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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MAY 1, 1999
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 June 11, 1999, the number of shares outstanding of the registrant's
common stock is 8,896,736.
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GADZOOKS, INC.
FORM 10-Q
For the Quarter Ended May 1, 1999
INDEX
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of May 1, 1999 3
and January 30, 1999
Condensed Statements of Income for the 4
First Quarter Ended May 1, 1999 and
May 2, 1998
Condensed Statements of Cash Flows for the 5
First Quarter Ended May 1, 1999 and
May 2, 1998
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis 8-11
of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 11-12
Market Risk
PART II. OTHER INFORMATION 12
SIGNATURE PAGE 13
INDEX TO EXHIBITS 14-17
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PART I - FINANCIAL INFORMATION
GADZOOKS, INC.
CONDENSED BALANCE SHEETS
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(In thousands)
(Unaudited)
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MAY 1, JANUARY 30,
1999 1999
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ASSETS
Current assets:
Cash and cash equivalents $ 12,237 $ 16,353
Accounts receivable 1,481 3,002
Inventory 38,046 34,404
Other current assets 2,855 1,987
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54,619 55,746
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Leaseholds, fixtures and equipment, net 30,445 30,696
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$ 85,064 $ 86,442
========= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,117 $ 18,149
Accrued expenses & other current liabilities 5,503 5,968
Income taxes payable 335 --
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21,955 24,117
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Accrued rent 2,397 2,294
Shareholders' equity:
Common stock 89 89
Additional paid-in capital 42,235 42,198
Retained earnings 18,456 17,855
Treasury stock (68) (111)
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60,712 60,031
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$ 85,064 $ 86,442
========= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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GADZOOKS, INC.
CONDENSED STATEMENTS OF INCOME
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(In thousands, except per share data)
(Unaudited)
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FIRST QUARTER ENDED
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MAY 1, MAY 2,
1999 1998
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Net sales $ 51,465 $ 45,026
Cost of goods sold including buying,
distribution and occupancy costs 37,457 32,324
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Gross profit 14,008 12,702
Selling, general and administrative expenses 13,199 10,620
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Operating income 809 2,082
Interest income, net 144 185
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Income before income taxes 953 2,267
Provision for income taxes 353 850
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Net income $ 600 $ 1,417
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Net income per share
Basic $ 0.07 $ 0.16
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Diluted $ 0.07 $ 0.16
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Average shares outstanding
Basic 8,893 8,795
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Diluted 8,994 9,095
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The accompanying notes are an integral part of these financial statements.
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GADZOOKS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
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(In thousands)
(Unaudited)
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FIRST QUARTER ENDED
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MAY 1, MAY 2,
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES :
Net income $ 600 $ 1,417
Adjustments to reconcile net income to cash
used in operating activities :
Depreciation 1,346 1,024
Changes in operating assets and liabilities (5,047) (8,595)
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NET CASH USED IN OPERATING ACTIVITIES (3,101) (6,154)
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CASH FLOWS FROM INVESTING ACTIVITIES :
Capital expenditures, net (1,095) (2,078)
Sales of short-term investments, net -- 1,036
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NET CASH USED IN INVESTING ACTIVITIES (1,095) (1,042)
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CASH FLOWS FROM FINANCING ACTIVITIES :
Issuance of common stock 37 258
Sale of treasury stock under employee stock purchase plan 43 --
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NET CASH PROVIDED BY FINANCING ACTIVITIES 80 258
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Net decrease in cash and cash equivalents (4,116) (6,938)
Cash and cash equivalents at beginning of period 16,353 9,755
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,237 $ 2,817
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</TABLE>
The accompanying notes are an integral part of these financial statements.
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Gadzooks, Inc.
Notes to Financial Statements
(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 May 1, 1999 and January 30, 1999,
and the results of operations and cash flows for the three months ended
May 1, 1999 and May 2, 1998. The results of operations for the three
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 30, 1999 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 30, 1999.
