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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 29, 2000
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: (763) 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. [X]
The aggregate market value of the voting common equity held by non-
affiliates of the registrant was $89,220,558, based on the closing sale price
for the common stock on March 24, 2000 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 16,691,601 at March 24, 2000. All references to the registrant's
common stock in this Annual Report on Form 10-K reflect the three-for-two
stock split effected March 15, 2000.
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, 2000 (the
Proxy Statement), which will be filed within 120 days after the registrant's
fiscal year ended January 29, 2000, 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 29, 2000
TABLE OF CONTENTS
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DESCRIPTION PAGE
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PART I
Item 1. Business................................................... 1
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....................... 15
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...................................................... 29
Item 8. Financial Statements....................................... 30
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 30
PART III
Item 10. Directors and Executive Officers of the Registrant......... 30
Item 11. Executive Compensation..................................... 30
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 30
Item 13. Certain Relationships and Related Transactions............. 30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 31
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PART I
When we refer to the "Company", or "Wilsons Leather", 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 29, 2000, and references to 1999, 1998, and 1997
refer to the twelve-months ended January 29, 2000, January 30, 1999 and
January 31, 1998, 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" contain 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 Leather(TM) is the largest specialty retailer of leather outerwear,
apparel and accessories in the United States. As of January 29, 2000, the
Company operated 529 retail stores in 44 states, Canada and England, including
444 mall stores, 55 outlet stores and 30 airport locations. The Company also
supplements its permanent mall stores with temporary holiday stores during the
period from October through December, and operated 249 of these stores in
1999. Over 90% of the Company's merchandise is designed and sold under
Wilsons Leather's proprietary labels, including M. Julian(R), Maxima(R), Pelle
Studio(R) and Wilsons with each label positioned to appeal to identified
customer lifestyle segments. Wilsons Leather's 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 $543.6 million in 1999, an increase of 18.3% over 1998.
Wilsons Leather designs, contracts for manufacture, imports, distributes
and retails a broad assortment of leather apparel, accessories and travel-
related goods. This vertical integration enables the Company to consistently
provide its customers high-quality, fashionable merchandise at attractive
prices. This business structure also allows the Company to react quickly to
changing fashion and customer preferences, rapidly replenish fast-selling
merchandise and increase production capacity as the Company grows. Management
believes its vertically integrated operations, combined with its strategies to
strengthen brand recognition, tailor its merchandise assortments to specific
customer lifestyles and focus on young customers provide it with a competitive
advantage.
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BUSINESS STRATEGY
Wilsons Leather intends to grow revenues and profits to reinforce its
position as the largest specialty retailer of leather outerwear, apparel and
accessories in the United States through the following strategic initiatives:
Strengthen Brand Recognition. The Company is making significant efforts to
expand the overall reach of the Wilsons Leather brand with the goal of
becoming the "top of mind" brand for leather apparel and accessories. This
marketing initiative was launched in 1998 to transform the Company from not
only the country's largest leather retailer, but also the country's leading
leather brand. The Company promotes the Wilsons Leather brand through a
variety of in-store visual presentations, radio and magazine advertising, and
its sales associates who have extensive product knowledge.
Tailor Assortments to Specific Customer Lifestyles. Wilsons Leather offers
an extensive assortment of leather products that appeal to a broad range of
customers. The Company's different labels offer customers various fashion
styles that suit their individual lifestyles and tastes. Wilsons Leather
serves a wide variety of customers and lifestyles, both young and old, urban
and suburban. The Company's merchandise serves a range of fashion tastes, from
classic to cutting-edge. Wilsons Leather analyzes customer transactions to
tailor its merchandise offerings to best serve the demographic profile of
likely shoppers at each store. This methodology enables the Company to
maximize each store's sales potential while giving customers the apparel and
accessories they want. The Company markets to key customer segments through
its four main proprietary labels. Young, trend-driven customers prefer the
Maxima label for women and the M. Julian label for men. Products carrying
these labels attract young customers who seek the most current fashions.
Pelle Studio merchandise is designed for the sophisticated, fashion-aware
customer seeking the finest in contemporary leather and styling. Apparel in
this collection has a rich look that reflects the finest quality materials and
craftsmanship available. The Wilsons label emphasizes classic styling and a
timeless quality that transcends the years. This merchandise is designed for
the customer who appreciates a high level of functionality, comfort and
value. Each Wilsons Leather store features a core merchandise assortment as
well as merchandise tailored to meet local preferences based on market-
specific characteristics.
Focus on Young Customer. During 1999, the Company's marketing and
merchandising efforts focused on a younger customer, which represents a key
growth driver of Wilsons Leather. The demographic group known as Generation Y
is comprised of approximately 30 million people between the ages of 15 and 22
and is expected to continue to grow 5% each year for the next decade, peaking
in 2010 at 79 million. Generation Y will be a larger group than the Baby
Boomers, and is expected to be the most affluent generation in history. The
tremendous purchasing power of this group, coupled with its high regard for
fashion apparel, will be the focus of Wilsons Leather's marketing and
merchandise design, as the Company believes that this customer will set the
fashion direction for the broader population in future years. In addition, by
successfully introducing this younger customer to Wilsons Leather's products
now, the Company expects to be able to maintain a relationship with them for
many years to come.
Capitalize on Vertical Integration. Wilsons Leather is able to provide its
customers with fashionable merchandise because it closely monitors fashion
trends around the world. The Company obtains leather from many countries of
the world, and from time to time purchases leather in order to assure adequate
supply. The Company works with its global business partners using the latest
technology to develop new leather finishes. Wilsons Leather's designers then
combine these new leather finishes with the latest fashion trends to create
unique and desirable styles. 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;
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. responding 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.
GROWTH STRATEGY
Wilsons Leather has implemented several initiatives consistent with its
business strategy of aggressively growing the Company's annual sales to $1
billion by 2004. These initiatives include expanding various retail concepts
as follows:
. Mall Stores. Mall stores represent the core of Wilsons Leather's
business and will lead the Company's younger, more fashion-forward
customer branding strategy. In its mall stores, the Company is creating
a more appealing and exciting shopping environment by the use of larger,
eye-catching graphics, new fixtures that better showcase merchandise, as
well as updated store lighting and music. Wilsons Leather plans to add
approximately 25 new mall stores, net of closings, per year for the next
several years. As of January 29, 2000, the Company operated 444 mall
stores and believes there are 650 to 700 potential mall locations in the
United States.
. Outlet Stores. Outlet stores will be a key driver of the Company's
future growth. There are more than 500 large outlet centers in the
United States, and this business channel offers significant
opportunities for expansion. Wilsons Leather outlet stores offer a
combination of key in-season and clearance-priced merchandise from our
mall stores and special outlet-only merchandise at attractive prices. As
of January 29, 2000, the Company operated 55 outlet stores and plans to
grow this concept by 30% per year for the next several years.
. Airport Stores. Wilsons Leather currently operates 30 airport locations.
Over 100 million travelers pass by the Company's airport stores each
year. As such, these stores play an instrumental role in growing brand
awareness and extend the visibility of the Company's other retail
concepts. Wilsons Leather opened four new airport stores in 1999 and
plans to expand this concept by a similar number of locations per year
as new viable airport retail opportunities permit.
. e-Commerce. Wilsons Leather launched its online retail store,
www.wilsonsleather.com this past December. The e-commerce site makes the
Company's merchandise more accessible to customers, increases brand
awareness and facilitates cross-marketing efforts with its brick-and-
mortar stores. The Company plans to expand its merchandise assortment in
2000, with the goal of capturing the leading market share of leather
apparel and accessories on the web.
Pursue Strategic Acquisitions. Wilsons Leather 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 that have significant growth potential and complement
Wilsons Leather's core competencies in leather apparel, accessories and
travel-related merchandise. The Company also intends to find companies that
complement its existing seasonality.
International. While Wilsons Leather's growth strategy currently centers on
expanding its existing retail channels, the Company also believes there are
additional opportunities for Wilsons Leather to expand internationally in the
future. International markets are attractive for several reasons. First, the
propensity of consumers in other countries to purchase fashionable leather
apparel is, in many cases, much higher than that of consumers in the United
States. In addition, Wilsons Leather believes competition is highly
fragmented and purchasing power is expanding in a number of international
markets.
STORE FORMATS AND LOCATIONS
As of January 29, 2000, Wilsons Leather operated 529 retail stores located
in 44 states, Canada and England, including 444 mall stores, 55 outlet stores
and 30 airport locations. The Company also operates holiday stores, numbering
249 in 1999, to better capitalize on its peak selling season from October
through December. In
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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
also analyzes projected sales performance and occupancy and other costs 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 Leather has also established a cross-functional
review committee that approves proposed store projects, including new sites
and lease renewals.
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STORE LOCATIONS BY STATE
[United States map indicating store locations]
* Corporate Headquarters and Distribution Center
<TABLE>
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MALL OUTLET AIRPORT TOTAL
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<S> <C> <C> <C> <C>
Alabama......... 2 1 -- 3
Arizona......... 4 3 -- 7
Arkansas........ 1 -- -- 1
California...... 59 8 1 68
Colorado........ 8 1 -- 9
Connecticut..... 8 -- -- 8
Delaware........ 3 -- -- 3
Florida......... 6 4 2 12
Georgia......... 13 1 3 17
Idaho........... 1 -- -- 1
Illinois........ 32 1 4 37
Indiana......... 11 -- 1 12
Iowa............ 5 1 -- 6
Kansas.......... 3 -- -- 3
Kentucky........ 3 1 -- 4
Louisiana....... 5 1 -- 6
Maine........... 3 -- -- 3
Maryland........ 14 1 2 17
Massachusetts... 16 1 1 18
Michigan........ 20 2 -- 22
Minnesota....... 12 -- 2 14
Missouri........ 8 2 -- 10
Nebraska........ 3 -- -- 3
Nevada.......... 4 2 -- 6
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MALL OUTLET AIRPORT TOTAL
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New Hampshire............. 5 -- -- 5
New Jersey................ 21 1 -- 22
New Mexico................ 2 -- -- 2
New York.................. 33 1 -- 34
North Carolina............ 9 2 2 13
North Dakota.............. 3 -- -- 3
Ohio...................... 21 -- 1 22
Oklahoma.................. 2 -- -- 2
Oregon.................... 3 3 -- 6
Pennsylvania.............. 21 5 3 29
Rhode Island.............. 2 1 -- 3
South Carolina............ 1 1 -- 2
South Dakota.............. 2 -- -- 2
Tennessee................. 9 1 -- 10
Texas..................... 19 4 2 25
Utah...................... 4 1 -- 5
Virginia.................. 10 1 2 13
Washington................ 16 1 -- 17
West Virginia............. 1 -- -- 1
Wisconsin................. 16 3 -- 19
Canada.................... -- -- 2 2
England................... -- -- 2 2
--- --- --- ---
Total................... 444 55 30 529
=== === === ===
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Mall Stores
The Company's 444 mall stores average approximately 2,100 square feet and
are primarily located in regional shopping malls. While Wilsons Leather is
placing new emphasis on younger, fashion-forward customers, the Company
continues to serve a wide variety of customers with high-quality, fashion-
right merchandise. In 1999, mall stores had sales of $426.3 million,
representing 78.4% of the Company's total sales, compared to $375.7 million,
or 81.8%, in 1998. Comparable store sales increased 10.9% on top of a 6.2%
increase in 1998. Stores open the entire year averaged sales of $967,000 and
sales per square foot of $470 as compared to sales per store of $865,000 and
sales per square foot of $417 in 1998.
Outlet Stores
The Company's 55 outlet stores are located in 28 states under the names
Wallet Works and Wilsons Leather Outlet. These stores average approximately
1,300 square feet for Wallet Works and approximately 3,900 square feet for
Wilsons Leather Outlet stores. Both store formats are primarily located in
outlet centers. The outlet stores offer a combination of key in-season and
clearance-priced merchandise from our mall stores and special outlet-only
merchandise at attractive prices. In 1999, outlet stores had sales of $51.1
million, representing 9.4% of the Company's total sales, compared to $31.6
million, or 6.9%, in 1998. Comparable store sales increased 20.6% on top of a
18.4% increase in 1998. Stores open the entire year averaged sales of
$882,000 and sales per square foot of $433 as compared to sales per store of
$1,753,000 and sales per square foot of $432 in 1998. The Company purchased 40
Wallet Works outlet stores in May 1998. Therefore, the 1998 sales per store
and sales per square foot for stores open the entire year do not included
Wallet Works stores. The Wilsons Leather Outlet stores open the entire year
averaged sales per store of $1,987,000 and sales per square foot of $515 in
1999.
Airport Stores
The Company's 30 airport locations average approximately 700 square feet.
The airport stores are located in 13 states, Canada and England. 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 than mall stores, due to
steadier flows of passenger traffic in airports throughout the year and an
emphasis on accessories. In 1999, airport stores had sales of $22.2 million,
representing 4.1% of the Company's total sales, compared to $15.8 million, or
3.4%, in 1998. Comparable store sales increased 8.6% compared to a 2.2%
decrease in 1998. Stores open the entire year averaged sales of $761,000 and
sales per square foot of $1,117 as compared to average sales per store of
$737,000 and sales per square foot of $1,020 in 1998.
Holiday Stores
In 1999, Wilsons Leather operated 249 holiday stores in 40 states, and
plans to operate approximately 240 holiday stores in 2000. A holiday store is
a temporary, full-size mall store located in a vacant mall space and typically
operates from October through December, the Company's peak selling season.
Wilsons Leather usually locates these stores in malls where there is not an
existing Wilsons Leather store. These stores offer a merchandise selection and
presentation similar to the mall stores, allowing the Company to leverage its
brand recognition and national reputation. These stores also offer the
opportunity 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 associates being considered for future store
managers. In 1999, holiday stores had sales of $44.0 million, representing
8.1% of the Company's total sales, compared to $36.3 million, or 7.9%, in
1998. Stores averaged sales of $161,000 as compared to $137,000 in 1998.
New Store Economics
The Company's average cost for leasehold improvements and fixtures for new
mall stores opened in 1999 was approximately $140,000 per store, net of
landlord reimbursements. Wilsons Leather's stores have an average
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discounted payback period of approximately three years. Working capital
requirements consist primarily of inventory, which averages $160,000 in mall
locations.
MERCHANDISING
Wilsons Leather's merchandising strategy is based on offering a broad
assortment of quality leather apparel and accessories at affordable prices,
building strong brand recognition and tailoring its product assortment to
identified customer segments. Wilsons Leather offers more than 9,800 styles of
leather apparel and accessories such as coats, blazers, pants, vests, gloves,
belts, handbags, wallets, briefcases, planners, computer cases and CD cases.
Key elements of the Company's merchandising strategy include:
. Customer Lifestyles--Wilsons Leather 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 key customer segments through its proprietary
labels. Within each store, Wilsons Leather displays its merchandise by
lifestyle segments offering a broad variety of styles to its many
customer groups. Each Wilsons Leather store features a core merchandise
assortment as well as additional merchandise tailored to meet local
preferences based on market-specific characteristics.
. Labels--The name and reputation of the Wilsons Leather brand assures
customers they are purchasing high-quality, fashionable merchandise.
Over 90% of the Company's merchandise is designed and sold under Wilsons
Leather's proprietary labels, including, (i) M. Julian and Maxima for
fashion-savvy young men and women, (ii) Pelle Studio for the more
sophisticated, confident and fashion-aware segment and (iii) Wilsons for
the classic, traditional, value-conscious segment. Wilsons Leather
promotes these labels through in-store visual presentations, a targeted
marketing strategy and its sales associates who have extensive product
knowledge. Wilsons Leather also offers limited 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.
. Selection--Wilsons Leather offers its customers a broad and deep
selection of high-quality leather apparel and accessories. Management
believes that the Company's mall stores offer significantly more stock
keeping units (SKUs) than are 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.
