##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 (Mark one)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the quarterly period ended August 4, 2007
 OR
 o
    
    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.
  MINNESOTA
    
    41-1839933(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 7401 BOONE AVE. N.
BROOKLYN PARK, MN 55428
 (763) 391-4000
  þ o
  o þ o
  o þ




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##### Table of Contents



WILSONS THE LEATHER EXPERTS INC.
 INDEX
 PagePART I  FINANCIAL INFORMATION
    
    
    3Item 1. Consolidated Financial Statements (Unaudited)
    
    
    3Consolidated Balance Sheets as of August 4, 2007 and February 3, 2007
    
    
    3Consolidated Statements of Operations for the three months ended August 4, 2007 and July 29, 2006
    
    
    4Consolidated Statements of Operations for the year-to-date periods ended August 4, 2007 and July 29, 2006
    
    
    5Consolidated Statements of Cash Flows for the year-to-date periods ended August 4, 2007 and July 29, 2006
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    32Item 4. Controls and Procedures
    
    
    32PART II  OTHER INFORMATION
    
    
    32Item 1. Legal Proceedings
    
    
    32Item 1A. Risk Factors
    
    
    32Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    34Item 4. Submission of Matters to a Vote of Security Holders
    
    
    34Item 6. Exhibits
    
    
    34Signature
    
    
    35Certification of Chief Executive OfficerCertification of Chief Financial Officer906 Certification of Chief Executive Officer906 Certification of Chief Financial Officer
 2




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PART I  FINANCIAL INFORMATION
 
 ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 (In thousands, except share and per share amounts)
 August 4,
    
    
    February 3,2007
    
    
    2007(1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    8,474
    
    
    $
    19,909Accounts receivable, net
    
    
    3,465
    
    
    
    3,132Inventories
    
    
    64,179
    
    
    
    74,897Prepaid expenses
    
    
    7,540
    
    
    
    7,267Income taxes receivable
    
    
    565
    
    
    
    Total current assets
    
    
    84,223
    
    
    
    105,205Property and equipment, net
    
    
    37,353
    
    
    
    38,890Other assets, net
    
    
    1,047
    
    
    
    1,250TOTAL ASSETS
    
    $
    122,623
    
    
    $
    145,345LIABILITIES, PREFERRED STOCK AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    20,925
    
    
    $
    14,337Accrued expenses
    
    
    13,117
    
    
    
    14,534Income taxes payable
    
    
    
    
    
    
    921Deferred income taxes
    
    
    775
    
    
    
    220Total current liabilities
    
    
    34,817
    
    
    
    30,012Long-term debt
    
    
    
    
    
    
    20,000Income taxes payable
    
    
    1,491
    
    
    
    Other long-term liabilities
    
    
    16,171
    
    
    
    16,832Total liabilities
    
    
    52,479
    
    
    
    66,844Commitments and contingenciesPreferred stock, $.01 par value; 200,000 shares authorized; 45,000
and no shares issued and outstanding on August 4, 2007 and
February 3, 2007, respectively
    
    
    51,839
    
    
    
    Shareholders equity:Common stock, $.01 par value; 150,000,000 shares
authorized; 39,299,680 and 39,204,299 shares issued and
outstanding on August 4, 2007 and February 3, 2007,
respectively
    
    
    393
    
    
    
    392Additional paid-in capital
    
    
    126,885
    
    
    
    136,441Accumulated deficit
    
    
    (108,975
    )
    
    
    (58,334
    )Accumulated other comprehensive income
    
    
    2
    
    
    
    2Total shareholders equity
    
    
    18,305
    
    
    
    78,501TOTAL LIABILITIES, PREFERRED STOCK AND SHAREHOLDERS
EQUITY
    
    $
    122,623
    
    
    $
    145,345
  
 (1)
    
    Derived from audited consolidated financial statements. 3




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WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share amounts)
 (Unaudited)
 For the three months endedAugust 4,
    
