<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED AUGUST 1, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-26732
--------
GADZOOKS, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 74-2261048
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
4121 INTERNATIONAL PARKWAY
CARROLLTON, TX 75007
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 972-307-5555
---------------------------
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(FORMER NAME, FORMER ADDRESS AND FISCAL YEAR, IF CHANGED SINCE LAST REPORT.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes (X) No ( )
----- -----
As of September 10, 1998, the number of shares outstanding of the
registrant's common stock is 8,886,839.
<PAGE> 2
GADZOOKS, INC.
FORM 10-Q
For the Quarter Ended August 1, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of August 1, 1998
and January 31, 1998 3
Condensed Statements of Income for the 4
Second Quarter and Six Months Ended
August 1, 1998 and August 2, 1997
Condensed Statements of Cash Flows for the 5
Six Months Ended August 1, 1998 and
August 2, 1997
Notes to Financial Statements 6-7
Item 2. Management's Discussion and Analysis 8-11
of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures 11
About Market Risk
PART II. OTHER INFORMATION 12-13
SIGNATURE PAGE 14
INDEX TO EXHIBITS 15-18
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
GADZOOKS, INC.
CONDENSED BALANCE SHEETS
- --------------------------------------------------------------------------------
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
AUGUST 1, JANUARY 31,
1998 1998
--------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,624 $ 9,755
Short-term investments 600 9,157
Accounts receivable 4,051 2,815
Inventory 41,265 35,764
Other current assets 1,748 1,427
-------- -----------
55,288 58,918
-------- -----------
Leaseholds, fixtures and equipment, net 28,474 25,403
-------- -----------
$ 83,762 $ 84,321
======== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 15,122 $ 16,722
Accrued expenses & other current liabilities 4,872 4,823
Income taxes payable 859 2,495
-------- -----------
20,853 24,040
-------- -----------
Accrued rent 1,973 1,800
Shareholders' equity:
Common stock 88 88
Additional paid-in capital 41,353 40,869
Retained earnings 19,540 17,524
Treasury stock (45) ( --)
-------- -----------
60,936 58,481
-------- -----------
$ 83,762 $ 84,321
======== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
GADZOOKS, INC.
CONDENSED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
SECOND QUARTER ENDED SIX MONTHS ENDED
-------------------------- -------------------------
AUGUST 1, AUGUST 2, AUGUST 1, AUGUST 2,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 48,202 $ 36,780 $ 93,228 $ 70,850
Cost of goods sold including buying,
distribution and occupancy costs 35,916 27,758 68,240 51,701
--------- --------- --------- ---------
Gross profit 12,286 9,022 24,988 19,149
Selling, general and administrative expenses 11,429 8,881 22,049 17,114
--------- --------- --------- ---------
Operating income 857 141 2,939 2,035
Interest income, net 113 134 298 376
--------- --------- --------- ---------
Income before income taxes 970 275 3,237 2,411
Provision for income taxes 364 104 1,214 916
--------- --------- --------- ---------
Net income $ 606 $ 171 $ 2,023 $ 1,495
========= ========= ========= =========
Net income per share
Basic $ 0.07 $ 0.02 $ 0.23 $ 0.17
========= ========= ========= =========
Diluted $ 0.07 $ 0.02 $ 0.22 $ 0.16
========= ========= ========= =========
Average shares outstanding
Basic 8,836 8,669 8,815 8,631
========= ========= ========= =========
Diluted 9,071 9,110 9,083 9,118
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
GADZOOKS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
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(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------
AUGUST 1, August 2,
1998 1997
--------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES :
Net income $ 2,023 $ 1,495
Adjustments to reconcile net income to cash
used in operating activities :
Depreciation 2,095 1,457
Changes in operating assets and liabilities (10,074) (2,091)
--------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (5,956) 861
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES :
Capital expenditures, net (5,165) (6,797)
Sales of short-term investments, net 8,557 2,249
--------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 3,392 (4,548)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES :
Issuance of common stock 485 356
Purchase of treasury stock (110) --
Sale of treasury stock under employee stock purchase plan 58 --
--------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 433 356
--------- -----------
Net decrease in cash and cash equivalents (2,131) (3,331)
Cash and cash equivalents at beginning of period 9,755 10,348
--------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,624 $ 7,017
========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
GADZOOKS, INC.
NOTES TO FINANCIAL STATEMENTS
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(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying condensed financial statements contain all adjustments
(consisting of only normal recurring accruals) necessary to present
fairly the financial position as of August 1, 1998 and January 31,
1998, and the results of operations and cash flows for the second
quarter and six months ended August 1, 1998 and August 2, 1997. The
results of operations for the second quarter and six months then ended
are not necessarily indicative of the results to be expected for the
full fiscal year. The condensed balance sheet as of January 31, 1998 is
derived from audited financial statements. The condensed financial
statements should be read in conjunction with the financial statement
disclosures contained in the Company's Annual Report on Form 10-K for
the fiscal year ended January 31, 1998.
2. LONG-TERM OBLIGATIONS
On June 11, 1998, the Company amended its credit agreement with Wells
Fargo Bank to increase its unsecured revolving line of credit from $10
million to $20 million. The terms of the credit agreement remained
virtually the same; however, the commitment fee has been reduced from
0.50 percent to 0.35 percent per annum on the unused portion of the
revolving line. Any amount borrowed under the revolving line of credit
becomes due on June 5, 1999. As of August 1, 1998, no amounts were
outstanding under the revolving line.
3. EMPLOYEE BENEFIT PLANS
On June 18, 1998, the shareholders approved the Gadzooks, Inc. Employee
Stock Purchase Plan ("ESPP"). The ESPP allows eligible employees the
right to purchase common stock on a monthly basis at 85 percent of the
closing market price of the shares on the last day of the respective
calendar month. The aggregate number of shares that may be offered
under the ESPP is 60,000. The Company may purchase shares of common
stock from time-to-time on the open market to provide shares for sale
pursuant to the ESPP.
