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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
FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
AT OF 1934
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
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(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
-----------------
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 APRIL 24, 1998 WAS APPROXIMATELY $452,364,000 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 APRIL 24,
1998 WAS:
CLASS A COMMON STOCK: 18,862,982
CLASS B COMMON STOCK: 7,249,068
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE REGISTRANT'S PROXY STATEMENT DATED JUNE 9, 1998 FOR THE ANNUAL
MEETING OF STOCKHOLDERS TO BE HELD ON JULY 16, 1998 (HEREINAFTER REFERRED TO AS
THE "1998 PROXY STATEMENT") ARE INCORPORATED INTO PART III.
PORTIONS OF THE REGISTRANT'S ANNUAL REPORT TO STOCKHOLDERS FOR THE FISCAL YEAR
ENDED FEBRUARY 28, 1998 (HEREINAFTER REFERRED TO AS THE "1998 ANNUAL REPORT TO
STOCKHOLDERS") ARE INCORPORATED INTO PARTS II AND IV.
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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"or "Finish Line") 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, 1998, the Company operated 304 stores in 33 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, adidas, Reebok,
Fila, Lugz, Converse, Champion, Nautica, 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 5,250 square feet, and the Company's stores opened during
fiscal 1998 averaged approximately 8,100 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 31% of the
Company's net sales in fiscal 1998.
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 304 stores at April 1, 1998. The
Company opened 53 new stores in fiscal 1998 and intends to open 50 to 60 new
stores in fiscal 1999, which represents increases of approximately 21% in fiscal
1998 and 16% to 20% in fiscal 1999. Total square footage increased 46% in fiscal
1998 as a result of the Company's strategy of opening larger traditional stores,
as well as selected larger format stores.
For fiscal 1999 the Company plans to increase its total square footage open
by approximately 30%. Much of this square footage growth will result from a
continued emphasis on larger 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 five 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. In
conjunction with these large stores the Company has developed three store
formats:
TRADITIONAL FORMAT CONCEPT - These stores are less than 10,000 square feet
in size. They typically are stocked with 600-700 footwear styles and 10,000+
shoes. While the average size of all traditional concept stores is 4,500 square
feet, traditional concept stores opened in fiscal 1998 averaged 5,800 square
feet.
MEDIUM FORMAT CONCEPT - These stores are 10,000 to 14,999 square feet in
size. They are typically stocked with 1,000 footwear styles and 20,000 shoes.
In this size store the Company features innovations such as Nike Concept Shops.
LARGE FORMAT CONCEPT - These stores are more than 15,000 square feet in
size. They are typically stocked with 1,300 footwear styles and 30,000+ shoes.
This format offers Finish Line the opportunity to establish a dominant presence
in the best major malls throughout the country.
COMMITMENT TO CONTINUALLY STRENGTHEN INFRASTRUCTURE. Over the past three 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
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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.
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 June 1997, the Company
completed a 130,000 square foot addition to its distribution center. Projects
currently under construction are a 22,000 square foot addition to the existing
office building and a 100,000 square foot addition of floor space in the
existing distribution center through the addition of mezzanine levels.
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
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Feb. 28, March 1, Feb. 29,
Category 1998 1997 1996
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<S> <C> <C> <C>
Footwear 69% 68% 67%
Activewear/Accessories 31% 32% 33%
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Total 100% 100% 100%
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</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, adidas, Reebok, Lugz. Fila, Nautica, Asics, Timberland, Airwalk, Rockport,
Clarks, Ecco, Lugz, Converse and many others. To make shopping easier for
customers, footwear is categorized into definable sections including:
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.
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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, North Face, Timberland and Helly
Hansen. In addition, the Company offers fashion brands including FuBu, Perry
Ellis, RP55 and enyce. Many vendors offer footwear, activewear and accessories
in "collections". 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
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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 1998 and fiscal 1997 was 1.7% and 1.5%, respectively, 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, adidas, Reebok and Fila.
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 165 suppliers and
manufacturers of athletic and fashion products, the largest of which (Nike)
accounted for approximately 63% and 69% of total purchases in fiscal 1998 and
fiscal 1997, respectively. The Company purchased approximately 87% and 89% of
total merchandise in fiscal 1998 and fiscal 1997, respectively, from its five
largest suppliers. The Company and its vendors have the capability to use EDI
technology to streamline purchasing and distribution operations.
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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. The existing facility
includes 24,000 square feet of office space and 256,000 square feet of warehouse
space. During fiscal 1998, the Company commenced building 100,000 square feet
of additional floor space in the distribution center through the addition of
mezzanine levels and commenced building a 22,000 square foot addition to its
existing office space. These projects are expected to be completed by June
1998. The Company believes it has the ability to significantly expand the
distribution center on its existing 33 acres.
The Company has implemented 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.
As is commonly known, there is a potential issue facing companies regarding
the ability of information systems to accommodate the year 2000. The Company has
completed an assessment and will have to modify portions of its software so that
its computer systems will function properly with respect to dates in the year
2000 and thereafter. The Company believes that with modifications to existing
software and conversions to new software, the year 2000 issue will not pose
significant operational problems for its computer systems. The costs related to
these modification are not expected to exceed $250,000.
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The Company has initiated formal communications with all of its significant
suppliers to determine the extent to which the Company's interface systems are
vulnerable to those third parties failure to remidiate their own year 2000
issues. There is no guarantee that the systems of other companies on which the
Company's systems rely will be timely converted and would not have an adverse
effect on the Company's systems.
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 helps to
control inventory shrinkage, which was approximately 1.1% of net sales in fiscal
1998.
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
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As of April 1, 1998, Finish Line operated 304 stores in 33 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. 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 19
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
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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 1998, the Company estimates that the cash
requirements for opening a traditional new store (under 10,000 square feet) will
approximate $475,000. This estimate includes $250,000 for fixtures, equipment,
leasehold improvements and pre-opening expenses plus $325,000 ($225,000 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
footage, 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 256,000 square feet of warehouse space. Currently, the Company
is building a 22,000 square foot addition to the existing office and is adding
100,000 square feet of floor space in the existing distribution center through
the addition of mezzanine levels. If the need for significant expansion arises,
the Company believes it has the ability to do so on its existing 33 acres.
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 (Late July through early September) and
holiday (Thanksgiving through Christmas) periods. During the fiscal year ended
February 28, 1998, these periods accounted for approximately 35% of the
Company's annual sales.
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EMPLOYEES
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As of April 1, 1998, the Company employed approximately 7,370 persons, 1,490 of
whom were full-time and 5,880 of whom were part-time. Of this total, 315 were
employed at the Company's Indianapolis, Indiana corporate headquarters and
distribution center and 26 were employed as 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.
PROFIT SHARING PLAN
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The Company has in the past purchased on the open market a limited amount of
Class A Common Stock and later contributed it in lieu of cash to the Company's
profit sharing plan. Although the Company has no current plans to again make
such purchases for such purpose, it may do so in the future.
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.
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 256,000 square feet of warehouse space. The Company has started
construction of a 22,000 square feet addition to the existing office building
and an addition of 100,000 square feet of floor space to the existing
distribution center through the addition of mezzanine levels. These projects
are expected to be completed by June 1998. 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, 1998, the Company operated 304 stores in 33 states. With the
exception of four strip center stores, all Finish Line stores are located in
enclosed shopping malls. The following table sets forth information concerning
the Company's stores.
<TABLE>
<CAPTION>
STATE TOTAL STATE TOTAL
- -------------------------- --------------- ---------------------------- ---------------
<S> <C> <C> <C>
Alabama 2 Missouri 8
Arizona 4 Nebraska 4
Arkansas 2 New Hampshire 1
Colorado 2 New Jersey 2
Connecticut 3 New York 16
Florida 16 North Carolina 14
Georgia 13 Ohio 38
Illinois 22 Oklahoma 6
Indiana 23 Pennsylvania 16
Iowa 5 South Carolina 3
Kansas 8 Tennessee 10
Kentucky 7 Texas 26
Louisiana 5 Virginia 11
Maryland 7 Washington 1
Massachusetts 1 West Virginia 5
Michigan 13 Wisconsin 8
Mississippi 2 ---------------
Total 304
</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
pages 27 through 28 and the inside back cover of the 1998 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 13 of the 1998 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 14 through 17 of the 1998 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
pages 15 through 16 and pages 18 through 26 of the 1998 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 1998 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 1998 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 1998 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 1998 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 1998 Annual Report to
Stockholders are incorporated herein by reference:
Report of Independent Auditors
Consolidated Balance Sheets as of February 28, 1998 and March 1,
1997.
