-----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, R8U9V9OKQjHmH++162VVOryecUrLgyPIo9H5pbwP481I7RafgZ0/BjMO42zzcwYT AQ/ACgGXrfRLcGguYmRlIQ== 0000950134-98-007592.txt : 19980916 0000950134-98-007592.hdr.sgml : 19980916 ACCESSION NUMBER: 0000950134-98-007592 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980801 FILED AS OF DATE: 19980915 SROS: NASD 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-Q SEC ACT: SEC FILE NUMBER: 000-26732 FILM NUMBER: 98709679 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-Q 1 FORM 10-Q FOR QUARTER ENDED AUGUST 1, 1998 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 - -------------------------------------------------------------------------------- FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED AUGUST 1, 1998 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-26732 -------- GADZOOKS, INC. - -------------------------------------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) TEXAS 74-2261048 - -------------------------------------------------------------------------------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION INCORPORATION OR ORGANIZATION) NUMBER) 4121 INTERNATIONAL PARKWAY CARROLLTON, TX 75007 - -------------------------------------------------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 972-307-5555 --------------------------- - -------------------------------------------------------------------------------- (FORMER NAME, FORMER ADDRESS AND FISCAL YEAR, IF CHANGED SINCE LAST REPORT.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No ( ) ----- ----- As of September 10, 1998, the number of shares outstanding of the registrant's common stock is 8,886,839. 2 GADZOOKS, INC. FORM 10-Q For the Quarter Ended August 1, 1998 INDEX
PAGE ----- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Balance Sheets as of August 1, 1998 and January 31, 1998 3 Condensed Statements of Income for the 4 Second Quarter and Six Months Ended August 1, 1998 and August 2, 1997 Condensed Statements of Cash Flows for the 5 Six Months Ended August 1, 1998 and August 2, 1997 Notes to Financial Statements 6-7 Item 2. Management's Discussion and Analysis 8-11 of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures 11 About Market Risk PART II. OTHER INFORMATION 12-13 SIGNATURE PAGE 14 INDEX TO EXHIBITS 15-18
2 3 PART I - FINANCIAL INFORMATION GADZOOKS, INC. CONDENSED BALANCE SHEETS - -------------------------------------------------------------------------------- (In thousands) (Unaudited)
AUGUST 1, JANUARY 31, 1998 1998 --------- ----------- ASSETS Current assets: Cash and cash equivalents $ 7,624 $ 9,755 Short-term investments 600 9,157 Accounts receivable 4,051 2,815 Inventory 41,265 35,764 Other current assets 1,748 1,427 -------- ----------- 55,288 58,918 -------- ----------- Leaseholds, fixtures and equipment, net 28,474 25,403 -------- ----------- $ 83,762 $ 84,321 ======== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 15,122 $ 16,722 Accrued expenses & other current liabilities 4,872 4,823 Income taxes payable 859 2,495 -------- ----------- 20,853 24,040 -------- ----------- Accrued rent 1,973 1,800 Shareholders' equity: Common stock 88 88 Additional paid-in capital 41,353 40,869 Retained earnings 19,540 17,524 Treasury stock (45) ( --) -------- ----------- 60,936 58,481 -------- ----------- $ 83,762 $ 84,321 ======== ===========
The accompanying notes are an integral part of these financial statements. 3 4 GADZOOKS, INC. CONDENSED STATEMENTS OF INCOME - -------------------------------------------------------------------------------- (In thousands, except per share data) (Unaudited)
SECOND QUARTER ENDED SIX MONTHS ENDED -------------------------- ------------------------- AUGUST 1, AUGUST 2, AUGUST 1, AUGUST 2, 1998 1997 1998 1997 --------- --------- --------- --------- Net sales $ 48,202 $ 36,780 $ 93,228 $ 70,850 Cost of goods sold including buying, distribution and occupancy costs 35,916 27,758 68,240 51,701 --------- --------- --------- --------- Gross profit 12,286 9,022 24,988 19,149 Selling, general and administrative expenses 11,429 8,881 22,049 17,114 --------- --------- --------- --------- Operating income 857 141 2,939 2,035 Interest income, net 113 134 298 376 --------- --------- --------- --------- Income before income taxes 970 275 3,237 2,411 Provision for income taxes 364 104 1,214 916 --------- --------- --------- --------- Net income $ 606 $ 171 $ 2,023 $ 1,495 ========= ========= ========= ========= Net income per share Basic $ 0.07 $ 0.02 $ 0.23 $ 0.17 ========= ========= ========= ========= Diluted $ 0.07 $ 0.02 $ 0.22 $ 0.16 ========= ========= ========= ========= Average shares outstanding Basic 8,836 8,669 8,815 8,631 ========= ========= ========= ========= Diluted 9,071 9,110 9,083 9,118 ========= ========= ========= =========
The accompanying notes are an integral part of these financial statements. 4 5 GADZOOKS, INC. CONDENSED STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------- (In thousands) (Unaudited)
SIX MONTHS ENDED ------------------------- AUGUST 1, August 2, 1998 1997 --------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES : Net income $ 2,023 $ 1,495 Adjustments to reconcile net income to cash used in operating activities : Depreciation 2,095 1,457 Changes in operating assets and liabilities (10,074) (2,091) --------- ----------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (5,956) 861 --------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES : Capital expenditures, net (5,165) (6,797) Sales of short-term investments, net 8,557 2,249 --------- ----------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 3,392 (4,548) --------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES : Issuance of common stock 485 356 Purchase of treasury stock (110) -- Sale of treasury stock under employee stock purchase plan 58 -- --------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 433 356 --------- ----------- Net decrease in cash and cash equivalents (2,131) (3,331) Cash and cash equivalents at beginning of period 9,755 10,348 --------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,624 $ 7,017 ========= ===========
