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EX-32 - EXHIBIT 32 - FINISH LINE INC /IN/finl10k2018exhibit32.htm
EX-21 - EXHIBIT 21 - FINISH LINE INC /IN/finl10k2018exhibit21.htm
EX-31.2 - EXHIBIT 31.2 - FINISH LINE INC /IN/finl10k2018exhibit312.htm
EX-31.1 - EXHIBIT 31.1 - FINISH LINE INC /IN/finl10k2018exhibit311.htm
EX-23 - EXHIBIT 23 - FINISH LINE INC /IN/finl10k2018exhibit23.htm
EX-10.18 - EXHIBIT 10.18 - FINISH LINE INC /IN/finl10k2018exhibit1018.htm
EX-4.4 - EXHIBIT 4.4 - FINISH LINE INC /IN/finl10k2018exhibit44.htm
EX-4.3 - EXHIBIT 4.3 - FINISH LINE INC /IN/finl10k2018exhibit43.htm
EX-4.2 - EXHIBIT 4.2 - FINISH LINE INC /IN/finl10k2018exhibit42.htm
EX-4.1 - EXHIBIT 4.1 - FINISH LINE INC /IN/finl10k2018exhibit41.htm

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________
FORM 10-K
__________________________________________
(Mark One)
x
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended March 3, 2018
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)
__________________________________________
Indiana
 
35-1537210
(State of Incorporation)
 
(I.R.S. Employer ID No.)
3308 N. Mitthoeffer Road, Indianapolis, Indiana 46235
Registrant’s telephone number, including area code: (317) 899-1022
 
 Securities registered pursuant to Section 12(b) of the Act:
(Title of Each Class)
 
(Name of each exchange on which registered)
Class A Common Stock, $.01 par value
 
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
 
¨
Accelerated filer
 
x
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
Smaller reporting company
 
¨
Emerging growth company
 
¨
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The aggregate market value of the voting Class A Common Stock held by non-affiliates of the registrant, which was based on the closing price on the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $435,398,014. The registrant does not have any outstanding non-voting common equity.
The number of shares of the registrant’s Class A Common Stock outstanding as of May 3, 2018 was 40,516,631.
 
 
 
 
 



PART I
Item 1. Business
General
Throughout this Annual Report on Form 10-K, the 53 weeks ended March 3, 2018, the 52 weeks ended February 25, 2017, and the 52 weeks ended February 27, 2016 are referred to as fiscal 2018, fiscal 2017, and fiscal 2016, respectively.
The Finish Line, Inc., together with its subsidiaries (collectively, the “Company”), is one of the largest specialty retailers in the United States. The Company’s goal is to offer the most relevant products from the best brands in an engaging and exciting shopping environment with knowledgeable staff trained to deliver outstanding customer service. On February 24, 2017, the Company completed the sale of its JackRabbit division to a third party and as a result, has classified JackRabbit’s balance sheet and operating results within discontinued operations.
Throughout this Annual Report on Form 10-K, the term “brick and mortar stores” is used to describe Finish Line stores and the term “digital” is used to describe Finish Line’s e-commerce site, www.finishline.com, and the Company’s mobile app. The brick and mortar stores and digital are collectively referred to as “Finish Line” throughout this Annual Report on Form 10-K.
Finish Line is a premium retailer of athletic shoes, apparel, and accessories. As of May 3, 2018, the Company operated 555 Finish Line stores, which averaged 5,611 square feet, in 44 U.S. states and Puerto Rico. In addition, Finish Line operates an e-commerce site, www.finishline.com, as well as mobile commerce via m.finishline.com. Finish Line carries a large selection of men’s, women’s, and kids’ athletic shoes (“footwear”), as well as an assortment of apparel and accessories (“softgoods”). Brand names offered by Finish Line include Nike, Brand Jordan, adidas, Under Armour, Puma, and many others. Footwear accounted for 94% of Finish Line’s net sales during fiscal 2018.
Under the Finish Line brand, the Company is the exclusive retailer of athletic shoes, both in-store and online, for Macy’s Retail Holdings, Inc., Macy’s Puerto Rico, Inc., and Macys.com, Inc. (collectively, “Macy’s”). The Company is responsible for the athletic footwear assortment, inventory, fulfillment, and pricing at all of Macy’s locations and online at www.macys.com. The Company operates branded and unbranded shops in-store at Macy’s. Branded shops include Finish Line signage within those shops and are generally staffed by Finish Line employees, while unbranded shops do not include Finish Line signage and are exclusively serviced by Macy’s employees. There are no differences in the merchandise that is sold, the classification of revenue recorded at retail, or the Company’s operation of the athletic footwear inventory and business between branded and unbranded shops and www.macys.com. As of May 3, 2018, the Company operated Finish Line-branded shops in 375 Macy’s department stores, which averaged 1,432 square feet, in 38 U.S. states, the District of Columbia, Puerto Rico, and Guam. Throughout this Annual Report on Form 10-K, the term “shops within department stores” is used to describe the Company’s business operations at Macy’s in-store branded and unbranded shops, as well as online at www.macys.com. Shops within department stores carry men’s, women’s, and kids’ athletic shoes, as well as a small assortment of accessories. Brand names offered by shops within department stores include Nike, Skechers, Converse, Puma, New Balance, adidas, and many others.
The Company’s principal executive offices are located at 3308 N. Mitthoeffer Road, Indianapolis, Indiana 46235, and its telephone number is (317) 899-1022.
Significant Business Developments
Proposed Merger with JD Sports Fashion Plc
On March 25, 2018, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with JD Sports Fashion Plc, a company incorporated under the laws of England and Wales (“JD Sports”), and Genesis Merger Sub, Inc., an Indiana corporation and an indirect wholly-owned subsidiary of JD Sports (“Merger Sub”). Pursuant to the Merger Agreement, and subject to the terms and conditions thereof, Merger Sub will merge with and into the Company (the “Merger), with the Company surviving the Merger as an indirect wholly-owned subsidiary of JD Sports. At the effective time of the Merger, each issued and outstanding class A Common Share, no par value, of the Company (“Company Common Shares”) (other than shares held by the Company in treasury or owned by any subsidiary of the Company, JD Sports, Merger Sub, or any other subsidiary of JD Sports) will automatically be converted into the right to receive $13.50 in cash (the “Merger Consideration”). In addition, at the effective time of the Merger, all outstanding and unexercised Company stock options (whether vested or unvested) granted under the Company’s 2002 Stock Incentive Plan, as amended, and Amended and Restated 2009 Incentive Plan, as amended, will be cancelled and JD Sports, or the surviving corporation, will pay the holder of each such option an amount in cash (without interest) equal to the product of (x) the excess, if any, of the Merger Consideration over the exercise price per share of the Company Common Shares underlying such option, and (y) the number of Company

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Common Shares subject to the option (net of withholding taxes and rounded down to the nearest cent). Each award of Company restricted stock that is outstanding and unvested immediately prior to the effective time of the Merger will become fully vested and free of forfeiture restrictions immediately prior to the effective time, and each such share of restricted stock will be converted into the right to receive the Merger Consideration (net of withholding taxes).
The closing of the transaction is subject to the receipt of any required regulatory approvals, the approvals of the Company’s and JD Sports’ shareholders and the satisfaction of other customary closing conditions. The Merger is expected to close as soon as practicable after the satisfaction or waiver of all the conditions to the closing in the Merger Agreement, which is currently expected to be in the late second quarter of calendar year 2018, although delays may occur.
The payment of the Merger Consideration will be funded in part, through debt financing that has been committed to JD Sports by Barclays Bank PLC, HSBC Bank plc, PNC Bank, National Association, and PNC Capital Markets LLC. The Merger Agreement does not contain a financing condition.
The Merger Agreement contains certain termination rights in favor of the parties, as set forth therein, including, among other things, the right of either party, subject to specified limitations, to terminate the Merger Agreement if the Merger is not consummated by September 25, 2018. Upon the termination of the Merger Agreement, under specified circumstances, the Company may be required to pay JD Sports a termination fee of $28 million. In addition, if the Merger Agreement is terminated in certain other circumstances, then the Company must pay JD Sports its reasonable and documented out-of-pocket fees and expenses incurred in connection with the Merger and related transactions, as well as JD Sports’ fees and expenses in connection with JD Sports’ financing of the transaction, in an aggregate amount up to $5.6 million. Any fees and expenses paid by the Company will be credited against any termination fee that may become due and payable.
Additional information about the Merger is set forth in the Company’s filings with the U.S. Securities and Exchange Commission (the "SEC").
Operating Strategies
The Company seeks to be the premium athletic shoe, apparel, and accessory retailer and active lifestyle retailer in the markets it serves. To achieve this, the Company has developed the following elements to its operating strategy:
Emphasis on Customer Service and Convenience. The Company is committed to providing a premium, relevant, and rewarding shopping experience for customers.
Finish Line seeks to achieve this objective in stores by providing convenient mall-based locations that feature a compelling store design with knowledgeable, trained, and courteous customer service professionals as well as a vast selection of fashion-forward and innovative products. In addition, the Company has extended the Finish Line brand to shops within department stores, a majority of which feature Finish Line branding and the same trained and courteous customer service professionals to extend the Finish Line brand to the Macy’s customer.
Through e-commerce and mobile commerce, the Company seeks to provide an easy shopping experience, robust product selection, and outstanding service.
Product Diversity; Target Customer Appeal. The Company stocks its stores/shops with a combination of the leading and newest brand name merchandise, including in-line offerings and unique products offered exclusively by the Company. The focus is on the Company’s stores/shops maintaining their status as a leader in premium athletic shoes, apparel, and accessories for men, women, and kids. Product diversity, in combination with the Company’s store/shop formats and commitment to customer service, is intended to attract a core customer (typically age 18-29 for Finish Line and age 30-50 for shops within department stores with a greater focus on females) as well as other key demographics. The Company is focused on offering premium product, which includes the best brands, on-trend styles, and most relevant selection.

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Merchandise
The following table sets forth net sales along with the percentage of net sales for the Company attributable to the categories of footwear and softgoods during the fiscal years indicated. These amounts and percentages fluctuate substantially during the different consumer buying seasons. To take advantage of this seasonality, the Company’s stores/shops have been designed to allow for a shift in emphasis in the merchandise mix between footwear and softgoods items throughout the year.
 
Category
 
2018
 
2017
 
2016
 
 
(in thousands)
Footwear
 
$
1,721,020

 
94
%
 
$
1,715,348

 
93
%
 
$
1,619,002

 
90
%
Softgoods
 
117,936

 
6
%
 
129,045

 
7
%
 
179,980

 
10
%
Total net sales
 
$
1,838,956

 
100
%
 
$
1,844,393

 
100
%
 
$
1,798,982

 
100
%
All merchandising decisions for Finish Line and shops within department stores, including merchandise mix, pricing, promotions, and markdowns, are made at the Company’s Customer Central corporate headquarters (“Customer Central”). The merchandising management at Customer Central, along with store/shop sales managers and district sales managers, review the merchandise mix to adapt to trends in the marketplace.
Technology
The Company continues to update its digital sites to enhance their quality and functionality. The Company has committed capital and other resources specifically for its growing digital channel, which includes design and content upgrades, mobile and tablet applications, expanded presence on social media, and platform enhancements. Finishline.com and related mobile sites are collectively the Company’s most visited store/shop with approximately 500,000 visitors per day.
To support the Company’s omnichannel commitment as a customer-centric organization, the Company also continuously evaluates and implements improvements to technological platforms, which affect stores/shops, merchandising, planning, allocation, warehouse management, order management, and customer relationship management. These improvements allow the Company to more effectively engage the customer, remain flexible and scalable to support growth, provide integrated service, and have information for real-time decision making.
In fiscal 2016, the Company replaced its existing warehouse and order management system, which allowed the Company to deliver its products more quickly to its stores/shops and customers, further enhancing the customer experience in store and online. Additionally, during fiscal 2016, the Company made enhancements to its customer data and analytics systems, which helped improve customer engagement by allowing the Company to develop customized communications based on individual preferences. In fiscal 2017, the Company upgraded its digital platform, which increased the website’s stability and functionality, invested in enhancements to increase the Company’s mobile first strategy, and enhanced the Company’s information security. In fiscal 2018, the Company launched the latest iteration of the customer-centric Finish Line mobile app and further upgraded its digital platform to enhance security, increase the speed of its sites, simplify the checkout process, and introduce additional post-transaction tracking features. The Company also enhanced its credit card terminals and replaced its legacy HR and payroll systems in fiscal 2018.
The Company is focused on creating an omnichannel customer experience which delivers a consistent, seamless brand experience for customers at all touch points – stores, shops within department stores, web, mobile, social media, phone, email, and direct mail.
Marketing
Finish Line attempts to reach its target audience by using a multifaceted approach to marketing on national, regional, and local levels. Finish Line utilizes its store windows, television, e-mail, social media, search engine optimization, key word searches, and affiliate programs in its marketing efforts. Shops within department stores collaborate with Macy’s on specific marketing approaches, which are generally similar to the marketing approaches utilized by Finish Line.
The Company benefits from advertising and promotional assistance from many of its suppliers. This assistance takes the form of cooperative advertising programs, in-store sales incentives, point-of-purchase materials, product training for employees, and other programs. The Company’s total net advertising expense was 2.0% and 2.1% of net sales after deducting cooperative reimbursements in fiscal 2018 and 2017, respectively. These percentages fluctuate substantially throughout the year during the different consumer buying seasons. The Company believes that it benefits from the multi-million dollar advertising campaigns of its key suppliers, such as Nike, adidas, and Under Armour.

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Finish Line has a customer loyalty program called “Winner’s Circle.” Customers earn a $20 reward certificate for every $200 they spend at Finish Line within a 12 month period, in addition to receiving special member offers on footwear and softgoods. Finish Line maintains a Winner’s Circle database with information that it uses to communicate with members regarding key initiatives, product offerings, and promotions. At year-end, the Winner’s Circle program had 10.6 million active members. Finish Line continues to improve the marketing effectiveness of the Winner’s Circle program to strengthen Finish Line’s relationship with its most loyal customers to drive sales.
Merchandising and Distribution
In addition to merchandise procurement for both footwear and softgoods, the merchandising department for the Company is responsible for determining pricing and working with the planning and allocation department to establish appropriate stock levels and product mix. Additionally, the merchandising department is responsible for communicating with store/shop and digital operations to monitor shifts in customer preferences and market trends.
The planning and allocation department is responsible for merchandise allocation, inventory movements, and the automated replenishment system. The department acts as the central processing intermediary between the merchandising department, the distribution center, digital sites, and stores/shops and also tracks the effectiveness of each marketing effort to allow the merchandising and marketing departments to determine the relative success of each promotional program. In addition, the department also manages the implementation of price changes, creation of vendor purchase orders, and determination of inventory levels for each store/shop.
The Company believes that its ability to buy in large quantities directly from suppliers enables it to obtain favorable pricing and trade terms. Currently, the Company purchases product from approximately 60 suppliers and manufacturers of athletic and fashion products, the largest of which (Nike) accounted for approximately 66% and 71% of total Company purchases in fiscal 2018 and 2017, respectively. The Company purchased approximately 94% and 93% of its total merchandise in both fiscal 2018 and 2017, respectively, from its five largest suppliers. The Company and its suppliers use EDI technology to streamline purchasing and distribution operations.
Nearly all of the Company’s merchandise is shipped directly from suppliers to the Company’s distribution center in Indianapolis, Indiana, where the Company processes and ships the merchandise by contract and common carriers to its stores/shops or directly to customers. Each day shipments are made to approximately one-third of the Company’s stores/shops. Each store/shop receives a minimum of four shipments per month. A shipment is normally received by the store/shop one to four days from the date that the order is filled depending on the store/shop’s distance from the distribution center.
Store Operations
The Company’s corporate and regional senior management visit the stores/shops regularly to review and receive feedback from the stores/shops related to the implementation of the Company’s customer service model, plans, and policies, to monitor operations, and to review inventories and the presentation of merchandise. Accounting and general financial functions for the stores/shops are conducted at Customer Central. Each store/shop has a sales manager, co-sales managers, or team lead that is responsible for supervision and overall operations, one or more assistant sales managers, and additional full and part-time sales associates.
Regional, district, and store sales managers receive a fixed salary (except store managers in California) and are eligible for bonuses, based primarily on sales, payroll, inventory shrink, and other performance goals of the stores/shops for which they are responsible. In California, all store sales managers, team leads, assistant store sales managers, and sales associates are paid on an hourly basis.
Competition
The athletic shoe, apparel, and accessory business is highly competitive. Many of the products the Company sells are also sold in department stores, national and regional full-line sporting goods stores, athletic footwear specialty stores, athletic footwear superstores, discount stores, traditional shoe stores, mass merchandisers, and e-tailers. Some of the Company’s primary competitors are large national chains that have substantially greater financial and other resources than the Company. Additionally, the Company’s competition also includes stores and/or e-commerce sites that are owned by major suppliers of the Company. To a lesser extent, the Company competes with local sporting goods and athletic specialty stores. The majority of brick and mortar stores and shops within department stores are located in enclosed malls or shopping centers in which one or more competitors also operate. Typically, the leases that the Company enters into do not restrict the opening of stores by competitors.

