##### 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 October 28, 2006
  o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
  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(Address of principal executive offices)
    
    (Zip Code)
 (763) 391-4000
  þ o
 
 Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
  o þ




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##### 



WILSONS THE LEATHER EXPERTS INC.
 INDEX
 PagePART I  FINANCIAL INFORMATIONItem 1. Consolidated Financial Statements (Unaudited)
    
    
    3Consolidated Balance Sheets as of October 28, 2006 and January 28, 2006
    
    
    3Consolidated Statements of Operations for the three months ended October 28, 2006 and October 29, 2005
    
    
    4Consolidated Statements of Operations for the year-to-date periods ended October 28, 2006 and October 29, 2005
    
    
    5Consolidated Statements of Cash Flows for the year-to-date periods ended October 28, 2006 and October 29, 2005
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    27Item 4. Controls and Procedures
    
    
    27PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    27Item 1A. Risk Factors
    
    
    27Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    27Item 6. Exhibits
    
    
    27Signature
    
    
    28Certification of Chief Executive OfficerCertification of Chief Financial Officer906 Certification of Chief Executive Officer906 Certification of Chief Financial Officer
  2




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##### Table of Contents



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)
 October 28,
    
    
    January 28,2006
    
    
    2006(1)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    12,595
    
    
    $
    45,552Accounts receivable, net
    
    
    4,240
    
    
    
    4,063Inventories
    
    
    85,286
    
    
    
    85,645Prepaid expenses
    
    
    2,573
    
    
    
    1,987TOTAL CURRENT ASSETS
    
    
    104,694
    
    
    
    137,247Property and equipment, net
    
    
    40,654
    
    
    
    41,045Other assets, net
    
    
    1,105
    
    
    
    1,576TOTAL ASSETS
    
    $
    146,453
    
    
    $
    179,868LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    26,787
    
    
    $
    12,036Accrued expenses
    
    
    16,427
    
    
    
    16,595Income taxes payable
    
    
    794
    
    
    
    5,685Deferred income taxes
    
    
    20
    
    
    
    53TOTAL CURRENT LIABILITIES
    
    
    44,028
    
    
    
    34,369Long-term debt
    
    
    20,000
    
    
    
    20,000Other long-term liabilities
    
    
    17,408
    
    
    
    17,445TOTAL LIABILITIES
    
    
    81,436
    
    
    
    71,814COMMITMENTS AND CONTINGENCIESSHAREHOLDERS EQUITY:Common stock, $.01 par value; 150,000,000 shares
authorized; 39,182,334 and 39,087,652 shares issued and
outstanding on October 28, 2006 and January 28, 2006,
respectively
    
    
    392
    
    
    
    391Additional paid-in capital
    
    
    135,874
    
    
    
    133,853Accumulated deficit
    
    
    (71,260
    )
    
    
    (26,201
    )Accumulated other comprehensive income
    
    
    11
    
    
    
    11TOTAL SHAREHOLDERS EQUITY
    
    
    65,017
    
    
    
    108,054TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    146,453
    
    
    $
    179,868
 (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 endedOctober 28,
    
    
    October 29,2006
    
    
    2005NET SALES
    
    $
    64,457
    
    
    $
    76,389COST OF GOODS SOLD, BUYING AND OCCUPANCY COSTS
    
    
    49,036
    
    
    
    56,232Gross margin
    
    
    15,421
    
    
    
    20,157SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
    
    
    26,554
    
    
    
    27,226DEPRECIATION AND AMORTIZATION
    
    
    2,999
    
    
    
    3,275Operating loss
    
    
    (14,132
    )
    
    
    (10,344
    )INTEREST EXPENSE, net
    
    
    579
    
    
    
    949Loss before income taxes
    
    
    (14,711
    )
    
    
    (11,293
    )INCOME TAX PROVISION (BENEFIT)
    
    
    (654
    )
    
    
    423Net loss
    
    $
    (14,057
    )
    
    $
    (11,716
    )BASIC AND DILUTED LOSS PER SHARE:Basic and diluted loss per share
    
    $
    (0.36
    )
    
    $
    (0.30
    )Weighted
average shares outstanding - basic and diluted
    
    
    39,173
    
    
    
    39,021
  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 endedOctober 28,
    
    
    October 29,2006
    
    
    2005NET SALES
    
    $
    188,295
    
    
    $
    219,135COST OF GOODS SOLD, BUYING AND OCCUPANCY COSTS
    
    
    151,266
    
    
    
