Finish Line Inc.
Annual Report 2002

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FINL>> 2002 FINISH LINE ANNUAL REPORT FINL>> 2002 FINISH LINE ANNUAL REPORT 02 OUR MISSION FINISH LINE WILL PROVIDE THE BEST SELECTION OF SPORT INSPIRED FOOTWEAR, APPAREL AND ACCESSORIES TO FIT THE FAST CULTURE OF ACTION ADDICTED INDIVIDUALS 449 STORES NATIONWIDE Finish Line, Inc. is a leading athletic retailer specializing in brand name footwear, apparel, and accessories. Finish Line began operations in 1976 in Indianapolis, Indiana, and at fiscal year-end 2002 served customers in 43 states through 449 stores and online. In every single Finish Line you’ll find an outstanding selection of product built for Sport.Life.Style. ALABAMA Birmingham Dothan Montgomery ARIZONA Chandler Mesa Phoenix Scottsdale Sierra Vista Tucson ARKANSAS Fayetteville Fort Smith Little Rock N. Little Rock CALIFORNIA Cerritos Culver City Fairfield Los Angeles Mission Viejo Montclair Montebello National City Northridge Roseville Salinas San Diego Stockton West Covina Westminster COLORADO Boulder Broomfield Colorado Springs Denver Fort Collins Greeley Littleton CONNECTICUT Meriden Trumbull Waterbury Waterford DELAWARE Wilmington FLORIDA Altamonte Springs Brandon Clearwater Crystal River Daytona Beach Ft. Myers Jacksonville Lakeland Naples Ocoee Orange Park Orlando Panama City Pensacola Port Richey Sanford St. Petersburg Tallahassee Tampa GEORGIA Alpharetta Athens Atlanta Augusta Buford Decatur Douglasville Duluth Kennesaw Lithonia Macon Morrow Savannah Union City IDAHO Boise ILLINOIS Alton Aurora Bloomingdale Bloomington Bourbonnais Calumet City Carbondale Champaign Chicago Chicago Ridge Danville Evergreen Park Fairview Heights Forsyth Gurnee Joliet Lincolnwood Lombard Marion Matteson Moline Niles North Riverside Orland Park Peoria Peru Rockford Schaumburg Skokie Springfield Sterling Vernon Hills West Dundee INDIANA Anderson Bloomington Carmel Elkhart Evansville Fort Wayne Greenwood Indianapolis Kokomo Lafayette Marion Merrillville Michigan City Mishawaka Muncie Richmond South Bend Terre Haute IOWA Cedar Rapids Coralville Davenport Des Moines Dubuque Sioux City West Des Moines KANSAS Hutchinson Manhattan Olathe Overland Park Salina Topeka Wichita KENTUCKY Ashland Bowling Green Florence Lexington Louisville Paducah LOUISIANA Alexandria Bossier City Lake Charles Monroe MAINE Bangor MARYLAND Baltimore Bethesda Columbia Cumberland Forestville Frederick Glen Burnie Hagerstown Laurel Owings Mills Salisbury Towson Waldorf MASSACHUSETTS Brockton Hanover Holyoke Leominster North Attleboro Saugus Taunton MICHIGAN Adrian Auburn Hills Battle Creek Bay City Benton Harbor Burton Detroit Flint Fort Gratiot Grandville Harper Woods Holland Lansing Midland Monroe Muskegon Portage Saginaw Taylor Traverse City Waterford MISSISSIPPI Ridgeland Tupelo MISSOURI Cape Girardeau Chesterfield Florissant Independence Joplin Kansas City Springfield St. Ann St. Louis St. Peters NEBRASKA Lincoln Omaha NEVADA Las Vegas NEW HAMPSHIRE Concord Manchester Newington Salem NEW JERSEY Deptford Eatontown Freehold Jersey City Lawrenceville Paramus Phillipsburg Rockaway Vineland Voorhees NEW MEXICO Albuquerque NEW YORK Albany Bay Shore Blasdell Buffalo Clay DeWitt Horseheads Ithaca Lakewood Massapequa Middletown Nanuet Niagara Falls Poughkeepsie Rochester Saratoga Springs Schenectady Staten Island Syracuse Victor Williamsville NORTH CAROLINA Asheville Burlington Cary Charlotte Concord Durham Gastonia Greensboro Hickory High Point Pineville Raleigh Rocky Mount Wilmington Winston-Salem NORTH DAKOTA Bismarck Grand Forks OHIO Akron Ashtabula Beaver Creek Canton Cincinnati Cleveland Columbus Dayton Dublin Elyria Findlay Franklin Heath Lancaster Lima Mansfield Marion Mentor N. Olmsted New Philadelphia Niles Parma Piqua Reynoldsburg Richmond Heights Sandusky Springfield St. Clairsville Toledo OKLAHOMA Midwest City Norman Oklahoma City Tulsa OREGON Portland PENNSYLVANIA Altoona Bensalem Bloomsburg Butler Camp Hill Chambersburg Erie Exton Greensburg Hanover Indiana Johnstown Lancaster Media Monaca North Wales Pennsdale Philadelphia Pittsburgh Plymouth Meeting Scranton Uniontown Washington West Mifflin York SOUTH CAROLINA Charleston Columbia Greenville N. Charleston SOUTH DAKOTA Sioux Falls TENNESSEE Antioch Chattanooga Clarksville Franklin Goodlettsville Johnson City Memphis Nashville TEXAS Abilene Amarillo Arlington Austin Beaumont Cedar Park Dallas/Fort Worth El Paso Frisco Houston Humble Hurst Irving Katy Killeen Laredo Longview Mesquite Midland Plano Richardson San Angelo San Antonio Sherman Sugar Land The Woodlands Tyler Waco Wichita Falls VERMONT Burlington VIRGINIA Alexandria Chesapeake Christiansburg Colonial Heights Danville Dulles Fredericksburg Glen Allen Harrisonburg Lynchburg Newport News Norfolk Richmond Roanoke Springfield Virginia Beach Winchester WASHINGTON Bellingham Seattle Spokane Tacoma WEST VIRGINIA Barboursville Bridgeport Charleston Martinsburg Morgantown WISCONSIN Brookfield Green Bay Greendale Janesville Madison Milwaukee Racine Wauwatosa 2002 FINANCIAL HIGHLIGHTS (Dollars in thousands, except per share data) Net sales Operating income Operating income as a % of net sales Net income Net income as a % of net sales Diluted earnings per share Number of stores open at end of period Total retail square footage at end of period Average store size Total assets Cash and marketable securities Total debt Total stockholders’ equity Fiscal 2002 Fiscal 2001 Fiscal 2000 $ 701,426 $ 663,906 $ 585,963 27,215 3.9% 18,448 2.6% .75 449 $ 4,975 0.8% 3,745 0.6% .15 436 23,185 4.0% 15,607 2.7% .62 409 $ $ 2,694,380 2,653,886 2,478,930 6,001 6,087 6,061 $ 328,347 $ 308,868 $ 289,095 77,853 — 243,954 51,935 — 226,747 24,481 — 222,392 The Company’s fiscal year ends on the Saturday nearest the end of February. As used in this Report, “fiscal 1998,” “fiscal 1999,” “fiscal 2000,” “fiscal 2001” and “fiscal 2002” refer to the Company’s fiscal years ended February 28, 1998; February 27, 1999; February 26, 2000; March 3, 2001 and March 2, 2002 respectively. “Fiscal 2003” and “fiscal 2004” refer to the Company’s fiscal years ended March 1, 2003 and February 28, 2004, respectively. 1 0 7 $ 4 6 6 $ 6 8 5 $ NET SALES IN MILLIONS $700 600 500 400 300 200 100 0 NET INCOME IN MILLIONS DILUTED EARNINGS PER SHARE $30 25 20 15 10 5 0 8 1 $ 6 1 $ 4 $ $1.20 1.00 .80 .60 .40 .20 .00 5 7 . $ 2 6 . $ 5 1 . $ RETAIL SQUARE FOOTAGE IN THOUSANDS 4 5 6 , 2 4 9 6 , 2 9 7 4 , 2 2700 2250 1800 1350 900 450 200 0 00 01 02 00 01 02 00 01 02 00 01 02 It’s in our blood. Action. Performance. The game. It’s where we live. At Finish Line, sport is the foundation for everything we do. It’s reflected in our products. It’s echoed in our stores. It's defined by our brands and our people. No matter how the game may change, we will be a part of it. HERITAGE PERFORMANCE AUTHENTICITY At Finish Line, it’s about more than what happens between buzzers. It’s what happens between sunrise and sunset. It’s being there for a customer who is addicted to action. A customer who is fast, online, mobile, digital, energetic, and athletic. Someone who isn’t waiting to be defined, but searches for definition. REAL ACTION ADDICTED FAST CULTURE Our customer gets it. What’s cool, what’s not. They know what’s real, and where to get it. Nobody brings it all together the way we can. It’s about having the right stuff, having the best selection. It’s color and cut, performance and point-of-view. It’s about self-expression, and being true to yourself. FASHIONABLE FUSION OF INFLUENCE INDIVIDUAL Best selection goes far beyond the product on the wall. It's illustrated in a thorough understanding of our customer and reflected in the brands, styles, and colors we stock. We have to carry what they're looking for. Our buyers and merchandisers are out in front of the trends, creating a story that's unique to Finish Line. Product our customers are hungry for. Grounded in Sport. True to Life. Always in Style. RIGHT STYLES MORE CHOICES PERFECT FIT 2002 FINANCIALS 2002 FINANCIALS Letter to the Stockholders