<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 29, 2000
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 19, 2000 was approximately $185,892,359. 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 19, 2000, the registrant had 8,931,765 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 29, 2000, filed
herewith as Exhibit 13.
Part III incorporates information by reference from the definitive Proxy
Statement for the 2000 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 14 and 18. At the end of fiscal 1999, the
Company operated 326 stores in both metropolitan and middle markets in 33
states. The Company opened 19 new stores and closed five stores during fiscal
1999. In addition, the Company plans to open approximately 50 new stores in
fiscal 2000, three of which were opened as of April 12, 2000.
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 over 31 million teenagers in the United States
today and the number is expected to grow to approximately 34 million by the year
2005. 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 for 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 some 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 ECKO, DKNY Jeans, Hurley, Tommy Jeans, Billabong
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, style 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's 207,000 square-foot facility in
the Dallas area can support the merchandising needs of about 500 stores,
providing for the Company's continued store expansion for the next few
years. The Company believes the distribution center is a critical element
in its future growth plans.
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STORE LOCATIONS
As of April 12, 2000, the Company operated 328 stores in 34 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>
<S> <C> <C> <C> <C>
ALABAMA KANSAS MISSOURI OKLAHOMA TEXAS - CONT.
------- ------ -------- -------- -------------
Huntsville Hays Columbia Enid Port Arthur
Mobile Hutchinson Jefferson City Lawton San Angelo
Montgomery Manhattan Joplin Norman San Antonio (4)
ARKANSAS Salina Kansas City (3) Oklahoma City (4) Sherman
-------- Topeka Springfield Shawnee Temple
Fayetteville Wichita (2) St. Louis (3) Tulsa (2) Texarkana
Fort Smith KENTUCKY NEBRASKA PENNSYLVANIA Tyler
Jonesboro -------- -------- -------- Victoria
Little Rock (2) Ashland Grand Island Altoona Waco
COLORADO Bowling Green Lincoln Erie Wichita Falls
-------- Elizabethtown Omaha (2) Harrisburg VIRGINIA
Denver Florence/Cincinnati NEW HAMPSHIRE Johnstown --------
FLORIDA Owensboro ------------- Lancaster Charlottesville
------- Lexington Manchester Philadelphia Chesapeake
Daytona Beach Louisville (2) Salem Pittsburgh Christiansburg
Fort Myers Paducah NEW JERSEY Scranton Danville
Fort Walton Beach LOUISIANA ---------- State College Fredericksburg
Gainesville --------- Freehold RHODE ISLAND Harrisonburg
Jacksonville Alexandria Livingston ------------ Newport News
Orlando (3) Baton Rouge (2) Mays Landing Providence Norfolk
Panama City Houma Depford/Philadelphia SOUTH CAROLINA Roanoke
Pensacola Lafayette Rockaway -------------- Virginia Beach
Sarasota Lake Charles Wayne Charleston (2) Washington D.C (3)
Tallahassee Monroe NEW MEXICO Columbia (2) Winchester
Tampa (3) New Orleans (3) ---------- Greenville WEST VIRGINIA
GEORGIA Shreveport/Bossier Albuquerque (2) Myrtle Beach -------------
------- City(2) Las Cruces Spartanburg Bridgeport
Athens MARYLAND Santa Fe SOUTH DAKOTA Charleston
Atlanta (8) -------- NEW YORK ------------ Huntington
Augusta Baltimore (2) -------- Sioux Falls Morgantown
Macon Frederick Albany (2) TENNESSEE Parkersburg
ILLINOIS MASSACHUSETTS Rochester (3) --------- WISCONSIN
-------- ------------- Syracuse (2) Chattanooga ---------
Bloomington Boston (5) NORTH CAROLINA Clarksville Appleton
Carbondale MICHIGAN -------------- Jackson Eau Claire
Champaign -------- Cary Johnson City Green Bay
Chicago (13) Ann Arbor Charlotte (2) Kingsport Madison (2)
Fairview Heights/St. Louis Battle Creek Concord Knoxville (2) Milwaukee (3)
Moline Detroit (5) Fayetteville Memphis (3) Wausau
Peoria Flint Greensboro Nashville (3)
Rockford Grand Rapids (2) Hickory TEXAS
Springfield Holland High Point -----
INDIANA Jackson Raleigh-Durham (2) Abilene
------- Lansing Winston-Salem Amarillo
Elkhart Monroe OHIO Austin (2)
Evansville Port Huron ---- Beaumont
Fort Wayne Portage Akron College Station
Indianapolis Saginaw Cincinnati (2) Corpus Christi
Lafayette Traverse City Cleveland (4) Dallas/Fort Worth (9)
Merrillville MINNESOTA Columbus Denton
Muncie --------- Dayton (2) El Paso (3)
South Bend Mankato Findlay Harlingen
Terre Haute Minneapolis/St. Heath Houston (12)
IOWA Paul (3) Lancaster Killeen
---- St. Cloud Lima Laredo
Cedar Rapids (2) MISSISSIPPI Mansfield Longview
Council Bluffs ----------- New Philadelphia Lubbock
Davenport Biloxi St. Clairsville McAllen
Des Moines (3) Hattiesburg Sandusky Midland/Odessa (2)
Dubuque Jackson Toledo
Fort Dodge Meridian Youngstown/Niles (2)
Iowa City Tupelo Zanesville
Sioux City
</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
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Number of stores open at beginning of period 312 250 183 126 90
Number of new stores opened 19 63 67 57 39
Number of stores closed 5 1 -- -- 3
---- ---- ---- ---- ----
Number of stores open at end of period 326 312 250 183 126
==== ==== ==== ==== ====
</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 50 new stores during fiscal 2000, three of which have been
opened as of April 12, 2000. 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. Currently, the Company expects to open the highest number of
stores in new and mature 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, the Company analyzes stores for potential
closing from time to time and closed five under performing stores during fiscal
1999.
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 agreements in place for any in the
future.
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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 14 and 18. Each store
typically carries an inventory of approximately 1,600 SKUs, with most
merchandise selling at prices ranging between $15 and $50.
The Company's merchandise includes high visibility names such as ECKO, DKNY
Jeans, Hurley, Tommy Jeans, Billabong 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 DKNY, Tommy, Guess, ECKO, MUDD, and
Mossimo.
o Young Mens: 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.
Key brands in this category include ECKO,
Fox, Billabong, Hurley, Tommy and Guess.
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, Puma, and Fox.
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 Vans, Bongo and
Skechers.
The following table sets forth the Company's merchandise by category as an
approximate percentage of net sales:
<TABLE>
<CAPTION>
Fiscal Year
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Juniors.......................................................... 34% 32% 29%
Young Mens....................................................... 30 29 26
Accessories ..................................................... 16 17 17
Unisex Apparel .................................................. 11 12 17
Footwear ........................................................ 9 10 11
--- --- ---
................................................................. 100% 100% 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 certain 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 1999, 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 planning and allocation 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 207,000 square
foot site in the Dallas metropolitan area, which includes a distribution
facility and the Company's corporate offices. 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 7 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 and performance bonuses, 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 management. 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 regularly enhances 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 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 store operations personnel and by
regularly reviewing and responding to customer feedback.
