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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
[Fee Required]
For the fiscal year ended March 1, 1997 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
[Fee Required]
For the transition period from _________ to __________
Commission File Number 0-20184
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THE FINISH LINE, INC.
(Exact name of registrant as specified in its charter)
Delaware 35-1537210
- ------------------------ ------------------------
(State of Incorporation) (I.R.S. Employer ID No.)
3308 N. Mitthoeffer Road, Indianapolis, Indiana 46236
Registrant's telephone number, including area code: (317) 899-1022
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Securities registered pursuant to Section 12(b) of the act:
(Title of Each Class) (Name of each exchange on which registered)
None None
Securities registered pursuant to Section 12(g) of the act:
Class A Common Stock, $.01 par value
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Indicate by check mark whether 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.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-k is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-k or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of may 2, 1997 was approximately $186,623,000 which was based on
the last sale price reported for such date by NASDAQ.
The number of shares of the Registrant's Common Stock outstanding on May 2,
1997 was:
Class A Common Stock: 17,993,642
Class B Common Stock: 7,967,206
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement dated June 9, 1997 for the Annual
Meeting of Stockholders to be held on july 17, 1997 (hereinafter referred to as
the "1997 Proxy Statement") are incorporated into Part III.
Portions of the Registrant's Annual Report to Stockholders for the fiscal year
ended March 1, 1997 (hereinafter referred to as the "1997 Annual Report to
Stockholders") are incorporated into Parts II and IV.
The Exhibit Index is located on Page 19 hereof.
(Including Exhibits) Total Number of Pages: 51
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PART I
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ITEM 1 - BUSINESS
GENERAL
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Over the last 20 years, The Finish Line, Inc. together with its wholly owned
subsidiary Spike's Holding, Inc. (the "Company") has grown into one of the
largest mall based specialty retailers of brand name athletic, outdoor and
casual footwear, activewear and accessories in the United States. As of April 1,
1997, the Company operated 260 stores in 27 states. A Finish Line store
generally carries a large selection of men's, women's and children's athletic
and casual shoes, as well as a broad assortment of activewear and accessories.
Brand names offered by the Company include Nike, Fila, adidas, Reebok, Converse,
Champion, Asics, Airwalk, Logo Athletic, Timberland and New Balance.
The Company attempts to distinguish itself from other athletic footwear
specialty retailers through larger mall-based store formats. Finish Line stores
average approximately 4,300 square feet, and the Company's stores opened during
fiscal 1997 averaged approximately 6,200 square feet. The Company's strategy is
to create an exciting and entertaining retail environment by continually
updating store designs, and to operate a larger store size which permits greater
product depth and merchandising flexibility. Since activewear and accessories
generally carry higher gross margins, Finish Line devotes a greater percentage
of its sales area to these products than typical athletic footwear specialty
stores. Activewear and accessories accounted for approximately 32% of the
Company's net sales in fiscal 1997.
The Company's principal executive offices are located at 3308 N. Mitthoeffer
Road, Indianapolis, Indiana 46236, and its telephone number is (317) 899-1022.
OPERATING STRATEGIES
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Finish Line seeks to be a leading specialty retailer of athletic footwear
and activewear in the markets it serves. To achieve this, the Company has
developed the following elements to its business strategy:
EMPHASIS ON CUSTOMER SERVICE AND CONVENIENCE. The Company is committed to
making the shopping experience at Finish Line rewarding and enjoyable, and seeks
to achieve this objective by providing convenient mall-based locations with
highly functional store designs, offering competitive prices on brand name
products, maintaining optimal in-stock levels of merchandise and employing
knowledgeable and courteous sales associates.
INVENTORY MANAGEMENT. The Company stresses effective replenishment and
distribution to each store. The Company's advanced information and distribution
systems enable it to track inventory in each store by stockkeeping unit (SKU) on
a daily basis, giving finish line flexibility to merchandise its products
effectively. In addition, these systems allow the Company to respond promptly to
changing customer preferences and to maintain optimal inventory levels in each
store. The Company's inventory management system features automatic
replenishment driven by point-of-sale (POS) data capture and a highly automated
distribution center, which enables Finish Line to ship merchandise to each store
every third day.
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PRODUCT DIVERSITY; BROAD DEMOGRAPHIC APPEAL. Finish Line stocks its stores with
a combination of the newest high profile and brand name merchandise, unique
products manufactured exclusively for the Company, as well as promotional and
opportunistic purchases of other brand name merchandise. Product diversity, in
combination with the Company's store formats and commitment to customer service,
is intended to attract a broad demographic cross-section of customers.
EXPANSION STRATEGIES
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The Company's objective is to continue its store expansion program by
introducing Finish Line stores into new markets as well as increase its
visibility in previously established markets.
NEW STORE OPENINGS. Since the Company's initial public offering in June 1992,
Finish Line has expanded from 104 stores to 260 stores at April 1, 1997. The
Company opened 35 new stores in fiscal 1997 and intends to open 50 to 60 new
stores in fiscal 1998, which will represent increases of approximately 16% in
fiscal 1997 and 20% to 24% in fiscal 1998. Total square footage increased 25% in
fiscal 1997 as a result of the Company's strategy of opening larger traditional
stores, as well as selected larger format stores.
For fiscal 1998 the Company plans to accelerate its total square footage
growth to 40-45% from 25% in fiscal year 1997. Much of this accelerated square
footage growth will result from a greater emphasis on larger format stores. The
Company expects that its new stores will be in both new and existing geographic
markets.
LARGER STORES. The Company has been adding larger stores to its chain over the
past four years. This strategy allows for greater product depth and
merchandising flexibility, which the Company believes improves its ability to
compete against both mall-based and non-mall-based athletic retailers, and will
result in total square footage increasing at a faster rate than store count. As
of April 1, 1997, the traditional stores which Finish Line has firm commitments
to open in fiscal 1998 average approximately 5,700 square feet.
Since September 1995, the Company has opened four "large format" stores
ranging in size from 20,000 to 25,000 square feet. These stores are upscale
athletic specialty stores designed and merchandised into distinct departments to
satisfy the needs of the entire family. Over 1,300 different styles of shoes
are displayed in these stores with 35,000+ pairs in back stock. Based upon the
expansion of the large format concept, the Company expects to open approximately
11 stores over 10,000 square feet in fiscal 1998.
COMMITMENT TO CONTINUALLY STRENGTHEN INFRASTRUCTURE. Over the past two years,
Finish Line has made a number of strategic infrastructure investments, including
enhancements to its management, store operations, and distribution and
information systems. Significant management additions and organizational changes
include recruiting additional senior management professionals with significant
industry experience, as well as centralizing the supervision of the footwear and
activewear/accessories departments to improve communication and coordination
between the two areas. In addition, staffs in both departments have been
increased to allow the buyers and merchandisers to focus more time and attention
on specific product categories.
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The Company has also invested in management information systems and the
distribution center by implementing Electronic Data Interchange (EDI) and radio
frequency (RF) technologies in inventory management/distribution areas. Both
technologies are designed to improve the efficiency of inventory management as
well as response time and in-stock position. In November 1996, the Company
broke ground on a 130,000 square foot addition to its distribution center. The
project is expected to be completed by June 1997.
MERCHANDISE
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The following table sets forth the percentage of net sales attributable to
the categories of footwear, activewear and related accessories during the
periods indicated. These percentages fluctuate substantially during the
different consumer buying seasons. To take advantage of this seasonality, the
Company's stores have been designed to allow for a shift in emphasis in the
merchandise mix between footwear and activewear/accessory items.
<TABLE>
<CAPTION>
Year Ended
---------------------------------
March 1, Feb. 29, Feb. 28,
Category 1997 1996 1995
-------- ---- ---- ----
<S> <C> <C> <C>
Footwear 68% 67% 69%
Activewear/Accessories 32% 33% 31%
---- ---- ----
Total 100% 100% 100%
==== ==== ====
</TABLE>
All merchandising decisions, including merchandise mix, pricing, promotions
and markdowns, are made at the corporate headquarters. The store manager and
district manager, along with management at the Company's headquarters, review
the merchandise mix to adapt to permanent or temporary changes or trends in the
marketplace.
Footwear
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Finish Line's distinctive curved shoe wall is stocked with the latest in
athletic, casual and outdoor footwear that the industry has to offer, including:
Nike, Fila, adidas, Reebok, Asics, Timberland, Airwalk, Rockport, Clarks, Ecco,
LUGZ, Converse and many others. To make shopping easier for customers, footwear
is categorized into definable sections includeing: basketball, cross-training,
running, aerobics, tennis, cleated, golf, outdoor, casual and lifestyle. Most
categories are available in men's, women's and children's styles.
Activewear/Accessories
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Many of the same companies which supply Finish Line with quality footwear
also supply activewear, including products made by Nike, adidas, Fila and
Reebok. Additional suppliers include Champion and Logo Athletic, along with
outdoor activewear from Columbia, Woolrich, Timberland and Helly Hansen. Many
vendors offer footwear, activewear and accessories in "collections". Categories
of activewear consist of jackets, caps, tops, bottoms, windwear, running
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wear, warm-ups, fleece, fitness wear and sport-casual wear. Many of these
categories include licensed products bearing the logos of college and
professional teams. Among the accessories offered by the Company are socks,
athletic bags, backpacks, sunglasses, watches and shoe-care products.
MARKETING
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The Company attempts to reach its target audience by using a multifaceted
approach to marketing and advertising on national, regional and local levels.
The Company utilizes television, direct mail, consumer print, outdoor, and the
internet in its marketing efforts.
The Company also takes advantage of advertising and promotional assistance
from many of its suppliers. This assistance takes the form of cooperative
advertising programs, in-store sales incentives, point-of-purchase materials,
product training for employees and other programs. Total advertising expense for
fiscal 1997 and fiscal 1996 was 1.5% of net sales, after deducting co-op
reimbursements. These percentages fluctuate substantially during the different
consumer buying seasons. The Company also believes that it benefits from the
multimillion dollar advertising campaigns of its key suppliers, such as Nike,
Fila, adidas, and Reebok.
The Company also uses in-store contests, promotions and event sponsorships,
as well as a comprehensive public relations effort to further market the
Company.
PURCHASING AND DISTRIBUTION
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Finish Line's footwear and activewear purchasing is coordinated through a
centralized merchandising department under the direction of a Senior Vice
President-Merchandise and Marketing. The buying and merchandise departments are
comprised of approximately 30 people. The footwear and activewear/accessories
divisions consist of a Vice President-General Merchandise Manager, divisional
merchandise managers, multiple buyers and associate buyers. Both buying
divisions are supported by a planning and distribution division which consists
of a director, planners, merchandisers and administrative assistants.
The Company believes that its ability to buy in large quantities directly
from suppliers enables it to obtain favorable pricing and trade terms.
Currently, the Company purchases product from approximately 150 suppliers and
manufacturers of athletic and fashion products, the largest of which (Nike)
accounted for approximately 69% and 50% of total purchases in fiscal 1997 and
fiscal 1996 respectively. The Company purchased approximately 89% and 80% of
total merchandise in fiscal 1997 and fiscal 1996, respectively, from its five
largest suppliers. The Company and its vendors have the capability to use EDI
technology to streamline purchasing and distribution operations.
Finish Line's corporate headquarters and distribution center is located on
33 acres in Indianapolis, Indiana. The facility, was designed to Finish Line's
specifications and is owned by the Company. It includes automated conveyor and
storage rack systems designed to reduce labor costs, increase efficiency in
processing merchandise and enhance space productivity. Twenty-four thousand
square feet of office space and 128,000 square feet of
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warehouse space are included in the existing facility. During fiscal 1997, the
Company commenced building a 130,000 square foot addition to the existing
distribution center which is expected to be completed by June 1997. The Company
believes it has the ability to significantly expand the distribution center on
its existing 33 acres.
In fiscal 1996, Finish Line implemented new warehouse management computer
software for distribution center processing that features RF technology. This
system has helped improve productivity and accuracy as well as reduce the time
it takes to send merchandise to stores. The Company believes this innovative
technology will continue to improve its operations as well as allow for real-
time tracking of inventory within the distribution center.
Nearly all of the Company's merchandise is shipped directly from suppliers
to the distribution center, where the Company processes and ships it by contract
and common carriers to its stores. Each day shipments are made to one-third of
the Company's stores. In any three-week period, each store will receive five
shipments. A shipment is normally received one to three days from the date that
the order is filled depending on the store's distance from the distribution
center. Historically, the Company maintains approximately two-thirds of a
month's supply of merchandise at the distribution center.
The Company believes that the distribution center, including planned future
expansion, will enable it to continue to service its stores, including
additional stores, for the foreseeable future.
MANAGEMENT INFORMATION SYSTEM
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The Company has a computerized management information system which includes
a network of computers at corporate headquarters used by management to support
decision making along with PC-based POS computers at the stores. Store computers
are connected via modem to computers at corporate headquarters. A perpetual
inventory system permits corporate management to review daily each store's
inventory by department, class and SKU. This system includes an automated
replenishment system that allows the Company to replace faster-selling items
more quickly. Other functions in the system include accounting, distribution,
inventory tracking and control.
STORE OPERATIONS
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The Company has a Senior Vice President - Store Operations and regional and
district managers who visit the stores regularly to review the implementation of
Company plans and policies, monitor operations, and review inventories and the
presentation of merchandise. Accounting and general financial functions for the
stores are conducted at corporate headquarters. Each store has a store manager
responsible for supervision and overall operations, one or more assistant
mangers and additional full- and part-time sales associates. Management believes
that the Finish Line store format and attentive customer service also help to
reduce inventory shrinkage, which was approximately 1% of net sales in fiscal
1997.
Regional, district and store managers receive a fixed salary and are
eligible for bonuses, based primarily on sales, payroll and shrinkage
performance goals of the stores for which they are responsible. All assistant
store managers and sales associates are paid on an hourly basis.
