-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, M09v0de2WN96fb4/TT3X1u7pSnDmkJW/Oyu7qEOk9lcCl7l2WzvhW3jscka+oC0X yGnj5gvJuB8avdWDA242HA== 0000898430-99-001909.txt : 19990510 0000898430-99-001909.hdr.sgml : 19990510 ACCESSION NUMBER: 0000898430-99-001909 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19990227 FILED AS OF DATE: 19990507 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FINISH LINE INC /DE/ CENTRAL INDEX KEY: 0000886137 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-SHOE STORES [5661] IRS NUMBER: 351537210 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-20184 FILM NUMBER: 99613883 BUSINESS ADDRESS: STREET 1: 3308 N MITTHOEFFER RD CITY: INDINAPOLIS STATE: IN ZIP: 46236 BUSINESS PHONE: 3178991022 MAIL ADDRESS: STREET 1: 3308 N MITTHOEFFER ROAD CITY: INDIANAPOLIS STATE: IN ZIP: 46236 10-K405 1 PERIOD FEBRUARY 27, 1999 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- 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 27, 1999 or [_] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to --------- ---------- Commission File Number 0-20184 ------- THE FINISH LINE, INC. (Exact name of registrant as specified in its charter) Delaware 35-1537210 - -------------------- ----------------- (State of Incorporation) (I.R.S. Employer ID No.) 3308 N. Mitthoeffer Road, Indianapolis, Indiana 46235 Registrant's telephone number, including area code: (317) 899-1022 ----------------- 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 ---- ---- 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 23, 1999 was approximately $246,656,494 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 23, 1999 was: Class A Common Stock: 17,658,321 Class B Common Stock: 7,244,068 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement dated June 9, 1999 for the Annual Meeting of Stockholders to be held on July 15, 1999 (hereinafter referred to as the "1999 Proxy Statement") are incorporated into Part III. Portions of the Registrant's Annual Report to Stockholders for the fiscal year ended February 27, 1999 (hereinafter referred to as the "1999 Annual Report to Stockholders") are incorporated into Parts II and IV. 1 PART I ------ Item 1 - Business General - ------- The Finish Line, Inc. together with its wholly owned subsidiary Spike's Holding, Inc. (the "Company" or "Finish Line") is 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, 1999, the Company operated 365 stores in 39 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, And 1, K-Swiss, New Balance, Asics, Fila and Skechers. The Company attempts to distinguish itself from other athletic footwear specialty retailers through larger mall-based store formats. Finish Line stores average approximately 5,850 square feet, and the Company's stores opened during fiscal 1999 averaged approximately 6,970 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 28% of the Company's net sales in fiscal 1999. The Company's principal executive offices are located at 3308 N. Mitthoeffer Road, Indianapolis, Indiana 46235, and its telephone number is (317) 899-1022. Operating Strategies - -------------------- 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. 2 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 - -------------------- 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 365 stores at April 1, 1999. The Company opened 59 new stores in fiscal 1999 and intends to open 40 to 50 new stores in fiscal 2000, which represents increases of approximately 19% in fiscal 1999 and 11% to 14% in fiscal 2000. Total square footage increased 32% in fiscal 1999 as a result of the Company's strategy of opening larger traditional stores, as well as selected larger format stores. For fiscal 2000 the Company plans to increase its total square footage open by approximately 15%. 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 two 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 4,970 square feet, traditional concept stores opened in fiscal 1999 averaged 5,980 square feet. Larger Format Concept - These stores are more than 10,000 square feet in size. They are typically stocked with 1,000 - 1,300 footwear styles and 20,000 - - 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 several years, Finish Line has made a number of strategic infrastructure investments, including enhancements to its management, store operations, and distribution and information systems. Significant 3 management additions and organizational changes include recruiting additional senior management professionals with significant industry experience, as well as centralizing the supervision of the footwear and activewear/accessories departments to improve communication and coordination between the two areas. In addition, staffs in both departments have been increased to allow the buyers and merchandisers to focus more time and attention on specific product categories. 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. Merchandise - ----------- 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.
Year Ended -------------------------------- Feb. 27, Feb. 28, March 1, Category 1999 1998 1997 - ------------------------------ ---- ---- ---- Footwear 72% 69% 68% Activewear/Accessories 28% 31% 32% ----- ----- ----- Total 100% 100% 100% ====== ====== ======
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 - -------- Finish Line's distinctive shoe wall is stocked with the latest in athletic, casual and outdoor footwear that the industry has to offer, including: Nike, adidas, Reebok, And 1, K-Swiss, New Balance, Asics, Converse, Fila, Skechers and many others. To make shopping easier for customers, footwear is categorized into definable sections including: basketball, cross-training, running, fitness, tennis, cleated, golf, outdoor, casual and lifestyle. Most categories are available in men's, women's and children's styles. 4 Activewear/Accessories - ---------------------- Many of the same companies which supply Finish Line with quality footwear also supply activewear, including products made by Nike, adidas and Reebok. Additional suppliers include Logo Athletic, along with outdoor activewear from Columbia, Woolrich, North Face, Timberland and Helly Hansen. In addition, the Company offers fashion brands including NST Nautica Sport Tech, RLX Polo Sport, Perry Ellis, RP55 and enyce. Many vendors offer footwear, activewear and accessories in "collections". Categories of activewear consist of jackets, caps, tops, pants, shorts, windwear, running wear, warm-ups, fleece, fitness wear and sport-casual wear. Among the accessories offered by the Company are socks, athletic bags, backpacks, sunglasses, watches and shoe-care products. In addition, the Company has recently initiated a private label apparel program focusing on basic products. Marketing - --------- 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 1999 and fiscal 1998 was 1.5% and 1.7%, 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 - --------------------------- 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 160 suppliers and manufacturers of athletic and fashion products, the largest of which (Nike) accounted for approximately 56% and 63% of total purchases in fiscal 1999 and fiscal 1998, respectively. The Company purchased approximately 87% of total merchandise in fiscal 1999 and fiscal 1998, respectively, from its five largest suppliers. The Company and its vendors use EDI technology to streamline purchasing and distribution operations. 5 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. Management Information System - ----------------------------- The Company has a computerized management information system which includes a network of computers at corporate headquarters used by management to support decision making along with PC-based POS computers at the stores. Store computers are connected via modem to computers at corporate headquarters. A perpetual inventory system permits corporate management to review daily each store's inventory by department, class and SKU. This system includes an automated replenishment system that allows the Company to replace faster-selling items more quickly. Other functions in the system include accounting, distribution, inventory tracking and control. Store Operations - ---------------- The Company has a Senior Vice President - Store Operations, Vice President- Store Personnel 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 or co-managers that are responsible for supervision and overall operations, one or more assistant mangers and additional full and part-time sales associates. Regional, district and store managers receive a fixed salary and are eligible for bonuses, based primarily on sales, payroll and shrinkage performance goals of the stores for which they are responsible. All assistant store managers and sales associates are paid on an hourly basis. Real Estate - ----------- As of April 1, 1999, Finish Line operated 365 stores in 39 states. With the exception of nine 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 16 stores using a "rack store" format, where footwear inventory is kept directly on the sales floor. 6 To keep its stores fresh and exciting, the Company has developed a strategy of consolidating older merchandise in one or more stores in each district for additional or final markdown. These stores are generally located in strip shopping centers or mixed-use outlet centers because these locations typically have lower occupancy costs and investments in leasehold improvements. Finish Line believes that its ability to obtain attractive, high traffic store locations, such as enclosed malls, to be a critical element of its business and a key factor in its future growth and profitability. In determining new store locations, management evaluates market areas, in-mall locations, "anchor" stores, consumer traffic, mall sales per square foot, competition and occupancy, construction and other costs associated with opening a store. The Company believes that the number of desirable store sites likely to be available in the future will permit it to implement its growth strategy in total square footage. Finish Line leases all of its stores. Initial lease terms of the stores generally range from 5 to 10 years in duration without renewal options, although some of the stores are subject to leases for 5 years with one or more renewal options. The leases generally provide for a fixed minimum rental plus a percentage of sales in excess of a specified amount. Based upon expenditures for fiscal 1999, the Company estimates that the cash requirements for opening a traditional new store (under 10,000 square feet) will approximate $565,000. This estimate includes $340,000 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 large 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. Competition - ----------- 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. 7 Seasonal Business - ----------------- 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 27, 1999, these periods accounted for approximately 34% of the Company's annual sales. Employees - --------- As of April 1, 1999, the Company employed approximately 8,070 persons, 1,830 of whom were full-time and 6,240 of whom were part-time. Of this total, 360 were employed at the Company's Indianapolis, Indiana corporate headquarters and distribution center and 33 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 - ------------------- 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 - ---------- 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 46,000 square feet of office space and 256,000 square feet of warehouse space. The Company completed 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 in fiscal 1999. 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. 8 Store Locations - --------------- At April 1, 1999, the Company operated 365 stores in 39 states. With the exception of nine strip center stores, all Finish Line stores are located in enclosed shopping malls. The following table sets forth information concerning the Company's stores.