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, upbeat environment using neon signs, video
monitors featuring popular music videos, playful mannequins and creative,
eye-catching signage. A standard feature in all stores is the Company's
signature Volkswagen Beetle. The Company typically displays a significant amount
of merchandise on the walls of the store, with male merchandise along one side,
and female merchandise along the other. 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 2,400 square feet. The
Company typically seeks a location of approximately 2,400 to 3,100 square feet
with significant mall 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 construction begins.
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," updated sales reports 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 personnel 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 believes that its current
management information and control systems are adequate to support the Company's
planned expansion, but regularly evaluates its systems to determine when
upgrades or replacements are needed. In 1999, the Company significantly upgraded
its information technology infrastructure network to support many ongoing
initiatives.
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 Teen
People, 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
On March 31, 2000, the Company had 1,189 full-time employees and 2,835
part-time employees. Of the Company's 4,024 employees, 188 were corporate
personnel, 91 were distribution center employees and 3,745 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 50 new stores during fiscal 2000. 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 customers 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 agreements in place 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 $10.7 million for
capital expenditures in fiscal 2000, which will include the opening
of approximately 50 new stores, remodeling of six to eight existing stores and
refurbishment of 50 existing stores. 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 fiscal 2000. The Company cannot assure you that it will 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 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 (0.5%), (0.6%), (6.9%) and (10.9%) in the first,
second, third and fourth quarters of fiscal 1998, respectively, and (3.3%),
6.5%, 4.6% and 11.3% in the first, second, third and fourth quarters of fiscal
1999, respectively. The Company has recorded comparable store sales decreases in
past months, quarters and years, and cannot assure you that such decreases for
any particular month, quarter or fiscal year will not occur 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. 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 business conditions, interest
rates, taxation and consumer confidence in future economic conditions. If the
demand for apparel and related merchandise by teenagers declines, 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. 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. During the Company's 1999 fiscal year, no single
vendor accounted for more than 10% of the Company's merchandise purchases. 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 retain current and attract 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, 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 that 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," located on page 26 of the Registrant's 1999 Annual
Report to Shareholders, filed as Exhibit 13 to this Report. Such Notes to
Financial Statements are incorporated herein by reference.
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 2000 and January 2011. The leases for most of the
existing stores are for terms of ten 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 does not believe that any resulting liability from
existing legal proceedings, individually or in the aggregate, will have a
material adverse effect on its operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information in response to Item 5 is contained in the section entitled
"Corporate Information - Share Price Data" located on the inside back cover of
the registrant's 1999 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 9
of the registrant's 1999 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 10 to 13 of the registrant's 1999 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, would affect the
rate at which the Company could borrow funds under its credit facility.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information in response to Item 8 is contained in the registrant's 1999
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.............................................................. 12
Balance Sheets at January 29, 2000 and January 30, 1999......................................... 14
Statements of Income for the Years Ended January 29, 2000,
January 30, 1999, and January 31, 1998.................................................... 15
Statements of Stockholders' Equity for the Years Ended January 29, 2000,
January 30, 1999, and January 31, 1998.................................................... 16
Statements of Cash Flows for the Years Ended January 29, 2000,
January 30, 1999, and January 31, 1998.................................................... 17
Notes to Financial Statements................................................................... 18 - 26
Report of Independent Accountants............................................................... 27
Corporate Information...........................................................................Inside back cover
..........................................................................................of annual report
</TABLE>
*The indicated pages of the Company's 1999 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 Item 10 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 Item 11 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 Item 12 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 Item 13 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 6, 2000, appearing in the accompanying 1999 Annual Report
to Shareholders are incorporated by reference in this Report. With the
exception of the aforementioned information and information
incorporated in Items 5, 6 and 7, the 1999 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 26, 2000 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 James A. Motley, 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 26, 2000
- ------------------------------------------- and Chief Executive Officer
Gerald R. Szczepanski (Principal Executive Officer)
/s/ James A. Motley Vice President and April 26, 2000
- ------------------------------------------- Chief Financial Officer, Secretary
James A. Motley (Principal Financial and
Accounting Officer)
/s/ G. Michael Machens Director April 26, 2000
- -------------------------------------------
G. Michael Machens
/s/ Robert E.M. Nourse Director April 26, 2000
- -------------------------------------------
Robert E.M. Nourse
/s/ Ron G. Stegall Director April 26, 2000
- -------------------------------------------
Ron G. Stegall
/s/ Lawrence H. Titus, Jr. Director April 26, 2000
- -------------------------------------------
Lawrence H. Titus, Jr.
</TABLE>
17
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF DOCUMENTS PAGE
- ------- ------------------------ ----
<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, as amended and revised
(filed as Exhibit 4.5 to the Company's Form S-8 (No. 333-68205)
filed with the Commission on December 1, 1998 and incorporated
herein by reference).
10.10 -- 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).
10.11 -- 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 -- Lease Agreement between Gadzooks, Inc. (Lessee) and CB Midway
International, LTD. (Lessor) dated August 23, 1996 (filed as
Exhibit 10.17 to the Company's 1997 Annual Report on Form 10-K
filed with the Commission on April 27, 1998 and incorporated
herein by reference).
10.17 -- 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).
</TABLE>
19
<PAGE> 20
<TABLE>
<S> <C>
10.18 -- 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).
10.19 -- Amendment No. 2 to the Credit Agreement between the Company and
Wells Fargo Bank (Texas) National Association, dated May 14, 1999
(filed as Exhibit 10.20 to the Company's Quarterly Report on Form
10-Q filed with the Commission on June 15, 1999 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's Form S-8 (No. 333-60869) filed with the Commission on
August 7, 1998 and incorporated herein by reference).
10.22* -- Severance Protection Agreement dated January 5, 1998 between the
Company and James F. Wimpress.
10.23* -- Severance Protection Agreement dated January 11, 1999 between the
Company and Paula Y. Masters.
13* -- Pages 9-27 as well as the inside back cover of the Company's 1999
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 10.22
SEVERANCE AGREEMENT
Agreement made on January 5 1998, between Gadzooks, Inc., a Texas
corporation (the "Company"), and James F. Wimpress ("Executive").
RECITALS
A. Executive is currently employed by the Company.
B. The Company and Executive desire to enter into certain
agreements providing for certain events upon the termination of the Executive's
employment with the Company.
NOW THEREFORE, in consideration of the premises and mutual covenants
herein contained and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Termination by the Company without Cause. The Company may
at any time terminate Executive's employment without Cause (as defined below) by
giving Executive notice of the effective date of termination (which effective
date may be the date of such notice). In the event of such termination without
Cause, and after the Executive has accumulated six months of continuous service,
the Company shall have the continuing obligation to make payments of base salary
at the rate in effect at the effective date of such termination for a period of
six (6) months following the effective date of such termination.
2. Termination by the Company for Cause. The Company shall
have the right to terminate Executive's employment at any time for any of the
following reasons (each of which is referred to herein as "Cause") by giving
Executive written notice of the effective date of termination (which effective
date may be the date of such notice):
(A) any habitual neglect of duties;
(B) any failure to follow any legal directives of
Gadzooks' Chief Executive Officer, which directive is consistent with your
position and duties;
(C) any act of fraud or dishonesty by you which
results, or is intended to result in financial, economic or reputation harm to
the Company or any of its business;
(D) any commission of a felony
(E) any breach of material Company policy
If the Company terminates Executive's employment for
any of the reasons set forth above in this Section 2, the Company shall have no
further obligations hereunder from and after the effective date of termination
and shall have all other rights and remedies available under this or any other
agreement and at law or in equity.
