##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark one) [X]      
          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 2004 OR [   ]                TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _________________ Commission file number 000-21543 WILSONS THE LEATHER EXPERTS INC.
(Exact name of registrant as specified in its charter) MINNESOTA
    
    41-1839933(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)7401 BOONE AVE. N.BROOKLYN PARK, MN
    
    55428(Address of principal executive offices)
    
    (Zip Code)
 (763) 391-4000
(Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  As of September 3, 2004, there were 38,837,507 shares of the Registrants
common stock, $0.01 par value per share, outstanding.




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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 July 31, 2004 and January 31, 2004
    
    
    3Consolidated Statements of Operations for the three months ended July 31, 2004 and August 2, 2003
    
    
    4Consolidated Statements of Operations for the year-to-date periods ended July 31, 2004 and August 2, 2003
    
    
    5Consolidated Statements of Cash Flows for the year-to-date periods ended July 31, 2004 and August 2, 2003
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 4.
    
    Controls and Procedures
    
    
    20PART II  OTHER INFORMATION
    
    
    20Item 2.
    
    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    20Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    20Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    21Signature
    
    
    
    
    23Amendment to Stay Bonus AgreementUnqualified Release AgreementAgreement - David L. RogersNon-Statutory Stock Option Agreement (Director) - 1996Non-Statutory Stock Option Agreement (Associate) - 1996Non-Statutory Stock Option Agreement (Director) - 2000Non-Statutory Stock Option Agreement (Associate) - 2000Restricted Stock AgreementCertification of Chief Executive OfficerCertification of Chief Financial OfficerCertification of Chief Executive OfficerCertification of Chief Financial OfficerRisk Factors Relating to Forward-Looking Statements
  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) July 31,
    
    January 31,2004
    
    2004(1)(Unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    20,609
    
    
    $
    42,403Accounts receivable, net
    
    
    2,996
    
    
    
    6,122Inventories
    
    
    77,917
    
    
    
    89,298Prepaid expenses and other current assets
    
    
    7,036
    
    
    
    3,719TOTAL CURRENT ASSETS
    
    
    108,558
    
    
    
    141,542Property and equipment, net
    
    
    41,996
    
    
    
    60,047Goodwill and other assets, net
    
    
    2,530
    
    
    
    2,538TOTAL ASSETS
    
    $
    153,084
    
    
    $
    204,127LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    15,681
    
    
    $
    10,198Notes payable
    
    
    490
    
    
    
    490Current portion of long-term debt
    
    
    8,625
    
    
    
    30,635Accrued expenses
    
    
    17,470
    
    
    
    26,670Liabilities of discontinued operations
    
    
    219
    
    
    
    406Income taxes payable
    
    
    3,521
    
    
    
    3,214Deferred income taxes
    
    
    8,203
    
    
    
    6,477TOTAL CURRENT LIABILITIES
    
    
    54,209
    
    
    
    78,090Long-term debt
    
    
    25,000
    
    
    
    25,064Other long-term liabilities
    
    
    12,500
    
    
    
    13,893Deferred income taxes
    
    
    
    
    
    
    1,726TOTAL LIABILITIES
    
    
    91,709
    
    
    
    118,773COMMITMENTS AND CONTINGENCIESSHAREHOLDERS EQUITY:Common
stock, $.01 par value; 150,000,000 shares authorized; 38,837,507 and
20,807,706
shares issued and outstanding on July 31, 2004 and January 31, 2004, respectively
    
    
    388
    
    
    
    208Additional paid-in capital
    
    
    133,007
    
    
    
    100,633Accumulated deficit
    
    
    (72,024
    )
    
    
    (14,788
    )Unearned compensation
    
    
    
    
    
    
    (701
    )Accumulated other comprehensive income
    
    
    4
    
    
    
    2TOTAL SHAREHOLDERS EQUITY
    
    
    61,375
    
    
    
    85,354TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    153,084
    
    
    $
    204,127
 The accompanying notes are an integral part of these 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 endedJuly 31,
    
    August 2,2004
    
    2003NET SALES
    
    $
    55,330
    
    
    $
    59,750COST OF GOODS SOLD, BUYING AND OCCUPANCY COSTS
    
    
    46,488
    
    
    
    56,775Gross margin
    
    
    8,842
    
    
    
    2,975SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
    
    
    33,646
    
    
    
    32,475DEPRECIATION AND AMORTIZATION
    
    
    3,687
    
    
    
    4,027Operating loss
    
    
    (28,491
    )
    
    
    (33,527
    )INTEREST EXPENSE, net
    
    
    1,953
    
    
    
    2,474Loss before income taxes
    
    
    (30,444
    )
    
    
    (36,001
    )INCOME TAX BENEFIT
    
    
    
    
    
    
    (14,401
    )Net loss
    
    $
    (30,444
    )
    
    $
    (21,600
    )BASIC AND DILUTED LOSS PER SHARE:Basic and diluted loss per share
    
    $
    (1.14
    )
    
    $
    (1.05
    )Weighted average shares outstanding  basic and diluted
    
    
    26,698
    
    
    
    20,480
 The accompanying notes are an integral part of these consolidated financial statements. 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 endedJuly 31,
    
    August 2,2004
    
    2003NET SALES
    
    $
    153,081
    
    
    $
    155,051COST OF GOODS SOLD, BUYING AND OCCUPANCY COSTS
    
    
    124,821
    
    
    
    133,987Gross margin
    
    
    28,260
    
    
    
    21,064SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
    
    
    61,755
    
    
    
    65,245DEPRECIATION AND AMORTIZATION
    
    
    19,044
    
    
    
    8,306Operating loss
    
    
    (52,539
    )
    
    
    (52,487
    )INTEREST EXPENSE, net
    
    
    4,697
    
    
    
    4,742Loss before income taxes
    
    
    (57,236
    )
    
    
    (57,229
    )INCOME TAX BENEFIT
    
    
    
    
    
    
    (22,892
    )Net loss
    
    $
    (57,236
    )
    
    $
    (34,337
    )BASIC AND DILUTED LOSS PER SHARE:Basic and diluted loss per share
    
    $
    (2.42
    )
    
    $
    (1.68
    )Weighted average shares outstanding  basic and diluted
    
    
    23,693
    
    
    
    20,459
 The accompanying notes are an integral part of these consolidated financial statements. 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 endedJuly 31,
    
    August 2,2004
    
    2003OPERATING ACTIVITIES:Net loss
    
    $
    (57,236
    )
    
    $
    (34,337
    )Adjustments
to reconcile net loss to net cash used in
operating activities:Depreciation
    
    
    18,996
    
    
    
    8,250Amortization
    
    
    48
    
    
    
    56Amortization of deferred financing costs
    
    
    1,112
    
    
    
    827Loss on disposal of assets
    
    
    1,323
    
    
    
    30Restricted stock compensation expense
    
    
    828
    
    
    
    150Deferred income taxes
    
    
    
    
    
    
    (9,468
    )Changes in operating assets and liabilities:Accounts receivable, net
    
    
    3,126
    
    
    
    (832
    )Inventories
    
    
    11,381
    
    
    
    12,565Prepaid expenses and other current assets
    
    
    (3,317
    )
    
    
    (7,456
    )Refundable income taxes
    
    
    
    
    
    
    (3,432
    )Accounts payable and accrued expenses
    
    
    (3,717
    )
    
    
    (4,895
    )Income taxes payable and other liabilities
    
    
    (1,086
    )
    
    
    189Net cash used in operating activities
    
    
    (28,542
    )
    
    
    (38,353
    )INVESTING ACTIVITIES:Additions to property, equipment and other assets
    
    
    (2,295
    )
    
    
    (4,489
    )Proceeds from the sale of property and equipment
    
    
    27
    
    
    
    Changes in other assets
    
    
    
    
    
    
    52Net cash used in investing activities
    
    
    (2,268
    )
    
    
    (4,437
    )FINANCING ACTIVITIES:Proceeds from issuance of common stock, net
    
    
    32,426
    
    
    
    304Debt acquisition costs
    
    
    (1,151
    )
    
    
    (1,025
    )Repayments of long-term debt
    
    
    (64
    )
    
    
    (22
    )(Repurchase of debt) borrowings under revolving credit facility
    
    
    (22,010
    )
    
    
    17,180Checks written in excess of cash balance
    
    
    
    
    
    
    6,413Other financing
    
    
    2
    
    
    
    5Net cash provided by financing activities
    
    
    9,203
    
    
    
    22,855NET CASH USED IN DISCONTINUED OPERATIONS
    
    
    (187
    )
    
    
    (10,507
    )NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (21,794
    )
    
    
    (30,442
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    42,403
    
    
    
    30,442CASH AND CASH EQUIVALENTS, end of period
    
    $
    20,609
    
    
    $
    
 The accompanying notes are an integral part of these consolidated financial statements. 6




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WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)  1.
    
