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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 1, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
SECURITIES EXCHANGE ACTION OF 1934
COMMISSION FILE NUMBER 0-26732
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)
4121 INTERNATIONAL PARKWAY
CARROLLTON, TX 75007
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 972-307-5555
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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
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 ( )
As of December 4, 1997, the number of shares outstanding of the
registrant's common stock is 8,697,510.
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GADZOOKS, INC.
FORM 10-Q
For the Quarter Ended November 1, 1997
INDEX
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of November 1, 1997 3
and February 1, 1997
Condensed Statements of Income for the 4
Third Quarter and Nine Months Ended
November 1, 1997 and October 26, 1996
Condensed Statements of Cash Flows for the 5
Nine Months Ended November 1, 1997 and
October 26, 1996
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 11
SIGNATURE PAGE 12
INDEX TO EXHIBITS 13-15
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2
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PART I - FINANCIAL INFORMATION
GADZOOKS, INC.
CONDENSED BALANCE SHEETS
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(In thousands)
(Unaudited)
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<CAPTION>
NOVEMBER 1, FEBRUARY 1,
1997 1997
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ASSETS
Current assets:
Cash and cash equivalents $ 14,295 $ 10,348
Short-term investments -- 12,420
Accounts receivable 2,980 1,284
Inventory 34,547 23,211
Other current assets 2,082 1,328
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53,904 48,591
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Leaseholds, fixtures and equipment, net 23,000 16,156
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$ 76,904 $ 64,747
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 18,044 $ 7,654
Accrued expenses & other current liabilities 3,812 5,490
Income taxes payable -- 1,115
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21,856 14,259
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Accrued rent & other long-term obligations 1,645 1,425
Shareholders' equity:
Common stock 87 86
Additional paid-in capital 40,665 39,741
Retained earnings 12,651 9,236
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53,403 49,063
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$ 76,904 $ 64,747
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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GADZOOKS, INC.
CONDENSED STATEMENTS OF INCOME
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(In thousands, except per share data)
(Unaudited)
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THIRD QUARTER ENDED NINE MONTHS ENDED
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NOVEMBER 1, OCTOBER 26, NOVEMBER 1, OCTOBER 26,
1997 1996 1997 1996
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Net sales $ 41,268 $ 31,171 $112,118 $ 83,161
Cost of goods sold including buying,
distribution and occupancy costs 28,629 21,337 80,330 57,510
-------- -------- -------- --------
Gross profit 12,639 9,834 31,788 25,651
Selling, general and administrative expenses 9,770 7,045 26,884 19,454
-------- -------- -------- --------
Operating income 2,869 2,789 4,904 6,197
Interest income, net 168 254 543 650
-------- -------- -------- --------
Income before income taxes 3,037 3,043 5,447 6,847
Provision for income taxes 1,117 1,125 2,032 2,545
-------- -------- -------- --------
Net income $ 1,920 $ 1,918 $ 3,415 $ 4,302
======== ======== ======== ========
Net income per common and common
equivalent share $ 0.21 $ 0.21 $ 0.38 $ 0.47
======== ======== ======== ========
Weighted average common and common
equivalent shares outstanding 9,064 9,119 9,099 9,090
======== ======== ======== ========
</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)
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NINE MONTHS ENDED
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NOVEMBER 1, OCTOBER 26,
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,415 $ 4,302
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation 2,362 1,580
Changes in operating assets and liabilities (5,970) (4,129)
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (193) 1,753
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (9,206) (5,956)
Sales (purchases) of short-term investments, net 12,420 (7,759)
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 3,214 (13,715)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term obligations -- (45)
Issuance of common stock, net 357 9,092
Tax benefit from exercise of stock options 569 --
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 926 9,047
-------- --------
Net increase (decrease) in cash and cash equivalents 3,947 (2,915)
Cash and cash equivalents at beginning of period 10,348 13,733
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14,295 $ 10,818
======== ========
</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 contain all adjustments
(consisting of only normal recurring accruals) necessary to present
fairly the financial position as of November 1, 1997 and February 1,
1997, and the results of operations and cash flows for the nine months
ended November 1, 1997 and October 26, 1996. The results of operations
for the third quarters and nine months then ended are not necessarily
indicative of the results to be expected for the full fiscal year. The
condensed balance sheet as of February 1, 1997 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 Annual Report on Form 10-K for the fiscal year ended
February 1, 1997.
2. NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
Earnings Per Share, to simplify the calculation of earnings per share
for publicly held companies. SFAS 128 is effective for financial
statements issued for periods ending after December 15, 1997 and
requires the disclosure of basic and diluted earnings per share as well
as the restatement of all prior period earnings per share data
presented. For the third quarter and nine months ended November 1,
1997, the amounts reported as net income per common and common
equivalent share are not materially different from that which would
have been reported for basic and diluted earnings per share in
accordance with SFAS 128. Under SFAS 128, the basic pro forma earnings
per share for the third quarter and nine months ending October 26, 1996
would have been $0.23 and $0.52, respectively.
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. As of November 1, 1997, the Company had opened 49 new stores since
the beginning of the fiscal year, and operated 232 mall-based stores in 28
states throughout the Mid-Atlantic, Southwest, Midwest, and Southeast regions of
the United States. Eleven of the 49 new stores were opened during the third
quarter ended November 1, 1997.
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 November 1, 1997 Compared to Third Quarter Ended October 26,
1996
Net sales increased approximately $10.1 million, or 32.4 percent to $41,268,000
during the third quarter of fiscal 1997 from $31,171,000 during the comparable
quarter of fiscal 1996. Comparable store sales increased 3.3 percent for the
third quarter of fiscal 1997. 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 $2.8 million to $12,639,000 during the
third quarter of fiscal 1997 from $9,834,000 during the comparable quarter of
fiscal 1996. As a percentage of net sales, gross profit decreased to 30.6
percent compared to 31.5 percent in the comparable quarter of last year. The
decrease in gross profit resulted from markdowns taken in the junior category
for back-to-school merchandise as the Company transitioned its inventory in this
category from retro wear to active wear. Store occupancy and buying and
distribution costs as a percentage of sales were flat when compared to the third
quarter of 1996.
7
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Selling, general and administrative expenses ("SG&A") increased approximately
$2.7 million to $9,770,000 during the third quarter of 1997 from $7,045,000
during the comparable quarter of fiscal 1996. The increase in SG&A dollars is
primarily attributable to increased costs at the store level as a result of the
Company's expanded current year store base and a corresponding increase in
administrative support costs. As a percentage of net sales, SG&A increased to
23.7 percent during the third quarter of fiscal 1997 from 22.6 percent during
the comparable quarter of last year. The increase in the SG&A percentage is
primarily due to the change in the Company's reporting calendar at the end of
last year to match the fiscal reporting periods of other peer-group retailers.
Because of the shift, the third quarter lost a high-volume sales week to the
second quarter and gained a low-volume sales week. The one-week shift in the
calendar reduced third quarter sales by a net of $1.3 million, while SG&A, which
has a significant fixed-cost component, remained essentially unchanged.
The Company's net interest income decreased $86,000 to $168,000 during the third
quarter of fiscal 1997 from $254,000 in the comparable period of last year due
to the use of short-term investments to fund the Company's continuing expansion.
Nine Months Ended November 1, 1997 Compared to Nine Months Ended October 26,
1996
Net sales increased approximately $29.0 million, or 34.8 percent, to
$112,118,000 during the first nine months of fiscal 1997 from $83,161,000 during
the comparable period of fiscal 1996. Comparable store sales increased 1.2
percent for the first nine months of fiscal 1997. 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 $6.1 million to $31,788,000 during the
first nine months of fiscal 1997 from $25,651,000 during the comparable period
of fiscal 1996. As a percentage of net sales, gross profit decreased to 28.4
percent compared to 30.8 percent in the comparable period of last year.
Merchandise margins decreased by 2.0 percent of sales due to the substantial
amount of mark downs taken primarily in the junior category during the second
and third quarters of 1997. Store occupancy costs, included in cost of goods
sold, increased slightly as a percentage of sales as a result of lower than
expected second quarter sales. In addition, buying and distribution costs
increased slightly as a percentage of sales as a result of the Company's move to
a larger distribution center in May 1997. As the Company continues to grow its
store base, this percentage is expected to decline.
8
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SG&A increased approximately $7.4 million to $26,884,000 during the first nine
months of 1997 from $19,454,000 during the comparable period of fiscal 1996. As
a percentage of net sales, SG&A increased to 24.0 percent during the first nine
months of fiscal 1997 from 23.4 percent during the comparable period of last
year. The increase as a percentage of net sales was primarily due to lower than
expected second quarter sales. Additional sales promotions, increased markdown
pricing and other related tasks required at the store level to clear summer
merchandise during the second quarter were primary factors contributing to the
increase in store level operating costs as a percentage of sales.
