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 NOVEMBER 2, 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 December 13, 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 November 2, 2002

INDEX

2

PART 1 -- 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 FLOWS
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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 November 2,
2002 and February 2, 2002, and the results of operations and cash flows
for the third quarter and nine months ended November 2, 2002 and
November 3, 2001. The results of operations for the third quarter and
nine 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 "Bank"). The restated facility
provided 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.

At November 2, 2002, the Company was in technical default of its line
of credit covenant that requires net income of not less than $1 on a
trailing two-quarter basis determined as of each fiscal quarter end. On
November 11, 2002, the Company and the Bank entered into the First
Amendment to the First Amended and Restated Credit Agreement and Waiver
of Defaults, which provides the Bank with a security interest in the
Company's inventory, accounts receivable and other rights to payment,
furniture and fixtures, and machinery and equipment and includes a
waiver of the specific covenant violation for the quarter ended
November 2, 2002. The covenant will remain in effect for future
periods. Amounts available to borrow under the line of credit, as
limited by the cash flow multiple and/or outstanding letters of credit,
totaled $13.0 million at November 2, 2002. No borrowings (other than
letters of credit, totaling $2.0 million) were outstanding under the
revolving line at November 2, 2002. Any amount borrowed under the
revolving line of credit will become due on June 1, 2003, the date the
credit agreement matures.

6

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
1,309,980 and 474,668 for the quarters ended November 2, 2002 and
November 3, 2001, and 772,729 and 376,248 for the nine months ended
November 2, 2002 and November 3, 2001, respectively.

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 was implemented primarily during the
second and third quarters of 2002 in an attempt to increase the visual
appeal, flow and shopability 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) and $61,000 ($38,000 after tax) in the second and third
quarters of fiscal 2002, respectively.

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.

7

Pursuant to the agreement, Mr. Szczepanski is fully vested in the
postretirement benefits available under the executive retirement
agreement. Accordingly, during the third quarter, the Company
recognized $115,000 as SG&A expense, which represents the estimated
present value of the future health insurance benefits payable pursuant
to the contract.

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. 143, "Accounting for Asset Retirement Obligations", effective
for fiscal years beginning after June 15, 2002. SFAS 143 addresses the
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets. We do not expect that the
adoption of SFAS 143 will have a significant impact on our financial
statements.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections", effective for transactions occurring after May
15, 2002. SFAS 145 requires gains and losses from extinguishment of
debt to be reported as part of recurring operations, unless the
transaction is considered unusual or infrequent in which case the
transaction would be classified as an extraordinary item. This standard
also eliminates an inconsistency between the accounting for certain
lease modifications that have economic effects that are similar to
sale-leaseback transactions. The Company's consolidated financial
statements will not be impacted by the adoption of SFAS 145.

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 November 2, 2002, the Company had opened 11 new Gadzooks stores and closed
one store since the beginning of the fiscal year and operated 437 Gadzooks
stores and four Orchid stores for a total of 441 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 financial statements and the notes related thereto.

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 quarters 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

9

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 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 third quarter ended November 2, 2002 compared to the third quarter ended
November 3, 2001

Net Sales

Net sales increased approximately $557,000, or 0.8 percent, to $73.7 million
during the third quarter of fiscal 2002 from $73.2 million during the comparable
quarter of fiscal 2001. The total Company sales increase was due to $4.1 million
of sales from the 37 new stores not yet included in the comparable store sales
base partially offset by a comparable store sales decrease of $3.6 million.
Comparable store sales decreased 5.1 percent for the third quarter of fiscal
2002. Sales by category in the average store changed as follows versus the prior
year quarter: shoes - increased a low single digit percentage; junior apparel -
decreased a low single digit percentage; accessories - decreased a low single
digit percentage; and men's apparel - decreased a high single digit percentage.
The Company's average transaction size increased 1.3 percent, and the number of
transactions per average store declined by 6.0 percent.

Gross profit

Gross profit decreased approximately $1.9 million to $16.9 million during the
third quarter of fiscal 2002 from $18.9 million during the comparable quarter of
fiscal 2001. As a percentage of net sales, gross profit decreased 2.8 percentage
points to 23.0 percent from 25.8 percent for the comparable quarter of last
year. Merchandise margins as a percentage of sales were 0.9 percent lower than
the prior year. This decrease is primarily attributable to an increase in retail
markdowns taken during the period partially offset by a reduction in the
inventory shrinkage accrual based on the last physical inventory count results.
Occupancy costs as a percentage of sales increased by 1.8 percent. The increase
in occupancy costs (which are relatively fixed in nature) as a percentage of
sales was due equally to the negative leverage effect of the comparable store
sales decrease and the higher costs related to new stores.

Selling, general and administrative expenses

Selling, general and administrative expenses increased approximately $1.1
million to $18.4 million during the third quarter of 2002 from $17.3 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 1.2 percentage points to 24.9 percent during the third quarter of fiscal 2002
from 23.7 percent during the third quarter of last year. The increase in the
SG&A percentage is a result of negative leverage from the comparable store sales
decrease.

