Server: Netscape-Enterprise/2.01 Date: Fri, 19 Dec 1997 13:38:32 GMT Accept-ranges: bytes Last-modified: Mon, 08 Dec 1997 10:00:02 GMT Content-length: 46522 Content-type: text/html 1997 Second Quarter 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED AUGUST 2, 1997

OR

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
SECURITIES EXCHANGE ACTION OF 1934

COMMISSION FILE NUMBER 0-26732

GADZOOKS, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

TEXAS 74-2261048
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)

(I.R.S. EMPLOYER IDENTIFICATION
NUMBER)

4121 INTERNATIONAL PARKWAY
CARROLLTON, TX
75007
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)


REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 972-307-5555



(FORMER NAME, FORMER ADDRESS AND FISCAL YEAR, IF CHANGED SINCE LAST REPORT.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [  X  ] No [     ]

As of September 5, 1997, the number of shares outstanding of the registrant's common stock is 8,695,066.


GADZOOKS, INC.
FORM 10-Q

For the Quarter Ended August 2, 1997

 

INDEX


PART I - FINANCIAL INFORMATION

GADZOOKS, INC.
CONDENSED BALANCE SHEETS

(In thousands)
(Unaudited)

AUGUST 2,
1997

FEBRUARY 1,
1997

ASSETS
Current assets:
Cash and cash equivalents $ 7,017 $ 10,348
Short-term investments 10,171 12,420
Accounts receivable 3,275 1,284
Inventory 30,713 23,211
Other current assets 1,446

1,328

52,622

48,591

Leaseholds, fixtures and equipment, net 21,496

16,156

$ 74,118

$ 64,747

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 17,257 $ 7,654
Accrued expenses & other current liabilities 4,002 5,490
Income taxes payable 386

1,115

21,645

14,259

Accrued rent & other long-term obligations 1,559 1,425
Shareholders' equity:
Common stock 87 86
Additional paid-in capital 40,096 39,741
Retained earnings 10,731

9,236

50,914

49,063

$ 74,118

$ 64,747

The accompanying notes are an integral part of these financial statements.

Table of Contents

GADZOOKS, INC.
CONDENSED STATEMENTS OF INCOME

(In thousands, except per share data)
(Unaudited)

SECOND QUARTER ENDED

SIX MONTHS ENDED

AUGUST 2,
1997
JULY 27,
1996
AUGUST 2,
1997
JULY 27,
1996
Net Sales $ 36,780 $ 28,504 $ 70,850 $ 51,990
Cost of goods sold including buying,
distribution and occupancy costs

27,758


19,634


51,701


36,173

Gross Profit 9,022 8,870 19,149 15,817
Selling, general and administrative expenses 8,881

6,423

17,114

12,409

Operating Income 141 2,447 2,035 3,408
Interest income, net 134

168

376

397

Income before income taxes 275 2,615 2,411 3,805
Provision for income taxes 104

968

916

1,420

Net income $ 171


$ 1,647


$ 1,495


$ 2,385


Net income per common and common
equivalent share

$ 0.02



$ 0.18



$ 0.16



$ 0.26


Weighted average common and common
equivalent shares outstanding

9,110



9,116



9,118



9,074


The accompanying notes are an integral part of these financial statements.

Table of Contents

GADZOOKS, INC.
CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)
(Unaudited)

SIX MONTHS ENDED

AUGUST 2,
1997

JULY 27,
1996

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,495 $ 2,385
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation 1,457 1,006
Changes in operating assets and liabilities (2,091)

(5,089)

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 861

(1,698)

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (6,797)
(3,799)
Sales of short-term investments, net 2,249

--

NET CASH USED IN INVESTING ACTIVITIES: (4,548)

(3,799)

CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term obligations -- (45)
Issuance of common stock, net 356

9,041

NET CASH PROVIDED BY FINANCING ACTIVITIES 356

8,996

Net increase (decrease) in cash and cash equivalents (3,331)
3,499
Cash and cash equivalents at beginning of period 10,348

13,733

CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,017


$ 17,232


The accompanying notes are an integral part of these financial statements.

