10-K/A 1 d10ka.htm AMENDMENT NO. 1 ON FORM 10-K Prepared by R.R. Donnelley Financial -- Amendment No. 1 on Form 10-K
 
 
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K/A
AMENDMENT NO. 1
TO
(Mark one)
 
x
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 2, 2002
 
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
incorporation or organization)
   
(I.R.S. Employer
Identification No.)
7401 Boone Ave. N., Brooklyn Park, MN
   
55428
(Address of principal executive offices)
   
(Zip Code)
 
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.    ¨
 
The aggregate market value of the voting common equity held by non-affiliates of the registrant was $150,292,577, based on the closing sale price for the common stock on April 1, 2002 as reported by the Nasdaq National Market®. 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 19,325,848 at April 19, 2002.
 
This Amendment on Form 10-K/A is being filed for the purpose of amending and restating Schedule II, Valuation and Qualifying Accounts (“Schedule II”), filed as part Item 14(a) of the Registrant’s Annual Report on Form 10-K for the fiscal year ended February 2, 2002. The only revision being made to Item 14(a) is to add two line items, “Restructuring Liabilities—El Portal” and “Restructuring liabilities—Bentley’s Luggage”, under the “Year ended February 2, 2002” period in Schedule II and to add an additional column, “Balance at end of period,” for all periods presented in Schedule II. The two line items and the column were inadvertently omitted by the Registrant’s financial printer in the EDGAR filing of the Registrant’s Annual Report on Form 10-K for the fiscal year ended February 2, 2002.
 
The following amends and restates Item 14(a) in its entirety:
 

PART IV
 
 
(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:
 
Report of independent public accountants
 
To Wilsons The Leather Experts Inc.:
 
Our audit was made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. We have audited in accordance with the auditing standards generally accepted in the United States, the consolidated financial statements of Wilsons the Leather Experts Inc. and Subsidiaries included in this Form 10-K and have issued our report thereon dated April 23, 2002. The schedule listed in the index to consolidated financial statements is presented for purposes of complying with the Securities and Exchange Commission’s rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.
 
Arthur Andersen LLP
 
Minneapolis, Minnesota,
April 23, 2002
 
Schedule II
 
Valuation and Qualifying Accounts
        
Additions
            
    
Balance at beginning of period
   
Charged to costs and expenses
   
Charged to other accounts
   
Deductions
     
Balance at end of period
Year ended January 29, 2000:
                           
Allowance for doubtful accounts deducted from accounts receivable
   
1,122
   
1,437
   
—
   
(1,436
)
   
1,123
Year ended February 3, 2001:
                           
Allowance for doubtful accounts deducted from accounts receivable
   
1,123
   
891
   
459
   
(1,211
)
   
1,262
Restructuring liabilities—El Portal
   
—
   
—
   
1,536
   
—
 
   
1,536
Year ended February 2, 2002:
                           
Allowance for doubtful accounts deducted from accounts receivable
   
1,262
   
1,011
   
—
   
(1,862
)
   
411
Restructuring liabilities—El Portal
   
1,536
   
—  
   
—  
   
(1,497
)
   
39
Restructuring liabilities—Bentley’s Luggage
   
—  
   
—  
   
3,991
   
(2,756
)
   
1,235

37

WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
 
Index to Consolidated Financial Statements
 
    
Page
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
 
NOTE:    The page numbers of the consolidated financial statements will be changed to correspond with  
the index above.
 

F-1

 
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 February 2, 2002 and February 3, 2001, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended February 2, 2002. 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 February 2, 2002 and February 3, 2001, and the results of their operations and their cash flows for each of the three years in the period ended February 2, 2002, in conformity with accounting principles generally accepted in the United States.
 
As discussed in Note 2 to the consolidated financial statements, effective January 31, 1999, the Company changed its method of accounting for layaway sales.
 
 
AR
THUR ANDERSEN LLP
 
Minneapolis, Minnesota,
April 23, 2002
 

F-2

 
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
(In thousands, except share and per share amounts)
 
    
February 2, 2002
     
February 3, 2001
ASSETS
                
CURRENT ASSETS:
                
Cash and cash equivalents
   
$
43,329
 
   
$
52,122
Accounts receivable, net
   
 
10,255
 
   
 
11,640
Inventories
   
 
128,555
 
   
 
129,412
Prepaid expenses and other current assets
   
 
4,450
 
   
 
9,564
    
  
Total current assets
   
 
186,589
 
   
 
202,738
PROPERTY AND EQUIPMENT, net
   
 
109,827
 
   
 
82,428
GOODWILL AND OTHER ASSETS, net
   
 
28,772
 
   
 
26,760
DEFERRED TAXES
   
 
3,584
 
   
 
—  
    
  
Total assets
   
$
328,772
 
   
$
311,926
    
  
LIABILITIES AND SHAREHOLDERS’ EQUITY
                
CURRENT LIABILITIES:
                
Accounts payable
   
$
38,685
 
   
$
17,803
Accrued expenses
   
 
33,572
 
   
 
45,999
Income taxes payable
   
 
11,824
 
   
 
38,025
DEFERRED TAXES
   
 
1,974
 
   
 
247
    
  
Total current liabilities
   
 
86,055
 
   
 
102,074
LONG-TERM DEBT
   
 
55,590
 
   
 
30,590
DEFERRED TAXES
   
 
—  
 
   
 
388
OTHER LONG-TERM LIABILITIES
   
 
4,360
 
   
 
2,691
    
  
Total liabilities
   
 
146,005
 
   
 
135,743
    
  
COMMITMENTS AND CONTINGENCIES (Notes 11 and 12)
                
SHAREHOLDERS’ EQUITY:
                
Common stock, $.01 par value, 150,000,000 shares authorized; 19,204,545 and 16,885,750 shares issued and outstanding at February 2, 2002 and February 3, 2001, respectively
   
 
192
 
   
 
169
Additional paid-in capital
   
 
85,896
 
   
 
60,495
Retained earnings
   
 
97,952
 
   
 
115,490
Unearned compensation
   
 
(1,243
)
   
 
—  
Cumulative other comprehensive income (loss)
   
 
(30
)
   
 
29
    
  
Total shareholders’ equity
   
 
182,767
 
   
 
176,183
    
  
Total liabilities and shareholders’ equity
   
$
328,772
 
   
$
311,926
    
  
 
The accompanying notes are an integral part of these consolidated financial statements.