2. LONG-TERM OBLIGATIONS
On May 14, 1999, the Company renewed and revised its existing credit
facility with Wells Fargo Bank. The revised facility provides an
unsecured revolving line of credit totaling $10 million. The total
amount available to borrow pursuant to the credit agreement is limited
to 150% of cash flow (as defined in the credit agreement) for the
trailing 12-month period. Amounts borrowed under the revolving line
bear interest at the lesser of either Prime Rate or 195 basis points
above LIBOR. The Company pays commitment fees of 0.50% on the unused
portion of the revolving line of credit. The credit agreement also
provides for the issuance of letters of credit that are generally used
in connection with international merchandise purchases. Outstanding
letters of credit issued by the bank reduce amounts otherwise available
for borrowing under the revolving line of credit. The 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 certain
tangible net worth, working capital, net income and fixed charge
coverage minimums as well as certain other ratios. Amounts available to
borrow under the line of credit, as limited by the cash flow multiple,
totaled $6.8 million at June 11, 1999. No borrowings or letters of
credit were outstanding under the revolving line at May 1, 1999. Any
amount borrowed under the revolving line of credit will become due on
June 1, 2000, the date the credit agreement matures.
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3. 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 disposition, 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 or results of operations.
7
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Management's Discussion and Analysis of Financial
Condition and Results of Operations
GENERAL
Gadzooks 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.
As of May 1, 1999, the Company had opened 4 new stores since the beginning of
the fiscal year and operated 316 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
First Quarter Ended May 1, 1999 Compared to First Quarter Ended May 2, 1998
Net sales increased approximately $6.5 million, or 14.3 percent, to $51.5
million during the first quarter of fiscal 1999 from $45.0 million during the
comparable quarter of fiscal 1998. Comparable store sales decreased 3.3 percent
for the first quarter of fiscal 1999. The decrease in comparable sales was
primarily due to a decline in the unisex T-shirt category, and to a lesser
extent, declines in the footwear and accessory categories. The total company
sales increase was attributable to the 67 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 $1.3 million to $14.0 million during the
first quarter of fiscal 1999 from $12.7 million during the comparable quarter of
fiscal 1998. As a percentage of net sales, gross profit decreased to 27.2
percent from 28.2 percent in the comparable quarter of last year. Store
occupancy costs as a percentage of sales increased by approximately 115 basis
points as a result of lower than expected sales. Merchandise margins as a
percentage of sales increased slightly due to a decrease in markdowns and
promotional activity. Buying and distribution costs as a percentage of sales
were essentially flat when compared to the first quarter of 1998.
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Selling, general and administrative expenses ("SG&A") increased approximately
$2.6 million to $13.2 million during the first quarter of 1999 from $10.6
million during the comparable quarter of fiscal 1998. 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 increased to 25.6 percent during the first quarter of fiscal 1998
from 23.6 percent during the comparable quarter of last year. The increase in
the SG&A percentage is primarily due to lower than expected sales as well as
increased spending for management information systems support.
The Company's net interest income decreased $41,000 to $144,000 during the first
quarter of fiscal 1999 from $185,000 in the comparable period of last year due
to the use of short-term investments to fund inventory levels, and to a lesser
extent, 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. The Company is currently meeting its cash
requirements through cash flow from operations and cash and cash equivalents
on-hand.
Cash Flows. At May 1, 1999, cash and cash equivalents were $12.2 million, a
decrease of $4.1 million since January 30, 1999. The primary uses of cash were
increased inventory levels of $3.6 million, capital expenditures of $1.0 million
for new or remodeled stores, and a decrease in accounts payable of $2.0 million.
The primary sources of cash for the first three months of fiscal 1999 were net
income before depreciation of $1.9 million and a decrease in accounts receivable
of $1.5 million. The Company opened 4 new stores during the first three months
of 1999 as compared with 26 new stores in the same period of the prior year.
Credit Facility. On May 14, 1999, the Company renewed and revised its existing
credit facility with Wells Fargo Bank. The revised facility provides an
unsecured revolving line of credit totaling $10 million. The total amount
available to borrow pursuant to the credit agreement is limited to 150% of cash
flow (as defined in the credit agreement) for the trailing 12-month period.