Selected Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operations Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Cash Flow Consolidated Statements of Changes in Stockholders’ Equity Notes to Consolidated Financial Statements Report of Independent Auditors Market Price of Common Stock Senior Officers and Directors Stockholder Information 22 24 25 32 33 34 35 36 43 43 44 45 LETTER TO THE STOCKHOLDERS Net income for Fiscal 2002 was $18.4 million, or $.75 per diluted share, compared to net income of $3.7 million, or $.15 per diluted share, for Fiscal 2001. On a comparable basis (after excluding repositioning and last year’s extra week) net income increased 23% over last year. Keys to Success in FY2002. There were several factors that helped us achieve improved performance this past year. One was our persistent marketing focus on new products and key categories in our stores rather than leading with “price or sale” as our primary marketing message. Our core consumers responded positively to this positioning, allowing us to differentiate ourselves from our competition and to sell more new product at higher margins. Additionally, our decision in Fiscal 2002 to reduce aged inventory had a dramatic effect on our performance and should continue to do so in years to come. During the year we reduced our aged inventory (product over one year old) from approximately 13% of our total inventory to the low single digits. By cleaning up our aged product, we have been able to increase sales with less inventory while increasing our product turns. Another key to our success this past fiscal year was closing 13 under-performing stores, which has helped increase our profitability. Positioned for Growth. During the year we made changes to strengthen our merchandise team, especially in the apparel category, to better position us for future growth. These changes included promotions from within as well as important new hires who have substantial apparel retailing backgrounds. These personnel changes were made without interrupting the positive momentum that has characterized our footwear business over the last few years. One of the first steps taken by the new team was a renewed focus on our primary customer by defining a more specific product and marketing edit point. This edit point is directed at a young, college-aged consumer who is “action addicted.” It is an aspirational target that younger kids emulate, and that our older, active consumers strive to maintain. We feel As I look back at Fiscal 2002, it is clear to me that this was a pivotal year for Finish Line. We began the year with a plan to make changes that would position our Company for success in both the short and long term. As part of our repositioning plan, our goals were to reduce the amount of aged inventory, close under-performing stores, continue our footwear sales momentum, and make dramatic changes in our apparel program. I am happy to report that we accomplished these goals and are well positioned for future growth. Financial Highlights of FY2002. The financial results of our repositioning plan were apparent in Fiscal 2002. For this year net sales were $701,426,000, an increase of 6% over last year. Comparable store net sales increased 4% (52 weeks vs. 52 weeks) versus a 1% comp gain last year. During the year we maintained our sales momentum in footwear with a 7% increase in comparable sales and with strong growth in all three sectors of our business: men’s, women’s, and kids’. Additionally, for the first time in 15 quarters, our apparel/accessory business reported a positive comparable sales gain in the fourth quarter. 22 these action addicted teens are more multicultural than past generations, are connected online, fear boredom, and are always on the move. They are redefining sport and fashion for their generation. This focus became the foundation for creating our new private brand apparel line Finish Line Blue Label which launched in March 2002. It has also provided our buyers and vendors with a clearer vision of product that is relevant to our core consumer.This new leadership and vision have already produced improved results that we expect to continue in Fiscal 2003 and beyond. Redefined Mission. Better understanding our core customer and current market trends, we rethought our Mission Statement taking into account this new aspirational target. We have decided to launch a new branding effort in Fiscal 2003 to communicate our new positioning to consumers and employees. Our mission is to provide the best selection of sport inspired footwear, apparel and accessories to fit the fast culture of action addicted individuals. We are confident this mission more clearly defines Finish Line and where we are headed. Our market research tells us that an important point-of- difference with our competitors is our greater product selection — and we expect to enhance this in the future with even stronger and more compelling product and visual merchandising. “Best” selection does not necessarily mean the “most,” but it does mean having the “right” selection in the right stores. Sport inspired product is also important to Finish Line. This is our heritage, and every product we carry should be grounded in athletics. Apparel and accessories are an integral part of this mission as well. We know we have to increase our store productivity, and to achieve this we have to be more than just a great athletic footwear store. No other athletic specialty retailer in the mall can cross-merchandise all three categories (footwear, apparel, and accessories) under one roof like Finish Line. in the country. We believe we have the flexibility and vision to remain ahead of these trends and to continue our sales momentum in the future. Opportunities for FY2003. Finish Line is poised for growth in Fiscal 2003. We have strengthened our merchandising team, we have reduced the average age of our inventory, and we have taken our proprietary brand Finish Line Blue Label to market. All these changes have further strengthened our successful relationships with key vendors. They appreciate our marketing approach to their products and brands and now better understand Finish Line’s consumer and new edit point. This will be beneficial as we continue to develop exclusive product offerings with these partners and further distinguish ourselves from our competition. As we enter into the new fiscal year, we are well positioned in the mall to gain market share in the women’s and kids’ categories. Our stores and shopping environment are appealing to women and kids, as well as men, and we intend to increase our focus on the women’s and kids’ businesses with enhanced and improved product offerings. Throughout Fiscal 2003 we intend to fortify our new positioning and mission in the marketplace. Through an enhanced brand marketing campaign we have developed a consistent, relevant message that speaks to the action addicted consumer at all points of contact, including in-store, online, and in our advertising. Fiscal 2002 was a successful transition year for Finish Line. I am confident that with the continued dedication and hard work of all Finish Line associates combined with our new consumer focus and merchandising strategies we will maintain this positive momentum into next year. Sincerely, Finally, we recognize that action addicted consumers create a very fast culture with fashion trends that can emerge overnight from any city Alan H. Cohen President and CEO, Finish Line, Inc. 23 SELECTED FINANCIAL DATA (In thousands, except per share and store operating data) Income Statement Data: Net sales Cost of sales (including occupancy expenses) Gross profit Selling, general and administrative expenses Repositioning and asset impairment charges (reversals) Operating income Interest income — net Income before income taxes Income taxes Net income Earnings Per Share Data: Basic earnings per share Diluted earnings per share Share Data(1): Weighted-average shares Diluted weighted-average shares Selected Store Operating Data: Number of stores: Opened during period Closed during period Open at end of period Total square feet (2) Average square feet per store (2) Net sales per square