<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
For Annual and Transition Reports Pursuant to Sections 13 or 15(d)
of the Securities Exchange Act of 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER 0-26732
GADZOOKS, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-2261048
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4121 INTERNATIONAL PARKWAY
CARROLLTON, TEXAS 75007
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(972) 307-5555
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
-------------------
Common Stock, $0.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
---
The aggregate market value of Common Stock held by non-affiliates of the
registrant on April 23, 1999 was approximately $78,282,598. All outstanding
shares of voting stock, except for shares held by executive officers and members
of the Board of Directors and their affiliates, are deemed to be held by
non-affiliates.
On April 23, 1999, the registrant had 8,892,736 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part II incorporates information by reference from the registrant's Annual
Report to Shareholders for the fiscal year ended January 30, 1999, filed
herewith as Exhibit 13.
Part III incorporates information by reference from the definitive Proxy
Statement for the 1999 Annual Meeting of Shareholders, to be filed with the
Commission no later than 120 days after the end of the registrant's fiscal year
covered by this Form 10-K.
<PAGE> 2
PART I
ITEM 1. BUSINESS.
Gadzooks, Inc. (the "Company" or "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. At fiscal year-end 1998, the Company
operated 312 stores in both metropolitan and middle markets in 32 states. The
Company opened 63 new stores and closed one store during fiscal 1998. In
addition, the Company plans to open approximately 30 new stores in fiscal 1999,
five of which have been opened as of April 1999.
Management believes that current demographic trends provide the Company
with the opportunity to continue its store expansion program. According to the
U.S. Census Bureau, there are approximately 25 million teenagers in the United
States today and the number is expected to grow to approximately 31 million by
the year 2010. Management believes that teenagers represent both a growing part
of the U.S. population and an increasing source of purchasing power.
The Company was incorporated in Texas in 1982, its executive offices are
located at 4121 International Parkway, Carrollton, Texas 75007 and its telephone
number is (972) 307-5555.
BUSINESS STRATEGY
The Company is a leading retailer of brand name casual apparel and related
accessories to teenagers. The principal elements of the Company's business
strategy are:
o Focus on the Male and Female Teenage Customer. The Gadzooks concept
focuses on providing fashionable casual apparel and accessories to both
male and female teenage customers. By offering merchandise for both sexes,
Gadzooks believes that it serves a broader customer base than many of its
specialty store competitors thereby reducing the potential fashion risk of
concentrating on one gender exclusively. Furthermore, Gadzooks believes
that it attracts additional customers by creating a shopping environment
where it is comfortable for both males and females to shop with friends, as
well as on their own.
o Multiple Merchandise Categories. A key component of the Company's
merchandising strategy is to reduce its dependence on any one fashion,
style, brand or item by offering products in a broad range of categories.
Each Gadzooks store carries approximately 1,600 stock-keeping units or
"SKUs" (excluding different sizes of the same item), including woven and
knit tops, jeans, shorts, junior dresses, swimwear, t-shirts, footwear,
sunglasses, watches, jewelry and other accessory items. The Company
regularly monitors store sales by classification, style and size to
identify emerging fashion trends, and manages the product mix in its stores
to respond to the spending patterns of its customers. The Company believes
that its success to date has been largely attributable to its ability to
meet the changing fashion preferences of its customers.
o Emphasis on Brand Name Merchandise. Another key feature of the Company's
merchandising strategy is to offer a wide variety of popular brand name
merchandise based on its belief that its customers shop primarily for
recognized labels and designs. The Company's merchandise includes high
visibility names such as L.E.I., JNCO, Dr. Marten, Billabong, and Mudd and
other popular fashions and brand name merchandise. The Company concentrates
on merchandise that appeals to the mainstream teenager rather than relying
on "cutting edge" products. The Company believes that this strategy is
consistent with its philosophy of responding to its customers' fashion
preferences as opposed to attempting to establish fashion trends.
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o Metropolitan and Middle Market Locations. A central aspect of the
Company's strategy has been the development of a store concept that is
successful in both metropolitan and middle markets. The Company believes
that teenagers throughout the United States frequently have similar fashion
preferences as a result of the influence of television programs, MTV, and
music and fashion magazines. As a result, the Company has been able to
operate stores successfully across a broad range of demographic and
geographic markets, increasing the number of potential sites available to
the Company.
o Attentive Customer Service. The Company is committed to offering
professional and attentive customer service. Gadzooks hires young,
energetic, service-oriented sales associates who understand teenagers and
can relate to their changing needs and preferences. The Company strives to
give its teenage customers the same level of respect and attention that is
generally given to adult customers at other retail stores. The Company
trains sales associates to greet each customer personally, to inform the
customer about new fashion trends and to suggest merchandise to suit the
customer's wardrobe and lifestyle needs. The Company believes that the high
level of service given to its teenage customers differentiates Gadzooks
from its competition.
o Entertaining Store Environment. The Company believes that its stores are
visually appealing and provide a fun and enjoyable shopping experience for
its customers. Gadzooks stores are designed to create a high energy, fun
environment using neon lighting, television monitors featuring popular
music videos, playful mannequins and creative, eye-catching signage. The
Company's signature Volkswagen Beetle is a feature attraction in the
stores. The Company believes that its entertaining store design encourages
customers to visit the stores more frequently and to shop in the stores for
longer periods of time. While Gadzooks stores are designed to appeal
primarily to the teenage customer, the Company also strives to create a
shopping environment that is comfortable for adults.
o Investment in Systems and Personnel. The Company is committed to
investing in information systems and using current technology to help
execute its merchandising strategy. The Company's systems provide its
buyers and merchandise planners with daily sales and inventory information
by store, SKU and size, allowing Gadzooks to respond to changing customer
preferences and to stock the appropriate quantities and styles of
merchandise at each store. The Company is also committed to attracting and
retaining highly-qualified, service-oriented management and sales
associates and providing them with career advancement opportunities. The
corporate culture at Gadzooks promotes the open exchange of new ideas and
information between all levels of the Company, thereby enabling management
to supplement the data from its information systems with the practical
experience of its employees.
o Distribution Capabilities. The Company has a 110,000 square-foot
distribution center that can support the merchandising needs of about 500
stores, providing for our continued store expansion into the next century.
The Company believes the distribution center is a critical element in its
future growth plans.
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STORE LOCATIONS
As of April 23, 1999, the Company operated 317 stores in 32 states. The
Company's existing stores are located in metropolitan markets such as Dallas,
Chicago, Atlanta, Boston and Kansas City, as well as middle markets such as
Amarillo, Texas; Tupelo, Mississippi; and Roanoke, Virginia. The following store
list shows the number of stores that Gadzooks operates in each state and the
cities in which Gadzooks stores are located.
<TABLE>
<CAPTION>
ALABAMA KANSAS MISSOURI OKLAHOMA TEXAS - CONT.
------- ------ -------- -------- -------------
<S> <C> <C> <C> <C>
Huntsville Hays Columbia Enid Port Arthur
Mobile Hutchinson Jefferson City Lawton San Angelo
Montgomery Manhattan Joplin Norman San Antonio (4)
Salina Kansas City (3) Oklahoma City (4) Sherman
ARKANSAS Topeka Springfield Shawnee Temple
-------- Wichita (2) St. Louis (3) Tulsa (2) Texarkana
Fayetteville Tyler
Fort Smith KENTUCKY NEBRASKA PENNSYLVANIA Victoria
Jonesboro -------- -------- ------------ Waco
Little Rock (2) Ashland Grand Island Altoona Wichita Falls
Bowling Green Lincoln Erie
FLORIDA Elizabethtown Omaha (2) Harrisburg VIRGINIA
------- Florence/Cincinnati Johnstown --------
Fort Myers Owensboro NEW HAMPSHIRE Lancaster
Jacksonville Lexington ------------- Philadelphia (2) Charlottesville
Orlando (3) Louisville (2) Manchester Scranton Chesapeake
Pensacola Paducah Salem State College Christiansburg
Tallahassee Danville
Tampa (2) LOUISIANA NEW JERSEY SOUTH CAROLINA Dulles/Washington D.C.
--------- ---------- -------------- Fredericksburg
GEORGIA Alexandria Freehold Charleston (2) Harrisonburg
------- Baton Rouge (2) Livingston Columbia (2) Manassas
Athens Bossier City Mays Landing Greenville Newport News
Atlanta (7) Houma Paramus Myrtle Beach Norfolk
Augusta Lafayette Depford/Philadelphia Spartanburg Roanoke
Macon Lake Charles Rockaway Springfield
Monroe Wayne SOUTH DAKOTA Virginia Beach
ILLINOIS New Orleans (3) ------------ Winchester
-------- Shreveport NEW MEXICO Sioux Falls
Bloomington ---------- WEST VIRGINIA
Carbondale MARYLAND Albuquerque (2) TENNESSEE -------------
Champaign -------- Las Cruces --------- Bridgeport
Chicago (13) Baltimore (2) Santa Fe Chattanooga Charleston (2)
Fairview Heights/St. Louis Frederick Clarksville Morgantown
Moline NEW YORK Jackson Parkersburg
Peoria MASSACHUSETTS -------- Johnson City
Rockford ------------- Albany (2) Kingsport WISCONSIN
Springfield Boston (5) Nanuet Knoxville (2) ---------
Rochester (3) Memphis (3)
INDIANA MICHIGAN Staten Island Nashville (3) Appleton
------- -------- Syracuse (2) Eau Claire
Elkhart Ann Arbor TEXAS Green Bay
Evansville Battlecreek NORTH CAROLINA ----- Madison (2)
Fort Wayne Detroit (4) -------------- Abilene Milwaukee (4)
Indianapolis Flint Charlotte (2) Amarillo Wausau
Lafayette Grand Rapids Concord Austin (2)
Merrillville Holland Fayetteville Beaumont
Muncie Jackson Greensboro College Station
South Bend Monroe Hickory Corpus Christi
Terre Haute Port Huron High Point Dallas/Fort Worth (9)
Portage Raleigh-Durham (3) Denton
IOWA Saginaw Winston-Salem El Paso (3)
---- Harlingen
Cedar Rapids (2) MINNESOTA OHIO Houston (12)
Council Bluffs --------- ---- Killeen
Davenport Mankato Cincinnati (2) Laredo
Des Moines (3) Minneapolis/St. Paul (3) Cleveland (4) Longview
Dubuque St. Cloud Columbus Lubbock
Fort Dodge Dayton (2) McAllen
Iowa City MISSISSIPPI Heath Midland
Sioux City ----------- Lancaster Odessa
Biloxi Lima
Hattiesburg Mansfield
Jackson New Philadelphia
Meridian Niles
Tupelo St. Clairsville
Sandusky
Toledo
Youngstown
Zanesville
</TABLE>
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EXPANSION STRATEGY
The following table provides a history of the Company's store expansion
program over the past five fiscal years.
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Number of stores open at beginning of period.... 65 90 126 183 250
Number of new stores opened .................... 26 39 57 67 63
Number of stores closed ........................ 1 3 -- -- 1
--- --- --- --- ---
Number of stores open at end of period ......... 90 126 183 250 312
=== === === === ===
</TABLE>
The Company's expansion strategy is to continue to open stores in enclosed
shopping malls in both metropolitan and middle markets. The Company expects to
open approximately 20-30 new stores during fiscal 1999, five of which have been
opened as of April 1999. The Company believes that the broad appeal of the
Gadzooks concept enables it to operate successfully in diverse geographic and
demographic markets, thereby increasing the total number of potential sites
available to the Company.
The Company selects locations for new store openings to achieve a balance
between (i) test markets where the Company has had no previous operating
experience, (ii) new markets where the Company has tested a Gadzooks store and
believes that the Company can successfully expand, and (iii) mature markets
where the Company desires to add new stores at attractive locations as they
become available. In general, the Company will open the highest number of stores
in new markets where the Company's concept has recently been introduced and
where the Company believes that it can capitalize on the potential of these
markets. The Company typically expands from existing markets into contiguous new
markets and attempts to cluster its stores within a market area in order to
achieve management and operating efficiencies and to enhance its name
recognition. In addition, from time to time the Company analyzes stores for
potential closing.
The Company has from time to time analyzed potential acquisitions of small
chains of stores that serve its target customer in order to provide the Company
with more rapid access to desirable locations and new markets. The Company may
consider such acquisitions again in the future. Except for a limited number of
stores acquired from former franchisees, the Company has never made any such
acquisitions and does not currently have any agreements for any in the future.
STORE-LEVEL ECONOMICS
In 1998, the Company's 312 stores averaged $717,976 in annualized net sales
or approximately $306 in annualized net sales per square foot. In general, the
Company's newer stores typically generate lower sales volumes and operating cash
flow than its more mature stores. Capital expenditures, including leasehold
improvements and furniture and fixtures, for the 63 new stores opened during
fiscal 1998 averaged approximately $180,000 (approximately $105,000 net of all
landlord allowances), and initial gross inventory requirements (which were
partially financed by trade credit) averaged approximately $100,000 per store.
