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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 1, 1997
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 0-26732
GADZOOKS, INC.
(Exact name of registrant as specified in its charter)
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<C> <C>
TEXAS 74-2261048
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4121 INTERNATIONAL PARKWAY 75007
CARROLLTON, TEXAS (Zip Code)
(Address of principal executive offices)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(972) 307-5555
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
<C> <C>
Common Stock, $0.01 par value Nasdaq National Market
</TABLE>
Securities Registered Pursuant to Section 12(g) of the Act: NONE
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
-----
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K 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. [X]
The aggregate market value of Common Stock held by non-affiliates of the
registrant on April 11, 1997 was approximately $279,829,872. All outstanding
shares of voting stock, except for shares held by executive officers and members
of the Board of Directors and their affiliates, are deemed to be held by
non-affiliates.
On April 11, 1997, the registrant had 8,598,697 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part II incorporates information by reference from the registrant's Annual
Report to Shareholders for the fiscal year ended February 1, 1997, filed
herewith as Exhibit 13.
Part III incorporates information by reference from the definitive Proxy
Statement for the 1997 Annual Meeting of Shareholders, to be filed with the
Commission no later than 120 days after the end of the registrant's fiscal year
covered by this Form 10-K.
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PART I
ITEM 1. BUSINESS.
Gadzooks, Inc. (the "Company" or "Gadzooks") is a rapidly growing specialty
retailer of casual apparel and related accessories for young men and women
principally between the ages of 13 and 19. The Company currently operates 196
stores in both metropolitan and middle markets in 25 states throughout the Mid-
Atlantic, Midwest, Southeast and Southwest regions of the United States. The
Company opened 57 new stores during fiscal 1996. In addition, the Company plans
to open approximately 60 to 65 new stores in fiscal 1997, 13 of which have been
opened as of April 1997.
Management believes that current demographic trends provide the Company
with the opportunity to continue its rapid store expansion program. According to
the U.S. Census Bureau, there are approximately 25 million teenagers in the
United States today and the number is expected to grow to approximately 31
million by the year 2010. Management believes that teenagers represent both a
growing part of the U.S. population and an increasing source of purchasing
power.
The Company was incorporated in Texas in 1982, its executive offices are
located at 4121 International Parkway, Carrollton, Texas 75007, and its
telephone number is (972) 307-5555.
BUSINESS STRATEGY
The Company's goal is to become a leading retailer of brand name casual
apparel and related accessories to teenagers in each of the markets it serves.
The principal elements of the Company's business strategy to accomplish this
goal are as follows:
- Focus on the Male and Female Teenage Customer. The Company was founded on
management's belief that teenagers represent a significant segment of the
population that has been traditionally underserved by the retailing
market. Consequently, the Gadzooks concept focuses on providing
fashionable casual apparel and accessories to both male and female
teenage customers. By offering merchandise for both sexes, Gadzooks
believes that it serves a much broader customer base than many of its
specialty store competitors and that it reduces the potential fashion
risk of concentrating on one gender exclusively. Furthermore, Gadzooks
believes that it attracts additional customers by creating a shopping
environment where it is comfortable for both males and females to shop as
couples or with friends, as well as on their own.
- Multiple Merchandise Categories. A key component of the Company's
merchandising strategy is to reduce its dependence on any one fashion,
style, brand or item by offering products in a broad range of categories.
Each Gadzooks store carries approximately 2,000 stock-keeping units or
"SKUs" (excluding different sizes of the same item), including woven and
knit tops, jeans, shorts, junior dresses, swimwear, t-shirts, footwear,
sunglasses, watches, costume jewelry and other accessory items. The
Company regularly monitors store sales by classification, SKU and size to
identify emerging fashion trends, and manages the product mix in its
stores to respond to the spending patterns of its customers. The Company
believes that its success to date has been largely attributable to its
ability to meet the changing fashion preferences of its customers.
- Emphasis on Brand Name Merchandise. Another key feature of the Company's
merchandising strategy is to offer a wide variety of popular brand name
merchandise based on its belief that its customers shop primarily for
recognized labels and designs. The Company's merchandise includes high
visibility names such as Mossimo, JNCO, BC Ethic, 26 Red, Wu-Wear, Tag
Rag and Lip Service and other popular fashions and brand name
merchandise. The Company concentrates on merchandise that appeals to the
mainstream teenager rather than relying on "cutting edge" products. The
Company believes that this strategy is consistent with its philosophy of
responding to its customers' fashion preferences as opposed to attempting
to establish fashion trends.
- Metropolitan and Middle Market Locations. A central aspect of the
Company's strategy has been the development of a store concept that is
successful in both metropolitan and middle markets. The
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Company believes that teenagers throughout the United States frequently
have similar fashion preferences as a result of the influence of
television programs, MTV and music and fashion magazines. As a result,
the Company has been able to operate stores successfully across a broad
range of demographic and geographic markets, increasing the number of
potential sites available to the Company.
- Attentive Customer Service. The Company is committed to offering
professional, attentive and personalized customer service. Gadzooks hires
young, energetic, service-oriented sales associates who understand
teenagers and can relate to their changing needs and preferences. The
Company strives to give its teenage customers the same level of respect
and attention that is generally given to adult customers at other retail
stores. The Company trains sales associates to greet each customer
personally, to inform the customer about new fashion trends and to
suggest merchandise to suit the customer's wardrobe and lifestyle needs.
The Company believes that the high level of service given to its teenage
customers differentiates Gadzooks from its competition.
- Entertaining Store Environment. The Company believes that its stores are
visually appealing and provide a fun and enjoyable shopping experience
for its customers. Gadzooks stores are designed to create a high energy,
fun environment using neon lighting, television monitors featuring
popular music videos, playful mannequins and creative, eye-catching
signage. The Company's signature Volkswagen Beetle, decorated with
merchandise, is a feature attraction in the stores. The Company believes
that its entertaining store design encourages customers to visit the
stores more frequently and to shop in the stores for longer periods of
time. While Gadzooks stores are designed to appeal primarily to the
teenage customer, the Company also strives to create a shopping
environment that is comfortable for adults.
- Investment in Systems and Personnel. The Company is committed to
investing in information systems and using current technology to help
execute its merchandising strategy. The Company's systems provide its
buyers and merchandise planners with daily sales and inventory
information by store, SKU and size, allowing Gadzooks to respond to
changing customer preferences and to stock the appropriate quantities and
styles of merchandise at each store. The Company is also committed to
attracting and retaining highly-qualified, service-oriented management
and sales associates and providing them with career advancement
opportunities. The corporate culture at Gadzooks promotes the open
exchange of new ideas and information between all levels of the Company
thereby enabling management to supplement the data from its information
systems with the practical experience of its employees.
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STORE LOCATIONS
The Company currently operates 196 stores in 25 states. The Company's
existing stores are located in metropolitan markets such as Dallas, Atlanta,
Kansas City, Chicago and Cincinnati, as well as middle markets such as Amarillo,
Texas; Tupelo, Mississippi; and Roanoke, Virginia. The following store list
shows the number of stores that Gadzooks operates in each state and the cities
in which Gadzooks stores are located.
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<S> <C> <C> <C> <C>
ALABAMA-3 INDIANA-7 MARYLAND-1 OKLAHOMA-6 VIRGINIA-7
Huntsville Evansville Frederick Lawton Charlottesville
Mobile Fort Wayne Norman Chesapeake
Montgomery Indianapolis MINNESOTA-3 Oklahoma City(3) Harrisonburg
Lafayette Minneapolis/St. Paul Tulsa Newport News
ARKANSAS-5 Merrillville St. Cloud Roanoke
Fayetteville Muncie SOUTH CAROLINA-6 Springfield
Fort Smith Terre Haute MISSISSIPPI-3 Charleston(2) (Washington, D.C.)
Jonesboro Hattiesburg Columbia(2) Virginia Beach
Little Rock(2) IOWA-8 Jackson Greenville
Cedar Rapids Tupelo Spartanburg WEST VIRGINIA-3
FLORIDA-4 Council Bluffs Charleston
Jacksonville Davenport MISSOURI-9 TENNESSEE-10 Huntington
Orlando Des Moines(3) Columbia Chattanooga Parkersburg
Pensacola Dubuque Joplin Kingsport
Tallahassee Sioux City Kansas City(3) Knoxville(2) WISCONSIN-8
Springfield Memphis(3) Appleton
GEORGIA-6 KANSAS-6 St. Louis(3) Nashville(3) Eau Claire
Athens Hays Green Bay
Atlanta(4) Manhattan NEBRASKA-4 TEXAS-53 Madison(2)
Macon Salina Grand Island Abilene Milwaukee(3)
Topeka Lincoln Amarillo
ILLINOIS-15 Wichita(2) Omaha(2) Austin(2)
Bloomington Beaumont
Carbondale KENTUCKY-4 NEW MEXICO-3 College Station
Chicago(8) Ashland Albuquerque(2) Corpus Christi
Fairview Heights Florence/Cincinnati Las Cruces Dallas/Ft. Worth(10)
(St. Louis) Lexington Denton
Moline Paducah NORTH CAROLINA-5 El Paso(2)
Peoria Charlotte Harlingen
Rockford LOUISIANA-10 Durham Houston(12)
Springfield Alexandria Greensboro Killeen
Baton Rouge Hickory Laredo
Bossier City High Point Longview
Houma Lubbock
Lafayette OHIO-7 McAllen
Lake Charles Cincinnati(2) Midland
Monroe Cleveland(4) Odessa
New Orleans(2) Dayton Port Arthur
Shreveport San Angelo
San Antonio(4)
Sherman
Temple
Texarkana
Tyler
Victoria
Waco
Wichita Falls
</TABLE>
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EXPANSION STRATEGY
The following table provides a history of the Company's store expansion
program over the past five fiscal years.
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Number of stores open at beginning of period.......... 33 43 65 90 126
Number of new stores opened........................... 10 23 26 39 57
Number of stores closed............................... -- 1 1 3 --
-- -- -- --- ---
Number of stores open at end of period................ 43 65 90 126 183
== == == === ===
</TABLE>
The Company's expansion strategy is to continue to open stores in enclosed
shopping malls in both metropolitan markets and middle markets primarily in the
Mid-Atlantic, Midwest, Southeast and Southwest, and the Company is considering
expansion into other regions. The Company opened 57 new stores during fiscal
1996. The Company expects to open approximately 60 to 65 new stores during
fiscal 1997, 13 of which have been opened as of April 1997. The Company believes
that the broad appeal of the Gadzooks concept enables it to operate successfully
in diverse geographic and demographic markets, thereby increasing the number of
potential sites available to the Company.
The Company selects locations for new store openings to achieve a balance
between (i) test markets where the Company has had no previous operating
experience, (ii) new markets where the Company has tested a Gadzooks store and
believes that the Company can successfully expand, and (iii) mature markets
where the Company desires to add new stores at attractive locations as they
become available. In general, the Company will open the highest number of stores
in new markets where the Company's concept has recently been introduced and
where the Company believes that it can capitalize on the potential of these
markets. The Company typically expands from existing markets into contiguous new
markets and attempts to cluster its stores within a market area in order to
achieve management and operating efficiencies and to enhance its name
recognition. In addition, from time to time the Company analyzes stores for
potential closing.
The Company has from time to time analyzed potential acquisitions of small
chains of stores that serve its target customer in order to provide the Company
with more rapid access to desirable locations and new markets and may consider
such acquisitions again in the future. Except for a limited number of stores
acquired from former franchisees, the Company has never made any such
acquisitions and does not currently have any agreements for any in the future.
STORE-LEVEL ECONOMICS
The Company's 183 stores averaged $814,838 in net sales and produced net
sales per square foot of approximately $356. Stores which were opened during all
of fiscal 1996, a total of 126 stores, generated average store-level operating
cash flow (defined as store operating income before depreciation and excluding
changes in working capital) of approximately $158,000, or 19.5% of average net
sales. In general, the Company's newer stores typically generate lower sales
volumes and operating cash flow than its more mature stores. Given the Company's
plan to significantly expand its store base in new geographic markets, the
Company believes that its store-level averages will decline slightly in the near
term. Capital expenditures, including leasehold improvements and furniture and
fixtures, for the 57 new stores opened during fiscal 1996 averaged approximately
$167,000 (approximately $100,000 net of all landlord allowances), and initial
gross inventory requirements (which were partially financed by trade credit)
averaged approximately $60,000 per store. Pre-opening costs range from $8,000 to
$10,000 for travel, hiring and training, and other miscellaneous costs
associated with the set-up of a new store prior to its opening for business.
Inventory requirements vary at new stores depending on the season and current
fashion trends. There can be no assurance that in the future, the average
store-level sales and operating cash flow will not vary from historical results
or that the total estimated capital expenditures for new stores will not
increase.
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MERCHANDISING
The Company's merchandising strategy is to provide a wide range of brand
name casual apparel and related accessories that reflect the fashion preferences
of young men and women principally between the ages of 13 and 19. Each store
typically carries an inventory of approximately 2,000 SKUs, with most
merchandise selling at prices ranging between $15 and $50.
The Company's merchandise includes high visibility names such as Mossimo,
JNCO, BC Ethic, 26 Red, Wu-Wear, Tag Rag and Lip Service and other popular
fashions and brand name merchandise. The Company concentrates on merchandise
that appeals to the mainstream teenager rather than relying on "cutting edge"
products. The Company believes that this strategy is consistent with its
philosophy of responding to its customers' fashion preferences as opposed to
attempting to establish fashion trends.
The Company classifies all of its merchandise into one of five categories
as follows:
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<S> <C>
- - Young Men: The Company's Young Men category includes casual
sportswear separates reflecting current fashion trends,
such as woven and knit tops and bottoms made of denim and
other fabrics. The key vendors in this category include
Mossimo, JNCO, BC Ethic and Reactor.
- - Juniors (Young The Company's Juniors category includes casual sportswear
Women): separates designed for the fashion-current young woman,
such as knit tops, woven shirts and vests, denim, dresses
and swimwear. The key vendors in this category include
Generation X, Lip Service, Tag Rag and Jalate.
- - Accessories: The Company offers a variety of male, female and unisex
accessories including sunglasses, watches, wallets, key
chains, handbags, earrings, necklaces, hats and other
accessories. The key vendors in this category include
Oakley, Fossil, Mossimo and Zedhead.
- - Unisex Apparel: The Company offers unisex apparel, consisting primarily
of t-shirts with logos containing current topics and
humorous designs and phrases. This category includes
merchandise from various vendors as well as a small
selection of Company-designed products. Periodically, the
Company will supplement this category with other apparel
appropriate for both sexes.
- - Footwear: The Company offers male, female and unisex footwear
including sandals and active footwear. The key vendors in
this category include Dr. Martens, Airwalk and Vans.
</TABLE>
The following table sets forth the Company's merchandise by category as an
approximate percentage of net sales for fiscal 1996:
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
-----------------------
<S> <C>
Juniors (Young Women)....................................... 30%
Young Men................................................... 27
Accessories................................................. 20
Unisex Apparel.............................................. 13
Footwear.................................................... 10
---
100%
===
</TABLE>
By offering products in multiple categories, the Company is able to shift
its merchandise emphasis among and within its core categories to respond to
changing customer preferences. For example, in response to increased demand for
junior and young men's apparel in fiscal 1996, the Company increased its
emphasis in
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these merchandise categories and decreased its emphasis in the merchandise
categories that the Company identified as having decreased demand. The Company
expects to continue to adjust its emphasis on particular categories in response
to fashion trends and, therefore, its merchandise mix may vary slightly at
different times.
In an effort to keep the stores fresh and exciting, the Company's
merchandising staff provides specific floor sets and merchandising ideas to the
stores and regularly instructs district and store managers on the creative
display of merchandise. The merchandise presentation in the stores is
significantly changed three times each year to highlight specific merchandise
for each of the Company's three peak selling seasons and to maintain a current
look. In addition, the Company maintains a constant flow of new merchandise to
the stores in order to meet changing fashion preferences. To reduce the risk
associated with the introduction of new products, the Company frequently tests
products in selected stores before determining if it will purchase the product
for a broader group of stores.
PURCHASING
The Company's purchasing staff consists of a General Merchandising Manager,
five buyers, four associate buyers and five assistants. The General
Merchandising Manager and the buyers analyze current fashion directions by
visiting major fashion markets and maintaining close relationships with the
Company's vendors in order to identify styles and trends. In addition, the
Company's buyers regularly attend concerts and other events attended by
teenagers. The General Merchandising Manager and the buyers constantly monitor
merchandise flow through the stores and strive to maintain the appropriate
merchandise mix to meet customer demand. Several of the buyers were formerly
district managers or store managers of the Company and are familiar with the
Company's customers and their merchandise preferences.
Due to changes in fashion trends and seasonality, the Company purchases
merchandise from numerous vendors throughout the year. During fiscal 1996, the
Company did business with approximately 990 vendors. Of those vendors, Mossimo,
Inc. accounted for approximately 6% of the Company's merchandise purchases, and
no other single vendor accounted for more than 5% of merchandise purchases.
Certain of the Company's vendors have limited financial resources and production
capabilities. The Company believes that its relationships with its vendors are
good.
ALLOCATION AND DISTRIBUTION OF MERCHANDISE
The Company continually strives to improve its merchandising, distribution,
planning and allocation methods to manage its inventory more efficiently. The
Company's Director of Planning and Allocation and the six personnel in the
planning and allocation department work closely with merchandise buyers and
store personnel to meet the requirements of individual stores for appropriate
merchandise in sufficient quantities. The Company divides its stores into
different categories based on, among other things, geographic location,
demographics and sales volume. Product allocation and distribution are based in
part on an analysis of the stores by category. Information from the Company's
point-of-sale computer system is regularly reviewed and analyzed to assist in
making merchandise allocation and markdown decisions.
In May 1997, the Company will relocate its headquarters to a larger site,
in the Dallas metropolitan area, which will include a distribution facility of
approximately 110,000 square feet. Merchandise will be delivered by the vendors
to this facility, where it will be inspected, entered into the Company's
computer system, allocated to stores, ticketed (to the extent that it was not
pre-ticketed by the vendor) and boxed for distribution to the Company's stores.
Currently, merchandise is typically shipped to stores daily via United Parcel
Service, providing Gadzooks stores with a steady flow of new merchandise. For
key products, the Company maintains a backstock at its distribution center that
is allocated and distributed to the stores through an automatic replenishment
program.
STORE OPERATIONS
Gadzooks stores are open seven days a week during normal mall hours. The
Company's store operations are managed by a Vice President of Store Operations,
four regional managers and 26 district managers who
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generally have responsibility for 8 to 10 stores within a geographic district.
Individual stores are managed by a store manager and two assistant store
managers. A typical store has three full time and 6 to 12 part time sales
associates, depending on the season. Gadzooks compensates its district and store
managers with a base salary, a performance bonus based on store sales, expense
control and loss prevention, and, in the case of district managers, stock
options. Sales associates are compensated on an hourly basis.