Amounts borrowed under the revolving line bear interest at the lesser of either
Prime Rate or 195 basis points above LIBOR. The Company pays commitment fees of
0.50% on the unused portion of the revolving line of credit. The credit
agreement also provides for the issuance of letters of credit that are generally
used in connection with international merchandise purchases. Outstanding letters
of credit issued by the bank reduce amounts otherwise available for borrowing
under the revolving line of credit. The credit facility subjects the Company to
various restrictions on the incurrence of additional indebtedness, acquisitions,
loans to officers and stock repurchases. The
9
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covenants also require the Company to maintain certain tangible net worth,
working capital, net income and fixed charge coverage minimums as well as
certain other ratios. Amounts available to borrow under the line of credit, as
limited by the cash flow multiple, totaled $6.8 million at June 11, 1999. No
borrowings or letters of credit were outstanding under the revolving line at May
1, 1999. Any amount borrowed under the revolving line of credit will become due
on June 1, 2000, the date the credit agreement matures.
Management believes that the Company's working capital, credit facility and cash
flows from operating activities will be sufficient to meet the Company's
operating and capital requirements through the end of fiscal 1999.
Capital Expenditures. The Company began its fiscal 1999 store expansion program
with the opening of 4 new stores during the months of March and April. The
Company anticipates opening 16 new stores during the remainder of the year for a
total of 20 new stores during fiscal 1999. The Company estimates that its
average capital expenditures to open a new store, including leasehold
improvements and furniture and fixtures, will be approximately $180,000
(approximately $105,000 net of all landlord construction allowances). The
typical cost of initial inventory for a new store is approximately $100,000;
however, the immediate cash requirement for inventory is partially financed
through the Company's payment terms with its vendors. 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.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of some computer programs having been written
using two digits rather than four to define the applicable year. Any computer
programs that have date sensitive software and use the two digit method of
determining time periods may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculations
causing disruptions.
The Company has received formal communications from the third-party suppliers of
its merchandising, financial and store point-of-sale software systems which
confirm that these core systems are Year 2000 compliant.
The Company has assessed and compiled a project list of certain software
developed by the Company which requires modification or replacement in order to
become Year 2000 compliant. Management presently believes that such
modifications or replacements will be both completed and tested no later than
October 1999. However, if such modifications or replacements are not made, or
10
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are not completed timely, the Year 2000 issue could have a negative impact on
the operations of the Company.
In addition, the Company is initiating formal communications with its shipping
companies and formulating a contingency plan to ensure that the delivery of
merchandise to its distribution center and stores will not be affected by the
Year 2000 issue. No vendor represents more than 10% of the Company's sales;
however the Company will be contacting key vendors prior to the holiday season
for clarification on their Year 2000 plans in order to ensure merchandise
receipts will not be disrupted. There can be no guarantee that the systems of
other companies on which the Company's systems or operations rely will be timely
converted or that a failure to convert by another company will not have a
material adverse effect on the Company.
The Company will utilize both internal and external resources to modify, or
replace, and test its information systems for Year 2000 compliance. The costs
associated with ensuring Year 2000 compliance will be expensed as incurred. The
Company expects to spend approximately $300,000, to be funded from existing
cash, in order to achieve Year 2000 compliance.
The costs to ensure the Company's systems are Year 2000 compliant and the date
on which such modifications or replacements will be completed are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events including the continued availability of certain resources,
third party modification plans and other factors. There can be no guarantee that
these estimates will be achieved and the actual results could differ materially
from those plans.
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, would affect the
rate at which the Company could borrow funds under its credit facility.
11
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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 30, 1999.
PART II - OTHER INFORMATION
Items 1-5 - None
Item 6 - Exhibits and Reports on Form 8-K
(a) See Index to Exhibits.
(b) None.
12
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GADZOOKS, INC.
(Registrant)
DATE: June 15, 1999 By: /s/ JAMES A. MOTLEY
------------------------------------------
James A. Motley
Vice President - Finance
(Chief Accounting Officer and
Duly Authorized Officer of the Registrant)
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INDEX TO EXHIBITS
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EXHIBIT
NO. DESCRIPTION OF DOCUMENTS
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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).
4.1 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).
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).
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).
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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).
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).
