GADZOOKS INC - 10-Q Quarterly Report

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

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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 3, 2002

OR

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

COMMISSION FILE NUMBER 0-26732
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GADZOOKS, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

TEXAS 74-2261048
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STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)

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

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 972-307-5555
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(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, 2002, the number of shares outstanding of the registrant's
common stock is 9,158,466.

GADZOOKS, INC.

FORM 10-Q

For the Quarter Ended August 3, 2002

INDEX

2

PART I -- FINANCIAL INFORMATION

GADZOOKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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(IN THOUSANDS)
(UNAUDITED)

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

3

GADZOOKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

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

4

GADZOOKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
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(IN THOUSANDS)
(UNAUDITED)

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

5

GADZOOKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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1. BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements contain all
adjustments (consisting of only normal recurring accruals) necessary to present
fairly the financial position as of August 3, 2002 and February 2, 2002, and the
results of operations and cash flows for the second quarter and six months ended
August 3, 2002 and August 4, 2001. 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 consolidated balance
sheet as of February 2, 2002 is derived from audited financial statements. The
condensed consolidated financial statements should be read in conjunction with
the financial statement disclosures contained in the Company's Annual Report on
Form 10-K for the fiscal year ended February 2, 2002.

Fiscal year: The Company's fiscal year is the 52- or 53-week period that ends on
the Saturday closest to the end of January. "Fiscal 2002" is the 52-week period
ending February 1, 2003.

2. LONG-TERM OBLIGATIONS

On June 1, 2002, the Company entered into a restated and amended credit facility
with Wells Fargo Bank. The restated 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 140% 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 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, and includes various financial covenants. Amounts available
to borrow under the line of credit, as limited by the cash flow multiple and/or
outstanding letters of credit, totaled $13.5 million at August 3, 2002. No
borrowings (other than letters of credit, totaling $1.5 million) were
outstanding under the revolving line at August 3, 2002. Any amount borrowed
under the revolving line of credit will become due on June 1, 2003, the date the
credit agreement matures.

3. EARNINGS PER SHARE

The following table outlines the Company's calculation of weighted average
shares outstanding (in thousands):

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 588,825 and 1,288,930 for the quarters ended
August 3, 2002 and August 4, 2001, and 536,174 and 327,039 for the six months
ended August 3, 2002 and August 4, 2002, respectively.

6

4. IMPAIRMENT OF LONG LIVED ASSETS

During the second quarter of 2002, the Company abandoned its point of sale
software implementation project after learning that the software provider would
offer a new point of sale software product in 2003 and would discontinue sales
of the current software. As a result of the abandonment of the project, certain
costs related to the original project have been written off. The total impact of
the write-off was a $310,000 ($191,000 after tax, or $.02 per diluted share)
loss on disposal during the second quarter of fiscal 2002.

In the first quarter of fiscal 2002, the Company hired a consulting firm to
review the current store base and provide recommendations on ways to update the
look of more mature stores and enhance visual merchandising in all stores. The
store update and visual enhancement program developed in conjunction with the
consulting firm was finalized during the second quarter and will be implemented
during the second and third quarters of 2002 in an attempt to increase the
visual appeal, flow and shop-ability of all stores. The program includes the
removal of certain leasehold improvements and fixtures prior to the end of
their estimated useful life. As a result, the Company recognized accelerated
depreciation and loss on disposal of assets related to the project of
approximately $365,000 ($224,000 after tax, or $.02 per diluted share) for the
second quarter of fiscal 2002.

5. RETIREMENT AGREEMENT

Effective August 28, 2002, the Company entered into an executive retirement
agreement with Gerald R. Szczepanski, Chairman of the Board and Chief Executive
Officer, pursuant to which Mr. Szczepanski or his estate shall be eligible to
receive certain benefits on termination of his employment with Gadzooks as a
result of either death, termination without cause or retirement. Upon such
termination (i) Gadzooks will continue to provide Mr. Szczepanski (and his
spouse, if applicable) medical, dental and life insurance coverage, (ii)
Gadzooks will enter into a consulting relationship with Mr. Szczepanski for 24
months whereby Mr. Szczepanski will receive a consulting fee of $300,000 per
year to facilitate an orderly transition to Mr. Szczepanski's successor; (iii)
Mr. Szczepanski will receive his pro rata bonus for the fiscal year in which he
retires; (iv) all of Mr. Szczepanski's stock options will become vested in
full; and (v) all of Mr. Szczepanski's stock options with an exercise price
equal to or greater than $9.00 will be amended to include a term equal to the
lesser of (a) three years from such termination or (b) the original expiration
date of such stock options. In addition, Mr. Szczepanski agrees that upon
termination of his employment with Gadzooks, he will not disclose any
confidential information relating to Gadzooks and he will not solicit,
interfere or compete with Gadzooks, its business, its clients or its customers
for a period of two years