foot for comparable stores (3) Increase (decrease) in comparable store net sales (4) Balance Sheet Data: Working capital Total assets Total debt Stockholders’ equity Year Ended: March 2, 2002 March 3, 2001 February 26, 2000 February 27, 1999 February 28, 1998 $ $ $ $ $ $ 701,426 508,533 192,893 167,681 (2,003) 27,215 1,610 28,825 10,377 18,448 .76 .75 24,312 24,683 27 14 449 2,694,380 6,001 262 4.5% 153,846 328,347 — 243,954 $ $ $ $ $ $ 663,906 491,527 172,379 156,820 10,584 4,975 970 5,945 2,200 3,745 .15 .15 24,458 24,663 34 7 436 2,653,886 6,087 256 1.3% 133,640 308,868 — 226,747 $ $ $ $ $ $ 585,963 423,505 162,458 139,273 — 23,185 826 24,011 8,404 15,607 .63 .62 24,848 25,039 55 4 409 2,478,930 6,061 272 (2.6)% 124,898 289,095 — 222,392 $ $ $ $ $ $ 522,623 373,170 149,453 117,507 — 31,946 1,421 33,367 12,680 20,687 .81 .80 25,541 25,833 59 3 358 2,095,264 5,853 310 (1.7)% 106,661 278,555 — 208,679 $ $ $ $ $ $ 438,911 303,809 135,102 94,303 — 40,799 2,495 43,294 16,560 26,734 1.03 1.02 25,963 26,317 53 2 302 1,586,520 5,253 345 5.6% 120,822 255,978 — 197,122 (1) Consists of weighted-average common and common equivalent shares outstanding for the period. (2) Computed as of the end of each fiscal period. (3) Calculated excluding sales for the 53rd week of fiscal 2001. (4) Calculated using those stores that were open for the full current fiscal period and were also open for the full prior fiscal period. 24 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Year Ended: March 2, 2002 March 3, 2001 February 26, 2000 100.0% 100.0% 100.0% Income Statement Data: Net sales Cost of sales (including occupancy expenses) Gross profit Selling, general and administrative expenses Repositioning and asset 72.5 27.5 23.9 impairment charges (reversals) (0.3) Operating income Interest income—net Income before income taxes Income taxes 3.9 0.2 4.1 1.5 74.0 26.0 23.6 1.6 0.8 0.1 0.9 0.3 72.3 27.7 23.7 — 4.0 0.1 4.1 1.4 Net income 2.6% 0.6% 2.7% General. The following discussion and analysis should be read in conjunction with the information set forth under “Selected Financial Data” and the Consolidated Financial Statements and Notes thereto included elsewhere herein. The table above sets forth operating data of the Company as a percentage of net sales for the periods indicated. Critical Accounting Policies. Management’s discussion and analysis of financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgements that affect the reported amounts of assets, liabilities, expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates these estimates, including those related to the valuation of inventory, the potential impairment of long-lived assets and the valuation of repositioning reserve. The Company bases the estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Management believes the following critical accounting policies affect its more significant judgements and estimates used in preparation of its consolidated financial statements. Valuation of Inventory. 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. The Company’s valuation of inventory includes a markdown reserve for merchandise that will be sold below cost. The markdown reserves value is based upon historical information and assumptions about future demand and market conditions. It is possible that changes to the markdown reserve could be required in future periods due to changes in market conditions. Impairment of Long-Lived Assets. The Company evaluates the recoverability of its long-lived assets in accordance with Statement of Financial Accounting Standards No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” which generally requires the Company to assess these assets in circumstance indicate that the carrying amounts of long-lived tangible assets may not be recoverable. The Company considers historical performances and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to the estimated non-discounted future cash for recoverability whenever events or changes 25 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Quarter Ended: (Dollars in thousands, except per share data) Net sales Cost of sales (including occupancy expenses) Gross profit Selling, general and administrative expenses Repositioning and asset impairment charges (reversals) – net Operating income (loss) Interest income – net Income (loss) before income taxes Income taxes (benefit) Net income (loss) Basic earnings (loss) per share Diluted earnings (loss) per share June 2, 2001 September 1, 2001 December 1, 2001 March 2, 2002 $ $ $ $ 160,825 120,370 40,455 39,796 100.0% 74.9 25.1 24.7 (.4) .8 .3 1.1 .4 .7% (660) 1,319 480 1,799 648 1,151 .05 .05 $ $ $ $ 196,776 137,922 58,854 43,494 — 15,360 458 15,818 5,694 10,124 .41 .41 100.0% 70.1 29.9 22.1 — 7.8 .2 8.0 2.9 5.1% $ $ $ $ 142,266 107,297 34,969 38,748 100.0% 75.4 24.6 27.3 $ 201,559 142,944 58,615 45,643 (549) (3,230) 387 (2,843) (1,023) (1,820) (.08) (.07) (.4) (2.3) .3 (2.0) (.7) (1.3)% $ (794) 13,766 285 14,051 5,058 8,993 .37 .36 100.0% 70.9 29.1 22.7 (.4) (6.8) .2 7.0 2.5 4.5% (Dollars in thousands, except per share data) Quarter Ended: May 27, 2000 August 26, 2000 November 25, 2000 Net sales Cost of sales (including occupancy expenses) $ 146,657 106,013 100.0% 72.3 $ 190,542 137,296 100.0% 72.1 $ 134,503 101,378 100.0% 75.4 Gross profit Selling, general and administrative expenses Repositioning and asset impairment charges Operating income (loss) Interest income – net Income (loss) before income taxes Income taxes (benefit) Net income (loss) Basic earnings (loss) per share Diluted earnings (loss) per share 40,644 34,846 — 5,798 223 6,021 2,228 3,793 .16 .15 $ $ $ 27.7 23.8 — 3.9 .2 4.1 1.5 2.6% 53,246 42,207 — 11,039 169 11,208 4,147 7,061 .29 .29 $ $ $ 27.9 22.1 — 5.8 .1 5.9 2.2 3.7% 33,125 37,404 — (4,279) 328 (3,951) (1,462) (2,489) (.10) (.10) $ $ $ 24.6 27.8 — (3.2) .2 (3.0) (1.1) (1.9)% $ $ $ 26 March 3, 2001 192,204 146,840 45,364 42,363 10,584 (7,583) 250 (7,333) (2,713) (4,620) (.19) (.19) 100.0% 76.4 23.6 22.0 5.5 (3.9) .1 (3.8) (1.4) (2.4)% $ $ $ MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) flows expected to result from the use of the asset. If such assets are considered to be impaired, the impairment recognized is measured by comparing projected individual store discounted cash flows to the asset carrying values. The estimation of fair value is measured by discounting expected future cash flows at the discount rate the Company utilizes to evaluate potential investments. Actual results may differ from these estimates and as a result the estimation of fair values may be adjusted in the future. Repositioning Plan Reserve. During fiscal 2001, the Company recorded reserves in connection with its repositioning plan. The remaining reserve at March 2, 2002 relating to lease obligations for planned store closings requires the use of estimates. Though the Company believes that these estimates accurately reflect the anticipated costs of the repositioning plan, actual results may differ. Fiscal 2002 Compared to Fiscal 2001. Net sales for fiscal 2002 were $701.4 million, an increase of $37.5 million or 5.7% over fiscal 2001. Of this increase, $14.4 million was attributable to an increase from the 34 existing stores open only part of fiscal 2001, and $20.4 million was from an increase in the number of stores open during the period from 436 at the end of fiscal 2001 to 449 at the end of fiscal 2002. The balance of the increase in net sales was attributable to a comparable store net sales increase of 4.5% in fiscal 2002, which was partially offset by fiscal 2002 containing seven less days than fiscal 2001. Comparable net footwear sales increased 7.1% for fiscal 2002 while comparable net activewear and accessories sales decreased 6.1%. Activewear and accessories were negatively effected by the transition to new merchandise strategies undertaken by the new apparel buying team, however in the fourth quarter of 2002 comparable activewear and accessories sales increased 2.0%. Gross profit, which includes product margin less store occupancy costs, for fiscal 2002 was $192.9 million. Excluding the net effect of non-recurring