    160,165Gross margin
    
    
    37,029
    
    
    
    58,970SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
    
    
    76,226
    
    
    
    76,598DEPRECIATION AND AMORTIZATION
    
    
    9,280
    
    
    
    10,567Operating loss
    
    
    (48,477
    )
    
    
    (28,195
    )INTEREST EXPENSE, net
    
    
    1,143
    
    
    
    2,295Loss before income taxes
    
    
    (49,620
    )
    
    
    (30,490
    )INCOME TAX BENEFIT
    
    
    (4,561
    )
    
    
    (988
    )Net loss
    
    $
    (45,059
    )
    
    $
    (29,502
    )BASIC AND DILUTED LOSS PER SHARE:Basic and diluted loss per share
    
    $
    (1.15
    )
    
    $
    (0.76
    )Weighted
average shares outstanding - basic and diluted
    
    
    39,141
    
    
    
    38,973
  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 endedOctober 28,
    
    
    October 29,2006
    
    
    2005(Revised)OPERATING ACTIVITIES:Net loss
    
    $
    (45,059
    )
    
    $
    (29,502
    )Adjustments to reconcile loss from operations to net cash used in
operating activities:Depreciation
    
    
    9,280
    
    
    
    10,566Amortization
    
    
    -
    
    
    
    1Amortization of deferred financing costs
    
    
    471
    
    
    
    471Gain on disposal of assets
    
    
    (16
    )
    
    
    (162
    )Stock-compensation expense
    
    
    1,737
    
    
    
    -Deferred income taxes
    
    
    (33
    )
    
    
    -Changes in operating assets and liabilities:Accounts receivable, net
    
    
    (177
    )
    
    
    (2,766
    )Inventories
    
    
    359
    
    
    
    (36,929
    )Prepaid expenses
    
    
    (586
    )
    
    
    (1,845
    )Accounts payable and accrued expenses
    
    
    14,355
    
    
    
    11,582Income taxes payable and other liabilities
    
    
    (4,928
    )
    
    
    (2,084
    )Net cash used in operating activities
    
    
    (24,597
    )
    
    
    (50,668
    )INVESTING ACTIVITIES:Additions to property and equipment
    
    
    (8,725
    )
    
    
    (7,740
    )Proceeds from the disposition of property and equipment
    
    
    80
    
    
    
    305Net cash used in investing activities
    
    
    (8,645
    )
    
    
    (7,435
    )FINANCING ACTIVITIES:Proceeds from issuance of common stock
    
    
    285
    
    
    
    633Repayments of long-term debt
    
    
    -
    
    
    
    (5,000
    )Borrowings under revolving credit facility
    
    
    -
    
    
    
    12,978Checks written in excess of cash balance
    
    
    -
    
    
    
    664Other financing
    
    
    -
    
    
    
    7Net cash provided by financing activities
    
    
    285
    
    
    
    9,282NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (32,957
    )
    
    
    (48,821
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    45,552
    
    
    
    48,821CASH AND CASH EQUIVALENTS, end of period
    
    $
    12,595
    
    
    $
    -
  6




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##### Table of Contents



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
   Debt issuance costs
  Operating leases
  8




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Revenue recognition
  Stock-based compensation
 Share-Based Payment Accounting for Stock Issued to Employees Accounting for Stock-Based Compensation
    For the three months ended
    
    
    For the year-to-date period endedOctober 28,
    
    
    October 29,
    
    
    October 28,
    
    
    October 29,2006
    
    
    2005
    
    
    2006
    
    
    2005Expected term (in years)
    
    
    4.0
    
    
    
    4.4
    
    
    
    4.1
    
    
    
    4.5Expected volatility
    
    
    68.2%
    
    
    
    66.6%
    
    
    
    69.7%
    
    
    
    69.5%Risk-free interest rate
    
    
    4.8%
    
    
    
    4.1%
    
    
    
    4.8%
    
    
    
    3.9%Dividend yield
    
    
    0.0%
    
    
    
    0.0%
    
    
    
    0.0%
    
    
    
    0.0%Weighted Average fair value
of options granted
    
    $
    1.47
    
    
    $
    3.54
    
    
    $
    2.02
    
    
    $
    3.43
  9




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For the three
    
    
    For the year-to-months ended
    
    
    date period endedOctober 29,
    
    
    October 29,2005
    
    
    2005Net loss:As reported
    
    $
    (11,716
    )
    