F-3

WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
(In thousands, except per share amounts)
 
    
For the years ended
  
    
February 2, 2002
     
February 3, 2001
     
January 29, 2000
  
NET SALES
   
$
720,082
 
   
$
636,941
 
   
$
543,608
 
COSTS OF GOODS SOLD, BUYING AND OCCUPANCY COSTS
   
 
509,871
 
   
 
389,324
 
   
 
340,740
 
    
  
  
Gross margin
   
 
210,211
 
   
 
247,617
 
   
 
202,868
 
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
   
 
188,050
 
   
 
161,363
 
   
 
136,267
 
GOODWILL AND PROPERTY AND EQUIPMENT IMPAIRMENT
   
 
16,250
 
   
 
—  
 
   
 
—  
 
DEPRECIATION AND AMORTIZATION
   
 
20,818
 
   
 
11,166
 
   
 
6,876
 
    
  
  
Income (loss) from operations
   
 
(14,907
)
   
 
75,088
 
   
 
59,725
 
INTEREST EXPENSE, net
   
 
9,581
 
   
 
4,205
 
   
 
4,993
 
    
  
  
Income (loss) before income taxes
   
 
(24,488
)
   
 
70,883
 
   
 
54,732
 
INCOME TAX PROVISION (BENEFIT)
   
 
(6,950
)
   
 
28,352
 
   
 
21,674
 
    
  
  
Income (loss) before extraordinary item and cumulative effect of change in accounting principle
   
 
(17,538
)
   
 
42,531
 
   
 
33,058
 
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT, net of tax of $410 and $626
   
 
—  
 
   
 
(623
)
   
 
(958
)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, net of tax of $950
   
 
—  
 
   
 
—  
 
   
 
(1,449
)
    
  
  
Net income (loss)
   
$
(17,538
)
   
$
41,908
 
   
$
30,651
 
    
  
  
BASIC NET INCOME (LOSS) PER COMMON SHARE:
                           
Income (loss) before extraordinary item and cumulative effect of change in accounting principle
   
$
(1.02
)
   
$
2.54
 
   
$
2.02
 
Extraordinary loss on early extinguishment of debt, net of tax
   
 
—  
 
   
 
(0.04
)
   
 
(0.06
)
Cumulative effect of change in accounting principle, net of tax
   
 
—  
 
   
 
—  
 
   
 
(0.09
)
    
  
  
Basic net income (loss) per common share
   
$
(1.02
)
   
$
2.50
 
   
$
1.87
 
    
  
  
Weighted average common shares outstanding
   
 
17,172
 
   
 
16,732
 
   
 
16,408
 
    
  
  
DILUTED NET INCOME (LOSS) PER COMMON SHARE:
                           
Income (loss) before extraordinary item and cumulative effect of change in accounting principle
   
$
(1.02
)
   
$
2.45
 
   
$
1.94
 
Extraordinary loss on early extinguishment of debt, net of tax
   
 
—  
 
   
 
(0.03
)
   
 
(0.06
)
Cumulative effect of change in accounting principle, net of tax
   
 
—  
 
   
 
—  
 
   
 
(0.08
)
    
  
  
Diluted net income (loss) per common share
   
$
(1.02
)
   
$
2.42
 
   
$
1.80
 
    
  
  
Weighted average common shares outstanding—assuming dilution
   
 
17,172
 
   
 
17,342
 
   
 
17,064
 
    
  
  
 
The accompanying notes are an integral part of these consolidated financial statements.

F-4

 
WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
 
(In thousands, except share amounts)
 
   
Common Stock
   
Additional paid-in capital
     
Deferred compensation
     
Retained earnings
       
Cumulative other comprehensive income (loss)
     
Total shareholders’ equity
  
   
Shares
   
Amount
                   
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 underwriters’ 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
 
Net income
  
—  
   
 
—  
   
 
—  
     
 
—  
 
   
 
41,908
 
     
 
—  
 
   
 
41,908
 
Other comprehensive
                                                          
Foreign currency translation adjustment
  
—  
   
 
—  
   
 
—  
     
 
—  
 
   
 
—  
 
     
 
55
 
   
 
55
 
                                                     
Comprehensive income
                                                    
 
41,963
 
                                                     
Stock options exercised
  
256,398
   
 
3
   
 
2,496
     
 
—  
 
   
 
—  
 
     
 
—  
 
   
 
2,499
 
Shares issued under the Company’s employee stock purchase plan
  
44,118
   
 
—  
   
 
514
     
 
—  
 
   
 
—  
 
     
 
—  
 
   
 
514
 
   
  
  
    
  
    
  
BALANCE, February 3, 2001
  
16,885,750
   
 
169
   
 
60,495
     
 
—  
 
   
 
115,490
 
     
 
29
 
   
 
176,183
 
Net loss
  
—  
   
 
—  
   
 
—  
     
 
—  
 
   
 
(17,538
)
     
 
—  
 
   
 
(17,538
)
Other comprehensive loss
                                                          
Foreign currency translation adjustment
  
—  
   
 
—  
   
 
—  
     
 
—  
 
   
 
—  
 
     
 
(59
)
   
 
(59
)
                                                     
Comprehensive loss
                                                    
 
(17,597
)
                                                     
Stock options exercised
  
281,921
   
 
2
   
 
1,874
     
 
—  
 
   
 
—  
 
     
 
—  
 
   
 
1,876
 
Tax benefit on employee stock options
  
—  
   
 
—  
   
 
1,412
     
 
—  
 
   
 
—  
 
     
 
—  
 
   
 
1,412
 
Shares issued under employee stock purchase plan
  
54,374
   
 
1
   
 
526
     
 
—  
 
   
 
—  
 
     
 
—  
 
   
 
527
 
Restricted stock issued to employees
  
82,500
   
 
1
   
 
1,569
     
 
(1,570
)
   
 
—  
 
     
 
—  
 
   
 
—  
 
Compensation expense for restricted stock issued to employees
  
—  
   
 
—  
   
 
—  
     
 
327
 
   
 
—  
 
     
 
—  
 
   
 
327
 
Private placement of common stock, net of issuance costs
  
1,900,000
   
 
19
   
 
20,020
     
 
—  
 
   
 
—  
 
     
 
—  
 
   
 
20,039
 
   
  
  
    
  
    
  
BALANCE, February 2, 2002
  
19,204,545
   
$
192
   
$
85,896
     
$
(1,243
)
   
$
97,952
 
     
$
(30
)
   
$
182,767
 
   
  
  
    
  
    
  
 
The accompanying notes are an integral part of these consolidated financial statements.