charges of $288,000 in fiscal 2002 and $9.2 million in fiscal 2001 included in cost of sales representing inventory writedowns associated with the repositioning plan, gross profit was $193.2 million in fiscal 2002 and $181.6 million in fiscal 2001. This was an increase of approximately $11.6 million or 6.4% over fiscal 2001, and an increase of approximately 0.2% as a percent of net sales. This 0.2% increase is due to a 0.3% increase in margin for product sold, partially offset by a 0.1% increase in occupancy costs as a percentage of net sales. Selling, general and administrative expenses were $167.7 million, an increase of $10.9 million or 6.9% over fiscal 2001, and increased to 23.9% from 23.6% as a percentage of net sales. The dollar increase was primarily attributable to the operating costs related to the 27 additional stores opened during 2002. The increase as a percentage of net sales is a result of the fiscal 2001 benefiting from an extra week due to the 53-week retail calendar which added approximately $14.0 million in sales to fiscal 2001. In March 2001, the Company approved a repositioning plan (the “Plan”) and recorded pre-tax non-recurring repositioning and asset impairment charges totaling $19.8 million in connection with additional inventory markdowns, lease costs and asset impairment charges for 17 planned store closings, and asset impairment charges for 14 identified under-performing stores. During 2002 the Company completed its repositioning plan related to aged inventory and recognized an additional $288,000 of expense related to inventory markdowns which was recorded as a component of cost of sales. The repositioning markdown reserve balance is zero as of March 2, 2002. In connection with the store closings, the Company established a reserve for future lease payments after store closures of $3.8 million 27 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) all of which was included in accrued expenses at March 3, 2001. The accrued expense was reduced $2.4 million in fiscal 2002 which represented payments of $434,000 and a decrease in the expected future store closure obligation of $2.0 million, which was taken back into income as a change in estimate. The remaining reserve, which is reviewed periodically to is $1.4 million at March 2, 2002, determine its adequacy. Net interest income for fiscal 2002 was $1.6 million compared to net interest income of $1.0 million for fiscal 2001. The increase was the result of increased levels of invested cash due to the Company’s progress with the liquidation of aged inventory and fewer store openings in fiscal 2002. Income tax expense was $10.4 million for fiscal 2002 compared to $2.2 million for fiscal 2001. The increase in the Company’s provision for federal and state taxes in 2002 is due to the increased level of income before taxes slightly offset by a decrease in the effective tax rate to 36% for fiscal 2002 compared to 37% in fiscal 2001. Net income increased 392.6% to $18.4 million for fiscal 2002 compared to $3.7 million for fiscal 2001. Diluted net income per share increased 400.0% to $.75 for fiscal 2002 compared to $.15 for fiscal 2001. Diluted weighted average shares outstanding were 24,683,000 and 24,663,000, for fiscal 2002 and 2001, respectively. Fiscal 2001 Compared to Fiscal 2000. Net sales for fiscal 2001 were $663.9 million, an increase of $77.9 million or 13.3% over fiscal 2000. Of this increase, $33.9 million was attributable to an increase from the 55 existing stores open only part of fiscal 2000, and $26.7 million was from a 6.6% increase in the number of stores open during the period from 409 at the end of fiscal 2000 to 436 at the end of fiscal 2001. The balance of the increase in net sales was attributable to an approximate $14.0 million increase due to fiscal 2001 having seven additional days as compared to fiscal 2000 and a comparable store net sales increase of 1.3% in fiscal 2001. Comparable net footwear sales increased 4.9% for fiscal 2001 while comparable net activewear and accessories sales decreased 10.6%. Net sales per square foot decreased in fiscal 2001 to $256 (on a comparable 52- week year basis) from $272 in fiscal 2000. Activewear and accessories continue to be negatively effected by a significant reduction in the average unit selling price. Net sales per square foot have been negatively impacted by the decrease in activewear sales. Gross profit, which includes product margin less store occupancy costs, for fiscal 2001 was $172.4 million. Excluding the effect of non- recurring charges of $9.2 million in fiscal 2001 representing inventory writedowns associated with the repositioning plan discussed below, gross profit was $181.6 million, an increase of approximately $19.1 million or 11.8% over fiscal 2000, and a decrease of approximately 0.4% as a percent of net sales. Of this 0.4% decrease, 0.3% was due to a decrease in margin for product sold, 0.2% was due to an increase in occupancy costs as a percentage of net sales, partially offset by a decrease in inventory shrink of 0.1%. Selling, general and administrative expenses were $156.8 million, an increase of $17.5 million or 12.6% over fiscal 2000, and decreased to 23.6% from 23.7% as a percentage of net sales. The dollar increase was primarily attributable to the operating costs related to the 34 additional stores opened during 2001. The decrease as a percentage of net sales is a result of the 53-week year in fiscal 2001 which added approximately $14.0 million in sales to the year. In the fourth quarter of 2001, the Company approved a repo- sitioning plan (the “Plan”) designed to increase long-term profitability of its retail stores and generate long-term value for stockholders. As part of that plan the Company recorded pre-tax non-recurring repositioning and asset impairment charges totaling $19.8 million ($12.5 million after tax or $.51 per share) in connection with additional inventory markdowns, lease costs and 28 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) asset impairment charges for 17 planned store closings, and asset impairment charges for 14 identified under-performing stores. The most significant component of the Plan included a more aggressive approach to reducing aged inventory by reconfiguring merchandise assortments to place greater emphasis on better performing fresher merchandise. The additional markdown reserve, which totaled $9.2 million, has been recorded as a component of cost of sales. In connection with the store closings, the Company established a reserve for future lease payments after store closures of $3.8 million, all of which is included in accrued expenses at March 3, 2001. Costs were charged against this reserve as paid (expected to be primarily in 2002) and the reserve was reviewed periodically to determine its adequacy. The Company recorded an asset impairment charge, pursuant to the requirements of SFAS No. 121, of $3.1 million related to the planned store closings. The fixed assets written off could not readily be used at other store locations nor was there a ready market outside the Company to determine fair value. The assets, consisting principally of fixtures and leasehold improvements, are expected to be discarded at the time of store closing. Accordingly, the asset impairment charge recorded represents the carrying value of the assets at the time of approval of the repositioning plan and depreciation of these assets was discontinued at that time. Operating results for the individual stores will be included in operations through the closing dates of the respective stores. The Company also reviewed its under-performing stores for asset impairment charges. The asset impairment test was applied to all stores with negative contribution and cash flows. An asset impairment charge of $3.6 million was calculated as the difference between the carrying amount of the assets and each store’s estimated future discounted cash flows. Net interest income for fiscal 2001 was $1.0 million compared to net interest income of $.8 million for fiscal 2000. The increase was the result of increased levels of invested cash