Expanding the accessories business is an important priority for Wilsons
Leather. The Company believes there is significant opportunity to increase
sales and market share in the highly fragmented leather accessories market. To
drive accessories growth, Wilsons Leather intends to create new styles
designed to match our customers' lifestyle needs. Accessories sales grew as a
percentage of the Company's sales to 28.6% in 1999 from 23.2% in 1995.
The following table sets forth the Company's percentages of net sales by
major merchandise category from 1995 to 1999.
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MERCHANDISE CATEGORY 1999 1998 1997 1996 1995
-------------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Men's Apparel............................ 35.7% 36.1% 38.9% 40.8% 42.4%
Women's Apparel.......................... 35.7% 35.0% 35.3% 34.8% 34.4%
Accessories.............................. 28.6% 28.9% 25.8% 24.4% 23.2%
------ ------ ------ ------ ------
Total.................................... 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== ======
</TABLE>
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PRODUCT DESIGN AND SOURCING
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.
Product Design
Wilsons Leather's buyers and designers are trained to translate market
trends into leather products that appeal to Wilsons Leather's 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 quickly to changing consumer preferences, the Company
monitors emerging lifestyle and market trends affecting 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 fashion merchandise are incorporated into future designs. As part
of the design process, the Company also considers the anticipated retail
prices and profit margins of the merchandise, the availability of leather and
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 1999, Wilsons Leather contracted for the manufacture of
approximately 2.7 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
effectively 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. Their responsibilities include
inspecting leather at the tanneries, coordinating the production capacity,
matching product samples to Wilsons Leather's 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 1992 and 1999, the Company
reduced its merchandise production cycle from approximately 120 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.
DISTRIBUTION
Merchandise is shipped directly from merchandise vendors or contract
manufacturers to the Company's distribution centers located at its
headquarters in Brooklyn Park, Minnesota and Maple Grove, Minnesota. The
Company also uses third party distribution centers on the West Coast during
its peak selling season. The 289,000 square foot distribution center at the
Company's headquarters is equipped with automated, 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. Additional
merchandise is stored in the distribution center to replenish stores with key
styles and to build inventory for the Company's peak selling season. The
Company seeks to schedule merchandise replenishment to ensure that goods sold
during a weekend are replenished to the store before the next weekend.
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During 1998, the Company signed a five-year lease for a 45,600 square foot
facility that supports the distribution requirements of certain accessory
styles. The facility is located in Maple Grove, Minnesota approximately two
miles from the Company's distribution center in Brooklyn Park, Minnesota.
MARKETING AND ADVERTISING
Wilsons Leather's marketing strategy is to position the Company as the
global fashion leather brand, capitalizing on its position as the largest
specialty retailer of leather outerwear, apparel and accessories. Through
compelling fashion photo imagery in its stores and store fronts, the Wilsons
Leather brand identity and latest fashion trends are communicated effectively
to customers.
Marketing to a customer's lifestyle supports the label collections, created
to connect with three distinct segments: teen, contemporary and classic
traditional. The Wilsons Leather brand serves a wide variety of customers and
lifestyles and is customized specifically to each group. Targeting the
Generation Y segment is a key marketing initiative. This Generation Y group of
younger customers is expected to occupy more than 25% of the population in the
next ten years, and becoming "top of mind" as they mature will be important to
the Company's future success.
Advertising media efforts are focusing on national teen fashion magazines,
promotional radio and expansion of the Company's professional sports marketing
effort. In addition, the Company believes cross-channel brand marketing will
be a key driver in its future success. By leveraging its various selling
channels--malls, outlets, airports and e-commerce--the Company intends to
strengthen the Wilsons Leather name in the marketplace as the fashion leather
leader and world brand.
CUSTOMER SERVICE
Wilsons Leather built its image by offering customers an extensive
selection of affordably priced leather apparel, accessories and leather care
products. The Company emphasizes sales associate training to ensure each
associate has knowledge of Wilsons Leather's 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 and appropriate methods
of care for the various leather finishes. In addition, the Company trains
associates to perform minor repairs in the store for the customer free of
charge.
Wilsons Leather regularly evaluates its customer service performance
through customer comment cards, direct survey of customers who return
merchandise and mall intercept and telephone interview surveys. Wilsons
Leather 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 1996, the Company developed a strategic systems plan to create a
flexible infrastructure that would result in (i) real-time inventory
management, (ii) the ability to manage information at the lowest level of
detail, while preserving macro-level analysis and action, (iii) a scaleable
hardware and software base, (iv) flexibility to connect to third party
systems, (v) discrete customization of product by customer segments, and (vi)
anywhere computing--the ability to access critical business information from
anywhere in the world. As a result of these goals, the Company decided to buy,
not develop, software; it decided to replace its central proprietary mainframe
technology with open systems on a client-server platform; and it decided to
implement a world-wide network.
In 1997, Wilsons Leather completed implementation of two major software
packages providing new merchandising, financial and human resources
information systems. Management believes these systems continue to improve
inventory management, providing the Company with the opportunity to better
control its merchandise flow from overseas factories to its stores. These
systems provide broader and quicker access to information at all relevant
levels of the organization, stronger analytical tools for understanding sales
and
9
<PAGE>
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 expanded its high-speed reliable network connections to its
overseas offices in 1998. The network also supports field management and
allows home office personnel access to pertinent business information. The
merchandising department utilizes this expanded international computer network
to communicate purchase order information from the Company's merchandising
systems to its overseas personnel. This provides 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.
In 1999, Wilsons Leather piloted a new point-of-sale and store back-office
system designed specifically for the specialty retailing environment.
Approximately 500 of the Company's stores were connected to home office
systems through a new virtual private network (Web) that allows voice and data
to travel over the same phone line at much higher speeds than dial-up
networking. Advantages of this technology include the ability to verify credit
cards faster, to view sales activity more than once a day, to view inventory
in other store locations or distribution centers and to offer e-commerce
services from store locations. By the end of the summer 2000, it is expected
that the Company's store managers will routinely use the Web for human
resource activities and payroll. The advantage of this network/application
architecture is that the application is managed centrally, but is accessible
via the Web by all permanent store locations.
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--Year 2000."
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 Leather competes with a broad range of other retailers including
specialty retailers, department stores, mass merchandisers and discounters and
other retailers of leather apparel and accessories. Major competitors include,
among others, The Gap, Coach, J.C. Penney, The Leather Loft, Burlington Coat
Factory, The Limited and Eddie Bauer.
TRADEMARKS
Wilsons Leather 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), Wilsons The Leather Experts(TM),
Tannery West(R), Georgetown Leather Design(R), WalletWorks(TM), Open Road(TM),
Wilsons Leather(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 29, 2000, Wilsons Leather had approximately 4,200 associates.
During the Company's peak selling season from October through December,
Wilsons Leather employs approximately 4,000 additional seasonal associates.
Wilsons Leather considers its relationships with its associates to be good.
None of the Company's associates are governed by collective bargaining
agreements.
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<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
could harm our business
A decline in demand for leather 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 apparel and accessories and
our ability to anticipate, gauge and respond in a timely manner to changing
consumer demands and fashion trends. When leather apparel and accessories are
not generally in fashion, our results of operations are adversely affected.
There can be no assurance that demand for leather 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 e-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. 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, 55.8% in 1999, which includes the holiday selling season. During
December, we generated 35.7% of our annual sales for 1999. Net sales are
generally lowest during the period from April through July. Historically, we
have typically 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, the 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 supply arrangements with our contract manufacturers.
Many of our domestic vendors also import a substantial portion of their
merchandise from abroad. In 1999, of the 94% of the leather garments
contracted for manufacture, we sourced more than 88% from contract
manufacturers located in The People's Republic of China, which currently has
Most Favored
11
<PAGE>
Nation (MFN) trading status with the United States. China's MFN status must be
renewed annually and there can be no assurance that China's MFN status will be
renewed as political conditions in the United States and China evolve.
Additionally, in 1999 we contracted for manufacture of approximately 10% and
2% 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 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 sales prices, profitability
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.
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 profit.
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.
Our future growth will depend on our ability to make additional acquisitions
Our success depends on our ability to continually enhance and expand our
business in response to changing customer demands and competitive pressures.
Strategic acquisitions have been part of our growth strategy in the past and
will continue to be in the future. If we are unable to identify suitable
acquisition targets, or are unable to successfully complete acquisitions, our
ability to increase the size of operations could be reduced. This could cause
us to lose business to our competitors, and our financial condition and
operating results could suffer significantly.
Acquisitions that we make may involve numerous risks, including:
. diverting management's attention from other business concerns;
. being unable to maintain uniform standards, controls, procedures and
policies;
. entering markets in which we have no direct prior experience;
12
<PAGE>
. improperly evaluating new services, products and markets; and
. being unable to effectively integrate any newly acquired businesses,
technologies or personnel.
In addition, in order to finance any acquisitions, we may need to raise
additional funds through public or private financings. In this event, we could
be forced to obtain equity or debt financing on terms that are not favorable
to us and that may result in dilution to our shareholders.
We may be affected by unexpected year 2000 problems
In order to minimize or eliminate the effect of the year 2000 risk on our
business systems and applications, we identified, evaluated, implemented and
tested changes to our computer system, applications and software necessary to
achieve year 2000 compliance. The Company's computer systems and equipment
successfully transitioned to the year 2000 with no significant issues. We
continue to keep the year 2000 project management in place to monitor latent
problems that could surface at key dates or events in the future. We do not
anticipate any significant problems related to these events. However, there
can be no assurances that failure to address the year 2000 issues by
significant business partners will not have a material adverse effect on us.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Year 2000."
Ownership of our common stock is concentrated
Our directors and executive officers beneficially own, in the aggregate,
40.7% of the outstanding shares of our common stock. If these shareholders
vote together as a group, they will be able to exert significant control over
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. Also, the ownership
concentration of our stock may limit liquidity and cause shareholders to
experience price fluctuations when trading large blocks of our stock.
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 Leather, and David Rogers, President and Chief
Operating Officer of Wilsons Leather. Their experience and worldwide contacts
in the leather industry significantly benefit Wilsons Leather. Although we
have entered into employment agreements with Messrs. Waller and Rogers, the
agreements do not contain any restrictions on competition. The agreements
expire on March 31, 2003, subject to an automatic one-year extension on each
April 1 commencing April 1, 2001, unless either the Company or Messrs. Waller
or Rogers, as applicable, has given at least 90 days notice to the other party
not to extend. The loss of the services of either of these individuals
13
<PAGE>
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 debt service could negatively impact our business
As of January 29, 2000, our debt included $43.9 million of 11 1/4% senior
notes due 2004, no borrowings outstanding under our three-year $125.0 million
revolving credit facility that expires in May 2002 and $20.2 million of
outstanding letters of credit. Our peak borrowings under the revolving credit
facility and outstanding letters of credit in 1999 were $47.7 million and
$52.6 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 debt service requirements
may 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, and
our ability to pay cash dividends or make other distributions is
limited;
. 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 and 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."
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."
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 reduced 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.
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<PAGE>
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 our ability in the future to raise additional capital.
ITEM 2. PROPERTIES
As of January 29, 2000, Wilsons Leather operated 528 leased store locations
and one owned store location. Substantially all of Wilsons Leather's stores
are located in regional shopping malls, outlet malls or airport retail
locations. Store leases with third parties are typically five to ten years in
duration. Most leases require the Company to pay annual minimum rent plus a
contingent rent dependent on the store's annual sales in excess of a specified
threshold. Of the 528 store leases, an affiliate of CVS guaranties
approximately 250 leases, all of which were entered into before the Management
Buyout. Wilsons Leather has not experienced any significant difficulty in
obtaining market leases without a CVS guaranty subsequent to the Management
Buyout.
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 343,500 square feet. The
Company is also party to a five-year lease that expires in 2003 with a five-
year renewal option for its 45,600 square foot distribution facility in Maple
Grove, Minnesota.
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.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the executive
officers of the Company as of March 24, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Joel N. Waller.......... 60 Chairman of the Board of Directors and Chief Executive Officer
David L. Rogers......... 57 President, Chief Operating Officer and Director
John Serino............. 50 Executive Vice President, Store Sales
W. Michael Bode......... 55 Senior Vice President--Wilsons, General Manager Outlet Division
John Fowler............. 44 Senior Vice President, General Merchandise Manager
Betty Goff.............. 43 Vice President, Human Resources
Linda Ireland........... 40 Vice President, General Manager e-Commerce
Jeffrey W. Orton........ 44 Vice President, Information Systems and Strategies and Logistics
Lisa Stanley............ 52 Vice President, Marketing
Douglas J. Treff........ 42 Vice President, Finance, Chief Financial Officer and Assistant Secretary
Daniel R. Thorson....... 41 Treasurer and Director, Business Planning and Analysis
</TABLE>
15
<PAGE>
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 Leather, and he served in such capacity until April 1992. Prior to
joining Wilsons Leather, Mr. Waller served in several capacities at Bermans
The Leather Experts Inc.; a specialty leather retailer ("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., a gaming
company, and Rainforest Cafe, Inc., a retail/restaurant company.
David L. Rogers has served as President and Chief Operating Officer of
Wilsons Leather since April 1992. In 1988, Mr. Rogers joined Wilsons Leather
as Executive Vice President and Chief Operating Officer when Bermans was
acquired by Wilsons Leather, 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., a gaming company, and
Rainforest Cafe, Inc., a retail/restaurant company.
John Serino has served as Executive Vice President, Store Sales of the
Company since January 1998. Prior to rejoining Wilsons Leather, 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., an off-price retailer,
from 1992 to 1995. Mr. Serino previously served with Wilsons Leather as
President of the Tannery West division from 1990 to 1992 and as Senior Vice
President, Stores from 1989 to 1990.
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 Leather from 1987 to January 1999. Prior to joining
Wilsons Leather, 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 Leather since January 1999 and as Vice President, General
Merchandise Manager from May 1998 to January 1999. Mr. Fowler served as
Overseas Merchant for Wilsons Leather from February 1993 to April 1998, as
Vice President, Divisional Merchandise Manager of Tannery West from August
1989 to January 1993 and as General Merchandise Manager of Tannery West from
October 1986 to July 1989.
Betty Goff has served as Vice President, Human Resources of Wilsons Leather
since February 1992. Ms. Goff served as Director of Executive Recruitment and
Placement of Wilsons Leather from October 1987 to February 1992.
Linda Ireland has served as Vice President, General Manager e-Commerce of
Wilsons Leather since December 1999. Prior to joining Wilsons Leather, Ms.
Ireland served as Vice President of Direct Marketing at Digital River, Inc.,
an internet commerce and marketing services company, from February 1999 to
December 1999. From September 1997 to February 1999, Ms. Ireland served as
Vice President and General Merchandise Manager at Genesis Direct, Inc., a
multi-brand catalog and internet direct marketing company. Additionally,
Ms. Ireland held various marketing, merchandising and business development
positions at Deluxe Corporation, a payment and financial information services
company, for its catalog and internet businesses from June 1988 to September
1997.
Jeffrey W. Orton has served as Vice President, Information Systems and
Strategies and Logistics of Wilsons Leather 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
Leather from September 1993 to March 1997. Prior to joining Wilsons Leather,
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.
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<PAGE>
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.
Douglas J. Treff has served as Chief Financial Officer and Assistant
Secretary of Wilsons Leather since May 1996 and as Vice President, Finance
since January 1993. Mr. Treff served as Controller of Wilsons Leather from
September 1992 to January 1993 and as Director of Financial Planning and
Analysis of Wilsons Leather from May 1990 to September 1992.
Daniel R. Thorson has served as Treasurer of Wilsons Leather since May 1996
and as Director of Business Planning since October 1995. Prior to joining
Wilsons Leather, 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.
