-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AvImfeLebrAeALR6cHOmBPLqZKetgXJebb46xP2IU2onuU3AL2goeIaQX+EWuMKY jHtIjiWnSD5tGgrnQgb8Cg== 0000950134-01-500920.txt : 20010501 0000950134-01-500920.hdr.sgml : 20010501 ACCESSION NUMBER: 0000950134-01-500920 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010203 FILED AS OF DATE: 20010430 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GADZOOKS INC CENTRAL INDEX KEY: 0000924140 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-FAMILY CLOTHING STORES [5651] IRS NUMBER: 742261048 STATE OF INCORPORATION: TX FISCAL YEAR END: 0127 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-26732 FILM NUMBER: 1615915 BUSINESS ADDRESS: STREET 1: 4121 INTERNATIONAL PKWY CITY: CARROLLTON STATE: TX ZIP: 75007 BUSINESS PHONE: 9723075555 MAIL ADDRESS: STREET 1: 4121 INTERNTIONAL PKWY CITY: CARROLLTON STATE: TX ZIP: 75007 10-K 1 d86174e10-k.txt FORM 10-K FOR FISCAL YEAR END FEBRUARY 3, 2001 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 FEBRUARY 3, 2001 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 27, 2001 was approximately $172,684,155. 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 27, 2001, the registrant had 9,029,957 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 February 3, 2001, filed herewith as Exhibit 13. Part III incorporates information by reference from the definitive Proxy Statement for the 2001 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. 2 PART I ITEM 1. BUSINESS. Gadzooks, Inc. and its wholly owned subsidiaries (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 2000, the Company operated 375 stores in both metropolitan and middle markets in 36 states. The Company opened 52 new stores and closed three stores during fiscal 2000. In addition, the Company plans to open approximately 50-60 new stores in fiscal 2001, 17 of which were opened as of April 11, 2001. 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 both Male and Female Teenage Customers. 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. 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 2,600 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, vendor 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, Billabong, Fox, Hurley, Candie's, DKNY Jeans, Todd Oldham and others. 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. 2 3 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 television monitors featuring popular music videos, 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, vendor 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 believes that its 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. 3 4 STORE LOCATIONS As of March 30, 2001, the Company operated 383 stores in 36 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 lists the Company's stores by city and state. ALABAMA IOWA MISSISSIPPI OKLAHOMA TEXAS - CONT. Huntsville Cedar Falls Biloxi Bartlesville Sherman Mobile Cedar Rapids (2) Hattiesburg Enid Temple Montgomery Council Bluffs Jackson Lawton Texarkana Oxford Davenport Meridian Muskogee Tyler ARKANSAS Des Moines (3) Tupelo Norman Victoria Fayetteville Dubuque MISSOURI Oklahoma City (4) Waco Fort Smith Fort Dodge Cape Girardeau Shawnee Wichita Falls Jonesboro Iowa City Columbia Tulsa (3) UTAH Little Rock (2) Sioux City Jefferson City PENNSYLVANIA Salt Lake City (2) COLORADO Waterloo Joplin Altoona VIRGINIA Denver (3) KANSAS Kansas City (3) Erie Charlottesville FLORIDA Hays Springfield Harrisburg (2) Chesapeake Daytona Beach Hutchinson St. Louis (3) Johnstown Christiansburg Fort Lauderdale (3) Kansas City NEBRASKA Lancaster Danville Fort Myers Manhattan Grand Island Muncy Fredericksburg Fort Walton Beach Salina Lincoln Philadelphia (2) Harrisonburg Gainesville Topeka Omaha (2) Pittsburgh (6) Lynchburg Jacksonville (2) Wichita (2) NEW HAMPSHIRE Scranton Newport News Jensen Beach KENTUCKY Manchester State College Norfolk Lakeland Ashland Salem Wilkes-Barre Roanoke Merritt Island Bowling Green NEW JERSEY RHODE ISLAND Virginia Beach Miami Elizabethtown Deptford/Philadelphia Providence Washington, DC (3) Naples Florence/Cincinnati Freehold SOUTH CAROLINA Winchester Orlando (4) Lexington Livingston Charleston (2) WEST VIRGINIA Panama City Louisville (2) Mays Landing Columbia (2) Bluefield Pensacola Owensboro Wayne Florence Bridgeport Port Charlotte Paducah NEW MEXICO Greenville Charleston Sarasota LOUISIANA Albuquerque (2) Myrtle Beach Huntington Tallahassee Alexandria Las Cruces Spartanburg Morgantown Tampa (4) Baton Rouge (2) Santa Fe SOUTH DAKOTA Mount Hope West Palm Beach Houma NEW YORK Rapid City Parkersburg GEORGIA Lafayette Albany (2) Sioux Falls WISCONSIN Athens Lake Charles Rochester (3) TENNESSEE Appleton Atlanta (8) Monroe Syracuse (2) Chattanooga (2) Eau Claire Augusta New Orleans (3) NORTH CAROLINA Clarksville Green Bay Macon Shreveport/Bossier City (2) Cary Jackson LaCrosse Rome MARYLAND Charlotte (2) Johnson City Madison (2) Savannah Baltimore (2) Concord Kingsport Milwaukee (3) IDAHO Frederick Fayetteville Knoxville (2) Wausau Boise MASSACHUSETTS Greensboro Memphis (3) ILLINOIS Boston (5) Greenville Nashville (3) Bloomington MICHIGAN Hickory TEXAS Carbondale Ann Arbor High Point Abilene Champaign Battle Creek Raleigh-Durham (2) Amarillo Chicago (13) Detroit (5) Wilmington Austin (2) Fairview Heights/St. Louis Flint Winston-Salem Beaumont Moline Grand Rapids (2) OHIO Brownsville Peoria Holland Akron College Station Rockford Jackson Cincinnati (2) Corpus Christi Springfield Lansing Cleveland (4) Dallas/Fort Worth (11) INDIANA Monroe Columbus Denton Bloomington Port Huron Dayton (2) El Paso (2) Elkhart Portage Findlay Harlingen Evansville Saginaw Heath Houston (12) Fort Wayne Traverse City Lancaster Killeen Indianapolis (2) MINNESOTA Lima Laredo Lafayette Duluth Mansfield Longview Merrillville Mankato New Philadelphia Lubbock Muncie Minneapolis/St. Paul (5) Piqua Lufkin South Bend St. Cloud Sandusky McAllen Terre Haute St. Clairsville Midland/Odessa (2) Toledo Port Arthur Youngstown/Niles (2) San Angelo Zanesville San Antonio (5)
4 5 EXPANSION STRATEGY The following table provides a history of the Company's store expansion program over the past five fiscal years.