6
<PAGE> 7
4. SUBSEQUENT EVENTS
Shareholder Rights Plan
On September 3, 1998, the Company declared a dividend of one Preferred
Share Purchase Right ("Right") on each outstanding share of Gadzooks,
Inc. common stock. The dividend distribution will be made on September
15, 1998 payable to shareholders of record on that date. The Rights
become exercisable only if a person or group acquires 20 percent or
more of the Company's common stock. Each Right will entitle
shareholders to buy one one-thousandth of a new series of junior
participating preferred stock at an exercise price of $110. When the
Rights become exercisable, the holder of each Right (other than the
acquiring person or members of such group) is entitled (1) to purchase,
at the Right's then current exercise price, a number of the acquiring
company's common shares having a market value of twice such price, (2)
to purchase, at the Right's then current exercise price, a number of
the Company's common shares having a market value of twice such price,
or (3) at the option of the Company, to exchange the Rights (other than
Rights owned by such person or group), in whole or in part, at an
exchange ratio of one share of common stock (or one one-thousandth of a
share of the new series of junior participating preferred stock) per
Right. The Rights may be redeemed for one cent each by the Company at
any time prior to acquisition by a person (or group) of beneficial
ownership of 20 percent or more of the Company's common stock. The
Rights will expire on September 15, 2008.
Contingency
A lawsuit was filed on August 19, 1998 in the United States District
Court for the Northern District of Texas on behalf of purchasers of the
publicly traded securities of the Company within the inclusive period
of July 9, 1998 through July 22, 1998 alleging misleading and
incomplete public disclosures regarding the Company's sales results.
The Company believes the lawsuit is without merit and intends to defend
it vigorously.
The liability, if any, associated with this matter is not determinable
at this time. While the adverse resolution of this case could
negatively impact earnings in the year of settlement, it is the opinion
of management that the ultimate resolution of the matter will not have
a materially adverse effect on the Company's financial position.
7
<PAGE> 8
Management's Discussion and Analysis of Financial
Condition and Results of Operations
GENERAL
Gadzooks is a rapidly growing, mall-based specialty retailer of casual apparel
and related accessories for young men and women principally between the ages of
13 and 19. As of August 1, 1998, the Company had opened 55 new stores since the
beginning of the fiscal year, closed one store, and operated 304 stores in 32
states east of the Rocky Mountains.
The Company's business is subject to seasonal influences with slightly higher
sales during the Christmas holiday, back-to-school, and spring break seasons.
Management's discussion and analysis should be read in conjunction with the
Company's financial statements and the notes related thereto.
RESULTS OF OPERATIONS
Second Quarter Ended August 1, 1998 Compared to Second Quarter Ended August 2,
1997
Net sales increased approximately $11.4 million, or 31.1 percent, to $48.2
million during the second quarter of fiscal 1998 from $36.8 million during the
comparable quarter of fiscal 1997. Comparable store sales decreased 0.6 percent
for the second quarter of fiscal 1998. The total company sales increase was
attributable to new stores not yet included in the comparable store sales base.
A store becomes comparable after it has been open for 14 full fiscal months.
Gross profit increased approximately $3.3 million to $12.3 million during the
second quarter of fiscal 1998 from $9.0 million during the comparable quarter of
fiscal 1997. As a percentage of net sales, gross profit increased to 25.5
percent from 24.5 percent in the comparable quarter of last year. The majority
of the increase in gross profit resulted from an increase in merchandise margin
of 2.0 percent of sales due to a reduction in the amount of markdowns taken in
the junior and unisex categories as compared to the prior year. Store occupancy
costs as a percentage of sales increased by 1.4 as a result of lower than
expected sales. Buying and distribution costs decreased slightly as a percentage
of sales primarily due to the leveraging of the distribution center costs over a
larger store base.
8
<PAGE> 9
Selling, general and administrative expenses ("SG&A") increased approximately
$2.5 million to $11.4 million during the second quarter of 1998 from $8.9
million during the comparable quarter of fiscal 1997. The aggregate increase in
SG&A is primarily attributable to additional store expenses as a result of the
Company's expanded store base during the past year and an increase in
administrative costs to support the larger store chain. As a percentage of net
sales, SG&A decreased to 23.7 percent during the second quarter of fiscal 1998
from 24.1 percent during the comparable quarter of last year. The decrease in
the SG&A percentage is primarily due to improved controls over store level
expenses.
The Company's net interest income decreased $21,000 to $113,000 during the
second quarter of fiscal 1998 from $134,000 in the comparable period of last
year due to the use of short-term investments to fund the Company's continuing
expansion.
Six Months Ended August 1, 1998 Compared to Six Months Ended August 2, 1997
Net sales increased approximately $22.4 million, or 31.6 percent, to $93.2
million during the first six months of fiscal 1998 from $70.9 million during the
comparable period of fiscal 1997. Comparable store sales decreased 0.6 percent
for the first six months of fiscal 1998. The total company sales increase was
attributable to new stores not yet included in the comparable store sales base.
Gross profit increased approximately $5.8 million to $25.0 million during the
first six months of fiscal 1998 from $19.1 million during the comparable period
of fiscal 1997. As a percentage of net sales, gross profit decreased to 26.8
percent compared to 27.0 percent in the comparable period of last year.
Merchandise margins as a percentage of sales increased by 1.0 percent due to a
reduction in the amount of markdowns taken in the junior category as compared to
the second quarter of 1997. Store occupancy costs as a percentage of sales
increased by 1.4 percent as a result of lower than expected sales. In addition,
buying and distribution costs decreased slightly as a percentage of sales as a
result of leveraging the distribution center costs over a larger store base.
Selling, general and administrative expenses increased approximately $4.9
million to $22.0 million during the first six months of 1998 from $17.1 million
during the comparable period of fiscal 1997. As a percentage of net sales,
selling, general and administrative expenses decreased to 23.7 percent of sales
during the first six months of fiscal 1998 from 24.2 percent of sales during the
comparable period of last year. The decrease in the SG&A percentage is primarily
due to improved controls over store level expenses.
9
<PAGE> 10
Net interest income decreased by $78,000 to $298,000 during the first six months
of fiscal 1998 from $376,000 in the comparable period of last year due to the
use of short-term cash investments to fund the Company's continuing expansion.
LIQUIDITY AND CAPITAL RESOURCES
General. The Company's primary uses of cash are financing new store openings and
purchasing merchandise inventories. As a result of a previously announced
slow-down in the Company's new store openings, the Company expects its primary
use of cash for the remainder of the current fiscal year to be the purchase of
merchandise inventory. The Company is currently meeting its cash requirements
through cash flow from operations and short-term investments on-hand.
Cash Flows. At August 1, 1998, cash and cash equivalents were $7.6 million, a
decrease of $2.1 million since January 31, 1998. The primary uses of cash were
increased inventory levels of $5.5 million, capital expenditures of $5.2 million
for new stores, a decrease in accounts payable of $1.6 million, a decrease in
income taxes payable of $1.6 million, and an increase in accounts receivable of
$1.2 million. The primary sources of cash for the first six months of fiscal
1998 were net income before depreciation of $4.1 million and sales of short-term
investments of $8.6 million. The Company opened 55 new stores during the first
six months of 1998 as compared with 38 new stores in the same period of the
prior year.