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.
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<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 March 24, 2000, the market price of the
common stock was $12.813. The table presents the high and low market prices
from February 1, 1998 through January 29, 2000.
<TABLE>
<CAPTION>
QUARTERLY COMMON STOCK PRICE RANGES
-------------------------------------------------
FISCAL QUARTER ENDED HIGH LOW
----------------------------------- ------ ------
<S> <C> <C>
May 2, 1998........................ 10.667 5.667
August 1, 1998..................... 11.167 9.583
October 31, 1998................... 10.292 6.417
January 30, 1999................... 8.125 6.167
May 1, 1999........................ 7.417 6.000
July 31, 1999...................... 13.417 7.583
October 30, 1999................... 12.583 10.000
January 29, 2000................... 12.917 11.542
</TABLE>
There were 45 recordholders of the Company's common stock as of March 24,
2000.
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
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
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<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 29, 2000, January 30, 1999, January 31, 1998 and February 1, 1997,
and for the years ended January 29, 2000, 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 audited consolidated financial statements of
the Company. The selected historical consolidated financial data as of
December 31, 1995 for the year then ended and for the five months ended May
25, 1996 have been derived from the historical audited consolidated financial
statements of the Predecessor Companies. 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.
19
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS AND STORE DATA)
<TABLE>
<CAPTION>
COMBINED
COMPANY COMPANIES(/1/) COMPANY PREDECESSOR COMPANIES
----------------------------------- -------------- -------------- --------------------------------------------
PERIOD FROM EIGHT
YEARS ENDED INCEPTION MONTHS FIVE MONTHS ENDED
----------------------------------- YEAR ENDED (MAY 26, 1996) ENDED ------------------ YEAR ENDED
JANUARY 29, JANUARY 30, JANUARY 31, FEBRUARY 1, TO FEBRUARY 1, JANUARY 27, MAY 25, MAY 27, DECEMBER 31,
2000 1999 1998 1997 1997 1996 1996 1995 1995
----------- ----------- ----------- -------------- -------------- ----------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net Sales........ $543,608 $459,372 $418,140 $424,816 $345,121 $ 367,639 $109,640 $124,700 $ 462,394
Costs and
expenses:
Costs of goods
sold, buying
and occupancy
costs.......... 340,740 303,501 282,369 286,867 222,131 238,558 86,213 99,849 316,946
Selling, general
and
administrative
expenses....... 136,267 113,706 100,691 103,265 75,806 76,442 34,868 45,918 114,923
Depreciation and
amortization... 6,876 4,454 2,277 4,800 994 13,294 4,722 9,002 21,393
Restricted stock
compensation
expense(/2/)... -- -- 8,511 1,485 1,485 -- -- -- --
Restructuring and
asset impairment
charges......... -- -- -- -- -- 182,184 -- -- 182,184
-------- -------- -------- -------- -------- --------- -------- -------- ---------
Income (loss)
from
operations...... 59,725 37,711 24,292 28,399 44,705 (142,839) (16,163) (30,069) (173,052)
Interest expense,
net............. 4,993 7,815 6,434 6,520 5,271 7,400 1,581 3,396 10,463
-------- -------- -------- -------- -------- --------- -------- -------- ---------
Income (loss)
before income
taxes........... 54,732 29,896 17,858 21,879 39,434 (150,239) (17,744) (33,465) (183,515)
Income tax
provision
(benefit)....... 21,674 11,719 10,783 8,967 15,528 (4,681) (6,603) (5,461) (10,100)
-------- -------- -------- -------- -------- --------- -------- -------- ---------
Income (loss)
before
extraordinary
items and
cumulative
effect of change
in accounting
principle....... 33,058 18,177 7,075 12,912 23,906 (145,558) (11,141) (28,004) (173,415)
Extraordinary
gain (loss) on
early
extinguishment
of debt, net of
tax............. (958) -- 3,763 -- -- -- -- -- --
Cumulative effect
of change in
accounting
principle, net
of tax(/3/)..... (1,449) -- -- -- -- -- -- -- --
-------- -------- -------- -------- -------- --------- -------- -------- ---------
Net income
(loss).......... $ 30,651 $ 18,177 $ 10,838 $ 12,912 $ 23,906 ($145,558) ($11,141) ($28,004) ($173,415)
======== ======== ======== ======== ======== ========= ======== ======== =========
NET INCOME PER
DILUTED SHARE:
Income before
extraordinary
item and
cumulative
effect of change
in accounting
principle....... $ 1.94 $ 1.11 $ 0.45 $ 1.77
Extraordinary
gain (loss) on
early
extinguishment
of debt, net of
tax............. (0.06) -- 0.24 --
Cumulative effect
of change in
accounting
principle, net
of tax.......... (0.08) -- -- --
-------- -------- -------- --------
Net income per
diluted share... $ 1.80 $ 1.11 $ 0.69 $ 1.77
======== ======== ======== ========
Weighted average
common shares
outstanding--
assuming
dilution........ 17,064 16,381 15,596 13,478
======== ======== ======== ========
OTHER DATA:
Adjusted
EBITDA(/4/)..... $ 66,601 $ 42,165 $ 35,080 $ 34,684 $ 47,184 $ 52,639 ($11,441) ($21,067) $ 30,525
======== ======== ======== ======== ======== ========= ======== ======== =========
STORE DATA:
Traditional
stores:
Open at end of
period......... 529 518 460 461 461 494 480 567 548
Net sales per
square foot for
stores open
entire year.... $ 478 $ 426 $ 393 $ 389 -- -- -- -- $ 373
Change in
comparable
store
sales(/5/)..... 11.5% 6.3% 0.4% (1.3%) (2.7%) (3.1%) 3.9% 4.4% (1.5%)
Peak number of
seasonal stores
during period... 274 265 297 376 376 227 -- -- 227
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY COMPANIES
----------------------------------------------- ------------
JANUARY 29, JANUARY 30, JANUARY 31, FEBRUARY 1, DECEMBER 31,
2000 1999 1998 1997(/1/) 1995
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working Capital(/6/).... $126,855 $131,549 $120,205 $83,798 $44,514
Total assets............ 272,554 245,391 227,672 172,388 182,369
Total long-term
debt(/7/).............. 43,890 70,000 75,000 59,592 --
Total liabilities....... 141,347 147,214 155,020 128,923 154,780
Shareholders' equity.... 131,207 98,177 72,652 43,465 27,589
</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) Represents a charge to operations, net of tax, resulting from the
cumulative effect of the adoption of a new method of accounting for
revenue recognition of layaway sales.
(4) 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. EBIDTA and Adjusted EBITDA are not intended to
represent cash flow from operations as defined by generally accepting
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.
(5) Comparable store sales means sales generated by stores open at least one
full year.
(6) Working capital excludes amounts due to CVS as of December 31, 1995.
(7) 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 $59.6
million note issued 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 Leather 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 Company's fiscal year end is the Saturday closest to January 31. Unless
otherwise indicated, references to 1999, 1998 and 1997 in this Form 10-K refer
to the twelve months ended January 29, 2000, January 30, 1999, and January 31,
1998, respectively.
OVERVIEW
The Company operates 529 retail stores under one segment using various
formats including mall stores, outlet stores and airport locations. The
Company also operates holiday stores to better capitalize on its peak selling
season from October through December.
Wilsons Leather's comparable store sales increased 11.5%, 6.3% and 0.4% in
1999, 1998 and 1997, respectively. Income from operations as a percentage of
sales for the three years was 11.0%, 8.2% and 5.8%, respectively. In 1999, the
Company incurred extraordinary and one-time charges of $1.0 million for the
early extinguishment of debt, net of tax, and $1.4 million for the cumulative
effect of the change in accounting principle, net of tax.
In 1999, the Company adopted a new method of accounting for recognition of
layaway sales. Historically, the Company recognized revenue from layaway sales
in full upon the initial customer down-payment. Under the new accounting
method adopted retroactive to January 31, 1999, Wilsons Leather now recognizes
layaway sales in full upon final payment and delivery of merchandise to the
customer.
The Company generates a significant portion of its sales from October
through December, 55.8% in 1999, which includes the holiday selling season.
During December, the Company generated 35.7% of its annual sales for 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 outlet and airport locations and
modified its product mix to emphasize accessories. To drive accessories
growth, Wilsons Leather intends to create new styles designed to match its
customers' lifestyle needs. Accessories sales grew as a percentage of sales to
28.6% in 1999 from 23.2% in 1995.
22
<PAGE>
RESULTS OF OPERATIONS
The following table contains selected information from the Company's
historical consolidated statements of operations, expressed as a percentage of
net sales:
<TABLE>
<CAPTION>
YEARS ENDED
-----------------------------------
JANUARY 29, JANUARY 30, JANUARY 31,
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net sales............................... 100.0% 100.0% 100.0%
Cost of goods sold, buying and occupancy
costs.................................. 62.7 66.1 67.5
------ ------ ------
Gross margin............................ 37.3 33.9 32.5
Costs and expenses:
Selling, general and administrative
expenses.............................. 25.0 24.7 24.1
Depreciation and amortization.......... 1.3 1.0 0.6
Restricted stock compensation charge... -- -- 2.0
------ ------ ------
Income from operations.................. 11.0 8.2 5.8
Interest expense, net................... 0.9 1.7 1.5
Income tax provision.................... 4.0 2.5 2.6
------ ------ ------
Income before extraordinary item and
cumulative effect of change in
accounting principle................... 6.1 4.0 1.7
Extraordinary gain (loss) on early
extinguishment of debt, net of tax..... (0.2) -- 0.9
Cumulative effect of change in
accounting principle, net of tax....... (0.3) -- --
------ ------ ------
Net income.............................. 5.6% 4.0% 2.6%
====== ====== ======
</TABLE>
1999 Compared to 1998
Net sales increased 18.3% to $543.6 million in 1999 from $459.4 million in
1998. The $84.2 million sales increase was due to: (i) a $46.7 million
increase associated with an 11.5% comparable store sales increase which was
the result of strong sales gains in all merchandise categories, with
particularly strong increases in sales of our young men's and women's
merchandise, which increased more than 50%, and (ii) a $37.5 million increase
in non-comparable store sales due to 39 new store openings and the annualized
effect of 1998 store openings offset by 28 store closings during 1999.
Wilsons Leather opened 39 stores and closed 28 stores in 1999 compared to
40 store openings, the acquisition of 40 stores and 22 store closings in 1998.
As of January 29, 2000, Wilsons Leather operated 529 stores compared to 518
stores at January 30, 1999. Square footage increased 4.2% to 1,067,000 from
1,024,000 in 1998. The Company operated 249 holiday stores and 25 kiosks
during the 1999 holiday season compared to 215 holiday stores and 50 kiosks
during the prior year holiday season.
Cost of goods sold, buying and occupancy costs decreased to 62.7% of net
sales, from 66.1% of net sales, in 1998. Stronger product mark-up related to a
higher mix of fashion merchandise and a lower markdown rate due to strong
comparable store sales produced a 2.5 point improvement in gross margin net of
buying and occupancy costs compared to 1998. Buying and occupancy costs
decreased 0.9 points due to the leverage effect of strong sales increases
partially offset by operating 11 additional stores and the effect of lease
renewals. The Company's inventories are valued under the retail inventory
method using the last-in, first-out (LIFO) basis. The difference in
inventories between the LIFO and the first-in, first-out (FIFO) methods was
not material as of January 29, 2000.
Selling, general and administrative expenses increased to $136.3 million in
1999 from $113.7 million in 1998, and increased as a percentage of net sales
to 25.0% from 24.7%. The increase was primarily due to
23
<PAGE>
investments in the Company's e-commerce launch of $2.7 million, an increase in
write-offs of nonproductive assets and expenses related to closed stores of
$1.7 million and an increase in year 2000 remediation expenses of $0.7
million. Excluding these expenses, the Company's selling, general and
administrative expenses would have declined to 24.1% of sales as the Company
was able to leverage other operating expenses.
Depreciation and amortization increased to $6.9 million from $4.5 million
in 1998, and increased as a percentage of net sales to 1.3% from 1.0%. The
increase resulted from $23.2 million in capital expenditures for the
construction of 39 new stores and the renovation of 31 existing stores.
As a result of the above, income from operations increased 58.4% to $59.7
million, or 11.0% of net sales, in 1999 from $37.7 million, or 8.2% of net
sales, in 1998.
Net interest expense decreased to $5.0 million from $7.8 million in 1998.
The decrease was due to repurchasing $26.1 million of the Senior Notes during
the year.
The income tax provision increased to $21.7 million from $11.7 million in
1998 due to increased income before income taxes and an increase in the
effective tax rate to 39.6% from 39.2%.
The Company realized a $1.0 million extraordinary loss on the early
extinguishment of debt, net of tax, in 1999 due to the Senior Notes
repurchased.
The Company also recognized the cumulative effect of a change in accounting
principle. A charge to operations of $1.4 million, net of tax, resulted from
the adoption of a new method of accounting for revenue recognition of layaway
sales.
1998 Compared to 1997
Net sales increased 9.9% to $459.4 million in 1998 from $418.1 million in
1997. The $41.3 million sales increase was due to: (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 and the annualized effect of 1997 openings offset by 22
store closings and lower average sales volumes in seasonal stores of $5.0
million and (iii) a $10.4 million increase resulting from the acquisition of
the 40-store Wallet Works outlet chain in May 1998.
Wilsons Leather 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 Leather operated 518 stores compared to 460 stores
at year end 1997. Square footage increased 7.8% to 1,024,000 from 950,000 in
1997. 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,
from 67.5% of sales in 1997. Gross margin net of buying and occupancy costs
increased 0.8 points due to strong comparable store sales increases that
reduced the mark-down rate on merchandise. Buying and occupancy costs for 1998
increased $3.9 million due to operating additional stores and the effect of
lease renewals, although such costs declined as a percent of net sales due to
leverage from the sales increase. The difference in inventories between the
LIFO and FIFO methods 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% from 24.1%. 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
outlet and airport businesses.
24
<PAGE>
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.
As a result of the above, income from operations increased 55.2% to $37.7
million, or 8.2% of net sales, in 1998 from $24.3 million, or 5.8% of net
sales, in 1997. The 1997 year included an $8.5 million noncash compensation
charge associated with the vesting of all remaining shares of restricted
stock. 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 Senior Notes. This increase
was partially offset by an increase in interest income.
The income tax provision increased to $11.7 million from $10.8 million due
to increased income before income taxes. 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 Management Buyout at a discount.
LIQUIDITY AND CAPITAL RESOURCES
Wilsons Leather's capital requirements are primarily driven by the
Company's seasonal working capital needs and investments in new stores,
remodeling existing stores and enhancing 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.
General Electric Capital Corporation and a syndicate of banks have provided
the Company with a senior credit facility (the Senior Credit Facility) that
provides for borrowings of up to $125.0 million in aggregate principal amount,
including an $85.0 million letter of credit subfacility. 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 advance) less outstanding letters of credit.
Interest is payable on borrowings at one or more variable rates determined
by LIBOR plus 1.25%, commercial paper rate plus 1.25% or the "prime" rate
(6.85% at January 29, 2000). The spreads are subject to change based on the
Company's financial results. As of January 29, 2000, the Company had no
borrowings under the Senior Credit Facility and $20.2 million in outstanding
letters of credit. 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. Peak borrowings
typically occur from October through December and outstanding letters of
credit typically 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,
will be adequate to meet the Company's anticipated working capital and capital
expenditure requirements. For 1999, the peak borrowings and letters of credit
outstanding under the Senior Credit Facility were $47.7 million and
25
<PAGE>
$52.6 million, respectively, and the average amount of borrowings and the
average amount of letters of credit outstanding were $8.1 million and $28.0
million, respectively. For 1998, the peak borrowings and letters of
credit outstanding were $38.4 million and $48.7 million, respectively, and the
average amount of borrowings and the average amount of letters of credit
outstanding were $6.1 million and $27.5 million, respectively. For 1997, the
peak borrowings and letters of credit outstanding were $30.8 million and $51.9
million, respectively, and the average amounts of borrowings and the average
amounts of letters of credit outstanding were $3.6 million and $28.1 million,
respectively.