    
    July 29,2007
    
    
    2006NET SALES
    
    $
    43,586
    
    
    $
    49,158Cost of goods sold, buying and occupancy costs
    
    
    46,009
    
    
    
    47,280GROSS MARGIN
    
    
    (2,423
    )
    
    
    1,878Selling, general and administrative expenses
    
    
    23,150
    
    
    
    24,092Depreciation and amortization
    
    
    2,871
    
    
    
    3,109OPERATING LOSS
    
    
    (28,444
    )
    
    
    (25,323
    )Interest expense, net
    
    
    338
    
    
    
    322LOSS BEFORE INCOME TAXES
    
    
    (28,782
    )
    
    
    (25,645
    )Income tax provision (benefit)
    
    
    594
    
    
    
    (1,143
    )NET LOSS
    
    
    (29,376
    )
    
    
    (24,502
    )Less: Preferred stock paid-in-kind dividends
    
    
    (914
    )
    
    
    Beneficial conversion feature on preferred stock
    
    
    (14,877
    )
    
    
    Deemed dividend to warrant holders
    
    
    (967
    )
    
    
    NET LOSS AVAILABLE TO COMMON SHAREHOLDERS
    
    $
    (46,134
    )
    
    $
    (24,502
    )BASIC AND DILUTED LOSS PER SHARE:Basic and diluted loss per share
    
    $
    (1.17
    )
    
    $
    (0.63
    )Weighted average shares outstanding  basic and diluted
    
    
    39,268
    
    
    
    39,146
  4




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WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share amounts)
 (Unaudited)
 For the year-to-date period endedAugust 4,
    
    
    July 29,2007
    
    
    2006NET SALES
    
    $
    101,181
    
    
    $
    123,838Cost of goods sold, buying and occupancy costs
    
    
    97,154
    
    
    
    102,230GROSS MARGIN
    
    
    4,027
    
    
    
    21,608Selling, general and administrative expenses
    
    
    47,668
    
    
    
    49,672Depreciation and amortization
    
    
    5,710
    
    
    
    6,281OPERATING LOSS
    
    
    (49,351
    )
    
    
    (34,345
    )Interest expense, net
    
    
    769
    
    
    
    564LOSS BEFORE INCOME TAXES
    
    
    (50,120
    )
    
    
    (34,909
    )Income tax provision (benefit)
    
    
    521
    
    
    
    (3,907
    )NET LOSS
    
    
    (50,641
    )
    
    
    (31,002
    )Less: Preferred stock paid-in-kind dividends
    
    
    (914
    )
    
    
    Beneficial conversion feature on preferred stock
    
    
    (14,877
    )
    
    
    Deemed dividend to warrant holders
    
    
    (967
    )
    
    
    NET LOSS AVAILABLE TO COMMON SHAREHOLDERS
    
    $
    (67,399
    )
    
    $
    (31,002
    )BASIC AND DILUTED LOSS PER SHARE:Basic and diluted loss per share
    
    $
    (1.72
    )
    
    $
    (0.79
    )Weighted average shares outstanding  basic and diluted
    
    
    39,240
    
    
    
    39,125
  5




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WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 For the year-to-date period endedAugust 4,
    
    
    July 29,2007
    
    
    2006(Revised)OPERATING ACTIVITIES:Net loss
    
    $
    (50,641
    )
    
    $
    (31,002
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation
    
    
    5,710
    
    
    
    6,281Amortization of deferred financing costs
    
    
    337
    
    
    
    314Gain on disposal of assets
    
    
    (5
    )
    
    
    (5
    )Stock-based compensation expense
    
    
    838
    
    
    
    1,154Deferred income taxes
    
    
    555
    
    
    
    17Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (333
    )
    
    
    486Inventories
    
    
    10,718
    
    
    
    21,535Prepaid expenses and other current assets
    
    
    (838
    )
    
    
    (1,516
    )Accounts payable and accrued expenses
    
    
    4,600
    
    
    
    (297
    )Income taxes payable and other liabilities
    
    
    (91
    )
    