Fiscal Year 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Number of stores open at beginning of period 326 312 250 183 126 Number of new stores opened 52 19 63 67 57 Number of stores closed 3 5 1 -- -- --- --- --- --- --- Number of stores open at end of period 375 326 312 250 183 === === === === ===
The Company's expansion strategy for fiscal 2001 is to continue to open stores in enclosed shopping malls in both metropolitan and middle markets. The Company expects to open approximately 50-60 new stores during fiscal 2001, 17 of which have been opened as of April 11, 2001. 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 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 fiscal 2001, the Company will open its first store on the west coast with several new stores in the state of Washington. The Company closed three under-performing stores during fiscal 2000 and analyzes stores for potential closing from time to time. 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. 5 6 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 2,600 SKUs. The Company's merchandise includes highly visible names such as ECKO, Billabong, Fox, Hurley, Candie's, DKNY Jeans, Todd Oldham and others. 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 Candie's, DKNY Jeans, ECKO, Todd Oldham and Mudd. 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, Billabong, Fox, Hurley and Todd Oldham. 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 ECKO, Fossil and Candie's. o Unisex t-shirts: The Unisex category consists 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 Candie's, Soap and ECKO.
The following table sets forth the Company's merchandise by category as an approximate percentage of net sales:
Fiscal Year 2000 1999 1998 ---- ---- ---- Juniors ................................ 38% 34% 32% Young Mens ............................. 27 30 29 Accessories ............................ 17 16 17 Unisex t-shirts ........................ 12 11 12 Footwear ............................... 6 9 10 --- --- --- 100% 100% 100% --- --- ---
6 7 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 its 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 chief merchandising officer, divisional merchandising managers, buyers and assistant buyers. The chief merchandising officer and the buyers analyze current fashion directions by visiting major fashion markets, maintaining close relationships with the Company's vendors and utilizing focus groups in order to identify styles and trends. In addition, the Company's buyers attend concerts and other events attended by teenagers. The chief merchandising officer, divisional merchandising managers 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 2000, the Company did business with approximately 725 vendors. No single vendor accounted for more than 10% of merchandise purchases. Gadzooks believes that strong vendor relationships are important to the growth and success of the Company. In addition, the Company has added private label merchandise to its product line. Misdemeanor has been established for the junior's category, and Epidemic and Decibel have been established for the young men's category. 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, 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. 7 8 STORE OPERATIONS Gadzooks stores are open seven days a week during normal mall hours. The Company's store operations are managed by a vice president of store operations, regional sales managers and district sales 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 shrink results. In addition, stock options are granted to district sales 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 sales 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. 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 customer service at the store level 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, fun environment using television monitors featuring popular music videos, 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. 8 9 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. The Company implemented enhanced planning and allocation systems in fiscal 2000. The Company is currently implementing a new financial system and expects it to be operational by the end of the second quarter of fiscal 2001. Additionally, the Company has signed a contract to license new point-of-sale, merchandising and distribution systems to be installed and implemented over the course of the next three years. 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 partnership 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. During 2000, the Company created a website that features music videos, animation, interactive games and promotions to capture the attention of teenagers and attract them to the stores. The Company has also been active in sponsoring concerts and other teen-related promotional events. TRADEMARKS The Company has registered on the Principal Register of the United States Patent and Trademark Office "Gadzooks" (in various formats) and "Gaditude" and has currently pending registration for "Decibel," "Epidemic" and "Misdemeanor." 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. 9 10 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 Old Navy and certain divisions of The Limited, with numerous other teen retailers such as American Eagle Outfitters, The Buckle, Abercrombie & Fitch, 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 competitive factors in the Company's business are fashion, merchandise selection, customer service, price and store location. EMPLOYEES On March 31, 2001, the Company had 1,409 full-time employees and 3,043 part-time employees. Of the Company's 4,452 employees, 146 were corporate personnel, 97 were distribution center employees and 4,209 were store employees. The number of part-time employees varies 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 believes its employee relations to be excellent. 10 11 RISK FACTORS This Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21F of the Securities Exchange Act of 1934. When used in this report, words such an "anticipate," "believe," "estimate," "expect," "intend," "predict," "project," and similar expressions, as they relate to us or our management, identify forward-looking statements. These forward-looking statements are based on information currently available to our management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors, including but not limited to fluctuations in store sales results, changes in economic conditions, fluctuations in quarterly results and other factors described under the "Risk Factors" section. Such statements reflect the current views of our management with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by this paragraph. 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 50-60 new stores during fiscal 2001. 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 $13.0 million for capital expenditures in fiscal 2001, which will include the opening of approximately 50-60 new stores and the remodeling of seven 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, store size 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 2001. The Company cannot give assurance that it will not be required to seek additional sources of funds for such expansion. 11 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 varied significantly in the past. The Company's comparable store sales results were (3.3%), 6.5%, 4.6% and 11.3% in the first, second, third and fourth quarters of fiscal 1999, respectively, and 17.1%, 5.7%, 9.3% and 1.7% in the first, second, third and fourth quarters of fiscal 2000, respectively. The Company has recorded comparable store sales decreases in past months, quarters and years, and cannot give assurance 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 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. 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 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 2000 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 depends 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 of Incorporation 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 of Incorporation 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 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 Consolidated Financial Statements - - Note 12 Shareholder Rights Plan," located on page 25 of the Registrant's 2000 Annual Report to Shareholders, filed as Exhibit 13 to this Report. Such Notes to Consolidated 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 April 2001 and July 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 page 27 of the registrant's 2000 Annual Report to Shareholders, filed as Exhibit 13 to this Report. Such information is 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 11 of the registrant's 2000 Annual Report to Shareholders, filed as Exhibit 13 to this Report. Such information 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 12 to 15 of the registrant's 2000 Annual Report to Shareholders, filed as Exhibit 13 to this Report. Such information is incorporated herein by reference. 14 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 2000 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.
PAGE NUMBER(S) IN FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ANNUAL REPORT* - ------------------------------------------- ------------------ Unaudited Quarterly Financial Data.............................................................. 14 Consolidated Balance Sheets at February 3, 2001 and January 29, 2000............................ 16 Consolidated Statements of Income for the Years Ended February 3, 2001, January 29, 2000, and January 30, 1999.................................................... 17 Consolidated Statements of Shareholders' Equity for the Years Ended February 3, 2001, January 29, 2000, and January 30, 1999.................................................... 18 Consolidated Statements of Cash Flows for the Years Ended February 3, 2000, January 29, 2000, and January 30, 1999.................................................... 19 Notes to Consolidated Financial Statements...................................................... 20 - 25 Report of Independent Accountants............................................................... 26 Corporate Information........................................................................... 27
* The indicated pages of the Company's 2000 Annual Report to Shareholders are filed as Exhibit 13 to this Report. Exhibit 13 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 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 8, 2001, appearing in the accompanying 2000 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 2000 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 17 SIGNATURES 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 its behalf by the undersigned, thereunto duly authorized. GADZOOKS, INC. Date: April 30, 2001 By /s/ Gerald R. Szczepanski ------------------------------ Gerald R. Szczepanski Chairman of the Board 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.