The accompanying notes are an integral part of these financial statements. 5 6 GADZOOKS, INC. NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying condensed financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of August 1, 1998 and January 31, 1998, and the results of operations and cash flows for the second quarter and six months ended August 1, 1998 and August 2, 1997. The results of operations for the second quarter and six months then ended are not necessarily indicative of the results to be expected for the full fiscal year. The condensed balance sheet as of January 31, 1998 is derived from audited financial statements. The condensed financial statements should be read in conjunction with the financial statement disclosures contained in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1998. 2. LONG-TERM OBLIGATIONS On June 11, 1998, the Company amended its credit agreement with Wells Fargo Bank to increase its unsecured revolving line of credit from $10 million to $20 million. The terms of the credit agreement remained virtually the same; however, the commitment fee has been reduced from 0.50 percent to 0.35 percent per annum on the unused portion of the revolving line. Any amount borrowed under the revolving line of credit becomes due on June 5, 1999. As of August 1, 1998, no amounts were outstanding under the revolving line. 3. EMPLOYEE BENEFIT PLANS On June 18, 1998, the shareholders approved the Gadzooks, Inc. Employee Stock Purchase Plan ("ESPP"). The ESPP allows eligible employees the right to purchase common stock on a monthly basis at 85 percent of the closing market price of the shares on the last day of the respective calendar month. The aggregate number of shares that may be offered under the ESPP is 60,000. 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. 6 7 4. SUBSEQUENT EVENTS 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 will be made on September 15, 1998 payable to shareholders of record on that date. The Rights become exercisable only if a person or group acquires 20 percent or more of the Company's common stock. 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 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. Contingency A lawsuit was filed on August 19, 1998 in the United States District Court for the Northern District of Texas on behalf of purchasers of the publicly traded securities of the Company within the inclusive period of July 9, 1998 through July 22, 1998 alleging misleading and incomplete public disclosures regarding the Company's sales results. The Company believes the lawsuit is without merit and intends to defend it vigorously. The liability, if any, associated with this matter is not determinable at this time. While the adverse resolution of this case could negatively impact earnings in the year of settlement, it is the opinion of management that the ultimate resolution of the matter will not have a materially adverse effect on the Company's financial position. 7 8 Management's Discussion and Analysis of Financial Condition and Results of Operations GENERAL Gadzooks is a rapidly growing, mall-based specialty retailer of casual apparel and related accessories for young men and women principally between the ages of 13 and 19. As of August 1, 1998, the Company had opened 55 new stores since the beginning of the fiscal year, closed one store, and operated 304 stores in 32 states east of the Rocky Mountains. The Company's business is subject to seasonal influences with slightly higher sales during the Christmas holiday, back-to-school, and spring break seasons. Management's discussion and analysis should be read in conjunction with the Company's financial statements and the notes related thereto. RESULTS OF OPERATIONS Second Quarter Ended August 1, 1998 Compared to Second Quarter Ended August 2, 1997 Net sales increased approximately $11.4 million, or 31.1 percent, to $48.2 million during the second quarter of fiscal 1998 from $36.8 million during the comparable quarter of fiscal 1997. Comparable store sales decreased 0.6 percent for the second quarter of fiscal 1998. The total company sales increase was attributable to new stores not yet included in the comparable store sales base. A store becomes comparable after it has been open for 14 full fiscal months. Gross profit increased approximately $3.3 million to $12.3 million during the second quarter of fiscal 1998 from $9.0 million during the comparable quarter of fiscal 1997. As a percentage of net sales, gross profit increased to 25.5 percent from 24.5 percent in the comparable quarter of last year. The majority of the increase in gross profit resulted from an increase in merchandise margin of 2.0 percent of sales due to a reduction in the amount of markdowns taken in the junior and unisex categories as compared to the prior year. Store occupancy costs as a percentage of sales increased by 1.4 as a result of lower than expected sales. Buying and distribution costs decreased slightly as a percentage of sales primarily due to the leveraging of the distribution center costs over a larger store base. 8 9 Selling, general and administrative expenses ("SG&A") increased approximately $2.5 million to $11.4 million during the second quarter of 1998 from $8.9 million during the comparable quarter of fiscal 1997. The aggregate increase in SG&A is primarily attributable to additional store expenses as a result of the Company's expanded store base during the past year and an increase in administrative costs to support the larger store chain. As a percentage of net sales, SG&A decreased to 23.7 percent during the second quarter of fiscal 1998 from 24.1 percent during the comparable quarter of last year. The decrease in the SG&A percentage is primarily due to improved controls over store level expenses. The Company's net interest income decreased $21,000 to $113,000 during the second quarter of fiscal 1998 from $134,000 in the comparable period of last year due to the use of short-term investments to fund the Company's continuing expansion. Six Months Ended August 1, 1998 Compared to Six Months Ended August 2, 1997 Net sales increased approximately $22.4 million, or 31.6 percent, to $93.2 million during the first six months of fiscal 1998 from $70.9 million during the comparable period of fiscal 1997. Comparable store sales decreased 0.6 percent for the first six months of fiscal 1998. The total company sales increase was attributable to new stores not yet included in the comparable store sales base. Gross profit increased approximately $5.8 million to $25.0 million during the first six months of fiscal 1998 from $19.1 million during the comparable period of fiscal 1997. As a percentage of net sales, gross profit decreased to 26.8 percent compared to 27.0 percent in the comparable period of last year. Merchandise margins as a percentage of sales increased by 1.0 percent due to a reduction in the amount of markdowns taken in the junior category as compared to the second quarter of 1997. Store occupancy costs as a percentage of sales increased by 1.4 percent as a result of lower than expected sales. In addition, buying and distribution costs decreased slightly as a percentage of sales as a result of leveraging the distribution center costs over a larger store base. Selling, general and administrative expenses increased approximately $4.9 million to $22.0 million during the first six months of 1998 from $17.1 million during the comparable period of fiscal 1997. As a percentage of net sales, selling, general and administrative expenses decreased to 23.7 percent of sales during the first six months of fiscal 1998 from 24.2 percent of sales during the comparable period of last year. The decrease in the SG&A percentage is primarily due to improved controls over store level expenses. 