and marketable securities due to fewer store openings in fiscal 2001. Income tax expense was $2.2 million for fiscal 2001 compared to $8.4 million for fiscal 2000. The decrease in the Company’s provision for federal and state taxes in 2001 is due to the decreased level of income before taxes, slightly offset by an increase in the effective tax rate to 37% for fiscal 2001 from 35% in fiscal 2000. Net income decreased 76.0% to $3.7 million for fiscal 2001 compared to $15.6 million for fiscal 2000. Diluted net income per share decreased 75.8% to $.15 for fiscal 2001 compared to $.62 for fiscal 2000. Diluted weighted average shares outstanding were 24,663,000 and 25,039,000, for fiscal 2001 and 2000, respectively. Quarterly Comparisons. The Company’s merchandise is marketed during all seasons, with the highest volume of merchandise sold during the second and fourth fiscal quarters as a result of back- to-school and holiday shopping. The third fiscal quarter has traditionally had the lowest volume of merchandise sold and the lowest results of operations. The table on page 26 sets forth quarterly operating data of the Company, including such data as a percentage of net sales, for fiscal 2002 and fiscal 2001. This quarterly information is unaudited but, in management’s opinion, reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information for the periods presented. Liquidity and Capital Resources. The Company finances the opening of new stores and the resulting increase in inventory requirements principally from operating cash flow and cash on hand. Net cash provided by operations was $39.8 million, $44.9 million 29 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) and $12.1 million respectively, for fiscal 2002, 2001 and 2000. At March 2, 2002, the Company had cash and cash equivalents of $74.5 million and an additional $3.3 million in marketable securities. Cash equivalents are primarily invested in taxable instruments with maturities of one to twenty-eight days. Marketable securities represent securities that range in maturity from 90 days to three years and are primarily invested in tax exempt municipal obligations. Marketable securities are classified as available-for-sale and are available to support current operations. Merchandise inventories were $141.9 million at March 2, 2002 compared to $145.5 million at March 3, 2001. On a per square foot basis, merchandise inventories at March 2, 2002 decreased 4.0% compared to March 3, 2001. 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 $60 million, which expires on September 20, 2003. The Company periodically reviews its ongoing credit needs with its syndicate of commercial banks and currently expects to be able to renew or renegotiate the Facility prior to its expiration for an additional period beyond the current maturity date of September 20, 2003. The interest rate on the Facility is, at the Company’s election, either a negotiated rate approximating the federal funds effective rate plus 1.5% (this rate is available on the first $5 million of borrowings), the bank’s LIBOR Rate plus 1.0%, or the bank’s prime commercial lending rate. The margin percentage added to the LIBOR Rate is subject to adjustment quarterly based on the leverage ratio (as defined). At March 2, 2002, there were no borrowings outstanding under the Facility. The Facility contains restrictive covenants which limit, among other things, mergers and acquisitions, redemptions of common stock, and In addition, the Company must maintain a payment of dividends. minimum leverage ratio (as defined) and minimum consolidated tangible net worth (as defined). The Company is also subject to a liquidity test and an annual capital expenditure limitation. The Company was in compliance with all such covenants at March 2, 2002. Capital expenditures were $13.6 million and $16.4 million for fiscal 2002 and 2001, respectively. Expenditures in 2002 were primarily for the build-out of 27 stores that were opened during fiscal 2002, the remodeling of five existing stores and various corporate projects. Expenditures in 2001 were primarily for the build-out of 34 stores that were opened in fiscal 2001, the remodeling of 13 existing stores and various corporate projects. Additionally, $12-15 million is for an addition of 275,000 square feet to the corporate office and distribution center. The Company anticipates that total capital expenditures for fiscal 2003 will be approximately $30-35 million. Of this amount, $18-20 million is primarily for the build-out of approximately 30 new stores, the remodeling of 15-20 existing stores, and various corporate projects. Additionally, $12-15 million is for an addition of 275,000 square feet to the corporate office and distribution center. The Company estimates that its cash requirement to open a traditional format new store (averaging approximately 5,000 square feet) to be $500,000 (net of construction allowance). These requirements for a traditional store include approximately $325,000 for fixtures, equipment, and leasehold improvements and $275,000 ($175,000 net of payables) in new store inventory. During fiscal 2001, the Company contributed 165,000 shares of Finish Line Class A Common Stock to the Company’s retirement plan for its employees. The Company had purchased the shares in fiscal 1999 at an aggregate cost of $1.5 million. 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, 30 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) through December 31, 1999, up to 2.6 million shares of the Company’s Class A Common Stock outstanding. Effective December 28,1999, the Board of Directors extended the stock repurchase program through December 31, 2000 at which time it expired. Effective January 18, 2001 the Board of Directors approved a new through which the Company is stock repurchase program, authorized to purchase on the open market or in privately negotiated transactions through February 28, 2004, up to 2.5 million shares of the Company’s Class A Common Stock outstanding. As of March 2, 2002, the Company holds 2,083,665 shares of its Class A Common Stock purchased on the open market at an average price of $7.96 per share for an aggregate purchase amount of $16.6 million, and has 2,097,300 shares available to repurchase under the January 2001 program. 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 2003 store expansion program and to satisfy the Company’s other capital requirements through fiscal 2003. Market Risk. The Company is exposed to changes in interest rates primarily from its investments in available-for-sale 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 $45,000 at March 2, 2002. 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. 31 CONSOLIDATED BALANCE SHEETS (in thousands) Assets Current Assets Cash and cash equivalents Marketable securities Accounts receivable Merchandise inventories Other Total current assets Property and Equipment Land Building Leasehold improvements Furniture, fixtures, and equipment Construction in progress Less accumulated depreciation March 2, 2002 March 3, 2001 (in thousands) March 2, 2002 March 3, 2001 $ 74,510 3,343 2,221 141,878 7,673 229,625 315 10,767 97,724 45,685 2,801 157,292 66,554 90,738 $ 45,422 6,513 3,476 145,503 7,233 208,147 315 10,486 91,657 41,515 2,849 146,822 52,348 94,474 Liabilities and Stockholders’ Equity Current Liabilities Accounts payable Employee compensation Accrued property and sales tax Deferred income taxes Other liabilities and accrued expenses Total current liabilities Long-term deferred rent payments Stockholders’ Equity Preferred stock, $.01 par value; $ 50,908 7,768 4,036 2,922 10,145 75,779 8,614 $ 53,450 6,640 3,914 906 9,597 74,507 7,614 1,000 shares authorized; none issued — — Common stock, $.01 par value Class A: Shares authorized—30,000 Shares issued (2002–22,045; 2001–20,022) Shares outstanding (2002–19,961; 2001–18,181) 220 200 Class B: Shares authorized—12,000 Shares issued and outstanding (2002–4,351; 2001–6,268) Additional paid-in capital Retained earnings Accumulated other comprehensive income Treasury stock (2002–2,084; 2001–1,841) 7,984 6,247 Total stockholders’ equity 44 123,559 136,705 63 122,748 118,257 22 12 (16,596) 243,954 (14,533) 226,747 $ 328,347 $ 308,868 Total liabilities and stockholders’ equity $ 328,347 $ 308,868 Other Assets Deferred income taxes Total assets See accompanying notes. 