3. Change of Control. In the event of the sale of all or
substantially all of the Company's assets, or the company's merger with or into
another corporation, any of the Executive's stock options, which are then
outstanding but unexercisable, shall immediately become fully vested prior to
the event.
<PAGE> 2
4. Voluntary Termination by Executive. In the event that
Executive's employment with the Company is terminated by Executive, the Company
shall have no further obligations hereunder from and after the date of such
termination.
5. Complete Agreement. This Agreement embodies the complete
agreement and understanding between the parties and supersedes and preempts any
prior understandings, agreements or representations by or between the parties,
written or oral, which may have related to the subject matter hereof in any way.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered on the day and year first above written.
GADZOOKS, INC.
By: /s/ Gerald R. Szczepanski
-------------------------------------------
Name
Title: Chief Executive Officer and President
----------------------------------------
Title
/s/ James F. Wimpress
----------------------------------------
[Executive]
<PAGE> 1
EXHIBIT 10.23
SEVERANCE AGREEMENT
Agreement made on January 11, 1999, between Gadzooks, Inc., a Texas
corporation (the "Company"), and Paula Y. Masters ("Executive").
RECITALS
A. Executive is currently employed by the Company.
B. The Company and Executive desire to enter into certain
agreements providing for certain events upon the termination of the Executive's
employment with the Company.
NOW THEREFORE, in consideration of the premises and mutual covenants
herein contained and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Termination by the Company without Cause. The Company may
at any time terminate Executive's employment without Cause (as defined below) by
giving Executive notice of the effective date of termination (which effective
date may be the date of such notice). In the event of such termination without
Cause, during the Executive's second twelve month period of employment with the
Company, the Company shall have the continuing obligation to make payments of
base salary at the rate in effect at the effective date of such termination for
a period of six (6) months following the effective date of such termination.
2. Termination by the Company for Cause. The Company shall
have the right to terminate Executive's employment at any time for any of the
following reasons (each of which is referred to herein as "Cause") by giving
Executive written notice of the effective date of termination (which effective
date may be the date of such notice):
(A) any habitual neglect of duties;
(B) any failure to follow any legal directives of
Gadzooks' Chief Executive Officer, which directive is consistent with your
position and duties;
(C) any act of fraud or dishonesty with respect to
any aspect of the Company's or any affiliate's business;
(D) as a result of Executive's gross negligence or
willful misconduct, Executive shall violate, or cause the Company to violate,
any applicable federal or state securities or banking law or regulation and as a
result of such violation, shall become, or shall cause the Company or any
affiliate to become the subject of any legal action or administrative proceeding
seeking an injunction from further violations or a suspension of any right or
privilege;
(E) as a result of Executive's gross negligence or
willful misconduct, Executive shall commit any act that causes, or shall
knowingly fail to take reasonable and appropriate action to prevent, any
material injury to the financial condition or business reputation of the Company
or any affiliate; or
(F) any commission of a felony or of a crime
involving moral turpitude.
(G) any breach of material Company policy
<PAGE> 2
If the Company terminates Executive's employment for
any of the reasons set forth above in this Section 2, the Company shall have no
further obligations hereunder from and after the effective date of termination
and shall have all other rights and remedies available under this or any other
agreement and at law or in equity.
3. Voluntary Termination by Executive. In the event that
Executive's employment with the Company is terminated by Executive, the Company
shall have no further obligations hereunder from and after the date of such
termination.
4. Complete Agreement. This Agreement embodies the complete
agreement and understanding between the parties and supersedes and preempts any
prior understandings, agreements or representations by or between the parties,
written or oral, which may have related to the subject matter hereof in any way.
Any severance arrangements or agreements between the Company and Executive that
existed at any time prior to the execution and delivery of this Agreement are
hereby terminated by Executive; provided, however, that Executive shall remain
liable for any breach of such arrangements or agreements occurring during the
term of such arrangement or agreement. From and after the date of this
Agreement, Executive shall not be entitled to any compensation from the Company
on account of any such arrangement or agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered on the day and year first above written.
GADZOOKS, INC.
By: /s/ Gerald R. Szczepanski
------------------------------------------
Name
Title: Chief Executive Officer and President
---------------------------------------
Title
/s/ Paula Y. Masters
---------------------------------------
[Executive]
<PAGE> 1
SELECTED FINANCIAL DATA
($ in thousands, except operating data and per share amounts)
<TABLE>
<CAPTION>
Fiscal Year Ended
-------------------------------------------------------------
January 29, January 30, January 31, February 1, January 27,
2000 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales $ 241,616 $ 208,203 $ 171,639 $ 128,388 $ 84,602
Cost of goods sold 173,778 157,729 120,309 87,418 58,015
------------ ------------ ------------ ------------ ------------
Gross profit 67,838 50,474 51,330 40,970 26,587
Selling, general and administrative expenses 56,921 50,526 38,773 29,212 19,794
Provision for store closings and
asset impairments 1,721 -- -- -- --
------------ ------------ ------------ ------------ ------------
Operating income (loss) 9,196 (52) 12,557 11,758 6,793
Interest income (expense), net 496 536 706 945 (179)
------------ ------------ ------------ ------------ ------------
Income before income taxes 9,692 484 13,263 12,703 6,614
Provision for income taxes 3,622 97 4,975 4,712 2,538
------------ ------------ ------------ ------------ ------------
Net income $ 6,070 $ 387 $ 8,288 $ 7,991 $ 4,076
============ ============ ============ ============ ============
Net income per share
Basic $ 0.68 $ 0.04 $ 0.95 $ 0.94 $ 0.67
Diluted $ 0.67 $ 0.04 $ 0.91 $ 0.87 $ 0.60
Average shares outstanding
Basic 8,910 8,852 8,683 8,525 6,095
Diluted 9,043 9,036 9,100 9,143 6,742
SELECTED OPERATING DATA:
Comparable store sales increase (decrease)(1) 5.4% (5.6%) 1.8% 6.1% 14.7%
Number of stores at year end 326 312 250 183 126
Average net sales per store $ 750,359 $ 717,976 $ 794,437 $ 814,838 $ 776,807
Average net sales per square foot $ 317 $ 306 $ 341 $ 356 $ 343
Total square footage at end of period 772,170 736,214 585,092 421,572 284,953
Operating income percentage 3.8% -- 7.3% 9.2% 8.0%
Capital expenditures (in 000s) $ 7,008 $ 10,082 $ 12,624 $ 6,864 $ 5,959
BALANCE SHEET DATA:
Working capital $ 38,660 $ 31,629 $ 34,878 $ 34,333 $ 20,368
Total assets 96,662 86,442 84,321 64,747 45,611
Total debt -- -- -- -- 178
Shareholders' equity 66,145 60,031 58,480 49,063 30,765
</TABLE>
(1) A store becomes comparable after it has been open for 14 full fiscal months.
GADZOOKS, INC 9
<PAGE> 2
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 14 and 18.
The Company opened its first store in 1983, and at fiscal year-end 1999,
operated 326 stores in 33 states east of the Rocky Mountains. The Company has
opened 67 new stores in fiscal 1997, 63 new stores in fiscal 1998 and 19 stores
in fiscal 1999. Five stores were closed during fiscal 1999.
