##### Table of Contents



UNITED
STATESSECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 (Mark one)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended May 5, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 000-21543
 WILSONS THE LEATHER EXPERTS INC.
  MINNESOTA
(State or other jurisdiction of 
incorporation or organization)
    
    41-1839933
(I.R.S. Employer
Identification No.)
 7401 BOONE AVE. N.
BROOKLYN PARK, MN 55428
 (763) 391-4000
  þ o
  o þ o
  o þ




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##### 



WILSONS THE LEATHER EXPERTS INC.
 INDEX
 PagePART I  FINANCIAL INFORMATIONItem 1. Consolidated Financial Statements (Unaudited)
    
    
    3Consolidated Balance Sheets as of May 5, 2007 and February 3, 2007
    
    
    3Consolidated Statements of Operations for the three months ended May 5, 2007 and April 29, 2006
    
    
    4Consolidated Statements of Cash Flows for the year-to-date periods ended May 5, 2007 and April 29, 2006
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    25PART II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    25Item 1A. Risk Factors
    
    
    25Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    26Item 6. Exhibits
    
    
    26Signature
    
    
    27Rule 13a-14(a)/15d-14(a) Certification of CEORule 13a-14(a)/15d-14(a) Certification of CFOCertification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 (In thousands, except share and per share amounts)
 May 5,
    
    
    February 3,2007
    
    
    2007(1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    9,469
    
    
    $
    19,909Accounts receivable, net
    
    
    2,344
    
    
    
    3,132Inventories
    
    
    62,463
    
    
    
    74,897Prepaid expenses
    
    
    6,169
    
    
    
    7,267Income taxes receivable
    
    
    590
    
    
    
    Total current assets
    
    
    81,035
    
    
    
    105,205Property and equipment, net
    
    
    38,249
    
    
    
    38,890Other assets, net
    
    
    1,180
    
    
    
    1,250TOTAL ASSETS
    
    $
    120,464
    
    
    $
    145,345LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    12,361
    
    
    $
    14,337Accrued expenses
    
    
    12,423
    
    
    
    14,534Income taxes payable
    
    
    
    
    
    
    921Deferred income taxes
    
    
    220
    
    
    
    220Total current liabilities
    
    
    25,004
    
    
    
    30,012Long-term debt
    
    
    20,000
    
    
    
    20,000Income taxes payable
    
    
    1,451
    
    
    
    Other long-term liabilities
    
    
    16,418
    
    
    
    16,832Total liabilities
    
    
    62,873
    
    
    
    66,844Commitments and contingenciesShareholders equity:Common stock, $.01 par value; 150,000,000 shares
authorized; 39,225,713 and 39,204,299 shares
issued and outstanding on May 5, 2007 and
February 3, 2007, respectively
    
    
    392
    
    
    
    392Additional paid-in capital
    
    
    136,796
    
    
    
    136,441Accumulated deficit
    
    
    (79,599
    )
    
    
    (58,334
    )Accumulated other comprehensive income
    
    
    2
    
    
    
    2Total shareholders equity
    
    
    57,591
    
    
    
    78,501TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    120,464
    
    
    $
    145,345
  
 (1)
    
    Derived from audited consolidated financial statements. 3




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WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share amounts)
 (Unaudited)
 For the three months endedMay 5,
    
    
    April 29,2007
    
    
    2006NET SALES
    
    $
    57,595
    
    
    $
    74,680Cost of goods sold, buying and occupancy costs
    
    
    51,145
    
    
    
    54,950GROSS MARGIN
    
    
    6,450
    
    
    
    19,730Selling, general and administrative expenses
    
    
    24,518
    
    
    
    25,580Depreciation and amortization
    
    
    2,839
    
    
    
    3,172OPERATING LOSS
    
    
    (20,907
    )
    
    
    (9,022
    )Interest expense, net
    
    
    431
    
    
    
    242LOSS BEFORE INCOME TAXES
    
    
    (21,338
    )
    
    
    (9,264
    )Income tax benefit
    
    
    (73
    )
    
    
    (2,764
    )NET LOSS
    
    $
    (21,265
    )
    
    $
    (6,500
    )BASIC AND DILUTED LOSS PER SHARE:Basic and diluted loss per share
    
    $
    (0.54
    )
    
    $
    (0.17
    )Weighted average shares outstanding  basic and diluted
    
    
    39,212
    
    
    
