By Vicki M. Young

NEW YORK — Gadzooks, moving quickly to bring its house in order, has filed for bankruptcy court protection and is seeking to oust its president and chief merchandising officer, Paula Masters.

As expected, the teen retailer filed its Chapter 11 petition in a Dallas bankruptcy court. The filing, on Tuesday, confirmed stories first reported in these columns in December that a bankruptcy might be in the cards for the Carrollton, Tex.-based chain.

The surprise, however, was a court filing seeking to end a “Severance Protection Agreement” with Masters so early in the case. In addition, court papers said that on Feb. 2, the retailer provided its former president and chief merchant with a written notice of its intent to terminate her employment “for cause.”

The same documents said due to the “sensitive nature of the contents of the notice,” that it did not attach a copy of it to the request to end the severance agreement, but could provide the court with a copy if required. The company also said the notice “clearly spells out the debtor’s cause for its intended termination of Masters.”

Neither Masters, who is still employed by Gadzooks, nor Jerry Szczepanski, chairman and chief executive officer, could be reached for comment.

The agreement, dated July 1, 2001, was initially for a one-year term, but was automatically extended twice through June 30, 2003 and through June 30, 2004. Under the terms of the agreement, “cause” is defined as either “intentionally and continually” failing to perform “reasonably assigned duties” or “intentionally engaged in conduct which is demonstrably and materially injurious to the company.”

Both instances require a written notice to Masters regarding the company’s contention, and in the latter scenario, allows her an opportunity to speak before the board with the assistance of counsel, if desired.

According to the proxy statement filed on May 13, 2003 with the Securities and Exchange Commission, Masters, 40, has served in her current positions since March 2001. Her salary was listed as $402,000. She’s been with Gadzooks since January 1999, joining as vice president, general merchandise manager, until October of the same year when she became senior vice president, gmm. Prior to joining Gadzooks, she was vice president, divisional merchandise manager from January 1996 to December 1998 with Elder-Beerman, where she was responsible for that company’s junior sportswear and dress business. From May 1986 to December 1995, Masters served in a variety of capacities at Margo’s.Regarding the bankruptcy, Gadzooks said it was necessary to allow it time to complete a reorganization of its core business of around 252 stores. In addition to 31 stores currently being liquidated, another 125 stores will be shuttered under the plan. About 65 corporate and field positions will also be eliminated. The firm currently operates 410 stores in 41 states.

The retailer, which caters to teens between ages 16 and 22 years old, has reached an agreement with Wells Fargo Retail Finance for debtor-in-possession financing, pending court approval.

Gadzooks, struggling for the last three years, disclosed in a regulatory filing with the SEC in December that its quarterly same-store sales results have been in negative territory for the last three quarters, and that the firm was struggling with its transition to an all-junior merchandise mix. Historically, Gadzooks catered to the apparel needs of young men and women. That changed in July. Additionally, many of Gadzooks’ vendors rely on factoring agreements to insure payment of their invoices, and several factors late last year either stopped approving orders or modified their terms.

Gadzooks Bankruptcy Facts
Creditors Holding 10 Largest Unsecured Claims:*

Company: Amount:
1. Liberty Acorn Fund $6 million
2. Evergreen Special Values Fund $4 million
3. Provident Premier Master Fund $2.7 million
4. Simon Property Group $1.3 million
5. General Growth $1.2 million
6. Von Dutch Originals $1 million
7. Craig Hallum $1 million
8. Quiksilver $845,107
9. Excell Canada $778,917
10. CBL $584,815

Total Liabilities: $42.5 million
Total Assets: $84.6 million

Investors holding 5 percent or more of the voting securities:
Columbia Wanger Asset Management; Royce & Associates; Evergreen Investment Management Co.; Dimensional Fund Advisors, Inc.; Fuller & Thaler Asset Management; Vanguard Group and Barclays Global Investors.

Source: Court filings. *Includes trade debt, subordinate debt and rent.

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