F-5

WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(In thousands)
 
    
For the years ended
  
    
February 2, 2002
     
February 3, 2001
     
January 29, 2000
  
OPERATING ACTIVITIES:
                           
Net income (loss)
   
$
(17,538
)
   
$
41,908
 
   
$
30,651
 
Adjustments to reconcile net income (loss) to net cash provided by operating activities-
                           
Extraordinary loss on early extinguishment of debt
   
 
—  
 
   
 
623
 
   
 
958
 
Cumulative effect of change in accounting principle
   
 
—  
 
   
 
—  
 
   
 
1,449
 
Depreciation and amortization
   
 
20,818
 
   
 
11,166
 
   
 
6,876
 
Amortization of deferred financing costs
   
 
728
 
   
 
460
 
   
 
724
 
Loss (gain) on disposal of assets
   
 
877
 
   
 
(232
)
   
 
3,050
 
Impairment of goodwill and property and equipment
   
 
16,250
 
   
 
—  
 
   
 
—  
 
Restricted stock compensation expense
   
 
327
 
   
 
—  
 
   
 
—  
 
Deferred income taxes (benefit)
   
 
895
 
   
 
3,716
 
   
 
(4,951
)
Changes in operating assets and liabilities, net of assets and liabilities acquired:
                           
Accounts receivable
   
 
2,878
 
   
 
(3,609
)
   
 
(3,794
)
Inventories
   
 
20,481
 
   
 
(36,973
)
   
 
7,776
 
Prepaid expenses
   
 
5,560
 
   
 
(715
)
   
 
(2,344
)
Accounts payable and accrued expenses
   
 
(7,658
)
   
 
(12,829
)
   
 
9,442
 
Income taxes payable and other liabilities
   
 
(21,992
)
   
 
1,354
 
   
 
14,646
 
    
  
  
Net cash provided by operating activities
   
 
21,626
 
   
 
4,869
 
   
 
64,483
 
    
  
  
INVESTING ACTIVITIES:
                           
Additions to property and equipment and other assets, net
   
 
(44,244
)
   
 
(32,553
)
   
 
(23,214
)
Acquisitions, net of cash acquired
   
 
(33,552
)
   
 
(19,376
)
   
 
—  
 
    
  
  
Net cash used in investing activities
   
 
(77,796
)
   
 
(51,929
)
   
 
(23,214
)
    
  
  
FINANCING ACTIVITIES:
                           
Repayment of short-term debt
   
 
(20,000
)
   
 
—  
 
   
 
—  
 
Repayment of long-term debt
   
 
—  
 
   
 
(27,100
)
   
 
(26,110
)
Proceeds from issuance of debt
   
 
45,000
 
   
 
—  
 
   
 
—  
 
Proceeds from sale of common stock and exercise of options
   
 
22,442
 
   
 
1,992
 
   
 
2,164
 
Other
   
 
(65
)
   
 
(636
)
   
 
(632
)
    
  
  
Net cash provided by (used in) financing activities
   
 
47,377
 
   
 
(25,744
)
   
 
(24,578
)
    
  
  
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
   
 
(8,793
)
   
 
(72,804
)
   
 
16,691
 
CASH AND CASH EQUIVALENTS, beginning of year
   
 
52,122
 
   
 
124,926
 
   
 
108,235
 
    
  
  
CASH AND CASH EQUIVALENTS, end of year
   
$
43,329
 
   
$
52,122
 
   
$
124,926
 
    
  
  
SUPPLEMENTAL CASH FLOW INFORMATION:
                           
Cash paid during the year for-
                           
Interest
   
$
8,478
 
   
$
7,281
 
   
$
8,126
 
    
  
  
Income taxes
   
$
14,823
 
   
$
23,619
 
   
$
12,282
 
    
  
  
 
The accompanying notes are an integral part of these consolidated financial statements.

F-6

WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
February 2, 2002 and February 3, 2001
 
1
 
Nature of organization
 
Wilsons The Leather Experts Inc. (Wilsons Leather or the Company), a Minnesota corporation, acquired 100 percent 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. In May 1996, pursuant to a sale agreement between Wilsons Leather and CVS, Wilsons Leather acquired the common stock for (i) $2.0 million, (ii) a 10 percent 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), (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 stock for $10.0 million.
 
The Company is the leading specialty retailer of quality leather outerwear, apparel, accessories and travel products in the United States. At February 2, 2002, Wilsons Leather operated 619 stores located in 46 states, the District of Columbia, Guam and Canada, including 492 Wilsons Leather mall stores, 94 Wilsons Leather outlet stores and 33 airport locations. In addition, at February 2, 2002, the Company operated 150 premium travel products and accessories stores in 25 states, Puerto Rico and Guam under the El Portal, Bentley’s Luggage, and California Luggage Outlet names. The Company supplemented permanent mall stores with 281, 239, and 274 seasonal stores during its peak selling season from October through January during fiscal years 2001, 2000, and 1999, respectively.
 
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.
 
Wilsons Leather operates in one segment: selling leather outerwear, accessories, apparel and travel-related products. The Company’s chief operating decision-maker evaluates revenue and profitability performance on an enterprise basis to make operating and strategic decisions.
 
Year-end
 
Wilsons Leather’s fiscal year ends on the Saturday closest to January 31. The periods ended February 2, 2002, February 3, 2001, and January 29, 2000 are referred to herein as fiscal years 2001, 2000, and 1999, respectively. The results of operations for fiscal year 2000 consisted of 53 weeks, as compared to 52 weeks for fiscal years 2001 and 1999.
 
Use of estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets  

F-7

WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 inventories, and the adequacy of certain accrued liabilities and reserves. Ultimate results could differ from those estimates.
 
Reclassifications
 
Certain amounts included in the consolidated financial statements have been reclassified in prior years to conform with the fiscal 2001 financial statement presentation. These amounts had no effect on previously reported shareholders’ equity or net income.
 
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 because of the variability of the interest costs associated with these instruments as of February 2, 2002 and February 3, 2001.
 
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 commercial paper and money market funds. Interest income of $0.4 million, $2.8 million and $3.8 million in fiscal years 2001, 2000 and 1999, respectively, is included in interest expense, net in the accompanying statements of operations.
 
Inventories
 
We value our inventories, which consist primarily of finished goods held for sale, 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 and approximated first-in, first-out (FIFO) cost as of February 2, 2002 and February 3, 2001. The cost includes the cost of merchandise and freight. A periodic review of inventory quantities on hand is performed in order to determine if inventory is properly stated at the lower of cost or market. Factors related to current inventories such as future consumer demand and fashion trends, current aging, current and anticipated retail markdowns, and class or type of inventory are analyzed to determine estimated net realizable values. A provision is recorded to reduce the cost of inventories to the estimated net realizable values, if required. Any significant unanticipated changes in the factors noted above could have a significant impact on the value of our inventories and our reported operating results.
 
The Company recognized a $5.4 million inventory valuation charge during the fourth quarter of 2001 related to under absorbed freight and customs expenses that had previously been capitalized. The charge was included in costs of goods sold, buying and occupancy costs in the consolidated statement of operations for 2001.
 
Inventories consisted of the following (in thousands):
 
    
February 2, 2002
   
February 3, 2001
Raw materials
   
$
11,613
   
$
30,716
Finished goods
   
 
116,942
   
 
98,696
    
  
    
$
128,555
   
$
129,412
    
  

F-8

WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
Property and equipment
 
Property and equipment are stated at cost. Depreciation and amortization of property, equipment and leasehold improvements is computed on a straight-line basis 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.
 