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. The Senior Notes
are callable subsequent to August 15, 2001 at a defined premium. 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 governing the
Senior Notes contains numerous operating covenants that limit the discretion
of management with respect to certain business matters and 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 dividends, to make certain payments or investments, loans and
guaranties and to sell or otherwise dispose of assets and merge or consolidate
with another entity.
During 1999 and 1998, the Company repurchased $26.1 million and $5.0
million respectively, of its Senior Notes. As of January 29, 2000, the Company
had $43.9 million of Senior Notes outstanding. Subsequent to January 29, 2000,
the Company has repurchased, at various times, an additional $13.3 million of
its Senior Notes.
On March 27, 1998, Wilsons Leather 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 had given CVS the right to purchase
a total of 2,025,000 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 outlet malls, a new distribution
channel for the Company.
On June 16, 1998, the Company completed the redemption of its outstanding
redeemable common stock purchase warrants that had been issued in the
Company's initial public offering. The net proceeds to the Company from the
exercise of the warrants were approximately $17.0 million after deducting
related costs and expenses.
During 1999, the underwriters of the Company's initial public offering
exercised the outstanding underwriter warrants that were issued to them in
connection with the offering. The net proceeds received by the Company from
the exercise of such warrants were approximately $1.2 million.
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% (11.03% at January 29,
2000). The agreement terminates on August 15, 2001. The transaction did not
have a material impact on the Company's financial position or results of
operations.
CASH FLOW ANALYSIS
Operating activities for 1999 resulted in cash provided of $64.5 million
compared to cash provided of $21.0 and $16.1 million in 1998 and 1997,
respectively. The $64.5 million in cash provided by operating activities in
1999 was primarily a result of net income of $33.1 million, excluding the $1.0
million extraordinary loss on early extinguishment of debt and the $1.4
million cumulative effect of a change in accounting principle, and the $25.7
million provided by changes in various current assets and liabilities.
26
<PAGE>
Investing activity for 1999 was comprised of $23.2 million in capital
expenditures primarily for the construction of new stores, the renovation of
and improvements to existing stores, and the implementation of certain new
information systems. Capital expenditures for 1998 and 1997 totaled $16.0 and
$10.5 million, respectively. The Company currently plans to open at least 25
mall stores and at least 20 outlet stores annually for the next several years.
The cost to build a typical store including leasehold improvements and
fixtures is approximately $140,000, net of landlord reimbursements. Working
capital requirements average $160,000 primarily for inventory.
Cash used in financing activities in 1999 was $24.6 million, $26.1 million
of which was used to repurchase Senior Notes partially offset by $2.2 million
from the exercise of underwriter warrants issued in the Company's initial
public offering and employee stock options. Cash provided by financing
activities for 1998 was $2.2 million, comprised of $17.2 million net proceeds
from the exercise of common stock redeemable purchase warrants issued in the
Company's initial public offering and employee stock options offset by $10.0
million used to repurchase the warrant issued to CVS and $5.0 million used to
repurchase Senior Notes. Cash provided by 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.
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 2002, when the Company expects to extend or replace such
facility.
SEASONALITY AND INFLATION
A majority of the Company's net sales and operating profit is generated in
the peak selling period from October through December, which includes the
holiday selling season. Wilsons Leather recorded 55.8% of its 1999 sales in
the peak selling period. During December, the Company generated 35.7% of its
annual sales for 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 Company does not believe that inflation has had a material effect on
the results of operations during the past three year; however, there can be no
assurance that the Company's business will not be affected by inflation in the
future.
The following table sets forth certain unaudited financial information from
the Company's historical consolidated statements of operations for each fiscal
quarter of 1999 and 1998. 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.
Included in the table are pro forma fiscal 1998 quarterly results that
include the effect of the accounting change, as well as 1999 results, which
reflect the retroactive adoption of the new accounting method. In 1999, the
Company adopted a new method of accounting for recognition of layaway sales.
Historically, the Company recognized revenue from layaway sales in full upon
the initial customer down-payment. Under the new accounting method adopted
retroactive to January 31, 1999, Wilsons Leather now recognizes layaway sales
in
27
<PAGE>
full upon final payment and delivery of merchandise to the customer.
Accordingly, this change resulted in a quarterly shift of revenues and related
expenses. As a result, the Company also recorded a one-time charge in fiscal
1999 for the cumulative effect of the accounting change.
<TABLE>
<CAPTION>
AS REPORTED
----------------------------------------------------
1999 1998
------------------------------------ ------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- -------- ------- -------- ------- -------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $81,343 $ 47,267 $97,663 $317,335 $68,011 $ 45,724 $87,493 $258,144
Costs of goods sold,
buying and occupancy
costs.................. 58,688 43,803 64,724 173,525 51,441 41,304 61,404 149,352
------- -------- ------- -------- ------- -------- ------- --------
Gross profit............ 22,655 3,464 32,939 143,810 16,570 4,420 26,089 108,792
Selling, general and
administrative
expense................ 24,570 23,913 32,667 55,117 21,946 20,906 25,397 45,457
Depreciation and
amortization........... 1,458 1,531 1,727 2,160 753 969 1,226 1,506
------- -------- ------- -------- ------- -------- ------- --------
Income (loss) from
operations............. (3,373) (21,980) (1,455) 86,533 (6,129) (17,455) (534) 61,829
Interest expense, net... 1,069 1,134 1,849 941 1,151 1,821 2,695 2,148
------- -------- ------- -------- ------- -------- ------- --------
Income (loss) before
income taxes........... (4,442) (23,114) (3,304) 85,592 (7,280) (19,276) (3,229) 59,681
Income tax provision
(benefit).............. (1,713) (9,119) (1,288) 33,794 (2,743) (7,398) (1,239) 23,099
------- -------- ------- -------- ------- -------- ------- --------
Income (loss) before
extraordinary item and
cumulative effect of
change in accounting
principle.............. (2,729) (13,995) (2,016) 51,798 (4,537) (11,878) (1,990) 36,582
Loss on early
extinguishment of debt,
net of tax............. -- (839) (119) -- -- -- -- --
Cumulative effect of
change in accounting
principle, net of tax.. (1,449) -- -- -- -- -- -- --
------- -------- ------- -------- ------- -------- ------- --------
Net income (loss)....... ($4,178) ($14,834) ($2,135) $ 51,798 ($4,537) ($11,878) ($1,990) $36,582
======= ======== ======= ======== ======= ======== ======= ========
Net income (loss) per
diluted share before
extraordinary item and
cumulative effect of
change in accounting
principle.............. ($0.17) ($0.86) ($0.12) $2.98 ($0.32) ($0.77) ($0.12) $2.21
------- -------- ------- -------- ------- -------- ------- --------
Net income (loss) per
diluted share.......... ($0.26) ($0.91) ($0.13) $2.98 ($0.32) ($0.77) ($0.12) $2.21
------- -------- ------- -------- ------- -------- ------- --------
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA(/1/)
------------------------------------
1998
------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- -------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales................................ $68,823 $ 41,461 $80,406 $269,185
Cost of goods sold, buying and occupancy
costs................................... 51,819 39,453 58,185 154,385
------- -------- ------- --------
Gross profit............................. 17,004 2,008 22,221 114,800
Selling, general and administrative
expense................................. 21,946 20,906 25,397 45,457
Depreciation and amortization............ 753 969 1,226 1,506
------- -------- ------- --------
Income (loss) from operations............ (5,695) (19,867) (4,402) 67,837
Interest expense, net.................... 1,151 1,821 2,695 2,148
------- -------- ------- --------
Income (loss) before income taxes........ (6,846) (21,688) (7,097) 65,689
Income tax provision (benefit)........... (2,574) (8,352) (2,714) 25,430
------- -------- ------- --------
Net income (loss)........................ ($4,272) ($13,336) ($4,383) $ 40,259
------- -------- ------- --------
Net income (loss) per diluted share...... ($0.30) ($0.87) ($0.27) $2.43
------- -------- ------- --------
</TABLE>
- --------
(1) Reflects the retroactive change in accounting principle for the revenue
recognition of layaway sales as if the change had occurred prior to 1998.
28
<PAGE>
YEAR 2000
In order to minimize or eliminate the effect of the year 2000 risk on the
Company's business systems and applications, Wilsons Leather identified,
evaluated, implemented and tested changes to its computer system, applications
and software necessary to achieve year 2000 compliance. The Company's computer
systems and equipment successfully transitioned to the year 2000 with no
significant issues. Wilsons Leather continues to keep the year 2000 project
management in place to monitor latent problems that could surface at key dates
or events in the future. The Company does not anticipate any significant
problems related to these events. However, there can be no assurances that
failure to address the year 2000 issues by significant business partners will
not have a material adverse effect on the Company. The Company expensed $0.9
million related to year 2000 remediation during 1999. Wilsons Leather expensed
and capitalized the costs to complete the compliance plan in accordance with
appropriate accounting policies.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended, becomes effective
for the years beginning after June 15, 2000. SFAS No. 133 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. SFAS No. 133 requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge criteria are met.
Special accounting for qualifying hedges allow a derivative's gains or 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. The adoption of
SFAS No. 133 is not expected to have a material effect on the Company's
financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's exposure to market risks for changes in interest rates
relates primarily to the Company's short-term investments, short-term
borrowings, long-term debt obligations and interest rate swap agreement. The
Company does not use derivative financial instruments in its available for
sale securities. 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. Market risk is limited by including only securities with active
markets in the Company's portfolio. All short-term investments mature within
one year.
At January 29, 2000, Wilsons Leather had cash and cash equivalents totaling
$124.9 million. The effect of a 100 basis point change in interest rates would
have an estimated $285,000 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 LIBOR, the commercial paper rate or the prime rate. If
any of those rates were to change while Wilsons Leather was borrowing under
the facility, interest expense would increase or decrease accordingly. As of
January 29, 2000, there were no outstanding borrowings under the Senior Credit
Facility and $20.2 million in outstanding letters of credit.
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 29, 2000, Wilsons Leather had fixed-rate debt of $43.9
million maturing in August 2004.
The Company entered into a $40.0 million interest rate swap transaction
whereby a financial institution pays the Company interest at a fixed rate of
11.25%, and the Company pays the financial institution interest at a
29
<PAGE>
commercial paper rate plus 5.37% (11.03% at January 29, 2000). The agreement
terminates on August 15, 2001. The effect of a 100 basis point change in
interest rates would have an estimated $500,000 pre-tax earnings and cash flow
impact, assuming other variables are held constant.
ITEM 8. FINANCIAL STATEMENTS
Financial statements 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, 2000 (the Proxy Statement), which will be
filed with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days after January 29, 2000.
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 and family relationships between any director or
executive officer, 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 "Election of Directors--Director Compensation" and "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.
30
<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
Consolidated Balance Sheets
Consolidated Statements of Income
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 1999.
(C) EXHIBITS:
The following exhibits are filed as part of this Form 10-K for the year
ended January 29, 2000.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION METHOD OF FILING
------- ------------------------------------------- -------------------------
<C> <S> <C>
2.1 Sale Agreement dated as of May 24, 1996 by
and among CVS New York, Inc., Wilsons
Center, Inc. and Wilsons The Leather
Experts Inc. (1)........................... Incorporated by Reference
3.1 Amended and Restated Articles of
Incorporation of Wilsons The Leather
Experts Inc. adopted June 16, 1998 as
amended by the Articles of Amendment dated
February 17, 2000.......................... Electronic Transmission
3.2 Restated Bylaws of Wilsons The Leather
Experts Inc. as amended June 16, 1998 and
January 25, 2000........................... 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
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION METHOD OF FILING
------- ------------------------------------------ -------------------------
<C> <S> <C>
4.4 Registration Rights Agreement dated as of
May 25, 1996, by and among CVS New York,
Inc., Wilsons The Leather Experts Inc.,
the Managers listed on the signature pages
thereto, Leather Investors Limited
Partnership I and the Partners listed on
the signature pages thereto. (5).......... Incorporated by Reference
4.5 Amendment to Registration Rights Agreement
dated as of August 12, 1999 by and among
Wilsons The Leather Experts Inc. and the
Shareholders listed on the attachments
thereto................................... Electronic Transmission
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. (6).......................... Incorporated by Reference
*10.2 Wilsons The Leather Experts Inc. Amended
Executive and Key Management Incentive
Plan. (7)................................. Incorporated by Reference
*10.3 Wilsons The Leather Experts Inc. 401(k)
Plan. (1)................................. Incorporated by Reference
*10.4 Employment Agreement dated as of May 25,
1996 between Wilsons The Leather Experts
Inc. and Joel N. Waller. (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 Amended and Restated Credit Agreement
dated as of May 24, 1999 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 (the "Credit
Agreement"). (8).......................... 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 Supplemental Security Agreement dated as
of May 24, 1999, by and among Wilsons
Leather Holdings Inc. and the other
Grantors listed on the signature pages
thereto, in favor of General Electric
Capital Corporation, in its capacity as
Agent for Lendors. (9).................... 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.
(10)...................................... Incorporated by Reference
*10.10 Wilsons The Leather Experts Inc. Amended
1996 Stock Option Plan. (2)............... Incorporated by Reference
10.11 Joinder Agreement dated as of May 24,
1999, by and between the Store Guarantors
that are signatories thereto and General
Electric Capital Corporation. (11)........ Incorporated by Reference
10.12 Pledge Agreement dated as of May 24, 1999,
by and between Wilsons Leather of
Delaware, Inc. and General Electric
Capital Corporation, individually and as
Agent for the Lenders signatory to the
Credit Agreement. (12).................... Incorporated by Reference
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION METHOD OF FILING
------- ------------------------------------------ -------------------------
<C> <S> <C>
10.13 Pledge Agreement dated as of May 24, 1999,
between Wilsons International, Inc. and
General Electric Capital Corporation,
individually and as Agent for the Lenders
signatory to the Credit Agreement. (13)... 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. (14)........................... 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. (15)... 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. (16)... 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. (17)... Incorporated by Reference
10.18 Reaffirmation of Guaranty dated as of May
24, 1999, by Wilsons The Leather Experts
Inc., Wilsons Center Inc., Rosedale
Wilsons, Inc., River Hills Wilsons, Inc.
and the Store Guarantors listed on the
signature pages thereto in favor of
General Electric Capital Corporation.
(18)...................................... 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. (19)......................... Incorporated by Reference
10.20 Joinder Agreement dated as of July 31,
1997, by and between Wilsons International
Inc. and General Electric Capital
Corporation. (20)......................... 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. (21)......................... Incorporated by Reference
10.22 Wilsons The Leather Experts Inc. 1998
Stock Option Plan. (22)................... Incorporated by Reference
10.23 First Amendment to the Amended and
Restated Credit Agreement dated as of
September 24, 1999. (23).................. Incorporated by Reference
10.24 Reaffirmation of Guaranty dated September
24, 1999 by Wilsons The Leather Experts
Inc., Wilsons Center, Inc., Rosedale
Wilsons, Inc. and River Hills Wilsons,
Inc. (24)................................. Incorporated by Reference
10.25 Unqualified Release Agreement dated March
3, 1999. (25)............................. Incorporated by Reference
10.26 Second Amendment to the Amended and
Restated Credit Agreement dated as of
February 29, 2000......................... Electronic Transmission
*10.27 First Amendment to Employment Agreement
dated as of April 3, 2000 between Wilsons
The Leather Experts Inc. and Joel N.
