<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 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 offices) (Zip Code)
(612) 391-4000
--------------
(Registrant's telephone number, including area code)
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 [ ]
As of September 7, 1999, there were 11,028,677 shares of common stock, $0.01 par
value per share, outstanding.
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WILSONS THE LEATHER EXPERTS INC.
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets as of July 31, 1999 and
January 30, 1999 3
Consolidated Statements of Operations for the
three months ended July 31, 1999 and
August 1, 1998 4
Consolidated Statements of Operations for the six months
Ended July 31, 1999, and August 1, 1998 5
Consolidated Statements of Cash Flows
for the six months ended July 31, 1999 and
August 1, 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II - OTHER INFORMATION
Item 4. Submission of matters to a vote of security holders 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
Index to Exhibits 17
</TABLE>
2
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Wilsons The Leather Experts Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Amounts)
<TABLE>
<CAPTION>
July 31, January 30,
Assets 1999 1999 *
------ ----------- ------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 23,936 $116,160
Accounts receivable, net 6,422 6,325
Inventories 103,132 84,971
Prepaid expenses 2,228 1,595
-------- --------
Total current assets 135,718 209,051
Property and equipment, net 39,543 36,195
Other assets, net 2,883 3,532
-------- --------
Total assets $178,144 $248,778
======== ========
Liabilities and Shareholders' Equity
------------------------------------
Current Liabilities:
Accounts payable $ 9,356 $ 17,328
Accrued expenses 27,893 33,033
Income taxes payable 709 22,894
Deferred income taxes 5,314 4,247
-------- --------
Total current liabilities 43,272 77,502
Long-term debt 48,890 70,000
Other long-term liabilities 2,920 3,099
-------- --------
Total liabilities 95,082 150,601
-------- --------
Commitments and contingencies
Shareholders' Equity:
Common stock, $.01 par value; 100,000,000 shares authorized,
10,911,977 and 10,833,424 shares issued and outstanding on
July 31, 1999 and January 30, 1999, respectively 109 108
Additional paid-in capital 55,965 55,180
Retained earnings 27,013 42,931
Cumulative translation adjustment (25) (42)
-------- --------
Total shareholders' equity 83,062 98,177
-------- --------
Total liabilities and shareholders' equity $178,144 $248,778
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
* Derived from audited consolidated financial statements.
3
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Wilsons The Leather Experts Inc. and Subsidiaries
Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
----------------------
July 31, August 1,
1999 1998
-------- ---------
<S> <C> <C>
Net sales $ 52,822 $ 45,724
Costs and expenses:
Cost of goods sold, buying and occupancy costs 46,210 41,304
Selling, general and administrative expenses 23,913 20,906
Depreciation and amortization 1,531 969
-------- ---------
Loss from operations (18,832) (17,455)
Interest expense, net 1,134 1,821
-------- ---------
Loss before income taxes (19,966) (19,276)
Income tax benefit (7,885) (7,398)
-------- ---------
Loss before extraordinary item (12,081) (11,878)
Extraordinary loss on early extinguishment of debt,
net of tax of $548 (839) -
-------- ---------
Net loss $(12,920) $ (11,878)
======== =========
Net loss per common share - basic and diluted:
Loss before extraordinary item $ (1.11) $ (1.16)
Extraordinary loss on early extinguishment
of debt, net of tax (0.08) -
-------- --------
Net loss per common share - basic and diluted $ (1.19) $ (1.16)
======== ========
Weighted average common shares
outstanding - basic and diluted 10,877 10,240
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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Wilsons The Leather Experts Inc. and Subsidiaries
Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------
July 31, August 1,
1999 1998
-------- ---------
<S> <C> <C>
Net sales $133,340 $ 113,735
Costs and expenses:
Cost of goods sold, buying and occupancy costs 104,512 92,745
Selling, general and administrative expenses 48,483 42,852
Depreciation and amortization 2,989 1.722
-------- ---------
Loss from operations (22,644) (23,584)
Interest expense, net 2,203 2,972
-------- ---------
Loss before income taxes (24,847) (26,556)
Income tax benefit (9,769) (10,141)
-------- ---------
Loss before extraordinary item (15,078) (16,415)
Extraordinary loss on early extinguishment of debt,
net of tax of $548 (839) -
-------- ---------
Net loss $(15,917) $ (16,415)