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The Company seeks to differentiate itself from its competition by operating more attractive, well-stocked stores/shops in high retail traffic areas, with competitive prices and knowledgeable and courteous customer service. The Company keeps its prices competitive with athletic specialty and sporting goods stores in each trade area, including competitors that are not necessarily located inside malls. The Company believes it accomplishes this by effectively assorting its stores/shops and online with the most relevant premium brands and products in the market.
Seasonal Business
The Company’s business follows a seasonal pattern, peaking over a total of approximately 12 weeks during the back-to-school (mid July through early September) and holiday (Thanksgiving through Christmas) seasons. During fiscal 2018 and 2017, these seasons collectively accounted for approximately 31% and 32%, respectively, of the Company’s annual sales.
Employees
As of March 3, 2018, the Company employed a total of approximately 13,500 persons, 3,700 of whom were full-time and 9,800 of whom were part-time. Of this total, approximately 1,000 were employed at Customer Central and the Company’s distribution center in Indianapolis, Indiana, and the Company’s digital team office in Boulder, Colorado, and approximately 60 were employed as regional vice presidents and district sales managers. Additional part-time employees are typically hired during the back-to-school and holiday seasons. None of the Company’s employees are represented by a union and employee relations are good.
Retirement Plan
The Company sponsors a qualified defined contribution profit sharing plan that has a 401(k) feature. The Company matches 100 percent of employee contributions to the 401(k) plan on the first three percent of an employee’s wages and matches an additional 50 percent of employee contributions to the 401(k) plan on the next two percent up to five percent of their wages (maximum of four percent Company match).
Intellectual Property
The Company has registered, in the United States and other countries, trademarks, service marks, and domain names relating to its business. The Company believes its registrations are valid. It intends to be vigilant with regard to infringing or diluting uses by other parties, and to enforce vigorously its rights in its trademarks, service marks, and domain names.
Available Information
The Company’s Internet address is www.finishline.com. The Company makes available free of charge through its website the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after such reports and amendments are electronically filed with or furnished to the Securities and Exchange Commission. In addition, the Company’s Code of Ethics and other corporate governance documents are available on its Investor Relations page under “Corporate Governance.”

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Item 1A. Risk Factors
Forward-Looking Statements
Forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as elsewhere in this Annual Report on Form 10-K, involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond the Company’s control. Accordingly, future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. Investors should not place undue reliance on forward-looking statements as a prediction of actual results. You can identify these statements as those that may predict, forecast, indicate, or imply future results, performance, or advancements and by forward-looking words such as, but not limited to, “believe,” “expect,” “anticipate,” “estimate,” “intend,” “future,” “forecast,” “outlook,” “foresee,” “predict,” “potential,” “plan,” “project,” “goal,” “will,” “will be,” “continue,” “lead to,” “expand,” “grow,” “confidence,” “could,” “should,” “may,” “might,” or any variations of such words or other words or phrases with similar meanings. Forward-looking statements address or describe, among other things, expectations, growth strategies, including plans to open and close stores/shops, projections of future profitability, results of operations, future allocations of capital, including capital expenditures, financial condition, or other “forward-looking” information and may include statements about net sales, product margin, occupancy costs, selling, general, and administrative expenses, operating margins, liquidity, operations, and/or inventory. All of these forward-looking statements are subject to risks, management assumptions, and uncertainties that could cause actual results to differ materially from those contemplated by the relevant forward-looking statements. The forward-looking statements included herein are made only as of the date of this Annual Report on Form 10-K and the Company undertakes no obligation to publicly update these forward-looking statements to reflect subsequent events or circumstances.
Risks Related to the Merger Agreement
Failure to consummate the Merger could negatively impact the price of the Company’s common stock and its future business and financial results.
The consummation of the Merger with JD Sports may be delayed, the Merger may be consummated on terms different than those contemplated by the Merger Agreement, or the Merger may not be consummated at all. Failure to consummate the Merger would prevent the Company’s shareholders from realizing the anticipated benefits of the Merger. In addition, the consideration offered by JD Sports reflects a valuation of the Company in excess of the price at which the Company’s common stock was trading prior to the public announcement of the entry into the Merger Agreement. The current market price of the Company’s common stock may reflect a market assumption that the Merger will occur, and a failure to consummate the Merger could result in a significant decline in the market price of the Company’s common stock and a negative perception of the Company generally. Any delay in the consummation of the Merger or any uncertainty about the consummation of the Merger could also negatively impact the share price and future business and financial results of the Company.
The Merger remains subject to conditionssome of which JD Sports and the Company cannot control, which could result in the Merger not being consummated or being delayed, either of which could negatively impact the share price and future business and operating results of the Company.
The Merger is subject to the satisfaction or waiver of certain conditions to closing, including, but not limited to, the approval of the Merger Agreement by the shareholders of both the Company and JD Sports; the absence of any orders, injunctions, or rulings that would have the effect of enjoining or preventing the consummation of the Merger; and the approval of the UK Listing Authority (UKLA) of a circular convening the JD Sports shareholders meeting. Certain conditions to the Merger may not be satisfied or, if they are, the timing of such satisfaction is uncertain. If any conditions to the Merger are not satisfied or, where waiver is permitted by applicable law, not waived, the Merger will not be consummated.
The Merger is not subject to a financing condition. While JD Sports has obtained debt financing commitments to finance, in part, the Merger Consideration under debt commitment letters to JD Sports (consisting of a £400 million unsecured revolving credit facility) and to the Company (consisting of a $315 million senior secured asset-based revolving credit facility to be provided to the Company as the surviving entity of the Merger), certain customary conditions precedent to funding must be satisfied in order for JD Sports and the Company to utilize these bank facilities, and if such conditions are not satisfied or if the lenders do not satisfy their funding commitment, JD Sports may be unable to obtain the funds necessary to consummate the Merger.
If for any reason the Merger is not completed, or the closing of the Merger is significantly delayed, the Company’s share price and business and results of operations may be adversely affected. In addition, failure to consummate the Merger would prevent the Company’s shareholders from realizing the anticipated benefits of the Merger. The Company has incurred, and expects to continue to incur, significant transaction fees, professional service fees, taxes, and other costs related to the Merger.

6


Further, if the Merger Agreement is terminated under certain circumstances, the Company may be required to pay to JD Sports a termination fee of $28 million or pay JD Sports its reasonable and documented out-of-pocket fees and expenses incurred in connection with the Merger and related transactions, as well as JD Sports’ fees and expenses in connection with its financing of the transaction, in an aggregate amount up to $5.6 million (of which, any reimbursement could be credited against the termination fee, if applicable). Any fees and expenses paid by the Company will be credited against any termination fee that may become due and payable.
The directors and executive officers of the Company have interests in the Merger that may be different from, or in addition to, those of other Company shareholders.
The Company’s shareholders should recognize that the directors and executive officers of the Company have interests in the Merger that may be different from, or in addition to, their interests as shareholders of the Company generally. Interests of executive officers and directors that may be different from or in addition to the interests of the Company’s shareholders generally include, among other matters: (i) the acceleration and cash-out of all Company stock options, including options on Company common stock held by the Company's executive officers and directors, with exercise prices less than the Merger Consideration, as provided in the Merger Agreement; (ii) the acceleration of vesting of each award of Company restricted stock that is outstanding and unvested immediately prior to the effective time of the Merger, including restricted stock held by the Company's executive officers and directors, and the conversion of each such share of restricted stock into the right to receive the Merger Consideration (net of withholding taxes), pursuant to the Merger Agreement; (iii) cash payments, accelerated vesting of outstanding Company equity awards, and other benefits payable under severance arrangements, award agreements, and/or employment agreements with the Company's executive officers in the event of a qualifying termination of employment in connection with the Merger; and (iv) indemnification of the Company's directors and executive officers by the surviving corporation following the Merger.
The Merger Agreement contains provisions that restrict the Company’s ability to pursue alternatives to the Merger and, in specified circumstances, could require the Company to pay JD Sports a termination fee or expense reimbursement.
Under the Merger Agreement, the Company is restricted from soliciting, encouraging, or discussing alternative acquisition proposals from third parties, and the directors are required to maintain its recommendation to its shareholders to approve the Merger with JD Sports. However, prior to the Merger Agreement being approved by the Company’s shareholders, the Company may, if in receipt of an alternative acquisition proposal (obtained without breaching the foregoing restrictions) that is or is reasonably expected to lead to a “superior proposal” (as defined in the Merger Agreement), provide information to and participate in discussions with such proposing party as provided in the Merger Agreement. In addition, prior to the Merger Agreement being approved by the Company’s shareholders, solely if the failure to so change its recommendation would be a breach of its fiduciary duties under applicable law, the directors would be permitted to change its recommendation with respect to the Merger in response to the receipt of a superior proposal that did not result from a breach of the no-solicitation covenants, and/or terminate the Merger Agreement (subject to the Company simultaneously paying to JD Sports a $28 million termination fee) in order to accept a superior proposal. If the directors make such a change in recommendation, JD Sports would also have the right to terminate the Merger Agreement and upon such termination receive the termination fee from the Company. These provisions could discourage a third party that may have an interest in acquiring all or a significant part of the Company from considering or proposing that acquisition, even if such third party were prepared to enter into a transaction that is more favorable to the Company or its shareholders than the Merger with JD Sports.
Uncertainties associated with the Merger may cause a loss of employees and may otherwise affect the future business and operations of the Company, JD Sports, and the combined company after the Merger.
Uncertainty about the effect of the Merger on employees and customers may have an adverse effect on the Company or JD Sports and, if the proposed combination with JD Sports is consummated, on the combined company following the Merger. These consequent uncertainties may impair the Company’s and JD Sports’ ability to retain and motivate key personnel and could also cause customers, suppliers, licensees, partners, and others that deal with the Company or JD Sports to defer entering into contracts with, making other decisions concerning, or seeking to change existing business relationships with the Company or JD Sports. Because the Company and JD Sports depend on the experience and industry knowledge of their executives and other key personnel to execute their business plans, the combined company may be unable to meet its strategic objectives.
While the Merger is pending, the Company may not be able to hire qualified personnel to replace any key employees that may depart to the same extent that it has been able to in the past. In addition, if the Merger is not completed, the Company may also encounter challenges in hiring qualified personnel to replace key employees that may depart the Company subsequent to the Merger announcement.

7


Two lawsuits have been filed and additional lawsuits may be filed against the Company, JD Sports, and the Company’s Board of Directors challenging the Merger. An adverse ruling in any such lawsuit may delay or prevent the completion of the Merger or result in an award of damages against the Company.
In each complaint, a purported shareholder of the Company has filed a lawsuit on behalf of themselves and a putative class of public Company shareholders, as well as on behalf of the Company derivatively, in the U.S. District Court for the Southern District of Indiana. The lawsuits, which are captioned Martinez v. Lyon, et al., Civil Action No. 1:18-cv-1342 and Franchi v. The Finish Line, Inc., Lyon, et al., Civil Action No. 1:18-cv-01434, names the Company as a nominal defendant and alleges, among other things, breach of fiduciary duty claims against the Company’s Board of Directors (the "Board") in connection with the Board’s consideration and approval of the Merger. The complaints also allege that the preliminary proxy statement that the Company submitted to the SEC in connection with the Merger was materially misleading and incomplete, purportedly violating Sections 14(a) and 20(a) of the Exchange Act, and Rule 14a-9 promulgated thereunder. The lawsuits seek, among other things, to enjoin the consummation of the Merger and damages. The Company believes the lawsuits are without merit and intends to vigorously defend itself. In addition to the foregoing lawsuits, additional lawsuits arising out of or relating to the Merger Agreement or the Merger may be filed in the future.
The results of complex legal proceedings are difficult to predict and could delay or prevent the completion of the Merger. The existence of litigation relating to the Merger could impact the likelihood of obtaining the shareholder approvals from either the Company or JD Sports. Moreover, the pending litigation is, and any future additional litigation could be, time consuming and expensive and could divert the Company’s and JD Sports’ respective management’s attention away from their regular business. One of the conditions to completion of the Merger is the absence of any pending action or proceeding challenging the Merger Agreement or the consummation of the Merger or seeking to compel the Company or any of its subsidiaries, or JD Sports or any of its subsidiaries, to take any action explicitly not required to be taken to obtain required approvals. In addition, another condition to the completion of the Merger is the absence of any law, action, order, or other legal restraint or prohibition, entered, enacted, promulgated, enforced or issued by any court or other governmental authority of competent jurisdiction, which prohibits, renders illegal, or enjoins the consummation of the Merger or any of the other transactions contemplated by the Merger Agreement, whether temporarily, preliminarily or permanently. Accordingly, if a plaintiff is successful in obtaining a judgment prohibiting completion of the Merger, then such judgment may prevent the Merger from being completed, or from being completed within the expected time frame.
The following risk factors assume that the Company remains a stand-alone company except as otherwise noted.
Current, recent past, and future economic and financial conditions have caused and/or in the future may cause a decline in consumer spending and may adversely affect the Company’s business, operations, liquidity, financial results, and stock price.
The Company’s operating results are affected by the relative condition of the U.S. economy. Business and financial performance may be adversely affected by current, recent past, and future economic conditions that cause a decline in business and consumer spending, including a reduction in the availability of credit, increased unemployment levels, higher energy and fuel costs, rising interest rates, financial market volatility, and recession. Additionally, the Company may experience difficulties in operating and growing its operations to react to economic pressures in the U.S.
As a business that depends on consumer discretionary spending, the Company’s customers may reduce their spending and purchases due to job losses or fear of job losses, foreclosures, bankruptcies, higher consumer debt and interest rates, reduced access to credit, falling home prices, increased taxes, and/or lower consumer confidence. Decreases in comparable store net sales, customer traffic, or average dollar per transaction negatively affect the Company’s financial performance, and a prolonged period of depressed consumer spending could have a material adverse effect on the Company’s business and results. Promotional activities, product liquidation, and decreased demand for consumer products could affect profitability and margins. Customer traffic is difficult to forecast and mitigate. As a consequence, sales, operating, and financial results for a particular period are difficult to predict, and, therefore, it is difficult to forecast expected results for future periods. Any of the foregoing factors could have a material adverse effect on the Company’s business, results of operations, and financial condition and could adversely affect the Company’s stock price.
Additionally, many of the effects and consequences of U.S. and global financial and economic conditions could potentially have a material adverse effect on the Company’s liquidity and capital resources, including the ability to raise additional capital, if needed, or the ability of banks to honor draws on the Company’s credit facility, or could otherwise negatively affect the Company’s business and financial results. Although the Company normally generates funds from operations to pay operating expenses and fund capital expenditures and has a revolving credit agreement in place until November 30, 2021 (which had no borrowings under it other than amounts used for stand-by letters of credit as of March 3, 2018), the ability to continue to meet these cash requirements over the long-term may require access to additional sources of