32 CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts) Net sales Cost of sales (including occupancy expenses) Gross profit Selling, general and administrative expenses Repositioning and asset impairment charges (reversals) Operating income Interest income–net Income before income taxes Income taxes Net income Basic earnings per share Diluted earnings per share See accompanying notes. Year Ended: March 2, 2002 $ 701,426 508,533 192,893 167,681 (2,003) 27,215 1,610 28,825 10,377 18,448 .76 .75 $ $ $ March 3, 2001 $ 663,906 491,527 172,379 156,820 10,584 4,975 970 5,945 2,200 3,745 .15 .15 $ $ $ February 26, 2000 $ $ $ $ 585,963 423,505 162,458 139,273 — 23,185 826 24,011 8,404 15,607 .63 .62 33 CONSOLIDATED STATEMENTS OF CASH FLOW (in thousands) Operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Repositioning and asset impairment charges (reversals) Depreciation Contribution of treasury stock to retirement plan Loss on sale of available-for-sale marketable securities Deferred income taxes Loss on disposal of property and equipment Changes in operating assets and liabilities: Accounts receivable Merchandise inventories Other current assets Other assets Accounts payable Employee compensation Other liabilities and accrued expenses Deferred rent payments Net cash provided by operating activities Investing activities Purchases of property and equipment Proceeds from disposals of property and equipment Proceeds from sale of available-for-sale marketable securities Proceeds from maturity of held-to-maturity marketable securities Net cash used in investing activities Financing activities Proceeds from short-term debt Principal payments on short-term debt Proceeds and tax benefits from exercise of stock options Purchase of treasury stock Net cash used in financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year See accompanying notes. 34 Year Ended: March 2, 2002 March 3, 2001 February 26, 2000 $ 18,448 $ 3,745 $ 15,607 (2,003) 16,318 — — 279 60 1,255 3,625 (440) — (2,542) 1,128 2,673 1,000 39,801 (13,641) 999 3,181 — (9,461) — — 2,280 (3,532) (1,252) 29,088 45,422 10,584 16,391 1,758 — (7,157) 247 6,079 3,476 (5,760) 209 11,262 2,003 779 1,257 44,873 (16,413) 142 4,960 — (11,311) 48,305 (48,305) 192 (1,393) (1,201) 32,361 13,061 — 14,369 682 19 5,292 354 (2,604) (13,676) (232) 39 (8,484) (388) 89 1,015 12,082 (26,274) 366 4,154 2,155 (19,599) 84,800 (84,800) 317 (2,852) (2,535) (10,052) 23,113 $ 74,510 $ 45,422 $ 13,061 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (in thousands) Class A Class B Treasury Class A Class B Number of Shares Amount Additional Paid-In Capital Retained Earnings e v i s n e h e r p m o C l d e t a u m u c c A r e h t O s s o L Treasury Stock Totals Balance at February 27, 1999 17,598 7,244 1,363 $ 190 $ 72 $ 121,954 $ 98,905 — $ (12,442) $ 208,679 Comprehensive income: Net income for 2000 Other comprehensive income – Net unrealized loss on available-for-sale securities, net of tax benefit of $22 Total comprehensive income Conversion of Class B Common Stock to Class A Common Stock Non-qualified Class A Common Stock options exercised Treasury Stock purchased Contribution of Treasury Stock to profit sharing plan 976 51 (472) 50 (976) (9) 9 1 472 (50) 316 (1) 15,607 (41) 15,607 (41) 15,566 — 317 (2,852) (2,852) 683 682 Balance at February 26, 2000 18,203 6,268 1,785 200 63 122,269 114,512 (41) (14,611) 222,392 Comprehensive income: Net income for 2001 Other comprehensive income - Net unrealized gain on available-for-sale securities, net of tax expense of $30 Total comprehensive income Non-qualified Class A Common Stock options exercised Treasury Stock purchased Contribution of Treasury Stock to profit sharing plan 34 (221) 165 221 (165) 192 287 3,745 53 3,745 53 3,798 192 (1,393) 1,758 (1,393) 1,471 Balance at March 3, 2001 18,181 6,268 1,841 200 63 122,748 118,257 12 (14,533) 226,747 Comprehensive income: Net income for 2002 Other comprehensive income - Net unrealized gain on available-for-sale securities, net of tax expense of $6 Total comprehensive income Non-qualified Class A Common Stock options exercised Treasury Stock purchased Conversion of Class B Common Stock to Class A Common Stock Balance at March 2, 2002 See accompanying notes. 18,448 10 266 (403) (160) 403 1 811 1,469 (3,532) 1,917 ( 1,917) 19 (19) 18,448 10 18,458 2,281 (3,532) — 19,961 4,351 2,084 $ 220 $ 44 $ 123,559 $ 136,705 $ 22 $ (16,596) $ 243,954 35 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, (collectively the “Company”). All significant intercompany transactions and balances have been eliminated. Throughout these notes to the financial statements, the fiscal years ended March 2, 2002, March 3, 2001 and February 26, 2000 are referred to as 2002, 2001 and 2000, respectively. Inc. The Company uses a “Retail” calendar. The Company’s fiscal year ends on the Saturday closest to the last day of February and included 52 weeks in 2002, 53 weeks in 2001 and 52 weeks in 2000. 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. The Company manages its business on the basis of one reportable segment. Finish Line stores average approximately 6,001 square feet in size and are primarily located in enclosed malls throughout most of the United States. In 2002, the Company purchased approximately 78% of its merchandise from its five largest suppliers. The largest supplier, Nike, accounted for approximately 56%, 53% and 49% of merchandise purchases in 2002, 2001 and 2000 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 the customer receives the merchandise. 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. Impairment of Long-Lived Assets. The Company accounts for in accordance with the provisions of long-lived assets Statement of Financial Accounting Standards (“SFAS”) No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-lived Assets to Be Disposed Of.” The Company reviews long- lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is determined by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be If such assets are considered to be generated by the asset. impaired, the impairment recognized is measured by comparing projected individual store discounted cash flows to the asset carrying values. Store Opening and Closing Costs. Store opening costs and other non-capitalized expenditures incurred prior to opening new retail stores are expensed as incurred. In the event a store is closed before its lease has expired, the estimated post-closing lease obligation, less sublease rental income, is provided for when a decision to close the store is made. 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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 generally expenses the cost of advertising as incurred. Advertising expense net of co-op credits for the years ended 2002, 2001 and 2000 amounted to $11,158,000, $10,203,000 and $9,203,000 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. The Company classifies its marketable securities in one of three categories: trading, available-for-sale, or held-to-maturity. 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. Management determines the appropriate classification of marketable securities at the time of purchase and reevaluates such designations as of each balance sheet date. Available-for- sale securities are carried at fair value with unrealized gains and losses recorded as a separate component of accumulated other comprehensive income. The Company has no held-to-maturity or trading securities at March 2, 2002 or March 3, 2001. At March 2, 2002 and March 3, 2001, the Company had not invested in, nor did it have, any derivative financial instruments. 