Our property and equipment consist principally of store leasehold improvements and are included in the “Property and Equipment” line item in our consolidated balance sheets included in this report. These long-lived assets are recorded at cost and are amortized using the straight-line method over the lesser of the applicable store lease term or the estimated useful life of the leasehold improvements. The typical initial lease term for our stores is ten years. In assessing potential impairment of these assets, we will periodically evaluate the historical and forecasted operating results and cash flows on a store-by-store basis. Our estimate of future cash flows is based on our experience, knowledge and typically third-party advice or market data. However, these estimates can be affected by factors such as future store profitability, real estate demand and economic conditions that can be difficult to predict. Newly opened stores may take time to generate positive operating and cash flow results. Factors such as store location (e.g., urban are versus suburb), current marketplace awareness of the Wilsons Leather and El Portal brands, local customer demographic data and current fashion trends are all considered in determining the time frame required for a store to achieve positive financial results. If economic conditions are substantially different from our expectations, the carrying value of certain of our long-lived assets may become impaired.
 
Goodwill
 
The excess of acquisition cost over the fair value of net assets acquired is included in goodwill and other assets in the accompanying consolidated balance sheets and is being amortized on a straight-line basis over periods not exceeding 20 years. Accumulated amortization was approximately $1,691,000 (net of impairments) and $407,000 at February 2, 2002 and February 3, 2001, respectively. Amortization expense was $1,682,000, $350,000, and $57,000 for 2001, 2000 and 1999, respectively.
 
Debt issuance costs
 
Debt issuance costs are being amortized over the life of the related debt. Accumulated amortization amounted to approximately $1,774,000 and $1,046,000 at February 2, 2002 and February 3, 2001, respectively. Amortization expense is included in interest expense in the accompanying consolidated statements of income.
 
Revenue Recognition
 
The Company recognizes sales upon customer receipt of the merchandise generally at the point of sale. Shipping and handling revenues are included in net sales and the related costs are included in costs of goods sold, buying and occupancy costs. Revenue for gift certificate sales and store credits is recognized at redemption. A reserve is provided at the time of sale for projected merchandise returns based upon historical experience.
 
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.

F-9

WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
Advertising costs
 
Advertising costs are charged to operations in the year incurred.
 
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 the United Kingdom) 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 did not enter into any hedging transactions during 2001.
 
Net income (loss) per common share
 
Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the year. Diluted net income (loss) per share is computed by dividing net income (loss) by the sum of the weighted average number of common shares outstanding plus all additional common shares that would have been outstanding if potentially dilutive common shares related to stock options had been issued. The following table reconciles the number of shares utilized in the net income (loss) per common share calculations (in thousands):
 
    
For the years ended
    
February 3, 2002
     
February 3, 2001
   
January 29, 2000
Net income (loss)
   
$
(17,538
)
   
$
41,908
   
$
30,651
    
  
  
Weighted average common shares outstanding
   
 
17,172
 
   
 
16,732
   
 
16,408
Effect of stock options
   
 
—  
 
   
 
610
   
 
656
    
  
  
Weighted average common shares outstanding—assuming dilution
   
 
17,172
 
   
 
17,342
   
 
17,064
    
  
  
Diluted net income (loss) per common share
   
$
(1.02
)
   
$
2.42
   
$
1.80
    
  
  
 
Recently issued accounting pronouncements
 
Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, became effective for fiscal 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 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 allows a derivative’s gains or losses to offset related results on the hedged item in the income statement and requires that a

F-10

WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The Company adopted SFAS No. 133 on February 4, 2001, and the adoption did not have a material effect on the Company’s financial position or results of operations.
 
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” Under these new standards, all acquisitions subsequent to June 30, 2001 must be accounted for under the purchase method of accounting, and purchased goodwill is no longer amortized over its useful life. Rather, goodwill will be subject to a periodic impairment test based on its fair value. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001, although earlier adoption is permitted. We plan to adopt these standards effective February 3, 2002, which will result in no goodwill being amortized in fiscal 2002. As part of adopting these standards, we are required to assess the fair value of our business to determine whether goodwill carried on our books has been impaired and the extent of such impairment, if any. The Company has not determined the impact of adopting SFAS No. 142 on its earnings and financial position, including whether it will be required to recognize any transitional impairment losses as a cumulative effect of a change in accounting principle.
 
The Company had goodwill amortization of $1,682,000 in fiscal 2001. The Company estimates the amount of goodwill amortization would have been approximately $1.4 million in fiscal 2002.
 
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 supersedes SFAS No. 121. SFAS No. 144 primarily addresses significant issues relating to the implementation of SFAS No. 121 and develops a single accounting model for long-lived assets to be disposed of, whether primarily held, used or newly acquired. The provisions of SFAS No. 144 will be effective for fiscal years beginning after December 15, 2001. The Company will apply this standard beginning in 2002 and do not expect the adoption to have a material impact on its financial position or its results of operations.
 
Change in accounting method—layaway sales
 
Effective January 31, 1999, the Company changed its method of accounting for layaway sales in accordance with Staff Accounting Bulletin (SAB) No. 101. “Revenue Recognition in Financial Statements.” 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, 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 in the first quarter of 1999. 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).
 
3
 
Acquisitions
 
The following acquisitions were accounted for as purchases. The purchase prices assigned to the net assets acquired were based on the fair value of such assets and liabilities at the respective acquisition dates. Tangible net assets acquired include accounts receivable, inventories, prepaid expenses, other current assets and fixed assets. Liabilities assumed principally include accounts payable and accrued expenses. The operating results of these acquired companies have been included in the consolidated statements of operations from the dates of acquisition.

F-11

WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
On October 31, 2000, the Company acquired all of the outstanding common shares of the El Portal Group, Inc. (El Portal), a specialty retailer of premium travel products and accessories, for approximately $17.8 million, including transaction costs.
 
Allocation of the purchase price (in millions):
         
Tangible net assets acquired
   
$
(5.1
)
Goodwill acquired
   
 
22.9
 
    
Total purchase price allocation
   
$
17.8
 
    
 
In conjunction with the acquisition, the Company decided to close certain stores and established a restructuring reserve of $1.5 million. Costs incurred and charged to these reserves associated with the closure of acquired facilities amounted to $1.5 million for fiscal year 2001. As of February 2, 2002, the balance of restructuring liabilities recorded in conjunction with the acquisition was approximately $39,000. The remaining closures of facilities are expected to be completed by the end of fiscal year 2002.
 
On April 14, 2001, the Company acquired all of the outstanding shares of Bentley’s Luggage Corp. (Bentley’s), a specialty retailer of travel products and accessories, for approximately $34.3 million.
 
Allocation of the purchase price (in millions):
       
Tangible net assets acquired
   
$
21.6
Goodwill acquired
   
 
12.7
    
Total purchase price allocation
   
$
34.3
    
 
In conjunction with the acquisition, the Company decided to close certain stores and facilities as well as terminate certain related employees and established a restructuring reserve of $4.0 million. Costs incurred and charged to these reserves associated with the closure of acquired facilities and termination of employees amounted to $1.4 million and $2.6 million, respectively for fiscal year 2001. As of February 2, 2002, the balance of restructuring liabilities recorded in conjunction with the acquisition was approximately $1.2 million. The remaining closures of facilities are expected to be completed by the middle of fiscal year 2003.
 