Net interest income decreased $107,000 to $543,000 during the first nine months
of fiscal 1997 from $650,000 in the comparable period of last year. The
Company's interest income decreased due to the use of short-term cash
investments to fund the Company's continued expansion.
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 proceeds of a public offering
completed in January, 1996.
Cash Flows. At November 1, 1997, cash and cash equivalents were $14.3 million,
an increase of $3.9 million since February 1, 1997. The primary uses of cash
were increased inventory levels of $11.3 million, capital expenditures of $5.8
million for new stores, capital expenditures of $3.3 million for the new
corporate headquarters and distribution center, an increase in accounts
receivable of $1.7 million and a decrease in accrued payroll of $1.7 million.
The primary sources of cash for the first nine months of fiscal 1997 were an
increase in accounts payable of $10.4 million, net income before depreciation of
$5.8 million and sales of short-term investments of $12.4 million. The Company
opened 49 new stores during the first nine months of 1997 as compared with 48
new stores in the same period of the prior year.
9
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Credit Facility. The Company currently has a loan agreement with Wells Fargo
Bank, Dallas, Texas, which provides for an unsecured revolving line of credit of
$10 million. Amounts borrowed under the revolving line bear interest at the
lesser of either Prime Rate or 1.95 percent above LIBOR. The Company must also
pay a commitment fee of 0.50 percent per annum on the unused portion of the
revolving line. As of November 1, 1997, no amounts were outstanding under the
revolving line. The revolving line also provides for the issuance of letters of
credit that are generally used in certain circumstances in connection with
merchandise purchases. As of November 24, 1997, letters of credit in the amount
of $0.3 million were issued and outstanding.
Capital Expenditures. The Company completed its fiscal 1997 store expansion with
the opening of 18 new stores during the month of November. The Company estimates
that its average capital expenditures to open a new store, including leasehold
improvements and furniture and fixtures, will be approximately $167,000
(approximately $100,000 net of all landlord construction allowances). The
typical 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. The Company expects each
new store opened in the Northeast market during the fourth quarter of fiscal
1997 to cost approximately $290,000 prior to landlord construction allowances.
Pre-opening costs range from $9,000 to $13,000 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 February 1, 1997.
10
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PART II - OTHER INFORMATION
Items 1-5 - None
Item 6 - Exhibits and Reports on Form 8-K
(a) See Index to Exhibits.
(b) None.
11
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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: December 10, 1997 By: /s/ MONTY R. STANDIFER
------------------------------------
Monty R. Standifer
Senior Vice President and
Chief Financial Officer
12
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INDEX TO EXHIBITS
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EXHIBIT
NO. DESCRIPTION OF DOCUMENTS
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3.1 Third Restated Articles of Incorporation of the Company (filed
as Exhibit 4.1 to the Company's Form S-8 (No. 33-98038) filed
with the Commission on October 12, 1995 and incorporated herein
by reference).
3.2 Amended and Restated Bylaws of the Company (filed as Exhibit
4.2 to the Company's Form S-8 (No. 33-98038) filed with the
Commission on October 12, 1995 and incorporated herein by
reference).
3.3 First Amendment to the Amended and Restated Bylaws of the
Company (filed as Exhibit 3.3 of the Company's Quarterly Report
on Form 10-Q for the quarter ended August 2, 1997 filed with
the Commission on September 16, 1997 and is incorporated herein
by reference).
4.1 Specimen Certificate for shares of Common Stock, $.01 par
value, of the Company (filed as Exhibit 4.1 to the Company's
Amendment No. 2 to Form S-1 (No. 33-95090) filed with the
Commission on September 8, 1995 and incorporated herein by
reference).
10.1 Purchase Agreement dated as of January 31, 1992 among the
Company, Gerald R. Szczepanski, Lawrence H. Titus, Jr. and the
Investors listed therein (filed as Exhibit 10.1 to the
Company's Form S-1 (No. 33-95090) filed with the Commission on
July 28, 1995 and incorporated herein by reference).
10.2 Purchase Agreement dated as of May 26, 1994 among the Company,
Gerald R. Szczepanski, Lawrence H. Titus, Jr. and the Investors
listed therein (filed as Exhibit 10.2 to the Company's Form S-1
(No. 33-95090) filed with the Commission on July 28, 1995 and
incorporated herein by reference).
