SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________________
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the thirteen week period ended August 29, 1998
---------------
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission File number 0-20184
The Finish Line, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 35-1537210
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(State or other jurisdiction (I.R.S. Employer identification number)
of incorporation or organization)
3308 North Mitthoeffer Road Indianapolis, Indiana 46235
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(Address of principal executive offices) (zip code)
317-899-1022
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(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Shares of common stock outstanding at September 18, 1998:
Class A 18,304,671
Class B 7,244,068
1
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE FINISH LINE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
August 29, February 28,
ASSETS 1998 1998
----------- -----------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 37,801 $ 28,113
Short-term marketable securities 4,858 7,886
Accounts receivable 10,626 4,668
Merchandise inventories 131,121 130,150
Deferred income taxes 2,275 2,275
Other 2,061 1,988
-------- --------
Total current assets 188,742 175,080
PROPERTY AND EQUIPMENT:
Land 315 315
Building 10,490 7,517
Leasehold improvements 60,047 49,549
Furniture, fixtures, and equipment 27,387 21,547
Construction in progress 1,931 3,828
-------- --------
100,170 82,756
Less accumulated depreciation 25,506 21,844
-------- --------
74,664 60,912
OTHER ASSETS:
Marketable securities 16,156 17,810
Deferred income taxes 2,000 1,951
Other 224 225
-------- --------
18,380 19,986
-------- --------
Total assets $281,786 $255,978
======== ========
See accompanying notes.
2
THE FINISH LINE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
August 29, February 28,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1998
----------- -----------
(Unaudited)
CURRENT LIABILITIES:
Accounts payable $ 47,755 $ 38,790
Employee compensation and related payroll taxes 4,489 5,154
Accrued income taxes 2,372 3,377
Accrued property and sales tax 4,557 3,352
Other liabilities and accrued expenses 4,332 3,585
--------- ---------
Total current liabilities 63,505 54,258
Long-term deferred rent payments 4,958 4,598
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 1,000 shares authorized; none issued -- --
Common Stock, $.01 par value
Class A:
Shares authorized - 30,000
Shares issued and outstanding (August 29,
1998 - 18,948; February 28, 1998 - 18,170) 189 182
Class B:
Shares authorized - 12,000
Shares issued and outstanding
(August 29, 1998 - 7,249; February 28, 1998 - 7,842) 72 78
Additional paid-in capital 121,903 119,181
Retained earnings 91,842 78,218
Treasury stock (August 29, 1998 - 50; February 28, 1998 - 40) (683) (537)
Total stockholders' equity 213,323 197,122
--------- ---------
Total liabilities and stockholders' equity $ 281,786 $ 255,978
========= =========
See accompanying notes.
3
THE FINISH LINE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Thirteen Weeks Ended Twenty-Six Weeks Ended
August 29, August 30, August 29, August 30,
1998 1997 1998 1997
--------- -------- -------- --------
Net sales $144,719 $118,727 $261,321 $206,264
Cost of sales (including occupancy expense) 100,211 80,178 181,590 141,081
-------- -------- -------- --------
Gross profit 44,508 38,549 79,731 65,183
Selling, general, and administrative expenses 32,170 24,744 58,642 44,827
-------- -------- -------- --------
Operating income 12,338 13,805 21,089 20,356
Interest income - net (397) (712) (887) (1,434)
-------- -------- -------- --------
Income before income taxes 12,735 14,517 21,976 21,790
Provision for income taxes 4,839 5,553 8,351 8,335
-------- -------- -------- --------
Net income $ 7,896 $ 8,964 $ 13,625 $ 13,455
======== ======== ======== ========
Basic net income per share $ .30 $ .35 $ .52 $ .52
======== ======== ======== ========
Basic weighted average shares 26,169 25,963 26,121 25,960
======== ======== ======== ========
Diluted net income per share $ .30 $ .34 $ .51 $ .51
======== ======== ======== ========
Diluted weighted average shares 26,541 26,304 26,523 26,320
======== ======== ======== ========
See accompanying notes.