The Company believes that its continued success is dependent in part on its
ability to attract, retain and motivate quality employees. In particular, the
success of the Company's expansion program will be dependent on its ability to
promote and/or recruit qualified district and store managers. To date, the vast
majority of the Company's district managers were previously Gadzooks store
managers. The Company has recently established a training program for future
district managers. In addition, store managers, many of whom are selected from
among the Company's sales associates, currently complete a two-week training
program either at the Company's headquarters or a designated training store
before taking responsibility for a store. The hiring and training of new sales
associates are the responsibility of store managers, and the Company has
established training and operations manuals to assist them in this process. The
Company is developing enhanced training programs for its store managers,
assistant managers and sales associates.
Management considers its employees' knowledge of the Company's customers
and merchandise to be significant to its marketing approach and customer
satisfaction. While all Gadzooks store employees are responsible for the general
appearance of the store, restocking of shelves and merchandise presentation, the
Company's major emphasis in training its store employees is to give priority to
customer service and assistance. Sales associates regularly act as greeters,
meeting customers as they enter the store, handing out promotional materials and
offering assistance. The Company trains its sales associates to inform the
customer about new fashion trends and to suggest merchandise that suits the
customer's wardrobe and lifestyle needs. The Company monitors the customer
service level at each store through various programs, including its "I Spy"
program of unannounced visits to the stores by shoppers who are unknown by the
store employees and by regularly reviewing and responding to comment cards
received from its customers.
STORE ENVIRONMENT
The Company believes that its stores are visually appealing and provide a
fun and enjoyable shopping experience for its customers. Gadzooks stores are
designed to create a high energy, fun environment using neon lighting,
television monitors featuring popular music videos, playful mannequins and
creative, eye-catching signage. Store entrances are typically decorated with a
brightly colored checkerboard floor, and a Volkswagen Beetle, decorated with
merchandise, is a feature attraction in the stores. The Company displays a
significant amount of merchandise on the walls of the store, with male
merchandise along one side, female merchandise along the other and t-shirts
along part of the back wall. In the center of the store, lower fixtures are used
to display merchandise in order to maintain an open feeling. Stores typically
feature large windows along the mall which provide an open view of the entire
store to mall traffic and are merchandised to draw customers into the store.
While Gadzooks stores are designed to appeal primarily to the teenage customer,
the Company also strives to create a shopping environment that is comfortable
for adults.
SITE SELECTION
Based on its results to date in both metropolitan and middle markets, the
Company believes that it can operate successfully in markets with a broad range
of geographic and demographic profiles. The Company takes into account certain
demographic factors such as population density, concentration of teenagers,
income levels, lifestyle characteristics and the performance of other retailers
to identify attractive new markets, evaluate specific shopping malls and project
individual store sales volumes. All new store locations are approved by the
Board of Directors.
Within each shopping mall, the Company typically seeks a highly visible
location and often locates its stores near major fashion-oriented department
stores, food courts and other specialty stores catering to teenage customers.
The Company's existing stores average approximately 2,300 square feet. The
Company typically seeks a location of approximately 2,000 to 2,500 square feet
with significant store frontage. However, the
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Company's flexible store design enables it to take advantage of well-situated
sites with more unique layouts. Once a site is approved, the Company, with the
assistance of an outside architect, designs the store to meet the specific site
characteristics. The Company's construction department seeks competitive bids
from outside contractors for the build-out of each store and oversees the
construction process. The Company typically requires six to eight weeks to open
a new store after the beginning of build-out.
MANAGEMENT INFORMATION SYSTEMS
Each Gadzooks store is linked to the Company's headquarters through a
point-of-sale system that interfaces with an IBM RS6000 computer equipped with
an integrated merchandising, distribution and accounting software package. The
Company's point-of-sale computer system has several features, including
merchandise scanning, "price look-up," the ability to compile preferred customer
lists and on-line credit card approval. These features improve transaction
accuracy, speed and checkout time, increase overall store efficiency, and enable
the Company to track the productivity of individual sales associates.
The Company's management information and control systems enable the
Company's corporate headquarters to promptly identify sales trends, replenish
depleted store inventories, reprice merchandise and monitor merchandise mix and
inventory shrinkage at individual stores and throughout the Company's store
network. Management believes that these systems provide a number of benefits,
including improved store inventory management, better in-stock availability,
higher operating efficiency and fewer markdowns.
The Company's merchandising, distribution and accounting software system
was installed in late 1993, and the point-of-sale software system was installed
during the second quarter of fiscal 1995. The Company estimates that its current
management information and control systems are adequate to support the Company's
planned expansion, but may upgrade and enhance its computer systems for certain
distribution functions in the last half of fiscal 1997.
ADVERTISING AND PROMOTION
The Company relies primarily on the enthusiasm of its sales associates and
existing customers, highly visible store locations and eye-catching signage to
attract new customers to the stores. The Company has generally found this
approach to be more cost effective than more traditional media advertising. The
Company plans the opening of new stores to coincide with peak shopping seasons
and mall grand openings when customer traffic is greater. The Company also uses
promotions to generate repeat visits to its stores, such as a "preferred
customer program" that entitles high volume customers to attend private sale
events held twice each year. The Company advertises to a limited extent in
national magazines, such as Seventeen and YM in cooperation with certain of its
vendors. The Company also benefits from advertising by its vendors, especially
where Gadzooks is listed as a retailer of their products.
TRADEMARKS
The Company has registered on the Principal Register of the United States
Patent and Trademark Office its mark "Gadzooks" and the distinctive design of
its service mark and has currently pending registration for "Gaditude" and "Cool
Stuff for Teens." Each federal registration is renewable indefinitely if the
mark is in use at the time of the renewal. The Company is not aware of any
claims of infringement or other challenges to the Company's right to use its
marks in the United States.
COMPETITION
The teenage retail apparel and accessories industry is highly competitive.
The Company competes with other retailers for customers, suitable retail
locations and qualified management personnel. Gadzooks currently competes with
traditional department stores such as Foley's and Dillard's, with national
specialty chains such as The Gap and certain divisions of The Limited, with
numerous regional chains such as The Buckle, Wet Seal and Pacific Sunwear, with
smaller chains and local specialty stores and, to a lesser extent, with mass
merchandisers. Many of the Company's competitors are larger and have
substantially greater
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financial, marketing and other resources than the Company. The principal factors
of competition in the Company's business are fashion, merchandise selection,
customer service, store location and price.
EMPLOYEES
At April 11, 1997, the Company had 775 full-time employees and 1,605
part-time employees. Of the Company's 2,380 employees, 122 were corporate
personnel, 62 were distribution center employees and 2,196 were store employees.
The number of part-time employees fluctuates with seasonal needs. None of the
Company's employees is covered by a collective bargaining agreement. The Company
seeks to create a casual and supportive working environment and considers its
employee relations to be excellent.
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RISK FACTORS
This Report contains certain forward looking statements about the business,
operations and financial condition of the Company. The actual results of the
Company could differ materially from those forward looking statements. The
following information sets forth certain factors that could cause the actual
results of the Company to differ materially from those contained in the forward
looking statements.
AGGRESSIVE GROWTH STRATEGY; FUTURE OPERATING RESULTS
The Company's net sales and net income have grown significantly during the
past several years, primarily as a result of the opening of new stores and, to a
lesser extent, increases in comparable store sales. The Company intends to
continue to pursue an aggressive growth strategy for the foreseeable future, and
its future operating results will depend largely upon its ability to open and
operate new stores successfully and to manage a larger business profitably. The
Company anticipates opening approximately 60 to 65 new stores during fiscal
1997, which will result in a significant increase in the number of stores
operated by the Company. The Company also plans to enter several new markets in
various regions of the United States. Expansion into new markets may present
competitive and merchandising challenges that are different from those currently
encountered by the Company in its existing markets. As an additional part of its
growth strategy, the Company has occasionally analyzed the acquisition of other
retailers that serve the Company's target customer and may consider such
acquisitions again in the future. Except for a limited number of stores acquired
from former franchisees, the Company has never made any such acquisitions and
does not currently have any agreements for any in the future. There can be no
assurance that the operations of any acquired entities could be successfully
integrated with the Company's existing operations or that the combined business
would be profitable.
The Company is subject to a variety of business risks generally associated
with rapidly growing companies. The Company's ability to open new stores will
depend upon many factors, including, among others, the ability to identify and
enter new markets, locate suitable store sites, negotiate acceptable lease
terms, hire and train store managers and sales associates and obtain adequate
capital resources on acceptable terms. There can be no assurance that the
Company will be able to integrate successfully new stores into its operations or
that new stores will achieve sales and profitability levels comparable to the
Company's existing stores. In addition, there can be no assurance that the
Company's expansion within its existing markets will not adversely affect the
individual financial performance of the Company's existing stores or its overall
results of operations. Furthermore, the Company will need to continually
evaluate the adequacy of its store management and management information and
distribution systems to manage its planned expansion. There can be no assurance
that the Company will anticipate all of the changing demands that its expanding
operations will impose on such systems and facilities, and the failure to adapt
its systems, facilities and procedures could have a material adverse effect on
the Company's business. There can be no assurance that the Company will
successfully achieve its planned expansion or, if achieved, that the expansion
will result in profitable operations. See "Business -- Store Locations" and
"-- Expansion Strategy."
The Company anticipates that it will spend approximately $7.0 million for
capital expenditures and approximately $4.0 million for initial inventories to
open approximately 60 to 65 new stores and to remodel 6 to 7 existing stores in
fiscal 1997. The actual costs that the Company will incur in connection with
opening new stores cannot be predicted with precision because such costs will
vary based upon, among other things, geographic location, the size of the store
and the extent of the build-out required at the selected site. The Company
believes that its existing cash balances, cash generated from operations, net
proceeds received by the Company from its public offerings and funds available
under the Company's revolving line of credit will be sufficient to fund its
expansion requirements through at least 1997. There can be no assurance that the
Company may not be required to seek additional sources of funds for such
expansion.
FLUCTUATIONS IN COMPARABLE STORE SALES RESULTS
A variety of factors affect the Company's comparable store sales results
including, among others, economic conditions, fashion trends, the retail sales
environment, sourcing and distribution of products and the
11
<PAGE> 12
Company's ability to execute its business strategy efficiently. The Company's
quarterly comparable store sales results have fluctuated significantly in the
past. The Company's comparable store sales results were 24.2%, 10.5%, 10.9% and
15.6% in the first, second, third and fourth quarters of fiscal 1995,
respectively, and 7.3%, 8.6%, 5.9% and 3.9% in the first, second, third and
fourth quarters of fiscal 1996, respectively. The Company has recorded
comparable store sales decreases in past quarters, and there can be no assurance
that comparable store sales for any particular quarter or fiscal year will not
decrease in the future. The Company's comparable store sales results could cause
the price of the Common Stock to fluctuate substantially.
CHANGES IN FASHION TRENDS
The Company's profitability is largely dependent upon its ability to
anticipate the fashion tastes of its customers and to provide merchandise that
appeals to their preferences in a timely manner. The fashion tastes of the
Company's customers may change frequently, and the Company's failure to
anticipate, identify or react appropriately to changes in styles, trends or
brand preferences could lead to, among other things, excess inventories and
higher markdowns, which could have a material adverse effect on the Company's
business. In addition, fashion misjudgments could materially and adversely
affect the Company's operating results, comparable store sales results and image
with its customers. See "Business -- Merchandising."
IMPACT OF ECONOMIC CONDITIONS
Certain economic conditions affect the level of consumer spending on
merchandise offered by the Company, including, among others, business
conditions, interest rates, taxation and consumer confidence in future economic
conditions. If the demand for apparel and related merchandise by teenagers were
to decline, the Company's business, comparable store sales results and results
of operations would be materially and adversely affected. Although the Company
advertises in national magazines to a limited extent through cooperative
agreements with certain of its vendors, its stores rely principally on mall
traffic for customers. Therefore, the Company is dependent upon the continued
popularity of malls as a shopping destination and the ability of mall anchor
tenants and other attractions to generate customer traffic for its stores. A
decrease in mall traffic or a decline in economic conditions in the markets in
which the Company's stores are located would adversely affect the Company's
growth, net sales, comparable store sales results and profitability. See
"Business."
QUARTERLY RESULTS AND SEASONALITY
The Company's quarterly results of operations may fluctuate materially
depending on, among other things, the timing of new store openings and related
pre-opening expenses, net sales contributed by new stores, increases or
decreases in comparable store sales, shifts in timing of certain holidays and
changes in the Company's merchandise mix. The Company's business is also subject
to seasonal influences, with heavier concentrations of sales during the
Christmas holiday, back-to-school and spring break seasons. As is the case with
many apparel retailers, the Company's net sales and net income are typically
lower in the first quarter. The Company has experienced first quarter losses in
the past and may experience such losses in the future. Because of these
fluctuations in net sales and net income, the results of operations of any
quarter are not necessarily indicative of the results that may be achieved for a
full fiscal year or any future quarter.
DEPENDENCE ON KEY VENDORS
The Company's business depends on its ability to purchase current season,
brand name apparel in sufficient quantities at competitive prices. During the
Company's 1996 fiscal year, Mossimo, Inc. accounted for approximately 6% of the
Company's merchandise purchases. Of the Company's other vendors, no single
vendor accounted for more than 5% of the Company's merchandise purchases. The
inability or failure of key vendors to supply the Company with adequate
quantities of desired merchandise, the loss of one or more key vendors or a
material change in the Company's current purchase terms could have a material
adverse effect on the Company's business. Many of the Company's smaller vendors
have limited resources, production capacities and operating histories, and many
have limited the distribution of their merchandise in the past. The Company has
no long-term purchase contracts or other contractual assurances of continued
supply,
12
<PAGE> 13
pricing or access to new products. There can be no assurance that the Company
will be able to acquire desired merchandise in sufficient quantities on terms
acceptable to the Company in the future. See "Business -- Merchandising" and
"-- Purchasing."
DEPENDENCE ON KEY PERSONNEL
The Company's success will depend largely on the efforts and abilities of
senior management, particularly Gerald R. Szczepanski, the Chairman of the Board
and Chief Executive Officer and a founder of the Company. The loss of his
services or the services of other members of senior management could have a
material adverse effect on the Company's business. The Company has a $1,000,000
key-man life insurance policy on Mr. Szczepanski. There can be no assurance that
the Company's existing management team will be able to manage the Company or its
growth or that the Company will be able to attract and retain additional
qualified personnel as needed in the future.
COMPETITION
The Company operates in a highly competitive environment. The Company
currently competes with traditional retail department stores such as Foley's and
Dillard's, with national specialty chains such as The Gap and certain divisions
of The Limited, with numerous regional chains such as The Buckle, Wet Seal and
Pacific Sunwear, with smaller chains and local specialty stores and, to a lesser
extent, with mass merchandisers. Many of these competitors are larger and have
substantially greater resources than the Company. Direct competition with these
and other retailers may increase significantly in the future, which could
require the Company, among other things, to lower its prices and/or increase its
advertising expenses. Increased competition could have a material adverse effect
on the Company's operations and comparable store sales results. See
"Business -- Competition."
STOCK PRICE VOLATILITY
The market price of the Company's Common Stock has risen substantially
since the Company's initial public offering in October 1995. The Company's
Common Stock is quoted on the Nasdaq National Market, which has experienced and
is likely to experience in the future significant price and volume fluctuations
which could adversely affect the market price of the Common Stock without regard
to the operating performance of the Company. In addition, the Company believes
that factors such as quarterly fluctuations in the financial results of the
Company, the Company's comparable store sales results, announcements by other
apparel retailers, the overall economy and the condition of the financial
markets could cause the price of the Common Stock to fluctuate substantially.
ANTI-TAKEOVER MATTERS
The Company's Restated Articles and its Bylaws contain provisions that may
have the effect of delaying, deterring or preventing a takeover of the Company
that shareholders may consider to be in their best interests. The Company's
Restated Articles and Bylaws provide for a classified Board of Directors serving
staggered terms of three years, the prohibition of shareholder action by written
consent in certain circumstances and certain "fair price provisions."
Additionally, the Board of Directors has the authority to issue up to 1,000,000
shares of preferred stock having such rights, preferences and privileges as
designated by the Board of Directors without shareholder approval.
ITEM 2. PROPERTIES.
All of the existing stores are leased by the Company, with lease terms
(excluding renewal option periods exercisable by the Company at escalating
rents) expiring between February 1997 and February 2007. The leases for most of
the existing stores are for terms of 10 years and provide for contingent rent
based upon a percent of sales in excess of specified minimums.
In May 1997, the Company will relocate its office and distribution center
to a larger site in the Dallas metropolitan area in order to accommodate its
expanding operations. The Company's new office and
13
<PAGE> 14
distribution center will be located in Carrollton, Texas and will be occupied
under a lease covering approximately 150,000 square feet, which is scheduled to
expire on May 1, 2007.
ITEM 3. LEGAL PROCEEDINGS.
In the ordinary course of its business, the Company is periodically a party
to lawsuits. The Company believes that any resulting liability from existing
legal proceedings, individually or in the aggregate, will not have a material
adverse effect on its operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock is traded on the Nasdaq National Market under the symbol
"GADZ." The Company consummated its initial public offering in October 1995 at a
price of $14.00 per share ($9.33, as adjusted to give effect to the stock split
described below). The following table sets forth, for the Company's fiscal
periods indicated and is adjusted to give retroactive effect to the Company's
three-for-two Common Stock split paid on May 30, 1996, the high and low sale
prices per share for the Common Stock, as reported on the Nasdaq National
Market.
<TABLE>
<CAPTION>
HIGH LOW
---- -----
<S> <C> <C>
1995
- ----------------------------------------
Third Quarter (from October 5, 1995).... $14 $ 9 1/3
Fourth Quarter.......................... 18 5/6 11 1/3
1996
- ----------------------------------------
First Quarter........................... 30 5/8 15 13/16
Second Quarter.......................... 41 23 1/4
Third Quarter........................... 39 3/4 22
Fourth Quarter.......................... 34 1/4 17 1/2
</TABLE>
On April 11, 1997, the last sale price of the Common Stock as reported on
the Nasdaq National Market was $33.25 per share. As of April 11, 1997, there
were approximately 60 holders of record of the Common Stock, although the
Company believes the number of beneficial holders is substantially greater.
The Company intends to retain its earnings, if any, to finance the growth
and development of its business and does not anticipate paying cash dividends on
its Common Stock in the foreseeable future. The payment of any future dividends
will be at the discretion of the Company's Board of Directors and will depend
upon, among other things, the future earnings, operations, capital requirements
and financial condition of the Company. In addition, the Company's current
revolving line of credit ("Revolving Line") contains various financial
covenants, including covenants relating to net worth, which may have the effect
of restricting the Company's ability to pay dividends.
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial and operating data in response to Item 6 is
contained in the section entitled "Selected Financial Data," located on page 15
of the registrant's 1996 Annual Report to Shareholders, filed as Exhibit 13 to
this Report. Such Exhibit is incorporated herein by reference.
14
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information in response to item 7 is contained in the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," located on pages 16 to 19 of the registrant's 1996 Annual Report to
Shareholders, filed as Exhibit 13 to this Report. Such Exhibit is incorporated
herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The registrant's exposures to market risk associated with activities in
derivative financial instruments, other financial instruments, and derivative
commodity instruments are not material with respect to its operations or
financial condition.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information in response to item 8 is contained in the registrant's 1996
Annual Report to Shareholders, filed as Exhibit 13 to this Report. Such Exhibit
is incorporated herein by reference. A cross-reference for location of the
requested information is below.