Table of Contents

GADZOOKS, INC.
NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

  1. BASIS OF PRESENTATION

    The accompanying condensed financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of August 2, 1997 and February 1, 1997, and the results of operations and cash flows for the six months ended August 2, 1997 and July 27, 1996. The results of operations for the second quarters and six months then ended are not necessarily indicative of the results to be expected for the full fiscal year. The condensed balance sheet as of February 1, 1997 is derived from audited financial statements. The condensed financial statements should be read in conjunction with the financial statement disclosures contained in the Company's Annual Report on Form 10-K for the fiscal year ended February 1, 1997.

  2. NEW ACCOUNTING STANDARDS

    In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 ("SFAS 128"), Earnings Per Share, to simplify the calculation of earnings per share for publicly held companies. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997 and requires the disclosure of basic and diluted earnings per share as well as the restatement of all prior period earnings per share data presented. For the second quarter and six months ended August 2, 1997, the amounts reported as net income per common and common equivalent share are not materially different from that which would have been reported for basic and diluted earnings per share in accordance with SFAS 128. Under SFAS 128, the basic and diluted pro forma earnings per share for the second quarter and six months ending July 27, 1996 would have been $0.20 and $0.29, respectively.

Table of Contents

Management's Discussion and Analysis of Financial
Condition and Results of Operations

GENERAL

Gadzooks is a rapidly growing, mall-based specialty retailer of casual apparel and related accessories for young men and women principally between the ages of 13 and 19. As of August 2, 1997, the Company had opened 38 new stores since the beginning of the fiscal year, and operated 221 mall-based stores in 28 states throughout the Mid-Atlantic, Southwest, Midwest, and Southeast regions of the United States.

The Company's business is subject to seasonal influences with slightly higher sales during the Christmas holiday, back-to-school, and spring break seasons. Management's discussion and analysis should be read in conjunction with the Company's financial statements and the notes related thereto.

RESULTS OF OPERATIONS

Second Quarter Ended August 2, 1997 Compared to Second Quarter Ended July 27, 1996

Net sales increased approximately $8.3 million, or 29.0 percent to $36,780,000 during the second quarter of fiscal 1997 from $28,504,000 during the comparable quarter of fiscal 1996. The overall sales increase was attributable to new stores not yet included in the comparable store sales base that offset a decrease in comparable store sales of 3.6 percent for the second quarter of fiscal 1997. A store becomes comparable after it has been open for 14 full fiscal months.

Gross profit increased approximately $152,000 to $9,022,000 during the second quarter of fiscal 1997 from $8,870,000 during the comparable quarter of fiscal 1996. As a percentage of net sales, gross profit decreased to 24.5 percent compared to 31.1 percent in the comparable quarter of last year. Merchandise margins decreased by 5 percent of sales due to the substantial amount of markdowns taken primarily in the junior category, and to a lesser extent, the unisex category. These markdowns were attributable to a shift in key fashion trends during the quarter. Store occupancy costs increased by one percent of sales as a result of lower than expected sales. Buying and distribution costs increased slightly as a percentage of sales primarily due to the Company's move to a larger distribution center at the beginning of the second quarter.

Selling, general and administrative expenses increased approximately $2.5 million to $8,881,000 during the second quarter of 1997 from $6,423,000 during the comparable quarter of fiscal 1996. As a percentage of net sales, selling, general and administrative expenses increased to 24.1 percent of sales during the second quarter of fiscal 1997 from 22.5 percent of sales during the comparable quarter of last year. The increase as a percentage of sales was primarily due to lower than expected sales. Additional sales promotions, increased markdown pricing and other related tasks required at the store level to clear summer merchandise were primary factors contributing to the increase in store level operating costs as a percentage of sales.