    NATURE OF ORGANIZATION Wilsons The Leather Experts Inc. (Wilsons Leather or the Company), a
Minnesota corporation, is the leading specialty retailer of quality leather
outerwear, accessories and apparel in the United States. As of July 31, 2004,
Wilsons Leather operated 453 permanent retail stores located in 45 states and
the District of Columbia, including 329 mall stores, 108 outlet stores and 16
airport stores. The Company regularly supplements its permanent mall stores
with seasonal stores during its peak selling season from October through
January.  2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  BASIS OF PRESENTATION The accompanying consolidated financial statements include those of the
Company and all of its subsidiaries. All material intercompany balances and
transactions between the entities have been eliminated in consolidation. At
July 31, 2004, Wilsons Leather operated in one segment: selling leather
outerwear, accessories and apparel. The Companys chief operating
decision-maker evaluates revenue and profitability performance on an enterprise
basis to make operating and strategic decisions. As more fully described in Note 4, on January 22, 2004, the Company
announced that it would liquidate up to 100 underperforming mall and outlet
stores (subsequently revised to 111 stores) and eliminate approximately 950
store-related positions. The accompanying unaudited consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission (SEC) applicable to interim financial information.
Certain information and footnote disclosures, normally included in consolidated
financial statements prepared in accordance with generally accepted accounting
principles in the United States of America (GAAP), have been condensed or
omitted in these interim statements pursuant to such rules and regulations.
Although management believes that the accompanying disclosures are adequate so
as not to make the information presented misleading, it is recommended that
these interim consolidated financial statements be read in conjunction with the
Companys most recent audited consolidated financial statements and related
notes included in its 2003 Annual Report on Form 10-K. In the opinion of
management, all adjustments (which include normal recurring adjustments)
necessary for a fair presentation of the financial position, results of
operations and cash flows for the interim periods presented have been made.
The Companys business is highly seasonal, and accordingly, interim operating
results are not indicative of the results that may be expected for the fiscal
year ending January 29, 2005.  FISCAL YEAR Wilsons Leathers fiscal year ends on the Saturday closest to January 31.
The periods that will end or have ended January 29, 2005, and January 31, 2004,
are referred to herein as 2004 and 2003, respectively.  USE OF ESTIMATES The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Matters of significance in which
management relies on these estimates relate primarily to the realizability of
assets such as accounts receivable, property and equipment, and inventories,
and the adequacy of certain accrued liabilities and reserves. Ultimate results
could differ from those estimates. 7




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INVENTORIES The Company values its inventories, which consist primarily of finished
goods held for sale that have been purchased from domestic and foreign vendors,
at the lower of cost or market value, determined by the retail inventory method
on the last-in, first-out (LIFO) basis. As of July 31, 2004, and January 31,
2004, the LIFO cost of inventories approximated the first-in, first-out cost of
inventories. The inventory cost includes the cost of merchandise and freight.
A periodic review of inventory quantities on hand is performed in order to
determine if the inventory value is properly stated at the lower of cost or
market. Factors related to current inventories such as future consumer demand,
fashion trends, current aging, current and anticipated retail markdowns, and
class or type of inventory are analyzed to determine estimated net realizable
values. A provision is recorded to reduce the cost of inventories to the
estimated net realizable values, if required. Any significant unanticipated
changes in the factors noted above could have a significant impact on the value
of the Companys inventories and its reported operating results.  STORE CLOSING AND IMPAIRMENT OF LONG-LIVED ASSETS The Company continually reviews its stores operating performance and
assesses plans for store closures. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets(SFAS No. 144), losses related to the
impairment of long-lived assets are recognized when expected future cash flows
are less than the assets carrying value. When a store is closed or when a
change in circumstances indicates the carrying value of an asset may not be
recoverable, the Company evaluates the carrying value of the asset in relation
to its expected future cash flows. If the carrying value is greater than the
expected future cash flows, a provision is made for the impairment of the asset
to write the asset down to estimated fair value. Fair value is determined by
estimating net future cash flows, discounted using a risk-adjusted rate of
return. These impairment charges are recorded as a component of selling,
general and administrative expenses. When a store under a long-term lease is to be closed, the Company records
a liability for any lease termination or broker fees at the time an agreement
related to such closing is signed. At July 31, 2004, and January 31, 2004, the
Company had $0.3 million and $0.5 million, respectively, accrued for store
lease terminations.  REVENUE RECOGNITION The Company recognizes sales upon customer receipt of the merchandise
generally at the point of sale. Shipping and handling revenues are excluded
from net sales as a contra-expense and the related costs are included in cost
of goods sold, buying and occupancy costs. Revenue for gift certificate or
gift card sales and store credits is recognized at redemption. A reserve is
provided at the time of sale for projected merchandise returns based upon
historical experience. The Company recognizes revenue for on-line sales at the
time goods are received by the customer. An allowance for on-line sales is
recorded to cover in-transit shipments, as product is shipped to these
customers Free on Board destination.  INCOME TAXES Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. The Companys deferred income tax assets include certain
future tax benefits. The Company records a valuation allowance against any
portion of those deferred income tax assets when it believes it is more likely
than not that some portion or all of the deferred income tax asset will not be
realized.  LOSS PER SHARE Basic loss per share is computed by dividing the net loss by the weighted
average number of common shares outstanding during the year. Diluted loss per
share is computed by dividing the net loss by the sum of the weighted average
number of common shares outstanding plus all additional common shares that
would have been outstanding if potentially dilutive common shares related to
stock options and warrants had been issued (calculated using the treasury stock
method). The following table reconciles the number of shares utilized in the
loss per share calculations (in thousands): For the three months ended
    
    For the year-to-date period endedJuly 31,
    
    August 2,
    
    July 31,
    
    August 2,2004
    
    2003
    
    2004
    
    2003Weighted average common shares outstanding  basic
    
    
    26,698
    
    
    
    20,480
    
    
    
    23,693
    
    
    
    20,459Effect of dilutive securities: stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Effect of dilutive securities: warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average common shares outstanding  diluted
    
    
    26,698
    
    
    
    20,480
    
    
    
    23,693
    
    
    
    20,459
 8




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STOCK-BASED COMPENSATION As permitted by SFAS No. 123, Accounting for Stock-Based Compensation
(SFAS No. 123),the Company uses the intrinsic-value method for employee
stock-based compensation pursuant to Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees,under which no compensation cost
has been recognized. The Company adopted the disclosure provisions for
employee stock-based compensation and the fair-value method for non-employee
stock-based compensation of SFAS No. 123. Had compensation cost for the stock
option plans been determined consistent with SFAS No. 123, the Companys net
loss and basic and diluted loss per share would have been the following pro
forma amounts (in thousands, except per share amounts): For the three months ended
    
    For the year-to-date period endedJuly 31,
    
    August 2,
    
    July 31,
    
    August 2,2004
    
    2003
    
    2004
    
    2003Net Loss:As reported
    
    $
    (30,444
    )
    
    $
    (21,600
    )
    
    $
    (57,236
    )
    
    $
    (34,337
    )Stock option
and purchase plans(1)
    
    
    (1,519
    )
    
    
    (446
    )
    
    
    (1,959
    )
    
    
    (846
    )Pro forma loss
    
    $
    (31,963
    )
    
    $
    (22,046
    )
    
    $
    (59,195
    )
    
    $
    (35,183
    )Basic and diluted loss per share:As reported
    
    $
    (1.14
    )
    
    $
    (1.05
    )
    
    $
    (2.42
    )
    
    $
    (1.68
    )Stock option and purchase plans
    
    
    (0.06
    )
    
    
    (0.03
    )
    
    
    (0.08
    )
    
    
    (0.04
    )Pro forma loss
    
    $
    (1.20
    )
    
    $
    (1.08
    )
    
    $
    (2.50
    )
    
    $
    (1.72
    )Weighted average fair value of options granted
    
    $
    2.81
    
    
    $
    3.16
    
    
    $
    2.28
    
    
    $
    2.04
  (1)
    
    For the three months ended July 31, 2004 and the year-to-date period ended
July 31, 2004, $1,105 of pro-forma expense is due to stock option
acceleration from the change in control private placement equity
transaction which occurred in July 2004 (see Note 9  Additional
Financing). The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions
used for grants in 2004 and 2003: Weighted average
    
    Dividend
    
    Expected
    
    Expectedrisk free rate
    
    yield
    
    lives
    
    volatility2004
    
    
    3.9
    %
    
    
    0.0
    %
    
    
    4.8
    
    
    
    67.1
    %2003
    
    
    3.0
    %
    
    
    0.0
    %
    
    
    5.0
    
    
    
    55.3
    %
  RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In December 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation Number (FIN) 46 (revised December 2003), Consolidation of
Variable Interest Entities(FIN 46R), which addresses how a business
enterprise should evaluate whether it has a controlling financial interest in
an entity through means other than voting rights and accordingly should
consolidate the entity. The Company is required to apply FIN 46R to variable
interests in variable interest entities (VIEs) created after December 31,
2003. For variable interests in VIEs created before January 1, 2004, FIN 46R
will be applied beginning on January 1, 2005. For any VIEs that must be
consolidated under FIN 46R that were created before January 1, 2004, the
assets, liabilities and noncontrolling interests of the VIEs initially would be
measured at their carrying amounts, with any differences between the net
amounts added to the balance sheet and any previously recognized interest being
recognized as the cumulative effect of a change in accounting principle. If
determining the carrying amounts is not practicable, fair value at the date FIN
46R first applies may be used to measure the assets, liabilities and
noncontrolling interest of the VIEs. As of July 31, 2004, the Company had no
entities within the scope of this statement. FASB Statement No. 150 (the Statement), Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity,was issued in
May 2003. The Statement establishes standards for the classification and
measurement of certain financial instruments with characteristics of both
liabilities and equity. The Statement also includes required disclosures for
financial instruments within its scope. For the Company, the Statement was
effective for instruments entered into or modified after May 31, 2003, and
otherwise was effective as of January 1, 2004, except for mandatorily
redeemable financial instruments. For certain mandatorily redeemable financial
instruments, the Statement will be effective for the Company on January 1,
2005. The effective date has been deferred indefinitely for certain other
types of mandatorily redeemable financial instruments. As of July 31, 2004,
the Company had no financial instruments within the scope of the Statement.  3.
    