======== =========
Net loss per common share - basic and diluted:
Loss before extraordinary item $ (1.39) $ (1.66)
Extraordinary loss on early extinguishment
of debt, net of tax (0.08) -
-------- ---------
Net loss per common share - basic and diluted $ (1.47) $ (1.66)
======== =========
Weighted average common shares
outstanding - basic and diluted 10,856 9,886
======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
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Wilsons The Leather Experts Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
-----------------------
July 31, August 1,
1999 1998
-------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(15,917) $ (16,415)
Adjustments to reconcile net loss to net cash used in
operating activities-
Extraordinary loss on early extinguishment of debt 839 -
Depreciation and amortization 2,989 1,722
Amortization of deferred financing costs 478 519
Loss on disposal of assets 417 168
Deferred income taxes 611 1,238
Changes in operating assets and liabilities:
Accounts receivable, net (97) (1,972)
Inventories (18,161) (20,484)
Prepaid expenses (633) (713)
Accounts payable and accrued expenses (13,175) (8,852)
Income taxes payable and other liabilities (21,279) (20,722)
-------- ---------
Net cash used in operating activities (63,928) (65,511)
-------- ---------
INVESTING ACTIVITIES:
Additions to property and equipment (6,662) (7,215)
Additions to other noncurrent assets (654) (5,128)
-------- ---------
Net cash used in investing activities (7,316) (12,343)
-------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 705 17,166
Repurchase of CVS warrant - (9,990)
Repayment of long-term debt (21,110) -
Other (575) (10)
-------- ---------
Net cash provided by (used in) financing
activities (20,980) 7,166
-------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (92,224) (70,688)
CASH AND CASH EQUIVALENTS, beginning of period 116,160 112,975
-------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 23,936 $ 42,287
======== =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for-
Interest $ 4,272 $ 4,596
======== =========
Income taxes $ 11,049 $ 9,999
======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
6
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WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. NATURE OF ORGANIZATION
Wilsons The Leather Experts Inc. (Wilsons or the Company), incorporated in
Minnesota in 1996, is the leading specialty retailer of leather outerwear,
apparel and accessories in the United States. As of July 31, 1999, the Company
operated 514 retail stores located in 44 states, Canada and England, including
446 mall stores, 28 airport locations and 40 factory outlet stores. The
Company's mall stores offer a full range of its leather merchandise while the
less seasonal airport and factory outlet stores offer primarily accessories. The
Company also supplements its permanent mall stores with holiday stores,
numbering 215 in 1998, to better capitalize on its peak selling season from
October through December.
2. BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include those of Wilsons and all of
its subsidiaries. All material intercompany balances and transactions between
the entities have been eliminated in consolidation.
The accompanying unaudited financial statements have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosure, normally included in
financial statements prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to such rules and
regulations. Although management believes that the accompanying disclosures are
adequate to make the information presented not misleading, it is recommended
that these interim financial statements be read in conjunction with the
Company's most recent audited financial statements and related notes included in
its 1998 Annual Report on Form 10-K. In the opinion of management, all
adjustments (which include normal recurring adjustments) necessary for a fair
presentation of the financial position, results of operations and cash flows for
the interim periods presented have been made. The Company's business is highly
seasonal, and accordingly, interim operating results are not necessarily
indicative of the results that may be expected for the fiscal year ending
January 29, 2000.
3. 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. Quarterly inventory determinations under LIFO are partially based
on assumptions as to inventory levels at the end of the fiscal year, sales and
the projected rate of inflation for the year. If the first in, first out (FIFO)
method of accounting had been used by the Company, inventories at August 1,
1998, would have been $0.6 million higher than reported. There was no LIFO
provision included in inventory at July 31, 1999.