9 10 Net interest income decreased by $78,000 to $298,000 during the first six months of fiscal 1998 from $376,000 in the comparable period of last year due to the use of short-term cash investments to fund the Company's continuing expansion. LIQUIDITY AND CAPITAL RESOURCES General. The Company's primary uses of cash are financing new store openings and purchasing merchandise inventories. As a result of a previously announced slow-down in the Company's new store openings, the Company expects its primary use of cash for the remainder of the current fiscal year to be the purchase of merchandise inventory. The Company is currently meeting its cash requirements through cash flow from operations and short-term investments on-hand. Cash Flows. At August 1, 1998, cash and cash equivalents were $7.6 million, a decrease of $2.1 million since January 31, 1998. The primary uses of cash were increased inventory levels of $5.5 million, capital expenditures of $5.2 million for new stores, a decrease in accounts payable of $1.6 million, a decrease in income taxes payable of $1.6 million, and an increase in accounts receivable of $1.2 million. The primary sources of cash for the first six months of fiscal 1998 were net income before depreciation of $4.1 million and sales of short-term investments of $8.6 million. The Company opened 55 new stores during the first six months of 1998 as compared with 38 new stores in the same period of the prior year. Credit Facility. On June 11, 1998, the Company renewed its credit agreement with Wells Fargo Bank, increasing its unsecured revolving line of credit from $10 million to $20 million. Amounts borrowed under the revolving line bear interest at the lesser of either Prime Rate or 1.95 percent above LIBOR. The Company must also pay a commitment fee of 0.35 percent per annum on the unused portion of the revolving line. As of August 1, 1998, no amounts were outstanding under the revolving line. The revolving line also provides for the issuance of letters of credit that are generally used in connection with international merchandise purchases and that reduce amounts otherwise available under the revolving line of credit. As of September 10, 1998, letters of credit in the amount of $0.8 million were issued and outstanding. Any amount borrowed under the revolving line of credit becomes due on June 5, 1999. Capital Expenditures. The Company anticipates opening approximately eight new stores during the remaining quarters of 1998. The Company estimates that its average capital expenditures to open a new store, including leasehold improvements and furniture and fixtures, will be approximately $175,000 (approximately $100,000 net of landlord construction allowances). The typical 10 11 cost of initial inventory for a new store is approximately $100,000; however, the immediate cash requirement for inventory is partially financed through the Company's payment terms with its vendors. Pre-opening costs range from $9,000 to $13,000 for travel, hiring and training, and other miscellaneous costs associated with the setup of a new store prior to its opening for business. Pre-opening costs are expensed as incurred. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not engage in trading market risk sensitive instruments and does not purchase as investments, as hedges, or for purposes "other than trading" instruments that are likely to expose the Company to market risk, whether it be from interest rate, foreign currency exchange, commodity price or equity price risk. The Company has issued no debt instruments, entered into no forward or futures contracts, purchased no options and entered into no swaps. The Company's primary market risk exposure is that of interest rate risk. A change in LIBOR or the Prime Rate as set by Wells Fargo Bank (Texas), National Association, would affect the rate at which the Company could borrow funds under its revolving line of credit. STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE Certain sections of this Quarterly Report on Form 10-Q, including the preceding "Management's Discussion and Analysis of Financial Condition and Results of Operations," contain various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act, which represent the Company's expectations or beliefs concerning future events. These forward-looking statements involve risks and uncertainties, and the Company cautions that these statements are further qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements, including, without limitation, those set forth in the "Risk Factors" section of the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 1998. 11 12 PART II - OTHER INFORMATION Items 1-3 - None Item 4 - Submission of Matters to a Vote of Security Holders (a) The Annual Meeting of Shareholders of the Company was held on June 18, 1998. (b) Information regarding the Company's directors is contained in the Company's Definitive Proxy Statement, which is attached hereto as Exhibit 22. (c) Robert E.M. Nourse was elected to serve as a director until the Company's 2001 annual meeting of shareholders according to the following vote: For: 8,114,276 Withheld: 169,450 The 1992 Incentive and Nonstatutory Stock Option Plan was amended to increase the aggregate number of shares of Common Stock available for issuance under the Plan from 900,000 to 1,500,000 according to the following vote: For: 5,276,933 Against: 1,808,991 Withheld: 9,688 The 1995 Non-Employee Director Stock Option Plan was amended to (i) fix the number of shares for which options will be granted to newly elected or appointed non-employee directors at 5,000 shares, (ii) fix the number of shares for which options will be granted annually to incumbent non-employee directors at 2,000 shares and have such options vest over two years, (iii) provide for a one-time grant of an option to purchase 5,000 shares to each incumbent non-employee director on June 18, 1998, (iv) accelerate the vesting and extend the exercise period of a non-employee director's options upon his cessation of service as a director if such director has served on the Board of Directors for at least five (5) consecutive years immediately preceding the date of such cessation of service, (v) change the date of the annual grant of options to each non-employee director to the third day after the Company's release of 12 13 annual earnings, and (vi) increase the number of shares available for issuance under the Director Plan from 30,000 to 100,000, according to the following vote: For: 6,262,836 Against: 825,002 Withheld: 14,790 The Employee Stock Purchase Plan was adopted according to the following vote: For: 6,870,154 Against: 229,574 Withheld: 2,900 The selection of PricewaterhouseCoopers LLP as the Company's independent accountants for the fiscal year ending January 30, 1999 was ratified by the shareholders according to the following vote: For: 8,274,326 Against: 7,335 Withheld: 2,065 (d) None. Item 5 - None Item 6 - Exhibits and Reports on Form 8-K (a) See Index of Exhibits. (b) A Form 8-K dated September 3, 1998 was filed announcing the adoption of a shareholder rights plan. 13 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GADZOOKS, INC. (Registrant) DATE: September 15, 1998 By: /s/ MONTY R. STANDIFER --------------------------- Monty R. Standifer Senior Vice President and Chief Financial Officer 14 15 INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION OF DOCUMENTS 3.1 Second Restated Articles of Incorporation of the Company (filed as Exhibit 4.1 to the Company's Form S-8 (No. 33-98038) filed with the Commission on October 12, 1995 and incorporated herein by reference). 