Consolidated Statements of Income for the years ended February 28,
1998, March 1, 1997, and February 29, 1996.
Consolidated Statements of Changes in Stockholders' Equity for the
years ended February 28, 1998, March 1, 1997, and February 29, 1996.
Consolidated Statements of Cash Flows for the years ended February
28, 1998, March 1, 1997 and February 29, 1996.
Notes to Consolidated Financial Statements February 28, 1998.
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
None.
(c) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
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<S> <C>
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.*****
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.*******
</TABLE>
13
<PAGE>
<TABLE>
<S> <C>
10.25 Second Amendment to Loan Agreement among NBD Bank, NA and The Finish
Line, Inc. dated July 16, 1997. ********
10.26 Revolving Credit Agreement among Spike's Holding, Inc., and The Finish
Line, Inc. dated May 4, 1997. ********
11 Statement RE: Computation of Net Income Per Share.
13 Annual Report to Stockholders for the year ended February 28, 1998.
21 Subsidiaries of The Finish Line, Inc.
23 Consent of Ernst & Young LLP (independent auditors).
27.1 Financial Data Schedule for year ended February 28, 1998 and March 1,
1997
27.2 Restated Financial Data Schedule for 39 weeks ended November 29, 1997
and 9 months ended November 30, 1996.
27.3 Restated Financial Data Schedule for 26 weeks ended August 30, 1997 and
6 months ended August 31, 1996.
27.4 Restated Financial Data Schedule for 13 weeks ended May 31, 1997 and 3
months ended May 31, 1996.
* 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 a like numbered 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.
******** Previously filed as a like numbered exhibit to the Registrants'
Quarterly Report on Form 10Q (File No. 01-20184) for the quarter ended
August 30, 1997 and incorporated herein by reference.
</TABLE>
14
<PAGE>
<TABLE>
<S> <C>
(d) Financial Statement Schedule Page
----
Schedule II -- Valuation and Qualifying Accounts 18
</TABLE>
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 6, 1998 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 6, 1998 /s/ Alan H. Cohen
--------------------------
Alan H. Cohen, Chairman of the Board, President and Chief
Executive Officer (Principal Executive Officer)
Date: May 6, 1998 /s/ David I. Klapper
--------------------------
David I. Klapper, Executive Vice President, and Director
Date: May 6, 1998 /s/ David M. Fagin
--------------------------
David M. Fagin, Executive Vice President and Director
Date: May 6, 1998 /s/ Larry J. Sablosky
--------------------------
Larry J. Sablosky, Executive Vice President and Director
Date: May 6, 1998 /s/ Jonathan K. Layne
--------------------------
Jonathan K. Layne, Director
Date: May 6, 1998 /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 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
======= ======= ======== ========= =======
Year ended
February 28, 1998:
Deducted from asset
account:
Reserve for inven-
tory obsolescence....... $ 2,800 $ 200 -- -- $ 3,000
------- ------- -------- --------- -------
Total.................. $ 2,800 $ 200 $ 0 $ 0 $ 3,000
======= ======= ======== ========= =======
</TABLE>
18
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit Numbered
Number Description Page
- ------- ----------------------------------------------------------------- ------------
<S> <C> <C>
11 Statement RE: Computation of Net Income Per Share.
13 Annual Report to Stockholders for the year ended February 28, 1998
21 Subsidiaries of The Finish Line, Inc.
23 Consent of Ernst & Young LLP (independent auditors).
27.1 Financial Data Schedule for year ended February 28, 1998 and
March 1, 1997
27.2 Restated Financial Data Schedule for 39 weeks ended November
29, 1997 and 9 months ended November 30, 1996.
27.3 Restated Financial Data Schedule for 26 weeks ended August 30, 1997
and 6 months ended August 31, 1996.
27.4 Restated Financial Data Schedule for 13 weeks ended May 31, 1997
and 3 months ended May 31, 1996.
</TABLE>
19
<PAGE>
EXHIBIT 11
COMPUTATION OF NET INCOME PER SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended
--------------------------------------
February 28, March 1, February 29,
1998 1997 1996
------------ -------- ------------
<S> <C> <C> <C>
Basic
- -----
Average shares outstanding 25,963 23,100 20,630
========= ======== ========
Net income $26,734 $18,813 $ 9,658
========= ======== ========
Per share amount $ 1.03 $ .81 $ .47
========= ======== ========
Diluted
- -------
Average shares outstanding 25,963 23,100 20,630
Net effect of dilutive stock options 354 402 41
--------- -------- --------
Total 26,317 23,502 20,671
========= ======== ========
Net Income $26,734 $18,813 $ 9,658
========= ======== ========
Per Share Amount $ 1.02 $ .80 $ .47
========= ======== ========
</TABLE>
Exhibit 11
<PAGE>
================================================================================
ABOUT THE COVER
On our cover we tout ourselves as Champions of Achievement. We do so with an
understanding that all of our customers have goals. Whether that goal is to run
a marathon or a mile, the accomplishment of that goal signifies an achievement.
We want to be a part of that. Having adopted "Champions of Achievement" as the
theme of our new branding campaign, we feel it embodies the spirit of Finish
Line and our commitment at every level to be the best athletic specialty
retailer in our industry. Finish Line is more than just a store, it is a
"destination." We do more than just sell product. We help each customer meet
their individual goals.
Company
profile
Finish Line, Inc. is a leading athletic specialty retailer selling brand name
athletic and casual footwear, apparel and accessories to men, women and kids of
all ages. Headquartered in Indianapolis, Indiana, Finish Line began operation in
1976 and now has over 300 exciting mall based stores throughout the United
States.
[MAP APPEARS HERE]
<PAGE>
The Finish Line, Inc.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Fiscal Fiscal Fiscal
Dollars in thousands (except per share data) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $438,911 $ 332,002 $240,155
Operating income 40,799 30,533 16,989
Operating income as a percent to net sales 9.3% 9.2% 7.1%
Net income 26,734 18,813 9,658
Net income as a percent to net sales 6.1% 5.7% 4.0%
Diluted earnings per share $ 1.02 $ .80 $ .47
Number of stores open at end of period 302 251 220
Total retail square feet at end of period 1,586,520 1,088,419 870,340
Average store size 5,253 4,336 3,956
Total assets $255,978 $ 217,718 $114,972
Cash (including short-term & long-term securities) 53,809 82,834 1,686
Total debt -- -- 9,500
Total stockholders' equity 197,122 169,875 63,148
===================================================================================================
</TABLE>
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 1994", "fiscal
1995", "fiscal 1996", "fiscal 1997" and "fiscal 1998" refer to the Company's
fiscal years ended February 28, 1994, February 28, 1995, February 29, 1996,
March 1, 1997 and February 28, 1998, respectively. "Fiscal 1999" and "fiscal
2000" refer to the Company's fiscal years ending February 27, 1999 and February
26, 2000.
[BAR GRAPHS APPEAR HERE]
1
<PAGE>
- --------------------------------------------------------------------------------
LETTER TO SHAREHOLDERS
- --------------------------------------------------------------------------------
Fiscal 1998 was another stellar year for Finish Line. By any standard of
measure we are a better company today than we were a year ago. In spite of
negative industry trends, we achieved record sales, including a same store sales
increase of 6% vs. 16% last fiscal year. We also achieved record net income and
another record high earnings per share of $1.02. As planned, we opened 53 new
stores and remodeled 19 existing stores. We broadened our merchandise selection
even further, and as a result cultivated even more opportunities for growth with
new customers in new and existing markets. Our comparable store sales were
positive for the fourth consecutive year in spite of a difficult athletic
specialty retail environment. I
"By any standard of measurement we are a better company today than
we were a year ago"
am proud to report that our success for the year went beyond financial. Our
"Give the Card that Counts" campaign with the Boys and Girls Clubs of America
raised over $500,000, one dollar at a time, during the past holiday season. This
unique partnership, involving our stores, employees and customers, allows us to
give back to the communities in which we operate by distributing this money back
to the local Boys and Girls Clubs in each community where Finish Line stores are
located.
We are proud of these results, but realize they are yesterday's news. In
fiscal 1999 we will again raise the bar and try to achieve more. How will we get
there? We will open another 50+ new stores, remodel over 20 existing stores, and
establish a presence in 5 new states enhancing our position as the fastest
growing and most innovative mall based retailer of athletic footwear, apparel
and accessories.