Operating income decreased approximately $2.3 million to $141,000 during the second quarter of fiscal 1997 from $2,447,000 during the comparable quarter of last year. As a percentage of net sales, operating income decreased to 0.4 percent of sales from 8.6 percent of sales during the comparable quarter of last year.

The Company's net interest income decreased $34,000 to $134,000 during the second quarter of fiscal 1997 from $168,000 net interest income in the comparable period of last year due to the use of temporary investments of cash to fund the Company's continuing expansion into new markets.

Six Months Ended August 2, 1997 Compared to Six Months Ended July 27, 1996

Net sales increased approximately $18.9 million, or 36.3 percent to $70,850,000 during the first six months of fiscal 1997 from $51,990,000 during the comparable period of fiscal 1996. The sales increase was attributable to new stores not yet included in the comparable store sales base. Comparable store sales were flat for the first six months of fiscal 1997. A store becomes comparable after it has been open for 14 full fiscal months.

Gross profit increased approximately $3.3 million to $19,149,000 during the first six months of fiscal 1997 from $15,817,000 during the comparable period of fiscal 1996. As a percentage of net sales, gross profit decreased to 27.0 percent compared to 30.4 percent in the comparable period of last year. Merchandise margins decreased by 3 percent of sales due to the substantial amount of mark downs taken primarily in the junior category during the second quarter of 1997. Store occupancy costs, included in cost of goods sold, increased slightly as a percentage of sales as a result of lower than expected sales. In addition, buying and distribution costs increased slightly as a percentage of sales, as a result of the Company's move to a larger distribution center in May 1997.

Selling, general and administrative expenses increased approximately $4.7 million to $17,114,000 during the first six months of 1997 from $12,409,000 during the comparable period of fiscal 1996. As a percentage of net sales, selling, general and administrative expenses increased to 24.2 percent of sales during the first six months of fiscal 1997 from 23.9 percent of sales during the comparable period of last year. The increase as a percentage of net sales was due to lower than expected second quarter sales. Additional sales promotions, increased markdown pricing and other related tasks required at the store level to clear summer merchandise were primary factors contributing to the increase in store level operating costs as a percentage of sales.

Operating income decreased approximately $1.4 million to $2,035,000 during the first six months of fiscal 1997 from $3,408,000 during the comparable period of last year. As a percentage of net sales, operating income decreased to 2.9 percent of sales from 6.6 percent of sales during the comparable period of last year.

Net interest income decreased $21,000 to $376,000 during the first six months of fiscal 1997 from $397,000 net interest income in the comparable period of last year. The Company's interest income decreased due to the use of temporary cash investments to fund the Company's continued expansion.

LIQUIDITY AND CAPITAL RESOURCES

General. The Company's primary uses of cash are financing new store openings and purchasing merchandise inventories. The Company is currently meeting its cash requirements through cash flow from operations and proceeds of a public offering completed in January, 1996.

Cash Flows. At August 2, 1997, cash and cash equivalents were $7.0 million, a decrease of $3.3 million since February 1, 1997. The primary uses of cash were increased inventory levels of $7.5 million, capital expenditures of $3.8 million for new stores, capital expenditures of $3.0 million for the new corporate headquarters and distribution center, an increase in accounts receivable of $2.0 million and a decrease in accrued payroll of $2.0 million. The primary sources of cash for the first six months of fiscal 1997 were an increase in accounts payable of $9.6 million, net income before depreciation of $3.0 million and sales of short-term investments of $2.2 million. The Company opened 24 new stores during the second quarter of 1997 as compared with 14 new stores in the same period of the prior year.

As of August 2, 1997, the Company had $10.2 million in short-term investments consisting of highly liquid investments with original maturities between three and twelve months. These funds are available for the Company's cash requirements.