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REAL ESTATE
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As of April 1, 1997, Finish Line operated 260 stores in 27 states. With the
exception of four strip-center stores, all Finish Line stores are located in
enclosed shopping malls. The typical store format has a sales floor, which
includes a try-on area and a display area where each style of footwear carried
in the store is displayed by category (e.g., basketball, tennis, running), and
an adjacent stock room where the footwear inventory is maintained. Finish Line
stores currently range in size from 1,200 to 10,750 square feet plus the four
recently opened "large format" stores which are approximately 20,200 to 24,750
square feet. Sales floors in all stores represents approximately 65% to 75% of
the total space. In addition to its typical store format, the Company operates
approximately 29 stores using a "rack store" format, where footwear inventory is
kept directly on the sales floor.
To keep its stores fresh and exciting, the Company has developed a strategy
of consolidating older merchandise in one or more stores in each district for
additional or final markdown. These stores are generally located in strip
shopping centers or mixed-use outlet centers because these locations typically
have lower occupancy costs and investments in leasehold improvements.
Finish Line believes that its ability to obtain attractive, high traffic
store locations, such as enclosed malls, to be a critical element of its
business and a key factor in its future growth and profitability. In
determining new store locations, management evaluates market areas, in-mall
locations, "anchor" stores, consumer traffic, mall sales per square foot,
competition and occupancy, construction and other costs associated with opening
a store. The Company believes that the number of desirable store sites likely to
be available in the future will permit it to implement its growth strategy in
total square footage.
Finish Line leases all of its stores. Initial lease terms of the stores
generally range from 5 to 10 years in duration without renewal options, although
some of the stores are subject to leases for 5 years with one or more renewal
options. The leases generally provide for a fixed minimum rental plus a
percentage of sales in excess of a specified amount.
Based upon expenditures for fiscal 1997, the Company estimates that the cash
requirements for opening a traditional new store (under 10,000 square feet) will
approximate $400,000. This estimate includes $200,000 for fixtures, equipment,
leasehold improvements and pre-opening expenses plus $325,000 ($200,000 net of
payables) in inventory investment. The estimate of opening a larger format
store (over 10,000 square feet) may vary significantly depending on exact square
feet, landlord construction allowance and inventory investment needed to support
expected sales levels. These estimates range from $900,00 to $1,900,000.
The Company's corporate headquarters and distribution center are located on
33 acres in Indianapolis, Indiana. This facility includes 24,000 square feet of
office space and 128,000 square feet of warehouse space. Currently, the Company
is building a 130,000 square foot addition to the existing distribution center
which is expected to be completed by June 1997 at an estimated cost of $3.3
million. If the need for significant expansion arises, the Company believes it
has the ability to do so on its existing 33 acres.
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COMPETITION
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The Company's business is highly competitive. Many of the products the
Company sells are sold in department stores, national and regional full-line
sporting goods stores, athletic footwear specialty stores, athletic footwear
superstores, discount stores, traditional shoe stores and mass merchandisers.
Some of the Company's primary competitors are large national and/or regional
chains that have substantially greater financial and other resources than Finish
Line. Among the Company's competition are stores that are owned by major
suppliers to the Company. To a lesser extent, the Company competes with mail
order and local sporting goods and athletic specialty stores. In many cases, the
Company's stores are located in enclosed malls or shopping centers in which one
or more competitors also operate. Typically, the leases which the Company enters
into do not restrict the opening of stores by competitors.
The Company attempts to differentiate itself from its competition by
operating larger, more attractive, well-stocked stores in high retail traffic
areas, with competitive prices and knowledgeable and courteous customer service.
The Company attempts to keeps its prices competitive with athletic specialty and
sporting goods stores in each trade area, including competitors that are not
necessarily located inside the mall. The Company believes it accomplishes this
by effectively mixing high profile and brand name merchandise with promotional
and opportunistic purchases of other brand name merchandise and by controlling
expenses, especially administrative and overhead expenses, with small, efficient
departments throughout the organization.
SEASONAL BUSINESS
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The Company's business follows a seasonal pattern, peaking over a total of
about 12 weeks during the late summer (August through early September) and
holiday (Thanksgiving through Christmas) periods. During the fiscal year ended
March 1, 1997, these periods accounted for approximately 33% of the Company's
annual sales.
EMPLOYEES
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As of April 1, 1997, the Company employed approximately 5,890 persons, 1,210 of
whom were full-time and 4,680 of whom were part-time. Of this total, 255 were
employed at the Company's Indianapolis, Indiana corporate headquarters and
distribution center and 24 were employed as national, regional, and district
managers. Additional part-time employees are typically hired during the back-to-
school and holiday seasons. None of the Company's employees are represented by
a union and employee relations are generally considered good.
TRADEMARKS
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The Company has registered in the United States Patent and Trademark Office
several trademarks relating to its business.
The Company believes its trademark and service mark registrations are valid,
and it intends to be vigilant with regard to infringing or diluting uses by
other parties, and to enforce vigorously its rights in its trademarks and
service marks.
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ITEM 2 - PROPERTIES
In November 1991, the Company moved into its existing corporate headquarters
and distribution center located on 16 acres in Indianapolis, Indiana. The
facility, which is owned by the Company, was designed and constructed to the
Company's specifications and includes automated conveyor and storage rack
systems designed to reduce labor costs, increase efficiency in processing
merchandise and enhance space productivity. In 1992, the Company purchased an
additional 17 adjacent acres, thus bringing the total size of the headquarters
property to 33 acres. This facility includes 24,000 square feet of office space
and 128,000 square feet of warehouse space. The Company has started
construction of a 130,000 square feet addition to the existing warehouse which
is expected to be completed by June 1997. In addition, the 33 acres will
permit the headquarters and distribution center to be expanded to an aggregate
of approximately 800,000 square feet through the expansion of the existing
building and construction of additional buildings.
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STORE LOCATIONS
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At April 1, 1997, the Company operated 260 stores in 27 states. The
following table sets forth information concerning the Company's stores.
<TABLE>
<CAPTION>
ENCLOSED STRIP
STATE MALLS CENTERS TOTAL
- ----- ----- ------- -----
<S> <C> <C> <C>
Alabama 1 - 1
Arkansas 2 - 2
Colorado 1 - 1
Florida 14 - 14
Georgia 13 - 13
Illinois 17 - 17
Indiana 22 1 23
Iowa 5 - 5
Kansas 5 - 5
Kentucky 6 - 6
Louisiana 5 - 5
Maryland 7 - 7
Michigan 11 - 11
Mississippi 2 - 2
Missouri 5 - 5
Nebraska 4 - 4
New York 10 - 10
North Carolina 11 2 13
Ohio 37 1 38
Oklahoma 6 - 6
Pennsylvania 17 - 17
South Carolina 2 - 2
Tennessee 9 - 9
Texas 24 - 24
Virginia 9 - 9
West Virginia 5 - 5
Wisconsin 6 - 6
----- ------- -----
TOTALS 256 4 260
</TABLE>
The Company leases all of its stores. Initial lease terms for the Company's
stores generally range from five to ten years in duration without renewal
options, although some of the stores are subject to leases for five years with
one of more renewal options. The leases generally provide for a fixed minimum
rental plus a percentage of sales in excess of a specified amount.
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ITEM 3 - LEGAL PROCEEDINGS
The Company is from time to time, involved in certain legal proceedings in
the ordinary course of conducting its business. Management believes there are
no pending legal proceedings in which the Company is currently involved which
will have a material adverse effect on the Company's financial position.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
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ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The information required by this item is incorporated herein by reference to
the inside front cover page and the inside back cover of the 1997 Annual Report
to Stockholders filed as Exhibit 13 to this Annual Report on Form 10-K.
ITEM 6 - SELECTED FINANCIAL DATA
The information required by this item is incorporated herein by reference to
page 14 of the 1997 Annual Report to Stockholders filed as Exhibit 13 to this
Annual Report on Form 10-K.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information required by this item is incorporated herein by reference to
pages 15 through 17 of the 1997 Annual Report to Stockholders filed as Exhibit
13 to this Annual Report on Form 10-K.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated herein by reference to
page 16 and pages 19 through 24 of the 1997 Annual Report to Stockholders filed
as Exhibit 13 to this Annual Report on Form 10-K.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There were no disagreements between the Registrant and its independent
auditors on matters of accounting principles or practices.
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PART III
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ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated herein by reference to
the Sections entitled "Election of Directors--Nominees", and "Management--
Executive Officers and Directors" in the 1997 Proxy Statement.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to
the Section entitled "Executive Compensation" in the 1997 Proxy Statement.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference to
the Section entitled "Securities Ownership of Certain Beneficial Owners and
Management" in the 1997 Proxy Statement.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to
the Sections entitled "Certain Transactions" and "Compensation Committee
Interlocks and Insider Participation" in the 1997 Proxy Statement.
PART IV
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ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) 1. The following financial statements of The Finish Line, Inc. and
the report of independent auditors included in the 1997 Annual
Report to Stockholders are incorporated herein by reference:
Report of Independent Auditors
Balance Sheets as of March 1, 1997 and February 29, 1996.
Statements of Income for the years ended March 1, 1997,
February 29, 1996 and February 28, 1995.
Statements of Changes in Stockholders' Equity for the years
ended March 1, 1997, February 29, 1996 and February 28, 1995.
Statements of Cash Flows for the years ended March 1, 1997,
February 29, 1996 and February 28, 1995.
Notes to Financial Statements -- March 1, 1997.
2. The Financial Statement Schedule of The Finish Line, Inc. is
listed in Item 14(d).
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(b) Reports on Form 8-K
The Company filed a report on Form 8-K on December 4, 1996 with respect
to a press release issued by the Company on December 4, 1996
The Company filed a report on Form 8-K on December 18, 1996 with
respect to a press release issued by the Company on December 18, 1996
The Company filed a report on Form 8-K on March 7, 1997 with respect to
a resolution of the Board of Directors of The Finish Line, Inc. dated
March 4, 1997 in which the Board approved and ratified a change in the
Company's fiscal year end.
(c) Exhibits
Exhibit
Number Description
- ------ -----------
3.1.1 Restated Certificate of Incorporation of The Finish Line, Inc.*
3.1.2 Certificate of Amendment to the Restated Certificate of Incorporation
of The Finish Line, Inc.*
3.2 Bylaws of The Finish Line, Inc. as amended and restated.*
4.1 1992 Employee Stock Incentive Plan of The Finish Line, Inc., as
amended and restated.******
10.6.2 Form of Incentive Stock Option Agreement pursuant to the 1992 Employee
Stock Incentive Plan.*
10.6.3 Form of Non-Qualified Stock Option Agreement pursuant to the 1992
Employee Stock Incentive Plan.*
10.7 Form of Indemnity Agreement between The Finish Line Inc. and each of
its Directors or Executive Officers.*
10.18 Amended and Restated Tax Indemnification Agreement**
10.20 The Finish Line, Inc. Non-Employee Director Stock Option Plan.***
10.21.1 The Finish Line, Inc. Profit Sharing Plan as Amended and Restated.****
10.21.2 Amendment to The Finish Line, Inc. Profit Sharing Plan dated January
1, 1993.****
10.21.3 Second Amendment to The Finish Line, Inc. Profit Sharing Plan dated
January 1, 1994.****
10.23.1 Loan Agreement among NBD Bank, NA and The Finish Line, Inc. dated July
20, 1995.*****
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10.23.2 Revolving Line of Credit Promissory Note in the amount of $25,000,000
dated July 20, 1995.*****
10.24.1 First Amendment to Loan Agreement among NBD Bank, NA. And The Finish
Line, Inc. dated September 1, 1996.*******
10.24.2 Amended and Restated Promissory Note (unsecured) in the amount of
$30,000,000 dated September 1, 1996.*******
11 Statement RE: Computation of Net Income Per Share.
13 Annual Report to Stockholders for the year ended March 1, 1997
21 Subsidiaries of The Finish Line, Inc.
23 Consent of Ernst & Young LLP (independent auditors).
27 Financial Data Schedule
* Previously filed as a like numbered exhibit to the Registrant's
Registration Statement on Form S-1 and amendments thereto (File No.
33-47247) and incorporated herein by reference.
** Previously filed as a like numbered exhibit to the Registrant's
Quarterly Report on Form 10-Q (File No. 0-20184) for the quarter ended
May 31, 1994 and incorporated herein by reference.
*** Previously filed as an exhibit to the Registrant's Registration
Statement on Form S-8 (File No. 33-84590) and incorporated herein by
reference.
**** Previously filed as a like numbered exhibit to the Registrant's Annual
Report on Form 10-K (File No. 0-20184) for the year ended February 28,
1995 and incorporated herein by reference.
***** Previously filed as a like numbered exhibit to the Registrant's
Quarterly Report on Form 10-Q (File No. 0-20184) for the quarter ended
August 31, 1995 and incorporated herein by reference.
****** Previously filed as an exhibit to the Registrant's Registration
Statement on Form S-8 (File No. 33-95720) and incorporated herein by
reference.
******* Previously filed as a like numbered exhibit to the Registrant's
Quarterly Report on Form 10-Q (File No. 0-20184) for the quarter ended
August 31, 1996 and incorporated herein by reference.
14
<PAGE>
(d) Financial Statement Schedule Page
----
Schedule II -- Valuation and Qualifying Accounts 18
All supporting schedules other than the above have been omitted because
they are not required or the information to be set forth therein is included in
the financial statements or in the notes thereto.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
THE FINISH LINE, INC.
Date: May 12, 1997 By:/s/ Steven J. Schneider,
-----------------------
Steven J. Schneider, Sr. Vice President Finance,
Chief Financial Officer and Secretary (Principal
Financial and Accounting Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature to this
Annual Report on Form 10-K appears below hereby constitutes and appoints Alan H.