    $
    (29,502
    )Stock based employee
compensation expense included
in net loss
    
    
    -
    
    
    
    -Stock based employee
compensation determined under
fair value based method for
all awards
    
    
    (782
    )
    
    
    (1,471
    )Pro forma loss
    
    $
    (12,498
    )
    
    $
    (30,973
    )Basic and diluted loss per share:As reported
    
    $
    (0.30
    )
    
    $
    (0.76
    )Stock based employee
compensation expense included
in net loss
    
    
    -
    
    
    
    -Stock based employee
compensation determined under
fair value based method for
all awards
    
    
    (0.02
    )
    
    
    (0.03
    )Pro forma loss
    
    $
    (0.32
    )
    
    $
    (0.79
    )
   Income taxes
  Foreign currency translation
  10




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Loss per share
  For the three months ended
    
    
    For the year-to-date period endedOctober 28,
    
    
    October 29,
    
    
    October 28,
    
    
    October 29,2006
    
    
    2005
    
    
    2006
    
    
    2005Weighted
average common shares outstanding - basic
    
    
    39,173
    
    
    
    39,021
    
    
    
    39,141
    
    
    
    38,973Effect of dilutive securities: stock options
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -Effect of dilutive securities: warrants
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -Weighted
average common shares outstanding - diluted
    
    
    39,173
    
    
    
    39,021
    
    
    
    39,141
    
    
    
    38,973
  New accounting pronouncements
 Fair Value Measurements
 Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements
 Accounting for
Uncertainty in Income Taxes Accounting for Income Taxes.
 How Sales
Taxes Collected From Customers and Remitted to Governmental Authorities Should Be Presented in the
Income Statement
 Inventory Costs
 11




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2 Other comprehensive income
  3 Long-term debt
  October 28,
    
    
    January 28,2006
    
    
    2006Term B promissory note
    
    $
    20,000
    
    
    $
    20,000Total debt
    
    
    20,000
    
    
    
    20,000Less: current portion
    
    
    -
    
    
    
    -Total long-term debt
    
    $
    20,000
    
    
    $
    20,000
     12




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##### Table of Contents



4 Employee stock benefit plans
 Stock options
    As of and for the year-to-date period ended October 28, 2006Weighted average
    
    
    Weighted averageShares
    
    
    exercise price
    
    
    remaining lifeOutstanding, beginning of period
    
    
    3,470,736
    
    
    $
    6.79Granted
    
    
    331,000
    
    
    $
    3.51Exercised
    
    
    (44,040
    )
    
    $
    2.92Forfeited
    
    
    (307,996
    )
    
    $
    5.53Expired
    
    
    (208,939
    )
    
    $
    11.53Outstanding, end of period
    
    
    3,240,761
    
    
    $
    6.32
    
    
    
    4.31Exercisable, end of period
    
    
    1,513,130
    
    
    $
    7.58
    
    
    
    4.16Available for grant, end of period (1)
    
    
    1,081,899
 (1)
    
    Amended and Restated 2000 Long Term Incentive Plan only.  13




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##### Table of Contents



Options outstanding and exercisable by price range as of October 28, 2006Options outstanding
    
    
    Options exercisableWeighted
    
    
    Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedRange of exercise
    
    Number of
    
    
    average
    
    
    average
    
    
    Aggregate
    
    
    Number of
    
    
    average
    
    
    Aggregateprices
    
    options
    
    
    remaining life
    
    
    exercise price
    
    
    intrinsic value
    
    
    options
    
    
    exercise price
    
    
    intrinsic value$  2.07 - $  4.14
    
    
    609,550
    
    
    
    5.1
    
    
    $
    3.52
    
    
    $
    -
    
    
    
    182,550
    
    
    $
    3.56
    
    
    $
    -$  4.14 - $  6.21
    
    
    2,099,954
    
    
    
    4.0
    
    
    $
    5.74
    
    
    
    -
    
    
    
    885,320
    
    
    $
    5.76
    
    
    
    -$  6.21 - $  8.28
    
    
    149,627
    
    
    
    3.7
    
    
    $
    6.72
    
    
    
    -
    
    
    
    63,630
    
    
    $
    6.72
    
    
    