    DISCONTINUED OPERATIONS In November 2002, the Company liquidated two companies it had previously
acquired, El Portal Group, Inc. and Bentleys Luggage Corp. (collectively the
Travel Subsidiaries), which consisted of 135 stores, due to their large
operating losses. In accordance with SFAS No. 144, the Travel Subsidiaries
were presented as a discontinued operation effective November 19, 2002, and the
consolidated financial statements were reclassified to segregate the assets,
liabilities and operating results of the Travel Subsidiaries for all periods
presented. The Travel Subsidiaries had current liabilities of $0.2 million and $0.4
million, respectively, as of July 31, 2004, and January 31, 2004. Due to the
de minimis amount of the liability, a separate table is not being provided. 9




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In May 2003, the Company sold its Miami, Florida, distribution center for
net proceeds of $2.5 million. This facility was an asset acquired in the
Bentleys Luggage Corp. acquisition. The net proceeds from the sale decreased
cash used by discontinued operations for the year-to-date period ended August
2, 2003. The following summarizes the Travel Subsidiaries disposal reserve
activity during the year-to-date period ended July 31, 2004, (in thousands): Discontinued operations reserves: January 31,
    
    
    
    
    
    
    
    
    
    July 31,2004
    
    Usage
    
    Transfers
    
    2004Store
closing(1)
    
    $
    388
    
    
    
    ($183
    )
    
    
    
    
    
    $
    205Taxes
    
    
    18
    
    
    
    (4
    )
    
    
    
    
    
    
    14Total liabilities of discontinued operations
    
    $
    406
    
    
    
    ($187
    )
    
    
    
    
    
    $
    219
  (1)
    
    Primarily includes vendor chargebacks and other miscellaneous liabilities
associated with the liquidation of the Travel Subsidiaries. 4.             RESTRUCTURING AND PARTIAL STORE LIQUIDATION On January 22, 2004, the Company announced that it would liquidate up to
100 underperforming mall and outlet stores (subsequently revised to 111 stores
 the liquidation stores) and eliminate approximately 950 store-related
positions. The Company entered into an Agency Agreement with a joint venture
comprised of Hilco Merchant Resources, LLC, Gordon Brothers Retail Partners,
LLC and Hilco Real Estate, LLC (the Hilco/Gordon Brothers Joint Venture) to
liquidate the inventory in the 111 stores and assist in the discussions with
landlords regarding lease terminations in approximately 94 of these stores.
Pursuant to the Agency Agreement, the Hilco/Gordon Brothers Joint Venture was
required to pay the Company a guaranteed amount of 84.0% of the cost value of
the inventory, subject to certain adjustments. The Hilco/Gordon Brothers Joint
Venture was responsible for all expenses related to the sale. The liquidation
stores were selected based on strategic criteria, including negative sales and
earnings trends, projected real estate costs, location and financial conditions
within the market. In addition, the Company announced that it would eliminate
approximately 70 positions at its corporate headquarters in Brooklyn Park,
Minnesota and its distribution center in Las Vegas, Nevada, close its
distribution center in Las Vegas, Nevada, and write-off essentially all
remaining assets located at its distribution centers in Maple Grove, Minnesota
and Las Vegas, Nevada. The Company recorded expenses related to the restructuring and partial
store liquidation of $22.4 million in the year-to-date period ended July 31,
2004, primarily related to accelerated depreciation of fixed assets and lease
termination costs related to store closings. The liquidation sales were
completed in April 2004, and as of May 1, 2004, all the liquidation stores had
been closed. As of July 31, 2004, the Company had successfully negotiated
96.0% of its lease terminations. The overall net cash outlay for the
restructuring costs is anticipated to be at or near zero.  5.
    
    OTHER COMPREHENSIVE INCOME The Company reports accumulated other comprehensive income as a separate
item in the shareholders equity section of the consolidated balance sheet.
Other comprehensive income consists of foreign currency translation
adjustments. For the quarters ending July 31, 2004, and August 2, 2003, the
amounts were de minimis.  6.
    
    LONG-TERM AND SHORT-TERM DEBT Long-term debt at July 31, 2004, and January 31, 2004, consisted of the
following (in thousands): July 31,
    
    January 31,2004
    
    2004Senior notes
    
    $
    8,625
    
    
    $
    30,590Term B promissory note
    
    
    25,000
    
    
    
    25,000Note payable
    
    
    490
    
    
    
    490Other loans
    
    
    
    
    
    
    109Total debt
    
    $
    34,115
    
    
    $
    56,189Less: current portion
    
    
    (9,115
    )
    
    
    (31,125
    )Total long-term debt
    
    $
    25,000
    
    
    $
    25,064
  SENIOR NOTES On August 18, 1997, the Company issued $75.0 million of 111⁄4% Senior
Notes due August 15, 2004 (the 111⁄4% Senior Notes). Interest on the
111⁄4% Senior Notes was payable semiannually in arrears on February 15 and
August 15 of each year. The Company repurchased an aggregate of $44.4 million
of the 111⁄4% Senior Notes in fiscal 1998, 1999 and 2000. In addition,
during July 2004 the Company repurchased an additional $22.0 million of the
111⁄4% Senior Notes. As of July 31, 2004, and January 31, 2004, the
outstanding balance on the 111⁄4% Senior Notes was $8.6 million and $30.6
million, respectively. The 111⁄4% Senior Notes were classified as current as
of July 31, 2004, and January 31, 2004. As discussed in Note 10, Subsequent
Events, the 111⁄4% Senior Notes were paid in full at maturity. 10




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The
111⁄4% Senior Notes were general unsecured obligations that ranked
senior in right of payment to all existing and future subordinated indebtedness
and ranked on equal terms in right of payment with all other current and future
unsubordinated indebtedness. The indenture governing the 111⁄4% Senior Notes
contained numerous operating covenants that limited the discretion of
management with respect to certain business matters and that placed significant
restrictions on, among other things, the ability of the Company to incur
additional indebtedness, to create liens or other encumbrances, to declare or
pay any dividend, to make certain payments or investments, loans and
guarantees, and to sell or otherwise dispose of assets and merge or consolidate
with another entity. At July 31, 2004, the Company was in compliance with all
covenants of the 111⁄4% Senior Notes.  REVOLVING CREDIT AGREEMENT AND TERM B PROMISSORY NOTE General Electric Capital Corporation and a syndicate of banks have
provided the Company with a senior credit facility, which was amended on
November 1, 2002, January 31, 2003, April 11, 2003, January 21, 2004, April 15,
2004, and April 27, 2004, that provides for borrowings of up to $150.0 million
in aggregate principal amount, including a $25.0 million Term B promissory note
and a $75.0 million letter of credit subfacility. With the completion of the
sale of capital stock (described below in Note 9, Additional Financing), and
the subsequent repayment of the 111⁄4% Senior Notes in full at maturity (see
Note 10, Subsequent Events), the senior credit facility expiration date was
extended to June 28, 2008, at which time all borrowings, including the Term B
promissory note, will become due and payable. The senior credit facility contains certain restrictions and covenants
which, among other things, restrict the Companys ability to make capital
expenditures; acquire or merge with another entity; make investments, loans or
guarantees; incur additional indebtedness; prepay, repurchase or pay any
principal on any 111⁄4% Senior Notes, except pursuant to a permitted
refinancing; create liens or other encumbrances; or pay cash dividends or make
other distributions. At July 31, 2004, the Company was in compliance with all
covenants related to the senior credit facility. At July 31, 2004, and January 31, 2004, there were no borrowings under the
revolving portion of the credit facility. At July 31, 2004, and January 31,
2004, there were $14.6 million and $6.7 million, respectively, in letters of
credit outstanding. The Term B promissory note had a balance of $25.0 million
on July 31, 2004, and January 31, 2004.  7.
    
    LEGAL PROCEEDINGS In January 2003, a class action was brought on behalf of current and
former store managers of the Company in California regarding their
classification as exempt from overtime pay. In July 2003, the Company reached
a confidential settlement of the class action through mediation. A charge of
$1.9 million related to this settlement was taken during the second quarter of
2003. The court granted final approval of the settlement on January 30, 2004.
The Company paid the entire settlement during the first quarter of 2004. The Company is involved in various other legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Companys consolidated financial position and results of operations.  8.
    
