<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE QUARTERLY PERIOD ENDED OCTOBER 26, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
SECURITIES EXCHANGE ACTION OF 1934
COMMISSION FILE NUMBER 0-26732
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GADZOOKS, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 74-2261048
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
4801 SPRING VALLEY ROAD
SUITE 108B
DALLAS, TX 75244
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 972-991-5500
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(FORMER NAME, FORMER ADDRESS AND FISCAL YEAR, IF CHANGED SINCE LAST REPORT.)
Indicate by check mark whether the registrant (1) has filed all reports 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 ( )
----- -----
As of November 19, 1996, the number of shares outstanding of the registrant's
common stock is 8,582,927.
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GADZOOKS, INC.
FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 26, 1996
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of October 26, 1996 3
and January 27, 1996
Condensed Statements of Operations for the 4
Third Quarter and Nine Months Ended
October 26, 1996 and October 28, 1995
Condensed Statements of Cash Flows for the 5
Nine Months Ended October 26, 1996 and
October 28, 1995
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis 7-10
of Financial Condition and Results
of Operations
PART II. OTHER INFORMATION 10
SIGNATURE PAGE 11
</TABLE>
2
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PART I - FINANCIAL INFORMATION
GADZOOKS, INC.
CONDENSED BALANCE SHEETS
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(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
OCTOBER 26, JANUARY 27,
1996 1996
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<S> <C> <C>
ASSETS
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Current assets:
Cash and cash equivalents $ 10,818 $ 13,733
Short-term investments 7,759 ---
Accounts receivable 1,673 491
Inventory 25,458 18,707
Other current assets 2,512 1,161
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48,220 34,092
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Leasehold, fixtures and equipment, net 15,895 11,519
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$ 64,115 $ 45,611
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LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 13,143 $ 8,495
Accrued expenses & other current liabilities 4,281 3,775
Income taxes payable --- 1,321
Current portion of long-term obligations --- 133
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17,424 13,724
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Accrued rent & other long-term obligations 1,324 1,122
Shareholders' equity:
Common stock 86 78
Additional paid-in capital 39,734 29,442
Retained earnings 5,547 1,245
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45,367 30,765
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$ 64,115 $ 45,611
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</TABLE>
The accompany notes are an integral part of these financial statements.
3
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GADZOOKS, INC.
CONDENSED STATEMENTS OF OPERATIONS
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(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
------------------------------------ --------------------------------
OCTOBER 26, OCTOBER 28, OCTOBER 26, OCTOBER 28,
1996 1995 1996 1995
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<S> <C> <C> <C> <C>
Net Sales $ 31,171 $ 20,346 $ 83,161 $ 54,753
Cost of goods sold including buying,
distribution and occupancy costs 21,337 14,074 57,510 38,299
----------- ----------- ---------- ----------
Gross Profit 9,834 6,272 25,651 16,454
Selling, general and
administrative expenses 7,045 4,694 19,454 13,142
----------- ----------- ---------- ----------
Operating Income 2,789 1,578 6,197 3,312
Interest income (expense), net 254 (66) 650 (304)
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Income before income taxes 3,043 1,512 6,847 3,008
Provision for income taxes 1,125 582 2,545 1,151
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Net Income $ 1,918 $ 930 $ 4,302 $ 1,857
=========== =========== ========== ==========
Net income per common and
common equivalent share $ 0.21 $ 0.14 $ 0.47 $ 0.29
=========== =========== ========== ==========
Weighted average common and
common equivalent shares outstanding 9,119 6,860 9,090 6,467
=========== =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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GADZOOKS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
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(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
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OCTOBER 26, OCTOBER 28,
1996 1995
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<S> <C> <C>
Cash flows from operating activities:
Net Income $ 4,302 $ 1,857
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,580 1,020
Changes in operating assets and liabilities (4,129) (3,148)
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Net cash provided by (used in) operating activities 1,753 (271)
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Cash flows from investing activities:
Capital expenditures, net (5,956) (4,354)
Purchases of short-term investments, net (7,759) ---
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Net cash used in investing activities (13,715) (4,354)
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Cash flows from financing activities:
Payments on long-term obligations (45) (4,386)
Proceeds from term note --- 1,572
Issuance of common stock, net 9,092 20,104
Payment of accrued preferred stock dividends --- (2,126)
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Net cash provided by financing activities 9,047 15,164
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Net increase (decrease) in cash and cash equivalents (2,915) 10,539
Cash and cash equivalents at beginning of period 13,733 321
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Cash and cash equivalents at end of period $ 10,818 $ 10,860
========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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GADZOOKS, INC.