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
--------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of goods sold, including buying,
distribution and occupancy costs 71.9 75.8 70.1
-------- -------- --------
Gross profit 28.1 24.2 29.9
Selling, general and administrative expenses 23.6 24.2 22.6
Provision for store closings
and asset impairments 0.7 -- --
-------- -------- --------
Operating income 3.8 -- 7.3
Interest income, net 0.2 0.3 0.4
-------- -------- --------
Income before income taxes 4.0 0.3 7.7
Provision for income taxes 1.5 0.1 2.9
-------- -------- --------
Net income 2.5% 0.2% 4.8%
======== ======== ========
Number of stores open at end of period 326 312 250
</TABLE>
FISCAL 1999 COMPARED TO FISCAL 1998
Net sales increased approximately $33.4 million, or 16.0 percent, to $241.6
million during fiscal 1999 from $208.2 million during fiscal 1998. Net sales of
the 19 new stores opened during fiscal 1999 and for those not yet qualifying as
comparable stores contributed $22.6 million of the increase in total sales.
Comparable store sales increased by $10.8 million, or 5.4 percent in fiscal
1999. The Company experienced comparable store sales increases in all but two of
its major categories, unisex T-shirts and shoes. Both of which, however,
improved as the year progressed. The increase in comparable store sales is due
to several factors, including a greater concentration of brand-name merchandise,
enhancements to the stores' appearance and visual merchandising changes. The
merchandise changes allowed for higher price points and improved sell-through,
which reduced the number of markdowns taken. In addition, units sold per store
increased approximately 8 percent during the fourth quarter of fiscal 1999. A
store becomes comparable after it has been open for 14 full fiscal months.
Gross profit increased approximately $17.3 million to $67.8 million during
fiscal 1999 from $50.5 million in fiscal 1998. As a percentage of net sales,
gross profit increased 384 basis points to 28.08 percent from 24.24 percent in
fiscal 1998. The majority of the increase in gross profit resulted from an
increase in merchandise margin of 340 basis points. The Company's updated
product offerings, which consist increasingly of branded merchandise, allowed
the Company to generate improved inventory sell-through with a reduced level of
retail markdowns leading to the improvement in merchandise margin. In addition,
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
to net realizable value. Store occupancy costs (which are relatively fixed in
nature) as a percent of sales decreased by 32 basis points due to leverage
achieved as a result of the comparable store sales increase. Buying and
distribution costs as a percent of sales decreased by 12 basis points as a
result of both operating and comparable store sales leverage.
Selling, general and administrative expenses ("SG&A") increased approximately
$6.4 million to $56.9 million in fiscal 1999 from $50.5 million in fiscal 1998.
The aggregate increase in SG&A is primarily attributable to additional store
expenses as a result of the Company's expanded store base during the past year
and an increase in administrative costs to support the larger store base. As a
percentage of net sales, SG&A decreased 71 basis points to 23.56 percent in
fiscal 1999 from 24.27 percent in fiscal 1998. The decrease in SG&A as a
percentage of sales is due primarily to the Company's ability to leverage
corporate overhead and store costs as a result of the comparable store sales
increase.
The Company's net interest income decreased $40,000 to $496,000 in fiscal 1999
from $536,000 in fiscal 1998, due primarily to higher average cash balances in
fiscal 1998.
The Company's effective income tax rate increased to 37.4 percent in fiscal 1999
from 20.1 percent in fiscal 1998. The increase is due primarily to tax-free
interest income, which accounted for a significantly higher portion of income
before income taxes in fiscal 1998.
PROVISION FOR STORE CLOSINGS AND ASSET IMPAIRMENTS
During 1999, the Company decided to close eight stores that had been identified
as under-performing and recognized a $1.2 million pre-tax provision for costs
(consisting of the write down of long-lived assets and lease termination costs)
related to closing the
GADZOOKS, INC 10
<PAGE> 3
facilities. As of February 26, 2000, six of the eight stores had been closed,
with the remaining two slated for closure by the end of fiscal 2000. The Company
anticipates annual earnings improvement of approximately $.06 per diluted share,
once all eight stores have been closed. As of January 29, 2000, a majority of
the costs related to the five stores already closed had been incurred. The
components of the provision, an analysis of amounts charged against the accrual
and the sales and operating profit (loss) data for the eight stores are outlined
in Note 3 of the "Notes to the Financial Statements".
As indicated in Note 4 of the "Notes to the Financial Statements", the Company
recorded a non-cash impairment charge of $533,000 to reflect fixtures and
leasehold improvements at their respective estimated fair value in six other
under-performing stores. These additional locations have not been identified for
closure. This impairment charge is expected to reduce depreciation expense by
approximately $115,000 annually over the average remaining useful lives of these
assets (approximately 4.7 years). Management regularly reviews the performance
of all the Company's stores. If management determines that it is unlikely that a
store's sales volume will increase to a level that would allow the store to
generate positive cash flow, management will consider remedial actions up to and
including closing the store. If the Board of Directors approves a plan for
closing a store or stores, the Company will recognize a provision for store
closing costs during the quarter in which such approval is granted.
The aforementioned charges totaling $1.7 million have been combined and are
reflected under the caption "Provision for store closings and asset impairments"
in the accompanying Statements of Income.
FISCAL 1998 COMPARED TO FISCAL 1997
Net sales increased approximately $36.6 million, or 21.3 percent, 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 percent, in fiscal
1998. The decrease in comparable sales was primarily due to a decline in the
unisex T-shirt category, and to a lesser extent declines in the footwear and
accessory categories. 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 percent in fiscal 1998 from 29.9 percent 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 to net realizable 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 percent in fiscal 1998 from 22.6
percent 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 percent
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 $5.0 million in
fiscal 1997. The decrease in the Company's effective income tax rate was
primarily attributable to tax-free interest income which accounted for a
significantly larger portion of income before income taxes in fiscal 1998.
QUARTERLY RESULTS AND SEASONALITY
The Company's quarterly results of operations may fluctuate materially depending
on, among other things, the timing of new store openings, net sales contributed
by new stores, increases or decreases in comparable store sales and changes in
the Company's merchandise mix.
The Company's business is also subject to seasonal influences, with higher sales
during the Christmas holiday, back-to-school, and spring break seasons. The
Christmas holiday season remains the Company's single most important selling
season. The Company believes, however, that the significance of the
back-to-school season (which affects operating results in the second and third
quarters) and spring break season (which affects operating results in the first
quarter) reduces somewhat the Company's dependence on the Christmas holiday
selling season. As is the case with many apparel retailers, the Company's net
sales and net income are typically lower in the first quarter.
The following table sets forth certain statement of operations and operating
data for each of the Company's last eight fiscal quarters. The following
quarterly data were derived from unaudited financial statements of the Company,
which in the opinion of management of the Company, contain all adjustments
(consisting only of normal recurring adjustments) necessary for fair
presentation thereof. Results for any quarter are not necessarily indicative of
results that may be achieved for a full fiscal year.