8


funds, including capital and credit markets. Continuing market volatility, the impact of government intervention in financial markets, and general economic conditions may adversely affect the ability of the Company to access capital and credit markets.
Global economic conditions may also adversely affect the Company's suppliers’ access to capital and liquidity with which to maintain their inventory, production levels, and product quality and to operate their businesses, all of which could adversely affect the Company’s supply chain. Furthermore, the Company's suppliers might reduce their offerings of customer incentives and vendor allowances, cooperative marketing expenditures, and product promotions. Market instability could make it more difficult for the Company and its suppliers to accurately forecast future product demand trends, which could cause the Company to carry too much or too little merchandise in various product categories. Current, recent past, and future financial and economic conditions may also adversely affect landlords and real estate developers of retail space, which may limit the availability of attractive leased store locations. Current, recent past, and future conditions may also adversely affect the Company’s pricing and liquidation strategy.
The Company’s business faces a great deal of competitive pressure.
The athletic shoe, apparel, and accessory business is highly competitive. The Company competes for customers, customer service professionals, management and other qualified personnel, locations, merchandise, services, and other important aspects of its business with many other local, regional, and national retailers, as well as many of its own suppliers. Those competitors, some of whom have a greater market presence than the Company, include traditional brick and mortar store-based retailers, Internet and digital businesses, and other forms of retail commerce. A factor in the Company’s success is its ability to differentiate itself from its competitors. Unanticipated changes in the pricing and other practices of those competitors may adversely affect the Company’s performance. The Company cannot guarantee that it will be able to compete successfully against current and/or future companies within its industry and market space.
The Company may experience fluctuations in results of operations due to seasonality of the business.
The Company’s business is subject to seasonal influences, with a major portion of sales and income historically realized during the second and fourth quarters of the fiscal year, which include the back-to-school and holiday seasons, respectively. This seasonality causes operating results to vary considerably from quarter to quarter and could materially and adversely affect the Company’s results and stock price. In addition, comparable sales are subject to significant fluctuation, on a monthly, quarterly, and annual basis, and the Company anticipates this fluctuation to continue in the future.
The Company’s business is dependent on consumer preferences, fashion trends, and successful management of inventory.
The athletic footwear and softgoods industry is subject to changing fashion trends and consumer preferences. The Company cannot guarantee that its merchandise selection will accurately reflect customer preferences when it is offered for sale or that the Company will be able to identify and respond quickly to fashion trends and changes, particularly given the long lead times for ordering much of the Company’s merchandise from suppliers. For example, merchandise is generally ordered six to nine months prior to delivery to stores/shops. Sufficient inventory levels must be maintained for the Company to operate its business successfully. However, the Company must concurrently guard against accumulating excess or irrelevant inventory. If the Company fails to accurately anticipate either the market for merchandise or customers’ purchasing habits, the Company may be forced to rely on markdowns, promotional sales, or product liquidation to dispose of excess, irrelevant, and/or slow moving inventory, which may adversely affect performance and results.
The Company’s business may be adversely affected by changes in merchandise sourcing.
The Company’s suppliers must comply with applicable laws and required standards of conduct. The ability to find qualified suppliers and access products in a timely and efficient manner can be a challenge, especially with respect to goods sourced outside the United States. Political or financial instability, supplier employment relations, trade restrictions, tariffs, currency exchange rates, transport capacity and costs, and other factors relating to foreign trade, and the ability to access suitable merchandise on acceptable terms, are beyond the Company’s control and could adversely impact performance and results.
Changes in relationships with any of the Company’s key suppliers may have an adverse impact on future results.
The Company’s business is dependent, to a significant degree, upon the ability to purchase premium brand-name merchandise at competitive prices, including the receipt of volume discounts, cooperative advertising, markdown allowances, and the ability to return merchandise to suppliers. The Company purchased approximately 94% of its merchandise in fiscal 2018 from its top five suppliers and expects to continue to obtain a significant percentage of its product from these suppliers in future periods. Approximately 66% of merchandise was purchased from one vendor (Nike). The inability to obtain merchandise in a timely manner from major suppliers (particularly Nike) as a result of business decisions by suppliers or disruptions in the

9


global transportation network such as a port strike, weather conditions, work stoppages, or other labor unrest could have a material adverse effect on the business, financial condition, and results of operations of the Company. Because of the strong dependence on Nike, any adverse development in Nike’s distribution strategy, financial condition, or results of operations or the inability of Nike to develop and manufacture products that appeal to the Company’s target customers could also have an adverse effect on the business, financial condition, and results of operations of the Company.
The Company’s operations are primarily dependent on a single distribution center, and the loss of, or disruption in, the distribution center and other factors affecting the distribution of merchandise could have a material adverse effect on the Company’s business and operations.
The distribution functions for the Company are primarily handled from a single facility in Indianapolis, Indiana. Any significant interruption in the operation of the distribution center due to natural disasters, accidents, system issues or failures, or other unforeseen causes could delay or impair the ability to distribute merchandise to stores/shops and/or fulfill orders originating from any of its e-commerce sites, which could cause sales to decline.
The Company depends upon third-party carriers for shipment of a significant amount of merchandise to both its stores/shops and directly to its consumers. An interruption in service by these third-party carriers for any reason could cause temporary disruptions in business, a loss of sales and profits, and other material adverse effects.
Freight costs are impacted by changes in fuel prices through surcharges, among other factors. Fuel prices and surcharges affect freight costs both on inbound freight from suppliers to the distribution center as well as outbound freight from the distribution center to stores/shops, supplier returns and third party liquidators, and shipments of product to customers. Increases in fuel prices, surcharges, and other potential factors may increase freight costs.
The Company may need to record significant non-cash impairment charges if its long-lived assets become impaired.
The Company reviews its property and equipment, including software and software development costs, when events, which include making decisions that strategically change the intended use of such assets, indicate that their carrying value may be impaired. If an impairment trigger is identified, the carrying value is compared to its estimated fair value and provisions for impairment are recorded as appropriate.
Impairment losses are significantly affected by estimates of future operating cash flows and estimates of fair value. Estimates of future operating cash flows are identified from strategic long-term plans, which are based upon experience, knowledge, and expectations; however, these estimates can be affected by such factors as future operating results, future store/shop profitability, and future economic conditions, all of which can be difficult to predict accurately. Any significant deterioration in macroeconomic conditions could affect the fair value of the Company's long-lived assets and could result in future impairment charges, which would adversely affect its results of operations.
The Company’s business may be adversely affected by the failure to identify and obtain suitable store locations and acceptable lease terms.
To take advantage of customer traffic and shopping preferences, the Company needs to obtain and retain stores in desirable locations, such as in regional and neighborhood malls anchored by major department stores. The Company cannot be certain that desirable mall or other locations will continue to be available. Several large landlords dominate the ownership of prime malls in the United States and because of the dependence upon these landlords for a substantial number of the Company’s store locations, any significant erosion of the relationships with these landlords or their financial condition would negatively affect its ability to obtain and retain locations. Additionally, further landlord consolidation may negatively affect the Company's ability to obtain and retain store locations at acceptable lease terms. The Company’s average remaining store lease term is relatively short. Due to the short-term nature, the Company is subject to potential market changes, which could increase occupancy costs and adversely affect profitability.
The Company’s future results may be adversely affected if it is unable to implement its strategic plan and growth initiatives.
The Company’s ability to succeed in its strategic plan and growth initiatives could require significant capital investment and management attention, which may result in the diversion of these resources from the core business and other business issues and opportunities. Additionally, any new initiative is subject to certain risks, including customer acceptance, competition, ramp up time, product differentiation, challenges to economies of scale in merchandise sourcing, and/or the ability to attract and retain qualified management and other personnel. There can be no assurance that the Company will be able to develop and successfully implement its strategic plan and growth initiatives to a point where they will become and/or continue to be profitable or generate positive cash flow. If the Company cannot successfully execute its strategic plan and growth initiatives, the Company’s financial condition and results of operations may be adversely impacted.

10


Changes in labor conditions, as well as the Company’s inability to attract and retain the talent required for the business, may negatively affect operating results.
Future performance will depend upon the Company’s ability to attract, retain, and motivate qualified employees, including store personnel, field management, senior management, and other key personnel. Many store/shop sales associates are in entry level or part-time positions with historically high rates of turnover. The ability to meet the Company’s labor needs while controlling costs is subject to external factors such as unemployment levels, prevailing wage rates, health care and minimum wage legislation, and changing demographics. If the Company is unable to attract and retain quality sales associates, management, and other key personnel, the ability to meet growth goals or to sustain expected levels of profitability may be compromised. In addition, a large number of the Company’s store employees are paid the prevailing minimum wage, which if increased would negatively affect profitability and could, if the increase were material, require the Company to adjust its business strategy, which may include the closure of less profitable and/or under-performing stores. Although none of the Company’s employees are currently covered under collective bargaining agreements, the Company cannot guarantee that employees will not elect to be represented by labor unions in the future. If some, or all, of the Company’s workforce were to become unionized and collective bargaining agreement terms were significantly different from the Company’s current compensation arrangements or work practices, it could have a material adverse effect on the Company’s business, financial condition, and results of operations.
Because the Company’s stock price may be volatile, it could experience substantial declines.
The market price of the Company’s common stock has historically experienced and may continue to experience volatility. The Company’s quarterly operating results, changes in general conditions in the economy or the financial markets, and other developments affecting the Company, its key suppliers, or competitors, could cause the market price of the Company’s common stock to fluctuate substantially. Although the U.S. broader stock market has experienced sustained price increases in recent years, significant stock price and volume fluctuations may return depending on national and international macroeconomic factors, changes in monetary policy, or other factors. This volatility would likely affect the market prices of securities issued by many companies, often for reasons unrelated to their operating performance, and may adversely affect the price of the Company’s common stock.
The Company cannot provide any guaranty of future dividend payments or that it will continue to repurchase stock pursuant to its share repurchase program.
The Board determines if it is in the best interest of the Company to pay a dividend to its shareholders and the amount of any dividend, and declares all dividend payments. There is no assurance that the Board will continue to declare dividends in the future or that the Company’s results of operations and financial condition will allow for a dividend to be declared. The Company’s current share repurchase program, as amended, authorizes the purchase of 5 million shares of the Company’s common stock (of which 4.5 million shares were available as of March 3, 2018) through December 31, 2019. However, the Company is not obligated to make any purchases under the share repurchase program and the program may be discontinued at any time.
A security breach of the Company’s information technology systems could damage the Company’s reputation and have an adverse effect on operations and results.
The Company accepts electronic credit and debit payment cards from customers. The Company also receives and maintains certain personal information about customers and employees. A number of retailers have experienced security breaches in which credit and debit card and other sensitive information has been stolen or compromised. While the Company has taken significant steps to prevent the occurrence of security breaches in this respect, the Company may, in the future, become subject to claims for purportedly fraudulent transactions arising out of the theft or compromise of credit or debit card or other information, and may also be subject to lawsuits or other proceedings in the future relating to these types of incidents. Any such proceeding could be a distraction to the Company and cause significant unplanned losses and expenses. If the Company’s security and information systems are compromised, if computer and mobile telephone equipment is lost or stolen, or if employees fail to comply with the applicable laws and regulations and electronic payment card or personal information is obtained by unauthorized persons or used inappropriately or illegally, it could adversely affect the Company’s reputation, as well as results of operations, and could result in litigation, the imposition of penalties, or significant expenditures to remediate any damage to persons whose credit card, debit card, or personal information has been compromised. The Company is continuously working to install new, and upgrade its existing, information technology systems and provide employee awareness training around phishing, malware, and other cyber risks to ensure that the Company is protected, to the greatest extent possible, against cyber risks and security breaches. However, there is no guarantee that the Company will not be affected by cyber risks or security breaches.

11


A major failure of technology and information systems could adversely affect the Company’s business.
The efficient operation of the Company’s business is dependent on technology and information systems. In particular, the Company relies on information systems to effectively manage sales, distribution, supply chain, and merchandise planning and allocation functions. However, the failure of technology and information systems to perform as designed could disrupt the Company’s business and adversely affect sales and profitability. There is the risk that the Company could experience challenges with its information systems due to system implementation issues, which include the replacement of certain management and merchandising systems now and over the next few years, system outages or failures, viruses, cyber extortion, which could lead to denial of service to customers, hackers, or other causes.
Various risks associated with digital sales may adversely affect the Company’s business.
The Company sells merchandise digitally over the Internet through www.finishline.com and www.macys.com, as well as through mobile commerce at m.finishline.com. The digital operations are subject to numerous risks, including but not limited to, unanticipated operating problems, reliance on third party computer hardware, software, and service providers, system failures, and the need to invest in additional computer and other systems. The digital operations also involve other risks that could have an impact on the Company’s results of operations, including hiring, retention, and training of personnel to conduct the digital operations, diversion of sales from the stores/shops, rapid technological changes, liability for online content, credit and debit card fraud, and risks related to the failure of the computer systems that operate the various websites and related support systems, such as computer viruses, cyber extortion, which could lead to denial of service to customers, telecommunication failures, break-ins, security breaches, and similar disruptions. There can be no assurance that the digital operations will continue to operate effectively, achieve sales and profitability growth, or remain at their current or any anticipated levels.
The Company’s business may be adversely affected by regulatory and litigation developments.
Various aspects of the Company’s operations are subject to federal, state, or local laws, rules, and regulations, any of which may change from time to time. Sales and results of operations may be adversely affected by new legal requirements, including but not limited to, comprehensive federal health care legislation enacted in 2010, the Fair Labor Standards Act, and attendant regulations. For example, new legislation or regulations may result in increased costs directly for compliance or indirectly to the extent that such requirements increase prices of goods and services because of increased compliance costs. Additionally, the Company is regularly involved in various litigation matters that arise in the ordinary course of doing business. Litigation or regulatory developments could adversely affect the business operations and financial performance of the Company.
Changes in tax laws and interpretations may affect the Company's earnings negatively.
On December 22, 2017, H.R. 1, originally the Tax Cuts & Jobs Act (“the Tax Act”), was signed into law making significant changes to the Internal Revenue Code. Changes include a corporate rate decrease from 35% to 21%, effective January 1, 2018, as well as a variety of other changes including eliminating certain deductions for executive compensation and limiting the deduction for interest.
In applying the impacts of the Tax Act, the Company re-measured its deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally a 21% federal tax rate and its related impacts on the state tax rates. The resulting impact was the recognition of an income tax benefit of $10.1 million in the fourth quarter of fiscal 2018.
The Tax Act is unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and implementing regulations by the U.S. Treasury Department and U.S. Internal Revenue Service, any of which could lessen or increase certain adverse impacts of the legislation. In addition, it is unclear how these U.S. federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities.
Anti-takeover provisions under the Indiana Business Corporation Law and the Company’s Restated Articles of Incorporation and Bylaws may render more difficult the accomplishment of mergers or the assumption of control by a principal shareholder, making more difficult the removal of management.
Certain provisions of the Indiana Business Corporation Law, specifically the director standards of conduct provision in Section 23-1-35-1, the control share acquisitions provisions in Sections 23-1-42-1 to 23-1-42-11, and the business combination provisions in Sections 23-1-43-1 to 23-1-43-24, and certain provisions of the Company’s Restated Articles of Incorporation and Bylaws, specifically the provisions regarding preferred stock, the provisions requiring a supermajority vote for certain business combinations and certain amendments to the Restated Articles of Incorporation, the provisions requiring approval of certain