Credit Facility. On June 11, 1998, the Company renewed its credit agreement with
Wells Fargo Bank, increasing its unsecured revolving line of credit from $10
million to $20 million. Amounts borrowed under the revolving line bear interest
at the lesser of either Prime Rate or 1.95 percent above LIBOR. The Company must
also pay a commitment fee of 0.35 percent per annum on the unused portion of the
revolving line. As of August 1, 1998, no amounts were outstanding under the
revolving line. The revolving line also provides for the issuance of letters of
credit that are generally used in connection with international merchandise
purchases and that reduce amounts otherwise available under the revolving line
of credit. As of September 10, 1998, letters of credit in the amount of $0.8
million were issued and outstanding. Any amount borrowed under the revolving
line of credit becomes due on June 5, 1999.
Capital Expenditures. The Company anticipates opening approximately eight new
stores during the remaining quarters of 1998. The Company estimates that its
average capital expenditures to open a new store, including leasehold
improvements and furniture and fixtures, will be approximately $175,000
(approximately $100,000 net of landlord construction allowances). The typical
10
<PAGE> 11
cost of initial inventory for a new store is approximately $100,000; however,
the immediate cash requirement for inventory is partially financed through the
Company's payment terms with its vendors. Pre-opening costs range from $9,000 to
$13,000 for travel, hiring and training, and other miscellaneous costs
associated with the setup of a new store prior to its opening for business.
Pre-opening costs are expensed as incurred.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not engage in trading market risk sensitive instruments and
does not purchase as investments, as hedges, or for purposes "other than
trading" instruments that are likely to expose the Company to market risk,
whether it be from interest rate, foreign currency exchange, commodity price or
equity price risk. The Company has issued no debt instruments, entered into no
forward or futures contracts, purchased no options and entered into no swaps.
The Company's primary market risk exposure is that of interest rate risk. A
change in LIBOR or the Prime Rate as set by Wells Fargo Bank (Texas), National
Association, would affect the rate at which the Company could borrow funds under
its revolving line of credit.
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
Certain sections of this Quarterly Report on Form 10-Q, including the preceding
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," contain various forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Exchange Act, which represent the Company's expectations or beliefs concerning
future events. These forward-looking statements involve risks and uncertainties,
and the Company cautions that these statements are further qualified by
important factors that could cause actual results to differ materially from
those in the forward-looking statements, including, without limitation, those
set forth in the "Risk Factors" section of the Company's Annual Report on Form
10-K for the fiscal year ended January 31, 1998.
11
<PAGE> 12
PART II - OTHER INFORMATION
Items 1-3 - None
Item 4 - Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders of the Company was held
on June 18, 1998.
(b) Information regarding the Company's directors is contained
in the Company's Definitive Proxy Statement, which is
attached hereto as Exhibit 22.
(c) Robert E.M. Nourse was elected to serve as a director until
the Company's 2001 annual meeting of shareholders according
to the following vote:
For: 8,114,276 Withheld: 169,450
The 1992 Incentive and Nonstatutory Stock Option Plan was
amended to increase the aggregate number of shares of Common
Stock available for issuance under the Plan from 900,000 to
1,500,000 according to the following vote:
For: 5,276,933 Against: 1,808,991 Withheld: 9,688
The 1995 Non-Employee Director Stock Option Plan was amended
to (i) fix the number of shares for which options will be
granted to newly elected or appointed non-employee directors
at 5,000 shares, (ii) fix the number of shares for which
options will be granted annually to incumbent non-employee
directors at 2,000 shares and have such options vest over
two years, (iii) provide for a one-time grant of an option
to purchase 5,000 shares to each incumbent non-employee
director on June 18, 1998, (iv) accelerate the vesting and
extend the exercise period of a non-employee director's
options upon his cessation of service as a director if such
director has served on the Board of Directors for at least
five (5) consecutive years immediately preceding the date of
such cessation of service, (v) change the date of the annual
grant of options to each non-employee director to the third
day after the Company's release of
12
<PAGE> 13
annual earnings, and (vi) increase the number of shares
available for issuance under the Director Plan from 30,000
to 100,000, according to the following vote:
For: 6,262,836 Against: 825,002 Withheld: 14,790
The Employee Stock Purchase Plan was adopted according to
the following vote:
For: 6,870,154 Against: 229,574 Withheld: 2,900
The selection of PricewaterhouseCoopers LLP as the Company's
independent accountants for the fiscal year ending January
30, 1999 was ratified by the shareholders according to the
following vote:
For: 8,274,326 Against: 7,335 Withheld: 2,065
(d) None.
Item 5 - None
Item 6 - Exhibits and Reports on Form 8-K
(a) See Index of Exhibits.
(b) A Form 8-K dated September 3, 1998 was filed announcing the
adoption of a shareholder rights plan.
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GADZOOKS, INC.
(Registrant)
DATE: September 15, 1998 By: /s/ MONTY R. STANDIFER
---------------------------
Monty R. Standifer
Senior Vice President and
Chief Financial Officer
14
<PAGE> 15
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION OF DOCUMENTS
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).
3.3 First Amendment to the Amended and Restated Bylaws of the
Company (filed as Exhibit 3.3 of the Company's Quarterly Report
on Form 10-Q for the quarter ended August 2, 1997 filed with
the Commission on September 16, 1997 and is incorporated herein
by reference).
4.2 Rights Agreement dated as of September 3, 1998 between the
Company and ChaseMellon Shareholder Services, L.L.C. (filed as
Exhibit 1 to the Company's Form 8-A filed with the commission
on September 4, 1998 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).
15
<PAGE> 16
10.3 Credit Agreement dated as of January 30, 1997 between the
Company and Wells Fargo Bank (Texas), National Association
(filed as Exhibit 10.3 to the Company's 1996 Annual Report on
Form 10-K filed with the Commission on April 23, 1997 and
incorporated herein by reference).
10.4 Form of Indemnification Agreement with a schedule of director
signatories (filed as Exhibit 10.5 to the Company's Form S-1
(No. 33-95090) filed with the Commission on July 28, 1995 and
incorporated herein by reference).
10.5 Employment Agreement dated January 31, 1992 between the Company
and Gerald R. Szczepanski, as continued by letter agreement
(filed as Exhibit 10.6 to the Company's Form S-1 (No. 33-95090)
filed with the Commission on July 28, 1995 and incorporated
herein by reference).
10.6 1992 Incentive and Nonstatutory Stock Option Plan dated
February 26, 1992, and Amendments No. 1 through 3 thereto
(filed as Exhibit 10.8 to the Company's Form S-1 (No. 33-95090)
filed with the Commission on July 28, 1995 and incorporated
herein by reference).