    
    (4,248
    )Net cash used in operating activities
    
    
    (29,150
    )
    
    
    (7,281
    )INVESTING ACTIVITIES:Additions to property and equipment
    
    
    (3,610
    )
    
    
    (4,968
    )Proceeds from the disposition of property and equipment
    
    
    13
    
    
    
    3Net cash used in investing activities
    
    
    (3,597
    )
    
    
    (4,965
    )FINANCING ACTIVITIES:Proceeds from issuance of common stock, net
    
    
    131
    
    
    
    253Proceeds from issuance of preferred stock, net
    
    
    36,049
    
    
    
    Proceeds from issuance of warrants, net
    
    
    5,266
    
    
    
    Debt issuance costs
    
    
    (134
    )
    
    
    Repayments of long-term debt
    
    
    (20,000
    )
    
    
    Net cash provided by financing activities
    
    
    21,312
    
    
    
    253NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (11,435
    )
    
    
    (11,993
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    19,909
    
    
    
    45,552CASH AND CASH EQUIVALENTS, end of period
    
    $
    8,474
    
    
    $
    33,559
  6




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WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 1 Summary of significant accounting policies
 Nature of organization
  Basis of presentation
   Fiscal year
  Use of estimates
  Cash and cash equivalents
  7




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Inventories
     Property and equipment
  Store closing and impairment of long-lived assets
  8




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Operating leases
  Revenue recognition
  Stock-based compensation
 Share-Based Payment
  9




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For the three months ended
    
    
    For the year-to-date period endedAugust 4,
    
    
    July 29,
    
    
    August 4,
    
    
    July 29,2007
    
    
    2006
    
    
    2007
    
    
    2006Expected term (in years)
    
    
    3.8
    
    
    
    4.1
    
    
    
    3.9
    
    
    
    4.1Expected volatility
    
    
    65.5
    %
    
    
    69.5
    %
    
    
    64.0
    %
    
    
    69.9
    %Risk-free interest rate
    
    
    4.7
    %
    
    
    5.0
    %
    
    
    4.7
    %
    
    
    4.8
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Weighted Average fair value
of options granted
    
    $
    1.11
    
    
    $
    2.04
    
    
    $
    0.79
    
    
    $
    2.11
    Income taxes
   10




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Sales taxes
  Income (loss) per share
  For the three months ended
    
    
    For the year-to-date period endedAugust 4,
    
    
    July 29,
    
    
    August 4,
    
    
    July 29,2007
    
    
    2006
    
    
    2007
    
    
    2006Weighted average common shares outstanding  basic
    
    
    39,268
    
    
    
    39,146
    
    
    
    39,240
    
    
    
    39,125Effect of dilutive securities:Stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average common shares outstanding  diluted
    
    
    39,268
    
    
    
    39,146
    
    
    
    39,240
    
    
    
    39,125
  For the three months ended
    
    
    For the year-to-date period endedAugust 4,
    
    
    July 29,
    
    
    August 4,
    
    
    July 29,2007
    
    
    2006
    
    
    2007
    
    
    2006Stock options
    
    
    1
    
    
    
    19
    
    
    
    
    
    
    
    19Warrants
    
    
    
    
    
    
    749
    
    
    
    
    
    
    
    698Preferred stock (1)
    
    
    16,813
    
    
    
    
    
    
    
    8,407
    
    
    
    Total potentially dilutive shares
    
    
    16,814
    
    
    
    768
    
    
    
    8,407
    
    
    
    717
  11




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New accounting pronouncements
 Accounting for Uncertainty in Income Taxes Accounting for Income Taxes. Definition of Settlement in FASB
Interpretation No. 48
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities  Including an Amendment of FASB Statement No. 115
 2 Other comprehensive income
  3 Long-term debt
  August 4,
    
    
    February 3,2007
    
    
    2007Term B promissory note
    
    $
    
    
    
    $
    20,000Total debt
    
    
    
    
    
    
    20,000Less: current portion
    
    
    
    
    
    
    Total long-term debt
    
    $
    
    
    