Pre-opening costs ranged from $9,000 to $13,000 for travel, hiring and training,
and other miscellaneous costs associated with the set-up of a new store prior to
its opening for business. Inventory requirements vary at new stores depending on
the season during which they are opened and current fashion trends. There can be
no assurance that future average store-level sales and operating cash flow will
not vary from historical results or that the total estimated capital
expenditures for new stores will not increase.
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MERCHANDISING
The Company's merchandising strategy is to provide a wide range of brand
name casual apparel and related accessories that reflect the fashion preferences
of young men and women principally between the ages of 13 and 19. Each store
typically carries an inventory of approximately 1,600 SKUs, with most
merchandise selling at prices ranging between $15 and $40.
The Company's merchandise includes high visibility names such as JNCO, Dr.
Marten, L.E.I., Billabong and Mudd and other popular fashions and brand name
merchandise. The Company concentrates on merchandise that appeals to the
mainstream teenager rather than relying on "cutting edge" products. The Company
believes that this strategy is consistent with its philosophy of responding to
its customers' fashion preferences as opposed to attempting to establish fashion
trends.
The Company classifies all of its merchandise into one of five categories
as follows:
o Juniors: The Juniors category includes casual sportswear
separates designed for fashion-current teenage
girls, such as knit tops, woven shirts and vests,
denim, dresses and swimwear. Key brands in this
category include Paris Blues, L.E.I., Mossimo,
XOXO, and Mudd.
o Young Men: The Young Mens category includes casual sportswear
separates reflecting current fashion trends, such
as woven and knit tops and bottoms made of denim
and other fabrics. The key brands in this category
include JNCO, Dr. Marten, Kikwear, BC Ethic,
Billabong and Hurley.
o Accessories: The Accessories category includes a variety of
male, female and unisex accessories including
sunglasses, watches, wallets, hair accessories,
backpacks, necklaces, hats and other accessories.
Key brands in this category include Fossil, Storm,
and Black Flys.
o Unisex Apparel: The Unisex category consists primarily of t-shirts
with logos containing current topics and humorous
designs and phrases. This category includes
merchandise from various vendors, as well as a
small selection of Company-designed products.
o Footwear: The Company offers a limited selection of male,
female and unisex footwear including sandals and
active footwear. Key brands in this category
include Dr. Marten, Adidas, and Skechers.
The following table sets forth the Company's merchandise by category as an
approximate percentage of net sales for fiscal 1998:
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
-----------------------
<S> <C>
Juniors.................................................................... 32%
Young Men.................................................................. 29
Accessories ............................................................... 17
Unisex Apparel ............................................................ 12
Footwear .................................................................. 10
---
100%
===
</TABLE>
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By offering products in multiple categories, the Company is able to shift
its merchandise emphasis among and within its core categories to respond to
changing customer preferences. The Company expects to continue to adjust its
emphasis in particular categories in response to changing fashion trends and,
therefore, its merchandise mix may vary slightly from time-to-time.
In an effort to keep the stores fresh and exciting, the Company's visual
merchandising department, in conjunction with the marketing and buying staff,
provides specific floor sets and merchandising ideas to the stores and regularly
instructs district and store managers on the creative display of merchandise.
The merchandise presentation in the stores is significantly changed three times
each year to highlight specific merchandise for each of the Company's three peak
selling seasons and to maintain a current look. In addition, the Company
maintains a constant flow of new merchandise to the stores through shipments
from its distribution center on a daily basis to encourage our customers to
frequently visit our stores. To reduce the risk associated with the introduction
of new products, the Company tests products in selected stores before
determining if it will purchase the product for a broader group of stores.
PURCHASING
The Company's purchasing staff consists of a General Merchandising Manager,
buyers, associate buyers and assistant buyers. The General Merchandising Manager
and the buyers analyze current fashion directions by visiting major fashion
markets and maintaining close relationships with the Company's vendors in order
to identify styles and trends. In addition, the Company's buyers attend concerts
and other events attended by teenagers. The General Merchandising Manager and
the buyers regularly monitor merchandise flow through the stores and strive to
maintain the appropriate merchandise mix to meet customer demand.
Due to changes in fashion trends and seasonality, the Company purchases
merchandise from numerous vendors throughout the year. During fiscal 1998, the
Company did business with approximately 750 vendors. No single vendor accounted
for more than 10% of merchandise purchases. Certain of the Company's vendors
have limited financial resources and production capabilities. Gadzooks believes
that strong vendor relationships are important to the growth and success of the
Company.
ALLOCATION AND DISTRIBUTION OF MERCHANDISE
The Company continually strives to improve its merchandising, distribution,
planning and allocation methods to manage its inventory more productively. The
Company's Vice President of Planning and Allocation and staff work closely with
the buyers to meet the requirements of determining the correct inventory levels
for all stores and merchandise categories. The Company divides its stores into
different categories based upon, among other things, geographic location,
demographics, sales volume, competition and store capacity. Merchandise
allocation and distribution are based in part on sales and inventory analysis of
the stores by category. Information from the Company's point-of-sale computer
system is regularly reviewed and analyzed to assist in making merchandise
allocation and markdown decisions.
In May 1997, the Company relocated its headquarters to a larger site in the
Dallas metropolitan area which includes a distribution facility of approximately
110,000 square feet. Vendors deliver merchandise to this facility, where it is
inspected, entered into the Company's computer system, ticketed (to the extent
that it was not pre-ticketed by the vendor), allocated to stores and boxed for
distribution to the Company's stores. Merchandise is typically shipped to stores
daily via United Parcel Service, providing Gadzooks stores with a steady flow of
new merchandise. For certain key products, the Company maintains a backstock at
its distribution center that is allocated and distributed to the stores through
an automated replenishment system.
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STORE OPERATIONS
Gadzooks stores are open seven days a week during normal mall hours. The
Company's store operations are managed by a Senior Vice President of Store
Operations, Director of Store Operations, regional managers and district
managers, who generally have responsibility for 8 to 10 stores within a
geographic district. Individual stores are managed by a store manager and two
assistant store managers. A typical store has 6 to 12 part time sales
associates, depending on the season. Gadzooks compensates its district and store
managers with a base salary, a performance bonus based on store sales and other
operating statistics. In addition, stock options are granted to district
managers and above at the time they assume their position, with additional
grants each year thereafter. Sales associates are compensated on an hourly
basis.
The Company believes that its continued success is dependent in part on its
ability to attract, retain and motivate quality employees. In particular, the
success of the Company's store expansion program will be dependent on its
ability to promote and/or recruit qualified district and store managers. The
Company has an established training program for future district managers. Store
managers, many of whom are selected from among the Company's assistant managers,
currently complete a one-week training program with a designated training store
manager before taking responsibility for a store. The hiring and training of new
sales associates are the responsibility of store managers, and the Company has
established training and operations manuals to assist them in this process. The
Company is constantly enhancing its training programs for its store managers,
assistant managers and sales associates.
Management considers its employees' knowledge of the Company's customers
and merchandise to be significant to its marketing approach and customer
satisfaction. While all Gadzooks store employees are responsible for the general
appearance of the store and merchandise presentation, the Company's major
emphasis in training its store employees is to give priority to customer service
and assistance. Sales associates regularly act as greeters, meeting customers as
they enter the store, handing out promotional materials and offering assistance.
The Company trains its sales associates to inform the customer about new fashion
trends and to suggest merchandise that suits the customer's wardrobe and
lifestyle needs. The Company monitors the customer service level at each store
through various programs, including unannounced visits to the stores by
shoppers, who are unknown by the store employees, and store operations
personnel, and by regularly reviewing and responding to comment cards received
from its customers.
STORE ENVIRONMENT
The Company believes that its stores are visually appealing and provide a
fun and enjoyable shopping experience for its customers. Gadzooks stores are
designed to create a high energy, fun environment using neon signs, video
monitors featuring popular music videos, playful mannequins and creative,
eye-catching signage. The Company's signature Volkswagen Beetle is a feature
attraction in the stores. The Company typically displays a significant amount of
merchandise on the walls of the store, with male merchandise along one side,
female merchandise along the other and t-shirts along part of the back wall. In
the center of the store, lower fixtures are used to display merchandise in order
to maintain an open feeling. Stores typically feature large windows along the
mall which provide an open view of the entire store to mall traffic and are
merchandised to draw customers into the store. While Gadzooks stores are
designed to appeal primarily to the teenage customer, the Company also strives
to create a shopping environment that is comfortable for adults.
SITE SELECTION
Based on its results to date in both metropolitan and middle markets, the
Company believes that it can operate successfully in markets with a broad range
of geographic and demographic profiles. The Company takes into account certain
demographic factors such as population density, concentration of teenagers,
income levels, lifestyle characteristics and the performance of other retailers
to identify attractive new markets, evaluate specific shopping malls and project
individual store sales volumes.
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Within each shopping mall, the Company typically seeks a highly visible
location and often locates its stores near major fashion-oriented department
stores, food courts and other specialty stores catering to teenage customers.
The Company's existing stores average approximately 2,300 square feet. The
Company typically seeks a location of approximately 2,000 to 2,500 square feet
with significant store frontage. However, the Company's flexible store design
enables it to take advantage of well-situated sites with more unique layouts.
Once a site is approved, the Company, with the assistance of an outside
architect, designs the store to meet the specific site characteristics. The
Company's construction department seeks competitive bids from outside
contractors for the build-out of each store and oversees the construction
process. The Company typically requires six to eight weeks to open a new store
after the beginning of build-out.
MANAGEMENT INFORMATION SYSTEMS
Each Gadzooks store is linked to the Company's headquarters through a
point-of-sale system that interfaces with an IBM RS6000 computer equipped with
an integrated merchandising, distribution and accounting software package. The
Company's point-of-sale computer system has several features, including
merchandise scanning, "price look-up," the ability to compile preferred customer
lists and on-line credit card approval. These features improve transaction
accuracy, speed and checkout time, increase overall store efficiency, and enable
the Company to track the productivity of individual sales associates.
The Company's management information and control systems enable the
Company's corporate headquarters to promptly identify sales trends, replenish
depleted store inventories, reprice merchandise and monitor merchandise mix and
inventory shrinkage at individual stores and throughout the Company's store
network. Management believes that these systems provide a number of benefits,
including improved store inventory management, better in-stock availability,
higher operating efficiency and fewer markdowns.
The Company's merchandising, distribution and accounting software system
was installed in late 1993, and the point-of-sale software system was installed
during the second quarter of fiscal 1995. The Company estimates that its current
management information and control systems are adequate to support the Company's
planned expansion, but has plans to continue to improve and enhance numerous
functions on a continuing basis. In 1998, the Company significantly upgraded its
information technology infrastructure network to support many new and ongoing
initiatives to take advantage of emerging technology. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Impact of Year 2000 Issue."
ADVERTISING AND PROMOTION
The Company relies primarily on mall traffic, the enthusiasm of its sales
associates and existing customers, highly visible store locations and
eye-catching signage to attract new customers to the stores. The Company has
generally found this approach to be more cost effective than more traditional
media advertising. The Company plans the opening of new stores to coincide with
peak shopping seasons and mall grand openings when customer traffic is greater.
The Company also uses promotions to generate repeat visits to its stores and
advertises to a limited extent in national magazines, such as Seventeen and YM,
in cooperation with certain of its vendors. The Company also benefits from
advertising by its vendors, especially where Gadzooks is listed as a retailer of
their products.
TRADEMARKS
The Company has registered on the Principal Register of the United States
Patent and Trademark Office "Gadzooks" (in various formats) and "Gaditude". Each
federal registration is renewable indefinitely if the mark is in use at the time
of the renewal. The Company is not aware of any claims of infringement or other
challenges to the Company's right to use its marks in the United States.
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COMPETITION
The teenage retail apparel and accessories industry is highly competitive.
The Company competes with other retailers for customers, suitable retail
locations and qualified management personnel. Gadzooks currently competes with
traditional department stores, with national specialty chains such as The Gap
and certain divisions of The Limited, with numerous other teen retailers such as
American Eagle Outfitters, The Buckle, Hot Topic, Pacific Sunwear and Wet Seal,
and with local specialty stores in certain markets, and to a lesser extent, with
mass merchandisers and companies providing shopping sites via the internet. Many
of the Company's competitors are larger and have substantially greater
financial, marketing and other resources than the Company. The principal factors
of competition in the Company's business are fashion, merchandise selection,
customer service, store location and price.
EMPLOYEES
At April 23, 1999, the Company had 1,167 full-time employees and 2,368
part-time employees. Of the Company's 3,535 employees, 169 were corporate
personnel, 77 were distribution center employees and 3,289 were store employees.
