Comprehensive Shareholders'
Shares Amount Capital (Deficit) Income (Loss) Equity
---------- ------ ---------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995.............. 100 $146 $135,452 $(108,018) $ 10 $ 27,590
Net loss............................... -- -- -- (11,141) -- (11,141)
Other comprehensive income--
Foreign currency translation
adjustment............................ -- -- -- -- 12 12
--------
Comprehensive income................... -- -- -- -- -- (11,129)
--------
Capital contributed by CVS............. -- -- 124,000 -- -- 124,000
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 Year (May 26, Months Five Months Ended
Ended Ended 1996) to Ended ---------------------
January 30, January 31, February 1, January 27, May 25, May 27,
1999 1998 1997 1996 1996 1995
----------- ----------- ----------- ----------- -------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)................................... $ 18,177 $ 10,838 $23,906 $(145,558) $(11,141) $(28,004)
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 -- --
Restructuring charges paid.......................... -- -- -- (1,412) (5,958) --
Depreciation and amortization....................... 4,454 2,277 994 13,294 4,722 9,002
Amortization of deferred financing costs............ 1,161 870 444 -- -- --
Restricted stock compensation expense............... -- 8,511 1,485 -- -- --
Loss on disposal of assets.......................... 1,601 106 -- 882 113 3,616
Deferred income taxes............................... 483 3,081 (4,928) (11,233) 5,116 --
Changes in operating assets and liabilities, net of
assets and liabilities acquired:
Accounts receivable, net........................... 685 (2,159) (941) (430) 3,395 4,120
Inventories........................................ (3,960) (12,992) (11,779) 5,559 19,344 27,070
Prepaid expenses................................... (996) 267 (4,740) 232 5,253 5,309
Other noncurrent assets............................ -- -- -- 508 145 12
Accounts payable and accrued expenses.............. (1,849) 7,224 9,074 7,809 (25,035) (26,444)
Income taxes payable and other liabilities......... 1,225 1,836 20,684 11,197 (11,926) (6,204)
-------- -------- ------- --------- -------- --------
Net cash provided by (used in) operating
activities....................................... 20,981 16,096 34,199 63,032 (15,972) (11,523)
-------- -------- ------- --------- -------- --------
INVESTING ACTIVITIES:
Additions to property, equipment and other
noncurrent assets.................................. (15,976) (10,519) (5,915) (7,473) (3,566) (2,852)
Acquisitions, net of cash acquired.................. (5,194) -- 37,072 -- -- --
-------- -------- ------- --------- -------- --------
Net cash (used in) provided by investing
activities....................................... (21,170) (10,519) 31,157 (7,473) (3,566) (2,852)
-------- -------- ------- --------- -------- --------
FINANCING ACTIVITIES:
Change in due to (from) CVS......................... -- -- -- (57,826) (107,442) 9,923
Capital contributed by CVS.......................... -- -- -- -- 124,000 --
Change in book overdrafts........................... 1,172 (540) 4,197 7,245 (8,024) (10,581)
Proceeds from sale of common and preferred stock and
exercise of redeemable warrants.................... 17,192 9,452 12,000 -- -- --
Proceeds from issuance of long-term debt............ -- 71,972 -- -- -- --
Repayment of long-term debt......................... (5,000) (55,039) -- -- -- --
Repurchase of CVS warrant........................... (9,990) -- -- -- -- --
-------- -------- ------- --------- -------- --------
Net cash provided by (used in) financing
activities....................................... 3,374 25,845 16,197 (50,581) 8,534 (658)
-------- -------- ------- --------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS......................................... 3,185 31,422 81,553 4,978 (11,004) (15,033)
CASH AND CASH EQUIVALENTS, beginning of period....... 112,975 81,553 -- 2,292 14,286 17,325
-------- -------- ------- --------- -------- --------
CASH AND CASH EQUIVALENTS, end of period............. $116,160 $112,975 $81,553 $ 7,270 $ 3,282 $ 2,292
======== ======== ======= ========= ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for-
Interest............................................ $ 9,626 $ 8,032 $ 1,678 $ 7,727 $ 2,035 $ 3,853
======== ======== ======= ========= ======== ========
Income taxes........................................ $ 11,220 $ 8,400 $ 1,008 $ 962 $ 208 $ 828
======== ======== ======= ========= ======== ========
Noncash investing and financing activities-
Liabilities assumed for acquisition of business..... $ 203 $ -- $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 Management Buyout) in a
management-led buyout (the Management Buyout) 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) $2.0 million, (ii) a 10.0% 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
Management Buyout, 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 $10.0 million.
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 Management Buyout was accounted for using the purchase method. The basis
of CVS's 15.0% 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 is the leading specialty retailer of leather outerwear, apparel
and accessories in the United States. The Company operates 518 retail stores
located in 44 states, Canada and England, including 449 mall stores, 28
airport locations and 41 factory outlet stores. The Company supplemented
permanent mall stores with 215 holiday stores during its peak selling season
from October through December.
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 Management Buyout and are
not comparable to the periods presented subsequent to the Management Buyout
date due to the effects of certain purchase accounting adjustments and the
Management Buyout 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.
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 $3.1 million, $2.6 million and $0.7 million for the years ended January 30,
1999 and 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
approximated fair value as of January 30, 1999.
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 30, 1999 and January
31, 1998. 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 5
to 40 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.
F-9
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Including Data Applicable to Unaudited Periods)
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 is
amortized on a straight-line basis over periods not exceeding 40 years.
In connection with CVS's decision to sell the Predecessor Companies, the
remaining goodwill relating to the Predecessor Companies was written off in
the fourth quarter of 1995 (see Note 3).
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 always charged to operations in the year incurred.
Layaway Sales
Layaway sales are recorded in full on the date of the layaway transaction.
Allowances for estimated returns and markdowns are established as appropriate.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.
Deferred tax assets and liabilities are measured using enacted tax rates in
effect for the year in which those temporary differences are expected to
reverse.
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 (Canada
and 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.
F-10
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Including Data Applicable to Unaudited Periods)
Earnings Per Common Share
Basic earnings per common share is computed by dividing net income by the
weighted average number of common shares outstanding during the year. Diluted
earnings per share is computed by dividing net income by the sum of the
weighted average number of common shares outstanding plus all additional
common shares that would have been outstanding if potentially dilutive common
shares related to stock options had been issued. The following table
reconciles the number of shares utilized in the earnings per share
calculations:
<TABLE>
<CAPTION>
Period From
Inception
(May 26,
Year Ended Year Ended 1996) to
January 30, January 31, February 1,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net income (in thousands)............ $18,177 $10,838 $23,906
======= ======= =======
Weighted average common shares
outstanding......................... 10,357 8,910 7,650
Effect of options granted............ 372 218 78
Effect of warrants................... 191 1,270 1,242
------- ------- -------
Weighted average common shares
outstanding--assuming dilution...... 10,920 10,398 8,970
======= ======= =======
Basic net income per common share.... $ 1.75 $ 1.22 $ 3.12
======= ======= =======
Diluted net income per common share.. $ 1.66 $ 1.04 $ 2.67
======= ======= =======
</TABLE>
Reclassifications
Certain reclassifications have been made to the consolidated financial
statements of the prior years to conform to the 1998 presentation.
Recently Issued Accounting Pronouncements
In February 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income," which establishes
standards of disclosure and financial statement display for reporting total
comprehensive income and the individual components thereof. Foreign currency
translation adjustment is the only component of other comprehensive income and
is presented on the consolidated statements of shareholders' equity.
In February 1998, the Company adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which establishes new
standards for determining reportable segments and for disclosing information
regarding each such segment. The adoption of SFAS No. 131 did not have a
material impact on the financial statements or the disclosures contained
therein.
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 pretax restructuring charge of $134.3 million
to reflect the anticipated costs associated with closing approximately 100 of
the Predecessor Companies' stores and the write-off of goodwill and other
intangibles. The permanent impairment decision was based upon an analysis of
the historical operating results and anticipated selling price of the
Predecessor
F-11
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Including Data Applicable to Unaudited Periods)
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):
<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
Management Buyout.
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 pretax 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 30, January 31,
1999 1998
----------- -----------
<S> <C> <C>
Layaway receivables................................ $ 4,675 $ 5,657
Trade receivables.................................. 3,232 4,083
Other receivables.................................. 1,643 1,197
------- -------
9,550 10,937
Less:
Layaway return reserves.......................... (2,104) (2,972)
Allowance for doubtful accounts.................. (1,121) (955)
------- -------
Total.......................................... $ 6,325 $ 7,010
======= =======
</TABLE>
F-12
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Including Data Applicable to Unaudited Periods)
5. Property and Equipment:
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
January 30, January 31,
1999 1998
----------- -----------
<S> <C> <C>
Land.............................................. $ 1,340 $ 1,340
Buildings and improvements........................ 914 922
Equipment and furniture........................... 31,253 21,711
Leasehold improvements............................ 9,935 4,446
------- -------
Total......................................... 43,442 28,419
Less--Accumulated depreciation and amortization... (7,247) (3,237)
------- -------
Total......................................... $36,195 $25,182
======= =======
</TABLE>
6. Accrued Expenses:
Accrued expenses consisted of the following (in thousands):
<TABLE>
<CAPTION>
January 30, January 31,
1999 1998
----------- -----------
<S> <C> <C>
Taxes other than federal and
state income taxes......... $ 6,789 $ 6,621
Salaries and compensated
absences................... 7,129 5,953
Interest.................... 3,948 3,879
Advertising................. 3,344 3,618
Lease obligations for closed
stores..................... 1,015 1,945
Other....................... 10,808 12,052
------- -------
Total................... $33,033 $34,068
======= =======
</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 (the Senior Notes). Interest on the Senior Notes is
payable semiannually 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. On
January 21, 1999, the Company redeemed $5.0 million of the Senior Notes, which
is reflected as treasury debt in the accompanying consolidated balance sheet.
The carrying amount of the Senior Notes is assumed to approximate its fair
value. 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 Management Buyout. 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).
F-13
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Including Data Applicable to Unaudited Periods)
As part of the Management Buyout, the Company issued a $55.8 million senior
secured subordinated note (the Note) to CVS. Interest was accrued annually at
10.0% on $55.0 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 1997.
In conjunction with the Management Buyout, the Company obtained a $150.0
million revolving credit agreement (the Revolver) with certain banks, which
extends through May 24, 1999 and includes a $90.0 million letter-of-credit
subfacility. The Revolver is collateralized by substantially all assets of the
Company.
Interest on cash borrowings under the Revolver is at the bank reference rate
plus 0%-1.25%, or LIBOR plus 1.75%-2.75%. The interest rate is dependent upon
the amount and term of the borrowings as well as the Company's earnings before
income taxes/cash interest coverage ratio for the trailing four quarters. The
Company pays a monthly fee equal to 0.375% 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%-0.875%. As of January 30, 1999, there were no
cash borrowings under the Revolver, and there was $10.3 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 30, 1999, the
Company was in compliance with all covenants of the Senior Notes and the
Revolver.
Prior to the Management Buyout, the Predecessor Companies' operations were
funded primarily by CVS (see Note 12).