STATE TOTAL STATE TOTAL - -------------------------- --------------- ---------------------------- --------------- Alabama 2 Missouri 9 Arizona 5 Nebraska 4 Arkansas 4 Nevada 1 California 3 New Hampshire 4 Colorado 5 New Jersey 4 Connecticut 3 New Mexico 1 Delaware 1 New York 21 Florida 21 North Carolina 15 Georgia 13 Ohio 38 Idaho 1 Oklahoma 7 Illinois 27 Pennsylvania 22 Indiana 24 South Carolina 4 Iowa 6 South Dakota 1 Kansas 8 Tennessee 11 Kentucky 8 Texas 27 Louisiana 5 Virginia 12 Maryland 12 Washington 2 Massachusetts 4 West Virginia 5 Michigan 14 Wisconsin 9 Mississippi 2 ------------- Total 365
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. Forward - Looking Statements - ---------------------------- This annual report on Form 10-K and the documents incorporated by reference contain statements which constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Except for the historical information contained herein, the matters discussed in the Form 10-K and the documents incorporated by reference 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 9 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. 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 ------- 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 31 through 32 and the inside back cover of the 1999 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 17 of the 1999 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 18 through 21 of the 1999 Annual Report to Stockholders filed as Exhibit 13 to this Annual Report on Form 10-K. Item 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is incorporated by reference to page 21 of the 1999 Annual Report to Stockholders filed as Exhibit 13 to this Annual Report on Form 10-K. Item 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is incorporated herein by reference to page 19 and pages 22 through 30 of the 1999 Annual Report to Stockholders filed as Exhibit 13 to this Annual Report on Form 10-K. 10 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. PART III -------- 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 1999 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 1999 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 1999 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 1999 Proxy Statement. PART IV ------- 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 1999 Annual Report to Stockholders are incorporated herein by reference: Report of Independent Auditors Consolidated Balance Sheets as of February 27, 1999 and February 28, 1998. Consolidated Statements of Income for the years ended February 27, 1999, February 28, 1998, and March 1, 1997. Consolidated Statements of Changes in Stockholders' Equity for the years ended February 27, 1999, February 28, 1998, and March 1, 1997. Consolidated Statements of Cash Flows for the years ended February 27, 1999, February 28, 1998 and March 1, 1997. Notes to Consolidated Financial Statements February 27, 1999. 11 2. The Financial Statement Schedule of The Finish Line, Inc. is listed in Item 14(d). (b) Reports on Form 8-K None. (c) Exhibits
Exhibit Number Description - --------- ----------- 3.1.1 Restated Certificate of Incorporation of The Finish Line, Inc.(1) 3.1.2 Certificate of Amendment to the Restated Certificate of Incorporation of The Finish Line, Inc.(1) 3.2 Bylaws of The Finish Line, Inc. as amended and restated.(1) 4.1 1992 Employee Stock Incentive Plan of The Finish Line, Inc., as amended and restated.(4) 10.6.2 Form of Incentive Stock Option Agreement pursuant to the 1992 Employee Stock Incentive Plan.(1) 10.6.3 Form of Non-Qualified Stock Option Agreement pursuant to the 1992 Employee Stock Incentive Plan.(1) 10.7 Form of Indemnity Agreement between The Finish Line Inc. and each of its Directors or Executive Officers.(1) 10.18 Amended and Restated Tax Indemnification Agreement(2) 10.21.1 The Finish Line, Inc. Profit Sharing Plan as Amended and Restated.(3) 10.21.2 Amendment to The Finish Line, Inc. Profit Sharing Plan dated January 1, 1993.(3) 10.21.3 Second Amendment to The Finish Line, Inc. Profit Sharing Plan dated January 1, 1994.(3) 10.26 Revolving Credit Agreement among Spike's Holding, Inc., and The Finish Line, Inc. dated May 4, 1997.(5) 10.27 Credit Agreement among The Finish Line, Inc. and NBD Bank, N.A., National City Bank of Indiana, The Northern Trust Company, Suntrust Bank, Central Florida, N.A. and NBD Bank, N.A. as Agent dated July 10, 1998. (6) 10.27.1 Revolving Credit Note in the amount of $30,000,000 with NBD Bank, N.A. dated July 10, 1998. (6)
12 10.27.2 Revolving Credit Note in the amount of $15,000,000 with The Northern Trust Company dated July 10, 1998. (6) 10.27.3 Revolving Credit Note in the amount of $15,000,000 with The Northern Trust Company dated July 10, 1998. (6) 10.27.4 Revolving Credit Note in the amount of $15,000,000 with Suntrust Bank, Central Florida, N.A. dated July 10, 1998. (6) 10.28 The Finish Line, Inc. Non-Employee Director Stock Option Plan, as amended and restated.(7) 11 Statement RE: Computation of Net Income Per Share. 13 Annual Report to Stockholders for the year ended February 27, 1999 21 Subsidiaries of The Finish Line, Inc. 23 Consent of Ernst & Young LLP (independent auditors). 27 Financial Data Schedule (1) 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. (2) 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. (3) 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. (4) Previously filed as a like numbered exhibit to the Registrant's Registration Statement on Form S-8 (File No. 333-62063) and incorporated herein by reference. (5) Previously filed as a like numbered exhibit to the Registrants' Quarterly Report on Form 10Q (File No. 0-20184) for the quarter ended August 30, 1997 and incorporated herein by reference. (6) Previously filed as a like numbered exhibit to the Registrants' Quarterly Report on Form 10Q (File No. 0-20184) for the quarter ended August 29, 1998 and incorporated herein by reference. (7) 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 27, 1999 and incorporated herein by reference.
13 (d) Financial Statement Schedule Page ---- Schedule II -- Valuation and Qualifying Accounts 17 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. 14 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, 1999 By:/s/ Steven J. Schneider, ----------------------- Steven J. Schneider, Sr. Vice President Finance, Chief Financial Officer and Assistant 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, 1999 /s/ Alan H. Cohen -------------------------- Alan H. Cohen, Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) Date: May 6, 1999 /s/ David I. Klapper -------------------------- David I. Klapper, Executive Vice President, and Director Date: May 6, 1999 /s/ David M. Fagin -------------------------- David M. Fagin, Executive Vice President and Director Date: May 6, 1999 /s/ Larry J. Sablosky -------------------------- Larry J. Sablosky, Executive Vice President and Director Date: May 6, 1999 /s/ Jonathan K. Layne -------------------------- Jonathan K. Layne, Director Date: May 6, 1999 /s/ Jeffrey H. Smulyan -------------------------- Jeffrey H. Smulyan, Director 15 INDEX TO FINANCIAL STATEMENT SCHEDULE PAGE - ------------------------------------- ---- II - Valuation and Qualifying Accounts 17 16 THE FINISH LINE, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (Dollars in thousands)
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 - ------------------ --------- --------- --------- -------- ------- Year ended March 1, 1997: Deducted from asset account: Reserve for inventory 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 ========== ========= ======== ========= ======= Year ended February 27, 1999: Deducted from asset account: Reserve for inven- tory obsolescence....... $3,000 $ 300 -- -- $3,300 ---------- --------- -------- --------- ------- Total.................. $3,000 $ 300 $0 $0 $3,300 ========== ========= ======== ========= =======
17 Exhibit Index ------------- Exhibit Number Description - ------- ---------------------------------------------- 10.28 The Finish Line, Inc. Non-Employee Director Stock Option Plan, as amended and restated. 11 Statement RE: Computation of Net Income Per Share. 13 Annual Report to Stockholders for the year ended February 27, 1999 21 Subsidiaries of The Finish Line, Inc. 23 Consent of Ernst & Young LLP (independent auditors). 27 Financial Data Schedule for year ended February 27, 1999 and February 28, 1998 18 EX-10.28 2 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN, AS AMENDED & RESTATED EXHIBIT 10.28 THE FINISH LINE, INC. NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN, AS AMENDED 1. Purpose of the Plan. Under this Non-Employee Director Stock Option Plan (the "Director Plan") of The Finish Line, Inc. a Delaware corporation (the "Company"), options may be granted to eligible persons, as set forth in Section 4, to purchase shares of the Company's Class A Common Stock ("Common Stock"). This Director Plan is designed to promote the long-term growth and financial success of The Finish Line, Inc. by enabling the Company to attract, retain and motivate such persons by providing for or increasing their proprietary interest in the Company. 2. Effective Dates. This Director Plan shall be in effect commencing on July 21, 1994, subject to approval by the Company's stockholders. Options may not be granted more than ten years after the date of stockholder approval of this Director Plan or termination of this Director Plan by the Board of Directors of the Company (the "Board"), whichever is earlier. 3. Plan Operation. This Director Plan is intended to be self-governing. To this end, this Director Plan requires no discretionary action by any administrative body with regard to any transaction under this Director Plan. To the extent, if any, that any questions of interpretation arise, these shall be resolved by the Board. 4. Eligible Persons. The persons eligible to receive a grant of non-qualified stock options hereunder are any Director of the Board who on the date of said grant is not an employee of the Company or a subsidiary of the Company. For purposes of this Section 4, a person shall not be considered an employee solely by reason of serving as Chairman of the Board. 5. Stock Subject to Director Plan. The maximum number of shares that may be subject to options granted hereunder shall be 150,000 shares of Class A Common Stock, subject to adjustments under Section 6. Shares of Class A Common Stock subject to the unexercised portions of any options granted under this Director Plan which expire, terminate or are canceled may again be subject to options under this Director Plan. 6. Adjustments. If the outstanding shares of stock of the class then subject to this Director Plan are increased or decreased, or are changed into or exchanged for a different number or kind of shares or securities as a result of one or more reorganizations, recapitalizations, stock splits, reverse stock splits, stock dividends, spin-offs and the like, appropriate adjustments shall be made in the number and/or type of shares or securities for which options may thereafter be granted under this Director Plan and for which options then outstanding under this Director Plan may thereafter be exercised. Any such adjustments in outstanding options shall be made without changing the aggregate exercise price applicable to the unexercised portions of such options. 