4. SENIOR CREDIT FACILITY
On May 24, 1999, the Company entered into a new Senior Credit Facility with
General Electric Capital Corporation and a syndicate of banks. The new Senior
Credit Facility provides for borrowings of up to $125.0 million in aggregate
principal amount, which includes a letter of credit subfacility of up to $85.0
million. The maximum amount available under the new Senior Credit Facility is
limited to 60% of net inventories (65% during the months of September and
October plus a $7.5 million seasonal over-advance). The Company's borrowing
availability is also reduced by outstanding letters of credit.
7
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Interest is payable on borrowings at one or more variable rates determined
by LIBOR plus 1.5%, commercial paper rate plus 1.5% or "prime" plus 0.0%. The
spreads are subject to change based on the Company's financial results. The new
Senior Credit Facility has covenants similar to the predecessor to the new
Senior Credit Facility. The new Senior Credit Facility expires in May 2002.
5. EXTRAORDINARY LOSS
The Company has repurchased $21.1 million of its 11-1/4% Senior Notes,
which are due 2004, during the current fiscal year. The Company has incurred an
extraordinary loss, net of tax, of approximately $0.8 million for the early
extinguishment of debt.
6. RECLASSIFICATIONS
Certain reclassifications have been made to the consolidated financial
statements of the prior year to conform to the 1999 presentation.
7. NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS No. 133). The Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting. In June 1999, the effective date
of SFAS No. 133 was delayed by the FASB to fiscal years beginning after June 15,
2000. The Company will adopt SFAS No. 133 on January 30, 2000. The Company has
not yet quantified the impacts of adopting SFAS No. 133 on its financial
statements. However, the statement could increase volatility in earnings and
other comprehensive income.
The Company entered into a $40.0 million interest rate swap transaction on
July 7, 1999 with First Union National Bank (First Union) whereby First Union
pays the Company interest at a fixed rate of 11.25% and the Company pays First
Union interest at a commercial paper rate plus 5.37% (10.45% at July 31, 1999).
The agreement terminates on August 15, 2001.
ITEM 2. 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 The Leather Experts Inc. and its wholly owned subsidiaries
(Wilsons or the Company) should be read in conjunction with the Company's most
recent audited financial statements and related notes included in its 1998
Annual Report on Form 10-K.
OVERVIEW
Wilsons is the leading specialty retailer of leather outerwear, apparel and
accessories in the United States. As of July 31, 1999, the Company operated 514
retail stores in 44 states, Canada and England, including 446 mall stores, 28
airport locations and 40 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 M. Julian(R),
Maxima(R), Pelle Studio(R), and Wilsons The Leather Experts(TM), with each label
positioned to appeal to identified customer segments lifestyles. 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.
8
<PAGE>
The Company's business is highly seasonal; therefore, the operating results
for the interim periods described below are not necessarily indicative of the
results that may be expected for a full fiscal year. A majority of the Company's
net sales and operating profit is generated in the peak selling season from
October through December, which includes the holiday selling season. Wilsons
recorded 56.6% of its sales for the fiscal year ended January 30, 1999, during
the peak selling season. 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 season. Net sales are generally lowest during the period from April
through July, and the Company historically has not become profitable, if at all,
until the fourth quarter of a given fiscal year.
The Company does not believe that inflation has had a material adverse
effect on the results of operations for the periods presented, however, there
can be no assurance that the Company's business will not be affected by
inflation in the future.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JULY 31, 1999 COMPARED TO THE
THREE MONTHS ENDED AUGUST 1, 1998
Net sales increased 15.5% to $52.8 million in 1999 from $45.7 million in
1998. Contributing to the $7.1 million sales increase were a $4.9 million
increase associated with a 9.7% comparable store sales increase due to the
continued strong sales of young men's and women's merchandise, and a $2.2
million increase in non-comparable store sales due to the opening of additional
stores during the quarter, plus the effect of 1998 stores that have been open
less than one year.