The number of part-time employees fluctuates with seasonal needs. None of the
Company's employees is covered by a collective bargaining agreement. The Company
seeks to create a casual and supportive working environment and considers its
employee relations to be excellent.
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RISK FACTORS
This Report contains certain forward looking statements about the business,
operations and financial condition of the Company. The actual results of the
Company could differ materially from those forward looking statements. The
following information sets forth certain factors that could cause the actual
results of the Company to differ materially from those contained in the forward
looking statements.
GROWTH STRATEGY; FUTURE OPERATING RESULTS
The Company's net sales have grown significantly during the past several
years, primarily as a result of the opening of new stores and, to a lesser
extent, increases in comparable store sales. The Company intends to continue its
growth strategy by opening new stores for the foreseeable future, and its future
operating results will depend, to a certain degree, upon its ability to open and
operate new stores successfully and to manage a larger business profitably. The
Company anticipates opening approximately 20-30 new stores during fiscal 1999.
In the future, the Company plans to enter new markets in various regions of the
United States. Expansion into new markets may present competitive and
merchandising challenges that are different from those currently encountered by
the Company in its existing markets. As an additional part of its growth
strategy, the Company has occasionally analyzed the acquisition of other
retailers that serve the Company's target customer and may consider such
acquisitions again in the future. Except for a limited number of stores acquired
from former franchisees, the Company has never made any such acquisitions and
does not currently have any agreements for any in the future. There can be no
assurance that the operations of any acquired entities could be successfully
integrated with the Company's existing operations or that the combined business
would be profitable.
The Company is subject to a variety of business risks generally associated
with rapidly growing companies. The Company's ability to open new stores will
depend upon many factors, including, among others, the ability to identify and
enter new markets, locate suitable store sites, negotiate acceptable lease
terms, hire and train store managers and sales associates and obtain adequate
capital resources on acceptable terms. There can be no assurance that the
Company will be able to integrate successfully new stores into its operations or
that new stores will achieve sales and profitability levels comparable to the
Company's existing stores. In addition, there can be no assurance that the
Company's expansion within its existing markets will not adversely affect the
individual financial performance of the Company's existing stores or its overall
results of operations. Furthermore, the Company will need to continually
evaluate the adequacy of its store management and management information and
distribution systems to manage its planned expansion. There can be no assurance
that the Company will anticipate all of the changing demands that its expanding
operations will impose on such systems and facilities, and the failure to adapt
its systems, facilities and procedures could have a material adverse effect on
the Company's business. There can be no assurance that the Company will
successfully achieve its planned expansion or, if achieved, that the expansion
will result in profitable operations. See "Business -- Store Locations" and
"Business -- Expansion Strategy."
The Company anticipates that it will spend approximately $8.0 million for
capital expenditures and approximately $2.0 million for initial inventories to
open approximately 30 new stores, remodel eight existing stores and refurbish
50-55 existing stores in fiscal 1999. The actual costs that the Company will
incur in connection with opening new stores cannot be predicted with precision
because such costs will vary based upon, among other things, geographic
location, the size of the store and the extent of the build-out required at the
selected site. The Company believes that its existing cash balances, cash
generated from operations, and funds available under the Company's revolving
line of credit will be sufficient to fund its expansion requirements through at
least 1999. There can be no assurance that the Company may not be required to
seek additional sources of funds for such expansion.
11
<PAGE> 12
FLUCTUATIONS IN COMPARABLE STORE SALES RESULTS
A variety of factors affect the Company's comparable store sales results
including, among others, economic conditions, fashion trends, the retail sales
environment, sourcing and distribution of products and the Company's ability to
execute its business strategy efficiently. The Company's quarterly comparable
store sales results have fluctuated significantly in the past. The Company's
comparable store sales results were 4.4%, (3.6%), 3.3% and 3.1% in the first,
second, third and fourth quarters of fiscal 1997, respectively, and (0.5%),
(0.6%), (6.9%) and (10.9%) in the first, second, third and fourth quarters of
fiscal 1998 respectively. The Company has recorded comparable store sales
decreases in past months, quarters and years, and there can be no assurance that
comparable store sales for any particular month, quarter or fiscal year will not
decrease in the future. The Company's comparable store sales results could cause
the price of the Common Stock to fluctuate substantially.
CHANGES IN FASHION TRENDS
The Company's profitability is largely dependent upon its ability to
anticipate the fashion tastes of its customers and to provide merchandise that
appeals to their preferences in a timely manner. The fashion tastes of the
Company's customers may change frequently, and the Company's failure to
anticipate, identify or react appropriately to changes in styles, trends or
brand preferences could lead to, among other things, excess inventories and
higher markdowns, which could have a material adverse effect on the Company's
business. In addition, fashion misjudgments could materially and adversely
affect the Company's operating results, comparable store sales results and image
with its customers. See "Business -- Merchandising."
IMPACT OF ECONOMIC CONDITIONS
Certain economic conditions affect the level of consumer spending on
merchandise offered by the Company, including, among others, business
conditions, interest rates, taxation and consumer confidence in future economic
conditions. If the demand for apparel and related merchandise by teenagers were
to decline, the Company's business, comparable store sales results and results
of operations would be materially and adversely affected. Although the Company
advertises in national magazines to a limited extent through cooperative
agreements with certain of its vendors, its stores rely principally on mall
traffic for customers. Therefore, the Company is dependent upon the continued
popularity of malls as a shopping destination and the ability of mall anchor
tenants and other attractions to generate customer traffic for its stores. A
decrease in mall traffic or a decline in economic conditions in the markets in
which the Company's stores are located would adversely affect the Company's
growth, net sales, comparable store sales results and profitability. See
"Business."
QUARTERLY RESULTS AND SEASONALITY
The Company's quarterly results of operations may fluctuate materially
depending on, among other things, the timing of new store openings, net sales
contributed by new stores, increases or decreases in comparable store sales,
shifts in timing of certain holidays and changes in the Company's merchandise
mix. The Company's business is also subject to seasonal influences, with heavier
concentrations of sales during the Christmas holiday, back-to-school and spring
break seasons. As is the case with many apparel retailers, the Company's net
sales and net income are typically lower in the first quarter. The Company has
experienced quarterly losses in the past and may experience such losses in the
future. Because of these fluctuations in net sales and net income, the results
of operations of any quarter are not necessarily indicative of the results that
may be achieved for a full fiscal year or any future quarter.
12
<PAGE> 13
DEPENDENCE ON KEY VENDORS
The Company's business depends on its ability to purchase current season,
brand name apparel in sufficient quantities at competitive prices. During the
Company's 1998 fiscal year, no single vendor accounted for more than 10% of the
Company's merchandise purchases. The inability or failure of key vendors to
supply the Company with adequate quantities of desired merchandise, the loss of
one or more key vendors or a material change in the Company's current purchase
terms could have a material adverse effect on the Company's business. Many of
the Company's smaller vendors have limited resources, production capacities and
operating histories, and many have limited the distribution of their merchandise
in the past. The Company has no long-term purchase contracts or other
contractual assurances of continued supply, pricing or access to new products.
There can be no assurance that the Company will be able to acquire desired
merchandise in sufficient quantities on terms acceptable to the Company in the
future. See "Business -- Merchandising" and "Business -- Purchasing."
DEPENDENCE ON KEY PERSONNEL
The Company's success will depend largely on the efforts and abilities of
senior management. The loss of the services of any member of senior management
could have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that the
Company's existing management team will be able to manage the Company or its
growth or that the Company will be able to attract and retain additional
qualified personnel as needed in the future.
COMPETITION
The Company operates in a highly competitive environment. The Company
currently competes with traditional retail department stores, with national
specialty chains such as The Gap and certain divisions of The Limited, with
numerous regional chains such as The Buckle, Pacific Sunwear, Wet Seal, Hot
Topic and American Eagle Outfitters, with smaller chains and local specialty
stores, and to a lesser extent, with mass merchandisers and companies providing
shopping sites via the internet. Many of these competitors are larger and have
substantially greater resources than the Company. Direct competition with these
and other retailers may increase significantly in the future, which could
require the Company, among other things, to lower its prices and/or increase its
advertising expenses. Increased competition could have a material adverse effect
on the Company's operations and comparable store sales results. See "Business --
Competition."
STOCK PRICE VOLATILITY
The market price of the Company's Common Stock has fluctuated substantially
since the Company's initial public offering in October 1995. The Company's
Common Stock is quoted on The Nasdaq Stock Market, which has experienced and is
likely to experience in the future significant price and volume fluctuations
which could adversely affect the market price of the Common Stock without regard
to the operating performance of the Company. In addition, the Company believes
that factors such as quarterly fluctuations in the financial results of the
Company, the Company's comparable store sales results, announcements by other
apparel retailers, the overall economy and the condition of the financial
markets could cause the price of the Common Stock to fluctuate substantially.
ANTI-TAKEOVER MATTERS
The Company's Restated Articles and its Bylaws contain provisions that may
have the effect of delaying, deterring or preventing a takeover of the Company
that shareholders may consider to be in their best interests. The Company's
Restated Articles and Bylaws provide for a classified Board of Directors serving
staggered terms of three years, the prohibition of shareholder action by written
consent in certain circumstances and certain "fair price provisions."
Additionally, the Board of Directors has the authority to issue up to 1,000,000
shares of preferred stock having such rights, preferences and privileges as
designated by the Board of Directors without shareholder approval.
13
<PAGE> 14
The Company has adopted a Shareholder Rights Plan which is intended to
deter an unfriendly takeover of the Company and to help ensure current
shareholders receive fair value upon the sale of their stock to another party
seeking control of the Company. See "Notes to Financial Statements - Note 12
Shareholder Rights Plan."
ITEM 2. PROPERTIES.
All of the existing stores are leased by the Company, with lease terms
(excluding renewal option periods exercisable by the Company at escalating
rents) expiring between June 1999 and January 2009. The leases for most of the
existing stores are for terms of 10 years and provide for contingent rent based
upon a percent of sales in excess of specified minimums.
The Company's office and distribution center is located in Carrollton,
Texas, under a lease that is scheduled to expire on May 1, 2007.
ITEM 3. LEGAL PROCEEDINGS.
In the ordinary course of its business, the Company is periodically a party
to lawsuits. The Company believes that any resulting liability from existing
legal proceedings, individually or in the aggregate, will not have a material
adverse effect on its operations or financial condition. See "Notes to Financial
Statements Note 13 Contingency".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information in response to item 5 is contained in the section entitled
"Corporate Information - Share Price Data" located on page 24 of the
registrant's 1998 Annual Report to Shareholders, filed as Exhibit 13 to this
Report. Such Market for Registrant's Common Equity and Related Stockholder
Matters are incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
The selected financial and operating data in response to Item 6 is
contained in the section entitled "Selected Financial Data," located on page 7
of the registrant's 1998 Annual Report to Shareholders, filed as Exhibit 13 to
this Report. Such Selected Financial Data is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information in response to item 7 is contained in the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," located on pages 8 to 11 of the registrant's 1998 Annual Report to
Shareholders, filed as Exhibit 13 to this Report. Such Management's Discussion
and Analysis of Financial Condition and Results of Operations are incorporated
herein by reference.
14
<PAGE> 15
ITEM 7A. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information in response to item 8 is contained in the registrant's 1998
Annual Report to Shareholders, filed as Exhibit 13 to this Report. Such
information is incorporated herein by reference. A cross-reference for location
of the requested information is below.
<TABLE>
<CAPTION>
PAGE NUMBER(S) IN
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ANNUAL REPORT*
- ------------------------------------------- -----------------
<S> <C>
Unaudited Quarterly Financial Data................................................... 9
Balance Sheets at January 30, 1999 and January 31, 1998.............................. 12
Statements of Income for the Years Ended January 30, 1999,
January 31, 1998, and February 1, 1997......................................... 13
Statements of Stockholders' Equity for the Years Ended January 30, 1999,
January 31, 1998, and February 1, 1997......................................... 14
Statements of Cash Flows for the Years Ended January 30, 1999,
January 31, 1998, and February 1, 1997......................................... 15
Notes to Financial Statements........................................................ 16 - 22
Report of Independent Accountants.................................................... 23
Corporate Information................................................................ 24
</TABLE>
*The indicated pages of the Company's 1998 Annual Report to Shareholders are
filed as Exhibit 13 to this Report. Such Exhibit is incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to this item is incorporated by reference from the
registrant's definitive Proxy Statement to be filed with the Commission not
later than 120 days after the end of the registrant's fiscal year.
ITEM 11. EXECUTIVE COMPENSATION.
Information with respect to this item is incorporated by reference from the
registrant's definitive Proxy Statement to be filed with the Commission not
later than 120 days after the end of the registrant's fiscal year.