7. Stock Options. Simultaneous with the original adoption of this Director Plan by stockholders on July 21, 1994, each non-employee director elected at such meeting of stockholders will be granted a non-qualified stock option to purchase 6,000 shares of the Company's Class A Common Stock. The per share exercise EXHIBIT 10.28 price of the option will be the fair market value of a share of the Company's Class A Common Stock on the date of grant, defined as the closing price of the Company's Class A Common Stock on the Nasdaq National Market (or such other securities market on which the Company's Class A Common Stock is primarily traded on such date). Each option will have a term of ten years and shall become fully exercisable one year after a non-employee director's initial election to the Board. Optionees will receive credit for service on the Board prior to the date of the option grant in satisfying these vesting requirements. Thereafter, upon election or appointment of any non-employee director to the Board or upon a continuing director becoming a non-employee director, such non-employee director will become eligible to receive an option to purchase 3,000 shares of the Company's Class A Common Stock to be granted on the date of the next Annual Meeting of Stockholders pursuant to the terms and conditions described in this Section 7. In addition, each non-employee director will be automatically granted, on an annual basis, a non-qualified stock option to purchase 4,000 shares of the Company's Class A Common Stock on the date of each Annual Meeting of Stockholders commencing with the Annual Meeting of Stockholders at which the non-employee director is granted the 3,000 share option pursuant to the foregoing paragraph. The per share exercise price of the option will be the fair market value of a share of the Company's Class A Common Stock on the date of grant, defined as the closing price of the Company's Class A Common Stock on the Nasdaq National Market (or such other securities market on which the Company's Class A Common Stock is primarily traded on such date). Each option will have a term of ten years and shall become fully exercisable one year after grant. If on any date upon which options are to be granted under this Director Plan the number of shares of Class A Common Stock remaining available under the Director Plan are less than the number of shares required for all grants to be made on such date, then options to purchase a proportionate amount of such available number of shares of Class A Common Stock shall be granted to each eligible non- employee director. 8. Documentation of Grants. Awards made under this Director Plan shall be evidenced by written agreements or such other appropriate documentation as the Board shall prescribe. The Board need not require the execution of any instrument or acknowledgement of notice of an award under this Direction Plan, in which case acceptance of such award by the respective optionee will constitute agreement to the terms of the award. 9. Nontransferrability. Any options granted under this Director Plan shall by its terms be nontransferable by the optionee otherwise than by will or the laws of descent and distribution, and shall be exercisable, during the optionee's lifetime, only by the optionee. 10. Amendment and Termination. The Board may alter, amend, suspend, or terminate this Director Plan, provided that no such actions shall deprive any optionee, without his consent, of any option granted to the optionee pursuant to this Director Plan or of any of his rights under such option and provided further that the provisions of this Director Plan designating persons eligible to participate in the Director Plan and specifying the amount, exercise price and timing of grants under the Director Plan shall not be amended more than once every six months other than to comply with changes with changes in the Internal Revenue Code, the Employee Retirement Income Security Act, or the rules thereunder. EXHIBIT 10.28 11. Termination of Directorship. All options held by non-employee directors as of the date of cessation of service as a director may be exercised in accordance with their terms by the non-employee director or his heirs or legal representatives until the earlier of one year after such termination and the expiration of the applicable option term. 12. Manner of Exercise. All or a portion of an exercisable option shall be deemed exercised upon delivery to the Secretary of the Company at the Company's principal office all of the following: (i) a written notice of exercise specifying the number of shares to be purchased signed by the non-employee director or other person then entitled to exercise the option, (ii) full payment of the exercise price for such shares by any of the following or combination thereof (a) cash, (b) certified or cashier's check payable to the order of the Company, ( c) the delivery of whole shares of the Company's Class A Common Stock owned by the option holder, or (d) by requesting that the Company withhold whole shares of Class A Common Stock then issuable upon exercise of the option (for purposes of such a transaction the value of shares of the Company's Class A Common Stock shall be defined as in the first paragraph of Section 7 hereof), (iii) such representations and documents as the Board, in its sole discretion, deems necessary or advisable to effect compliance with all applicable provisions of the Securities Act of 1933, as amended , and any other federal or state securities laws or regulations, (iv) in the event that the option shall be exercised by any person or persons other than the non-employee director, appropriate proof of the right of such person or persons to exercise the option, and (v) such representations and documents as the Board, in its sole discretion, deems necessary or advisable. 13. Compliance with Law. Class A Common Stock shall not be issued upon exercise of an option granted under this Director Plan unless and until counsel for the Company shall be satisfied that any conditions necessary for such issuance to comply with applicable federal, state or local tax, securities or other laws or rules or applicable securities exchange requirements have been fulfilled. IN TESTIMONY WHEREOF, The Finish Line, Inc. has executed this Director Plan, as amended, by it officers thereunto duly authorized this 29th day of April, 1999. THE FINISH LINE, INC. By /s/ Alan H. Cohen ----------------- Alan H. Cohen Chairman of the Board and Chief Executive Officer ATTEST: By /s/ Gary D. Cohen ----------------- Gary D. Cohen Secretary EX-11 3 COMPUTATION OF NET INCOME PER SHARE EXHIBIT 11 COMPUTATION OF NET INCOME PER SHARE (In thousands, except per share amounts)
Year Ended ------------------------------------- February 27, February 28, March 1, 1999 1998 1997 ------- ------- ------- Basic - ----- Average shares outstanding 25,541 25,963 23,100 ======= ======= ======= Net income $20,687 $26,734 $18,813 ======= ======= ======= Per share amount $ .81 $ 1.03 $ .81 ======= ======= =======
Diluted - -------
Average shares outstanding 25,541 25,963 23,100 Net effect of dilutive stock options 292 354 402 ------- ------- ------- Total 25,833 26,317 23,502 ======= ======= ======= Net Income $20,687 $26,734 $18,813 ======= ======= ======= Per Share Amount $ .80 $ 1.02 $ .80 ======= ======= =======
EX-13 4 ANNUAL REPORT TO STOCKHOLDERS ANNUAL REPORT [PICTURE OF MALL APPEARS HERE] Barton Creek Square Mall Austin, Texas Store Front FINANCIAL HIGHLIGHTS
FISCAL Fiscal Fiscal Dollars in thousands (except per share data) 1999 1998 1997 - ---------------------------------------------------------------------------------------- Net sales $ 522,623 $ 438,911 $ 332,002 Operating income 31,946 40,799 30,533 Operating income as a percent of net sales 6.1% 9.3% 9.2% Net income 20,687 26,734 18,813 Net income as a percent of net sales 4.0% 6.1% 5.7% Diluted earnings per share $ .80 $ 1.02 $ .80 Number of stores open at end of period 358 302 251 Total retail square footage at end of period 2,095,264 1,586,520 1,088,419 Average store size 5,853 5,253 4,336 Total assets $ 278,555 $ 255,978 $ 217,718 Cash (including short-term & long-term securities) 40,924 53,809 82,834 Total debt -- -- -- Total stockholders' equity 208,679 197,122 169,875 ========================================================================================
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 1995," "fiscal 1996," "fiscal 1997," "fiscal 1998" and "fiscal 1999" refer to the Company's fiscal years ended February 28, 1995; February 29, 1996; March 1, 1997; February 28, 1998; and February 27, 1999, respectively. "Fiscal 2000" and "fiscal 2001" refer to the Company's fiscal years ending February 26, 2000 and March 3, 2001. [GRAPH APPEARS HERE] COMPANY [FASHION MODEL PRESENTING PRODUCT PICTURE APPEARS HERE] Finish Line, Inc. is a leading athletic specialty retailer specializing in brand name athletic and casual footwear, apparel and accessories. Known for its signature shoe wall, Finish Line strives to offer customers more styles and sizes of active footwear than any mall-based retailer. Finish Line began operations in 1976 in Indianapolis, Indiana and at year-end served customers in 39 states through 358 stores. ALABAMA Kennesaw IOWA Flint Dothan Union City Cedar Rapids Fort Gratiot Montgomery Augusta Coralville Holland Macon Davenport Lansing ARIZONA Savannah Des Moines Midland Mesa Dubuque Monroe Phoenix IDAHO Iowa City Port Huron Scottsdale Boise Portage Traverse City ARKANSAS ILLINOIS KANSAS Fayetteville Alton Hutchinson MISSISSIPPI Fort Smith Bloomington Manhattan Ridgeland Little Rock Bourbonnais Olathe Tupelo N. Little Rock Carbondale Overland Park Chicago Salina MISSOURI CALIFORNIA Aurora Topeka Cape Girardeau Los Angeles Bloomingdale Wichita Chesterfield San Diego Fairview Heights Florissant Forsyth KENTUCKY Independence COLORADO Gurnee Ashland Joplin Boulder Lombard Bowling Green Kansas City Colorado Springs Matteson Florence St. Louis Denver Niles Lexington St. Peters N. Riverside Louisville Springfield CONNECTICUT Orland Park Paducah Meriden St. Charles Waterbury Schaumburg LOUISIANA NEBRASKA Waterford Skokie Alexandria Lincoln Waukegan Bossier City Omaha DELAWARE WestDundee Monroe Wilmington Danville Shreveport NEVADA Marion Las Vegas Moline MARYLAND FLORIDA Peoria Baltimore NEW Brandon Peru Bethesda HAMPSHIRE Crystal River Rockford Cumberland Concord Daytona Beach Springfield Frederick Manchester Fort Myers Hagerstown Newington Jacksonville Laurel Salem Lakeland INDIANA Owings Mills Naples Anderson Salisbury Ocoee Bloomington Towson NEW JERSEY Orlando Carmel Deptford Panama City Elkhart MASSACHUSETTS Eatontown Pensacola Evansville Hanover Paramus Port Richey Fort Wayne Holyoke Phillipsburg St. Petersburg Indianapolis Saugus Sanford Kokomo Taunton Tallahassee Lafayette NEW MEXICO Tampa Marion MICHIGAN Albuquerque Merrillville Adrian Michigan City Auburn Hills Muncie Battle Creek NEW YORK GEORGIA Richmond Bay City Albany Alpharetta South Bend Benton Harbor Buffalo Athens Terre Haute Burton Blasdell Atlanta Williamsville Decatur Clay Duluth Dewitt Horseheads Ithaca Lakewood Northwood TEXAS Janesville Middletown Piqua Abilene Madison Niagara Falls Reynoldsburg Amarillo Milwaukee Poughkeepsie St. Clairsville Austin Racine Rochester Sandusky Dallas/Fort Worth Wauwatosa Rotterdam Springfield Arlington Saratoga Springs Toledo Denton Schenectady Hurst Staten Island OKLAHOMA Irving Syracuse Midwest City Lewisville Wilton Oklahoma City Mesquite Tulsa Plano NORTH PENNSYLVANIA Richardson CAROLINA Altoona El Paso Burlington Bensalem Houston Cary Bloomsburg Humble Charlotte Butler Killeen Gastonia Camp Hill Longview Pineville Chambersburg Midland Concord Erie San Angelo Fayetteville Greensburg San Antonio Greensboro Hanover Sherman Hickory Indiana Temple High Point Johnstown Tyler Morrisville Media Waco Raleigh Wales Wichita Falls Rocky Mount Philadelphia Winston-Salem Pittsburgh Scranton OHIO Uniontown VIRGINIA Akron Washington Alexandria Ashtabula West Mifflin Chesapeake Beaver Creek York Dulles Canton Fredericksburg Cincinnati SOUTH Harrisonburg Cleveland CAROLINA Lynchburg Euclid Charleston Newport News Mentor Columbia Richmond N. Olmsted Greenville Colonial Heights N. Randall Glen Allen Parma SOUTH Roanoke Richmond Heights DAKOTA Virginia Beach Columbus Sioux Falls Winchester Dayton Dublin TENNESSEE WASHINGTON Elyria Antioch Seattle Findlay Chattanooga Franklin Clarksville WEST VIRGINIA Heath Franklin Barboursville Lancaster Goodlettsville Bridgeport Lima Johnson City Charleston Mansfield Memphis Martinsburg Marion Nashville Morgantown New Philadelphia Niles WISCONSIN Green Bay Greendale During the year our "Champions of Achievement" campaign succeeded in building Finish Line brand recognition in the marketplace. The campaign was led by two award-winning television commercials, and supported with consumer-targeted print advertising, outdoor boards, direct mail, in-store graphics and promotions. In order to complement the look and feel of our stores, and to continue to build our relationship and company brand recognition with our customers, we have continued our efforts