8. Income Taxes:
The income tax provision (benefit) is comprised of the following (in
thousands):
<TABLE>
<CAPTION>
Predecessor
Company Companies
----------------------------------- -----------
Period From
Inception Five-Month
(May 26, Period
Year Ended Year Ended 1996) to Ended
January 30, January 31, February 1, May 25,
1999 1998 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Current:
Federal................. $10,084 $ 6,912 $17,642 $(11,731)
State................... 1,152 790 2,814 --
Deferred.................. 483 3,081 (4,928) 5,128
------- ------- ------- --------
Total................. $11,719 $10,783 $15,528 $ (6,603)
======= ======= ======= ========
</TABLE>
F-14
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Including Data Applicable to Unaudited Periods)
Reconciliations of the U.S. federal statutory income tax rate to the
effective tax rate are as follows:
<TABLE>
<CAPTION>
Predecessor
Company Companies
----------------------------------- -----------
Period From
Inception Five-Month
(May 26, Period
Year Ended Year Ended 1996) to Ended
January 30, January 31, February 1, May 25,
1999 1998 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
U.S. federal statutory
income tax (benefit)
rate................... 35.0% 35.0% 35.0% (35.0)%
Restricted stock
compensation expense... -- 18.6 1.3 --
State income taxes, net
of federal tax effect.. 4.0 4.0 3.0 (2.3)
Other, net.............. 0.2 2.8 0.1 0.1
---- ---- ---- ------
Effective tax rate.. 39.2% 60.4% 39.4% (37.2)%
==== ==== ==== ======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the deferred tax asset and liability were as follows (in thousands):
<TABLE>
<CAPTION>
January 30, January 31,
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax asset:
Accrued liabilities.............................. $4,299 $4,650
Net operating loss carryforwards................. 1,651 2,201
Other............................................ 478 413
------ ------
Total.......................................... 6,428 7,264
------ ------
Deferred tax liability:
Inventories...................................... 8,596 9,546
Property and equipment........................... 3,114 2,450
Layaway and sales return reserve................. 105 193
Other............................................ 246 225
------ ------
Total.......................................... 12,061 12,414
------ ------
Net deferred tax liability..................... $5,633 $5,150
====== ======
</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 to purchase one share of
common stock for $13.50 per share. Each redeemable warrant entitled 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 were subject to redemption
by the Company for $0.01 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 this proposed
public offering were used to reduce seasonal borrowings under the Revolver and
to fund working capital and capital expenditures.
F-15
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Including Data Applicable to Unaudited Periods)
The Company's Amended Articles of Incorporation provided 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.
On October 11, 1996, the Company declared a 0.9-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 Management Buyout, certain members of management of
the Company purchased 1,080,000 shares of common stock with restrictions (the
Restricted Stock) at $0.60 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 $0.60 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 Management Buyout, the Company issued to CVS a warrant to
purchase 1,350,000 shares of common stock at an exercise price of $0.60 per
share (the CVS Warrant). The CVS Warrant was immediately exercisable and was
to remain exercisable until the tenth anniversary of the date of grant. On
March 27, 1998, the Company repurchased the CVS Warrant for $10.0 million in
cash and simultaneously canceled the Warrant.
The Company also issued to CVS a warrant to purchase 1,080,000 shares of
common stock at an exercise price of $0.60 per share (the Manager Warrant).
The Manager Warrant lapsed upon the repurchase of the Note on August 18, 1997.
Redeemable Warrant Redemption
On June 16, 1998, the Company completed the redemption of its outstanding
redeemable common stock purchase warrants that were issued in the Company's
initial public offering. The net proceeds received by the Company from warrant
exercises prompted by such redemption, after deducting costs and expenses,
were approximately $17.0 million.
F-16
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Including Data Applicable to Unaudited Periods)
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. All
outstanding stock options granted since the Company became a publicly held
corporation have been 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 an prorated basis on the first, second and third
anniversaries from the date of the grant.
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
(May 26, 1996)
Year Ended Year Ended to February 1,
January 30, 1999 January 31, 1998 1997
------------------- ------------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning
of period.............. 1,138,495 $ 8.18 182,700 $4.44 -- $ --
Granted............... 219,090 11.90 978,935 8.79 199,980 4.44
Exercised............. (38,441) 4.52 -- -- -- --
Forfeited............. (70,961) 7.72 (23,140) 4.44 (17,280) 4.44
Expired............... -- -- -- -- -- --
--------- ------ --------- ----- ------- -----
Outstanding, end of
period................. 1,248,183 $ 8.97 1,138,495 $8.18 182,700 $4.44
========= ====== ========= ===== ======= =====
Exercisable, end of
period................. 364,779 $ 8.15 53,187 $4.44 -- $ --
========= ====== ========= ===== ======= =====
Weighted average fair
value of options
granted................ $ 2.87 $ 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
(May 26,
Year Ended Year Ended 1996) to
January 30, January 31, February 1,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net income (in thousands):
As reported......................... $18,177 $10,838 $23,906
Pro forma........................... 17,628 10,638 23,734
Diluted net income per common share:
As reported......................... $ 1.66 $ 1.04 $ 2.67
Pro forma........................... 1.61 1.02 2.65
</TABLE>
F-17
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Including Data Applicable to Unaudited Periods)
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 years ended January 30, 1999 and
January 31, 1998, and for the period from inception (May 26, 1996) to February
1, 1997: risk-free interest rates of 4.9%, 5.1% and 6.4%, respectively; no
expected dividend yields; expected lives of three years; and expected
volatility of 45.6%, 32.1% and 53.5%, respectively.
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 15.0% of their eligible compensation (10.0% for those
employees whose compensation in the previous year exceeded $80,000). For
employees who have worked less than three years, the Company matches 25.0% of
contributions, up to a maximum of 4.0% of the employee's eligible
compensation. For employees who have worked more than three years, the Company
matches 50.0% of contributions up to a maximum of 4.0% of the employee's
eligible compensation. The Company may also, at its discretion, make a profit
sharing contribution to the 401(k) plan for each plan year. The Company's
contributions vest after five years of service, or at age 65 regardless of
service, or upon the death of the employee.
The Predecessor Companies' contributions to the 401(k) profit sharing plan
were $0.3 million, $1.0 million, $0.3 million and $0.6 million for the eight-
month period ended January 27, 1996, and for the five-month periods ended May
25, 1996 and May 27, 1995, respectively. The Company's contributions to the
401(k) profit sharing plan were $1.8 million, $1.5 million and $1.1 million
for the years ended January 30, 1999 and 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 Management Buyout.
Compensation expense of $2.0 million, $0.2 million, $0.1 million and $2.0
million was recognized for the eight-month period ended January 27, 1996, and
for the five-month periods ended May 25, 1996 and May 27, 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-month period ended
January 27, 1996, and for the five-month periods ended May 25, 1996 and May
27, 1995, was 6.2%, 5.8% and 5.6%, respectively. Prior to the Management
Buyout, in anticipation of the sale, CVS contributed $124.0 million to the
Predecessor Companies, which is 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-month period ended January 27, 1996, and for the five-month
periods ended May 25, 1996 and May 27, 1995, were $1.0 million, $0.5 million
and $0.6 million, respectively, and are included in selling, general and
administrative expenses.
F-18
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Including Data Applicable to Unaudited Periods)
CVS Realty Company, Inc., a subsidiary of CVS, guaranteed the payment of the
lease obligations of certain stores operated by the Predecessor Companies and
charged a fee for that service. These fees are included in
selling, general and administrative expenses and amounted to $0.5 million,
$0.3 million and $0.3 million, for the eight-month period ended January 27,
1996, and for the five-month periods ended May 25, 1996 and May 27, 1995,
respectively.
13. Commitments and Contingencies:
Leases
The Company has noncancelable operating leases, primarily for retail stores,
which expire through 2009. 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-Month Five-Month
(May 26, Period Periods Ended
Year Ended Year Ended 1996) to Ended --------------------
January 30, January 31, February 1, January 27, May 25, May 27,
1999 1998 1997 1996 1996 1995
----------- ----------- ----------- ----------- ------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Minimum rentals......... $39,363 $37,326 $26,972 $28,598 $14,917 $17,436
Contingent rentals...... 3,077 3,058 1,924 942 449 353
------- ------- ------- ------- ------- -------
42,440 40,384 28,896 29,540 15,366 17,789
Less--Sublease rentals.. (543) (588) (207) (24) (122) --
------- ------- ------- ------- ------- -------
Total............... $41,897 $39,796 $28,689 $29,516 $15,244 $17,789
======= ======= ======= ======= ======= =======
</TABLE>
As of January 30, 1999, 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:
2000........................................................... $ 33,916
2001........................................................... 29,848
2002........................................................... 25,774
2003........................................................... 22,282
2004........................................................... 17,058
Thereafter....................................................... 39,655
--------
Total........................................................ $168,533
========
Total future minimum sublease rental income...................... $ 320
========
</TABLE>
As of January 30, 1999, a significant number of the existing lease
obligations continue to be guaranteed by CVS. Any leases entered into
subsequent to the Management Buyout 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-19
<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 $12.0 million.
Guarantees
As of January 30, 1999 and January 31, 1998, the Company had outstanding
letters of credit of approximately $10.3 million and $6.5 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 $0.6 million and $0.4 million of these supplies on an
as-needed basis as of January 30, 1999 and January 31, 1998, respectively.
Total payments under this agreement, which was entered into in 1994, were $1.6
million, $0.8 million, $0.9 million, $0.8 million, $0.5 million and $0.9
million for the years ended January 30, 1999, January 31, 1998, for the period
from inception (May 26, 1996) to February 1, 1997, for the eight-month period
ended January 27, 1996, and the five-month periods ended May 25, 1996 and May
27, 1995.
14. Related-Party Transaction:
The Company regularly conducts business with G-III, of which Morris
Goldfarb, a director at Wilsons, is the Chief Executive Officer and a
director. Purchases from G-III totaled $9.4 million, $7.5 million and $5.0
million for the years ended January 30, 1999 and January 31, 1998, and for the
thirteen-month period ended February 1, 1997. The Company believes that
transactions with G-III are on terms no less favorable to the Company than
those obtainable in arm's-length transactions with unaffiliated third parties.
For a discussion of related-party transactions involving the Predecessor
Companies, see Note 12.
F-20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on April 12, 1999:
Wilsons The Leather Experts Inc.
(registrant)
/s/ Joel N. Waller
By: _________________________________
Joel N. Waller,
Chairman of the Board of
Directors and Chief Executive
Officer (principal executive
officer)
/s/ Douglas J. Treff
By: _________________________________
Douglas J. Treff,
Vice President Finance, Chief
Financial Officer and Assistant
Secretary (principal financial
and accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on April 12, 1999 by the following persons on
behalf of the registrant and in the capacities indicated:
<TABLE>
<CAPTION>
<S> <C>
/s/ Joel N. Waller Director, Chairman of the Board of Directors and
______________________________________ Chief Executive Officer
Joel N. Waller
/s/ David L. Rogers Director, President, Chief Operating Officer
______________________________________
David L. Rogers
/s/ Lyle Berman Director
______________________________________
Lyle Berman
/s/ Thomas J. Brosig Director
______________________________________
Thomas J. Brosig
/s/ Gary L. Crittenden Director
______________________________________
Gary L. Crittenden
/s/ Morris Goldfarb Director
______________________________________
Morris Goldfarb
/s/ Marvin W. Goldstein Director
______________________________________
Marvin W. Goldstein
</TABLE>
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
- ------- ----------- ----------------
<C> <S> <C>
2.1 Sale Agreement dated as of May 24, 1996 by and among CVS
New York, Inc., Wilsons Center, Inc. and the Registrant.