Waller.................................... Electronic Transmission
*10.28 First Amendment to Employment Agreement as
of March 23, 2000 between Wilsons The
Leather Experts Inc. and David L. Rogers.. Electronic Transmission
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION METHOD OF FILING
------- -------------------------------------------- -----------------------
<C> <S> <C>
11.1 Computation of per share income............. Electronic Transmission
21.1 Subsidiaries of Wilsons The Leather Experts
Inc......................................... Electronic Transmission
23.1 Consent of Arthur Andersen LLP.............. Electronic Transmission
27.1 Financial Data Schedule..................... 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 Exhibit 4.8 to the Company's Registration
Statement on Form S-1 (333-13967) filed with the Commission on October
11, 1996.
(6) 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.
(7) Incorporated by reference to Exhibit 10.2 to the Company's Report on Form
10-K for the fiscal year ended January 30, 1999 filed with the
Commission.
(8) Incorporated by reference to Exhibit 10.1 to the Company's Report on Form
10-Q for the quarter ended May 1, 1999 filed with the Commission.
(9) Incorporated by reference to Exhibit 10.2 to the Company's Report on Form
10-Q for the quarter ended May 1, 1999 filed with the Commission.
(10) 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.
(11) Incorporated by reference to Exhibit 10.3 to the Company's Report on
Form 10-Q for the quarter ended May 1, 1999 filed with the Commission.
(12) Incorporated by reference to Exhibit 10.4 to the Company's Report on
Form 10-Q for the quarter ended May 1, 1999 filed with the Commission.
(13) Incorporated by reference to Exhibit 10.5 to the Company's Report on
Form 10-Q for the quarter ended May 1, 1999 filed with the Commission.
(14) 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.
(15) 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.
(16) 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.
(17) 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.
(18) Incorporated by reference to Exhibit 10.6 to the Company's Report on
Form 10-Q for the quarter ended May 1, 1999 filed with the Commission.
(19) 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.
34
<PAGE>
(20) 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.
(21) 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.
(22) 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.
(23) Incorporated by reference to Exhibit 10.1 to the Company's Report on Form
10-Q for the quarter ended October 30, 1999 filed with the Commission.
(24) Incorporated by reference to Exhibit 10.2 to the Company's Report on Form
10-Q for the quarter ended October 30, 1999 filed with the Commission.
(25) Incorporated by reference to Exhibit 10.7 to the Company's Report on Form
10-Q for the quarter ended May 1, 1999 filed with the Commission.
35
<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
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Income.......................................... F-4
Consolidated Statements of Shareholders' Equity............................ F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</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
29, 2000 and January 30, 1999 and the related consolidated statements of
income, shareholders' equity and cash flows for each of the three years in the
period ended January 29, 2000. 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 auditing standards generally
accepted in the United States. 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 29, 2000 and January
30, 1999, and the results of their operations and their cash flows for each of
the three years in the period ended January 29, 2000, in conformity with
accounting principles generally accepted in the United States.
As discussed in Note 2 to the financial statements, effective January 31,
1999, the Company changed its method of accounting for layaway sales.
Arthur Andersen LLP
Minneapolis, Minnesota,
February 28, 2000
F-2
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 30,
2000 1999
----------- -----------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $124,926 $108,235
Accounts receivable, net.................................. 7,547 6,325
Inventories, net.......................................... 79,221 84,971
Prepaid expenses.......................................... 8,477 6,133
Deferred income taxes..................................... 663 --
-------- --------
Total current assets.................................. 220,834 205,664
PROPERTY AND EQUIPMENT, net................................. 49,587 36,195
OTHER ASSETS, net........................................... 2,133 3,532
-------- --------
Total assets.......................................... $272,554 $245,391
======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable.......................................... $ 10,912 $ 7,976
Accrued expenses.......................................... 47,722 38,998
Income taxes payable...................................... 35,345 22,894
Deferred income taxes..................................... -- 4,247
-------- --------
Total current liabilities............................. 93,979 74,115
LONG-TERM DEBT.............................................. 43,890 70,000
OTHER LONG-TERM LIABILITIES................................. 3,478 3,099
-------- --------
Total liabilities..................................... 141,347 147,214
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 10 and 11)
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 150,000,000 shares
authorized; 16,585,234 and 16,250,135 shares issued and
outstanding at January 29, 2000 and January 30, 1999,
respectively............................................. 166 163
Additional paid-in capital................................ 57,485 55,125
Retained earnings......................................... 73,582 42,931
Cumulative other comprehensive loss....................... (26) (42)
-------- --------
Total shareholders' equity............................ 131,207 98,177
-------- --------
Total liabilities and shareholders' equity............ $272,554 $245,391
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED
-----------------------------------
JANUARY 29, JANUARY 30, JANUARY 31,
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES.................................. $543,608 $459,372 $418,140
COSTS AND EXPENSES:
Cost of goods sold, buying and occupancy
costs................................... 340,740 303,501 282,369
Selling, general and administrative
expenses................................ 136,267 113,706 100,691
Depreciation and amortization............ 6,876 4,454 2,277
Restricted stock compensation expense.... -- -- 8,511
-------- -------- --------
Income from operations................. 59,725 37,711 24,292
Interest expense, net.................... 4,993 7,815 6,434
-------- -------- --------
Income before income taxes............. 54,732 29,896 17,858
Income tax provision..................... 21,674 11,719 10,783
-------- -------- --------
Income before extraordinary item and
cumulative effect of change in
accounting principle.................. 33,058 18,177 7,075
Extraordinary gain (loss) on early
extinguishment of debt, net of tax of
$626 and $2,509......................... (958) -- 3,763
Cumulative effect of change in accounting
principle, net of tax of $950........... (1,449) -- --
-------- -------- --------
Net income............................. $ 30,651 $ 18,177 $ 10,838
======== ======== ========
BASIC NET INCOME PER COMMON SHARE:
Income before extraordinary item and
cumulative effect of change in
accounting principle.................... $ 2.02 $ 1.17 $ 0.53
Extraordinary gain (loss) on early
extinguishment of debt, net of tax...... (0.06) -- 0.28
Cumulative effect of change in accounting
principle, net of tax................... (0.09) -- --
-------- -------- --------
Basic net income per common share.......... $ 1.87 $ 1.17 $ 0.81
======== ======== ========
Weighted average common shares
outstanding............................... 16,408 15,536 13,366
======== ======== ========
DILUTED NET INCOME PER COMMON SHARE:
Income before extraordinary item and
cumulative effect of change in
accounting principle.................... $ 1.94 $ 1.11 $ 0.45
Extraordinary gain (loss) on early
extinguishment of debt, net of tax...... (0.06) -- 0.24
Cumulative effect of change in accounting
principle, net of tax................... (0.08) -- --
-------- -------- --------
Diluted net income per common share........ $ 1.80 $ 1.11 $ 0.69
======== ======== ========
Weighted average common shares
outstanding--assuming dilution............ 17,064 16,381 15,596
======== ======== ========
PRO FORMA, assuming the new layaway sales
method is applied retroactively (Note 2):
Income before extraordinary item......... $ 33,058 $ 18,268 $ 7,154
======== ======== ========
Net income............................... $ 32,100 $ 18,268 $ 10,917
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED CUMULATIVE
STOCK COMMON STOCK ADDITIONAL OTHER TOTAL
--------------- ----------------- PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS LOSS EQUITY
------ ------- ---------- ------ ---------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, February 1,
1997................... 7,405 $ 7,405 11,475,000 $115 $12,463 $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) 925,625 9 7,396 -- -- --
Initial public
offering.............. -- -- 1,897,500 19 9,432 -- -- 9,451
Restricted Stock
vested................ -- -- -- -- 8,511 -- -- 8,511
Accrued preferred stock
dividends cancelled... -- -- -- -- -- 395 -- 395
------ ------- ---------- ---- ------- ------- ----- --------
BALANCE, January 31,
1998................... -- -- 14,298,125 143 37,802 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............. -- -- 57,660 1 310 -- -- 311
Exercise of redeemable
warrants.............. -- -- 1,894,350 19 17,013 -- -- 17,032
------ ------- ---------- ---- ------- ------- ----- --------
BALANCE, January 30,
1999................... -- -- 16,250,135 163 55,125 42,931 (42) 98,177
Net income............. -- -- -- -- -- 30,651 -- 30,651
Other comprehensive
income-
Foreign currency
translation
adjustment............ -- -- -- -- -- -- 16 16
--------
Comprehensive income... 30,667
--------
Stock options
exercised............. -- -- 160,062 1 1,081 -- -- 1,082
Exercise of underwriter
warrants.............. -- -- 165,000 2 1,187 -- -- 1,189
Shares issued under the
Company's employee
stock purchase plan... -- -- 10,037 -- 92 -- -- 92
------ ------- ---------- ---- ------- ------- ----- --------
BALANCE, January 29,
2000................... -- $ -- 16,585,234 $166 $57,485 $73,582 $ (26) $131,207
====== ======= ========== ==== ======= ======= ===== ========
</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 CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
-----------------------------------
JANUARY 29, JANUARY 30, JANUARY 31,
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income................................ $ 30,651 $ 18,177 $ 10,838
Adjustments to reconcile net income to net
cash provided by operating activities-
Extraordinary (gain) loss on early
extinguishment of debt.................. 958 -- (3,763)
Cumulative effect of change in accounting
principle............................... 1,449 -- --
Depreciation and amortization............ 6,876 4,454 2,277
Amortization of deferred financing
costs................................... 724 1,111 870
Restricted stock compensation expense.... -- -- 8,511
Loss on disposal of assets............... 3,050 1,601 106
Deferred income taxes.................... (4,951) 483 3,081
Changes in operating assets and
liabilities, net of assets and
liabilities acquired:
Accounts receivable, net................ (3,794) 685 (2,159)
Inventories, net........................ 7,776 (3,960) (12,992)
Prepaid expenses........................ (2,344) (996) 267
Accounts payable and accrued expenses... 9,442 (1,849) 7,224
Income taxes payable and other
liabilities............................ 14,646 1,225 1,836
-------- -------- --------
Net cash provided by operating
activities............................ 64,483 20,931 16,096
-------- -------- --------
INVESTING ACTIVITIES:
Additions to property, equipment and other
noncurrent assets........................ (23,214) (15,976) (10,519)
Acquisitions, net of cash acquired........ -- (5,194) --
-------- -------- --------
Net cash used in investing activities.. (23,214) (21,170) (10,519)
-------- -------- --------
FINANCING ACTIVITIES:
Proceeds from sale of common stock and
exercise of warrants..................... 2,164 17,192 9,452
Proceeds from issuance of long-term debt.. -- -- 71,972
Repayment of long-term debt............... (26,110) (5,000) (55,039)
Repurchase of CVS Warrant................. -- (9,990) --
Other..................................... (632) (4) (8)
-------- -------- --------
Net cash provided by (used in)
financing activities.................. (24,578) 2,198 26,377
-------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS.. 16,691 1,959 31,954
CASH AND CASH EQUIVALENTS, beginning of
year...................................... 108,235 106,276 74,322
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of year..... $124,926 $108,235 $106,276
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for-
Interest................................. $ 8,126 $ 9,626 $ 8,032
======== ======== ========
Income taxes............................. $ 12,282 $ 11,220 $ 8,400
======== ======== ========
Noncash investing and financing
activities-
Liabilities assumed for acquisition of
business................................ $ -- $ 203 $ --
======== ======== ========
Accrued preferred stock dividends........ $ -- $ -- $ (395)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.NATURE OF ORGANIZATION AND ACQUISITION:
Wilsons The Leather Experts Inc. (Wilsons Leather), 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 Leather 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 Leather and
CVS, Wilsons Leather acquired the common stock for (i) $2.0 million, (ii) a
10% senior secured subordinated note due December 31, 2000 in the principal
amount of $55.8 million, (iii) a warrant to purchase 2,025,000 shares of
common stock, (iv) a warrant to purchase 1,620,000 shares of common stock
(reduced by terms of the Restricted Stock Agreement--see Note 8),
(v) 6,480,000 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 6,480,000
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
925,625 shares of Wilsons Leather's common stock. On August 18, 1997, the
warrant for 1,620,000 shares of common stock was canceled with the vesting of
the remaining Restricted Stock (see Note 8).
The Company is the leading specialty retailer of leather outerwear, apparel
and accessories in the United States. The Company operates 529 retail stores
located in 44 states, Canada and England, including 444 mall stores, 55 outlet
stores and 30 airport locations. The Company supplemented permanent mall
stores with 249 holiday stores during its peak selling season from October
through December.
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying consolidated financial statements include those of the
Company and all of its subsidiaries. All material intercompany balances and
transactions between the entities have been eliminated in consolidation.
Year-End
Wilsons Leather's fiscal year ends on the Saturday closest to January 31.
The periods ended January 29, 2000, January 30, 1999 and January 31, 1998 are
referred to herein as fiscal years 1999, 1998 and 1997, respectively.
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.
Ultimate 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 short-term investments consist primarily of
F-7
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
commercial paper and money market funds. Interest income of $3.8 million, $3.1
million and $2.6 million for the years ended January 29, 2000, January 30,
1999 and January 31, 1998, respectively, are included in interest expense,
net.
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 29, 2000.
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 the
first-in, first-out method was not material as of January 29, 2000 and January
30, 1999.
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, impairment losses for store fixed assets are
calculated by the Company by comparing projected cash flows over the lease
terms to the asset carrying values.
Debt Issuance Costs
Debt issuance costs are amortized over the terms of the related financing
using the straight-line 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 tangible and
intangible assets acquired is included in other assets in the accompanying
consolidated balance sheets and is amortized on a straight-line basis over
15 years.
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 charged to operations in the year incurred.
F-8
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
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 (in
thousands, except per share amounts) reconciles the number of shares utilized
in the earnings per share calculations:
<TABLE>
<CAPTION>
YEARS ENDED
-----------------------------------
JANUARY 29, JANUARY 30, JANUARY 31,
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net income........................... $30,651 $18,177 $10,838
======= ======= =======
Weighted average common shares
outstanding......................... 16,408 15,536 13,366
Effect of options granted............ 656 559 326
Effect of warrants................... -- 286 1,905
------- ------- -------
Weighted average common shares
outstanding--assuming dilution...... 17,064 16,381 15,596
======= ======= =======
Basic net income per common share.... $ 1.87 $ 1.17 $ 0.81
======= ======= =======
Diluted net income per common share.. $ 1.80 $ 1.11 $ 0.69
======= ======= =======
</TABLE>
Recently Issued Accounting Pronouncements
Statement of Financial Accounting Statements (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended, becomes
effective for the years beginning after June 15, 2000. SFAS No. 133
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. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge criteria are met. Special accounting for qualifying hedges allow a
derivative's gains or 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. The adoption of SFAS No. 133 is not expected to have a material
effect on the Company's financial position or results of operations.
F-9
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Change in Accounting Method--Layaway Sales
Effective January 31, 1999, the Company changed its method of accounting
for layaway sales in accordance with recently released Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." The SAB
was released in December 1999. Historically, the Company has recognized
revenue from layaway sales in full upon the initial customer down payment.
Under the new accounting method adopted retroactive to January 31, 1999, the
Company now recognizes layaway sales in full upon final payment and delivery
of merchandise to the customer. The Company recorded an after-tax charge of
$1.4 million as the cumulative effect of this change in accounting. The effect
of the change for the year ended January 29, 2000 was to decrease income
before extraordinary item and cumulative effect of change in accounting
principle by $0.3 million ($0.01 per diluted common share) and net income by
$1.7 million ($0.10 per diluted common share).