<TABLE>
<CAPTION>
PAGE NUMBER(S) IN
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ANNUAL REPORT*
------------------------------------------- -----------------
<S> <C>
Unaudited Quarterly Financial Data.......................... 18
Balance Sheets at February 1, 1997 and January 27, 1996..... 20
Statements of Income for the Years Ended February 1, 1997,
January 27, 1996 and January 28, 1995..................... 21
Statements of Stockholders' Equity for the Years Ended
February 1, 1997, January 27, 1996 and January 28, 1995... 22
Statements of Cash Flows for the Years Ended February 1,
1997, January 27, 1996 and January 28, 1995............... 23
Notes to Financial Statements............................... 24-30
Report of Independent Accountants........................... 31
</TABLE>
- ---------------
* The indicated pages of the Company's 1996 Annual Report to Shareholders are
filed as Exhibit 13 to this Report. Such Exhibit is incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to this item is incorporated by reference from the
registrant's definitive Proxy Statement to be filed with the Commission not
later than 120 days after the end of the registrant's fiscal year.
ITEM 11. EXECUTIVE COMPENSATION.
Information with respect to this item is incorporated by reference from the
registrant's definitive Proxy Statement to be filed with the Commission not
later than 120 days after the end of the registrant's fiscal year.
15
<PAGE> 16
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information with respect to this item is incorporated by reference from the
registrant's definitive Proxy Statement to be filed with the Commission not
later than 120 days after the end of the registrant's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information with respect to this item is incorporated by reference from the
registrant's definitive Proxy Statement to be filed with the Commission not
later than 120 days after the end of the registrant's fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. The financial statements as cross-referenced in Item 8 of this
Report, together with the report thereon of Price Waterhouse LLP
dated March 12, 1997, appearing in the accompanying 1996 Annual
Report to Shareholders are incorporated by referenced in this
Report. With the exception of the aforementioned information and
information incorporated in Items 6 and 7, the 1996 Annual Report to
Shareholders is not deemed filed as part of this Report.
2. Financial statement schedules are omitted because they are not
applicable or the required information is shown in the financial
statements or notes thereto.
3. Exhibits included or incorporated herein:
See Exhibit Index.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the last quarter of
the fiscal year covered by this report.
16
<PAGE> 17
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
April 22, 1997 on its behalf by the undersigned, thereunto duly authorized.
GADZOOKS, INC.
By /s/ GERALD R. SZCZEPANSKI
-----------------------------------
Gerald R. Szczepanski
Chairman of the Board, President
and Chief Executive Officer
Each person whose signature appears below hereby authorizes Gerald R.
Szczepanski and Monty R. Standifer or either of them, as attorneys-in-fact to
sign on his behalf, individually, and in each capacity stated below and to file
all amendments and/or supplements to the Annual Report on Form 10-K.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ GERALD R. SZCZEPANSKI Chairman of the Board, President April 22, 1997
- ----------------------------------------------------- and Chief Executive Officer
Gerald R. Szczepanski (Principal Executive Officer)
/s/ MONTY R. STANDIFER Senior Vice President, Chief April 22, 1997
- ----------------------------------------------------- Financial Officer, Treasurer
Monty R. Standifer and Secretary (Principal
Financial and Accounting
Officer)
/s/ ALAN W. CRITES Director April 22, 1997
- -----------------------------------------------------
Alan W. Crites
/s/ G. MICHAEL MACHENS Director April 22, 1997
- -----------------------------------------------------
G. Michael Machens
/s/ ROBERT E.M. NOURSE Director April 22, 1997
- -----------------------------------------------------
Robert E.M. Nourse
/s/ LAWRENCE H. TITUS, JR. Director April 21, 1997
- -----------------------------------------------------
Lawrence H. Titus, Jr.
</TABLE>
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENTS PAGE
------- ------------------------ ----
<C> <S> <C>
3.1 -- Second 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).
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.
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.
</TABLE>
<PAGE> 19
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENTS PAGE
------- ------------------------ ----
<C> <S> <C>
*10.11 -- Form of Severance Agreement with a schedule of executive
officer signatories.
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.
*10.14 -- Amendment No. 1 to the 1994 Incentive and Nonstatutory
Stock Option Plan for Key Employees dated September 12,
1996.
*13 -- Pages 15-31 of the Company's 1996 Annual Report to
Shareholders.
*23.1 -- Consent of Price Waterhouse LLP.
24 -- Power of Attorney (included on signature page of this
report).
*27 -- Financial Data Schedule
</TABLE>
- ---------------
* Filed herewith (unless otherwise indicated exhibits are previously filed).
<PAGE> 1
CREDIT AGREEMENT Exhibit 10.3
THIS AGREEMENT is entered into as of January 30, 1997, by and between
GADZOOKS, INC., a Texas corporation ("Borrower"), and WELLS FARGO BANK (TEXAS),
NATIONAL ASSOCIATION ("Bank").
RECITAL
Borrower has requested from Bank the credit accommodation described
below, and Bank has agreed to provide said credit accommodation to Borrower on
the terms and conditions contained herein.
NOW, THEREFORE, for valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Bank and Borrower hereby agree as
follows:
ARTICLE I
THE CREDIT
SECTION 1.1. LINE OF CREDIT.
(a) Line of Credit. Subject to the terms and conditions of this
Agreement, Bank hereby agrees to make advances to Borrower from time to time up
to and including June 5, 1998, not to exceed at any time the aggregate
principal amount of Ten Million Dollars ($10,000,000.00) ("Line of Credit"),
the proceeds of which shall be used to finance Borrower's working capital,
general corporate purposes and expansion plans. Borrower's obligation to repay
advances under the Line of Credit shall be evidenced by a promissory note
substantially in the form of Exhibit A attached hereto ("Line of Credit Note"),
all terms of which are incorporated herein by this reference.
(b) Limitation on Borrowings. Outstanding borrowings under the
Line of Credit, to a maximum of the principal amount set forth above, shall not
at any time exceed the product of Annual Traditional Cash Flow multiplied by
1.25. As used in this Agreement, the term "Annual Traditional Cash Flow" will
mean, as of any date of determination for the twelve months ended on such date,
the sum of the Company's net income, plus depreciation and amortization (each
determined in accordance with GAAP), minus any cash gains resulting for the
sale of assets of the Company outside of the normal course of the Company's
business, minus all non-cash gains.
(c) Letter of Credit Subfeature. As a subfeature under the Line
of Credit, Bank agrees from time to time during the term thereof to issue
multiple letters of credit for the account of Borrower (each, a "Letter of
Credit" and collectively, "Letters of Credit"); provided however, that the form
and substance of each Letter of Credit shall be subject to approval by Bank, in
its sole discretion; and provided further, that the aggregate
<PAGE> 2
undrawn amount of all outstanding Letters of Credit shall not at any time
exceed Ten Million Dollars ($10,000,000.00). Each Letter of Credit shall be
issued for a term not to exceed one hundred eighty (180)days, as designated by
Borrower; provided however, that no Letter of Credit shall have an expiration
date subsequent to May 2, 1998. The undrawn amount of all Letters of Credit
shall be reserved under the Line of Credit and shall not be available for
borrowings thereunder. Each Letter of Credit shall be subject to the
additional terms and conditions of the Letter of Credit Agreement and related
documents, if any, required by Bank in connection with the issuance thereof
(each, a "Letter of Credit Agreement" and collectively, "Letter of Credit
Agreements"). Each draft paid by Bank under a Letter of Credit shall be deemed
an advance under the Line of Credit and shall be repaid by Borrower in
accordance with the terms and conditions of this Agreement applicable to such
advances; provided however, that if advances under the Line of Credit are not
available, for any reason, at the time any draft is paid by Bank, then Borrower
shall immediately pay to Bank the full amount of such draft, together with
interest thereon from the date such amount is paid by Bank to the date such
amount is fully repaid by Borrower, at the rate of interest applicable to
advances under the Line of Credit. In such event Borrower agrees that Bank, in
its sole discretion, may debit any demand deposit account maintained by
Borrower with Bank for the amount of any such draft.
(d) Borrowing and Repayment. Borrower may from time to time
during the term of the Line of Credit borrow, partially or wholly repay its
outstanding borrowings, and reborrow, subject to all of the limitations, terms
and conditions contained herein or in the Line of Credit Note; provided
however, that the total outstanding borrowings under the Line of Credit shall
not at any time exceed the maximum principal amount available thereunder, as
set forth above.
SECTION 1.2. INTEREST/FEES.
(a) Interest. The outstanding principal balance of the Line Of
Credit shall bear interest at the rate of interest set forth in the Line of
Credit Note.
(b) Computation and Payment. Interest shall be computed on the
basis of a 360-day year, actual days elapsed, unless such calculation would
result in a usurious rate, in which case interest shall be computed on the
basis of a 365/366-day year, as the case may be, actual days elapsed. Interest
shall be payable at the times and place set forth in the Line of Credit Note.
(c) Loan Origination Fee. Borrower shall pay to Bank a
non-refundable loan origination fee for the Line of Credit equal to Fifteen
Thousand Dollars ($15,000.00), which fee shall be due and payable in full on
March 15, 1997.
-2-
<PAGE> 3
(d) Unused Commitment Fee. Borrower shall pay to Bank a fee equal
to one-half percent (.50%) per annum (computed on the basis of a 360-day year,
actual days elapsed) on the average daily unused amount of the Line of Credit,
which fee shall be calculated on a calendar quarter basis by Bank and shall be
due and payable by Borrower in arrears on the fifth day of each calendar
quarter.
(e) Letter of Credit Fees. Borrower shall pay to Bank fees upon
the issuance of each Letter of Credit, upon the payment or negotiation by Bank
of each draft under any Letter of Credit and upon the occurrence of any other
activity with respect to any Letter of Credit (including without limitation,
the transfer, amendment or cancellation of any Letter of Credit) determined in
accordance with Bank's standard fees and charges then in effect for such
activity.
SECTION 1.3. COLLECTION OF PAYMENTS. Borrower authorizes Bank to
collect all interest and fees due under the Line of Credit by charging
Borrower's demand deposit account number ____________ with Bank, or any other
demand deposit account maintained by Borrower with Bank, for the full amount
thereof. Should there be insufficient funds in any such demand deposit account
to pay all such sums when due, the full amount of such deficiency shall be
immediately due and payable by Borrower.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
Borrower makes the following representations and warranties to Bank,
which representations and warranties shall survive the execution of this
Agreement and shall continue in full force and effect until the full and final
payment, and satisfaction and discharge, of all obligations of Borrower to Bank
subject to this Agreement.
SECTION 2.1. LEGAL STATUS. Borrower is a corporation, duly
organized and existing and in good standing under the laws of the State of
Texas, and is qualified or licensed to do business (and is in good standing as
a foreign corporation, if applicable) in all jurisdictions in which the failure
to so qualify or to be so licensed could have a material adverse effect on
Borrower.
SECTION 2.2. AUTHORIZATION AND VALIDITY. This Agreement, the Line
of Credit Note, and each other document, contract and instrument required
hereby or at any time hereafter delivered to Bank in connection herewith
(collectively, the "Loan Documents") have been duly authorized, and upon their
execution and delivery in accordance with the provisions hereof will constitute
legal, valid and binding agreements and obligations of Borrower or the
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party which executes the same, enforceable in accordance with their respective
terms.
SECTION 2.3. NO VIOLATION. The execution, delivery and
performance by Borrower of each of the Loan Documents do not violate any
provision of any law or regulation, or contravene any provision of the Articles
of Incorporation or By-Laws of Borrower, or result in any breach of or default
under any material contract, obligation, indenture or other instrument to which
Borrower is a party or by which Borrower may be bound.
SECTION 2.4. LITIGATION. There are no pending, or to the best of
Borrower's knowledge threatened, actions, claims, investigations, suits or
proceedings by or before any governmental authority, arbitrator, court or
administrative agency which could reasonably be expected to have a material
adverse effect on the financial condition or operation of Borrower other than
those disclosed by Borrower to Bank in writing prior to the date hereof.
SECTION 2.5. CORRECTNESS OF FINANCIAL STATEMENT. The financial
statement of Borrower dated September 28, 1996, a true copy of which has been
delivered by Borrower to Bank prior to the date hereof, (a) presents fairly the
financial condition of Borrower, (b) discloses all liabilities of Borrower that
are required to be reflected or reserved against under generally accepted
accounting principles, whether liquidated or unliquidated, fixed or contingent,
and (c) has been prepared in accordance with generally accepted accounting
principles consistently applied. Since the date of such financial statement
there has been no material adverse change in the financial condition of
Borrower, nor has Borrower mortgaged, pledged, granted a security interest in
or otherwise encumbered any of its assets or properties except in favor of Bank
or as otherwise permitted by Bank in writing.
SECTION 2.6. INCOME TAX RETURNS. Borrower has no knowledge of any
pending assessments or adjustments of its income tax payable with respect to
any year.
SECTION 2.7. NO SUBORDINATION. There is no agreement, indenture,
contract or instrument to which Borrower is a party or by which Borrower may be
bound that requires the subordination in right of payment of any of Borrower's
obligations subject to this Agreement to any other obligation of Borrower.
SECTION 2.8. PERMITS, FRANCHISES. Borrower possesses, and will
hereafter possess, all material permits, consents, approvals, franchises and
licenses required and rights to all trademarks, trade names, patents, and
fictitious names, if any, necessary to enable it to conduct the business in
which it is now engaged in compliance with applicable law.
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SECTION 2.9. ERISA. Borrower is in compliance in all material
respects with all applicable provisions of the Employee Retirement Income
Security Act of 1974, as amended or recodified from time to time ("ERISA");
Borrower has not violated any provision of any defined employee pension benefit
plan (as defined in ERISA) maintained or contributed to by Borrower (each, a
"Plan"); no Reportable Event as defined in ERISA has occurred and is continuing
with respect to any Plan initiated by Borrower; Borrower has met its minimum
funding requirements under ERISA with respect to each Plan; and each Plan will
be able to fulfill its benefit obligations as they come due in accordance with
the Plan documents and under generally accepted accounting principles.
SECTION 2.10. OTHER OBLIGATIONS. Borrower is not in default on any
obligation for borrowed money, any purchase money obligation or any other
material lease, commitment, contract, instrument or obligation.
SECTION 2.11. ENVIRONMENTAL MATTERS. Except as disclosed by
Borrower to Bank in writing prior to the date hereof, Borrower is in compliance
in all material respects with all applicable federal or state environmental,
hazardous waste, health and safety statutes, and any rules or regulations
adopted pursuant thereto, which govern or affect any of Borrower's operations
and/or properties, including without limitation, the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, the Superfund
Amendments and Reauthorization Act of 1986, the Federal Resource Conservation
and Recovery Act of 1976, and the Federal Toxic Substances Control Act, as any
of the same may be amended, modified or supplemented from time to time. None
of the operations of Borrower is the subject of any federal or state
investigation evaluating whether any remedial action involving a material
expenditure is needed to respond to a release of any toxic or hazardous waste
or substance into the environment. Borrower has no material contingent
liability in connection with any release of any toxic or hazardous waste or
substance into the environment.
ARTICLE III
CONDITIONS
SECTION 3.1. CONDITIONS OF INITIAL EXTENSION OF CREDIT. The
obligation of Bank to make the initial extension of credit contemplated by this
Agreement is subject to the fulfillment to Bank's satisfaction of all of the
following conditions:
(a) Approval of Bank Counsel. All legal matters incidental to the
extension of credit by Bank shall be satisfactory to Bank's counsel.
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(b) Documentation. Bank shall have received, in form and
substance satisfactory to Bank, each of the following, duly executed:
(i) This Agreement and the Line of Credit Note.
(ii) Corporate Borrowing Resolution.
(iii) Certificate of Incumbency.
(iv) Such other documents as Bank may require under any other
Section of this Agreement.
(c) Financial Condition. There shall have been no material
adverse change, as determined in good faith by Bank, in the financial condition
or business of Borrower, nor any material decline, as determined in good faith
by Bank, in the market value of any collateral required hereunder or a
substantial or material portion of the assets of Borrower.
SECTION 3.2. CONDITIONS OF EACH EXTENSION OF CREDIT. The
obligation of Bank to make each extension of credit requested by Borrower
hereunder shall be subject to the fulfillment to Bank's satisfaction of each of
the following conditions:
(a) Compliance. The representations and warranties contained
herein and in each of the other Loan Documents shall be true on and as of the
date of the signing of this Agreement and on the date of each extension of
credit by Bank pursuant hereto, with the same effect as though such
representations and warranties had been made on and as of each such date, and
on each such date, no Event of Default as defined herein, and no condition,
event or act which with the giving of notice or the passage of time or both
would constitute such an Event of Default, shall have occurred and be
continuing or shall exist.
(b) Documentation. Bank shall have received all additional
documents which may be required in connection with such extension of credit.
ARTICLE IV
AFFIRMATIVE COVENANTS
Borrower covenants that so long as Bank remains committed to extend
credit to Borrower pursuant hereto, or any liabilities (whether direct or
contingent, liquidated or unliquidated) of Borrower to Bank under any of the
Loan Documents remain outstanding, and until payment in full of all obligations
of Borrower subject hereto, Borrower shall, unless Bank otherwise consents in
writing:
SECTION 4.1. PUNCTUAL PAYMENTS. Punctually pay all principal,
interest, fees or other liabilities due under any of
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the Loan Documents at the times and place and in the manner specified therein.
SECTION 4.2. ACCOUNTING RECORDS. Maintain adequate books and
records in accordance with generally accepted accounting principles
consistently applied, and permit any representative of Bank, at any reasonable
time, to inspect, audit and examine such books and records, to make copies of
the same, and to inspect the properties of Borrower.
SECTION 4.3. FINANCIAL STATEMENTS. Provide to Bank all of the
following, in form and detail satisfactory to Bank:
(a) not later than 100 days after and as of the end of each fiscal
year, an audited financial statement of Borrower, prepared by a certified
public accountant, to include balance sheet, income statement, statement of
cash flow, source and application of funds statement, and Form 10-K;
(b) not later than 50 days after and as of the end of each fiscal
quarter, a Form 10-Q;
(c) not later than 30 days after and as of the end of each fiscal
month, a financial statement of Borrower, prepared by Borrower;
(d) not later than 10 days after Bank's request, an inventory
collateral report, and an aged listing of accounts receivable and accounts
payable and;
(e) not later than 30 days after and as of the end of each month,
a Borrowing Base Certificate;
(f) contemporaneously with each annual and quarterly financial
statement of Borrower required hereby, a certificate of the president or chief
financial officer of Borrower that said financial statements present fairly the
financial condition of the Borrower and that there exists no Event of Default
nor any condition, act or event which with the giving of notice or the passage
of time or both would constitute an Event of Default;
(g) from time to time such other information as Bank may
reasonably request.