GADZOOKS, INC 11
<PAGE> 4
Management's Discussion and Analysis, continued
<TABLE>
<CAPTION>
Fiscal 1999 Fiscal 1998
($ in thousands, except --------------------------------------------- ----------------------------------------------
operating data and First Second Third Fourth First Second Third Fourth
per share amounts) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of income data:
Net sales $ 51,465 $ 58,078 $ 56,510 $ 75,562 $ 45,026 $ 48,202 $ 50,697 $ 64,278
Gross profit 14,008 15,666 15,265 22,898 12,702 12,286 11,535 13,951
Operating income (loss)* 809 1,766 728 5,893 2,082 857 (1,293) (1,698)
Net income (loss)* 600 1,185 522 3,763 1,417 606 (738) (898)
Net income (loss) per share*
Basic $ 0.07 $ 0.13 $ 0.06 $ 0.42 $ 0.16 $ 0.07 $ (0.08) $ (0.10)
Diluted $ 0.07 $ 0.13 $ 0.06 $ 0.42 $ 0.16 $ 0.07 $ (0.08) $ (0.10)
Average shares outstanding
Basic 8,893 8,906 8,919 8,921 8,795 8,836 8,886 8,890
Diluted 8,994 9,116 9,000 9,063 9,095 9,071 8,886 8,890
Selected operating data:
Stores open at end of period 316 324 325 326 275 304 311 312
</TABLE>
(*)Includes a charge for store closings and asset impairments of $405,000
($255,000 after tax, or $0.03 per diluted share) and $1,316,000 ($821,000 after
tax, or $0.09 per diluted share) during the third and fourth quarters of 1999,
respectively.
- --------------------------------------------------------------------------------
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 historically satisfied its cash
requirements principally from cash flow from operations and proceeds from the
sale of equity securities.
Cash Flows. During fiscal 1999, 1998 and 1997, cash flows from operating
activities were $9.3 million, $6.4 million and $7.6 million, respectively. Cash
flow from operations before working capital changes increased to $13.9 million
in fiscal 1999 from $4.7 million in the prior year primarily due to higher net
income.
Working capital components used $4.7 million in fiscal 1999. Cash used was
primarily the result of funding higher inventory levels ($10 million) offset, in
part, by a decrease in accounts receivable of $1.8 million, and increases in
accounts payable and other accrued liabilities of $3.7 million. 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.
Cash used in investing activities approximated $7.0 million, $0.9 million and
$9.4 million for fiscal 1999, 1998 and 1997, respectively. The Company spent
$7.0 million on capital expenditures during fiscal 1999, the primary components
of which were $4.3 million to open new stores or remodel and refurbish existing
stores and $1.7 million to purchase and/or upgrade information systems. The
Company spent $10.1 million on capital expenditures during fiscal 1998, of which
$9.1 million was used to open new or remodel and refurbish existing stores, and
$1.0 million was used to upgrade information systems. The Company opened 19, 63
and 67 new stores in fiscal 1999, 1998 and 1997, respectively.
Net cash flow provided by financing activities totaled $44,000, $1.2 million and
$1.1 million for fiscal 1999, 1998 and 1997, respectively. During fiscal 1999,
the Company received $65,000 from the exercise of employee stock options as well
as $20,000 of
GADZOOKS, INC 12
<PAGE> 5
related tax benefit. The Company used $41,000 for net purchases of treasury
stock. 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 in fiscal 1998.
CREDIT FACILITY. On May 14, 1999, the Company renewed and revised its existing
credit facility with Wells Fargo Bank. The revised facility provides an
unsecured revolving line of credit totaling $10 million. The total amount
available to borrow pursuant to the credit agreement is limited to 150 percent
of cash flow (as defined in the credit agreement) for the trailing 12-month
period. Amounts borrowed under the revolving line bear interest at the lesser of
either Prime Rate or 195 basis points above LIBOR. The Company pays commitment
fees of 0.50 percent on the unused portion of the revolving line of credit. The
credit agreement also provides for the issuance of letters of credit that are
generally used in connection with international merchandise purchases.
Outstanding letters of credit issued by the bank reduce amounts otherwise
available for borrowing under the revolving line of credit. The credit facility
subjects the Company to various restrictions on the incurrence of additional
indebtedness, acquisitions, loans to officers and stock repurchases. The
covenants also require the Company to maintain certain tangible net worth,
working capital, net income and fixed charge coverage minimums as well as
certain other ratios. Amounts available to borrow under the line of credit, as
limited by the cash flow multiple and reduced by outstanding letters of credit,
totaled $9.9 million at February 26, 2000. Any amount borrowed under the
revolving line of credit will become due on June 1, 2000, the date the credit
agreement matures. Prior to June 1, 2000, management expects to renegotiate and
extend this facility under terms no less favorable to the Company than those of
the current credit agreement. No assurance can be given, however, that such
negotiations will be successful, or that the Company will be able to obtain
terms equivalent to the current credit agreement. As of January 29, 2000, there
were no borrowings outstanding under the revolving line, and $0.2 million in
letters of credit were outstanding.
CAPITAL EXPENDITURES. The Company anticipates that it will spend approximately
$10.7 million on capital expenditures in fiscal 2000 to open 50 new stores,
remodel six existing stores, update 50 existing stores and purchase and/or
upgrade information systems. During fiscal 1999, the Company had capital
expenditures of $7.0 million, of which $4.3 million was used to open 19 new
stores, remodel 8 existing stores and refurbish approximately 44 stores. The
remaining $2.7 million was used primarily for store fixtures and corporate
purchases, including $1.7 million to purchase and/or upgrade information
systems. 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 2000.
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, 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 29, 2000.