Wilsons opened two stores and closed one store in the second quarter ended
July 31, 1999 compared to 12 store openings and the acquisition of the 40 Wallet
Works stores during the second quarter last year. The two stores opened in the
second quarter of this year were mall stores. As of July 31, 1999, Wilsons
operated 514 stores compared to 503 stores at August 1, 1998.
Cost of goods sold, buying and occupancy costs for the second quarter were
87.5% of net sales, or $46.2 million, compared to 90.3% of net sales, or $41.3
million, for the same period a year ago. The decrease in the costs as a
percentage of net sales is related to an improvement in gross margin net of
occupancy and a decrease in occupancy costs as a percentage of net sales. Gross
margin net of occupancy costs improved 1.8% as a percentage of net sales for the
second quarter compared to last year due primarily to an improvement in initial
mark-on resulting from lower leather prices and fewer markdowns required due to
strong spring sales. The Company leveraged occupancy costs and reduced them to
30.1% of net sales in the three months ended July 31, 1999 compared to 31.1% of
net sales for the same period in 1998. The Company's inventories are valued
under the retail inventory method on the last-in, first-out (LIFO) basis. No
LIFO provision was required for the quarter ended July 31, 1999; the LIFO
provision included in cost of sales for the quarter ended August 1, 1998 was
$0.2 million.
Selling, general and administrative expenses for the second quarter were
45.3% of net sales, or $23.9 million, compared to 45.7% of net sales, or $20.9
million, for the same period last year. The improvement as a percentage of net
sales is largely due to sales productivity improvements in the stores. Partially
offsetting these improvements have been investments in e-commerce, Y2K
remediation and refinements to inventory systems, totaling almost $1.0 million.
Depreciation and amortization expense increased to $1.5 million in the
second quarter from $1.0 million in last year. The increase is due to capital
expenditures for new store construction and the renovation of existing stores.
Net interest expense for the second quarter decreased to $1.1 million from
$1.8 million during the same period last year. The decrease is the result of
less long-term debt outstanding during 1999.
9
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During the second quarter, the Company repurchased $16.6 million of its
11-1/4% Senior Notes, which are due 2004. The Company incurred an extraordinary
loss, net of tax, of approximately $0.8 million for the early extinguishment of
debt.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JULY 31, 1999 COMPARED TO THE SIX
MONTHS ENDED AUGUST 1, 1998
Net sales increased 17.2% to $133.3 million in 1999 from $113.7 million in
1998. Contributing to the $19.6 million sales increase were: (i) a $10.3 million
increase associated with a 9.6% comparable store sales increase, due to the
strong sales across all merchandise categories, (ii) a $5.7 million increase in
non-comparable store sales due to opening additional stores during 1999 plus the
effect of 1998 stores that have been open less than one year and (iii) a $3.6
million increase resulting from the acquisition of 40 Wallet Works factory
outlet stores in May 1998.
Wilsons opened five stores and closed nine stores in the six months ended
July 31, 1999 compared to 16 store openings, 12 store closings and the
acquisition of the 40 Wallet Works stores during the same period last year. The
five stores opened in the six months ended July 31, 1999 were mall stores. As of
July 31, 1999, Wilsons operated 514 stores compared to 503 stores at August 1,
1998.
Cost of goods sold, buying and occupancy costs for the six months ended
July 31, 1999 were 78.4% of net sales, or $104.5 million, compared to 81.5% of
net sales,or $92.7 million, for the same period a year ago. The decrease in the
costs as a percentage of net sales is related to an improvement in gross margin
net of occupancy and a decrease in occupancy costs. Gross margin net of
occupancy costs improved 1.5% as a percentage of net sales for the six months
ended July 31, 1999 as compared to last year due primarily to an improvement in
initial mark-on resulting from lower leather prices and fewer markdowns due to
strong spring sales. Occupancy costs decreased 1.6% as a percentage of net sales
compared to last year. The Company was able to leverage occupancy costs and
reduce them to 23.6% of net sales compared to 25.2% of net sales in 1998. No
LIFO provision was required for the six months ended July 31, 1999; the LIFO
provision included in cost of sales for the six months ended August 1, 1998 was
$0.6 million.
