Finish Line Inc. Annual Report 2002

FY2002 Annual Report · Finish Line Inc.

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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

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

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

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.

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.

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

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.

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%

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

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)% $

$
$

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

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

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.

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

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,

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.

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

(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.

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

February 26,
2000

585,963
423,505

162,458
139,273
—

23,185
826

24,011
8,404

15,607

.63

.62

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.

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

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

(472)

(976)

(9)

472

(50)

316

(1)

15,607

(41)

15,607

(41)

15,566

—

317

(2,852)

683

682

Balance at February 26, 2000

18,203

6,268

1,785

200

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

(221)

165

221

(165)

192

287

3,745

3,798

192

(1,393)

1,758

(1,393)

1,471

Balance at March 3, 2001

18,181

6,268

1,841

200

122,748

118,257

(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

266

(403)

(160)

403

811

1,469

(3,532)

1,917

( 1,917)

(19)

18,448

18,458

2,281

(3,532)

—

19,961

4,351

2,084

$ 220

$ 44

$ 123,559

$ 136,705

$ (16,596)

$ 243,954

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.

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

(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.

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,

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.

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:

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

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

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.

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

Position

Chairman of the Board of Directors
President and Chief Executive Officer

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

Officer or Director Since

1976

1982

1989

2001

1997

1989

1994

1995

1997

1998

2000

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

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.

Finish Line
3308 North Mitthoeffer Road
Indianapolis, Indiana 46235