---

---




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





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:
| | -- |  | ------------------------------




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



AdditionsBalance at beginning of period

Charged to costs and expenses

Charged to other accounts

Deductions


Balance at end of periodYear ended January 29, 2000:Allowance for doubtful accounts deducted from accounts receivable

1,122

1,437



(1,436
)

1,123Year ended February 3, 2001:Allowance for doubtful accounts deducted from accounts receivable

1,123

891

459

(1,211
)

1,262Restructuring liabilitiesEl Portal





1,536




1,536Year ended February 2, 2002:Allowance for doubtful accounts deducted from accounts receivable

1,262

1,011



(1,862
)

411Restructuring liabilitiesEl Portal

1,536





(1,497
)

39Restructuring liabilitiesBentleys Luggage





3,991

(2,756
)

1,235




37




---

WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES





Index to Consolidated Financial Statements





PageReport of Independent Public Accountants

F-2Consolidated Balance Sheets

F-3Consolidated Statements of Income

F-4Consolidated Statements of Shareholders Equity

F-5Consolidated Statements of Cash Flows

F-6Notes 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, 2001ASSETSCURRENT ASSETS:Cash and cash equivalents

$
43,329


$
52,122Accounts receivable, net


10,255



11,640Inventories


128,555



129,412Prepaid expenses and other current assets


4,450



9,564Total current assets


186,589



202,738PROPERTY AND EQUIPMENT, net


109,827



82,428GOODWILL AND OTHER ASSETS, net


28,772



26,760DEFERRED TAXES


3,584



Total assets

$
328,772


$
311,926LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable

$
38,685


$
17,803Accrued expenses


33,572



45,999Income taxes payable


11,824



38,025DEFERRED TAXES


1,974



247Total current liabilities


86,055



102,074LONG-TERM DEBT


55,590



30,590DEFERRED TAXES






388OTHER LONG-TERM LIABILITIES


4,360



2,691Total liabilities


146,005



135,743COMMITMENTS 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



169Additional paid-in capital


85,896



60,495Retained earnings


97,952



115,490Unearned compensation


(1,243
)


Cumulative other comprehensive income (loss)


(30
)


29Total shareholders equity


182,767



176,183Total 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 endedFebruary 2, 2002


February 3, 2001


January 29, 2000NET SALES

$
720,082


$
636,941


$
543,608COSTS OF GOODS SOLD, BUYING AND OCCUPANCY COSTS


509,871



389,324



340,740Gross margin


210,211



247,617



202,868SELLING, GENERAL AND ADMINISTRATIVE EXPENSES


188,050



161,363



136,267GOODWILL AND PROPERTY AND EQUIPMENT IMPAIRMENT


16,250







DEPRECIATION AND AMORTIZATION


20,818



11,166



6,876Income (loss) from operations


(14,907
)


75,088



59,725INTEREST EXPENSE, net


9,581



4,205



4,993Income (loss) before income taxes


(24,488
)


70,883



54,732INCOME TAX PROVISION (BENEFIT)


(6,950
)


28,352



21,674Income (loss) before extraordinary item and cumulative effect of change in accounting principle


(17,538
)


42,531



33,058EXTRAORDINARY 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


$
30,651BASIC NET INCOME (LOSS) PER COMMON SHARE:Income (loss) before extraordinary item and cumulative effect of change in accounting principle

$
(1.02
)

$
2.54


$
2.02Extraordinary 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


$
1.87Weighted average common shares outstanding


17,172



16,732



16,408DILUTED NET INCOME (LOSS) PER COMMON SHARE:Income (loss) before extraordinary item and cumulative effect of change in accounting principle

$
(1.02
)

$
2.45


$
1.94Extraordinary 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


$
1.80Weighted 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 equityShares

AmountBALANCE, January 30, 1999

16,250,135

$
163

$
55,125

$



$
42,931


$
(42
)

$
98,177Net income














30,651







30,651Other comprehensive income-Foreign currency translation adjustment


















16



16Comprehensive income






















30,667Stock options exercised,

160,062


1


1,081














1,082Exercise of underwriters warrants

165,000


2


1,187














1,189Shares issued under the Companys employee stock purchase plan

10,037





92














92BALANCE, January 29, 2000

16,585,234


166


57,485






73,582



(26
)


131,207Net income














41,908







41,908Other comprehensiveForeign currency translation adjustment


















55



55Comprehensive income






















41,963Stock options exercised

256,398


3


2,496














2,499Shares issued under the Companys employee stock purchase plan

44,118





514














514BALANCE, February 3, 2001

16,885,750


169


60,495






115,490



29



176,183Net loss














(17,538
)