Signature Title Date --------- ----- ---- /s/ Gerald R. Szczepanski Chairman of the Board, and Chief April 30, 2001 - ------------------------------------------- Executive Officer (Principal Gerald R. Szczepanski Executive Officer) /s/ James A. Motley Vice President, Chief Financial April 30, 2001 - ------------------------------------------- James A. Motley Officer, and Secretary (Principal Financial and Accounting Officer) /s/ G. Michael Machens Director April 30, 2001 - ------------------------------------------- G. Michael Machens /s/ Robert E.M. Nourse Director April 30, 2001 - ------------------------------------------- Robert E.M. Nourse /s/ Ron G. Stegall Director April 30, 2001 - ------------------------------------------- Ron G. Stegall /s/ Lawrence H. Titus, Jr. Director April 30, 2001 - ------------------------------------------- Lawrence H. Titus, Jr.
17 18 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF DOCUMENTS ------- ------------------------ 3.1 -- Third 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 Mellon Investor 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). 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).
18 19 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). 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).
19 20 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 (filed as Exhibit 10.22 to the Company's 1999 Annual Report on Form 10-K filed with the Commission on April 26, 2000 and incorporated herein by reference). 10.23 -- Severance Protection Agreement dated January 11, 1999 between the Company and Paula Y. Masters (filed as Exhibit 10.23 to the Company's 1999 Annual Report on Form 10-K filed with the Commission on April 26, 2000 and incorporated herein by reference). 10.24 -- Amendment No. 3 to the Credit Agreement between the Company and Wells Fargo Bank (Texas) National Association dated June 1, 2000 (filed as Exhibit 10.24 to the Company's Quarterly Report on Form 10-Q filed with the Commission on June 13, 2000 and incorporated herein by reference). 10.25 -- Management Services Agreement by and between Gadzooks Management, L.P. and Gadzooks, Inc. dated June 28, 2000 (filed as Exhibit 10.25 in the Company's Quarterly Report on Form 10-Q filed with the Commission on September 12, 2000 and incorporated herein by reference). 10.26 -- Lease and Occupancy Agreement between Gadzooks, Inc. and Gadzooks Management, L.P. dated June 28, 2000 (filed as Exhibit 10.26 to the Company's Quarterly Report on Form 10-Q filed with the Commission on September 12, 2000 and incorporated herein by reference). 10.27 -- Amendment No. 7 to the Gadzooks, Inc. 1992 Incentive and Nonstatutory Stock Option Plan dated as of March 30, 2000 (filed as Exhibit 4.9 to the Company's Form S-8 (No. 333-48350) filed with the Commission on October 20, 2000 and incorporated herein by reference) and incorporated herein by reference). 10.28 -- Amendment No. 1 to the Gadzooks, Inc. Employee Stock Purchase Plan dated as of March 30, 2000 (filed as Exhibit 4.11 to the Company's Form S-8 (No. 333-48350) filed with the Commission on October 20, 2000 and incorporated herein by reference). 13* -- Pages 11-27 of the Company's 2000 Annual Report to Shareholders. 21* -- List of Subsidiaries 23* -- Consent of PricewaterhouseCoopers LLP. 24* -- Power of Attorney (included on signature page of this report).
* Filed herewith (unless otherwise indicated, exhibits are previously filed). 20 EX-13 2 d86174ex13.txt 2000 ANNUAL REPORT TO SHAREHOLDERS 1 EXHIBIT 13 GADZOOKS, INC. SELECTED FINANCIAL DATA ($ in thousands, except operating data and per share amounts)
Fiscal Year Ended --------------------------------------------------------------- February 3, January 29, January 30, January 31, February 1, 2001 2000 1999 1998 1997 ---------- ---------- ----------- ----------- ----------- INCOME STATEMENT DATA: Net sales $ 288,411 $ 240,253 $ 207,172 $ 170,828 $ 127,631 Cost of goods sold 205,505 173,778 157,728 120,309 87,418 --------- --------- --------- --------- --------- Gross profit 82,906 66,475 49,444 50,519 40,213 Selling, general and administrative expenses 63,450 55,558 49,496 37,962 28,455 Provision for store closings and asset impairments -- 1,721 -- -- -- --------- --------- --------- --------- --------- Operating income (loss) 19,456 9,196 (52) 12,557 11,758 Interest income, net 792 496 536 706 945 --------- --------- --------- --------- --------- Income before income taxes 20,248 9,692 484 13,263 12,703 Provision for income taxes 7,458 3,622 97 4,975 4,712 --------- --------- --------- --------- --------- Net income $ 12,790 $ 6,070 $ 387 $ 8,288 $ 7,991 ========= ========= ========= ========= ========= Net income per share Basic $ 1.44 $ 0.68 $ 0.04 $ 0.95 $ 0.94 Diluted $ 1.38 $ 0.67 $ 0.04 $ 0.91 $ 0.87 Average shares outstanding Basic 8,911 8,910 8,852 8,683 8,525 Diluted 9,293 9,043 9,036 9,100 9,143 SELECTED OPERATING DATA: Comparable store sales increase (decrease)(1) 7.6% 5.4% (5.6%) 1.8% 6.1% Number of stores at year end 375 326 312 250 183 Average net sales per store $ 826,000 $ 746,000 $ 714,000 $ 791,000 $ 810,000 Average net sales per square foot $ 345 $ 315 $ 302 $ 338 $ 353 Total square footage at end of period 908,000 772,000 736,000 585,000 422,000 Operating income percentage 6.7% 3.8% -- 7.3% 9.2% Capital expenditures (in 000s) $ 12,936 $ 7,008 $ 10,082 $ 12,624 $ 6,864 BALANCE SHEET DATA: Working capital $ 44,986 $ 38,367 $ 31,629 $ 34,878 $ 34,333 Total assets 118,794 96,662 86,442 84,321 64,747 Total debt -- -- -- -- -- Shareholders' equity 79,388 66,145 60,031 58,480 49,063
(1) A store becomes comparable after it has been open for 14 full fiscal months. 11 2 GADZOOKS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Gadzooks is a mall-based specialty retailer of casual apparel and related accessories for young men and women, principally between the ages of 14 and 18. The Company opened its first store in 1983, and at fiscal year-end 2000, operated 375 stores in 36 states. The Company opened 52 stores in fiscal 2000, 19 stores in fiscal 1999 and 63 new stores in fiscal 1998. Five stores were closed during fiscal 1999, and three stores were closed during fiscal 2000. RESULTS OF OPERATIONS CLASSIFICATION OF DISCOUNTS ON EMPLOYEE SALES. The Company has historically recorded discounts related to the sale of merchandise to employees as a component of selling, general and administrative expenses ("SG&A"). Beginning with the second quarter of fiscal 2000, the Company began classifying these discounts as a reduction of gross sales. As a result, sales and gross profit have been reduced by the amount of the employee discounts, which have been offset by a like reduction in SG&A expenses for each period presented. This reclassification represents a change in income statement presentation only, and has no impact on net income or earnings per share. Employee discounts totaled $1.5 million, $1.4 million and $1.0 million for the years ended February 3, 2001, January 29, 2000 and January 30, 1999, respectively. 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:
Fiscal Year ----------------------- 2000 1999 1998 ------ ------ ------ Net sales 100.0% 100.0% 100.0% Cost of goods sold, including buying, distribution and occupancy costs 71.2 72.3 76.1 ----- ----- ----- Gross profit 28.8 27.7 23.9 Selling, general and administrative expenses 22.0 23.2 23.9 Provision for store closings and asset impairments -- 0.7 -- ----- ----- ----- Operating income 6.8 3.8 -- Interest income, net 0.2 0.2 0.3 ----- ----- ----- Income before income taxes 7.0 4.0 0.3 Provision for income taxes 2.6 1.5 0.1 ----- ----- ----- Net income 4.4% 2.5% 0.2% ===== ===== ===== Number of stores open at end of period 375 326 312