(1)....................................................... Incorporated by Reference
3.1 Amended and Restated Articles of Incorporation of the
Registrant adopted June 16, 1998.......................... Electronic Transmission
3.2 Restated Bylaws of the Registrant as amended June 16,
1998...................................................... Electronic Transmission
4.1 Specimen of common stock certificate. (2)................. Incorporated by Reference
4.2 Indenture dated as of August 18, 1997, by and among
Wilsons The Leather Experts Inc., the other corporations
listed on the signature pages thereof, and Norwest Bank
Minnesota, National Association, including specimen
Certificate of 11 1/4% Series A Senior Notes due 2004 and
specimen Certificate of 11 1/4% Series B Senior Notes due
2004. (3)................................................. Incorporated by Reference
4.3 Purchase Agreement dated as of August 14, 1997, by and
among Wilsons The Leather Experts Inc., the Subsidiary
Guarantors party thereto, and BancAmerica Securities,
Inc. (4).................................................. Incorporated by Reference
4.4 Underwriter Warrants. (5)................................. Incorporated by Reference
4.5 Registration Rights Agreement dated as of May 25, 1996,
by and among CVS New York, Inc., the Company, the
Managers listed on the signature pages thereto, Leather
Investors Limited Partnership I and the Partners listed
on the signature pages thereto. (6)....................... Incorporated by Reference
10.1 Parent Guaranty dated as of May 25, 1996, by Wilsons The
Leather Experts Inc., Wilsons Center, Inc., Rosedale
Wilsons, Inc. and River Hills Wilsons, Inc. in favor of
General Electric Capital Corporation. (7)................. Incorporated by Reference
*10.2 Wilsons The Leather Experts Inc. Amended Executive and
Key Management Incentive Plan. (1)........................ Electronic Transmission
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
- ------- ----------- ----------------
<C> <S> <C>
*10.3 Wilsons The Leather Experts Inc. 401(k) Plan. (1)......... Incorporated by Reference
*10.4 Employment Agreement dated as of May 25, 1996 between
Wilsons The Leather Experts Inc. and Joel N. Waller. (1).. Incorporated by Reference
*10.5 Employment Agreement dated as of May 25, 1996 between
Wilsons The Leather Experts Inc. and David L. Rogers. (1). Incorporated by Reference
10.6 Credit Agreement dated as of May 25, 1996 among Wilsons
Leather Holdings Inc., as Borrower, the Lenders signatory
thereto from time to time, as Lenders, and General
Electric Capital Corporation, as Agent, Lender and Swing
Line Lender. (1).......................................... Incorporated by Reference
10.7 Security Agreement dated as of May 25, 1996 by Wilsons
Leather Holdings Inc. and other grantors listed on the
signature pages thereto, in favor of General Electric
Capital Corporation, in its capacity as Agent for
Lenders. (1).............................................. Incorporated by Reference
10.8 Stock Exchange Agreement. (8)............................. Incorporated by Reference
10.9 Store Guarantors' Guaranty dated as of May 25, 1996, by
Bermans The Leather Experts, Inc., Wilsons House of
Suede, Inc., Wilsons Tannery West, Inc., the Georgetown
Subsidiaries that are signatories thereto and the
Individual Store Subsidiaries that are signatories
thereto, in favor of General Electric Capital
Corporation. (9).......................................... Incorporated by Reference
*10.10 Wilsons The Leather Experts Inc. Amended 1996 Stock
Option Plan. (2).......................................... Incorporated by Reference
10.11 Amendment No. 1 to Credit Agreement. (2).................. Incorporated by Reference
10.12 Amendment No. 2 to Credit Agreement. (2).................. Incorporated by Reference
10.13 Amendment No. 3 to Credit Agreement. (10)................. Incorporated by Reference
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
- ------- ----------- ----------------
<C> <S> <C>
10.14 Pledge Agreement, dated as of May 25, 1996, between
Wilsons The Leather Experts Inc. and General Electric
Capital Corporation, individually and as agent for the
lenders signatory to the Credit Agreement. (11)........... Incorporated by Reference
10.15 Pledge Agreement, dated as of May 25, 1996, between
Wilsons Center, Inc. and General Electric Capital
Corporation, individually and as agent for the lenders
signatory to the Credit Agreement. (12)................... Incorporated by Reference
10.16 Pledge Agreement, dated as of May 25, 1996, between
Rosedale Wilsons, Inc. and General Electric Capital
Corporation, individually and as agent for the lenders
signatory to the Credit Agreement. (13)................... Incorporated by Reference
10.17 Pledge Agreement, dated as of May 25, 1996, between River
Hills Wilsons, Inc. and General Electric Capital
Corporation, individually and as agent for the lenders
signatory to the Credit Agreement. (14)................... Incorporated by Reference
10.18 Amendment No. 4 to Credit Agreement. (15)................. Incorporated by Reference
10.19 Amendment No. 2 to Pledge Agreement dated as of July 31,
1997, between River Hills Wilsons, Inc. and General
Electric Capital Corporation. (16)........................ Incorporated by Reference
10.20 Joinder Agreement dated as of July 31, 1997, by and
between Wilsons International Inc. and General Electric
Capital Corporation. (17)................................. Incorporated by Reference
10.21 Reaffirmation of Guaranty dated as of July 31, 1997, by
Wilsons The Leather Experts Inc., Wilsons Center, Inc.,
Rosedale Wilsons, Inc. and River Hills Wilsons, Inc., in
favor of General Electric Capital Corporation. (18)....... Incorporated by Reference
10.22 Repurchase Agreement dated as of March 27, 1998, between
Wilsons The Leather Experts Inc. and CVS New York, Inc.
(19)...................................................... Incorporated by Reference
10.23 Wilsons The Leather Experts Inc. 1998 Stock Option Plan.
(20)...................................................... Incorporated by Reference
10.24 Consent to Credit Agreement dated March 27, 1998. (21).... Incorporated by Reference
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
- ------- ----------- ----------------
<C> <S> <C>
10.25 Consent and Amendment to Credit Agreement dated May 6,
1998. (22)................................................ Incorporated by Reference
10.26 Consent and Amendment to Credit Agreement dated January
19, 1999.................................................. Electronic Transmission
11.1 Computation of per share income........................... Electronic Transmission
12.1 Computation of ratios..................................... Electronic Transmission
21.1 Subsidiaries of Wilsons The Leather Experts Inc........... Electronic Transmission
23.1 Consent of Arthur Andersen LLP............................ Electronic Transmission
23.2 Consent of KPMG Peat Marwick LLP.......................... Electronic Transmission
27.1 Financial Data Schedule................................... Electronic Transmission
27.2 Financial Data Schedule for the quarter ended
August 1, 1998............................................ Electronic Transmission
27.3 Restated Financial Data Schedule for the quarter ended
August 2, 1997............................................ Electronic Transmission
</TABLE>
* Management contract or compensation plan or arrangement required to be
filed as an exhibit to this Form 10-K.
(1) Incorporated by reference to the same numbered exhibit to the Company's
Registration Statement on Form S-1 (333-13967) filed with the Commission on
October 11, 1996.
(2) Incorporated by reference to the same numbered exhibit to Amendment No. 1
to the Company's Registration Statement on Form S-1 (333-13967) filed with
the Commission on December 24, 1996.
(3) Incorporated by reference to Exhibit 10.3 to the Company's Report on Form
10-Q for the quarter ended August 2, 1997 filed with the Commission.
(4) Incorporated by reference to Exhibit 10.4 to the Company's Report on Form
10-Q for the quarter ended August 2, 1997 filed with the Commission.
(5) Incorporated by reference to the same numbered exhibit to the Company's
Registration Statement on Form S-4 (333-37055) filed with the Commission on
October 2, 1997.
(6) Incorporated by Reference to Exhibit 4.8 to the Company's Registration
Statement on
<PAGE>
Form S-1 (333-13967) filed with the Commission on October 11, 1996.
(7) Incorporated by reference to Exhibit 10.8 to the Company's Report on Form
10-Q for the quarter ended August 2, 1997 filed with the Commission.
(8) Incorporated by reference to Exhibit 10.2 to the Company's Report on Form
10-Q for the quarter ended May 3, 1997 filed with the Commission.
(9) Incorporated by reference to Exhibit 10.10 to the Company's Report on Form
1O-Q for the quarter ended August 2, 1997 filed with the Commission.
(10) Incorporated by reference to Exhibit 10.1 to the Company's Report on Form
10-Q for the quarter ended May 3, 1997 filed with the Commission.
(11) Incorporated by reference to Exhibit 10.21 to Amendment No. 4 to the
Company's Registration Statement on Form S-1 (333-13967) filed with the
Commission on May 27, 1997.
(12) Incorporated by reference to Exhibit 10.22 to Amendment No. 4 to the
Company's Registration Statement on Form S-1 (333-13967) filed with the
Commission on May 27, 1997.
(13) Incorporated by reference to Exhibit 10.23 to Amendment No. 4 to the
Company's Registration Statement on Form S-1 (333-13967) filed with the
Commission on May 27, 1997.
(14) Incorporated by reference to Exhibit 10.24 to Amendment No. 4 to the
Company's Registration Statement on Form S-1 (333-13967) filed with the
Commission on May 27, 1997.
(15) Incorporated by reference to Exhibit 10.1 to the Company's Report on Form
10-Q for the quarter ended August 2, 1997 filed with the Commission.
(16) Incorporated by reference to Exhibit 10.6 to the Company's Report on Form
10-Q for the quarter ended August 2, 1997 filed with the Commission.
(17) Incorporated by reference to Exhibit 10.7 to the Company's Report on Form
10-Q for the quarter ended August 2, 1997 filed with the Commission.
(18) Incorporated by reference to Exhibit 10.9 to the Company's Report on Form
10-Q for the quarter ended August 2, 1997 filed with the Commission.
(19) Incorporated by reference to Exhibit 10.30 to the Company's Report on Form
10-K for the fiscal year ended January 30, 1999 filed with the Commission.
(20) Incorporated by reference to Exhibit 10.31 to the Company's Report on Form
10-K for
<PAGE>
the fiscal year ended January 30, 1999 filed with the Commission.
(21) Incorporated by reference to Exhibit 10.1 to the Company's Report on Form
10-Q for the quarter ended August 1, 1998 filed with the Commission.
(22) Incorporated by reference to Exhibit 10.2 to the Company's Report on Form
10-Q for the quarter ended August 1, 1998 filed with the Commission.
<PAGE>
Exhibit 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
WILSONS THE LEATHER EXPERTS INC.
ARTICLE 1 - NAME
The name of this corporation shall be Wilsons The Leather Experts Inc.
ARTICLE 2 - REGISTERED OFFICE
The registered office of this corporation shall be 7401 Boone Avenue North,
Brooklyn Park, Minnesota 55428.
ARTICLE 3 - AUTHORIZED SHARES
SECTION 1. AUTHORIZED CAPITAL STOCK.
The aggregate number of shares of stock which the corporation is authorized
to issue is 110,000,000 shares, consisting of 100,000,000 shares of common
stock, par value $.01 (the "Common Stock"), and 10,000,000 shares of preferred
stock, par value $.01 (the "Preferred Stock"). The shares of Preferred Stock and
Common Stock are sometimes collectively referred to herein as the "capital
stock". The shares of Preferred Stock may be issued by the Board of Directors of
the corporation from time to time in one or more series, each of such series to
have such relative rights, voting power, preferences and restrictions as adopted
by the Board of Directors of the corporation.
SECTION 2. DESCRIPTION OF CAPITAL STOCK.
The rights, voting power and restrictions granted to or imposed upon the
shares of Common Stock or, to the extent set forth herein, other capital stock,
or the holders thereof are as follows:
(a) Voting Power.
(i) GENERAL. Each holder of Common Stock shall have one vote on all
matters submitted to the shareholders for each share of Common Stock
registered in the name of such holder on the books of the corporation.
(ii) ELECTION OF DIRECTORS. The Board of Directors of the corporation
shall consist of not less than five or more than nine members and the
directors of the corporation shall be elected by the affirmative vote of
the holders of the greater of (a) a majority of the voting power of the
shares of capital stock of the corporation present and entitled to vote on
the election of directors or (b) a majority of the voting power of the
minimum number of shares of capital stock of the corporation entitled to
vote that would constitute a quorum for the transaction of business at a
duly held meeting of shareholders.