12


transactions by the continuing directors, the provisions for a staggered board, and the provisions limiting removal of directors to removal for cause, may have the effect of discouraging an unsolicited attempt by another person or entity to acquire control of the Company. These provisions may make mergers, tender offers, the removal of directors or management, and certain other transactions more difficult or more costly and could discourage or limit shareholder participation in such types of transactions, whether or not such transactions are favored by the majority of the Company’s shareholders. Such provisions also could limit the price that investors might be willing to pay in the future for shares of the Company’s common stock. Further, the existence of these anti-takeover measures may cause potential bidders to look elsewhere, rather than initiating merger or acquisition discussions with the Company. Any of these factors could reduce the price of the Company’s common stock.
The Company’s shops within department stores operations are reliant on Macy’s.
The Company’s shops within department stores use selling space within Macy’s. These shops within department stores are dependent on the Macy’s point of sale and other technological platforms, including those related to www.macys.com. In addition, the Macy’s management team, corporate strategy, labor relations (including unionized Macy’s labor in two large geographic metropolitan regions in the United States), and marketing and advertising campaigns have an effect on the success of the Company’s shops within department stores. The Company has limited influence over these factors, so a strategic shift in any of these factors or a significant disruption in Macy’s business, including Macy’s store closures, could result in deterioration in the operations of the Company’s shops within department stores.
Additionally, the Company needs to obtain and retain shops within department stores in desirable locations. The Company cannot be certain that desirable locations will continue to be available because of the dependence upon Macy’s in negotiating the shop locations. Any significant erosion of the relationship with Macy’s or its financial condition could negatively affect the Company's ability to obtain and retain shop locations.
The effects of natural disasters, terrorism, acts of war, and public health issues may adversely affect the Company's business.
Natural disasters, including earthquakes, hurricanes, floods, and tornadoes, may affect the operations of the Company's stores/shops, information systems, and distribution center. In addition, acts of terrorism, acts of war, and military action both in the United States and abroad can have a significant effect on economic conditions and may negatively affect the Company's ability to purchase merchandise from suppliers for sale to its customers. Public health issues, such as the flu, viruses for which there is currently no known cure, or other pandemics, whether occurring in the United States or abroad, could disrupt the Company's operations and result in a significant part of its workforce being unable to operate or maintain its infrastructure or perform other tasks necessary to conduct its business. Additionally, public health issues may disrupt, or have an adverse effect on, the Company's suppliers’ operations or its own operations, customers, and customer demand. The Company's ability to mitigate the adverse impact of these events depends, in part, upon the effectiveness of its disaster preparedness and response planning as well as business continuity planning. However, the Company cannot be certain that its plans will be adequate or implemented properly in the event of an actual disaster. The Company may be required to suspend operations in some or all of its locations, which could have a material adverse effect on its business, financial condition, and results of operations. Any significant declines in public safety or uncertainties regarding future economic prospects that affect customer spending habits could have a material adverse effect on customer purchases of the Company's products.
Potential health care reform efforts under the new administration could significantly affect the Company's business.
In 2010, Congress enacted and the President signed the Patient Protection and Affordable Care Act (the “ACA”), which created comprehensive reform to the health care system in the United States. The ACA contains provisions which, among other things, includes guaranteed coverage requirements, establishes health insurance exchanges to facilitate the purchase of qualified health plans, eliminates pre-existing condition exclusions and annual and lifetime maximum limits, restricts the extent to which policies can be rescinded, imposes new and significant taxes on health insurers and health care benefits, and increases the reporting required to comply with the legislation. The ACA remains subject to continuing legislative scrutiny, including efforts by Congress and the new administration to amend or repeal a number of its provisions, as well as administrative actions delaying the effectiveness of key provisions. If the ACA is repealed or substantially modified, or if implementation of certain aspects of the ACA are delayed, such repeal, modification, or delay may impact the Company's business, financial condition, and results of operations. The Company is unable to predict the impact of any repeal, modification, or delay of the ACA at this time.

13


Legislative or regulatory initiatives related to global warming and climate change concerns may negatively affect the Company's business.
There has been an increasing focus and significant debate on global climate change, including increased attention from regulatory agencies and legislative bodies. The increased focus may lead to new initiatives directed at regulating an array of environmental matters. Legislative, regulatory, or other efforts in the United States to address climate change could result in future increases in taxes or in the cost of transportation and utilities, which could decrease the Company's operating profits and could necessitate additional investments in facilities and equipment. The Company is unable to predict the potential effects that any such future environmental initiatives may have on its business.

New accounting guidance or changes in the interpretation or application of existing accounting guidance could adversely affect the Company's financial performance.
The implementation of new accounting standards could require certain systems, internal process and other changes that could increase the Company's operating costs, and also could result in changes to its financial statements. In particular, the implementation of accounting standards related to leases, as issued by the Financial Accounting Standards Board are requiring the Company to make significant changes to its lease management and other accounting systems, and will result in a material impact to our consolidated financial statements.
U.S. generally accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to the Company's business involve many subjective assumptions, estimates and judgments by its management. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments by the Company's management could significantly change its reported or expected financial performance.
Other factors may negatively affect the Company’s business and results.
The foregoing list of risk factors is not exhaustive or exclusive. Other factors and unanticipated events could adversely affect the Company and its business and results. The Company does not undertake any obligation to revise any forward-looking statement to reflect events or circumstances that occur after the date the statement is made.
Item 1B. Unresolved Staff Comments
Not applicable.

14


Item 2. Properties
Customer Central and the Company’s distribution center are located on 54 acres in Indianapolis, Indiana. The facility consists of 142,000 square feet of office space and 647,000 square feet of warehouse space. The facility, which is owned by the Company, was designed and constructed to the Company’s specifications and includes automated conveyor and storage rack systems, a high speed shipping sorter, and a tilt-tray sortation system. The Company also leases 12,501 square feet of corporate office space for the Company’s digital team in Boulder, Colorado.
Store Locations
As of May 3, 2018, the Company operated 930 stores/shops in 47 U.S. states, the District of Columbia, Guam, and Puerto Rico. The brick and mortar stores and shops within department stores are primarily located in enclosed shopping malls. The following table sets forth information concerning the Company’s stores/shops as of May 3, 2018:
 
State

Finish Line

Branded shops
within
department stores

State

Finish Line

Branded shops
within
department stores
Alabama

8


2

Nebraska

3

 


Arizona

11


9

Nevada

5

 
5

Arkansas

6




New Hampshire

4

 
2

California

41


86

New Jersey

12

 
18

Colorado

12


4

New Mexico

3

 
1

Connecticut

8


8


New York

21

 
27

Delaware

1


1

North Carolina

14

 
3

Florida

43


27


North Dakota

2

 


Georgia

18


11

Ohio

35

 
12

Guam
 


 
1

 
Oklahoma
 
5

 
1

Hawaii
 


 
5

 
Oregon
 
1

 
6

Idaho




1

Pennsylvania

24

 
13

Illinois

31


13

Rhode Island

1

 
2

Indiana

22


6

South Carolina

8

 


Iowa

7




South Dakota

1

 


Kansas

4


2

Tennessee

14

 
5

Kentucky

8


2

Texas

58

 
24

Louisiana

6


3

Utah



 
1

Maine

1


1

Virginia

24

 
9

Maryland

17


11


Washington

7

 
18

Massachusetts

13


10


West Virginia

5

 


Michigan

17


8

Wisconsin

8

 
2

Minnesota

9


6

Wyoming

1

 


Mississippi

5




District of
Columbia



 
1

Missouri

8


6

Puerto Rico

3

 
2










 
 
 








555

 
375

Finish Line leases all of its stores. Initial lease terms for the Company’s stores are generally 10 years in duration without renewal options, although some of the stores are subject to leases for three to five years with one or more renewal options. The leases generally provide for a fixed minimum rental fee plus contingent rent, which is determined as a percentage of gross sales in excess of specified levels. Shops within department stores are operated under a license agreement based on a percentage of sales, which includes a guaranteed minimum license fee in fiscal years 2019 through 2023.

15


Item 3. Legal Proceedings
The Company is subject, from time to time, to certain legal proceedings and claims in the ordinary course of conducting its business. The Company establishes a liability related to its legal proceedings and claims when it has determined that it is probable that the Company has incurred a liability and the related amount can be reasonably estimated. If the Company determines that an obligation is reasonably possible, the Company will, if material, disclose the nature of the loss contingency and the estimated range of possible loss, or include a statement that no estimate of loss can be made. The Company believes there are no pending legal proceedings in which the Company is currently involved which will have a material adverse effect on the Company’s financial position, results of operations, or cash flows.
Item 4. Mine Safety Disclosures
Not applicable.

16


Item 4.5. Executive Officers of the Registrant
Executive officers of the Company are appointed by and serve at the discretion of the Company’s Board of Directors. The following table sets forth certain information regarding the Company’s executive officers as of May 3, 2018.
No executive officer of the Company has a “family relationship” with any director or other executive officer of the Company, as that term is defined for purposes of this disclosure requirement.

Name
 
Age
 
Position
 
Officer Since
Samuel M. Sato(1)
 
54
 
Chief Executive Officer and Director
 
2007
Melissa Greenwell(2)
 
51
 
Executive Vice President, Chief Operating Officer
 
2013
Edward W. Wilhelm(3)
 
59
 
Executive Vice President, Chief Financial Officer
 
2009
AJ Sutera(4)
 
52
 
Executive Vice President, Chief Information and Technology Officer
 
2016
John Hall(5)
 
53
 
Executive Vice President, Divisional President, Chief Merchandising Officer
 
2016
 _________________________
(1)
Mr. Sato has served as Chief Executive Officer of the Company since February 28, 2016 and as a Director since October 2014. Previously, Mr. Sato was the Company’s President, serving in such capacity since October 2014.
(2)
Ms. Greenwell has served as Executive Vice President, Chief Operating Officer of the Company since February 28, 2016. Previously, Ms. Greenwell was the Company’s Executive Vice President, Chief Human Resources Officer, serving in such capacity since June 2013.
(3)
Mr. Wilhelm has served as Executive Vice President, Chief Financial Officer of the Company since joining the Company in March 2009.
(4)
Mr. Sutera joined the Company as Executive Vice President, Chief Information and Technology Officer on March 16, 2016. Prior to joining the Company, Mr. Sutera held several senior leadership roles with Hudson’s Bay Company in support of a seamless omnichannel customer experience and key leadership positions at JetBlue Airways, Liberty Travel/GOGO Worldwide Vacations, and GlobalWorks Group LLC.
(5)
Mr. Hall has served as Divisional President, Executive Vice President, Chief Merchandising Officer since April 21, 2016. Prior to joining the Company, Mr. Hall was Vice President, Corporate Merchandiser of Rack Menswear at Nordstrom. During his almost 30 years at Nordstrom, he also served as Shoe Buyer, Vice President/National Merchandise Manager (men’s shoes), Vice President/Footwear Brand Manager (Nordstrom Product Group supporting men’s, women’s, and kids’ shoes), and Vice President/Corporate Merchandise Manager (kids’ shoes).



17


PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
The Company’s common stock is traded on the Nasdaq Global Select Market under the ticker symbol FINL.
The following table sets forth, for the periods indicated, the intra-day high and low sales prices of the Company’s common stock as reported by the Nasdaq Stock Market.
 
 
 
Fiscal 2018
 
Fiscal 2017
Quarter Ended
 
High
 
Low
 
High
 
Low
May
 
$
17.30

 
$
12.46

 
$
22.18

 
$
16.81

August
 
15.28

 
9.80

 
24.41

 
16.64

November
 
12.68

 
6.90

 
24.52

 
19.07

February
 
15.06

 
9.34

 
24.50

 
16.36

As of May 3, 2018, there were approximately 1,500 record holders of the Company’s common stock. The number of common stock record holders excludes the beneficial owners of shares held in “street” name or held through participants in depositories.
On January 17, 2018, the Company increased its quarterly cash dividend to $0.115 per share from $0.11 per share of the Company’s common stock. The Company declared dividends of $18.2 million, $17.0 million, and $16.5 million during fiscal 2018, 2017, and 2016, respectively. As of March 3, 2018 and February 25, 2017, dividends declared but not paid of $4.7 million and $4.5 million, respectively, were accrued in other liabilities and accrued expenses on the Company’s consolidated balance sheets. Further declarations of dividends remain at the discretion of the Company’s Board of Directors (the "Board").
On July 21, 2011, the Board authorized a share repurchase program to repurchase shares of the Company’s common stock with amendments on March 26, 2015 and July 13, 2016 authorizing further share repurchases through December 31, 2019 (the “Share Repurchase Program”). The Company repurchased 0.3 million shares of its common stock at an average price of $15.29 per share for an aggregate amount of $3.8 million in fiscal 2018. As of March 3, 2018, there were 4.5 million shares remaining available to repurchase under the Share Repurchase Program.
As of March 3, 2018, the Company held 19.4 million shares of its common stock as treasury shares at an average price of $20.59 per share for an aggregate carrying amount of $399.2 million. The Company’s treasury shares may be issued upon the exercise of employee stock options, under the Employee Stock Purchase Plan, in the form of restricted stock, or for other corporate purposes. The number of shares of common stock available for issuance upon the exercise of options and for awards of restricted stock and other awards is limited under The Finish Line, Inc. 2009 Incentive Plan Amended and Restated as of April 16, 2014 and further amended as of June 27 and July 14, 2016 (the “Amended and Restated 2009 Incentive Plan”). Further purchases will occur from time to time as market conditions warrant and as the Company deems appropriate when judged against other alternative uses of cash.
Details on the shares repurchased under the Share Repurchase Program during the fourteen weeks ended March 3, 2018 are as follows:
 
Period
 
Total Number of
Shares Purchased
 
Average Price
Paid per Share
 
Total Number of
Shares Purchased
as Part of Publicly
Announced
Plans or Programs
 
Maximum Number of 
Shares that May Yet Be Purchased Under the Program
November 26, 2017 – December 30, 2017
 

 
$

 

 
4,541,936

January 1, 2018 – February 3, 2018
 

 

 

 
4,541,936

February 4, 2018 – March 3, 2018
 

 

 

 
4,541,936

 
 

 
$

 

 
 

18


finl2018.jpg

19


Item 6. Selected Financial Data
 
 
Year Ended
 
 
March 3,
 
February 25,
 
February 27,
 
February 28,
 
March 1,
 
 
2018
 
2017
 
2016
 
2015
 
2014
 
 
(in thousands, except per share and store/shop data)
Statement of Operations Data(1):
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
1,838,956

 
$
1,844,393

 
$
1,798,982

 
$
1,750,707

 
$
1,620,231

Cost of sales (including occupancy costs)(a)
 
1,306,859

 
1,295,989

 
1,242,960

 
1,182,365

 
1,089,609

Gross profit
 
532,097

 
548,404

 
556,022

 
568,342

 
530,622

Selling, general, and administrative expenses(a)(b)
 
486,484

 
480,897

 
469,836

 
432,007

 
403,548

Impairment charges and store closing costs
 
36,691

 
13,312

 
43,637

 
2,030

 
2,767

Operating income
 
8,922

 
54,195

 
42,549

 
134,305

 
124,307

Interest (income) expense, net
 
(73
)
 
279

 
65

 
15

 
(37
)
Gain on sale of investment
 

 

 

 

 
1,038

Income from continuing operations before income taxes
 
8,995

 
53,916

 
42,484

 
134,290

 
125,382

Income tax (benefit) expense(c)
 
(5,719
)
 
18,760

 
13,562

 
45,191

 
47,663

Net income from continuing operations
 
14,714

 
35,156

 
28,922

 
89,099

 
77,719

Net loss from discontinued operations, net of tax
 
(304
)
 
(53,364
)
 
(7,126
)
 
(9,357
)
 
(2,667
)
Net income (loss)
 
14,410

 
(18,208
)
 
21,796

 
79,742

 
75,052

Net loss attributable to redeemable noncontrolling interest of discontinued operations
 

 

 
96

 
2,251

 
1,851

Net income (loss) attributable to The Finish Line, Inc.
 