The pro forma effect assuming the retroactive application of the change in
recording layaway sales is as follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
AS PRO AS PRO AS PRO
REPORTED FORMA REPORTED FORMA REPORTED FORMA
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Income before
extraordinary item..... $33,058 $33,058 $18,177 $18,268 $ 7,075 $ 7,154
Income per common
share--basic......... 2.02 2.02 1.17 1.18 0.53 0.54
Income per common
share--diluted....... 1.94 1.94 1.11 1.12 0.45 0.46
Net income.............. 30,651 32,100 18,177 18,268 10,838 10,917
Net income per common
share--basic......... 1.87 1.96 1.17 1.18 0.81 0.82
Net income per common
share--diluted....... 1.80 1.88 1.11 1.12 0.69 0.70
</TABLE>
The effect of the change on the first, second and third quarters of 1999 is
as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------
MAY 1, 1999 JULY 31, 1999 OCTOBER 30, 1999
----------------- ------------------- -----------------
AS PRO AS PRO AS PRO
REPORTED FORMA REPORTED FORMA REPORTED FORMA
-------- -------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before
extraordinary item..... $(2,997) $(2,729) $(12,081) $(13,995) $ 260 $(2,016)
Income (loss) per
common share--basic.. (0.18) (0.17) (0.74) (0.86) 0.02 (0.12)
Income (loss) per
common share--
diluted.............. (0.18) (0.17) (0.74) (0.86) 0.02 (0.12)
Net income (loss)....... (2,997) (4,178) (12,920) (14,834) 141 (2,135)
Net income (loss) per
common share--basic.. (0.18) (0.26) (0.79) (0.91) 0.01 (0.13)
Net income (loss) per
common share--
diluted.............. (0.18) (0.26) (0.79) (0.91) 0.01 (0.13)
</TABLE>
F-10
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. ACCOUNTS RECEIVABLE:
Accounts receivable consisted of the following (in thousands):
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 30,
2000 1999
----------- -----------
<S> <C> <C>
Trade receivables................................. $ 5,311 $ 3,232
Other receivables................................. 3,359 1,643
Layaway receivables............................... -- 4,675
------- -------
Total......................................... 8,670 9,550
Less-
Allowance for doubtful accounts................. (1,123) (1,121)
Layaway return reserves......................... -- (2,104)
------- -------
Total......................................... $ 7,547 $ 6,325
======= =======
</TABLE>
4. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 30,
2000 1999
----------- -----------
<S> <C> <C>
Land........................ $ 1,340 $ 1,340
Buildings and improvements.. 858 914
Equipment and furniture..... 46,412 31,253
Leasehold improvements...... 13,805 9,935
------- -------
Total................... 62,415 43,442
Less--Accumulated
depreciation and
amortization............... (12,828) (7,247)
------- -------
Total................... $49,587 $36,195
======= =======
</TABLE>
5. ACCRUED EXPENSES:
Accrued expenses consisted of the following (in thousands):
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 30,
2000 1999
----------- -----------
<S> <C> <C>
Payroll and related............................... $11,767 $ 8,540
Benefits.......................................... 6,014 3,537
Taxes other than income taxes..................... 5,602 5,169
Rent.............................................. 4,028 3,118
Interest.......................................... 2,301 3,948
Other............................................. 18,010 14,686
------- -------
$47,722 $38,998
======= =======
</TABLE>
6.LONG-TERM DEBT:
On August 18, 1997, the Company completed an offering of $75.0 million of 11
1/4% senior notes due August 15, 2004 (the Senior Notes). Interest on the
Senior Notes is payable semiannually in arrears on
F-11
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
February 15 and August 15 of each year. As of January 29, 2000, the Company
had reduced the outstanding balance to $43.9 million by purchasing, at various
times, approximately $31.1 million of its Senior Notes. For the year ended
January 29, 2000, the Company purchased $26.1 million of Senior Notes. As a
result of repurchasing $26.1 million of the Senior Notes in 1999, the Company
realized an extraordinary loss on the early extinguishment of debt of
approximately $1.0 million, net of tax.
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.
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% 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 approximately $3.8 million, net of tax, in the
third quarter of fiscal year 1997.
The Company obtained a $125.0 million revolving credit agreement (the
Revolver) with certain banks which extends through May 2002 and includes an
$85.0 million letter-of-credit subfacility. The Revolver is collateralized by
the Company's inventory. Interest on cash borrowings under the Revolver is at
LIBOR plus 1.25%, the commercial paper rate plus 1.25%, or prime. The interest
rate is dependent upon the Company's financial results. The Company pays
monthly fees on the unused portion of the Revolver and on the average daily
amount of letters of credit outstanding during each month. As of January 29,
2000 and January 30, 1999, there were no cash borrowings under the Revolver,
and there was $20.2 million and $10.3 million in letters of credit
outstanding, respectively.
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 29, 2000, the
Company was in compliance with all covenants of the Senior Notes and the
Revolver.
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% (11.03% at January 29,
2000). The agreement terminates on August 15, 2001. The transaction did not
have a material effect on the Company's financial position or results of
operations.
F-12
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7.INCOME TAXES:
The income tax provision is comprised of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
-----------------------------------
JANUARY 29, JANUARY 30, JANUARY 31,
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal............................. $23,896 $10,084 $ 6,912
State............................... 2,729 1,152 790
Deferred.............................. (4,951) 483 3,081
------- ------- -------
Total............................. $21,674 $11,719 $10,783
======= ======= =======
</TABLE>
Reconciliations of the U.S. federal statutory income tax rate to the
effective tax rate are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
-----------------------------------
JANUARY 29, JANUARY 30, JANUARY 31,
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
U.S. federal statutory income tax
rate............................... 35.0% 35.0% 35.0%
Restricted stock compensation
expense............................ -- -- 18.6
State income taxes, net of federal
tax effect......................... 4.0 4.0 4.0
Other, net.......................... 0.6 0.2 2.8
---- ---- ----
Effective tax rate.............. 39.6% 39.2% 60.4%
==== ==== ====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the deferred tax asset and liability were as follows (in thousands):
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 30,
2000 1999
----------- -----------
<S> <C> <C>
Deferred tax asset:
Accrued liabilities............................. $5,342 $ 4,299
Net operating loss carryforwards................ 1,101 1,651
Intangibles..................................... 569 --
Allowances...................................... 438 --
Other........................................... 387 478
------ -------
Total......................................... 7,837 6,428
------ -------
Deferred tax liability:
Inventories..................................... 5,655 8,596
Property and equipment.......................... 2,680 3,114
Layaway and sales return reserve................ -- 105
Other........................................... 184 246
------ -------
Total......................................... 8,519 12,061
------ -------
Net deferred tax liability.................... $ 682 $ 5,633
====== =======
</TABLE>
F-13
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8.CAPITAL STOCK:
Common Stock and Initial Public Offering
On May 27, 1997, the Company completed an initial public offering of
1,650,000 units at $6.00 per unit. In addition, the underwriter exercised its
overallotment option to purchase 247,500 units. Each unit consisted of one
share of common stock and one redeemable warrant to purchase one share of
common stock for $9.00 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 $9.00. The redeemable warrants were subject to redemption by
the Company for $.01 per warrant at any time on 30 days written notice,
provided that the closing bid price of the common stock exceeds $9.67 per
share for any ten consecutive trading days prior to such notice. The Company
received net proceeds of approximately $9.5 million after payment of the
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.
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.
In conjunction with the Management Buyout, certain members of management of
the Company purchased 1,620,000 shares of common stock with restrictions (the
Restricted Stock) at $.40 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
(297,027) earned pursuant to the Restricted Stock Agreement.
Upon the repurchase of the Note on August 18, 1997, the remaining 1,322,973
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 $6.83 per share, and
the original purchase price of the Restricted Stock, which was $.40 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 925,625 shares of common
stock at an exchange rate of $8.00 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 2,025,000 shares of common stock at an exercise price of $.40 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 CVS Warrant.
F-14
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company also issued to CVS a warrant to purchase 1,620,000 shares of
common stock at an exercise price of $.40 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.
During 1999, the underwriters of the Company's initial public offering
exercised the outstanding underwriter warrants that were issued to them in
connection with the offering. The net proceeds received by the Company from
the warrant exercises were approximately $1.2 million.
9.STOCK OPTIONS:
The Company has adopted the 1996 and 1998 Stock Option Plans, pursuant to
which options to acquire an aggregate of 2,250,000 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 a 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 years ended, is presented in the table below:
<TABLE>
<CAPTION>
YEARS ENDED
-----------------------------------------------------------
JANUARY 29, 2000 JANUARY 30, 1999 JANUARY 31, 1998
------------------- ------------------- -------------------
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 year................ 1,840,619 $ 5.94 1,694,152 $5.46 274,050 $2.96
Granted............... 323,249 10.78 328,648 7.93 1,468,432 5.85
Exercised............. (160,062) 4.76 (57,660) 3.01 -- --
Forfeited............. (155,360) 6.32 (124,521) 6.03 (48,330) 2.96
--------- ------ --------- ----- --------- -----
Outstanding, end of
year................... 1,848,446 $ 6.86 1,840,619 $5.94 1,694,152 $5.46
========= ====== ========= ===== ========= =====
Exercisable, end of
year................... 946,378 $ 5.77 549,970 $5.38 79,740 $2.96
========= ====== ========= ===== ========= =====
Weighted average fair
value of options
granted................ $2.48 $1.91 $2.41
</TABLE>
F-15
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEARS ENDED
-----------------------------------
JANUARY 29, JANUARY 30, JANUARY 31,
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Net income:
As reported........................ $30,651 $18,177 $10,838
Pro forma.......................... 30,026 17,628 10,638
Diluted net income per common share:
As reported........................ $ 1.80 $ 1.11 $ 0.69
Pro forma.......................... 1.76 1.08 0.68
</TABLE>
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in the years ended January 29, 2000,
January 30, 1999 and January 31, 1998: weighted average risk-free interest
rates of 6.1%, 4.9% and 5.1%, respectively; no expected dividend yields;
expected lives of six years, three years and three years, respectively; and
expected volatility of 39.8%, 45.6% and 32.1%, respectively.
10. EMPLOYEE BENEFIT PLANS:
401(k) Profit Sharing Plan
The Company has a defined contribution 401(k) profit sharing plan for
eligible employees which is qualified under Sections 401(a) and 401(k) of the
Internal Revenue Code of 1986. Employees are entitled to make tax-deferred
contributions of up to 15% of their eligible compensation (10% for those
employees whose compensation in the previous year exceeded $80,000). For
employees who have worked less than three years, the Company matches 25% of
contributions, up to a maximum of 4% of the employee's eligible compensation.
For employees who have worked more than three years, the Company matches 50%
of contributions, up to a maximum of 4% of the employee's eligible
compensation. The Company may also, at its discretion, make a profit sharing
contribution to the 401(k) plan for each plan year. The Company's
contributions vest after five years of service, at age 65 regardless of
service or upon the death of the employee.
The Company's contributions to the 401(k) profit sharing plan were $3.8
million, $1.8 million and $1.5 million for the years ended January 29, 2000,
January 30, 1999 and January 31, 1998, respectively.
Employee Stock Purchase Plan
During 1999, the Company adopted an employee stock purchase plan which is
qualified under Section 423 of the Internal Revenue Code of 1986. Employees
are entitled to have payroll deductions withheld that are used to purchase
company stock at a 15% discount at defined times during the year. The Company
has allowed for 375,000 shares of common stock to be distributed under this
plan. As of January 29, 2000, 10,037 shares had been issued under the plan.
11. 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
F-16
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
YEARS ENDED
-----------------------------------
JANUARY 29, JANUARY 30, JANUARY 31,
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Minimum rentals....................... $42,399 $39,363 $37,326
Contingent rentals.................... 4,390 3,077 3,058
------- ------- -------
46,789 42,440 40,384
Less--Sublease rentals................ (317) (543) (588)
------- ------- -------
Total............................... $46,472 $41,897 $39,796
======= ======= =======
</TABLE>
As of January 29, 2000, 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>
<CAPTION>
Fiscal years ending:
<S> <C>
2001........................................................... $ 35,463
2002........................................................... 31,146
2003........................................................... 27,662
2004........................................................... 22,422
2005........................................................... 17,663
Thereafter....................................................... 48,792
--------
Total........................................................ $183,148
========
</TABLE>
As of January 29, 2000, approximately 250 of the Company's 528 leases
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.
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 29, 2000 and January 30, 1999, the Company had outstanding
letters of credit of approximately $20.2 million and $10.3 million,
respectively (see Note 6), which were primarily used to guarantee foreign
purchase orders.
12. RELATED-PARTY TRANSACTIONS:
The Company regularly conducts business with G-III, of which a director of
Wilsons Leather is the chief executive officer. Purchases from G-III totaled
$5.9 million, $9.4 million and $7.5 million for the years ended
F-17
<PAGE>
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
January 29, 2000, January 30, 1999 and January 31, 1998, respectively. 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.
13. SUBSEQUENT EVENTS:
On February 15, 2000, the Board of Directors declared a three-for-two stock
split. The stock split becomes effective March 15, 2000 to shareholders of
record on February 29, 2000. The common stock share and per share information
in the accompanying consolidated financial statements and notes, for all
periods presented, reflect the effect of the stock split.
Subsequent to January 29, 2000, the Company repurchased an additional $13.3
million of its 11 1/4% Senior Notes due August 15, 2004. The Company incurred
an extraordinary charge, net of tax, of approximately $0.6 million for the
early retirement of debt in the first quarter of fiscal year 2000.