The following unaudited pro-forma consolidated financial information does not purport to represent what the Company’s financial position or results of operations would actually have been if these transactions had occurred at such dates or project the Company’s future results of operations. The unaudited pro-forma results of operations of Wilsons Leather, El Portal and Bentley’s Luggage for 2001 and 2000 are as follows (in thousands, except per share amounts):
 
    
Fiscal Year
    
2001
     
2000
Revenue
   
$
736,330
 
   
$
772,073
Net income (loss) before extraordinary item
   
 
(20,322
)
   
 
39,758
Net income (loss)
   
 
(20,322
)
   
 
39,135
Net income (loss) before extraordinary item per common share—basic
   
$
(1.18
)
   
$
2.38
Net income (loss) per common share—basic
   
 
(1.18
)
   
 
2.34
Net income (loss) before extraordinary item per common share—diluted
   
$
(1.18
)
   
$
2.29
Net income (loss) per common share—diluted
   
 
(1.18
)
   
 
2.26
Weighted average common shares outstanding
   
 
17,172
 
   
 
16,732
Weighted average common shares outstanding—assuming dilution
   
 
17,172
 
   
 
17,342

F-12

WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
4
 
Accounts receivable
 
Accounts receivable consisted of the following (in thousands):
 
    
February 2, 2002
     
February 3, 2001
  
Trade receivables
   
$
4,375
 
   
$
7,154
 
Other receivables
   
 
6,291
 
   
 
5,748
 
    
  
Total
   
 
10,666
 
   
 
12,902
 
Less — Allowance for doubtful accounts
   
 
(411
)
   
 
(1,262
)
    
  
Total
   
$
10,255
 
   
$
11,640
 
    
  
 
5
 
Property and equipment, goodwill and other assets
 
Property and equipment consisted of the following (in thousands):
 
    
February 2, 2002
     
February 3, 2001
  
Land
   
$
1,868
 
   
$
1,340
 
Buildings and improvements
   
 
3,620
 
   
 
1,021
 
Equipment and furniture
   
 
93,935
 
   
 
71,711
 
Leasehold improvements
   
 
47,134
 
   
 
31,626
 
    
  
Total
   
 
146,557
 
   
 
105,698
 
Less—  Accumulated depreciation and amortization
   
 
(36,730
)
   
 
(23,270
)
    
  
Total
   
$
109,827
 
   
$
82,428
 
    
  
 
Goodwill and other assets consisted of the following (in thousands):
 
    
February 2, 2002
   
February 3, 2001
Goodwill, net
   
$
26,474
   
$
24,796
Debt issuance costs, net
   
 
2,094
   
 
1,236
Other, net
   
 
204
   
 
728
    
  
    
$
28,772
   
$
26,760
    
  
 
The Company follows SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”. Accordingly, in the event that facts and circumstances indicate that property, equipment, goodwill and intangible or other assets may be impaired, an evaluation of recoverability would be performed. If an evaluation is required, the estimated future undiscounted cash flow associated with the asset is compared to the asset’s carrying value to determine if a write-down to recoverable value is necessary.
 
During its fourth quarter of 2001, the Company’s long-term forecast for the profitability of certain stores decreased significantly due to industry trends and revised company forecasts. The Company prepared analysis in accordance with SFAS No. 121 to determine if there was impairment of certain store property and equipment and

F-13

WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

goodwill. The analysis resulted in impairment charges based on the difference between the carrying value and the estimated fair value of these assets. Fair value was based on discounting identifiable cash flows at a discount rate commensurate with the risks involved. Based on the analysis performed by the Company, the Company recorded a charge in 2001 of $16.3 million for impaired assets and goodwill.
 
6
 
Accrued expenses
 
Accrued expenses consisted of the following (in thousands):
 
    
February 2, 2002
   
February 3, 2001
Compensation and benefits
   
$
10,395
   
$
15,225
Taxes other than income taxes
   
 
3,897
   
 
7,646
Rent
   
 
3,199
   
 
5,085
Interest
   
 
1,953
   
 
1,621
Other
   
 
14,128
   
 
16,422
    
  
    
$
33,572
   
$
45,999
    
  
 
7
 
Long-term debt
 
On August 18, 1997, the Company issued $75.0 million of 11¼% Senior Notes due August 15, 2004 (the Senior Notes). Interest on the Senior Notes is payable semiannually in arrears on February 15 and August 15 of each year. As of February 2, 2002, the outstanding balance on the Senior Notes was $30.6 million. The Company repurchased $13.3 million and $26.1 million of Senior Notes during 2000 and 1999, respectively. As a result of repurchasing the Senior Notes in 2000 and 1999, the Company realized an extraordinary loss on the early extinguishment of debt of approximately $623,000 and $958,000, respectively, 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 that 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.
 
A syndicate of banks had provided the Company with a $125.0 million revolving credit agreement (the Revolver) with certain banks which extended through May 2002 and included an $85.0 million letter-of-credit subfacility as of January 29, 2000 (collectively referred to as the Senior Credit Facility). In October 2000, the Company amended the Senior Credit Facility to increase the Revolver to $165.0 million and also to add a $20.5 million seasonal over-advance for November 2000, only with interest on the over-advance at 100 basis points over the Senior Credit Facility interest rate. This agreement was amended again on June 19, 2001 to increase the Revolver to $190 million, reduce and extend the seasonal over-advance to $15 million during July through October and to add a Term B promissory note of $25 million. The Term B note is collateralized by the Company’s inventory and buildings and is due June 18, 2004. The Senior Credit Facility is collateralized by the Company’s inventory. Interest on cash borrowings under the Senior Credit Facility is at LIBOR plus 2.75 percent or prime plus 1.50 percent. With respect to the Term B note, the interest rates is prime plus 4 percent. The

F-14

WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

interest rate is dependent upon the Company’s financial results. The Company pays monthly fees on the unused portion of the Senior Credit Facility and on the average daily amount of letters of credit outstanding during each month. As of February 2, 2002 and February 3, 2001, there were no cash borrowings under the Revolver, and there were $10.4 million and $23.6 million in letters of credit outstanding, respectively. In April 2002, the Senior Credit Facility was extended and renewed (see Note 14).
 
The Senior Credit Facility contains restrictions and 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 Senior Credit Facility also requires the Company to maintain certain financial covenants. At February 2, 2002, the Company was in compliance with or had received waivers for all covenants of the Senior Notes and the Senior Credit Facility. During the third quarter of 2001, the Company completed the offering of unsecured short-term promissory notes in the principal amount of $20.0 million at an interest rate of 7.9%, which matured on January 15, 2002. The notes were paid in full at maturity.
 
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 paid the Company interest at a fixed rate of 11.25 percent and the Company paid First Union interest at a commercial paper rate plus 5.37 percent (10.78 percent at February 3, 2001). The agreement terminated on August 15, 2001. The transaction did not have a material effect on the Company’s financial position or results of operations.
 