In accordance with the Statement of Financial Accounting Standards ("SFAS") No.
106, "Employers' Accounting for Postretirement Benefits Other than Pensions",
the Company will expense postretirement benefit costs during the third
quarter of fiscal 2002. The estimated postretirement benefit costs have not yet
been determined.

In accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and FIN 44, "Accounting for Certain Transactions Involving Stock
Compensation", the Company will not record any compensation expense related to
the potential stock option amendments due to the exercise price of the options,
potentially amended by the modification, being more than the stock price at the
execution date of the agreement.

6. NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS 141 supersedes Accounting Principles Board Opinion ("APB") No. 16,
"Business Combinations." The provisions of SFAS 141 (1) require that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001, (2) provide specific criteria for the initial recognition
and measurement of intangible assets apart from goodwill and (3) require that
unamortized negative goodwill be written off immediately as an extraordinary
gain instead of being deferred and amortized. SFAS 142 supersedes APB 17,
"Intangible Assets," and changes the accounting for goodwill from an
amortization method to an impairment-only approach. The Company's consolidated
financial statements were not impacted by the adoptions of SFAS 141 and SFAS
142.

7

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" effective for fiscal years beginning after
December 15, 2001 and replacing SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 144
establishes an accounting model for long-lived assets to be disposed of by sale,
including discontinued operations, and replaces the provisions of APB Opinion
No. 30 for the disposal of segments of a business. SFAS 144 retains the
fundamental provisions of SFAS 121 concerning the recognition and measurement of
long-lived assets to be held and used and the measurement of long-lived assets
to be disposed of by sale. However, SFAS 144 provides additional guidance with
regard to discontinued operations and assets to be disposed of. In addition,
SFAS 144 excludes goodwill from its scope. The adoption of SFAS 144 did not have
a material impact on the Company, but could result in future store closures
being classified as discontinued operations in the consolidated financial
statements.

SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
was issued on July 30, 2002 and replaces emerging Issues Task Force Issue 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity." SFAS 146 requires companies to recognize certain costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. SFAS 146 will be
effective for exit or disposal activities that are initiated after December 31,
2002.

8

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.
As of August 3, 2002, the Company had opened nine new Gadzooks stores and closed
one since the beginning of the fiscal year and operated 435 Gadzooks stores and
four Orchid stores for a total of 439 stores in 41 states.

The Company's business is subject to seasonal influences with 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 consolidated financial statements and related notes.

CRITICAL ACCOUNTING POLICIES

The preparation of Gadzooks' consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the balance sheet date, as well as the reported amounts of revenues and expenses
during the reporting period. On an ongoing basis, management evaluates such
estimates including sales return rates, inventory reserves, impairment of
long-lived assets, income taxes and accrued expenses. Actual results may differ
from estimates.

Gadzooks accounting policies are generally straightforward, but the following
items require more significant management judgments and estimates.

REVENUE RECOGNITION. Retail merchandise sales are recognized at the point of
sale less sales returns and employee discounts. Management records a provision
for estimated sales returns based on historical return rates. If sales return
rates change, an additional allowance may be required.

INVENTORY VALUATION. Inventories are valued at the lower of average cost or
market. In addition, inventories include an allocation of buying and
distribution costs to prepare product for the stores. This inventory valuation
method requires certain management estimates and judgments, including estimates
of merchandise markdowns, which could significantly affect gross margin.
Management estimates the markdown reserve based on several factors, including
but not limited to, merchandise quantities, historical markdown percentages, and
seasonal merchandise and future merchandise plans. If future demand or
merchandise markdowns are less favorable than those projected by management,
additional inventory adjustments may be required. On a monthly basis, management
estimates shrink based on historical shrink rates. These estimates are compared
to actual results as inventory counts are taken and reconciled to the general
ledger during the second and fourth quarter of each year.