10.7 1994 Incentive and Nonstatutory Stock Option Plan for Key
Employees dated September 30, 1994 (filed as Exhibit 10.9 to
the Company's Form S-1 (No. 33-95090) filed with the Commission
on July 28, 1995 and incorporated herein by reference).
10.8 1995 Non-Employee Director Stock Option Plan (filed as Exhibit
10.10 to the Company's Form S-1 (No. 333-00196) filed with the
Commission on January 9, 1996 and incorporated herein by
reference).
10.9 Gadzooks, Inc. Employees' Savings Plan (filed as Exhibit 10.11
to the Company's Form S-1 (No. 33-95090) filed with the
Commission on July 28, 1995 and incorporated herein by
reference).
10.10 Severance Agreement dated September 5, 1996 between the Company
and Gerald R. Szczepanski (filed as Exhibit 10.10 to the
Company's 1996 Annual Report on Form 10-K filed with the
Commission on April 23, 1997 and incorporated herein by
reference).
16
<PAGE> 17
10.11 Form of Severance Agreement with a schedule of executive
officer signatories (filed as Exhibit 10.11 to the Company's
1996 Annual Report on Form 10-K filed with the Commission on
April 23, 1997 and incorporated herein by reference).
10.12 Amendment No. 4 to the Gadzooks, Inc. 1992 Incentive and
Nonstatutory Stock Option Plan (filed as Exhibit 10.14 to the
Company's Amendment No. 3 to Form S-1 (No. 33-95090) filed with
the Commission on September 27, 1995 and incorporated herein by
reference).
10.13 Amendment No. 5 to the Gadzooks, Inc. 1992 Incentive and
Nonstatutory Stock Option Plan dated September 12, 1996 (filed
as Exhibit 10.13 to the Company's 1996 Annual Report on Form
10-K filed with the Commission on April 23, 1997 and
incorporated herein by reference).
10.14 Amendment No. 1 to the 1994 Incentive and Nonstatutory Stock
Option Plan for Key Employees dated September 12, 1996 (filed
as Exhibit 10.14 to the Company's 1996 Annual Report on Form
10-K filed with the Commission on April 23, 1997 and
incorporated herein by reference).
10.15 Gadzooks, Inc. Employee Stock Purchase Plan (filed as Exhibit
4.5 to the Company's Form S-8 (No. 333-50639) filed with the
Commission on April 21, 1998 and incorporated herein by
reference).
10.16 Gadzooks, Inc. Deferred Compensation Plan (filed as Exhibit
10.16 to the Company's 1997 Annual Report on Form 10-K filed
with the Commission on April 27, 1998 and incorporated herein
by reference).
10.17 Lease Agreement between Gadzooks, Inc. (Lessee) and CB Midway
International, LTD. (Lessor) dated August 23, 1996 (filed as
Exhibit 10.17 to the Company's 1997 Annual Report on Form 10-K
filed with the Commission on April 27, 1998 and incorporated
herein by reference).
10.18 Gadzooks, Inc. 401(k) Plan and Profit Sharing Plan Adoption
Agreement (filed as Exhibit 10.18 to the Company's Quarterly
Report on Form 10-Q filed with the Commission on June 9, 1998,
and incorporated herein by reference).
17
<PAGE> 18
10.19* Amendment No. 1 to the Credit Agreement between the Company and
Wells Fargo Bank (Texas), National Association, dated June 11,
1998.
10.20 Amendment No. 6 to the Gadzooks, Inc. 1992 Incentive and
Non-Statutory Stock Option Plan dated June 18, 1998 (filed as
Exhibit 4.8 to the Company's Form S-8 (No. 333-60869) filed
with the Commission on August 7, 1998 and incorporated herein
by reference).
10.21 Amendment No. 1 to the Gadzooks, Inc. 1995 Non-Employee
Director Stock Option Plan dated June 18, 1998 (filed as
Exhibit 4.10 to the Company's Form S-8 (No 333-60869) filed
with the Commission on August 7, 1998 and incorporated herein
by reference).
10.22* Employment Agreement dated July 18, 1998, between the Company
and David Mangini, as continued by letter agreement.
22 Definitive Proxy Statement pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (filed with the Commission on
May 11, 1998, and incorporated herein by reference).
27* Financial Data Schedule
- --------------------------------------------------------------------------------
* Filed herewith (unless otherwise indicated, exhibits are previously filed).
18
<PAGE> 1
EXHIBIT 10.19
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is made and
entered into this 11th day of June, 1998, by and between GADZOOKS, INC., a Texas
corporation (the "Company"), and WELLS FARGO BANK (TEXAS), National Association
(the "Bank").
PRELIMINARY STATEMENTS
A. The Company and the Bank are parties to that certain Credit
Agreement, dated January 30, 1997 (the "Credit Agreement"); and
B. The Company and the Bank desire to amend the Credit Agreement and
the other Loan Documents (as defined in the Credit Agreement, as amended hereby)
to, among other things, increase the amount of and extend the Line of Credit (as
defined in the Credit Agreement) provided by the Bank to the Company from
$10,000,000.00 to $20,000,000.00 as hereinafter set forth.
NOW, THEREFORE, in consideration of the premises herein contained and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties, intending to be legally bound, agree as
follows:
ARTICLE I
DEFINITIONS
1.01 Capitalized terms used in this Amendment are defined in the Credit
Agreement, as amended hereby, unless otherwise stated.
ARTICLE II
AMENDMENTS
2.01 AMENDMENT TO SECTION 1.1(a). Effective as of the date hereof,
Section 1.1(a) of the Credit Agreement is hereby amended by deleting therefrom
the (i) dollar amount "$10,000,000.00" and substituting therefor the dollar
amount "$20,000,000.00", (ii) the date "June 5, 1998" and substituting therefor
the date "June 5, 1999" and (iii) the last sentence thereof and substituting the
following new sentence:
"Borrower's obligations to repay the advances under this Line of Credit
shall be evidenced by a First Amended and Restated Revolving Line of
Credit Note substantially in the form of Exhibit A-1 to that certain
First Amendment to Credit Agreement, dated as of June 11, 1998 ("Line
of Credit Note"), all of the terms of which are hereby incorporated
herein by reference."
-1-
<PAGE> 2
2.02 AMENDMENT TO SECTION 1.1(b). Effective as of the date hereof,
Section 1.1(b) of the Credit Agreement is hereby amended by deleting therefrom
the word "for" between the words "resulting" and "the sale" and substituting
therefor the word "from."