3.2 Amended and Restated Bylaws of the Company (filed as Exhibit 4.2 to the Company's Form S-8 (No. 33-98038) filed with the Commission on October 12, 1995 and incorporated herein by reference). 3.3 First Amendment to the Amended and Restated Bylaws of the Company (filed as Exhibit 3.3 of the Company's Quarterly Report on Form 10-Q for the quarter ended August 2, 1997 filed with the Commission on September 16, 1997 and is incorporated herein by reference). 4.2 Rights Agreement dated as of September 3, 1998 between the Company and ChaseMellon Shareholder Services, L.L.C. (filed as Exhibit 1 to the Company's Form 8-A filed with the commission on September 4, 1998 and incorporated herein by reference). 4.1 Specimen Certificate for shares of Common Stock, $.01 par value, of the Company (filed as Exhibit 4.1 to the Company's Amendment No. 2 to Form S-1 (No. 33-95090) filed with the Commission on September 8, 1995 and incorporated herein by reference). 10.1 Purchase Agreement dated as of January 31, 1992 among the Company, Gerald R. Szczepanski, Lawrence H. Titus, Jr. and the Investors listed therein (filed as Exhibit 10.1 to the Company's Form S-1 (No. 33-95090) filed with the Commission on July 28, 1995 and incorporated herein by reference). 10.2 Purchase Agreement dated as of May 26, 1994 among the Company, Gerald R. Szczepanski, Lawrence H. Titus, Jr. and the Investors listed therein (filed as Exhibit 10.2 to the Company's Form S-1 (No. 33-95090) filed with the Commission on July 28, 1995 and incorporated herein by reference). 15 16 10.3 Credit Agreement dated as of January 30, 1997 between the Company and Wells Fargo Bank (Texas), National Association (filed as Exhibit 10.3 to the Company's 1996 Annual Report on Form 10-K filed with the Commission on April 23, 1997 and incorporated herein by reference). 10.4 Form of Indemnification Agreement with a schedule of director signatories (filed as Exhibit 10.5 to the Company's Form S-1 (No. 33-95090) filed with the Commission on July 28, 1995 and incorporated herein by reference). 10.5 Employment Agreement dated January 31, 1992 between the Company and Gerald R. Szczepanski, as continued by letter agreement (filed as Exhibit 10.6 to the Company's Form S-1 (No. 33-95090) filed with the Commission on July 28, 1995 and incorporated herein by reference). 10.6 1992 Incentive and Nonstatutory Stock Option Plan dated February 26, 1992, and Amendments No. 1 through 3 thereto (filed as Exhibit 10.8 to the Company's Form S-1 (No. 33-95090) filed with the Commission on July 28, 1995 and incorporated herein by reference). 10.7 1994 Incentive and Nonstatutory Stock Option Plan for Key Employees dated September 30, 1994 (filed as Exhibit 10.9 to the Company's Form S-1 (No. 33-95090) filed with the Commission on July 28, 1995 and incorporated herein by reference). 10.8 1995 Non-Employee Director Stock Option Plan (filed as Exhibit 10.10 to the Company's Form S-1 (No. 333-00196) filed with the Commission on January 9, 1996 and incorporated herein by reference). 10.9 Gadzooks, Inc. Employees' Savings Plan (filed as Exhibit 10.11 to the Company's Form S-1 (No. 33-95090) filed with the Commission on July 28, 1995 and incorporated herein by reference). 10.10 Severance Agreement dated September 5, 1996 between the Company and Gerald R. Szczepanski (filed as Exhibit 10.10 to the Company's 1996 Annual Report on Form 10-K filed with the Commission on April 23, 1997 and incorporated herein by reference). 16 17 10.11 Form of Severance Agreement with a schedule of executive officer signatories (filed as Exhibit 10.11 to the Company's 1996 Annual Report on Form 10-K filed with the Commission on April 23, 1997 and incorporated herein by reference). 10.12 Amendment No. 4 to the Gadzooks, Inc. 1992 Incentive and Nonstatutory Stock Option Plan (filed as Exhibit 10.14 to the Company's Amendment No. 3 to Form S-1 (No. 33-95090) filed with the Commission on September 27, 1995 and incorporated herein by reference). 10.13 Amendment No. 5 to the Gadzooks, Inc. 1992 Incentive and Nonstatutory Stock Option Plan dated September 12, 1996 (filed as Exhibit 10.13 to the Company's 1996 Annual Report on Form 10-K filed with the Commission on April 23, 1997 and incorporated herein by reference). 10.14 Amendment No. 1 to the 1994 Incentive and Nonstatutory Stock Option Plan for Key Employees dated September 12, 1996 (filed as Exhibit 10.14 to the Company's 1996 Annual Report on Form 10-K filed with the Commission on April 23, 1997 and incorporated herein by reference). 10.15 Gadzooks, Inc. Employee Stock Purchase Plan (filed as Exhibit 4.5 to the Company's Form S-8 (No. 333-50639) filed with the Commission on April 21, 1998 and incorporated herein by reference). 10.16 Gadzooks, Inc. Deferred Compensation Plan (filed as Exhibit 10.16 to the Company's 1997 Annual Report on Form 10-K filed with the Commission on April 27, 1998 and incorporated herein by reference). 10.17 Lease Agreement between Gadzooks, Inc. (Lessee) and CB Midway International, LTD. (Lessor) dated August 23, 1996 (filed as Exhibit 10.17 to the Company's 1997 Annual Report on Form 10-K filed with the Commission on April 27, 1998 and incorporated herein by reference). 10.18 Gadzooks, Inc. 401(k) Plan and Profit Sharing Plan Adoption Agreement (filed as Exhibit 10.18 to the Company's Quarterly Report on Form 10-Q filed with the Commission on June 9, 1998, and incorporated herein by reference). 17 18 10.19* Amendment No. 1 to the Credit Agreement between the Company and Wells Fargo Bank (Texas), National Association, dated June 11, 1998. 10.20 Amendment No. 6 to the Gadzooks, Inc. 1992 Incentive and Non-Statutory Stock Option Plan dated June 18, 1998 (filed as Exhibit 4.8 to the Company's Form S-8 (No. 333-60869) filed with the Commission on August 7, 1998 and incorporated herein by reference). 10.21 Amendment No. 1 to the Gadzooks, Inc. 1995 Non-Employee Director Stock Option Plan dated June 18, 1998 (filed as Exhibit 4.10 to the Company's Form S-8 (No 333-60869) filed with the Commission on August 7, 1998 and incorporated herein by reference). 10.22* Employment Agreement dated July 18, 1998, between the Company and David Mangini, as continued by letter agreement. 