$
14,410

 
$
(18,208
)
 
$
21,892

 
$
81,993

 
$
76,903

Earnings Per Share Data(1):
 
 
 
 
 
 
 
 
 
 
Basic earnings (loss) per share attributable to The Finish Line, Inc. shareholders:
 
 
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.36

 
$
0.86

 
$
0.64

 
$
1.86

 
$
1.59

Discontinued operations
 
(0.01
)
 
(1.31
)
 
(0.15
)
 
(0.15
)
 
(0.02
)
Basic earnings (loss) per share attributable to The Finish Line, Inc. shareholders
 
$
0.35

 
$
(0.45
)
 
$
0.49

 
$
1.71

 
$
1.57

 
 
 
 
 
 
 
 
 
 
 
Diluted earnings (loss) per share attributable to The Finish Line, Inc. shareholders:
 
 
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.36

 
$
0.85

 
$
0.64

 
$
1.85

 
$
1.58

Discontinued operations
 
(0.01
)
 
(1.29
)
 
(0.16
)
 
(0.15
)
 
(0.02
)
Diluted earnings (loss) per share attributable to The Finish Line, Inc. shareholders
 
$
0.35

 
$
(0.44
)
 
$
0.48

 
$
1.70

 
$
1.56

 
 
 
 
 
 
 
 
 
 
 
Dividends declared per share
 
$
0.445

 
$
0.41

 
$
0.37

 
$
0.33

 
$
0.29

Share Data:
 
 
 
 
 
 
 
 
 
 
Basic weighted-average shares
 
40,281

 
40,911

 
44,565

 
47,268

 
48,286

Diluted weighted-average shares(2)
 
40,339

 
41,367

 
44,787

 
47,658

 
48,701

Selected Store Operating Data:
 
 
 
 
 
 
 
 
 
 
Number of stores/shops
 
 
 
 
 
 
 
 
 
 
Opened during year
 
7

 
7

 
9

 
223

 
205

Closed during year
 
(23
)
 
(43
)
 
(58
)
 
(21
)
 
(23
)
Open at end of year
 
931

 
947

 
983

 
1,032

 
830

Total square feet(3)
 
3,652,183

 
3,714,228

 
3,754,572

 
3,875,969

 
3,737,550

Average square feet per store/shop(3)
 
3,923

 
3,922

 
3,820

 
3,756

 
4,503

Net sales per square foot for brick and mortar comparable stores(4)(5)
 
$
368

 
$
372

 
$
369

 
$
368

 
$
366

(Decrease) increase in Finish Line comparable sales(5)(6)
 
(3.9
)%
 
0.3
%
 
1.8
%
 
3.2
%
 
4.2
%
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
Working capital
 
$
291,567

 
$
269,439

 
$
347,533

 
$
320,266

 
$
362,297

Total assets
 
$
675,032

 
$
746,468

 
$
817,548

 
$
783,128

 
$
769,095

Total debt
 
$

 
$

 
$

 
$

 
$

Shareholders’ equity
 
$
450,990

 
$
451,498

 
$
527,644

 
$
589,644

 
$
582,184

____________________ 
(1)
Fiscal 2018 includes 53 weeks versus 52 weeks in all other years presented.
(2)
Consists of weighted-average common and common equivalent shares outstanding for the fiscal year.
(3)
Computed as of the end of each fiscal year.
(4)
Calculation includes all brick and mortar stores that were open as of the end of each fiscal year and that were open more than one year. Accordingly, stores opened, closed, or expanded during the fiscal year were not included. Temporarily closed stores are excluded during the months that the store was closed. Calculation excludes digital sales.
(5)
Shops within department stores are not included in this calculation.
(6)
Calculation includes all brick and mortar stores that were open as of the end of each fiscal year and that were open more than one year. Accordingly, stores opened, closed, or expanded during the fiscal year were not included. Temporarily closed stores are excluded during the months that the store was closed. Calculation includes digital sales.

(a)
Fiscal 2014 cost of sales includes $5.8 million in start-up costs related to inventory reserves established for inventory purchased from Macy’s. Fiscal 2014 selling, general, and administrative expenses includes $2.2 million in start-up costs associated with shipping and handling for the initial inventory takeover and assortment of Macy’s athletic footwear.
(b)
Fiscal 2017 and 2016 include $3.7 million and $3.6 million, respectively in employee severance and retirement costs.
(c)
Fiscal 2018 includes a provisional $10.1 million benefit resulting from the enactment of the Tax Cuts and Jobs Act due to the re-measurement of the Company’s deferred tax assets and liabilities (as discussed in Item 8. Financial Statement and Supplementary Information, Note 7, Income Taxes). Fiscal 2015 includes a $4.3 million income tax benefit for a worthless stock deduction with respect to the Company’s wholly-owned subsidiary, The Finish Line MA, Inc.


20


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The Finish Line, Inc., together with its subsidiaries (collectively, the “Company”), is one of the largest specialty retailers in the United States. The Company’s goal is to offer the most relevant products from the best brands in an engaging and exciting shopping environment with knowledgeable staff trained to deliver outstanding customer service. On February 24, 2017, the Company completed the sale of its JackRabbit division to a third party and as a result, has classified JackRabbit’s balance sheet and operating results within discontinued operations.
Finish Line is a premium retailer of athletic shoes, apparel, and accessories. As of May 3, 2018, the Company operated 555 Finish Line stores, which averaged 5,611 square feet, in 44 U.S. states and Puerto Rico. In addition, Finish Line operates an e-commerce site, www.finishline.com, as well as mobile commerce via m.finishline.com. Finish Line carries a large selection of men’s, women’s, and kids’ athletic shoes (“footwear”), as well as an assortment of apparel and accessories (“softgoods”). Brand names offered by Finish Line include Nike, Brand Jordan, adidas, Under Armour, Puma, and many others. Footwear accounted for 94% of Finish Line’s net sales during fiscal 2018.
Under the Finish Line brand, the Company is the exclusive retailer of athletic shoes, both in-store and online, for Macy’s Retail Holdings, Inc., Macy’s Puerto Rico, Inc., and Macys.com, Inc. (collectively, “Macy’s”). The Company is responsible for the athletic footwear assortment, inventory, fulfillment, and pricing at all of Macy’s locations and online at www.macys.com. The Company operates branded and unbranded shops in-store at Macy’s. Branded shops include Finish Line signage within those shops and are generally staffed by Finish Line employees, while unbranded shops do not include Finish Line signage and are exclusively serviced by Macy’s employees. There are no differences in the merchandise that is sold, the classification of revenue recorded at retail, or the Company’s operation of the athletic footwear inventory and business between branded and unbranded shops and www.macys.com. As of May 3, 2018, the Company operated Finish Line-branded shops in 375 Macy’s department stores, which averaged 1,432 square feet, in 39 U.S. states, the District of Columbia, Puerto Rico, and Guam. Throughout this Annual Report on Form 10-K, the term “shops within department stores” is used to describe the Company’s business operations at Macy’s in-store branded and unbranded shops, as well as online at www.macys.com. Shops within department stores carry men’s, women’s, and kids’ athletic shoes, as well as a small assortment of accessories. Brand names offered by shops within department stores include Nike, Skechers, Converse, Puma, New Balance, adidas, and many others.
Proposed Merger with JD Sports Fashion Plc
On March 25, 2018, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with JD Sports Fashion Plc, a company incorporated under the laws of England and Wales (“JD Sports”), and Genesis Merger Sub, Inc., an Indiana corporation and an indirect wholly-owned indirect subsidiary of JD Sports (“Merger Sub”). Pursuant to the Merger Agreement, and subject to the terms and conditions thereof, Merger Sub will merge with and into the Company (the “Merger), with the Company surviving the Merger as an indirect wholly-owned subsidiary of JD Sports. At the effective time of the Merger, each issued and outstanding class A Common Share, no par value, of the Company (“Company Common Shares”) (other than shares held by the Company in treasury or owned by any subsidiary of the Company, JD Sports, Merger Sub, or any other subsidiary of JD Sports) will automatically be converted into the right to receive $13.50 in cash (the “Merger Consideration”). In addition, at the effective time of the Merger, all outstanding and unexercised Company stock options (whether vested or unvested) granted under the Company’s 2002 Stock Incentive Plan, as amended, and Amended and Restated 2009 Incentive Plan, as amended, will be cancelled and JD Sports, or the surviving corporation, will pay the holder of each such option an amount in cash (without interest) equal to the product of (x) the excess, if any, of the Merger Consideration over the exercise price per share of the Company Common Shares underlying such option, and (y) the number of Company Common Shares subject to the option (net of withholding taxes and rounded down to the nearest cent). Each award of Company restricted stock that is outstanding and unvested immediately prior to the effective time of the Merger will become fully vested and free of forfeiture restrictions immediately prior to the effective time, and each such share of restricted stock will be converted into the right to receive the Merger Consideration (net of withholding taxes).
The closing of the transaction is subject to the receipt of any required regulatory approvals, the approvals of the Company’s and JD Sports’ shareholders and the satisfaction of other customary closing conditions. The Merger is expected to close as soon as practicable after the satisfaction or waiver of all the conditions to the closing in the Merger Agreement, which is currently expected to be in the late second quarter of calendar year 2018, although delays may occur.
The payment of the Merger Consideration will be funded in part, through debt financing that has been committed to JD Sports by Barclays Bank PLC, HSBC Bank plc, PNC Bank, National Association, and PNC Capital Markets LLC. The Merger Agreement does not contain a financing condition.
The Merger Agreement contains certain termination rights in favor of the parties, as set forth therein, including, among other things, the right of either party, subject to specified limitations, to terminate the Merger Agreement if the Merger is not

21


consummated by September 25, 2018. Upon the termination of the Merger Agreement, under specified circumstances, the Company may be required to pay JD Sports a termination fee of $28 million. In addition, if the Merger Agreement is terminated in certain other circumstances, then the Company must pay JD Sports its reasonable and documented out-of-pocket fees and expenses incurred in connection with the Merger and related transactions, as well as JD Sports’ fees and expenses in connection with JD Sports’ financing of the transaction, in an aggregate amount up to $5.6 million. Any fees and expenses paid by the Company will be credited against any termination fee that may become due and payable.
Additional information about the Merger is set forth in the Company’s filings with the U.S. Securities and Exchange Commission.
Critical Accounting Policies
Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The preparation of these financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, the Company evaluates these estimates. 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 judgments 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 the more significant judgments and estimates used in the preparation of its consolidated financial statements.
Cost of Sales. Cost of sales includes the cost associated with acquiring merchandise from suppliers, occupancy costs, license fees, provision for inventory shortages, and credits and allowances from the Company's merchandise suppliers. Cash consideration received from merchandise suppliers after the related merchandise has been sold is recorded as an offset to cost of sales in the period negotiations are finalized. For cash consideration received on merchandise still in inventory, the allowance is recorded as a reduction to the cost of on-hand inventory and recorded as a reduction of cost of sales at the time of sale.
Because the Company does not include the costs associated with operating its distribution center and freight within cost of sales, the Company’s gross profit may not be comparable to those of other retailers that may include all such costs related to their distribution centers and freight in cost of sales and in the calculation of gross profit.
Valuation of Inventories. Merchandise inventories are valued at the lower of cost or market using a weighted-average cost method. The Company’s valuation of merchandise inventory includes markdown adjustments for merchandise that will be sold below cost and the impact of inventory shrink. Markdowns are based upon historical information and assumptions about future demand and market conditions. Inventory shrink is based on historical information and assumptions about current inventory shrink trends. Supplier rebates are applied as a reduction to the cost of merchandise inventories. It is possible that changes to the markdowns and inventory shrink estimates could be required in future periods due to changes in market conditions.
Valuation of Property and Equipment and Software Development Costs. The Company reviews its property and equipment and software development costs for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to the estimated future undiscounted cash flows expected to be generated by the asset. If an asset is considered to be impaired, the impairment recognized is measured by comparing projected discounted cash flows to the asset’s carrying value. 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.
Operating Leases. The Company leases retail stores under non-cancelable operating leases, which generally have lease terms ranging from one to ten years. Most of these lease arrangements do not provide for renewal periods; however, management expects that in the normal course of business, expiring leases will generally be renewed or, upon making a decision to relocate, replaced by leases at other premises. The Company recognizes rent expense for minimum operating lease payments on a straight-line basis over the expected lease term, including rent holidays, rent escalation clauses, and/or cancelable option periods where failure to exercise such options would result in an economic penalty. In addition, the commencement date of the lease term is the earlier of the date when the Company becomes legally obligated for the rent payments or the date when the Company takes possession of the leased space for build-out.

22


Certain leases provide for contingent rents and/or license fees, which are determined as a percentage of gross sales in excess of specified levels. The Company records a contingent rent liability in other liabilities and accrued expenses on the consolidated balance sheets and the corresponding rent expense when specified levels have been achieved or when management determines that achieving the specified levels during the fiscal year is probable.
Income Taxes. The Company accounts for income taxes under the asset and liability method. Under this method, the amount of taxes currently payable or refundable are accrued and deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets are also recognized for realizable loss and tax credit carryforwards. The deferred tax assets may be reduced by a valuation allowance, which is established when it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. In addition, management is required to evaluate all available evidence, including estimating future taxable income by taxing jurisdictions, the future reversal of temporary differences, tax planning strategies, and recent results of operations, when making its judgment to determine whether or not to record a valuation allowance for a portion, or all, of its deferred tax assets. Deferred tax assets and liabilities are measured using enacted income tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in income tax rates is recognized in the Company’s consolidated statements of operations in the period that includes the enactment date.
The Company calculates an annual effective income tax rate based on annual income, permanent differences between book and tax income, and statutory income tax rates. The Company adjusts the annual effective income tax rate as additional information on outcomes or events becomes available. The Company’s effective income tax rate is affected by changes in tax law (such as the Tax Cuts and Jobs Act), the tax jurisdiction of new stores/shops or business ventures, the level of earnings or losses, the results of tax audits, permanent tax deductions and credits, the level of investment income, and other items.
The Company’s income tax returns, like those of most companies, are periodically audited by tax authorities. These audits include questions regarding the Company’s tax filing positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. At any one time, multiple tax years are subject to audit by the various tax authorities. The Company accounts for uncertainty in income taxes using a two-step approach for evaluating income tax positions. The first step requires the Company to conclude that a tax position, based solely on its technical merits, is more likely than not to be sustained upon examination by a tax authority. The second step applies if the Company has concluded that the tax position is more likely than not to be sustained upon examination and requires the Company to measure the largest amount of benefit, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement. The Company adjusts its accrual for uncertain tax positions and income tax provision in the period in which matters are effectively settled with tax authorities at amounts different from its established accrual, the statute of limitations expires for the relevant taxing authority to examine the tax position, new court cases, regulations, or rulings are issued, or when more or new information becomes available. The Company includes its accrual for uncertain tax positions, including accrued penalties and interest, in other long-term liabilities on the consolidated balance sheets unless the liability is expected to be paid within one year. Changes to the accrual for uncertain tax positions, including accrued penalties and interest, are included in income tax expense in the consolidated statements of operations.
Recent Accounting Pronouncements. In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance on revenue from contracts with customers and has subsequently issued several amendments which clarify the guidance as well as provide guidance for implementation. The guidance outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The guidance requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. The guidance is effective for annual or interim reporting periods beginning after December 15, 2017. The Company finalized its assessment of the new guidance, which it adopted on March 4, 2018, using a modified retrospective transition approach. The Company has determined that the new guidance will result in a net cumulative-effect adjustment to decrease beginning retained earnings as of the date of adoption, primarily due to a change in how the Company accounts for its loyalty program. The Company has determined that the adoption of the guidance will result in the following additional impacts:
Estimated costs of returns will be recorded as a current asset rather than netted within other liabilities and accrued expenses and;
Change from the cost deferral accounting method to the revenue deferral accounting method to record the Company’s unredeemed awards related to its customer loyalty program.