FISCAL YEAR. The Company's fiscal year is the 52- or 53-week period that ends on the Saturday nearest January 31. Fiscal 2000 was the 53-week period ending February 3, 2001. The Company estimates that the 53rd, or "extra," week included in fiscal 2000 increased net income by about $450,000, or $.05 per diluted share. The estimated impact of this 53rd week on the individual income statement components is discussed under the respective captions below. FISCAL 2000 COMPARED TO FISCAL 1999. Net sales increased approximately $48.1 million, or 20.0 percent, to $288.4 million during fiscal 2000 from $240.3 million during fiscal 1999. Net sales attributed to the 52 new stores opened during 2000 and for those not yet qualifying as comparable stores (excluding the effect of the 53rd week) contributed $25.4 million of the increase in total sales. Sales for the 53rd week contributed $4.5 million to the total increase in sales. Comparable store sales increased by $18.2 million, or 7.6 percent in fiscal 2000. The Company experienced comparable store sales increases in all but two of its major categories - young men's and shoes. The increase in comparable store sales is due to several factors, including continued improvements in product mix, a greater concentration of branded merchandise and visual merchandising improvements. The merchandise changes drove increases in unit sales up more than 10% per average store over the prior year. The Company experienced an overall decline in its average selling price per unit of approximately 3%, which was due primarily to slight shifts in the sales mix toward lower-priced merchandise, such as t-shirts and accessories. A store becomes comparable after it has been open for 14 full fiscal months. Gross profit increased approximately $16.4 million to $82.9 million during fiscal 2000 from $66.5 million in fiscal 1999. As a percentage of net sales, gross profit increased 108 basis points to 28.75 percent from 27.67 percent in fiscal 1999. The Company estimates that gross profit attributable to the 53rd week approximated $1.7 million. The majority of the increase in gross profit resulted from leverage achieved on store occupancy and buying and distribution costs (which are relatively fixed in nature) due to comparable store sales increases. Store occupancy and buying and distribution costs, as a percent of sales, decreased by 75 basis points and 7 basis points, respectively. Merchandise margin increased approximately 26 basis points, which was due primarily to a 12 3 GADZOOKS, INC. higher percentage of the Company's sales incurred in lower priced, merchandise with a higher initial mark-up, such as t-shirts, and the introduction of private label and exclusive merchandise. Selling, general and administrative expenses increased approximately $7.9 million to $63.5 million in fiscal 2000 from $55.6 million in fiscal 1999. The Company estimates that SG&A attributable to the 53rd week approximated $1.0 million. 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 112 basis points to 22.00 percent in fiscal 2000 from 23.12 percent in fiscal 1999. 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. These gains were partially offset, by an increase in compensation, of which a large portion is performance based. Net interest income increased $296,000 to $792,000 in fiscal 2000 from $496,000 in fiscal 1999 primarily due to higher average cash balances on hand. The Company's effective income tax rate decreased to 36.8 percent in fiscal 2000 from 37.4 percent in fiscal 1999. This decrease was primarily due to lower state income taxes resulting from the implementation of a new legal structure of the Company during the year, offset by the impact of graduated federal income tax rates. Additionally, the Company favorably settled with the Internal Revenue Service the open tax years of fiscal 1997 and 1998. FISCAL 1999 COMPARED TO FISCAL 1998. Net sales increased approximately $33.1 million, or 16.0 percent, to $240.3 million during fiscal 1999 from $207.2 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 $22.3 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. Gross profit increased approximately $17.1 million to $66.5 million during fiscal 1999 from $49.4 million in fiscal 1998. As a percentage of net sales, gross profit increased 380 basis points to 27.67 percent from 23.87 percent in fiscal 1998. The majority of the increase in gross profit resulted from an increase in merchandise margin of 336 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 increased approximately $6.1 million to $55.6 million in fiscal 1999 from $49.5 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 77 basis points to 23.12 percent in fiscal 1999 from 23.89 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 facilities. As of February 3, 2001, seven of the eight stores had been closed. The remaining store was closed on March 3, 2001. As of February 3, 2001 substantially all costs to close the eight stores had been incurred. The components of the provision, an analysis of amounts charged against the accrual and the sales and operating loss data for the eight stores are outlined in Note 3 of the "Notes to the Consolidated Financial Statements." As indicated in Note 4 of the "Notes to the Consolidated Financial Statements," the Company recorded a non-cash impairment charge of $533,000 in fiscal 1999 to reflect fixtures and leasehold improvements at their respective estimated fair value in six other under-performing stores. In January 2001, the Company closed one of these stores, the effect of which was not material to the 13 4 GADZOOKS, INC. consolidated financial statements. The remaining locations were not targeted 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 3.7 years). Management regularly reviews the performance of all the Company's stores. If management determines that it is unlikely that a store with negative cash flow will increase its sales volume 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 $1.7 million have been combined and are reflected under the caption "Provision for store closings and asset impairments" in the accompanying Consolidated Statement of Income for fiscal 1999. QUARTERLY RESULTS AND SEASONALITY The Company's quarterly results of operations may fluctuate materially depending on, among other things, the timing of new store openings, net sales contributed by new stores, increases or decreases in comparable store sales and changes in the Company's merchandise mix. The Company's business is also subject to seasonal influences, with higher sales during the Christmas holiday, back-to-school, and spring break seasons. The Christmas holiday season remains the Company's single most important selling season. The Company believes, however, that the significance of the back-to-school season (which affects operating results in the second and third quarters) and spring break season (which affects operating results in the first quarter) reduces somewhat the Company's dependence on the Christmas holiday selling season. As is the case with many apparel retailers, the Company's net sales and net income are typically lower in the first quarter. The following table sets forth certain statement of income and operating data for each of the Company's last eight fiscal quarters. The following quarterly data were derived from unaudited financial statements of the Company, which in the opinion of management of the Company, contain all adjustments (consisting only of normal recurring adjustments) necessary for fair presentation thereof. Results for any quarter are not necessarily indicative of results that may be achieved for a full fiscal year.