Cohen, and Steven J. Schneider as such person's true and lawful attorney-in-fact
and agent with full power of substitution for such person and in such person's
name, place and stead, in any and all capacities, to sign and to file with the
Securities and Exchange Commission, any and all amendments to this Annual Report
on Form 10-K, with exhibits thereto and other documents in connection therewith,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in and
about the premises, as fully to all intents and purposes as such person might or
could do in person, hereby ratifying and confirming all that said attorney-in-
fact and agent, or any substitute therefore, may lawfully do or cause to be done
by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: May 12, 1997 /s/ Alan H. Cohen
-----------------
Alan H. Cohen, Chairman of the Board, President and Chief
Executive Officer (Principal Executive Officer)
Date: May 12, 1997 /s/ David I. Klapper
--------------------
David I. Klapper, Executive Vice President, and Director
Date: May 12, 1997 /s/ David M. Fagin
------------------
David M. Fagin, Executive Vice President and Director
Date: May 12, 1997 /s/ Larry J. Sablosky
---------------------
Larry J. Sablosky, Executive Vice President and Director
Date: May 12, 1997 /s/ Jonathan K. Layne
---------------------
Jonathan K. Layne, Director
Date: May 12, 1997 /s/ Jeffrey H. Smulyan
----------------------
Jeffrey H. Smulyan, Director
16
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULE PAGE
- -------------------------------------- ----
II - Valuation and Qualifying Accounts 18
17
<PAGE>
THE FINISH LINE, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
<TABLE>
<CAPTION>
COL A COL B COL C COL D COL E
- ----- ----- ----- ----- -----
Additions
--------------
CHARGED TO
BALANCE CHARGED TO OTHER DEDUC- BALANCE
AT BEG. COSTS AND ACCOUNTS- TIONS- AT END OF
DESCRIPTION OF PERIOD EXPENSE DESCRIBE DESCRIBE PERIOD
---------- --------- -------- --------- ------
<S> <C> <C> <C> <C> <C>
Year ended
February 28, 1995:
Deducted from asset
account:
Reserve for inven-
tory obsolescence....... $628 $196 -- -- $ 824
---------- --------- -------- --------- -------
Total.................. $628 $196 $0 $0 $ 824
========== ========= ======== ========= =======
Year ended
February 29, 1996:
Deducted from asset
account:
Reserve for inventory
obsolescence............ $824 $961 -- -- $1,785
---------- --------- -------- --------- -------
Total.................. $824 $961 $0 $0 $1,785
========== ========= ======== ========= =======
Year ended
March 1, 1997:
Deducted from asset
account:
Reserve for inven-
tory obsolescence.... $1,785 $1,015 -- -- $2,800
---------- --------- -------- --------- -------
Total................. $1,785 $1,015 $0 $0 $2,800
========== ========= ======== ========= =======
</TABLE>
18
<PAGE>
EXHIBIT INDEX
-------------
Sequentially
Exhibit Numbered
Number Description Page
- ------ ----------- ----
11 Statement RE: Computation of Net Income Per Share. 20
13 Annual Report to Stockholders for the year ended March 1, 1997 21
21 Subsidiaries of The Finish Line, Inc. 49
23 Consent of Ernst & Young LLP (independent auditors). 50
27 Financial Data Schedule 51
19
<PAGE>
EXHIBIT 11
COMPUTATION OF NET INCOME PER SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended
--------------------------------------------
March 1, February 29, February 28,
1997 1996 1995
-------- ------------ ------------
Primary
- -------
<S> <C> <C> <C>
Average shares outstanding 23,100 20,630 20,630
Net effect of dilutive stock options - based on the
treasury stock method using average market price 611 68 --
------- ------- -------
Total 23,711 20,698 20,630
======= ======== =======
Net income $18,813 $ 9,658 $ 8,414
======= ======= =======
Per share amount $ .79 $ .47 $ .41
======= ======= =======
Fully Diluted
- -------------
Average shares outstanding 23,100 20,630 20,630
Net effect of dilutive stock options - based on the
treasury stock method using the higher of the average
market price for the period or the market price at the
end of the period 661 82 --
------- ------- -------
Total 23,761 20,712 20,630
======= ======= =======
Net Income $18,813 $ 9,658 $ 8,414
======= ======= =======
Per Share Amount $ .79 $ .47 $ .41
======= ======= =======
</TABLE>
NOTE: Average shares outstanding used for net income per share included in the
Company's financial statements reflect the effect of the stock options granted
since their effect is approximately 3% dilutive. Only fully diluted earnings
per share have been disclosed in the Company's financial statements as primary
earnings per shares are substantially the same.
<PAGE>
EXHIBIT 13
FINISH LINE
1997 ANNUAL REPORT
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
(In thousands, except per share and store operating data)
- ----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED
- ----------------------------------------------------------------------------------------------------------------------------------
MARCH 1, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales $332,002 $240,155 $191,623 $157,011 $129,547
Gross profit 102,815 71,243 58,897 49,520 43,823
Selling, general and administrative
expenses(1) 72,282 54,254 44,548 36,678 28,667
Operating income 30,533 16,989 14,349 12,842 15,156
Income before income taxes 31,357 16,097 14,032 12,658 14,689
Income taxes 12,544 6,439 5,618 5,063 2,812(2)
Net income $ 18,813 $ 9,658 $ 8,414 $ 7,595 $ 11,877
- ----------------------------------------------------------------------------------------------------------------------------------
PRO FORMA INCOME STATEMENT DATA(3):
Pro forma income before income taxes $ 14,899
Pro forma income taxes 5,960
- ----------------------------------------------------------------------------------------------------------------------------------
Pro forma net income $ 8,939
==================================================================================================================================
SHARE DATA:
Fully diluted net income per share
(pro forma for fiscal 1993)(3) $ .79 $ .47 $ .41 $ .37 $ .47
==================================================================================================================================
Weighted average shares(4) 23,761 20,712 20,630 20,634 18,974
==================================================================================================================================
- ----------------------------------------------------------------------------------------------------------------------------------
SELECTED STORE OPERATING DATA:
Number of stores:
Opened during period 35 35 30 35 27
Closed during period 4 5 4 1 1
Open at end of period 251 220 190 164 130
Total square feet(5) 1,088,419 870,340 691,831 565,588 435,784
Average square feet per store(5) 4,336 3,956 3,641 3,449 3,352
Net sales per square foot for stores open
entire period $ 352 $ 308 $ 300 $ 316 $ 324
Increase (decrease) in comparable store
net sales(6)(7) 16.0% 3.4% 1.7% (2.3%) 8.3%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
MARKET PRICE OF COMMON STOCK:
QUARTER ENDED FISCAL 1997 FISCAL 1996
- ----------------------------------------------------------------------------------------------------------------------------------
HIGH LOW HIGH LOW
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
May $14.19 4.38 $4.63 $ 2.88
August 16.00 9.88 6.38 3.94
November 24.63 15.63 4.82 4.00
February 28.00 18.25 4.63 3.25
</TABLE>
The Class A Common Stock has traded on the NASDAQ National Market System since
the Company became a public entity in June 1992. Since its initial public
offering in June 1992, the Company has not declared any cash dividends and does
not anticipate paying any cash dividends in the foreseeable future. See
Management's Discussion and Analysis and Note 3 of Notes to Financial Statements
for restrictions on the Company's ability to pay dividends.
The Company's fiscal year ends on the Saturday nearest the end of February
starting with fiscal 1997. For fiscal 1996 and prior, the Company's fiscal year
ended at the end of February. As used in this Report, "fiscal 1993," "fiscal
1994", "fiscal 1995", "fiscal 1996" and "fiscal 1997" refer to the Company's
fiscal years ended February 28, 1993, February 28, 1994, February 28, 1995,
February 29, 1996 and March 1, 1997, respectively. "Fiscal 1998" and "fiscal
1999" refer to the Company's fiscal years ending February 28, 1998 and February
27, 1999, respectively.
For footnote explanations see page 14.
Except for the historical information contained herein, the matters discussed in
this Annual Report are forward looking statements that involve risks and
uncertainties that could cause actual results to differ materially from those
expressed in any of the forward looking statements. Such risks and uncertainties
include, but are not limited to, product demand and market acceptance risks, the
effect of economic conditions, the effect of competitive products and pricing,
the availability of products, management of growth, and the other risks detailed
in the Company's Securities and Exchange Commission filings.
<PAGE>
TO OUR STOCKHOLDERS
Fiscal 1997 was an exciting and prosperous year for Finish Line and our
stockholders. In addition to record store sales and profits, our stock price
rose from $4.38 at the beginning of the fiscal year to close at $21.50 at fiscal
year end, a 391% increase. The Company also issued a 2 for 1 stock dividend and
completed two stock offerings raising approximately $84 million in additional
capital to accommodate accelerated growth plans and strengthen the Company's
balance sheet.
FISCAL 1997 RESULTS AND ACHIEVEMENTS
Finish Line had its twenty-first consecutive year of record sales. Net sales for
the year were $332,002,000, an increase of 38.2% over last year. We opened 35
new mall stores and closed 4 to end the year at 251 stores in 27 states,
including our first stores in Alabama and Colorado. We added a net 218,000
square feet of new retail space, increasing our total square footage to
1,088,000, a 25.1% increase over last fiscal year. We continued our strategy of
opening larger stores within malls during fiscal 1997, as we still believe the
most desirable athletic specialty retail locations are in malls anchored by
major department stores. We feel these larger stores give us a competitive edge
against the mall competition and allow us to create a more compelling and
exciting shopping environment with broader and deeper product representations in
most categories. These larger stores also improve our ability to compete against
large box athletic retailers outside the malls. This year, our average store
size has increased 9.6% to 4,336 square feet compared to 3,956 square feet at
the end of last fiscal year. The new stores opened (excluding our two "large
format" stores in Buffalo and Denver) averaged approximately 5,150 square feet.
Comparable store sales increased 16.0% against a 3.4% increase the previous
year. Footwear comparable sales increased 16.8% and activewear/accessories
increased 14.0%. Comparable store footwear sales remained strong and consistent
throughout the fiscal year ranging from 14% to 20% increases quarterly.
Activewear/accessories comparable store sales also remained strong throughout
the year, but were more volatile ranging from 8% to 21% increases quarterly,
with the highest percentage increase occurring during the second and third
quarters of the fiscal year. Record net earnings for the year were $18.8 million
up 94.8% compared to $9.7 million for fiscal 1996, resulting in net income equal
to 5.7% of sales compared to 4.0% last year. Earning per share for fiscal 1997
increased 68.1% to $.79 up from $.47 the previous year. Our gross profits as a
percentage of sales increased 1.3% to 31.0% (from 29.7%) with product margin
increasing .7% and occupancy cost improving .6%. Selling, general and
administrative expenses, as a percentage of sales, continued to improve,
decreasing .8% to 21.8% versus 22.6% in fiscal 1996. This .8% decrease was on
top of the .6% decrease realized the prior year. Merchandise inventories were
$82.0 million at fiscal year end versus $76.1 million at February 29, 1996. This
is a 7.8% increase during a year in which sales increased by 38.2% and retail
square footage increased by 25.1%. On a per square foot basis, inventories at
March 1, 1997 decreased 13.8% versus February 29, 1996 and reflects the
Company's strategy of turning merchandise inventories faster while improving
product margins.
These results, combined with our two stock offerings this fiscal year, have
further strengthened our balance sheet and positioned the Company to accelerate
its growth plans for next year. Our current ratio has improved at 3.6 to 1.0
versus 1.7 to 1.0 at the end of fiscal 1996 and we ended the year with no debt.
Stockholders' equity increased $106,727,000 to $169,875,000 as of March 1, 1997.
For a detailed and complete explanation of our fiscal year end financial
results, please refer to the MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS portion of this report.
Nike continued as our primary vendor in both footwear and activewear, with
consistent introductions of exciting products throughout the year. Adidas and
Converse also provided strong products substantially increasing their sales in
our stores. We believe these product trends will continue into fiscal 1998.
EMPHASIS ON LARGER STORES
For fiscal year 1998, we are planning a 40 to 45% increase in retail square
footage, adding over 435,000 square feet to our approximate 1.1 million square
feet of retail space operating at fiscal year end 1997. These plans call for 50
to 60 new stores and 10 to 15 significant expansions and remodels of existing
stores, with a greater emphasis on our larger format stores. The store
photographs in this report highlight our larger store formats. We now
characterize stores over 10,000 square feet as our larger store formats and
stores under 10,000 square feet as "traditional format" stores. Our larger store
formats includes two classifications; "medium format" which are stores 10,000 to
15,000 square feet and "large format" which are stores over 15,000 square feet.
In
1
<PAGE>
fiscal 1997 we opened 2 "large format" stores and converted 2 "traditional
format" stores to "medium format" stores. The "medium format" concept was
developed to enhance our larger store real estate opportunities. Securing good
mall real estate is easier, especially in mature and better performing malls, in
less than 15,000 square foot increments. We challenged our store designers,
buyers and merchandisers to create a store that would capture the ambiance and
excitement of our "large format" store in 10,000 to 15,000 square feet. The
result is a functional and well conceived take down of the "large format" store
using similar design features, fixtures and store finishes including floor,
ceiling, walls and lighting. We are pleased by the reaction of our customers,
vendors and mall developers to our new "medium format" concept and remain
optimistic about the future of the concept based upon the performance of the two
"medium format" stores opened during fiscal 1997. Our expansion plans for fiscal
1998 include a greater emphasis on these larger stores. We anticipate 15 store
openings over 10,000 square feet in this fiscal year, including new stores and
the expansion and remodeling of existing stores.
CHALLENGES AND GOALS
A major challenge for Finish Line in Fiscal 1998 will be to continue the
momentum of our record performance for fiscal 1997. We must maintain our
entrepreneurial spirit and continue to grow our Company without becoming tired
and complacent and indistinguishable from our competition. We must strive to be
different and to set new standards and criteria within our industry by
continuing to push the envelope in the design and merchandising of our stores.
We have made important changes and improvements to our Company's infrastructure
over the past two years. Our record performance this year shows these changes
were correct and have proven to be effective.
Our company must continue down this path, always open to new ideas and
strategies that may provide a better way to accomplish our goals and fulfill the
Company's mission statement, which is:
To create and operate a superior athletic specialty retail entity -- by
combining conceptual innovation which includes an entertaining and exciting
retail environment, the most current information technologies and systems,
capable and focused management, and the dedicated and motivated work force
empowered with the proper resources -- in order to provide customers a
beneficial and unique shopping experience.