We will continue to open our larger store formats (over 10,000 square feet)
at appropriate locations, as we believe having the most entertaining and
exciting athletic specialty store in a given mall is a major competitive
advantage. The larger stores enable us to offer more products to a broader
customer base and demographically this is very powerful. The additional space
can be used to offer more categories of footwear and apparel and more styles in
each category than our competition. Approximately one-third of our sales are in
apparel and accessories versus 12-20% by our major competitors. Traditionally,
the specialty athletic retail customers have primarily been young males ages
12-24. Our larger store formats have broader demographic appeal including men,
women and children of all ages. More selling space and more products make for a
more enjoyable shopping experience. In addition, the larger store allows us the
opportunity to offer value merchandise when it can be procured. Most
importantly, the larger stores with all their competitive advantages will make
Finish Line the destination athletic specialty retailer in the mall.
This year we will complete construction on the addition to our distribution
center and corporate offices, thereby doubling our existing space. Combining the
added space with our POS management information system and inventory control
systems will allow us to distribute merchandise to more stores faster and more
efficiently than ever before.
We will continue to market our stores and brand identity aggressively. In
terms of dollars, we will spend more money than in the past, but that is only
part of the story. We will maximize those dollars by being innovative in our
efforts to reach our target customers.
2
<PAGE>
One of our recent initiatives is "Spike" magazine which we produce and mail
to our customers. The magazine is designed to showcase our broad product
assortment and capture the excitement a customer would feel while visiting our
store. It offers insightful articles on issues and people our customers find
interesting. With sponsorship from most of our vendors, we can use the magazine
to build brand identity for Finish Line and the products we sell. The goals of
our advertising are to build awareness of the Finish Line brand name and to
generate additional store traffic. This will be achieved by utilizing local and
national T.V., print, direct mail and the Internet.
We believe each of these strategic initiatives will help drive future
growth. We also understand that our industry is constantly changing and that we
must continue to drive that change in order to maintain our position as an
innovative leader in our industry. Some of the initiatives we test will be very
successful and others may not. By continually challenging established standards
in our industry, we can offer our customers a more unique and exciting shopping
experience. Understanding our need to change has led to success in the past and
will remain a key to success in the future.
[PHOTOGRAPH APPEARS HERE]
"Understanding our need to change has
led to success in the past and will remain a
key to success in the future."
Over the past few years, I believe we have made some good strategic
decisions and are now bearing some of the fruit of those decisions. We have a
great team of experienced, hard working people. We stand on a very solid
financial base from which to work. In spite of difficult industry trends, we
will continue to execute our plan. And while we understand that we are not an
island unto ourselves, our plan and the people who execute it will continue to
build value for our customers and shareholders.
Sincerely,
/s/ Alan H. Cohen
Alan H. Cohen
President and Chief Executive Officer
3
<PAGE>
Bigger
better
[GRAPHIC APPEARS HERE]
----------------------------
Maximize
----------------------------
While we have developed three store sizes to maximize each market
opportunity, of key importance is that even our smaller traditional
stores are about double the size of our competitor's stores.
These larger stores provide a platform on which to innovate
and differentiate ourselves.
<PAGE>
Having a larger athletic specialty retail store in a given shopping mall is a
key competitive advantage for Finish Line. Our larger store formats provide a
platform to differentiate ourselves from our competition in several areas:
. A More Compelling Store Format--Being larger, our store designers have more
opportunity to inject energy into our store formats. The result is a more
innovative, exciting, family oriented atmosphere, with more room to relax
while shopping. This differentiates us from other athletic specialty retailers
in many mall locations and is a key in drawing customers into our stores.
. A Powerful Merchandise Mix--Larger stores provide more opportunity to build an
exciting shopping environment in which we offer more categories of merchandise
and more styles in each category than the competition. In the typical athletic
specialty retail environment the goal seems to be to get as much product in
front of the customer as possible. Our goal is not only to offer more product
to the customer, but also to present the merchandise in a more exciting and
compelling format.
[ARTWORK APPEARS HERE]
. Broader Demographic Appeal--With product lines that are broader and deeper
than the competition, Finish Line is able to appeal to men, women and children
of all ages, not just the fashion conscious 12-24 year old.
. Compelling Larger Store Economics--Finish Line's 20 larger format stores are
expected to achieve store level operating margins of approximately 15% as
compared to 13% for traditional stores. The ROI and overall profitability of
our larger stores are higher than our traditional stores.
Why 3 different store sizes? Each market presents a different level of
opportunity and having the largest and most exciting athletic specialty store in
a given mall provides competitive advantages. Our goal is to answer each
opportunity with an appropriately sized store. To this end we have developed
three store formats:
Traditional Format Concept--These stores are less than 10,000 square feet in
size. They typically are stocked with 600-700 footwear styles and 10,000+ shoes.
While the average size of all our traditional stores is 4,500 square feet,
traditional concept stores opened in fiscal 1998 averaged 5,800 square feet.
Important to note is that while this is our smallest store format these stores
are still significantly larger than our major competitors' average stores.
Medium Format Concept--These stores are 10,000 to 14,999 square feet in size.
They are typically stocked with 1,000 footwear styles and 20,000+ shoes. In this
size store we feature innovations such as Nike Concept Shops.
Large Format Concept--These stores are more than 15,000 square feet in size.
They are typically stocked with 1,300 footwear styles and 30,000+ shoes. This
format offers Finish Line the opportunity to establish a dominant presence in
the best major malls throughout the country.
5
<PAGE>
Aggressive
manageable
growth
-----------------------------------------
opportunities
-----------------------------------------
[ARTWORK APPEARS HERE]
Our goal is to grow as aggressively as market conditions will allow. We believe
fiscal 1999 presents us with some great opportunities and we are well positioned
to maximize on those opportunities.
<PAGE>
In fiscal 1999, Finish Line plans to open 50-60 new stores including additional
medium and large format stores. This will increase the number of our stores by
17 to 20%, and our total square footage by approximately 30%. We feel the larger
store economics are compelling and provide an opportunity to drive growth beyond
the limitations of smaller store formats.
As this aggressive growth strategy drives future sales increases, it should act
to reduce costs as a percentage of sales. As in the past year, we will continue
to prepare for growth by making major investments in infrastructure:
[ARTWORK APPEARS HERE]
. We have made major investments in intellectual capital by strengthening our
management team.
. We are implementing a new POS register system, which should provide
efficiencies and enhance data accessibility at the store and corporate office
levels.
. In fiscal 1999, we will complete construction of an addition to our corporate
offices, thereby doubling our existing office space.
[BAR GRAPHS APPEAR HERE]
7
<PAGE>
A powerful
merchandising
approach
---------------------------------------------
evolving
---------------------------------------------
[GRAPHIC APPEARS HERE]
We are transcending the limits of
traditional athletic specialty retailing and
in effect evolving the industry.
<PAGE>
In our fiscal 1998, while most of the athletic specialty retail industry was
experiencing sharp declines in same store sales, Finish Line experienced
encouraging gains of 5.6% in same store sales. With a difficult athletic retail
environment affecting many of our competitors, we continue to thrive because we
have evolved beyond the traditional specialty athletic retailer. Using our
larger store platform, we have energized store formats with a broader and deeper
merchandise mix.
In fiscal 1999, we will continue to separate ourselves from the pack by building
on the success of the past, and experimenting with innovations when appropriate.
We will continue to highlight market leaders like Nike, adidas, and Reebok. But
we will also continue to experiment and expand with less traditional athletic
specialty retail manufacturers such as North Face, Nautica and Oakley. Many of
our larger store formats will feature Nike, adidas and North Face concept shops.
[ARTWORK APPEARS HERE]
Even though offering merchandise from the same manufacturers as our competitors,
Finish Line differentiates itself by offering a broader and deeper selection
from each manufacturer, including special make-up product made exclusively for
Finish Line. We merchandise the product in our stores in collections of matching
apparel and footwear. This is the way our major suppliers are now creating
product and how our customers are shopping for and buying it. Historically,
approximately one-third of Finish Line sales has been in apparel and
accessories, with larger stores generating as much as 40% of sales in this kind
of product, versus a much smaller percentage apparel and accessories sales mix
by our competitors. Gross margins on apparel have been higher than footwear,
thereby making our sales mix even more advantageous.
Value merchandise historically has represented 15-20% of sales and at times when
there may be excess manufacturer's inventory in our channels of distribution an
opportunity to build on this percentage may exist. Here again our larger stores
provide another competitive advantage. For those of our customers who are less
motivated to purchase the newest product, our store formats allow us to offer
brand name value merchandise as an alternative. This also helps to insulate us
from less favorable fashion trends in the athletic specialty retail market.