SECTION 4.4. COMPLIANCE. Preserve and maintain all licenses,
permits, governmental approvals, rights, privileges and franchises necessary
for the conduct of its business; and comply with the provisions of all
documents pursuant to which Borrower is organized and/or which govern
Borrower's continued existence and with the requirements of all laws, rules,
regulations and
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orders of any governmental authority applicable to Borrower and/or its
business.
SECTION 4.6. FACILITIES. Keep all properties useful or necessary
to Borrower's business in good repair and condition, and from time to time make
necessary repairs, renewals and replacements thereto so that such properties
shall be fully and efficiently preserved and maintained.
SECTION 4.7. TAXES AND OTHER LIABILITIES. Pay and discharge when
due any and all indebtedness, obligations, assessments and taxes, both real or
personal, including without limitation Federal and state income taxes and state
and local property taxes and assessments, except such (a) as Borrower may in
good faith contest or as to which a bona fide dispute may arise, and (b) for
which Borrower has made provision, to Bank's satisfaction, for eventual payment
thereof in the event Borrower is obligated to make such payment.
SECTION 4.8. LITIGATION. Promptly give notice in writing to Bank
of any material litigation pending or threatened against Borrower.
SECTION 4.9. FINANCIAL CONDITION. Maintain Borrower's financial
condition as follows using generally accepted accounting principles
consistently applied and used consistently with prior practices (except to the
extent modified by the definitions herein):
(a) Current Ratio not at any time less than 2.0 to 1.0, with
"Current Ratio" defined as total current assets divided by total current
liabilities, with the Line of Credit being included as a current liability for
this purpose.
(b) Working Capital not at any time less than $15,000,000.00, with
"Working Capital" defined as total current assets minus total current
liabilities, with the Line of Credit being included as a current liability for
this purpose.
(c) Tangible Net Worth not less than $41,000,000.00 during the
period beginning the date hereof and ending February 1, 1997; and for the
fiscal year beginning February 2, 1997, and during each subsequent fiscal year
of the Borrower, not less than the sum of (i) the minimum Tangible Net Worth
that the Borrower was required to maintain by this covenant during the fiscal
year of the Borrower immediately preceding the year of determination, plus (ii)
seventy percent (70%) of the Borrower's net income after taxes during the
fiscal year of the Borrower immediately preceding the year of determination
(with net income after taxes being determined in accordance with generally
accepted accounting principles but before giving effect to the payment of any
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dividends); provided, that no reduction will be made to the amount of Tangible
Net Worth required to be maintained by the Borrower hereunder as a result of
the Borrower's net income after taxes being a negative number.
(d) Total Liabilities divided by Tangible Net Worth not at any
time greater than .75 to 1.0, with "Total Liabilities" defined as the aggregate
of current liabilities and non-current liabilities less subordinated debt
approved by the Bank, and with "Tangible Net Worth" as defined above.
(e) Net income after taxes not less than $1.00 on a trailing three
quarter basis, determined as of each fiscal quarter end.
(f) Maintain, on a rolling four quarter basis (i.e. as of the end
of each fiscal quarter for the four quarter period ended as of the end of each
quarter for which any determination is being made), a Fixed Charge Coverage of
not less than 1.35 to 1.0. For purposes of this financial covenant, "Fixed
Charge Coverage" means, as of any date of determination, (i) the sum of Annual
Traditional Cash flow, plus interest expense, plus rental expense, divided by
(ii) the sum of the Company's current portion of long-term debt, plus interest
expense, plus rental expense, plus any cash dividends paid by the Company.
(g) Maintain a ratio of (i) an amount equal to the sum of (A) the
face amount of all outstanding Documentary and Stand-by Letters of Credit, plus
(B) the indebtedness under the Revolving Note to; (ii) total inventory of
Company of not less than sixty-five percent (65%) throughout the term hereof.
SECTION 4.10. NOTICE TO BANK. Promptly (but in no event more than
five (5) days after the occurrence of each such event or matter) give written
notice to Bank in reasonable detail of: (a) the occurrence of any Event of
Default, or any condition, event or act which with the giving of notice or the
passage of time or both would constitute an Event of Default; (b) any change in
the name or the organizational structure of Borrower, or any material action,
claim, investigation, suit or proceeding pending or asserted by or before any
governmental authority, arbitrator, court or administrative agency; (c) the
occurrence and nature of any Reportable Event or Prohibited Transaction, each
as defined in ERISA, or any funding deficiency with respect to any Plan; or (d)
any termination or cancellation of any insurance policy which Borrower is
required to maintain, or any uninsured or partially uninsured loss through
liability or property damage, or through fire, theft or any other cause
affecting Borrower's property.
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ARTICLE V
NEGATIVE COVENANTS
Borrower further covenants that so long as Bank remains committed to
extend credit to Borrower pursuant hereto, or any liabilities (whether direct
or contingent, liquidated or unliquidated) of Borrower to Bank under any of the
Loan Documents remain outstanding, and until payment in full of all obligations
of Borrower subject hereto, Borrower will not without Bank's prior written
consent:
SECTION 5.1. USE OF FUNDS. Use any of the proceeds of any credit
extended hereunder except for the purposes stated in Article I hereof.
SECTION 5.2. [Intentionally Omitted].
SECTION 5.3. OTHER INDEBTEDNESS. Create, incur, assume or permit
to exist any indebtedness or liabilities resulting from borrowings, loans or
advances, whether secured or unsecured, matured or unmatured, liquidated or
unliquidated, joint or several, except (a) the liabilities of Borrower to Bank,
and(b) any other liabilities of Borrower existing as of, and disclosed to Bank
prior to, the date hereof, and (c) other liabilities not to exceed an aggregate
principal amount of $1,000,000.00.
SECTION 5.4. MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Merge
into or consolidate with any other entity; make any substantial change in the
nature of Borrower's business as conducted as of the date hereof; nor sell,
lease, transfer or otherwise dispose of all or a substantial or material
portion of Borrower's assets except in the ordinary course of its business.
SECTION 5.5. GUARANTIES. Guarantee or become liable in any way as
surety, endorser (other than as endorser of negotiable instruments for deposit
or collection in the ordinary course of business), accommodation endorser or
otherwise for, nor pledge or hypothecate any assets of Borrower as security
for, any liabilities or obligations of any other person or entity, except any
of the foregoing in favor of Bank.
SECTION 5.6. LOANS, ADVANCES, INVESTMENTS. Make any loans or
advances to or investments in any person or entity, except (a) any of the
foregoing existing as of, and disclosed to Bank prior to, the date hereof, and
(b) loans to officers not to exceed $150,000 in each individual instance, with
the aggregate of all loans to officers not to exceed $250,000 at any time.
SECTION 5.7. PLEDGE OF ASSETS. Mortgage, pledge, grant or permit
to exist a security interest in, or lien upon, all or any portion of Borrower's
assets now owned or hereafter acquired, except (a) any of the foregoing in
favor of Bank or which is existing as of, and disclosed to Bank in writing
prior to, the
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date hereof; (b) liens, mortgages, encumbrances or security interests to secure
payment of the borrowings authorized hereunder and those permitted under
Section 5.6 herein; (c) pledges or deposits to secure obligations under
workmen's compensation laws or of similar legislation; (d) deposits to secure
public or statutory obligations; (e) statutory mechanics', carriers',
workmen's, repairmen's liens or other like items in the ordinary course of
business in respect to obligations which are not overdue or are being contested
in good faith; (f) liens, mortgages, encumbrances, or security interests
granted by the Borrower on equipment, furniture and/or fixtures in connection
with additional purchases of such equipment, furniture and/or fixtures not in
excess of $250,000 per fiscal year of the Borrower; and (g) statutory or
contractual landlords liens in respect of obligations which are not overdue or
being contested in good faith.
SECTION 5.8. PURCHASES. Borrower will agree not to incur any debt
resulting from the purchase of any Treasury Stock.
SECTION 5.9. NEGATIVE PLEDGE. Enter into any agreement whereby
Borrower or any subsidiary agrees not to mortgage, pledge, grant or permit to
exist a security interest in, or lien upon, all or any portion of Borrower's or
any subsidiaries' assets now owned or hereafter acquired, except any of the
foregoing in favor of Bank or which is existing as of and disclosed to Bank in
writing prior to the date hereof.
Section 5.10. ACQUISITIONS. Make any new acquisition with a
total consideration to be paid in excess of Ten Million Dollars
($10,000,000.00) without prior Bank consent.
ARTICLE VI
EVENTS OF DEFAULT
SECTION 6.1. The occurrence of any of the following shall
constitute an "Event of Default" under this Agreement:
(a) Borrower shall fail to pay when due any principal, interest,
fees or other amounts payable under any of the Loan Documents.
(b) Any financial statement or certificate furnished to Bank in
connection with, or any representation or warranty made by Borrower or any
other party under this Agreement or any other Loan Document shall prove to be
incorrect, false or misleading in any material respect when furnished or made.
(c) Any default in the performance of or compliance with any
obligation, agreement or other provision contained herein or in any other Loan
Document (other than those referred to in
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subsections (a) and (b) above), and with respect to any such default which by
its nature can be cured, such default shall continue for a period of twenty
(20) days from its occurrence.
(d) Any default in the payment or performance of any obligation,
or any defined event of default, under the terms of any contract or instrument
(other than any of the Loan Documents) pursuant to which Borrower has incurred
any debt or other liability to any person or entity, including Bank.
(e) The filing of a notice of judgment lien in excess of $100,000
against Borrower; or the recording of any abstract of judgment in excess of
$100,000 against Borrower in any county in which Borrower has an interest in
real property; or the service of a notice of levy and/or of a writ of
attachment or execution, or other like process, against assets of Borrower in
excess of $100,000; or the entry of a judgment in excess of $100,000 against
Borrower.
(f) Borrower shall become insolvent, or shall suffer or consent to
or apply for the appointment of a receiver, trustee, custodian or liquidator of
itself or any of its property, or shall generally fail to pay its debts as they
become due, or shall make a general assignment for the benefit of creditors;
Borrower shall file a voluntary petition in bankruptcy, or seeking
reorganization, in order to effect a plan or other arrangement with creditors
or any other relief under the Bankruptcy Reform Act, Title 11 of the United
States Code, as amended or recodified from time to time ("Bankruptcy Code"), or
under any state or federal law granting relief to debtors, whether now or
hereafter in effect; or any involuntary petition or proceeding pursuant to the
Bankruptcy Code or any other applicable state or federal law relating to
bankruptcy, reorganization or other relief for debtors is filed or commenced
against Borrower, or Borrower shall file an answer admitting the jurisdiction
of the court and the material allegations of any involuntary petition; or
Borrower shall be adjudicated a bankrupt, or an order for relief shall be
entered against Borrower by any court of competent jurisdiction under the
Bankruptcy Code or any other applicable state or federal law relating to
bankruptcy, reorganization or other relief for debtors.
(g) The dissolution or liquidation of Borrower; or Borrower, or
its directors, shall take action seeking to effect the dissolution or
liquidation of Borrower.
SECTION 6.2. REMEDIES. Upon the occurrence of any Event of
Default: (a) all principal and accrued and unpaid interest outstanding under
each of the Loan Documents, any term thereof to the contrary notwithstanding,
shall at Bank's option and without notice become immediately due and payable
without presentment,
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demand, or any notices of any kind, including without limitation notice of
nonperformance, notice of protest, protest, notice of dishonor, notice of
intention to accelerate or notice of acceleration, all of which are hereby
expressly waived by each Borrower; (b) the obligation, if any, of Bank to
extend any further credit under any of the Loan Documents shall immediately
cease and terminate; and (c) Bank shall have all rights, powers and remedies
available under each of the Loan Documents, or accorded by law, including
without limitation the right to resort to any or all security for any credit
accommodation from Bank subject hereto and to exercise any or all of the rights
of a beneficiary or secured party pursuant to applicable law. All rights,
powers and remedies of Bank may be exercised at any time by Bank and from time
to time after the occurrence of an Event of Default, are cumulative and not
exclusive, and shall be in addition to any other rights, powers or remedies
provided by law or equity.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1. NO WAIVER. No delay, failure or discontinuance of
Bank in exercising any right, power or remedy under any of the Loan Documents
shall affect or operate as a waiver of such right, power or remedy; nor shall
any single or partial exercise of any such right, power or remedy preclude,
waive or otherwise affect any other or further exercise thereof or the exercise
of any other right, power or remedy. Any waiver, permit, consent or approval
of any kind by Bank of any breach of or default under any of the Loan Documents
must be in writing and shall be effective only to the extent set forth in such
writing.
SECTION 7.2. NOTICES. All notices, requests and demands which any
party is required or may desire to give to any other party under any provision
of this Agreement must be in writing delivered to each party at the following
address:
BORROWER: GADZOOKS, INC.
4801 Spring Valley Road, Suite 108B
Dallas, Texas 75244
BANK: WELLS FARGO BANK (TEXAS),
NATIONAL ASSOCIATION
1445 Ross Avenue, Suite 300
Dallas, Texas 75202
or to such other address as any party may designate by written notice to all
other parties. Each such notice, request and demand shall be deemed given or
made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by
mail, upon the
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earlier of the date of receipt or three (3) days after deposit in the U.S.
mail, first class and postage prepaid; and (c) if sent by telecopy, upon
receipt.
SECTION 7.3. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall
pay to Bank immediately upon demand the full amount of all payments, advances,
charges, costs and expenses, including reasonable attorneys' fees (to include
outside counsel fees and all allocated costs of Bank's in-house counsel to the
extent permissible), expended or incurred by Bank in connection with (a) Bank's
continued administration of this Agreement and the other Loan Documents, and
the preparation of any amendments and waivers hereto and thereto, (b) the
enforcement of Bank's rights and/or the collection of any amounts which become
due to Bank under any of the Loan Documents, and (c) the prosecution or defense
of any action in any way related to any of the Loan Documents, including
without limitation, any action for declaratory relief, whether incurred at the
trial or appellate level, in an arbitration proceeding or otherwise, and
including any of the foregoing incurred in connection with any bankruptcy
proceeding (including without limitation, any adversary proceeding, contested
matter or motion brought by Bank or any other person) relating to any Borrower
or any other person or entity.
SECTION 7.4. SUCCESSORS, ASSIGNMENT. This Agreement shall be
binding upon and inure to the benefit of the heirs, executors, administrators,
legal representatives, successors and assigns of the parties; provided however,
that Borrower may not assign or transfer its interest hereunder without Bank's
prior written consent. Bank reserves the right to sell, assign, transfer,
negotiate or grant participations in all or any part of, or any interest in,
Bank's rights and benefits under each of the Loan Documents. In connection
therewith, Bank may disclose all documents and information which Bank now has
or may hereafter acquire relating to any credit extended by Bank to Borrower,
Borrower or its business, or any collateral required hereunder.
SECTION 7.5. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the
other Loan Documents constitute the entire agreement between Borrower and Bank
with respect to any extension of credit by Bank subject hereto and supersede
all prior negotiations, communications, discussions and correspondence
concerning the subject matter hereof. This Agreement may be amended or
modified only by a written instrument executed by each party hereto.
SECTION 7.6. NO THIRD PARTY BENEFICIARIES. This Agreement is made
and entered into for the sole protection and benefit of the parties hereto and
their respective permitted successors and assigns, and no other person or
entity shall be a third party beneficiary of, or have any direct or indirect
cause of action or
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claim in connection with, this Agreement or any other of the Loan Documents to
which it is not a party.
SECTION 7.7. TIME. Time is of the essence of each and every
provision of this Agreement and each other of the Loan Documents.
SECTION 7.8. SEVERABILITY OF PROVISIONS. If any provision of this
Agreement shall be prohibited by or invalid under applicable law, such
provision shall be ineffective only to the extent of such prohibition or
invalidity without invalidating the remainder of such provision or any
remaining provisions of this Agreement.
SECTION 7.9. COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which when executed and delivered shall be
deemed to be an original, and all of which when taken together shall constitute
one and the same Agreement.
SECTION 7.10. GOVERNING LAW. This Agreement shall be governed by
and construed in accordance with the laws of the State of Texas.
SECTION 7.11. SAVINGS CLAUSE. It is the intention of the parties
to comply strictly with applicable usury laws. Accordingly, notwithstanding
any provision to the contrary in the Loan Documents, in no event shall any Loan
Documents require the payment or permit the payment, taking, reserving,
receiving, collection or charging of any sums constituting interest under
applicable laws that exceed the maximum amount permitted by such laws, as the
same may be amended or modified from time to time (the "Maximum Rate"). If any
such excess interest is called for, contracted for, charged, taken, reserved or
received in connection with any Loan Documents, or in any communication by
Lender or any other person to Borrower or any other person, or in the event
that all or part of the principal or interest hereof or thereof shall be
prepaid or accelerated, so that under any of such circumstances or under any
other circumstance whatsoever the amount of interest contracted for, charged,
taken, reserved or received on the amount of principal actually outstanding
from time to time under the Loan Documents shall exceed the Maximum Rate, then
in such event it is agreed that: (i) the provisions of this paragraph shall
govern and control; (ii) neither Borrower nor any other person or entity now or
hereafter liable for the payment of any Loan Documents shall be obligated to
pay the amount of such interest to the extent it is in excess of the Maximum
Rate; (iii) any such excess interest which is or has been received by Lender,
notwithstanding this paragraph, shall be credited against the then unpaid
principal balance hereof or thereof, or if any of the Loan Documents has been
or would be paid in full by such credit, refunded to Borrower; and (iv) the
provisions of each of the Loan Documents, and any other
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communication to Borrower, shall immediately be deemed reformed and such excess
interest reduced, without the necessity of executing any other document, to the
Maximum Rate. The right to accelerate the maturity of the Loan Documents does
not include the right to accelerate, collect or charge unearned interest, but
only such interest that has otherwise accrued as of the date of acceleration.
Without limiting the foregoing, all calculations of the rate of interest
contracted for, charged, taken, reserved or received in connection with any of
the Loan Documents which are made for the purpose of determining whether such
rate exceeds the Maximum Rate shall be made to the extent permitted by
applicable laws by amortizing, prorating, allocating and spreading during the
period of the full term of such Loan Documents, including all prior and
subsequent renewals and extensions hereof or thereof, all interest at any time
contracted for, charged, taken, reserved or received by Lender. The terms of
this paragraph shall be deemed to be incorporated into each of the other Loan
Documents.
To the extent that Article 5069-1.04 of the Texas Revised Civil
Statutes is relevant to Lender for the purpose of determining the Maximum Rate,
Bank hereby elects to determine the applicable rate ceiling under such Article
by the indicated (weekly) rate ceiling from time to time in effect, subject to
Lender's right subsequently to change such method in accordance with applicable
law, as the same may be amended or modified from time to time.