2. Marketable Securities The following is a summary of available-for-sale marketable securities: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value (in thousands) March 2, 2002 municipal obligations $ 3,307 March 3, 2001 municipal obligations $ 6,493 $ $ 43 46 $ $ (7) $ 3,343 (26) $ 6,513 The amortized cost and estimated fair value of marketable securities at March 2, 2002 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. (in thousands) Due in one year or less Due after one year through two years Amortized Cost $ 2,807 500 $ 3,307 Estimated Fair Value $ 2,825 518 $ 3,343 In January 2000, the Company sold $2,155,000 of investments that were previously classified as held-to-maturity. The Company’s decision was based on increased borrowing costs in comparison to the rate of return on the investments. At that time, the Company also transferred all remaining investments from held-to-maturity to available-for-sale. The amortized cost transferred was $14,001,000 and the net unrealized loss on these investments at the date of transfer was $69,000. 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 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 are as follows: (in thousands) 2002 2001 2000 Base Rent Deferred Rent Contingent Rent $ 53,819 1,000 2,088 $ 50,341 1,257 2,299 $ 44,211 1,014 1,628 Rent Expense $ 56,907 $ 53,897 $ 46,853 A schedule of future base rent payments by fiscal year for signed operating leases at March 2, 2002 with initial or remaining non- cancelable terms of one year or more is as follows: (in thousands) 2003 2004 2005 2006 2007 Thereafter $ 55,728 54,202 50,922 47,943 44,982 119,629 $ 373,406 This schedule of future base rent payments includes lease commitments for four new stores and four remodels which were not open as of March 2, 2002. 3. Debt Agreement The Company has an unsecured committed Credit Agreement (the “Facility”) with a syndicate of commercial banks in the amount of $60,000,000, which expires on September 20, 2003. At March 2, 2002, there were no borrowings outstanding under the Facility. Letters of credit amounting to $2,571,000 relating to purchase commitments were outstanding at March 2, 2002. The Facility contains restrictive covenants which limit, among other things, mergers, acquisitions, redemptions of common stock, and payment of dividends. In addition, the Company must maintain a minimum leverage ratio (as defined) and minimum consolidated tangible net worth (as defined). The Company is also subject to a liquidity test and an annual capital expenditure limitation. The Company was in compliance with all restrictive covenants of the debt agreement in effect at March 2, 2002. The interest rate on the Facility is, at the Company’s election, either a negotiated rate approximating the federal funds effective rate plus 1.5% (this rate is available on the first $5,000,000 of borrowings), the bank’s LIBOR Rate plus 1.0% or lending rate. The margin the bank’s prime commercial percentage added to the LIBOR Rate is subject to adjustment quarterly based on the leverage ratio (as defined). Interest expense, which approximated interest paid, for 2002, 2001 and 2000 was $0, $26,000 and $185,000 respectively. The Company pays a commitment fee on the unused portion of the Facility at an effective annual rate of .25%. 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, 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 5. Income Taxes The components of income taxes are as follows: The effective income tax rate varies from the statutory federal income tax rate for 2002, 2001 and 2000 due to the following: (in thousands) 2002 2001 2000 Currently payable: Federal State Deferred: Federal State $ $ 9,553 562 10,115 247 15 262 $ 8,342 1,015 9,357 (6,411) (777) (7,157) $ 10,377 $ 2,200 $ 2,756 356 3,112 4,687 605 5,292 8,404 Deferred income taxes reflect the net tax effects of temporary differences between the amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows: (in thousands) Deferred tax assets: Rent accrual Property and equipment Uniform capitalization Vacation accrual Other Total deferred tax assets Deferred tax liability – Inventory March 2, 2002 March 3, 2001 $ 3,794 4,651 1,268 716 142 10,571 (5,509) $ 4,225 3,372 1,132 579 231 9,539 (4,198) Net deferred tax asset $ 5,062 $ 5,341 Tax at statutory federal income tax rate State income taxes, net of federal benefit Tax exempt interest Other 2002 2001 2000 35.0 % 2.6 % (0.4)% (1.2)% 36.0 % 35.0% 2.6% (5.9)% 5.3% 37.0% 35.0 % 2.6 % (4.3)% 1.7 % 35.0 % Payments of income taxes for 2002, 2001 and 2000 were $8,257,000, $5,678,000 and $4,751,000 respectively. 6. Retirement 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. During 2001 the Company amended and restated the plan to add a 401(k) feature whereby the Company matches 100 percent of employee contributions to the plan up to three percent of an employee’s wages. The Company’s total expense for the plan in 2002, 2001 and 2000 amounted to $1,603,000, $1,036,000 and $1,626,000 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 other awards under the option plan. Stock options have been granted to directors, officers and other key employees. Generally, options outstanding under the plans 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. 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Dividend yield Volatility Risk-free interest rate Expected life 2002 0 % 75.7 % 5.14 % 7 years 2001 2000 0 % 78.0 % 6.20 % 7 years 0 % 77.9 % 6.58 % 7 years A reconciliation of the Company’s stock option activity and related information is as follows: Number of Options Weighted-Average Exercise Price February 27, 1999 Granted Exercised Canceled February 26, 2000 Granted Exercised Canceled March 3, 2001 Granted Exercised Canceled March 2, 2002 1,587,316 439,300 (50,751) (166,825) 1,809,040 12,000 (34,200) (76,105) 1,710,735 1,020,450 (265,765) (191,810) 2,273,610 $ $ $ $ 10.81 5.52 3.92 12.73 9.55 8.38 4.24 10.64 9.59 10.76 5.40 11.74 10.43 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, if 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. During February 2002, the Company awarded 105,000 options at a price equal to $1.00 which cliff vest after four years and expire ten years after the date of grant. Total compensation expense recognized for these option awards was $33,000 for 2002 and will approximate $402,000 in 2003. 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: (in thousands) Net income As reported Pro forma Diluted earnings per share 2002 2001 2000 $ 18,448 17,177 $ 3,745 2,190 $ 15,607 14,154 As reported Pro forma $ .75 .71 $ .15 .09 $ .62 .58 The estimated weighted-average fair value of the individual options granted during 2002, 2001 and 2000 was $9.46, $6.35 and $4.20 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: 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) The following table summarizes information concerning outstanding and exercisable options at March 2, 2002: Range of Exercise Prices $1–$5 $5–$10 $10–$15 $15–$25 Number Outstanding 317,625 1,053,510 292,975 609,500 Weighted- Average Remaining Contractual Life Weighted- Average Exercise Price 5.5 8.0 6.1 8.4 3.03 7.46 13.51 17.94 Weighted- Average Exercise Price 4.03 7.78 13.65 21.57 Number Exercisable 212,625 271,900 273,975 181,150 Options exercisable were 946,650; 950,375 and 721,192 at fiscal year end 2002, 2001 and 2000, 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) 2002 2001 2000 Income available to common stockholders Basic earnings per share: Weighted-average number of common shares outstanding Basic earnings per share Diluted earnings per share: Weighted-average number of common shares outstanding Stock options Diluted weighted-average number of common shares outstanding $ 18,448 $ 3,745 $ 15,607 24,312 .76 $ 24,458 .15 $ 24,848 .63 $ 24,312 371 24,458 205 24,848 191 24,683 24,663 25,039 Diluted earnings per share $ .75 $ .15 $ .62 9. Common Stock At March 2, 2002, 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 parties (except for transfer to certain family members of the holders and in other limited circumstances). All of the shares of Class B Common Stock are held by the founding stockholders and their family members. The Company’s Board of Directors approved a stock repurchase program in which the Company was authorized to purchase on the open market or