4
THE FINISH LINE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands) (Unaudited)
Twenty-Six Weeks Ended
August 29, 1998 August 30, 1997
--------------- ---------------
Net Income $ 13,625 $ 13,455
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,187 3,386
Contribution of treasury stock to profit sharing plan 981 -
Deferred income taxes (49) 990
Loss (Gain) on disposals of property and equipment 8 (4)
Changes in operating assets and liabilities:
Accounts receivable (5,958) (2,353)
Merchandise inventories (971) (24,522)
Other current assets (73) 1,111
Other assets 1 (154)
Accounts payable 8,965 34,706
Employee compensation and related payroll taxes (665) (926)
Accrued income taxes (1,005) (3,017)
Other liabilities and accrued expenses 1,952 2,030
Deferred rent payments 360 360
-------- --------
Net cash provided by operating activities 22,358 25,062
-------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment (18,951) (10,684)
Proceeds from disposals of property and equipment 4 18
Purchases of marketable securities (1,970) (1,695)
Proceeds from maturity of short-term marketable securities 6,652 4,626
-------- --------
Net cash used in investing activities (14,265) (7,735)
-------- --------
FINANCING ACTIVITIES:
Proceeds from short-term debt 2,200 10,250
Principal payments on short-term and long-term debt (2,200) (10,250)
Proceeds and tax benefit from exercise of stock options 2,279 383
Common stock repurchased (684) (693)
-------- --------
Net cash provided by (used in) financing activities 1,595 (310)
-------- --------
Net increase in cash and cash equivalents 9,688 17,017
Cash and cash equivalents at beginning of period 28,113 51,212
-------- --------
Cash and cash equivalents at end of period $ 37,801 $ 68,229
======== ========
See accompanying notes.
5
THE FINISH LINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of The Finish
Line, Inc. and its wholly-owned subsidiary Spike's Holding, Inc. (collectively
the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, considered
necessary for a fair presentation, have been included.
The Company has experienced, and expects to continue to experience,
significant variability in sales and net income from quarter to quarter.
Therefore, the results of the interim periods presented herein are not
necessarily indicative of the results to be expected for any other interim
period or the full year.
Except for the historical information contained herein, the matters discussed
in this filing are forward looking statements that involve risks and
uncertainties that could cause actual results to differ materially from those
expressed in any of the forward looking statements. Such risks and
uncertainties include, but are not limited to, product demand and market
acceptance risks, the effect of economic conditions, the effect of competitive
products and pricing, the availability of products, management of growth, and
the other risks detailed in the Company's Securities and Exchange Commission
filings.
These financial statements should be read in conjunction with the financial
statements and notes thereto for the year ended February 28, 1998.
2. Notes Payable to Bank
The Company entered into an unsecured committed Credit Agreement (the
"Facility") as of July 10, 1998 with a syndicate of commercial banks. The
Facility, with available credit of $75,000,000 matures on July 10, 2003. At
August 29, 1998 there were no borrowings outstanding under the Facility.
The Facility contains restrictive covenants which limit, among other things,
mergers and dividends. In addition, the Company must maintain a fixed charge
coverage ratio (as defined) of not less than 1.5 to 1.0, a consolidated tangible
net worth of not less than $158,000,000 and a leverage ratio (as defined) of not
greater than .63 to 1.0. As of August 29, 1998 the Company was in compliance
with all such covenants.
The interest rate on the Facility is, at the Company's election, either a
negotiated rate approximating the federal funds effective rate plus .5% (this
rate is available on the first $10,000,000 of borrowings), the bank's libor rate
plus .275%, or the bank's prime commercial lending rate. The margin percentage
added to the libor rate is subject to adjustment quarterly based on the fixed
charge coverage ratio (as defined).
6
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The following table and subsequent discussion sets forth operating data of
the Company as a percentage of net sales for the periods indicated below. The
following discussion and analysis should be read in conjunction with the
unaudited Financial Statements included elsewhere herein.