    -$  8.28 - $10.34
    
    
    8,928
    
    
    
    1.8
    
    
    $
    9.40
    
    
    
    -
    
    
    
    8,928
    
    
    $
    9.40
    
    
    
    -$10.34 - $12.41
    
    
    160,471
    
    
    
    4.7
    
    
    $
    11.19
    
    
    
    -
    
    
    
    160,471
    
    
    $
    11.19
    
    
    
    -$12.41 - $14.48
    
    
    108,150
    
    
    
    5.5
    
    
    $
    13.75
    
    
    
    -
    
    
    
    108,150
    
    
    $
    13.75
    
    
    
    -$14.48 - $16.55
    
    
    34,406
    
    
    
    3.8
    
    
    $
    16.03
    
    
    
    -
    
    
    
    34,406
    
    
    $
    16.03
    
    
    
    -$16.55 - $18.62
    
    
    2,475
    
    
    
    3.5
    
    
    $
    16.98
    
    
    
    -
    
    
    
    2,475
    
    
    $
    16.98
    
    
    
    -$18.62 - $20.69
    
    
    67,200
    
    
    
    4.1
    
    
    $
    19.77
    
    
    
    -
    
    
    
    67,200
    
    
    $
    19.77
    
    
    
    -3,240,761
    
    
    
    4.3
    
    
    $
    6.32
    
    
    $
    -
    
    
    
    1,513,130
    
    
    $
    7.58
    
    
    $
    -
   As of and for the year-to-date periodended October 28, 2006Weighted averagegrant date fairShares
    
    
    valueUnvested, beginning of period
    
    
    2,256,666
    
    
    $
    3.28Granted
    
    
    331,000
    
    
    $
    2.02Vested
    
    
    (552,039
    )
    
    $
    3.43Forfeited
    
    
    (307,996
    )
    
    $
    3.19Unvested, end of period
    
    
    1,727,631
    
    
    $
    3.01
 Non-vested shares and other stock-related awards
  14




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##### Table of Contents



Employee stock purchase plan
  5 Revision of financial statements
  As previously(In thousands)
    
    reported
    
    
    Adjustments
    
    
    RevisedFor the year-to-date period ended October 29, 2005Accounts payable and accrued expenses
    
    $
    12,571
    
    
    $
    (989
    )
    
    $
    11,582Net cash used in operating activities
    
    
    (49,679
    )
    
    
    (989
    )
    
    
    (50,668
    )Additions to property and equipment
    
    
    (8,729
    )
    
    
    989
    
    
    
    (7,740
    )Net cash used in investing activities
    
    
    (8,424
    )
    
    
    989
    
    
    
    (7,435
    )For the year ended January 28, 2006Accounts payable and accrued expenses
    
    $
    (12,025
    )
    
    $
    (276
    )
    
    $
    (12,301
    )Net cash provided by operating activities
    
    
    11,234
    
    
    
    (276
    )
    
    
    10,958Additions to property and equipment
    
    
    (10,567
    )
    
    
    276
    
    
    
    (10,291
    )Net cash used in investing activities
    
    
    (10,262
    )
    
    
    276
    
    
    
    (9,986
    )
 6 Legal proceedings
  15




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7 Supplemental balance sheet information
 October 28,
    
    
    January 28,(In thousands)
    
    2006
    
    
    2006Accounts receivable, net:Trade receivables
    
    $
    3,055
    
    
    $
    2,579Other receivables
    
    
    1,347
    
    
    
    1,641Total
    
    
    4,402
    
    
    
    4,220Less - Allowance for doubtful accounts
    
    
    (48
    )
    
    
    (76
    )Less - Deferred sales
    
    
    (114
    )
    
    
    (81
    )Total accounts receivable, net
    
    $
    4,240
    
    
    $
    4,063Inventories:Raw materials
    
    $
    954
    
    
    $
    2,040Finished goods
    
    
    84,332
    
    
    
    83,605Total inventories
    
    $
    85,286
    
    
    $
    85,645Property and equipment, net:Equipment and furniture
    
    $
    78,905
    
    
    $
    75,250Leasehold improvements
    
    
    42,210
    
    
    
    40,101Total
    
    
    121,115
    
    
    
    115,351Less-Accumulated depreciation and amortization
    
    
    (80,461
    )
    