22 Definitive Proxy Statement pursuant to Section 14(a) of the Securities Exchange Act of 1934 (filed with the Commission on May 11, 1998, and incorporated herein by reference). 27* Financial Data Schedule - -------------------------------------------------------------------------------- * Filed herewith (unless otherwise indicated, exhibits are previously filed). 18 EX-10.19 2 AMENDMENT NO. 1 TO CREDIT AGREEMENT 1 EXHIBIT 10.19 FIRST AMENDMENT TO CREDIT AGREEMENT THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is made and entered into this 11th day of June, 1998, by and between GADZOOKS, INC., a Texas corporation (the "Company"), and WELLS FARGO BANK (TEXAS), National Association (the "Bank"). PRELIMINARY STATEMENTS A. The Company and the Bank are parties to that certain Credit Agreement, dated January 30, 1997 (the "Credit Agreement"); and B. The Company and the Bank desire to amend the Credit Agreement and the other Loan Documents (as defined in the Credit Agreement, as amended hereby) to, among other things, increase the amount of and extend the Line of Credit (as defined in the Credit Agreement) provided by the Bank to the Company from $10,000,000.00 to $20,000,000.00 as hereinafter set forth. NOW, THEREFORE, in consideration of the premises herein contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties, intending to be legally bound, agree as follows: ARTICLE I DEFINITIONS 1.01 Capitalized terms used in this Amendment are defined in the Credit Agreement, as amended hereby, unless otherwise stated. ARTICLE II AMENDMENTS 2.01 AMENDMENT TO SECTION 1.1(a). Effective as of the date hereof, Section 1.1(a) of the Credit Agreement is hereby amended by deleting therefrom the (i) dollar amount "$10,000,000.00" and substituting therefor the dollar amount "$20,000,000.00", (ii) the date "June 5, 1998" and substituting therefor the date "June 5, 1999" and (iii) the last sentence thereof and substituting the following new sentence: "Borrower's obligations to repay the advances under this Line of Credit shall be evidenced by a First Amended and Restated Revolving Line of Credit Note substantially in the form of Exhibit A-1 to that certain First Amendment to Credit Agreement, dated as of June 11, 1998 ("Line of Credit Note"), all of the terms of which are hereby incorporated herein by reference." -1- 2 2.02 AMENDMENT TO SECTION 1.1(b). Effective as of the date hereof, Section 1.1(b) of the Credit Agreement is hereby amended by deleting therefrom the word "for" between the words "resulting" and "the sale" and substituting therefor the word "from." 2.03 AMENDMENT TO SECTION 1.1(c). Effective as of the date hereof, Section 1.1(c) of the Credit Agreement is hereby amended by deleting therefrom the (i) dollar amount "Ten Million Dollars ($10,000,000.00)" and substituting therefor the dollar amount "Twenty Million Dollars ($20,000,000.00)" and (ii) the date "May 2, 1998" and substituting therefor the date "May 2, 1999." 2.04 AMENDMENT TO SECTION 1.2(c); FEE PAYMENT. Effective as of the date hereof, Section 1.2(c) of the Credit Agreement is hereby amended by deleting therefrom the non-refundable loan origination fee amount from "FIFTEEN THOUSAND DOLLARS ($15,000.00)" and substituting therefor the non-refundable loan origination fee amount of "TWENTY-SEVEN THOUSAND FOUR HUNDRED ($27,400.00)". Such fee shall be payable on the date hereof. Section 1.2(c) shall be further amended by deleting therefrom the date "March 15, 1999" and substituting therefor the date "June 11, 1998." 2.05 AMENDMENT TO SECTION 1.2(d). Effective as of the date hereof, Section 1.2 (d) of the Credit Agreement is hereby amended by deleting therefrom the phrase "Borrower shall pay to Bank a fee equal to one-half percent (.50%) per annum" and substituting therefor the phrase "Borrower shall pay to Bank a fee equal to thirty-five basis points (0.35%) per annum." 2.06 AMENDMENT TO SECTION 2.5. Effective as of the date hereof, Section 2.5 of the Credit Agreement is hereby amended by deleting therefrom the date "September 28, 1996" and substituting therefor the date "May 2, 1998." 2.07 AMENDMENT TO SECTION 3.1(b). Effective as of the date hereof, Section 3.1 (b) of the Credit Agreement is hereby amended by adding the following last sentence: "The foregoing documents, the documents described in Section 3.2(b) below, and such other documents, instruments and agreements as may be executed and/or delivered in connection with this Credit Agreement, as the same may be amended, modified, extended, renewed or supplemented from time to time, shall be called the `Loan Documents'." 2.08 AMENDMENT TO ADD NEW SECTION 3.3. Effective as of the date hereof, the Credit Agreement is hereby amended by adding the following new Section 3.3: "SECTION 3.3. Subsidiary Guaranty. So long as an obligation exists under this Agreement, the Line of Credit Note or any other Loan Document, Borrower will cause any now or hereafter existing Subsidiary (as defined in Section 4.10 of this Agreement) promptly (upon becoming a Subsidiary) to execute and deliver to Bank an unconditional guaranty of such obligations of Borrower in form and substance satisfactory to Bank." -2- 3 2.09 AMENDMENT TO SECTION 4.3(c). Effective as of the date hereof, Section 4.3(c) of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "(c) not later than 30 days after the end of each of the first eleven months in Borrower's fiscal year; and within 45 days after the end of the twelfth month of such fiscal year, a financial statement of Borrower, prepared by Borrower in accordance with Borrower's customary or historical methods of accounting for such statements;" 2.10 AMENDMENT TO SECTION 4.3(e). Effective as of the date hereof, Section 4.3(e) of the Credit Agreement is deleted in its entirety. 2.11 AMENDMENT TO SECTION 4.9(a). Effective as of the date hereof, Section 4.9 (a) of the Credit Agreement is hereby deleted in its entirety. 2.12 AMENDMENT TO SECTION 4.9(b). Effective as of the date hereof, Section 4.9(b) of the Credit Agreement is hereby amended by deleting therefrom the dollar amount "15,000,000.00" and substituting therefor the dollar amount "$25,000,000.00." 2.13 AMENDMENT TO SECTION 4.9(c). Effective as of the date hereof, Section 4.9(c) of the Credit Agreement is deleted and amended and restated in its entirety to read as follows: "(c) Tangible Net Worth not at any time less than $55,000,000.00." 2.14 AMENDMENT TO SECTION 4.9(g). Effective as of the date hereof, Section 4.9(g) of the Credit Agreement is hereby amended and restated to read in its entirety as follows: "(g) Maintain a ratio of (i) an amount equal to the sum of (A) the face amount of all outstanding Letters of Credit, plus (B) the indebtedness under the Line of Credit Note to (ii) total inventory of the Company, of not more than sixty-five (65%) throughout the term hereof." 