(17,538
)Other comprehensive lossForeign currency translation adjustment


















(59
)


(59
)Comprehensive loss






















(17,597
)Stock options exercised

281,921


2


1,874














1,876Tax benefit on employee stock options







1,412














1,412Shares issued under employee stock purchase plan

54,374


1


526














527Restricted stock issued to employees

82,500


1


1,569


(1,570
)










Compensation expense for restricted stock issued to employees










327











327Private placement of common stock, net of issuance costs

1,900,000


19


20,020














20,039BALANCE, 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 endedFebruary 2, 2002


February 3, 2001


January 29, 2000OPERATING ACTIVITIES:Net income (loss)

$
(17,538
)

$
41,908


$
30,651Adjustments to reconcile net income (loss) to net cash provided by operating activities-Extraordinary loss on early extinguishment of debt






623



958Cumulative effect of change in accounting principle










1,449Depreciation and amortization


20,818



11,166



6,876Amortization of deferred financing costs


728



460



724Loss (gain) on disposal of assets


877



(232
)


3,050Impairment 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
)


7,776Prepaid expenses


5,560



(715
)


(2,344
)Accounts payable and accrued expenses


(7,658
)


(12,829
)


9,442Income taxes payable and other liabilities


(21,992
)


1,354



14,646Net cash provided by operating activities


21,626



4,869



64,483INVESTING 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



2,164Other


(65
)


(636
)


(632
)Net cash provided by (used in) financing activities


47,377



(25,744
)


(24,578
)NET INCREASE (DECREASE) IN CASH AND CASHEQUIVALENTS


(8,793
)


(72,804
)


16,691CASH AND CASH EQUIVALENTS, beginning of year


52,122



124,926



108,235CASH AND CASH EQUIVALENTS, end of year

$
43,329


$
52,122


$
124,926SUPPLEMENTAL CASH FLOW INFORMATION:Cash paid during the year for-Interest

$
8,478


$
7,281


$
8,126Income taxes

$
14,823


$
23,619


$
12,282





The accompanying notes are an integral part of these consolidated financial statements.




F-6




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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, 2001Raw materials

$
11,613

$
30,716Finished 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 endedFebruary 3, 2002


February 3, 2001

January 29, 2000Net income (loss)

$
(17,538
)

$
41,908

$
30,651Weighted average common shares outstanding


17,172



16,732


16,408Effect of stock options






610


656Weighted average common shares outstandingassuming dilution


17,172



17,342


17,064Diluted 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


22.9Total 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

$
21.6Goodwill acquired


12.7Total 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 Year2001


2000Revenue

$
736,330


$
772,073Net income (loss) before extraordinary item


(20,322
)


39,758Net income (loss)


(20,322
)


39,135Net income (loss) before extraordinary item per common sharebasic

$
(1.18
)

$
2.38Net income (loss) per common sharebasic


(1.18
)


2.34Net income (loss) before extraordinary item per common sharediluted

$
(1.18
)

$
2.29Net income (loss) per common sharediluted


(1.18
)


2.26Weighted average common shares outstanding


17,172



16,732Weighted 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, 2001Trade receivables

$
4,375


$
7,154Other receivables


6,291



5,748Total


10,666



12,902Less  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, 2001Land

$
1,868


$
1,340Buildings and improvements


3,620



1,021Equipment and furniture


93,935



71,711Leasehold improvements


47,134



31,626Total


146,557



105,698Less  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, 2001Goodwill, net

$
26,474

$
24,796Debt issuance costs, net


2,094


1,236Other, 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, 2001Compensation and benefits

$
10,395

$
15,225Taxes other than income taxes


3,897


7,646Rent


3,199


5,085Interest


1,953


1,621Other


14,128


16,422$
33,572

$
45,999





|7 |  | Long-term debt
|- |  | --------------




On August 18,
1997, the Company issued $75.0 million of 111⁄4% 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 endedFebruary 2, 2002


February 3, 2001

January 29, 2000Current:Federal

$
(7,039
)

$
22,110

$
23,896State


(806
)


2,526


2,729Deferred


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 endedFebruary 2, 2002


February 3, 2001

January 29, 2000U.S. federal statutory income tax (benefit) rate

$
(8,571
)

$
24,809

$
19,156State income taxes


(713
)


2,835


2,190Non-deductible goodwill amortization


2,089






Other


245



708


328Effective 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 endedFebruary 2, 2002


February 3, 2001


January 29, 2000U.S. federal statutory income tax (benefit) rate

(35.0
%)