    SUPPLEMENTAL BALANCE SHEET INFORMATION July 31,
    
    January 31,(in thousands)
    
    2004
    
    2004Accounts receivable, net:Trade receivables
    
    $
    2,175
    
    
    $
    5,290Other receivables
    
    
    873
    
    
    
    964Total
    
    
    3,048
    
    
    
    6,254Less  Allowance for doubtful accounts
    
    
    (35
    )
    
    
    (88
    )Less  Deferred sales
    
    
    (17
    )
    
    
    (44
    )Total accounts receivable, net
    
    $
    2,996
    
    
    $
    6,122Inventories:Raw materials
    
    $
    2,166
    
    
    $
    3,189Finished goods
    
    
    75,751
    
    
    
    86,109Total inventories
    
    $
    77,917
    
    
    $
    89,298Property and equipment, net:Equipment and furniture
    
    $
    77,856
    
    
    $
    91,555Leasehold improvements
    
    
    24,438
    
    
    
    32,267Total
    
    
    102,294
    
    
    
    123,822Less  Accumulated depreciation
    
    
    (60,298
    )
    
    
    (63,775
    )Total property and equipment, net
    
    $
    41,996
    
    
    $
    60,047Goodwill and other assets, net:Goodwill
    
    $
    72
    
    
    $
    72Debt issuance costs
    
    
    6,610
    
    
    
    7,001Other assets
    
    
    131
    
    
    
    186Total
    
    
    6,813
    
    
    
    7,259Less  Accumulated amortization
    
    
    (4,283
    )
    
    
    (4,721
    )Total goodwill and other assets, net
    
    $
    2,530
    
    
    $
    2,538
  9.
    
    ADDITIONAL FINANCING On April 25, 2004, the Company entered into an agreement to issue
17,948,718 shares of the Companys common stock (the Equity Financing) to
three institutional investors at a price of $1.95 per share. The transaction
closed on July 2, 2004, with gross proceeds before offering expenses of $35.0
million. As additional consideration for the investors commitment, on April
25, 2004, the Company issued two million warrants exercisable for five years to
the investors upon signing the Equity Financing agreement, and at closing,
issued an additional two million warrants exercisable for five years, each at
an exercise price of $3.00 per share of common stock. On July 9, 2004, the
Company repurchased $22.0 million of the 111⁄4% Senior Notes
with proceeds from the Equity Financing and repaid the balance of the
111⁄4% Senior Notes at maturity and will use the balance of these funds for
general working capital purposes. The relative fair value of the warrants and
common stock sold, determined using the Black-Scholes model, was allocated
within additional paid-in capital at closing. As of July 31, 2004, the warrants have a
fair value of $3.39 per share or $13,560,000 in total. 11




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##### Table of Contents



The Equity Financing qualified as a change in control pursuant to the
Companys equity compensation plans. As such, vesting was accelerated on all
outstanding unvested stock options and restricted stock as of July 2, 2004.  10.
    
    SUBSEQUENT EVENTS The Company fully repaid the remaining $8.6 million balance on the
111⁄4% Senior Notes at maturity. Pursuant to the terms
of the senior credit facility, as amended, the expiration date of the senior
credit facility, including the Term B promissory note, was extended to June 28,
2008. As the Equity Financing was completed during the second quarter of 2004
(see Note 9, Additional Financing) and the repurchase of
the 111⁄4% Senior
Notes had been provided for, as mentioned above, the Term B promissory note was
classified as long-term as of July 31, 2004. 
  ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS The following discussion of the financial condition and results of
operations of Wilsons The Leather Experts Inc. and wholly owned subsidiaries
should be read in conjunction with our most recent audited consolidated
financial statements and related notes included in our 2003 Annual Report on
Form 10-K. When we refer to we, our, us or Wilsons Leather, we mean
Wilsons The Leather Experts Inc. and its subsidiaries, including its
predecessor companies.  OVERVIEW We are the leading specialty retailer of quality leather outerwear,
accessories and apparel in the United States. Our multiple store formats are
designed to target a broad customer base with a superior level of customer
service. Through our worldwide leather sourcing network and in-house design
capabilities, we are able to consistently provide our customers high-quality,
fashionable merchandise at attractive prices. Our business structure results
in shorter lead times than our competition, allowing us to react quickly to
popular and emerging fashion trends and customer preferences, rapidly replenish
fast-selling merchandise and minimize fashion risk. As of July 31, 2004, we operated a total of 453 permanent retail stores
located in 45 states and the District of Columbia, including 329 mall stores,
108 outlet stores and 16 airport stores. Each year we supplement our permanent
stores with seasonal stores during our peak selling season. Our mall stores average approximately 2,600 total leased square feet and
feature a large assortment of both classic and contemporary leather outerwear,
accessories and apparel. Our outlet stores are operated primarily under the
Wilsons Leather Outlet name, average approximately 4,000 total leased square
feet, and offer a combination of clearance merchandise from our mall stores,
special outlet-only merchandise and key in-season goods. Our airport stores
average approximately 700 total leased square feet, feature travel-related
products as well as leather accessories and provide us the opportunity to
showcase our products and the Wilsons Leatherbrand to millions of potential
customers each year in some of the worlds busiest airports. Our e-commerce
site, www.wilsonsleather.com, offers an extension of our store experience and
is intended to increase brand awareness, strengthen the relationship with our
customers, make our merchandise more accessible to our customers and facilitate
cross-marketing with our stores. Our proprietary labels, including M. Julian®,
Maxima®, Pelle Studio® and Wilsons Leather, are positioned to appeal to
identified customer lifestyle segments. In evaluating our financial performance and operating trends, management
considers information concerning our operating loss, net loss, basic and
diluted loss per share and certain other information before
liquidation and restructuring costs that are not calculated in
accordance with generally accepted accounting principles in the United States
of America (GAAP). A reconciliation of these non-GAAP financial measures to
GAAP numbers for the three month and year-to-date periods ending July 31, 2004,
is included in the tables below. We believe that the non-GAAP numbers
calculated before liquidation and restructuring costs provide a useful analysis of our ongoing operating trends and in comparing
operating performance period to period. We evaluate these non-GAAP numbers
calculated before liquidation and restructuring costs
on a quarterly basis in order to measure and understand our ongoing operating
trends. Reconciliation of GAAP
Consolidated Statement of Operations to
Adjusted Statement of Operations for the three months ended July 31, 2004:
(In Thousands, Except Per Share Amounts)
(Unaudited) For the three months ended
    
    
    
    
    
    For the three months endedRestructuringJuly 31, 2004
    
    And Other
    
    July 31, 2004As Reported
    
    Charges (1)
    
    AdjustedNET SALES
    
    $
    55,330
    
    
    $
    
    
    
    $
    55,330COST OF GOODS SOLD, BUYING AND OCCUPANCY COSTS
    
    
    46,488
    
    
    
    (950
    )
    
    
    47,438Gross margin
    
    
    8,842
    
    
    
    950
    
    
    
    7,892SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
    
    
    33,646
    
    
    
    9,052
    
    
    
    24,594DEPRECIATION AND AMORTIZATION
    
    
    3,687
    
    
    
    117
    
    
    
    3,570Operating loss
    
    
    (28,491
    )
    
    
    (8,219
    )
    
    
    (20,272
    )INTEREST EXPENSE, net
    
    
    1,953
    
    
    
    
    
    
    
    1,953Loss before income taxes
    
    
    (30,444
    )
    
    
    (8,219
    )
    
    
    (22,225
    )INCOME TAX BENEFIT
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    $
    (30,444
    )
    
    $
    (8,219
    )
    
    $
    (22,225
    )BASIC AND DILUTED LOSS PER SHARE:Basic and diluted loss per share
    
    $
    (1.14
    )
    
    $
    (0.31
    )
    
    $
    (0.83
    )Weighted average shares outstanding  basic and diluted
    
    
    26,698
    
    
    
    
    
    
    
    26,698
  (1)
    
    Includes $8.2 million related primarily to lease termination costs and
asset write-offs related to store closings and other restructuring
costs. Reconciliation of GAAP Consolidated Statements of Operations to
Adjusted Statement of Operations for the year-to-date period ended
July 31, 2004:
(In Thousands, Except Per Share Amounts)
(Unaudited) For the year-to-date
    
    
    
    For the year-to-dateperiod ended
    
    Restructuring
    
    period endedJuly 31, 2004
    
    And Other
    
    July 31, 2004As Reported
    
    Charges (1)
    
    AdjustedNET SALES
    
    $
    153,081
    
    
    $
    20,778
    
    
    $
    132,303COST OF GOODS SOLD, BUYING AND OCCUPANCY COSTS
    
    
    124,821
    
    
    
    19,584
    
    
    
    105,237Gross margin
    
    
    28,260
    
    
    
    1,194
    
    
    
    27,066SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
    
    
    61,755
    
    
    
    12,306
    
    
    
    49,449DEPRECIATION AND AMORTIZATION
    
    
    19,044
    
    
    
    11,285
    
    
    
    7,759Operating loss
    
    
    (52,539
    )
    
    
    (22,397
    )
    
    
    (30,142
    )INTEREST EXPENSE, net
    
    
    4,697
    
    
    
    
    
    
    
    4,697Loss before income taxes
    
    
    (57,236
    )
    
    
    (22,397
    )
    
    
    (34,839
    )INCOME TAX BENEFIT
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    $
    (57,236
    )
    
    $
    (22,397
    )
    
    $
    (34,839
    )BASIC AND DILUTED LOSS PER SHARE:Basic and diluted loss per share
    
    $
    (2.42
    )
    
    $
    (0.95
    )
    
    $
    (1.47
    )Weighted average shares outstanding  basic and diluted
    
    
    23,693
    
    
    