15
<PAGE> 16
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information with respect to this item is incorporated by reference from the
registrant's definitive Proxy Statement to be filed with the Commission not
later than 120 days after the end of the registrant's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information with respect to this item is incorporated by reference from the
registrant's definitive Proxy Statement to be filed with the Commission not
later than 120 days after the end of the registrant's fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. The financial statements as cross-referenced in Item 8 of this Report,
together with the report thereon of PricewaterhouseCoopers LLP dated
March 8, 1999, except as to the second paragraph of Note 6, which is as
of April 5, 1999, appearing in the accompanying 1998 Annual Report to
Shareholders are incorporated by referenced in this Report. With the
exception of the aforementioned information and information
incorporated in Items 5, 6 and 7, the 1998 Annual Report to
Shareholders is not deemed filed as part of this Report.
2. Financial statement schedules are omitted because they are not
applicable or the required information is shown in the financial
statements or notes thereto.
3. Exhibits included or incorporated herein:
See Exhibit Index.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the last quarter of the
fiscal year covered by this report.
16
<PAGE> 17
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
April 28, 1998 on its behalf by the undersigned, thereunto duly authorized.
GADZOOKS, INC.
By /s/ Gerald R. Szczepanski
---------------------------------------
Gerald R. Szczepanski,
Chairman of the Board, President
and Chief Executive Officer
Each person whose signature appears below hereby authorizes Gerald R.
Szczepanski and Monty R. Standifer or either of them, as attorneys-in-fact to
sign on his behalf, individually, and in each capacity stated below and to file
all amendments and/or supplements to the Annual Report on Form 10-K.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Gerald R. Szczepanski Chairman of the Board, President April 28, 1999
- ------------------------------------------- and Chief Executive Officer
Gerald R. Szczepanski (Principal Executive Officer)
/s/ Monty R. Standifer Senior Vice President, Chief April 28, 1999
- ------------------------------------------- Financial Officer, Treasurer and
Monty R. Standifer Secretary (Principal Financial and
Accounting Officer)
/s/ G. Michael Machens Director April 28, 1999
- -------------------------------------------
G. Michael Machens
/s/ Robert E.M. Nourse Director April 28, 1999
- -------------------------------------------
Robert E.M. Nourse
/s/ Ron G. Stegall Director April 28, 1999
- -------------------------------------------
Ron G. Stegall
/s/ Lawrence H. Titus, Jr. Director April 28, 1999
- -------------------------------------------
Lawrence H. Titus, Jr.
</TABLE>
17
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
3.1 -- Second Restated Articles of Incorporation of the Company (filed
as Exhibit 4.1 to the Company's Form S-8 (No. 33-98038) filed with
the Commission on October 12, 1995 and incorporated herein by
reference).
3.2 -- Amended and Restated Bylaws of the Company (filed as Exhibit
4.2 to the Company's Form S-8 (No. 33-98038) filed with the
Commission on October 12, 1995 and incorporated herein by
reference).
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 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).
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).
</TABLE>
18
<PAGE> 19
<TABLE>
<S> <C>
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).
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).
</TABLE>
19
<PAGE> 20
<TABLE>
<S> <C>
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).
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).
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 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 (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).
10.23 -- 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).
10.24 -- 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).
10.25 -- 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).
10.26 -- 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).
13* -- Pages 17-24 of the Company's 1998 Annual Report to Shareholders.
23* -- Consent of PricewaterhouseCoopers LLP.
24* -- Power of Attorney (included on signature page of this report).
27* -- Financial Data Schedule.
</TABLE>
- -----------------
* Filed herewith (unless otherwise indicated exhibits are previously filed).
20
<PAGE> 1
EXHIBIT 13
GADZOOKS
ANNUAL REPORT
[PICTURE]
98
<PAGE> 2
CHANGES IN BOARD OF DIRECTORS
Alan W. Crites, a member of the Company's Board of Directors since 1992, retired
in November 1998. We want to thank him for his many contributions to the
Company's growth during that time. In seeking Alan's replacement, we were
fortunate that Ron G. Stegall, a career retailer, agreed to serve as a Director.
Ron is Chairman of the Board of electronics retailer InterTAN, Inc., and serves
on the Board of superstore retailer Hastings Entertainment, Inc. He also founded
and served as Chairman and Chief Executive Officer of BizMart, Inc., an office
products superstore chain, and was a retail executive with Tandy Corporation for
many years.
FINANCIAL & OPERATING HIGHLIGHTS
<TABLE>
<CAPTION>
Fiscal Year Ended
JANUARY 30, January 31, Percent
1999 1998 Change
----------- ----------- -----------------
<S> <C> <C> <C>
Net sales (in thousands) $ 208,203 $ 171,639 21%
Net income (in thousands) $ 387 $ 8,288 (95)%
Net income per share
Basic $ 0.04 $ 0.95 (96)%
Diluted $ 0.04 $ 0.91 (96)%
Average shares outstanding (in thousands)
Basic 8,852 8,683 2%
Diluted 9,036 9,100 (1)%
Comparable store sales increase (decrease) (5.6)% 1.8% --
Average net sales per store $ 717,976 $ 794,437 (10)%
Average net sales per square foot $ 306 $ 341 (10)%
Capital expenditures (in thousands) $ 9,947 $ 12,624 (21)%
Number of stores at year end 312 250 25%
</TABLE>
* See Financial Information section for further discussion and analysis.
GADZOOKS OFFERS
A VARIETY OF PRODUCTS
FROM RECOGNIZED
TEEN FASHION LEADERS.
<PAGE> 3
GADZOOKS IS COOL A HIGH-ENERGY SPECIALTY RETAILER CATERING TO YOUNG MEN AND
WOMEN PRINCIPALLY BETWEEN 13 AND 19 YEARS OF AGE. ESTABLISHED IN 1983,
DALLAS-BASED GADZOOKS CURRENTLY OPERATES 317 MALL-BASED STORES IN METROPOLITAN
AND MIDDLE MARKETS IN 32 STATES EAST OF THE ROCKY MOUNTAINS.
LETTER TO SHAREHOLDERS
[PICTURE]
Jerry Szczepanski
Chairman and CEO
GADZOOKS ended fiscal 1997 on a very positive note, so we entered 1998 full
of optimism that the Company would turn in another strong performance for the
year. Unfortunately, that would not be the case. The truism in retailing has
always been that location is everything. But in teen retailing, merchandise
selection and timing have proven to be just as important. There is no better
example of that than Gadzooks' performance in fiscal 1998. We simply were not on
the same merchandise page with our teen customers, so we struggled with
merchandising issues all year. Our sales and profits for fiscal 1998 reflected
that effort.
For the 12 months of fiscal 1998 ended January 30, 1999, net sales were
$208,203,000, up 21.3 percent from $171,639,000 for fiscal 1997. Net income was
$387,000 or $0.04 per diluted share, compared with $8,288,000 or $0.91 per
diluted share for fiscal 1997. Comparable-store sales, a key measure in
retailing, declined 5.6 percent in fiscal 1998, versus a modest 1.8 percent gain
in fiscal 1997. It was the first year in the Company's history that we did not
record positive comp-store sales gains.
1
<PAGE> 4
Working through such a challenging year has provided Gadzooks' management and
employees with a different perspective that should prove quite valuable to the
Company's future success. During this past year, we analyzed virtually every
aspect of our business from as many angles as possible, and reached a number of
significant conclusions.
FIRST, TEENAGERS ARE STILL GREAT CUSTOMERS The teenage market in the United
States is stronger than ever, with over 25 million teens today and growing
rapidly. They have a lot of money to spend, and don't hesitate to do so.
Industry sources estimate that teen expenditures in 1998 totaled approximately
$141 billion, up about 16 percent from the prior year. This type of spending
makes teens a very dynamic market.
WE HAVE AN OUTSTANDING GROUP OF STORES, AND CONTINUE TO DO A GOOD JOB OF OPENING
NEW ONES We have expanded our store base about tenfold during the 1990s, with
very few closings along the way. During 1998, we opened 63 new stores and closed
one, ending the year with 312 mall-based stores in 32 states east of the Rocky
Mountains. We'll be slowing store growth in fiscal 1999 because of our increased
emphasis on merchandising and better utilization of the existing assets in our
current store base.
OUR DISTRIBUTION CENTER HAS SIGNIFICANTLY ENHANCED GADZOOKS' EFFICIENCY We have
been able to achieve significant labor efficiencies in our merchandise
distribution activities since the facility opened in May 1997. With 110,000
square feet of capacity, our distribution center has the capability to
effectively support the merchandising needs of up to 500 stores. That additional
capacity will provide Gadzooks with several years of future growth before the
center will have to be expanded.
[PICTURE]
GADZOOKS' ASSOCIATES KNOW WHAT
OUR CUSTOMERS WANT...
BECAUSE THEY ARE OUR CUSTOMERS.
2
<PAGE> 5
[PICTURE]
THE TEENAGE MARKET IN THE UNITED STATES IS STRONGER THAN EVER,
AND GROWING RAPIDLY. GADZOOKS HAS OVER THREE-HUNDRED STORES
PROVIDING THE PRODUCTS AND SERVICE THEY WANT.
317 STORES IN 32 STATES...AND GROWING
3
<PAGE> 6
OUR MERCHANDISE SELECTION LACKED THE NAME-BRAND FOCUS OF PREVIOUS YEARS And our
product assortment lacked cohesiveness. We simply tried to appeal to too many
segments of the teen population. Now we're reemphasizing our core name-brand
strategy to emulate the lifestyle of our target mainstream teen customers. We
are utilizing market research to understand our customers better -- to
continually refine our merchandise to fit our customers' wants and needs. We're
buying in greater depth from a narrower assortment of merchandise to increase
in-stock positions of higher-demand products. We also concluded that our
inventory planning process didn't allow for proper "bottoms-up" assortment plans
at the stores. For 1999, we've instituted a new "average store" planning process
to provide a better balance between the young men's and junior categories, which
should enable us to improve sales and inventory turns.
WE HAVE STRENGTHENED OUR MERCHANDISING MANAGEMENT TEAM We reviewed every aspect
of the Company's merchandising activities in 1998 and took a number of steps to
substantially strengthen our inventory planning and merchandise management
capabilities. In January 1999, we hired Paula Masters, a 14-year veteran of
junior retail merchandising, as Vice President and General Merchandise Manager.
She is responsible for all buying functions and other merchandise management
aspects of our business. At the same time, Jeffrey Krainess was named Vice
President for Planning and Allocation, with responsibility for enhancing our
capabilities to support higher future sales from our fast-growing store base.
GADZOOKS IS STRONG FINANCIALLY, WITH NO BANK DEBT AND SIGNIFICANT CASH AVAILABLE
FOR FUNDING CONTINUED STORE EXPANSION The Company has traditionally satisfied
its cash requirements for store expansion and purchasing inventories mainly from
cash flow from operations. At the
[PICTURE]
UPDATED STORE INTERIORS KEEP OUR
CUSTOMERS INTERESTED AND
ENTERTAINED, ENCOURAGING SALES.
4
<PAGE> 7
end of fiscal 1998, we had $16.4 million in cash on the balance sheet, and a
bank credit facility which provides the Company with sufficient liquidity to
achieve its growth objectives.
WE LEARNED SOME IMPORTANT LESSONS IN 1998 THAT ARE REFLECTED IN OUR 1999
DIRECTION
Going forward, we want to achieve several key objectives:
O RE-ESTABLISH GADZOOKS' "COOL" IMAGE WITH OUR TEEN CUSTOMERS THROUGH A MORE
FOCUSED NAME-BRAND STRATEGY;
O ENSURE THAT OUR EXISTING STORES ARE PERFORMING AT THE TOP OF THEIR
POTENTIAL;
O UPGRADE OUR MERCHANDISE PLANNING AND ALLOCATION SYSTEMS;
O INSTITUTE A TIGHTER STORE-LEVEL MERCHANDISE CONTROL SYSTEM;
O FURTHER STRENGTHEN OUR COMPANY BY DEVELOPING EXISTING TALENT WHILE
CONTINUING TO ATTRACT TOP-PERFORMING INDIVIDUALS.
We failed this past year. It was not for lack of effort. In fact, the irony is
that you seem to work harder when things are not clicking. For their hard work
and competitiveness, our employees are to be commended. However, the point is
that we failed, and that is not acceptable. We have made the changes we feel are
necessary to assure that 1998 does not repeat itself. We want to thank our
shareholders for their support, and we will guarantee that every effort will be
made to make 1999 the success it should be.
Sincerely,
/s/ JERRY SZCZEPANSKI
Jerry Szczepanski,
Chairman of the Board and Chief Executive Officer April 27, 1999
[PICTURE]
BRAND-NAME MERCHANDISE INCLUDES A RANGE
OF CLOTHING, SHOES AND ACCESSORIES.