Selling, general and administrative expenses for the six months ended July
31, 1999 were 36.4% of net sales, or $48.5 million, compared to 37.7% of net
sales, or $42.9 million, for the same period last year. The improvement as a
percentage of net sales is largely due to sales productivity improvements in the
stores.
Depreciation and amortization expense increased to $3.0 million in the six
months ended July 31, 1999 from $1.7 million in the same period last year. The
increase resulted from the acquisition of the 40 Wallet Works factory outlet
stores, capital expenditures for new store construction and the renovation of
existing stores.
Net interest expense for the six months ended July 31, 1999 decreased to
$2.2 million from $3.0 million during the same period last year. The decrease is
the result of higher cash balances and a lower amount of long-term debt
outstanding during 1999.
The Company repurchased $21.1 million of its 11-1/4% Senior Notes, which
are due 2004, during the first six months of 1999. The Company incurred an
extraordinary loss, net of tax, of approximately $0.8 million for the early
extinguishment of debt.
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
10
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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.
On May 24, 1999, the Company entered into a new three-year senior credit
facility (the Senior Credit Facility) with General Electric Capital Corporation
and a syndicate of banks. The Senior Credit Facility provides for borrowings of
up to $125.0 million in aggregate principal amount, which includes a letter of
credit subfacility of up to $85.0 million. The maximum amount available under
the Senior Credit Facility is limited to 60% of net inventories (65%
during the months of September and October plus a $7.5 million seasonal over-
advance). The Company's borrowing availability is also reduced by outstanding
letters of credit.
Interest is payable on borrowings at one or more variable rates determined
by LIBOR plus 1.5%, commercial paper rate plus 1.5% or "prime" plus 0.0%. The
spreads are subject to change based on the Company's financial results. The
Company pays monthly fees on the unused portion of the Senior Credit Facility
and on the average daily amount of letters of credit outstanding during each
month. The Senior Credit Facility expires in May 2002.
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. As of July 31,
1999, the Company had no borrowings under the Senior Credit Facility and $36.2
million of outstanding letters of credit. For 1998, the peak borrowings and
letters of credit outstanding under the predecessor to the Senior Credit
Facility were $38.4 million and $48.7 million, respectively. Borrowings
typically peak from October through December while letters of credit peak from
August through September. 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.
On January 30, 1999, the Company had $70.0 million of 11-1/4% Senior Notes
outstanding. As of July 31, 1999, the Company had reduced the outstanding
balance to $48.9 million by purchasing, at various times, approximately $21.1
million of its Senior Notes.
CASH FLOW ANALYSIS
Operating activities for the six months ended July 31, 1999, resulted in
net cash used of $63.9 million compared to net cash used of $65.5 in the
comparable period of 1998. The cash used was primarily the result of the net
loss of $15.9 million and a seasonal decrease of $34.5 million in accounts
payable, accrued expenses, income taxes payable and other liabilities and the
seasonal increase of $18.9 million in accounts receivable, inventories and
prepaids.
Changes in certain balance sheet accounts between January 30, 1999, and
July 31, 1999, reflect normal seasonal variations within the retail industry.
The level of cash and cash equivalents, inventories, accounts receivable,
accounts payable and certain accrued liabilities fluctuate due to the seasonal
nature of the working capital needs of the Company.
Investing activities of $7.3 million for the six months ended July 31,
1999, were mainly comprised of capital expenditures of $6.7 million. The capital
expenditures were primarily for the renovation of existing stores and
constructing new stores.
11
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Net cash used in financing activities for the six months ended July 31,
1999, was $21.0 million. This was comprised primarily of $21.1 million to
repurchase Senior Notes offset by proceeds from the exercise of stock options.
Financing activities for the first six months of 1998 provided $7.2 million
from the issuance of $17.2 million in common stock relating to the redemption of
shareholder warrants, partially offset by the use of $10.0 million for the
repurchase of the warrant issued to CVS New York, Inc. (formerly Melville
Corporation).