    
    
    
    
    23,693
  (1)
    
    Includes $22.4 million related primarily to the transfer of inventory to an independent liquidator in conjunction
with the closing of approximately 111 stores, lease termination costs, accelerated depreciation, and asset write-offs
related to store closings, and other restructuring costs. We measure performance using key operating statistics such as comparable
store sales, sales per square foot, gross margin percentage and store operating
expenses, with a focus on labor, as a percentage of sales. These results
translate into store operating 12




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##### Table of Contents



contribution and store cash flow, which we use
to evaluate overall performance on an individual store basis. Store operating
contribution is calculated by deducting a stores operating expenses from its
gross margin and is measured as a percentage of sales. Store operating
contribution gives us an overall measure as to whether or not individual
locations and markets are meeting our financial objectives. In addition, general and administrative expenses are monitored in absolute
amounts, as well as on a percentage of sales basis. We continue to monitor
product costs and promotional activity, which allows us to generally maintain
acceptable margin levels. Our gross margins are influenced by the mix of
merchandise between outerwear and accessories in our total sales. We also measure and evaluate investments in our retail locations,
including inventory and property and equipment. Inventory performance is
primarily measured by inventory turns, or the number of times store inventory
turns over in a given period, and amounts of owned inventory at various times
based on payment terms from our vendors. The most significant investments in
property and equipment are made at the time we open a store. Comparable store sales increased 11.0% in the three months ended July 31,
2004, and increased 3.1% in the year-to-date period ended July 31, 2004,
compared to a 5.6% and 2.2% decrease in comparable store sales in the same
periods of the prior year. A store is included in the comparable store sales
calculation after it has been opened and operated by us for more than 52 weeks.
The liquidation stores are not included in the comparable store sales
calculation. The percentage change is computed by comparing total net sales
for comparable stores as thus defined at the end of the applicable reporting
period with total net sales from comparable stores for the same period in the
prior year. On April 25, 2004, we entered into an agreement to issue 17,948,718 shares
of our common stock (the Equity Financing) to three institutional investors
at a price of $1.95 per share. The transaction closed on July 2, 2004, with
gross proceeds before offering expenses of $35.0 million. As additional
consideration for the investors commitment, on April 25, 2004, we issued two
million warrants exercisable for five years to the investors upon signing the
Equity Financing agreement, and at closing, issued an additional two million
warrants exercisable for five years, each at an exercise price of $3.00 per
share of common stock. On July 9, 2004, we repurchased $22.0 million of our
111⁄4% Senior Notes due August 15, 2004 (the 111⁄4% Senior Notes) with
proceeds from the Equity Financing and repaid the balance of the
111⁄4%
Senior Notes at maturity and will use the balance of these funds for general working
capital purposes.  CRITICAL ACCOUNTING POLICIES We consider our critical accounting policies to be those related to
inventories and property and equipment impairment as discussed in the section
with this title in Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations that begins on page 24 of our 2003 Annual
Report on Form 10-K. No material changes occurred to these policies in the
periods covered by this quarterly report.  RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JULY 31, 2004,COMPARED TO THE THREE MONTHS ENDED AUGUST 2, 2003 Net Sales.Net sales decreased 7.4% to $55.3 million in the three months
ended July 31, 2004, from $59.8 million in the comparable period last year.
The sales decrease during the quarter is the result of having, on average,
152.5 fewer stores, or an approximate decrease in the number of stores of
25.1%. Comparable store sales for the three months ended July 31, 2004,
increased 11.0% compared to a decrease of 5.6% in comparable store sales for
the same period last year. This comparable store sales increase was primarily
driven by special clearance sales in the second quarter and improved marketing
efforts to drive customers into our stores in the first two quarters of 2004.
Comparable store sales for 2004 do not include sales for the liquidation
stores. We opened one store and closed six stores in the three months ended July
31, 2004, compared to opening three stores and closing eight stores in the
comparable period last year. As of July 31, 2004, we operated 453 stores
compared to 607 stores (including the 111 liquidation stores closed in 2004) at
August 2, 2003. We regularly supplement our permanent mall stores with
seasonal stores during our peak selling season from October to January. Cost of Goods Sold, Buying and Occupancy Costs.Cost of goods sold,
buying and occupancy costs decreased $10.3 million, or 18.1%, in the three
months ended July 31, 2004, compared to the comparable period last year. This
resulted in a $5.9 million increase 13




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in gross margin in the three months ended
July 31, 2004, compared to the corresponding period in 2003. The gross margin
percentage also increased to 16.0% in the three months ended July 31, 2004,
compared to 5.0% in the comparable period last year. The increase in gross
margin was largely due to an improvement in buying and occupancy costs of $7.2
million driven by: (1) an improvement of $6.8 million in occupancy costs due to
fewer stores open in 2004 compared to 2003, and (2) a $0.4 million decrease in
distribution center costs due to the closure of the Las Vegas, Nevada
distribution center in late January 2004. This improvement was also driven by
a lower level of clearance goods as a result of the liquidation process, as
well as positive sell-through of new receipts. Selling, General and Administrative Expenses.Selling, general and
administrative (SG&A) expenses increased to $33.6 million in 2004 from $32.5
million in 2003, and increased as a percentage of net sales to 60.8% from
54.4%. The $1.1 million increase was primarily due to:
(1) a $9.1 million
increase over the prior year for restructuring costs primarily
related to store closures, severance, and other non-recurring
compensation charges, and (2) a $0.2 million increase over the prior year for
general administrative expense. These expense increases were largely offset
by: (1) a $3.9 million decrease in store selling expenses primarily due to a
25.1% reduction in store count and tighter cost control, (2) a $1.2 million
decrease in sales promotion expense due to the deferral of spending until the
third quarter of 2004 and less direct advertising as compared to the prior
year, (3) a $0.5 million decrease in other store expenses also due to a lower
average store count, (4) a $0.2 million decrease in e-commerce expenses due to
fewer functionality improvements over the prior year and lower sales promotion
expenses related to the preparation for outsourcing e-commerce operations in
the third quarter of 2004, (5) a $1.9 million decrease in legal expenses due to
a 2003 charge of $1.9 million taken in the second quarter of 2003 in connection
with a class action lawsuit, and (6) a $0.5 million decrease in other
administrative costs related to the reduced store count and corporate
restructuring and cost-saving initiatives. SG&A
expenses as a percentage of net sales, excluding restructuring costs
(which totaled $9.1 million, or 16.4%), decreased to 44.4% compared to 54.4% for the second quarter of last
year. This reduction is a result of continued improvement in controlling
store-related expenses, the closing of 25.1% of the store base and the overhead
reductions implemented in January 2004, all discussed above. Depreciation and Amortization.Depreciation and amortization decreased to
$3.7 million in the three months ended July 31, 2004, from $4.0 million in the
comparable period last year, and remained flat as a percentage of net sales at
6.7%. The decrease of $0.3 million was primarily the result of $0.2 million in
decreased administrative depreciation as a result of a lower level of
headquarters assets due to headcount reductions at our headquarters and
closures of two distribution centers in the fourth quarter of 2003 and $0.6
million in lower store depreciation due to 25.1% fewer stores in 2004 compared
to 2003, offset by $0.5 million in accelerated depreciation recorded in 2004
compared to $0.1 million in 2003. Operating Loss.As a result of the above, the operating loss was $28.5
million in the three months ended July 31, 2004, compared to a $33.5 million
loss for the comparable period last year, or 51.5% of net sales in 2004 as
compared to 56.1% of net sales in 2003. This was largely due to
restructuring costs of $8.2 million in 2004, offset by: (1) $7.8
million in lower SG&A expenses in 2004 compared to 2003, (2) $4.9 million in
improved gross margin as compared to the prior year, and (3) $0.3 million in
favorable depreciation expense in 2004 due to a lower asset base. Excluding the restructuring charges, the operating
loss for the quarter was $20.3 million, a 39.5% improvement over the $33.5
million operating loss in the comparable period of 2003. This improvement
reflects the restructuring and store closing initiatives, as well as the impact
of improved product margins and increases in comparable store sales. Interest Expense.Net interest expense decreased to $2.0 million in 2004
from $2.5 million in 2003, primarily due to the early repurchase of $22.0
million of the 111⁄4% Senior Notes and reduced amortization of debt issuance
costs. The restructuring activities did not impact
interest expense. Income Tax Benefit.There was no income tax benefit in 2004 compared to
$14.4 million in 2003 due to sustained losses, which currently require the
recording of a valuation allowance in 2004 against potentially unrealizable net
operating losses in future periods. As a result, the effective rate was
reduced from 40.0% in 2003 to 0.0% in 2004. The ability to utilize net
operating loss carryforwards may be limited under various provisions of the
Internal Revenue Code. At this time, we are in the preliminary stages of
determining if such limitations are applicable. Net Loss.As a result of the above, the net loss for the three months
ended July 31, 2004, was $30.4 million compared to a net loss of $21.6 million
in the comparable period last year. The $8.8 million increase in net loss over
the prior year is primarily due to the $8.2 million of charges related to
restructuring activities and no tax benefit recorded
during the second quarter of 2004. Excluding the restructuring charges, the net loss for
the second quarter of 2004 was $22.2 million compared to $21.6 million in the
comparable period of 2003. 14