Thirteen Weeks Ended Twenty-Six Weeks Ended
August 29, August 30, August 29, August 30,
1998 1997 1998 1997
---- ---- ---- ----
(Unaudited) (Unaudited)
Income Statement Data:
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales (including occupancy expenses) 69.2 67.5 69.5 68.4
----- ----- ----- -----
Gross profit 30.8 32.5 30.5 31.6
Selling, general and administrative expenses 22.2 20.8 22.4 21.7
----- ----- ----- -----
Operating income 8.6 11.7 8.1 9.9
Interest income - net (.3) (.6) (.3) (.7)
----- ----- ----- -----
Income before income taxes 8.9 12.3 8.4 10.6
Provision for income taxes 3.4 4.7 3.2 4.1
----- ----- ----- -----
Net income 5.5% 7.6% 5.2% 6.5%
===== ===== ===== =====
7
THIRTEEN WEEKS ENDED 8/29/98 COMPARED TO THIRTEEN WEEKS ENDED 8/30/97
Net sales increased 21.9% to $144.7 million for the thirteen weeks ended
August 29, 1998 from $118.7 million for the thirteen weeks ended August 30,
1997. This increase in net sales was primarily attributable to sales from new
stores and comparable store sales increases. As of August 29, 1998, the number
of stores in operation increased 17.4% to 330 from 281 at August 30, 1997.
During the thirteen weeks ended August 29, 1998, the Company's comparable store
sales increased 0.1% compared to the same period in the prior year. Comparable
net footwear sales for the thirteen weeks ended August 29, 1998 increased
approximately 4.1%. Comparable net activewear and accessories sales for the
comparable period decreased approximately 11.2%.
Gross profit for the thirteen weeks ended August 29, 1998 was $44.5 million,
an increase of $6.0 million over the thirteen weeks ended August 30, 1997.
During this same period, gross profit decreased to 30.8% of net sales versus
32.5% for the prior year. Of this 1.7% decrease, 1.5% was due to an increase in
occupancy costs as a percentage of net sales and 0.4% was due to increased
inventory shrink expense partially offset by a 0.2% increase in margins for
products sold.
Selling, general and administrative expenses increased $7.4 million (30.0%)
to $32.2 million (22.2% of net sales) for the thirteen weeks ended August 29,
1998 from $24.7 million (20.8% of net sales) for the thirteen weeks ended August
30, 1997. This dollar increase was primarily attributable to the operating
costs related to operating 49 additional stores at August 29, 1998 versus August
30, 1997. The increase as a percentage of net sales is primarily attributable
to higher store payroll costs and weaker sales from the end of July through
August.
Net interest income was $397,000 (.3% of net sales) for the thirteen weeks
ended August 29, 1998, compared to net interest income of $712,000 (.6% of net
sales) for the quarter ended August 30, 1997, a decrease of $315,000. This
decrease was the result of reduced invested cash balances due to the Company's
funding of fiscal 1999 expansion.
The Company's provision for federal and state income taxes decreased
$714,000 for the thirteen weeks ended August 29, 1998. The decrease is due to
the decreased level of income before income taxes for the thirteen weeks ended
August 29, 1998, along with a decrease in the effective tax rate to 38.0% for
the thirteen weeks ended August 29, 1998 from 38.25% for the thirteen weeks
ended August 30, 1997.
Net income decreased 11.9% to $7.9 million for the thirteen weeks ended
August 29, 1998 compared to $9.0 million for the thirteen weeks ended August 30,
1997. Diluted net income per share decreased 11.8% to $.30 for the thirteen
weeks ended August 29, 1998 compared to diluted net income per share of $.34 for
the thirteen weeks ended August 30, 1997. Diluted weighted average shares
outstanding were 26,541,000 and 26,304,000 respectively, for the thirteen weeks
ended August 29, 1998 and August 30, 1997.
TWENTY-SIX WEEKS ENDED 8/29/98 COMPARED TO TWENTY-SIX WEEKS ENDED 8/30/97
Net sales increased 26.7% ($55.1 million) to $261.3 million for the twenty-
six weeks ended August 29, 1998 from $206.3 million for the twenty-six weeks
ended August 30, 1997. Of this increase, $30.0 million was attributable to a
17.4% increase in the number of stores open (54 stores opened less 5 stores
closed) during the period from 281 at August 30, 1997 to 330 at August 29, 1998.