NOTES TO FINANCIAL STATEMENTS
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(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed financial statements have been prepared in
accordance with the instructions to Form 10-Q and do not include all
of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. The results of operations for the third quarter ended
October 26, 1996 and October 28, 1995 are not necessarily indicative
of the results to be expected for the full fiscal year. The condensed
balance sheet as of January 27, 1996 is derived from audited financial
statements. The condensed financial statements should be read in
conjunction with the financial statement disclosures contained in the
Company's Report to Shareholders for the year ended January 27,1996.
2. COMMON STOCK OFFERING
On January 31, 1996, the Company completed a secondary offering of
600,000 shares of its common stock, while an additional 1,987,500
shares were sold by selling shareholders (after giving effect to the
stock split described in Note 3). The Company's portion of the net
proceeds, after deducting expenses associated with the offering,
totaled $9.0 million and will be used to finance new store openings,
store remodelings, and for other general corporate purposes.
3. STOCK SPLIT
On May 1, 1996, the Board of Directors declared a three-for-two split
of the Company's common stock in the form of a 50 percent stock
dividend. The stock split was payable on May 30, 1996 to holders of
record on May 16, 1996, and has been given retroactive effect in these
financial statements.
6
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Gadzooks is a rapidly growing, mall-based specialty retailer of casual apparel
and related accessories for young men and women principally between the ages of
13 and 19. The Company opened its first store in 1983, and had 174 stores in
operation at October 26, 1996, located in 24 states throughout the
Southwestern, Midwestern, and Southeastern regions of the United States.
The Company accelerated its expansion program in late fiscal 1992 and opened 10
new stores in the second six months of that fiscal year, followed by 23 new
stores in fiscal 1993, 26 new stores in fiscal 1994, and 39 new stores in
fiscal 1995. As of October 26, 1996, the Company has opened 48 new stores
since the beginning of fiscal 1996.
The Company's business is subject to seasonal influences with slightly higher
sales during the Christmas holiday, back- to-school, and spring break seasons.
Management's discussion and analysis should be read in conjunction with the
Company's financial statements and the notes related thereto.
RESULTS OF OPERATIONS
Third Quarter Ended October 26, 1996 Compared to Third Quarter Ended October
28, 1995
Net sales increased approximately $10.8 million, or 53.2 percent to $31,171,000
during the third quarter of fiscal 1996 from $20,346,000 during the comparable
quarter of fiscal 1995. Comparable store sales increased 5.9 percent for the
third quarter of fiscal 1996. The balance of the sales increase was
attributable to new stores not yet included in the comparable store sales base.
A store becomes comparable after it has been open for 14 full fiscal months.
Gross profit increased approximately $3.6 million to $9,834,000 during the
third quarter of fiscal 1996 from $6,272,000 during the comparable quarter of
fiscal 1995. As a percentage of net sales, gross profit increased to 31.5
percent compared to 30.8 percent in the comparable quarter of last year.
Buying and distribution costs decreased as a percentage of sales as a result of
the Company's larger store base.