    
    (74,306
    )Net property and equipment
    
    $
    40,654
    
    
    $
    41,045Other assets, net:Debt issuance costs
    
    $
    5,384
    
    
    $
    5,384Less - Accumulated amortization
    
    
    (4,338
    )
    
    
    (3,867
    )Debt issuance costs, net
    
    
    1,046
    
    
    
    1,517Other intangible assets, net
    
    
    59
    
    
    
    59Total
    
    $
    1,105
    
    
    $
    1,576
 16




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##### Table of Contents






ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS






Executive overview




(SM) Wilsons Leather www.wilsonsleather.com Wilsons Leather













    
    reengineering our Wilsons Leather mall stores with greater accessory penetration,
migration to a product mix with higher price points, introduction of new signage, product
ticketing and store set-ups giving our mall stores a fresh and clean look that is easier to
shop. This transformation of our mall stores was substantially completed during the third
quarter in advance of the holiday selling season;
    
    revitalizing our outlet division with marketing packages differentiated from our mall
stores and improved merchandising within the outlet stores;
    
    planning the launch of a new store concept in the future, which will focus on
mid-to-higher-end accessory offerings with a
limited assortment of outerwear; and
    
    laying the foundation for a wholesale business to sell proprietary licensed and branded
leather products in geographies and product categories outside our current markets and
product mix.


17



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Critical accounting policies
  Results of operations
  For the three months ended
    
    
    For the year-to-date period endedOctober 28,
    
    
    October 29,
    
    
    October 28,
    
    
    October 29,2006
    
    
    2005
    
    
    2006
    
    
    2005Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold,
buying and occupancy
costs
    
    
    76.1
    
    
    
    73.6
    
    
    
    80.3
    
    
    
    73.1Gross margin
    
    
    23.9
    
    
    
    26.4
    
    
    
    19.7
    
    
    
    26.9Selling, general and
administrative expenses
    
    
    41.2
    
    
    
    35.6
    
    
    
    40.5
    
    
    
    35.0Depreciation and
amortization
    
    
    4.6
    
    
    
    4.3
    
    
    
    4.9
    
    
    
    4.8Operating loss
    
    
    (21.9
    )
    
    
    (13.5
    )
    
    
    (25.7
    )
    
    
    (12.9
    )Interest expense, net
    
    
    0.9
    
    
    
    1.3
    
    
    
    0.6
    
    
    
    1.0Loss before income taxes
    
    
    (22.8
    )
    
    
    (14.8
    )
    
    
    (26.3
    )
    
    
    (13.9
    )Income tax provision
(benefit)
    
    
    (1.0
    )
    
    
    0.5
    
    
    
    (2.4
    )
    
    
    (0.4
    )Net loss
    
    
    (21.8
    )%
    
    
    (15.3
    )%
    
    
    (23.9
    )%
    
    
    (13.5
    )%
 18




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##### Table of Contents



For the three months ended

    
    For the year-to-date period endedOctober 28,
    
    October 29,

    
    October 28,

    
    October 29,2006
    
    2005
    
    2006
    
    2005Net sales (in thousands)
    
    $
    64,457
    
    
    $
    76,389
    
    
    $
    188,295
    
    
    $
    219,135Comparable store sales (1)Total
    
    
    (15.5
    )%
    
    
    (11.3
    )%
    
    
    (13.9
    )%
    
    
    3.1
    %By divisionMens
    
    
    (15.2
    )%
    
    
    (14.5
    )%
    
    
    (15.7
    )%
    
    
    1.4
    %Womens
    
    
    (10.2
    )%
    
    
    (22.4
    )%
    
    
    (17.9
    )%
    
    
    (1.7
    )%Accessories
    
    
    (19.1
    )%
    
    
    0.4
    %
    
    
    (10.2
    )%
    
    
    7.5
    %By channelMall stores
    
    
    (23.5
    )%
    
    
    (10.0
    )%
    
    
    (19.8
    )%
    
    
    7.4
    %Outlet stores
    
    
    (5.6
    )%
    
    
    (14.3
    )%
    
    
    (6.1
    )%
    
    
    (3.1
    )%Number of stores:Beginning of period
    
    
    422
    
    
    
    429
    
    
    
    422
    
    
    
    436Opened
    
    
    2
    
    
    
    3
    
    
    
    6
    
    
    
    7Closed
    
    
    
    
    
    
    (2
    )
    
    
    (4
    )
    
    
    (13
    )End of period
    
    
    424
    
    
    