23


The impacts from the adoption of this guidance, including the net cumulative-effect adjustment, did not have a material impact on the Company’s consolidated results of operations, financial position, or cash flows.
In February 2016, the FASB issued guidance on accounting for leases. A primary purpose of the guidance is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Specifically, lessees will be required to recognize the rights and obligations resulting from leases classified as operating leases as assets and liabilities. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and requires a modified retrospective adoption, with early adoption permitted. The Company does not expect to adopt this guidance until it is required and is currently assessing the impact of adopting this guidance and its potential impact to its consolidated results of operations, financial position, cash flows, and related disclosures. The Company expects the guidance to have a material impact due to the significant number of store leases that the Company has under contract.
Other recently issued accounting pronouncements did not, or are not believed by management to have a material effect on the Company’s present or future consolidated financial statements.
Recently Adopted Accounting Pronouncements. In July 2015, the FASB issued guidance on simplifying the measurement of inventory. The guidance, which applies to inventory that is measured using any method other than the last-in, first-out (“LIFO”) or retail inventory method, requires that entities measure inventory at the lower of cost or net realizable value. The Company adopted the provisions of this guidance prospectively on February 26, 2017. The adoption of this guidance did not have a material impact on the Company’s consolidated results of operations, financial position, or cash flows.
In March 2016, the FASB issued guidance on simplifying several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows, and accounting for forfeitures. The Company adopted the provisions of this guidance on February 26, 2017. The impact of the adoption resulted in the following:
Excess tax benefits (deficiencies) resulting from share-based compensation are now recorded within income tax expense when the awards vest or are settled, rather than within equity. Additionally, excess tax benefits are now excluded from assumed future proceeds in the Company’s calculation of diluted shares for purposes of determining diluted earnings per share. The prospective adoption of this provision did not have a material effect on the Company’s consolidated results of operations, financial position, or cash flows. The Company recorded excess tax deficiencies related to share-based compensation of approximately $1.4 million in fiscal 2018 to income tax expense, whereas such expense previously would have been recorded in equity. In addition, the Company recorded approximately $0.1 million of previously unrecognized tax benefits as a cumulative-effect adjustment to beginning retained earnings.
The Company elected to continue to expense share-based awards based on awards ultimately expected to vest, which requires the Company to continue to estimate forfeitures on the date of their grant.
Excess tax benefits from share-based compensation arrangements are classified as cash flows from operations, rather than as cash flows from financing activities. The Company adopted this change retrospectively, which resulted in an increase of $0.5 million and $0.3 million to net cash provided by operating activities and an increase of $0.5 million and $0.3 million in cash flows used in financing activities for fiscal 2017 and 2016, respectively.

24


General
The following discussion and analysis should be read in conjunction with the information included in Item 6, Selected Financial Data and Item 8, Financial Statements and Supplementary Data.
The Company uses a “Retail” calendar. The Company’s fiscal year ends on the Saturday closest to the last day of February and included 53 weeks in fiscal 2018 and 52 weeks in fiscal 2017 and 2016.
The Company is a premium retailer of athletic shoes, apparel, and accessories for men, women, and kids, throughout the United States, Guam, and Puerto Rico, through multiple operating segments.
Brick and mortar comparable sales are sales from Finish Line stores open longer than one year, beginning in the thirteenth month of a store’s operation. Expanded stores are excluded from the brick and mortar comparable sales calculation until the thirteenth month following the re-opening of the store and temporarily closed stores are excluded during the months that the store is closed. Brick and mortar comparable sales do not include sales from shops within department stores.
Digital comparable sales are the change in sales year over year for the reporting period derived from finishline.com and m.finishline.com.
Finish Line comparable sales is the aggregation of brick and mortar comparable sales and digital comparable sales.
Shops within department stores comparable sales are the change in sales year over year for the reporting periods presented from branded shops within department stores open longer than one year, including e-commerce sales, beginning in the thirteenth month of a shop’s operation. Expanded shops are excluded from the shops within department stores comparable sales calculation until the thirteenth month following the re-opening of the shop and temporarily closed shops are excluded during the months that the shop is closed. Additionally, non-branded shops are excluded from the shops within department stores comparable sales calculation.
The following tables set forth store/shop and square feet information of the Company for each of the following fiscal years:
 
 
 
Year Ended
Number of stores/shops
 
March 3, 2018
 
February 25, 2017
Finish Line:
 
 
 
 
Beginning of year
 
573

 
591

Opened
 
3

 
6

Closed
 
(20
)
 
(24
)
End of year
 
556

 
573

Branded shops within department stores:
 
 
 
 
Beginning of year
 
374

 
392

Opened
 
4

 
1

Closed
 
(3
)
 
(19
)
End of year
 
375

 
374

Total:
 
 
 
 
Beginning of year
 
947

 
983

Opened
 
7

 
7

Closed
 
(23
)
 
(43
)
End of year
 
931

 
947

 

25


Square feet information
 
March 3, 2018
 
February 25, 2017
Finish Line:
 
 
 
 
Square feet
 
3,115,153

 
3,187,942

Average store size
 
5,603

 
5,564

Branded shops within department stores:
 
 
 
 
Square feet
 
537,030

 
526,286

Average shop size
 
1,432

 
1,407

Total:
 
 
 
 
Square feet
 
3,652,183

 
3,714,228

Results of Operations
The following table sets forth net sales of the Company by major category for each of the following fiscal years (in thousands):
 
 
 
Year Ended
Category
 
March 3, 2018
 
February 25, 2017
 
February 27, 2016
Footwear
 
$
1,721,020

 
94
%
 
$
1,715,348

 
93
%
 
$
1,619,002

 
90
%
Softgoods
 
117,936

 
6
%
 
129,045

 
7
%
 
179,980

 
10
%
Total net sales
 
$
1,838,956

 
100
%
 
$
1,844,393

 
100
%
 
$
1,798,982

 
100
%
The following table and subsequent discussion set forth operating data of the Company as a percentage of net sales for the fiscal years indicated below:
 
 
 
Year Ended
 
 
March 3, 2018
 
February 25, 2017
 
February 27, 2016
Income Statement Data:
 
 
 
 
 
 
Net sales
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of sales (including occupancy costs)
 
71.1

 
70.3

 
69.1

Gross profit
 
28.9

 
29.7

 
30.9

Selling, general, and administrative expenses
 
26.4

 
26.1

 
26.1

Impairment charges and store closing costs
 
2.0

 
0.7

 
2.4

Operating income
 
0.5

 
2.9

 
2.4

Interest (income) expense, net
 

 

 

Income from continuing operations before income taxes
 
0.5

 
2.9

 
2.4

Income tax (benefit) expense
 
(0.3
)
 
1.0

 
0.8

Net income from continuing operations
 
0.8

 
1.9

 
1.6

Net loss from discontinued operations
 

 
(2.9
)
 
(0.4
)
Net income (loss)
 
0.8
 %
 
(1.0
)%
 
1.2
 %


26


Fifty-Three Weeks Ended March 3, 2018 Compared to the Fifty-Two Weeks Ended February 25, 2017
Net Sales
 
 
 
Year Ended
 
 
March 3, 2018
 
February 25, 2017
 
 
(dollars in thousands)
Brick and mortar stores sales
 
$
1,162,469

 
$
1,196,927

Digital sales
 
331,672

 
326,752

Shops within department stores sales
 
344,815

 
320,714

Total net sales
 
$
1,838,956

 
$
1,844,393

 
 
 
 
 
Brick and mortar comparable sales decrease
 
(4.8
)%
 
(2.4
)%
Digital comparable sales (decrease) increase
 
(0.6
)%
 
11.4
 %
Finish Line comparable sales (decrease) increase
 
(3.9
)%
 
0.3
 %
Shops within department stores comparable sales increase
 
6.9
 %
 
33.0
 %
Net sales decreased 0.3% in fiscal 2018 as compared to fiscal 2017, which was primarily due to the following:
A decrease in Finish Line net sales (composed of brick and mortar net sales and digital net sales) of 1.9%, primarily due to a Finish Line comparable sales decrease of 3.9%, as well as a decrease in net Finish Line store count as compared to the prior year, partially offset by an additional 7 days of sales in fiscal 2018 that resulted in additional sales of $40.0 million.
An increase in shops within department store net sales of 7.5%, primarily due to an increase in shops within department stores comparable sales and an additional 7 days of sales in fiscal 2018 that resulted in additional sales of $5.5 million, partially offset by a decrease in non-branded shop net sales.

Consolidated footwear sales increased 0.3% in fiscal 2018 as compared to fiscal 2017, which was primarily driven by a kids’ footwear net sales increase in the mid-single digits and a men's footwear net sales increase in the low-single digits, partially offset by a women’s footwear net sales decrease in the mid-single digits. Consolidated softgoods net sales decreased 8.6% in fiscal 2018 as compared to fiscal 2017, as the Company narrowed its assortments to align its offering with customer demand.
Cost of Sales (Including Occupancy Costs) and Gross Profit
 
 
 
Year Ended
 
 
March 3, 2018
 
February 25, 2017
 
 
(dollars in thousands)
Cost of sales (including occupancy costs)
 
$
1,306,859

 
$
1,295,989

Gross profit
 
$
532,097

 
$
548,404

Gross profit as a percentage of net sales
 
28.9
%
 
29.7
%
Gross profit, as a percentage of net sales, decreased 0.8% in fiscal 2018 as compared to fiscal 2017, which was primarily due to a 0.9% decrease in product margin, partially offset by a 0.1% decrease in occupancy costs, as a percentage of net sales. The 0.9% decrease in product margin, as a percentage of net sales, was primarily due to increased markdown cadence to be competitive in a highly promotional environment and to clear slow moving merchandise as compared to the prior year. The 0.1% decrease in occupancy costs, as a percentage of net sales, was primarily due to exiting unprofitable lease locations.

27


Selling, General, and Administrative Expenses
 
 
 
Year Ended
 
 
March 3, 2018
 
February 25, 2017
 
 
(dollars in thousands)
Selling, general, and administrative expenses
 
$
486,484

 
$
480,897

Selling, general, and administrative expenses as a percentage of net sales
 
26.4
%
 
26.1
%
Selling, general, and administrative expenses increased $5.6 million in fiscal 2018 as compared to fiscal 2017, which was primarily due to the following: an increase in variable costs due to the extra week in fiscal 2018 as well as other variable costs such as Macys.com license fees, in conjunction with the 7.5% increase in shops within department store net sales, and employee compensation costs and supply chain expenses, an increase in costs due to the Company's continued investment in its digital business and an increase in depreciation and amortization expense of $3.5 million, partially offset by a decrease in marketing, credit card costs, and severance and related benefits due to a reduction in workforce in fiscal 2017.
Impairment Charges and Store Closing Costs
 
 
 
Year Ended
 
 
March 3, 2018
 
February 25, 2017
 
 
(dollars in thousands)
Impairment charges and store closing costs
 
$
36,691

 
$
13,312

Impairment charges and store closing costs as a percentage of net sales
 
2.0
%
 
0.7
%
Number of stores/shops closed
 
23

 
43

The $36.7 million in impairment charges and store closing costs recorded during fiscal 2018 were primarily the result of a $13.5 million write-off of technology assets related to enterprise-wide systems infrastructure, as the Company determined the systems were no longer going to be utilized, an $11.6 million write-off of long-lived assets of underperforming stores, and an $11.1 million write-off of obsolete store fixtures and corporate assets. The asset impairment charges were calculated as the difference between the carrying amount of the impaired assets and their estimated future discounted cash flows. Additionally, the Company recorded $0.4 million in store closing costs during fiscal 2018, which represents the non-cash write-off of fixtures and equipment upon a store/shop closing.
The $13.3 million in impairment charges and store closing costs recorded during fiscal 2017 were primarily the result of an $11.5 million write-off of long-lived assets of underperforming stores and a $1.0 million write-off of obsolete store fixtures and corporate assets. The asset impairment charges were calculated as the difference between the carrying amount of the impaired assets and their estimated future discounted cash flows. Additionally, the Company recorded $0.8 million in store closing costs during fiscal 2017.
Interest (Income) Expense, Net
 
 
 
Year Ended
 
 
March 3, 2018
 
February 25, 2017
 
 
(dollars in thousands)
Interest (income) expense, net
 
$
(73
)
 
$
279

Interest (income) expense, net as a percentage of net sales
 
%
 
%
Interest income is earned on the Company’s investments and interest expense is incurred on money borrowed, the unused commitment fee, and letter of credit fees related to the Company’s Amended and Restated Revolving Credit Facility Credit Agreement.