    39,105
  4




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WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 For the three months endedApril 29,May 5,

    
    
    20062007
    
    
    (Revised)OPERATING ACTIVITIES:Net loss
    
    $
    (21,265
    )
    
    $
    (6,500
    )Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:Depreciation
    
    
    2,839
    
    
    
    3,172Amortization of deferred financing costs
    
    
    88
    
    
    
    157Gain on disposal of assets
    
    
    
    
    
    
    (2
    )Stock-based compensation expense
    
    
    328
    
    
    
    569Changes in operating assets and liabilities:Accounts receivable, net
    
    
    788
    
    
    
    1,297Inventories
    
    
    12,434
    
    
    
    16,093Prepaid expenses and other current assets
    
    
    508
    
    
    
    (3,095
    )Accounts payable and accrued expenses
    
    
    (5,098
    )
    
    
    (2,775
    )Income taxes payable and other liabilities
    
    
    116
    
    
    
    (2,814
    )Net cash (used in) provided by operating activities
    
    
    (9,262
    )
    
    
    6,102INVESTING ACTIVITIES:Additions to property and equipment
    
    
    (1,187
    )
    
    
    (2,282
    )Net cash used in investing activities
    
    
    (1,187
    )
    
    
    (2,282
    )FINANCING ACTIVITIES:Proceeds from issuance of common stock, net
    
    
    27
    
    
    
    107Debt issuance costs
    
    
    (18
    )
    
    
    Net cash provided by financing activities
    
    
    9
    
    
    
    107NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (10,440
    )
    
    
    3,927CASH AND CASH EQUIVALENTS, beginning of period
    
    
    19,909
    
    
    
    45,552CASH AND CASH EQUIVALENTS, end of period
    
    $
    9,469
    
    
    $
    49,479
  5




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WILSONS THE LEATHER EXPERTS INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 1 Summary of significant accounting policies
 Nature of organization
  Basis of presentation
   Fiscal year
  Use of estimates
  Cash and cash equivalents
  6




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Inventories
     Property and equipment
  Store closing and impairment of long-lived assets
   Operating leases
  7




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Revenue recognition
  Stock-based compensation
 Share-Based Payment
  For the three months endedMay 5,
    
    April 29,2007
    
    2006Expected term (in years)
    
    
    3.9
    
    
    
    4.1Expected volatility
    
    
    63.9
    %
    
    
    70.1
    %Risk-free interest rate
    
    
    4.7
    %
    
    
    4.7
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Weighted
Average fair value of options granted
    
    $
    0.78
    
    
    $
    2.14
  8




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##### Table of Contents



Income taxes
   Sales taxes
  Income (loss) per share
   9




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New accounting pronouncements
 Accounting for Uncertainty in
Income Taxes Accounting for Income Taxes. Definition of Settlement in FASB Interpretation No. 48
 Fair
Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities  Including an Amendment of FASB Statement No. 115
 2 Other comprehensive income
  3 Long-term debt
  May 5,
    
    
    February 3,2007
    
    
    2007Term B promissory note
    
    $
    20,000
    
    
    $
    20,000Total debt
    
    
    20,000
    
    
    
    20,000Less: current portion
    
    
    
    
    
    
    Total long-term debt
    
    $
    20,000
    
    
    $
    20,000
 Term B promissory note and senior credit facility
   10




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4 Employee stock benefit plans
 Stock options
   11




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##### Table of Contents



As of and for the three months ended May 5, 2007Weighted average
    
    
    Weighted averageShares
    
    
    exercise price
    
    
    remaining lifeOutstanding, beginning of period
    
    
    2,722,247
    
    
    
    $    5.50Granted
    
    
    129,000
    
    
    
    $    1.48Exercised
    
    
    
    
    
    
    $       Forfeited
    
    
    (279,331
    )
    
    
    $    4.01Expired
    
    
    (76,392
    )
    
    
    $    7.00Outstanding, end of period
    
    
    2,495,524
    
    
    
    $    5.41
    
    
    
    3.85Exercisable, end of period
    
    
    1,056,227
    
    
    
    $    6.01
    
    
    
    3.90Available for grant, end of period (1)
    
    
    1,626,166
 
 (1)
    
    The 2000 Plan only.  Non-vested shares and other stock-related awards
   Employee stock purchase plan
  12