The goal has been and will be to broaden our demographic appeal beyond the
fashion conscious 12-24 year old male customers. Many of our stores offer 200-
250 shoe styles for women and have separate youth footwear and apparel
departments. To appeal to customers with special performance needs, we carry a
much broader assortment of footwear than our competitors. Combining our
assortment of merchandise with exciting store formats, our innovative marketing
approach and our appeal transcends the limits of the traditional athletic
specialty retailer.
9
<PAGE>
Our own
brand
identity
-----------------------------------------------
brand equity
-----------------------------------------------
[GRAPHIC ART OF POLE VAULTER APPEARS HERE]
Our own brand identity gives us greater control over our own destiny. We can use
this brand equity to build an audience for our stores as well as the
merchandise.
<PAGE>
In fiscal 1999, we will continue to test the boundaries of conventional athletic
retail wisdom in order to create exciting and innovative shopping experiences
for our customers. We'll also try to extend the excitement of our store formats
beyond the walls of our stores with new advertising and marketing initiatives.
Our goal is to build our own brand identity, separate and apart from our
competitors and vendors, which will help differentiate us in the marketplace.
"Spike Magazine" is our own magazine which we have developed to appeal to our
own customer base. It's free to our customers and anyone else who requests a
subscription. Distributed via direct mail using information gathered at our
stores, this magazine is a vehicle we can use to build a long-term relationship
with our customer base and continually showcase new product to build repeat
business. The advertising support from our manufacturers makes the magazine
synergistic in nature because it builds brand identity for Finish Line and the
manufacturer's products we sell.
[ARTWORK APPEARS HERE]
This year we will redirect many of our marketing efforts from local levels to
regional and national campaigns. As a result, 50% of our advertising dollars
will be spent on television. We will produce these television ads independently
(without manufacturers' co-op dollars) enabling us to exercise more control over
our brand message. We will continue to utilize print advertising and assert
ourselves in cyberspace through our Web Site (www.thefinishline.com).
Our new campaign, "Champions of Achievement," was developed to inspire active
individuals to reach their own goals ("Where is your Finish Line?"), and remind
them that we have the gear to help get them there.
We will also develop marketing efforts aimed exclusively at women.
Traditionally, women have been an afterthought in this industry. Our larger
formats allow us to provide a broad assortment of footwear and apparel made
exclusively for women. By advertising and marketing to women, we will attempt to
capture a much larger share of this rapidly growing segment.
Finish Line understands that while we may have beaten the pack this past year,
we have many more races ahead of us. Like a runner, the Company knows it must
remain focused and strong in order to maintain our advantage over the
competition. We believe our aggressive growth strategy, flexible merchandising
mix, infrastructure and marketing investments will keep Finish Line ahead of its
competition in Fiscal 1999 and beyond.
11
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
------------------------------------------------------------
Selected Financial Data............................. 13
Management's Discussion and Analysis of
Financial Condition and Results of Operations....... 14
Consolidated Balance Sheets......................... 18
Consolidated Statements of Income................... 19
Consolidated Statements of Cash Flows............... 20
Consolidated Statements of
Changes in Stockholders' Equity..................... 21
Notes to Consolidated Financial Statements.......... 22
Report of Independent Auditors...................... 27
Market Price of Common Stock........................ 27
Shareholder Information............................. 28
------------------------------------------------------------
<PAGE>
The Finish Line, Inc.
- --------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
- ----------------------------------------------------------------------------------------------------------------------------------
February 28, March 1, February 29, February 28, February 28,
(In thousands, except per share and store operating data) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
- ----------------------------------------------------------------------------------------------------------------------------------
Net sales $438,911 $332,002 $240,155 $191,623 $157,011
Cost of sales (including occupancy expenses) 303,809 229,187 168,912 132,726 107,491
- ----------------------------------------------------------------------------------------------------------------------------------
Gross profit 135,102 102,815 71,243 58,897 49,520
Selling, general and administrative expenses 94,303 72,282 54,254 44,548 36,678
- ----------------------------------------------------------------------------------------------------------------------------------
Operating income 40,799 30,533 16,989 14,349 12,842
Interest expense (income)--net (2,495) (824) 892 317 184
- ----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 43,294 31,357 16,097 14,032 12,658
Income taxes 16,560 12,544 6,439 5,618 5,063
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 26,734 $ 18,813 $ 9,658 $ 8,414 $ 7,595
==================================================================================================================================
Earnings Per Share Data/(1)/:
- ----------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 1.03 $ .81 $ .47 $ .41 $ .37
Diluted earnings per share $ 1.02 $ .80 $ .47 $ .41 $ .37
==================================================================================================================================
Share Data/(2)/:
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted-average shares 25,963 23,100 20,630 20,630 20,630
Diluted weighted-average shares 26,317 23,502 20,671 20,630 20,633
==================================================================================================================================
Selected Store Operating Data:
- ----------------------------------------------------------------------------------------------------------------------------------
Number of stores:
Opened during period 53 35 35 30 35
Closed during period 2 4 5 4 1
Open at end of period 302 251 220 190 164
Total square feet/(3)/ 1,586,520 1,088,419 870,340 691,831 565,588
Average square feet per store/(3)/ 5,253 4,336 3,956 3,641 3,449
Net sales per square foot for stores open entire period $ 345 $ 352 $ 308 $ 300 $ 316
Increase (decrease) in comparable store net sales/(4)/ 5.6% 16.0% 3.4% 1.7% (2.3)%
==================================================================================================================================
Balance Sheet Data:
- ----------------------------------------------------------------------------------------------------------------------------------
Working capital $120,822 $112,079 $ 32,453 $ 30,050 $ 28,132
Total assets 255,978 217,718 114,972 88,535 72,884
Total debt -- -- 9,500 5,025 2,000
Stockholder's equity 197,122 169,875 63,148 53,487 45,073
==================================================================================================================================
</TABLE>
(1) At February 28, 1998, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share." As required, the Company has
recomputed earnings per share consistent with that standard. There were
insignificant effects on previously disclosed earnings per share and
diluted earnings per share.
(2) 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.
(3) Computed as of the end of each fiscal period.
(4) Calculated using only those stores that were open for the full current
fiscal period and were also open for the full prior fiscal period.
13
<PAGE>
The Finish Line, Inc.
- --------------------------------------------------------------------------------
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.
The table below sets forth operating data of the Company as a percentage of
net sales for the periods indicated below.
Year Ended
- --------------------------------------------------------------------------------
February 28, March 1, February 29,
1998 1997 1996
- --------------------------------------------------------------------------------
Income Statement Data:
Net sales 100.0% 100.0% 100.0%
Cost of sales (including
occupancy expenses) 69.2 69.0 70.3
- --------------------------------------------------------------------------------
Gross profit 30.8 31.0 29.7
Selling, general and
administrative expenses 21.5 21.8 22.6
- --------------------------------------------------------------------------------
Operating income 9.3 9.2 7.1
Interest expense (income)--net (.6) (.2) .4
- --------------------------------------------------------------------------------
Income before income taxes 9.9 9.4 6.7
Income taxes 3.8 3.7 2.7
- --------------------------------------------------------------------------------
Net income 6.1% 5.7% 4.0%
================================================================================
Fiscal 1998 Compared to Fiscal 1997 Net sales for fiscal 1998 were $438.9
million, an increase of $106.9 million or 32.2% over fiscal 1997. Of this
increase, $64.7 million was attributable to a 20.3% increase in the number of
stores open during the period from 251 at the end of fiscal 1997 to 302 at the
end of fiscal 1998. The balance of the increase in net sales was attributable to
an increase of $23.2 million from the 35 existing stores open only part of
fiscal 1997 along with an increase in net sales from existing stores open the
entire twelve month period of fiscal 1998 compared to fiscal 1997. During fiscal
1998, comparable store net sales increased 5.6% compared to fiscal 1997.
Comparable net footwear sales increased 6.6% for fiscal 1998 and comparable net
activewear and accessories sales increased 3.3%. Net sales per square foot
decreased in fiscal 1998 to $345 from $352 in fiscal 1997. The decrease in 1998
was the result of the competitive and promotional retail environment along with
a 21.1% increase in the average square feet per store from 4,336 in fiscal 1997
to 5,253 in fiscal 1998.
Gross profit, which includes product margin less store occupancy costs, for
fiscal 1998 was $135.1 million, an increase of $32.3 million or 31.4% over
fiscal 1997, and a decrease of approximately 0.2% as a percentage of net sales.
Of this 0.2% decrease, 0.4% was due to an increase in occupancy costs as a
percentage of net sales, partially offset by a 0.2% increase in margins for
product sold.