28


Income Tax (Benefit) Expense
 
 
 
Year Ended
 
 
March 3, 2018
 
February 25, 2017
 
 
(dollars in thousands)
Income tax (benefit) expense
 
$
(5,719
)
 
$
18,760

Income tax (benefit) expense as a percentage of net sales
 
(0.3
)%
 
1.0
%
Effective income tax rate
 
(63.6
)%
 
34.8
%
The decrease in the effective tax rate in fiscal 2018 as compared to fiscal 2017 was primarily due to the re-measurement of the net deferred tax liability as a result of the enactment of the Tax Cuts and Jobs Act (“the Tax Act”) on December 22, 2017, which resulted in an income tax benefit of $10.1 million. Among numerous other provisions, the Tax Act significantly revises the U.S. federal income tax by reducing the statutory rate from 35% to 21% effective January 1, 2018. The Tax Act also revises the tax laws that will affect fiscal 2019, including, but not limited to, eliminating the performance pay exceptions related to certain deductions for executive compensation and limiting the deduction for interest. The Company has reasonably estimated the effects of the Tax Act and recorded provisional amounts in its consolidated financial statements as of and for the fiscal year ended March 3, 2018. For fiscal 2018, the reduction in the tax rate effective January 1, 2018 resulted in a pro-rated current year statutory tax rate of 32.6%. The re-measurement of the Company’s deferred tax liability takes into account the change in the statutory tax rate and the impact associated with the future limitations on the deduction for executive compensation. The Company has calculated its best estimates of the impact of the Tax Act, however, the estimate may be impacted further as it analyzes available tax accounting methods and elections, state tax conformity to the federal tax changes, changes in estimates that may result from finalizing the filing of its fiscal 2018 U.S. income tax return and other guidance issued by the regulatory bodies that provide interpretations of the Tax Act, which may materially impact the Company’s provision for income taxes in the period in which the adjustments are recorded.
Net Income from Continuing Operations
 
 
Year Ended
 
 
March 3, 2018
 
February 25, 2017
 
 
(dollars in thousands)
Net income from continuing operations
 
$
14,714

 
$
35,156

Net income from continuing operations as a percentage of net sales
 
0.8
%
 
1.9
%
Diluted earnings per share attributable to The Finish Line, Inc. from continuing operations
 
$
0.36

 
$
0.85

Net income from continuing operations decreased $20.4 million in fiscal 2018 as compared to fiscal 2017, which was primarily due to the decrease in gross profit, increase in impairment charges and store closing costs, and an increase in selling, general, and administrative expenses, partially offset by a decrease in income tax expense as discussed above.
Net Loss from Discontinued Operations, Net of Tax
 
 
Year Ended
 
 
March 3, 2018
 
February 25, 2017
 
 
(dollars in thousands)
Net loss from discontinued operations, net of tax
 
$
(304
)
 
$
(53,364
)
Net loss from discontinued operations as a percentage of net sales
 
%
 
(2.9
)%
Diluted loss per share attributable to The Finish Line, Inc. from discontinued operations
 
$
(0.01
)
 
$
(1.29
)
Net loss from discontinued operations during fiscal 2018 includes a working capital adjustment which increased the purchase price by $1.0 million, offset by certain one-time benefits that were associated with the JackRabbit division and the associated income tax expense.

29


The $53.4 million in net loss from discontinued operations during fiscal 2017 represents the net operating losses and the loss on the sale of JackRabbit and the associated income tax benefit. On February 24, 2017, the Company completed the sale of its JackRabbit division to affiliates of CriticalPoint Capital, LLC (the “Buyers”). The transaction took the form of a sale by the Company of its entire membership interest in its affiliated company, which owns JackRabbit, and a payment of $10.1 million (which does not include the working capital adjustment discussed above), of which $1.8 million was held back and was payable as of February 25, 2017 based on certain conditions that need to be met by the Buyers. The Company recorded a loss on sale of $33.5 million in fiscal 2017, which represented the total cash payments to the Buyers of $10.1 million, net assets assumed by the Buyers of $18.3 million, and one-time costs of approximately $5.1 million associated with the transaction (prior to any adjustments recorded to the one-time costs in fiscal 2018).

The following table presents key financial results of JackRabbit for each of the following fiscal years:
 
 
Year Ended
 
 
March 3, 2018
 
February 25, 2017
 
 
(in thousands)
Net sales
 
$

 
$
89,739

Cost of sales (including occupancy costs)
 

 
68,495

Gross profit
 

 
21,244

Selling, general, and administrative
 

 
30,488

Impairment charges and store closing costs
 

 
44,202

Loss on sale of discontinued operations
 
483

 
33,500

Loss from discontinued operations before income tax benefit
 
(483
)
 
(86,946
)
Income tax benefit
 
179

 
33,582

Net loss from discontinued operations, net of tax
 
$
(304
)
 
$
(53,364
)
During fiscal 2017, the Company determined that it was more likely than not that the fair value of JackRabbit was less than its carrying value, and upon completion of an impairment analysis, that goodwill was impaired during the Company’s third fiscal quarter. The decrease in JackRabbit’s fair value from the Company’s prior year impairment analysis was the result of preliminary indications of interest for JackRabbit that indicated that the fair value was below its carrying value. Fair value of the JackRabbit reporting unit was determined using preliminary bids from interested parties. As a result of the second step of the goodwill impairment test, JackRabbit’s goodwill had no implied fair value and was written down to zero. This resulted in a pretax non-cash goodwill impairment charge of $44.0 million that is reflected in asset impairment charges in discontinued operations for the year ended February 25, 2017.

30


Fifty-Two Weeks Ended February 25, 2017 Compared to the Fifty-Two Weeks Ended February 27, 2016

Net Sales
 
 
 
Year Ended
 
 
February 25, 2017
 
February 27, 2016
 
 
(dollars in thousands)
Brick and mortar stores sales
 
$
1,196,927

 
$
1,258,405

Digital sales
 
326,752

 
293,228

Shops within department stores sales
 
320,714

 
247,349

Total net sales
 
$
1,844,393

 
$
1,798,982

 
 
 
 
 
Brick and mortar comparable sales decrease
 
(2.4
)%
 
(0.8
)%
Digital comparable sales increase
 
11.4
 %
 
14.5
 %
Finish Line comparable sales increase
 
0.3
 %
 
1.8
 %
Shops within department stores comparable sales increase
 
33.0
 %
 
N/A

Net sales increased 2.5% in fiscal 2017 as compared to fiscal 2016, which was primarily due to the following:
An increase in shops within department store net sales of 29.7%, primarily due to an increase in shops within department stores comparable sales as a result of the repositioning and expansion of 152 branded shops during fiscal 2017 and 2016, partially offset by a decrease in non-branded shop net sales.
A decrease in Finish Line net sales (composed of brick and mortar net sales and digital net sales) of 1.8%, primarily due to a net decrease in Finish Line store count as compared to the prior year, partially offset by an increase of 0.3% Finish Line comparable sales, which was due to an increase in brick and mortar and digital average dollar per transaction and digital traffic, partially offset by a decrease in brick and mortar and digital conversion and brick and mortar traffic in fiscal 2017 as compared to fiscal 2016.
Consolidated footwear sales increased 6.0% in fiscal 2017 as compared to fiscal 2016, which was primarily driven by percentage increases in the low-single digits in men’s and kids’ and low teens in women’s footwear sales. Consolidated softgoods sales decreased 28.3% in fiscal 2017 as compared to fiscal 2016 primarily due to exiting the promotional NCAA licensed fleece program in 2017, as well as the Company’s focus on a more narrow and deeper assortment to drive a more profitable softgoods business.
Cost of Sales (Including Occupancy Costs) and Gross Profit
 
 
 
Year Ended
 
 
February 25, 2017
 
February 27, 2016
 
 
(dollars in thousands)
Cost of sales (including occupancy costs)
 
$
1,295,989

 
$
1,242,960

Gross profit
 
$
548,404

 
$
556,022

Gross profit as a percentage of net sales
 
29.7
%
 
30.9
%

Gross profit, as a percentage of net sales, decreased 1.2% in fiscal 2017 as compared to fiscal 2016, which was primarily due to a 1.0% decrease in product margin and a 0.2% increase in occupancy costs, as a percentage of net sales. The 1.0% decrease in product margin, as a percentage of net sales, was primarily due to being more promotional than the prior year primarily during the holiday season through the end of the year, which caused a decrease in product margins in the current year as compared to the prior year. The 0.2% increase in occupancy costs, as a percentage of net sales, was primarily due to deleveraging against the Finish Line comparable sales increase.

31


Selling, General, and Administrative Expenses
 
 
 
Year Ended
 
 
February 25, 2017
 
February 27, 2016
 
 
(dollars in thousands)
Selling, general, and administrative expenses
 
$
480,897

 
$
469,836

Selling, general, and administrative expenses as a percentage of net sales
 
26.1
%
 
26.1
%
Selling, general, and administrative expenses increased $11.1 million in fiscal 2017 in comparison to fiscal 2016, which was primarily due to the following: (1) an increase in depreciation expense of $7.2 million, or 14.6%, which was primarily due to the replacement of the Company’s warehouse and order management system in the third quarter of fiscal 2016, the Company’s new store design initiative, and the website platform replacement in fiscal 2017; (2) incremental costs of $3.7 million for severance and related benefits due to a reduction in workforce; (3) incremental credit costs due to credit cards; (4) incremental costs related to the implementation of the Company’s new payroll software; and (5) increase in variable costs such as Macys.com license fees, in conjunction with the 29.7% increase in shops within department store net sales.
 Impairment Charges and Store Closing Costs
 
 
 
Year Ended
 
 
February 25, 2017
 
February 27, 2016
 
 
(dollars in thousands)
Impairment charges and store closing costs
 
$
13,312

 
$
43,637

Impairment charges and store closing costs as a percentage of net sales
 
0.7
%
 
2.4
%
Number of stores/shops closed
 
43

 
58

The $13.3 million in impairment charges and store closing costs recorded during fiscal 2017 were primarily the result of an $11.5 million write-off of long-lived assets of underperforming stores and a $1.0 million write-off of obsolete store fixtures and corporate assets. The asset impairment charges were calculated as the difference between the carrying amount of the impaired assets and their estimated future discounted cash flows. Additionally, the Company recorded $0.8 million in store closing costs during fiscal 2017, which represents the non-cash write-off of fixtures and equipment upon a store/shop closing.
The $43.6 million in impairment charges and store closing costs recorded during fiscal 2016 were primarily the result of a $33.3 million write-off of technology assets related to enterprise-wide systems infrastructure, as the Company determined that the systems were no longer going to be used for their originally intended purpose and instead the Company will focus on smaller upgrades and enhancements to its core systems going forward, a $8.4 million write-off of long-lived assets of underperforming stores, and a $1.1 million write-off of obsolete store fixtures and corporate assets. The asset impairment charges were calculated as the difference between the carrying amount of the impaired assets and their estimated future discounted cash flows. Additionally, the Company recorded $0.8 million in store closing costs during fiscal 2016.
Interest Expense, Net
 
 
 
Year Ended
 
 
February 25, 2017
 
February 27, 2016
 
 
(dollars in thousands)
Interest expense, net
 
$
279

 
$
65

Interest expense, net as a percentage of net sales
 
%
 
%
Interest income is earned on the Company’s investments and interest expense is incurred on money borrowed, the unused commitment fee, and letter of credit fees related to the Company’s Amended and Restated Revolving Credit Facility Credit Agreement.



32


Income Tax Expense
 
 
 
Year Ended
 
 
February 25, 2017
 
February 27, 2016
 
 
(dollars in thousands)
Income tax expense
 
$
18,760

 
$
13,562

Income tax expense as a percentage of net sales
 
1.0
%
 
0.8
%
Effective income tax rate
 
34.8
%
 
31.9
%
The increase in the effective tax rate in fiscal 2017 as compared to fiscal 2016 was primarily due to a decrease in research and development tax credits recognized in fiscal 2017 as compared to fiscal 2016. This was partially offset by a permanent deduction related to the non-performance based compensation of an executive that retired before the end of fiscal 2017.
Net Income from Continuing Operations
 
 
Year Ended
 
 
February 25, 2017
 
February 27, 2016
 
 
(dollars in thousands)
Net income from continuing operations
 
$
35,156

 
$
28,922

Net income from continuing operations as a percentage of net sales
 
1.9
%
 
1.6
%
Diluted earnings per share attributable to The Finish Line, Inc. from continuing operations
 
$
0.85

 
$
0.64

Net income from continuing operations increased $6.3 million in fiscal 2017 as compared to fiscal 2016, which was primarily due to the decrease in impairment and store closing costs, partially offset by a decrease in gross profit and an increase in selling, general, and administrative expenses and income tax expense, as discussed above.
Net Loss from Discontinued Operations, Net of Tax
 
 
Year Ended
 
 
February 25, 2017
 
February 27, 2016
 
 
(dollars in thousands)
Net loss from discontinued operations, net of tax
 
$
(53,364
)
 
$
(7,126
)
Net loss from discontinued operations as a percentage of net sales
 
(2.9
)%
 
(0.4
)%
Diluted loss per share attributable to The Finish Line, Inc. from discontinued operations
 
$
(1.29
)
 
$
(0.16
)
Net loss from discontinued operations represents the net operating losses and the loss on the sale of JackRabbit.
On February 24, 2017, the Company completed the sale of its JackRabbit division to affiliates of CriticalPoint Capital, LLC (the “Buyers”). The transaction took the form of a sale by the Company of its entire membership interest in its affiliated company, which owns JackRabbit, and a payment of $10.1 million (which does not include a working capital adjustment agreed to in fiscal 2018), of which $1.8 million was held back and was payable as of February 25, 2017 based on certain conditions that need to be met by the Buyers. Included in the $10.1 million payment to the Buyers is an estimated net working capital adjustment of $1.1 million, which was included in the $1.8 million payment held back as discussed above. The purchase price is subject to working capital and other customary adjustments set forth in the purchase agreement. The Buyers acquired all JackRabbit assets, inventory, leasehold interests, customary liabilities, intellectual property, and the JackRabbit trademark and name pursuant to the Agreement.
The Company recorded a loss on sale of $33.5 million, which represented the total cash payments to the Buyers of $10.1 million, net assets assumed by the Buyers of $18.3 million, and one-time costs of approximately $5.1 million associated with the transaction (prior to any adjustments recorded in fiscal 2018).

33


The following table presents key financial results of JackRabbit for each of the following fiscal years:
 
 
Year Ended
 
 
February 25, 2017
 
February 27, 2016
 
 
(in thousands)
Net sales
 
$
89,739

 
$
89,906

Cost of sales (including occupancy costs)
 
68,495

 
62,936

Gross profit
 
21,244

 
26,970

Selling, general, and administrative expenses
 
30,488

 
33,824

Impairment charges and store closing costs
 
44,202

 
5,055

Loss on sale of discontinued operations
 
33,500

 

Loss from discontinued operations before income tax benefit
 
(86,946
)
 
(11,909
)
Income tax benefit
 
33,582

 
4,783

Net loss from discontinued operations, net of tax
 
$
(53,364
)
 
$
(7,126
)
During fiscal 2017, the Company determined that it was more likely than not that the fair value of JackRabbit was less than its carrying value, and upon completion of an impairment analysis, that goodwill was impaired during the Company’s third fiscal quarter. The decrease in JackRabbit’s fair value from the Company’s prior year impairment analysis was the result of preliminary indications of interest for JackRabbit that indicated that the fair value was below its carrying value. Fair value of the JackRabbit reporting unit was determined using preliminary bids from interested parties. As a result of the second step of the goodwill impairment test, JackRabbit’s goodwill had no implied fair value and was written down to zero. This resulted in a pretax non-cash goodwill impairment charge of $44.0 million that is reflected in asset impairment charges in discontinued operations for the year ended February 25, 2017.
Liquidity and Capital Resources
The Company’s primary source of working capital is cash on hand and cash flows from operations. The following table sets forth material balance sheet and liquidity measures of the Company (in thousands):
 
 
 
March 3, 2018
 
February 25, 2017
Cash and cash equivalents
 
$
93,385

 
$
90,856

Merchandise inventories, net
 
$
321,742

 
$
331,146

Interest-bearing debt
 
$

 
$

Working capital
 
$
291,567

 
$
269,439

Operating Activities. Net cash provided by operating activities - continuing operations was $45.8 million, $168.0 million, and $107.5 million for fiscal 2018, 2017, and 2016, respectively. Net cash provided by operating activities decreased by $122.2 million in fiscal 2018 as compared to fiscal 2017. This decrease was primarily due to a net decrease in the cash inflow from working capital balances, a decrease in net income from continuing operations, and a decrease in non-cash expenses in fiscal 2018 compared to fiscal 2017.
Net cash provided by operating activities - continuing operations increased by $60.5 million in fiscal 2017 as compared to fiscal 2016. This increase was primarily due to a net increase in the cash inflow from working capital balances and an increase in net income from continuing operations, partially offset by a decrease in non-cash expenses for fiscal 2017 as compared to fiscal 2016.
At March 3, 2018, the Company had cash and cash equivalents of $93.4 million. Cash and cash equivalents consist primarily of cash on hand and highly liquid instruments with a maturity of three months or less at the date of purchase. At March 3, 2018, substantially all of the Company’s cash was invested in deposit accounts at banks.
Merchandise inventories, net decreased 2.8% at March 3, 2018 as compared to February 25, 2017. The decrease in merchandise inventories, net over the prior year was primarily due to reductions in planned inventory levels similar to the expected sales decreases year over year.