in privately negotiated transactions, through December 31, 2000, up to 2,600,000 shares of Class A Common Stock outstanding. Effective January 18, 2001, the Board of Directors approved a new stock repurchase program. The Company is 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) expected future lease store closure obligation of $2,003,000. The reserve balance at March 2, 2002 is $1,369,000. Costs will be charged against this reserve as incurred and the reserve will be reviewed periodically to determine its adequacy. The Company recorded an asset impairment charge in 2001 pursuant to the requirements of SFAS No. 121, of $3,140,000 related to the planned store closings. The fixed assets written off could not readily be used at other store locations nor was there a ready market outside the Company to determine fair value. The assets, consisting principally of fixtures and leasehold improvements, were the asset discarded at the time of store closing. Accordingly, impairment charge recorded represented the carrying value of the assets at the time of approval of the repositioning plan and depreciation of these assets was discontinued at that time. Operating results for the individual stores are included in operations through the closing dates of the respective stores. In 2001 the Company also reviewed its under-performing stores for asset impairment charges. The asset impairment test was applied to all stores with negative contribution and cash flows. An asset impairment charge in 2001 of $3,638,000 was calculated as the difference between the carrying amount of the assets and each store’s estimated future discounted cash flows. authorized to purchase on the open market or in privately negotiated transactions through February 28, 2004, up to 2,500,000 shares of the Company’s Class A Common Stock outstanding. As of March 2, 2002, the Company holds as treasury shares 2,083,665 shares of its Class A Common Stock at an average price of $7.96 per share for an aggregate purchase amount of $16,596,000, and has 2,097,300 shares available to repurchase under the January, 2001 plan. The treasury shares may be issued upon the exercise of employee stock options or for other corporate purposes. 10. Repositioning and Asset Impairment Charges In the fourth quarter of 2001, the Company approved a repositioning plan (the “Plan”). As part of that Plan, the Company recorded pre-tax non-recurring repositioning and asset impairment charges totaling $19,809,000 in connection with additional inventory markdowns, lease costs and asset impairment charges for 17 planned store closings, and asset impairment charges for 14 identified under- performing stores. The most significant component of the Plan included a more aggressive approach to reducing aged inventory by reconfiguring merchandise assortments to place greater emphasis on better performing fresher merchandise. The additional markdown reserve, which totaled $9,225,000, was recorded as a component of cost of sales in 2001. During 2002 the Company completed its repositioning plan related to aged inventory and recognized an additional $288,000 of expense related to inventory markdowns which was recorded as a component of cost of sales in 2001. The repositioning markdown reserve balance is zero as of March 2, 2002. In connection with the store closings, the Company established in 2001 a reserve for future lease payments after store closures of $3,806,000, all of which was included in accrued expenses at March 3, 2001. During 2002, the accrued expense was reduced $2,437,000 which represented payments of $434,000 and a decrease in the 42 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. as of March 2, 2002 and March 3, 2001, and the related consolidated statements of income, cash flows, and changes in stockholders’ equity for each of the three years in the period ended March 2, 2002. 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 auditing standards generally accepted in the United States. 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. at March 2, 2002 and March 3, 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 2, 2002, in conformity with accounting principles generally accepted in the United States. Fort Wayne, Indiana March 21, 2002 MARKET PRICE OF COMMON STOCK Quarter Ended Fiscal 2002 Fiscal 2001 May August November February High $ 10.61 $ 12.71 13.10 17.55 Low 5.88 8.92 8.55 12.45 High $ 11.63 $ 9.13 9.00 8.88 Low 5.50 5.63 6.50 4.75 The Class A Common Stock has traded on the Nasdaq National Market 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. 43 SENIOR OFFICERS AND DIRECTORS Name Alan H. Cohen David I. Klapper (3) Larry J. Sablosky Steven J. Schneider Glenn S. Lyon Gary D. Cohen Donald E. Courtney George S. Sanders Michael L. Marchetti Kevin S. Wampler Robert A. Edwards Kevin G. Flynn James B. Davis Joseph L. Gravitt Roger C. Underwood Jonathan K. Layne (2)(3)(4) Jeffrey H. Smulyan (1)(2)(5) Stephen Goldsmith (1)(6) Bill Kirkendall (1)(7) Age 55 53 53 46 51 49 47 44 51 39 39 38 39 42 32 48 54 55 48 Position Chairman of the Board of Directors President and Chief Executive Officer Senior Executive Vice President, Director Senior Executive Vice President, Director Executive Vice President — COO, CFO and Asst. Secretary Executive Vice President — Chief Merchandising Officer Executive Vice President — General Counsel and Secretary Executive Vice President — CIO and Distribution Executive Vice President — Real Estate and Store Development Executive Vice President — Store Operations Senior Vice President — Chief Accounting Officer and Asst. Secretary Senior Vice President — Distribution Senior Vice President — Marketing Senior Vice President — Real Estate Senior Vice President — Store Personnel Senior Vice President — Information Systems Director Director Director Director Officer or Director Since 1976 1976 1982 1989 2001 1997 1989 1994 1995 1997 1997 1997 1997 1998 2000 1992 1992 1999 2001 (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 (6) Mr. Goldsmith is a partner in the law firm of Baker & Daniels LLP (7) Mr. Kirkendall is Chief Executive Officer and President of Orlimar Golf Company 44 STOCKHOLDER INFORMATION Transfer Agent and Registrar: American Stock Transfer & Trust Co. Shareholder Services 40 Wall Street New York, NY 10005 Stock Market Information: The Company’s Class A Common Stock is traded on the NASDAQ National Market under the symbol FINL. As of April 12, 2002, the approximate number of holders of record of Class A Common Stock was 291. 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 12, 2002, the closing price for the Company’s Class A Common Stock, as reported by NASDAQ was $18.74. 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 Certain statements contained in this Annual Report regard matters that are not historical facts and are forward looking statements (as such term is defined in the rules promulgated pursuant to the Securities Act of 1933, as amended). Because such forward looking statements contain risks and uncertainties, actual results may differ materially from those expressed in or implied by such forward looking statements. Factors that could cause actual results to differ materially include, but are not limited to: changing consumer preferences; the Company’s inability to successfully market its footwear, apparel, accessories and other merchandise; price, product and other competition from other retailers (including internet and direct manufacturer sales); the unavailability of products; the inability to locate and obtain favorable lease terms for the Company’s stores; the loss of key employees, general economic conditions and adverse factors impacting the retail athletic industry; management of growth, and the other risks detailed in the Company’s Securities and Exchange Commission filings. The Company undertakes no obligation to release publicly the results of any revisions to these forward looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. 45 Finish Line 3308 North Mitthoeffer Road Indianapolis, Indiana 46235 WWW.FINISHLINE.COM

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