8
 
Income taxes
 
The income tax provision (benefit) is comprised of the following (in thousands):
 
    
For the years ended
  
    
February 2, 2002
     
February 3, 2001
   
January 29, 2000
  
Current:
                         
Federal
   
$
(7,039
)
   
$
22,110
   
$
23,896
 
State
   
 
(806
)
   
 
2,526
   
 
2,729
 
Deferred
   
 
895
 
   
 
3,716
   
 
(4,951
)
Total
   
$
(6,950
)
   
$
28,352
   
$
21,674
 
 
Reconciliations of the U.S. federal statutory income tax rate to the effective tax rate are as follows (in thousands):
 
    
For the years ended
    
February 2, 2002
     
February 3, 2001
   
January 29, 2000
U.S. federal statutory income tax (benefit) rate
   
$
(8,571
)
   
$
24,809
   
$
19,156
State income taxes
   
 
(713
)
   
 
2,835
   
 
2,190
Non-deductible goodwill amortization
   
 
2,089
 
   
 
—  
   
 
—  
Other
   
 
245
 
   
 
708
   
 
328
    
  
  
Effective tax rate
   
$
(6,950
)
   
$
28,352
   
$
21,674
    
  
  

F-15

WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
    
For the years ended
  
    
February 2, 2002
       
February 3, 2001
       
January 29, 2000
  
U.S. federal statutory income tax (benefit) rate
   
(35.0
%)
     
35.0
%
     
35.0
%
State income taxes
   
(2.9
)
     
4.0
 
     
4.0
 
Non-deductible goodwill amortization
   
8.5
 
     
—  
 
     
—  
 
Other
   
1.0
 
     
1.0
 
     
0.6
 
    
    
    
Effective tax rate
   
(28.4
%)
     
40.0
%
     
39.6
%
    
    
    
 
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 net deferred tax asset and liability were as follows (in thousands):
 
    
February 2, 2002
     
February 3, 2001
  
Net deferred tax asset (long term)
                  
Accrued liabilities
   
$
1,991
 
   
$
—  
 
Net operating loss carryforwards
   
 
1,600
 
   
 
—  
 
Property and equipment
   
 
(7
)
   
 
—  
 
    
  
Total
   
 
3,584
 
   
 
—  
 
    
  
Net deferred tax liability (current)
                  
Accrued liabilities
   
 
4,255
 
   
 
4,692
 
Net operating loss carryforwards
   
 
332
 
   
 
882
 
Allowances
   
 
160
 
   
 
337
 
Inventories
   
 
(5,980
)
   
 
(5,889
)
Intangibles
   
 
(1,016
)
   
 
(543
)
Other
   
 
275
 
   
 
274
 
    
  
Total
   
 
(1,974
)
   
 
(247
)
Net deferred tax liability (long term)
                  
Accrued liabilities
   
 
—  
 
   
 
1,008
 
Net operating loss carryforwards
   
 
—  
 
   
 
1,969
 
Property and equipment
   
 
—  
 
   
 
(3,286
)
Inventories
   
 
—  
 
   
 
(79
)
    
  
Total
   
 
—  
 
   
 
(388
)
    
  
Net deferred tax asset (liability)
   
$
1,610
 
   
$
(635
)
    
  
 
Included in the deferred tax asset is $3,140 for the deferred taxes from the acquisition, offset by the $895,000 from current year operations, to equal the net change of $2,245 for 2001.

F-16

WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
9
 
Capital stock
 
Stock split
 
On February 15, 2000, the board of directors declared a 3 for 2 stock split. The stock split became 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, reflects the effect of the stock split.
 
Private Placement Offering
 
In January 2002, the Company sold 1,900,000 shares of common stock in a private placement (the Placement) at $11.00 per share for total proceeds, net of offering costs, of $20.0 million.
 
10
 
Stock options
 
The Company has adopted the 1996 stock option plan, the 1998 stock option plan and the 2000 long term incentive plan (collectively referred to as the Plans), pursuant to which options to acquire an aggregate of 3,500,000 shares of the Company’s common stock may be granted.
 
The Company’s compensation committee is responsible for administering the Company’s 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 Plans is presented in the table below:
 
    
As of and for the years ended
    
February 2, 2002
   
February 3, 2001
   
January 29, 2000
    
Shares
     
Weighted average exercise price
   
Shares
     
Weighted average exercise price
   
Shares
     
Weighted average exercise price
Outstanding, beginning of year
   
 
1,742,117
 
   
$
8.45
   
 
1,848,446
 
   
$
6.86
   
 
1,840,619
 
   
$
5.94
Granted
   
 
562,585
 
   
 
13.74
   
 
269,200
 
   
 
17.78
   
 
323,249
 
   
 
10.78
Exercised
   
 
(281,921
)
   
 
6.66
   
 
(256,398
)
   
 
5.79
   
 
(160,062
)
   
 
4.76
Forfeited
   
 
(39,799
)
   
 
13.69
   
 
(119,131
)
   
 
10.42
   
 
(155,360
)
   
 
6.32
    
  
  
  
  
  
Outstanding, end of year
   
 
1,982,982
 
   
$
10.11
   
 
1,742,117
 
   
$
8.45
   
 
1,848,446
 
   
$
6.86
    
  
  
  
  
  
Exercisable, end of year
   
 
1,200,782
 
   
$
7.38
   
 
1,225,160
 
   
$
6.32
   
 
946,378
 
   
$
5.77
    
  
  
  
  
  
Weighted average fair value of options granted
   
$
8.15
 
          
$
3.91
 
          
$
2.48
 
       
    
         
         
      

F-17

WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
Options Outstanding and Exercisable by Price Range
as of February 2, 2002
 
OPTIONS OUTSTANDING
   
OPTIONS EXERCISABLE
Range of
Exercise Prices
   
Outstanding as of February 2, 2002
     
Weighted- Average Remaining Contractual Life
   
Weighted- Average Exercise Price
   
Exercisable as of February 2, 2002
   
Weighted- Average Exercise Price
$  2.07 - $  4.14
   
31,590
     
4.5
   
$
2.96
   
31,590
   
$
2.96
$  4.14 - $  6.21
   
758,999
     
5.7
   
$
5.83
   
758,999
   
$
5.83
$  6.21 - $  8.28
   
187,280
     
5.3
   
$
6.94
   
177,151
   
$
6.95
$  8.28 - $10.34
   
21,566
     
7.1
   
$
9.22
   
16,390
   
$
9.35
$10.34 - $12.41
   
491,362
     
8.7
   
$
11.26
   
138,754
   
$
11.29
$12.41 - $14.48
   
69,201
     
9.2
   
$
13.70
   
6,512
   
$
13.55
$14.48 - $16.55
   
180,409
     
8.8
   
$
15.77
   
23,894
   
$
15.32
$16.55 - $18.62
   
41,575
     
8.5
   
$
17.20
   
13,892
   
$
17.20
$18.62 - $20.69
   
201,000
     
8.9
   
$
19.82
   
33,600
   
$
20.69
    
    
  
  
  
    
1,982,982
     
7.2
   
$
10.11
   
1,200,782
   
$
7.38
 
The Company accounts for the Plans under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” 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 (loss) and net income (loss) per common share would have been reduced to the following pro forma amounts (in thousands, except per share amounts):
 
    
For the years ended
    
February 2, 2002
     
February 3, 2001
   
January 29, 2000
Net income (loss):
                       
As reported
   
$
(17,538
)
   
$
41,908
   
$
30,651
    
  
  
Pro forma
   
$
(19,034
)
   
$
41,153
   
$
30,026
    
  
  
Diluted net income (loss) per common share:
                       
As reported
   
$
(1.02
)
   
$
2.42
   
$
1.80
    
  
  
Pro forma
   
$
(1.11
)
   
$
2.37
   
$
1.76
    
  
  
 
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 2001, 2000, and 1999: weighted average risk-free interest rates of 3.5 percent, 6.2 percent and 6.1 percent, respectively; no expected dividend yields; expected lives of 5.5 years, 6 years and 6 years, respectively; and expected volatility of 59.9 percent, 51.7 percent and 39.8 percent, respectively.
 