LONG-TERM ASSET IMPAIRMENT. Management periodically reviews its long-lived
assets for impairment and records a provision whenever events or circumstances
indicate that the net book value of the asset may not be recoverable. Impairment
is determined based on several factors, including but not limited to, current
year operating loss or cash flow loss combined with a history and forecast of
operating or cash flow losses and significant negative industry or economic
trends. If management determines that an impairment exists, 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 net book value of the
assets. The amount of the impairment is measured as the difference between the
net book value of the assets and the estimated fair market value of the related
assets.

DEFERRED TAX ASSETS. The Company does not currently have a valuation allowance
recorded against its deferred tax assets. If management determines it is more
likely than not that its deferred tax assets would not be realizable in the
future, a valuation allowance would be recorded to reduce the deferred tax asset
to its net realizable value.

ACCRUED EXPENSES. On a monthly basis, certain expenses are estimated in an
effort to reflect these expenses in the proper period. Gadzooks' most material
estimates relate to self-insurance reserves, store level operating expenses and
bonuses. The self-insurance reserves for medical and worker's compensation
claims are recorded based on historical claim levels adjusted for growth in the
employee base. If the historical claims used to calculate these estimates are
not reflective of actual results, additional expenses may be incurred up to the
point that the Company's stop loss insurance begins. The Company is self-insured
for property and casualty claims at the store

9

level. Property and casualty claims at a store level are recorded as incurred.
Accrued store level operating expenses are estimated based on current activity
and historical results. Bonuses are based on performance and projected
performance for the remainder of the bonus period. If actual results are
significantly different from Gadzooks' expectations, an adjustment to expenses
may be required.

RESULTS OF OPERATIONS

The second quarter ended August 3, 2002 compared to the second quarter ended
August 4, 2001.

Net Sales

Net sales increased approximately $4.1 million, or 5.6 percent, to $76.7 million
during the second quarter of fiscal 2002 from $72.6 million during the
comparable quarter of fiscal 2001. The total Company sales increase was due to
$6.4 million of sales from the 48 new stores not yet included in the comparable
store sales base partially offset by a comparable store sales decrease of $2.3
million. Comparable store sales decreased 3.3 percent for the second quarter of
fiscal 2002. Sales by category in the average store changed as follows versus
the prior year quarter: shoes - increased a mid single digit percentage; junior
apparel - increased a low single digit percentage; accessories - decreased a mid
single digit percentage; and men's apparel - decreased a high single digit
percentage. The number of transactions in the average store declined by 6.1
percent, and the average transaction size increased 3.2 percent. A store becomes
comparable after it has been open for 14 full fiscal months.

Gross profit

Gross profit increased approximately $5.0 million to $19.3 million during the
second quarter of fiscal 2002 from $14.3 million during the comparable quarter
of fiscal 2001. As a percentage of net sales, gross profit increased by 5.5
percentage points to 25.2 percent from 19.7 percent for the comparable quarter
of last year. Merchandise margins as a percentage of sales were 7.1 percent
higher than the prior year. This increase is primarily attributable to a
significant reduction in retail markdowns taken during the period and a
considerable reduction in inventory shrinkage. The reduction in inventory
shrinkage is the result of a number of initiatives used by the Company to raise
awareness of loss prevention issues, train associates in loss prevention
techniques, identify and resolve associate integrity issues, and measure our
effectiveness at preventing external theft on a more real-time basis. Partially
offsetting the improvement in merchandise margin was a 1.5 percent increase in
occupancy costs as a percentage of sales. The increase in occupancy costs (which
are relatively fixed in nature) as a percentage of sales was due to the negative
leverage effect of the comparable store sales decrease, as well as higher costs
related to new stores.

Selling, general and administrative expenses

Selling, general and administrative expenses ("SG&A") increased approximately
$2.8 million to $19.2 million during the second quarter of 2002 from $16.4
million during the comparable quarter of fiscal 2001. 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 increased by 2.4 percentage points to 25.0 percent during the second
quarter of fiscal 2002 from 22.6 percent during the second quarter of last year.
The increase in the SG&A percentage is a result of negative leverage from the
comparable store sales decrease, an increase in store payroll expense, increased
advertising and visual marketing costs and the write-off of certain project
costs related to an abandoned information systems project.