2.15 AMENDMENT TO SECTION 4.10. Effective as of the date hereof, of Section 4.10 the Credit Agreement is hereby amended by (a) deleting the word "or" after the words "to any Plan"; and (b) inserting after the word "property" at the end thereof, the following clause: "or (e) the existence, now or hereafter, by formation, acquisition or otherwise, of any subsidiary of Borrower or of any subsidiary thereof (each a `Subsidiary')." 2.16 AMENDMENT TO ARTICLE V. Effective as of the date hereof, of the first paragraph of Article V (Negative Covenants) of the Credit Agreement is hereby amended by replacing the words "Borrower will not without Bank's prior written consent" with the words "Borrower will not, and will not permit any Subsidiary to, without Bank's prior written consent." -3- 4 2.17 AMENDMENT OF SECTION 7.11. Effective as of the date hereof, the last paragraph of Section 7.11 shall be amended and restated in its entirety to read as follows: "7.11 Nonapplicability of Chapter 346; Selection of Optional Interest Rate Ceilings. Borrower and Lender hereby agree that, except for Section 346.004 thereof, the provisions of Chapter 346 of the Texas Finance Code (Vernon's Texas Code Annotated), as amended from time to time (as amended, the "Texas Finance Code") shall not apply to this Agreement or any of the other Financing Agreements. To the extent that any of the optional interest rate ceilings provided in Chapter 303 of the Texas Finance Code may be available for application to any loan(s) or extension(s) of credit under this Agreement for the purpose of determining the maximum allowable interest hereunder pursuant to the Texas Finance Code, the applicable "weekly ceiling" (as such term is defined in Chapter 303 of the Texas Finance Code) from time to time in effect shall be used to the extent that it is so available." 2.18 AMENDMENT TO ADD NEW SECTION 7.15. Effective as of the date hereof, the Credit Agreement is hereby amended by adding the following new Section 7.15: 7.15 Waiver Of Consumer Rights. BORROWER HEREBY WAIVES ITS RIGHTS UNDER THE DECEPTIVE TRADE PRACTICES - CONSUMER PROTECTION ACT, SECTION 17.41 ET. SEQ. BUSINESS & COMMERCE CODE, A LAW THAT GIVES CONSUMERS SPECIAL RIGHTS AND PROTECTIONS. AFTER CONSULTATION WITH AN ATTORNEY OF ITS OWN SELECTION, BORROWER VOLUNTARILY CONSENTS TO THIS WAIVER. BORROWER EXPRESSLY WARRANTS AND REPRESENTS THAT IT (a) IS NOT IN A SIGNIFICANTLY DISPARATE BARGAINING POSITION RELATIVE TO LENDER, AND (b) HAS BEEN REPRESENTED BY LEGAL COUNSEL IN CONNECTION WITH THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. ARTICLE III CONDITIONS PRECEDENT 3.01 CONDITIONS TO EFFECTIVENESS. The effectiveness of this Amendment is subject to the satisfaction of the following conditions precedent, unless specifically waived in writing by the Bank: (a) The Bank shall have received the following documents, each in form and substance satisfactory to the Bank and its legal counsel: (i) this Amendment duly executed by the Company; -4- 5 (ii) the First Amended and Restated Revolving Line of Credit Note, in the form of Exhibit A-1 attached hereto, duly executed by the Company; (iii) a Company General Certificate certified by the Secretary of the Company acknowledging that (A) the Company's Board of Directors has by unanimous written consent adopted resolutions which authorize the execution, delivery and performance by the Company of this Amendment and all other Loan Documents to which the Company is or will be a party to, and (B) the names of the officers of the Company authorized to sign this Amendment and all other Loan Documents to which the Company is or will be a party to, together with specimen signatures of such officers; and (iv) the payment of the fee referred to in Section 2.04 above. (b) The representations and warranties contained herein and in the Credit Agreement and the other Loan Documents, as each is amended hereby, shall be true and correct as of the date hereof, as if made on the date hereof; (c) No default or Event of Default shall have occurred and be continuing, unless such default or Event of Default has been specifically waived in writing by the Bank; and (d) All corporate proceedings taken in connection with the transactions contemplated by this Amendment and all documents, instruments and other legal matters incident thereto shall be satisfactory to the Bank and its legal counsel. ARTICLE IV NO WAIVER 4.01 Except as otherwise specifically provided for in this Amendment, nothing contained herein shall be construed as a waiver by the Bank of any covenant or provision of the Credit Agreement, the other Loan Documents, this Amendment, or of any other contract or instrument between the Company and the Bank, and the failure of the Bank at any time or times hereafter to require strict performance by the Company of any provision thereof shall not waive, affect or diminish any right of the Bank to thereafter demand strict compliance therewith. The Bank hereby reserves all rights granted under the Credit Agreement, the other Loan Documents, this Amendment and any other contract or instrument between the Company and the Bank. ARTICLE V RATIFICATIONS, REPRESENTATIONS AND WARRANTIES 5.01 RATIFICATIONS. The terms and provisions set forth in this Amendment shall modify and supersede all inconsistent terms and provisions set forth in the Credit Agreement and the other Loan Documents, and, except as expressly modified and superseded by this Amendment, the terms and provisions of the Credit Agreement and the other Loan Documents are ratified and confirmed -5- 6 and shall continue in full force and effect. The Company and the Bank agree that the Credit Agreement and the other Loan Documents, as amended hereby, shall continue to be legal, valid, binding and enforceable in accordance with their respective terms. 5.02 REPRESENTATIONS AND WARRANTIES. The Company hereby represents and warrants to the Bank that (a) the execution, delivery and performance of this Amendment and any and all other Loan Documents executed and/or delivered in connection herewith have been authorized by all requisite corporate action on the part of the Company and will not violate the Articles of Incorporation or Bylaws of the Company; (b) the representations and warranties contained in the Credit Agreement, as amended hereby, and the other Loan Documents are true and correct on and as of the date hereof and on and as of the date of execution hereof as though made on and as of each such date; (c) no default or Event of Default under the Credit Agreement, as amended hereby, has occurred and is continuing, unless such default or Event of Default has been specifically waived in writing by the Bank; (d) the Company is in full compliance with all covenants and agreements contained in the Credit Agreement and the other Loan Documents, as amended hereby; and (e) the Company has not amended its Articles of Incorporation or its Bylaws since the date of the Credit Agreement. ARTICLE VI MISCELLANEOUS PROVISIONS 6.01 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties made in the Loan Agreement or any other Loan Documents, including, without limitation, any document furnished in connection with this Amendment, shall survive the execution and delivery of this Amendment and the other Loan Documents, and no investigation by the Bank or any closing shall affect the representations and warranties or the right of the Bank to rely upon them. 6.02 REFERENCE TO CREDIT AGREEMENT. Each of the Credit Agreement and the other Loan Documents, and any and all other agreements, documents or instruments now or hereafter executed and delivered pursuant to the terms hereof or pursuant to the terms of the Credit Agreement, as amended hereby, are hereby amended so that any reference in the Credit Agreement and such other Loan Documents to the Credit Agreement shall mean a reference to the credit Agreement as amended hereby. 