35.0
%

35.0
%State income taxes

(2.9
)

4.0


4.0Non-deductible goodwill amortization

8.5





Other

1.0


1.0


0.6Effective 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, 2001Net 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



4,692Net operating loss carryforwards


332



882Allowances


160



337Inventories


(5,980
)


(5,889
)Intangibles


(1,016
)


(543
)Other


275



274Total


(1,974
)


(247
)Net deferred tax liability (long term)Accrued liabilities






1,008Net operating loss carryforwards






1,969Property 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 endedFebruary 2, 2002

February 3, 2001

January 29, 2000Shares


Weighted average exercise price

Shares


Weighted average exercise price

Shares


Weighted average exercise priceOutstanding, beginning of year


1,742,117


$
8.45


1,848,446


$
6.86


1,840,619


$
5.94Granted


562,585



13.74


269,200



17.78


323,249



10.78Exercised


(281,921
)


6.66


(256,398
)


5.79


(160,062
)


4.76Forfeited


(39,799
)


13.69


(119,131
)


10.42


(155,360
)


6.32Outstanding, end of year


1,982,982


$
10.11


1,742,117


$
8.45


1,848,446


$
6.86Exercisable, end of year


1,200,782


$
7.38


1,225,160


$
6.32


946,378


$
5.77Weighted 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 EXERCISABLERange ofExercise 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

$
20.691,982,982

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 endedFebruary 2, 2002


February 3, 2001

January 29, 2000Net income (loss):As reported

$
(17,538
)

$
41,908

$
30,651Pro forma

$
(19,034
)

$
41,153

$
30,026Diluted net income (loss) per common share:As reported

$
(1.02
)

$
2.42

$
1.80Pro 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 endedFebruary 2, 2002

February 3, 2001

January 29, 2000Minimum rentals

$
74,929

$
48,433

$
42,399Contingent rentals


3,240


4,515


4,39078,169


52,948


46,789Less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

$
58,8762004


53,1002005


48,1632006


42,8932007


39,068Thereafter


104,476Total

$
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 111⁄4% 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


ConsolidatedASSETSCURRENT ASSETS:Cash and cash equivalents

$
43,329


$


$



$



$
43,329Accounts receivable, net


10,255














10,255Inventories


128,555














128,555Prepaid expenses and other current assets


4,450














4,450Deferred taxes









(5,422
)


5,422



Intercompany receivables






87,010






(87,010
)


Total current assets


186,589



87,010


(5,422
)


(81,588
)


186,589PROPERTY AND EQUIPMENT, net


109,827














109,827GOODWILL AND OTHER ASSETS, net


28,320






452







28,772DEFERRED TAXES


7,938






1,068



(5,422
)


3,584INVESTMENT IN SUBSIDIARIES






28,520


74,310



(102,830
)


Total assets

$
332,674


$
115,530

$
70,408


$
(189,840
)

$
328,772LIABILITIES ANDSHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable

$
38,685


$


$



$



$
38,685Accrued expenses


31,686






1,886







33,572Income taxes payable


(5,966
)





17,790







11,824Deferred taxes









1,974







1,974Intercompany payables


16,058






70,952



(87,010
)


Total current liabilities


80,463






92,602



(87,010
)


86,055LONG-TERM DEBT


25,000






30,590







55,590OTHER LONG-TERM LIABILITIES


4,360














4,360Total liabilities


109,823






123,192



(87,010
)


146,005SHAREHOLDERS EQUITY:Common stock, $.01 par value, 150,000,000 shares authorized; 19,204,545 shares issued and outstanding









192







192Additional paid-in capital


28,520



74,310


85,896



(102,830
)


85,896Retained earnings (deficit)


194,361



41,220


(137,629
)






97,952Unearned compensation









(1,243
)






(1,243
)Cumulative other comprehensive income (loss)


(30
)













(30
)Total shareholders equity


222,851



115,530


(52,784
)


(102,830
)


182,767Total 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

ConsolidatedNET SALES

$
720,082


$



$



$


$
720,082COST OF GOODS SOLD, BUYING AND OCCUPANCY COSTS


509,871














509,871Gross margin


210,211














210,211SELLING, GENERAL AND ADMINISTRATIVE EXPENSES


187,902







148






188,050GOODWILL AND PROPERTY AND EQUIPMENT IMPAIRMENT


16,250














16,250DEPRECIATION AND AMORTIZATION


20,818














20,818Income (loss) from operations


(14,759
)






(148
)





(14,907
)INTEREST EXPENSE (INCOME), net


10,418



(8,910
)


8,073






9,581Income (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