2.03 AMENDMENT TO SECTION 1.1(c). Effective as of the date hereof,
Section 1.1(c) of the Credit Agreement is hereby amended by deleting therefrom
the (i) dollar amount "Ten Million Dollars ($10,000,000.00)" and substituting
therefor the dollar amount "Twenty Million Dollars ($20,000,000.00)" and (ii)
the date "May 2, 1998" and substituting therefor the date "May 2, 1999."
2.04 AMENDMENT TO SECTION 1.2(c); FEE PAYMENT. Effective as of the date
hereof, Section 1.2(c) of the Credit Agreement is hereby amended by deleting
therefrom the non-refundable loan origination fee amount from "FIFTEEN THOUSAND
DOLLARS ($15,000.00)" and substituting therefor the non-refundable loan
origination fee amount of "TWENTY-SEVEN THOUSAND FOUR HUNDRED ($27,400.00)".
Such fee shall be payable on the date hereof. Section 1.2(c) shall be further
amended by deleting therefrom the date "March 15, 1999" and substituting
therefor the date "June 11, 1998."
2.05 AMENDMENT TO SECTION 1.2(d). Effective as of the date hereof,
Section 1.2 (d) of the Credit Agreement is hereby amended by deleting therefrom
the phrase "Borrower shall pay to Bank a fee equal to one-half percent (.50%)
per annum" and substituting therefor the phrase "Borrower shall pay to Bank a
fee equal to thirty-five basis points (0.35%) per annum."
2.06 AMENDMENT TO SECTION 2.5. Effective as of the date hereof, Section
2.5 of the Credit Agreement is hereby amended by deleting therefrom the date
"September 28, 1996" and substituting therefor the date "May 2, 1998."
2.07 AMENDMENT TO SECTION 3.1(b). Effective as of the date hereof,
Section 3.1 (b) of the Credit Agreement is hereby amended by adding the
following last sentence:
"The foregoing documents, the documents described in Section 3.2(b)
below, and such other documents, instruments and agreements as may be
executed and/or delivered in connection with this Credit Agreement, as
the same may be amended, modified, extended, renewed or supplemented
from time to time, shall be called the `Loan Documents'."
2.08 AMENDMENT TO ADD NEW SECTION 3.3. Effective as of the date hereof,
the Credit Agreement is hereby amended by adding the following new Section 3.3:
"SECTION 3.3. Subsidiary Guaranty. So long as an obligation
exists under this Agreement, the Line of Credit Note or any other Loan
Document, Borrower will cause any now or hereafter existing Subsidiary
(as defined in Section 4.10 of this Agreement) promptly (upon becoming
a Subsidiary) to execute and deliver to Bank an unconditional guaranty
of such obligations of Borrower in form and substance satisfactory to
Bank."
-2-
<PAGE> 3
2.09 AMENDMENT TO SECTION 4.3(c). Effective as of the date hereof,
Section 4.3(c) of the Credit Agreement is hereby amended and restated in its
entirety to read as follows:
"(c) not later than 30 days after the end of each of the first
eleven months in Borrower's fiscal year; and within 45 days after the
end of the twelfth month of such fiscal year, a financial statement of
Borrower, prepared by Borrower in accordance with Borrower's customary
or historical methods of accounting for such statements;"
2.10 AMENDMENT TO SECTION 4.3(e). Effective as of the date hereof,
Section 4.3(e) of the Credit Agreement is deleted in its entirety.
2.11 AMENDMENT TO SECTION 4.9(a). Effective as of the date hereof,
Section 4.9 (a) of the Credit Agreement is hereby deleted in its entirety.
2.12 AMENDMENT TO SECTION 4.9(b). Effective as of the date hereof,
Section 4.9(b) of the Credit Agreement is hereby amended by deleting therefrom
the dollar amount "15,000,000.00" and substituting therefor the dollar amount
"$25,000,000.00."
2.13 AMENDMENT TO SECTION 4.9(c). Effective as of the date hereof,
Section 4.9(c) of the Credit Agreement is deleted and amended and restated in
its entirety to read as follows:
"(c) Tangible Net Worth not at any time less than
$55,000,000.00."
2.14 AMENDMENT TO SECTION 4.9(g). Effective as of the date hereof,
Section 4.9(g) of the Credit Agreement is hereby amended and restated to read in
its entirety as follows:
"(g) Maintain a ratio of (i) an amount equal to the sum of (A)
the face amount of all outstanding Letters of Credit, plus (B) the
indebtedness under the Line of Credit Note to (ii) total inventory of
the Company, of not more than sixty-five (65%) throughout the term
hereof."
2.15 AMENDMENT TO SECTION 4.10. Effective as of the date hereof, of
Section 4.10 the Credit Agreement is hereby amended by (a) deleting the word
"or" after the words "to any Plan"; and (b) inserting after the word "property"
at the end thereof, the following clause:
"or (e) the existence, now or hereafter, by formation, acquisition or
otherwise, of any subsidiary of Borrower or of any subsidiary thereof
(each a `Subsidiary')."
2.16 AMENDMENT TO ARTICLE V. Effective as of the date hereof, of the
first paragraph of Article V (Negative Covenants) of the Credit Agreement is
hereby amended by replacing the words "Borrower will not without Bank's prior
written consent" with the words "Borrower will not, and will not permit any
Subsidiary to, without Bank's prior written consent."
-3-
<PAGE> 4
2.17 AMENDMENT OF SECTION 7.11. Effective as of the date hereof, the
last paragraph of Section 7.11 shall be amended and restated in its entirety to
read as follows:
"7.11 Nonapplicability of Chapter 346; Selection of Optional
Interest Rate Ceilings. Borrower and Lender hereby agree that, except
for Section 346.004 thereof, the provisions of Chapter 346 of the Texas
Finance Code (Vernon's Texas Code Annotated), as amended from time to
time (as amended, the "Texas Finance Code") shall not apply to this
Agreement or any of the other Financing Agreements. To the extent that
any of the optional interest rate ceilings provided in Chapter 303 of
the Texas Finance Code may be available for application to any loan(s)
or extension(s) of credit under this Agreement for the purpose of
determining the maximum allowable interest hereunder pursuant to the
Texas Finance Code, the applicable "weekly ceiling" (as such term is
defined in Chapter 303 of the Texas Finance Code) from time to time in
effect shall be used to the extent that it is so available."