    $
    20,000
 Senior
credit facility and Term B promissory note
   12




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4 Preferred Stock and Warrant Financing
  13




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Classification and
Measurement of Redeemable Securities
  Application of Issue No. 98-5 to Certain
Convertible Instruments Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios
 14




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5 Employee stock benefit plans
 Stock options
   15




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As of and for the year-to-date period ended August 4, 2007Weighted average
    
    
    Weighted averageShares
    
    
    exercise price
    
    
    remaining lifeOutstanding, beginning of period
    
    
    2,722,247
    
    
    $
    5.50Granted
    
    
    135,000
    
    
    $
    1.51Exercised
    
    
    
    
    
    $
    Forfeited
    
    
    (341,329
    )
    
    $
    3.94Expired
    
    
    (173,825
    )
    
    $
    6.86Outstanding, end of period
    
    
    2,342,093
    
    
    $
    5.39
    
    
    
    3.67Exercisable, end of period
    
    
    1,509,433
    
    
    $
    5.81
    
    
    
    3.81Available for grant, end of period (1)
    
    
    1,674,214
   Non-vested shares and other stock-related awards
   16




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Employee stock purchase plan
  6 Warrants
  As of August 4, 2007Weighted average
    
    
    Weighted averageExercise Price
    
    
    Shares
    
    
    exercise price
    
    
    remaining lifeWarrants issued April 25, 2004 (1)
    
    $
    2.39
    
    
    
    2,511,182
    
    
    $
    2.39
    
    
    
    1.75Warrants issued July 2, 2004 (1)
    
    $
    2.39
    
    
    
    2,511,182
    
    
    $
    2.39
    
    
    
    2.00Warrants issued June 15, 2007 (2)
    
    $
    2.00
    
    
    
    15,000,000
    
    
    $
    2.00
    
    
    
    4.90Outstanding, end of period
    
    $
    2.00-$2.39
    
    
    
    20,022,364
    
    
    $
    2.10
    
    
    
    4.17Exercisable, end of period
    
    $
    2.00-$2.39
    
    
    
    20,022,364
    
    
    $
    2.10
    
    
    
    4.17
 (1)
    
    In connection with an equity financing transaction entered into in July of 2004, the
Company issued four million warrants exercisable for five years to certain institutional
investors at an exercise price of $3.00 per share of the Companys common stock. Pursuant
to the anti-dilution provisions of the terms of these warrants, as a result of the June
2007 Preferred Stock and Warrant financing, the exercise price of the warrants was reduced
to $2.39 and the number of underlying shares of common stock increased from 4,000,000 to
5,022,364.(2)
    
    These warrants were issued in conjunction with the June 2007 Preferred Stock and
Warrant financing and are exercisable for five years.
 7 Income taxes
  17




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8 Revision of financial statements
  AsPreviously(In thousands)
    
    reported
    
    
    Adjustments
    
    
    RevisedFor the year-to-date period ended July 29, 2006Accounts payable and accrued expenses
    
    $
    (33
    )
    
    $
    (264
    )
    
    $
    (297
    )Net cash used in operating activities
    
    
    (7,017
    )
    
    
    (264
    )
    
    
    (7,281
    )Additions to property and equipment
    
    
    (5,232
    )
    
    
    264
    
    
    
    (4,968
    )Net cash used in investing activities
    
    
    (5,229
    )
    
    
    264
    
    
    
    (4,965
    )
 9 Commitments and contingencies
   18




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10 Supplemental balance sheet information
 August 4,
    
    
    February 3,(In thousands)
    
    2007
    
    
    2007Accounts receivable, net:Trade receivables
    
    $
    2,534
    
    
    $
    2,359Other receivables
    
    
    1,108
    
    
    
    929Total
    
    
    3,642
    
    
    
    3,288Less  Allowance for doubtful accounts
    
    
    (29
    )
    
    
    (71
    )Less  Deferred sales
    
    
    (148
    )
    
