##### 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 April 29, 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
  o þ o
  o þ




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##### 



WILSONS THE LEATHER EXPERTS INC.
 INDEX
 PagePART I  FINANCIAL INFORMATION
    
    
    3Item 1. Consolidated Financial Statements (Unaudited)
    
    
    3Consolidated Balance Sheets as of April 29, 2006 and January 28, 2006
    
    
    3Consolidated Statements of Operations for the three months ended April 29, 2006 and April 30, 2005
    
    
    4Consolidated Statements of Cash Flows for the year-to-date periods ended April 29, 2006 and April 30, 2005
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 4. Controls and Procedures
    
    
    20PART II  OTHER INFORMATION
    
    
    20Item 1. Legal Proceedings
    
    
    20Item 1A. Risk Factors
    
    
    20Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    20Item 6. Exhibits
    
    
    20Signature
    
    
    21Rule 13a-14a/15d-14(a) Certification of CEORule 13a-14a/15d-14(a) Certification of CFOCertification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
  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)
 April 29,
    
    
    January 28,2006
    
    
    2006(1)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    49,479
    
    
    $
    45,552Accounts receivable, net
    
    
    2,766
    
    
    
    4,063Inventories
    
    
    69,552
    
    
    
    85,645Prepaid expenses
    
    
    5,082
    
    
    
    1,987TOTAL CURRENT ASSETS
    
    
    126,879
    
    
    
    137,247Property and equipment, net
    
    
    41,046
    
    
    
    41,045Other assets, net
    
    
    1,419
    
    
    
    1,576TOTAL ASSETS
    
    $
    169,344
    
    
    $
    179,868LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    10,889
    
    
    $
    12,036Accrued expenses
    
    
    15,856
    
    
    
    16,595Income taxes payable
    
    
    2,810
    
    
    
    5,685Deferred income taxes
    
    
    53
    
    
    
    53TOTAL CURRENT LIABILITIES
    
    
    29,608
    
    
    
    34,369Long-term debt
    
    
    20,000
    
    
    
    20,000Other long-term liabilities
    
    
    17,505
    
    
    
    17,445TOTAL LIABILITIES
    
    
    67,113
    
    
    
    71,814COMMITMENTS AND CONTINGENCIESSHAREHOLDERS EQUITY:Common stock, $.01 par value; 150,000,000 shares
authorized; 39,124,193 and 39,087,652 shares
issued and outstanding on April 29, 2006 and
January 28, 2006, respectively
    
    
    391
    
    
    
    391Additional paid-in capital
    
    
    134,530
    
    
    
    133,853Accumulated deficit
    
    
    (32,701
    )
    
    
    (26,201
    )Accumulated other comprehensive income
    
    
    11
    
    
    
    11TOTAL SHAREHOLDERS EQUITY
    
    
    102,231
    
    
    
    108,054TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    169,344
    
    
    $
    179,868
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##### Table of Contents



WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share amounts)
(Unaudited)
 For the three months endedApril 29,
    
    
    April 30,2006
    
    
    2005NET SALES
    
    $
    74,680
    
    
    $
    84,329COST OF GOODS SOLD, BUYING AND OCCUPANCY COSTS
    
    
    54,950
    
    
    
    58,944Gross margin
    
    
    19,730
    
    
    
    25,385SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
    
    
    25,580
    
    
    
    24,804DEPRECIATION AND AMORTIZATION
    
    
    3,172
    
    
    
    3,711Operating loss
    
    
    (9,022
    )
    
    
    (3,130
    )INTEREST EXPENSE, net
    
    
    242
    
    
    
    663Loss before income taxes
    
    
    (9,264
    )
    
    
    (3,793
    )INCOME TAX BENEFIT
    
    
    (2,764
    )
    
    
    Net loss
    
    $
    (6,500
    )
    
    $
    (3,793
    )BASIC AND DILUTED LOSS PER SHARE:Basic and diluted loss per share
    
    $
    (0.17
    )
    
    $
    (0.10
    )Weighted average shares outstanding  basic and diluted
    
    
    39,105
    
    
    
    38,901
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WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
(Unaudited)
 For the three months endedApril 29,
    
    
    April 30,2006
    
    
    2005OPERATING ACTIVITIES:Net loss
    
    $
    (6,500
    )
    
    $
    (3,793
    )Adjustments to reconcile loss from operations to net cash provided byoperating activities:Depreciation
    
    
    3,172
    
    
    
    3,711Amortization of deferred financing costs
    
    
    157
    
    
    
    157Gain on disposal of assets
    
    
    (2
    )
    
    
    (163
    )Stock-compensation expense
    
    
    569
    
    
    
    Changes in operating assets and liabilities:Accounts receivable, net
    
    
    1,297
    
    
    
    163Inventories
    
    
    16,093
    
    
    
    16,439Prepaid expenses and other current assets
    
    
    (3,095
    )
    
    
    (3,150
    )Accounts payable and accrued expenses
    
    
    (1,886
    )
    
    
    (12,526
    )Income taxes payable and other liabilities
    
    
    (2,814
    )
    