7
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Selling, general and administrative expenses increased approximately $2.4
million to $7,045,000 during the third quarter of 1996 from $4,694,000 during
the comparable quarter of fiscal 1995. The increase was primarily due to the
increase in the number of stores to 174 stores at the end of the third quarter
of fiscal 1996 from 115 at the end of the comparable period last year. As a
percentage of net sales, selling, general and administrative expenses decreased
to 22.6 percent of sales during the third quarter of fiscal 1996 from 23.1
percent of sales during the comparable quarter of last year. The decrease as a
percentage of net sales was due to leveraging of certain store and corporate
overhead expenses as a percentage of sales primarily as a result of the
comparable store sales increases achieved during the quarter and the Company's
larger store base.
Operating income increased approximately $1.2 million to $2,789,000, during the
third quarter of fiscal 1996 from $1,578,000 during the comparable quarter of
last year. As a percentage of net sales, operating income increased to 8.9
percent of sales from 7.8 percent of sales during the comparable quarter of
last year.
Net interest income increased approximately $0.3 million to $254,000 during the
third quarter of fiscal 1996 from $66,000 net interest expense in the
comparable period of last year. The Company's interest income increased due to
temporary investments of cash available from the two public stock offerings
completed in October 1995 and January 1996.
Nine Months Ended October 26, 1996 Compared to Nine Months Ended October 28,
1995
Net sales increased approximately $28.4 million, or 51.9 percent to $83,161,000
during the first nine months of fiscal 1996 from $54,753,000 during the
comparable period of fiscal 1995. Comparable store sales increased 7.2 percent
for the first nine months of fiscal 1996. The balance of the sales increase
was attributable to new stores not yet included in the comparable store sales
base. A store becomes comparable after it has been open for 14 full fiscal
months.
Gross profit increased approximately $9.2 million to $25,651,000 during the
first nine months of fiscal 1996 from $16,454,000 during the comparable period
of fiscal 1995. As a percentage of net sales, gross profit increased to 30.8
percent compared to 30.1 percent in the comparable period of last year. The
Company's merchandise margin for the first nine months of fiscal 1996 was
higher than the prior year's margin due to fewer price-based promotional
activities during the first nine months of fiscal 1996. The Company began
fiscal 1996 with less markdown merchandise to clear from its store system after
the 1995 Christmas holiday season. Additionally, the first nine months of 1995
had lower merchandise margins due to editing certain merchandise categories
and closing the Company's two outlet stores. Store occupancy costs, included
in cost of goods sold, increased slightly as a percentage of sales as a result
of opening 48 new stores during the first nine months of fiscal 1996 as
compared to opening 28 stores during the comparable period of fiscal 1995.
Although store occupancy costs increased as a percentage of sales, this
increase was more than offset by decreased buying and distribution costs due to
the Company's larger store base.
8
<PAGE> 9
Selling, general and administrative expenses increased approximately $6.3
million to $19,454,000 during the first nine months of 1996 from $13,142,000
during the comparable period of fiscal 1995. The increase was primarily due to
the increase in the number of stores to 174 stores at the end of the third
quarter of fiscal 1996 from 115 at the end of the comparable period last year.
As a percentage of net sales, selling, general and administrative expenses
decreased to 23.4 percent of sales during the first nine months of fiscal 1996
from 24.0 percent of sales during the comparable period of last year. The
decrease as a percentage of net sales was primarily due to leveraging of
certain store and corporate overhead expenses as a percentage of sales as a
result of the comparable store sales increases achieved during the nine months,
and the Company's larger store base.
Operating income increased approximately $2.9 million to $6,197,000 during the
first nine months of fiscal 1996 from $3,312,000 during the comparable period
of last year. As a percentage of net sales, operating income increased to 7.5
percent of sales from 6.0 percent of sales during the comparable nine months of
last year.
Net interest income increased approximately $1.0 million to $650,000 during the
first nine months of fiscal 1996 from $304,000 net interest expense in the
comparable period of last year. The Company's interest income increased due to
temporary investments of cash available from the two public stock offerings
completed in October 1995 and January 1996.