SECTION 7.12. RIGHT OF SETOFF; DEPOSIT ACCOUNTS. Upon the occurrence
of an Event of Default, (a) Borrower hereby authorizes Bank, at any time and
from time to time, without notice, which is hereby expressly waived by each
Borrower, and whether or not Bank shall have declared any credit extended
hereunder to be due and payable in accordance with the terms hereof, to set off
against, and to appropriate and apply to the payment of, Borrower's obligations
and liabilities under the Loan Documents (whether matured or unmatured, fixed
or contingent, liquidated or unliquidated), any and all amounts owing by Bank
to Borrower (whether payable in U.S. dollars or any other currency, whether
matured or unmatured, and in the case of deposits, whether general or special
(except trust and escrow accounts), time or demand and however evidenced), and
(b) pending any such action, to the extent necessary, to hold such amounts as
collateral to secure such obligations and liabilities and to return as unpaid
for insufficient funds any and all checks and other items drawn against any
deposits so held as Bank, in its sole discretion, may elect. Borrower hereby
grants to Bank a security interest in all deposits and accounts maintained with
Bank and its affiliates to secure the payment of all obligations and
liabilities of Borrower to Bank under the Loan Documents.
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<PAGE> 17
SECTION 7.13. BUSINESS PURPOSE. Borrower represents and warrants
that any credit extended hereunder is for a business, commercial, investment,
agricultural or other similar purpose and not primarily for a personal, family
or household use.
SECTION 7.14. ARBITRATION.
(a) Arbitration. Upon the demand of any party, any Dispute shall
be resolved by binding arbitration (except as set forth in (e) below) in
accordance with the terms of this Agreement. A "Dispute" shall mean any
action, dispute, claim or controversy of any kind, whether in contract or tort,
statutory or common law, legal or equitable, now existing or hereafter arising
under or in connection with, or in any way pertaining to, any of the Loan
Documents, or any past, present or future extensions of credit and other
activities, transactions or obligations of any kind related directly or
indirectly to any of the Loan Documents, including without limitation, any of
the foregoing arising in connection with the exercise of any self-help,
ancillary or other remedies pursuant to any of the Loan Documents. Any party
may by summary proceedings bring an action in court to compel arbitration of a
Dispute. Any party who fails or refuses to submit to arbitration following a
lawful demand by any other party shall bear all costs and expenses incurred by
such other party in compelling arbitration of any Dispute.
(b) Governing Rules. Arbitration proceedings shall be
administered by the American Arbitration Association ("AAA") or such other
administrator as the parties shall mutually agree upon in accordance with the
AAA Commercial Arbitration Rules. All Disputes submitted to arbitration shall
be resolved in accordance with the Federal Arbitration Act (Title 9 of the
United States Code), notwithstanding any conflicting choice of law provision in
any of the Loan Documents. The arbitration shall be conducted at a location in
Texas selected by the AAA or other administrator. If there is any
inconsistency between the terms hereof and any such rules, the terms and
procedures set forth herein shall control. All statutes of limitation
applicable to any Dispute shall apply to any arbitration proceeding. All
discovery activities shall be expressly limited to matters directly relevant to
the Dispute being arbitrated. Judgment upon any award rendered in an
arbitration may be entered in any court having jurisdiction; provided however,
that nothing contained herein shall be deemed to be a waiver by any party that
is a bank of the protections afforded to it under 12 U.S.C. Section 91 or any
similar applicable state law.
(c) No Waiver; Provisional Remedies, Self-Help and Foreclosure. No
provision hereof shall limit the right of any party to exercise self-help
remedies such as setoff, foreclosure against or sale of any real or personal
property collateral or security, or to obtain provisional or ancillary
remedies,
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<PAGE> 18
including without limitation injunctive relief, sequestration, attachment,
garnishment or the appointment of a receiver, from a court of competent
jurisdiction before, after or during the pendency of any arbitration or other
proceeding. The exercise of any such remedy shall not waive the right of any
party to compel arbitration hereunder.
(d) Arbitrator Qualifications and Powers; Awards. Arbitrators
must be active members of the Texas State Bar with expertise in the substantive
laws applicable to the subject matter of the Dispute. Arbitrators are
empowered to resolve Disputes by summary rulings in response to motions filed
prior to the final arbitration hearing. Arbitrators (i) shall resolve all
Disputes in accordance with the substantive law of the state of Texas, (ii) may
grant any remedy or relief that a court of the state of Texas could order or
grant within the scope hereof and such ancillary relief as is necessary to make
effective any award, and (iii) shall have the power to award recovery of all
costs and fees, to impose sanctions and to take such other actions as they deem
necessary to the same extent a judge could pursuant to the Federal Rules of
Civil Procedure, the Texas Rules of Civil Procedure or other applicable law.
Any Dispute in which the amount in controversy is $5,000,000 or less shall be
decided by a single arbitrator who shall not render an award of greater than
$5,000,000 (including damages, costs, fees and expenses). By submission to a
single arbitrator, each party expressly waives any right or claim to recover
more than $5,000,000. Any Dispute in which the amount in controversy exceeds
$5,000,000 shall be decided by majority vote of a panel of three arbitrators;
provided however, that all three arbitrators must actively participate in all
hearings and deliberations.
(e) Judicial Review. Notwithstanding anything herein to the
contrary, in any arbitration in which the amount in controversy exceeds
$25,000,000, the arbitrators shall be required to make specific, written
findings of fact and conclusions of law. In such arbitrations (i) the
arbitrators shall not have the power to make any award which is not supported
by substantial evidence or which is based on legal error, (ii) an award shall
not be binding upon the parties unless the findings of fact are supported by
substantial evidence and the conclusions of law are not erroneous under the
substantive law of the state of Texas, and (iii) the parties shall have in
addition to the grounds referred to in the Federal Arbitration Act for
vacating, modifying or correcting an award the right to judicial review of (A)
whether the findings of fact rendered by the arbitrators are supported by
substantial evidence, and (B) whether the conclusions of law are erroneous
under the substantive law of the state of Texas. Judgment confirming an award
in such a proceeding may be entered only if a court determines the award is
supported by substantial evidence and not based on legal error under the
substantive law of the state of Texas.
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<PAGE> 19
(f) Miscellaneous. To the maximum extent practicable, the AAA,
the arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the Dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose
the existence, content or results thereof, except for disclosures of
information by a party required in the ordinary course of its business, by
applicable law or regulation, or to the extent necessary to exercise any
judicial review rights set forth herein. If more than one agreement for
arbitration by or between the parties potentially applies to a Dispute, the
arbitration provision most directly related to the Loan Documents or the
subject matter of the Dispute shall control. This arbitration provision shall
survive termination, amendment or expiration of any of the Loan Documents or
any relationship between the parties.
NOTICE: THIS DOCUMENT AND ALL OTHER DOCUMENTS RELATING TO THE INDEBTEDNESS
CONSTITUTE A WRITTEN LOAN AGREEMENT WHICH REPRESENTS THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES RELATING TO THE INDEBTEDNESS.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the day and year first written above.
WELLS FARGO BANK (TEXAS),
GADZOOKS, INC. NATIONAL ASSOCIATION
FORMERLY FIRST INTERSTATE
BANK OF TEXAS, N.A.
By: /s/ Monty R. Standifer By: /s/ Jeffrey S. A. Cook
--------------------------------- ---------------------------------
Monty Standifer Jeffrey S. A. Cook
Chief Financial Officer Relationship Manager and
Vice President
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<PAGE> 20
EXHIBIT A
WELLS FARGO BANK REVOLVING LINE OF CREDIT NOTE
- --------------------------------------------------------------------------------
$10,000,000.00 Dallas, Texas
January 30, 1997
FOR VALUE RECEIVED, the undersigned GADZOOKS, INC. ("Borrower")
promises to pay to the order of WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION
("Bank") at its office at North Texas RCBO, 1445 Ross, Suite 300, Dallas, TX
75202, or at such other place as the holder hereof may designate, in lawful
money of the United States of America and in immediately available funds, the
principal sum of $10,000,000.00, or so much thereof as may be advanced and be
outstanding, with interest thereon, to be computed on each advance from the
date of its disbursement as set forth herein.
DEFINITIONS:
As used herein, the following terms shall have the meanings set forth
after each, and any other term defined in this Note shall have the meaning set
forth at the place defined:
(a) "Business Day" means any day except a Saturday, Sunday or any
other day on which commercial banks in Texas are authorized or required by law
to close.
(b) "Fixed Rate Term" means a period commencing on a Business Day
and continuing for 1, 2 or 3 months, as designated by Borrower, during which
all or a portion of the outstanding principal balance of this Note bears
interest determined in relation to LIBOR; provided however, that no Fixed Rate
Term may be selected for a principal amount less than $100,000.00; and provided
further, that no Fixed Rate Term shall extend beyond the scheduled maturity
date hereof. If any Fixed Rate Term would end on a day which is not a Business
Day, then such Fixed Rate Term shall be extended to the next succeeding
Business Day.
(c) "LIBOR" means the rate per annum (rounded upward, if
necessary, to the nearest whole 1/8 of 1%) determined by dividing Base LIBOR by
a percentage equal to 100% less any LIBOR Reserve Percentage.
(i) "Base LIBOR" means the rate per annum for United
States dollar deposit quoted by Bank as the Inter-Bank Market Offered Rate,
with the understanding that such rate is quoted by Bank for the purpose of
calculating effective rates of interest for loans making reference thereto, on
the first day of a Fixed Rate Term for delivery of funds on said date for a
period of time approximately equal to the number of days in such Fixed Rate
Term and in an amount approximately equal to the principal amount to which such
Fixed Rate Term applies. Borrower understands and agrees that Bank may base
its quotation of the Inter-Bank Market Offered Rate upon such offers or other
market indicators of the
<PAGE> 21
Inter-Bank Market as Bank in its discretion deems appropriate including, but
not limited to, the rate offered for U.S. dollar deposits on the London
Inter-Bank Market.
(ii) "LIBOR Reserve Percentage" means the reserve
percentage prescribed by the Board of Governors of the Federal Reserve System
(or any successor) for "Eurocurrency Liabilities" (as defined in Regulation D
of the Federal Reserve Board, as amended), adjusted by Bank for expected
changes in such reserve percentage during the applicable Fixed Rate Term.
(d) "Prime Rate" means at any time the rate of interest most
recently announced within Bank at its principal office as its Prime Rate, with
the understanding that the Prime Rate is one of Bank's base rates and serves as
the basis upon which effective rates of interest are calculated for those loans
making reference thereto, and is evidenced by the recording thereof after its
announcement in such internal publication or publications as Bank may
designate.
INTEREST:
(a) Interest. The outstanding principal balance of this Note
shall bear interest (computed on the basis of a 360-day year, actual days
elapsed, unless such calculation would result in a usurious rate, in which case
interest shall be computed on the basis of a 365/366-day year, as the case may
be, actual days elapsed) at the lesser of (i) either (A) at a fluctuating rate
per annum equal to the Prime Rate in effect from time to time, or (B) at a
fixed rate per annum determined by Bank to be 1.95000% above LIBOR in effect on
the first day of the applicable Fixed Rate Term, or (ii) the Maximum Rate.
When interest is determined in relation to the Prime Rate, each change in the
rate of interest hereunder shall become effective on the date each Prime Rate
change is announced within Bank. With respect to each LIBOR selection option
selected hereunder, Bank is hereby authorized to note the data, principal
amount, interest rate and Fixed Rate Term applicable thereto and any payments
made thereon on Bank's books and records (either manually or by electronic
entry) and/or on any schedule attached to this Note, which notations shall be
prima facie evidence of the accuracy of the information noted.
(b) Selection of Interest Rate Options. At any time any portion
of this Note bears interest determined in relation to LIBOR, it may be
continued by Borrower at the end of the Fixed Rate Term applicable thereto so
that all or a portion thereof bears interest determined in relation to the
Prime Rate or to LIBOR for a new Fixed Rate Term designated by Borrower. At
any time any portion of this Note bears interest determined in relation to the
Prime Rate, Borrower may convert all or a portion
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<PAGE> 22
thereof so that it bears interest determined in relation to LIBOR for a Fixed
Rate Term designated by Borrower. At such time as Borrower requests an advance
hereunder or wishes to select a LIBOR option for all or a portion of the
outstanding principal balance hereof, and at the end of each Fixed Rate Term,
Borrower shall give Bank notice specifying: (i) the interest rate option
selected by Borrower; (ii) the principal amount subject thereto; and (iii) for
each LIBOR selection, the length of the applicable Fixed Rate Term. Any such
notice may be given by telephone so long as, with respect to each LIBOR
selection, (A) Bank receives written confirmation from Borrower not later than
3 Business Days after such telephone notice is given, and (B) such notice is
given to Bank prior to 10:00 a.m., California time, on the first day of the
Fixed Rate Term. For each LIBOR option requested hereunder, Bank will quote
the applicable fixed rate to Borrower at approximately 10:00 a.m., California
time, on the first day of the Fixed Rate Term. If Borrower does not
immediately accept the rate quoted by Bank, any subsequent acceptance by
Borrower shall be subject to a redetermination by Bank of the applicable fixed
rate; provided however, that if Borrower fails to accept any such rate by 11:00
a.m., California time, on the Business Day such quotation is given, then the
quoted rate shall expire and Bank shall have no obligation to permit a LIBOR
option to be selected on such day. If no specific designation of interest is
made at the time any advance is requested hereunder or at the end of any Fixed
Rate Term, Borrower shall be deemed to have made a Prime Rate interest
selection for such advance or the principal amount to which such Fixed Rate
Term applied.
(c) Additional LIBOR Provisions.
(i) If Bank at any time shall determine that for any
reason adequate and reasonable means do not exist for ascertaining LIBOR, then
Bank shall promptly give notice thereof to Borrower. If such notice is given
and until such notice has been withdrawn by Bank, then (A) no new LIBOR option
may be selected by Borrower, and (B) any portion of the outstanding principal
balance hereof which bears interest determined in relation to LIBOR, subsequent
to the end of the Fixed Rate Term applicable thereto, shall bear interest
determined in relation to the Prime Rate.
(ii) If any law, treaty, rule, regulation or determination
of a court or governmental authority or any change therein or in the
interpretation or application thereof (each, a "Change in Law") shall make it
unlawful for Bank (A) to make LIBOR options available hereunder, or (B) to
maintain interest rates based on LIBOR, then in the former event, any
obligation of Bank to make available such unlawful LIBOR options shall
immediately be cancelled, and in the latter event, any such unlawful
LIBOR-based interest rates then outstanding shall be converted, at Bank's
option, so that interest on the portion of the outstanding principal balance
subject thereto is determined
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<PAGE> 23
in relation to the Prime Rate; provided however, that if any such Change in Law
shall permit any LIBOR-based interest rates to remain in effect until the
expiration of the Fixed Rate Term applicable thereto, then such permitted
LIBOR-based interest rates shall continue in effect until the expiration of
such Fixed Rate Term. Upon the occurrence of any of the foregoing events,
Borrower shall pay to Bank immediately upon demand such amounts as may be
necessary to compensate Bank for any fines, fees, charges, penalties or other
costs incurred or payable by Bank as a result thereof and which are
attributable to any LIBOR options made available to Borrower hereunder, and any
reasonable allocation made by Bank among its operations shall be conclusive and
binding upon Borrower.
(iii) If any Change in Law or compliance by Bank with any
request or directive (whether or not having the force of law) from any central
bank or other governmental authority shall:
(A) subject Bank to any tax, duty or other charge with
respect to any LIBOR options, or change the basis of
taxation of payments to Bank of principal, interest,
fees or any other amount payable hereunder (except
for changes in the rate of tax on the overall net
income of Bank); or
(B) impose, modify or hold applicable any reserve,
special deposit, compulsory loan or similar
requirement against assets held by, deposits or other
liabilities in or for the account of, advances or
loans by, or any other acquisition of funds by any
office of Bank; or
(C) impose on Bank any other condition;
and the result of any of the foregoing is to increase the cost to Bank of
making, renewing or maintaining any LIBOR options hereunder and/or to reduce
any amount receivable by Bank in connection therewith, then in any such case,
Borrower shall pay to Bank immediately upon demand such amounts as may be
necessary to compensate Bank for any additional costs incurred by Bank and/or
reductions in amounts received by Bank which are attributable to such LIBOR
options. In determining which costs incurred by Bank and/or reductions in
amounts received by Bank are attributable to any LIBOR options made available
to Borrower hereunder, any reasonable allocation made by Bank among its
operations shall be conclusive and binding upon Borrower.
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<PAGE> 24
(d) Payment of Interest. Interest accrued on this Note shall be
payable on the 2nd day of each March, June, September and December, commencing
March 2, 1997.
BORROWING AND REPAYMENT:
(a) Borrowing and Repayment. Borrower may from time to time
during the term of this Note borrow, partially or wholly repay its outstanding
borrowings, and reborrow, subject to all of the limitations, terms and
conditions of this Note and of the Credit Agreement between Borrower and Bank
defined below; provided however, that the total outstanding borrowings under
this Note shall not at any time exceed the principal amount stated above. The
unpaid principal balance of this obligation at any time shall be the total
amounts advanced hereunder by the holder hereof less the amount of principal
payments made hereon by or for any Borrower, which balance may be endorsed
hereon from time to time by the holder. The outstanding principal balance of
this Note shall be due and payable in full on June 5, 1998.
(b) Advances. Advances hereunder, to the total amount of the
principal sum available hereunder, may be made by the holder at the oral or
written request of (i) GERALD SZCZEPANSKI or MONTY STANDIFER or JANA WILSON or
RONALD SZCZEPANSKI, any one acting alone, who are authorized to request
advances and direct the disposition of any advances until written notice of the
revocation of such authority is received by the holder at the office designed
above. The holder shall have no obligation to determine whether any person
requesting an advance is or has been authorized by any Borrower.
(c) Application of Payments. Each payment made on this Note shall
be credited first, to any interest then due and second, to the outstanding
principal balance hereof. All payments credited to principal shall be applied
first, to the outstanding principal balance of this Note which bears interest
determined in relation to the Prime Rate, if any, and second, to the
outstanding principal balance of this Note which bears interest determined in
relation to LIBOR, with such payments applied to the oldest Fixed Rate Term
first.
PREPAYMENT:
(a) Prime Rate. Borrower may prepay principal on any portion of
this Note which bears interest determined in relation to the Prime Rate at any
time, in any amount and without penalty.
(b) LIBOR. Borrower may prepay principal on any portion of this
Note which bears interest determined in relation to LIBOR at any time and in
the minimum amount of $10,000.00; provided however, that if the outstanding
principal balance of such portion of this Note is less than said amount, the
minimum prepayment amount shall be the entire outstanding principal
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<PAGE> 25
balance thereof. In consideration of Bank providing this prepayment option to
Borrower, or if any such portion of this Note shall become due and payable at
any time prior to the last day of the Fixed Rate Term applicable thereto,
Borrower shall pay to Bank immediately upon demand a fee which is the sum of
the discounted monthly differences for each month from the month of prepayment
through the month in which such Fixed Rate Term matures, calculated as follows
for each such month:
(i) Determine the amount of interest which would have
accrued each month on the amount prepaid at the interest rate applicable to
such amount had it remained outstanding until the last day of the Fixed Rate
Term applicable thereto.
(ii) Subtract from the amount determined in (i) above the
amount of interest which would have accrued for the same month on the amount
prepaid for the remaining term of such Fixed Rate Term at LIBOR in effect on
the date of prepayment for new loans made for such term and in a principal
amount equal to the amount prepaid.
(iii) If the result obtained in (ii) for any month is
greater than zero, discount that difference by LIBOR used in (ii) above.