<PAGE>
(iii) NO CUMULATIVE VOTING. No holder of shares of capital stock of
the corporation shall have any cumulative voting rights.
(b) Preemptive Rights.
No holder of shares of any class of capital stock of the corporation shall
be entitled as such, as a matter of right, to subscribe for, purchase or receive
any part of any new or additional issue of shares of stock of any class or
series whatsoever, or of securities convertible into or exchangeable for or
exercisable for or carrying a right to purchase any shares of stock of any class
or series whatsoever, whether now or hereafter authorized and whether issued for
cash or other consideration or by way of dividend or other distribution.
ARTICLE 4 - LIMITATION OF DIRECTOR LIABILITY
To the fullest extent permitted by Chapter 302A, Minnesota Statutes, as the
same exists or may hereafter be amended, a director of this corporation shall
not be personally liable to the corporation or its shareholders for monetary
damages for breach of fiduciary duty as a director. No amendment or repeal of
this Article shall apply to or have any effect on the liability or alleged
liability of any director of this corporation for or with respect to any acts or
omissions of such director occurring prior to such amendment or repeal.
<PAGE>
Exhibit 3.2
Amendments to By-Laws
of
Wilsons The Leather Experts Inc.
authorized
June 16, 1998
The following Sections of the By-Laws of Wilsons the Leather Experts Inc.
were amended to read as follows:
Section 2.05 Regular Meetings. Regular meetings of the Board of Directors
for the election of officers and the transaction of any other business shall be
held without notice at the place of and immediately after each regular meeting
of the shareholders or at such other time and place as the Board of Directors
shall determine at a previous meeting of the Board of Directors, or as the Chief
Executive Officer or President shall fix in a notice given to all directors not
less than two days before the meeting, provided that when notice is mailed, at
least four days' notice shall be given.
Section 3.02 Chief Executive Officer. Unless provided otherwise by a
resolution adopted by the Board of Directors, the Chief Executive Officer (a)
shall have general active management of the business of the Corporation; (b)
shall preside at all meetings of the shareholders and Board or shall designate
another officer of the Corporation to preside; (c) shall see that all orders and
resolutions of the Board are carried into effect; (d) may maintain records of
and certify proceedings of the Board and shareholders; and (e) shall perform
such other duties as may from time to time be assigned by the Board.
<PAGE>
RESTATED BY-LAWS
OF
WILSONS THE LEATHER EXPERTS INC.
TABLE OF CONTENTS
Section Page
- ------- ----
SHAREHOLDERS 1
1.01 Place of Meetings 1
1.02 Regular Meetings 1
1.03 Special Meetings 1
1.04 Meetings Held Upon Shareholder Demand 1
1.05 Adjournments 2
1.06 Notice of Meetings 2
1.07 Waiver of Notice 2
1.08 Voting Rights 2
1.09 Proxies 2
1.10 Quorum 3
1.11 Acts of Shareholders 3
1.12 Action Without a Meeting 3
1.13 Advance Notice Requirements 3
DIRECTORS 5
2.01 Qualifications 5
2.02 Term 5
2.03 Intentionally Omitted 5
2.04 Place of Meetings 5
2.05 Regular Meetings 5
2.06 Special Meetings 5
2.07 Waiver of Notice; Previously Scheduled Meetings 6
2.08 Quorum 6
2.09 Acts of Board 6
2.10 Participation by Electronic Communications 6
2.11 Absent Directors 6
2.12 Action Without a Meeting 7
2.13 Committees 7
2.14 Special Litigation Committee 7
2.15 Compensation 7
-i-
<PAGE>
Section Page
- ------- ----
OFFICERS 8
3.01 Number and Designation 8
3.02 Chief Executive Officer 8
3.03 Chief Financial Officer 8
3.04 President 8
3.05 Vice Presidents 8
3.06 Secretary 9
3.07 Treasurer 9
3.08 Authority and Duties 9
3.09 Term 9
3.10 Salaries 9
INDEMNIFICATION 10
4.01 Indemnification 10
4.02 Insurance 10
SHARES 10
5.01 Certificated and Uncertificated Shares 10
5.02 Declaration of Dividends and Other Distributions 11
5.03 Transfer of Shares 11
5.04 Record Date 11
MISCELLANEOUS 11
6.01 Execution of Instruments 11
6.02 Advances 11
6.03 Corporate Seal 11
6.04 Fiscal Year 12
6.05 Amendments 12
6.06 Inapplicability of Control Share Acquisition Statute 12
6.07 Limited Applicability of Business Combination Statute 12
This Table of Contents is not part of the By-Laws of the Corporation. It is
intended merely to aid in the utilization of the By-Laws.
-ii-
<PAGE>
RESTATED BY-LAWS
OF
WILSONS THE LEATHER EXPERTS INC.
SHAREHOLDERS
Section 1.01 Place of Meetings. Each meeting of the shareholders shall be
held at the principal executive office of the Corporation or at such other place
as may be designated by the Board of Directors or the Chief Executive Officer;
provided, however, that any meeting called by or at the demand of a shareholder
or shareholders shall be held in the county where the principal executive office
of the Corporation is located.
Section 1.02 Regular Meetings. Regular meetings of the shareholders may be
held on an annual or other less frequent basis as determined by the Board of
Directors; provided, however, that if a egular meeting has not been held during
the immediately preceding 15 months, a shareholder or shareholders holding three
percent or more of the voting power of all shares entitled to vote may demand a
regular meeting of shareholders by written demand given to the Chief Executive
Officer or Chief Financial Officer of the Corporation. At each regular meeting
the shareholders shall elect qualified successors for directors who serve for an
indefinite term or whose terms have expired or are due to expire within six
months after the date of the meeting and may transact any other business,
provided, however, that no business with respect to which special notice is
required by law shall be transacted unless such notice shall have been given.
Section 1.03 Special Meetings. A special meeting of the shareholders may be
called for any purpose or purposes at any time by the Chief Executive Officer;
by the Chief Financial Officer; by the Board of Directors or any two or more
members thereof; or by one or more shareholders holding not less than ten
percent of the voting power of all shares of the Corporation entitled to vote
(except that a special meeting for the purpose of considering any action to
directly or indirectly facilitate or effect a business combination, including
any action to change or otherwise affect the composition of the Board for that
purpose, must be called by shareholders holding not less than 25 percent of the
voting power of all shares of the Corporation entitled to vote), who shall
demand such special meeting by written notice given to the Chief Executive
Officer or the Chief Financial Officer of the Corporation specifying the
purposes of such meeting.
Section 1.04 Meetings Held Upon Shareholder Demand. Within 30 days after
receipt of a demand by the Chief Executive Officer or the Chief Financial
Officer from any shareholder or shareholders entitled to call a meeting of the
shareholders, it shall be the duty of the Board of Directors of the Corporation
to cause a special or regular meeting of shareholders, as the case may be, to be
duly called and held on notice no later than 90 days after receipt of such
demand. If the Board fails to cause such a meeting to be called and held as
required by this Section, the shareholder or shareholders making the demand may
call the meeting by giving notice as provided in Section 1.06 hereof at the
expense of the Corporation.
<PAGE>
Section 1.05 Adjournments. Any meeting of the shareholders may be adjourned
from time to time to another date, time and place. If any meeting of the
shareholders is so adjourned, no notice as to such adjourned meeting need be
given if the date, time and place at which the meeting will be reconvened are
announced at the time of adjournment and the adjourned meeting is held within
120 days after the date fixed for the original meeting.
Section 1.06 Notice of Meetings. Unless otherwise required by law, written
notice of each meeting of the shareholders, stating the date, time and place
and, in the case of a special meeting, the purpose or purposes, shall be given
at least ten days and not more than 60 days prior to the meeting to every holder
of shares entitled to vote at such meeting except as specified in Section 1.05
or as otherwise permitted by law. The business transacted at a special meeting
of shareholders is limited to the purposes stated in the notice of the meeting.
Section 1.07 Waiver of Notice. A shareholder may waive notice of the date,
time, place and purpose or purposes of a meeting of shareholders. A waiver of
notice by a shareholder entitled to notice is effective whether given before, at
or after the meeting, and whether given in writing, orally or by attendance.
Attendance by a shareholder at a meeting is a waiver of notice of that meeting,
unless the shareholder objects at the beginning of the meeting to the
transaction of business because the meeting is not lawfully called or convened,
or objects before a vote on an item of business because the item may not
lawfully be considered at that meeting and does not participate in the
consideration of the item at that meeting.
Section 1.08 Voting Rights. Subdivision 1. A shareholder shall have one
vote for each share held which is entitled to vote. Except as otherwise required
by law, a holder of shares entitled to vote may vote any portion of the shares
in any way the shareholder chooses. If a shareholder votes without designating
the proportion or number of shares voted in a particular way, the shareholder is
deemed to have voted all of the shares in that way.
Subdivision 2. The Board of Directors may fix a date not more than 60 days
before the date of a meeting of shareholders as the date for the determination
of the holders of shares entitled to notice of and entitled to vote at the
meeting. When a date is so fixed, only shareholders on that date are entitled to
notice of and permitted to vote at that meeting of shareholders.
Section 1.09 Proxies. A shareholder may cast or authorize the casting of a
vote by filing a written appointment of a proxy with an officer of the
Corporation at or before the meeting at which the appointment is to be
effective. The shareholder may sign or authorize the written appointment by
telegram, cablegram or other means of electronic transmission, provided that the
Corporation has no reason to believe that the telegram, cablegram or other
electronic transmission was not authorized by the shareholder. Any copy,
facsimile, telecommunication or other reproduction of the original of either the
writing or transmission may be used in lieu of the original, provided that it is
a complete and legible reproduction of the entire original.
Section 1.10 Quorum. The holders of a majority of the voting power of the
shares entitled to vote at a shareholders meeting are a quorum for the
transaction of business. If a quorum is present when a duly called or held
meeting is convened, the shareholders present may continue to
-2-
<PAGE>
transact business until adjournment, even though the withdrawal of a number of
the shareholders originally present leaves less than the proportion or number
otherwise required for a quorum.
Section 1.11 Acts of Shareholders. Subdivision 1. Except as otherwise
required by law or specified in the Articles of Incorporation of the
Corporation, the shareholders shall take action by the affirmative vote of the
holders of the greater of (a) a majority of the voting power of the shares
present and entitled to vote on that item of business or (b) a majority of the
voting power of the minimum number of shares entitled to vote that would
constitute a quorum for the transaction of business at a duly held meeting of
shareholders.
Subdivision 2. A shareholder voting by proxy authorized to vote on less
than all items of business considered at the meeting shall be considered to be
present and entitled to vote only with respect to those items of business for
which the proxy has authority to vote. A proxy who is given authority by a
shareholder who abstains with respect to an item of business shall be considered
to have authority to vote on that item of business.
Section 1.12 Action Without a Meeting. Any action required or permitted to
be taken at a meeting of the shareholders of the Corporation may be taken
without a meeting by written action signed by all of the shareholders entitled
to vote on that action. The written action is effective when it has been signed
by all of those shareholders, unless a different effective time is provided in
the written action.
