##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 FORM 10-Q
 (Mark one)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended November 3, 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 INFORMATION
    
    
    3Item 1. Consolidated Financial Statements (Unaudited)
    
    
    3Consolidated Balance Sheets as of November 3, 2007 and February 3, 2007
    
    
    3Consolidated Statements of Operations for the three months ended November 3, 2007 and October 28, 2006
    
    
    4Consolidated Statements of Operations for the year-to-date periods ended November 3, 2007 and October
28, 2006
    
    
    5Consolidated Statements of Cash Flows for the year-to-date periods ended November 3, 2007 and October
28, 2006
    
    
    6Notes to Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 4. Controls and Procedures
    
    
    30PART II  OTHER INFORMATION
    
    
    30Item 1. Legal Proceedings
    
    
    30Item 1A. Risk Factors
    
    
    30Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    32Item 4. Submission of Matters to a Vote of Security Holders
    
    
    32Item 6. Exhibits
    
    
    32Signature
    
    
    32Rule 13a-14(a)/15d-14(a) Certification of Chief Executive OfficerRule 13a-14(a)/15d-14(a) Certification of Chief Financial OfficerCertification of Chief Executive Officer Pursuant to Section 906Certification of Chief Financial Officer Pursuant to Section 906
  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)
 November 3,
    
    
    February 3,2007
    
    
    2007(1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    
    
    
    $
    19,909Accounts receivable, net
    
    
    3,758
    
    
    
    3,132Inventories
    
    
    88,525
    
    
    
    74,897Prepaid expenses
    
    
    7,214
    
    
    
    7,267Income taxes receivable
    
    
    220
    
    
    
    Total current assets
    
    
    99,717
    
    
    
    105,205Property and equipment, net
    
    
    35,562
    
    
    
    38,890Other assets, net
    
    
    959
    
    
    
    1,250TOTAL ASSETS
    
    $
    136,238
    
    
    $
    145,345LIABILITIES, PREFERRED STOCK AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    30,826
    
    
    $
    14,337Revolving credit facility
    
    
    19,145
    
    
    
    Checks written in excess of cash balance
    
    
    4,795
    
    
    
    Accrued expenses
    
    
    11,190
    
    
    
    14,534Income taxes payable
    
    
    
    
    
    
    921Deferred income taxes
    
    
    775
    
    
    
    220Total current liabilities
    
    
    66,731
    
    
    
    30,012Long-term debt
    
    
    
    
    
    
    20,000Income taxes payable
    
    
    1,479
    
    
    
    Other long-term liabilities
    
    
    15,969
    
    
    
    16,832Total liabilities
    
    
    84,179
    
    
    
    66,844Commitments and contingenciesPreferred stock, $.01 par value; 200,000 shares authorized; 45,000 and no shares
issued and outstanding on November 3, 2007 and February 3, 2007, respectively
    
    
    38,365
    
    
    
    Shareholders equity:Common stock, $.01 par value; 150,000,000 shares authorized; 39,314,901
and 39,204,299 shares issued and outstanding on November 3, 2007 and
February 3, 2007, respectively
    
    
    393
    
    
    
    392Additional paid-in capital
    
    
    140,795
    
    
    
    136,441Accumulated deficit
    
    
    (127,496
    )
    
    
    (58,334
    )Accumulated other comprehensive income
    
    
    2
    
    
    
    2Total shareholders equity
    
    
    13,694
    
    
    
    78,501TOTAL LIABILITIES, PREFERRED STOCK AND SHAREHOLDERS EQUITY
    
    $
    136,238
    
    
    $
    145,345
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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 endedNovember 3,
    
    
    October 28,2007
    
    
    2006NET SALES
    
    $
    57,833
    
    
    $
    64,457Cost of goods sold, buying and occupancy costs
    
    
    50,157
    
    
    
    49,036GROSS MARGIN
    
    
    7,676
    
    
    
    15,421Selling, general and administrative expenses
    
    
    23,309
    
    
    
    26,554Depreciation and amortization
    
    
    2,636
    
    
    
    2,999OPERATING LOSS
    
    
    (18,269
    )
    