Selling, general and administrative expenses were $94.3 million, an increase
of $22.0 million or 30.5% over fiscal 1997, and decreased to 21.5% from 21.8% as
a percentage of net sales. The dollar increase was primarily attributable to the
operating costs related to the 53 additional stores opened during fiscal 1998.
The decrease as a percentage of sales is primarily a result of the comparable
store net sales increase of 5.6% for fiscal 1998 along with improved expense
controls.
Net interest income for fiscal 1998 was $2.5 million compared to net
interest income of $824,000 for fiscal 1997. The increase 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 $16.6 million for fiscal 1998 compared to $12.5
million for fiscal 1997. The increase in the Company's provisions for federal
and state taxes in 1998 is due to the increased level of income before income
taxes, partially offset by a decrease in the effective tax rate to 38.25% for
fiscal 1998 from 40.0% in fiscal 1997. With the Company's significant investment
in tax exempt instruments, it is expected that the effective tax rate will
decrease to approximately 38% in fiscal 1999. 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 42.1% to $26.7 million for fiscal 1998 compared to
$18.8 million for fiscal 1997. Diluted net income per share increased 27.5% to
$1.02 for fiscal 1998 compared to $0.80 for fiscal 1997. Diluted
weighted-average shares outstanding were 26,317,000 and 23,502,000,
respectively, for fiscal 1998 and 1997.
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
14
<PAGE>
The Finish Line, Inc.
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
(Continued)
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
exiting 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 was due to the increased level of income before income taxes
as the effective tax rate was 40% for each of the comparable periods.
Net income increased 94.8% to $18.8 million for fiscal 1997 compared to $9.7
million for fiscal 1996. Diluted earnings per share increased 70.2% to $0.80 for
fiscal 1997 compared to $0.47 for fiscal 1996. Diluted weighted-average shares
outstanding were 23,502,000 and 20,671,000, respectively, for fiscal 1997 and
1996.
<TABLE>
<CAPTION>
Quarter Ended
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data) May 31, 1997 August 30, 1997 November 29, 1997 February 28, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $87,537 100.0% $118,727 100.0% $95,928 100.0% $136,719 100.0%
Cost of sales (including occupancy expenses) 60,903 69.6 80,178 67.5 67,557 70.4 95,171 69.6
- ------------------------------------------------------------------------------------------------------------------------------------
Gross profit 26,634 30.4 38,549 32.5 28,371 29.6 41,548 30.4
Selling, general and administrative expenses 20,083 22.9 24,744 20.8 23,141 24.1 26,335 19.3
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income 6,551 7.5 13,805 11.7 5,230 5.5 15,213 11.1
Interest income--net (722) (0.8) (712) (0.6) (624) (0.6) (437) (0.4)
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 7,273 8.3 14,517 12.3 5,854 6.1 15,650 11.5
Income taxes 2,782 3.2 5,553 4.7 2,240 2.3 5,985 4.4
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 4,491 5.1% $ 8,964 7.6% $ 3,614 3.8% $ 9,665 7.1%
- ------------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.17 $ 0.35 $ 0.14 $ 0.37
Diluted earnings per share $ 0.17 $ 0.34 $ 0.14 $ 0.37
====================================================================================================================================
</TABLE>
15
<PAGE>
The Finish Line, Inc.
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
(Continued)
<TABLE>
<CAPTION>
Quarter Ended
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data) May 31, 1996 August 31, 1996 November 30, 1996 March 1, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<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 4,127 5.7 10,490 10.9
Interest expense (income)--net 194 0.3 (137) (0.1) (189) (0.2) (692) (0.7)
- ------------------------------------------------------------------------------------------------------------------------------------
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%
- ------------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.15 $ 0.28 $ 0.11 $ 0.26
Diluted earnings per share $ 0.15 $ 0.27 $ 0.11 $ 0.26
====================================================================================================================================
</TABLE>
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 above sets forth quarterly operating data of the Company,
including such data as a percentage of net sales, for fiscal 1998 and fiscal
1997. 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
$212,000, $15,565,000 and $6,216,000 respectively, for fiscal 1998, 1997 and
1996. At February 28, 1998, cash and cash equivalents were $28.1 million and
short-term marketable securities were an additional $7.9 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 $130.1 million at February 28, 1998 compared to
$82.0 million at March 1, 1997. On a per square foot basis, merchandise
inventories at February 28, 1998 increased 8.9% compared to March 1, 1997. The
increase reflects early receipt of March 1998 deliveries and a return to
inventory levels that the Company believes are appropriate.
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 1, 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 February 28, 1998, 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
16
<PAGE>
The Finish Line, Inc.
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
(Continued)
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 $133,000,000 and funded debt to total
capitalization (as defined) may not exceed 40%. The Company is in compliance
with all such covenants.
Capital expenditures were $29,555,000 and $13,064,000 for fiscal 1998 and
1997, respectively.
Expenditures in 1998 were primarily for the build out of 50 of the 53
stores that were opened during fiscal 1998 (including 12 larger format stores),
the remodeling of 19 existing stores, the completion of a 130,000 square foot
addition to the existing distribution center, the start of a 22,000 square foot
addition to the existing office building and the start of the addition of
100,000 square feet of floor space in the existing distribution center through
the addition of mezzanine levels.
Expenditures in 1997 were primarily for the build out of 32 of the 35 stores
that were opened during fiscal 1997 (including two larger 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.
The Company anticipates that total capital expenditures for fiscal 1999 will
be approximately $35,000,000 primarily for the build out of 50-60 new stores
(including 12 larger format stores), the remodeling of 20-25 existing stores and
the completion of the 22,000 square foot addition to the corporate offices
complex, as well as the completion of the mezzanine and conveyor system in the
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 $450,000
to $500,000 (net of construction allowance) and from $900,000 to $1.9 million
(net of construction allowance) for a larger format new store (10,000 to 25,000
square feet). These requirements for a traditional store include approximately
$250,000 for fixtures, equipment, and leasehold improvements and $325,000
($225,000 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 and leasehold improvements and $1.5 million ($900,000 net of payables)
in new store inventory.
During fiscal 1998, the Company purchased, at an aggregate cost of
$1,230,000, 94,500 shares of Finish Line Class A Common Stock for the sole
purpose of contributing such stock to the Company's retirement plan for its
employees. At February 28, 1998, 54,500 shares had been contributed to the
retirement plan with the remaining 40,000 shares being contributed on April 1,
1998.
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 1999 store expansion program and to satisfy the Company's other
capital requirements through fiscal 1999.
As is commonly known, there is a potential issue facing companies regarding
the ability of information systems to accommodate the year 2000. The Company is
evaluating its information systems and believes that all critical systems can,
or will be able to, accommodate the coming century, without material adverse
effect on the Company's financial condition, results of operations, capital
spending or competitive position.
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.
17
<PAGE>
The Finish Line, Inc.
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
February 28, March 1,
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
Assets
Current Assets
Cash and cash equivalents $ 28,113 $ 51,212
Short-term marketable securities 7,886 11,516
Accounts receivable 4,668 4,849
Merchandise inventories 130,150 81,991
Deferred income taxes 2,275 2,785
Other 1,988 3,631
- --------------------------------------------------------------------------------
Total current assets 175,080 155,984
================================================================================
Property and Equipment
Land 315 315
Building 7,517 4,238
Leasehold improvements 49,549 32,732
Furniture, fixtures, and equipment 21,547 14,071
Construction in progress 3,828 4,120
- --------------------------------------------------------------------------------
82,756 55,476
Less accumulated depreciation 21,844 15,958
- --------------------------------------------------------------------------------
60,912 39,518
Other Assets
Marketable securities 17,810 20,106
Deferred income taxes 1,951 2,110
Other 225 --
- --------------------------------------------------------------------------------
19,986 22,216
Total assets $255,978 $217,718
================================================================================
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 38,790 $ 27,589
Employee compensation 5,154 4,853
Accrued income taxes 3,377 5,176
Accrued property and sales tax 3,352 2,448
Other liabilities and accrued expenses 3,585 3,839
- --------------------------------------------------------------------------------
Total current liabilities 54,258 43,905
================================================================================
Long-term deferred rent payments 4,598 3,938
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
(1998--18,170; 1997--17,192) 182 172
Class B:
Shares authorized--12,000
Shares issued and outstanding
(1998--7,842; 1997--8,750) 78 87
Additional paid-in capital 119,181 118,132
Retained earnings 78,218 51,484
Treasury stock--40 shares (537) --
- --------------------------------------------------------------------------------
Total stockholders' equity 197,122 169,875
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $255,978 $217,718
================================================================================
See accompanying notes.