10.3 Credit Agreement dated as of January 30, 1997 between the
Company and Wells Fargo Bank (Texas), National Association
(filed as Exhibit 10.3 to the Company's 1996 Annual Report on
Form 10-K filed with the Commission on April 23, 1997 and
incorporated herein by reference).
</TABLE>
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<TABLE>
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10.4 Form of Indemnification Agreement with a schedule of director
signatories (filed as Exhibit 10.5 to the Company's Form S-1
(No. 33-95090) filed with the Commission on July 28, 1995 and
incorporated herein by reference).
10.5 Employment Agreement dated January 31, 1992 between the Company
and Gerald R. Szczepanski, as continued by letter agreement
(filed as Exhibit 10.6 to the Company's Form S-1 (No. 33-95090)
filed with the Commission on July 28, 1995 and incorporated
herein by reference).
10.6 1992 Incentive and Nonstatutory Stock Option Plan dated
February 26, 1992, and Amendments No. 1 through 3 thereto
(filed as Exhibit 10.8 to the Company's Form S-1 (No. 33-95090)
filed with the Commission on July 28, 1995 and incorporated
herein by reference).
10.7 1994 Incentive and Nonstatutory Stock Option Plan for Key
Employees dated September 30, 1994 (filed as Exhibit 10.9 to
the Company's Form S-1 (No. 33-95090) filed with the Commission
on July 28, 1995 and incorporated herein by reference).
10.8 1995 Non-Employee Director Stock Option Plan (filed as Exhibit
10.10 to the Company's Form S-1 (No. 333-00196) filed with the
Commission on January 9, 1996 and incorporated herein by
reference).
10.9 Gadzooks, Inc. Employees' Savings Plan (filed as Exhibit 10.11
to the Company's Form S-1 (No. 33-95090) filed with the
Commission on July 28, 1995 and incorporated herein by
reference).
10.10 Severance Agreement dated September 5, 1996 between the Company
and Gerald R. Szczepanski (filed as Exhibit 10.10 to the
Company's 1996 Annual Report on Form 10-K filed with the
Commission on April 23, 1997 and incorporated herein by
reference).
10.11 Form of Severance Agreement with a schedule of executive
officer signatories (filed as Exhibit 10.11 to the Company's
1996 Annual Report on Form 10-K filed with the Commission on
April 23, 1997 and incorporated herein by reference).
</TABLE>
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10.12 Amendment No. 4 to the Gadzooks, Inc. 1992 Incentive and
Nonstatutory Stock Option Plan (filed as Exhibit 10.14 to the
Company's Amendment No. 3 to Form S-1 (No. 33-95090) filed with
the Commission on September 27, 1995 and incorporated herein by
reference).
10.13 Amendment No. 5 to the Gadzooks, Inc. 1992 Incentive and
Nonstatutory Stock Option Plan dated September 12, 1996 (filed
as Exhibit 10.13 to the Company's 1996 Annual Report on Form
10-K filed with the Commission on April 23, 1997 and
incorporated herein by reference).
10.14 Amendment No. 1 to the 1994 Incentive and Nonstatutory Stock
Option Plan for Key Employees dated September 12, 1996 (filed
as Exhibit 10.14 to the Company's 1996 Annual Report on Form
10-K filed with the Commission on April 23, 1997 and
incorporated herein by reference).
27 Financial Data Schedule.
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<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-START> FEB-02-1997
<PERIOD-END> NOV-01-1997
<CASH> 14,295
<SECURITIES> 0
<RECEIVABLES> 2,980
<ALLOWANCES> 0
<INVENTORY> 34,547
<CURRENT-ASSETS> 2,082
<PP&E> 31,306
<DEPRECIATION> 8,306
<TOTAL-ASSETS> 76,904
<CURRENT-LIABILITIES> 21,856
<BONDS> 0
0
0
<COMMON> 87
<OTHER-SE> 40,665
<TOTAL-LIABILITY-AND-EQUITY> 76,904
<SALES> 41,268
<TOTAL-REVENUES> 0
<CGS> 28,629
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 9,770
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (168)
<INCOME-PRETAX> 3,037
<INCOME-TAX> 1,117
<INCOME-CONTINUING> 1,920
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,920
<EPS-PRIMARY> .21
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