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<TABLE>
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10.12 Amendment No. 4 to the Gadzooks, Inc. 1992 Incentive and
Nonstatutory Stock Option Plan (filed as Exhibit 10.14 to the
Company's Amendment No. 3 to Form S-1 (No. 33-95090) filed with
the Commission on September 27, 1995 and incorporated herein by
reference).
10.13 Amendment No. 5 to the Gadzooks, Inc. 1992 Incentive and
Nonstatutory Stock Option Plan dated September 12, 1996 (filed
as Exhibit 10.13 to the Company's 1996 Annual Report on Form
10-K filed with the Commission on April 23, 1997 and
incorporated herein by reference).
10.14 Amendment No. 1 to the 1994 Incentive and Nonstatutory Stock
Option Plan for Key Employees dated September 12, 1996 (filed
as Exhibit 10.14 to the Company's 1996 Annual Report on Form
10-K filed with the Commission on April 23, 1997 and
incorporated herein by reference).
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 1998 Annual
Report on Form 10-K filed with the Commission on April 29, 1999
and incorporated herein by reference).
10.19 Amendment No. 1 to the Credit Agreement between the Company and
Wells Fargo Bank (Texas), National Association, dated June 11,
1998 (filed as Exhibit 10.19 to the Company's Quarterly Report
on Form 10-Q filed with the Commission on September 15, 1998,
and incorporated herein by reference).
</TABLE>
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<TABLE>
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10.20* Amendment No. 2 to the Credit Agreement between the Company and
Wells Fargo Bank (Texas)) National Association, dated May 14,
1999.
10.21 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).
10.22 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 Form S-8 (No. 333-60869) filed with
the Commission on August 7, 1998 and incorporated herein by
reference).
10.23 Employment Agreement dated July 18, 1998, between the Company
and David Mangini, as continued by letter agreement (filed as
Exhibit 10.22 to the Company's Quarterly Report on Form 10-Q
filed with the Commission on September 15, 1998, and
incorporated herein by reference).
10.24 Executive Retirement Agreement dated June 10, 1998 between the
Company and Monty R. Standifer (filed as Exhibit 10.23 to the
Company's Quarterly Report on Form 10-Q filed with the
Commission on December 15, 1998 and incorporated herein by
reference).
10.25 Severance Protection Agreement dated September 1, 1998 between
the Company and Gerald R. Szczepanski (filed as Exhibit 10.24
to the Company's Quarterly Report on Form 10-Q filed with the
Commission on December 15, 1998 and incorporated herein by
reference).
10.26 Severance Protection Agreement dated September 1, 1998 between
the Company and David L. Mangini (filed as Exhibit 10.25 to the
Company's Quarterly Report on Form 10-Q filed with the
Commission on December 15, 1998 and incorporated herein by
reference).
10.27 Severance Protection Agreement dated September 1, 1998 between
the Company and Monty R. Standifer (filed as Exhibit 10.26 to
the Company's Quarterly Report on Form 10-Q filed with the
Commission on December 15, 1998 and incorporated herein by
reference).
27* Financial Data Schedule.
</TABLE>
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* Filed herewith (unless otherwise indicated, exhibits are previously filed).
17
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EXHIBIT 10.20
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is made
and entered into this 14th day of May, 1999, 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, as modified and amended by that First
Amendment to Credit Agreement, dated June 11, 1998, (collectively 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, (i) decrease the amount of the Line of Credit (as
defined in the Credit Agreement) provided by the Bank to the Company from
$20,000,000.00 to $10,000,000.00; (ii) extend the payment due date for such Line
of Credit; (iii) modify and amend certain covenants; and (iv) modify and amend
such other terms and conditions as set forth herein.
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
(i) the dollar amount "$20,000,000.00" and substituting therefor the dollar
amount "$10,000,000.00", (ii) the date "June 5, 1999" and substituting therefor
the date "June 1, 2000" 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 Second Amended and Restated Revolving Line of
Credit Note substantially in the form of Exhibit A-1 to that certain
Second Amendment to Credit Agreement, dated as of May 14, 1999 ("Line
of Credit Note"), all of the terms of which are hereby incorporated
herein by reference."