Credit Facility. The Company currently has a loan agreement with Wells Fargo Bank, Dallas, Texas, which provides for an unsecured revolving line of credit of $10 million. Amounts borrowed under the revolving line bear interest at the lesser of either Prime Rate or 1.95 percent above LIBOR. The Company must also pay a commitment fee of 0.50 percent per annum on the unused portion of the revolving line. As of August 2, 1997, no amounts were outstanding under the revolving line. The revolving line also provides for the issuance of letters of credit that are generally used in certain circumstances in connection with merchandise purchases. As of August 30, 1997, letters of credit in the amount of $0.6 million were issued and outstanding.

Capital Expenditures. The Company anticipates opening approximately 29 new stores during the remaining quarters of fiscal 1997. The Company estimates that its average capital expenditures to open a new store, including leasehold improvements and furniture and fixtures, will be approximately $167,000 (approximately $100,000 net of all landlord construction allowances). The cost of initial inventory for a new store is approximately $100,000; however, the immediate cash requirement for inventory is partially financed through the Company's payment terms with its vendors. The Company expects new stores opened in the Northeast market during the third and fourth quarters of fiscal 1997 to cost approximately $225,000 prior to landlord construction allowances. Pre-opening costs range from $9,000 to $13,000 for travel, hiring and training, and other miscellaneous costs associated with the setup of a new store prior to its opening for business. Pre-opening costs are expensed in the period when the store opens.

STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE

Certain sections of this Quarterly Report on Form 10-Q, including the preceding "Management's Discussion and Analysis of Financial Condition and Results of Operations," contain various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), 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 February 1, 1997.

Table of Contents

PART II - OTHER INFORMATION

Items 1-3 - None

Item 4 - Submission of Matters to a Vote of Security Holders

  1. The Annual Meeting of Shareholders of the Company was held on June 25, 1997.

  2. Information regarding the Company's directors is contained in the Company's Definitive Proxy Statement which is attached hereto as Exhibit 22.

  3. Alan W. Crites and Gerald R. Szczepanski were elected to serve as directors until the Company's 2000 annual meeting of shareholders according to the following votes:

    Crites: For: 7,646,114 Withheld: 10,022
    Szczepanski: For: 7,646,139 Withheld: 9,997

    The selection of Price Waterhouse as the Company's independent accountants for the fiscal year ending January 31, 1998 was ratified by the shareholders according to the following vote:

    For: 7,653,737 Against: 992 Withheld: 1,407

  4. None.

Item 5 - None

Item 6 - Exhibits and Reports on Form 8-K

  1. See Index to Exhibits.

  2. None.

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

GADZOOKS, INC.
      (Registrant)


DATE: September 11, 1997 By:                 /s/ MONTY R. STANDIFER

Monty R. Standifer
Senior Vice President and
Chief Financial Officer
Table of Contents

INDEX TO EXHIBITS

EXHIBIT
NO.

DESCRIPTION OF DOCUMENTS

3.1 Second Restated Articles of Incorporation of the Company (filed as Exhibit 4.1 to the Company's Form S-8 (No. 33-98038) filed with the Commission on October 12, 1995 and incorporated herein by reference).

3.2 Amended and Restated Bylaws of the Company (filed as Exhibit 4.2 to the Company's Form S-8 (No. 33-98038) filed with the Commission on October 12, 1995 and incorporated herein by reference).

*3.3 First Amendment to the Amended and Restated Bylaws of the Company.

4.1 Specimen Certificate for shares of Common Stock, $.01 par value, of the Company (filed as Exhibit 4.1 to the Company's Amendment No. 2 to Form S-1 (No. 33-95090) filed with the Commission on September 8, 1995 and incorporated herein by reference).

10.1 Purchase Agreement dated as of January 31, 1992 among the Company, Gerald R. Szczepanski, Lawrence H. Titus, Jr. and the Investors listed therein (filed as Exhibit 10.1 to the Company's Form S-1 (No. 33-95090) filed with the Commission on July 28, 1995 and incorporated herein by reference).