Section 1.13 Advance Notice Requirements. Only persons who are nominated in
accordance with the procedures set forth in this Section 1.13 shall be eligible
for election as directors. Nominations of persons for election to the Board of
Directors of the Corporation may be made at a meeting of shareholders (a) by or
at the direction of the Board of Directors or (b) by any shareholder of the
Corporation entitled to vote for the election of directors at the meeting who
complies with the notice procedures set forth in this Section 1.13. Nominations
by shareholders shall be made pursuant to timely notice in writing to the
Secretary of the Corporation. To be timely, a shareholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation not less than 50 days prior to the meeting; provided, however, that
in the event that less than 60 days' notice or prior public disclosure of the
date of the meeting is given or made to shareholders, notice by the shareholder
to be timely must be so received not later than the close of business on the
10th day following the day on which such notice of the date of the meeting was
mailed or such public disclosure was made. Such shareholder's notice shall set
forth (x) as to each person whom the shareholder proposes to nominate for
election or re-election as a director, (i) such person's name, and (ii) all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required,
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended, if the Corporation is then subject to Regulation 14A (including such
person's written consent to being named in the proxy statement as a nominee and
to serving as a director if elected); and (y) as to the shareholder giving the
notice, (i) the name and address, as they appear on the Corporation's books, of
such shareholder and (ii) the class and number of shares of the Corporation
which are beneficially owned by such shareholder. At the request of the Board of
Directors, any person nominated by the Board of Directors for election as a
director shall furnish to the Secretary of the Corporation that information
required to be set forth in a
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shareholder's notice of nomination which pertains to a nominee. No person shall
be eligible for election as a director of the Corporation unless nominated in
accordance with the procedures set forth in this Section 1.13. The Chairman of
the meeting shall, if the facts warrant, determine and declare to the meeting
that a nomination was not made in accordance with the procedures prescribed in
this Section 1.13 and, if the Chairman should so determine, the Chairman shall
so declare to the meeting and the defective nomination shall be disregarded.
At any regular or special meeting of shareholders, only such business shall
be conducted as shall have been brought before the meeting (a) by or at the
direction of the Board of Directors or (b) by any shareholder of the Corporation
who complies with the notice procedures set forth in this Section 1.13. For
business to be properly brought before any regular or special meeting by a
shareholder, the shareholder must have given timely notice thereof in writing to
the Secretary of the Corporation. To be timely, a shareholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation not less than 50 days prior to the meeting, provided, however, that
in the event that less than 60 days' notice or prior public disclosure of the
date of the meeting is given or made to shareholders, notice by the shareholder
to be timely must be received not later than the close of business on the 10th
day following the day on which such notice of the date of the regular or special
meeting was mailed or such public disclosure was made. A shareholder's notice to
the Secretary shall set forth as to each matter the shareholder proposes to
bring before the regular or special meeting (w) a brief description of the
business desired to be brought before the meeting and the reasons for conducting
such business at the meeting, (x) the name and address, as they appear on the
Corporation's books, of the shareholder proposing such business, (y) the class
and number of shares of the Corporation which are beneficially owned by the
shareholder and (z) any material interest of the shareholder in such business.
Notwithstanding anything in these By-Laws to the contrary, no business shall be
conducted at any regular or special meeting except in accordance with the
procedures set forth in this Section 1.13. The Chairman of the meeting shall, if
the facts warrant, determine and declare to the meeting that business was not
properly brought before the meeting in accordance with the provisions of this
Section 1.13 and, if the Chairman should so determine, the Chairman shall so
declare to the meeting and any such business not properly brought before the
meeting shall not be transacted.
DIRECTORS
Section 2.01 Qualifications. Except as authorized by the shareholders
pursuant to a shareholder control agreement or unanimous affirmative vote, the
business and affairs of the Corporation shall be managed by or under the
direction of a Board. Directors shall be natural persons. Subject to the
Articles of Incorporation of the Corporation, the shareholders at each regular
meeting shall determine the number of directors to constitute the Board,
provided that subject to the Articles of Incorporation of the Corporation,
thereafter the authorized number of directors may be increased by the
shareholders or the Board and decreased by the shareholders. Directors need not
be shareholders.
Section 2.02 Term. Each director shall serve for an indefinite term that
expires at the next regular meeting of the shareholders. A director shall hold
office until a successor is elected and has qualified or until the earlier
death, resignation, removal or disqualification of the director.
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Section 2.03 Intentionally Omitted.
Section 2.04 Place of Meetings. Each meeting of the Board of Directors
shall be held at the principal executive office of the Corporation or at such
other place as may be designated from time to time by a majority of the members
of the Board or by the Chief Executive Officer. A meeting may be held by
conference among the directors using any means of communication through which
the directors may simultaneously hear each other during the conference.
Section 2.05 Regular Meetings. Regular meetings of the Board of Directors
for the election of officers and the transaction of any other business shall be
held without notice at the place of and immediately after each regular meeting
of the shareholders or at such other time and place as the Board of Directors
shall determine at a previous meeting of the Board of Directors, or as the Chief
Executive Officer or President shall fix in a notice given to all directors not
less than two days before the meeting, provided that when notice is mailed, at
least four days' notice shall be given.
Section 2.06 Special Meetings. A special meeting of the Board of Directors
may be called for any purpose or purposes at any time by any member of the Board
by giving not less than two days' notice to all directors of the date, time and
place of the meeting, provided that when notice is mailed, at least four days'
notice shall be given. The notice need not state the purpose of the meeting.
Section 2.07 Waiver of Notice; Previously Scheduled Meetings. Subdivision
1. A director of the Corporation may waive notice of the date, time and place of
a meeting of the Board. A waiver of notice by a director entitled to notice is
effective whether given before, at or after the meeting, and whether given in
writing, orally or by attendance. Attendance by a director at a meeting is a
waiver of notice of that meeting, unless the director objects at the beginning
of the meeting to the transaction of business because the meeting is not
lawfully called or convened and thereafter does not participate in the meeting.
Subdivision 2. If the day or date, time and place of a Board meeting have
been provided herein or announced at a previous meeting of the Board, no notice
is required. Notice of an adjourned meeting need not be given other than by
announcement at the meeting at which adjournment is taken of the date, time and
place at which the meeting will be reconvened.
Section 2.08 Quorum. The presence in person of a majority of the directors
currently holding office shall be necessary to constitute a quorum for the
transaction of business. In the absence of a quorum, a majority of the directors
present may adjourn a meeting from time to time without further notice until a
quorum is present. If a quorum is present when a duly called or held meeting is
convened, the directors present may continue to transact business until
adjournment, even though the withdrawal of a number of the directors originally
present leaves less than the proportion or number otherwise required for a
quorum.
Section 2.09 Acts of Board. Except as otherwise required by law or
specified in the Articles of Incorporation of the Corporation, the Board shall
take action by the affirmative vote of
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the greater of (a) a majority of the directors present at a duly held meeting at
the time the action is taken or (b) a majority of the minimum proportion or
number of directors that would constitute a quorum for the transaction of
business at the meeting.
Section 2.10 Participation by Electronic Communications. A director may
participate in a Board meeting by any means of communication through which the
director, other directors so participating and all directors physically present
at the meeting may simultaneously hear each other during the meeting. A director
so participating shall be deemed present in person at the meeting.
Section 2.11 Absent Directors. A director of the Corporation may give
advance written consent or opposition to a proposal to be acted on at a Board
meeting. If the director is not present at the meeting, consent or opposition to
a proposal does not constitute presence for purposes of determining the
existence of a quorum, but consent or opposition shall be counted as the vote of
a director present at the meeting in favor of or against the proposal and shall
be entered in the minutes or other record of action at the meeting, if the
proposal acted on at the meeting is substantially the same or has substantially
the same effect as the proposal to which the director has consented or objected.
Section 2.12 Action Without a Meeting. An action required or permitted to
be taken at a Board meeting may be taken without a meeting by written action
signed by all of the directors.
Section 2.13 Committees. Subdivision 1. A resolution approved by the
affirmative vote of a majority of the Board may establish committees having the
authority of the Board in the management of the business of the Corporation only
to the extent provided in the resolution. Committees shall be subject at all
times to the direction and control of the Board, except as provided in Section
2.14 or otherwise provided by law.
Subdivision 2. A committee shall consist of one or more natural persons,
who need not be directors, appointed by affirmative vote of a majority of the
directors present at a duly held Board meeting.
Subdivision 3. Section 2.04 and Sections 2.06 to 2.12 hereof shall apply to
committees and members of committees to the same extent as those sections apply
to the Board and directors.
Subdivision 4. Minutes, if any, of committee meetings shall be made
available upon request to members of the committee and to any director.
Section 2.14 Special Litigation Committee. Pursuant to the procedure set
forth in Section 2.13, the Board may establish a committee composed of one or
more independent directors or other independent persons to determine whether it
is in the best interests of the Corporation to consider legal rights or remedies
of the Corporation and whether those rights and remedies should be pursued. The
committee, once established, is not subject to the direction or control of, or
(unless required by law) termination by, the Board. To the extent permitted by
law, a vacancy on the
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committee may be filled by a majority vote of the remaining committee members.
The good faith determinations of the committee are binding upon the Corporation
and its directors, officers and shareholders to the extent permitted by law. The
committee terminates when it issues a written report of its determinations to
the Board.
Section 2.15 Compensation. The Board may fix the compensation, if any, of
directors.
OFFICERS
Section 3.01 Number and Designation. The Corporation shall have one or more
natural persons exercising the functions of the offices of Chief Executive
Officer and Chief Financial Officer. The Board of Directors may elect or appoint
such other officers or agents as it deems necessary for the operation and
management of the Corporation, with such powers, rights, duties and
responsibilities as may be determined by the Board, including, without
limitation, a President, one or more Vice Presidents, a Secretary and a
Treasurer, each of whom shall have the powers, rights, duties and
responsibilities set forth in these By-Laws unless otherwise determined by the
Board. Any of the offices or functions of those offices may be held by the same
person.
Section 3.02 Chief Executive Officer. Unless provided otherwise by a
resolution adopted by the Board of Directors, the Chief Executive Officer (a)
shall have general active management of the business of the Corporation; (b)
shall preside at all meetings of the shareholders and Board or shall designate
another officer of the Corporation to preside; (c) shall see that all orders and
resolutions of the Board are carried into effect; (d) may maintain records of
and certify proceedings of the Board and shareholders; and (e) shall perform
such other duties as may from time to time be assigned by the Board.
Section 3.03 Chief Financial Officer. Unless provided otherwise by a
resolution adopted by the Board of Directors, the Chief Financial Officer (a)
shall keep accurate financial records for the Corporation; (b) shall deposit all
monies, drafts and checks in the name of and to the credit of the Corporation in
such banks and depositories as the Board shall designate from time to time; (c)
shall endorse for deposit all notes, checks and drafts received by the
Corporation as ordered by the Board, making proper vouchers therefor; (d) shall
disburse corporate funds and issue checks and drafts in the name of the
Corporation, as ordered by the Board; (e) shall render to the Chief Executive
Officer and the Board, whenever requested, an account of all of such officer's
transactions as Chief Financial Officer and of the financial condition of the
Corporation; and (f) shall perform such other duties as may be prescribed by the
Board or the Chief Executive Officer from time to time.
Section 3.04 President. Unless otherwise determined by the Board of
Directors, the President shall be the Chief Executive Officer of the
Corporation. If an officer other than the President is designated Chief
Executive Officer, the President shall perform such duties as may from time to
time be assigned by the Board.
Section 3.05 Vice Presidents. Any one or more Vice Presidents, if any, may
be designated by the Board of Directors as Executive Vice Presidents or Senior
Vice Presidents.
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During the absence or disability of the President, it shall be the duty of the
highest ranking Executive Vice President, and, in the absence of any such Vice
President, it shall be the duty of the highest ranking Senior Vice President or
other Vice President, who shall be present at the time and able to act, to
perform the duties of the President. The determination of who is the highest
ranking of two or more persons holding the same office shall, in the absence of
specific designation of order of rank by the Board, be made on the basis of the
earliest date of appointment or election, or, in the event of simultaneous
appointment or election, on the basis of the longest continuous employment by
the Corporation.
Section 3.06 Secretary. The Secretary, unless otherwise determined by the
Board of Directors, shall attend all meetings of the shareholders and all
meetings of the Board, shall record or cause to be recorded all proceedings
thereof in a book to be kept for that purpose, and may certify such proceedings.