F-18
<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 10, 2000:
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 10, 2000 BY THE FOLLOWING PERSONS ON
BEHALF OF THE REGISTRANT AND IN THE CAPACITIES INDICATED:
<TABLE>
<CAPTION>
<S> <C>
/s/ Joel N. Waller Director
______________________________________
JOEL N. WALLER
/s/ David L. Rogers Director
______________________________________
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
- --- ----------- ----------------
<S> <C> <C>
2.1 Sale Agreement dated as of May 24, 1996 by and among CVS New York,
Inc., Wilsons Center, Inc. and Wilsons The Leather Experts Inc. (1).. Incorporated by Reference
3.1 Amended and Restated Articles of Incorporation of Wilsons The Leather
Experts Inc. adopted June 16, 1998 as amended by the Articles of
Amendment dated February 17, 2000.................................... Electronic Transmission
3.2 Restated Bylaws of Wilsons The Leather Experts Inc. as amended
June 16, 1998 and January 25, 2000................................... 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 Registration Rights Agreement dated as of May 25, 1996, by and among
CVS New York, Inc., Wilsons The Leather Experts Inc., the Managers
listed on the signature pages thereto, Leather Investors Limited
Partnership I and the Partners listed on the signature pages
thereto. (5)......................................................... Incorporated by Reference
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
- --- ----------- ----------------
<S> <C> <C>
4.5 Amendment to Registration Rights Agreement dated as of August 12,
1999 by and among Wilsons The Leather Experts Inc. and the
Shareholders listed on the attachments thereto. ..................... Electronic Transmission
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. (6)..................................................... Incorporated by Reference
10.2 Wilsons The Leather Experts Inc. Amended Executive and Key
Management Incentive Plan. (7)....................................... Incorporated by Reference
10.3 Wilsons The Leather Experts Inc. 401(k) Plan. (1).................... Incorporated by Reference
10.4 Employment Agreement dated as of May 25, 1996 between Wilsons The
Leather Experts Inc. and Joel N. Waller. (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 Amended and Restated Credit Agreement dated as of May 24, 1999 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 (the "Credit
Agreement"). (8)..................................................... 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 Supplemental Security Agreement dated as of May 24, 1999, by and
among Wilsons Leather Holdings Inc. and the other Grantors listed on
the signature pages thereto, in favor of General Electric Capital
Corporation, in its capacity as Agent for Lendors. (9)............... Incorporated by Reference
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
- --- ----------- ----------------
<S> <C> <C>
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. (10)............... Incorporated by Reference
10.10 Wilsons The Leather Experts Inc. Amended 1996 Stock Option
Plan. (2)............................................................ Incorporated by Reference
10.11 Joinder Agreement dated as of May 24, 1999, by and between the Store
Guarantors that are signatories thereto and General Electric Capital
Corporation. (11).................................................... Incorporated by Reference
10.12 Pledge Agreement dated as of May 24, 1999, by and between Wilsons
Leather of Delaware, Inc. and General Electric Capital Corporation,
individually and as Agent for the Lenders signatory to the Credit
Agreement. (12)...................................................... Incorporated by Reference
10.13 Pledge Agreement dated as of May 24, 1999, between Wilsons
International, Inc. and General Electric Capital Corporation,
individually and as Agent for the Lenders signatory to the Credit
Agreement. (13)...................................................... 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. (14)...................................................... 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. (15)........ 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. (16). 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. (17). Incorporated by Reference
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
- --- ----------- ----------------
<S> <C> <C>
10.18 Reaffirmation of Guaranty dated as of May 24, 1999, by Wilsons The
Leather Experts Inc., Wilsons Center Inc., Rosedale Wilsons, Inc.,
River Hills Wilsons, Inc. and the Store Guarantors listed on the
signature pages thereto in favor of General Electric Capital
Corporation. (18).................................................... 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. (19).................................................... Incorporated by Reference
10.20 Joinder Agreement dated as of July 31, 1997, by and between Wilsons
International Inc. and General Electric Capital Corporation. (20).... 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. (21).................................................... Incorporated by Reference
10.22 Wilsons The Leather Experts Inc. 1998 Stock Option Plan. (22)........ Incorporated by Reference
10.23 First Amendment to the Amended and Restated Credit Agreement dated
as of September 24, 1999. (23)....................................... Incorporated by Reference
10.24 Reaffirmation of Guaranty dated September 24, 1999 by Wilsons The
Leather Experts Inc., Wilsons Center, Inc., Rosedale Wilsons, Inc.
and River Hills Wilsons, Inc. (24)................................... Incorporated by Reference
10.25 Unqualified Release Agreement dated March 3, 1999. (25).............. Incorporated by Reference
10.26 Second Amendment to the Amended and Restated Credit Agreement dated
as of February 29, 2000.............................................. Electronic Transmission
10.27 First Amendment to Employment Agreement dated as of April 3, 2000
between Wilsons The Leather Experts Inc. and Joel N. Waller.......... Electronic Transmission
10.28 First Amendment to Employment Agreement as of March 23, 2000
between Wilsons The Leather Experts Inc. and David L. Rogers......... Electronic Transmission
11.1 Computation of per share income...................................... Electronic Transmission
21.1 Subsidiaries of Wilsons The Leather Experts Inc...................... Electronic Transmission
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description Method of Filing
- --- ----------- ----------------
<S> <C> <C>
23.1 Consent of Arthur Andersen LLP....................................... Electronic Transmission
27.1 Financial Data Schedule.............................................. Electronic Transmission
</TABLE>
(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 Exhibit 4.8 to the Company's Registration
Statement on Form S-1 (333-13967) filed with the Commission on October
11, 1996.
(6) 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.
(7) Incorporated by reference to Exhibit 10.2 to the Company's Report on
Form 10-K for the fiscal year ended January 30, 1999 filed with the
Commission.
(8) Incorporated by reference to Exhibit 10.1 to the Company's Report on
Form 10-Q for the quarter ended May 1, 1999 filed with the Commission.
(9) Incorporated by reference to Exhibit 10.2 to the Company's Report on
Form 10-Q for the quarter ended May 1, 1999 filed with the Commission.
(10) 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.
(11) Incorporated by reference to Exhibit 10.3 to the Company's Report on
Form 10-Q for the quarter ended May 1, 1999 filed with the Commission.
(12) Incorporated by reference to Exhibit 10.4 to the Company's Report on
Form 10-Q for the quarter ended May 1, 1999 filed with the Commission.
(13) Incorporated by reference to Exhibit 10.5 to the Company's Report on
Form 10-Q for the quarter ended May 1, 1999 filed with the Commission.
<PAGE>
(14) 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.
(15) 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.
(16) 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.
(17) 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.
(18) Incorporated by reference to Exhibit 10.6 to the Company's Report on
Form 10-Q for the quarter ended May 1, 1999 filed with the Commission.
(19) 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.
(20) 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.
(21) 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.
(22) 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.
(23) Incorporated by reference to Exhibit 10.1 to the Company's Report on
Form 10-Q for the quarter ended October 30, 1999 filed with the
Commission.
(24) Incorporated by reference to Exhibit 10.2 to the Company's Report on
Form 10-Q for the quarter ended October 30, 1999 filed with the
Commission.
(25) Incorporated by reference to Exhibit 10.7 to the Company's Report on
Form 10-Q for the quarter ended May 1, 1999 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 160,000,000 shares, consisting of 150,000,000 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
<PAGE>
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.
(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
RESTATED BY-LAWS
OF
WILSONS THE LEATHER EXPERTS INC.
TABLE OF CONTENTS
Section Page
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SHAREHOLDERS 1
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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
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Section Page
- ------- ----
OFFICERS 8
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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
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4.01 Indemnification 10
4.02 Insurance 10
SHARES 10
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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
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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.
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<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 regular 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
<PAGE>
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.
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
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<PAGE>
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 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
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<PAGE>
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 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
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<PAGE>
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.
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,
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<PAGE>
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 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
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<PAGE>
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 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.
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<PAGE>
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. 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
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<PAGE>
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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<PAGE>
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.
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<PAGE>
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.
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".
-11-
<PAGE>
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,
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.
-12-
<PAGE>
Exhibit 4.5
AMENDMENT TO REGISTRATION RIGHTS AGREEMENT
THIS AMENDMENT TO REGISTRATION RIGHTS AGREEMENT is made and entered into as
of the 12th day of August, 1999 by and among Wilsons The Leather Experts Inc., a
Minnesota corporation, (the "Corporation") and the shareholders listed on the
attachments hereto (the "Shareholders").
WHEREAS, the Company, CVS New York, Inc. (formerly Melville Corporation)
("CVS"), and the Shareholders or their predecessors, entered into a Registration
Rights Agreement dated as of May 25, 1996 (the "Registration Rights Agreement"),
which, among other things, governs the registration rights of such Shareholders;
and
WHEREAS, the Management Warrant (as that term is defined in the
Registration Rights Agreement) held by CVS lapsed upon repayment of the Note (as
that term is defined in the Registration Rights Agreement) as of August 18,
1997, and the Warrant (as that term is defined in the Registration Rights
Agreement) held by CVS was repurchased and simultaneously cancelled by the
Corporation as of March 27, 1998; and
WHEREAS, the Shareholders constitute all of the securityholders of the
Corporation who are entitled to the benefits of the Registration Rights
Agreement, and the Shareholders and the Corporation wish to amend the
Registration Rights Agreement to clarify the registration rights of such
Shareholders pursuant to the Registration Rights Agreement; and
WHEREAS, all of the Shareholders whose consent is required to approve an
amendment to the Registration Rights Agreement in accordance with Section 4.2
thereof have agreed and consented in writing to amending the Registration Rights
Agreement pursuant to a letter dated either August 27, 1998 or August 28, 1998,
copies of which are attached hereto, to expressly provide that incidental
registration rights do not apply to any shares of Common Stock of the
Corporation that can be sold pursuant to Rule 144(k), as promulgated under the
Securities Act of 1933, as amended (the "1933 Act");
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Section 2.2 of the Agreement is hereby amended to reflect that
incidental registration rights do not apply to any shares of Common Stock of the
Corporation that can be sold pursuant to Rule 144(k), as promulgated under the
1933 Act, by adding the following sentence at the end of Section 2.2:
"Notwithstanding the foregoing, the Company shall not be obligated to
register securities pursuant to this Section 2.2 or any other provision of
this Agreement if such securities are available for resale pursuant to Rule
144(k) promulgated under the 1933 Act."
<PAGE>
2. The Registration Rights Agreement shall continue in full force and
effect, unmodified except as expressly amended hereby.
3. This Amendment may be executed in two or more counterparts, each of
which shall be an original, but all of which shall constitute but one agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first written above.
WILSONS THE LEATHER EXPERTS INC.
By /s/David Rogers
--------------------------------------
Its President
---------------------------------
SHAREHOLDERS
(See Attachments hereto)
<PAGE>
[ATTACHMENTS OMITTED]
<PAGE>
Exhibit 10.26
SECOND AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT
This SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (this
"Amendment") is entered into as of this 29th day of February, 2000 among WILSONS
LEATHER HOLDINGS INC., a Minnesota corporation ("Borrower"), GENERAL ELECTRIC
CAPITAL CORPORATION, a New York corporation, as Lender, Swing Line Lender and as
Agent ("Agent"), the Credit Parties signatory hereto and the Requisite Lenders
signatory hereto. Unless otherwise specified herein, capitalized terms used in
this Amendment shall have the meanings ascribed to them by the Credit Agreement
(as hereinafter defined).
RECITALS
--------
WHEREAS, Borrower, certain Credit Parties, Agent, and Lenders have entered
into that certain Amended and Restated Credit Agreement dated as of May 24,
1999, as amended by the First Amendment to the Amended and Restated Credit
Agreement dated September 24, 1999 (as further amended, supplemented, restated
or otherwise modified from time to time, the "Credit Agreement"); and
WHEREAS, Borrower and Agent wish to further amend the Credit Agreement, all
as more fully set forth herein;
NOW THEREFORE, in consideration of the mutual covenants herein and other
good and valuable consideration, the parties hereto agree as follows:
Section 1 Amendments to the Credit Agreement.
Subject to the satisfaction of the conditions precedent set forth in
Section 3 hereof, the parties hereto hereby agree to amend the Credit Agreement
as follows:
(a) Clause (12) of Section 6.1 is amended to read in its entirety as
follows:
After giving effect to a Permitted Investment, Ultimate Parent and
Target, on a consolidated basis (if consolidation is required under
GAAP), or Ultimate Parent alone (if consolidation is not required
under GAAP) shall have a Fixed Charge Coverage Ratio that complies
with Schedule I for the 12 months preceding and the 12 months
following the Permitted Investment.
(b) Section 6.2 of the Credit Agreement is amended and restated to
read in its entirety as follows:
No Credit Party shall make any investment in, or make or accrue loans
or advances of money to, any Person, through the direct or indirect
lending of money, holding of securities or otherwise, except that (a)
any Loan Party
<PAGE>
may, so long as no Default or Event of Default has occurred and is
continuing, make investments in (i) marketable direct obligations
issued or unconditionally guaranteed by the United States of America
or any agency thereof maturing within one year from the date of
acquisition thereof, (ii) commercial paper maturing no more than one
year from the date of creation thereof and having an investment rating
of A-2 or P-2 or better from either Standard & Poor's Corporation or
Moody's Investors Service, Inc., (iii) time deposits, demand deposits
and certificates of deposit, maturing no more than one year from the
date of creation thereof, issued by commercial banks incorporated
under the laws of the United States of America, each having combined
capital, surplus and undivided profits of not less than $300,000,000
and having a senior secured rating of "A" or better by a nationally
recognized rating agency (an "A Bank"), (iv) time deposits, maturing
no more than 30 days from the date of creation thereof with an A Bank;
(v) overnight repurchase obligations issued by an A Bank; (b) any Loan
Party may, so long as no Default or Event of Default has occurred and
is continuing and no Revolving Credit Advances are outstanding, make
investments in (i) asset-backed securities and taxable or tax-exempt
municipal bonds, in each case rated "AAA" or better by Standard &
Poor's Corporation and maturing in six months or less and (ii)
corporate bonds maturing in six months or less and rated "A" or better
by Standard & Poor's Corporation; and (c) each Credit Party may (i)
maintain its existing investments in its Subsidiaries as of the
Closing Date, (ii) make unlimited investments in Borrower, (iii) make
investments in new Subsidiaries and Permitted Investments in
accordance with Section 6.1, (iv) upon prior written notice to Agent,
maintain equity investments in Store Guarantors necessary to maintain
them as Solvent in an aggregate amount not to exceed $1,000,000, (v)
make intercompany loans as permitted under Section 6.3, and (vi) make
other investments not exceeding $500,000 in the aggregate at any time
outstanding.
(c) The last sentence of Section 6.17 is amended and restated to read
as follows:
In addition, Ultimate Parent may repurchase up to an additional
$30,000,000 of Senior Notes in the aggregate at any time after the end
of the Fiscal Year ending in January of 2000; provided that Ultimate
Parent may only repurchase Senior Notes during any Fiscal Year if it
had consolidated EBITDA of at least $47,200,000 during the preceding
Fiscal Year.
(d) Clause (a) of Schedule I to the Credit Agreement is amended for
Fiscal Year 2001 as follows:
2
<PAGE>
Maximum Capital
Period Expenditures per Period
------ -----------------------
Fiscal Year ending in January of 2001 $38,000,000
(e) Clause (b) of Schedule I is amended by adding the following
proviso to the end of that clause:
provided, however, that for the four Fiscal Quarters ending on or
about the last day of July, 2000, and on or about the last day of
October, 2000, the Fixed Charge Coverage Ratio shall be not less than
0.90 : 1.0.
Section 2 Representations and Warranties.
Borrower and the Credit Parties represent and warranty that:
(a) the execution, delivery and performance by Borrower and the Credit
Parties of this Amendment have been duly authorized by all necessary
corporate action and this Amendment is a legal, valid and binding
obligation of Borrower and the Credit Parties enforceable against Borrower
and Credit 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 law affecting creditors'
rights generally and (ii) general principles of equity (regardless of
whether such enforcement is sought in a proceeding in equity or at law);
(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 Amendment
nor the consummation of the transactions contemplated hereby does or shall
contravene, result in a breach of, or violate (i) any provision of
Borrower's or Credit Parties' certificate or articles of incorporation or
bylaws, (ii) any law or regulation, or any order or decree of any court or
government instrumentality or (iii) indenture, mortgage, deed of trust,
lease, agreement or other instrument to which Borrower, the Credit Parties
or any of their Subsidiaries is a party or by which Borrower, the Credit
Parties or any of their 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 waiver document a copy of which has been delivered to
Agent on or before the date hereof; and
(d) no Default or Event of Default will exist or result after giving
effect hereto.
3
<PAGE>
Section 3 Conditions to Effectiveness.
This Amendment will be effective only upon satisfaction of the following:
(a) Execution and delivery of four counter-parts of this Amendment by
Borrower, the Credit Parties that are listed on the signature pages hereto
and Requisite Lenders.
(b) The representations and warranties contained herein shall be true
and correct in all respects.
(c) Each of the Guarantors shall have executed and delivered the form
of Reaffirmation of Guaranty attached to this Amendment.
Section 4 Reference to and Effect Upon the Credit Agreement.
(a) Except as specifically amended above, the Credit Agreement and the
other Loan Documents shall remain in full force and effect and are hereby
ratified and confirmed.
(b) The execution, delivery and effectiveness of this Amendment 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
Amendment, each reference in the Credit Agreement to "this Agreement",
"hereunder", "hereof", "herein" or words of similar import shall mean and
refer to the Credit Agreement as amended hereby.
Section 5 Waiver and Release.
In consideration of the foregoing, Borrower and the Credit Parties hereby
waives, releases and covenants not to sue Agent with respect to, any and all
claims it may have against Agent, whether known or unknown, arising in tort, by
contract or otherwise prior to the date hereof.
Section 6 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 Amendment.
Section 7 Governing Law.
THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
INTERNAL LAWS (AS OPPOSED TO CONFLICTS OF LAWS PROVISIONS) OF THE STATE OF
ILLINOIS.
4
<PAGE>
Section 8 Headings.
Section headings in this Amendment are included herein for
convenience of reference only and shall not constitute a part of this amendment
for any other purposes.
Section 9 Counterparts.
This Amendment 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]
5
<PAGE>
IN WITNESS WHEREOF, this Amendment has been duly executed as of the date
first written above.
BORROWER:
WILSONS LEATHER HOLDINGS INC.
By: /s/ Douglas J. Treff
-------------------------------------
Title: CFO
----------------------------------
AGENT:
Revolving Loan Commitment: GENERAL ELECTRIC CAPITAL
$45,000,000 CORPORATION, as Agent, Lender and
(including $10,000,000 Swing Swing Line Lender
Line Commitment)
By: Geoffrey K. Hall
-------------------------------------
Title: Duly Authorized Singatory
----------------------------------
LENDERS:
Revolving Loan Commitment: Fleet National Bank
$10,000,000
By: /s/ Katheleen Dimock
-------------------------------------
Title: Vice President
----------------------------------
Revolving Loan Commitment: THE CIT GROUP/BUSINESS CREDIT,
$10,000,000 INC., as Lender
By: /s/ Evelyn Kusold
-------------------------------------
Title: Assistant Vice President
----------------------------------
6
<PAGE>
Revolving Loan Commitment: FIRST UNION NATIONAL BANK, as Lender
$20,000,000
By: /s/ Joan Anderson
-------------------------------------
Title: VP
----------------------------------
Revolving Loan Commitment: U.S. BANK NATIONAL ASSOCIATION,
$15,000,000 as Lender
By: /s/ Kim Leppanen
-------------------------------------
Title: Vice President
----------------------------------
Revolving Loan Commitment HARRIS TRUST AND SAVINGS BANK,
$15,000,000 as Lender
By: /s/ George M. Dluhy
-------------------------------------
Title: Vice President
----------------------------------
Revolving Loan Commitment FLEET BUSINESS CREDIT CORPORATION,
$10,000,000 as Lender
By: /s/ Donald A. Mastro
-------------------------------------
Title: Vice President
----------------------------------
7
<PAGE>
LOAN PARTIES:
Wilsons The Leather Experts Inc.
By: /s/ Douglas J. Treff
-------------------------------------
Title: CFO
----------------------------------
Wilsons Center, Inc.
By: /s/ Douglas J. Treff
-------------------------------------
Title: CFO
----------------------------------
Rosedale Wilsons, Inc.
By: /s/ Douglas J. Treff
-------------------------------------
Title: CFO
----------------------------------
River Hills Wilsons, Inc.
By: /s/ Douglas J. Treff
-------------------------------------
Title: CFO
----------------------------------
Bermans The Leather Experts Inc.
By: /s/ Douglas J. Treff
-------------------------------------
Title: CFO
----------------------------------
8
<PAGE>
Exhibit 10.27
FIRST AMENDMENT
TO
EMPLOYMENT AGREEMENT
(WALLER)
THIS FIRST AMENDMENT (this "Amendment") is made as of April 3, 2000, to the
Employment Agreement dated May 25, 1996 (the "Original Agreement") by and
between WILSONS THE LEATHER EXPERTS INC., a Minnesota corporation (the
"Company"), and JOEL WALLER, a resident of Minnesota (the "Executive").
WHEREAS, the Company wishes to continue to secure the Executive's services
as Chairman and Chief Executive Officer of the Company under the terms of the
Original Agreement as modified by this Amendment;
WHEREAS, the Executive wishes to continue to provide such services to the
Company; and
WHEREAS, the Executive and the Company desire to modify the definitions of
"Employment Year" and "Base Salary" in the Original Agreement.
NOW THEREFORE, in consideration of the premises and of the mutual covenants
and undertakings stated herein, the Executive and the Company hereby agree to
amend the Original Agreement as follows:
A. Section 1 of the Original Agreement is hereby amended in its entirety to
read as follows:
1. Employment. Subject to all terms and conditions hereof, the Company
shall employ the Executive as, and the Executive shall serve the Company
as, Chairman and Chief Executive Officer of the Company during the period
commencing May 25, 1996 and ending at the end of the Employment Period,
unless the Executive's employment hereunder terminates earlier in
accordance with Section 5 hereof. For purposes of this Agreement, the
"Employment Period" shall commence on May 25, 1996 and shall end on March
31, 2003, subject to an automatic one-year extension on each April 1,
commencing on April 1, 2001 and each April 1 thereafter (provided that the
Executive's employment hereunder has not previously terminated), unless,
not later than ninety (90) days prior to the applicable April 1, the
Executive or the Company shall have given notice to the other party hereto
not to extend, or further extend, the Employment Period. As a result of the
automatic one-year extensions, the Employment Period shall not have less
than two remaining Employment Years at the time of any termination of the
Executive's employment unless, not later than ninety (90) days prior to an
April 1 preceding such termination, the Executive or the Company shall have
<PAGE>
given notice to the other party hereto not to extend, or further extend,
the Employment Period.
B. The definition of "Employment Year" contained in the Original Agreement
is hereby changed to mean, as applicable, the twelve-month period ending on May
25 for all such twelve-month periods ending on or prior to May 25, 1999, the
period commencing May 26, 1999 and ending March 31, 2000 and each twelve-month
period thereafter during the Employment Period commencing April 1 and ending on
the next March 31.
C. Section 3(a) of the Original Agreement is hereby amended in its entirety
to read as follows for Employment Years commencing on May 26, 1999 and each
Employment Year thereafter:
3. Compensation.
(a) Subject to all terms and conditions hereof, while the
Executive is employed by the Company hereunder, the Company shall pay,
or cause one or more of its Subsidiaries to pay, to the Executive a
base salary ("Base Salary") of $425,000 per Employment Year (prorated
for any partial Employment Year) or such higher amount as is from time
to time hereafter established by the Board of Directors or the
Compensation Committee of the Company. The Executive's annual Base
Salary shall be payable in substantially equal installments once every
two weeks. The Board of Directors of the Company or the Compensation
Committee will review the Executive's Base Salary at the beginning of
each Employment Year, to determine whether an increase in the annual
amount thereof is merited. In no event shall the Board of Directors or
the Compensation Committee reduce the Executive's Base Salary for any
Employment Year commencing April 1, 2000 or thereafter below the
greater of $425,000 or the amount of Base Salary paid by the Company
to the Executive on an annualized basis for the immediately preceding
Employment Year.
D. All references in the Original Agreement and this Amendment to "this
Agreement," the "Agreement," "hereunder," "herein," or "hereof" shall be deemed
to be references to the Original Agreement, as amended by this Amendment and as
hereafter amended by any other amendment adopted in accordance with Section 22
of the Original Agreement.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed on the date and year first above written.
WILSONS THE LEATHER EXPERTS
INC.
/s/ Joel Waller By: /s/ David Rogers
- ---------------------------------- -------------------------------------
Name: Joel Waller Name: David Rogers
Title: President
3
<PAGE>
Exhibit 10.28
FIRST AMENDMENT
TO
EMPLOYMENT AGREEMENT
(ROGERS)
THIS FIRST AMENDMENT (this "Amendment") is made as of March 23, 2000, to
the Employment Agreement dated May 25, 1996 (the "Original Agreement") by and
between WILSONS THE LEATHER EXPERTS INC., a Minnesota corporation (the
"Company"), and DAVID ROGERS, a resident of Minnesota (the "Executive").
WHEREAS, the Company wishes to continue to secure the Executive's services
as President of the Company under the terms of the Original Agreement as
modified by this Amendment;
WHEREAS, the Executive wishes to continue to provide such services to the
Company; and
WHEREAS, the Executive and the Company desire to modify the definitions of
"Employment Year" and "Base Salary" in the Original Agreement.
NOW THEREFORE, in consideration of the premises and of the mutual covenants
and undertakings stated herein, the Executive and the Company hereby agree to
amend the Original Agreement as follows:
A. Section 1 of the Original Agreement is hereby amended in its entirety to
read as follows:
1. Employment. Subject to all terms and conditions hereof, the Company
shall employ the Executive as, and the Executive shall serve the Company
as, President of the Company during the period commencing May 25, 1996 and
ending at the end of the Employment Period, unless the Executive's
employment hereunder terminates earlier in accordance with Section 5
hereof. For purposes of this Agreement, the "Employment Period" shall
commence on May 25, 1996 and shall end on March 31, 2003, subject to an
automatic one-year extension on each April 1, commencing on April 1, 2001
and each April 1 thereafter (provided that the Executive's employment
hereunder has not previously terminated), unless, not later than ninety
(90) days prior to the applicable April 1, the Executive or the Company
shall have given notice to the other party hereto not to extend, or further
extend, the Employment Period. As a result of the automatic one-year
extensions, the Employment Period shall not have less than two remaining
Employment Years at the time of any termination of the Executive's
employment unless, not later than ninety (90) days prior to an April 1
preceding such termination, the Executive or the Company shall have given
notice to the other party hereto not to extend, or further extend, the
Employment Period.
<PAGE>
B. The definition of "Employment Year" contained in the Original Agreement
is hereby changed to mean, as applicable, the twelve-month period ending on May
25 for all such twelve-month periods ending on or prior to May 25, 1999, the
period commencing May 26, 1999 and ending March 31, 2000 and each twelve-month
period thereafter during the Employment Period commencing April 1 and ending on
the next March 31.
C. Section 3(a) of the Original Agreement is hereby amended in its entirety
to read as follows for Employment Years commencing on May 26, 1999 and each
Employment Year thereafter:
3. Compensation.
(a) Subject to all terms and conditions hereof, while the
Executive is employed by the Company hereunder, the Company shall pay,
or cause one or more of its Subsidiaries to pay, to the Executive a
base salary ("Base Salary") of $425,000 per Employment Year (prorated
for any partial Employment Year) or such higher amount as is from time
to time hereafter established by the Board of Directors or the
Compensation Committee of the Company. The Executive's annual Base
Salary shall be payable in substantially equal installments once every
two weeks. The Board of Directors of the Company or the Compensation
Committee will review the Executive's Base Salary at the beginning of
each Employment Year, to determine whether an increase in the annual
amount thereof is merited. In no event shall the Board of Directors or
the Compensation Committee reduce the Executive's Base Salary for any
Employment Year commencing April 1, 2000 or thereafter below the
greater of $425,000 or the amount of Base Salary paid by the Company
to the Executive on an annualized basis for the immediately preceding
Employment Year.
D. All references in the Original Agreement and this Amendment to "this
Agreement," the "Agreement," "hereunder," "herein," or "hereof" shall be deemed
to be references to the Original Agreement, as amended by this Amendment and as
hereafter amended by any other amendment adopted in accordance with Section 22
of the Original Agreement.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed on the date and year first above written.
WILSONS THE LEATHER EXPERTS
INC.
/s/David Rogers By: /s/ Joel Waller
- ----------------------------- -----------------------------------
Name: David Rogers Name: Joel Waller
Title: CEO
3
<PAGE>
Exhibit 11.1
Wilsons The Leather Experts Inc. and Subsidiaries
Net Income Per Common Share
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
January 29, 2000 January 30, 1999
---------------- ----------------
<S> <C> <C>
Net income $51,798 $36,582
======= =======
Weighted average common shares
outstanding-basic 16,569 16,247
Effect of options granted (1) 819 324
------- -------
Weighted average common shares
outstanding-assuming dilution 17,388 16,571
======= =======
Basic net income per common share (1) $ 3.13 $ 2.25
======= =======
Diluted net income per common share (1) $ 2.98 $ 2.21
======= =======
<CAPTION>
Year Ended Year Ended
January 29, 2000 January 30, 1999
---------------- ----------------
<S> <C> <C>
Net income $30,651 $18,177
======= =======
Weighted average common shares
outstanding - basic 16,408 15,536
Effect of options granted (1) 656 559
Effect of warrant (1) -- 286
------- -------
Weighted average common shares
outstanding - basic and diluted 17,064 16,381
======= =======
Basic net income per common share (1) $ 1.87 $ 1.17
======= =======
Diluted net income per common share (1) $ 1.80 $ 1.11
======= =======
</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.
<PAGE>
Exhibit 21.1
Wilsons
Wilsons The Leather Experts Inc.
Wilsons Center, Inc.
Rosedale Wilsons, Inc.
Wilsons Leather Direct Inc.
River Hills Wilsons, Inc.
Wilsons Leather of Alabama Inc.
Wilsons Leather of Arkansas Inc.
Wilsons Leather of Connecticut Inc.
Wilsons Leather of Delaware Inc.
Wilsons Leather of Airports Inc.
Chicago O'Hare Leather Concessions Joint Venture
Houston Airport Leather Concessions L.L.C.
Wilsons Leather of Florida Inc.
Wilsons Leather of Georgia Inc.
Wilsons Leather of Indiana Inc.
Wilsons Leather of Iowa Inc.
Wilsons Leather of Louisiana Inc.
Wilsons Leather of Maryland Inc.
Wilsons Leather of Massachusetts Inc.
Wilsons Leather of Michigan Inc.
Wilsons Leather of Mississippi Inc.
Wilsons Leather of Missouri Inc.
Wilsons Leather of New Jersey Inc.
Wilsons Leather of New York Inc.
Wilsons Leather of North Carolina Inc.
Wilsons Leather of Ohio Inc.
Wilsons Leather of Pennsylvania Inc.
Wilsons Leather of Rhode Island Inc.
Wilsons Leather of South Carolina Inc.
Wilsons Leather of Tennessee Inc.
Wilsons Leather of Texas Inc.
Wilsons Leather of Vermont Inc.
Wilsons Leather of Virginia Inc.
Wilsons Leather of West Virginia Inc.
Wilsons Leather of Wisconsin Inc.
Bermans the Leather Experts Inc.
Wilsons Leather Holdings Inc.
Wilsons International Inc.
Wilsons Leather of Canada Ltd.
Wilsons Leather of Hong Kong Ltd.
Wilsons (UK) Limited
Wilsons Leather Gatsland Limited
Wilsons Leather Gatsair Limited
<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, 333-70793, 333-79301 and 333-85049.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
April 10, 2000
<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 29, 2000 AND FOR THE THREE
AND TWELVE MONTH PERIODS ENDED JANUARY 29, 2000 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-29-2000 JAN-29-2000
<PERIOD-START> OCT-31-1999 JAN-31-1999
<PERIOD-END> JAN-29-2000 JAN-29-2000
<CASH> 124,926 124,926
<SECURITIES> 0 0
<RECEIVABLES> 8,670 8,670
<ALLOWANCES> 1,123 1,123
<INVENTORY> 79,221 79,221
<CURRENT-ASSETS> 220,834 220,834
<PP&E> 62,415 62,415
<DEPRECIATION> 12,828 12,828
<TOTAL-ASSETS> 272,554 272,554
<CURRENT-LIABILITIES> 93,979 93,979
<BONDS> 43,890 43,890
0 0
0 0
<COMMON> 166 166
<OTHER-SE> 131,041 131,041
<TOTAL-LIABILITY-AND-EQUITY> 272,554 272,554
<SALES> 317,335 543,608
<TOTAL-REVENUES> 317,335 543,608
<CGS> 173,525 340,740
<TOTAL-COSTS> 228,642 477,007
<OTHER-EXPENSES> 2,160 6,876
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 941 4,993
<INCOME-PRETAX> 85,592 54,732
<INCOME-TAX> 33,794 21,674
<INCOME-CONTINUING> 51,798 33,058
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 (958)
<CHANGES> 0 (1,449)
<NET-INCOME> 51,798 30,651
<EPS-BASIC> 3.13 1.87
<EPS-DILUTED> 2.98 1.80
</TABLE>