The words of our mission statement call for this continual need for change -- to
be innovative -- to be current -- to be unique.
We are grateful for the hard work of our 5,500 employees and also for the
loyalty of our customers and support of our stockholders. We also understand our
record performance in fiscal 1997 required the cooperation, assistance and good
wishes of many other people and companies. We appreciate this help from our
business partners and recognize how important they are to our past and future
success. This group includes our product vendors who developed and marketed
exciting and innovative product for our stores. Also included are the mall
developers who had the foresight to test our larger format stores, and the
confidence and trust in our Company to successfully develop these special stores
and make certain that the best athletic specialty concept in the industry
remains in the mall.
We invite them to join with us in further building our already successful
Company to greater achievements in years to come.
Sincerely,
/s/ Alan H. Cohen
Alan H. Cohen,
President
2
<PAGE>
BUSINESS REVIEW
GENERAL
Over the last 20 years, Finish Line has grown beyond its small company
beginnings into one of the largest specialty retailers of brand name athletic,
outdoor and casual footwear, activewear and accessories in the United States. As
of April 1, 1997, the Company operated 260 stores in 27 states. Finish Line
stores generally carry the largest selection of men's, women's and children's
athletic and casual shoes in the mall, as well as a broad assortment of
activewear and accessories all at competitive prices. Brand names offered by the
Company include Nike, Fila, adidas, Reebok, Converse, Champion, Asics, Airwalk,
Logo Athletic, Timberland and New Balance.
[PHOTO APPEARS HERE]
IRONDEQUOIT MALL, ROCHESTER, NY
[PHOTO APPEARS HERE]
PARK MEADOWS MALL, DENVER, CO
<PAGE>
We distinguish ourselves from other athletic footwear specialty retailers
through our larger mall-based store formats. Finish Line stores average
approximately 4,300 square feet, and the stores we opened during fiscal 1997
averaged approximately 6,200 square feet. We strive to create an exciting and
entertaining retail environment by continually updating our unique and highly
functional store designs, while the larger store size permits greater product
depth and merchandising flexibility. Since activewear and accessories generally
carry higher gross margins, Finish Line devotes a greater percentage of its
sales area to these products than typical athletic footwear specialty stores.
Activewear and accessories accounted for approximately 32% of the Company's net
sales in fiscal 1997.
OPERATING STRATEGIES
Finish Line is committed to being a leading specialty retailer of athletic
footwear and activewear in every market we serve. To achieve this, we have
developed the following elements to our business strategy:
. EMPHASIS ON CUSTOMER SERVICE AND CONVENIENCE. We are committed to making the
shopping experience at Finish Line rewarding and enjoyable. We achieve this by
providing convenient mall-based locations with highly functional store designs,
offering competitive prices on brand name products, maintaining optimal in-stock
levels of merchandise and employing knowledgeable and courteous sales
associates.
. INVENTORY MANAGEMENT. The Company stresses effective replenishment and
distribution to each of our stores. Our advanced information and distribution
systems enable us to track inventory in each store by stockkeeping unit (SKU) on
a daily basis, giving Finish Line flexibility to merchandise its products
effectively. In addition, these systems allow us to respond promptly to changing
customer preferences and to maintain optimal inventory levels in each of our
stores. The Company's inventory management system features automatic
replenishment driven by point-of-sale (POS) data capture and a highly automated
distribution center, which enables Finish Line to ship merchandise to each store
every third day.
. PRODUCT DIVERSITY; BROAD DEMOGRAPHIC APPEAL. Finish Line stocks its stores
with a combination of the newest high profile and brand name merchandise, unique
products manufactured exclusively for the Company, as well as promotional and
opportunistic purchases of other brand name merchandise. Product diversity, in
combination with the Company's store formats and commitment to customer service,
is intended to attract a broad demographic cross-section of customers.
EXPANSION STRATEGIES
A Company objective is to continue our aggressive store expansion. We plan to do
this by introducing Finish Line stores into new markets as well as increase our
visibility in previously established markets.
. NEW STORE OPENINGS. Since the Company's initial public offering in June 1992,
Finish Line has expanded rapidly from 104 stores to 260 stores at April 1, 1997.
we opened 35 new stores in fiscal 1997 and we intend to open 50 to 60 new stores
in fiscal 1998, which will represent increases of approximately 16% in fiscal
1997 and 20% to 24% in fiscal 1998. Our total square footage increased 25% in
fiscal 1997 as a result of the Company's strategy of opening larger traditional
stores, as well as selected larger format stores.
For fiscal 1998 we plan to accelerate Finish Line's total square footage growth
to a range of 40% to 45% from 25% in fiscal year 1997. Much of this accelerated
square footage growth will result from a greater emphasis on our larger format
stores. We are confident that this can be achieved due to the encouraging
performance of these stores, the continued strengthening of the Company's
infrastructure, and our recent operating results. The Company expects that its
new stores will be in both new and existing geographic markets.
. LARGER STORES. The Company has been adding larger stores to its chain
over the past four years. This strategy allows for greater product depth and
merchandising flexibility, which we believe improves our ability to compete
against both mall-based and non-mall-based athletic retailers. This tactic will
also result in our total square footage increasing at a faster rate than our
store count. As of April 1, 1997, the traditional stores which Finish Line has
firm commitments to open in fiscal 1998 average approximately 5,700 square feet.
4
<PAGE>
OVER 1,300 DIFFERENT STYLES AND 30,000
PAIRS OF ATHLETIC AND CASUAL SHOES ARE
CARRIED IN THE LARGE FORMAT STORES.
[PHOTO APPEARS HERE]
GREENWOOD PARK MALL, INDIANAPOLIS, IN
[PHOTO APPEARS HERE]
PARK MEADOWS MALL, DENVER, CO
<PAGE>
Since September 1995, the Company has opened four "large format" stores ranging
in size from 20,000 to 25,000 square feet. These stores are upscale athletic
speciality stores designed and merchandised into distinct departments to satisfy
the needs of the entire family. Over 1,300 different styles of shoes are
displayed in these stores with 35,000+ pairs in backstock. Our "large format"
stores have generated encouraging results. We believe that we can effectively
take down the merchandising presentation and atmosphere of this "large format"
concept to stores exceeding 10,000 square feet in order to take advantage of
real estate opportunities. Based upon the expansion of the larger format
concepts, the Company expects to open approximately 11 stores over 10,000 square
feet in fiscal 1998.
. COMMITMENT TO CONTINUALLY STRENGTHEN INFRASTRUCTURE. Over the past two years,
Finish Line has made a number of strategic infrastructure investments, including
enhancements to its management, store operations, and distribution and
information systems. Significant management additions and organizational changes
include recruiting additional senior management professionals with significant
industry experience, as well as centralizing the supervision of our footwear and
activewear/accessories departments to improve communication and coordination
between the two areas. In addition, staffs in both departments have been
increased to allow our buyers and merchandisers to focus more time and attention
on specific product categories.
We have also invested in our management information systems and distribution
center by implementing electronic data interchange (EDI) and radio frequency
(RF) technologies in our inventory management/distribution areas. Both
technologies are designed to improve the efficiency of our inventory management
as well as our response time and in-stock position. In November 1996, the
Company broke ground on a 130,000 square foot addition to its distribution
center. The project is expected to be completed by June 1997. By making a sound
commitment to continually strengthening our corporate infrastructure, we believe
we can continue our positive growth.
MERCHANDISE
Quality merchandise is a mainstay of our business. We take pride in serving a
more diverse pool of customers than our mall competitors, be it the customer
looking for the latest and greatest fashion products or the athlete needing high
quality technical footwear or the person who may be more value conscious.
The following table sets forth the percentage of net sales attributable to the
categories of footwear, activewear and related accessories during the periods
indicated. These percentages fluctuate substantially during the different
consumer buying seasons. To take advantage of this seasonality, we have designed
our stores to allow for a shift in emphasis in the merchandise mix between
footwear and activewear/accessory items.
<TABLE>
<CAPTION>
YEAR ENDED
- --------------------------------------------------------------------------------
MARCH 1, FEBRUARY 29, FEBRUARY 28,
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Footwear 68% 67% 69%
Activewear/Accessories 32% 33% 31%
- --------------------------------------------------------------------------------
Total 100% 100% 100%
================================================================================
</TABLE>
All merchandising decisions, including merchandise mix, pricing, promotions and
markdowns, are made at our corporate headquarters. The store manager and
district manager, along with management at the Company's headquarters, review
the merchandise mix to adapt to permanent or temporary changes or trends in the
marketplace.
. FOOTWEAR
Finish Line's distinctive curved shoe wall is stocked with the latest in
athletic, casual and outdoor footwear that the industry has to offer, including:
Nike, Fila, adidas, Reebok, Asics, Timberland, Airwalk, Rockport, Clarks, Ecco,
LUGZ, Converse and many others. To make shopping easier for our customers, we
categorize our footwear into definable sections. Major categories include:
basketball, cross-training, running, aerobics, tennis, cleated, golf, outdoor,
casual and lifestyle. Most categories are available in men's, women's and
children's styles.
. ACTIVEWEAR/ACCESSORIES
Many of the same companies that supply Finish Line with quality footwear also
help us fill our activewear departments, including products made by Nike,
adidas, Fila and Reebok. Additional suppliers include Champion and Logo
Athletic, along with outdoor activewear from Columbia, Woolrich, Timberland and
Helly Hansen. Many of our vendors offer footwear, activewear and accessories in
"collections" and we merchandise their products in the same
6
<PAGE>
DISTINCT DEPARTMENTS PROVIDE
CLEAR DESTINATION POINTS WITHIN
OUR STORES FOR CUSTOMERS.
[PHOTO APPEARS HERE]
PARK MEADOWS MALL, DENVER, CO
<PAGE>
manner. Categories of activewear consist of jackets, caps, tops, bottoms,
windwear, running wear, warm-ups, fleece, fitness wear and sport-casual wear.
Many of these categories include licensed products bearing the logos of college
and professional teams. Among the accessories offered by the Company are socks,
athletic bags, backpacks, sunglasses, watches and shoe-care products.
MARKETING
Creating a brand image for Finish Line is an important marketing strategy. We
are able to reach our target audience by using a multifaceted approach to our
marketing and advertising on national, regional and local levels. The media we
use include television, direct mail, consumer print, outdoor, and the internet.
The Company also takes advantage of advertising and promotional assistance from
many of its suppliers. This assistance takes the form of cooperative advertising
programs, in-store sales incentives, point-of-purchase materials, product
training for employees and other programs. Total advertising expense for fiscal
1997 and fiscal 1996 was approximately 1.5% of net sales, after deducting co-op
reimbursements. These percentages fluctuate substantially during the different
consumer buying seasons. The Company also believes that we benefit significantly
from the multimillion dollar advertising campaigns of our key suppliers, such as
Nike, Fila, adidas and Reebok.
We also use in-store contests, promotions and event sponsorships, as well as a
comprehensive public relations effort to further market the Company.
PURCHASING AND DISTRIBUTION
Finish Line's footwear and activewear purchasing is coordinated through a
centralized merchandising department under the direction of a Sr. Vice
President-Merchandise and Marketing. The buying and merchandise departments are
comprised of approximately 30 people. The footwear and activewear/accessories
divisions consist of a Vice President-General Merchandise Manager, divisional
merchandise managers, multiple buyers and associate buyers. Both buying
divisions are supported by our planning and distribution division which consists
of a director, planners, merchandisers and administrative assistants.
The Company believes that its ability to buy in large quantities directly from
suppliers enables it to obtain favorable pricing and trade terms. Currently, we
work with approximately 150 suppliers and manufacturers of high quality athletic
and fashion products, the largest of which (Nike) accounted for approximately
69% and 50% of total purchases in fiscal 1997 and fiscal 1996, respectively. We
purchased approximately 89% and 80% of total merchandise in fiscal 1997 and
fiscal 1996, respectively, from our five largest suppliers. The Company and its
vendors have the capability to use EDI technology to streamline purchasing and
distribution operations.
Finish Line's corporate headquarters and distribution center is located on 33
acres in Indianapolis, Indiana. The facility was designed to the Company's
specifications and is owned by us. It includes automated conveyor and storage
rack systems designed to reduce labor costs, increase efficiency in processing
merchandise and enhance space productivity. Twenty-four thousand square feet of
office space and 128,000 square feet of warehouse space are included in the
existing facility. During fiscal 1997, we started building a 130,000 square foot
addition to the existing distribution center which is expected to be completed
by June 1997. When necessary, we can further expand our facility on the existing
33 acres.
In fiscal 1996, Finish Line implemented new warehouse management computer
software for distribution center processing that features RF technology. This
system has helped us improve our productivity and accuracy as well as reduce the
time it takes to get the merchandise to our stores. We believe that this
innovative technology will continue to improve our operations as well as allow
for real-time tracking of inventory within the distribution center.
Nearly all of the Company's merchandise is shipped directly from suppliers to
the distribution center, where the Company processes and
8
<PAGE>
LARGER FORMAT STORES CONTAIN OUTDOOR AND CASUAL
DEPARTMENTS THAT TRANSCEND TRADITIONAL
ATHLETIC SPECIALTY PRODUCT OFFERINGS.
[PHOTO APPEARS HERE]
PARK MEADOWS MALL, DENVER, CO
<PAGE>
ships it by contract and common carriers to its stores. Each day shipments are
made to one-third of the Company's stores. In any three-week period, each store
will receive five shipments. A shipment is normally received one to three days
from the date that the order is filled depending on the store's distance from
the distribution center. Historically, the Company maintains approximately two-
thirds of a month's supply of merchandise at the distribution center.
The Company believes that the distribution center, including planned future
expansion, will enable it to continue to service its stores, including
additional stores, for the foreseeable future.