5
<PAGE> 8
FINANCIAL
INFORMATION
[PICTURE]
NASDAQ SYMBOL
GADZ
6
<PAGE> 9
GADZOOKS
INC. 7
- --------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
($ in thousands, except operating data and per share amounts)
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------------------------------------------
JANUARY 30, January 31, February 1, January 27, January 28,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales $ 208,203 $ 171,639 $ 128,388 $ 84,602 $ 56,463
Cost of goods sold 157,729 120,309 87,418 58,015 38,379
--------- --------- --------- --------- ---------
Gross profit 50,474 51,330 40,970 26,587 18,084
Selling, general and administrative
expenses(1) 50,526 38,773 29,212 19,794 14,702
--------- --------- --------- --------- ---------
Operating income (loss) (52) 12,557 11,758 6,793 3,382
Interest income (expense), net 536 706 945 (179) (240)
--------- --------- --------- --------- ---------
Income before income taxes 484 13,263 12,703 6,614 3,142
Provision for income taxes 97 4,975 4,712 2,538 1,201
--------- --------- --------- --------- ---------
Net income $ 387 $ 8,288 $ 7,991 $ 4,076 $ 1,941
========= ========= ========= ========= =========
Net income per share
Basic $ 0.04 $ 0.95 $ 0.94 $ 0.67 $ 0.34
Diluted $ 0.04 $ 0.91 $ 0.87 $ 0.60 $ 0.32
Average shares outstanding
Basic 8,852 8,683 8,525 6,095 5,671
Diluted 9,036 9,100 9,143 6,742 5,976
SELECTED OPERATING DATA:
Comparable store sales increase (decrease)(2) (5.6)% 1.8% 6.1% 14.7% 8.4%
Number of stores at year end 312 250 183 126 90
Average net sales per store $ 717,976 $ 794,437 $ 814,838 $ 776,807 $ 698,108
Average net sales per square foot $ 306 $ 341 $ 356 $ 343 $ 306
Total square footage at end of period 736,214 585,092 421,572 284,953 204,711
Operating income percentage -- 7.3% 9.2% 8.0% 6.0%
Capital expenditures (in 000s) $ 9,947 $ 12,624 $ 6,864 $ 5,959 $ 3,445
BALANCE SHEET DATA:
Working capital $ 31,629 $ 34,878 $ 34,333 $ 20,368 $ 4,262
Total assets 86,442 84,321 64,747 45,611 19,836
Total debt -- -- -- 178 3,026
Redeemable preferred stock and
cumulative dividends -- -- -- -- 10,631
Shareholders' equity (deficit) 60,031 58,480 49,063 30,765 (2,204)
========= ========= ========= ========= =========
</TABLE>
(1) A provision for closing outlet stores was combined with January 28, 1995
selling, general and administrative expenses.
(2) A store becomes comparable after it has been open for 14 full fiscal
months.
<PAGE> 10
GADZOOKS
8 INC.
- --------------------------------------------------------------------------------
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.
The Company opened its first store in 1983, and at fiscal year-end 1998,
operated 312 stores in 32 states east of the Rocky Mountains. The Company has
been on a rapid expansion program, opening 57 new stores in fiscal 1996, 67 new
stores in fiscal 1997, and 63 new stores in fiscal 1998. One store was closed
during fiscal 1998.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain selected
income statement data expressed as a percentage of net sales and certain store
data:
<TABLE>
<CAPTION>
Fiscal Year
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of goods sold, including buying, distribution
and occupancy costs 75.8 70.1 68.1
----- ----- -----
Gross profit 24.2 29.9 31.9
Selling, general and administrative expenses 24.2 22.6 22.7
----- ----- -----
Operating income -- 7.3 9.2
Interest income, net 0.3 0.4 0.7
----- ----- -----
Income before income taxes 0.3 7.7 9.9
Provision for income taxes 0.1 2.9 3.7
----- ----- -----
Net income 0.2% 4.8% 6.2%
===== ===== =====
Number of stores open at end of period 312 250 183
</TABLE>
FISCAL 1998 COMPARED TO FISCAL 1997
Net sales increased approximately $36.6 million, or 21.3%, to $208.2 million
during fiscal 1998 from $171.6 million in fiscal 1997. Net sales of the 63 new
stores opened during fiscal 1998 and for those stores not yet qualifying as
comparable stores contributed $45.4 million of the increase in sales. Comparable
store sales decreased by $8.8 million, or 5.6%, in fiscal 1998. The decrease in
comparable sales was primarily due a decline in the unisex T-shirt category, and
to a lesser extent declines in the footwear and accessory categories. A store
becomes comparable after it has been open for 14 full fiscal months.
Gross profit decreased approximately $0.8 million to $50.5 million in
fiscal 1998 from $51.3 million in fiscal 1997. As a percentage of sales, gross
profit decreased to 24.2% in fiscal 1998 from 29.9% in fiscal 1997. The decrease
in gross profit resulted primarily from increased markdowns and promotional
activities to clear out slow-moving inventory during the third and fourth
quarters of fiscal 1998. Gross profit for the fourth quarter of fiscal 1998 was
negatively impacted by a charge of approximately $0.6 million to reduce the cost
of slow-moving inventory down to fair value. Store occupancy costs increased as
a percentage of sales primarily due to the lower average sales per store in
1998.
Selling, general and administrative expenses increased approximately $11.8
million to $50.5 million during fiscal 1998 from $38.8 million in fiscal 1997
and increased as a percentage of sales to 24.2% in fiscal 1998 from 22.6% in
fiscal 1997. The increase as a percentage of sales was due to the inability to
leverage corporate overhead costs and store payroll costs over lower than
expected sales as well as the addition of several new executives and managers.
Operating income decreased approximately $12.6 million to about breakeven
during fiscal 1998 from $12.6 million in fiscal 1997. As a percentage of sales,
operating income decreased to about zero percent in fiscal 1998 from 7.3% in
fiscal 1997.
Net interest income decreased approximately $0.2 million to $0.5 million
during fiscal 1998 from $0.7 million net interest income in fiscal 1997. The
Company's interest income decreased due to the use of a portion of its
short-term cash investments in connection with the Company's fiscal 1998 store
expansion program.
Income tax expense was $97,188 for fiscal 1998, compared to $5.0 million in
fiscal 1997. The decrease in the Company's effective income tax rate was
primarily attributable to tax-free interest income which accounted for a
significantly larger portion of income before income taxes in fiscal 1998.
<PAGE> 11
GADZOOKS
INC. 9
- --------------------------------------------------------------------------------
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales increased approximately $43.2 million, or 33.6%, to $171.6
million during fiscal 1997 from $128.4 million in fiscal 1996. Net sales of the
67 new stores opened during fiscal 1997 and for those stores not yet qualifying
as comparable stores contributed $41.1 million of the increase in sales.
Comparable store sales increased 1.8% in fiscal 1997 and contributed $2.1
million to the increase in sales. The increase in comparable sales was primarily
due to strong sales in the young men's category. Fiscal 1996 was a 53 week
period. The fifty-third week contributed $1.9 million to net sales in fiscal
1996.
Gross profit increased approximately $10.3 million to $51.3 million in
fiscal 1997 from $41.0 million in fiscal 1996. As a percentage of sales, gross
profit decreased to 29.9% in fiscal 1997 from 31.9% in fiscal 1996. The decrease
in gross profit resulted primarily from substantial markdowns taken during the
second quarter of fiscal 1997 in the junior apparel and accessories categories.
Store occupancy costs increased by approximately one half of one percent
primarily as a result of lower sales in the second quarter.
Selling, general and administrative expenses increased approximately $9.6
million to $38.8 million during fiscal 1997 from $29.2 million in fiscal 1996,
but decreased as a percentage of sales to 22.6% in fiscal 1997 from 22.7% in
fiscal 1996. The slight decrease as a percentage of sales was primarily due to
the leveraging of corporate overhead expenses and lower management bonuses.
Operating income increased approximately $0.8 million to $12.6 million
during fiscal 1997 from $11.8 million in fiscal 1996. As a percentage of sales,
operating income decreased to 7.3% in fiscal 1997 from 9.2% in fiscal 1996.
Net interest income decreased approximately $0.2 million to $0.7 million
during fiscal 1997 from $0.9 million in fiscal 1996. The Company's interest
income decreased due to the use of short-term cash investments to fund the
Company's continuing store expansion program.
Income tax expense was $5.0 million for fiscal 1997, compared to $4.7
million in fiscal 1996. The effective income tax rate in fiscal 1997 was 37.5%,
compared to 37.1% in fiscal 1996. The increase in the Company's effective income
tax rate was primarily attributable to the Company's expansion into states with
higher state income tax rates.
QUARTERLY RESULTS AND SEASONALITY
The Company's quarterly results of operations may fluctuate materially
depending on, among other things, the timing of new store openings, net sales
contributed by new stores, increases or decreases in comparable store sales and
changes in the Company's merchandise mix.
The Company's business is also subject to seasonal influences, with
slightly higher sales during the Christmas holiday, back-to-school, and spring
break seasons. The Christmas holiday season remains the Company's single most
important selling season. The Company believes, however, that the significance
of the back-to-school season (which affects operating results in the second and
third quarters) and spring break season (which affects operating results in the
first quarter) reduces somewhat the Company's dependence on the Christmas
holiday selling season. As is the case with many apparel retailers, the
Company's net sales and net income are typically lower in the first quarter.
The following table sets forth certain statement of operations and
operating data for each of the Company's last eight fiscal quarters. The
quarterly data set forth below were derived from unaudited financial statements
of the Company, which in the opinion of management of the Company, contain all
adjustments (consisting only of normal recurring adjustments) necessary for fair
presentation thereof. Results for any quarter are not necessarily indicative of
results that may be achieved for a full fiscal year.
<TABLE>
<CAPTION>
(In thousands, except operating and per share data) Fiscal 1998 Fiscal 1997
--------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of income data:
Net sales $ 45,026 $ 48,202 $ 50,697 $ 64,278 $ 34,070 $ 36,780 $ 41,268 $ 59,521
Gross profit 12,702 12,286 11,535 13,951 10,127 9,022 12,639 19,542
Operating income (loss) 2,082 857 (1,293) (1,698) 1,893 141 2,869 7,654
Net income (loss) 1,417 606 (738) (898) 1,324 171 1,920 4,873
Net income (loss) per share
Basic $ 0.16 $ 0.07 $ (0.08) $ (0.10) $ 0.15 $ 0.02 $ 0.22 $ 0.56
Diluted $ 0.16 $ 0.07 $ (0.08) $ (0.10) $ 0.15 $ 0.02 $ 0.21 $ 0.54
Average shares outstanding
Basic 8,795 8,836 8,886 8,890 8,592 8,669 8,730 8,739
Diluted 9,095 9,071 8,886 8,890 9,124 9,110 9,064 9,102
Selected operating data:
Stores open at end of period 275 304 311 312 197 221 232 250
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
<PAGE> 12
GADZOOKS
10 INC.
- --------------------------------------------------------------------------------
Management's Discussion and Analysis, continued
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. During the last three fiscal years, the Company's primary uses of cash
have been to finance new store openings and purchase merchandise inventories.
In fiscal 1997, $3.1 million was spent on a new distribution center and
corporate headquarters for the Company. The Company has satisfied its cash
requirements principally from cash flow from operations and proceeds from the
sale of equity securities.
CASH FLOWS. During fiscal 1998, 1997 and 1996, cash flows from operating
activities were $6.2 million, $7.6 million, and $5.6 million, respectively.
Cash flow from operations before working capital changes decreased to $4.6
million in fiscal 1998 from $11.7 million in the prior year. The decrease was
due primarily to the reduction in net income. The increase in cash flow from
operations before working capital changes from $9.9 million in fiscal 1996 to
$11.7 million in fiscal 1997 was primarily caused by increases in net income
and depreciation expense of $0.3 million and $1.1 million, respectively.
Working capital components generated $1.6 million of cash flow in fiscal
1998. Cash was generated by a reduction in inventory of $1.4 million and
increases in accounts payable and other liabilities of $1.4 million and $1.3
million, respectively. Offsetting those increases in cash was a decrease in
income taxes payable of $2.5 million. In fiscal 1997, working capital used $4.1
million of cash flow. An inventory increase of $12.6 million offset by an
increase in accounts payable of $9.1 million primarily caused the net use of
working capital. Working capital used $4.2 million of cash flow in fiscal 1996,
primarily the result of a $4.5 million increase in inventory.
Cash used in investing activities approximated $0.8 million, $9.4 million
and $19.3 million for fiscal 1998, 1997 and 1996, respectively. The Company
spent $9.9 million on capital expenditures during fiscal 1998, of which $8.9
million was used to open new or remodel and refurbish existing stores and $1.0
million was used to upgrade information systems. The Company spent $12.6 million
on capital expenditures during fiscal 1997, of which $8.5 million was used to
open new or remodel existing stores, and $4.1 million was used to build-out and
furnish the new corporate headquarters and distribution center as well as to
upgrade information systems. The Company opened 63, 67, and 57 new stores in
fiscal 1998, 1997 and 1996, respectively.