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5 Income taxes
      6 Revision of financial statements
  As previously(In thousands)
    
    reported
    
    Adjustments
    
    RevisedFor the three-month period ended April 29, 2006Accounts payable and accrued expenses
    
    $
    (1,886
    )
    
    $
    (889
    )
    
    $
    (2,775
    )Net cash provided by operating activities
    
    
    6,991
    
    
    
    (889
    )
    
    
    6,102Additions to property and equipment
    
    
    (3,171
    )
    
    
    889
    
    
    
    (2,282
    )Net cash used in investing activities
    
    
    (3,171
    )
    
    
    889
    
    
    
    (2,282
    )
 7 Commitments and contingencies
   13




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8 Supplemental balance sheet information
 May 5,
    
    
    February 3,(In thousands)
    
    2007
    
    
    2007Accounts receivable, net:Trade receivables
    
    $
    1,448
    
    
    $
    2,359Other receivables
    
    
    1,030
    
    
    
    929Total
    
    
    2,478
    
    
    
    3,288Less  Allowance for doubtful accounts
    
    
    (31
    )
    
    
    (71
    )Less  Deferred sales
    
    
    (103
    )
    
    
    (85
    )Total accounts receivable, net
    
    $
    2,344
    
    
    $
    3,132Inventories:Raw materials
    
    $
    3,603
    
    
    $
    2,940Finished goods
    
    
    58,860
    
    
    
    71,957Total inventories
    
    $
    62,463
    
    
    $
    74,897Property and equipment, net:Equipment and furniture
    
    $
    75,760
    
    
    $
    74,420Leasehold improvements
    
    
    43,151
    
    
    
    42,700Total
    
    
    118,911
    
    
    
    117,120Less-Accumulated depreciation and amortization
    
    
    (80,662
    )
    
    
    (78,230
    )Net property and equipment
    
    $
    38,249
    
    
    $
    38,890Other assets, net:Debt issuance costs
    
    $
    5,237
    
    
    $
    5,219Less-Accumulated amortization
    
    
    (4,115
    )
    
    
    (4,027
    )Debt issuance costs, net
    
    
    1,122
    
    
    
    1,192Other intangible assets, net
    
    
    58
    
    
    
    58Total
    
    $
    1,180
    
    
    $
    1,250
 9 Subsequent event
   §
    
    there shall have been no material adverse effect, as described in the Purchase Agreement,
since the date of signing the Purchase Agreement;
 14




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§
    
    the lead investor shall be satisfied, in its reasonable discretion, based on meetings
with four of the Companys landlords who control most of the Companys mall store leases,
that such landlords will make such modifications in the leases as are necessary to enable
the Company to execute the future business strategy the lead investor has discussed with the
Company; and§
    
    GECC shall have entered into an amendment of the Companys credit agreement, in a form
reasonably satisfactory to the lead investor, containing substantially the terms set forth
in the term sheet previously provided by GECC, and GECC shall have consented to the
transactions set forth in the Purchase Agreement.
      
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   Executive overview
  15




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Wilsons Leather
       16




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Wilsons Leather
  Wilsons Leather Wilsons Leather
  Critical accounting policies
  Results of operations
  For the three months endedMay 5,
    
    
    April 29,2007
    
    
    2006NET SALES
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold, buying and occupancy costs
    
    
    88.8
    
    
    
    73.6GROSS MARGIN
    
    
    11.2
    
    
    
    26.4Selling, general and administrative expenses
    
    
    42.6
    
    
    
    34.3Depreciation and amortization
    
    
    4.9
    
    
    
    4.2OPERATING LOSS
    
    
    (36.3
    )
    
    
    (12.1
    )Interest expense, net
    
    
    0.7
    
    
    
    0.3LOSS BEFORE INCOME TAXES
    
    
    (37.0
    )
    
    
    (12.4
    )Income tax benefit
    
    
    (0.1
    )
    
    
    (3.7
    )NET LOSS
    
    
    (36.9
    )%
    
    
    (8.7
    )%
 17




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For the three months endedMay 5,
    
    April 29,2007
    
    2006Net sales (in thousands)
    