to position and grow SPIKE Magazine, which now reaches more than 800,000 customers every three months. Conceived two years ago and directed to the 14- to 22-year-old mall shopper, SPIKE Magazine has positioned Finish Line as the first choice for the hottest athletic products and product information and has made our store, not just the mall, our customers' shopping destination. Back in 1976, we began by opening our first store in Indianapolis. We did not dare dream how far we could come with the Finish Line concept. Over the years, we have continued to challenge ourselves to be the best athletic footwear retailer in the mall. Today, as a result of meeting those challenges, we have a sound financial base from which to operate and a track record that builds confidence in and around the Company. We are staffed with bright professionals eager to succeed in any competitive environment. Professionals who not only work hard, but work smart, setting a standard for those who work with and for them. Together we will meet the needs of our customers and the marketplace, as we continually strive to be the best athletic footwear retailer in the mall. While our competitors are focusing on the Finish Line, we at the Finish Line remain focused on the future. /s/ Alan H. Cohen Alan H. Cohen, President & CEO [LOGO OF FINISH LINE YOUTH FOUNDATION] This year also saw the creation of the Finish Line Youth Foundation. We created the Youth Foundation to facilitate our ability to provide funding and assistance to youth athletics and programs. In its first year of operation, the Finish Line Youth Foundation, through our customers, employees and stores, raised more than $600,000 for Boys and Girls Clubs of America. We look forward to growing the Foundation and continue giving back to the communities where we do business. [PICTURE APPEARS HERE] Alan Cohen, Finish Line President & CEO (left) and Kurt Aschermann, Vice President of the Boys and Girls Clubs of America. (to shareholders) Finish Line has always understood the importance of setting goals, participating and competing to the best of one's abilities. Even our marketing efforts focused on what it takes to be a true "Champion of Achievement." From the store level to the front office, Finish Line worked as a team to succeed in a challenging year. Fiscal 1999 proved to be a difficult year in our industry and caused us to reflect on that marketing message. This adverse business environment challenged us to be "Champions." Throughout the year industry trends seemed to grow more negative, but true champions find a way to persevere and succeed. As we were faced with new challenges and obstacles, we continued to work toward our corporate goal of being THE BEST ATHLETIC FOOTWEAR RETAILER IN THE MALL. For the year, we again broke sales records posting $522,623,000 in sales, an increase of 19 percent vs. last year. While an adverse specialty retail environment kept us from reporting same store sales increases for the year, we were still able to deliver respectable earnings of $.80 per share vs. $1.02 last year. We also accomplished our aggressive store growth plan for the year with the opening of 59 new stores, including our first stores in Delaware, New Mexico, Nevada, Idaho, South Dakota and California, and ended the year with 358 stores in 39 states. In addition to the new stores, we expanded/remodeled 26 existing stores. During fiscal 1999, we added approximately 510,000 square feet of retail space, an increase of 32 percent on top of a 46 percent square footage increase the previous year, bringing us to 2.1 million square feet of retail space at year end. As a result of this aggressive growth, at fiscal year-end 1999 nearly one-half of our total retail square footage was less than two years old. We remain confident and committed to our store concept and operating strategies, and believe that our larger, more exciting stores have become the mall-based athletic specialty store of choice for our customers, landlords and product vendors. We intend to continue to grow our retail square footage in fiscal year 2000 with 40 to 50 new stores and approximately 20 expansion/remodels of existing stores. Our store formats will continue to cater to the branded athletic footwear and apparel needs of the entire family, including performance, fashion and value-oriented product. At Finish Line, we believe important lessons can be learned through adverse times and such experiences will help make us a better retailer. In our search for improvement and competitive advantage, it is critical to recognize and adapt quickly to changing market conditions, including fashion shifts and consumer spending habits. We must also be prepared to review and refine in-store merchandising and product offerings to better serve our customers' needs, as illustrated in the recent introductions of new vendors and products such as NST Nautica Sport Tech and RLX Polo Sport into our stores. [PICTURE OF STORE APPEARS HERE] Northridge Fashion Center Northridge, California [PICTURE OF SHOES APPEARS HERE] BUSINESS STRATEGY Finish Line is dedicated to being the best athletic footwear retailer in the mall. Like a ballplayer staying after practice to work on his game, we are working harder and smarter to always be a step ahead of the competition. We are working on the little things so that every time a customer steps into our stores, we are delivering the best possible shopping experience. For more than 20 years, our success has been built on a three-point strategy. Through our product offering, particularly footwear, we address three key consumer desires: FUNCTION, FASHION AND VALUE FUNCTION. Finish Line will always be tied to authentic athletic performance. From our Company name and the dreams and best efforts it immediately inspires, to our well-trained sales associates and performance product mix, Finish Line has a heritage linked to the thrill of competition and being the best. Performance is trend-proof and will never go out of style. FASHION FOLLOWS FUNCTION. We understand that not every pair of athletic shoes we sell will find its way to the track or court. Many of our customers are looking for an athletic or casual look. To meet these [FASHION MODELS PRESENTING PRODUCT PICTURE APPEARS HERE] customers' needs, we keep abreast of the latest trends--offering product for use on or off the court. VALUE ENHANCES FUNCTION AND FASHION. We will also take advantage of market opportunities that allow us to purchase brand name performance or fashion products from our vendors at special prices to attract the value customer. And in-store programs like the Tiebreaker price guarantee policy ensure that Finish Line will never lose a sale on price. Today, Finish Line is more focused than ever on being the best athletic footwear retailer in the mall. No matter what our customers interpret as best (selection, service, product knowledge, value, etc.), we are working to make sure they will find it at Finish Line. GROWING STRONG During the last few years, Finish Line has aggressively grown into a national chain. Fiscal 1999 saw 59 new Finish Lines open across the country, while we remodeled/expanded an additional 26 existing stores. In the last two years, we have nearly doubled our retail square footage. Today our customers shop our stores in 39 states, in more than 2.1 million square feet of retail space. [FASHION MODELS PRESENTING PRODUCT PICTURE APPEARS HERE] [PICTURE APPEARS HERE] Los Cerritos Mall Cerritos, California Womens Shoe Wall As the competition for prime mall real estate intensifies, Finish Line will continue to work to find prime locations in the best markets and malls. A careful growth plan calling for a 15 to 20 percent retail square footage increase is now in place to guide Finish Line into the next millennium. During fiscal 2000, we expect to add another 300,000 to 400,000 square feet of great looking, athletic specialty store space. SIZED TO FIT When a customer walks into a Finish Line store, they are walking into an athletic retail format like no other. In our large-format stores, those with more than 10,000 square feet, a dramatic shoe wall showcasing up to 1,300 styles drives home our footwear focus. Our large-format stores offer customers a unique shopping experience. Multiple footwear and apparel styles are offered in an exciting and entertaining shopping environment. Vendor and sport-specific concept shops are used to showcase particular vendors or categories, simplifying the shopping experience while showcasing product collections and accessories. Even our traditional stores, those less than 10,000 square feet, offer more shopping area than most of our competitors' stores. Our traditional new stores, opened over the last two fiscal years, have averaged almost 6,000 square feet allowing us to offer a broader product selection in both footwear and apparel. Product. Product. Product. [PICTURE APPEARS HERE] Northridge Fashion Center Northridge California Mens Shoe Wall [FASHION MODELS PRESENTING PRODUCT PICTURE APPEARS HERE] In addition to footwear, our merchandise department will work closely with vendors to offer a complete and complimentary product assortment. New items from vendors like NST Nautica Sport Tech, RLX Polo Sport, Oakley and The North Face will enhance our product offering beyond our traditional athletic brands like Nike and adidas. We have also recently introduced our own private label apparel brand into our stores, SPK. This proprietary branded product is designed to meet the needs of consumers looking for a high-quality, basics-type of product at attractive price points. In all categories, we will continue to offer value merchandise. Our size, flexibility and good reputation with our product partners have allowed us to take advantage of opportunity buys from our vendors, allowing us to satisfy the needs of our value-conscious customers. It's another way we meet the diverse needs of our target audience. IT'S WHAT YOU KNOW As we've grown, it has become increasingly important that our information technology keep pace. From managing inventories to tracking daily sales to forecasting product allotment for new stores, quick and accurate sharing of information is crucial for our continued success. [FASHION MODEL PRESENTING PRODUCT PICTURE APPEARS HERE] Enhanced capabilities at our stores provide for daily transmission of information to and from the field and home office, allowing for timely product replenishment and rapid response for buying and merchandising strategies. Going forward, we will continue to invest in our communications infrastructure to strengthen our capabilities of exchanging information throughout the company in a timely and accurate manner. [FASHION MODEL PRESENTING PRODUCT PICTURE APPEARS HERE] Improved communication is vital to our aggressive expansion plan. We plan to implement a new merchandise planning system which will allow us to more accurately forecast merchandise needs and store allotments. We will be able to build more precise sales plans down to the department class level for each store. New software now being implemented will also allow improved store-level labor forecasting and scheduling. Armed with these new ways to gather and provide information, our people are more prepared than ever before to meet customer needs. [PICTURE APPEARS HERE] Los Cerritos Mall Cerritos, California Youth Wall PEOPLE MAKE THE DIFFERENCE [EMPLOYEE PICTURES APPEAR HERE] With the addition of 59 stores this year, on top of 53 openings in fiscal year 1998, it is an on-going challenge to make certain we have well-trained, motivated staffs to service our customers and operate each store. With this rapid growth, our entire store workforce has doubled in two short years--placing unique pressures on the crucial hiring and training process. Realizing that our store personnel are the front line, we have worked diligently to recruit quality people and provide them with the right tools and training to offer our customers a satisfying store experience. The rallying cry has been back to basics with a re-emphasis on service, knowledge and selection. With each success in training, recruitment and education, employee confidence has grown. Today our pool of management trainees is greater and better prepared to take leadership positions as new