The balance of the increase was due to a $12.6 million increase in net sales
from the 30 stores open only part of the twenty-six weeks of last year, an
increase of $7.6 million in net sales in remodeled stores and a comparable store
sales increase of 3.7% for the twenty-six weeks ended August 29, 1998.
Comparable net footwear sales
8
for the twenty-six weeks ended August 29, 1998 increased approximately 6.5%.
Comparable net activewear and accessories decreased approximately 4.3% for the
comparable period. Net sales per square foot decreased to $166 from $174 for the
same period of the prior year.
Gross profit for the twenty-six weeks ended August 29, 1998 was $79.7
million, an increase of $14.5 million over the twenty-six weeks ended August 30,
1997. During this same period, gross profit decreased to 30.5% of net sales
versus 31.6% for the prior year. Of this 1.1% decrease, 1.1% was due to an
increase in occupancy costs as a percentage of net sales. Additionally, margin
for product sold increased .3%, however it was offset by a .3% increase in
inventory shrink expense.
Selling, general and administrative expenses increased $13.8 million (30.8%)
to $58.6 million (22.4% of net sales) for the twenty-six weeks ended August 29,
1998 from $44.8 million (21.7% of net sales) for the twenty-six weeks ended
August 30, 1997. This dollar increase was primarily attributable to the
operating costs related to operating 49 additional stores at August 29, 1998
versus August 30, 1997. The increase as a percentage of net sales is a result
of higher store payroll costs and weaker sales from the end of July through
August.
Net interest income was $887,000 (.3% of net sales) for the twenty-six weeks
ended August 29, 1998, compared to net interest income of $1.4 million (.7% of
net sales) for the twenty-six weeks ended August 30, 1997, a decrease of
$547,000. This decrease was the result of reduced invested cash balances due to
the Company's funding of fiscal 1999 expansion.
The Company's provision for federal and state income taxes increased $16,000
to $8.4 million for the twenty-six weeks ended August 30, 1997 from $8.3 million
for the twenty-six weeks ended August 30, 1997. The increase is due to the
increased level of income before income taxes for the twenty-six weeks ended
August 29, 1998, partially offset by a decrease in the effective tax rate to
38.0% for the twenty-six weeks ended August 29, 1998 from 38.25% for the twenty-
six weeks ended August 30, 1997.
Net income increased 1.3% to $13.6 million for the twenty-six weeks ended
August 29, 1998 compared to $13.5 million for the twenty-six weeks ended August
30, 1997. Diluted net income per share was $.51 in each of the twenty-six week
periods ended August 29, 1998 and August 30, 1997. Diluted weighted average
shares outstanding were 26,523,000 and 26,320,000, respectively, for the periods
ended August 29, 1998, and August 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated cash of $22.4 million from its operating activities
during the twenty-six weeks ended August 29, 1998 as compared to $25.1 million
during the twenty-six weeks ended August 30, 1997. The decrease in cash
generated from operating activities was primarily the result of increased
receivable balances.
The Company had a net use of cash from its investing activities of $14.3
million and $7.7 million for the twenty-six weeks ended August 29, 1998 and
August 30, 1997, respectively. In fiscal 1999, $19.0 million was used primarily
for construction of new stores and remodeling of existing stores. This was
partially offset by a $4.7 million net maturities of marketable securities.
The Company had working capital of $125.2 million at August 30, 1997, an
increase of $4.4 million from the working capital of $120.8 million at February
28, 1998.
9
At August 29, 1998 the Company had cash and cash equivalents of $37.8
million and short-term marketable securities of $4.9 million and no interest
bearing debt. Cash equivalents are primarily invested in tax exempt instruments
with maturities of one to twenty-eight days. Short-term marketable securities
range in maturity from 90 - 365 days from date of purchase and are primarily
invested in tax exempt municipal obligations.