    
    (85
    )Total accounts receivable, net
    
    $
    3,465
    
    
    $
    3,132Inventories:Raw materials
    
    $
    1,911
    
    
    $
    2,940Finished goods
    
    
    62,268
    
    
    
    71,957Total inventories
    
    $
    64,179
    
    
    $
    74,897Property and equipment, net:Equipment and furniture
    
    $
    76,187
    
    
    $
    74,420Leasehold improvements
    
    
    43,586
    
    
    
    42,700Total
    
    
    119,773
    
    
    
    117,120Less-Accumulated depreciation and amortization
    
    
    (82,420
    )
    
    
    (78,230
    )Net property and equipment
    
    $
    37,353
    
    
    $
    38,890Other assets, net:Debt issuance costs
    
    $
    4,578
    
    
    $
    5,219Less-Accumulated amortization
    
    
    (3,589
    )
    
    
    (4,027
    )Debt issuance costs, net
    
    
    989
    
    
    
    1,192Other intangible assets, net
    
    
    58
    
    
    
    58Total
    
    $
    1,047
    
    
    $
    1,250
 19




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11 Subsequent event
  
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   Executive overview
  Wilsons Leather
   20




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21




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Critical accounting policies
  Results of operations
  For the three months ended
    
    
    For the year-to-date period endedAugust 4,
    
    
    July 29,
    
    
    August 4,
    
    
    July 29,2007
    
    
    2006
    
    
    2007
    
    
    2006NET SALES
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold, buying and
occupancy costs
    
    
    105.6
    
    
    
    96.2
    
    
    
    96.0
    
    
    
    82.6GROSS MARGIN
    
    
    (5.6
    )
    
    
    3.8
    
    
    
    4.0
    
    
    
    17.4Selling, general and
administrative expenses
    
    
    53.1
    
    
    
    49.0
    
    
    
    47.1
    
    
    
    40.1Depreciation and amortization
    
    
    6.6
    
    
    
    6.3
    
    
    
    5.7
    
    
    
    5.0OPERATING LOSS
    
    
    (65.3
    )
    
    
    (51.5
    )
    
    
    (48.8
    )
    
    
    (27.7
    )Interest expense, net
    
    
    0.7
    
    
    
    0.7
    
    
    
    0.7
    
    
    
    0.5LOSS BEFORE INCOME TAXES
    
    
    (66.0
    )
    
    
    (52.2
    )
    
    
    (49.5
    )
    
    
    (28.2
    )Income tax provision (benefit)
    
    
    1.4
    
    
    
    (2.4
    )
    
    
    0.5
    
    
    
    (3.2
    )NET LOSS
    
    
    (67.4
    )%
    
    
    (49.8
    )%
    
    
    (50.0
    )%
    
    
    (25.0
    )%
 22




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For the three months ended
    
    
    For the year-to-date period endedAugust 4,
    
    
    July 29,
    
    
    August 4,
    
    
    July 29,2007
    
    
    2006
    
    
    2007
    
    
    2006Net sales (in thousands)
    
    $
    43,586
    
    
    $
    49,158
    
    
    $
    101,181
    
    
    $
    123,838Comparable store salesTotal
    
    
    (11.9
    )%
    
    
    (16.2
    )%
    
    
    (17.2
    )%
    
    
    (13.0
    )%By divisionMens
    
    
    (23.8
    )%
    
    
    (22.7
    )%
    
    
    (26.7
    )%
    
    
    (16.0
    )%Womens
    
    
    (16.3
    )%
    
    
    (29.4
    )%
    
    
    (22.5
    )%
    
    
    (21.9
    )%Accessories
    
    
    (5.9
    )%
    
    
    (7.9
    )%
    
    
    (9.1
    )%
    
    
    (5.5
    )%By channelMall stores
    
    
    (13.1
    )%
    
    
    (22.6
    )%
    
    
    (20.6
    )%
    
    
    (17.9
    )%Outlet stores
    
    
    (10.1
    )%
    
    
    (9.2
    )%
    
    
    (13.1
    )%
    
    
    (6.4
    )%Number of stores:Beginning of period
    
    
    414
    
    
    