stores are opened. [PICTURE OF WASHINGTON SQUARE MALL INDIANAPOLIS, INDIANA STORE CASH WRAP AND PRODUCT APPEARS HERE] HOW WE SEE IT In many instances, how we show our product may be as important as what we carry. We will continue to hone our merchandising strategy to create an exciting, shopping environment that not only invites customers into the store, but sets the stage for product purchase. New footwear display tables and lease line fixtures offer additional opportunities to showcase footwear. And by working with vendors to create shared graphics packages, each Finish Line can deliver a consistent brand or category message at the crucial in-mall contact point. BUILDING RELATIONSHIPS [SPIKE MAGAZINE COVERS PICTURE APPEARS HERE] BUILDING OUR BRAND. OUR BRAND. This year we embarked on a performance-based branding campaign that positioned Finish Line as a supportive, goal-driven retailer that understands and relishes the joy of competition. In two television commercials, we asked our customers the simple question, "Where's your Finish Line?" Print ads focused on goals and goal attainment, reinforcing a commitment to performance and positioning Finish Line as the destination for gear that can help you reach your goals. Our own SPIKE Magazine continued to reach more than 800,000 customers, creating customer loyalty and providing a showcase for new footwear and apparel. Delivered four times a year, SPIKE Magazine offers a unique one-on-one dialogue in the homes of our key target audiences. Advertising support from our vendors makes the magazine cost effective while building Finish Line brand identity as well as reinforcing the product and performance messages of our vendors. We will continue to build a bridge to our customers. This year we will investigate new ways to reach our customers and test several new programs to build customer loyalty and repeat visits. Direct mail, cooperative marketing programs and grass-roots initiatives will again play a role in getting our message out. This summer for the first time, product will be available for sale on our web site at www.finishline.com along with in-store promotional activities and technical product information. Our goal is to deliver a consistent message every time we "speak" to our customers, whether it's in their home, in the mall or in our store. [FASHION MODEL PRESENTING PRODUCT PICTURE APPEARS HERE] [PICTURE OF STORE APPEARS HERE] Los Cerritos Mall Cerritos, California Store Front SELECTED FINANCIAL DATA
Year Ended - ------------------------------------------------------------------------------------------------------------------------------------ FEBRUARY 27, February 28, March 1, February 29, February 28, (In thousands, except per share and store operating data) 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ INCOME STATEMENT DATA: - ------------------------------------------------------------------------------------------------------------------------------------ Net sales $ 522,623 $ 438,911 $ 332,002 $ 240,155 $ 191,623 Cost of sales (including occupancy expenses) 373,170 303,809 229,187 168,912 132,726 - ------------------------------------------------------------------------------------------------------------------------------------ Gross profit 149,453 135,102 102,815 71,24 58,897 Selling, general and administrative expenses 117,507 94,303 72,282 54,254 44,548 - ------------------------------------------------------------------------------------------------------------------------------------ Operating income 31,946 40,799 30,533 16,989 14,349 Interest expense (income)--net (1,421) (2,495) (824) 892 317 - ------------------------------------------------------------------------------------------------------------------------------------ Income before income taxes 33,367 43,294 31,357 16,097 14,032 Income taxes 12,680 16,560 12,544 6,439 5,618 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 20,687 $ 26,734 $ 18,813 $ 9,658 $ 8,414 ==================================================================================================================================== EARNINGS PER SHARE DATA: - ------------------------------------------------------------------------------------------------------------------------------------ Basic earnings per share $ .81 $ 1.03 $ .81 $ .47 $ .41 - ------------------------------------------------------------------------------------------------------------------------------------ Diluted earnings per share $ $ .80 $ 1.02 $ .80 $ .47 $ .41 ==================================================================================================================================== Share Data/(1)/: - ------------------------------------------------------------------------------------------------------------------------------------ Weighted-average shares 25,541 25,963 23,100 20,630 20,630 - ------------------------------------------------------------------------------------------------------------------------------------ Diluted weighted-average shares 25,833 26,317 23,502 20,671 20,630 ==================================================================================================================================== Selected Store Operating Data: - ------------------------------------------------------------------------------------------------------------------------------------ Number of stores: Opened during period 59 53 35 35 30 Closed during period 3 2 4 5 4 Open at end of period 358 302 251 220 190 Total square feet/(3)/ 2,095,264 1,586,520 1,088,419 870,340 691,831 Average square feet per store/(2)/ 5,853 5,253 4,336 3,956 3,641 Net sales per square foot for comparable stores 310 $ 345 $ 352 $ 308 $ 300 Increase (decrease) in comparable store net sales/(3)/ (1.7)% 5.6% 16.0% 3.4% 1.7% ==================================================================================================================================== Balance Sheet Data: - ------------------------------------------------------------------------------------------------------------------------------------ Working capital $ 106,661 $ 120,822 $ 112,079 $ 32,453 $ 30,050 Total assets 278,555 255,978 217,718 114,972 88,535 Total debt -- -- -- 9,500 5,025 Stockholders' equity 208,679 197,122 169,87 63,148 53,487 ====================================================================================================================================
(1) 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. (2) Computed as of the end of each fiscal period. (3) Calculated using those stores that were open for the full current fiscal period and were also open for the full prior fiscal period. [FINISH LINE] Selected Financial Data................................................... 17 Management Discussion and Analysis of Financial Conditions and Results of Operations......................... 18-21 Consolidated Balance Sheets............................................... 22 Consolidation Statements of Income........................................ 23 Consolidated Statements of Cash Flows..................................... 24 Consolidated Statements of Changes of Stockholder's Equity...................................................... 25 Notes to Consolidated Financial Statements................................ 26-30 Report of Independent Auditors............................................ 31 Market Price of Common Stock.............................................. 31 Officers and Directors.................................................... 32 Shareholder Information................................................... 33
[PICTURE OF LOS CERRITOS MALL CERRITOS, CALIFORNIA STORE CASH WRAP APPEARS HERE] 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 27, February 28, March 1, 1999 1998 1997 - ----------------------------------------------------------------------------- Income Statement Data: Net sales 100.0% 100.0% 100.0% Cost of sales (including occupancy expenses) 71.4 69.2 69.0 - ----------------------------------------------------------------------------- Gross profit 28.6 30.8 31.0 Selling, general and administrative expenses 22.5 21.5 21.8 - ----------------------------------------------------------------------------- Operating income 6.1 9.3 9.2 Interest income--net .3 .6 .2 - ----------------------------------------------------------------------------- Income before income taxes 6.4 9.9 9.4 Income taxes 2.4 3.8 3.7 - ----------------------------------------------------------------------------- Net income 4.0% 6.1% 5.7% - ----------------------------------------------------------------------------- FISCAL 1999 COMPARED TO FISCAL 1998 Net sales for fiscal 1999 were $522.6 million, an increase of $83.7 million or 19.1% over fiscal 1998. Of this increase, $48.3 million was attributable to an 18.5% increase in the number of stores open during the period from 302 at the end of fiscal 1998 to 358 at the end of fiscal 1999. The balance of the increase in net sales was attributable to an increase of $30.9 million from the 53 existing stores open only part of fiscal 1998 along with an increase in sales from stores remodeled. These increases were partially offset by a comparable store net sales decrease of 1.7% in fiscal 1999. Comparable net footwear sales increased 2.4% for fiscal 1999 and comparable net activewear and accessories sales decreased 11.0%. Net sales per square foot decreased in fiscal 1999 to $310 from $345 in fiscal 1998. The decrease in 1999 was the result of the competitive and promotional retail environment and negative apparel trends due to a fashion shift by customers to contemporary non-athletic brands. In addition, an 11.4% increase in the average store size from 5,253 square feet in fiscal 1998 to 5,853 square feet in fiscal 1999 contributed to the decline in sales per square foot. Gross profit, which includes product margin less store occupancy costs, for fiscal 1999 was $149.5 million, and increase of $14.4 million or 10.6% over fiscal 1998, and a decrease of approximately 2.2% as a percentage of net sales. Of this 2.2% decrease, 1.5% was due to an increase in occupancy costs as a percentage of net sales, 0.4% was due to lower margins for product sold and 0.3% was due to an increase in inventory shrink. Selling, general and administrative expenses were $117.5 million, an increase of $23.2 million or 24.6% over fiscal 1998, and increased to 22.5% from 21.5% as a percentage of net sales. The dollar increase was primarily attributable to the operating costs related to the 59 additional stores opened during 1999. The increase as a percentage of net sales is a result of higher store payroll costs and weaker sales from the end of July through February. Net interest income for fiscal 1999 was $1.4 million compared to net interest income of $2.5 million for fiscal 1998. This decrease was the result of reduced invested cash balances due to the Company's funding of fiscal 1999 expansion and the purchase of treasury stock under the Company's stock repurchase program. Income tax expense was $12.7 million for fiscal 1999 compared to $16.6 million for fiscal 1998. The decrease in the Company's provision for federal and state taxes in 1999 is due to the decreased level of income before taxes along with a decrease in the effective tax rate to 38% for fiscal 1999 from 38.25% in fiscal 1998. In addition, the Company is currently considering other opportunities that may further reduce the Company's effective tax rate in future periods. Net income decreased 22.6% to $20.7 million for fiscal 1999 compared to $26.7 million for fiscal 1998. Diluted net income per share decreased 21.6% to $.80 for fiscal 1999 compared to $1.02 for fiscal 1998. Diluted weighted average shares outstanding were 25,833,000 and 26,317,000, for fiscal 1999 and 1998, respectively. The reduction in the diluted weighted average shares outstanding reflects the repurchase of 1,313,000 shares of Class A Common Stock through the stock buyback program authorized by the Board of Directors in September 1998. 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, MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Quarter Ended - ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands, except per share data) May 30, 1998 August 29, 1998 November 28, 1998 FEBRUARY 27, 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Net sales $116,602 100.0% $144,719 100.0% $109,655 100.0% $151,647 100.0% Cost of sales (including occupancy expenses) 81,379 69.8 100,211 69.2 81,874 74.7 109,706 72.3 - ------------------------------------------------------------------------------------------------------------------------------------ Gross profit 35,223 30.2 44,508 30.8 27,781 25.3 41,941 27.7 Selling, general and administrative expenses 26,472 22.7 32,170 22.2 27,454 25.0 31,411 20.7 - ------------------------------------------------------------------------------------------------------------------------------------ Operating income 8,751 7.5 12,338 8.6 327 5.3 10,530 7.0 Interest income--net 490 .4 397 .3 313 .3 221 .1 - ------------------------------------------------------------------------------------------------------------------------------------ Income before income taxes 9,241 7.9 12,735 8.9 640 .6 10,751 7.1 Income taxes 3,512 3.0 4,839 3.4 244 .2 4,085 2.7 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 5,729 4.9% $ 7,896 5.5% $ 396 .4% $ 6,666 4.4% - ------------------------------------------------------------------------------------------------------------------------------------ Basic earnings per share $ .22 $ .30 $ .02 $ .27 Diluted earnings per share $ .22 $ .30 $ .02 $ .27 - ------------------------------------------------------------------------------------------------------------------------------------ Quarter Ended - ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands, except per share data) May 31, 1997 August 30, 1997 November 29, 1997 February 28, 1998 - ------------------------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------------------------