FISCAL 2000 Fiscal 1999 ---------------------------------------- ------------------------------------ FIRST SECOND THIRD FOURTH First Second Third Fourth QUARTER QUARTER QUARTER QUARTER(1) Quarter Quarter Quarter Quarter ------- ------- ------- ---------- ------- ------- ------- ------- ($ in thousands, except operating data and per share amounts) Statement of income data: Net sales $62,955 $64,223 $67,328 $93,904 $51,182 $57,748 $56,202 $75,121 Gross profit 17,881 16,801 18,512 29,712 13,725 15,335 14,957 22,457 Operating income(2) 3,747 2,248 3,381 10,081 809 1,766 728 5,893 Net income(2) 2,495 1,537 2,311 6,447 600 1,185 522 3,763 Net income per share(2) Basic $ 0.28 $ 0.17 $ 0.26 $ 0.72 $ 0.07 $ 0.13 $ 0.06 $ 0.42 Diluted $ 0.27 $ 0.17 $ 0.25 $ 0.69 $ 0.07 $ 0.13 $ 0.06 $ 0.42 Average shares outstanding Basic 8,927 8,915 8,894 8,909 8,893 8,906 8,919 8,921 Diluted 9,381 9,215 9,248 9,325 8,994 9,116 9,000 9,063 Selected operating data: Stores open at end of period 328 345 368 375 316 324 325 326
(1) The fourth quarter of fiscal 2000 includes results for a 13-week period versus 12 in the prior year. The Company estimates that this 53rd week increased sales, gross profit, operating income, net income and diluted earnings per share by $4.5 million, $1.7 million, $720,000, $450,000 and $.05, respectively. (2) 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 store remodels, and to purchase merchandise inventories. 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 2000, 1999 and 1998, cash flows from operating activities were $14.1 million, $9.3 million and $6.4 million, respectively. Cash flow from operations before working capital changes increased to $18.7 million in fiscal 2000 from $13.9 million in the prior year primarily due to higher net income. Working capital components used $4.6 million in fiscal 2000. Cash used was primarily the result of funding higher inventory levels ($11.5 million) offset, in part, by increases in accounts payable and income taxes payable of $7.5 million. Working capital 14 5 GADZOOKS, INC. components used $4.7 million of cash flow 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. Cash used in investing activities approximated $12.9 million, $7.0 million and $0.9 million for fiscal 2000, 1999 and 1998, respectively. The Company spent $12.9 million on capital expenditures during fiscal 2000, the primary components of which were $11.6 million to open new stores or remodel and refurbish existing stores and $1.3 million to purchase and/or upgrade information systems and other corporate purposes. 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 opened 52, 19 and 63 new stores in fiscal 2000, 1999 and 1998, respectively. Net cash flow provided by financing activities totaled $453,000, $44,000 and $1.2 million for fiscal 2000, 1999 and 1998, respectively. During fiscal 2000, the Company received $435,000 from the exercise of employee stock options as well as $162,000 of related tax benefit. The Company used $144,000 for net purchases of treasury stock. During fiscal 1999, the Company received $66,000 from the exercise of employee stock options as well as $20,000 of related tax benefit. The Company used $41,000 for net purchases of treasury stock in fiscal 1999. CREDIT FACILITY. On June 1, 2000, the Company renewed and revised its existing credit facility with Wells Fargo Bank. The revised facility provides an unsecured revolving line of credit totaling $15 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 the bank's prime rate, or 195 basis points above LIBOR. The Company pays commitment fees of 0.33% 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, debt to equity, net income and fixed charge coverage minimums as well as certain other ratios customary in such agreements. Amounts available to borrow under the line of credit, as limited by the cash flow multiple, totaled $14.9 million at February 3, 2001. No borrowings (other than letters of credit totaling $100,000) were outstanding under the revolving line at February 3, 2001. Any amount borrowed under the revolving line of credit will become due on June 1, 2001, the date the credit agreement matures. CAPITAL EXPENDITURES. The Company anticipates that it will spend approximately $13 million on capital expenditures in fiscal 2001 to open 50 to 60 new stores, remodel seven existing stores, and purchase and/or upgrade information systems. During fiscal 2000, the Company had capital expenditures of $12.9 million, of which $11.6 million was used to open 52 new stores, remodel 6 existing stores, refurbish approximately 7 stores and purchase other assets for open stores. The remaining $1.3 million was used primarily for corporate purposes, such as the purchase and/or upgrade of 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 2001. 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, 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 February 3, 2001. 15 6 GADZOOKS, INC. CONSOLIDATED BALANCE SHEETS
February 3, January 29, 2001 2000 ------------- ------------- ASSETS Current assets: Cash and cash equivalents $ 20,284,368 $ 18,643,475 Accounts receivable 3,125,995 1,216,579 Inventory 55,941,468 44,418,484 Other current assets 1,956,079 1,855,620 ------------- ------------- 81,307,910 66,134,158 ------------- ------------- Leaseholds, fixtures and equipment, net 36,025,881 30,234,808 Deferred tax assets 1,459,884 293,126 ------------- ------------- 37,485,765 30,527,934 ------------- ------------- $ 118,793,675 $ 96,662,092 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 25,233,423 $ 20,395,375 Accrued payroll and benefits 4,241,859 3,532,655 Other current liabilities 3,306,201 2,928,135 Income taxes payable 3,540,830 910,764 ------------- ------------- 36,322,313 27,766,929 Accrued rent 3,083,419 2,750,280 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, 8,969,825 and 8,922,528 shares issued and outstanding, respectively 89,698 89,225 Additional paid-in capital 43,042,615 42,282,468 Retained earnings 36,699,218 23,909,645 Treasury stock, at cost, 52,797 and 19,548 shares, respectively (443,588) (136,455) ------------- ------------- 79,387,943 66,144,883 ------------- ------------- $ 118,793,675 $ 96,662,092 ============= =============
The accompanying notes are an integral part of these consolidated financial statements. 16 7 GADZOOKS, INC. CONSOLIDATED STATEMENTS OF INCOME
Fiscal Year Ended --------------------------------------------- February 3, January 29, January 30, 2001 2000 1999 ------------- ------------- ------------- Net sales $ 288,410,676 $ 240,252,299 $ 207,172,393 Costs and expenses: Cost of goods sold, including buying, distribution and occupancy costs 205,504,899 173,777,873 157,728,597 Selling, general and administrative expenses 63,449,926 55,557,545 49,496,257 Provision for store closings and asset impairments -- 1,721,343 -- ------------- ------------- ------------- 268,954,825 231,056,761 207,224,854 ------------- ------------- ------------- Operating income (loss) 19,455,851 9,195,538 (52,461) Interest expense 127,709 97,686 58,265 Interest income 919,423 594,339 594,738 ------------- ------------- ------------- Income before income taxes 20,247,565 9,692,191 484,012 Provision for income taxes 7,457,992 3,621,953 97,188 ------------- ------------- ------------- Net income $ 12,789,573 $ 6,070,238 $ 386,824 ============= ============= ============= Net income per share Basic $ 1.44 $ 0.68 $ 0.04 ============= ============= ============= Diluted $ 1.38 $ 0.67 $ 0.04 ============= ============= ============= Average shares outstanding Basic 8,911,331 8,910,084 8,851,609 ============= ============= ============= Diluted 9,292,895 9,043,135 9,035,841 ============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements. 