6.03 EXPENSES OF THE BANK. The Company agrees to pay on demand all reasonable costs and expenses incurred by the Bank in connection with any and all amendments, modifications, and supplements to the Loan Documents, including, without limitation, the costs and fees of the Bank's legal counsel, and all costs and expenses incurred by the Bank in connection with the enforcement or preservation of any rights under the Credit Agreement, as amended hereby, or any other Loan Documents, including, without, limitation, the costs and fees of the Bank's legal counsel. 6.04 SEVERABILITY. Any provision of this Amendment held by a court of competent jurisdiction to be invalid or unenforceable shall not impair or invalidate the remainder of this -6- 7 Amendment and the effect thereof shall be confined to the provision so held to be invalid or unenforceable. 6.05 SUCCESSORS AND ASSIGNS. This Amendment is binding upon and shall inure to the benefit of the Bank and the Company and their respective successors and assigns, except that the Company may not assign or transfer any of its rights or obligations hereunder without the prior written consent of the Bank. 6.06 COUNTERPARTS. This Amendment may be executed in one or more counterparts, each of which when so executed shall be deemed to be an original, but all of which when taken together shall constitute one and the same instrument. 6.07 EFFECT OF WAIVER. No consent or waiver, express or implied, by the Bank to or for any breach of or deviation from any covenant or condition by the Company shall be deemed a consent to or waiver of any other breach of the same or any other covenant, condition or duty. 6.08 HEADINGS. The headings, captions, and arrangements used in this Amendment are for convenience only and shall not affect the interpretation of this Amendment. 6.09 APPLICABLE LAW. THIS AMENDMENT AND ALL OTHER AGREEMENTS EXECUTED PURSUANT HERETO SHALL BE DEEMED TO HAVE BEEN MADE AND TO BE PERFORMABLE IN AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS. 6.10 FINAL AGREEMENT. THE CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS, EACH AS AMENDED HEREBY, REPRESENT THE ENTIRE EXPRESSION OF THE PARTIES WITH RESPECT TO THE SUBJECT MATTER HEREOF ON THE DATE THIS AMENDMENT IS EXECUTED. THE CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTS, AS AMENDED HEREBY, MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. NO MODIFICATION, RESCISSION, WAIVER, RELEASE OR AMENDMENT OF ANY PROVISION OF THIS AMENDMENT SHALL BE MADE, EXCEPT BY A WRITTEN AGREEMENT SIGNED BY THE COMPANY AND THE BANK. 6.11 RELEASE. THE COMPANY HEREBY ACKNOWLEDGES THAT IT HAS NO DEFENSE, COUNTERCLAIM, OFFSET, CROSS-COMPLAINT, CLAIM OR DEMAND OF ANY KIND OR NATURE WHATSOEVER THAT CAN BE ASSERTED TO REDUCE OR ELIMINATE ALL OR ANY PART OF ITS LIABILITY TO REPAY THE "INDEBTEDNESS" OR TO SEEK AFFIRMATIVE RELIEF OR DAMAGES OF ANY KIND OR NATURE FROM THE BANK. THE COMPANY HEREBY VOLUNTARILY AND KNOWINGLY RELEASES AND FOREVER DISCHARGES THE BANK, ITS PREDECESSORS, AGENTS, EMPLOYEES, SUCCESSORS AND ASSIGNS, FROM ALL POSSIBLE CLAIMS, DEMANDS, ACTIONS, CAUSES OF ACTION, DAMAGES, COSTS, EXPENSES, AND LIABILITIES WHATSOEVER, KNOWN OR UNKNOWN, ANTICIPATED OR UNANTICIPATED, -7- 8 SUSPECTED OR UNSUSPECTED, FIXED, CONTINGENT, OR CONDITIONAL, AT LAW OR IN EQUITY, ORIGINATING IN WHOLE OR IN PART ON OR BEFORE THE DATE THIS AMENDMENT IS EXECUTED, WHICH THE COMPANY MAY NOW OR HEREAFTER HAVE AGAINST THE BANK, ITS PREDECESSORS, AGENTS, EMPLOYEES, SUCCESSORS AND ASSIGNS, IF ANY, AND IRRESPECTIVE OF WHETHER ANY SUCH CLAIMS ARISE OUT OF CONTRACT, TORT, VIOLATION OF LAW OR REGULATIONS, OR OTHERWISE, AND ARISING FROM ANY LOANS OR EXTENSIONS OF CREDIT FROM THE BANK TO THE COMPANY UNDER THE CREDIT AGREEMENT OR THE OTHER LOAN DOCUMENTS, INCLUDING, WITHOUT LIMITATION, ANY CONTRACTING FOR, CHARGING, TAKING, RESERVING, COLLECTING OR RECEIVING INTEREST IN EXCESS OF THE HIGHEST LAWFUL RATE APPLICABLE, THE EXERCISE OF ANY RIGHTS AND REMEDIES UNDER THE CREDIT AGREEMENT OR OTHER LOAN DOCUMENTS, AND NEGOTIATION FOR AND EXECUTION OF THIS AMENDMENT. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK] -8- 9 IN WITNESS WHEREOF, this Amendment has been executed and is effective as of the date first above-written. COMPANY: GADZOOKS, INC. By: /s/ MONTY R. STANDIFER ---------------------------------- Monty R. Standifer, Senior Vice President, Chief Financial Officer, Treasurer and Secretary BANK: WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION By: /s/ LISA M. AUTRY ---------------------------------- Lisa M. Autry Vice President -9- EX-10.22 3 EMPLOYMENT AGREEMENT - DAVID MANGINI 1 EXHIBIT 10.22 [GADZOOKS LETTERHEAD] CONFIDENTIAL JULY 18, 1998 DAVID L. MANGINI 7125 RIVERSIDE DRIVE DUBLIN, OH 43016 DEAR DAVID, We are pleased to make the following offer of employment to join Gadzooks, Inc., and are excited about the prospect of your joining our team. We are confident that upon joining our team, you will find both the challenges and the rewards that you are seeking and will make many significant and lasting contributions to our growth. WE HAVE OUTLINED THE KEY POINTS OF THE OFFER: POSITION: Your position will be President and Chief Operating Officer. REPORTING RELATIONSHIP: You will report directly to Jerry Szczepanski, Chairman and Chief Executive Officer. LOCATION: Your office will be located at 4121 International Parkway, Carrollton, TX 75007. START DATE: We would like you to begin as soon as possible. A mutually agreeable date will be determined upon acceptance of this offer. SALARY: Your initial base salary will be $400,000 per year payable biweekly and subject to review during our annual Focal Review period, currently in March of each year. Your next compensation review will be in March of 1999. ANNUAL BONUS PROGRAM: You will participate in the Executive Management Annual Bonus Plan for fiscal 1998 on a prorated basis. The EPS Budget for this fiscal year by quarter is: Q1 .16 Q2 .23 Q3 .25 Q4 .71