MANAGEMENT INFORMATION SYSTEMS
The Company has a computerized management information system that includes a
network of computers at corporate headquarters used by management to support
decision making along with PC-based POS computers at the stores. Store computers
are connected via modem to the computers at our corporate headquarters. A
perpetual inventory system permits corporate management to review daily each
store's sales and inventory by department, class and SKU. This system includes
an automated replenishment system that allows the Company to replace faster-
selling items more quickly. Other functions in the system include accounting,
distribution, inventory tracking and control.
STORE OPERATIONS
While all merchandise decisions with respect to prices, markdowns and
advertising are controlled by management at the corporate headquarters, an
important and distinguishing part of who we are is determined by what happens in
our stores everyday. It is here where we are closest to our customers.
We take pride in our intensive training program for all store associates.
They understand that customer service is the #1 priority with the Finish Line.
Our store teams meet regularly to improve customer service, learn about new
innovations in product technology, as well as discuss sales goals and objectives
for the store.
The Company has a Sr. Vice President-Store Operations and regional and district
managers who visit each of our stores regularly to review the implementation of
all Company plans and policies, monitor operations, and review inventories and
the presentation of merchandise. Accounting and general financial functions for
our stores are conducted at corporate headquarters. Each store has a store
manager responsible for supervision and overall operations, one or more
assistant managers and additional full- and part-time sales associates.
Management believes that the Finish Line store format and attentive customer
service also help to reduce inventory shrinkage, which was approximately 1% of
net sales in fiscal 1997.
Regional, district and store managers receive a fixed salary and are eligible
for bonuses, based primarily on sales, payroll and shrinkage performance goals
of the stores for which they are responsible. All assistant store managers and
sales associates are paid on an hourly basis.
REAL ESTATE
As of April 1, 1997, Finish Line operated 260 stores in 27 states. With the
exception of four strip-center stores, all Finish Line stores are located in
enclosed shopping malls. The typical store format has a sales floor, which
includes a try-on area and a display area where each style of footwear carried
in the store is displayed by category (e.g., basketball, tennis, running), and
an adjacent stock room where the footwear inventory is maintained. Finish Line
stores currently range in size from 1,200 to 10,750 square feet plus the four
recently opened "large format" stores which range in size from 20,200 to 24,750
square feet. Sales floors in all stores represent approximately 65% to 75% of
the total space. In addition to its typical store format, the Company operates
approximately 29 stores using a "rack store" format, where footwear inventory is
kept directly on the sales floor.
To keep our stores fresh and exciting, the Company has developed a strategy of
consolidating older merchandise in one or more stores in each district for
additional
10
<PAGE>
YOUTH
A SEPARATE DEPARTMENT FOR KIDS
MAKES ALL FAMILY SHOPPING EASIER
AND FUN AT THE FINISH LINE.
[PHOTO APPEARS HERE]
GREENWOOD PARK MALL, INDIANAPOLIS, IN
PARK MEADOWS MALL, DENVER, CO.
<PAGE>
or final markdown. We try to locate these stores in strip shopping centers or
mixed-use outlet centers because these locations typically have lower occupancy
costs and investments in leasehold improvements.
Finish Line believes that our ability to obtain attractive, high traffic store
locations, such as enclosed malls, to be a critical element of our business and
a key factor in our future growth and profitability. In determining new store
locations, we evaluate market areas, in-mall locations, "anchor" stores,
consumer traffic, mall sales per square foot, competition and occupancy,
construction and other costs associated with opening a store. We believe that
the number of desirable store sites likely to be available in the future will
permit us to implement our revised growth strategy and accelerate growth in
total square footage.
Finish Line leases all of its stores. Initial lease terms of our stores
generally range from 5 to 10 years in duration without renewal options, although
some of the stores are subject to leases for 5 years with one or more renewal
options. The leases generally provide for a fixed minimum rental plus a
percentage of sales in excess of a specified amount.
Based upon expenditures for fiscal 1997, we estimate that the cash requirements
for opening a traditional new store (under 10,000 square feet) will approximate
$400,000. This estimate includes $200,000 for fixtures, equipment, leasehold
improvements and pre-opening expenses plus $325,000 ($200,000 net of payables)
in inventory investment. The estimate of opening a larger format store (over
10,000 square feet) may vary significantly depending on exact square feet,
landlord construction allowance and inventory investment needed to support
expected sales levels. These estimates range from $900,000 to $1,900,000.
The Company's corporate headquarters and distribution center are located on 33
acres in Indianapolis, Indiana. This facility includes 24,000 square feet of
office space and 128,000 square feet of warehouse space. Currently, the Company
is building a 130,000 square foot addition to the existing distribution center
which is expected to be completed by June 1997 at an estimated cost of $3.3
million. If the need for significant expansion arises, the Company believes it
has the ability to do so on our existing 33 acres.
COMPETITION
Our business is highly competitive. Many of the products we sell are sold in
department stores, national and regional full-line sporting goods stores,
athletic footwear specialty stores, athletic footwear superstores, discount
stores, traditional shoe stores and mass merchandisers. Some of our primary
competitors are large national and/or regional chains that have substantially
greater financial and other resources than Finish Line. Among our competitors
are stores that are owned by major suppliers to the Company. To a lesser extent,
we compete with mail order and local sporting goods and athletic specialty
stores. In many cases, our stores are located in enclosed malls or shopping
centers in which one or more of our competitors also operate. Typically, the
leases that we enter into do not restrict the opening of stores by our
competitors.
We have been able to compete favorably with all of our competitors. We try to
differentiate ourselves from our competition by operating larger, more
attractive, well-stocked stores in high retail traffic areas, with competitive
prices and knowledgeable and courteous customer service. The Company attempts to
keep its prices competitive with athletic specialty and sporting goods stores in
each trade area, including competitors that are located outside the mall. We do
this by effectively mixing high profile and brand name merchandise with
promotional and opportunistic purchases of other brand name merchandise and by
controlling expenses, especially administrative and overhead expenses, with
efficient departments throughout our organization.
POISED FOR SUCCESS
As we embark on a new year, we look forward to continued positive growth.
However, no matter how large Finish Line becomes, we will maintain focus on the
following three keys to our success: superior customer service; innovative and
exciting products; and compelling store formats and product presentation. Put
simply, Finish Line's goal for fiscal 1998 is to be the best athletic specialty
chain in the country.
12
<PAGE>
WOMEN
A DISTINCT AND SEPARATE WOMEN'S
DEPARTMENT ALLOWS FINISH LINE
TO CARRY THE LARGEST SELECTION
OF ATHLETIC FOOTWEAR AND
MATCHING APPAREL MADE
SPECIFICALLY FOR WOMEN.
[PHOTO APPEARS HERE]
GREENWOOD PARK MALL, INDIANAPOLIS, IN
[PHOTO APPEARS HERE]
WALDEN GALLERIA, BUFFALO, NY
<PAGE>
The Finish Line, Inc.
SELECTED FINANCIAL DATA
(In thousands, except per share and store operating data)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED
- ---------------------------------------------------------------------------------------------------------------------------------
MARCH 1, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales $332,002 $240,155 $191,623 $157,011 $129,547
Cost of sales (including occupancy expenses) 229,187 168,912 132,726 107,491 85,724
- ---------------------------------------------------------------------------------------------------------------------------------
Gross profit 102,815 71,243 58,897 49,520 43,823
Selling, general and administrative
expenses(1) 72,282 54,254 44,548 36,678 28,667
- ---------------------------------------------------------------------------------------------------------------------------------
Operating income 30,533 16,989 14,349 12,842 15,156
Interest expense (income) (824) 892 317 184 467
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 31,357 16,097 14,032 12,658 14,689
Income taxes 12,544 6,439 5,618 5,063 2,812(2)
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 18,813 $ 9,658 $ 8,414 $ 7,595 $ 11,877
=================================================================================================================================
- ---------------------------------------------------------------------------------------------------------------------------------
PRO FORMA INCOME STATEMENT DATA(3):
Pro forma income before income taxes $ 14,899
Pro forma income taxes 5,960
- ---------------------------------------------------------------------------------------------------------------------------------
Pro forma net income $ 8,939
=================================================================================================================================
- ---------------------------------------------------------------------------------------------------------------------------------
SHARE DATA:
Fully diluted net income per share
(pro forma for fiscal 1993)(3) $ .79 $ .47 $ .41 $ .37 $ .47
=================================================================================================================================
Weighted average shares(4) 23,761 20,712 20,630 20,634 $ 18,974
=================================================================================================================================
- ---------------------------------------------------------------------------------------------------------------------------------
SELECTED STORE OPERATING DATA:
Number of stores:
Opened during period 35 35 30 35 27
Closed during period 4 5 4 1 1
Open at end of period 251 220 190 164 130
Total square feet(5) 1,088,419 870,340 691,831 565,588 435,784
Average square feet per store(5) 4,336 3,956 3,641 3,449 3,352
Net sales per square foot for stores open
entire period $ 352 $ 308 $ 300 $ 316 $ 324
Increase (decrease) in comparable store
net sales(6)(7) 16.0% 3.4% 1.7% (2.3%) 8.3%
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA:
Working capital $ 112,079 $ 32,453 $ 30,050 $ 28,132 $ 24,066
Total assets 217,718 114,972 88,535 72,884 60,688
Total debt -- 9,500 5,025 2,000 2,612
Stockholders' equity 169,875 63,148 53,487 45,073 37,461
</TABLE>
Footnotes to adjacent table and to table on inside front cover.
(1) Includes executive compensation expenses for the Principal Stockholders of
$1,019,000, $1,159,000, $1,348,000, $1,147,000 and $1,454,000 in fiscal 1997,
1996, 1995, 1994 and 1993, respectively.
(2) Reflects the effect of the Company's treatment as a C Corporation rather
than an S Corporation after June 11, 1992, including a one-time deferred tax
credit of $1,108,000.
(3) Reflects the effects on the historical income statement data for fiscal 1993
as if the Company (i) had paid its four Principal Stockholders (who are also
Executive Officers) annual executive compensation aggregating $1,250,000 and
(ii) had been treated as a C Corporation rather than an S Corporation for income
tax purposes, with an assumed effective tax rate of 40%.
(4) Consists of weighted average common and common equivalent shares outstanding
for the period and was adjusted to give effect for the November 15, 1996 two-
for-one stock split.
(5) Computed as of the end of each fiscal period. Calculations for 1997 and 1996
include "Large Format" stores which exceed 20,000 square feet per store.
Excluding "Large Format" stores the average square feet per store would be 4,113
in 1997 and 3,882 in 1996.
(6) Calculated using only those stores that were open for the full current
fiscal period and were also open for the full prior fiscal period.
(7) The increase in comparable store net sales is based on the actual number of
days (generally 365 days) in each year. 1997 and 1996 included 366 days due
to the Company's change to a more commonly used "Retail" calendar, which
therefore included one additional day, Saturday, March 1, 1997 in 1997 and
due to leap year in 1996.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with the
information set forth under "Selected Financial Data" and the Financial
Statements and Notes thereto included elsewhere herein.
RESULTS OF OPERATIONS
The Company's net sales grew from $129.5 million in fiscal 1993 to $332.0
million in fiscal 1997 as a result of the Company's store expansion program and
increased sales from existing stores. During that period, the number of stores
increased from 130 to 251, total square feet increased from 435,784 to 1,088,419
and sales per square foot ranged from $324 in 1993, to a high of $352 in 1997.
The decrease in sales per square foot in 1994 was a result of a decrease in the
average selling price of footwear, a more competitive and promotional retail
environment and a comparable store sales decrease in 1994. The continued
decrease in 1995 was a result of the competitive and promotional retail
environment along with a 5.6% increase in the average square feet per store from
3,449 in fiscal 1994 to 3,641 in fiscal 1995. The increase in 1996 was a result
of the 3.4% increase in comparable net sales along with improved performance
from the 30 existing stores open only part of fiscal 1995. The continued
increase in 1997 is attributable to a 16.0% increase in comparable net sales, as
well as, a number of strategic infrastructure investments, including
enhancements to management, store formats, and distribution and information
systems. The Company's comparable store sales growth was 8.3%, (2.3%), 1.7%,
3.4% and 16.0% in fiscal 1993, 1994, 1995, 1996, and 1997, respectively.
The table at the right sets forth operating data of the Company as a percentage
of net sales for the periods indicated below.
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales for fiscal 1997 were $332.0 million, an increase of $91.8 million or
38.2% over fiscal 1996. Of this increase, $37.8 million was attributable to a
14.1% increase in the number of stores open during the period from 220 at the
end of fiscal 1996 to 251 at the end of fiscal 1997. The balance of the increase
in net sales was attributable to an increase of $22.2 million from the 35
existing stores open only part of fiscal 1996 along with an increase in net
sales from existing stores open the entire twelve month period of fiscal 1997
compared to fiscal 1996. During fiscal 1997, comparable store net sales
increased 16.0% compared to fiscal 1996. Comparable net footwear sales increased
16.8% for fiscal 1997 and comparable net activewear and accessories sales
increased 14.0%. Net sales per square foot increased in fiscal 1997 to $352 from
$308 in fiscal 1996, primarily the result of the comparable store sales increase
of 16.0%.
Gross profit, which includes product margin less store occupancy costs, for
fiscal 1997 was $102.8 million, an increase of $31.6 million or 44.3% over
fiscal 1996, and an increase of approximately 1.3% as a percentage of net sales.
Of this 1.3% increase, 0.6% was due to a decrease in occupancy costs as a
percentage of net sales, 0.4% was due to an increase in margins for product
sold, with the remaining 0.3% increase due to a decrease in inventory shrinkage.
Selling, general and administrative expenses were $72.3 million, an increase of
$18.0 million or 33.2% over fiscal 1996, and decreased to 21.8% from 22.6% as a
percentage of net sales. The dollar increase was primarily attributable to the
operating costs related to the 35 additional stores opened during fiscal 1997.
The decrease as a percentage of sales is primarily a result of the comparable
store net sales increase of 16.0% for fiscal 1997 along with improved expense
controls.