18
<PAGE>
The Finish Line, Inc.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
- ----------------------------------------------------------------------------------------------------------------------------
February 28, March 1, February 29,
(in thousands, except per share amounts) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $438,911 $332,002 $240,155
Cost of sales (including occupancy expenses) 303,809 229,187 168,912
- ---------------------------------------------------------------------------------------------------------------------------
Gross profit 135,102 102,815 71,243
Selling, general and administrative expenses 94,303 72,282 54,254
- ---------------------------------------------------------------------------------------------------------------------------
Operating income 40,799 30,533 16,989
Interest expense (income)--net (2,495) (824) 892
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes 43,294 31,357 16,097
Income taxes 16,560 12,544 6,439
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 26,734 $ 18,813 $ 9,658
===========================================================================================================================
Basic earnings per share $ 1.03 $ .81 $ .47
===========================================================================================================================
Diluted earnings per share $ 1.02 $ .80 $ .47
===========================================================================================================================
</TABLE>
See accompanying notes.
19
<PAGE>
The Finish Line, Inc.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
- ------------------------------------------------------------------------------------------------------------------------------------
February 28, March 1, February 29,
(in thousands) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income $ 26,734 $18,813 $ 9,658
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 7,359 5,013 3,982
Contribution of treasury stock to pension plan 1,039 -- --
Deferred income taxes 669 (1,079) (468)
(Gain) loss on disposal of property and equipment (42) 59 213
Changes in operating assets and liabilities:
Accounts receivable 181 (3,750) 815
Merchandise inventories (48,159) (5,903) (20,590)
Other current assets 1,643 (3,107) 158
Other assets (225) -- 147
Accounts payable 11,201 (2,128) 10,445
Employee compensation 301 1,619 664
Accrued income taxes (1,799) 3,102 (386)
Other liabilities and accrued expenses 650 2,260 965
Deferred rent payments 660 666 613
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 212 15,565 6,216
Investing activities
Purchases of property and equipment (29,555) (13,064) (10,197)
Proceeds from disposals of property and equipment 844 233 211
Purchases of short-term marketable securities (3,511) (16,496) --
Proceeds from maturity of short-term marketable securities 12,066 4,980 --
Purchase of marketable securities (2,629) (20,106) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (22,785) (44,453) (9,986)
Financing activities
Proceeds from short-term debt 13,650 42,200 102,100
Principal payments on short-term debt (13,650) (51,700) (97,625)
Net proceeds from public offerings -- 84,467 --
Proceeds and tax benefits from exercise of stock options 704 3,447 3
Purchase of treasury stock (1,230) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (526) 78,414 4,478
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (23,099) 49,526 708
Cash and cash equivalents at beginning of year 51,212 1,686 978
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 28,113 $51,212 $ 1,686
====================================================================================================================================
</TABLE>
See accompanying notes.
20
<PAGE>
The Finish Line, Inc.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Number of Shares Amount Additional
------------------ ----------------- Paid-In
(in thousands) Class A Class B Class A Class B Capital
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at March 1, 1995 8,118 12,512 $ 40 $ 63 $ 30,371
====================================================================================================================================
Net income for 1996
- ------------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at February 29, 1996 8,162 12,470 41 62 30,374
====================================================================================================================================
Net income for 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Secondary Public Offering of Class A Common Stock--June 19, 1996 2,600 13 33,546
- ------------------------------------------------------------------------------------------------------------------------------------
Secondary Public Offering of Class A Common Stock--December 18, 1996 2,400 24 50,884
- ------------------------------------------------------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 1, 1997 17,192 8,750 172 87 118,132
====================================================================================================================================
Net income for 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Conversion of Class B Common Stock to Class A Common Stock 908 (908) 9 (9)
- ------------------------------------------------------------------------------------------------------------------------------------
Non-qualified Class A Common Stock options exercised 70 1 703
- ------------------------------------------------------------------------------------------------------------------------------------
Treasury Stock purchased
- ------------------------------------------------------------------------------------------------------------------------------------
Contribution of Treasury Stock to pension plan 346
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at February 28, 1998 18,170 7,842 $182 $ 78 $119,181
====================================================================================================================================
<CAPTION>
Retained Treasury
Earnings Stock Totals
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at March 1, 1995 $ 23,013 $ -- $ 53,487
=======================================================================================================
Net income for 1996 9,658 9,658
- -------------------------------------------------------------------------------------------------------
Conversion of Class B Common Stock to Class A Common Stock --
- -------------------------------------------------------------------------------------------------------
Non-qualified Class A Common Stock options exercised 3
- -------------------------------------------------------------------------------------------------------
Balance at February 29, 1996 32,671 -- 63,148
=======================================================================================================
Net income for 1997 18,813 18,813
- -------------------------------------------------------------------------------------------------------
Secondary Public Offering of Class A Common Stock--June 19, 1996 33,559
- -------------------------------------------------------------------------------------------------------
Secondary Public Offering of Class A Common Stock--December 18, 1996 50,908
- -------------------------------------------------------------------------------------------------------
Conversion of Class B Common Stock to Class A Common Stock --
- -------------------------------------------------------------------------------------------------------
Two-for-One Stock Split --
- -------------------------------------------------------------------------------------------------------
Non-qualified Class A Common Stock options exercised 3,447
- -------------------------------------------------------------------------------------------------------
Balance at March 1, 1997 51,484 -- 169,875
=======================================================================================================
Net income for 1998 26,734 26,734
- -------------------------------------------------------------------------------------------------------
Conversion of Class B Common Stock to Class A Common Stock --
- -------------------------------------------------------------------------------------------------------
Non-qualified Class A Common Stock options exercised 704
- -------------------------------------------------------------------------------------------------------
Treasury Stock purchased (1,230) (1,230)
- -------------------------------------------------------------------------------------------------------
Contribution of Treasury Stock to pension plan 693 1,039
- -------------------------------------------------------------------------------------------------------
Balance at February 28, 1998 $ 78,218 $ (537) $197,122
=======================================================================================================
</TABLE>
See accompanying notes.
21
<PAGE>
The Finish Line, Inc.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
Basis of Presentation The consolidated financial statements include the
accounts of The Finish Line, Inc. and its wholly-owned subsidiary Spike's
Holding, Inc. (collectively the "Company"). Throughout these notes to the
financial statements, the fiscal years ended February 28, 1998, March 1, 1997
and February 29, 1996 are referred to as 1998, 1997 and 1996, respectively.
Effective with the quarter ended March 1, 1997, the Company changed to a
"Retail" calendar. The Company's fiscal year ends on the Saturday closest to the
last day of February and included 52 weeks in 1998.
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 5,250 square feet in
size and are primarily located in enclosed malls in the Midwest, Southeast and
South.
In 1998, the Company purchased approximately 87% of its merchandise from
its five largest suppliers. The largest supplier, Nike, accounted for
approximately 63%, 69% and 50% of merchandise purchases in 1998, 1997 and 1996,
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.
Basic Earnings Per Share The Company has adopted SFAS No. 128, "Earnings per
Share," which requires that both basic earnings per share and diluted earnings
per share be presented on the face of the income statement. Restatement of
earnings-per-share data for previous periods is also required. Earnings per
share are calculated based on the weighted-average number of outstanding common
shares. Diluted earnings per share are calculated based on the weighted-average
number of outstanding common shares, plus the effect of dilutive stock options.
All per-share amounts, unless otherwise noted, are presented on a diluted basis,
that is, based on the weighted-average number of outstanding common shares and
the effect of all potentially dilutive common shares (primarily unexercised
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 as incurred. 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 1998, 1997 and 1996
amounted to $7,326,000, $4,950,000 and $3,524,000, respectively.
Financial Instruments Financial instruments consist of cash and cash
equivalents, marketable securities and accounts payable. The fair value of cash
and cash equivalents and accounts payable approximate fair value. At February
28, 1998 and March 1, 1997, 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 designations 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 interest income. Interest on securities
classified as held-to-maturity is included in interest income.
22
<PAGE>
The Finish Line, Inc.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(Continued)
2. Marketable Securities
All marketable securities are classified as held-to-maturity. The Company
held no marketable securities prior to 1997. The following is a summary of
marketable securities (in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- --------------------------------------------------------------------------------
February 28, 1998--
municipal obligations $25,696 $251 $(47) $25,900
- --------------------------------------------------------------------------------
March 1, 1997--
municipal obligations $31,622 $ 88 $(17) $31,693
================================================================================
The amortized cost and estimated fair value of marketable securities at
February 28, 1998 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.