2 Your pro rata bonus will be based on the Company's performance for Q3 and Q4 only. If budget is achieved for the combined Q3 and Q4 results your pro rata share of the bonus pool will assume the yearly budget was achieved. All computations will assume Q1 and Q2 budgeted numbers were achieved. Should you leave the employment of the Company prior to the payment of annual bonus, any accrued bonus will be forfeited. Additionally, you will participate in the Executive Management Annual Bonus plan for fiscal 1999. The Company will pay you a targeted bonus of $300,000.00 if the Company achieves the overall budgeted profit goal. DEFERRED COMPENSATION: You will be eligible to participate in our Deferred Compensation Plan beginning January 1, 1999. The Plan allows Key Executives to defer up to 100% of both salary and bonus, if you desire to participate. More details will be provided at a later date. AUTO ALLOWANCE: You will receive an auto allowance of $1,000.00 per month to offset any auto related expenses incurred while traveling on Company business. BENEFITS: Your medical, dental and life insurance benefits will be effective on the first of the month following your 90th day of employment. The insurance premiums will be fully paid on your behalf by the Company. Additionally, at no charge and on the first enrollment date after 90 days, you will participate in our supplemental (Exec-U-Care) insurance plan. This plan covers all charges and claims that are not covered by our "base" plan. In essence, you will experience no out of pocket expenses for full medical, dental and prescription coverage and charges. You will receive a complete Benefits Orientation during your first week of employment. STOCK OPTIONS: You will be granted an option to purchase 125,000 common shares of the Company. These options will be priced at the closing price of the stock on your first day of active employment. One-fifth of the shares (25,000 shares) shall become exercisable 12 months following the grant date of the option. An additional one-fifth (1/5) shall become exercisable on each subsequent anniversary of the grant date. The total 125,000 common shares shall be fully vested at the end of five years from the date of the option. Options can be exercised as they vest, but must be exercised over a ten year period following the date of the grant. A separate Incentive Stock Option (ISO) agreement which sets forth all terms and conditions will be provided under separate cover. FUTURE STOCK OPTIONS: You will be granted an option to purchase a minimum of 20,000 common shares of the Company for your first full year of employment (on or about April 1, 1999). One-fifth of the shares (4,000 shares) shall become exercisable 12 months following the grant date of the option. An additional one-fifth (1/5) shall become exercisable on each subsequent 3 anniversary of the grant date. The total 20,000 common shares shall be fully vested at the end of five years from the date of the option. Options can be exercised as they vest, but must be exercised over a ten year period following the date of the grant. A separate agreement which sets forth all terms and conditions will be provided under separate cover. This grant will be reviewed each year of employment. VACATION: You will be eligible for three weeks annual vacation beginning on your first day of employment. INTERIM LIVING: The Company will pay reasonable interim living costs incurred for up to 180 days while awaiting your permanent move-in date. DUPLICATE HOUSING: In the event that you purchase a new home prior to the sale of your current home (thereby realizing two mortgage payments); the Company will pay the lesser amount of the two mortgage payments for a period up to 180 days. HOUSEHUNTING VISITS: The Company will pay the reasonable costs associated with three trips for your spouse to travel to Dallas to assist in househunting. HOME SALE: The Company will pay the actual Real Estate Commission incurred as a result of the sale of your home in Dublin, OH. RELOCATION: The Company will pay the reasonable costs incurred for the movement of your household goods and autos from Dublin, OH to Dallas, via third party movers selected by the Company. RELOCATION BONUS: The Company will pay an additional bonus of $10,000.00 to offset any incremental relocation expenses. The bonus will be paid upon completion of your relocation to Dallas. EMPLOYMENT AGREEMENT: The Company will guarantee your employment for a period of one year beginning on your initial start date. Should your employment with Gadzooks be terminated by the Company for a reason other than for "Cause" during the initial 12 months of employment, you will be compensated for the balance (remainder) of the initial 12 month period. SEVERANCE AGREEMENT: Should your employment with Gadzooks be terminated by the Company for a reason other than "Cause" after accumulating at least six months of continuous service, you will be compensated for a period of six additional months after your date of termination, including any remaining portion of the initial year of employment noted above. "Cause" shall mean: your habitual neglect of your duties, your commission of a felony, your failure to follow any legal directive of Gadzooks' Chairman and Chief Executive Officer which directive is consistent with your position and duties, and act or acts of fraud or dishonesty by you which results or is intended to result in financial, 4 economic or reputation harm to the Company or any of its affiliates, or your breach of a material Company policy. CHANGE OF CONTROL: In the event of the sale of all or substantially all of the Company's assets, or the Company's merger with or into another corporation, the options will accelerate and become fully vested immediately prior to the event. This offer of employment is conditional upon the presentation of acceptable documents establishing your identity and employability, as required by the Immigration Reform and Control Act of 1986. Again, David, we are delighted at the prospect of you joining our team and are anticipating many positive contributions. Please understand that you are an "at-will" associate and either Gadzooks or you may terminate your employment at any time and for any reason, with or without cause. Enclosed please find two copies of this offer letter. Upon acceptance, please sign, date and return one copy to Steve Puterbaugh. Please keep one copy for your records. We look forward to your joining our team. Thank You. SINCERELY, /s/ JERRY SZCZEPANSKI /s/ STEVE PUTERBAUGH - ----------------------------------- ------------------------------------ JERRY SZCZEPANSKI STEVE PUTERBAUGH CHAIRMAN & CHIEF EXECUTIVE OFFICER VICE PRESIDENT, HUMAN RESOURCES /s/ DAVID MANGINI CC: MONTY STANDIFER ----------------------------------- SENIOR VICE PRESIDENT, DAVID MANGINI FINANCE & CHIEF FINANCIAL PRESIDENT & CHIEF OPERATING OFFICER OFFICER 7/24/98 ----------------------------------- DATE EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS JAN-30-1999 MAY-03-1998 AUG-01-1998 7,624 600 4,051 0 41,265 55,288 39,908 11,434 83,762 20,853 0 0 0 88 60,848 83,762 48,202 48,202 35,916 35,916 0 0 0 970 364 606 0 0 0 606 0.07 0.07
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