    421
    
    
    
    417
    
    
    
    422Opened
    
    
    2
    
    
    
    2
    
    
    
    2
    
    
    
    4Closed
    
    
    (5
    )
    
    
    (1
    )
    
    
    (8
    )
    
    
    (4
    )End of period
    
    
    411
    
    
    
    422
    
    
    
    411
    
    
    
    422
  Net Sales.
   23




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##### Table of Contents



Cost of Goods Sold, Buying and Occupancy Costs.
     Selling, General and Administrative Expenses.
 24




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##### Table of Contents



Depreciation and Amortization.
  Operating Loss.
  Interest Expense, Net.
 25




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##### Table of Contents



Income Tax Provision (Benefit).
   Net Loss.
 Net Loss Available to Common Shareholders.
  26




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##### Table of Contents



For the three months ended
    
    
    For the year-to-date period endedAugust 4, 2007
    
    
    August 4, 2007Net Loss Available To
    
    
    Loss Per Basic
    
    
    Net Loss Available To
    
    
    Loss Per BasicCommon Shareholders
    
    
    And Diluted Share
    
    
    Common Shareholders
    
    
    And Diluted ShareAs reported
    
    $
    (46,134
    )
    
    $
    (1.17
    )
    
    $
    (67,399
    )
    
    $
    (1.72
    )Adjustment (1)
    
    
    16,758
    
    
    
    0.42
    
    
    
    16,758
    
    
    
    0.43Adjusted
    
    $
    (29,376
    )
    
    $
    (0.75
    )
    
    $
    (50,641
    )
    
    $
    (1.29
    )Weighted average shares
outstanding  basic and
diluted
    
    
    
    
    
    
    39,268
    
    
    
    
    
    
    
    39,240
  Liquidity and capital resources
 Wilsons Leather
     
    
    100% of the book value of credit card receivables;
    
    plus the lesser of $10 million or 100% of the book value of eligible wholesale accounts receivable;
 27




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##### Table of Contents




    
    plus 102.5% of the then applicable discount rate applied in appraising eligible retail inventories
times the appraised eligible retail inventories, plus 102.5% of such discount rate times our
future retail inventories subject to trade letters of credit;
    
    plus the lesser of $10 million, or 60% of the book value of our wholesale inventory, including
in-transit inventory but minus the book value of in-transit inventory in excess of $5 million;
    
    plus 60% of the book value of our future wholesale inventories related to trade letters of credit;
    
    plus 85% of the then applicable discount rate applied in appraising value of eligible equipment
times the appraised eligible equipment; and
    
    minus a reserve equal to 10% of the lesser of $115.0 million and the maximum amount calculated
under the formula described above.
       28




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##### Table of Contents



Cash flow analysis
 Operating Activities.
  29




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##### Table of Contents



Investing Activities.
  Financing Activities.
  Off-balance sheet arrangements
  Contractual obligations and commercial commitments
  30




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##### Table of Contents



Seasonality and inflation
   Recently issued accounting pronouncements
 Accounting for
Uncertainty in Income Taxes Accounting for Income Taxes. Definition of Settlement in FASB Interpretation No.
48
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities  Including an Amendment of FASB Statement No. 115
 Forward-looking statements
  31




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
  
 PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  Our comparable store sales declined during four of the past five years.
  
    
    general economic conditions and, in particular, the retail sales environment;
 32




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##### Table of Contents




    
    consumer shopping preferences;
    
    transition of our target customer base;
    
    acceptance of the Wilsons Leatherbrand;
    
    actions by competitors or mall anchor tenants;
    
    weather conditions;
    
    fashion trends;
    
    changes in our merchandise mix;
    
    the timing of new store openings and the relative proportion of new stores to mature stores;
    
    maintaining appropriate inventory levels;
    
    calendar shifts of seasonal periods; and
    
    timing of promotional events.
  We may not be able to expand our accessories business or acquire a suitable accessories brand.
 Wilsons Leather
 We may need funding in addition to our cash flow from operations and existing credit
facilities.
  33