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RESULTS OF OPERATIONS FOR THE YEAR-TO-DATE PERIOD ENDED JULY 31, 2004,COMPARED TO THE YEAR-TO-DATE PERIOD ENDED AUGUST 2, 2003 Net Sales.Net sales decreased 1.3% to $153.1 million in the year-to-date
period ended July 31, 2004, from $155.1 million in the comparable period last
year. Included in sales for the first two quarters of 2004 was approximately
$20.8 million in liquidation sales resulting from the liquidation of 111 stores
begun in the fourth quarter of 2003 and ended in April of 2004. See Note 4,
Restructuring and Partial Store Liquidation. Comparable store sales for the year-to-date period ended July 31, 2004,
increased 3.1% compared to a 2.2% decrease in comparable store sales for the
same period last year. This comparable store sales increase was primarily
driven by special clearance sales in the second quarter, offset by competition
from the liquidation stores in the first quarter. Comparable store sales for
2004 do not include sales for the liquidation stores. Excluding the $20.8
million in liquidation sales, net sales decreased 14.7% to $132.3 million,
reflecting the 25.2% average store count decline. We opened four stores and closed 11 stores in the year-to-date period
ended July 31, 2004 (excluding the 111 liquidation stores), compared to opening
eight stores and closing 19 stores in the comparable period last year. As of
July 31, 2004, we operated 453 stores compared to 607 stores (including the 111
liquidation stores closed in 2004) at August 2, 2003. We regularly supplement
our permanent mall stores with seasonal stores during our peak selling season
from October to January. Cost of Goods Sold, Buying and Occupancy Costs.Cost of goods sold,
buying and occupancy costs decreased $9.2 million, or 6.8%, in the year-to-date
period ended July 31, 2004, compared to the comparable period last year. This
resulted in a $7.2 million increase in gross margin in the current period
compared to the corresponding period in 2003. The gross margin percentage also
increased to 18.5 % in the year-to-date period ended July 31, 2004, compared to
13.6% in the comparable period last year. The increased gross margin was due
primarily to $13.4 million in decreased buying and occupancy costs. The
improvement in buying and occupancy costs was largely driven by: (1) an
improvement of $12.5 million in occupancy costs as a result of an average of
25.2% fewer stores open in 2004 compared to 2003, (2) a $0.8 million decrease
in distribution center costs due to the closure of the Las Vegas, Nevada
distribution center in late January 2004, and (3) a $0.1 million decrease in
other merchandising costs. This improvement was also driven by a lower level
of clearance goods as a result of the liquidation process as well as positive
sell-through of new receipts. Selling, General and Administrative Expenses.SG&A expenses decreased to
$61.8 million in 2004 from $65.2 million in 2003, and decreased as a percentage
of net sales to 40.3% from 42.1%. The $3.5 million decrease was primarily due
to: (1) an $8.8 million decrease in store selling expenses primarily due to
tighter cost control and a 25.2% reduction in store count, (2) a
$2.0 million
decrease in other store expenses also due to a lower average store count, (3) a
$0.5 million decrease in e-commerce expenses due to fewer functionality
improvements over the prior year and lower sales promotion expenses due to the
preparation for outsourcing e-commerce operations in the third quarter of 2004,
(4) a $1.9 million decrease in legal expenses related to a charge of $1.9
million taken in the second quarter of 2003 in connection with a class action
lawsuit, (5) a $1.2 million decrease in other administration costs related to a
reduced store count and corporate restructuring and cost-saving initiatives,
and (6) a $1.4 million decrease in sales promotion expense due to deferral of
spending until the third quarter of 2004 and less spending on direct
advertising as compared to the prior year. These expense reductions were
offset by a $12.3 million increase over the prior year for
liquidation and restructuring costs related primarily to store
closures, severance and other non-recurring compensation charges. SG&A
expenses as a percentage of net sales, excluding liquidation and
restructuring charges (which totaled $12.3 million, or 8.0%, decreased to 37.4%
compared to 42.1% for the first two quarters of last year. This reduction is a
result of continued improvement in controlling store-related expenses, the
closing of underperforming stores and the overhead reductions implemented in
January 2004, all discussed above. Depreciation and Amortization.Depreciation and amortization increased to
$19.0 million in the year-to-date period ended July 31, 2004, from $8.3 million
in the comparable period last year, and increased as a percentage of net sales
to 12.4% from 5.4%. The increase of $10.7 million was primarily the result of
$11.3 million in accelerated depreciation recorded in 2004 for the 111
liquidation stores, offset by $0.6 million in decreased administrative
depreciation as a result of lower level of headquarters assets due to 15




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headcount
reductions at our headquarters and closures of two distribution centers in the
fourth quarter of 2003 and a lower level of store assets related to a reduced
store count. Depreciation and amortization, excluding liquidation effects (which
totaled $11.3 million, or 7.4% of net sales), decreased to $7.8 million, or
5.9% of net sales, compared to $8.3 million, or 5.4% of net sales, in the first
two quarters last year. This decrease is due to a lower level of
administrative and store assets. Operating Loss.As a result of the above, the operating loss was $52.5
million in the year-to-date period ended July 31, 2004, compared to a $52.5
million operating loss for the comparable period last year, or 34.3% of net
sales in 2004 as compared to 33.9% of net sales in 2003. This was largely due
to liquidation and restructuring costs of $22.4 million in 2004, offset
by: (1) $15.8 million in lower SG&A expenses in 2004 compared to 2003, (2) $6.0
million in improved external gross margin as compared to the prior year, and
(3) $0.6 million in favorable depreciation expense in 2004 due to a lower asset
base. Excluding
the liquidation and restructuring charges, the operating
loss for the first two quarters was $30.1 million, a 42.6% improvement over the
$52.5 million operating loss in the first two quarters of 2003. This
improvement reflects the restructuring and store closing initiatives as well as
the impact of improved product margins. Interest Expense.Net interest expense was flat to the prior year at $4.7
million in 2004 compared to 2003, primarily due to a $0.5
million write-off of debt issuance costs related to the amended senior credit
facility, which reduced our revolving line of credit borrowing capacity from
$180.0 million to $125.0 million, offset by interest savings from early
repurchase of $22.0 million of the 111⁄4% Senior Notes and reduced
amortization of debt issuance costs. The liquidation and restructuring activities did not impact interest expense. Income Tax Benefit.There was no income tax benefit in 2004 compared to
$22.9 million in 2003 due to sustained losses, which currently require the
recording of a valuation allowance in 2004 against potentially unrealizable net
operating losses in future periods. As a result, the effective rate was
reduced from 40.0% in 2003 to 0.0% in 2004. The ability to utilize net
operating loss carryforwards may be limited under various provisions of the
Internal Revenue Code. At this time, we are in the preliminary stages of
determining if such limitations are applicable. Net Loss.As a result of the above, the net loss for the year-to-date
period ended July 31, 2004, was $57.2 million compared to a net loss of $34.3
million in the comparable period last year. The $22.9 million increase in net
loss over the prior year is primarily due to the $22.4 million of charges
related to liquidation and restructuring activities, and no
tax benefit recorded during the year-to-date period ended July 31, 2004.
Excluding the liquidation and restructuring charges, the net loss for the year-to-date period ended July
31, 2004 was $34.8 million. LIQUIDITY AND CAPITAL RESOURCES Our capital requirements are primarily driven by our seasonal working
capital needs, investments in new stores, remodeling existing stores, enhancing
information systems and increasing capacity for our distribution center. Our
peak working capital needs typically occur during the period from August
through early December as inventory levels are increased in advance of our peak
selling season from October through January. Our future capital requirements depend on the sustained demand for our
leather products. Many factors affect the level of consumer spending on our
products, including, among others, general business conditions, interest rates,
the availability of consumer credit, weather, the outbreak of war, acts of
terrorism or the threat of either, other significant national and international
events, taxation and consumer confidence in future economic conditions.
Consumer purchases of discretionary items, such as our leather products, tend
to decline during recessionary periods when disposable income is lower. The
uncertain outlook in the United States economy has shifted consumer spending
habits toward large discount retailers, which has decreased mall traffic,
resulting in lower net sales on a quarterly and annual basis. Our ability to meet our debt service obligations will be dependent upon
our future performance, which will be subject to general economic conditions
and financial, business and other factors affecting our operations. If we are
unable to generate sufficient cash flow from operations in the future to
service our debt, we may be required to refinance all or a portion of our
existing debt or to obtain 16




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additional financing. There can be no assurance
that any such refinancing or additional financing would be possible or could be
obtained on terms that are favorable to us. General Electric Capital Corporation and a syndicate of banks have
provided us with a senior credit facility, which was amended on April 15, 2004,
and April 27, 2004 (the senior credit facility or the credit agreement),
that provides for borrowings of up to $150.0 million in aggregate principal
amount, including a $25.0 million Term B promissory note and a $75.0 million
letter of credit subfacility. The maximum amount available under the revolving
credit portion of the senior credit facility is limited to:  
    
    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. In addition, borrowings under the senior credit facility are subject to the
further limitations that:  
    