2.18 AMENDMENT TO ADD NEW SECTION 7.15. Effective as of the date
hereof, the Credit Agreement is hereby amended by adding the following new
Section 7.15:
7.15 Waiver Of Consumer Rights. BORROWER HEREBY WAIVES ITS
RIGHTS UNDER THE DECEPTIVE TRADE PRACTICES - CONSUMER PROTECTION ACT,
SECTION 17.41 ET. SEQ. BUSINESS & COMMERCE CODE, A LAW THAT GIVES
CONSUMERS SPECIAL RIGHTS AND PROTECTIONS. AFTER CONSULTATION WITH AN
ATTORNEY OF ITS OWN SELECTION, BORROWER VOLUNTARILY CONSENTS TO THIS
WAIVER. BORROWER EXPRESSLY WARRANTS AND REPRESENTS THAT IT (a) IS NOT
IN A SIGNIFICANTLY DISPARATE BARGAINING POSITION RELATIVE TO LENDER,
AND (b) HAS BEEN REPRESENTED BY LEGAL COUNSEL IN CONNECTION WITH THE
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT.
ARTICLE III
CONDITIONS PRECEDENT
3.01 CONDITIONS TO EFFECTIVENESS. The effectiveness of this Amendment
is subject to the satisfaction of the following conditions precedent, unless
specifically waived in writing by the Bank:
(a) The Bank shall have received the following documents, each
in form and substance satisfactory to the Bank and its legal counsel:
(i) this Amendment duly executed by the Company;
-4-
<PAGE> 5
(ii) the First Amended and Restated Revolving Line of
Credit Note, in the form of Exhibit A-1 attached
hereto, duly executed by the Company;
(iii) a Company General Certificate certified by the
Secretary of the Company acknowledging that (A) the
Company's Board of Directors has by unanimous written
consent adopted resolutions which authorize the
execution, delivery and performance by the Company of
this Amendment and all other Loan Documents to which
the Company is or will be a party to, and (B) the
names of the officers of the Company authorized to
sign this Amendment and all other Loan Documents to
which the Company is or will be a party to, together
with specimen signatures of such officers; and
(iv) the payment of the fee referred to in Section 2.04 above.
(b) The representations and warranties contained herein and in
the Credit Agreement and the other Loan Documents, as each is amended
hereby, shall be true and correct as of the date hereof, as if made on
the date hereof;
(c) No default or Event of Default shall have occurred and be
continuing, unless such default or Event of Default has been
specifically waived in writing by the Bank; and
(d) All corporate proceedings taken in connection with the
transactions contemplated by this Amendment and all documents,
instruments and other legal matters incident thereto shall be
satisfactory to the Bank and its legal counsel.
ARTICLE IV
NO WAIVER
4.01 Except as otherwise specifically provided for in this Amendment,
nothing contained herein shall be construed as a waiver by the Bank of any
covenant or provision of the Credit Agreement, the other Loan Documents, this
Amendment, or of any other contract or instrument between the Company and the
Bank, and the failure of the Bank at any time or times hereafter to require
strict performance by the Company of any provision thereof shall not waive,
affect or diminish any right of the Bank to thereafter demand strict compliance
therewith. The Bank hereby reserves all rights granted under the Credit
Agreement, the other Loan Documents, this Amendment and any other contract or
instrument between the Company and the Bank.
ARTICLE V
RATIFICATIONS, REPRESENTATIONS AND WARRANTIES
5.01 RATIFICATIONS. The terms and provisions set forth in this
Amendment shall modify and supersede all inconsistent terms and provisions set
forth in the Credit Agreement and the other Loan Documents, and, except as
expressly modified and superseded by this Amendment, the terms and provisions of
the Credit Agreement and the other Loan Documents are ratified and confirmed
-5-
<PAGE> 6
and shall continue in full force and effect. The Company and the Bank agree that
the Credit Agreement and the other Loan Documents, as amended hereby, shall
continue to be legal, valid, binding and enforceable in accordance with their
respective terms.
5.02 REPRESENTATIONS AND WARRANTIES. The Company hereby represents and
warrants to the Bank that (a) the execution, delivery and performance of this
Amendment and any and all other Loan Documents executed and/or delivered in
connection herewith have been authorized by all requisite corporate action on
the part of the Company and will not violate the Articles of Incorporation or
Bylaws of the Company; (b) the representations and warranties contained in the
Credit Agreement, as amended hereby, and the other Loan Documents are true and
correct on and as of the date hereof and on and as of the date of execution
hereof as though made on and as of each such date; (c) no default or Event of
Default under the Credit Agreement, as amended hereby, has occurred and is
continuing, unless such default or Event of Default has been specifically waived
in writing by the Bank; (d) the Company is in full compliance with all covenants
and agreements contained in the Credit Agreement and the other Loan Documents,
as amended hereby; and (e) the Company has not amended its Articles of
Incorporation or its Bylaws since the date of the Credit Agreement.
ARTICLE VI
MISCELLANEOUS PROVISIONS
6.01 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations
and warranties made in the Loan Agreement or any other Loan Documents,
including, without limitation, any document furnished in connection with this
Amendment, shall survive the execution and delivery of this Amendment and the
other Loan Documents, and no investigation by the Bank or any closing shall
affect the representations and warranties or the right of the Bank to rely upon
them.
6.02 REFERENCE TO CREDIT AGREEMENT. Each of the Credit Agreement and
the other Loan Documents, and any and all other agreements, documents or
instruments now or hereafter executed and delivered pursuant to the terms hereof
or pursuant to the terms of the Credit Agreement, as amended hereby, are hereby
amended so that any reference in the Credit Agreement and such other Loan
Documents to the Credit Agreement shall mean a reference to the credit Agreement
as amended hereby.
6.03 EXPENSES OF THE BANK. The Company agrees to pay on demand all
reasonable costs and expenses incurred by the Bank in connection with any and
all amendments, modifications, and supplements to the Loan Documents, including,
without limitation, the costs and fees of the Bank's legal counsel, and all
costs and expenses incurred by the Bank in connection with the enforcement or
preservation of any rights under the Credit Agreement, as amended hereby, or any
other Loan Documents, including, without, limitation, the costs and fees of the
Bank's legal counsel.
6.04 SEVERABILITY. Any provision of this Amendment held by a court of
competent jurisdiction to be invalid or unenforceable shall not impair or
invalidate the remainder of this
-6-
<PAGE> 7
Amendment and the effect thereof shall be confined to the provision so held to
be invalid or unenforceable.
6.05 SUCCESSORS AND ASSIGNS. This Amendment is binding upon and shall
inure to the benefit of the Bank and the Company and their respective successors
and assigns, except that the Company may not assign or transfer any of its
rights or obligations hereunder without the prior written consent of the Bank.