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 non-compliant, legacy mainframe software
systems. These vendor software packages, with current release level upgrades,
have been certified by the vendors as year 2000 compliant and will be installed
and further tested for compliance throughout the third quarter of 1999.
In order to support these new software packages, the Company's systems
infrastructure has been upgraded to be fully year 2000 compliant. The Company
completed its migration to year 2000 compliant servers, operating systems and
related data base software during 1998 and the first quarter of 1999.
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 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 and service providers have been sent surveys and 83% have been returned.
The Company is currently sending follow-up surveys where it has not received a
response or where the response included a future date for year 2000 completion.
This 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 all of its key "critical" and "important"
suppliers and other business partners or vendors seeking assurances they will be
year 2000 compliant. Although no method exists for achieving certainty that any
significant business 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 business partners throughout 1999 to confirm their level of
preparedness for the year 2000 and to make adjustments where necessary to avoid
12
<PAGE>
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. Projects are underway to repair or replace components determined to
pose significant risks. Desktop replacement was completed early in the
third quarter of fiscal 1999. Key software projects completed include
the remediation of distribution center systems, the upgrade and/or
replacement of store point-of-sale registers and/or software, the
upgrades to certain merchandising and financial systems, and the
development of a test environment.
2. The Company's store back office communication system will not be year
2000 compliant. Alternative procedures are in place to bridge from
year-end 1999 until the new system is installed during the first
quarter of 2000. The Company believes that this will not have a
material effect on store operations.
3. 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 to be completed by the
end of the third quarter of fiscal 1999.
4. 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
$1.0 million. The largest single year 2000 expenditure to date has been
consulting fees incurred in the assessment and remediation of year 2000 issues.
To date, the Company has spent $0.7 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.
This planning focuses on the prioritization of business processes and the
development of action plans to deal with potential events that could be caused
by the year 2000 that may disrupt the normal work routine. 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 than currently anticipated. In addition, the
Company's business, financial condition and results of operations may be
13
<PAGE>
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.
______________________________
Except for historical information, matters discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These statements involve risks and uncertainties, and actual results
may be materially different. Because actual results may differ, readers are
cautioned not to place undue reliance on forward-looking statements.
Factors that could cause actual results to differ include: changing fashion
trends and consumer preferences or misjudgment in fashion trends; adverse
economic conditions and consumer shopping patterns; declines in comparable store
sales; seasonality of business; risks of foreign sourcing and international
business; effect of year 2000 on information systems; risks associated with
future growth; loss of key personnel; high levels of Company debt and
restrictions imposed by lenders and indentures; competition in the retail
industry; price and availability of raw material; availability of personnel;
possible volatility of stock price; dividend policy; effect of anti-takeover
provisions; and control by certain shareholders. Certain of these risk factors
are more fully discussed in the Company's Annual Report on Form 10-K for the
fiscal year ended January 30, 1999.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's 1999 Annual Meeting of Shareholders held on May 18, 1999,
the shareholders approved the following:
(a) The election of directors. Each nominated director was elected as follows:
<TABLE>
<CAPTION>
Director-Nominee Votes For Votes Withheld
- ---------------- --------- --------------
<S> <C> <C>
Lyle Berman 9,956,520.5 3,350
Thomas J. Brosig 9,956,520.5 3,350
Gary L. Crittenden 9,956,520.5 3,350
Morris Goldfarb 9,956,520.5 3,350
Marvin W. Goldstein 9,956.520.5 3,350
David L. Rogers 9,956,520.5 3,350
Joel N. Waller 9,956,520.5 3,350
</TABLE>
(b) Approval and adoption of the Wilsons The Leather Experts Inc. Employee
Stock Purchase Plan.
The proposal received 9,951,246.5 votes for and 750 votes against. There
were 7,874 abstentions and 0 broker non-votes.
(c) Ratification of the appointment of Arthur Andersen LLP as the independent
public accountants of the Company for the fiscal year ending January 29,
2000.