Except as otherwise required or permitted by law or by these By-Laws, the
Secretary shall give or cause to be given notice of all meetings of the
shareholders and all meetings of the Board.
Section 3.07 Treasurer. The Treasurer shall perform such duties as may from
time to time be assigned by the Board.
Section 3.08 Authority and Duties. In addition to the foregoing authority
and duties, all officers of the Corporation shall respectively have such
authority and perform such duties in the management of the business of the
Corporation as may be designated from time to time by the Board of Directors.
Unless prohibited by a resolution approved by the affirmative vote of a majority
of the directors present, an officer elected or appointed by the Board may,
without the approval of the Board, delegate some or all of the duties and powers
of an office to other persons.
Section 3.09 Term. Subdivision 1. All officers of the Corporation shall
hold office until their respective successors are chosen and have qualified or
until their earlier death, resignation or removal.
Subdivision 2. An officer may resign at any time by giving written notice
to the Corporation. The resignation is effective without acceptance when the
notice is given to the Corporation, unless a later effective date is specified
in the notice.
Subdivision 3. An officer may be removed at any time, with or without
cause, by a resolution approved by the affirmative vote of a majority of the
directors present at a duly held Board meeting.
Subdivision 4. A vacancy in an office because of death, resignation,
removal, disqualification or other cause may, or in the case of a vacancy in the
office of Chief Executive Officer or Chief Financial Officer shall, be filled
for the unexpired portion of the term by the Board.
Section 3.10 Salaries. The salaries of all officers of the Corporation
shall be fixed by the Board of Directors or by the Chief Executive Officer if
authorized by the Board.
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INDEMNIFICATION
Section 4.01 Indemnification. The Corporation shall indemnify its officers
and directors for such expenses and liabilities, in such manner, under such
circumstances, and to such extent, as required or permitted by Minnesota
Statutes, Section 302A.521, as amended from time to time, or as required or
permitted by other provisions of law.
Section 4.02 Insurance. The Corporation may purchase and maintain insurance
on behalf of any person in such person's official capacity against any liability
asserted against and incurred by such person in or arising from that capacity,
whether or not the Corporation would otherwise be required to indemnify the
person against the liability.
SHARES
Section 5.01 Certificated and Uncertificated Shares. Subdivision 1. The
shares of the Corporation shall be either certificated shares or uncertificated
shares. Each holder of duly issued certificated shares is entitled to a
certificate of shares.
Subdivision 2. Each certificate of shares of the Corporation shall bear the
corporate seal, if any, and shall be signed by the Chief Executive Officer, or
the President or any Vice President, and the Chief Financial Officer, or the
Secretary or any Assistant Secretary, but when a certificate is signed by a
transfer agent or a registrar, the signature of any such officer and the
corporate seal upon such certificate may be facsimiles, engraved or printed. If
a person signs or has a facsimile signature placed upon a certificate while an
officer, transfer agent or registrar of the Corporation, the certificate may be
issued by the Corporation, even if the person has ceased to serve in that
capacity before the certificate is issued, with the same effect as if the person
had that capacity at the date of its issue.
Subdivision 3. A certificate representing shares issued by the Corporation
shall, if the Corporation is authorized to issue shares of more than one class
or series, set forth upon the face or back of the certificate, or shall state
that the Corporation will furnish to any shareholder upon request and without
charge, a full statement of the designations, preferences, limitations and
relative rights of the shares of each class or series authorized to be issued,
so far as they have been determined, and the authority of the Board to determine
the relative rights and preferences of subsequent classes or series.
Subdivision 4. A resolution approved by the affirmative vote of a majority
of the directors present at a duly held meeting of the Board may provide that
some or all of any or all classes and series of the shares of the Corporation
will be uncertificated shares. Any such resolution shall not apply to shares
represented by a certificate until the certificate is surrendered to the
Corporation.
Section 5.02 Declaration of Dividends and Other Distributions. Subject to
the Articles of Incorporation of the Corporation, the Board of Directors shall
have the authority to declare dividends and other distributions upon the shares
of the Corporation to the extent permitted by law.
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Section 5.03 Transfer of Shares. Shares of the Corporation may be
transferred only on the books of the Corporation by the holder thereof, in
person or by such person's attorney. In the case of certificated shares, shares
shall be transferred only upon surrender and cancellation of certificates for a
like number of shares. The Board of Directors, however, may appoint one or more
transfer agents and registrars to maintain the share records of the Corporation
and to effect transfers of shares.
Section 5.04 Record Date. The Board of Directors may fix a time, not
exceeding 60 days preceding the date fixed for the payment of any dividend or
other distribution, as a record date for the determination of the shareholders
entitled to receive payment of such dividend or other distribution, and in such
case only shareholders of record on the date so fixed shall be entitled to
receive payment of such dividend or other distribution, notwithstanding any
transfer of any shares on the books of the Corporation after any record date so
fixed.
MISCELLANEOUS
Section 6.01 Execution of Instruments. Subdivision 1. All deeds, mortgages,
bonds, checks, contracts and other instruments pertaining to the business and
affairs of the Corporation shall be signed on behalf of the Corporation by the
Chief Executive Officer, or the President, or any Vice President, or by such
other person or persons as may be designated from time to time by the Board of
Directors.
Subdivision 2. If a document must be executed by persons holding different
offices or functions and one person holds such offices or exercises such
functions, that person may execute the document in more than one capacity if the
document indicates each such capacity.
Section 6.02 Advances. The Corporation may, without a vote of the
directors, advance money to its directors, officers or employees to cover
expenses that can reasonably be anticipated to be incurred by them in the
performance of their duties and for which they would be entitled to
reimbursement in the absence of an advance.
Section 6.03 Corporate Seal. The seal of the Corporation, if any, shall be
a circular embossed seal having inscribed thereon the name of the Corporation
and the following words:
"Corporate Seal Minnesota".
Section 6.04 Fiscal Year. The fiscal year of the Corporation shall be
determined by the Board of Directors.
Section 6.05 Amendments. The Board of Directors shall have the power to
adopt, amend or repeal the By-Laws of the Corporation, subject to the power of
the shareholders to change or repeal the same, provided, however, that the Board
shall not adopt, amend or repeal any By-Law fixing a quorum for meetings of
shareholders, prescribing procedures for removing directors or filling vacancies
in the Board, or fixing the number of directors or their classifications,
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qualifications or terms of office, but may, subject to the Articles of
Incorporation of the Corporation, adopt or amend a By-Law that increases the
number of directors.
Section 6.06 Inapplicability of Control Share Acquisition Statute. Neither
Section 302A.671 of the Minnesota Business Corporation Act nor any successor
statute thereto shall apply to, or govern in any manner, the Corporation or any
control share acquisition of shares of capital stock of the Corporation or limit
in any respect the voting or other rights of any existing or future shareholder
of the Corporation or entitle the Corporation or its shareholders to any
redemption or other rights with respect to outstanding capital stock of the
Corporation that the Corporation or its shareholders would not have in the
absence of Section 302A.671 of the Minnesota Business Corporation Act or any
successor statute thereto.
Section 6.07 Limited Applicability of Business Combination Statute. Neither
Section 302A.673 of the Minnesota Business Corporation Act nor any successor
statute thereto shall apply to any business combination (as defined in the
Minnesota Business Corporation Act) of the Corporation with, with respect to,
proposed by or on behalf of, or pursuant to any written or oral agreement,
arrangement, relationship, understanding or otherwise with, any interested
shareholder (as defined in the Minnesota Business Corporation Act) whose share
acquisition date (as defined in the Minnesota Business Corporation Act) is
either before the date on which the Corporation becomes a publicly held
corporation (as defined in the Minnesota Business Corporation Act) or on that
date, but prior to the time the Corporation becomes a publicly held corporation
(or, to the extent permitted by the Minnesota Business Corporation Act, any
affiliate or associate (each as defined in the Minnesota Business Corporation
Act) of any such interested shareholder), including Leather Investors Limited
Partnership I, Lyle Berman, Morris Goldfarb, Joel Waller, David Rogers and
Melville Corporation (and, to the extent permitted by the Minnesota Business
Corporation Act, each affiliate and associate of any thereof). All references in
this section to the Minnesota Business Corporation Act shall be deemed to be
references to the Minnesota Business Corporation Act as in effect from time to
time, including all amendments thereto after adoption of this section.
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EXHIBIT 10.2
WILSONS THE LEATHER EXPERTS
EXECUTIVE AND KEY MANAGEMENT
INCENTIVE PLAN
(As Adopted Effective May 26, 1996)
<PAGE>
Wilsons The Leather Experts
Executive and Key Management
Incentive Plan
A. INTRODUCTION AND PURPOSE
This Plan has been developed to provide opportunities for Wilsons The Leather
Experts Inc. (hereinafter "Wilsons") to motivate and reward key home office and
distribution center associates through annual incentive awards. Eligible
participants include the Chairman, President, all Vice Presidents, Directors and
certain designated key personnel below the Director level. Cash awards are
based on actual results measured against pre-established corporate financial
objectives for consolidated earnings before federal and state income taxes of
Wilsons and its direct and indirect subsidiaries ("EBT"). Selected positions
below the level of President may also have position-specific measures in
addition to the corporate financial performance measure. Awards are paid in
cash to provide an immediate reward and supplement our base compensation
program. Generally, payments are made in March or April following the end of
each Plan Year.
This Plan is intended to be as simple as possible so that the goals are very
clear to all parties. Important features of the Plan are described in this
document. Any questions regarding the interpretation of this Plan, or any
details not covered in this document, will be determined by the Incentive
Committee in its sole discretion.
B. INCENTIVE PLAN PROVISIONS
1. ADMINISTRATION
The Human Resource group administers the Plan. An Incentive Committee,
consisting of the Vice President-Human Resources, the President and the
Chairman, selects the participants in the Plan, establishes position-specific
goals, if any, for the participants and targeted award percentages for
incentive-eligible positions, and resolves disputes on interpretation and
application of the Plan. The budgeted EBT for each Plan Year will be
established by the Board of Directors of Wilsons (the "Board").
2. TERMS OF PARTICIPATION AND PAYOUT
Incentive-eligible positions, targeted award amounts, Wilsons' EBT goals and any
applicable position-specific goals will be established and communicated, as
early as possible, at the beginning of each Plan Year.
a. Eligibility Requirements.
You must be actively employed by Wilsons or one of its direct or indirect
subsidiaries as of the last day of the Plan Year (not the calendar year) in
order to receive an incentive award for that year. In addition, in order
to receive an incentive award for a Plan Year, you must be in an incentive
eligible position as of the last day of the Plan Year, so that associates
who transfer during a Plan Year from an incentive eligible position to an
ineligible position will receive no
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incentive payout for that year. Incentive awards generally will be
distributed in March or April following the close of financial records for
the Plan Year.
Associates on written warning status either at the end of the Plan Year or
on the date of payout will receive no incentive payout for that year.
Further, associates terminated on or after the last day of a Plan Year but
prior to the date of award payout for such Plan Year for a reason that
Wilsons determines to be for cause will receive no incentive award payout
for that year.
For participants at the level of Vice President or below, functional area
Vice President's budget/expense plan(s) must be met for the Plan Year in
order to participate in a payout under this Plan for that year. Failure to
achieve functional area Vice President's budget disqualifies you from
eligibility for an award/payout under this Plan for the year.
b. Pro-rated Awards.
Associates who become participants during a Plan Year will be eligible to
receive a pro-rated bonus for that year reflecting their time as an
eligible participant.
Associates who transfer from an eligible position to another eligible
position during a Plan Year will receive a pro-rata award based on the time
spent in each of the eligible positions. In this situation, the ending
base salary in, and targeted award percentage for, each position will be
used to calculate the pro-rata award for the portion of the Plan Year in
that position. Adjustments to base salary for associates who remain in the
same position throughout the Plan Year, will be handled on an individual
basis with terms and conditions communicated at time of salary change.