Net interest income for fiscal 1997 was $824,000 compared to net interest
expense of $892,000 for fiscal 1996. This decrease was a result of using the
proceeds of the secondary offering completed on June 19, 1996 to repay all
existing outstanding indebtedness under the Company's unsecured committed Loan
Agreement with the remainder of these proceeds along with the proceeds, from the
secondary offering completed on December 18, 1996, being invested in interest
bearing instruments.
Income tax expense was $12.5 million for fiscal 1997 compared to $6.4 million
for fiscal 1996. The increase in the Company's provision for federal and state
taxes in 1997 is due to the increased level of income before income taxes as the
effective tax rate was 40% for each of the comparable periods. With the
Company's significant investment in tax exempt instruments, it is expected that
the effective tax rate will decrease to approximately 39% in fiscal 1998. In
addition, the Company is currently considering other opportunities that may
further reduce the Company's effective tax rate in future periods.
Net income increased 94.8% to $18.8 million for fiscal 1997 compared to $9.7
million for fiscal 1996. Fully diluted net income per share increased 68.1% to
$0.79 for fiscal 1997 compared to $0.47 for fiscal 1996. Weighted average shares
outstanding were 23,761,000 and 20,712,000, respectively, for fiscal 1997 and
1996.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
YEAR ENDED
- --------------------------------------------------------------------------------------------------
MARCH 1, FEBRUARY 29, FEBRUARY 28,
1997 1996 1995
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
Income Statement Data:
Net sales 100.0% 100.0% 100.0%
Cost of sales (including occupancy expenses) 69.0 70.3 69.3
- --------------------------------------------------------------------------------------------------
Gross profit 31.0 29.7 30.7
Selling, general and administrative expenses 21.8 22.6 23.2
- --------------------------------------------------------------------------------------------------
Operating income 9.2 7.1 7.5
Interest expense (income) (.2) .4 .2
- --------------------------------------------------------------------------------------------------
Income before income taxes 9.4 6.7 7.3
Income taxes 3.7 2.7 2.9
- --------------------------------------------------------------------------------------------------
Net income 5.7% 4.0% 4.4%
==================================================================================================
</TABLE>
15
<PAGE>
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales for fiscal 1996 were $240.2 million, an increase of $48.6 million or
25.3% over fiscal 1995. Of this increase, $29.0 million was attributable to a
15.8% increase in the number of stores open during the period from 190 at the
end of fiscal 1995 to 220 at the end of fiscal 1996. The balance of the increase
in net sales was attributable to an increase of $14.9 million from the 30
existing stores open only part of fiscal 1995 along with an increase in net
sales from existing stores open the entire twelve month period of fiscal 1996
compared to fiscal 1995. During fiscal 1996, comparable store net sales
increased 3.4% compared to fiscal 1995. Comparable net footwear sales increased
1.0% for fiscal 1996 and comparable net activewear and accessories sales
increased 8.9%. Net sales per square foot increased in fiscal 1996 to $308 from
$300 in fiscal 1995, primarily the result of the comparable store sales increase
of 3.4%.
Gross profit, which includes product margin less store occupancy costs, for
fiscal 1996 was $71.2 million, an increase of $12.3 million or 21.0% over fiscal
1995, and a decrease of approximately 1.0% as a percentage of net sales. Of the
1.0% decrease, 0.6% was due to lower margins for products sold, 0.2% was due to
an increase in inventory shrink and the remaining 0.2% decrease was due to an
increase in occupancy costs as a percentage of net sales. The 0.6% decrease in
product margin was due to a competitive and promotional retail environment,
particularly in the Holiday selling season.
Selling, general and administrative expenses were $54.3 million, an increase of
$9.7 million or 21.8% over fiscal 1995, and decreased to 22.6% from 23.2% as a
percentage of net sales. The dollar increase was primarily attributable to the
operating costs related to the 35 additional stores opened during fiscal 1996.
The decrease as a percentage of sales is primarily a result of the comparable
store net sales increase of 3.4% for fiscal 1996 along with improved expense
controls.
Net interest expense for fiscal 1996 was $892,000, an increase of $575,000 or
181.4%. This increase resulted from a higher average balance outstanding on the
Company's bank line of credit due to an increase in the number of stores in
operation, the funding of new store expansion and related inventory
requirements, and an increase in the merchandise inventories on a per square
foot basis. Partially offsetting the increase in interest expense was a decrease
in the Company's average interest rate on outstanding borrowings.
Income tax expense was $6.4 million for fiscal 1996 compared to $5.6 million for
fiscal 1995. The increase in the company's provision for federal and state taxes
in 1996 is due to the increased level of income before income taxes as the
effective tax rate was 40% for each of the comparable periods.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDED
- ------------------------------------------------------------------------------------------------------------------------------------
MAY 31, 1996 AUGUST 31, 1996 NOVEMBER 30, 1996 MARCH 1, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $71,744 100.0% $91,006 100.0% $73,003 100.0% $96,249 100.0%
Cost of sales (including
occupancy expenses) 50,212 70.0% 61,543 67.6% 51,129 70.0% 66,303 68.9%
- ------------------------------------------------------------------------------------------------------------------------------------
Gross profit 21,532 30.0% 29,463 32.4% 21,874 30.0% 29,946 31.1%
Selling, general and
administrative expenses 16,042 22.4% 19,037 20.9% 17,747 24.3% 19,456 20.2%
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income 5,490 7.6% 10,426 11.5% 14,127 5.7% 10,490 10.9%
Interest expense (income) 194 .3% (137) .1 (189) (.2) (692) (.7)
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 5,296 7.3% 10,563 11.6% 4,316 5.9% 11,182 11.6%
Income taxes 2,119 2.9% 4,225 4.6% 1,727 2.4% 4,473 4.6%
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 3,177 4.4% 6,338 7.0% $ 2,589 3.5% 6,709 7.0%
====================================================================================================================================
Fully diluted net income per share $ .15 .27 $ .11 $ .26
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
QUARTER ENDED
- ------------------------------------------------------------------------------------------------------------------------------------
MAY 31, 1995 AUGUST 31, 1995 NOVEMBER 30, 1995 FEBRUARY 29, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $52,219 100.0% $64,584 100.0% $52,729 100.0% $70,623 100.0%
Cost of sales (including
occupancy expenses) 36,341 69.6% 44,895 69.5% 37,770 71.6% 49,906 70.7%
- ------------------------------------------------------------------------------------------------------------------------------------
Gross profit 15,878 30.4% 19,689 30.5% 14,959 28.4% 20,717 29.3%
Selling, general and
administrative expenses 12,358 23.7% 14,015 21.7% 13,356 25.3% 14,525 20.5%
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income 3,520 6.7% 5,674 8.8% 1,603 3.1% 6,192 8.8%
Interest expense 130 .2% 229 .3% 305 .6% 228 .3%
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 3,390 6.5% 5,445 8.5% 1,298 2.5% 5,964 8.5%
Income taxes 1,356 2.6% 2,178 3.4% 519 1.0% 2,386 3.4%
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 2,034 3.9% 3,267 5.1% $ 779 1.5% $ 3,578 5.1%
====================================================================================================================================
Fully diluted net income per share $ .10 $ .16 $ .04 $ .17
====================================================================================================================================
</TABLE>
16
<PAGE>
Fully diluted net income per share increased 14.6% to $0.47 for fiscal 1996
compared to $0.41 for fiscal 1995. Weighted average shares were 20,712,000 and
20,630,000, respectively, for fiscal 1996 and 1995.
QUARTERLY COMPARISONS
The Company's merchandise is marketed during all seasons, with the highest
volume of merchandise sold during the second and fourth fiscal quarters as a
result of back-to-school and holiday shopping. The third fiscal quarter has
traditionally had the lowest volume of merchandise sold and the lowest results
of operations.
The table on page 16 sets forth quarterly operating data of the Company,
including such data as a percentage of net sales, for fiscal 1997 and fiscal
1996. This quarterly information is unaudited but, in management's opinion,
reflects all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the information for the periods presented.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances the opening of new stores and the resulting increase in
inventory requirements principally from operating cash flow and cash on hand.
Net cash provided by operations was $15,565,000, $6,216,000 and $3,892,000,
respectively, for fiscal 1997, 1996 and 1995. At March 1, 1997, cash and cash
equivalents were $51.2 million and short-term marketable securities were an
additional $11.5 million. Cash equivalents are primarily invested in tax exempt
instruments with maturities of one to twenty-eight days. Short-term marketable
securities range in maturity from 90-365 days and are primarily invested in tax
exempt municipal obligations.
Merchandise inventories were $82.0 million at March 1, 1997 compared to $76.1
million at February 29, 1996. On a per square foot basis, merchandise
inventories at March 1, 1997 decreased 13.8% compared to February 29, 1996. The
decrease reflects the Company's strategy of turning merchandise inventories
faster while improving product margins.
The Company has an unsecured committed Loan Agreement (the "Facility") with a
commercial bank in the amount of $30,000,000, which expires on September 1,
1999. The Company periodically reviews its ongoing credit needs with its
commercial bank and expects to renew the Facility prior to its expiration for an
additional period beyond the current maturity date of September 1999. The
interest rate on the Facility is, at the Company's election, either the bank's
Federal Funds Rate plus .5%, the bank's LIBOR Rate plus .375% or the bank's
prime commercial lending rate. The margin percentage added to the Federal Funds
Rate and LIBOR Rate is subject to adjustment quarterly based on the fixed charge
coverage ratio (as defined). At March 1, 1997, there were no borrowings
outstanding under the Facility.
The Facility contains restrictive covenants that limit, among other things, the
Company's ability to declare or pay dividends, incur or guarantee debt, redeem
shares of its capital stock, be a party to a merger, acquire or dispose of
assets or engage in any other transactions outside the ordinary course of
business. In addition, the Company must maintain a fixed charge coverage ratio
(as defined) of not less than 1.5 to 1.0, a tangible net worth of not less than
$119,600,000 and funded debt to total capitalization (as defined) may not exceed
40%. The Company is in compliance with all such covenants.
Capital expenditures were $13,064,000 and $10,197,000 for fiscal 1997 and 1996,
respectively.
Expenditures in 1997 were primarily for the build out of 32 of the 35 stores
that were opened during fiscal 1997 (including two large format stores), the
remodeling of 4 existing stores, the build out of the first three stores that
were opened in fiscal 1998 (including one large format store), and the start of
construction of the 130,000 square foot addition to the existing distribution
center.
Expenditures in 1996 were primarily for the build out of 32 of the 35 stores
that were opened during fiscal 1996 (including one large format store), the
remodeling of 7 existing stores, the build out of the first three stores that
were opened in fiscal 1997 and the addition of 40,000 square feet of floor space
in the existing warehouse through the addition of a mezzanine level.
The Company anticipates that total capital expenditures for fiscal 1998 will be
approximately $24,000,000, primarily for the opening of 50 to 60 new stores
(including 11 larger format stores), the remodeling of 10-14 existing stores and
the completion of the 130,000 square foot addition to the existing distribution
center. The Company estimates that its cash requirement to open a traditional
format new store (up to 10,000 square feet) will range from $375,000 to $425,000
(net of construction allowance) and from $900,000 to $1.9 million (net of
construction allowance) for a large format new store (10,000 to 25,000 square
feet). These requirements for a traditional store include approximately $200,000
for fixtures, equipment, leasehold improvements and pre-opening expenses and
$325,000 ($200,000 net of payables) in new store inventory. The cash
requirements for a large format store include approximately $500,000 to $1.0
million for fixtures, equipment, leasehold improvements and pre-opening expenses
and $1.5 million ($900,000 net of payables) in new store inventory.
Management believes that cash on hand, operating cash flow and borrowings under
the Company's existing Facility will be sufficient to complete the Company's
fiscal 1998 store expansion program and to satisfy the Company's other capital
requirements through fiscal 1998.
EFFECTS OF INFLATION
As the costs of inventory and other expenses of the Company have increased, the
Company has generally been able to increase its selling prices. In periods of
high inflation, increased build out and other costs could adversely affect the
Company's expansion plans.
In 1996, President Clinton signed a bill that among other items, increased the
minimum wage effective October 1, 1996 from $4.25 to $4.75 per hour and
subsequently to $5.15 per hour on September 1, 1997. Although many of the
Company's store employees are part-time and paid hourly, the passage of this
bill is not expected to have a material adverse effect on the Company's
financial condition or results of operation.
17
<PAGE>
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS OF THE FINISH LINE, INC.