11
 
Employee benefit plans
 
The 2000 long term incentive plan provides that the Company’s Compensation Committee may grant incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock and performance share awards, and determine the terms and conditions of each grant. In March 2001, 82,500 shares of restricted stock were issued under this plan.

F-18

WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
These restricted stock awards outstanding vest ratably over four years from the date of grant. When restricted shares are issued, deferred compensation is recorded as a reduction of shareholders’ equity. Annual compensation is charged to expense over the vesting period. During 2001, $327,000 was charged to expense for vested restricted shares.
 
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 percent of their eligible compensation (10 percent 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 percent of contributions, up to a maximum of 4 percent of the employee’s eligible compensation. For employees who have worked three years or more, the Company matches 50 percent of contributions, up to a maximum of 4 percent 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 $487,000, $2.1 million and $3.8 million in 2001, 2000, and 1999, respectively.
 
Employee stock purchase plan
 
The Company has 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 percent discount at defined times during the year. The Company has allowed for 375,000 shares of common stock to be purchased under this plan.            As of February 2, 2002, 108,529 shares had been issued under the plan.
 
12
 
Commitments and contingencies
 
Leases
 
The Company has noncancelable operating leases, primarily for retail stores, which expire through 2016. A limited number of the leases contain renewal options for periods ranging from six months to five years. These leases generally require the Company to pay costs, such as real estate taxes, common area maintenance costs and contingent rentals, based on sales. Net rental expense for all operating leases was as follows (in thousands):
 
    
For the years ended
  
    
February 2, 2002
   
February 3, 2001
   
January 29, 2000
  
Minimum rentals
   
$
74,929
   
$
48,433
   
$
42,399
 
Contingent rentals
   
 
3,240
   
 
4,515
   
 
4,390
 
    
  
  
    
 
78,169
   
 
52,948
   
 
46,789
 
Less—Sublease rentals
   
 
—  
   
 
—  
   
 
(317
)
    
  
  
Total
   
$
78,169
   
$
52,948
   
$
46,472
 
    
  
  

F-19

WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 
As of February 2, 2002, the future minimum rental payments due under operating leases, excluding lease obligations for closed stores, were as follows (in thousands):
 
Fiscal years ending:
       
2003
   
$
58,876
2004
   
 
53,100
2005
   
 
48,163
2006
   
 
42,893
2007
   
 
39,068
Thereafter
   
 
104,476
    
    Total
   
$
346,576
    
 
As of February 2, 2002, 156 of the Company’s 769 leases continued to be guaranteed by CVS and one was guaranteed by an officer of El Portal. Leases entered into subsequent to the Management Buyout are no longer 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 entered into in connection with the Management Buyout, 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 February 2, 2002 and February 3, 2001, the Company had outstanding letters of credit of approximately $10.4 million and $23.6 million, respectively (see Note 7), which were primarily used to guarantee foreign purchase orders.
 
13
 
Related-party transactions
 
The Company regularly conducts business with G-III Apparel Group, Ltd. (G-III), of which a director of Wilsons Leather is the chief executive officer and chairman of the board of directors. Purchases from G-III totaled $2.3 million, $4.9 million and $5.9 million for 2001, 2000, and 1999, 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.
 
14
 
Subsequent events (unaudited)
 
On April 8, 2002, affiliates of the purchasers in the Placement exercised the option under the stock purchase agreement relating to the Placement, to purchase an additional 100,000 shares (the “Additional Shares”) for an aggregate purchase price of $1,100,000, which sale was completed on April 12, for net proceeds of approximately $1.0 million.
 
On April 23, 2002, the senior credit facility was amended to increase the borrowings of up to $205 million in aggregate principal amount, including a $25 million Term B promissory note and a $75 million letter of credit  

F-20

WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

subfacility. Based on defined levels of inventory and receivables reduced by outstanding and undrawn trade letters of credit and $10 million ($5 million during the months of August, September and October) as specified in the agreement.
 
The terms of the senior credit facility prohibit us from borrowing additional funds, other than letters of credit, until we have received $10 million in net proceeds from debt or equity financing, a sale-leaseback transaction with respect to our Brooklyn Park distribution center and corporate offices, a sale or sale-leaseback transaction with respect to our Miami distribution center or any combination of the above. Any financing involving debt will require the consent of the senior lenders under the senior credit facility and may require the consent of the holders of the senior notes described above. The senior credit facility also contains a requirement that we either amend, refund, renew, extend or refinance the outstanding 11¼% senior notes on or before June 15, 2004 so that no principal payment with respect to any such amended, refunded, renewed, extended or refinanced notes is due on or before September 1, 2005. Although we anticipate we will be able to obtain such financing before we would being to borrow under the revolving credit portion of our senior credit facility in preparation for our peak selling season, there can be no assurance that we will obtain such financing or consent prior to the time when we will need to borrow under the senior credit facility in order to meet our working capital requirements.
 
On April 24, 2002, we entered into a new definitive stock purchase agreement for the sale in a private placement of up to 900,000 shares of our common stock at a purchase price of $11.00 per share, subject to certain closing conditions, which sale is expected to close within one week. The stock purchase agreement provides that one of the investors may purchase an additional 100,000 shares of common stock at $11.00 per share at any time within 75 days after the closing of the initial sale.

F-21

WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
 
CONSOLIDATING BALANCE SHEET
 
As of February 2, 2002
(In thousands, except share and per share amounts)
 
    
Rosedale Wilsons, Inc.
     
Wilsons Center, Inc.
   
Wilsons The Leather Experts Inc.
     