6.06 COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which when so executed shall be deemed to be an original,
but all of which when taken together shall constitute one and the same
instrument.
6.07 EFFECT OF WAIVER. No consent or waiver, express or implied, by the
Bank to or for any breach of or deviation from any covenant or condition by the
Company shall be deemed a consent to or waiver of any other breach of the same
or any other covenant, condition or duty.
6.08 HEADINGS. The headings, captions, and arrangements used in this
Amendment are for convenience only and shall not affect the interpretation of
this Amendment.
6.09 APPLICABLE LAW. THIS AMENDMENT AND ALL OTHER AGREEMENTS EXECUTED
PURSUANT HERETO SHALL BE DEEMED TO HAVE BEEN MADE AND TO BE PERFORMABLE IN AND
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
TEXAS.
6.10 FINAL AGREEMENT. THE CREDIT AGREEMENT AND THE OTHER LOAN
DOCUMENTS, EACH AS AMENDED HEREBY, REPRESENT THE ENTIRE EXPRESSION OF THE
PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF ON THE DATE THIS AMENDMENT IS
EXECUTED. THE CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS, AS AMENDED HEREBY,
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. NO MODIFICATION, RESCISSION, WAIVER, RELEASE OR AMENDMENT OF ANY
PROVISION OF THIS AMENDMENT SHALL BE MADE, EXCEPT BY A WRITTEN AGREEMENT SIGNED
BY THE COMPANY AND THE BANK.
6.11 RELEASE. THE COMPANY HEREBY ACKNOWLEDGES THAT IT HAS NO DEFENSE,
COUNTERCLAIM, OFFSET, CROSS-COMPLAINT, CLAIM OR DEMAND OF ANY KIND OR NATURE
WHATSOEVER THAT CAN BE ASSERTED TO REDUCE OR ELIMINATE ALL OR ANY PART OF ITS
LIABILITY TO REPAY THE "INDEBTEDNESS" OR TO SEEK AFFIRMATIVE RELIEF OR DAMAGES
OF ANY KIND OR NATURE FROM THE BANK. THE COMPANY HEREBY VOLUNTARILY AND
KNOWINGLY RELEASES AND FOREVER DISCHARGES THE BANK, ITS PREDECESSORS, AGENTS,
EMPLOYEES, SUCCESSORS AND ASSIGNS, FROM ALL POSSIBLE CLAIMS, DEMANDS, ACTIONS,
CAUSES OF ACTION, DAMAGES, COSTS, EXPENSES, AND LIABILITIES WHATSOEVER, KNOWN OR
UNKNOWN, ANTICIPATED OR UNANTICIPATED,
-7-
<PAGE> 8
SUSPECTED OR UNSUSPECTED, FIXED, CONTINGENT, OR CONDITIONAL, AT LAW OR IN
EQUITY, ORIGINATING IN WHOLE OR IN PART ON OR BEFORE THE DATE THIS AMENDMENT IS
EXECUTED, WHICH THE COMPANY MAY NOW OR HEREAFTER HAVE AGAINST THE BANK, ITS
PREDECESSORS, AGENTS, EMPLOYEES, SUCCESSORS AND ASSIGNS, IF ANY, AND
IRRESPECTIVE OF WHETHER ANY SUCH CLAIMS ARISE OUT OF CONTRACT, TORT, VIOLATION
OF LAW OR REGULATIONS, OR OTHERWISE, AND ARISING FROM ANY LOANS OR EXTENSIONS OF
CREDIT FROM THE BANK TO THE COMPANY UNDER THE CREDIT AGREEMENT OR THE OTHER LOAN
DOCUMENTS, INCLUDING, WITHOUT LIMITATION, ANY CONTRACTING FOR, CHARGING, TAKING,
RESERVING, COLLECTING OR RECEIVING INTEREST IN EXCESS OF THE HIGHEST LAWFUL RATE
APPLICABLE, THE EXERCISE OF ANY RIGHTS AND REMEDIES UNDER THE CREDIT AGREEMENT
OR OTHER LOAN DOCUMENTS, AND NEGOTIATION FOR AND EXECUTION OF THIS AMENDMENT.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
-8-
<PAGE> 9
IN WITNESS WHEREOF, this Amendment has been executed and is effective
as of the date first above-written.
COMPANY:
GADZOOKS, INC.
By: /s/ MONTY R. STANDIFER
----------------------------------
Monty R. Standifer,
Senior Vice President, Chief Financial
Officer, Treasurer and Secretary
BANK:
WELLS FARGO BANK (TEXAS), NATIONAL
ASSOCIATION
By: /s/ LISA M. AUTRY
----------------------------------
Lisa M. Autry
Vice President
-9-
<PAGE> 1
EXHIBIT 10.22
[GADZOOKS LETTERHEAD]
CONFIDENTIAL
JULY 18, 1998
DAVID L. MANGINI
7125 RIVERSIDE DRIVE
DUBLIN, OH 43016
DEAR DAVID,
We are pleased to make the following offer of employment to join Gadzooks,
Inc., and are excited about the prospect of your joining our team. We are
confident that upon joining our team, you will find both the challenges and the
rewards that you are seeking and will make many significant and lasting
contributions to our growth.
WE HAVE OUTLINED THE KEY POINTS OF THE OFFER:
POSITION: Your position will be President and Chief
Operating Officer.
REPORTING RELATIONSHIP: You will report directly to Jerry
Szczepanski, Chairman and Chief Executive
Officer.
LOCATION: Your office will be located at 4121
International Parkway, Carrollton, TX 75007.
START DATE: We would like you to begin as soon as
possible. A mutually agreeable date will be
determined upon acceptance of this offer.
SALARY: Your initial base salary will be $400,000 per
year payable biweekly and subject to review
during our annual Focal Review period,
currently in March of each year. Your next
compensation review will be in March of 1999.
ANNUAL BONUS PROGRAM: You will participate in the Executive
Management Annual Bonus Plan for fiscal 1998
on a prorated basis. The EPS Budget for this
fiscal year by quarter is:
<TABLE>
<S> <C>
Q1 .16
Q2 .23
Q3 .25
Q4 .71
</TABLE>
<PAGE> 2
Your pro rata bonus will be based on the
Company's performance for Q3 and Q4 only. If
budget is achieved for the combined Q3 and Q4
results your pro rata share of the bonus pool
will assume the yearly budget was achieved.
All computations will assume Q1 and Q2
budgeted numbers were achieved. Should you
leave the employment of the Company prior to
the payment of annual bonus, any accrued
bonus will be forfeited.
Additionally, you will participate in the
Executive Management Annual Bonus plan for
fiscal 1999. The Company will pay you a
targeted bonus of $300,000.00 if the Company
achieves the overall budgeted profit goal.