Merchandise inventories were $131.1 million at August 29, 1998 compared to
$130.2 million at February 28, 1998 and $106.5 million at August 30, 1997. On a
per square foot basis, merchandise inventories at August 29, 1998 decreased 9.2%
compared to August 30, 1997. The Company believes present levels are
appropriate for the selling season.
The Company's previously announced expansion plans are to increase its
retail square footage by approximately 30% for fiscal 1999. Management believes
that cash on hand, operating cash flow and borrowings under the Company's
existing bank facility will be sufficient to complete the Company's fiscal 1999
store expansion program and to satisfy the Company's other capital requirements
through fiscal 1999.
As is commonly known, there is a potential issue facing companies regarding
the ability of information systems to accommodate the year 2000. The Company
has completed an assessment and will have to modify portions of its software so
that its computer systems will function properly with respect to dates in the
year 2000 and thereafter. The Company believes that with modifications to
existing software and planned conversions to new software, the year 2000 issue
will not pose significant operational problems for its computer systems. The
costs related to the modifications of existing software are not expected to
exceed $250,000.
On September 3, 1998, the Company announced that its Board of Directors
authorized the purchase of up to 2.6 million shares of the Company's Class A
Common Stock through December 1999.
10
PART II - OTHER INFORMATION
ITEM 1: Legal Proceedings
-----------------
None.
ITEM 2: Changes in Securities
---------------------
None.
ITEM 3: Defaults Upon Senior Securities
-------------------------------
None.
ITEM 4: Submission of Matters to a Vote of Security-Holders
---------------------------------------------------
( a ) The Annual Meeting of Stockholders was held on July 16, 1998.
( b ) The following directors were elected to serve until the 1999
Annual Meeting of stockholders or until their successors have
been duly elected and qualified. Of the 15,328,694 shares (1
vote per share) of Class A common stock and the 7,249,068 shares
(10 votes per share) of Class B common stock represented at the
meeting, the directors were elected by the following votes:
Number Of Votes Received
------------------------
Name For Against
----------- ---------- -------
Alan H. Cohen 87,246,786 572,588
David I. Klapper 87,246,796 572,578
David M. Fagin 86,946,796 872,578
Larry J. Sablosky 87,246,796 572,578
Jonathan K. Layne 87,246,796 572,578
Jeffrey H. Smulyan 87,246,696 572,678
( c ) The amendment to the Company's 1992 Employee Stock Incentive
Plan to increase the number of shares subject thereto from
1,700,000 to 3,500,000 and to approve and ratify the Company's
1992 Employee Stock Incentive Plan, as amended and restated was
approved by the stockholders by the following vote:
For Against Abstain
--- ------- -------
80,704,551 3,082,921 25,283
ITEM 5: Other Information
-----------------
None.
11
ITEM 6: Exhibits and Reports on Form 8-K:
---------------------------------
( a ) Exhibits
10.27 Credit Agreement among The Finish Line, Inc. and NBD
Bank, N.A., National City Bank of Indiana, the
Northern Trust Company, Suntrust Bank, Central
Florida, N.A. and NBD Bank, N.A., as Agent dated July
10, 1998.
10.27.1 Revolving Credit Note in the amount of $30,000,000
with NBD Bank, N.A. dated July 10, 1998.
10.27.2 Revolving Credit Note in the amount of $15,000,000
with National City Bank of Indiana dated July 10,
1998.
10.27.3 Revolving Credit Note in the amount of $15,000,000
with The Northern Trust Company dated July 10, 1998.
10.27.4 Revolving Credit Note in the amount of $15,000,000
with Suntrust Bank, Central Florida, N.A. dated July
10, 1998.
11 - Computation of Net Income Per Share.
27 - Financial Data Schedule
( b ) Reports on Form 8-K There were no reports filed on Form 8-K during
the thirteen week period ending August 29, 1998; however, the
Company did file a report on Form 8-K on September 3, 1998 with
respect to a press release issued by the Company on September 3,
1998.
12
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE FINISH LINE, INC.
Date: September 25, 1998 By: /s/ Steven J. Schneider
-----------------------------
Steven J. Schneider
Sr. Vice President - Finance, Chief
Financial Officer and Assistant Secretary
13