Interest

The Company's net interest income decreased $29,000 to $19,000 during the third
quarter of fiscal 2002 from $48,000 in the comparable period of last year due
primarily to lower average cash balances and lower market interest rates.

10

The nine months ended November 2, 2002 compared to the nine months ended
November 3, 2001.

Net sales

Net sales increased approximately $12.1 million, or 5.6 percent, to $228.7
million during the first nine months of fiscal 2002 from $216.6 million during
fiscal 2001. The total Company sales increase was attributable to new stores
sales of $19.5 million, net of a comparable store sales decrease of $7.4
million, or 3.6 percent for the first nine months of fiscal 2002. The Company
experienced comparable store sales decreases in all categories except footwear.
The Company's average transaction size increased by 3.6 percent, and the number
of transactions per average store decreased by 6.7 percent.

Gross profit

Gross profit increased approximately $4.8 million to $57.9 million during the
first nine months of fiscal 2002 from $53.1 million during the comparable period
of fiscal 2001. As a percentage of sales, gross profit increased 0.8 percentage
points to 25.3 percent from 24.5 percent for the comparable nine months of last
year. The merchandise margin as a percentage of sales was 2.3 percent higher
than the prior year. This increase is primarily attributable to a significant
reduction in retail markdowns taken during the first half of the year as well as
improved inventory shrinkage results. Partially offsetting the improvement in
merchandise margin was a 1.6 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 $6.2
million to $56.3 million during the first nine months of 2002 from $50.1 million
during the comparable nine 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 1.5 percent to 24.6 percent during the first nine months
of fiscal 2002 from 23.1 percent during the comparable nine 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 $242,000 to $85,000 during the first
nine months of fiscal 2002 from $327,000 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, 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 November 2, 2002, cash and cash equivalents were $2.4 million, a decrease of
$12.5 million since February 2, 2002. The primary uses of cash were capital
expenditures of $8.7 million for new stores, store refurbishments and
information systems, an increase in other assets of $6.0 million, a decrease in
accounts payable of $3.7 million, an increase in inventory of $2.7 million and a
decrease in income taxes payable of $1.7 million.

11

Credit Facility

On June 1, 2002, the Company entered into a restated and amended credit facility
with Wells Fargo Bank (the "Bank"). The restated facility provided 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.

At November 2, 2002, the Company was in technical default of its line of credit
covenant that requires net income of not less than $1 on a trailing two-quarter
basis determined as of each fiscal quarter end. On November 11, 2002, the
Company and the Bank entered into the First Amendment to the First Amended and
Restated Credit Agreement and Waiver of Defaults, which provides the Bank with a
security interest in the Company's inventory, accounts receivable and other
rights to payment, furniture and fixtures, and machinery and equipment and
includes a waiver of the specific covenant violation for the quarter ended
November 2, 2002. The covenant will remain in effect for future periods. Amounts
available to borrow under the line of credit, as limited by the cash flow
multiple and/or outstanding letters of credit, totaled $13.0 million at November
2, 2002. No borrowings (other than letters of credit, totaling $2.0 million)
were outstanding under the revolving line at November 2, 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

As of the filing date of this document, the Company has opened all 11 new
Gadzooks stores scheduled for opening this year. Capital expenditures for the
remainder of the year should approximate $500,000 to $1,000,000 to complete the
new 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 was primarily
implemented during the second and third quarters of 2002 in an attempt to
increase the visual appeal, flow and shopability of all stores. Accelerated
depreciation and loss on disposal of assets related to the project was
approximately $365,000 and $61,000 for the second and third quarters,
respectively.

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.

12

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.

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, as amended. 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.

CONTROLS AND PROCEDURES

Within 90 days prior to the date of the filing date of this Quarterly
Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer
conducted an evaluation of the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of
1934, as amended). Based on that evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and
procedures are effective to ensure that information required to be disclosed by
us in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and include controls and procedures designed to ensure
that information required to be disclosed by us in such reports is accumulated
and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate to allow timely discussions regarding
required disclosure.

13

There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date
the Chief Executive Officer and Chief Financial Officer completed their
evaluation.

PART II - OTHER INFORMATION

Items 1-5 - None

Item 6 - Exhibits and Reports on Form 8-K.
(a) See Index to 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: December 13, 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;

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;

4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act rules
13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the
equivalent functions):

a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and

b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.

DATE: December 13, 2002 By: /s/ James A. Motley
----------------------------------------
James A. Motley
Vice President,
Chief Financial Officer
and Secretary

16

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;

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;

4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act rules
13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c. presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the
equivalent functions):

a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and

b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.

DATE: December 13, 2002 By: /s/ Gerald R. Szczepanski
-----------------------------------
Gerald R. Szczepanski
Chairman of the Board and
Chief Executive Officer

17

INDEX TO EXHIBITS

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

18