Each Borrower acknowledges that prepayment of such amount may result in Bank
incurring additional costs, expenses and/or liabilities, and that it is
difficult to ascertain the full extent of such costs, expenses and/or
liabilities. Each Borrower, therefore, agrees to pay the above-described
prepayment fee and agrees that said amount represents a reasonable estimate of
the prepayment costs, expenses and/or liabilities of Bank.
EVENTS OF DEFAULT:
This Note is made pursuant to and is subject to the terms and
conditions of that certain Credit Agreement between Borrower and Bank dated as
of January 30, 1997, as amended from time to time (the "Credit Agreement").
Any default in the payment or performance of any obligation under this Note, or
any defined event of default under the Credit Agreement, shall constitute an
"Event of Default" under this Note.
MISCELLANEOUS:
(a) Remedies. Upon the occurrence of any Event of Default as
defined in the Credit Agreement, the holder of this Note, at the holder's
option, may declare all sums of principal and accrued and unpaid interest
outstanding hereunder to be immediately due and payable without presentment,
demand, or any notices of any kind, including without limitation notice of
nonperformance, notice of protest, protest, notice of dishonor, notice of
intention to accelerate or notice of acceleration, all
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<PAGE> 26
of which are expressly waived by each Borrower, and the obligation, if any, of
the holder to extend any further credit hereunder shall immediately cease and
terminate. Each Borrower shall pay to the holder immediately upon demand the
full amount of all payments, advances, charges, costs and expenses, including
reasonable attorneys' fees (to include outside counsel fees and all allocated
costs of the holder's in-house counsel to the extent permissible), expended or
incurred by the holder in connection with the enforcement of the holder's
rights and/or the collection of any amounts which become due to the holder
under this Note, and the prosecution or defense of any action in any way
related to this Note, including without limitation, any action for declaratory
relief, whether incurred at the trial or appellate level, in an arbitration
proceeding or otherwise, and including any of the foregoing incurred in
connection with any bankruptcy proceeding (including without limitation, any
adversary proceeding, contested matter or motion brought by Bank or any other
person) relating to any Borrower or any other person or entity.
(b) Obligations Joint and Several. Should more than one person or
entity sign this Note as a Borrower, the obligations of each such Borrower
shall be joint and several.
(c) Governing Law. this Note shall be governed by and construed
in accordance with the laws of the state of Texas.
(d) Savings Clause. It is the intention of the parties to comply
strictly with applicable usury laws. Accordingly, notwithstanding any
provision to the contrary in this Note, or in any contract, instrument or
document evidencing or securing the payment hereof or otherwise relating hereto
(each, a "Related Document"), in no event shall this Note or any Related
Document require the payment or permit the payment, taking, reserving,
receiving, collection or charging of any sums constituting interest under
applicable laws that exceed the maximum amount permitted by such laws, as the
same may be amended or modified from time to time (the "Maximum Rate"). If any
such excess interest is called for, contracted for, charged, taken, reserved or
received in connection with this Note or any Related Document, or in any
communication by Bank or any other person to Borrower or any other person, or
in the event that all or part of the principal or interest hereof or thereof
shall be prepaid or accelerated, so that under any of such circumstances or
under any other circumstance whatsoever the amount of interest contracted for,
charged, taken, reserved or received on the amount of principal actually
outstanding from time to time under this Note shall exceed the Maximum Rate,
then in such event it is agreed that: (i) the provisions of this paragraph
shall govern and control; (ii) neither Borrower nor any other person or entity
now or hereafter liable for the payment of this Note or any Related Document
shall be obligated to pay the amount of such interest to the extent it is in
excess of the Maximum Rate; (iii) any such
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<PAGE> 27
excess interest which is or has been received by Bank, notwithstanding this
paragraph, shall be credited against the then unpaid principal balance hereof
or thereof, or if this Note or any Related Document has been or would be paid
in full by such credit, refunded to Borrower; and (iv) the provisions of this
Note and each Related Document, and any other communication to Borrower, shall
immediately be deemed reformed and such excess interest reduced, without the
necessity of executing any other document, to the Maximum Rate. The right to
accelerate the maturity of this Note and any Related Document does not include
the right to accelerate, collect or charge unearned interest, but only such
interest that has otherwise accrued as of the date of acceleration. Without
limiting the foregoing, all calculations of the rate of interest contracted
for, charged, taken, reserved or received in connection with this Note and any
Related Document which are made for the purpose of determining whether such
rate exceeds the Maximum Rate shall be made to the extent permitted by
applicable laws by amortizing, prorating, allocating and spreading during the
period of the full term of this Note or such Related Document, including all
prior and subsequent renewals and extensions hereof or thereof, all interest in
any time contracted for, taken, reserved or received. The terms of this
paragraph shall be deemed to be incorporated into each Related Document.
To the extent that Article 5069-1.04 of the Texas Revised Civil Statutes is
relevant to Bank for the purpose of determining the Maximum Rate, Bank hereby
elects to determine the applicable rate ceiling under such Article by the
indicated (weekly) rate ceiling from time to time in effect, subject to Bank's
right subsequently to change such method in accordance with applicable law, as
the same may be amended or modified from time to time.
(e) Right of Setoff; Deposit Accounts. Upon and after the
occurrence of an Event of Default, (i) Borrower hereby authorizes Bank, at any
time and from time to time, without notice, which is hereby expressly waived by
Borrower, and whether or not Bank shall have declared this Note to be due and
payable in accordance with the terms hereof, to set off against, and to
appropriate and apply to the payment of, Borrower's obligations and liabilities
under this Note (whether matured or unmatured, fixed or contingent, liquidated
or unliquidated), any and all amounts owing by Bank to Borrower (whether
payable in U.S. dollars or any other currency, whether matured or unmatured,
and in the case of deposits, whether general or special (except trust and
escrow accounts), time or demand and however evidenced), and (ii) pending any
such action, to the extent necessary, to hold such amounts as collateral to
secure such obligations and liabilities and to return as unpaid for
insufficient funds any and all checks and other items drawn against any
deposits so held as Bank, in its sole discretion, may elect. Borrower hereby
grants to Bank a security interest in all deposits and accounts maintained with
Bank and with any other financial institution to secure the
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<PAGE> 28
payment of all obligations and liabilities of Borrower to Bank under this Note.
(f) Business Purpose. Borrower represents and warrants that all
loans evidenced by this Note are for a business, commercial, investment,
agricultural or other similar purposes and not primarily for a personal, family
or household use.
(g) Certain Tri-Party Accounts. Borrower and Bank agree that Tex.
Civ. Stat. Ann. Art. 5089, ch. 15 (which regulates certain revolving credit
loan accounts and revolving tri-party accounts) shall not apply to any
revolving loan accounts created under this Note or maintained in connection
herewith.
NOTICE: THIS NOTE AND ALL OTHER DOCUMENTS RELATING TO THE INDEBTEDNESS
EVIDENCED HEREBY CONSTITUTE A WRITTEN LOAN AGREEMENT WHICH REPRESENTS THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES RELATING TO THIS NOTE AND THE
INDEBTEDNESS EVIDENCED HEREBY.
IN WITNESS WHEREOF, the undersigned has executed this Note as of the
date first written above.
GADZOOKS, INC.
By:
---------------------------
MONTY STANDIFER
CHIEF FINANCIAL OFFICER
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<PAGE> 1
Exhibit 10.10
SEVERANCE AGREEMENT
Agreement made on September 5, 1996, between Gadzooks, Inc., a Texas
corporation (the "Company"), and Gerald R. Szczepanski ("Executive").
RECITALS
A. Executive is currently employed by the Company.
B. The Company and Executive desire to enter into certain
agreements providing for certain events upon the termination of the Executive's
employment with the Company.
NOW THEREFORE, in consideration of the premises and mutual covenants
herein contained and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Termination by the Company without Cause. The Company may at
any time terminate Executive's employment without Cause (as defined below) by
giving Executive notice of the effective date of termination (which effective
date may be the date of such notice). In the event of such termination without
Cause, the Company shall have the continuing obligation to make payments of
base salary at the rate in effect at the effective date of such termination for
a period of twelve (12) months following the effective date of such
termination. The Executive will also receive the cash bonus he would have
received had the Company achieved the budgeted financial performance for the
fiscal year in which such termination occurs, irrespective of whether the
Company actually meets such budgeted financial performance goals for such
fiscal year. Such cash bonus payment shall be made when payments are otherwise
made to executive officers under the Company's cash bonus plan, but in no event
later than 120 days after the end of the fiscal year in which such termination
occurred. In addition, the Company will continue to pay premiums for
Executive's health insurance coverage under the Company's health insurance plan
for a period of twelve (12) months following the effective date of such
termination.
2. Termination by the Company for Cause. The Company shall have
the right to terminate Executive's employment at any time for any of the
following reasons (each of which is referred to herein as "Cause") by giving
Executive written notice of the effective date of termination (which effective
date may be the date of such notice):
(A) any act of fraud or dishonesty with respect to any
aspect of the Company's or any affiliate's business;
(B) as a result of Executive's gross negligence or
willful misconduct, Executive shall violate, or cause the Company to
violate, any applicable federal or state securities or banking law or
regulation and as a result of such violation, shall become, or shall
cause the Company or any affiliate to become the subject of any legal
action or
<PAGE> 2
administrative proceeding seeking an injunction from further
violations or a suspension of any right or privilege;
(C) as a result of Executive's gross negligence or
willful misconduct, Executive shall commit any act that causes, or
shall knowingly fail to take reasonable and appropriate action to
prevent, any material injury to the financial condition or business
reputation of the Company or any affiliate; or
(D) conviction of a felony or of a crime involving moral
turpitude.
If the Company terminates Executive's employment for any of the reasons
set forth above in this Section 2, the Company shall have no further
obligations hereunder from and after the effective date of termination and
shall have all other rights and remedies available under this or any other
agreement and at law or in equity.
3. Voluntary Termination by Executive. In the event that
Executive's employment with the Company is terminated by Executive, the Company
shall have no further obligations hereunder from and after the date of such
termination.
4. Complete Agreement. This Agreement embodies the complete
agreement and understanding between the parties and supersedes and preempts any
prior understandings, agreements or representations by or between the parties,
written or oral, which may have related to the subject matter hereof in any
way. Any severance arrangements or agreements between the Company and
Executive that existed at any time prior to the execution and delivery of this
Agreement are hereby terminated by Executive; provided, however, that Executive
shall remain liable for any breach of such arrangements or agreements occurring
during the term of such arrangement or agreement. From and after the date of
this Agreement, Executive shall not be entitled to any compensation from the
Company on account of any such arrangement or agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered on the day and year first above written.
GADZOOKS, INC.
By: /s/ Monty R. Standifer
----------------------------------
Name: Monty R. Standifer
Title: Senior Vice President and CFO
/s/ Gerald R. Szczepanski
---------------------------------------
Gerald R. Szczepanski
2
<PAGE> 1
Exhibit 10.11
SEVERANCE AGREEMENT
Agreement made on ________________________, 1996, between Gadzooks,
Inc., a Texas corporation (the "Company"), and _____________________
("Executive").
RECITALS
A. Executive is currently employed by the Company.
B. The Company and Executive desire to enter into certain
agreements providing for certain events upon the termination of the Executive's
employment with the Company.
NOW THEREFORE, in consideration of the premises and mutual covenants
herein contained and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Termination by the Company without Cause. The Company may at
any time terminate Executive's employment without Cause (as defined below) by
giving Executive notice of the effective date of termination (which effective
date may be the date of such notice). In the event of such termination without
Cause, the Company shall have the continuing obligation to make payments of
base salary at the rate in effect at the effective date of such termination for
a period of six (6) months following the effective date of such termination.
In addition, the Company will continue to pay premiums for Executive's health
insurance coverage under the Company's health insurance plan for a period of
six (6) months following the effective date of such termination.
2. Termination by the Company for Cause. The Company shall have
the right to terminate Executive's employment at any time for any of the
following reasons (each of which is referred to herein as "Cause") by giving
Executive written notice of the effective date of termination (which effective
date may be the date of such notice):
(A) any act of fraud or dishonesty with respect to any
aspect of the Company's or any affiliate's business;
(B) as a result of Executive's gross negligence or
willful misconduct, Executive shall violate, or cause the Company to
violate, any applicable federal or state securities or banking law or
regulation and as a result of such violation, shall become, or shall
cause the Company or any affiliate to become the subject of any legal
action or administrative proceeding seeking an injunction from further
violations or a suspension of any right or privilege;
(C) as a result of Executive's gross negligence or
willful misconduct, Executive shall commit any act that causes, or
shall knowingly fail to take reasonable and
<PAGE> 2
appropriate action to prevent, any material injury to the financial
condition or business reputation of the Company or any affiliate; or
(D) conviction of a felony or of a crime involving moral
turpitude.
If the Company terminates Executive's employment for any of the reasons
set forth above in this Section 2, the Company shall have no further
obligations hereunder from and after the effective date of termination and
shall have all other rights and remedies available under this or any other
agreement and at law or in equity.
3. Voluntary Termination by Executive. In the event that
Executive's employment with the Company is terminated by Executive, the Company
shall have no further obligations hereunder from and after the date of such
termination.
4. Complete Agreement. This Agreement embodies the complete
agreement and understanding between the parties and supersedes and preempts any
prior understandings, agreements or representations by or between the parties,
written or oral, which may have related to the subject matter hereof in any
way. Any severance arrangements or agreements between the Company and
Executive that existed at any time prior to the execution and delivery of this
Agreement are hereby terminated by Executive; provided, however, that Executive
shall remain liable for any breach of such arrangements or agreements occurring
during the term of such arrangement or agreement. From and after the date of
this Agreement, Executive shall not be entitled to any compensation from the
Company on account of any such arrangement or agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered on the day and year first above written.
GADZOOKS, INC.
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
-------------------------------------
[Executive]
2
<PAGE> 3
SCHEDULE OF SIGNATORIES
Monty R. Standifer
Loretta S. Beck
William S. Kotch III
Georgia A. Taylor
<PAGE> 1
Exhibit 10.13
AMENDMENT NO. 5 TO THE
GADZOOKS, INC.
1992 INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN
WHEREAS, pursuant to Section 9(a) of the 1992 Incentive and
Nonstatutory Stock Option Plan, as amended (the "Plan"), any option granted
under the Plan is exercisable at such times and under such conditions as
determined by the Board of Directors (the "Board") of Gadzooks, Inc. (the
"Company");
WHEREAS, pursuant to Section 13(a) of the Plan, the Board may amend
the Plan from time to time; and
WHEREAS, the Board has approved the following amendment to the Plan.
NOW THEREFORE, the Plan is hereby amended as follows:
(1) The first paragraph of Section 9(a) of the Plan is hereby
amended to read in its entirety as follows:
(a) Procedure for Exercise; Rights as a Stockholder.
Any Option granted hereunder shall be exercisable at such
times and under such conditions as determined by the Board,
including performance criteria with respect to the Company
and/or the Optionee, and as shall be permissible under the
terms of the Plan. Notwithstanding the foregoing, in the
event of (i) a proposed sale of substantially all of the
Common Stock of the Company, (ii) a proposed sale of
substantially all of the assets of the Company, (iii) a
proposed merger in which the Company is not to be the
surviving corporation (other than with a subsidiary of the
Company) or (iv) any other proposed extraordinary corporate
transaction which, in the judgment of the Board, might deprive
the Optionee of the full value of the Options granted
hereunder, the Company shall forward written notification of
such transaction to the Optionee, and the Optionee shall have
thirty (30) days in which to exercise all or any portion of
the Optionee's Options granted hereunder, including any
portion of the Optionee's Options which have not yet vested as
of such date (to the extent such Options have not been
previously exercised), pursuant to the procedure set forth
below. Upon the conclusion of such thirty-day period, unless
otherwise determined by the Board, all rights of the Optionee
hereunder shall terminate. Any exercise of Options by the
Optionee shall be effective immediately prior to the
occurrence of the transaction giving rise to the right to
exercise the Options and, to the extent such transaction does
not occur, the exercise shall be deemed rescinded and the
Optionee shall again only be entitled to exercise its Options
according to the vesting schedules set forth in the Optionee's
Option Agreements issued pursuant to Section 16 hereof.
<PAGE> 2
IN WITNESS WHEREOF, the Company has caused its duly authorized officer
to execute this Amendment No. 5 as of the 12th day of September, 1996.
GADZOOKS, INC.
By: /s/ Monty R. Standifer
--------------------------------
Name: Monty R. Standifer
Title: Senior Vice President and CFO
<PAGE> 1
Exhibit 10.14
AMENDMENT NO. 1 TO THE
GADZOOKS, INC.
1994 INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN
FOR KEY EMPLOYEES
WHEREAS, pursuant to Section 9(a) of the 1994 Incentive and
Nonstatutory Stock Option Plan for Key Employees (the "Plan"), any option
granted under the Plan is exercisable at such times and under such conditions
as determined by the Board of Directors (the "Board") of Gadzooks, Inc. (the
"Company");
WHEREAS, pursuant to Section 13(a) of the Plan, the Board may amend
the Plan from time to time; and
WHEREAS, the Board has approved the following amendment to the Plan.
NOW THEREFORE, the Plan is hereby amended as follows:
(1) The first paragraph of Section 9(a) of the Plan is hereby
amended to read in its entirety as follows:
(a) Procedure for Exercise; Rights as a Stockholder.
Any Option granted hereunder shall be exercisable at such
times and under such conditions as determined by the Board,
including performance criteria with respect to the Company
and/or the Optionee, and as shall be permissible under the
terms of the Plan. Notwithstanding the foregoing, in the
event of (i) a proposed sale of substantially all of the
Common Stock of the Company, (ii) a proposed sale of
substantially all of the assets of the Company, (iii) a
proposed merger in which the Company is not to be the
surviving corporation (other than with a subsidiary of the
Company) or (iv) any other proposed extraordinary corporate
transaction which, in the judgment of the Board, might deprive
the Optionee of the full value of the Options granted
hereunder, the Company shall forward written notification of
such transaction to the Optionee, and the Optionee shall have
thirty (30) days in which to exercise all or any portion of
the Optionee's Options granted hereunder, including any
portion of the Optionee's Options which have not yet vested as
of such date (to the extent such Options have not been
previously exercised), pursuant to the procedure set forth
below. Upon the conclusion of such thirty-day period, unless
otherwise determined by the Board, all rights of the Optionee
hereunder shall terminate. Any exercise of Options by the
Optionee shall be effective immediately prior to the
occurrence of the transaction giving rise to the right to
exercise the Options and, to the extent such transaction does
not occur, the exercise shall be deemed rescinded and the
Optionee shall again only be entitled to exercise its Options
according to the vesting schedules set forth in the Optionee's
Option Agreements issued pursuant to Section 16 hereof.
<PAGE> 2
IN WITNESS WHEREOF, the Company has caused its duly authorized officer
to execute this Amendment No. 1 as of the 12th day of September, 1996.
GADZOOKS, INC.