Net cash flow provided by financing activities totaled $1.2 million, $1.1
million and $10.3 million for fiscal 1998, 1997 and 1996, respectively. During
fiscal 1998, the Company received $0.6 million from the exercise of employee
stock options as well as $0.7 million of related tax benefit. The Company used
$0.2 million for net purchases of treasury stock. During fiscal 1997, the
Company received $0.4 million from the exercise of employee stock options as
well as $0.7 million of related tax benefit. During fiscal 1996, the Company
received $9.1 million from a public equity offering and $1.2 million as a tax
benefit from the exercise of employee stock options.
CREDIT FACILITY. The Company intends to renew and revise its existing credit
facility with Wells Fargo Bank and has received a commitment letter from the
bank dated April 6, 1999. The revised facility would provide an unsecured
revolving line of credit totaling $10 million. The facility would permit the
Company to borrow the lesser of 150% of trailing twelve-month cash flow (as
defined in the credit agreement) or $10 million. Assuming that the revised
credit facility had been executed prior to year-end, the amount available to
borrow (prior to reduction for outstanding letters of credit) at January 31,
1999 would have been $7.6 million. Amounts borrowed under the revolving line
will continue to bear interest at the lessor of either Prime Rate or 195 basis
points above LIBOR. The renewed revolving line would continue to provide 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 line of credit.
The renewed credit agreement would continue to subject the Company to various
restrictions on the incurrence of additional indebtedness, acquisitions, loans
to officers, and stock repurchases. The revised covenants will continue to
require the Company to maintain a certain minimum tangible net worth, minimum
working capital and other financial covenants. In addition the Company will be
required to pay a commitment fee of 0.50% on the unused portion of the revolving
line. Any amount borrowed under the new revolving line of credit will become
due on June 1, 2000, the date the renewed credit agreement will mature. No
assurance can be given that negotiations will be successfully completed with the
bank regarding the revised facility.
As of January 30, 1999 the Company was in technical default of the net
income requirement and fixed coverage charge ratio covenants of its current
credit agreement dated June 11, 1998. Wells Fargo has issued waivers on both
covenants through April 30, 1999, by which time the Company expects to have the
new loan agreement in place with revised covenants. As of January 30, 1999, no
borrowings were outstanding under the revolving line, and $0.3 million in
letters of credit were outstanding. As of April 2, 1999, no letters of credit or
borrowings were outstanding under the current revolving line.
CAPITAL EXPENDITURES. The Company anticipates that it will spend approximately
$8.0 million on capital expenditures in fiscal 1999 to open 30 new stores,
remodel eight existing stores and refurbish 50-55 existing stores. During fiscal
1998, the Company had capital expenditures of $9.9 million, of which $8.9
million was used to open 63 new stores, remodel five existing stores and
refurbish approximately 50 stores. The Company's average capital expenditures to
construct a new store during fiscal 1998, including leasehold improvements and
furniture and fixtures, averaged approximately $180,000 (approximately $105,000
net of landlord construction allowances).
The Company anticipates that its cash requirements for initial inventories
in stores expected to open in fiscal 1999 will be approximately $2.0 million.
The cost of initial inventory for a new store is approximately $100,000;
however, the immediate cash requirement for inventory is partially financed
through the Company's payable terms with its vendors.
<PAGE> 13
GADZOOKS
INC. 11
- --------------------------------------------------------------------------------
Pre-opening costs range from $9,000 to $13,000 for travel, hiring, 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. The actual
costs that the Company will incur in opening new stores cannot be predicted with
precision because such costs will vary based upon, among other things,
geographic location, the size of the store, and the extent of the build-out
required at the selected site.
The Company believes that its existing cash balances, cash generated from
operations, and funds available under its credit facility will be sufficient to
satisfy its cash requirements through fiscal 1999.
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 operating
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 require modification or replacement in order to
become Year 2000 compliant. Management presently believes that such
modifications or replacements will be both tested and completed no later than
September 1999. However, if such modifications or replacements are not made, or
are not completed timely, the Year 2000 issue could have an immaterial 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 in accordance
with the guidelines established by the AICPA's Emerging Issues Task Force
Release #96-14 "Accounting for the Costs Associated with Modifying Computer
Software for the Year 2000." The Company expects to spend approximately
$300,000, to be funded from operating cash flows, 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.
INFLATION
The Company does not believe that inflation has had a material effect on
net sales or results of operations. The Company has generally been able to pass
on increased costs through increases in selling prices.
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.
STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE
Certain sections of this Annual Report on Form 10-K, 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.
<PAGE> 14
GADZOOKS
12 INC.
- --------------------------------------------------------------------------------
BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 30, January 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16,353,393 $ 9,755,083
Short-term investments -- 9,157,209
Accounts receivable 3,001,651 2,815,444
Inventory 34,403,807 35,763,833
Other current assets 1,987,077 1,426,539
------------ ------------
55,745,928 58,918,108
------------ ------------
Leaseholds, fixtures and equipment, net 30,696,262 25,403,044
------------ ------------
$ 86,442,190 $ 84,321,152
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 18,148,736 $ 16,721,808
Accrued payroll and benefits 2,498,758 2,111,284
Other current liabilities 3,469,776 2,712,060
Income taxes payable -- 2,494,855
------------ ------------
24,117,270 24,040,007
Accrued rent 2,294,275 1,800,730
Commitments and contingencies (Notes 7 and 13)
Shareholders' equity:
Preferred stock, $1.00 par value, 1,000,000 shares
authorized, none issued -- --
Common stock, $.01 par value, 25,000,000 shares authorized,
8,892,736 and 8,754,577 shares issued and outstanding, respectively 88,927 87,546
Additional paid-in capital 42,197,629 40,868,605
Retained earnings 17,855,453 17,524,264
Treasury stock, at cost, 15,226 and no shares, respectively (111,364) --
------------ ------------
60,030,645 58,480,415
------------ ------------
$ 86,442,190 $ 84,321,152
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 15
GADZOOKS
INC. 13
- --------------------------------------------------------------------------------
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------------
January 30, January 31, February 1,
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net sales $ 208,202,866 $ 171,639,147 $ 128,388,380
Costs and expenses:
Cost of goods sold, including buying, distribution
and occupancy costs 157,728,597 120,308,942 87,417,930
Selling, general and administrative expenses 50,526,730 38,773,576 29,212,565
------------- ------------- -------------
208,255,327 159,082,518 116,630,495
------------- ------------- -------------
Operating income (loss) (52,461) 12,556,629 11,757,885
Interest expense (58,265) (52,313) (26,367)
Interest income 594,738 758,580 971,382
------------- ------------- -------------
Income before income taxes 484,012 13,262,896 12,702,900
Provision for income taxes 97,188 4,974,998 4,711,500
------------- ------------- -------------
Net income $ 386,824 $ 8,287,898 $ 7,991,400
============= ============= =============
Net income per share
Basic $ 0.04 $ 0.95 $ 0.94
============= ============= =============
Diluted $ 0.04 $ 0.91 $ 0.87
============= ============= =============
Average shares outstanding
Basic 8,851,609 8,682,582 8,525,322
============= ============= =============
Diluted 9,035,841 9,100,027 9,142,921
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 16
GADZOOKS
14 INC.
- --------------------------------------------------------------------------------
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Retained Treasury Stock
Shares Capital Paid-In Capital Earnings Shares Capital Total
------ ------- --------------- -------- ------ ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 27, 1996 5,219,930 $ 52,199 $ 29,467,782 $ 1,244,966 -- -- $ 30,764,947
Issuance of common stock,
net of underwriting
commissions and expenses 400,000 4,000 9,012,586 -- -- -- 9,016,586
Stock issued under option plans 131,284 1,313 80,985 -- -- -- 82,298
Three-for-two common stock
split effected in the form of
a 50% stock dividend 2,833,226 28,332 (28,332) -- -- -- --
Tax benefit from exercise
of stock options -- -- 1,208,000 -- -- -- 1,208,000
Net income -- -- -- 7,991,400 -- -- 7,991,400
---------- -------- ------------ ------------ ------ ---------- ------------
BALANCE, FEBRUARY 1, 1997 8,584,440 85,844 39,741,021 9,236,366 -- -- 49,063,231
Stock issued under option plans 170,137 1,702 407,647 -- -- -- 409,349
Tax benefit from exercise of
stock options -- -- 719,937 -- -- -- 719,937
Net income -- -- -- 8,287,898 -- -- 8,287,898
---------- -------- ------------ ------------ ------ ---------- ------------
BALANCE, JANUARY 31, 1998 8,754,577 87,546 40,868,605 17,524,264 -- -- 58,480,415
Stock issued under option plans 138,159 1,381 604,713 -- -- -- 606,094
Purchase of treasury stock -- -- -- -- 29,500 (312,031) (312,031)
Sale of treasury stock -- -- -- (55,635) (14,274) 200,667 145,032
Tax benefit from exercise
of stock options -- -- 724,311 -- -- -- 724,311
Net income -- -- -- 386,824 -- -- 386,824
---------- -------- ------------ ------------ ------ ---------- ------------
BALANCE, JANUARY 30, 1999 8,892,736 $ 88,927 $ 42,197,629 $ 17,855,453 15,226 $ (111,364) $ 60,030,645
========== ======== ============ ============ ====== ========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 17
GADZOOKS
INC. 15
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------
JANUARY 30, January 31, February 1,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 386,824 $ 8,287,898 $ 7,991,400
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 4,653,433 3,376,442 2,227,401
Deferred income taxes (433,967) 3,587 (347,500)
Changes in operating assets and liabilities:
Accounts receivable (186,207) (1,531,534) (793,141)
Inventory 1,360,026 (12,552,797) (4,503,951)
Other assets (126,571) (101,092) 179,639
Accounts payable 1,426,928 9,067,685 (840,884)
Accrued payroll and benefits 387,474 (1,023,868) 1,267,495
Income taxes payable (2,494,855) 1,380,193 (206,107)
Other liabilities 1,251,260 732,631 662,595
------------ ------------ ------------
Net cash provided by operating activities 6,224,345 7,639,145 5,636,947
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures, net (9,946,650) (12,623,714) (6,864,184)
Purchases of short-term investments (7,596,979) (18,177,257) (14,129,847)
Proceeds from redemption of short-term investments 16,754,188 21,439,895 1,710,000
------------ ------------ ------------
Net cash used in investing activities (789,441) (9,361,076) (19,284,031)
------------ ------------ ------------
Cash flows from financing activities:
Principal payments on long-term obligations -- -- (44,716)
Issuance of common stock, net 606,094 409,349 9,098,884
Purchase of treasury stock (312,031) -- --
Sale of treasury stock under employee stock purchase plan 145,032 -- --
Tax benefit from exercise of stock options 724,311 719,937 1,208,000
------------ ------------ ------------
Net cash provided by financing activities 1,163,406 1,129,286 10,262,168
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 6,598,310 (592,645) (3,384,916)
Cash and cash equivalents at beginning of period 9,755,083 10,347,728 13,732,644
------------ ------------ ------------
Cash and cash equivalents at end of period $ 16,353,393 $ 9,755,083 $ 10,347,728
============ ============ ============
Cash paid during the year for:
Interest $ 63,240 $ 50,240 $ 20,106
Income taxes 4,407,154 2,849,664 4,057,107
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 18
GADZOOKS
16 INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1 ORGANIZATION AND NATURE OF THE COMPANY
Gadzooks, Inc. (the "Company") is a mall-based, specialty retailer of casual
apparel and related accessories for young men and women principally between the
ages of 13 and 19. At January 30, 1999, the Company had 312 company-owned stores
in metropolitan and middle markets in 32 states east of the Rocky Mountains.
The Company's fiscal year ends on the Saturday nearest January 31. All
references in these financial statements to fiscal years are to the calendar
year in which the fiscal year begins. Fiscal years 1998, 1997, and 1996
represent the 52 or 53 week periods ended January 30, 1999, January 31, 1998 and
February 1, 1997, respectively. Fiscal 1996 was a 53 week period.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and marketable securities with
original maturities of three months or less.
SHORT-TERM INVESTMENTS
Short-term investments consist of highly liquid investments with original
maturities between three and twelve months. Management determines the proper
classifications of investments at the time of purchase and reevaluates such
designations as of each balance sheet date. At January 31, 1998, all securities
were classified as held-to-maturity based on the Company's positive intent and
ability to hold the securities to maturity. These securities were carried at
amortized cost, which approximated fair value.
INVENTORY
Inventories are valued at the lower of average cost or market.