    
    (14,132
    )Interest expense, net
    
    
    234
    
    
    
    579LOSS BEFORE INCOME TAXES
    
    
    (18,503
    )
    
    
    (14,711
    )Income tax provision (benefit)
    
    
    18
    
    
    
    (654
    )NET LOSS
    
    
    (18,521
    )
    
    
    (14,057
    )Less: Preferred stock paid-in-kind dividends
    
    
    (1,662
    )
    
    
    NET LOSS AVAILABLE TO COMMON SHAREHOLDERS
    
    $
    (20,183
    )
    
    $
    (14,057
    )BASIC AND DILUTED LOSS PER SHARE:Basic and diluted loss per share
    
    $
    (0.51
    )
    
    $
    (0.36
    )Weighted average shares outstanding  basic and diluted
    
    
    39,306
    
    
    
    39,173
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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 endedNovember 3,
    
    
    October 28,2007
    
    
    2006NET SALES
    
    $
    159,014
    
    
    $
    188,295Cost of goods sold, buying and occupancy costs
    
    
    147,311
    
    
    
    151,266GROSS MARGIN
    
    
    11,703
    
    
    
    37,029Selling, general and administrative expenses
    
    
    70,977
    
    
    
    76,226Depreciation and amortization
    
    
    8,346
    
    
    
    9,280OPERATING LOSS
    
    
    (67,620
    )
    
    
    (48,477
    )Interest expense, net
    
    
    1,003
    
    
    
    1,143LOSS BEFORE INCOME TAXES
    
    
    (68,623
    )
    
    
    (49,620
    )Income tax provision (benefit)
    
    
    539
    
    
    
    (4,561
    )NET LOSS
    
    
    (69,162
    )
    
    
    (45,059
    )Less:  Preferred stock paid-in-kind dividends
    
    
    (2,576
    )
    
    
    Beneficial conversion feature on preferred stock
    
    
    (14,877
    )
    
    
    Deemed dividend to warrant holders
    
    
    (967
    )
    
    
    NET LOSS AVAILABLE TO COMMON SHAREHOLDERS
    
    $
    (87,582
    )
    
    $
    (45,059
    )BASIC AND DILUTED LOSS PER SHARE:Basic and diluted loss per share
    
    $
    (2.23
    )
    
    $
    (1.15
    )Weighted average shares outstanding  basic and diluted
    
    
    39,262
    
    
    
    39,141
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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 endedNovember 3,
    
    
    October 28,2007
    
    
    2006OPERATING ACTIVITIES:Net loss
    
    $
    (69,162
    )
    
    $
    (45,059
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation
    
    
    8,346
    
    
    
    9,280Amortization of deferred financing costs
    
    
    425
    
    
    
    471Gain on disposal of assets
    
    
    (12
    )
    
    
    (16
    )Stock-based compensation expense
    
    
    1,253
    
    
    
    1,737Deferred income taxes
    
    
    555
    
    
    
    (33
    )Changes in operating assets and liabilities:
    
    
    
    
    
    
    Accounts receivable, net
    
    
    (626
    )
    
    
    (177
    )Inventories
    
    
    (13,628
    )
    
    
    359Prepaid expenses and other current assets
    
    
    (167
    )
    
    
    (586
    )Accounts payable and accrued expenses
    
    
    12,580
    
    
    
    14,355Income taxes payable and other liabilities
    
    
    (305
    )
    
    
    (4,928
    )Net cash used in operating activities
    
    
    (60,741
    )
    
    
    (24,597
    )INVESTING ACTIVITIES:Additions to property and equipment
    
    
    (4,462
    )
    
    
    (8,725
    )Proceeds from the disposition of property and equipment
    
    
    20
    
    
    
    80Net cash used in investing activities
    
    
    (4,442
    )
    
    
    (8,645
    )FINANCING ACTIVITIES:Proceeds from issuance of common stock
    
    
    153
    
    
    
    285Net proceeds from issuance of preferred stock
    
    
    36,049
    
    
    
    Net proceeds from issuance of common stock warrants
    
    
    5,266
    
    
    