10.2 Purchase Agreement dated as of May 26, 1994 among the Company, Gerald R. Szczepanski, Lawrence H. Titus, Jr. and the Investors listed therein (filed as Exhibit 10.2 to the Company's Form S-1 (No. 33-95090) filed with the Commission on July 28, 1995 and incorporated herein by reference).

10.3 Credit Agreement dated as of January 30, 1997 between the Company and Wells Fargo Bank (Texas), National Association (filed as Exhibit 10.3 to the Company's 1996 Annual Report on Form 10-K filed with the Commission on April 23, 1997 and incorporated herein by reference).

10.4 Form of Indemnification Agreement with a schedule of director signatories (filed as Exhibit 10.5 to the Company's Form S-1 (No. 33-95090) filed with the Commission on July 28, 1995 and incorporated herein by reference).

10.5 Employment Agreement dated January 31, 1992 between the Company and Gerald R. Szczepanski, as continued by letter agreement (filed as Exhibit 10.6 to the Company's Form S-1 (No. 33-95090) filed with the Commission on July 28, 1995 and incorporated herein by reference).

10.6 1992 Incentive and Nonstatutory Stock Option Plan dated February 26, 1992, and Amendments No. 1 through 3 thereto (filed as Exhibit 10.8 to the Company's Form S-1 (No. 33-95090) filed with the Commission on July 28, 1995 and incorporated herein by reference).

10.7 1994 Incentive and Nonstatutory Stock Option Plan for Key Employees dated September 30, 1994 (filed as Exhibit 10.9 to the Company's Form S-1 (No. 33-95090) filed with the Commission on July 28, 1995 and incorporated herein by reference).

10.8 1995 Non-Employee Director Stock Option Plan (filed as Exhibit 10.10 to the Company's Form S-1 (No. 333-00196) filed with the Commission on January 9, 1996 and incorporated herein by reference).

10.9 Gadzooks, Inc. Employees' Savings Plan (filed as Exhibit 10.11 to the Company's Form S-1 (No. 33-95090) filed with the Commission on July 28, 1995 and incorporated herein by reference).

10.10 Severance Agreement dated September 5, 1996 between the Company and Gerald R. Szczepanski (filed as Exhibit 10.10 to the Company's 1996 Annual Report on Form 10-K filed with the Commission on April 23, 1997 and incorporated herein by reference).

10.11 Form of Severance Agreement with a schedule of executive officer signatories (filed as Exhibit 10.11 to the Company's 1996 Annual Report on Form 10-K filed with the Commission on April 23, 1997 and incorporated herein by reference).

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).

22 Definitive Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (filed with the Commission on May 13, 1997 and incorporated herein by reference).

*27 Financial Data Schedule.

* Filed herewith (unless otherwise indicated exhibits are previously filed).


EXHIBIT 3.3

FIRST AMENDMENT TO THE
AMENDED AND RESTATED BYLAWS
OF GADZOOKS, INC.

ARTICLE III - DIRECTORS

A. Section 3.5 of Article III of the Amended and Restated Bylaws is hereby amended and restated in its entirety to read as follows:

Section 3.5. Removal. Unless otherwise restricted by law, the Articles of Incorporation or these Bylaws, any director may be removed, with cause, at any annual or special meeting of shareholders by majority vote of the shares then entitled to vote at an election of directors; provided that notice of the intention to act upon such matter shall have been given in the notice calling such meeting.

CERTIFICATION

I, the undersigned officer, hereby certify that the foregoing amendment to the Amended and Restated Bylaws of Gadzooks, Inc. was adopted by the Board of Directors of Gadzooks, Inc. at a meeting held on June 26, 1997, to certify which witness my hand and seal of office this 26th day of June, 1997.

/s/ MONTY R. STANDIFER


Monty R. Standifer, Secretary