GADZOOKS, INC 13
<PAGE> 6
BALANCE SHEETS
<TABLE>
<CAPTION>
January 29, January 30,
2000 1999
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $18,643,475 $ 16,353,393
Accounts receivable 1,216,579 3,001,651
Inventory 44,418,484 34,403,807
Other current assets 2,148,746 1,987,077
----------- ------------
66,427,284 55,745,928
----------- ------------
Leaseholds, fixtures and equipment, net 30,234,808 30,696,262
----------- ------------
$96,662,092 $ 86,442,190
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $20,395,375 $ 18,148,736
Accrued payroll and benefits 3,532,655 2,498,758
Other current liabilities 2,928,135 3,469,776
Income taxes payable 910,764 --
----------- ------------
27,766,929 24,117,270
Accrued rent 2,750,280 2,294,275
Commitments and contingencies (Note 7)
Shareholders' equity:
Preferred stock, $1.00 par value, 1,000,000 shares authorized, none issued -- --
Common stock, $.01 par value, 25,000,000 shares authorized, 8,922,528
and 8,892,736 shares issued and outstanding, respectively 89,225 88,927
Additional paid-in capital 42,282,468 42,197,629
Retained earnings 23,909,645 17,855,453
Treasury stock, at cost, 19,548 and 15,226 shares, respectively (136,455) (111,364)
----------- ------------
66,144,883 60,030,645
----------- ------------
$96,662,092 $ 86,442,190
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
GADZOOKS, INC 14
<PAGE> 7
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------
January 29, January 30, January 31,
2000 1999 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Net sales $ 241,615,574 $ 208,202,866 $ 171,639,147
Costs and expenses:
Cost of goods sold, including buying,
distribution and occupancy costs 173,777,873 157,728,597 120,308,942
Selling, general and administrative expenses 56,920,820 50,526,730 38,773,576
Provision for store closings and asset impairments 1,721,343 -- --
-------------- -------------- --------------
232,420,036 208,255,327 159,082,518
-------------- -------------- --------------
Operating income (loss) 9,195,538 (52,461) 12,556,629
Interest expense (97,686) (58,265) (52,313)
Interest income 594,339 594,738 758,580
-------------- -------------- --------------
Income before income taxes 9,692,191 484,012 13,262,896
Provision for income taxes 3,621,953 97,188 4,974,998
-------------- -------------- --------------
Net income $ 6,070,238 $ 386,824 $ 8,287,898
============== ============== ==============
Net income per share
Basic $ 0.68 $ 0.04 $ 0.95
============== ============== ==============
Diluted $ 0.67 $ 0.04 $ 0.91
============== ============== ==============
Average shares outstanding
Basic 8,910,084 8,851,609 8,682,582
============== ============== ==============
Diluted 9,043,135 9,035,841 9,100,027
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
GADZOOKS, INC 15
<PAGE> 8
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
------------------------------------------------------------
Common Stock Additional Retained
Shares Capital Paid-In Capital Earnings
------------ ------------ --------------- ------------
<S> <C> <C> <C> <C>
Balance, February 1, 1997 8,584,440 $ 85,844 $ 39,741,021 $ 9,236,366
Stock issued under option plans 170,137 1,702 407,647 --
Tax benefit from exercise
of stock options -- -- 719,937 --
Net income -- -- -- 8,287,898
------------ ------------ --------------- ------------
Balance, January 31, 1998 8,754,577 87,546 40,868,605 17,524,264
Stock issued under option plans 138,159 1,381 604,713 --
Purchase of treasury stock -- -- -- --
Sale of treasury stock -- -- -- (55,635)
Tax benefit from exercise
of stock options -- -- 724,311 --
Net income -- -- -- 386,824
------------ ------------ --------------- ------------
Balance, January 30, 1999 8,892,736 88,927 42,197,629 17,855,453
Stock issued under option plans 29,792 298 65,274 --
Purchase of treasury stock -- -- -- --
Sale of treasury stock -- -- -- (16,046)
Tax benefit from exercise
of stock options -- -- 19,565 --
Net income -- -- -- 6,070,238
------------ ------------ --------------- ------------
Balance, January 29, 2000 8,922,528 $ 89,225 $ 42,282,468 $ 23,909,645
============ ============ =============== ============
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------
Treasury Stock
Shares Capital Total
------------ ------------ ------------
<S> <C> <C> <C>
Balance, February 1, 1997 -- $ -- $ 49,063,231
Stock issued under option plans -- -- 409,349
Tax benefit from exercise
of stock options -- -- 719,937
Net income -- -- 8,287,898
------------ ------------ ------------
Balance, January 31, 1998 -- -- 58,480,415
Stock issued under option plans -- -- 606,094
Purchase of treasury stock 29,500 (312,031) (312,031)
Sale of treasury stock (14,274) 200,667 145,032
Tax benefit from exercise
of stock options -- -- 724,311
Net income -- -- 386,824
------------ ------------ ------------
Balance, January 30, 1999 15,226 (111,364) 60,030,645
Stock issued under option plans -- -- 65,572
Purchase of treasury stock 25,000 (212,981) (212,981)
Sale of treasury stock (20,678) 187,890 171,844
Tax benefit from exercise
of stock options -- -- 19,565
Net income -- -- 6,070,238
------------ ------------ ------------
Balance, January 29, 2000 19,548 $ (136,455) $ 66,144,883
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
GADZOOKS, INC 16
<PAGE> 9
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------
JANUARY 29, January 30, January 31,
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 6,070,238 $ 386,824 $ 8,287,898
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for store closings 1,188,547 -- --
Impairment of long-lived assets 532,796 -- --
Loss on disposal of assets 288,813 135,456 --
Depreciation 5,841,152 4,653,433 3,376,442
Deferred income taxes (15,338) (433,967) 3,587
Changes in operating assets and liabilities:
Accounts receivable 1,785,072 (186,207) (1,531,534)
Inventory (10,014,677) 1,360,026 (12,552,797)
Other assets (146,331) (126,571) (101,092)
Accounts payable 2,246,639 1,426,928 9,067,685
Accrued payroll and benefits 1,033,897 387,474 (1,023,868)
Income taxes payable 910,764 (2,494,855) 1,380,193
Other liabilities (467,219) 1,251,260 732,631
------------ ----------- ------------
Net cash provided by operating activities 9,254,353 6,359,801 7,639,145
------------ ----------- ------------
Cash flows from investing activities:
Capital expenditures (7,008,271) (10,082,106) (12,623,714)
Purchases of short-term investments -- (7,596,979) (18,177,257)
Proceeds from redemption of short-term investments -- 16,754,188 21,439,895
------------ ----------- ------------
Net cash used in investing activities (7,008,271) (924,897) (9,361,076)
------------ ----------- ------------
Cash flows from financing activities:
Issuance of common stock, net 65,572 606,094 409,349
Purchase of treasury stock (212,981) (312,031) --
Sale of treasury stock under employee stock purchase plan 171,844 145,032 --
Tax benefit from exercise of stock options 19,565 724,311 719,937
------------ ----------- ------------
Net cash provided by financing activities 44,000 1,163,406 1,129,286
------------ ----------- ------------
Net increase (decrease) in cash and cash equivalents 2,290,082 6,598,310 (592,645)
Cash and cash equivalents at beginning of period 16,353,393 9,755,083 10,347,728
------------ ----------- ------------
Cash and cash equivalents at end of period $ 18,643,475 $16,353,393 $ 9,755,083
============ =========== ============
Cash paid during the year for:
Interest $ 93,348 $ 63,240 $ 50,240
Income taxes 2,736,158 4,407,154 2,849,664
</TABLE>
The accompanying notes are an integral part of these financial statements.
GADZOOKS, INC 17
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS
1 ORGANIZATION AND NATURE OF THE COMPANY
- --------------------------------------------------------------------------------
Gadzooks, Inc. (the "Company") is a mall-based, specialty retailer of casual
apparel and related accessories for young men and women principally between the
ages of 14 and 18. At January 29, 2000, the Company had 326 company-owned stores
in metropolitan and middle markets in 33 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 1999, 1998 and 1997 represent
the 52-week periods ended January 29, 2000, January 30, 1999 and January 31,
1998, respectively.
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 29, 2000
and January 30, 1999 there were no short-term investment securities.
INVENTORY. Inventory is 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 net carrying amounts
may not be recoverable. An impairment loss is 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 is 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. Advertising costs
were $748,311, $610,945 and $474,498 for fiscal years 1999, 1998 and 1997,
respectively.
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 1999 and 1998. In
fiscal 1997 such costs were expensed in the month the store opened. This change
had an immaterial impact on the Company's financial statements.
GADZOOKS, INC 18
<PAGE> 11
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. The Company reviews its deferred
tax assets for ultimate realization and will record a valuation allowance to
reduce the deferred tax asset if it is more likely than not that some portion,
or all, of these deferred tax assets will not be realized.
EARNINGS PER SHARE. Basic earnings per share are computed by dividing net income
by the weighted average number of shares outstanding during each period. Diluted
earnings per share are computed by dividing net income by the weighted average
number of shares outstanding during each period after giving effect to dilutive
potential common shares resulting from stock options.
RECLASSIFICATIONS. Certain prior year amounts have been reclassified to conform
to current year presentation.