    $
    57,595
    
    
    $
    74,680Comparable store salesTotal
    
    
    (20.8
    )%
    
    
    (10.8
    )%By divisionMens
    
    
    (28.2
    )%
    
    
    (12.2
    )%Womens
    
    
    (25.2
    )%
    
    
    (18.3
    )%Accessories
    
    
    (12.1
    )%
    
    
    (3.0
    )%By channelMall stores
    
    
    (25.1
    )%
    
    
    (14.8
    )%Outlet stores
    
    
    (15.4
    )%
    
    
    (4.2
    )%Number of stores:Beginning of period
    
    
    417
    
    
    
    422Opened
    
    
    
    
    
    
    2Closed
    
    
    (3
    )
    
    
    (3
    )End of period
    
    
    414
    
    
    
    421
  Net Sales.
  18




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Cost of Goods Sold, Buying and Occupancy Costs.
   Selling, General and Administrative Expenses.
  Depreciation and Amortization.
 Operating Loss.
 19




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Interest Expense, Net.
 Income Tax Benefit.
  Net Loss.
 Liquidity and capital resources
 Wilsons Leather
     20




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
    
    90% of the then applicable discount rate applied in appraising eligible retail
inventories to reflect their value as if sold in an orderly liquidation, plus the lesser of
10% of various components of the borrowing base or the then outstanding principal balance of
the Term B promissory note, except that such amount is reduced by the amount of certain
in-transit inventory to the extent such inventory reflects a disproportionate amount of our
total inventory;
    
    plus the lesser of $10.0 million or 50% of the difference between the book value of
eligible wholesale inventory and the book value of eligible wholesale inventory in-transit
in excess of $5.0 million;
    
    plus 90% of the discount rate applied in appraising retail inventories to reflect their
value as if sold in an orderly liquidation, times the future retail inventory subject to
trade letters of credit;
    
    plus 50% of the book value of our future wholesale inventories related to trade letters of credit;
    
    plus 90% of credit card receivables;
    
    plus the lesser of $10.0 million or 90% of eligible wholesale accounts receivable; and
    
    minus a reserve equal to the outstanding principal amount of the Term B promissory note
($20.0 million as of May 5, 2007) and a separate reserve equal to 10% of the lesser of
$115.0 million and the maximum amount calculated under the formula described above.
      21




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§
    
    there shall have been no material adverse effect, as described in the Purchase Agreement,
since the date of signing the Purchase Agreement;§
    
    the lead investor shall be satisfied, in its reasonable discretion, based on meetings
with four of our landlords who control most of our mall store leases, that such landlords
will make such modifications in the leases as are necessary to enable us to execute the
future business strategy the lead investor has discussed with us; and§
    
    GECC shall have entered into an amendment of our credit agreement, in a form reasonably
satisfactory to the lead investor, containing substantially the terms set forth in the term
sheet previously provided by GECC, and GECC shall have consented to the transactions set
forth in the Purchase Agreement.
      Cash flow analysis
 Operating Activities.
 22




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Investing Activities.
  Financing Activities.
  Off-balance sheet arrangements
  Contractual obligations and commercial commitments
  Seasonality and inflation
  23




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Recently issued accounting pronouncements
 Accounting for
Uncertainty in Income Taxes Accounting for Income Taxes. Definition of Settlement in FASB Interpretation No. 48
 Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities  Including an Amendment of FASB Statement No. 115
 Forward-looking statements
  24




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
  
 PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  Our comparable store sales declined during four of the past five years.
  §
    
    general economic conditions and, in particular, the retail sales environment;§
    
    consumer shopping preferences;§
    
    transition of our target customer base;§
    
    acceptance of the Wilsons Leatherbrand;§
    
    actions by competitors or mall anchor tenants;§
    
    weather conditions;
 25




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§
    
    fashion trends;§
    
    changes in our merchandise mix;§
    
    the timing of new store openings and the relative proportion of new stores to mature stores;§
    
    maintaining appropriate inventory levels;§
    
    calendar shifts of seasonal periods; and§
    
    timing of promotional events.
  We may need funding in addition to our cash flow from operations and existing credit facilities.
  The public sale of our common stock issued pursuant to our employee benefit plans or the sale into
the market of the shares issued in our equity financing in April 2004 or issuable upon exercise of
the warrants delivered in connection with our April 2004 equity financing, as well as shares
issuable upon conversion of the Preferred Stock and exercise of the Warrants that may be issued in
connection with the financing described in this report, could decrease the price of our common
stock or make it more difficult to obtain additional financing in the future.
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 6. EXHIBITS
  26