LEASEHOLDS, FIXTURES AND EQUIPMENT
Leaseholds, fixtures and equipment are stated at cost. Depreciation of fixtures
and equipment is based upon the estimated useful lives of the assets, generally
from five to ten years, computed on the straight-line method. Amortization of
leasehold improvements is computed on the straight-line method over estimated
useful lives or lease terms, if shorter. The Company reviews its long-lived
assets for impairment whenever events or changes in circumstances indicate the
respective carrying amounts may not be recoverable. An impairment loss will be
recognized if the sum of the expected future cash flows (undiscounted and before
interest) from the use of the assets is less than the net book value of the
assets. The amount of the impairment loss will generally be measured as the
difference between the net book value of the assets and the estimated fair value
of the related assets.
REVENUE RECOGNITION
Retail merchandise sales are recognized at the point of sale less sales returns.
ADVERTISING
Advertising costs are expensed when incurred.
STORE PRE-OPENING COSTS
Costs incurred with the setup of a new store prior to its opening for business
were expensed as incurred in fiscal 1998. In fiscal 1997 and 1996, such costs
were expensed in the month the store opened. This change had an immaterial
impact on the Company's financial statements.
INCOME TAXES
Deferred income taxes are provided on the liability method. Under this method,
deferred tax assets and liabilities are recognized based on differences between
the financial statement and the tax bases of assets and liabilities using
presently enacted tax rates.
EARNINGS PER SHARE AND STOCK SPLITS
Earnings per share are computed by dividing net income by the weighted average
number of shares outstanding during each period after giving effect to (i) a
three-for-two stock split declared by the Board of Directors in May 1996, and
(ii) dilutive potential common shares resulting from stock options. The
three-for-two stock split has been given retroactive effect in the financial
statements.
<PAGE> 19
GADZOOKS
INC. 17
- --------------------------------------------------------------------------------
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at January 30, 1999 and January
31, 1998 and the reported amounts of revenues and expenses during each of the
three years in the period ended January 30, 1999. Actual results could differ
from these estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
All financial instruments classified as current are recorded at cost, which
approximates fair value due to the short maturity of these instruments.
3 COMMON STOCK OFFERING
On January 31, 1996, the Company completed a secondary offering of 600,000
shares of its common stock (after giving effect to the three-for-two stock split
described in Note 2). The Company's portion of the net proceeds, after deducting
expenses associated with the offering, totaled $9,016,586.
4 SHORT-TERM INVESTMENTS
The amortized cost and estimated fair value of investments are as follows:
<TABLE>
<CAPTION>
January 31, 1998
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Commercial paper $ 4,439,188 $ 463 $ 42 $ 4,439,609
Tax exempt securities backed by
municipal bonds 12,868,021 396 3,160 12,865,257
----------- ----------- ----------- -----------
Less cash equivalents 8,150,000 -- -- 8,150,000
----------- ----------- ----------- -----------
Total investment securities $ 9,157,209 $ 859 $ 3,202 $ 9,154,866
=========== =========== =========== ===========
</TABLE>
At January 30, 1999 there were no short-term investment securities. Investments
classified as held-to-maturity at January 31, 1998 had various maturity dates
that did not exceed one year.
5 LEASEHOLDS, FIXTURES AND EQUIPMENT
Leaseholds, fixtures and equipment are summarized as follows:
<TABLE>
<CAPTION>
JANUARY 30, January 31,
1999 1998
------------ ------------
<S> <C> <C>
Leasehold improvements $ 27,715,153 $ 22,233,244
Fixtures and equipment 16,876,857 12,490,384
------------ ------------
44,592,010 34,723,628
Less accumulated depreciation (13,895,748) (9,320,584)
------------ ------------
$ 30,696,262 $ 25,403,044
============ ============
</TABLE>
<PAGE> 20
GADZOOKS
18 INC.
- --------------------------------------------------------------------------------
Notes to Financial Statements, continued
6 LONG-TERM OBLIGATIONS
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. The total amount available to borrow pursuant to the credit agreement
is limited to 125% 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 0.35% 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. No borrowings were outstanding under the revolving line,
and letters of credit totaling $343,986 were outstanding at year-end. The
Company was in technical default of the minimum net income and fixed charge
coverage covenants as of January 30, 1999. Wells Fargo Bank has issued waivers
of both covenant violations through April 30, 1999.
The Company intends to renew and revise its existing credit facility with Wells
Fargo Bank and has received a commitment letter from the bank dated March 29,
1999. The revised facility would provide an unsecured revolving line of credit
totaling $10 million. The facility would permit the Company to borrow the lesser
of 150% of trailing twelve-month cash flow (as defined in the credit agreement)
or $10 million. Amounts borrowed under the revolving line will continue to bear
interest at the lessor of either Prime Rate or 195 basis points above LIBOR.
The renewed revolving line would continue to provide for the issuance of
letters of credit. The renewed credit agreement would continue to subject the
Company to various restrictions on the incurrence of additional indebtedness,
acquisitions, loans to officers and stock repurchases. The revised covenants
will continue to require the Company to maintain a certain minimum tangible net
worth, minimum working capital and other financial covenants. In addition the
Company will be required to pay a commitment fee of 0.50% on the unused portion
of the revolving line. Any amount borrowed under the new revolving line of
credit will become due on June 1, 2000, the date the renewed credit agreement
will mature.
7 LEASES
The Company leases store, office, and warehouse space under non-cancelable
leases with terms that generally range from five to ten years. Most of the store
leases provide for additional rentals based on a percentage of store sales and
specify rental increases over the term of the lease. Total rent expense under
these operating leases was $18,717,424, $13,822,868 and $9,602,618, for fiscal
years 1998, 1997, and 1996, respectively. Included in these total rent figures
are $511,000, $566,000 and $775,856 of contingent rent for fiscal years 1998,
1997 and 1996, respectively. Accrued rent of $2,294,275 as of January 30, 1999
and $1,800,730 as of January 31, 1998 has been provided to account for rent
expenses on a straight-line basis. Future minimum lease payments under
non-cancelable operating leases as of January 30, 1999 are as follows:
<TABLE>
<CAPTION>
Fiscal year
-----------
<S> <C>
1999 $ 19,215,013
2000 19,192,736
2001 19,183,566
2002 18,973,664
2003 18,319,483
Thereafter 54,173,794
-------------
Total minimum lease payments $ 149,058,256
=============
</TABLE>
<PAGE> 21
GADZOOKS
INC. 19
- --------------------------------------------------------------------------------
8 INCOME TAXES
The provision for federal and state income taxes consists of the following:
<TABLE>
<CAPTION>
Fiscal
----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Current tax expense $ 531,155 $ 4,971,411 $ 5,037,623
Deferred tax expense (benefit) (433,967) 3,587 (326,123)
----------- ----------- -----------
$ 97,188 $ 4,974,998 $ 4,711,500
=========== =========== ===========
</TABLE>
The following table reconciles the provision for income taxes to the amount
computed by applying the U.S. statutory federal tax rate of 34% to pre-tax
income:
<TABLE>
<CAPTION>
Fiscal
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Tax provision at the federal corporate rate $ 164,564 $ 4,509,385 $ 4,318,986
State income taxes, net of related federal benefit 31,209 564,420 418,449
Tax exempt interest (69,613) (182,731) (175,547)
Other, net (28,972) 83,924 149,612
----------- ----------- -----------
Provision for income taxes $ 97,188 $ 4,974,998 $ 4,711,500
=========== =========== ===========
</TABLE>
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
JANUARY 30, January 31,
1999 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Accruals not currently deductible $ 1,305,955 $ 825,436
Depreciation 100,164 219,383
Deferred compensation 98,809 --
----------- -----------
1,504,928 1,044,819
Deferred tax liabilities (282,789) (256,647)
----------- -----------
$ 1,222,139 $ 788,172
=========== ===========
</TABLE>
At January 30, 1999, the Company had an income tax receivable of $2.1 million
classified in accounts receivable. The early disposition of certain qualified
stock options and the exercise of certain nonqualified stock options in fiscal
1998, 1997 and 1996 resulted in income tax benefits to the Company of $724,311,
$719,937 and $1,208,000 respectively, which was credited to additional paid-in
capital. The income tax benefit is the tax effect of the difference between the
market price on the date of exercise and the option price.
9 EMPLOYEE BENEFIT PLANS
Effective January 1, 1995, the Company established the Gadzooks, Inc. Employees'
Savings Plan (the "401(k) Plan"). The 401(k) Plan is open to substantially all
employees who have been employed at least one year and who work at least 1,000
hours per year. Under the 401(k) Plan, a participant may contribute up to 15% of
earnings with the Company matching 50% of the employee's first 5% contribution.
Employee and Company contributions are paid to a corporate trustee and invested
in various mutual funds or the Company's common stock at the discretion of the
participant. Company contributions made to participants' accounts become 100%
vested on the fifth anniversary of the employee's initial participation in the
Plan. For the years ended January 30, 1999, January 31, 1998 and February 1,
1997, the Company contributed $117,917, $108,814 and $88,150, respectively, in
matching contributions to the 401(k) Plan.
<PAGE> 22
GADZOOKS
20 INC.
- --------------------------------------------------------------------------------
Notes to Financial Statements, continued
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. During fiscal 1998, 14,274
shares of the Company's common stock were sold to employees pursuant to the
plan. 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.
During fiscal 1998 the Company established a nonqualified deferred compensation
program which permits officers to defer a portion of their compensation, on a
pre-tax basis, until their retirement. Participant deferrals are deposited into
variable life insurance contracts held in a Rabbi Trust. The insurance premiums
in excess of the insurance cost are deemed invested in mutual funds as directed
by the participants. The Company may, at its discretion, make matching
contributions on behalf of the plan participants. No such matching contributions
were made in fiscal 1998.
10 STOCK OPTION PLANS
The Company has three incentive and nonstatutory stock option plans. The
"Employee Plan" for employees and consultants was adopted in February 1992; the
"Key Employee Plan" for key employees was adopted in September 1994; and the
"Nonemployee Director Plan" for the Company's outside directors was adopted in
August 1995. Under these plans, options are granted to purchase common stock at
a price no less than fair market value at the grant date. For options granted
prior to the initial public offering, the Board of Directors considered various
factors in determining fair market value including, among other things, the
rights and preferences of holders of other securities issued by the Company, the
financial position and results of operations of the Company, and the liquidity
of the Company's common stock. Subsequent to the initial public offering, all
shares have been granted at the closing price of the Company's common stock
traded on The Nasdaq Stock Market on the date of grant. Options have vesting
periods of generally two to five years from date of grant and may be exercised
at any time once they become vested, but not more than 10 years from date of
grant.
During fiscal 1998, the plans were amended to adjust the maximum aggregate
number of shares that may be optioned and sold under the plans to 1,500,000
shares for the Employee Plan and 100,000 shares for the Nonemployee Director
Plan. The maximum aggregate number of shares that may be optioned and sold under
the Key Employee Plan is 272,651 shares.
On December 15, 1998, options to purchase 517,585 shares of the Company's common
stock at prices ranging from $17.63 to $29.25 were cancelled and replaced with
options to purchase 393,438 shares of common stock at prices of either $9.00 per
share or $11.60 per share. The closing price of the Company's common stock on
December 15, 1998 was $6.75 per share. The newly issued options vest over the
same period as the cancelled options they replaced. For officers of the Company
the replacement options provide the right to purchase from 50% to 67% of the
number of shares subject to purchase under the cancelled options depending on
the exercise price of the options cancelled. For all other employees, the
replacement options provide the right to purchase the same number of shares as
provided by the cancelled options.
The following table includes option information for the Employee Plan, Key
Employee Plan, and Nonemployee Director Plan:
<TABLE>
<CAPTION>
Fiscal
--------------------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 698,360 $ 13.00 655,289 $ 6.23 675,946 $ 2.13
Granted 973,595 14.65 275,182 23.46 139,115 19.70
Exercised (138,159) 4.38 (170,137) 2.41 (154,418) 0.53
Cancelled (663,726) 21.54 (61,974) 17.95 (5,354) 10.22
--------- -------- --------- ------- --------- --------
Outstanding at end of year 870,070 $ 9.71 698,360 $ 13.00 655,289 $ 6.23
--------- -------- --------- ------- --------- --------
Available for grant at end of year 389,603 29,472 242,830
--------- --------- ---------
</TABLE>
<PAGE> 23
GADZOOKS
INC. 21
- --------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at
January 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices at 1/30/99 Life Price at 1/30/99 Price
- --------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.21 - $ 7.06 189,254 6 years $ 3.61 93,842 $ 2.71
7.25 - 10.15 215,839 9 years 9.37 13,285 9.00
10.38 - 11.56 138,000 9 years 11.49 800 10.50
11.60 - 11.60 298,838 9 years 11.60 18,165 11.60
17.50 - 28.13 28,139 9 Years 24.48 18,523 24.62
- ---------------- ------- -------
$ 0.21 - $28.13 870,070 144,615
</TABLE>
During 1996, the Company adopted the disclosure-only provision of SFAS No. 123,
"Accounting for Stock-Based Compensation," which generally establishes financial
accounting and reporting standards for stock-based employee compensation plans.