Eliminations
     
Consolidated
  
ASSETS
                                           
CURRENT ASSETS:
                                           
Cash and cash equivalents
   
$
43,329
 
   
$
 
   
$
 
 
   
$
 
 
   
$
43,329
 
Accounts receivable, net
   
 
10,255
 
                            
 
10,255
 
Inventories
   
 
128,555
 
                            
 
128,555
 
Prepaid expenses and other current assets
   
 
4,450
 
                            
 
4,450
 
Deferred taxes
   
 
—  
 
          
 
(5,422
)
   
 
5,422
 
   
 
—  
 
Intercompany receivables
            
 
87,010
            
 
(87,010
)
   
 
—  
 
    
  
  
  
  
Total current assets
   
 
186,589
 
   
 
87,010
   
 
(5,422
)
   
 
(81,588
)
   
 
186,589
 
PROPERTY AND EQUIPMENT, net
   
 
109,827
 
                            
 
109,827
 
GOODWILL AND OTHER ASSETS, net
   
 
28,320
 
          
 
452
 
            
 
28,772
 
DEFERRED TAXES
   
 
7,938
 
          
 
1,068
 
   
 
(5,422
)
   
 
3,584
 
INVESTMENT IN SUBSIDIARIES
            
 
28,520
   
 
74,310
 
   
 
(102,830
)
   
 
—  
 
    
  
  
  
  
Total assets
   
$
332,674
 
   
$
115,530
   
$
70,408
 
   
$
(189,840
)
   
$
328,772
 
    
  
  
  
  
LIABILITIES AND
SHAREHOLDERS’ EQUITY
                                           
CURRENT LIABILITIES:
                                           
Accounts payable
   
$
38,685
 
   
$
 
   
$
 
 
   
$
 
 
   
$
38,685
 
Accrued expenses
   
 
31,686
 
          
 
1,886
 
            
 
33,572
 
Income taxes payable
   
 
(5,966
)
          
 
17,790
 
            
 
11,824
 
Deferred taxes
                   
 
1,974
 
            
 
1,974
 
Intercompany payables
   
 
16,058
 
          
 
70,952
 
   
 
(87,010
)
   
 
—  
 
    
  
  
  
  
Total current liabilities
   
 
80,463
 
   
 
—  
   
 
92,602
 
   
 
(87,010
)
   
 
86,055
 
LONG-TERM DEBT
   
 
25,000
 
          
 
30,590
 
            
 
55,590
 
OTHER LONG-TERM LIABILITIES
   
 
4,360
 
          
 
—  
 
            
 
4,360
 
    
  
  
  
  
Total liabilities
   
 
109,823
 
   
 
—  
   
 
123,192
 
   
 
(87,010
)
   
 
146,005
 
    
  
  
  
  
SHAREHOLDERS’ EQUITY:
                                           
Common stock, $.01 par value, 150,000,000 shares authorized; 19,204,545 shares issued and outstanding
   
 
—  
 
          
 
192
 
            
 
192
 
Additional paid-in capital
   
 
28,520
 
   
 
74,310
   
 
85,896
 
   
 
(102,830
)
   
 
85,896
 
Retained earnings (deficit)
   
 
194,361
 
   
 
41,220
   
 
(137,629
)
            
 
97,952
 
Unearned compensation
                   
 
(1,243
)
            
 
(1,243
)
Cumulative other comprehensive income (loss)
   
 
(30
)
                            
 
(30
)
Total shareholders’ equity
   
 
222,851
 
   
 
115,530
   
 
(52,784
)
   
 
(102,830
)
   
 
182,767
 
    
  
  
  
  
Total liabilities and shareholders’ equity
   
$
332,674
 
   
$
115,530
   
$
70,408
 
   
$
(189,840
)
   
$
328,772
 
    
  
  
  
  
 
The accompanying notes are an integral part of this consolidating financial statement.

S-1

WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
 
CONSOLIDATING STATEMENT OF INCOME
 
For the year ended February 2, 2002
(In thousands)
 
    
Rosedale Wilsons, Inc.
     
Wilsons Center, Inc.
     
Wilsons The Leather Experts Inc.
     
Eliminations
   
Consolidated
  
NET SALES
   
$
720,082
 
   
$
—  
 
   
$
—  
 
   
$
—  
   
$
720,082
 
COST OF GOODS SOLD, BUYING AND OCCUPANCY COSTS
   
 
509,871
 
   
 
—  
 
   
 
—  
 
   
 
—  
   
 
509,871
 
    
  
  
  
  
Gross margin
   
 
210,211
 
   
 
—  
 
   
 
—  
 
   
 
—  
   
 
210,211
 
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
   
 
187,902
 
   
 
—  
 
   
 
148
 
          
 
188,050
 
GOODWILL AND PROPERTY AND EQUIPMENT IMPAIRMENT
   
 
16,250
 
   
 
—  
 
   
 
—  
 
   
 
—  
   
 
16,250
 
DEPRECIATION AND AMORTIZATION
   
 
20,818
 
   
 
—  
 
   
 
—  
 
   
 
—  
   
 
20,818
 
    
  
  
  
  
Income (loss) from operations
   
 
(14,759
)
   
 
—  
 
   
 
(148
)
   
 
—  
   
 
(14,907
)
INTEREST EXPENSE (INCOME), net
   
 
10,418
 
   
 
(8,910
)
   
 
8,073
 
   
 
—  
   
 
9,581
 
    
  
  
  
  
Income (loss) before income taxes
   
 
(25,177
)
   
 
8,910
 
   
 
(8,221
)
   
 
—  
   
 
(24,488
)
INCOME TAX (BENEFIT) PROVISION
   
 
(7,226
)
   
 
3,564
 
   
 
(3,288
)
   
 
—  
   
 
(6,950
)
    
  
  
  
  
Income (loss) before extraordinary item
   
 
(17,951
)
   
 
5,346
 
   
 
(4,933
)
   
 
—  
   
 
(17,538
)
    
  
  
  
  
Net income (loss)
   
$
(17,951
)
   
$
5,346
 
   
$
(4,933
)
   
$
—  
   
$
(17,538
)
    
  
  
  
  
 
 
The accompanying notes are an integral part of this consolidating financial statement.

S-2

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 30, 2002:
 
   
WILSONS THE LEATHER EXPERTS INC.
(registrant)
   
By:
  
/s/    JOEL N. WALLER
Joel N. Waller,
Chairman of the Board of Directors and
Chief Executive Officer (principal executive officer)
   
By:
  
/s/    PETER G. MICHIELUTTI
Peter G. Michielutti,
Senior Vice President and Chief Financial Officer
(principal financial and accounting officer)
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on April 30, 2002 by the following persons on behalf of the registrant and in the capacities indicated:
 
/s/    JOEL N. WALLER
JOEL N. WALLER
     
Director
/s/    DAVID L. ROGERS
DAVID L. ROGERS
     
Director
/s/    LYLE BERMAN
LYLE BERMAN
     
Director
/s/    THOMAS J. BROSIG
THOMAS J. BROSIG
     
Director
/s/    GARY L. CRITTENDEN
GARY L. CRITTENDEN
     
Director
/s/    MORRIS GOLDFARB
MORRIS GOLDFARB
     
Director
/s/    MARVIN W. GOLDSTEIN
MARVIN W. GOLDSTEIN
     
Director
/s/    CHERYL L. VITALI
CHERYL L. VITALI
     
Director