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2.02 AMENDMENT TO SECTION 1.1(b). Effective as of the date hereof,
Section 1.1(b) of the Credit Agreement is hereby deleted and amended and
restated in its entirety to read as follows:
"(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 1.50. 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
from the sale of assets of the Company outside of the normal course of
the Company's business, minus all non-cash gains."
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
(i) the dollar amount "Twenty Million Dollars ($20,000,000.00)" and substituting
therefor the dollar amount "Ten Million Dollars ($10,000,000.00)" and (ii) the
date "May 2, 1999" and substituting therefor the date "May 1, 2000."
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 "TWENTY-SEVEN
THOUSAND FOUR HUNDRED ($27,400.00)" and substituting therefore the
non-refundable loan origination fee amount of "FIFTEEN THOUSAND dollars
($15,000.00)." Such fee shall be payable in full in cash on the date hereof.
Section 1.2(c) shall be further amended by deleting therefrom the phrase "on
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 thirty-five basis points
(0.35%) per annum" and substituting therefor the phrase "Borrower shall pay to
Bank a fee equal to one-half percent (0.50%) 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
"May 2, 1998" and substituting therefor the date "January 31, 1999."
2.07 AMENDMENT TO SECTION 4.3(e). Effective as of the date hereof, the
Credit Agreement is hereby amended by adding the following new Section 4.3(e):
"(e) upon delivery of the financial statements required
pursuant to this Section 4.3, a Certificate of Compliance duly executed
by the president or chief financial officer or controller of Borrower
in a form and condition satisfactory to Bank in its sole discretion
stating (i) whether or not Borrower is in compliance with the
applicable financial covenants of this Agreement as evidenced by the
accompanying financial statements, and if not in compliance, stating
the reasons for such non-compliance, and (ii) further stating that
there exists no Event of Default nor any condition, act or event
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which with the giving of notice or the passage of time or both would
constitute an Event of Default."
2.08 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
$57,000,000.00."
2.09 AMENDMENT TO SECTION 4.9(e). Effective as of the date hereof,
Section 4.9(e) is hereby amended by deleting the phrase "trailing three quarter
basis, determined as of each fiscal quarter end." and substituting therefor the
phrase "trailing two quarter basis, determined as of each fiscal quarter end,
effective as of the Borrower's second fiscal quarter end of 1999."
2.10 AMENDMENT TO SECTION 4.9(f). Effective as of the date hereof,
Section 4.9(f) is hereby amended by deleting the phrase "a Fixed Charge Coverage
of not less than 1.35 to 1.0" and substituting therefor the phrases "for
Borrower's first and second fiscal quarters of 1999, a Fixed Charge Coverage of
not less than 1.10 to 1.0; for Borrower's third fiscal quarter of 1999, a Fixed
Charge Coverage of 1.15 to 1.0; and for Borrower's fourth fiscal quarter of 1999
and continuing thereafter, a Fixed Charge Coverage of 1.25 to 1.0."
2.11 AMENDMENT TO SECTION 4.9(g). Effective as of the date hereof,
Section 4.9(g) of the Credit Agreement is hereby deleted and 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 Borrower, of not more than
forty percent (40%) throughout the term hereof."
2.12 AMENDMENT TO ADD NEW SECTION 4.11. Effective as of the date
hereof, the Credit Agreement is hereby amended by adding the following new
Section 4.11:
"Year 2000 Compliance. Perform all acts reasonably necessary
to ensure that (a) Borrower and any business in which Borrower
holds a substantial interest, and (b) all customers, suppliers
and vendors that are material to Borrower's business, become
Year 2000 Compliant in a timely manner. Such acts shall
include, without limitation, performing a comprehensive review
and assessment of all of Borrower's systems and adopting a
detailed plan, with itemized budget, for the remediation,
monitoring and testing of such systems. As used herein, "Year
2000 Compliant" shall mean, in regard to any entity, that all
software, hardware, firmware, equipment, goods or systems
utilized by or material to the business operations or
financial condition of such entity, will properly perform date
sensitive functions before, during and after the year 2000.
Borrower shall, immediately upon request, provide to Bank such
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certifications or other evidence of Borrower's compliance with
the terms hereof as Bank may from time to time require."