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SIGNATURE
   By:
    
    /s/ STACY A. KRUSEStacy A. KruseChief Financial Officer and Treasurer
  27




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INDEX TO EXHIBITS
 ExhibitNo
    
    Description
    
    Method of Filing3.1
    
    Amended and Restated Articles of Incorporation of Wilsons The
Leather Experts Inc. adopted June 16, 1998, as amended by the
Articles of Amendment dated February 17, 2000, and the Articles
of Amendment dated May 23, 2002. (1)
    
    Incorporated by Reference3.2
    
    Restated Bylaws of Wilsons The Leather Experts Inc. as amended
June 16, 1998, January 25, 2000, May 23, 2002, and February 5,
2004. (2)
    
    Incorporated by Reference4.1
    
    Specimen of common stock certificate. (3)
    
    Incorporated by Reference4.2
    
    Registration Rights Agreement dated as of May 25, 1996, by and
among CVS New York, Inc. (formerly known as Melville
Corporation), Wilsons The Leather Experts Inc., the Managers
listed on the signature pages thereto, Leather Investors Limited
Partnership I and the Partners listed on the signature pages
thereto. (4)
    
    Incorporated by Reference4.3
    
    Amendment to Registration Rights Agreement dated as of August 12,
1999, by and among Wilsons The Leather Experts Inc. and the
Shareholders listed on the attachments thereto. (5)
    
    Incorporated by Reference4.4
    
    Common Stock and Warrant Purchase Agreement, dated as of April
25, 2004, by and among Wilsons The Leather Experts Inc. and the
Purchasers identified on the signatory pages thereto (the
Purchase Agreement). (6)
    
    Incorporated by Reference4.5
    
    Registration Rights Agreement, dated as of April 25, 2004, by and
among Wilsons The Leather Experts Inc. and the Investors
identified therein. (7)
    
    Incorporated by Reference4.6
    
    Form of Warrant issued to the Purchasers named in the Purchase
Agreement on April 25, 2004. (8)
    
    Incorporated by Reference10.1
    
    Separation Agreement dated March 23, 2007 by and between Betty A.
Goff and River Hills Wilsons, Inc. (9)
    
    Incorporated by Reference10.2
    
    Separation Agreement dated April 23, 2007 by and between Megan L.
Featherston and Wilsons Leather Holdings Inc. (10)
    
    Incorporated by Reference31.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
    
    Electronic Transmission31.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
    
    Electronic Transmission32.1
    
    Certification of Chief Executive Officer pursuant to Section
1350, Chapter 63 of Title 18, United States Code, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
    
    Electronic Transmission32.2
    
    Certification of Chief Financial Officer pursuant to Section
1350, Chapter 63 of Title 18, United States Code, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
    
    Electronic Transmission
 
 1.
    
    Incorporated by reference to the same numbered exhibit to the Companys Report on Form 10-Q
for the quarter ended May 4, 2002 (File No. 000-21543).2.
    
    Incorporated by reference to the same numbered exhibit to the Companys Report on Form 10-K
for the year ended January 31, 2004 (File No. 000-21543). 28




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3.
    
    Incorporated by reference to the same numbered exhibit to Amendment No. 1 to the Companys
Registration Statement on Form S-l (333-13967) filed with the Commission on December 24, 1996.4.
    
    Incorporated by reference to Exhibit 4.8 to the Companys Registration Statement on Form S-l
(333-13967) filed with the Commission on October 11, 1996.5.
    
    Incorporated by reference to Exhibit 4.5 to the Companys Report on Form 10-K for the fiscal
year ended January 29, 2000, filed with the Commission (File No. 000-21543).6.
    
    Incorporated by reference to Exhibit 4.1 to the Companys Report on Form 8-K filed with the
Commission on April 27, 2004.7.
    
    Incorporated by reference to Exhibit 4.2 to the Companys Report on Form 8-K filed with the
Commission on April 27, 2004.8.
    
    Incorporated by reference to Exhibit 4.3 to the Companys Report on Form 8-K filed with the
Commission on April 27, 2004.9.
    
    Incorporated by reference to Exhibit 10.1 to the Companys Report on Form 8-K filed with the
Commission on March 29, 2007.10.
    
    Incorporated by reference to Exhibit 10.1 to the Companys Report on Form 8-K filed with the
Commission on April 25, 2007. 29