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##### Table of Contents



The public sale of our common stock issued pursuant to our employee benefit plans or the sale
into the market of the shares issued in our equity financing in April 2004 or issuable upon
exercise of the warrants delivered in connection with our April 2004 equity financing, as well as
shares issuable upon conversion of the Preferred Stock and exercise of the Warrants issued in
connection with the financing described in this report, could decrease the price of our common
stock or make it more difficult to obtain additional financing in the future.
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  (a)
    
    The election of two directors for a three-year term. Each nominated director was elected
as follows:
 Director-Nominee
    
    Votes For
    
    Votes WithheldDavid L. Rogers
    
    
    37,918,784
    
    
    
    254,651R. Ted Weschler
    
    
    37,746,522
    
    
    
    426,913
 (b)
    
    Ratification of the appointment of KPMG LLP as our independent registered public
accounting firm for the fiscal year ending February 2, 2008.
  
 ITEM 6. EXHIBITS
  34




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##### Table of Contents



SIGNATURE
   By:
    
    /s/ STACY A. KRUSEStacy A. KruseChief Financial Officer and Treasurer
  35




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##### Table of Contents



INDEX TO EXHIBITS
 ExhibitNo
    
    Description
    
    Method of Filing3.1
    
    Amended and Restated Articles of Incorporation of Wilsons The
Leather Experts Inc. adopted June 16, 1998, as amended by the
Articles of Amendment dated February 17, 2000, and the Articles
of Amendment dated May 23, 2002. (1)
    
    Incorporated by
Reference3.2
    
    Restated Bylaws of Wilsons The Leather Experts Inc. as amended
June 16, 1998, January 25, 2000, May 23, 2002, and February 5,
2004. (2)
    
    Incorporated by
Reference3.3
    
    Certificate of Designations for Series A Convertible Preferred
Stock dated June 15, 2007. (3)
    
    Incorporated by
Reference4.1
    
    Specimen of common stock certificate. (4)
    
    Incorporated by
Reference4.2
    
    Registration Rights Agreement dated as of May 25, 1996, by and
among CVS New York, Inc. (formerly known as Melville
Corporation), Wilsons The Leather Experts Inc., the Managers
listed on the signature pages thereto, Leather Investors Limited
Partnership I and the Partners listed on the signature pages
thereto. (5)
    
    Incorporated by
Reference4.3
    
    Amendment to Registration Rights Agreement dated as of August 12,
1999, by and among Wilsons The Leather Experts Inc. and the
Shareholders listed on the attachments thereto. (6)
    
    Incorporated by
Reference4.4
    
    Common Stock and Warrant Purchase Agreement, dated as of April
25, 2004, by and among Wilsons The Leather Experts Inc. and the
Purchasers identified on the signatory pages thereto (the
Purchase Agreement). (7)
    
    Incorporated by
Reference4.5
    
    Registration Rights Agreement, dated as of April 25, 2004, by and
among Wilsons The Leather Experts Inc. and the Investors
identified therein. (8)
    
    Incorporated by
Reference4.6
    
    Form of Warrant issued to the Purchasers named in the Purchase
Agreement on April 25, 2004. (9)
    
    Incorporated by
Reference4.7
    
    Registration Rights Agreement dated as of June 15, 2007 by and
among Wilsons The Leather Experts Inc., Marathon Fund Limited
Partnership V, Peninsula Investment Partners, L.P., Quaker
Capital Partners I, L.P., and Quaker Capital Partners II, L.P.
(10)
    
    Incorporated by
Reference4.8
    
    Form of Warrant issued to Marathon Fund Limited Partnership V,
Peninsula Investment Partners, L.P., Quaker Capital Partners I,
L.P., and Quaker Capital Partners II, L.P. on June 15, 2007.
(11)
    