We have audited the accompanying balance sheets of The Finish Line, Inc. as of
March 1, 1997 and February 29, 1996, and the related statements of income, cash
flows, and changes in stockholders' equity for each of the three years in the
period ended March 1, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Finish Line, Inc. at March
1, 1997 and February 29, 1996 and the results of its operations and its cash
flows for each of the three years in the period ended March 1, 1997, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Fort Wayne, Indiana
March 26, 1997
18
<PAGE>
BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
MARCH 1, FEBRUARY 29,
1997 1996
- -----------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 51,212 $ 1,686
Short-term marketable securities 11,516 --
Accounts receivable 4,849 1,099
Merchandise inventories 81,991 76,088
Deferred income taxes 2,785 1,608
Other 3,631 524
- ---------------------------------------------------------------------
Total current assets 155,984 81,005
Property and Equipment
Land 315 315
Building 4,238 4,156
Leasehold improvements 32,732 26,898
Furniture, fixtures, and
equipment 14,071 11,235
Construction in progress 4,120 1,596
- ---------------------------------------------------------------------
55,476 43,200
Less accumulated depreciation 15,958 11,441
- ---------------------------------------------------------------------
39,518 31,759
Other Assets
Marketable securities 20,106 --
Deferred income taxes 2,110 2,208
- ---------------------------------------------------------------------
22,216 112,208
- ---------------------------------------------------------------------
Total assets $217,718 $114,972
=====================================================================
<CAPTION>
- ----------------------------------------------------------------------------
MARCH 1, FEBRUARY 29,
1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 27,589 $ 29,717
Note payable to bank -- 9,500
Employee compensation 4,853 3,234
Accrued income taxes 5,176 2,074
Accrued property and sales tax 2,448 1,869
Other liabilities and accrued expenses 3,839 2,158
- -------------------------------------------------------------------------
Total current liabilities 43,905 48,552
Long-term deferred rent payments 3,938 3,272
Stockholders' Equity
Preferred stock, $.01 par value;
1,000 shares authorized; none
issued -- --
Common Stock, $.01 par value
Class A:
Shares authorized-30,000
Shares issued and outstanding
(1997-17,192; 1996-8,162) 172 41
Class B:
Shares authorized-12,000
Shares issued and outstanding
(1997-8,750; 1996-12,470) 87 62
Additional paid-in capital 118,132 30,374
Retained earnings 51,484 32,671
- -------------------------------------------------------------------------
Total stockholders' equity 169,875 63,148
- -------------------------------------------------------------------------
Total liabilities and stockholders' equity $217,718 $114,972
</TABLE>
See accompanying notes
19
<PAGE>
STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
YEAR ENDED
- ----------------------------------------------------------------------------
MARCH 1, FEBRUARY 29, FEBRUARY 28,
1997 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $332,002 $240,155 $191,623
Cost of sales
(including occupancy expenses) 229,187 168,912 132,726
- -------------------------------------------------------------------------
Gross profit 102,815 71,243 58,897
Selling, general, and
administrative expenses 72,282 54,254 44,548
- -------------------------------------------------------------------------
Operating income 30,533 16,989 14,349
Interest expense (income) (824) 892 317
- -------------------------------------------------------------------------
Income before income taxes 31,357 16,097 14,032
Income taxes 12,544 6,439 5,618
- -------------------------------------------------------------------------
Net income $ 18,813 $ 9,658 $ 8,414
=========================================================================
Fully diluted net income per share $ .79 $ .47 $ .41
=========================================================================
Weighted average shares and
share equivalents 23,761 20,712 20,630
=========================================================================
</TABLE>
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
YEAR ENDED
- ------------------------------------------------------------------------------------------------------
MARCH 1, FEBRUARY 29, FEBRUARY 28,
1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 18,813 $ 9,658 $ 8,414
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 5,013 3,982 2,888
Deferred income taxes (1,079) (468) (835)
(Gain) loss on disposal of property and equipment 59 213 (15)
Changes in operating assets and liabilities:
Accounts receivable (3,750) 815 (881)
Merchandise inventories (5,903) (20,590) (9,568)
Other current assets (3,107) 158 (280)
Tax deposits and other assets -- 147 (43)
Accounts payable (2,128) 10,445 1,391
Employee Compensation 1,619 664 608
Accrued income taxes 3,102 (386) 1,038
Other liabilities and accrued expenses 2,260 965 554
Deferred rent payments 666 613 621
- --------------------------------------------------------------------------------------------------
Net cash provided by operating activities 15,565 6,216 3,892
INVESTING ACTIVITIES
Purchases of property and equipment (13,064) (10,197) (10,025)
Proceeds from disposals of property and equipment 233 211 418
Purchases of short-term marketable securities (16,496) -- --
Proceeds from maturity of short-term
marketable securities 4,980 -- --
Purchase of marketable securities (20,106) -- --
- --------------------------------------------------------------------------------------------------
Net cash used in investing activities (44,453) (9,986) (9,607)
FINANCING ACTIVITIES
Proceeds from short-term and long-term debt 42,200 102,100 59,249
Principal payments on short-term
and long-term debt (51,700) (97,625) (56,224)
Net proceeds from public offerings 84,467 -- --
Proceeds and tax benefits from exercise
of stock options 3,447 3 --
- --------------------------------------------------------------------------------------------------
Net cash provided by financing activities 78,414 4,478 3,025
- --------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 49,526 708 (2,690)
Cash and cash equivalents at beginning of year 1,686 978 3,668
- --------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 51,212 $ 1,686 $ 978
==================================================================================================
</TABLE>
See accompanying notes
20
<PAGE>
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
------------------------------------------------------
NUMBER OF SHARES AMOUNT ADDITIONAL
PAID-IN RETAINED
CLASS A CLASS B CLASS A CLASS B CAPITAL EARNINGS TOTALS
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT MARCH 1, 1994 8,072 12,558 $ 40 $ 63 $ 30,371 $14,599 $ 45,073
Net Income for 1995 8,414 8,414
Conversion of Class B Common Stock
to Class A Common Stock 46 (46)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT FEBRUARY 28, 1995 8,118 12,512 40 63 30,371 23,013 53,487
Net income for 1996 9,658 9,658
Conversion of Class B Common Stock
to Class A Common Stock 42 (42) 1 (1) --
Non-qualified Class A Common Stock
options exercised 2 3 3
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT FEBRUARY 29, 1996 8,162 12,470 41 62 30,374 32,671 63,148
Net income for 1997 18,813 18,813
Secondary Public Offering of Class
A Common Stock -- June 19, 1996 2,600 13 33,546 33,559
Secondary Public Offering of Class
A Common Stock -- December 18, 1996 2,400 24 50,884 50,908
Conversion of Class B Common Stock
to Class A Common Stock 3,720 (3,720) 37 (37) --
Two-for-One Stock Split 54 62 (116) --
Non-qualified Class A Common Stock
options exercised 310 3 3,444 3,447
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 1, 1997 17,192 8,750 $172 $ 87 $118,132 $51,484 $169,875
====================================================================================================================================
</TABLE>
See accompanying notes
21
<PAGE>
NOTES TO FINANCIAL STATEMENTS
I. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements include the accounts of The Finish Line, Inc. ("the
Company"). Throughout these notes to the financial statements, the fiscal years
ended March 1, 1997, February 29, 1996, and February 28, 1995 are referred to as
1997, 1996, and 1995, respectively.
Effective with the quarter ended March 1, 1997, the Company changed to a
"Retail" calendar. The Company's fiscal year will now end on the Saturday
closest to the last day of February.
Nature of Operations
Finish Line is a specialty retailer of men's, women's and children's brand-name
athletic, outdoor and lifestyle footwear, activewear and accessories. Finish
Line stores average approximately 4,300 square feet in size and are primarily
located in enclosed malls in the Midwest, Southeast and South.
In 1997, the Company purchased approximately 89% of its merchandise from its
five largest suppliers. The largest supplier, Nike, accounted for approximately
69%, 50% and 40% of merchandise purchases in 1997, 1996 and 1995, respectively.
Use of Estimates
Preparation of the financial statements requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Fully Diluted Net Income Per Share
The computation of net income per share is based on the weighted average number
of shares outstanding during each period and the assumed exercise of dilutive
stock options.
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments with a maturity
date of three months or less when purchased.
Merchandise Inventories
Merchandise inventories are valued at the lower of cost or market using a
weighted average cost method, which approximates the first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
generally provided using the straight-line method over the estimated useful
lives of the assets, or where applicable, the terms of the respective leases,
whichever is shorter.
Store Opening and Closing Costs
Store opening costs and other non-capitalized expenditures incurred prior to
opening new retail stores are expensed on a pro rata basis throughout the fiscal
year in which the store is opened. When a decision to close a retail store is
made, the Company expenses any remaining future net lease obligation,
nonrecoverable investment in property and equipment and other costs related to
the store closure.
Deferred Rent Payments
The Company is a party to various lease agreements which require scheduled rent
increases over the noncancelable lease term. Rent expense for such leases is
recognized on a straight-line basis over the related lease term. The difference
between rent based upon scheduled monthly payments and rent expense recognized
on a straight-line basis is recorded as deferred rent payments.
Advertising
The Company expenses the cost of advertising as incurred. Advertising expense
net of co-op credits for the years ended 1997, 1996, and 1995 amounted to
$4,950,000, $3,524,000, and $3,020,000, respectively.
Financial Instruments
Financial instruments consist of cash and cash equivalents, marketable
securities, accounts payable, and notes payable. The fair value of cash and cash
equivalents, accounts payable, and notes payable approximate fair value. At
March 1, 1997 and February 29, 1996, the Company had not invested in any
derivative financial instruments.
The Company classifies its marketable securities in one of three categories:
trading, available-for-sale, or held-to-maturity. Trading securities are bought
and held for resale in anticipation of short-term market movements. Held-to-
maturity securities are those securities which the Company has the positive
intent and ability to hold until maturity. Marketable securities not included in
trading or held-to-maturity are classified as available-for-sale. The Company
does not have any securities classified as trading or available-for-sale.
Management determines the appropriate classification of marketable securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. Held-to-maturity securities are stated at amortized cost, adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization is included in investment income. Interest on securities classified
as held-to-maturity is included in investment income.
2. MARKETABLE SECURITIES
At March 1, 1997 the Company classified all marketable securities as held-to-
maturity. The Company held no marketable securities prior to 1997. The following
is a summary of marketable securities at March 1, 1997 (in thousands).
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal
Obligations $31,622 $88 $(17) $31,693
================================================================================
</TABLE>
The amortized cost and estimated fair value of marketable securities at March 1,
1997 by contractual maturity are shown below. Expected maturities may differ
from contractual maturities because the issuers of the securities may have the
right to prepay obligations without prepayment penalties.
<TABLE>
<CAPTION>
ESTIMATED
COST FAIR VALUE
- ----------------------------------------------------
<S> <C> <C>
Due in one year or less $11,516 $11,516
Due after one year
through three years 7,029 7,041
Due after three years
through five years 9,552 9,593
Due after five years 3,525 3,543
- ----------------------------------------------------
$31,622 $31,693
====================================================
</TABLE>
3. DEBT AGREEMENT
The Company has an unsecured committed Loan Agreement (the "Facility") with a
commercial bank in the amount of $30,000,000, which expires on September 1,
1999. At March 1, 1997, there were no borrowings outstanding under the Facility.
The Facility contains restrictive covenants which limit, among other things,
mergers, and dividends. In addition, the Company must maintain a fixed
22
<PAGE>
charge coverage ratio (as defined) of not less than 1.5 to 1.0, a tangible net
worth of not less than $119,600,000, and funded debt to total capitalization (as
defined) may not exceed 40%. The Company was in compliance with all restrictive
covenants of the debt agreement in effect at March 1, 1997.
The interest rate on the Facility is, at the Company's election, either the
bank's Federal Funds Rate plus .5%, the bank's LIBOR Rate plus .375% or the
bank's prime commercial lending rate. The margin percentage added to the Federal
Funds Rate and LIBOR Rate is subject to adjustment quarterly based on the fixed
charge coverage ratio (as defined). Interest expense for 1997, 1996, and 1995
was $242,000, $821,000 and $233,000, respectively. Interest paid on the Facility
during 1997, 1996, and 1995 amounted to $298,000, $773,000, and $225,000,
respectively. The Company pays a commitment fee on the unused portion of the
Facility at an effective annual rate of .1%.
4. LEASES
The Company leases retail stores under noncancelable operating leases which
generally have lease terms ranging from five to ten years. Most of these lease
arrangements do not provide for renewal periods. Many of the leases contain
contingent rental provisions computed on the basis of store sales. In addition
to rent payments, certain leases require the Company to pay real estate taxes,
insurance, maintenance, and other costs. The components of rent expense incurred
under these leases is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
- -----------------------------------------------------------
MARCH 1, FEBRUARY 29, FEBRUARY 28,
1997 1996 1995
- -----------------------------------------------------------
<S> <C> <C> <C>
Base rent $17,716 $14,042 $11,079
Deferred rent 666 613 621
Contingent rent 2,868 1,509 859
- -----------------------------------------------------------
Rent expense $21,250 $16,164 $12,559
===========================================================
</TABLE>
A schedule of future fixed rent payments by fiscal year for signed operating
leases at March 1, 1997 with initial or remaining noncancelable terms of one
year or more is as follows (in thousands):
<TABLE>
<S> <C>
1998 $ 21,594
1999 22,273
2000 22,002
2001 21,712
2002 20,967
Thereafter 74,873
----------------------------
$183,421
============================
</TABLE>
This schedule of future fixed rent payments includes lease commitments for
eleven new stores which were not open as of March 1, 1997.
5. INCOME TAXES
The components of income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
- -------------------------------------------------------------------
MARCH 1, FEBRUARY 29, FEBRUARY 28,
1997 1996 1995
- -------------------------------------------------------------------
<S> <C> <C> <C>
Currently payable:
Federal $10,741 $5,570 $5,162
State 2,882 1,337 1,291
- -------------------------------------------------------------------
13,623 6,907 6,453
- -------------------------------------------------------------------
Deferred:
Federal (850) (371) (663)
State (229) ( 97) (172)
- -------------------------------------------------------------------
(1,079) (468) (835)
- -------------------------------------------------------------------
$12,544 $6,439 $ 5,618
===================================================================
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the amount of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 1, FEBRUARY 29,
1997 1996
- ------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Deferred rent accrual $1,575 $1,343
Store opening supplies 1,225 1,073
Uniform capitalization 1,016 819
Vacation accrual 325 224
Bonus accrual 1,251 438
Other 194 127
- ------------------------------------------------------------
Total deferred tax assets 5,586 4,024
- ------------------------------------------------------------
Deferred tax liabilities:
Tax over book depreciation (691) (208)
- ------------------------------------------------------------
Net deferred tax assets $4,895 $3,816
============================================================
</TABLE>
Payments of income taxes for 1997, 1996, and 1995 were $9,122,000, $7,465,000,
and $5,579,000, respectively.
6. PROFIT SHARING PLAN
The Company sponsors a defined contribution profit sharing plan which covers
substantially all employees who have completed one year of service.
Contributions to this plan are discretionary and are allocated to employees as a
percentage of each covered employee's salary. The Company's total expense for
the plan in 1997, 1996, and 1995 amounted to $1,338,000, $815,000, and $900,000,
respectively.
7. STOCK OPTIONS
On March 27, 1992, the Board of Directors of the Company adopted and approved
the 1992 Incentive Plan (the "Plan"), which allows the grants of incentive stock
options and other awards. The Board of Directors has reserved 1,700,000 shares
of Class A Common Stock for issuance upon exercise of options or grants of other
awards under the Plan.