17 8 GADZOOKS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Additional Retained Treasury Stock Shares Capital Paid-In Capital Earnings Shares Capital Total ---------- -------- --------------- ------------ -------- ---------- ------------ BALANCE, JANUARY 31, 1998 8,754,577 $ 87,546 $ 40,868,605 $ 17,524,264 -- $ -- $ 58,480,415 Stock issued under option plans 138,159 1,381 604,713 -- -- -- 606,094 Purchase of treasury stock -- -- -- -- 29,500 (312,031) (312,031) Sale of treasury stock -- -- -- (55,635) (14,274) 200,667 145,032 Tax benefit from exercise of stock options -- -- 724,311 -- -- -- 724,311 Net income -- -- -- 386,824 -- -- 386,824 ---------- -------- --------------- ------------ -------- ---------- ------------ BALANCE, JANUARY 30, 1999 8,892,736 88,927 42,197,629 17,855,453 15,226 (111,364) 60,030,645 Stock issued under option plans 29,792 298 65,274 -- -- -- 65,572 Purchase of treasury stock -- -- -- -- 25,000 (212,981) (212,981) Sale of treasury stock -- -- -- (16,046) (20,678) 187,890 171,844 Tax benefit from exercise of stock options -- -- 19,565 -- -- -- 19,565 Net income -- -- -- 6,070,238 -- -- 6,070,238 ---------- -------- --------------- ------------ -------- ---------- ------------ BALANCE, JANUARY 29, 2000 8,922,528 89,225 42,282,468 23,909,645 19,548 (136,455) 66,144,883 Stock issued under option plans 47,297 473 434,504 -- -- -- 434,977 Purchase of treasury stock -- -- -- -- 50,000 (423,938) (423,938) Sale of treasury stock -- -- 163,177 -- (16,751) 116,805 279,982 Tax benefit from exercise of stock options -- -- 162,466 -- -- -- 162,466 Net income -- -- -- 12,789,573 -- -- 12,789,573 ---------- -------- --------------- ------------ -------- ---------- ------------ BALANCE, FEBRUARY 3, 2001 8,969,825 $ 89,698 $ 43,042,615 $ 36,699,218 52,797 $ (443,588) $ 79,387,943 ========== ======== =============== ============ ======== ========== ============
The accompanying notes are an integral part of these consolidated financial statements. 18 9 GADZOOKS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended -------------------------------------------- February 3, January 29, January 30, 2001 2000 1999 ------------ ------------ ------------ Cash flows from operating activities: Net income $ 12,789,573 $ 6,070,238 $ 386,824 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 193,939 288,813 135,456 Depreciation 6,951,320 5,841,152 4,653,433 Deferred income taxes (1,232,138) (15,338) (433,967) Changes in operating assets and liabilities: Accounts receivable (1,909,416) 1,785,072 (186,207) Inventory (11,522,984) (10,014,677) 1,360,026 Other assets (35,079) (146,331) (126,571) Accounts payable 4,838,048 2,246,639 1,426,928 Accrued payroll and benefits 709,204 1,033,897 387,474 Income taxes payable 2,630,066 910,764 (2,494,855) Other liabilities 711,205 (467,219) 1,251,260 ------------ ------------ ------------ Net cash provided by operating activities 14,123,738 9,254,353 6,359,801 ------------ ------------ ------------ Cash flows from investing activities: Capital expenditures (12,936,332) (7,008,271) (10,082,106) Purchases of short-term investments -- -- (7,596,979) Proceeds from redemption of short-term investments -- -- 16,754,188 ------------ ------------ ------------ Net cash used in investing activities (12,936,332) (7,008,271) (924,897) ------------ ------------ ------------ Cash flows from financing activities: Issuance of common stock, net 434,977 65,572 606,094 Purchase of treasury stock (423,938) (212,981) (312,031) Sale of treasury stock under employee stock purchase plan 279,982 171,844 145,032 Tax benefit from exercise of stock options 162,466 19,565 724,311 ------------ ------------ ------------ Net cash provided by financing activities 453,487 44,000 1,163,406 ------------ ------------ ------------ Net increase in cash and cash equivalents 1,640,893 2,290,082 6,598,310 Cash and cash equivalents at beginning of year 18,643,475 16,353,393 9,755,083 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 20,284,368 $ 18,643,475 $ 16,353,393 ============ ============ ============ Cash paid during the year for: Interest $ 68,564 $ 93,348 $ 63,240 Income taxes 5,900,872 2,736,158 4,407,154
The accompanying notes are an integral part of these consolidated financial statements. 19 10 GADZOOKS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS I. 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 February 3, 2001, the Company had 375 company-owned stores in metropolitan and middle markets in 36 states. 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 year 2000 represents the 53-week period ended February 3, 2001 and fiscal years 1999 and 1998 represent the 52-week periods ended January 29, 2000 and January 30, 1999, respectively. II. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION. In June 2000, the Company completed a corporate restructuring. The consolidated financial statements include the accounts of Gadzooks, Inc. and its wholly-owned affiliates, Gadzooks Holding Company and Gadzooks Management, L.P. All significant intercompany accounts and transactions have been eliminated in consolidation. CASH AND CASH EQUIVALENTS. Cash and cash equivalents include cash on hand and marketable securities with original maturities of three months or less. 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 and employee discounts. The Company adopted the provisions of SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101") in the fourth quarter of fiscal 2000. The effect of the adoption of this standard was immaterial to the Company's results of financial position and income. Gadzooks has historically recorded discounts related to the sale of merchandise to employees as a component of selling, general and administrative expenses ("SG&A"). Beginning with the second quarter of fiscal 2000, such discounts were reported as a reduction of sales. As a result, gross profit was reduced by the amount of the employee discounts each period, which was totally offset by a like reduction in SG&A expenses. Employee discounts have been retroactively reflected as a reduction of sales on all historical statements of income presented by the Company. Employee discounts totaled $1.5 million, $1.4 million and $1.0 million for the years ended February 3, 2001, January 29, 2000 and January 30, 1999, respectively. ADVERTISING. Advertising costs are expensed when incurred. Advertising costs were $1,212,657, $748,311 and $610,945 for fiscal years 2000, 1999 and 1998, 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 2000, 1999 and 1998. 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 basis 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. 20 11 GADZOOKS, INC. 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 February 3, 2001 and January 29, 2000 and the reported amounts of revenues and expenses during each of the three years in the period ended February 3, 2001. 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. III. PROVISION FOR STORE CLOSINGS 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 3, 2001, seven of the eight stores had been closed. The remaining store was closed on March 3, 2001. As of February 3, 2001, substantially all costs to close the eight stores had been incurred. The components of the provision and an analysis of the amounts charged against the accrual are outlined below.