2.13 AMENDMENT TO SECTION 7.2. Effective as of the date hereof, Section
7.2 of the Credit Agreement is hereby amended by deleting the address of
Borrower of "4801 Spring Valley Road, Suite 108B, Dallas, Texas 75244" and
substituting therefor the address of Borrower of "4121 International Parkway,
Carrollton, Texas 75007."
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;
(ii) the Second 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.
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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 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
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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 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.
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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, 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.
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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
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EXHIBIT A-1
Second Amended and Restated Revolving Line of Credit Note
(See Attached)
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SECOND AMENDED AND RESTATED
REVOLVING LINE OF CREDIT NOTE
Dallas, Texas
$10,000,000.00 May 14, 1999
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, Texas
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 Ten Million Dollars ($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 One Hundred Thousand Dollars
($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%) and determined pursuant to the following formula:
Base LIBOR
LIBOR = -------------------------------
100% - LIBOR Reserve Percentage
(i) "Base LIBOR" means the rate per annum for United States
dollar deposits 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 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.
<PAGE> 11
(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) a fluctuating rate per annum equal to
the Prime Rate in effect from time to time, or (B) 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 hereunder, Bank is hereby
authorized to note the date, 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 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 three (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
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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 canceled, 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 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
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(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.
(d) Payment of Interest. Interest accrued on this Note shall be payable
on the 1st day of each March, June, September and December, commencing September
1, 1999.
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 any document executed in connection with or governing this Note;
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 1, 2000.
(b) Advances. Advances hereunder, to the total amount of the principal
sum stated above, may be made by the holder at the oral or written request of
GERALD SZCZEPANSKI or MONTY STANDIFER or RONALD SZCZEPANSKI or JIM MOTLEY, 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 designated above, The holder
shall have no obligation to determine whether any such person requesting an
advance remains authorized by any Borrower after the date hereof.
(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
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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 Ten Thousand Dollars ($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
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 the date hereof, as amended pursuant to the Second Amendment to Credit
Agreement, dated as of the date hereof, as the same may be further amended from
time to time (the "Credit Agreement"). Any default in the payment or
5
Gadzooks Second Amended and
Restated Revolving Line of Credit Note
<PAGE> 15
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, 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 of
which are expressly waived by each Borrower, and the obligation, if any, of the
holder to extend any further credit hereunder and under the Credit Agreement
shall immediately cease and terminate. 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
6
Gadzooks Second Amended and
Restated Revolving Line of Credit Note
<PAGE> 16
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 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
or 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 at any time contracted for, charged, taken, reserved or
received by Bank. The terms of this paragraph shall be deemed to be incorporated
into each Related Document.
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 Note or the
Credit Agreement for the purpose of determining the maximum allowable interest
hereunder pursuant to the Texas Finance Code (Vernon's Texas Code Annotated), as
amended from time to time (as amended, 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.
(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 payment of all obligations and liabilities of Borrower
to Bank under this Note.
7
Gadzooks Second Amended and
Restated Revolving Line of Credit Note
<PAGE> 17
(f) Business Purpose. Borrower represents and warrants that all loans
evidenced by this Note are for a business, commercial, investment, agricultural
or other similar purpose and not primarily for a personal, family or household
use.
(g) Certain Tri-Party Accounts. Borrower and Bank agree that Chapter
346 of the Texas Finance Code (which regulates certain revolving credit loan
accounts and revolving triparty 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.
This Note is a renewal, extension and restatement of that certain First
Amended and Restated Revolving Credit Note dated June 11, 1998 in the face
amount of $20,000,000.00 (the "First Amended Note"), and accordingly, this Note
is not intended to be or constitute a repayment, novation or termination of the
First Amended Note.
[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]
8
Gadzooks Second Amended and
Restated Revolving Line of Credit Note
<PAGE> 18
IN WITNESS WHEREOF, the undersigned has executed this Note as of the
date first written above.
GADZOOKS, INC.
By: /s/ MONTY R. STANDIFER
--------------------------------
Monty R. Standifer
Senior Vice President, Chief
Financial Officer, Treasurer
and Secretary
9
Gadzooks Second Amended and
Restated Revolving Line of Credit Note
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