    Incorporated by
Reference10.1
    
    Securities Purchase Agreement dated as of June 1, 2007 among
Wilsons The Leather Experts Inc. and the Purchasers set forth on
Schedule 1 thereto, including the Exhibits thereto. (12)
    
    Incorporated by
Reference10.2
    
    Support Agreement, dated as of June 1, 2007, by and among Wilsons
The Leather Experts Inc., Marathon Fund Limited Partnership V,
Peninsula Investment Partners, L.P., Quaker Capital Partners I,
L.P., and Quaker Capital Partners II, L.P. (13)
    
    Incorporated by
Reference
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##### Table of Contents



10.3
    
    Second Amendment to Fifth Amended and Restated Credit Agreement
dated as of June 15, 2007, among Wilsons Leather Holdings Inc.,
General Electric Capital Corporation, as Lender, Term Lender,
Swing Line Lender and Agent, the Credit Parties signatory thereto
and the Lenders signatory thereto. (14)
    
    Incorporated by
Reference10.4
    
    Reaffirmation of Guaranty dated as of June 15, 2007 by Wilsons
The Leather Experts Inc., Wilsons Center, Inc., Rosedale Wilsons,
Inc., River Hills Wilsons, Inc. and the Store Guarantors listed
on the signature pages thereto in favor of General Electric
Capital Corporation as Agent. (15)
    
    Incorporated by
Reference31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
    
    Electronic Transmission31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
    
    Electronic Transmission32.1
    
    Certification of Chief Executive Officer pursuant to Section
1350, Chapter 63 of Title 18, United States Code, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
    
    Electronic Transmission32.2
    
    Certification of Chief Financial Officer pursuant to Section
1350, Chapter 63 of Title 18, United States Code, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
    
    Electronic Transmission
 1.
    
    Incorporated by reference to the same numbered exhibit to the Companys Report on Form 10-Q
for the quarter ended May 4, 2002 (File No. 000-21543).2.
    
    Incorporated by reference to the same numbered exhibit to the Companys Report on Form 10-K
for the year ended January 31, 2004 (File No. 000-21543).3.
    
    Incorporated by reference to Exhibit 3.1 to the Companys Report on Form 8-K filed with the
Commission on June 21, 2007.4.
    
    Incorporated by reference to the same numbered exhibit to Amendment No. 1 to the Companys
Registration Statement on Form S-l (333-13967) filed with the Commission on December 24, 1996.5.
    
    Incorporated by reference to Exhibit 4.8 to the Companys Registration Statement on Form S-l
(333-13967) filed with the Commission on October 11, 1996.6.
    
    Incorporated by reference to Exhibit 4.5 to the Companys Report on Form 10-K for the fiscal
year ended January 29, 2000, filed with the Commission (File No. 000-21543).7.
    
    Incorporated by reference to Exhibit 4.1 to the Companys Report on Form 8-K filed with the
Commission on April 27, 2004.8.
    
    Incorporated by reference to Exhibit 4.2 to the Companys Report on Form 8-K filed with the
Commission on April 27, 2004.9.
    
    Incorporated by reference to Exhibit 4.3 to the Companys Report on Form 8-K filed with the
Commission on April 27, 2004.10.
    
    Incorporated by reference to Exhibit 4.1 to the Companys Report on Form 8-K filed with the
Commission on June 21, 2007.11.
    
    Incorporated by reference to Exhibit 4.2 to the Companys Report on Form 8-K filed with the
Commission on June 21, 2007.12.
    
    Incorporated by reference to Exhibit 10.1 to the Companys Report on Form 8-K filed with the
Commission on June 5, 2007.13.
    
    Incorporated by reference to Exhibit 10.1 to the Companys Report on Form 8-K filed with the
Commission on June 21, 2007.14.
    
    Incorporated by reference to Exhibit 10.2 to the Companys Report on Form 8-K filed with the
Commission on June 21, 2007.15.
    
    Incorporated by reference to Exhibit 10.3 to the Companys Report on Form 8-K filed with the
Commission on June 21, 2007.
 37