In each case, a pro-rated award will be paid for a Plan Year only if all
the requirements of subsection a. above are satisfied for that year. For
purposes of pro-rating awards under the preceding two paragraphs, a
transfer or other event that occurs prior to the 15th day of a month will
be deemed to have occurred on the first day of that month, and a transfer
or other event that occurs on or after the 15th day of a month will be
deemed to occur on the first day of the following month.
Company-paid leave-of-absence which exceeds eight weeks will result in the
award being pro-rated to reflect time on leave which is greater than eight
weeks. Unpaid leave-of-absence will result in the award being pro-rated
for time on unpaid-leave status.
3. PERFORMANCE MEASURES
The basis for award payment will be EBT as established herein or by the Board in
accordance herewith. Select associates below the level of President may have
additional position-specific performance measures such as sales or gross margin.
Foremost is the intent to motivate and reward our associates for contributions
that successfully drive Wilsons' businesses. A personalized award sheet will be
provided to each participant which outlines the basis upon which incentives will
be awarded.
4. INCENTIVE AWARDS
A targeted award amount is established for each participant each Plan Year
expressed as a percentage of base salary at the beginning of the Plan Year.
While your targeted award amount communicated to you at the beginning of each
Plan Year is based on your base salary at the beginning of that year, your
actual
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award will be based on your base salary on the last day of the Plan Year
(subject to the proration provisions set forth in 2b).
Your targeted award amount is the amount of the incentive award which will be
earned by you with respect to a Plan Year (assuming no change in your base
salary and no transfer between positions during the year) if 100% of budgeted
EBT for such Plan Year is achieved and if the other conditions to your receipt
of such award set forth in or established pursuant to this Plan are satisfied.
However, the program is structured to include a flexible scale ranging from 65%
achievement of budgeted EBT to 135% achievement of budgeted EBT. The following
chart shows the actual percents which will be paid out when EBT results are
above or below budget:
% Achievement % of Targeted
of Budget Award Amount
------------- -------------
135.0% or more 200%
131.5% 190%
128.0% 180%
124.5% 170%
121.0% 160%
117.5% 150%
114.0% 140%
110.5% 130%
107.0% 120%
103.5% 110%
100.0% 100%
95.0% 90%
90.0% 80%
85.0% 70%
80.0% 60%
75.0% 50%
70.0% 40%
65.0% 30%
less than 65.0% 0%
Note that at 135% achievement of budgeted EBT your incentive award DOUBLES! At
the sole discretion of the Incentive Committee, there may be interpolation
between levels unless otherwise expressly provided in the chart.
5. GENERAL PROVISIONS
The Plan operates on a "Plan Year" that ends on the Saturday nearest January 31
of each year. The following chart shows the first five Plan Years:
Beginning Date Ending Date
-------------- -----------
February 4, 1996 February 1, 1997
February 2, 1997 January 31, 1998
February 1, 1998 January 30, 1999
January 31, 1999 January 29, 2000
January 30, 2000 February 3, 2001
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Please see your Vice President-Human Resources if you need assistance in
interpretation of this Plan.
C. RIGHTS OF THE PARTICIPANT
This Plan is not an employment agreement and does not ensure or evidence to any
degree the continued employment of any participant for any time, period or
position. If a participant is covered by a written employment agreement that
specifically refers to this Plan, the participant's rights and benefits shall be
governed by the terms of the employment agreement to the extent inconsistent
with this Plan.
No participant shall, by virtue of this Plan, have any interest in any specific
asset or assets of Wilsons or any of its direct or indirect subsidiaries. A
participant has only an unsecured right to receive an Incentive Plan payout in
accordance with, and at the time specified by, the Plan.
D. RIGHTS OF WILSONS
Wilsons reserves the right to change, amend, or terminate this Plan at any time,
with or without notice to participants. Any changes, amendments or Plan
termination may be made only by the Board.
-4-
<PAGE>
EXHIBIT 10.26
CONSENT TO CREDIT AGREEMENT
This CONSENT TO CREDIT AGREEMENT is entered into as of this 19th day of
January, 1999 (this "Consent") by and between WILSONS LEATHER HOLDINGS INC., a
Minnesota corporation ("Borrower"), the other Loan Parties signatory hereto,
GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation (in its individual
capacity, "GE Capital"), for itself, as Lender, as Swing Line Lender and as
Agent for Lenders, and the other Lenders signatory hereto. Unless otherwise
specified herein, all capitalized terms used in this Consent shall have the
respective meanings ascribed to them in the Credit Agreement (as hereinafter
defined).
RECITALS
WHEREAS, Borrower, GE Capital, certain Loan Parties and Lenders are
parties to a Credit Agreement dated as of May 25, 1996, as amended by that
certain Amendment No. 1 to Credit Agreement dated as of July 11, 1996, that
certain Amendment No. 2 to Credit Agreement dated as of October 22, 1996, that
certain Amendment No. 3 to Credit Agreement dated as of May 23, 1997, that
certain Consent and Amendment No. 4 to Credit Agreement dated as of July 31,
1997, that certain Consent to Credit Agreement dated as of March 27, 1998 and
that certain Consent and Amendment No. 5 to Credit Agreement dated as of May 6,
1998 (as further amended, supplemented, restated or otherwise modified from time
to time, the "Credit Agreement"); and
WHEREAS, Borrower requests Requisite Lenders' consent under the Credit
Agreement and certain amendments to the Credit Agreement as herein set forth.
NOW THEREFORE, in consideration of the foregoing recitals and the
mutual agreements contained herein, and for good and valuable consideration, the
parties hereto agree as follows:
Section 1. Consent. Subject to the conditions herein set forth and
notwithstanding any provision of the Credit Agreement to the contrary, Agent and
Requisite Lenders consent to the purchase by Newco of Senior Notes (including
premiums) in an aggregate amount not to exceed $20,000,000, which Senior Notes
shall be held in Newco's treasury.
Section 2. Representations and Warranties of Loan Parties. The Loan
Parties represent and warrant that:
(a) the execution, delivery and performance by the Loan
Parties of this Consent have been duly authorized by all necessary
corporate action required on their part and this Consent is a legal,
valid and binding obligation of the Loan Parties enforceable against
the Loan Parties in accordance with its terms except as the enforcement
thereof may be subject to (i) the effect of any applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting
creditors' rights generally and (ii) general principles of equity
(regardless of whether enforcement is sought in a proceeding in equity
or at law);
<PAGE>
(b) each of the representations and warranties contained in
the Credit Agreement is true and correct in all material respects on
and as of the date hereof as if made on the date hereof, except to the
extent that such representations and warranties expressly relate to an
earlier date;
(c) neither the execution, delivery and performance of this
Consent nor the consummation of the transactions contemplated hereby
does or shall contravene, result in a breach of, or violate (i) any
provision of any Loan Party's certificates or articles of incorporation
or bylaws, (ii) any law or regulation, or any order or decree of any
court or government instrumentality, or (iii) any indenture, mortgage,
deed of trust, lease, agreement or other instrument to which any Loan
Party or any of its Subsidiaries is a party or by which any Loan Party
or any of its Subsidiaries or any of their property is bound, except in
any such case to the extent such conflict or breach has been waived by
a written document, a copy of which has been delivered to Agent on or
before the date hereof.
Section 3. Condition to Effectiveness. This Consent shall be effective
upon satisfaction of the following conditions precedent:
(a) Execution and delivery of this Consent by the Loan Parties
and Requisite Lenders.
(b) The representations and warranties contained herein shall
be true and correct in all respects.
Section 4. Reference to and Effect Upon the Credit Agreement.
(a) The Credit Agreement and the other Loan Documents shall
remain in full force and effect and are hereby ratified and confirmed,
except as specifically amended hereby.
(b) The execution, delivery and effectiveness of this Consent
shall not operate as a waiver of any right, power or remedy of Agent or
any Lender under the Credit Agreement or any Loan Document, nor
constitute a waiver of any provision of the Credit Agreement or any
Loan Document, except as specifically set forth herein. Upon the
effectiveness of this Consent, each reference in the Credit Agreement,
to "this Agreement", "hereunder", "hereof", "herein" or words of
similar import shall mean and be a reference to the Credit Agreement as
amended hereby.
Section 5. Costs and Expenses. As provided in Section 11.3 of the
Credit Agreement, Borrower agrees to reimburse Agent for all fees, costs and
expenses, including the fees, costs and expenses of counsel or other advisors
for advice, assistance, or other representation in connection with this Consent.
2
<PAGE>
Section 6. GOVERNING LAW. THIS CONSENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS (AS OPPOSED TO CONFLICTS OF LAWS
PROVISIONS) OF THE STATE OF ILLINOIS.
Section 7. Headings. Section headings in this Consent are included
herein for convenience of reference only and shall not constitute a part of this
Consent for any other purposes.
Section 8. Counterparts. This Consent may be executed in any number of
counterparts, each of which when so executed shall be deemed an original, but
all such counterparts shall constitute one and the same instrument.
(signature page follows)
3
<PAGE>
IN WITNESS WHEREOF, this Consent has been duly executed as of the date
first written above.
WILSONS LEATHER HOLDINGS INC.
By: /s/ Douglas J. Treff
------------------------------
Title: Chief Financial Officer
---------------------------
GENERAL ELECTRIC CAPITAL
CORPORATION, as Agent, Lender
and Swing Line Lender
By: /s/ Paul M. Finkham
------------------------------
Title: Duly Authorized Signatory
---------------------------
BANKBOSTON, N.A. (formerly THE
FIRST NATIONAL BANK OF
BOSTON), as Lender
By: /s/ Pete J.
------------------------------
Title: Managing Director
---------------------------
SANWA BUSINESS CREDIT
CORPORATION, as Lender
By:
------------------------------
Title:
---------------------------
SIGNET BANK, as Lender
By:
------------------------------
Title:
---------------------------
4
<PAGE>
THE CIT GROUP/BUSINESS CREDIT,
INC., as Lender
By: James C.
---------------------------------
Title: Vice President
------------------------------
TRANSAMERICA BUSINESS CREDIT
CORPORATION, as
Lender
By: R.F.S.