    Debt issuance costs
    
    
    (134
    )
    
    
    Repayments of long-term debt
    
    
    (20,000
    )
    
    
    Borrowings under revolving credit facility
    
    
    19,145
    
    
    
    Checks written in excess of cash balance
    
    
    4,795
    
    
    
    Net cash provided by financing activities
    
    
    45,274
    
    
    
    285NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (19,909
    )
    
    
    (32,957
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    19,909
    
    
    
    45,552CASH AND CASH EQUIVALENTS, end of period
    
    $
    
    
    
    $
    12,595
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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
  7




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




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




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For the three months ended
    
    
    For the year-to-date period endedNovember 3,
    
    
    October 28,
    
    
    November 3,
    
    
    October 28,2007
    
    
    2006
    
    
    2007
    
    
    2006Expected term (in years)
    
    
    3.8
    
    
    
    4.0
    
    
    
    3.9
    
    
    
    4.1Expected volatility
    
    
    63.5%
    
    
    
    68.2%
    
    
    
    63.9%
    
    
    
    69.7%Risk-free interest rate
    
    
    4.5%
    
    
    
    4.8%
    
    
    
    4.6%
    
    
    
    4.8%Dividend yield
    
    
    0.0%
    
    
    
    0.0%
    
    
    
    0.0%
    
    
    
    0.0%Weighted average fair value 
of options granted
    
    $
    0.69
    
    
    $
    1.47
    
    
    $
    0.78
    
    
    $
    2.02
 10




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Income taxes
   Sales taxes
  Income (loss) per share
  11




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For the three months ended
    
    
    For the year-to-date period endedNovember 3,
    
    
    October 28,
    
    
    November 3,
    
    
    October 28,2007
    
    
    2006
    
    
    2007
    
    
    2006Weighted average common shares outstanding - basic
    
    
    39,306
    
    
    
    39,173
    
    
    
    39,262
    
    
    
    39,141Effect of dilutive securities:Stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average common shares outstanding -
diluted
    
    
    39,306
    
    
    
    39,173
    
    
    
    39,262
    
    
    
    39,141
  For the three months ended
    
    
    For the year-to-date period endedNovember 3,
    
    
    October 28,
    
    
    November 3,
    
    
    October 28,2007
    
    
    2006
    
    
    2007
    
    
    2006Stock options
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    13Warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    482Preferred stock (1)
    
    
    30,000
    
    
    
    
    
    
    
    15,604
    
    
    
    Total potentially dilutive shares
    
    
    30,000
    
    
    
    2
    
    
    
    15,604
    
    
    
    495
  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
  November 3,
    
    
    February 3,2007
    
    
    2007Term B promissory note
    
    $
    
    
    
    $
    20,000Senior credit facility
    
    
    19,145
    
    
    
    Checks written in excess of cash balances
    
    
    4,795
    
    
    
    Total debt
    
    
    23,940
    
    
    
    20,000Less: current portion
    
    
    (23,940
    )
    
    
    Total long-term debt
    
    $
    
    
    
    $
    20,000
 12




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Senior credit facility and Term B promissory note
       13




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4 Preferred Stock and Warrant Financing
     Classification and
Measurement of Redeemable Securities
 14




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Application of Issue No. 98-5 to Certain
Convertible Instruments Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios
    Accounting for Equity Instruments That Are Issued
to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services
 5 Employee stock benefit plans
 Stock options
  15




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As of and for the year-to-date period ended November 3, 2007Weighted average
    
    
    Weighted averageShares
    
    
    exercise price
    
    
    remaining lifeOutstanding, beginning of period
    
    
    2,722,247
    
    
    $
    5.50Granted
    
    
    151,000
    
    
    $
    1.50Exercised
    
    
    
    
    
    $
    Forfeited
    
    
    (351,328
    )
    
    $
    3.92Expired
    
    
    (238,377
    )
    
    $
    6.44Outstanding, end of period
    
    
    2,283,542
    
    
    $
    5.38
    
    
    
    3.52Exercisable, end of period
    
    
    1,507,882
    
    
    $
    5.85
    
    
    