By: /s/ Monty R. Standifer
-----------------------------------
Name: Monty R. Standifer
Title: Senior Vice President and CFO
<PAGE> 1
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
($ in thousands, except operating data and per share amounts) Fiscal Year Ended
- ---------------------------------------------------------------------------------------------------------------------
FEBRUARY 1, January 27, January 28, January 29, January 30,
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales $ 128,388 $ 84,602 $ 56,463 $ 38,239 $ 25,368
Cost of goods sold 87,418 58,015 38,379 25,699 17,427
--------- --------- --------- --------- ---------
Gross profit 40,970 26,587 18,084 12,540 7,941
Selling, general and administrative expenses 29,212 19,794 14,452 10,315 6,765
Provision for closing outlet stores -- -- 250 -- --
--------- --------- --------- --------- ---------
Operating income 11,758 6,793 3,382 2,225 1,176
Interest income (expense), net 945 (179) (240) (81) (17)
--------- --------- --------- --------- ---------
Income before income taxes 12,703 6,614 3,142 2,144 1,159
Provision for income taxes 4,712 2,538 1,201 817 447
--------- --------- --------- --------- ---------
Net income $ 7,991 $ 4,076 $ 1,941 $ 1,327 $ 712
========= ========= ========= ========= =========
Net income per share $ 0.87 $ 0.60 $ 0.32 $ 0.24 $ 0.13
Weighted average shares outstanding 9,143 6,742 5,976 5,506 5,416
SELECTED OPERATING DATA:
Comparable store sales increase(1) 6.1% 14.7% 8.4% 3.5% 19.6%
Number of stores at year end 183 126 90 65 43
Average net sales per store $ 814,838 $ 776,807 $ 698,108 $ 680,651 $ 692,736
Average net sales per square foot $ 356 $ 343 $ 306 $ 306 $ 346
Total square footage at end of period 421,572 284,953 204,711 148,338 97,920
Operating income percentage 9.2% 8.0% 6.0% 5.8% 4.6%
Capital expenditures (in 000s) $ 6,864 $ 5,959 $ 3,445 $ 2,426 $ 1,562
BALANCE SHEET DATA:
Working capital $ 34,333 $ 20,368 $ 4,262 $ 2,014 $ 1,937
Total assets $ 64,747 $ 45,611 $ 19,836 $ 13,471 $ 9,038
Total debt -- $ 178 $ 3,026 $ 972 $ 211
Redeemable preferred stock and
cumulative dividends -- -- $ 10,631 $ 6,856 $ 6,342
Shareholders' equity (deficit) $ 49,063 $ 30,765 $ (2,204) $ (1,436) $ (2,249)
</TABLE>
(1) A store becomes comparable after it has been open for 14 full fiscal
months.
15
<PAGE> 2
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 at year-end 1996,
operated 183 stores in 24 states throughout the Mid-Atlantic, Midwest,
Southeast and Southwest, regions of the United States. Since fiscal 1992, the
Company has been on a rapid expansion program, opening 23 new stores in fiscal
1993, 26 new stores in fiscal 1994, 39 new stores in fiscal 1995, and 57 new
stores in 1996.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain selected
income statement data expressed as a percentage of net sales and certain store
data:
<TABLE>
<CAPTION>
Fiscal Year
- ------------------------------------------------------------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of goods sold, including buying, distribution 68.1 68.6 68.0
and occupancy costs
----- ----- -----
Gross profit 31.9 31.4 32.0
Selling, general and administrative expenses 22.7 23.4 25.6
Provision for closing outlet stores -- -- 0.4
----- ----- -----
Operating income 9.2 8.0 6.0
Interest income (expense), net .7 (0.2) (0.4)
----- ----- -----
Income before income taxes 9.9 7.8 5.6
Provision for income taxes 3.7 3.0 2.1
----- ----- -----
Net income 6.2% 4.8% 3.5%
===== ===== =====
Number of stores open at end of period 183 126 90
</TABLE>
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales increased approximately $43.8 million, or 51.8%, to $128.4 million
during fiscal 1996 from $84.6 million in fiscal 1995. Net sales of the 57 new
stores opened during fiscal 1996 and for those stores not yet qualifying as
comparable stores contributed $39.0 million of the increase in sales.
Comparable store sales increased 6.1% in fiscal 1996 and contributed $4.7
million of the increase in sales. The increase in comparable store sales was
primarily due to continuous improvements in merchandise assortments supported
by strong sales in the junior and young men categories. A store becomes
comparable after it has been open for 14 full fiscal months. Fiscal 1996 was a
53 week period. The fifty-third week contributed $1.9 million to the increase
in net sales.
Gross profit increased approximately $14.4 million to $41.0 million in fiscal
1996 from $26.6 million in fiscal 1995. As a percentage of sales, gross profit
increased to 31.9% in fiscal 1996 from 31.4% in fiscal 1995 due to slightly
higher merchandise margins and a decrease in buying and distribution costs as a
percentage of sales resulting from the Company's larger store base.
Selling, general and administrative expenses increased approximately $9.4
million to $29.2 million during fiscal 1996 from $19.8 million in fiscal 1995,
but decreased as a percentage of sales to 22.7% in fiscal 1996 from 23.4% in
fiscal 1995. The decrease as a percentage of sales was due to the 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 year and the Company's larger store base.
16
<PAGE> 3
Operating income increased approximately $5.0 million to $11.8 million during
fiscal 1996 from $6.8 million in fiscal 1995. As a percentage of sales,
operating income increased to 9.2% in fiscal 1996 from 8.0% in fiscal 1995.
Net interest income increased approximately $1.1 million to $0.9 million net
interest income during fiscal 1996 from $0.2 million net interest expense in
fiscal 1995. 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.
Income tax expense was $4.7 million for fiscal 1996, compared to $2.5 million
in fiscal 1995. The effective income tax rate in fiscal 1996 was 37.1%,
compared to 38.4% in fiscal 1995. The lower effective income tax rate for
fiscal 1996 compared to fiscal 1995 was primarily attributable to higher
amounts of non-taxable interest income in fiscal 1996.
FISCAL 1995 COMPARED TO FISCAL 1994
Net sales increased approximately $28.1 million, or 49.8%, to $84.6 million
during fiscal 1995 from $56.5 million in fiscal 1994. Net sales for the 39 new
stores opened during fiscal 1995 and for those stores not yet qualifying as
comparable stores contributed $20.6 million of the increase in sales.
Comparable store sales increased 14.7% in fiscal 1995 and contributed $7.5
million of the increase in sales. The increase in comparable store sales was
primarily due to continued improvements in merchandise assortments and better
in-stock positions in the stores as a result of improvements in the Company's
inventory planning and allocation systems implemented during the fourth quarter
of fiscal 1994.
Gross profit increased approximately $8.5 million to $26.6 million in fiscal
1995 from $18.1 million in fiscal 1994. As a percentage of sales, gross profit
decreased to 31.4% in fiscal 1995 from 32.0% in fiscal 1994 due to increased
buying and distribution costs primarily resulting from the addition of a
general merchandising manager and related merchandising staff in late 1994.
Selling, general and administrative expenses increased approximately $5.3
million to $19.8 million during fiscal 1995 from $14.5 million in fiscal 1994,
but decreased as a percentage of sales to 23.4% in fiscal 1995 from 25.6% in
fiscal 1994. The increase in aggregate selling, general and administrative
expenses was primarily due to the larger number of stores in operation. The
decrease as a percentage of sales was primarily due to a reduction in store
operating expenses as a percentage of sales due to comparable store sales
increases, and to a lesser extent, a reduction in corporate overhead expense as
a percentage of sales due to operating leverage achieved through the Company's
larger store base.
Operating income increased approximately $3.4 million to $6.8 million during
fiscal 1995 from $3.4 million in fiscal 1994. As a percentage of sales,
operating income increased to 8.0% in fiscal 1995 from 6.0% in fiscal 1994.
Net interest expense decreased approximately $61,000 during fiscal 1995 from
fiscal 1994, primarily due to a reduction in average bank borrowings during the
fourth quarter of fiscal 1995 as a result of the utilization of funds received
from the Company's initial public offering in October 1995.
QUARTERLY RESULTS AND SEASONALITY
The Company's quarterly results of operations may fluctuate materially
depending on, among other things, the timing of new store openings and related
pre-opening expenses, net sales contributed by new stores, increases or
decreases in comparable store sales, and changes in the Company's merchandise
mix.
The Company's business is also subject to seasonal influences, with slightly
higher sales during the Christmas holiday, back-to-school, and spring break
seasons. The Christmas holiday season remains the Company's single most
important selling season. The Company believes, however, that the significance
of the back-to-school season
17
<PAGE> 4
(which affects operating results in the second and third quarters) and spring
break season (which affects operating results in the first quarter) reduces
somewhat the Company's dependence on the Christmas holiday selling season. As
is the case with many apparel retailers, the Company's net sales and net income
are typically lower in the first quarter. The Company has experienced first
quarter losses in the past and may experience such losses in the future.
The following table sets forth certain statement of operations and operating
data for each of the Company's last eight fiscal quarters. The quarterly data
set forth below were derived from unaudited financial statements of the
Company, which in the opinion of management of the Company, contain all
adjustments (consisting only of normal recurring adjustments) necessary for
fair presentation thereof. Results for any quarter are not necessarily
indicative of results that may be achieved for a full fiscal year.
<TABLE>
<CAPTION>
(In thousands, except operating and per share data) Fiscal 1996 Fiscal 1995
- -------------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH First Second Third Fourth
QUARTER QUARTER QUARTER QUARTER Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $23,486 $28,504 $31,171 $45,227 $15,999 $18,408 $20,346 $29,849
Gross profit 6,947 8,870 9,834 15,320 4,563 5,619 6,272 10,132
Operating income 961 2,447 2,789 5,561 455 1,280 1,578 3,480
Net income 738 1,647 1,918 3,689 231 696 930 2,218
Net income per share $ 0.08 $ 0.18 $ 0.21 $ 0.41 $ 0.04 $ 0.11 $ 0.14 $ 0.26
Weighted average
shares outstanding 9,030 9,116 9,119 9,083 6,075 6,064 6,860 8,408
Selected Operating Data:
Stores open at end
of period 146 160 174 183 101 111 115 126
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. During the last three fiscal years, the Company's primary uses of cash
have been to finance new store openings and purchase merchandise inventories.
The Company has satisfied its cash requirements principally from proceeds of
the sale of equity securities, borrowings under bank credit facilities and cash
flow from operations.
CASH FLOWS. During fiscal 1996, 1995, and 1994, cash flows from operating
activities were $5.6 million, $4.0 million, and $0.3 million, respectively. The
Company's net income has increased in each of the last three fiscal years.
However, cash flows from operating activities decreased in fiscal 1994
primarily as a result of an increase in inventory, principally in connection
with new store openings. While the increase in inventory was partially financed
through vendor trade credit, accounts payable did not increase in proportion to
the increase in inventory during fiscal 1994 due to changes in the factoring of
accounts receivable by many of the Company's vendors, which effectively
shortened the Company's payment terms. Since the Company's initial public
offering, vendor credit terms have become more favorable to the Company.
Cash used in investing activities was approximately $19.3 million, $6.0
million, and $3.4 million for fiscal 1996, 1995, and 1994, respectively. The
Company spent $6.9 million in capital expenditures during fiscal 1996, the
majority of which was used to open new stores. The Company opened 57, 39, and
26 stores in fiscal 1996, 1995, and 1994, respectively. In addition, $12.4
million of capital resources, in excess of current working capital needs, was
used to purchase highly liquid investments during fiscal 1996.
Net cash flow provided by financing activities was $10.3 million, $15.4
million, and $3.1 million for fiscal 1996, 1995, and 1994, respectively. During
fiscal 1996, the Company received $9.1 million from a secondary public offering
and
18
<PAGE> 5
$1.2 million as a tax benefit from the exercise of employee stock options.
During fiscal 1995, the Company received $20.1 million from its initial public
offering and $1.6 million from borrowings on a bank term loan. The Company used
$4.4 million for payment on the bank term loan and capital lease obligations,
and $2.1 million for payment of cash dividends to holders of Preferred Stock.
During fiscal 1994, the Company received $3.0 million from proceeds of a bank
term loan and $3.1 million from the issuance of Class A and Class B Preferred
Stock. The Company used $2.0 million of proceeds of the Class A Preferred Stock
issuance to repurchase Common Stock pursuant to the terms of the Class A
Purchase Agreement. In addition, the Company used $0.5 million for repayments
on its bank revolving line of credit and $0.4 million for payments on long-term
obligations.
CREDIT FACILITY. The Company currently has a loan agreement ("Credit Facility")
with Wells Fargo Bank which provides for an unsecured revolving line of credit
totaling $10.0 million, which bears interest at the lesser of either Prime Rate
or 1.95% above LIBOR. The current bank Credit Facility matures on June 5, 1998.
The Credit Facility also provides for the issuance of letters of credit under
the revolving line that are generally used in certain circumstances in
connection with merchandise purchases. At February 1, 1997, no amounts were
outstanding under the Credit Facility.
The Credit Facility also subjects the Company to various restrictions on the
incurrence of additional indebtedness, acquisitions, loans to officers and
stock repurchases. The covenants require the Company to maintain a certain
minimum current ratio, minimum tangible net worth, minimum working capital, and
coverage ratios each month.
CAPITAL EXPENDITURES. The Company anticipates that it will spend approximately
$7.0 million in capital expenditures to open 55 to 60 new stores and to remodel
six or seven existing stores in fiscal 1997. During fiscal 1996, the Company
spent $6.2 million in capital expenditures to open 57 new stores and remodel
four existing stores and $0.7 million for other capital purchases. The
Company's average capital expenditures to construct a new store during fiscal
1996, including leasehold improvements and furniture and fixtures, averaged
approximately $167,000 (approximately $100,000 net of landlord construction
allowances).
The Company anticipates that its cash requirements for opening inventories in
stores expected to open in fiscal 1997 will be approximately $4.0 million. 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 payable terms with its vendors.
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. The actual costs that the Company will incur in opening new stores
cannot be predicted with precision because such costs will vary based upon,
among other things, geographic location, the size of the store, and the extent
of the build-out required at the selected site.
The Company estimates that it will spend approximately $2.0 million to install
additional merchandise handling equipment at its new distribution center and to
finish-out the new corporate headquarters in the first half of fiscal 1997. The
Company may also upgrade and enhance its computer systems for certain
distribution functions in the last half of fiscal 1997, which would result in
additional capital expenditures of approximately $1.0 million.
The Company believes that its existing cash balances, cash generated from
operations, and funds available under the Credit Facility will be sufficient to
satisfy its cash requirements through fiscal 1997.
INFLATION
The Company does not believe that inflation has had a material effect on net
sales or results of operations. The Company has generally been able to pass on
increased costs through increases in selling prices.
19
<PAGE> 6
BALANCE SHEETS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
FEBRUARY 1, January 27,
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $10,347,728 $13,732,644
Short-term investments 12,419,847 --
Accounts receivable 1,283,910 490,769
Inventory 23,211,036 18,707,085
Other current assets 1,329,034 1,161,173
----------- -----------
48,591,555 34,091,671
----------- -----------
Leaseholds, fixtures and equipment, net 16,155,772 11,518,989
----------- -----------
$64,747,327 $45,610,660
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,654,123 $ 8,495,007
Accrued payroll and benefits 3,135,152 1,867,657
Other current liabilities 2,355,099 1,906,907
Income taxes payable 1,114,662 1,320,769
Current portion of long-term obligations -- 133,256
----------- -----------
14,259,036 13,723,596
----------- -----------
Long-term obligations, less current portion -- 44,716
Accrued rent 1,425,060 1,077,401
Commitments and contingencies (Note 7)
Shareholders' equity:
Preferred stock, $1.00 par value, 1,000,000 shares authorized, none issued -- --
Common stock, $.01 par value, 25,000,000 shares authorized, 8,584,440
and 5,219,930 shares issued and outstanding, respectively 85,844 52,199
Additional paid-in capital 39,741,021 29,467,782
Retained Earnings 9,236,366 1,244,966
----------- -----------
49,063,231 30,764,947
----------- -----------
$64,747,327 $45,610,660
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE> 7
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Fiscal Year Ended
- -----------------------------------------------------------------------------------------------------------
FEBRUARY 1, January 27, January 28,
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net sales $ 128,388,380 $ 84,601,819 $ 56,462,742
Costs and expenses:
Cost of goods sold, including buying, distribution and
occupancy costs 87,417,930 58,015,483 38,378,994
Selling, general and administrative expenses 29,212,565 19,793,831 14,452,161
Provision for closing outlet stores -- -- 250,000
------------- ------------- -------------
116,630,495 77,809,314 53,081,155
------------- ------------- -------------
Operating income 11,757,885 6,792,505 3,381,587
Interest expense (26,367) (347,480) (247,475)
Interest income 971,382 168,641 7,894
------------- ------------- -------------
Income before income taxes 12,702,900 6,613,666 3,142,006
Provision for income taxes 4,711,500 2,538,000 1,201,492
------------- ------------- -------------
Net income $ 7,991,400 $ 4,075,666 $ 1,940,514
============= ============= =============
Net income per common and common equivalent share $ 0.87 $ 0.60 $ 0.32
------------- ------------- -------------
Weighted average common and common equivalent
shares outstanding 9,142,921 6,742,416 5,975,836
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE> 8
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Common Stock Additional Retained
Shares Capital Paid In Earnings Total
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 29, 1994 1,428,571 $14,286 $ 30,714 $(1,481,274) $ (1,436,274)
Repurchase of common stock (423,280) (4,233) (9,100) (1,986,667) (2,000,000)
Accrued preferred stock dividends (666,000) (666,000)
Other (42,002) (42,002)
Net income 1,940,514 1,940,514
--------- ------- ------------ ----------- ------------
BALANCE, JANUARY 28, 1995 1,005,291 10,053 21,614 (2,235,429) (2,203,762)
Issuance of common stock,
net of underwriting
commissions and expenses 1,687,050 16,871 20,167,697 -- 20,184,568
Conversion of preferred stock 2,527,589 25,275 9,074,726 -- 9,100,001
Accrued preferred stock dividends (500,554) (500,554)
Tax benefit from exercise of
stock options 203,745 -- 203,745
Other (94,717) (94,717)
Net income 4,075,666 4,075,666
--------- ------- ------------ ----------- ------------
BALANCE, JANUARY 27, 1996 5,219,930 52,199 29,467,782 1,244,966 30,764,947
Issuance of common stock,
net of underwriting
commissions and expenses 400,000 4,000 9,012,586 -- 9,016,586
Stock issued under option plans 131,284 1,313 80,985 -- 82,298
Three-for-two common stock
split effected in the form of
a 50% stock dividend 2,833,226 28,332 (28,332) -- --
Tax benefit from exercise
of stock options 1,208,000 -- 1,208,000
Net Income 7,991,400 7,991,400
--------- ------- ------------ ----------- ------------
BALANCE, FEBRUARY 1, 1997 8,584,440 $85,844 $ 39,741,021 $ 9,236,366 $ 49,063,231
========= ======= ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE> 9
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Year Ended
- ----------------------------------------------------------------------------------------------------------
FEBRUARY 1, January 27, January 28,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 7,991,400 $ 4,075,666 $ 1,940,514
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 2,227,401 1,461,265 990,223
Deferred income taxes (347,500) (117,287) (284,995)
Provision for closing outlet stores -- -- 250,000
Changes in operating assets and liabilities:
Accounts receivable (793,141) (162,751) (55,190)
Inventory (4,503,951) (6,974,472) (3,901,016)
Other assets 179,639 (611,328) 122,327
Accounts payable (840,884) 3,625,800 147,946
Accrued payroll and benefits 1,267,495 769,352 528,280
Income taxes payable (206,107) 657,311 182,249
Other liabilities 662,595 1,232,423 409,812
------------ ------------ ------------
Net cash provided by operating activities 5,636,947 3,955,979 330,150
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures, net (6,864,184) (5,958,770) (3,444,916)
Purchases of short-term investments (14,129,847) -- --
Proceeds from redemption of short-term investments 1,710,000 -- --
------------ ------------ ------------
Net cash used in investing activities (19,284,031) (5,958,770) (3,444,916)
------------ ------------ ------------
Cash flows from financing activities:
Repayments of line of credit -- -- (500,000)
Principal payments on long-term obligations (44,716) (4,419,729) (446,076)
Proceeds from term note -- 1,572,000 3,000,000
Issuance of preferred stock, net -- -- 3,066,787
Issuance of common stock, net 9,098,884 20,184,567 --
Repurchase of common stock -- -- (2,000,000)
Payment of preferred stock dividends -- (2,126,554) --
Tax Benefit From Exercise Of Stock Options 1,208,000 203,745 --
------------ ------------ ------------
Net cash provided by financing activities 10,262,168 15,414,029 3,120,711
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (3,384,916) 13,411,238 5,945
Cash and cash equivalents at beginning of period 13,732,644 321,406 315,461
------------ ------------ ------------
Cash and cash equivalents at end of period $ 10,347,728 $ 13,732,644 $ 321,406
============ ============ ============
Cash paid during the year for:
Interest $ 20,106 $ 332,099 $ 229,195
Income taxes 4,057,107 1,794,233 1,304,238
Noncash activities:
Accrual of preferred stock dividends -- $ 500,554 $ 666,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND NATURE OF THE COMPANY
Gadzooks, Inc. (the "Company") is a mall-based, specialty retailer of casual
apparel and related accessories for young men and women principally between the
ages of 13 and 19. At February 1, 1997, the Company had 183 company-owned
stores in operation throughout the Mid-Atlantic, Midwest, Southeast, and
Southwest regions of the United States.