Interest

The Company's net interest income decreased $39,000 to $21,000 during the second
quarter of fiscal 2002 from $60,000 in the comparable period of last year due
primarily to lower average cash balances and lower market interest rates.

10

The six months ended August 3, 2002 compared to the six months ended August 4,
2001.

Net sales

Net sales increased approximately $11.6 million, or 8.1 percent, to $155.0
million during the first six months of fiscal 2002 from $143.4 million during
fiscal 2001. The total Company sales increase was attributable to new store
sales of $15.4 million, net of a comparable store sales decrease of $3.8
million, or 2.8 percent for the first six months of fiscal 2002. The Company
experienced comparable store sales decreases in all its major categories except
footwear. The Company's average transaction size increased by 4.8 percent, and
the number of transactions per average store decreased by 7.2 percent.

Gross profit

Gross profit increased approximately $6.7 million to $40.9 million during the
first six months of fiscal 2002 from $34.2 million during the comparable six
months of fiscal 2001. As a percentage of net sales, gross profit increased 2.5
percentage points to 26.4 percent from 23.9 percent for the comparable six
months of last year. Merchandise margins as a percentage of sales were 4.0
percent higher than the prior year. This increase is primarily attributable to a
significant reduction in retail markdowns taken during the period as well as
considerably improved inventory shrinkage results. Partially offsetting the
improvement in merchandise margin was a 1.5 percent increase in occupancy costs
as a percentage of sales. The increase in occupancy costs as a percentage of
sales was due to the negative leverage effect of the comparable store sales
decrease, as well as higher costs related to new stores.

Selling, general and administrative expenses

Selling, general and administrative expenses increased approximately $5.2
million to $38.0 million during the first six months of 2002 from $32.8 million
during the comparable six months of fiscal 2001. 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 increased 1.6 percent to 24.5 percent during the first six months of
fiscal 2002 from 22.9 percent during the comparable six months of last year. The
increase in the SG&A percentage is a result of the negative leverage effect of
the comparable store sales decrease, an increase in store payroll expense,
increased advertising and visual marketing costs and the write-off of certain
project costs related to an abandoned information systems project.

Interest

The Company's net interest income decreased $214,000 to $65,000 during the first
six months of fiscal 2002 from $279,000 in the comparable period of last year
due primarily to lower average cash balances and lower market interest rates.

LIQUIDITY AND CAPITAL RESOURCES

General

The Company's primary uses of cash are financing new store openings and store
refurbishments, and purchasing merchandise inventories. The Company is currently
meeting its cash requirements through cash flow from operations and cash and
cash equivalents on-hand.

Cash Flows

At August 3, 2002, cash and cash equivalents were $7.8 million, a decrease of
$7.1 million since February 2, 2002. The primary uses of cash were capital
expenditures of $5.1 million for new stores, store refurbishments and
information systems, net short-term investment purchases of $4.0 million and a
decrease in accounts payable of $6.9 million, which were slightly offset by a
decrease in inventory of $4.0 million.

11

Credit Facility

On June 1, 2002, the Company entered into a restated and amended credit facility
with Wells Fargo Bank. The restated 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 140% 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 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, and includes various financial covenants. Amounts available
to borrow under the line of credit, as limited by the cash flow multiple and/or
outstanding letters of credit, totaled $13.5 million at August 3, 2002. No
borrowings (other than letters of credit totaling $1.5 million) were outstanding
under the revolving line at August 3, 2002. Any amount borrowed under the
revolving line of credit will become due on June 1, 2003, the date the credit
agreement matures.

Capital Expenditures

The Company began its fiscal 2002 store expansion program with the opening of
nine new stores during the first half, and anticipates opening an additional two
stores during the remainder of the year. The Company expects capital
expenditures for the remainder of the year of between $2.5 million and $4.5
million to open the remaining stores, update the look of selected existing
stores and purchase and/or upgrade information systems. The Company hired a
consulting firm to review the current store base and provide recommendations on
ways to update the look of more mature stores and enhance visual merchandising
in all stores. The store update and visual enhancement program developed in
conjunction with the consulting firm was finalized during the second quarter and
will be implemented during the second and third quarters of 2002 in an attempt
to increase the visual appeal, flow and shop-ability of all stores. Accelerated
depreciation and loss on disposal of assets related to the project was
approximately $365,000 for the second quarter of fiscal 2002, and management
estimates that accelerated depreciation will be approximately $100,000 in the
third quarter of fiscal 2002.