    3.69Available for grant, end of period (1)
    
    
    1,715,215
   Non-vested shares and other stock-related awards
   Employee stock purchase plan
  16




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6 Warrants
  As of November 3, 2007Weighted average
    
    
    Weighted averageExercise price
    
    
    Shares
    
    
    exercise price
    
    
    remaining lifeWarrants issued April 25, 2004 (1)
    
    $
    2.39
    
    
    
    2,511,182
    
    
    $
    2.39
    
    
    
    1.75Warrants issued July 2, 2004 (1)
    
    $
    2.39
    
    
    
    2,511,182
    
    
    $
    2.39
    
    
    
    2.00Warrants issued June 15, 2007 (2)
    
    $
    2.00
    
    
    
    15,000,000
    
    
    $
    2.00
    
    
    
    4.90Outstanding, end of period
    
    
    $ 2.00-$2.39
    
    
    
    20,022,364
    
    
    $
    2.10
    
    
    
    4.17Exercisable, end of period
    
    
    $ 2.00-$2.39
    
    
    
    20,022,364
    
    
    $
    2.10
    
    
    
    4.17
 (1)
    
    In connection with an equity financing transaction completed in July of 2004, the Company
issued four million warrants exercisable for five years to certain institutional investors
at an exercise price of $3.00 per share of the Companys common stock. Pursuant to the
anti-dilution provisions of the terms of these warrants, as a result of the June 2007
Preferred Stock and Warrant financing, the exercise price of the warrants was reduced to
$2.39 and the number of underlying shares of common stock increased from 4,000,000 to
5,022,364.(2)
    
    These warrants were issued in conjunction with the June 2007 Preferred Stock and Warrant
financing and are exercisable for five years.
 7 Income taxes
      8 Commitments and contingencies
   17




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9 Revision of financial statements
  As previously(In thousands)
    
    reported
    
    
    Adjustments
    
    
    RevisedPreferred stock
    
    $
    51,839
    
    
    $
    (14,969
    )
    
    $
    36,870Shareholders equity:Additional paid in capital
    
    $
    126,885
    
    
    $
    14,969
    
    
    $
    141,854Total shareholders equity
    
    $
    18,305
    
    
    $
    14,969
    
    
    $
    33,274
 10 Supplemental balance sheet information
 November 3,
    
    
    February 3,(In thousands)
    
    2007
    
    
    2007Accounts receivable, net:Trade receivables
    
    $
    3,169
    
    
    $
    2,359Other receivables
    
    
    739
    
    
    
    929Total
    
    
    3,908
    
    
    
    3,288Less  Allowance for doubtful accounts
    
    
    (35
    )
    
    
    (71
    )Less  Deferred sales
    
    
    (115
    )
    
    
    (85
    )Total accounts receivable, net
    
    $
    3,758
    
    
    $
    3,132Inventories:Raw materials
    
    $
    1,148
    
    
    $
    2,940Finished goods
    
    
    87,377
    
    
    
    71,957Total inventories
    
    $
    88,525
    
    
    $
    74,897Property and equipment, net:Equipment and furniture
    
    $
    76,843
    
    
    $
    74,420Leasehold improvements
    
    
    43,577
    
    
    
    42,700Total
    
    
    120,420
    
    
    
    117,120Less-Accumulated depreciation and amortization
    
    
    (84,858
    )
    
    
    (78,230
    )Total property and equipment, net
    
    $
    35,562
    
    
    $
    38,890Other assets, net:Debt issuance costs
    
    $
    4,578
    
    
    $
    5,219Less-Accumulated amortization
    
    
    (3,676
    )
    
    
    (4,027
    )Debt issuance costs, net
    
    
    902
    
    
    
    1,192Other intangible assets, net
    
    
    57
    
    
    
    58Total other assets, net
    
    $
    959
    
    
    $
    1,250
 11 Supplemental cash flow information
  For the year-to-date period endedNovember 3,
    