As permitted, the Company measures and records compensation expense in
accordance with current practices as prescribed by APB Opinion No. 25,
"Accounting for Stock issued to Employees", and provides disclosure about pro
forma compensation expense. Such adoption did not result in a charge to earnings
in the Company's financial statements. If the Company had elected to recognize
compensation expense based on the fair value of options granted at the grant
date as prescribed by SFAS No. 123, net income and earnings per share would have
been reduced to the pro forma amounts indicated in the following table:
<TABLE>
<CAPTION>
Fiscal
----------------------------------------------
1998 1997 1996
----------- ---------- -----------
<S> <C> <C> <C>
Net income - as reported $ 386,824 $8,287,898 $ 7,991,4OO
Net income (loss) - pro forma (1,560,440) 7,347,426 7,654,272
Diluted earnings per share - as reported 0.04 0.91 0.87
Diluted earnings (loss) per share - pro forma (0.18) 0.81 0.84
</TABLE>
The fair value of each option grant is estimated as of the date of grant using
the Black-Scholes Multiple Option pricing model with the following
weighted-average assumptions used for grants:
<TABLE>
<CAPTION>
Fiscal
----------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Expected volatility 87% 79% 70%
Risk-free interest rate 5.1% 5.6% 6.4%
Expected lives 3.7 years 4.2 years 3.6 years
Dividend yield 0% 0% 0%
</TABLE>
The weighted average fair value of options granted is $7.43, $14.14 and $9.52
per share for fiscal 1998, 1997 and 1996 respectively.
<PAGE> 24
GADZOOKS
22 INC.
- --------------------------------------------------------------------------------
Notes to Financial Statements, continued
11 EARNINGS PER SHARE
The following table outlines the Company's calculation of weighted average
shares outstanding:
<TABLE>
<CAPTION>
Fiscal
---------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Weighted average common shares outstanding (basic) 8,851,609 8,682,582 8,525,322
Effect of dilutive options 184,232 417,445 617,599
--------- --------- ---------
Weighted average common and dilutive
potential shares outstanding (diluted) 9,035,841 9,100,027 9,142,921
========= ========= =========
</TABLE>
The treasury stock method is used to determine dilutive potential common shares
outstanding related to stock options. Options which, based on their exercise
price, would be antidilutive are not considered in the treasury stock method
calculation. Options excluded from the earnings per share calculation due to
their antidilutive nature totaled 22,132, 40,332 and 22,500 in fiscal 1998, 1997
and 1996, respectively.
12 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 was made on September 15, 1998 to shareholders
of record on that date. The Rights become exercisable if a person or group
acquires 20 percent or more of the Company's common stock or announces its
intent to do so. 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-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.
13 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.
<PAGE> 25
GADZOOKS
INC. 23
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Gadzooks, Inc.
In our opinion, the accompanying balance sheets and the related statements of
income, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of Gadzooks, Inc. at January 30, 1999
and January 31, 1998, and results of its operations and its cash flows for each
of the three years in the period ended January 30, 1999 in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
March 8, 1999, except as to the second paragraph of Note 6,
which is as of April 5, 1999
<PAGE> 26
GADZOOKS
24 INC.
- --------------------------------------------------------------------------------
CORPORATE INFORMATION
<TABLE>
<CAPTION>
DIRECTORS OFFICERS
<S> <C>
Gerald R. Szczepanski Gerald R. Szczepanski
Chairman of the Board President and
Co-Founder of Gadzooks Chief Executive Officer
Director since 1983
Monty R. Standifer
G. Michael Machens(A,C) Senior Vice President
General Partner Chief Financial Officer
Phillips-Smith Specialty Treasurer and Secretary
Retail Group
Director since 1992 James F. Wimpress, Jr.
Senior Vice President
Robert E.M. Nourse(C) Store Operations
Private Investor
Former President and David W. Gruehn
Chief Executive Officer Vice President
The Bombay Company, Inc. Information Systems
Director since 1993
William S. Kotch III
Ron G. Stegall(A) Vice President
President Real Estate
Arlington Equity Partners, Inc.
Director since 1999 Jeff P. Krainess
Vice President
Lawrence H. Titus, Jr.(A) Planning and Allocation
Co-Founder of Gadzooks
(retired) Paula Y. Masters
Director since 1983 Vice President
General Merchandising Manager
A Audit Committee
C Compensation Committee Stephen R. Puterbaugh
Vice President
Human Resources
</TABLE>
SHAREHOLDER INFORMATION
A COPY OF FORM 10-K, EXCLUDING EXHIBITS, AS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION MAY BE OBTAINED WITHOUT CHARGE UPON WRITTEN REQUEST TO
INVESTOR RELATIONS AT THE COMPANY'S HEADQUARTERS. COPIES OF EXHIBITS ARE
AVAILABLE UPON PAYMENT OF A $125.00 FEE TO COVER THE COSTS OF REPRODUCTION.
CORPORATE HEADQUARTERS
4121 International Parkway
Carrollton, Texas 75007
(972) 307-5555
(972) 662-4290 Fax
WEBSITE
www.gadzooks.com
Gadzooks and the Gadzooks logo are registered trademarks and service marks of
Gadzooks, Inc. Gaditude is a registered service mark of Gadzooks, Inc.
ANNUAL MEETING
The Annual Meeting of Gadzooks, Inc. will be held at 9:30 a.m., on Thursday,
June 17, 1999, at the Company's headquarters.
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services, L.L.C.
Overpeck Centre
85 Challenger Road
Ridgefield Park, NJ 07660
(800) 635-9270
www.chasemellon.com
CORPORATE COUNSEL
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
Dallas, Texas
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
Dallas, Texas
COMMON STOCK
Listed on
The Nasdaq Stock Market(SM)
Symbol: GADZ
SHARE PRICE DATA
The following table sets forth, for the quarterly periods indicated, the high
and low closing prices per share of the common stock as reported on The Nasdaq
Stock Market:
<TABLE>
<CAPTION>
1998 1997
------------ -----------
Fiscal Quarters HIGH LOW HIGH LOW
- --------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter 29.38 20.88 36.25 24.25
Second Quarter 28.69 10.50 36.00 16.81
Third Quarter 11.56 6.03 25.75 15.38
Fourth Quarter 8.94 5.69 30.50 19.31
</TABLE>
On April 1, 1999 the closing sales price on The Nasdaq Stock Market was $7.25.
As of March 31, 1999, the approximate number of common shareholders of record
was 107, although the Company believes that the actual number of beneficial
owners is significantly higher. The Company presently intends to retain earnings
for use in its business and therefore does not anticipate declaring a cash
dividend in the near future.
Certain statements contained in this Annual Report (other than historical
information) are forward-looking statements that involve risks and
uncertainties. Reference is made to the "Risk Factors" section of the Company's
most recent annual report on Form 10-K filed with the U.S. Securities and
Exchange Commission for factors that, among others, could cause the actual
results of the Company to differ materially from those contained in the
forward-looking statements.
<PAGE> 27
- --------------------------------------------------------------------------------
STORE LOCATIONS
There are currently 317 Gadzooks stores in 32 states.*
ALABAMA
Huntsville
Mobile
Montgomery
ARKANSAS
Fayetteville
Fort Smith
Jonesboro
Little Rock (2)
FLORIDA
Fort Myers
Jacksonville
Orlando (3)
Pensacola
Tallahassee
Tampa (2)
GEORGIA
Athens
Atlanta (7)
Augusta
Macon
ILLINOIS
Bloomington
Carbondale
Champaign
Chicago (13)
Fairview Heights/
St. Louis
Moline
Peoria
Rockford
Springfield
INDIANA
Elkhart
Evansville
Fort Wayne
Indianapolis
Lafayette
Merrillville
Muncie
South Bend
Terre Haute
IOWA
Cedar Rapids (2)
Council Bluffs
Davenport
Des Moines (3)
Dubuque
Fort Dodge
Iowa City
Sioux City
KANSAS
Hays
Hutchinson
Manhattan
Salina
Topeka
Wichita (2)
KENTUCKY
Ashland
Bowling Green
Elizabethtown
Florence/Cincinnati
Owensboro
Lexington
Louisville (2)
Paducah
LOUISIANA
Alexandria
Baton Rouge (2)
Bossier City
Houma
Lafayette
Lake Charles
Monroe
New Orleans (3)
Shreveport
MARYLAND
Baltimore (2)
Frederick
MASSACHUSETTS
Boston (5)
MICHIGAN
Ann Arbor
Battlecreek
Detroit (4)
Flint
Grand Rapids
Holland
Jackson
Monroe
Port Huron
Portage
Saginaw
MINNESOTA
Mankato
Minneapolis/
St.Paul (3)
St.Cloud
MISSISSIPPI
Biloxi
Hattiesburg
Jackson
Meridian
Tupelo
MISSOURI
Columbia
Jefferson City
Joplin
Kansas City (3)
Springfield
St. Louis (3)
NEBRASKA
Grand Island
Lincoln
Omaha (2)
NEW HAMPSHIRE
Manchester
Salem
NEW JERSEY
Freehold
Livingston
Mays Landing
Paramus
Deptford/Philadelphia
Rockaway
Wayne
NEW MEXICO
Albuquerque (2)
Las Cruces
Santa Fe
NEW YORK
Albany (2)
Nanuet
Rochester (3)
Staten Island
Syracuse (2)
NORTH CAROLINA
Charlotte (2)
Concord
Fayetteville
Greensboro
Hickory
High Point
Raleigh-Durham (3)
Winston-Salem
OHIO
Cincinnati (2)
Cleveland (4)
Columbus
Dayton (2)
Heath
Lancaster
Lima
Mansfield
New Philadelphia
Niles
St. Clairsville
Sandusky
Toledo
Youngstown
Zanesville
OKLAHOMA
Enid
Lawton
Norman
Oklahoma City (4)
Shawnee
Tulsa (2)
PENNSYLVANIA
Altoona
Erie
Harrisburg
Johnstown
Lancaster
Philadelphia (2)
Scranton
State College
SOUTH CAROLINA
Charleston (2)
Columbia (2)
Greenville
Myrtle Beach
Spartanburg
SOUTH DAKOTA
Sioux Falls
TENNESSEE
Chattanooga
Clarksville
Jackson
Johnson City
Kingsport
Knoxville (2)
Memphis (3)
Nashville (3)
TEXAS
Abilene
Amarillo
Austin (2)
Beaumont
College Station
Corpus Christi
Dallas/Fort Worth (9)
Denton
El Paso (3)
Harlingen
Houston (12)
Killeen
Laredo
Longview
Lubbock
McAllen
Midland
Odessa
Port Arthur
San Angelo
San Antonio (4)
Sherman
Temple
Texarkana
Tyler
Victoria
Waco
Wichita Falls
VIRGINIA
Charlottesville
Chesapeake
Christiansburg
Danville
Dulles/Washington, DC
Fredericksburg
Harrisonburg
Manassas
Newport News
Norfolk
Roanoke
Springfield
Virginia Beach
Winchester
WEST VIRGINIA
Bridgeport
Charleston (2)
Morgantown
Parkersburg
WISCONSIN
Appleton
Eau Claire
Green Bay
Madison (2)
Milwaukee (4)
Wausau
* As of April 22, 1999
<PAGE> 28
[GADZOOKS LOGO]
4121 INTERNATIONAL PARKWAY
CARROLLTON, TEXAS 75007
www.gadzooks.com
[RECYCLE LOGO] Printed entirely on recycled paper
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-98038, 333-12097, 333-50639, 333-60869 and
333-68205) of Gadzooks, Inc. of our report dated March 8, 1999, except as to the
second paragraph of Note 6, which is as of April 5, 1999, appearing on page 23
of the Annual Report to Shareholders which is incorporated in this Annual Report
on Form 10-K.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
April 28, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> JAN-30-1999
<CASH> 16,353
<SECURITIES> 0
<RECEIVABLES> 3,002
<ALLOWANCES> 0
<INVENTORY> 34,404
<CURRENT-ASSETS> 55,746
<PP&E> 44,592
<DEPRECIATION> 13,896
<TOTAL-ASSETS> 86,442
<CURRENT-LIABILITIES> 24,117
<BONDS> 0
0
0
<COMMON> 89
<OTHER-SE> 59,942
<TOTAL-LIABILITY-AND-EQUITY> 60,031
<SALES> 208,203
<TOTAL-REVENUES> 208,203
<CGS> 157,729
<TOTAL-COSTS> 157,729
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 484
<INCOME-TAX> 97
<INCOME-CONTINUING> 387
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 387
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