Subject to the provisions of the Plan, the Compensation and Stock Option
Committee determines the terms of awards under the Plan, including exercise
price, vesting and expiration. All options outstanding under the Plan as of the
end of fiscal 1997 are exercisable at a price equal to the fair market value on
the date of grant, vest over four years and expire ten years after the date of
grant.
On July 21, 1994, the Company's stockholders approved The Finish Line, Inc. Non-
Employee Director Stock Option Plan (the "Director Plan"), which allows the
grant of a maximum of 150,000 shares of Class A Common Stock to non-employee
directors of the Company.
Subject to the provisions of the Director Plan, upon initial election as a non-
employee director, each such director will be granted a non-qualified stock
option to purchase 6,000 shares of the Class A Common Stock. In addition, each
non-employee director will be automatically granted, on an annual basis, a non-
qualified stock option to purchase 4,000 shares of the Company's Class A Common
Stock on the date of each Annual Meeting of Stockholders commencing with the
Annual Meeting of Stockholders at which the non-employee director is granted the
initial 6,000 share option. The per share exercise
23
<PAGE>
price of the options will be the fair market value of a share of the Company's
Class A Common Stock on the date of grant. Each option will have a term of ten
years and will become fully exercisable one year after a non-employee director's
initial election to the board. Options granted under the Director Plan amounted
to 8,000, 8,000 and 20,000 in 1997, 1996 and 1995, respectively.
The Company adopted Statement of Financial Accounting Standards No. 123 ("SFAS
123") "Accounting for Stock-Based Compensation" during 1997. SFAS 123 required
the Company to either adopt a fair value based method of expense recognition for
all stock compensation based awards, or provide pro forma net income and
earnings per share information as if the recognition and measurement provisions
of SFAS 123 had been adopted. The Company decided to account for its stock based
compensation awards following the provisions of Accounting Principles Board
Opinion No. 25 ("APB 25"). APB 25 requires compensation expense to be recognized
only if the market price of the underlying stock exceeds the exercise price on
the date of grant. The Company's stock based awards consists of stock options
with an exercise price equal to market price on the date of grant. As such, the
Company has not recorded compensation expense in connection with these awards.
In addition, the effect of applying the SFAS 123 fair value method to the
Company's stock-based awards results in net income and EPS that are not
materially different from amounts reported.
A reconciliation of the Company's stock option activity and related information
under both plans is as follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
OF OPTIONS EXERCISE PRICE
- ------------------------------------------------------------
<S> <C> <C>
February 28, 1994 352,002 $ 6.47
Granted 345,000 3.97
Exercised -- --
Canceled (33,000) 5.65
- ------------------------------------------------------------
February 28, 1995 664,002 5.21
Granted 562,500 3.89
Exercised (600) 4.00
Canceled (57,400) 4.60
- ------------------------------------------------------------
February 29, 1996 1,168,502 4.61
Granted 16,000 17.00
Exercised (311,650) 5.51
Canceled (34,000) 4.41
- ------------------------------------------------------------
March 1, 1997 838,852 $ 4.52
============================================================
</TABLE>
Exercise prices for options outstanding as of March 1, 1997 ranged from $3.38 to
$22.38. The weighted-average remaining contractual life of those options is 7.9
years. Exercisable stock options were 108,702, 208,112, and 100,674 at fiscal
year end 1997, 1996, and 1995, respectively. The weighted average exercise price
of those options exercisable at March 1, 1997 is $4.66.
8. COMMON STOCK
At March 1, 1997, shares of the Company's stock outstanding consisted of Class A
and Class B Common Stock. Class A and Class B Common Stock have identical rights
with respect to dividends and liquidation preference. However, Class A and Class
B Common Stock differ with respect to voting rights, convertibility, and
transferability.
Holders of Class A Common Stock are entitled to one vote for each share held of
record, and holders of Class B Common Stock are entitled to ten votes for each
share held of record. The Class A Common Stock and the Class B Common Stock vote
together as a single class on all matters submitted to a vote of stockholders
(including the election of directors), except that, in the case of a proposed
amendment to the Company's Restated Certificate of Incorporation that would
alter the powers, preferences or special rights of either the Class A Common
Stock or the Class B Common Stock, the class of Common Stock to be altered shall
vote on the amendment as a separate class. Shares of Class A and Class B Common
Stock do not have cumulative voting rights.
While the shares of Class A Common Stock are not convertible into any other
series or class of the Company's securities, each share of Class B Common Stock
is freely convertible into one share of Class A Common Stock at the option of
the Class B Stockholders.
Shares of Class B Common Stock may not be transferred to third parties (except
for transfer to certain family members of the holders and in other limited
circumstances). All of the shares of Class B Common Stock are held by the
Principal Stockholders and their family members.
On November 14, 1996 the Company increased the number of authorized shares of
Class A Common Stock to 30,000,000 from 20,000,000. The Company increased the
number of authorized shares in order to implement a two-for-one stock split.
9. STOCK SPLIT
On September 27, 1996, the Company's Board of Directors declared a two-for-one
split of the Company's Class A and Class B Common Stock which was distributed
after the close of business on November 15, 1996 in the form of a 100% stock
dividend to shareholders of record as of October 18, 1996. All references in the
financial statements to number of shares, per share amounts and prices per share
of the Company's Class A and B Common Stock have been retroactively restated to
reflect the impact of the Company's stock split.
10. PUBLIC OFFERINGS
The Company completed a secondary offering (the "Secondary Offering") of its
Class A Common Stock on June 19, 1996 pursuant to which the Company sold
2,600,000 shares of Class A Common Stock at an offering price of $13.75 per
share. Net proceeds to the Company from the Secondary Offering (after deducting
the underwriting discount of $1,781,000 and expenses of $410,000) were
$33,559,000. These proceeds were used to repay bank indebtedness of $15,000,000
and for general corporate purposes.
The Company completed a secondary public offering (the "December 1996 Secondary
Offering") of its Class A Common Stock on December 18, 1996, pursuant to which
the Company sold 2,400,000 shares of its Class A Common Stock at an offering
price of $22.50 per share. Net proceeds to the Company from the December 1996
Secondary Offering (after deducting the underwriting discount of $2,700,000 and
expenses of $392,000) were $50,908,000. These proceeds will be used to finance
the accelerated expansion of the Company's store base as well as for potential
acquisitions and general corporate purposes.
24
<PAGE>
OFFICERS AND DIRECTORS
- -------------------------------------------------------------------------------
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
OFFICER OR
NAME AGE POSITION DIRECTOR SINCE
<S> <C> <C> <C>
Alan H. Cohen/(1)/ 50 Chairman of the Board of Directors, 1976
President and Chief Executive Officer
David I. Klapper 48 Executive Vice President, Director 1976
David M. Fagin 53 Executive Vice President, Director 1982
Larry J. Sablosky 48 Executive Vice President, Director 1982
Joseph W. Wood 49 Sr. Vice President - Merchandising and Marketing 1995
Steven J. Schneider 41 Sr. Vice President - Finance, Secretary and Chief Financial Officer 1989
Donald E. Courtney 42 Sr. Vice President - MIS and Distribution 1989
George S. Sanders 39 Sr. Vice President - Real Estate and Store Development 1994
Michael L. Marchetti 46 Sr. Vice President - Store Operations 1995
Thomas R. Sicari 43 Vice President - General Merchandise Manager 1997
Kevin S. Wampler 34 Vice President - Corporate Controller and Assistant Secretary 1997
Robert A. Edwards 34 Vice President - Distribution 1997
Kevin G. Flynn 33 Vice President - Marketing 1997
Jonathan K. Layne/(1)(2)(3)/ 43 Director 1992
Jeffrey H. Smulyan/(1)(2)(4)/ 49 Director 1992
</TABLE>
[MAP OF U.S. SHOWING *CORPORATE HEADQUARTERS AND DISTRIBUTION CENTERS APPEARS
HERE]
The map depicts the locations by state of the Company's stores. As of April 1,
1997, the Company operated 260 stores in 27 states.
(1) Member of the Audit Committee
(2) Member of the Compensation and Stock Option Committee
(3) Mr. Layne is a partner in the law firm of Gibson, Dunn & Crutcher
(4) Mr. Smulyan is Chairman of the Board and President of Emmis Broadcasting
Corporation
STOCKHOLDER INFORMATION
- --------------------------------------------------------------------------------
TRANSFER AGENT AND REGISTRAR:
American Stock Transfer & Trust Co.
Shareholder Services
40 Wall Street
New York, NY 10005
STOCK MARKET INFORMATION:
The Company's Class A Common Stock is traded on the NASDAQ National Market
System under the symbol FINL. As of April 4, 1997, the approximate number of
holders of record of Class A Common Stock was 260. The Company believes that the
number of beneficial holders of its Class A Common Stock was in excess of 500 as
of that date. On April 4, 1997 the closing price for the Company's Class A
Common Stock, as reported by NASDAQ, was $23.38.
FINANCIAL REPORTS:
A copy of Form 10-K, the Company's annual report to the Securities and Exchange
Commission, for the current period can be obtained without charge by writing to:
The Finish Line, Inc.
Attn: Chief Financial Officer
3308 N. Mitthoeffer Road
Indianapolis, IN 46236
www.thefinishline.com
<PAGE>
IN THE STARTING BLOCKS
In October 1976, two boyhood friends started down a path that would lead them to
becoming one of the premier specialty athletic retailers in the nation.
Beginning with a meager investment of $60,000, Finish Line opened its doors in
the heart of downtown Indianapolis, right on Monument Circle. Originally a
franchise of the Athlete's Foot, the Company was operated by Alan Cohen and
David Klapper who saw a future in the fledgling athletic footwear business.
Back then, the mania for athletic shoes and equipment hadn't yet been
established. However, adidas had already carved a successful reputation for
itself as the nation's leading athletic shoe developer, followed closely behind
by Converse and Puma. Nike was just a tiny company starting out on the West
Coast.
By 1981, the owners (avid athletes themselves) were operating twelve stores and
were ready to expand beyond Indiana. Since Athlete's Foot franchise rights ended
at the Indiana border, they decided to start their own Company called Finish
Line. Klapper and Cohen approached a childhood friend, Larry Sablosky, with a
full partnership opportunity. Dave Fagin, a manufacturer's rep who had been
selling goods to Cohen and Klapper, was also offered the same deal.
From the outset, Finish Line's niche was to sell brand-name athletic shoes and
activewear at a competitive price. That strategy has clearly paid off. By 1991,
the Company had grown to 105 stores located primarily throughout the Midwest and
Southeastern states; the company's annual gross sales were nearly $100 million.
Clearly eyeing the future as a national retail chain, the foursome took the
Company public in 1992.
Today, a mere five years later, Finish Line operates 260 stores in 27 states.
With the help of more than 5,000 employees, both in the stores and in the
Indianapolis corporate office, Finish Line has grown to become one of the
largest athletic specialty stores in the country.
EYEING THE FINISH LINE
As the specialty athletic industry has grown, so has Finish Line. If you walk
into a Finish Line store today you will see that our product lines have greatly
expanded. Known for our signature "wall of shoes," a typical Finish Line store
will carry the largest selection of men's, women's and kid's athletic and casual
shoes in the mall. A typical Finish Line store will show between 600-1,300
different kinds of athletic and casual footwear, including basketball, running,
walking, aerobics, outdoor, cross training, cleated, sandals and casual shoes.
Some stores also carry golf shoes as well as in-line skates.
Nike, that new company on the West Coast when the "Finish Line boys" were
getting started, today comprises almost 60 percent of the products sold by
Finish Line. Other brand leaders include Fila, adidas, Reebok and Timberland.
But the Company doesn't just sell shoes. Today, approximately 33 percent of all
sales come from activewear and accessories. This includes the latest in
functional and fashion products from Nike, adidas and Fila, professional and
college licensed products including replica jerseys from Champion and Starter,
and a wide variety of T-shirts, shorts, caps and outerwear from other well-known
manufacturers.
As the market continues to change and expand, so does Finish Line. The Company's
buyers are constantly searching for the newest fashions and trends to keep our
product mix exciting. The Real Estate department continues to seek profitable,
high traffic locations in order to expand Finish Line's presence as a national
retailer.
While the company's size has increased dramatically over the past 20 years, the
style of management and commitment to outstanding customer service has remained
the same. Hard work, dedication, commitment to selling quality goods at a fair
price are the hallmarks of Finish Line's philosophy. It's no wonder that Finish
Line continues to eye the future as a winner in today's race in retail athletic
fashion.
<PAGE>
FINISH LINE
3308 NORTH MITTHOEFFER ROAD, INDIANAPOLIS, INDIANA 46236 (317) 899-1022
www.thefinishline.com
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE FINISH LINE, INC.
SUBSIDIARY STATE OF INCORPORATION PERCENTAGE OF OWNERSHIP
- ---------- ---------------------- -----------------------
Spike's Holding, Inc. Delaware 100%
Exhibit 21
<PAGE>
EXHIBIT 23
[LETTERHEAD OF ERNST & YOUNG LLP]
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of The Finish Line, Inc. of our report dated March 26, 1997, included in the
1997 Annual Report to Stockholders of The Finish Line, Inc.
Our audits also included the financial statement schedule of The Finish Line,
Inc. listed in Item 14(d). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration
Statements (Form S-8 Nos. 33-95720 and 33-51392) pertaining to The Finish Line,
Inc. 1992 Employee Stock Incentive Plan and the Registration Statement (Form S-8
No. 33-84590) pertaining to The Finish Line, Inc. Non-Employee Director Stock
Option Plan of our report dated March 26, 1997, with respect to the financial
statements incorporated herein by reference, and our report included in the
preceding paragraph with respect to the financial statement schedule included in
this Annual Report (Form 10-K) of The Finish Line, Inc.
ERNST & YOUNG LLP
Fort Wayne, Indiana
May 12, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR THE YEAR ENDED MARCH 1, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-01-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> MAR-01-1997
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<SECURITIES> 11,516
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<COMMON> 259
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