    
    October 28,2007
    
    
    2006Investing Activities:Additions to property and equipment
    
    $
    956
    
    
    $
    627Financing Activities:Preferred stock paid-in-kind dividends
    
    $
    2,576
    
    
    $
    Beneficial conversion feature on preferred stock
    
    $
    14,877
    
    
    $
    Deemed dividend to warrant holders
    
    $
    967
    
    
    $
    
 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   Executive overview
  Wilsons Leather
 18




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19




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Critical accounting policies
  20




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Results of operations
  For the three months ended
    
    
    For the year-to-date period endedNovember 3,
    
    
    October 28,
    
    
    November 3,
    
    
    October 28,2007
    
    
    2006
    
    
    2007
    
    
    2006NET SALES
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of goods sold, buying and occupancy costs
    
    
    86.7
    
    
    
    76.1
    
    
    
    92.6
    
    
    
    80.3GROSS MARGIN
    
    
    13.3
    
    
    
    23.9
    
    
    
    7.4
    
    
    
    19.7Selling, general and administrative expenses
    
    
    40.3
    
    
    
    41.2
    
    
    
    44.6
    
    
    
    40.5Depreciation and amortization
    
    
    4.6
    
    
    
    4.6
    
    
    
    5.3
    
    
    
    4.9OPERATING LOSS
    
    
    (31.6
    )
    
    
    (21.9
    )
    
    
    (42.5
    )
    
    
    (25.7
    )Interest expense, net
    
    
    0.4
    
    
    
    0.9
    
    
    
    0.7
    
    
    
    0.6LOSS BEFORE INCOME TAXES
    
    
    (32.0
    )
    
    
    (22.8
    )
    
    
    (43.2
    )
    
    
    (26.3
    )Income tax provision (benefit)
    
    
    
    
    
    
    (1.0
    )
    
    
    0.3
    
    
    
    (2.4
    )NET LOSS
    
    
    (32.0
    )%
    
    
    (21.8
    )%
    
    
    (43.5
    )%
    
    
    (23.9
    )%
  For the three months ended
    
    
    For the year-to-date period endedNovember 3,
    
    
    October 28,
    
    
    November 3,
    
    
    October 28,2007
    
    
    2006
    
    
    2007
    
    
    2006Net sales (in thousands)
    
    $
    57,833
    
    
    $
    64,457
    
    
    $
    159,014
    
    
    $
    188,295Comparable store salesTotal
    
    
    (13.3
    )%
    
    
    (15.5
    )%
    
    
    (15.8
    )%
    
    
    (13.9
    )%By divisionMens
    
    
    (25.5
    )%
    
    
    (15.2
    )%
    
    
    (26.2
    )%
    
    
    (15.7
    )%Womens
    
    
    (18.9
    )%
    
    
    (10.2
    )%
    
    
    (21.1
    )%
    
    
    (17.9
    )%Accessories
    
    
    (0.7
    )%
    
    
    (19.1
    )%
    
    
    (6.0
    )%
    
    
    (10.2
    )%By channelMall stores
    
    
    (13.6
    )%
    
    
    (23.5
    )%
    
    
    (18.3
    )%
    
    
    (19.8
    )%Outlet stores
    
    
    (14.6
    )%
    
    
    (5.6
    )%
    
    
    (13.7
    )%
    
    
    (6.1
    )%Number of stores:Beginning of period
    
    
    411
    
    
    
    422
    
    
    
    417
    
    
    
    422Opened
    
    
    1
    
    
    
    2
    
    
    
    3
    
    
    
    6Closed
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    (4
    )End of period
    
    
    412
    
    
    
    424
    
    
    
    412
    
    
    
    424
  Net Sales.
    Cost of Goods Sold, Buying and Occupancy Costs.
   21




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Selling, General and Administrative Expenses.
    Depreciation and Amortization.
 22




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Operating Loss.
  Interest Expense, Net.
  Income Tax Provision (Benefit).
   Net Loss.
 23




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##### Table of Contents



Net Loss Available to Common Shareholders.
  For the three months ended
    
    
    For the year-to-date period endedNovember 3, 2007
    
    
    November 3, 2007Net loss available to
    
    
    Loss per basic
    
    
    Net loss available to
    
    
    Loss per basiccommon shareholders
    
    
    and diluted share
    
    
    common shareholders
    
    
    and diluted shareAs reported
    
    $
    (20,183
    )
    