The proposal received 9,958,120.5 votes for and 650 votes against. There
were 1,100 abstentions and 0 broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
Exhibit Description
------- -----------
11.1 Computation of per share loss.
27.1 Financial Data Schedule.
B. Exhibits and Reports on Form 8-K: The Company did not file any reports on
Form 8-K during the second quarter ended July 31, 1999.
15
<PAGE>
SIGNATURE
Pursuant to the requirements 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.
WILSONS THE LEATHER EXPERTS INC.
By: /s/ Douglas J. Treff
--------------------
Douglas J. Treff
Vice President, Finance,
Chief Financial Officer, and
Assistant Secretary
Date: September 13, 1999
-------------
16
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description Method of Filing
- ----------- ----------- ----------------
<S> <C> <C>
11.1 Computation of per share loss Electronic Transmission
27.1 Financial Data Schedule Electronic Transmission
</TABLE>
17
<PAGE>
Exhibit 11.1
Wilsons The Leather Experts Inc. and Subsidiaries
Net Loss Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
July 31, 1999 August 1, 1998
------------- --------------
<S> <C> <C>
Net loss $ (12,920) $ (11,878)
============= ==============
Weighted average common shares outstanding - basic 10,877 10,240
Effect of options granted (1) N/A N/A
Effect of warrant (1) N/A N/A
------------- --------------
Weighted average common shares outstanding - basic
and diluted 10,877 10,240
============= ==============
Basic and diluted net loss per common share (1) $ (1.19) $ (1.16)
============= ==============
</TABLE>
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
July 31, 1999 August 1, 1998
------------- --------------
<S> <C> <C>
Net loss $ (15,917) $ (16,415)
============= ==============
Weighted average common shares outstanding - basic 10,856 9,886
Effect of options granted (1) N/A N/A
Effect of warrant (1) N/A N/A
------------- --------------
Weighted average common shares outstanding - basic and
diluted 10,856 9,886
============= ==============
Basic and diluted net loss per common share (1) $ (1.47) $ (1.66)
============= ==============
</TABLE>
Note 1: Under Statement of Financial Accounting Standard No. 128 "Earnings
per Share," common stock equivalents are excluded when computing
diluted net income or loss per common share if the effect is anti-
dilutive.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM WILSONS THE
LEATHER EXPERTS INC. AND SUBSIDIARIES AS OF JULY 31, 1999 AND FOR THE THREE
MONTH AND SIX MONTH PERIODS ENDED JULY 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FIANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JAN-29-2000 JAN-29-2000
<PERIOD-START> MAY-02-1999 JAN-31-1999
<PERIOD-END> JUL-31-1999 JUL-31-1999
<CASH> 23,936 23,936
<SECURITIES> 0 0
<RECEIVABLES> 11,830 11,830
<ALLOWANCES> 5,408 5,408
<INVENTORY> 103,132 103,132
<CURRENT-ASSETS> 135,718 135,718
<PP&E> 49,734 49,734
<DEPRECIATION> 10,191 10,191
<TOTAL-ASSETS> 178,144 178,144
<CURRENT-LIABILITIES> 43,272 43,272
<BONDS> 48,890 48,890
0 0
0 0
<COMMON> 109 109
<OTHER-SE> 82,953 82,953
<TOTAL-LIABILITY-AND-EQUITY> 178,144 178,144
<SALES> 52,822 133,340
<TOTAL-REVENUES> 52,822 133,340
<CGS> 46,210 104,512
<TOTAL-COSTS> 70,123 152,995
<OTHER-EXPENSES> 1,531 2,989
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,134 2,203
<INCOME-PRETAX> (19,966) (24,847)
<INCOME-TAX> (7,885) (9,769)
<INCOME-CONTINUING> (12,081) (15,078)
<DISCONTINUED> 0 0
<EXTRAORDINARY> (839) (839)
<CHANGES> 0 0
<NET-INCOME> (12,920) (15,917)
<EPS-BASIC> (1.19) (1,47)
<EPS-DILUTED> (1.19) (1.47)
</TABLE>