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 29,
2000 and January 30, 1999 and the reported amounts of revenues and expenses
during each of the three years in the period ended January 29, 2000. 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.
PROVISION FOR STORE CLOSINGS 3
- --------------------------------------------------------------------------------
During 1999, the Company decided to close eight stores that had been identified
as under-performing, and recognized a $1,189,000 pre-tax provision for costs
related to closing the facilities. As of February 26, 2000, six of the eight
stores had been closed with the remaining two slated for closure by the end of
fiscal 2000. As of January 29, 2000, a majority of the costs related to the five
stores already closed had been incurred. The components of the provision and an
analysis of the amounts charged against the accrual are outlined below.
1999 STORE CLOSING PROVISION
<TABLE>
<CAPTION>
1999 Charges
Original through Balance at
In thousands Provision 1/29/00 1/29/00
--------- ------- ----------
<S> <C> <C> <C>
Lease termination costs $ 382 $ (263) $ 119
Impairment of long-lived assets 807 (807) --
------ ------- ---------
Total $1,189 $(1,070) $ 119
</TABLE>
Sales and operating profit (loss) of the eight stores are shown below for the
years ended January 29, 2000, January 30, 1999 and January 31, 1998 (unaudited):
<TABLE>
<CAPTION>
-----------------------------
JANUARY 29, January 30, January 31,
In thousands 2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Sales $ 3,034,965 $ 3,600,539 $ 2,345,099
----------- ----------- -----------
Operating profit (loss) (695,402) (924,816) 14,888
----------- ----------- -----------
</TABLE>
GADZOOKS, INC 19
<PAGE> 12
Notes to Financial Statements, continued
4 IMPAIRMENT OF LONG-LIVED ASSETS
- --------------------------------------------------------------------------------
In accordance with Statement of Financial Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets to be Disposed of", which requires that
long-lived assets held and used by an entity be reviewed for impairment whenever
events or circumstances indicate that the net book value of the asset may not be
recoverable, the Company recorded a non-cash impairment charge of $533,000 to
reflect fixtures and leasehold improvements at their respective fair value in
six under-performing stores. These locations have not been identified for
closure. Management regularly reviews the performance of all the Company's
stores. If management determines that it is unlikely that a store's sales volume
will increase to a level that would allow the store to generate positive cash
flows, management will consider remedial actions up to and including closing the
store. If the Board of Directors approves a plan for closing a store or stores,
the Company will recognize a provision for store closing costs during the
quarter in which such approval is granted.
5 LEASEHOLDS, FIXTURES AND EQUIPMENT
- --------------------------------------------------------------------------------
Leaseholds, fixtures and equipment are summarized as follows:
<TABLE>
<CAPTION>
------------
January 29, January 30,
2000 1999
------------ ------------
<S> <C> <C>
Leasehold improvements $ 29,080,001 $ 27,715,153
Fixtures and equipment 19,516,913 16,876,857
------------ ------------
48,596,914 44,592,010
Less accumulated depreciation (18,362,106) (13,895,748)
------------ ------------
$ 30,234,808 $ 30,696,262
============ ============
</TABLE>
6 LONG-TERM OBLIGATIONS
- --------------------------------------------------------------------------------
On May 14, 1999, the Company renewed and revised its existing credit facility
with Wells Fargo Bank. The revised facility provides an unsecured revolving line
of credit totaling $10 million. The total amount available to borrow pursuant to
the credit agreement is limited to 150% of cash flow (as defined in the credit
agreement) for the trailing 12-month period. Amounts borrowed under the
revolving line bear interest at the lesser of either Prime Rate or 195 basis
points above LIBOR. The Company pays commitment fees of 0.50% on the unused
portion of the revolving line of credit. The credit agreement also provides for
the issuance of letters of credit that are generally used in connection with
international merchandise purchases. Outstanding letters of credit issued by the
bank reduce amounts otherwise available for borrowing under the revolving line
of credit. The credit facility subjects the Company to various restrictions on
the incurrence of additional indebtedness, acquisitions, loans to officers and
stock repurchases. The covenants also require the Company to maintain
GADZOOKS, INC 20
<PAGE> 13
certain tangible net worth, working capital, net income and fixed charge
coverage minimums as well as certain other ratios. Amounts available to borrow
under the line of credit, as limited by the cash flow multiple and reduced by
outstanding letters of credit, totaled $9.9 million at February 26, 2000. Any
amount borrowed under the revolving line of credit will become due on June 1,
2000, the date the credit agreement matures. Prior to June 1, 2000, management
expects to be able to renegotiate and extend this facility under terms no less
favorable to the Company than those of the current credit agreement. No
assurance can be given, however, that such negotiations will be successful, or
that the Company will be able to obtain terms equivalent to the current credit
agreement. As of January 29, 2000, there were no borrowings outstanding under
the revolving line, and $0.2 million in letters of credit were outstanding.
LEASES 7
- --------------------------------------------------------------------------------
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 $20,775,846, $18,717,424 and $13,822,868, for
fiscal years 1999, 1998 and 1997, respectively. Included in these total rent
figures are $350,000, $511,000 and $566,000 of contingent rent for fiscal years
1999, 1998 and 1997, respectively. Accrued rent of $2,750,280 as of January 29,
2000 and $2,294,275 as of January 30, 1999 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 29, 2000 are as follows:
<TABLE>
<CAPTION>
Fiscal year
<S> <C>
2000 $ 20,416,418
2001 20,417,810
2002 20,377,293
2003 19,874,985
2004 18,857,156
Thereafter 48,252,231
------------
Total minimum lease payments $148,195,893
============
</TABLE>
Income taxes 8
- --------------------------------------------------------------------------------
The provision for federal and state income taxes consists of the following:
<TABLE>
<CAPTION>
Fiscal
----------------------------
1999 1998 1997
----------- ---------- -----------
<S> <C> <C> <C>
Current tax expense $ 3,637,291 $ 531,155 $ 4,971,411
Deferred tax expense (benefit) (15,338) (433,967) 3,587
----------- ---------- -----------
$ 3,621,953 $ 97,188 $ 4,974,998
</TABLE>
GADZOOKS, INC 21
<PAGE> 14
Notes to Financial Statements, continued
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
----------------------------
1999 1998 1997
----------- ---------- -----------
<S> <C> <C> <C>
Tax provision at the federal corporate rate $ 3,295,345 $ 164,564 $ 4,509,385
State income taxes, net of related federal benefit 410,099 31,209 564,420
Tax exempt interest -- (69,613) (182,731)
Other, net (83,491) (28,972) 83,924
----------- ---------- -----------
Provision for income taxes $ 3,621,953 $ 97,188 $ 4,974,998
=========== ========== ===========
</TABLE>
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
-----------
JANUARY 29, January 30,
2000 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Accruals not currently deductible $ 1,255,934 $ 1,305,955
Depreciation 257,756 100,164
Deferred compensation -- 98,809
----------- -----------
1,513,690 1,504,928
Deferred tax liabilities (276,213) (282,789)
----------- -----------
$ 1,237,477 $ 1,222,139
=========== ===========
</TABLE>
The early disposition of certain qualified stock options and the exercise of
certain nonqualified stock options in fiscal 1999, 1998 and 1997 resulted in
income tax benefits to the Company of $19,565, $724,311 and $719,937
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 29, 2000, January 30, 1999 and January 31,
1998, the Company contributed $130,837, $117,917 and $108,814, respectively, in
matching contributions to the 401(k) Plan.