    $
    (0.51
    )
    
    $
    (87,582
    )
    
    $
    (2.23
    )Adjustments (1) (2)
    
    
    1,662
    
    
    
    0.04
    
    
    
    18,420
    
    
    
    0.47Adjusted
    
    $
    (18,521
    )
    
    $
    (0.47
    )
    
    $
    (69,162
    )
    
    $
    (1.76
    )Weighted average shares outstanding
 basicand diluted
    
    
    39,306
    
    
    
    39,306
    
    
    
    39,262
    
    
    
    39,262
   Liquidity and capital resources
 Capital resources
 Wilsons Leather
   24




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##### Table of Contents




    
    100% of the book value of credit card receivables;
    
    plus the lesser of $10 million or 100% of the book value of eligible wholesale accounts
receivable;
    
    plus 102.5% of the then applicable discount rate applied in appraising eligible retail
inventories times the appraised eligible retail inventories, plus 102.5% of such discount
rate times our future retail inventories subject to trade letters of credit;
    
    plus the lesser of $10 million, or 60% of the book value of our wholesale inventory,
including in-transit inventory but minus the book value of in-transit inventory in excess of
$5 million;
    
    plus 60% of the book value of our future wholesale inventories related to trade letters of
credit;
    
    plus 85% of the then applicable discount rate applied in appraising value of eligible
equipment times the appraised eligible equipment; and
    
    minus a reserve equal to 10% of the lesser of $115.0 million and the maximum amount
calculated under the formula described above.
      25




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Cash flow analysis
 Operating Activities.
  26




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Investing Activities.
  Financing Activities.
  Liquidity
  27




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Off-balance sheet arrangements
  Contractual obligations and commercial commitments
  Seasonality and inflation
   Recently issued accounting pronouncements
 Accounting for
Uncertainty in Income Taxes Accounting for Income Taxes. Definition of Settlement in FASB Interpretation No.
48
 28




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##### Table of Contents



Fair Value Measurements
 The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of FASB Statement No. 115
 Forward-looking statements
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  29




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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 our branded designer outerwear and accessories;
    
    expansion of our accessories business;
    
    acceptance of the Wilsons Leatherbrand;
    
    actions by competitors or mall anchor tenants;
    
    weather conditions;
    
    fashion trends;
    
    changes in our merchandise mix;
    
    the timing of new store openings and the relative proportion of new stores to mature stores;
    
    maintaining appropriate inventory levels;
    
    calendar shifts of seasonal periods; and
    
    timing of promotional events.
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We may not be able to expand our accessories business or acquire a suitable accessories brand.
  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 issued in
connection with the June 2007 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.
 31




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##### Table of Contents



We may not be able to maintain our listing on the Nasdaq Global Market if we are unable to
satisfy the minimum bid price requirements and, if we fail to do so, the price and liquidity of
our common stock may decline.
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
   
 ITEM 6. EXHIBITS
  
 SIGNATURE
  WILSONS THE LEATHER EXPERTS INC.By:
    /s/ STACY A. KRUSEStacy A. KruseChief Financial Officer and Treasurer  32




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##### Table of Contents



INDEX TO EXHIBITS
 ExhibitNo.
    
    Description
    
    Method of Filing3.1
    
    
    Amended and Restated Articles of Incorporation of Wilsons The
Leather Experts Inc. adopted June 16, 1998, as amended by the
Articles of Amendment dated February 17, 2000, and the Articles of
Amendment dated May 23, 2002. (1)
    
    Incorporated by Reference3.2
    
    
    Restated Bylaws of Wilsons The Leather Experts Inc. as amended
June 16, 1998, January 25, 2000, May 23, 2002, and February 5,
2004. (2)
    
    Incorporated by Reference3.3
    
    
    Certificate of Designations for Series A Convertible Preferred
Stock dated June 15, 2007. (3)
    