    
    (107
    )Net cash provided by operating activities
    
    
    6,991
    
    
    
    731INVESTING ACTIVITIES:Additions to property and equipment
    
    
    (3,171
    )
    
    
    (2,081
    )Proceeds from the disposition of property and equipment
    
    
    
    
    
    
    163Net cash used in investing activities
    
    
    (3,171
    )
    
    
    (1,918
    )FINANCING ACTIVITIES:Proceeds from issuance of common stock, net
    
    
    107
    
    
    
    372Repayments of long-term debt
    
    
    
    
    
    
    (5,000
    )Net cash provided by (used in) financing activities
    
    
    107
    
    
    
    (4,628
    )NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    3,927
    
    
    
    (5,815
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    45,552
    
    
    
    48,821CASH AND CASH EQUIVALENTS, end of period
    
    $
    49,479
    
    
    $
    43,006
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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
  6




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##### Table of Contents



Inventories
  Property and equipment
  Store closing and impairment of long-lived assets
 Accounting for the Impairment or Disposal of Long-Lived Assets,
  Debt issuance costs
  Operating leases
  7




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##### Table of Contents



Revenue recognition
  Income taxes
  Foreign currency translation
  Loss per share
  For the three months endedApril 29,
    
    April 30,2006
    
    2005Weighted average common shares outstanding  basic
    
    
    39,105
    
    
    
    38,901Effect of dilutive securities: stock options
    
    
    
    
    
    
    Effect of dilutive securities: warrants
    
    
    
    
    
    
    Weighted average common shares outstanding  diluted
    
    
    39,105
    
    
    
    38,901
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##### Table of Contents



New accounting pronouncement
 Inventory Costs
 2 Other comprehensive income
  3 Long-term debt
  April 29,
    
    
    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
 Term B promissory note and senior credit facility
     9




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##### Table of Contents



4 Employee stock benefit plans
 Stock options
    As of and for the three months ended April 29, 2006Weighted Average
    
    
    Weighted AverageShares
    
    
    Exercise Price
    
    
    Remaining LifeOutstanding, beginning of period
    
    
    3,470,736
    
    
    $
    6.79Granted
    
    
    199,000
    
    
    $
    3.62Exercised
    
    
    (27,120
    )
    
    $
    2.90Forfeited
    
    
    (198,333
    )
    
    $
    5.85Expired
    
    
    (160,467
    )
    
    $
    12.35Outstanding, end of period
    
    
    3,283,816
    
    
    $
    6.41
    
    
    
    4.72Exercisable, end of period
    
    
    1,026,483
    
    
    $
    8.43
    
    
    
    4.78Available for grant, end of period
    
    
    1,730,255
   Options Outstanding and Exercisable by Price Range as of April 29, 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
    
    
    553,377
    
    
    
    5.5
    
    
    $
    3.59
    
    
    $
    171,547
    
    
    
    204,377
    
    
    $
    3.50
    
    
    $
    81,751$  4.14 - $  6.21
    
    
    2,175,118
    
    
    
    4.5
    
    
    $
    5.74
    
    
    
    
    
    
    
    397,785
    
    
    $
    5.59
    
    
    
    $  6.21 - $  8.28
    
    
    156,402
    
    
    
    4.1
    
    
    $
    6.74
    
    
    
    
    
    
    
    25,402
    
    
    $
    6.81
    
    
    
    $  8.28 - $10.34
    
    
    9,828
    
    
    
    2.3
    
    
    $
    9.32
    
    
    
    
    
    
    
    9,828
    
    
    $
    9.32
    
    
    
    $10.34 - $12.41
    
    
    164,671
    
    
    
    5.1
    
    
    $
    11.19
    
    
    
    
    
    
    
    164,671
    
    
    $
    11.19
    
    
    
    $12.41 - $14.48
    
    
    108,488
    
    
    
    6.0
    
    
    $
    13.75
    
    
    
    
    
    
    
    108,488
    
    
    $
    13.75
    
    
    
    $14.48 - $16.55
    
    
    43,257
    
    
    
    3.7
    
    
    $
    15.91
    
    
    
    
    
    
    
    43,257
    
    
    $
    15.91
    
    
    
    $16.55 - $18.62
    
    
    5,475
    
    
    
    1.9
    
    
    $
    17.33
    
    
    
    
    
    
    
    5,475
    
    
    $
    17.33
    
    
    
    $18.62 - $20.69
    
    
    67,200
    
    
    
    4.6
    
    
    $
    19.77
    
    
    
    
    
    
    
    67,200
    
    
    $
    19.77
    
    
    
    3,283,816
    
    
    
    4.7
    
    
    $
    6.41
    
    
    $
    171,547
    
    
    
    1,026,483
    
    
    $
    8.43
    
    
    $
    81,751
   As of and for the three months endedApril 29, 2006WeightedAverage GrantShares
    
    
    Date Fair ValueUnvested, beginning of period
    
    
    2,256,666
    
    
    $
    3.28Granted
    
    
    199,000
    
    
    $
    2.14Vested
    
    
    
    
    
    $
    Forfeited
    
    
    (198,333
    )
    