1999 Charges Charges Original through Balance at through Balance at In thousands provision 1/29/00 1/29/00 2/03/01 2/03/01 - ----------------- --------- --------- ---------- --------- ---------- Lease termination costs $ 382 $ (263) $ 119 $ (113) $ 6 Impairment of long-lived assets 807 (807) -- -- -- --------- --------- ---------- --------- ---------- Total $ 1,189 $ (1,070) $ 119 $ (113) $ 6
Sales and operating loss of the eight stores are shown below for the years ended February 3, 2001, January 29, 2000 and January 30, 1999 (unaudited):
February 3, January 29, January 30, In thousands 2001 2000 1999 - ----------------- ----------- ----------- ----------- Sales $ 883,117 $ 3,015,017 $ 3,576,634 Operating loss (58,608) (695,402) (924,816)
IV. IMPAIRMENT OF LONG-LIVED ASSETS In accordance with Statement of Financial Accounting Standards ("SFAS") 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 in fiscal 1999 to reflect fixtures and leasehold improvements at their respective fair value in six under-performing stores. In January 2001, the Company closed one of these stores, the effect of which was not material to the consolidated financial statements. The remaining locations were not targeted 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. V. LEASEHOLDS, FIXTURES AND EQUIPMENT Leaseholds, fixtures and equipment are summarized as follows:
February 3, January 29, 2001 2000 ----------- ----------- Leasehold improvements $35,748,417 $29,080,001 Fixtures and equipment 24,789,217 19,516,913 ----------- ----------- 60,537,634 48,596,914 Less accumulated depreciation (24,511,753) (18,362,106) ----------- ----------- $36,025,881 $30,234,808 =========== ===========
21 12 GADZOOKS, INC. VI. LONG-TERM OBLIGATIONS On June 1, 2000, the Company renewed and revised its existing credit facility with Wells Fargo Bank. The revised facility provides an unsecured revolving line of credit totaling $15 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 0.33% 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, debt to equity, net income and fixed charge coverage minimums as well as certain other ratios customary in such agreements. Amounts available to borrow under the line of credit, as limited by the cash flow multiple and reduced by outstanding letters of credit, totaled $14.9 million at February 3, 2001. Any amount borrowed under the revolving line of credit will become due on June 1, 2001, the date the credit agreement matures. Prior to June 1, 2001, 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 February 3, 2001, there were no borrowings outstanding under the revolving line, and $100,000 in letters of credit were outstanding. VII. LEASES The Company leases store, office, and warehouse space under non-cancelable leases with terms that generally range from five to ten years. Most of the store leases provide for additional rentals based on a percentage of store sales and specify rental increases over the term of the lease. Total rent expense under these operating leases was $23,112,695, $20,775,846 and $18,717,424, for fiscal years 2000, 1999 and 1998, respectively. Included in these total rent figures are $608,000, $350,000 and $511,000 of contingent rent for fiscal years 2000, 1999 and 1998, respectively. Accrued rent of $3,083,419 as of February 3, 2001 and $2,750,280 as of January 29, 2000 has been provided to account for rent expenses on a straight-line basis. Future minimum lease payments under non-cancelable operating leases as of February 3, 2001 are as follows:
Fiscal year - ----------- 2001 $ 23,993,466 2002 24,214,395 2003 23,776,689 2004 22,830,998 2005 21,453,563 Thereafter 53,569,228 ------------- Total minimum lease payments $ 169,838,339 =============
VIII. INCOME TAXES The provision for federal and state income taxes consists of the following:
Fiscal -------------------------------------------- 2000 1999 1998 ------------ ------------ ------------ Current tax expense $ 8,690,125 $ 3,637,291 $ 531,155 Deferred tax benefit (1,232,133) (15,338) (433,967) ------------ ------------ ------------ $ 7,457,992 $ 3,621,953 $ 97,188 ============ ============ ============
22 13 GADZOOKS, INC. 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:
Fiscal -------------------------------------------- 2000 1999 1998 ------------ ------------ ------------ Tax provision at the federal corporate rate $ 6,884,172 $ 3,295,345 $ 164,564 State income taxes, net of related federal benefit 599,533 410,099 31,209 Graduated federal rate 100,000 -- -- Tax exempt interest -- -- (69,613) Other, net (125,713) (83,491) (28,972) ------------ ------------ ------------ Provision for income taxes $ 7,457,992 $ 3,621,953 $ 97,188 ============ ============ ============
Deferred tax assets (liabilities) are comprised of the following:
February 3, January 29, 2001 2000 ------------- ------------- Deferred tax assets: Accruals not currently deductible $ 1,750,452 $ 1,255,934 Depreciation 719,158 257,756 ------------- ------------- 2,469,610 1,513,690 Deferred tax liabilities -- (276,213) ------------- ------------- $ 2,469,610 $ 1,237,477 ============= =============
At February 3, 2001 and January 29, 2000, $1,009,726 and $944,351, respectively of net current deferred tax assets were classified as other current assets. The early disposition of certain qualified stock options and the exercise of certain nonqualified stock options in fiscal 2000, 1999 and 1998 resulted in income tax benefits to the Company of $162,466, $19,565 and $724,311 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. IX. 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 February 3, 2001, January 29, 2000 and January 30, 1999, the Company contributed $104,854, $130,837 and $117,917, respectively, in matching contributions to the 401(k) Plan. 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 was increased from 60,000 to 110,000 in fiscal 2000. During fiscal 2000, 1999 and 1998, 16,751, 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. 23 14 GADZOOKS, INC. X. STOCK OPTION PLANS The Company has three incentive and nonstatutory stock option plans. The "Employee Plan" for employees and consultants was adopted in February 1992; the "Key Employee Plan" for key employees was adopted in September 1994; and the "Nonemployee Director Plan" for the Company's outside directors was adopted in August 1995. Under these plans, options are granted to purchase common stock at a price no less than fair market value at the grant date. For options granted prior to the initial public offering, the Board of Directors considered various factors in determining fair market value including, among other things, the rights and preferences of holders of other securities issued by the Company, the financial position and results of operations of the Company, and the liquidity of the Company's common stock. Subsequent to the initial public offering, all shares have been granted at the closing price of the Company's common stock traded on The Nasdaq Stock Market on the date of grant. Options have vesting periods of generally two to five years from date of grant and may be exercised at any time once they become vested, but not more than 10 years from the date of grant. During fiscal 2000, the Employee Plan was amended to adjust the maximum aggregate number of shares that may be optioned and sold under the plan to 2,100,000 shares. During fiscal 1998, the Nonemployee Director Plan was amended to adjust the maximum aggregate number of shares that may be optioned and sold to 100,000 shares. The maximum aggregate number of shares that may be optioned and sold under the Key Employee Plan is 272,651 shares. On December 15, 1998, options to purchase 517,585 shares of the Company's common stock at prices ranging from $17.63 to $29.25 were cancelled and replaced with options to purchase 393,438 shares of common stock at prices of either $9.00 per share or $11.60 per share. The closing price of the Company's common stock on December 15, 1998 was $6.75 per share. The newly issued options vest over the same period as the cancelled options they replaced. For officers of the Company the replacement options provide the right to purchase from 50% to 67% of the number of shares subject to purchase under the cancelled options depending on the exercise price of the options cancelled. For all other employees, the replacement options provide the right to purchase the same number of shares as provided by the cancelled options. The following table includes option information for the Employee Plan, Key Employee Plan and Nonemployee Director Plan:
Fiscal ------------------------------------------------------------------------------------ 2000 1999 1998 ------------------------------------------------------------------------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ----------- ----------- ----------- ----------- ----------- ----------- Outstanding at beginning of year 1,049,652 $ 9.72 870,070 $ 9.71 698,360 $ 13.00 Granted 197,025 15.79 555,580 9.82 973,595 14.65 Exercised (52,273) 9.41 (30,192) 2.21 (138,159) 4.38 Cancelled (76,893) 11.89 (345,806) 10.50 (663,726) 21.54 ----------- ----------- ----------- ----------- ----------- ----------- Outstanding at end of year 1,117,511 $ 10.64 1,049,652 $ 9.72 870,070 $ 9.71 ----------- ----------- ----------- ----------- ----------- ----------- Available for grant at end of year 659,697 179,829 389,603 ----------- ----------- ----------- ----------- ----------- -----------
The following table summarizes information about stock options outstanding at February 3, 2001:
Options Outstanding Options Exercisable --------------------------------- --------------------------------- Weighted Average Weighted Weighted Number Remaining Average Number Average Range of Outstanding Contractual Exercise Exercisable Exercise Exercise Prices at 2/03/01 Life Price at 2/03/01 Price - ----------------- --------------- --------------- --------------- --------------- --------------- $ 0.21 - $ 5.78 142,237 4 years $ 3.87 142,237 $ 3.87 $ 6.16 - $ 8.88 199,873 8 years $ 7.27 42,461 $ 7.29 $ 9.00 - $ 11.56 210,685 8 years $ 9.91 73,491 $ 9.63 $ 11.60 - $ 12.38 370,202 8 years $ 11.99 119,023 $ 11.84 $ 12.44 - $ 28.13 194,514 9 years $ 17.32 31,307 $ 23.50 - ----------------- --------------- --------------- --------------- --------------- --------------- $ 0.21 - $ 28.13 1,117,511 408,519 - ----------------- --------------- --------------- --------------- --------------- ---------------
The Company measures and records compensation expense in accordance with current practices as prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and provides disclosure about pro forma compensation expense in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," 24 15 GADZOOKS, INC. 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:
Fiscal ------------------------------------------------ 2000 1999 1998 -------------- -------------- -------------- Net income - as reported $ 12,789,573 $ 6,070,238 $ 386,824 Net income (loss) - pro forma 10,764,338 4,831,365 (1,560,440) Diluted earnings per share - as reported 1.38 0.67 0.04 Diluted earnings (loss) per share - pro forma 1.16 0.53 (0.18)
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:
Fiscal -------------------------------------- 2000 1999 1998 ---------- ---------- ---------- Expected volatility 226% 248% 87% Risk-free interest rate 4.6% 6.5% 5.1% Expected lives 4.1 years 4.2 years 3.7 years Dividend yield 0% 0% 0%
The weighted average fair value of options granted was $15.23, $9.63 and $7.43 per share for fiscal 2000, 1999 and 1998, respectively. XI. EARNINGS PER SHARE The following table outlines the Company's calculation of weighted average shares outstanding:
Fiscal ------------------------------------------ 2000 1999 1998 ------------ ------------ ------------ Weighted average common shares outstanding (basic) 8,911,331 8,910,084 8,851,609 Effect of dilutive options 381,564 133,051 184,232 ------------ ------------ ------------ Weighted average common and dilutive potential shares outstanding (diluted) 9,292,895 9,043,135 9,035,841 ============ ============ ============
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 51,232, 215,389 and 22,132 in fiscal 2000, 1999 and 1998, respectively. XII. 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. 25 16 GADZOOKS, INC. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Gadzooks, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Gadzooks, Inc. and its subsidiaries at February 3, 2001 and January 29, 2000, and the results of their operations and their cash flows for each of the three years in the period ended February 3, 2001 in conformity with accounting principles generally accepted in the United States of America. 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 of America, 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 our opinion. /s/ PRICEWATERHOUSECOOPERS LLP Fort Worth, Texas March 8, 2001 26 17 GADZOOKS, INC. CORPORATE INFORMATION
DIRECTORS OFFICERS ANNUAL MEETING GERALD R. SZCZEPANSKI GERALD R. SZCZEPANSKI The Annual Meeting of Gadzooks, Inc. will be Chairman of the Board Chairman of the Board and held at 9:00 a.m., on June, 14, 2001, Co-Founder of Gadzooks Chief Executive Officer at the Company's headquarters. Director since 1983 PAULA Y. MASTERS TRANSFER AGENT AND REGISTRAR G. MICHAEL MACHENS (A,C) Senior Vice President General Partner General Merchandising Manager Mellon Investor Services Phillips-Smith Specialty Overpeck Centre Retail Group JAMES F. WIMPRESS, JR. 85 Challenger Road Director since 1992 Senior Vice President Ridgefield Park, NJ 07660 Store Operations (800) 635-9270 ROBERT E.M. NOURSE (C) www.mellon-investor.com Private Investor JAMES A. MOTLEY Former President and Vice President and CORPORATE COUNSEL Chief Executive Officer Chief Financial Officer The Bombay Company, Inc. Treasurer and Secretary Akin, Gump, Strauss, Hauer & Feld, L.L.P. Director since 1993 Dallas, Texas WILLIAM S. KOTCH III RON G. STEGALL (A) Vice President INDEPENDENT ACCOUNTANTS President Real Estate Arlington Equity Partners, Inc. PricewaterhouseCoopers LLP Director since 1999 STEPHEN R. PUTERBAUGH Fort Worth, Texas Vice President LAWRENCE H. TITUS, JR. (A) Human Resources SHAREHOLDER INFORMATION Co-Founder of Gadzooks (retired) JEFFREY P. CREECY A copy of Form 10-K, excluding exhibits, as Director since 1983 Vice President filed with the Securities and Exchange Information Systems 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 (A) Audit Committee $125.00 fee to cover the costs of (C) Compensation Committee reproduction. 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 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:
2000 1999 ------------------------------- ------------------------------- Fiscal Quarters HIGH LOW High Low -------------- ------------- ------------- ------------- First Quarter $ 24.13 $ 12.38 $ 9.94 $ 6.56 Second Quarter 23.13 7.94 16.00 9.13 Third Quarter 18.75 11.00 10.38 6.13 Fourth Quarter 21.13 12.94 13.69 7.44
On March 20, 2001 the closing sales price on The Nasdaq Stock Market was $24.64. As of March 20, 2001, the approximate number of common shareholders of record was 84, 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. 27 EX-21 3 d86174ex21.txt SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 LIST OF SUBSIDIARIES
Subsidiary State of Organization ---------- --------------------- Gadzooks Management, LP Texas Gadzooks Holding Company Nevada
EX-23 4 d86174ex23.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP 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, 333-68205 and 333-48350) of Gadzooks, Inc. of our report dated March 8, 2001 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 30, 2001 -----END PRIVACY-ENHANCED MESSAGE-----