DEFERRED COMPENSATION: You will be eligible to participate in our
Deferred Compensation Plan beginning January
1, 1999. The Plan allows Key Executives to
defer up to 100% of both salary and bonus, if
you desire to participate. More details will
be provided at a later date.
AUTO ALLOWANCE: You will receive an auto allowance of
$1,000.00 per month to offset any auto
related expenses incurred while traveling on
Company business.
BENEFITS: Your medical, dental and life insurance
benefits will be effective on the first of
the month following your 90th day of
employment. The insurance premiums will be
fully paid on your behalf by the Company.
Additionally, at no charge and on the first
enrollment date after 90 days, you will
participate in our supplemental (Exec-U-Care)
insurance plan. This plan covers all charges
and claims that are not covered by our "base"
plan. In essence, you will experience no out
of pocket expenses for full medical, dental
and prescription coverage and charges.
You will receive a complete Benefits
Orientation during your first week of
employment.
STOCK OPTIONS: You will be granted an option to purchase
125,000 common shares of the Company. These
options will be priced at the closing price
of the stock on your first day of active
employment. One-fifth of the shares (25,000
shares) shall become exercisable 12 months
following the grant date of the option. An
additional one-fifth (1/5) shall become
exercisable on each subsequent anniversary
of the grant date. The total 125,000 common
shares shall be fully vested at the end of
five years from the date of the option.
Options can be exercised as they vest, but
must be exercised over a ten year period
following the date of the grant. A separate
Incentive Stock Option (ISO) agreement which
sets forth all terms and conditions will be
provided under separate cover.
FUTURE STOCK OPTIONS: You will be granted an option to purchase a
minimum of 20,000 common shares of the
Company for your first full year of
employment (on or about April 1, 1999).
One-fifth of the shares (4,000 shares) shall
become exercisable 12 months following the
grant date of the option. An additional
one-fifth (1/5) shall become exercisable on
each subsequent
<PAGE> 3
anniversary of the grant date. The total
20,000 common shares shall be fully vested at
the end of five years from the date of the
option. Options can be exercised as they
vest, but must be exercised over a ten year
period following the date of the grant. A
separate agreement which sets forth all terms
and conditions will be provided under
separate cover. This grant will be reviewed
each year of employment.
VACATION: You will be eligible for three weeks annual
vacation beginning on your first day of
employment.
INTERIM LIVING: The Company will pay reasonable interim
living costs incurred for up to 180 days
while awaiting your permanent move-in date.
DUPLICATE HOUSING: In the event that you purchase a new home
prior to the sale of your current home
(thereby realizing two mortgage payments);
the Company will pay the lesser amount of the
two mortgage payments for a period up to 180
days.
HOUSEHUNTING VISITS: The Company will pay the reasonable costs
associated with three trips for your spouse
to travel to Dallas to assist in
househunting.
HOME SALE: The Company will pay the actual Real Estate
Commission incurred as a result of the sale
of your home in Dublin, OH.
RELOCATION: The Company will pay the reasonable costs
incurred for the movement of your household
goods and autos from Dublin, OH to Dallas,
via third party movers selected by the
Company.
RELOCATION BONUS: The Company will pay an additional bonus of
$10,000.00 to offset any incremental
relocation expenses. The bonus will be paid
upon completion of your relocation to Dallas.
EMPLOYMENT AGREEMENT: The Company will guarantee your employment
for a period of one year beginning on your
initial start date. Should your employment
with Gadzooks be terminated by the Company
for a reason other than for "Cause" during
the initial 12 months of employment, you will
be compensated for the balance (remainder) of
the initial 12 month period.
SEVERANCE AGREEMENT: Should your employment with Gadzooks be
terminated by the Company for a reason other
than "Cause" after accumulating at least six
months of continuous service, you will be
compensated for a period of six additional
months after your date of termination,
including any remaining portion of the
initial year of employment noted above.
"Cause" shall mean: your habitual neglect of
your duties, your commission of a felony,
your failure to follow any legal directive of
Gadzooks' Chairman and Chief Executive
Officer which directive is consistent with
your position and duties, and act or acts of
fraud or dishonesty by you which results or
is intended to result in financial,
<PAGE> 4
economic or reputation harm to the Company or
any of its affiliates, or your breach of a
material Company policy.
CHANGE OF CONTROL: In the event of the sale of all or
substantially all of the Company's assets, or
the Company's merger with or into another
corporation, the options will accelerate and
become fully vested immediately prior to the
event.
This offer of employment is conditional upon the presentation of acceptable
documents establishing your identity and employability, as required by the
Immigration Reform and Control Act of 1986.
Again, David, we are delighted at the prospect of you joining our team and are
anticipating many positive contributions. Please understand that you are an
"at-will" associate and either Gadzooks or you may terminate your employment at
any time and for any reason, with or without cause.
Enclosed please find two copies of this offer letter. Upon acceptance, please
sign, date and return one copy to Steve Puterbaugh. Please keep one copy for
your records.
We look forward to your joining our team. Thank You.
SINCERELY,
/s/ JERRY SZCZEPANSKI /s/ STEVE PUTERBAUGH
- ----------------------------------- ------------------------------------
JERRY SZCZEPANSKI STEVE PUTERBAUGH
CHAIRMAN & CHIEF EXECUTIVE OFFICER VICE PRESIDENT, HUMAN RESOURCES
/s/ DAVID MANGINI
CC: MONTY STANDIFER -----------------------------------
SENIOR VICE PRESIDENT, DAVID MANGINI
FINANCE & CHIEF FINANCIAL PRESIDENT & CHIEF OPERATING OFFICER
OFFICER
7/24/98
-----------------------------------
DATE
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> MAY-03-1998
<PERIOD-END> AUG-01-1998
<CASH> 7,624
<SECURITIES> 600
<RECEIVABLES> 4,051
<ALLOWANCES> 0
<INVENTORY> 41,265
<CURRENT-ASSETS> 55,288
<PP&E> 39,908
<DEPRECIATION> 11,434
<TOTAL-ASSETS> 83,762
<CURRENT-LIABILITIES> 20,853
<BONDS> 0
0
0
<COMMON> 88
<OTHER-SE> 60,848
<TOTAL-LIABILITY-AND-EQUITY> 83,762
<SALES> 48,202
<TOTAL-REVENUES> 48,202
<CGS> 35,916
<TOTAL-COSTS> 35,916
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
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<INCOME-TAX> 364
<INCOME-CONTINUING> 606
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<NET-INCOME> 606
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