    $
    3.40Unvested, end of period
    
    
    2,257,333
    
    
    $
    3.17
 Stock-based compensation
 Share-Based Payment Accounting for Stock Issued to Employees Accounting for
Stock-Based Compensation
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Expected
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted averageterm
    
    Expected
    
    Risk-free
    
    Dividend
    
    fair value of(in years)
    
    volatility
    
    interest rate
    
    yield
    
    options granted2006
    
    
    4.1
    
    
    
    70.1
    %
    
    
    4.7
    %
    
    
    0.0
    %
    
    $
    2.142005
    
    NA
    
    NA
    
    NA
    
    NA
    
    NA
     For the threemonths endedApril 30,2005Net loss:As reported
    
    $
    (3,793
    )Stock-based employee compensation
expense included in net loss
    
    
    Stock-based employee compensation
determined under fair value based
method for all awards
    
    
    (148
    )Pro forma loss
    
    $
    (3,941
    )Basic and diluted loss per share:As reported
    
    $
    (0.10
    )Stock-based employee compensation
expense included in net loss
    
    
    Stock-based employee compensation
determined under fair value based
method for all awards
    
    
    Pro forma loss
    
    $
    (0.10
    )
  11




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##### Table of Contents



Non-vested shares
  Employee stock purchase plan
  5 Legal proceedings
     12




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6 Supplemental balance sheet information
 April 29,
    
    
    January 28,(In thousands)
    
    2006
    
    
    2006Accounts receivable, net:Trade receivables
    
    $
    1,740
    
    
    $
    2,579Other receivables
    
    
    1,112
    
    
    
    1,641Total
    
    
    2,852
    
    
    
    4,220Less  Allowance for doubtful accounts
    
    
    (44
    )
    
    
    (76
    )Less  Deferred sales
    
    
    (42
    )
    
    
    (81
    )Total accounts receivable, net
    
    $
    2,766
    
    
    $
    4,063Inventories:Raw materials
    
    $
    3,844
    
    
    $
    2,040Finished goods
    
    
    65,708
    
    
    
    83,605Total inventories
    
    $
    69,552
    
    
    $
    85,645Property and equipment, net:Equipment and furniture
    
    $
    76,111
    
    
    $
    75,250Leasehold improvements
    
    
    41,514
    
    
    
    40,101Total
    
    
    117,625
    
    
    
    115,351Less  Accumulated depreciation and amortization
    
    
    (76,579
    )
    
    
    (74,306
    )Net property and equipment
    
    $
    41,046
    
    
    $
    41,045Other assets, net:Debt issuance costs
    
    $
    5,384
    
    
    $
    5,384Less  Accumulated amortization
    
    
    (4,024
    )
    
    
    (3,867
    )Debt issuance costs, net
    
    
    1,360
    
    
    
    1,517Other intangible assets, net
    
    
    59
    
    
    
    59Total
    
    $
    1,419
    
    
    $
    1,576
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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   Overview
  Wilsons Leather www.wilsonsleather.com Wilsons Leather
     14




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
    
    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 will be completed in our mall stores 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 2007 concentrating on mid-to-higher-end
accessory offerings with a limited assortment of outerwear; and
    
    laying the foundation for a future wholesale business to sell proprietary licensed and
branded leather products in geographies and product categories outside our current markets
and product mix.
   Critical accounting policies
  RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 29, 2006, COMPARED TO THE THREE MONTHS ENDED APRIL 30, 2005
 Net Sales.
   15




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##### Table of Contents



Cost of Goods Sold, Buying and Occupancy Costs.
  Selling, General and Administrative Expenses.
 Depreciation and Amortization.
 Operating Loss.
 Interest Expense, Net.
 Income Tax Benefit.
 16




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##### Table of Contents



Net Loss.
 Liquidity and capital resources
     
    
    85% of net inventories, 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 85% of outstanding and undrawn trade letters of credit, 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 credit card receivables; and
    
    minus a $10.0 million reserve.
  
    
    the revolving credit portion of such borrowings cannot exceed the sum of 85% of credit
card 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 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
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
    
    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.
     Cash flow analysis
 Operating Activities.
     Investing Activities.
  18




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##### Table of Contents



Financing Activities.
  Off-balance sheet arrangements
  Contractual obligations and commercial commitments
  Seasonality and inflation
   Recently issued accounting pronouncements
 Inventory Costs
 Forward-looking statements
  19




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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
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 6. EXHIBITS
  20




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SIGNATURE
   By:
    
    /s/ STACY A. KRUSEStacy A. KruseChief Financial Officer and Treasurer
  21




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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 Reference10.1
    
    Letter Agreement dated January 31, 2006, between Wilsons Leather
Holdings, Inc., and General Electric Corporation. (9)
    
    Incorporated by Reference10.2
    
    Agreement dated March 10, 2006 by and between Teresa L. Wright and
River Hills Wilsons, Inc. (10)
    
    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. 22




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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, 2004.9.
    
    Incorporated by reference to Exhibit 10.62 to the Companys Report on Form 10-K for the
fiscal year ended January 28, 2006.10.
    
    Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed
with the Commission on March 16, 2006.
 23