    430
    
    
    
    424
    
    
    
    430
   Net Sales.
     19




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##### Table of Contents



Cost of Goods Sold, Buying and Occupancy Costs.
     20




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##### Table of Contents



Selling, General and Administrative Expenses.
    Depreciation and Amortization.
  Operating Loss.
  21




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##### Table of Contents



Interest Expense, Net.
 Income Tax Benefit.
   Net Loss.
 Liquidity and capital resources
    22




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##### Table of Contents




    
    85% of net inventories (excluding wholesale inventory), provided that such percentage at
no time may exceed 85% of the then applicable discount rate applied in appraising such
inventories to reflect their value as if sold in an orderly liquidation, except that the
discount rate is gradually increased from August 17 to October 1 of each year and gradually
decreased from December 17 to February 1 of each year, and except that such amount is
reduced by the amount of certain in-transit inventory to the extent such in-transit
inventory reflects a disproportionate amount of our total inventory;
    
    plus the lesser of $10.0 million or 50% of the book value of wholesale inventory which is not in-transit;
    
    plus the lesser of $2.0 million or 50% of the book value of wholesale inventory in-transit;
    
    plus 85% of outstanding and undrawn trade letters of credit (excluding those related to
wholesale inventory), provided that such percentage at no time may exceed 85% of the
discount rate applied in appraising the future inventories related to such letters of
credit to reflect their value as if sold in an orderly liquidation;
    
    plus 85% of outstanding and undrawn wholesale trade letters of credit related to
wholesale inventory, provided that such percentage at no time may exceed 50% of the book
value of the Companys future wholesale inventories related to such letters of credit;
    
    plus 85% of credit card receivables;
    
    plus the lesser of $5.0 million or 85% of wholesale accounts receivable; and
    
    minus a $10.0 million reserve.
  
    
    the revolving credit portion of such borrowings cannot exceed the sum of 85% of credit
card and wholesale receivables, plus 85% of the appraised value of inventory (including
inventory subject to trade letters of credit) as if sold on a going-out-of-business basis;
    
    the total borrowings (i.e. the revolving credit portion of the facility and the Term B
promissory note) cannot exceed the sum of 85.0% of the book value of credit card and
wholesale receivables, plus 92.5% of the appraised value of inventory (including inventory
subject to trade letters of credit) as if sold on a going-out-of-business basis; and
    
    from December 31 of each year, through March 31 of the following year, we must have no
borrowings under the revolving credit portion of the facility and outstanding letters of
credit must be no greater than $20.0 million.
   23




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##### Table of Contents



Cash flow analysis
 Operating Activities.
    24




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##### Table of Contents



Investing Activities.
  Financing Activities.
  Off-balance sheet arrangements
  Contractual obligations and commercial commitments
  Seasonality and inflation
   Recently issued accounting pronouncements
 Fair Value Measurements
 25




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##### Table of Contents



,
Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements
 Accounting for Uncertainty in
Income Taxes Accounting for Income Taxes.
 How Sales Taxes
Collected From Customers and Remitted to Governmental Authorities Should Be Presented in the Income
Statement
 Inventory Costs
 Forward-looking statements
  26




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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 growth is dependent on strengthening our existing stores and strategy development.
  We May Need Funding in Addition to Our Cash Flow from Operations and Existing Credit
Facilities.
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 6. EXHIBITS
  27




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##### Table of Contents



SIGNATURE
   By:
    
    /s/ STACY A. KRUSE

Stacy A. Kruse
Chief Financial Officer and Treasurer
  28




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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 Reference4.1
    
    Specimen of common stock certificate. (3)
    
    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. (4)
    
    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. (5)
    
    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). (6)
    
    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. (7)
    
    Incorporated by Reference4.6
    
    Form of Warrant issued to the Purchasers named in the Purchase
Agreement on April 25, 2004. (8)
    
    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 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, 1996.4.
    
    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, 1996.5.
    
    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).6.
    
    Incorporated by reference to Exhibit 4.1 to the Companys Report on Form 8-K filed with the
Commission on April 27, 2004.7.
    
    Incorporated by reference to Exhibit 4.2 to the Companys Report on Form 8-K filed with the
Commission on April 27, 2004.8.
    
    Incorporated by reference to Exhibit 4.3 to the Companys Report on Form 8-K filed with the
Commission on April 27, 2004. 29