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 was 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. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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. 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. QUARTERLY COMPARISONS The Company's merchandise is marketed during all seasons, with the highest volume of merchandise sold during the second and fourth fiscal quarters as a result of back-to-school and holiday shopping. The third fiscal quarter has traditionally had the lowest volume of merchandise sold and the lowest results of operations. The table on the previous page sets forth quarterly data of the Company, including such data as a percentage of net sales. For fiscal 1999 and fiscal 1998. This quarterly information is unaudited but, in managements 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 $37,734,000, $212,000 and $15,565,000 respectively, for fiscal 1999, 1998 and 1997. At February 27, 1999, cash and cash equivalents were $23.1 million and short-term marketable securities were an additional $2.2 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 $135.3 million at February 27, 1999 compared to $130.1 million at February 28, 1998. On a per square foot basis, merchandise inventories at February 27, 1999 decreased 21.3% compared to February 28, 1998. The company believes current inventory levels are appropriate based on the industry environment. The Company has an unsecured committed Credit Agreement (the "Facility") with a syndicate of commercial banks in the amount of $75,000,000, which expires on July 10, 2003. The Company periodically reviews its ongoing credit needs with its syndicate of commercial banks and expects to be able to renew or renegotiate the Facility prior to its expiration for an additional period beyond the current maturity date of July 10, 2003. The interest rate on the Facility is, at the Company's election, either a negotiated rate approximating the federal funds effective rate plus .775% (this rate is available on the first $10,000,000 of borrowings), the bank's LIBOR Rate plus .475% or the bank's prime commercial lending rate. The margin percentage added to the LIBOR Rate is subject to adjustment quarterly based on the fixed charge coverage ratio (as defined). At February 27, 1999, there were no borrowings outstanding under the Facility. The Facility contains restrictive covenants that limit, among other things, the Company's ability to declare or pay dividends, incur or guarantee debt, redeem shares of its capital stock, be a party to a merger, acquire or dispose of assets or engage in any other transactions outside the ordinary course of business. In addition, the Company must maintain a fixed charge coverage ratio (as defined) of not less than 1.5 to 1.0, a consolidated tangible net worth of not less than $168,000,000 and a leverage ratio (as defined) of not greater than .63 to 1.0. The Company is in compliance with all such covenants. Capital expenditures were $41,398,000 and $29,555,000 for fiscal 1999 and 1998, respectively. Expenditures in 1999 were primarily for the build-out of 59 stores that were opened during fiscal 1999 (including 7 large format stores), the remodeling of 26 existing stores, the completion of a 22,000 square foot addition to the existing office building and the completion of mezzanine levels in the existing distribution center which added 100,000 square feet of floor space. 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. The Company anticipates that total capital expenditures for fiscal 2000 will be approximately $30,000,000 primarily for the build-out of 40-50 new stores (including 5-7 large format stores), the remodeling of 15-20 existing stores and various corporate projects. The Company estimates that its cash requirement to open a traditional format new store (up to 10,000 square feet) will range from $500,000 to $600,000 (net of construction allowance) and from $900,000 to $1.9 million (net of construction allowance) for a large format new store (10,000 to 25,000 square feet). These requirements for a traditional store include approximately $340,000 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 ($1.0 million net of payables) in new store inventory. During fiscal 1999, the Company purchased, at an aggregate cost of $683,000, 50,000 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. The Company contributed 40,000 shares purchased in fiscal 1998 to the retirement plan on April 1, 1998. Effective September 2, 1998 the Board of Directors approved a stock repurchase program. The Company was authorized to purchase on the open market or in privately negotiated transactions, through December 31, 1999, up to 2.6 million shares of the MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Company's Class A Common Stock outstanding. As of February 27, 1999, the Company purchased 1,313,000 shares of its Class A Common Stock in the open market at an average price of $8.96 per share for an aggregate purchase amount of $11,759,000. The treasury shares may be issued upon the exercise of employee stock options or for other corporate purposes. 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 2000 store expansion program and to satisfy the Company's other capital requirements through fiscal 2000. MARKET RISK The Company is exposed to changes in interest rates primarily from its investments in held-to-maturity municipal marketable securities. The Company does not use interest rate derivative instruments to manage exposure to interest rate changes. A hypothetical 100 basis point increase in interest rates would adversely effect the net fair value of marketable securities by $337,000 at February 27, 1999. YEAR 2000 READINESS The year 2000 issue is the result of computer programs using two digits rather than four to define the applicable year. Such software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failures or miscalculations leading to disruptions in the Company's operations, including, among other things, a temporary inability to process transactions, receive inventory from suppliers, ship inventory to stores, or engage in similar business activities. The Company's Year 2000 Plan is being completed in four phases as it relates to IT systems, non-IT systems and third party suppliers, vendors and service providers ("Third Parties"). The four phases include inventory and assessment; remediation; testing; and contingency planning. The Company has undertaken initiatives to ensure that its information technology (IT) systems and non-IT systems will function properly with respect to dates in the Year 2000 and thereafter. IT systems include hardware, accounting, data processing, and telephone systems, cash registers, hand-held terminals, scanning equipment, and other miscellaneous systems. Non-IT systems include alarm systems, time clocks, fax machines, material handling equipment, sprinklers, and heating, ventilating and air conditioning systems. To date the Company has substantially completed the first three phases of the Plan as it relates to substantially all IT and non-IT systems. The Company utilizes commercially available packaged software to support the majority of its application needs. A majority of such packages have been represented by the respective vendors as Year 2000 compliant. Testing completed to date has confirmed this. Contingency planning as deemed necessary will be completed by June 1999. The Company believes that Third Parties represent the area of greatest risk to the Company including the potential failure of mall utilities and failure of merchandise vendor production facilities. This is due to the Company's limited ability to influence actions of the Third Parties, and because of the Company's inability to estimate the level and impact of noncompliance of Third Parties in some instances. Material Third Parties have been identified and the Company has opened communication with them in regards to the Year 2000 issue. Correspondence has been sent to material Third Parties and the Company has received return correspondence from a large majority stating that they expect to be Year 2000 compliant in 1999. The Company plans to perform follow-up inquiries with nonresponding Third Parties and develop contingency plans by June 1999 if necessary. Costs related to the Year 2000 issue are funded through operating cash flows. The Company has not incurred significant historic costs related to the Year 2000 issue as systems have been upgraded as a part of the Company's growth and normal maintenance routines. Through February 27, 1999 the Company had expended approximately $100,000 in remediation efforts, including the costs of new software and modifying the applicable code of existing software. The Company has expensed the majority of these costs to date. The Company estimates the remaining costs to be less than $50,000. Although the Company anticipates no material business disruption will occur as a result of the Year 2000 issue, the Year 2000 issue is unique and the failure to correct a material Year 2000 issue could result in an interruption, or a failure of certain normal business activities or operations, such as loss of communications with store locations, inability to process transactions, inability for malls to operate, and the disruption of the supply of product and distribution channel. Such failures could materially and adversely affect the Company's results of operations, liquidity and financial condition. Due to general uncertainty inherent in the Year 2000 problem resulting from the uncertainty of the Year 2000 readiness of Third Parties, the Company is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on the Company's results of operations, liquidity or financial condition. The Company's Year 2000 Plan is expected to significantly reduce the Company's level of uncertainty about the Year 2000 issue and the readiness of its material Third Parties. The Company believes that with the completion of the Plan as scheduled, the possibility of significant interruptions of normal operations should be reduced. The above section, even if incorporated by reference into other documents or disclosures, is a Year 2000 Readiness Disclosure as defined under the Year 2000 Information and Readiness Disclosure Act of 1998. EFFECTS OF INFLATION As the costs of inventory and other expenses of the Company have increased, the Company has generally been able to increase its selling prices. In periods of high inflation, increased build out and other costs could adversely affect the Company's expansion plans.