The Company's fiscal year ends on the Saturday nearest January 31. All
references in these financial statements to fiscal years are to the calendar
year in which the fiscal year begins. Fiscal years 1996, 1995, and 1994
represent the 52 or 53 week periods ended February 1, 1997, January 27, 1996,
and January 28, 1995, respectively. Fiscal 1996 was a 53 week period.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and marketable securities with
original maturities of three months or less.
SHORT-TERM INVESTMENTS
Short-term investments consist of highly liquid investments with original
maturities between three and twelve months. Management determines the proper
classifications of investments at the time of purchase and reevaluates such
designations as of each balance sheet date. At February 1, 1997, all securities
are classified as held-to-maturity under the provisions of SFAS No. 115
"Accounting for Certain Investments in Debt and Equity Securities" based on the
Company's positive intent and ability to hold the securities to maturity. In
accordance with SFAS No. 115, these securities are carried at amortized cost,
which approximates fair market value.
INVENTORY
Inventories are valued at the lower of average cost or market.
LEASEHOLDS, FIXTURES AND EQUIPMENT
Leaseholds, fixtures and equipment are stated at cost or, in the case of
capitalized leases, at the present value of future minimum lease payments.
Depreciation of fixtures and equipment is based upon the estimated useful lives
of the assets, generally from five to ten years, computed on the straight-line
method. Amortization of leasehold improvements is computed on the straight-line
method over estimated useful lives or lease terms, if shorter. The Company
reviews its long-lived assets for impairment whenever events or changes in
circumstances indicate the respective carrying amounts may not be recoverable.
REVENUE RECOGNITION
Retail merchandise sales are recognized at the point of sale less sales returns.
ADVERTISING
Advertising costs are expensed when incurred.
STORE PRE-OPENING COSTS
Costs incurred with the setup of a new store prior to its opening for business
are expensed in the period when the store opens.
24
<PAGE> 11
INCOME TAXES
Deferred income taxes are provided on a liability method. Under this method,
deferred tax assets and liabilities are recognized based on differences between
the financial statement and the tax bases of assets and liabilities using
presently enacted tax rates.
EARNINGS PER SHARE AND STOCK SPLITS
Earnings per share are computed by dividing net income by the weighted average
number of shares outstanding during each period after giving effect to (i) a
three-for-two stock split declared by the Board of Directors in May 1996, (ii)
a 3.15-to-1 reverse stock split declared by the Board of Directors in July
1995, (iii) the conversion of all redeemable preferred stock into shares of
common stock and (iv) common stock equivalents resulting from stock options.
Stock options granted with exercise prices below the initial public offering
price (see Note 3) during the 12-month period preceding the initial filing date
of the initial public offering and through October 5, 1995 have been included
in the calculation of common stock equivalents using the treasury stock method
as if they were outstanding for all periods prior to the initial public
offering. The three-for-two stock split and the 3.15-to-1 reverse stock split
have been given retroactive effect in the financial statements. Fully diluted
earnings per share do not materially differ from primary earnings per share.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at February 1, 1997 and January
27, 1996 and the reported amounts of revenues and expenses during each of the
three years in the period ended February 1, 1997. Actual results could differ
from these estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
All financial instruments classified as current are recorded at cost, which
approximates fair value due to the short maturity of these instruments.
(3) COMMON STOCK OFFERINGS
On October 5, 1995, the Company completed an initial public offering of
1,587,000 shares of common stock that provided net proceeds of $20,662,740. The
offering required the automatic conversion of all outstanding shares of the
Company's mandatorily redeemable preferred stock into 2,527,589 shares of
common stock. Cumulative accrued preferred stock dividends of $2,005,041 and
$121,512 for Class A and Class B Preferred Stock, respectively, were paid in
cash out of the proceeds of the offering. At the completion of the offering,
the Company filed restated articles of incorporation authorizing 1,000,000
shares of undesignated preferred stock and canceling all other classes of
preferred stock.
On January 31, 1996, the Company completed a secondary offering of 600,000
shares of its common stock (after giving effect to the three-for-two stock
split described in Note 2). The Company's net proceeds, after deducting
expenses associated with the offering, totaled $9,016,586.
25
<PAGE> 12
(4) SHORT-TERM INVESTMENTS
The amortized cost and estimated fair market value of investments are as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Gross Gross Fair
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Commercial paper $ 5,129,733 $ 3,167 $ -- $ 5,132,900
Tax exempt securities backed by 12,846,114 6,735 2,030 12,850,819
municipal bonds
Repurchase agreements 1,270,000 -- -- 1,270,000
Other debt securities 900,000 -- 567 899,433
Less cash equivalents 7,726,000 -- -- 7,726,000
----------- ----------- ----------- -----------
Total investment securities $12,419,847 $ 9,902 $ 2,597 $12,427,152
=========== =========== =========== ===========
</TABLE>
Investments classified as held-to-maturity at February 1, 1997 have various
maturity dates that do not exceed one year.
(5) LEASEHOLDS, FIXTURES AND EQUIPMENT
Leaseholds, fixtures and equipment are summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
FEBRUARY 1, January 27,
1997 1996
------------ ------------
<S> <C> <C>
Leasehold improvements $ 15,164,836 $ 10,444,481
Fixtures and equipment 7,014,643 4,870,845
------------ ------------
22,179,479 15,315,326
Less accumulated depreciation (6,023,707) (3,796,337)
------------ ------------
$ 16,155,772 $ 11,518,989
============ ============
</TABLE>
(6) LONG-TERM OBLIGATIONS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
FEBRUARY 1, January 27,
1997 1996
---------- ----------
<S> <C> <C>
Capital lease obligations $ -- $ 177,972
Less current portion -- (133,256)
---------- ----------
$ -- $ 44,716
========== ==========
</TABLE>
On January 30, 1997, the Company entered into a new credit agreement with Wells
Fargo Bank that provides for an unsecured revolving line of credit in the
amount of $10 million. The revolving line, under which no amount is outstanding
as of February 1, 1997, bears interest at the lesser of either Prime Rate or
1.95% above LIBOR. Any amount
26
<PAGE> 13
borrowed under the revolving line of credit becomes due June 5, 1998. The line
also provides for the issuance of letters of credit. As of February 1, 1997,
none of the available revolving line of credit has been used for the issuance
of letters of credit.
The bank credit facility subjects the Company to various restrictions on the
incurrence of additional indebtedness, acquisitions, loans to officers, and
stock repurchases. The covenants also require the Company to maintain a certain
minimum current ratio, minimum tangible net worth, minimum working capital and
coverage ratios each month. The Company pays commitment fees of 0.50% on the
unused portion of the revolving line of credit.
(7) LEASES
The Company leases store, office, and warehouse space under non-cancelable
leases with terms that generally range from five to ten years. Most of the
store leases provide for additional rentals on a percentage of store sales and
specify rental increases over the term of the lease. Total rent expense under
these operating leases was $9,602,618, $6,326,046, and $4,309,819 for fiscal
years 1996, 1995, and 1994, respectively. Accrued rent of $1,425,060 as of
February 1, 1997 and $1,077,401 as of January 27, 1996 has been provided to
account for rent expenses on a straight-line basis. Future minimum lease
payments under non-cancelable operating leases as of February 1, 1997 are as
follows:
<TABLE>
<CAPTION>
Fiscal year
- -------------------------------------------------------------------
<C> <C>
1997 $ 11,612,360
1998 11,876,514
1999 11,677,071
2000 11,487,201
2001 11,375,574
Thereafter 44,039,449
--------------
Total minimum lease payments $ 102,068,169
==============
</TABLE>
The Company paid in full its obligations under capital leases during fiscal
1996. Capital leased assets consisted primarily of computer equipment totaling
$214,942, net of accumulated amortization of $233,638 at January 27, 1996.
(8) INCOME TAXES
The provision for federal and state income taxes consisted of the following:
<TABLE>
<CAPTION>
Fiscal
- --------------------------------------------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Current tax expense $ 5,037,623 $ 2,654,146 $ 1,331,332
Deferred tax benefit (326,123) (116,146) (129,840)
----------- ----------- -----------
$ 4,711,500 $ 2,538,000 $ 1,201,492
=========== =========== ===========
</TABLE>
27
<PAGE> 14
The provision for income taxes differs from the amount of income taxes,
computed by applying the U.S. statutory federal tax rate (34%) to pre-tax
income, as a result of the following differences:
<TABLE>
<CAPTION>
Fiscal
- ------------------------------------------------------------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Tax provision at the statutory corporate rate $ 4,318,986 $ 2,248,646 $ 1,068,282
State income taxes, net of related federal tax effect 418,449 211,564 117,786
Other, net (25,935) 77,790 15,424
----------- ----------- -----------
Provision for income taxes $ 4,711,500 $ 2,538,000 $ 1,201,492
=========== =========== ===========
</TABLE>
Deferred tax assets (liabilities) comprised the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
FEBRUARY 1, January 27,
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Accruals not currently deductible $ 631,240 $ 439,565
Depreciation 427,442 142,517
Other -- 20,495
----------- -----------
1,058,682 602,577
Deferred tax liabilities:
Capital leases (174,946) (105,537)
Other (91,977) (52,778)
----------- -----------
(266,923) (158,315)
----------- -----------
$ 791,759 $ 444,262
=========== ===========
</TABLE>
At February 1, 1997 and January 27, 1996, $502,211 and $459,250, respectively,
of net current deferred tax assets were classified as other current assets. The
early disposition of certain qualified stock options in fiscal 1996 and 1995
resulted in an income tax benefit to the Company of $1,208,000 and $203,745,
respectively, that was credited to additional paid-in capital. The income tax
benefit is the tax effect of the difference between the market price on the
date of exercise and the option price.
(9) EMPLOYEE BENEFIT PLANS
Effective January 1, 1995, the Company established the Gadzooks, Inc.
Employees' Savings Plan (the "401(k) Plan"). The 401(k) Plan is open to
substantially all employees who have been employed for one year and who work at
least 1,000 hours per year. Under the 401(k) Plan, a participant may contribute
up to 15% of earnings with the Company matching 50% of the employee's first 4%
contribution. Employee and Company contributions are paid to a corporate
trustee and invested in various funds at the discretion of the participant.
Company contributions made to participants' accounts become 100% vested on the
fifth anniversary of the employee's participation in the Plan. For the years
ended February 1, 1997 and January 27, 1996, the Company contributed $88,150 and
$67,171, respectively, in matching contributions to the 401(k) Plan.
28
<PAGE> 15
(10) STOCK OPTION PLANS
The Company has three incentive and nonstatutory stock option plans. The
"Employee Plan" for employees and consultants was adopted in February 1992; the
"Key Employee Plan" for key employees was adopted in September 1994; and the
"Nonemployee Director Plan" for the Company's outside directors was adopted in
August 1995. Under these plans, options are granted to purchase common stock at
a price no less than fair market value at the grant date. For options granted
prior to the initial public offering, the board of directors considered various
factors in determining fair market value including, among other things, the
rights and preferences of holders of other securities issued by the Company,
the financial position and results of operations of the Company, and the
liquidity of the Company's common stock. Subsequent to the initial public
offering, all shares have been granted at the closing price of the Company's
common stock traded on the NASDAQ National Market on the date of grant. Options
have vesting periods of generally three to five years from date of grant, and
may be exercised at any time once they become vested, but not more than 10 years
from date of grant.
During fiscal 1995, plans were amended to adjust the maximum aggregate number
of shares that may be optioned and sold under the plans to 900,000 shares for
the Employee Plan and 272,651 for the Key Employee Plan. The maximum aggregate
number of shares that may be optioned and sold under the Nonemployee Director
Plan is 30,000 shares.
The following table includes option information for the Employee Plan, Key
Employee Plan, and Nonemployee Director Plan:
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
WEIGHTED Weighted Weighted
AVERAGE Average Average
EXERCISE Exercise Exercise
SHARES PRICE Shares Price Shares Price
------- ----------- ------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 675,946 $ 2.13 867,474 $ 1.79 340,678 $ 0.23
Granted 139,115 $ 19.70 141,787 $ 4.48 562,509 $ 2.64
Exercised (154,418) $ 0.53 (150,117) $ 1.11 -- --
Canceled (5,354) $ 10.22 (183,198) $ 3.13 (35,713) $ 0.31
------- ----------- ------- ----------- ------- -----------
Outstanding at end of year 655,289 $ 6.23 675,946 $ 2.13 867,474 $ 1.79
------- ----------- ------- ----------- ------- -----------
Available for grant at end of year 242,830 378,858 63,136
------- ------- ------- -----------
</TABLE>
The following table summarizes information about stock options outstanding at
February 1, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------- -------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 2/1/97 Life Price at 2/1/97 Price
- ----------------------------------------------------------- -------------------------
<S> <C> <C> <C> <C> <C>
$ 0.21 - $ 0.53 159,746 7 years $ 0.39 84,289 $ 0.30
$ 1.05 - $ 1.05 48,097 8 years $ 1.05 22,869 $ 1.05
$ 3.15 - $3.15 227,209 7 years $ 3.15 136,326 $ 3.15
$ 5.78 - $17.83 128,737 9 years $ 10.54 11,655 $ 6.99
$ 18.50 - $29.00 88,500 9 years $ 20.31 0 $ 0.00
$ 33.25 - $33.25 3,000 9 years $ 33.25 0 $ 0.00
- ----------------------------------------------------------- -------------------------
$ 0.21 - $33.25 655,289 255,139
</TABLE>
29
<PAGE> 16
During 1996, the Company has adopted the disclosure-only provision of SFAS No.
123, "Accounting for Stock-Based Compensation," which generally establishes
financial accounting and reporting standards for stock-based employee
compensation plans. As permitted, the Company measures and records compensation
expense in accordance with current practices as prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
provides disclosure about pro forma compensation expense. Such adoption did not
result in a charge to earnings in the Company's financial statements. If the
Company had elected to recognize compensation expense based on the fair value
of options granted at the grant date as prescribed by SFAS No. 123, net income
and earnings per share would have been reduced to the pro forma amounts
indicated in the following table:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
1996 1995
----------- -----------
<S> <C> <C>
Net income - as reported $ 7,991,400 $ 4,075,666
Net income - pro forma $ 7,654,272 $ 4,037,156
Earnings per share - as reported $ .87 $ .60
Earnings per share - pro forma $ .84 $ .60
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes Multiple Option pricing model with the following weighted-average
assumptions used for grants:
<TABLE>
<CAPTION>
- ------------------------------------------------------
1996 1995
---------- ----------
<S> <C> <C>
Expected volatility 70% 70%
Risk-free interest rate 6.4% 6.3%
Expected lives 3.6 years 3.5 years
Dividend yield 0% 0%
</TABLE>
The weighted average fair value of options granted is $9.52 and $2.16 per share
for fiscal 1996 and 1995, respectively.
(11) PROVISION FOR CLOSING OUTLET STORES
In January 1995, the Company decided to close its two outlet stores and
recorded a provision of $250,000 to cover the write-down of inventory and fixed
assets of $205,000 and estimated lease termination costs of $45,000. The
closing of the outlets was completed during fiscal 1995. No significant
adjustments were made to the provision.
30
<PAGE> 17
GADZOOKS, INC.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Gadzooks, Inc.
In our opinion, the accompanying balance sheets and the related statements of
income, shareholders' equity (deficit) and of cash flows present fairly, in all
material respects, the financial position of Gadzooks, Inc. at February 1, 1997
and January 27, 1996, and results of its operations and its cash flows for each
of the three years in the period ended February 1, 1997 in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
Dallas, Texas
March 12, 1997
31
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-98038 and 333-12097) of Gadzooks, Inc. of our
report dated March 12, 1997 appearing on page 31 of the 1996 Annual Report to
Shareholders, which is incorporated in this Report on Form 10-K.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Dallas, Texas
April 22, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-START> JAN-28-1996
<PERIOD-END> FEB-01-1997
<CASH> 10,347,728
<SECURITIES> 12,419,847
<RECEIVABLES> 1,283,910
<ALLOWANCES> 0
<INVENTORY> 23,211,036
<CURRENT-ASSETS> 1,329,034
<PP&E> 22,179,479
<DEPRECIATION> 6,023,707
<TOTAL-ASSETS> 64,747,327
<CURRENT-LIABILITIES> 15,684,096
<BONDS> 0
0
0
<COMMON> 85,844
<OTHER-SE> 48,977,387
<TOTAL-LIABILITY-AND-EQUITY> 64,747,327
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<CGS> 87,417,930
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 29,212,565
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (945,015)
<INCOME-PRETAX> 12,702,900
<INCOME-TAX> 4,711,500
<INCOME-CONTINUING> 0
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,991,400
<EPS-PRIMARY> .87
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</TABLE>