    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% of
the book value of credit card receivables, plus 95% (100% during August,
September and October) 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. Peak borrowings typically occur from October through December and
outstanding letters of credit typically peak from August through September. As
of July 31, 2004, we had no borrowings under the revolving portion of the
credit facility, $25.0 million under the Term B promissory note and $14.6
million in outstanding letters of credit. Except as noted in the next sentence, interest is payable on revolving
credit borrowings at variable rates determined by LIBOR plus 3.25%, or the
prime rate plus 2.0% (commercial paper rate plus 3.25% if the loan is made
under the swing line portion of the revolver). If we meet certain financial
tests for our fiscal year ending January 29, 2005, these rates will be reduced
by 0.50% per annum thereafter. Interest is payable on the $25.0 million Term B
promissory note at a variable rate equal to the prime rate plus 4%, plus an
additional 5% payable pursuant to a separate letter agreement with General
Electric Capital Corporation. We pay monthly fees on the unused portion of the
senior credit facility and on the average daily amount of letters of credit
outstanding during each month. With the completion of the sale of
capital stock (described above under Note 9, Additional Financing) and
subsequent repurchase of the 111⁄4% Senior Notes (described above in Note 10,
Subsequent Events), the senior credit facility will expire on June 28, 2008,
at which time all borrowings, including the Term B promissory note, become due
and payable. Prepayment of the Term B promissory note is subject to a 1%
prepayment fee. The revolving credit portion of the facility is subject to a
1% prepayment fee under most circumstances. The Term B promissory note is
prepayable, only with the consent of the senior lenders under the senior credit
facility. The senior credit facility contains certain restrictions and covenants,
which, among other things, restrict our ability to make capital expenditures;
acquire or merge with another entity; make investments, loans or guarantees;
incur additional indebtedness; create liens or other encumbrances; or pay cash
dividends or make other distributions. 17




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We plan to use the senior credit facility for our immediate and future
working capital needs. We are dependent on the senior credit facility to fund
working capital and letter of credit needs. We believe that borrowing capacity
under the senior credit facility, together with cash on hand, current and
anticipated cash flow from operations, cost reductions associated with the 111
liquidation stores and the proceeds from the Equity Financing discussed below,
will be adequate to meet our working capital and capital expenditure
requirements through the next twelve months. On August 18, 1997, we completed a private offering of $75.0 million of
our 111⁄4% Senior Notes to certain institutional buyers. The 111⁄4% Senior
Notes, matured on August 15, 2004, and as of July 31, 2004, had a balance
remaining of $8.6 million, and were classified as current. During fiscal 2000
and fiscal 1999, we repurchased $13.3 million and $26.1 million, respectively,
of our 111⁄4% Senior Notes. On July 9, 2004, the Company repurchased $22.0
million of the 111⁄4% Senior Notes with proceeds from the Equity Financing.
We repaid the remaining $8.6 million balance of the 111⁄4% Senior Notes at
maturity. On April 25, 2004, we entered into an agreement to issue 17,948,718 shares
of our common stock to three institutional investors at a price of $1.95 per
share. The Equity Financing closed on July 2, 2004, with gross proceeds of
$35.0 million before offering costs. As additional consideration for the
investors commitment, on April 25, 2004, we issued two million warrants
exercisable for five years to the investors upon signing the Equity Financing
agreement, and at closing issued an additional two million warrants exercisable
for five years, each at an exercise price of $3.00 per share of common stock.
The proceeds of the offering were used to repay
the 111⁄4% Senior Notes described above. The remaining balance of these
funds will be used for general working capital purposes.  CASH FLOW ANALYSIS Operating Activities.Operating activities for the year-to-date period
ended July 31, 2004, resulted in cash used of $28.5 million compared to cash
used of $38.4 million in the corresponding period of 2003. The $28.5 million of cash used by operating activities in 2004 was
comprised of sources of cash including: (1) an $11.4 million decrease in
inventories due to a strategic operating decision to keep inventory levels more
tightly managed than in previous years and a lower store count than in the
prior year due to the net closure of 111 liquidation stores and approximately
40 other stores, bringing the average store count to 457 for the year-to-date
period of 2004, compared to 612 for the comparable period of 2003 (a 25.2%
decrease), (2) $22.3 million in non-cash adjustments for depreciation,
amortization, property and equipment impairment, and restricted stock
compensation expense, of which $11.3 million was related to the 111 liquidation
stores, and (3) a $3.1 million decrease in accounts receivable primarily due to
lower credit card receivables as a result of a lower store count. These sources of cash were primarily offset by: (1) a net loss from
operations of $57.2 million (of which $22.4 million related to charges for the
111 store liquidation and other restructuring activities), (2) a $3.7 million
decrease in accounts payable and accrued expenses from a reduction in the
volume of merchandise purchased and a lower level of general non-merchandise
vendor purchases in 2004 compared to 2003, (3) a $3.3 million increase in
prepaid expenses due to $3.0 million in higher prepaid rent due to the timing
of rent payments, and $0.4 million in higher insurance prepaids due to renewal
of corporate policies, which were offset by $0.1 million in lower supplies due
to fewer stores, and (4) a $1.1 million decrease in income taxes payable and
other liabilities primarily due to $1.5 million in reductions in straight-line
rent due to the 111 store liquidation event and amortization of deferred gain
on the sale/leaseback of our headquarters facility, offset by a $0.3 million
increase in miscellaneous income tax liability accounts, and a $0.1 million
increase in sublease deposits refundable. The $38.4 million of cash used by operating activities in 2003 was
comprised of: a $12.6 million decrease in inventories due to clearance
sales and a $9.3 million non-cash adjustment for depreciation and amortization
expense. These sources of cash in 2003 were primarily offset by: (1) a $34.3
million net loss from operations, (2) a $7.5 million increase in prepaids due
to timing of rent payments, (3) a $3.3 million increase in income taxes
refundable/payable and other liabilities primarily due to net operating losses,
(4) a $4.9 million decrease in accrued expenses and accounts payable due to the
seasonality of the business, (5) a $0.8 million increase in accounts
receivable, and (6) a $9.5 million increase in deferred income taxes. Investing Activities.Investing activities for the year-to-date period
ended July 31, 2004, were comprised of $2.3 million in capital expenditures
primarily for the construction of new stores and the renovation of and
improvements to existing stores, offset by de 18




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minimis proceeds on the sale of
property and equipment. For 2004, capital expenditures are capped by the
senior credit facility at $6.0 million. Investing activities for the year-to-date period ended August 2, 2003,
were comprised primarily of $4.4 million in capital expenditures and additions
to other assets used primarily for the construction of new stores and the
renovation of and improvements to existing stores. Financing Activities.Cash provided by financing activities for the
year-to-date period ended July 31, 2004, was $9.2 million and was comprised
primarily of $32.4 million in net proceeds from the Equity Financing, offset by
$22.0 million used for payment of the 111⁄4% Senior Notes and $1.2 million
used for debt acquisition costs related to amendments to our senior credit
facility in April 2004. Cash provided by financing activities for the year-to-date period ended
August 2, 2003, was $22.9 million, which was comprised primarily of $23.6
million provided by revolver financing and checks written in excess of cash
balances, and $0.3 million from the issuance of common stock and exercise of
stock options, partially offset by $1.0 million used for debt acquisition
costs.  OFF-BALANCE SHEET ARRANGEMENTS We have no off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes
in our financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that are material to
investors.  SEASONALITY AND INFLATION A majority of our net sales and operating profit is generated in the peak
selling period from October through January, which includes the holiday selling
season. As a result, our annual operating results have been, and will continue
to be, heavily dependent on the results of our peak selling period. Net sales
are generally lowest during the period from April through July, and we
typically do not become profitable, if at all, until the fourth quarter of a
given year. Most of our stores are unprofitable during the first three
quarters. Conversely, in a typical year nearly all of our stores are
profitable during the fourth quarter, even those that may be unprofitable for
the full year. Historically, we have opened most of our stores during the last
half of the year. As a result, new mall stores opened just prior to the fourth
quarter produce profits in excess of their annualized profits since the stores
typically generate losses in the first nine months of the year. We do not believe that inflation has had a material effect on the results
of operations during the past three years; however, there can be no assurance
that our business will not be affected by inflation in the future.  RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS See
Note 2,  Recently Issued Accounting Pronouncements, to the
consolidated financial statements beginning on page 9 of this report for a
full description of recently issued accounting pronouncements, including the
respective expected dates of adoption and effects on results of operations and
financial condition.  FORWARD-LOOKING STATEMENTS Except for historical information, matters discussed in Item 2.
Managements Discussion and Analysis of Financial Condition and Results of
Operations are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These statements involve risks and
uncertainties, and actual results may be materially different. Because actual
results may differ, readers are cautioned not to place undue reliance on
forward-looking statements. Factors that could cause actual results to differ
include: changes in customer shopping patterns; competition in our markets;
economic uncertainty; change in consumer preferences and fashion trends away
from leather; reductions in our comparable store sales and operating results
over the past three years; our inability to grow the business as planned;
decreased availability and increased cost of leather; risks associated with
foreign sourcing and international business; seasonality of the business; risks
associated with our debt covenant compliance; risks associated with estimates
made in our critical accounting policies; loss of key members of our management
team; dilution to our shareholders as a result of the refinancing;
concentration of our common stock; volatility of the price of our common stock;
reliance on third parties for maintaining our management information systems;
war, acts of terrorism or the threat of either; interruption in the operation
of corporate offices and distribution centers; and public sale of 19




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common stock
by existing shareholders. Certain of these risk factors are more fully
discussed in Exhibit 99.1 filed with this quarterly report on Form 10-Q. 
 ITEM 3.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our senior credit facility carries interest rate risk that is generally
related to LIBOR, the commercial paper rate or the prime rate. If any of
those rates were to change while we were borrowing under the senior credit
facility, interest expense would increase or decrease accordingly. As of July
31, 2004, we had no borrowings under the revolving portion of the credit
facility, $25.0 million under the Term B promissory note, and $14.6 million in
outstanding letters of credit. 
 ITEM 4.      CONTROLS AND PROCEDURES As of the end of the period covered by this report, we conducted an
evaluation, under the supervision and with the participation of the principal
executive officer and principal financial officer, of our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (the Exchange Act)). Based on this
evaluation, the principal executive officer and principal financial officer
concluded that our disclosure controls and procedures are effective to ensure
that information we are required to disclose in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms. There was no change in our internal control over financial reporting
during our most recently completed fiscal quarter that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting. 
 PART II  OTHER INFORMATION 
  ITEM 2.
    
    CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES See Part I. Item 2. Managements Discussion and Analysis of Financial
Condition and Results of OperationsLiquidity and Capital Resources contained
herein for a description of working capital restrictions and limitations upon
the payment of dividends. We did not repurchase any shares of our common stock
during the second quarter of 2004.  RECENT SALES OF UNREGISTERED SECURITIES On July 2, 2004, we sold 17,948,718 shares of our common stock to three
institutional investors at a price of $1.95 per share in the Equity Financing
discussed above. As additional consideration for the investors commitment, on
April 25, 2004, the Company issued two million warrants exercisable for five
years to the investors, and on July 2, 2004, issued an additional two million
warrants exercisable for five years, each at an exercise price of $3.00 per
share of common stock. We received net proceeds of $32.4 million in the Equity
Financing. Because the sales of shares were made to accredited investors pursuant to
Rule 506 of Regulation D under the Securities Act of 1933, as amended (the
Act), we believe they are exempt from the registration requirements of the
Act. The shares sold and the shares underlying the warrants were subsequently
registered for resale pursuant to a Registration Statement on Form S3. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At our annual meeting held on June 3, 2004, the shareholders approved the
following:  (a)
    
    The election of two directors for a three-year term. Each nominated
director was elected as follows: Director-Nominee
    
    Votes
For
    
    Votes
WithheldMichael T. Cowhig
    
    
    19,939,820
    
    
    167,727David L. Rogers
    
    
    19,879,496
    
    
    228,051
  (b)
    
    Ratification of the appointment of KPMG LLP as our independent
auditors for the fiscal year ending January 29, 2005. 20




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The proposal received 20,080,039 votes for and 3,798 votes against.
There were 23,710 abstentions and no broker non-votes. At our special meeting held on June 24, 2004, the shareholders approved
the following:  The issuance and sale of an aggregate of 17,948,718 shares of our
common stock and warrants to purchase an aggregate of two million shares of our common stock on the terms and subject to the conditions
described in our Proxy Statement dated May 20, 2004.The proposal received 13,159,971 votes for and 1,295,688 votes
against. There were 48,207 abstentions and no broker non-votes. 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 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
    
    Indenture dated as of August 18, 1997, by and among Wilsons The
Leather Experts Inc., the other corporations listed on the signature
pages thereof, and Wells Fargo Bank Minnesota, National Association
(formerly known as Norwest Bank Minnesota, National Association),
including specimen Certificate of 111⁄4% Series A Senior Notes due
2004 and specimen Certificate of 111⁄4% Series B Senior Notes due
2004. (4)
    
    Incorporated by Reference4.3
    
    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 Reference4.4
    
    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 Reference4.5
    
    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 Reference4.6
    
    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 Reference
 21




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4.7
    
    Form of Warrant issued to the Purchasers named in the Purchase
Agreement on April 25, 2004. (9)
    
    Incorporated by Reference10.1
    
    First Amendment to Stay Bonus Agreement dated as of June 21,
2004, by Peter G. Michielutti and the Company
    
    Electronic Transmission10.2
    
    Unqualified Release Agreement dated as of July 13, 2004, by
Jenele C. Grassle and the Company
    
    Electronic Transmission10.3
    
    Agreement dated as of July 29, 2004, by David L. Rogers and
the Company
    
    Electronic Transmission10.4
    
    Form of Non-Statutory Stock Option Agreement (Director)
pursuant to the 1996 Stock Option Plan
    
    Electronic Transmission10.5
    
    Form of Non-Statutory Stock Option Agreement (Associate)
pursuant to the 1996 Stock Option Plan
    
    Electronic Transmission10.6
    
    Form of Non-Statutory Stock Option Agreement (Director)
pursuant to the 2000 Long Term Incentive Plan
    
    Electronic Transmission10.7
    
    Form of Non-Statutory Stock Option Agreement (Associate)
pursuant to the 2000 Long Term Incentive Plan
    
    Electronic Transmission10.8
    
    Form of Restricted Stock Agreement (Associate)
pursuant to the 2000 Long Term Incentive Plan
    
    Electronic Transmission31.1
    
    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 Transmission99.1
    
    Risk Factors Relating to Forward-Looking Statements
    
    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 10.3 to the Companys Report on
Form 10-Q for the quarter ended August 2, 1997, filed with the
Commission.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. 22




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##### Table of Contents



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.  B.
    
    Reports on Form 8-K: The Company filed the following reports on Form
8-K during the second quarter ended July 31, 2004: On May 11, 2004, the Company announced that it received a non-binding
proposal from an institutional investor for the purchase in a private
placement of 16,279,070 shares of common stock. The report on Form 8-K was
filed on May 17, 2004. On May 18, 2004, the Company announced its first quarter and
year-to-date earnings for the period ended May 1, 2004. The earnings release
was furnished to the SEC on a Form 8-K filed on May 18, 2004. On May 19, 2004, the Company filed an amended Form 8-K/A to correct
inadvertent formatting errors made by the Companys financial printer on the
EDGAR version of the May 1, 2004 balance sheet previously reported on a Form
8-K filed on May 18, 2004. On June 24, 2004, the Company announced that its shareholders approved
the sale in a private placement of 17,948,718 newly issued shares of its
common stock and warrants to purchase an additional two million shares of
common stock. The report on Form 8-K was filed on June 25, 2004. On July 2, 2004, the Company announced that it had issued 17,948,718
shares of its common stock to three institutional investors. In addition,
the Company issued two million warrants to the investors as additional
consideration for the purchase. The Company received $35.0 million before
offering expenses. The report on Form 8-K was filed on July 16, 2004. On July 29, 2004, the Company announced the resignation of David L.
Rogers, President and Chief Operating Officer effective August 2, 2004. Mr.
Rogers will remain a director of the Company. The report on Form 8-K was
filed on July 29, 2004. 
 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. WILSONS THE LEATHER EXPERTS INC.By:
    
    /s/ Peter G. MichieluttiPeter G. Michielutti
Executive Vice President, Chief Financial Officer and Chief Operating OfficerDate:    September 9, 2004
 23




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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
    
    Indenture dated as of August 18, 1997, by and among Wilsons The
Leather Experts Inc., the other corporations listed on the signature
pages thereof, and Wells Fargo Bank Minnesota, National Association
(formerly known as Norwest Bank Minnesota, National Association),
including specimen Certificate of 111⁄4% Series A Senior Notes due
2004 and specimen Certificate of 111⁄4% Series B Senior Notes due
2004. (4)
    
    Incorporated by Reference4.3
    
    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 Reference4.4
    
    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 Reference4.5
    
    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 Reference4.6
    
    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 Reference4.7
    
    Form of Warrant issued to the Purchasers named in the Purchase Agreement on April 25,
2004. (9)
    
    Incorporated by Reference10.1
    
    First Amendment to Stay Bonus Agreement dated as of June 21, 2004, by
Peter G. Michielutti and the Company
    
    Electronic Transmission10.2
    
    Unqualified Release Agreement dated as of July 13, 2004, by Jenele C. Grassle and the
Company
    
    Electronic Transmission10.3
    
    Agreement dated as of July 29, 2004, by David L. Rogers and the Company
    
    Electronic Transmission10.4
    
    Form of Non-Statutory Stock Option Agreement (Director)
pursuant to the 1996 Stock Option Plan
    
    Electronic Transmission10.5
    
    Form of Non-Statutory Stock Option Agreement (Associate)
pursuant to the 1996 Stock Option Plan
    
    Electronic Transmission10.6
    
    Form of Non-Statutory Stock Option Agreement (Director)
pursuant to the 2000 Long Term Incentive Plan
    
    Electronic Transmission10.7
    
    Form of Non-Statutory Stock Option Agreement (Associate)
pursuant to the 2000 Long Term Incentive Plan
    
    Electronic Transmission
 24




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##### Table of Contents



10.8
    
    Form of Restricted Stock Agreement (Associate)
pursuant to the 2000 Long Term Incentive Plan
    
    Electronic Transmission31.1
    
    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 Transmission99.1
    
    Risk Factors Relating to Forward-Looking Statements
    
    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 10.3 to the Companys Report on
Form 10-Q for the quarter ended August 2, 1997, filed with the
Commission.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. 25