34


Investing Activities. Net cash used in investing activities - continuing operations was $52.0 million, $82.5 million, and $62.1 million for fiscal 2018, 2017, and 2016, respectively. The decrease in cash used in investing activities in fiscal 2018 as compared to fiscal 2017 was primarily due to a $25.3 million decrease in capital expenditures for property and equipment and software development costs in fiscal 2018 and a $5.8 million decrease in cash paid for the sale of discontinued operations, partially offset by a $0.6 million decrease in proceeds from disposal of property and equipment in fiscal 2018 as compared to fiscal 2017.
The increase in cash used in investing activities - continuing operations in fiscal 2017 as compared to fiscal 2016 was primarily due to a $12.6 million increase in capital expenditures for property and equipment and software development costs in fiscal 2017 and $8.3 million in cash paid for the sale of discontinued operations, partially offset by a $0.5 million increase in proceeds from disposal of property and equipment in fiscal 2017 as compared to fiscal 2016
Capital expenditures for property and equipment and software development costs were $49.5 million, $74.8 million, and $62.1 million for fiscal 2018, 2017, and 2016, respectively. Expenditures in fiscal 2018 were primarily for the construction of 3 new brick and mortar stores, 4 new shops within department stores, and the remodeling and repositioning of existing stores, and repositioning and expanding shops within department stores. Further, the Company had capital investments in technology to support its mobile first strategy, digital site enhancements, increased CRM loyalty management capabilities, and information security enhancements. In addition to the $49.5 million of cash paid for capital expenditures for property and equipment and software development costs in fiscal 2018, $2.7 million of capital expenditures for property and equipment and software development costs was accrued in accounts payable as of March 3, 2018.
The Company expects to invest approximately $35-40 million in capital expenditures for property and equipment and software development costs during fiscal 2019. The Company anticipates satisfying all of these capital expenditures through the use of cash-on-hand and operating cash flows.
Financing Activities. Net cash used in financing activities from continuing operations was $21.8 million, $69.5 million, and $94.3 million for fiscal 2018, 2017, and 2016, respectively. The $47.7 million decrease in cash used in financing activities in fiscal 2018 as compared to fiscal 2017 was primarily due to a $49.0 million decrease in stock repurchases, offset partially by a $1.3 million increase in dividends paid to shareholders.
The $24.8 million decrease in cash used in financing activities in fiscal 2017 as compared to fiscal 2016 was primarily due to a $27.1 million decrease in stock repurchases, offset partially by a $1.9 million decrease in proceeds from the issuance of common stock and a $0.3 million increase in dividends paid to shareholders.
Credit Facility. The Company has an unsecured $125 million credit facility with a syndicate of financial institutions, which expires on November 30, 2021 (the “Credit Facility”). The Credit Facility provides that, under certain circumstances, the Company may increase the maximum amount of the Credit Facility in an aggregate principal amount not to exceed $200 million. The Credit Facility is used by the Company, among other things, to issue letters of credit, support working capital needs, fund capital expenditures, and for other general corporate purposes.
There were no outstanding borrowings as of March 3, 2018. Approximately $1.6 million in stand-by letters of credit were outstanding as of March 3, 2018. Accordingly, the total revolving credit availability was $123.4 million as of March 3, 2018.
The Company’s ability to borrow in the future is subject to certain conditions, including compliance with certain covenants and making certain representations and warranties. The Credit Facility contains restrictive covenants that limit, among other things, mergers and acquisitions (including the Merger with JD Sports). In addition, the Company must maintain a maximum leverage ratio (as defined by the Credit Facility) and minimum consolidated tangible net worth (as defined by the Credit Facility). The Company was in compliance with all such covenants as of March 3, 2018.
The pricing grid is adjusted quarterly and is based on the Company’s leverage ratio. The minimum pricing is LIBOR plus 0.90% or Base Rate (as defined by the Credit Facility) and the maximum pricing is LIBOR plus 1.75% or Base Rate plus 0.75%. The Company is also subject to an unused commitment fee based on the Company’s leverage ratio with minimum pricing of 0.10% and maximum pricing of 0.25%. In addition, the Company is subject to a letter of credit fee based on the Company’s leverage ratio with minimum pricing of 0.40% and maximum pricing of 1.25%.
Shareholder Rights Plan. On August 28, 2017, the Company announced that its Board of Directors (the "Board") unanimously adopted a shareholder rights plan (the “Rights Plan”) to protect the best interests of Finish Line shareholders. The Board subsequently amended the Rights Plan on March 25, 2018 (the Rights Plan, as Amended). The Board authorized the

35


adoption of the Rights Plan, as Amended to protect against any coercive or abusive takeover tactics, and help ensure that the Company’s shareholders are not deprived of the opportunity to realize the full and fair value of their investments.
In connection with the adoption of the Rights Plan, as Amended, the Board authorized 10,000 shares of series A junior participating stock, no par value (“Preferred Stock”) and declared a dividend of one Preferred Stock purchase right (a “Right”) for each outstanding share of common stock of the Company on August 25, 2017. The authorization of the Preferred Stock became effective on August 28, 2017. The dividend was paid on September 11, 2017 to shareholders of record at the close of business on that date. Each Right initially entitles the registered holder to purchase from the Company one ten-thousandth of a share of Preferred Stock at a price of $26.00 per Right, in the event the Rights become exercisable, subject to adjustment.
In general, the Rights will become exercisable if a person or group becomes the beneficial owner of 12.5% or more of the outstanding common stock of the Company, with the exception of JD Sports, any other "Exempt Person" (as defined in the Rights Plan, as Amended), or any person who inadvertently becomes an "Acquiring Person" (as defined in the Rights Plan, as Amended), which determination is subject to the Board's conclusion. In the event that the Rights become exercisable due to the triggering threshold being crossed, each Right will entitle its holder to purchase, at the Right’s exercise price, a number of shares of common stock having a market value at that time of twice the Right’s exercise price. Rights held by the triggering person or group will become void and will not be exercisable to purchase any shares. The Board, at its option, may exchange each Right (other than Rights owned by the triggering person or group that have become void) in whole or in part, at an exchange ratio of one share of common stock per outstanding Right, subject to adjustment.
Persons or groups that beneficially owned 12.5% or more of the outstanding Company common stock prior to the Company’s announcement of the Rights Plan, As Amended will not cause the Rights to be exercisable until such time as those persons or groups become the beneficial owner of any additional shares of Company common stock.
The Rights Plan, as Amended has an expiration date of August 28, 2020, or immediately prior to the effective time of the Merger. In addition, the Rights Plan, as Amended will be terminated if shareholder approval of the Rights Plan, as Amended has not been obtained at or before the Company’s 2018 Annual Meeting of Shareholders. The Board will, in general, be entitled to redeem the Rights at $0.0001 per Right at any time before the triggering threshold is crossed.
Share Repurchase Program. On July 21, 2011, the Board authorized a share repurchase program to repurchase shares of the Company’s common stock with subsequent amendments on March 26, 2015 and July 13, 2016 authorizing further share repurchases through December 31, 2019 (the “Share Repurchase Program”).
The Company repurchased 0.3 million shares of its common stock at an average price of $15.29 per share for an aggregate amount of $3.8 million in fiscal 2018. As of March 3, 2018, there were 4.5 million shares remaining available to repurchase under the Share Repurchase Program.
As of March 3, 2018, the Company held 19.4 million shares of its common stock as treasury shares at an average price of $20.59 per share for an aggregate carrying amount of $399.2 million. The Company’s treasury shares may be issued upon the exercise of employee stock options, under the Employee Stock Purchase Plan, in the form of restricted stock, or for other corporate purposes. The number of shares of common stock available for issuance of restricted stock and other awards, or upon the exercise of options is limited under The Finish Line, Inc. 2009 Incentive Plan Amended and Restated as of April 16, 2014, and further amended as of June 27 and July 14, 2016 (the “Amended and Restated 2009 Incentive Plan”). Further purchases may occur from time to time as market conditions warrant and as the Company deems appropriate when judged against other alternative uses of cash.
Dividends. On January 17, 2018, the Company increased its quarterly cash dividend to $0.115 per share from $0.11 per share of the Company’s common stock. The Company declared dividends of $18.2 million, $17.0 million, and $16.5 million during fiscal 2018, 2017, and 2016, respectively. As of March 3, 2018 and February 25, 2017, dividends declared but not paid were $4.7 million and $4.5 million, respectively. Further declarations of dividends remain at the discretion of the Board.

36


Contractual Obligations
The following table summarizes the Company’s long-term contractual obligations as of March 3, 2018 (in thousands):
 
 
 
Total
 
Payments Due by Fiscal Year
 
 
Less than
1 Year
 
1-3
Years
 
3-5
Years
 
After 5
Years
 
Other
Contractual Obligations:
 
 
 
 
 
 
 
 
 
 
 
 
Operating lease obligations(1)
 
$
671,653

 
$
125,252

 
$
226,286

 
$
196,600

 
$
123,515

 
$

Non-qualified deferred compensation(2)
 
4,210

 

 
4,210

 

 

 

Other liabilities(3)
 
2,273

 

 

 

 

 
2,273

Total contractual obligations
 
$
678,136

 
$
125,252

 
$
230,496

 
$
196,600

 
$
123,515

 
$
2,273

_____________ 
(1)
Includes the guaranteed minimum license fee associated with shops within department stores. The Company has entered into an arrangement to sell product in shops within department stores which includes a guaranteed minimum license fee in fiscal years 2019 through 2023. The license fee is compensation for use of the selling space, administrative and operational services, and use of the department store’s name.
(2)
The Company terminated its non-qualified deferred compensation plan on March 25, 2018. The distribution of the plan assets and participant balances could begin in fiscal year 2019 and will be completely paid out no later than March 2019 depending on participant elections. For further information related to the Company's non-qualified deferred compensation plan, see Note 8, “Retirement Plans and Subsequent Event,” to the consolidated financial statements included in Item 8, Financial Statements and Supplementary Data.
(3)
Other liabilities include future estimated payments associated with unrecognized tax benefits of $2.3 million. The Company expects to make cash outlays in the future related to unrecognized tax benefits. The liability is included in the “Other” category as the timing and amount of these payments is not known until the matters are resolved with relevant tax authorities. For further information related to unrecognized tax benefits, see Note 7, “Income Taxes,” to the consolidated financial statements included in Item 8, Financial Statements and Supplementary Data.
In addition to the contractual obligations noted in the table above, the Company enters into arrangements with suppliers to purchase merchandise up to 12 months in advance of expected delivery in the ordinary course of business. These open purchase orders do not contain any significant termination payments or other penalties if canceled. Total open purchase orders outstanding at March 3, 2018 were $266.7 million, and have not been included in the table above.
Off Balance Sheet Arrangements
The Company has no off balance sheet arrangements as that term is defined in Item 303(a)(4) of Regulation S-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risks
The Company is exposed to changes in interest rates primarily from its investments in marketable securities from time to time. The Company did not have any marketable securities as of March 3, 2018. The Company does not use interest rate derivative instruments to manage exposure to interest rate changes.

37


Item 8. Financial Statements and Supplementary Data

Management’s Report on Internal Control Over Financial Reporting
The management of The Finish Line, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934). The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements.
Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s Board of Directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that: (1) pertain to the maintenance of records, that in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of March 3, 2018. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework (2013 framework). Based on management’s assessment, it believes that, as of March 3, 2018, the Company’s internal control over financial reporting is effective based on those criteria.
The Company’s independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on the Company’s internal control over financial reporting. Ernst & Young LLP’s report appears on the following page and expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of March 3, 2018.

38


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of The Finish Line, Inc.
Opinion on Internal Control over Financial Reporting
We have audited The Finish Line, Inc.’s internal control over financial reporting as of March 3, 2018, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, The Finish Line, Inc. (the "Company") maintained, in all material respects, effective internal control over financial reporting as of March 3, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the balance sheets of the Company as of March 3, 2018 and February 25, 2017, and the related statements of operations, changes in shareholders’ equity, and cash flows for each of the three years in the period ended March 3, 2018, and the related notes and our report dated May 11, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
/s/ Ernst & Young LLP
Indianapolis, Indiana
May 11, 2018




39


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of The Finish Line, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of The Finish Line, Inc. (the “Company”) as of March 3, 2018 and February 25, 2017, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each of the three years in the period ended March 3, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at March 3, 2018 and February 25, 2017, and the results of its operations and its cash flows for each of the three years in the period ended March 3, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of March 3, 2018, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated May 11, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
 
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1988.
Indianapolis, Indiana
May 11, 2018



40


THE FINISH LINE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
 
 
 
March 3,
2018
 
February 25,
2017
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
93,385

 
$
90,856

Accounts receivable, net
 
16,530

 
20,470

Merchandise inventories, net
 
321,742

 
331,146

Income taxes receivable
 
2,439

 
35,559

Other current assets
 
28,042

 
13,379

Total current assets
 
462,138

 
491,410

Property and equipment:
 
 
 
 
Land
 
1,557

 
1,557

Building
 
44,637

 
44,249

Leasehold improvements
 
184,771

 
206,446

Furniture, fixtures, and equipment
 
139,579

 
143,576

Construction in progress
 
3,749

 
5,966

 
 
374,293

 
401,794

Less accumulated depreciation
 
235,731

 
244,200

Total property and equipment, net
 
138,562

 
157,594

Software development costs, net
 
68,884

 
90,303

Other assets, net
 
5,448

 
7,161

Total assets
 
$
675,032

 
$
746,468

See accompanying notes.

41


THE FINISH LINE, INC.
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
(in thousands, except per share data)
 
 
 
March 3,
2018
 
February 25,
2017
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
122,590

 
$
166,614

Employee compensation
 
12,085

 
15,407

Accrued property and sales tax
 
10,087

 
9,750

Other liabilities and accrued expenses
 
25,809

 
30,200

Total current liabilities
 
170,571

 
221,971

Commitments and contingencies
 


 


Deferred credits from landlords
 
34,629

 
32,133

Deferred income taxes
 
11,813

 
32,226

Other long-term liabilities
 
7,029

 
8,640

Shareholders’ equity:
 
 
 
 
Preferred stock, $.01 par value; 1,000 shares authorized; none issued
 

 

Preferred stock, no par value; 10,000 shares authorized; none issued
 

 

Common stock, $.01 par value; 110,000 shares authorized; 60,145 shares issued
 
 
 
 
Shares outstanding - (2018 – 40,370; 2017 – 40,337)
 
601

 
601

Additional paid-in capital
 
249,195

 
245,335

Retained earnings
 
600,368

 
604,136

Treasury stock, shares held - (2018 – 19,388; 2017 – 19,421)
 
(399,174
)
 
(398,574
)
Total shareholders’ equity
 
450,990

 
451,498

Total liabilities and shareholders’ equity
 
$
675,032

 
$
746,468

See accompanying notes.

42


THE FINISH LINE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 
 
 
Year Ended
 
 
March 3,
2018
 
February 25,
2017
 
February 27,
2016
Net sales
 
$
1,838,956

 
$
1,844,393

 
$
1,798,982

Cost of sales (including occupancy costs)
 
1,306,859