Estimated
Amortized Fair
Cost Value
- --------------------------------------------------------------------------------
Due in one year or less $ 7,886 $ 7,853
Due after one year through three years 7,174 7,247
Due after three years through five years 9,436 9,584
Due after five years 1,200 1,216
- --------------------------------------------------------------------------------
$25,696 $25,900
================================================================================
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 February 28, 1998, 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 charge
coverage ratio (as defined) of not less than 1.5 to 1.0, a tangible net worth of
not less than $133,000,000 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 February 28, 1998.
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 1998, 1997 and 1996 was
$4,000, $242,000 and $821,000, respectively. Interest paid on the Facility
during 1998, 1997, and 1996 amounted to $4,000, $298,000, and $773,000,
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):
1998 1997 1996
- --------------------------------------------------------------------------------
Base Rent $25,067 $17,716 $14,042
Deferred Rent 660 666 613
Contingent Rent 2,940 2,868 1,509
- --------------------------------------------------------------------------------
Rent Expense $28,667 $21,250 $16,164
================================================================================
A schedule of future base rent payments by fiscal year for signed operating
leases at February 28, 1998 with initial or remaining noncancelable terms of one
year or more is as follows (in thousands):
1999 $ 30,154
2000 30,587
2001 30,397
2002 29,986
2003 29,032
Thereafter 106,572
- --------------------------------------------------------------------------------
$256,728
================================================================================
This schedule of future base rent payments includes lease commitments for
nine new stores which were not open as of February 28, 1998.
23
<PAGE>
The Finish Line, Inc.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(Continued)
5. Income Taxes
The components of income taxes are as follows (in thousands):
1998 1997 1996
- --------------------------------------------------------------------------------
Currently payable:
Federal $13,268 $10,741 $5,570
State 2,623 2,882 1,337
- --------------------------------------------------------------------------------
15,891 13,623 6,907
Deferred:
Federal 560 (850) (371)
State 109 (229) (97)
- --------------------------------------------------------------------------------
669 (1,079) (468)
- --------------------------------------------------------------------------------
$16,560 $12,544 $6,439
================================================================================
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):
February 28, March 1,
1998 1997
- --------------------------------------------------------------------------------
Deferred tax assets:
Deferred rent accrual $ 1,759 $1,575
Store opening supplies 1,179 1,225
Uniform capitalization 1,493 1,016
Vacation accrual 379 325
Bonus accrual 115 1,251
Other 396 194
- --------------------------------------------------------------------------------
Total deferred tax assets 5,321 5,586
- --------------------------------------------------------------------------------
Deferred tax liability:
Tax over book depreciation (1,095) (691)
- --------------------------------------------------------------------------------
Net deferred tax assets $ 4,226 $4,895
================================================================================
Payments of income taxes for 1998, 1997 and 1996 were $17,572,000,
$9,122,000 and $7,465,000, 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 1998, 1997 and 1996 amounted to $1,789,000, $1,338,000 and $815,000,
respectively.
7. Stock Options
The Board of Directors has reserved 1,700,000 shares of Class A Common Stock
for issuance upon exercise of options or of grants of other awards under the
option plan. Stock options have been granted to directors, officers and other
key employees. All options outstanding under the plans as of the end of fiscal
1998 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.
The Company has elected to follow Accounting Principles Board Opinion (APB)
No 25, "Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock options. Under APB No. 25, because the exercise price
of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
However, SFAS No. 123, "Accounting for Stock-Based Compensation," requires
presentation of pro forma information as if the Company had accounted for its
employee stock options granted subsequent to December 31, 1994, under the fair
value method. For purposes of pro forma disclosure, the estimated fair value of
the options is amortized to expense over the vesting period. Under the fair
value method, the Company's net income and earnings per share would have been as
follows:
1998 1997 1996
- --------------------------------------------------------------------------------
Net income (in thousands)
As reported $26,734 $18,813 $9,658
Pro forma 25,768 18,571 9,562
- --------------------------------------------------------------------------------
Diluted earnings per share
As reported $ 1.02 $ .80 $ .47
Pro forma .99 .80 .47
================================================================================
24
<PAGE>
The Finish Line, Inc.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(Continued)
The estimated weighted-average fair value of the individual options granted
during 1998, 1997 and 1996 was $12.70, $12.65 and $2.91, respectively, on the
date of grant. The fair values for all years were determined using a
Black-Scholes option-pricing model with the following assumptions:
1998 1997 1996
- --------------------------------------------------------------------------------
Dividend yield 0% 0% 0%
- --------------------------------------------------------------------------------
Volatility 74.8% 68.6% 55.7%
- --------------------------------------------------------------------------------
Risk-free interest rate 6.18% 6.47% 6.57%
- --------------------------------------------------------------------------------
Expected life 7 years 7 years 7 years
================================================================================
A reconciliation of the Company's stock option activity and related
information is as follows:
Number Weighted-Average
of Options Exercise Price
- --------------------------------------------------------------------------------
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
Granted 691,675 17.11
Exercised (70,000) 4.77
Canceled (50,500) 14.50
- --------------------------------------------------------------------------------
February 28, 1998 1,410,027 $10.33
================================================================================
The following table summarizes information concerning outstanding and
exercisable options at February 28, 1998:
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- --------------------------------------------------------------------------------
$ 3-$ 5 648,750 7.2 $ 3.93 224,524 $ 3.99
$ 5-$10 84,602 4.9 $ 6.60 84,602 $ 6.60
$10-$15 402,875 9.8 $13.85 8,000 $11.63
$15-$23 273,800 9.0 $21.43 -- --
================================================================================
Shares exercisable were 317,126, 108,702 and 208,112 at fiscal year end
1998, 1997 and 1996, respectively.
8. Earnings Per Share
The following is a reconciliation of the numerators and denominators used in
computing earnings per share (in thousands, except per share amounts).
1998 1997 1996
- --------------------------------------------------------------------------------
Income available to common stockholders $26,734 $18,813 $ 9,658
- --------------------------------------------------------------------------------
Basic earnings per share:
Weighted-average number of
common shares outstanding 25,963 23,100 20,630
Basic earnings per share $ 1.03 $ .81 $ .47
- --------------------------------------------------------------------------------
Diluted earnings per share:
Weighted-average number of
common shares outstanding 25,963 23,100 20,630
Stock options 354 402 41
- --------------------------------------------------------------------------------
Diluted weighted-average number of common
shares outstanding 26,317 23,502 20,671
- --------------------------------------------------------------------------------
Diluted earnings per share $ 1.02 $ .80 $ .47
================================================================================
25
<PAGE>
The Finish Line, Inc.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(Continued)
9. Common Stock
At February 28, 1998, 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 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 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 parities
(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 in order to implement a
two-for-one stock split as discussed in Note 10.
10. 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.
11. 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 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 were used to finance the
accelerated expansion of the Company's store base and general corporate
purposes.
26
<PAGE>
The Finish Line, Inc.
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
The Board of Directors and Stockholders of The Finish Line, Inc.
We have audited the accompanying consolidated balance sheets of The Finish
Line, Inc. and subsidiary as of February 28, 1998 and March 1, 1997, and the
related consolidated statements of income, cash flows, and changes in
stockholders' equity for each of the three years in the period ended February
28, 1998. 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 of 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 aspects, the consolidated financial position of The Finish Line,
Inc. and subsidiary at February 28, 1998 and March 1, 1997 and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended February 28, 1998, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Fort Wayne, Indiana
March 25, 1998
- --------------------------------------------------------------------------------
MARKET PRICE OF COMMON STOCK
- --------------------------------------------------------------------------------
Quarter Ended Fiscal 1998 Fiscal 1997
- --------------------------------------------------------------------------------
High Low High Low
- --------------------------------------------------------------------------------
May $27.25 $ 9.25 $14.19 $ 4.38
August 15.63 11.75 16.00 9.88
November 19.88 13.88 24.63 15.63
February 19.25 11.88 28.00 18.25
================================================================================
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 Consolidated
Financial Statements for restrictions on the Company's ability to pay dividends.
27
<PAGE>
The Finish Line, Inc.