    Incorporated by Reference4.1
    
    
    Specimen of common stock certificate. (4)
    
    Incorporated by Reference4.2
    
    
    Registration Rights Agreement dated as of May 25, 1996, by and
among CVS New York, Inc. (formerly known as Melville Corporation),
Wilsons The Leather Experts Inc., the Managers listed on the
signature pages thereto, Leather Investors Limited Partnership I
and the Partners listed on the signature pages thereto. (5)
    
    Incorporated by Reference4.3
    
    
    Amendment to Registration Rights Agreement dated as of August 12,
1999, by and among Wilsons The Leather Experts Inc. and the
Shareholders listed on the attachments thereto. (6)
    
    Incorporated by Reference4.4
    
    
    Common Stock and Warrant Purchase Agreement, dated as of April 25,
2004, by and among Wilsons The Leather Experts Inc. and the
Purchasers identified on the signatory pages thereto (the
Purchase Agreement). (7)
    
    Incorporated by Reference4.5
    
    
    Registration Rights Agreement, dated as of April 25, 2004, by and
among Wilsons The Leather Experts Inc. and the Investors
identified therein. (8)
    
    Incorporated by Reference4.6
    
    
    Form of Warrant issued to the Purchasers named in the Purchase
Agreement on April 25, 2004. (9)
    
    Incorporated by Reference4.7
    
    
    Registration Rights Agreement dated as of June 15, 2007 by and
among Wilsons The Leather Experts Inc., Marathon Fund Limited
Partnership V, Peninsula Investment Partners, L.P., Quaker Capital
Partners I, L.P., and Quaker Capital Partners II, L.P. (10)
    
    Incorporated by Reference4.8
    
    
    Form of Warrant issued to Marathon Fund Limited Partnership V,
Peninsula Investment Partners, L.P., Quaker Capital Partners I,
L.P., and Quaker Capital Partners II, L.P. on June 15, 2007. (11)
    
    Incorporated by Reference31.1
    
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
    
    Electronic Transmission31.2
    
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
    
    Electronic Transmission32.1
    
    
    Certification of Chief Executive Officer pursuant to Section 1350,
Chapter 63 of Title 18, United States Code, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
    
    Electronic Transmission32.2
    
    
    Certification of Chief Financial Officer pursuant to Section 1350,
Chapter 63 of Title 18, United States Code, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
    
    Electronic Transmission
 1.
    
    Incorporated by reference to the same numbered exhibit to the Companys Report on Form 10-Q
for the quarter ended May 4, 2002 (File No. 000-21543).2.
    
    Incorporated by reference to the same numbered exhibit to the Companys Report on Form 10-K
for the year ended January 31, 2004 (File No. 000-21543).3.
    
    Incorporated by reference to Exhibit 3.1 to the Companys Report on Form 8-K filed with the
Commission on June 21, 2007.4.
    
    Incorporated by reference to the same numbered exhibit to Amendment No. 1 to the Companys
Registration Statement on Form S-l (333-13967) filed with the Commission on December 24, 1996.5.
    
    Incorporated by reference to Exhibit 4.8 to the Companys Registration Statement on Form S-l
(333-13967) filed with the Commission on October 11, 1996.6.
    
    Incorporated by reference to Exhibit 4.5 to the Companys Report on Form 10-K for the fiscal
year ended January 29, 2000, filed with the Commission (File No. 000-21543).7.
    
    Incorporated by reference to Exhibit 4.1 to the Companys Report on Form 8-K filed with the
Commission on April 27, 2004.8.
    
    Incorporated by reference to Exhibit 4.2 to the Companys Report on Form 8-K filed with the
Commission on April 27, 2004.9.
    
    Incorporated by reference to Exhibit 4.3 to the Companys Report on Form 8-K filed with the
Commission on April 27, 2004.10.
    
    Incorporated by reference to Exhibit 4.1 to the Companys Report on Form 8-K filed with the
Commission on June 21, 2007.11.
    
    Incorporated by reference to Exhibit 4.2 to the Companys Report on Form 8-K filed with the
Commission on June 21, 2007.
 33