Management believes that the Company's working capital, credit facility and cash
flows from operating activities will be sufficient to meet the Company's
operating and capital requirements through the end of fiscal 2002.

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.

RELATED PARTY TRANSACTIONS

Gadzooks has entered into an executive retirement agreement with Gerald R.
Szczepanski, Chairman of the Board and Chief Executive Officer, pursuant to
which Mr. Szczepanski or his estate shall be eligible to receive certain
benefits on termination of his employment with Gadzooks as a result of either
death, termination without cause or retirement. Upon such termination (i)
Gadzooks will continue to provide Mr. Szczepanski (and his spouse, if
applicable) medical, dental and life insurance coverage, (ii) Gadzooks will
enter into a consulting relationship with Mr. Szczepanski for 24 months whereby
Mr. Szczepanski will receive a consulting fee of $300,000 per year to
facilitate an orderly transition to Mr. Szczepanski's successor; (iii) Mr.
Szczepanski will receive his pro rata bonus for the fiscal year in which he
retires; (iv) all of Mr. Szczepanski's stock options will become vested in
full; and (v) all of Mr. Szczepanski's stock options with an exercise price
equal to or greater than $9.00 will be amended to include a term equal to the
lesser of (a) three years from such termination or (b) the original expiration
date of such stock options. In addition, Mr. Szczepanski agrees that upon
termination of his employment with Gadzooks, he will not disclose any
confidential information relating to Gadzooks and he will not solicit,
interfere or compete with Gadzooks, its business, its clients or its customers
for a period of two years.

12

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
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 fluctuations in store sales results, changes in
economic conditions, fluctuations in quarterly results and other factors
described under the "Risk Factors" section of the Company's Annual Report on
Form 10-K for the fiscal year ended February 2, 2002. 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.

13

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 13, 2002.

(b) Information regarding the Company's directors is contained in
the Company's Definitive Proxy Statement, which was filed with
the Commission on May 5, 2002.

(c) William C. Bousquette was elected to serve as director until
the Company's 2004 annual meeting of shareholders, and G.
Michael Machens and Lawrence H. Titus, Jr. were elected to
serve as directors until the Company's 2005 annual meeting of
shareholders according to the following vote:

The 1992 Incentive and Nonstatutory Stock Option Plan (the
"Plan") was amended to extend the term of the Plan to February
26, 2012.

For: 5,483,281 Against or Withheld: 611,737
Abstention: 465,484 Broker Non-votes: 1,915,228

The Employee Stock Purchase Plan (the "Stock Purchase Plan")
was amended to increase the number of monthly offerings to 180
and extend the term of the Stock Purchase Plan to March 31,
2013.

For: 6,057,352 Against or Withheld: 36,884
Abstention: 466,266 Broker Non-votes: 1,915,228

The selection of PricewaterhouseCoopers LLP as the Company's
independent accountants for the fiscal year ending February 1,
2003 was ratified by the shareholders according to the
following vote:

For: 8,396,601 Against or Withheld: 78,644
Abstention: 485 Broker Non-votes: --

(d) None

Item 5 - None

Item 6 - Exhibits and Reports on Form 8-K.

(a) See Index of Exhibits.

(b) None.

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 10, 2002 By: /s/ James A. Motley
------------------------------------------
James A. Motley
Vice President / Chief Financial Officer
(Chief Accounting Officer and
Duly Authorized Officer of the Registrant)

15

CERTIFICATION

I, James A. Motley, Vice President, Chief Financial Officer and Secretary of
Gadzooks, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of
Gadzooks, Inc.;

2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report; and

3. Based on my knowledge, the financial statements and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report.

DATE: September 10, 2002 By: /s/ James A. Motley
--------------------------------------
James A. Motley
Vice President,
Chief Financial Officer
and Secretary

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CERTIFICATION

I, Gerald R. Szczepanski, Chairman of the Board and Chief Executive Officer of
Gadzooks, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of
Gadzooks, Inc.;

2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report; and

3. Based on my knowledge, the financial statements and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report.

DATE: September 10, 2002 By: /s/ Gerald R. Szczepanski
--------------------------------------
Gerald R. Szczepanski
Chairman of the Board and
Chief Executive Officer

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INDEX TO EXHIBITS

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

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