- --------------------------------------------------------------------------------
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Name Age Position Officer or Director Since
====================================================================================================================================
<S> <C> <C> <C>
Alan H. Cohen/(1)/ 51 Chairman of the Board of Directors
President and Chief Executive Officer 1976
- ------------------------------------------------------------------------------------------------------------------------------------
David I. Klapper/(3)/ 49 Executive Vice President, Director 1976
- ------------------------------------------------------------------------------------------------------------------------------------
David M. Fagin 54 Executive Vice President, Director 1982
- ------------------------------------------------------------------------------------------------------------------------------------
Larry J. Sablosky 49 Executive Vice President, Director 1982
- ------------------------------------------------------------------------------------------------------------------------------------
Steven J. Schneider 42 Sr. Vice President--Finance, Secretary and CFO 1989
- ------------------------------------------------------------------------------------------------------------------------------------
Gary D. Cohen 45 Sr. Vice President--General Counsel 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Joseph W. Wood 50 Sr. Vice President--Merchandising and Marketing 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Donald E. Courtney 43 Sr. Vice President--MIS and Distribution 1989
- ------------------------------------------------------------------------------------------------------------------------------------
George S. Sanders 40 Sr. Vice President--Real Estate and Store
Development 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Michael L. Marchetti 47 Sr. Vice President--Store Operations 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Kevin S. Wampler 35 Vice President--Corporate Controller and Asst. Secretary 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Robert A. Edwards 35 Vice President--Distribution 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Thomas R. Sicari 44 Vice President--General Merchandise Manager 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Paul C. Wagner 32 Vice President--Information Systems 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Kevin G. Flynn 34 Vice President--Marketing 1997
- ------------------------------------------------------------------------------------------------------------------------------------
James B. Davis 35 Vice President--Real Estate 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Jonathan K. Layne/(1)//(2)//(3)//(4)/ 44 Director 1992
- ------------------------------------------------------------------------------------------------------------------------------------
Jeffrey H. Smulyan/(1)//(2)//(5)/ 50 Director 1992
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Member of the Audit Committee
(2) Member of the Compensation and Stock Option Committee
(3) Member of the Finance Committee
(4) Mr. Layne is a partner in the law firm of Gibson, Dunn & Crutcher
(5) Mr. Smulyan is Chairman of the Board and President of Emmis Broadcasting
Corporation
28
<PAGE>
================================================================================
The Finish Line, Inc.
- ------------------------------------------------------------------------
SHAREHOLDER 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 3, 1998, the approximate number
of holders of record Class A Common Stock was 345. 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 3, 1998, the closing price for the
Company's Class A Common Stock, as reported by NASDAQ was $23.00.
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
Internet Address:
www.thefinishline.com
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 other risks detailed in
the Company's Securities and Exchange Commission filings.
<PAGE>
[ARTWORK APPEARS HERE]
[LOGO OF FINISH LINE APPEARS HERE]
3308 N. Mitthoeffer Road
Indianapolis, IN 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 25, 1998, included in the
1998 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 herein.
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 25, 1998, 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 6, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR THE YEAR ENDED FEBRUARY 28, 1998 AND MARCH 01, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<CIK> 0000886137
<NAME> THE FINISH LINE, INC.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> FEB-28-1998 MAR-01-1997
<PERIOD-START> MAR-02-1997 MAR-01-1996
<PERIOD-END> FEB-28-1998 MAR-01-1997
<CASH> 28,113 51,212
<SECURITIES> 7,886 11,516
<RECEIVABLES> 4,668 4,849
<ALLOWANCES> 0 0
<INVENTORY> 130,150 81,991
<CURRENT-ASSETS> 175,080 155,984
<PP&E> 82,756 55,476
<DEPRECIATION> 21,844 15,958
<TOTAL-ASSETS> 255,978 217,718
<CURRENT-LIABILITIES> 54,258 43,905
<BONDS> 0 0
0 0
0 0
<COMMON> 260 259
<OTHER-SE> 196,862 169,616
<TOTAL-LIABILITY-AND-EQUITY> 255,978 217,718
<SALES> 438,911 332,002
<TOTAL-REVENUES> 438,911 332,002
<CGS> 303,809 229,187
<TOTAL-COSTS> 303,809 229,187
<OTHER-EXPENSES> 94,303 72,282
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (2,495) (824)
<INCOME-PRETAX> 43,294 31,357
<INCOME-TAX> 16,560 12,544
<INCOME-CONTINUING> 26,734 18,813
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 26,734 18,813
<EPS-PRIMARY> 1.03 .81
<EPS-DILUTED> 1.02 .80
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINISH
LINE 10-Q FOR THE THIRTY NINE WEEKS ENDED NOVEMBER 29, 1997 AND NINE MONTHS
ENDED NOVEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> OTHER 9-MOS
<FISCAL-YEAR-END> FEB-28-1998 MAR-01-1997
<PERIOD-START> MAR-02-1997 MAR-01-1996
<PERIOD-END> NOV-29-1997 NOV-30-1996
<CASH> 9,061 18,513
<SECURITIES> 10,470 4,980
<RECEIVABLES> 10,809 7,104
<ALLOWANCES> 0 0
<INVENTORY> 143,004 87,547
<CURRENT-ASSETS> 180,555 122,271
<PP&E> 74,995 50,070
<DEPRECIATION> 19,907 15,067
<TOTAL-ASSETS> 257,155 159,756
<CURRENT-LIABILITIES> 64,730 43,687
<BONDS> 0 0
0 0
0 0
<COMMON> 260 235
<OTHER-SE> 187,687 112,022
<TOTAL-LIABILITY-AND-EQUITY> 257,155 159,756
<SALES> 302,192 235,753
<TOTAL-REVENUES> 302,192 235,753
<CGS> 208,638 162,884
<TOTAL-COSTS> 208,638 162,884
<OTHER-EXPENSES> 67,968 52,826
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (2,058) (132)
<INCOME-PRETAX> 27,644 20,175
<INCOME-TAX> 10,575 8,071
<INCOME-CONTINUING> 17,069 12,104
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 17,069 12,104
<EPS-PRIMARY> .66 .54
<EPS-DILUTED> .65 .53
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINISH
LINE 10-Q FOR THE TWENTY SIX WEEKS ENDED AUGUST 30, 1997 AND SIX MONTHS ENDED
AUGUST 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> OTHER 6-MOS
<FISCAL-YEAR-END> FEB-28-1998 MAR-01-1997
<PERIOD-START> MAR-02-1997 MAR-01-1996
<PERIOD-END> AUG-30-1997 AUG-31-1996
<CASH> 68,229 31,852
<SECURITIES> 9,468 4,980
<RECEIVABLES> 7,202 4,639
<ALLOWANCES> 0 0
<INVENTORY> 106,513 83,046
<CURRENT-ASSETS> 195,752 127,525
<PP&E> 65,982 46,973
<DEPRECIATION> 19,180 13,851
<TOTAL-ASSETS> 264,016 163,015
<CURRENT-LIABILITIES> 76,698 52,279
<BONDS> 0 0
0 0
0 0
<COMMON> 260 116
<OTHER-SE> 182,760 106,988
<TOTAL-LIABILITY-AND-EQUITY> 264,016 163,015
<SALES> 206,264 162,750
<TOTAL-REVENUES> 206,264 162,750
<CGS> 141,081 111,755
<TOTAL-COSTS> 141,081 111,755
<OTHER-EXPENSES> 44,827 35,079
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (1,434) 57
<INCOME-PRETAX> 21,790 15,859
<INCOME-TAX> 8,335 6,344
<INCOME-CONTINUING> 13,455 9,515
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 13,455 9,515
<EPS-PRIMARY> .52 .44
<EPS-DILUTED> .51 .43
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINISH
LINE 10-Q FOR THE THIRTEEN WEEKS ENDED MAY 31, 1997 AND THREE MONTHS ENDED MAY
31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> OTHER 3-MOS
<FISCAL-YEAR-END> FEB-28-1998 MAR-01-1997
<PERIOD-START> MAR-02-1997 MAR-01-1996
<PERIOD-END> MAY-31-1997 MAY-31-1996
<CASH> 47,206 2,290
<SECURITIES> 9,232 0
<RECEIVABLES> 6,317 2,220
<ALLOWANCES> 0 0
<INVENTORY> 88,419 73,467
<CURRENT-ASSETS> 154,620 80,438
<PP&E> 58,646 45,250
<DEPRECIATION> 17,508 12,687
<TOTAL-ASSETS> 217,783 115,276
<CURRENT-LIABILITIES> 39,056 45,103
<BONDS> 0 0
0 0
0 0
<COMMON> 260 103
<OTHER-SE> 174,349 66,618
<TOTAL-LIABILITY-AND-EQUITY> 217,783 115,276
<SALES> 87,537 71,744
<TOTAL-REVENUES> 87,537 71,744
<CGS> 60,903 50,212
<TOTAL-COSTS> 60,903 50,212
<OTHER-EXPENSES> 20,083 16,042
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (722) 194
<INCOME-PRETAX> 7,273 5,296
<INCOME-TAX> 2,782 2,119
<INCOME-CONTINUING> 4,491 3,177
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,491 3,177
<EPS-PRIMARY> .17 .15
<EPS-DILUTED> .17 .15
</TABLE>