---------------------------------
Title: SVP
------------------------------
FIRST UNION NATIONAL BANK
(formerly CoreStates Bank, N.A.), as
Lender
By: Myron Landau
---------------------------------
Title: VP
------------------------------
BANKAMERICA BUSINESS CREDIT,
INC., as Lender
By: /s/ Daniel L. Cusdez
---------------------------------
Title: SVP
------------------------------
FIRST BANK NATIONAL
ASSOCIATION,
as Lender
By: /s/ Kim Lippanen
---------------------------------
Title: Assistant Vice President
------------------------------
5
<PAGE>
Exhibit 11.1
Wilsons The Leather Experts Inc. and Subsidiaries
Computation of Net Income Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
For the For the Period From
Year Year Inception
Ended Ended (May 26, 1996) to
January 30, 1999 January 31, 1998 February 1, 1997
---------------- -------------------- --------------------
<S> <C> <C> <C>
Basic:
Net income $ 18,177 $ 10,838 $ 23,906
========== =============== ==============
Weighted average common shares outstanding 10,357 8,910 7,650
========== =============== ==============
Basic net income per common share $ 1.75 $ 1.22 $ 3.12
========== =============== ==============
Diluted:
Net income $ 18,177 $ 10,838 $ 23,906
========== =============== ==============
Weighted average common shares outstanding 10,357 8,910 7,650
Effect of:
Options granted 372 218 78
Warrant 192 1,270 1,242
----------- --------------- --------------
Weighted average common shares outstanding -
assuming dilution 10,920 10,398 8,970
=========== =============== ==============
Diluted net income per common share $ 1.66 $ 1.04 $ 2.67
=========== =============== ==============
</TABLE>
<PAGE>
Exhibit 12.1
Wilsons The Leather Experts Inc. and Subsidiaries
Computation of Ratio of Earnings to Fixed Charges
(In Thousands, Except Ratios)
<TABLE>
<CAPTION>
Predecessor Companies
----------------------------------------------------------------------
Eight
Years Ended December 31, Five Months Ended Months
-------------------------- --------------------- Ended
May 27, May 25, January 27,
1994 1995 1995 1996 1996
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income (loss) before income taxes $(15,700) $(183,515) $(33,465) $(17,744) $(150,239)
Fixed charges:
Interest expense (including amortiza-
tion of deferred financing costs) 8,393 10,463 3,396 1,581 7,400
One-third of the rent expense
from operating leases 13,839 13,874 5,643 4,791 9,251
-------- --------- -------- -------- ---------
Fixed charges $ 22,232 $ 24,337 $ 9,039 $ 6,372 $ 16,651
======== ========= ======== ======== =========
Earnings (loss), as defined $ 6,532 $(159,178) $(24,426) $(11,372) $(133,588)
======== ========= ======== ======== =========
Fixed charges $ 22,232 $ 24,337 $ 9,039 $ 6,372 $ 16,651
======== ========= ======== ======== =========
Ratio of earnings to fixed charges 0.3x - - - -
======== ========= ======== ======== =========
</TABLE>
<TABLE>
<CAPTION>
Combined
Company Companies (1) Company
------------- ------------- ----------------------------------
Period
From
Inception
(May 26, Year Ended Year Ended
1996) to ------------- -----------------------------------
February 1, February 1, January 31, January 30,
1997 1997 1998 1999
---------------------------- ------------------------------------
<S> <C> <C> <C> <C>
Income (loss) before income taxes $ 39,434 $ 12,900 $ 17,858 $ 29,896
Fixed charges:
Interest expense (including amortiza-
tion of deferred financing costs) 6,002 6,500 6,434 7,815
One-third of the rent expense
from operating leases 9,649 12,538 11,795 12,472
-------- -------- ---------- ----------
Fixed charges $ 15,651 $ 19,038 $ 18,229 $ 20,287
======== ======== ========== ==========
Earnings (loss), as defined $ 55,085 $ 31,938 $ 36,087 $ 50,183
======== ======== ========== ==========
Fixed charges $ 15,651 $ 19,038 $ 18,229 $ 20,287
======== ======== ========== ==========
Ratio of earnings to fixed charges 3.5x 1.7x 2.0x 2.5x
======== ======== ========== ==========
</TABLE>
- ---------------
(1) Results for the year 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, which periods
together contain 53 weeks.
<PAGE>
Exhibit 21.1
Direct and Indirect Subsidiaries
of
Wilsons The Leather Experts Inc.
(and states of incorporation or organization)
Direct Subsidiary of Wilsons The Leather Experts Inc.
Wilsons Center, Inc. (Minnesota)
Direct Subsidiary of Wilsons Center, Inc.:
Rosedale Wilsons, Inc. (Minnesota)
Direct Subsidiary of Rosedale Wilsons, Inc.:
River Hills Wilsons, Inc. (Minnesota)
Direct Subsidiaries of River Hills Wilsons, Inc.:
Wilsons Leather of Alabama, Inc. (Alabama)
Wilsons Leather of Arkansas, Inc. (Arkansas)
Wilsons Leather of Connecticut, Inc. (Connecticut)
Wilsons Leather of Delaware, Inc. (Delaware)
Wilsons Leather of Florida, Inc. (Florida)
Wilsons Leather of Georgia, Inc. (Georgia)
Wilsons Leather of Indiana, Inc. (Indiana)
Wilsons Leather of Iowa, Inc. (Iowa)
Wilsons Leather of Louisiana, Inc. (Louisiana)
Wilsons Leather of Maryland, Inc. (Maryland)
Wilsons Leather of Massachusetts, Inc. (Massachusetts)
Wilsons Leather of Michigan, Inc. (Michigan)
Wilsons Leather of Mississippi, Inc. Mississippi)
Wilsons Leather of Missouri, Inc. (Missouri)
Wilsons Leather of New Jersey, Inc. (New Jersey)
Wilsons Leather of New York, Inc. (New York)
Wilsons Leather of North Carolina, Inc. (North Carolina)
Wilsons Leather of Ohio, Inc. (Ohio)
Wilsons Leather of Pennsylvania, Inc. (Pennsylvania)
Wilsons Leather of Rhode Island, Inc. (Rhode Island)
Wilsons Leather of South Carolina, Inc. (South Carolina)
Wilsons Leather of Tennessee, Inc. (Tennessee)
Wilsons Leather of Texas, Inc. (Texas)
Wilsons Leather of Vermont, Inc. (Vermont)
Wilsons Leather of Virginia, Inc. (Virginia)
Wilsons Leather of West Virginia, Inc. (West Virginia)
Wilsons Leather of Wisconsin, Inc. (Wisconsin)
Bermans the Leather Experts Inc. (Delaware)
<PAGE>
Exhibit 21.1
Wilsons Leather Holdings Inc. (Minnesota)
Wilsons International Inc. (Minnesota)
Wilsons (UK) Limited (United Kingdom)
Direct Subsidiaries of Wilsons International Inc.:
Wilsons Leather of Canada Ltd. (Minnesota)
Wilsons Leather of Hong Kong Ltd. (Hong Kong)
Direct Subsidiaries of Wilsons (UK) Limited:
Wilsons Leather Gatsland Limited (United Kingdom)
Wilsons Leather Gatsair Limited (United Kingdom)
Direct Subsidiary of Wilsons Leather of Delaware Inc.:
Wilsons Leather of Airports Inc. (Delaware)
Direct Subsidiaries of Wilsons Leather of Airports Inc.:
Chicago O'Hare Leather Concessions Joint Venture (Delaware)
Houston Airport Leather Concessions, LLC (Delaware)
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K into the Company's previously filed
Registration Statement File Nos. 333-29837 and 333-70793.
/s/ ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
April 12, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF KPMG PEAT MARWICK LLP
The Board of Directors
Wilsons Center, Inc.:
We consent to incorporation by reference in the registration statement (No. 333-
29837) on Form S-8 and in the registration statement (No. 333-70793) on Form S-8
of Wilsons The Leather Experts Inc. of our report dated July 19, 1996, relating
to the 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, which report appears in the January 30, 1999 annual report on Form 10-
K of Wilsons The Leather Experts Inc.
Our report dated July 16, 1996 contains an explanatory paragraph that states
that the Company has been dependent on Melville Corporation for a significant
portion of its working captal 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. Our
report also refers to the Company's adoption of Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of, effective October 1, 1995.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
April 12, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM WILSONS THE
LEATHER EXPERTS INC. AND SUBSIDIARIES AS OF JANUARY 30, 1999 AND FOR THE QUARTER
AND YEAR ENDED JANUARY 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> JAN-30-1999 JAN-30-1999
<PERIOD-START> NOV-01-1998 FEB-01-1998
<PERIOD-END> JAN-30-1999 JAN-30-1999
<CASH> 116,160 116,160
<SECURITIES> 0 0
<RECEIVABLES> 9,550 9,550
<ALLOWANCES> 3,225 3,225
<INVENTORY> 84,971 84,971
<CURRENT-ASSETS> 209,051 209,051
<PP&E> 43,442 43,442
<DEPRECIATION> 7,247 7,247
<TOTAL-ASSETS> 248,778 248,778
<CURRENT-LIABILITIES> 77,502 77,502
<BONDS> 70,000 70,000
0 0
0 0
<COMMON> 108 108
<OTHER-SE> 98,069 98,069
<TOTAL-LIABILITY-AND-EQUITY> 248,778 248,778
<SALES> 258,144 459,372
<TOTAL-REVENUES> 258,144 459,372
<CGS> 149,352 303,501
<TOTAL-COSTS> 194,809 417,207
<OTHER-EXPENSES> 1,506 4,454
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,148 7,815
<INCOME-PRETAX> 59,681 29,896
<INCOME-TAX> 23,099 11,719
<INCOME-CONTINUING> 36,582 18,177
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 36,582 18,177
<EPS-PRIMARY> 3.38 1.75
<EPS-DILUTED> 3.31 1.66
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM WILSONS THE
LEATHER EXPERTS INC. AND SUBSIDIARIES AS OF AUGUST 1, 1998 AND FOR THE QUARTER
AND SIX MONTH PERIOD ENDED AUGUST 1, 1998 AND IS QUALIFIED IN ITS ENTIRELY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JAN-30-1999 JAN-30-1999
<PERIOD-START> MAY-03-1998 FEB-01-1998
<PERIOD-END> AUG-01-1998 AUG-01-1998
<CASH> 42,287 42,287
<SECURITIES> 0 0
<RECEIVABLES> 13,565 13,565
<ALLOWANCES> 4,583 4,583
<INVENTORY> 101,495 101,495
<CURRENT-ASSETS> 154,331 154,331
<PP&E> 36,394 36,394
<DEPRECIATION> 4,893 4,893
<TOTAL-ASSETS> 190,000 190,000
<CURRENT-LIABILITIES> 49,149 49,149
<BONDS> 75,000 75,000
0 0
0 0
<COMMON> 108 108
<OTHER-SE> 63,425 63,425
<TOTAL-LIABILITY-AND-EQUITY> 190,000 190,000
<SALES> 45,724 113,735
<TOTAL-REVENUES> 45,724 113,735
<CGS> 41,304 92,745
<TOTAL-COSTS> 62,210 135,597
<OTHER-EXPENSES> 969 1,722
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,821 2,972
<INCOME-PRETAX> (19,276) (26,556)
<INCOME-TAX> (7,398) (10,141)
<INCOME-CONTINUING> (11,878) (16,415)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (11,878) (16,415)
<EPS-PRIMARY> (1.16) (1.66)
<EPS-DILUTED> (1.16) (1.66)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM WILSONS THE
LEATHER EXPERTS INC. AND SUBSIDIARIES AS OF AUGUST 2, 1997 AND FOR THE QUARTER
AND SIX MONTH PERIOD ENDED AUGUST 2, 1997
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JAN-31-1998 JAN-31-1998
<PERIOD-START> MAY-04-1997 FEB-02-1997
<PERIOD-END> AUG-02-1997 AUG-02-1997
<CASH> 24,091 24,091
<SECURITIES> 0 0
<RECEIVABLES> 12,334 12,334
<ALLOWANCES> 4,843 4,843
<INVENTORY> 87,177 87,177
<CURRENT-ASSETS> 119,578 119,578
<PP&E> 20,622 20,622
<DEPRECIATION> 1,911 1,911
<TOTAL-ASSETS> 140,041 140,041
<CURRENT-LIABILITIES> 43,281 43,281
<BONDS> 61,311 61,311
0 0
0 0
<COMMON> 95 95
<OTHER-SE> 33,358 33,358
<TOTAL-LIABILITY-AND-EQUITY> 140,041 140,041
<SALES> 36,471 93,422
<TOTAL-REVENUES> 36,471 93,422
<CGS> 36,957 84,222
<TOTAL-COSTS> 54,250 120,713
<OTHER-EXPENSES> 955 1,842
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,248 1,919
<INCOME-PRETAX> (19,982) (31,052)
<INCOME-TAX> (7,401) (11,208)
<INCOME-CONTINUING> (12,581) (19,844)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (12,581) (19,844)
<EPS-PRIMARY> (1.41) (2.39)
<EPS-DILUTED> (1.41) (2.39)
</TABLE>