FEBRUARY 27, February 28, (in thousands) 1999 1998 - ------------------------------------------------------------------------- ASSETS Current Assets Cash and cash equivalents $ 23,113 $ 28,113 Short-term marketable securities 2,155 7,886 Accounts receivable 6,951 4,668 Merchandise inventories 135,303 130,150 Deferred income taxes 2,432 2,275 Other 1,241 1,988 - ------------------------------------------------------------------------- Total current assets 171,195 175,080 ========================================================================= Property and Equipment Land 315 315 Building 10,251 7,517 Leasehold improvements 74,948 49,549 Furniture, fixtures, and equipment 30,418 21,547 Construction in progress 4,251 3,828 - ------------------------------------------------------------------------- 120,183 82,756 Less accumulated depreciation 29,749 21,844 - ------------------------------------------------------------------------- 90,434 60,912 Other Assets Marketable securities 15,656 17,810 Deferred income taxes 1,022 1,951 Other 248 225 - ------------------------------------------------------------------------- 16,926 19,986 - ------------------------------------------------------------------------- Total assets $278,555 $255,978 ========================================================================= FEBRUARY 27, February 28, (in thousands) 1999 1998 - ------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable $ 50,672 $ 38,790 Employee compensation 5,025 5,154 Accrued income taxes 446 3,377 Accrued property and sales tax 3,533 3,352 Other liabilities and accrued expenses 4,858 3,585 - -------------------------------------------------------------------------- Total current liabilities 64,534 54,258 ========================================================================== Long-term deferred rent payments 5,342 4,598 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 (1999--18,961; 1998--18,170) Shares outstanding (1999--17,598; 1998--18,130) 190 182 Class B: Shares authorized--12,000 Shares issued and outstanding (1999--7,244; 1998--7,842) 72 78 Additional paid-in capital 121,954 119,181 Retained earnings 98,905 78,218 Treasury stock (1999--1,363; 1998--40) (12.442) (537) - -------------------------------------------------------------------------- Total stockholders' equity 208,679 197,122 - -------------------------------------------------------------------------- Total liabilities and stockholders' equity $278,555 $255,978 ==========================================================================
See accompanying notes CONSOLIDATED STATEMENTS OF INCOME
Year Ended - --------------------------------------------------------------------------------------------------------- FEBRUARY 27, February 28, March 1, (in thousands, except per share amounts) 1999 1998 1997 - --------------------------------------------------------------------------------------------------------- Net sales $522,623 $438,911 $332,002 Cost of sales (including occupancy expenses) 373,170 303,809 229,187 - --------------------------------------------------------------------------------------------------------- Gross profit 149,453 135,102 102,815 Selling, general and administrative expenses 117,507 94,303 72,282 - --------------------------------------------------------------------------------------------------------- Operating income 31,946 40,799 30,533 Interest income--net 1,421 2,495 824 - --------------------------------------------------------------------------------------------------------- Income before income taxes 33,367 43,294 31,357 Income taxes 12,680 16,560 12,544 - --------------------------------------------------------------------------------------------------------- Net income $ 20,687 $ 26,734 $ 18,813 ========================================================================================================= Basic earnings per share $ .81 $ 1.03 $ .81 ========================================================================================================= Diluted earnings per share $ .80 $ 1.02 $ .80 =========================================================================================================
See accompanying notes. CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended - ------------------------------------------------------------------------------------------------------------------------------------ February 27, February 28, March 1, (in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Net income $ 20,687 $ 26,734 $ 18,813 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 10,987 7,359 5,013 Contribution of treasury stock to pension plan 981 1,039 -- Deferred income taxes 772 669 (1,079) (Gain) loss on disposal of property and equipment (1) (42) 59 Changes in operating assets and liabilities: Accounts receivable (2,283) 181 (3,750) Merchandise inventories (5,153) (48,159) (5,903) Other current assets 747 1,643 (3,107) Other assets (23) (225) -- Accounts payable 11,882 11,201 (2,128) Employee compensation (129) 301 1,619 Accrued income taxes (2,931) (1,799) 3,102 Other liabilities and accrued expenses 1,454 650 2,260 Deferred rent payments 744 660 666 - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 37,734 212 15,565 INVESTING ACTIVITIES Purchases of property and equipment (41,398) (29,555) (13,064) Proceeds from disposals of property and equipment 890 844 233 Purchases of short-term marketable securities (1,971) (3,511) (16,496) Proceeds from maturity of short-term marketable securities 9,856 12,066 4,980 Purchase of marketable securities -- (2,629) (20,106) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (32,623) (22,785) (44,453) FINANCING ACTIVITIES Proceeds from short-term debt 32,200 13,650 42,200 Principal payments on short-term debt (32,200) (13,650) (51,700) Net proceeds from public offerings -- -- 84,467 Proceeds and tax benefits from exercise of stock options 2,331 704 3,447 Purchase of treasury stock (12,442) (1,230) -- - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) financing activities (10,111) 526 78,414 - ------------------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents (5,000) (23,099) 49,526 Cash and cash equivalents at beginning of year 28,113 51,212 1,686 - ------------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 23,113 $ 28,113 $ 51,212 ====================================================================================================================================
See accompanying notes. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Number of Shares Amount Additional -------------------------- --------------- Paid-In Retained Treasury (in thousands) Class A Class B Treasury Class A Class B Capital Earnings Stock Totals - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT FEBRUARY 29, 1996 8,162 12,470 -- $ 41 $ 62 $ 30,374 $32,671 $ -- $ 63,148 ==================================================================================================================================== Net income for 1997 18,813 18,813 - ------------------------------------------------------------------------------------------------------------------------------------ Secondary Public Offering of Class A Common Stock--June 19, 1996 2,600 13 33,546 33,559 - ------------------------------------------------------------------------------------------------------------------------------------ Secondary Public Offering of Class A Common Stock--December 18, 1996 2,400 24 50,884 50,908 - ------------------------------------------------------------------------------------------------------------------------------------ Conversion of Class B Common Stock to Class A Common Stock 3,720 (3,720) 37 (37) -- - ------------------------------------------------------------------------------------------------------------------------------------ Two-for-One Stock Split 54 62 (116) -- - ------------------------------------------------------------------------------------------------------------------------------------ Non-qualified Class A Common Stock options exercised 310 3 3,444 3,447 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT MARCH 1, 1997 17,192 8,750 -- 172 87 118,132 51,484 -- 169,875 ==================================================================================================================================== Net income for 1998 26,734 26,734 - ------------------------------------------------------------------------------------------------------------------------------------ Conversion of Class B Common Stock to Class A Common Stock 908 (908) 9 (9) -- - ------------------------------------------------------------------------------------------------------------------------------------ Non-qualified Class A Common Stock options exercised 70 1 703 704 - ------------------------------------------------------------------------------------------------------------------------------------ Treasury Stock purchased (94) 94 (1,230) (1,230) - ------------------------------------------------------------------------------------------------------------------------------------ Contribution of Treasury Stock to profit sharing plan 54 (54) 346 693 1,039 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT FEBRUARY 28, 1998 18,130 7,842 40 182 78 119,181 78,218 (537) 197,122 ==================================================================================================================================== Net income for 1999 20,687 20,687 - ------------------------------------------------------------------------------------------------------------------------------------ Conversion of Class B Common Stock to Class A Common Stock 598 (598) 6 (6) -- - ------------------------------------------------------------------------------------------------------------------------------------ Non-qualified Class A Common Stock options exercised 193 2 2,329 2,331 - ------------------------------------------------------------------------------------------------------------------------------------ Treasury Stock purchased (1,363) 1,363 (12,442) (12,442) - ------------------------------------------------------------------------------------------------------------------------------------ Contribution of Treasury Stock to profit sharing plan 40 (40) 444 537 981 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT FEBRUARY 27, 1999 17,598 7,244 1,363 $190 $72 $121,954 $98,905 $(12,442) $208,679 ====================================================================================================================================
See accompanying notes. 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 27, 1999, February 28, 1998 and March 1, 1997 are referred to as 1999, 1998 and 1997, 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 1999 and 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 5,850 square feet in size and are primarily located in enclosed malls in the Midwest, Northeast, Southeast and South. In 1999, the Company purchased approximately 87% of its merchandise from its five largest suppliers. The largest supplier, Nike, accounted for approximately 56%, 63% and 69% of merchandise purchases in 1999, 1998 and 1997, 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. EARNINGS PER SHARE 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). REVENUE RECOGNITION Revenues from retail sales are recognized at the time of sale. 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 1999, 1998 and 1997 amounted to $7,657,000, $7,326,000 and $4,950,000, respectively. FINANCIAL INSTRUMENTS Financial instruments consist of cash and cash equivalents, accounts receivable, marketable securities and accounts payable. The carrying value of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value. The fair value of marketable securities is determined on the basis of market quotes by brokers and is disclosed in Note 2. At February 27, 1999 and February 28, 1998, 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. MARKETABLE SECURITIES All marketable securities are classified as held-to-maturity. The following is a summary of marketable securities (in thousands):
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value - -------------------------------------------------------------------------- February 27, 1999-- municipal obligations $17,811 $350 $(15) $18,146 - -------------------------------------------------------------------------- February 28, 1998-- municipal obligations $25,696 $251 $(47) $25,900 ==========================================================================
The amortized cost and estimated fair value of marketable securities at February 27, 1999 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 $ 2,155 $ 2,161 Due after one year through three years 9,944 10,120 Due after three years through five years 5,512 5,658 Due after five years ,200 ,207 - --------------------------------------------------------------- $17,811 $18,146 ===============================================================
3. DEBT AGREEMENT The Company has an unsecured committed Credit Agreement (the "Facility") with a syndicate of commercial banks in the amount of $75,000,000, which expires on July 10, 2003. At February 27, 1999, 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 consolidated tangible net worth of not less than $168,000,000 and a leverage ratio (as defined) of not greater than .63 to 1.0. The Company was in compliance with all restrictive covenants of the debt agreement in effect at February 27, 1999. The interest rate on the Facility is, at the Company's election, either a negotiated rate approximating the federal funds effective rate plus .775% (this rate is available on the first $10,000,000 of borrowings), the bank's LIBOR Rate plus .475% or the bank's prime commercial lending rate. The margin percentage added to the LIBOR Rate is subject to adjustment quarterly based on the fixed charge coverage ratio (as defined). Interest expense for 1999, 1998 and 1997 was $57,000, $4,000 and $242,000, respectively. Interest paid on the Facility during 1999, 1998, and 1997 amounted to $57,000, $4,000 and $298,000, respectively. The Company pays a commitment fee on the unused portion of the Facility at an effective annual rate of .15%. 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, these leases generally 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):