LIQUIDITY AND CAPITAL RESOURCES
General. The Company's primary uses of cash are financing new store openings
and purchasing merchandise inventories. The Company is currently meeting its
cash requirements through cash flow from operations and from proceeds of its
initial public offering completed in October 1995 and a secondary public
offering completed in January 1996.
Cash Flows. At October 26, 1996, cash and cash equivalents were $10.8 million,
a decrease of $2.9 million since January 27, 1996. Sources of cash for the
first nine months of fiscal 1996 were primarily proceeds from the issuance of
common stock of $9.1 million, increase in liabilities of $5.2 million, and
income before depreciation of $5.9 million. The primary uses of cash were
increases in inventory levels of $6.8 million, in short-term investments of
$7.8 million, in other assets of $1.3 million, in receivables of $1.2 million,
and in capital expenditures of $6.0 million. The Company opened 48 new stores
during the first nine months of 1996 as compared with 28 new stores in the same
period of the prior year.
9
<PAGE> 10
Credit Facility. The Company currently has a loan agreement with a bank that
provides a revolving line of credit of $7.0 million. Amounts borrowed under
the Revolving Line bear interest at the bank's prime rate minus 0.65 percent.
The Company pays a commitment fee of 0.35 percent per annum on the unused
portion of the revolving line. As of October 26, 1996, no amounts were
outstanding under the revolving line. The Revolving Line credit facility is
subject to certain financial covenants and conditions with which the Company
was in compliance as of October 26, 1996.
Capital Expenditures. The Company anticipates opening approximately 9 new
stores during the remaining quarter of fiscal 1996. The Company estimates that
its average capital expenditures to open a new store, including leasehold
improvements and furniture and fixtures, will be approximately $165,000
(approximately $100,000 net of all landlord allowances). The cost of initial
inventory for a new store is approximately $100,000; however, the immediate
cash requirement for inventory is partially financed through the Company's
payment terms with its vendors. After a store has been constructed,
pre-opening costs range from $8,000 to $10,000 for travel, hiring and training,
and other miscellaneous costs associated with the setup of a new store prior to
its opening for business. Pre-opening costs are expensed in the period when
the store opens.
STATEMENT REGARDING FORWARD LOOKING DISCLOSURE
Certain sections of this Quarterly Report on Form 10-Q, including the preceding
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," contain various forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Exchange Act, which represent the Company's expectations
or beliefs concerning future events. These forward-looking statements involve
risks and uncertainties, and the Company cautions that these statements are
further qualified by important factors that could cause actual results to
differ materially from those in the forward-looking statements, including,
without limitation, those set forth in the "Risk Factors" section of the
Company's Annual Report on Form 10-K for the fiscal year ended January 27,
1996.
PART II - OTHER INFORMATION
Items 1-6 are not applicable.
10
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GADZOOKS, INC.
(Registrant)
DATE: November 26, 1996 By: /s/ MONTY R. STANDIFER
-------------------------
Monty R. Standifer
Senior Vice President and
Chief Financial Officer
11
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<S> <C>
27 - Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-START> JAN-28-1996
<PERIOD-END> OCT-26-1996
<CASH> 10,818
<SECURITIES> 7,759
<RECEIVABLES> 1,673
<ALLOWANCES> 0
<INVENTORY> 25,458
<CURRENT-ASSETS> 2,512
<PP&E> 21,271
<DEPRECIATION> 5,376
<TOTAL-ASSETS> 64,115
<CURRENT-LIABILITIES> 18,748
<BONDS> 0
0
0
<COMMON> 86
<OTHER-SE> 45,281
<TOTAL-LIABILITY-AND-EQUITY> 64,115
<SALES> 31,171
<TOTAL-REVENUES> 0
<CGS> 21,337
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,045
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (254)
<INCOME-PRETAX> 3,043
<INCOME-TAX> 1,125
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,918
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0
</TABLE>