GADZOOKS, INC 22
<PAGE> 15
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 1999 and
1998, 20,678 and 14,274 shares, respectively, 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 1999 the Company dissolved a nonqualified deferred compensation
program which permitted officers to defer a portion of their compensation on a
pre-tax basis until their retirement. Participant deferrals that were deposited
into variable life insurance contracts held in a Rabbi Trust were remitted back
to the participants during 1999.
STOCK OPTION PLANS 10
- --------------------------------------------------------------------------------
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.
GADZOOKS, INC 23
<PAGE> 16
Notes to Financial Statements, continued
The following table includes option information for the Employee Plan, Key
Employee Plan and Nonemployee Director Plan:
<TABLE>
<CAPTION>
Fiscal
--------------------------------------------------
1999 1998 1997
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 870,070 $ 9.71 698,360 $ 13.00 655,289 $ 6.23
Granted 555,580 9.82 973,595 14.65 275,182 23.46
Exercised (30,192) 2.21 (138,159) 4.38 (170,137) 2.41
Cancelled (345,806) 10.50 (663,726) 21.54 (61,974) 17.95
--------- --------- --------- --------- --------- ---------
Outstanding at end of year 1,049,652 $ 9.72 870,070 $ 9.71 698,360 $ 13.00
--------- --------- --------- --------- --------- ---------
Available for grant at end of year 179,829 389,603 29,472
--------- --------- ---------
</TABLE>
The following table summarizes information about stock options outstanding at
January 29, 2000:
<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 1/29/00 Life Price at 1/29/00 Price
--------------- ----------- ----------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.21- $ 6.56 155,678 5 years $ 3.91 130,539 $ 3.61
6.75- 7.88 148,728 9 years 7.01 5,461 7.58
8.00- 11.00 289,445 9 years 9.44 45,751 9.39
11.50- 11.69 240,412 8 years 11.61 62,070 11.60
12.38- 28.13 215,389 10 years 14.06 22,724 24.60
--------------- ----------- -------- -------- --------- ---------
$ 0.21- $28.13 1,049,652 266,545
</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.
GADZOOKS, INC 24
<PAGE> 17
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
----------------------------
1999 1998 1997
----------- ---------- -----------
<S> <C> <C> <C>
Net income - as reported $ 6,070,238 $ 386,824 $ 8,287,898
Net income (loss) - pro forma 4,831,365 (1,560,440) 7,347,426
Diluted earnings per share - as reported 0.67 0.04 0.91
Diluted earnings (loss) per share - pro forma 0.53 (0.18) 0.81
</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
-----------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Expected volatility 248% 87% 79%
Risk-free interest rate 6.5% 5.1% 5.6%
Expected lives 4.2 years 3.7 years 4.2 years
Dividend yield 0% 0% 0%
</TABLE>
The weighted average fair value of options granted is $9.63, $7.43 and $14.14
per share for fiscal 1999, 1998 and 1997, respectively.
EARNINGS PER SHARE 11
- --------------------------------------------------------------------------------
The following table outlines the Company's calculation of weighted average
shares outstanding:
<TABLE>
<CAPTION>
Fiscal
---------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Weighted average common shares outstanding (basic) 8,910,084 8,851,609 8,682,582
Effect of dilutive options 133,051 184,232 417,445
Weighted average common and dilutive
potential shares outstanding (diluted) 9,043,135 9,035,841 9,100,027
========= ========= =========
</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 215,389, 22,132 and 40,332 in fiscal 1999,
1998 and 1997, respectively.
GADZOOKS, INC 25
<PAGE> 18
Notes to Financial Statements, continued
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.
GADZOOKS, INC 26
<PAGE> 19
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 29, 2000
and January 30, 1999, and the results of its operations and its cash flows for
each of the three years in the period ended January 29, 2000 in conformity with
accounting principles generally accepted in the United States. 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
auditing standards generally accepted in the United States, 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
Fort Worth, Texas
March 6, 2000
GADZOOKS, INC 27
<PAGE> 20
[PHOTOS]
PAULA Y. MASTERS
JAMES F. WIMPRESS, JR.
JAMES A. MOTLEY
WILLIAM S. KOTCH III
STEPHEN R. PUTERBAUGH
JEFFREY P. CREECY
<TABLE>
<CAPTION>
DIRECTORS OFFICERS
<S> <C>
GERALD R. SZCZEPANSKI GERALD R. SZCZEPANSKI
Chairman of the Board Chairman of the Board and
Co-Founder of Gadzooks Chief Executive Officer
Director since 1983
PAULA Y. MASTERS
G. MICHAEL MACHENS(A)(C) Senior Vice President
General Partner General Merchandising Manager
Phillips-Smith Specialty
Retail Group JAMES F. WIMPRESS, JR.
Director since 1992 Senior Vice President
Store Operations
ROBERT E. M. NOURSE(C)
Private Investor JAMES A. MOTLEY
Former President and Vice President and
Chief Executive Officer Chief Financial Officer
The Bombay Company, Inc. Treasurer and Secretary
Director since 1993
WILLIAM S. KOTCH III
RON G. STEGALL(A) Vice President
President Real Estate
Arlington Equity Partners, Inc.
Director since 1999 STEPHEN R. PUTERBAUGH
Vice President
LAWRENCE H. TITUS, JR.(A) Human Resources
Co-Founder of Gadzooks
(retired) JEFFREY P. CREECY
Director since 1983 Vice President
Information Systems
</TABLE>
(A) Audit Committee
(C) Compensation Committee
MONTY STANDIFER, Senior Vice President and Chief Financial Officer for Gadzooks
since 1992 left the Company in June of 1999. Monty was an asset to the Company
and was instrumental in its growth. His efforts and dedication to Gadzooks are
sincerely appreciated.
ANNUAL MEETING
The Annual Meeting of Gadzooks, Inc. will be held at 9:30 a.m., on Thursday,
June 15, 2000, 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
Fort Worth, Texas
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.
Gadzooks and the Gadzooks logo are registered trademarks and service marks of
Gadzooks, Inc.
Gaditude is a registered service mark of Gadzooks, Inc.
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>
1999 1998
---------- ---------- ---------- ----------
Fiscal Quarters High Low High Low
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
First Quarter $ 9.94 $ 6.56 $ 29.38 $ 20.88
Second Quarter 16.00 9.13 28.69 10.50
Third Quarter 10.38 6.13 11.56 6.03
Fourth Quarter 13.69 7.44 8.94 5.69
</TABLE>
On March 24, 2000 the closing sales price on The Nasdaq Stock Market was $22.88.
As of March 24, 2000, the approximate number of common shareholders of record
was 101, 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.
COMMON STOCK
Listed on The Nasdaq Stock Market(SM)--Symbol: GADZ
CORPORATE HEADQUARTERS
4121 INTERNATIONAL PARKWAY
CARROLLTON, TEXAS 75007
(972)307-5555
(972)662-4290 FAX
WWW.GADZOOKS.COM
<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 6, 2000 relating to the
financial statements, which appears in the Annual Report to Shareholders, which
is incorporated in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
Fort Worth, Texas
April 25, 2000
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