1999 1998 1997 - --------------------------------------------- Base Rent $34,697 $25,067 $17,716 Deferred Rent 744 660 666 Contingent Rent 2,871 2,940 2,868 - --------------------------------------------- Rent Expense $38,312 $28,667 $21,250 =============================================
A schedule of future base rent payments by fiscal year for signed operating leases at February 27, 1999 with initial or remaining noncancelable terms of one year or more is as follows (in thousands): 2000 $ 40,441 2001 40,623 2002 40,738 2003 40,344 2004 38,168 Thereafter 146,162 - --------------------------------------------------------------- $346,476 ===============================================================
This schedule of future base rent payments includes lease commitments for ten new stores and nine remodels which were not open as of February 27, 1999. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. INCOME TAXES The components of income taxes are as follows (in thousands):
1999 1998 1997 - -------------------------------------------------------- Currently payable: Federal $ 10,028 $ 13,268 $ 10,741 State 1,880 2,623 2,882 - -------------------------------------------------------- 11,908 15,891 13,623 Deferred: Federal 650 560 (850) State 122 109 (229) - -------------------------------------------------------- 772 669 (1,079) - -------------------------------------------------------- $ 12,680 $ 16,560 $ 12,544 ========================================================
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 liability are as follows (in thousands):
FEBRUARY 27, February 28, 1999 1998 - --------------------------------------------------------------------- Deferred tax assets: Deferred rent accrual $ 2,030 $ 1,759 Property and Equipment -- 84 Uniform capitalization 1,513 1,493 Vacation accrual 471 379 Pension accrual 279 271 Bonus accrual 114 115 Other 163 125 - --------------------------------------------------------------------- Total deferred tax assets 4,570 4,226 - --------------------------------------------------------------------- Deferred tax liability: Property and Equipment (1,116) -- - --------------------------------------------------------------------- Net deferred tax assets $ 3,454 $ 4,226 =====================================================================
Payments of income taxes for 1999, 1998 and 1997 were $13,672,000, $17,572,000 and $9,122,000, 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 wages. The Company's total expense for the plan in 1999, 1998 and 1997 amounted to $1,621,000, $1,789,000 and $1,338,000, respectively. 7. STOCK OPTIONS The Board of Directors has reserved 3,500,000 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 1999 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:
1999 1998 1997 - ----------------------------------------------------------------- Net income (in thousands) As reported $ 20,687 $ 26,734 $ 18,813 Pro forma 19,165 25,768 18,571 - ----------------------------------------------------------------- Diluted earnings per share As reported $ 1.80 $ 1.02$ .80 Pro forma .75 .99 .80 =================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The estimated weighted-average fair value of the individual options granted during 1999, 1998 and 1997 was $7.59, $12.70 and $12.65, 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: 1999 1998 1997 - ---------------------------------------------------------------------- Dividend yield 0% 0% 0% - ---------------------------------------------------------------------- Volatility 81.6% 74.8% 68.6% - ---------------------------------------------------------------------- Risk-free interest rate 5.70% 6.18% 6.47% - ---------------------------------------------------------------------- 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 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 Granted 406,000 9.96 Exercised (192,791) 4.67 Canceled (35,920) 14.88 - ----------------------------------------------------------------------------- FEBRUARY 27, 1999 1,587,316 $ 10.81 ============================================================================= The following table summarizes information concerning outstanding and exercisable options at February 27, 1999: Weighted- Average Weighted- Weighted- Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life Price Exercisable Price - ------------------------------------------------------------------------------- $ 3-$ 5 483,101 6.3 $ 3.97 295,301 $ 4.01 $ 5-$10 448,400 9.2 $ 9.13 56,400 $ 6.75 $10-$15 385,875 8.8 $13.87 49,387 $13.65 $15-$25 269,940 8.1 $21.51 24,040 $21.43 =============================================================================== Options exercisable were 425,128, 317,126 and 108,702 at fiscal year end 1999, 1998 and 1997, 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). 1999 1998 1997 - -------------------------------------------------------------------------------- Income available to common stockholders $ 20,687 $ 26,734 $ 18,813 - -------------------------------------------------------------------------------- Basic earnings per share: Weighted-average number of common shares outstanding 25,541 25,963 23,100 Basic earnings per share $ .81 $ 1.03 $ .81 - -------------------------------------------------------------------------------- Diluted earnings per share: Weighted-average number of common shares outstanding 25,541 25,963 23,100 Stock options 292 354 402 - -------------------------------------------------------------------------------- Diluted weighted-average number of common shares outstanding 25,833 26,317 23,502 - -------------------------------------------------------------------------------- Diluted earnings per share $ .80 $ 1.02 $ .80 ================================================================================ NOTES TO CONSOLIDATED FINANCIAL STATEMENT (CONTINUED) 9. COMMON STOCK At February 27, 1999, 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. Effective September 2, 1998, the Company's Board of Directors approved a stock repurchase program. The Company was authorized to purchase on the open market or in privately negotiated transactions, through December 31, 1999, up to 2,600,000 shares of Class A Common Stock outstanding. As of February 27, 1999, the Company has repurchased under this plan 1,313,000 shares of its Class A Common Stock in the open market at an average price of $8.96 per share for an aggregate purchase amount of $11,758,000. The treasury shares may be issued upon the exercise of employee stock options or for other corporate purposes. 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. 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 27, 1999 and February 28, 1998, 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 27, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Finish Line, Inc. and subsidiary at February 27, 1999 and February 28, 1998 and the consolidated results of their operations and their cash flows for each of the three years in the period ended February 27, 1999, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Fort Wayne, Indiana March 23, 1999 MARKET PRICE OF COMMON STOCK
Quarter Ended FISCAL 1999 Fiscal 1998 - -------------------------------------------------------------------- HIGH LOW High Low - -------------------------------------------------------------------- May $26.50 $15.63 $27.25 $ 9.25 August 31.06 8.25 15.63 11.75 November 11.44 7.50 19.88 13.88 February 12.19 7.00 19.25 11.88 ====================================================================
The Class A Common Stock has traded on the Nasdaq Stock Marke(R) under the symbol FINL 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. OFFICERS AND DIRECTORS
NAME AGE POSITION OFFICER OR DIRECTOR SINCE =================================================================================================================================== Alan H. Cohen/(1)/ 52 Chairman of the Board of Directors President and Chief Executive Officer 1976 - ------------------------------------------------------------------------------------------------------------------------------------ David I. Klapper/(3)/ 50 Executive Vice President, Director 1976 - ------------------------------------------------------------------------------------------------------------------------------------ David M. Fagin 55 Executive Vice President, Director 1982 - ------------------------------------------------------------------------------------------------------------------------------------ Larry J. Sablosky 50 Executive Vice President, Director 1982 - ------------------------------------------------------------------------------------------------------------------------------------ Steven J. Schneider 43 Sr. Vice President--Finance, Assistant Secretary and CFO 1989 - ------------------------------------------------------------------------------------------------------------------------------------ Gary D. Cohen 46 Sr. Vice President--General Counsel and Secretary 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Joseph W. Wood 51 Sr. Vice President--Merchandising and Marketing 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Donald E. Courtney 44 Sr. Vice President--MIS and Distribution 1989 - ------------------------------------------------------------------------------------------------------------------------------------ George S. Sanders 41 Sr. Vice President--Real Estate and Store Development 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Michael L. Marchetti 48 Sr. Vice President--Store Operations 1995 - ------------------------------------------------------------------------------------------------------------------------------------ Kevin S. Wampler 36 Vice President--Corporate Controller and Asst. Secretary 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Robert A. Edwards 36 Vice President--Distribution 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Thomas R. Sicari 45 Vice President--General Merchandise Manager 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Paul C. Wagner 33 Vice President--Information Systems 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Kevin G. Flynn 35 Vice President--Marketing 1997 - ------------------------------------------------------------------------------------------------------------------------------------ James B. Davis 36 Vice President--Real Estate 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Joseph L. Gravitt 39 Vice President--Store Personnel 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Jonathan K. Layne/(1)(2)(3)(4)/ 45 Director 1992 - ------------------------------------------------------------------------------------------------------------------------------------ Jeffrey H+. Smulyan/(1)(2)(5)/ 51 Director 1992 - ------------------------------------------------------------------------------------------------------------------------------------
/(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 LLP /(5)/ Mr. Smulyan is Chairman of the Board and President of Emmis Communications Corporation SHAREHOLDER INFORMATION TRANSFER AGENT AND REGISTRAR: American Stock Transfer & Trust Co. Shareholder Services 40 Wall Street New York, NY 1005 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 2, 1999, the approximate number of holders of record of Class A Common Stock was 364. 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 2, 1999, the closing price for the Company's Class A Common Stock, as reported by NASDAQ was $12.25. 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 46235 Internet Address: www.finishline.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. FINISH LINE 3308 N. Mitthoeffer Road Indianapolis, IN 46235 317-899-1022 www.finishline.com EX-21 5 SUBSIDIARIES OF THE FINISH LINE EXHIBIT 21 SUBSIDIARIES OF THE FINISH LINE, INC. Subsidiary State of Incorporation Percentage of Ownership - ---------- ---------------------- ----------------------- Spike's Holding, Inc. Delaware 100% EX-23 6 CONSENT OF ERNST & YOUNG LLP 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 23, 1999, included in the 1999 Annual Report to Stockholders of The Finish Line, Inc. Our audits also included the financial statement schedule of The Finish Line, Inc. listed in Item 14(d). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 33-95720, 33-51392 and 333-62063) 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 23, 1999, with respect to the consolidated 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 5, 1999 EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS FOR THE YEARS ENDED FEBRUARY 27, 1999 AND FEBRUARY 28, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR YEAR FEB-27-1999 FEB-28-1998 MAR-01-1998 MAR-02-1997 FEB-27-1999 FEB-28-1998 23,113 28,113 2,155 7,886 6,951 4,668 0 0 135,303 130,150 171,195 175,080 120,183 82,756 29,749 21,844 278,555 255,978 64,534 54,258 0 0 0 0 0 0 262 260 208,417 196,862 278,555 255,978 522,623 438,911 522,623 438,911 373,170 303,809 373,170 303,809 117,507 94,303 0 0 (1,421) (2,495) 33,367 43,294 12,680 16,560 20,687 26,734 0 0 0 0 0 0 20,687 26,734 .81 1.03 .80 1.02
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