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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-24395
BEBE STORES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 94-2450490
(STATE OR JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
380 VALLEY DRIVE
BRISBANE, CALIFORNIA 94005
(Address of principal executive offices)
TELEPHONE: (415) 715-3900
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No _
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of voting stock held by non-affiliates of the
registrant was approximately $59,086,200 as of September 1, 2000, based upon the
closing sale price per share of $15.94 of the registrant's Common Stock as
reported on the Nasdaq National Market on such date. Shares of Common Stock held
by each executive officer and director and by each person who owns 10% or more
of the outstanding Common Stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily conclusive for other purposes. As of September 1, 2000, 24,612,572
shares of Common Stock, $0.001 per share par value, of the registrant were
outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive Proxy
Statement for the 2000 Annual Meeting of Shareholders, to be filed with the
Commission no later than 120 days after the end of the registrant's fiscal year
covered by this Form 10-K.
PART I
ITEM 1. BUSINESS
The following discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results may differ materially from the
results discussed in the forward-looking statements. This Form 10-K includes
forward-looking statements that could differ from actual future results.
Statements that are predictive in nature, that depend upon or refer to future
events or conditions or that include words such as "expects," "anticipates,"
"intends," "plans," "believes," "estimates," "thinks" and similar expressions
are forward-looking statements. These statements involve known and unknown
risks, uncertainties and other factors, including the factors described below,
that may cause our actual results and performance to be materially different
from any future results or performance expressed or implied by these
forward-looking statements. Although we believe that these statements are based
upon reasonable assumptions, we cannot assure you that our goals will be
achieved. These forward-looking statements are made as of the date of this Form
10-K, and we assume no obligation to update or revise them or provide reasons
why actual results may differ. Factors that might cause such a difference
include, but are not limited to, miscalculation of the demand for our products,
effective management of our growth, decline in comparable store sales
performance, ongoing competitive pressures in the apparel industry, changes in
the level of consumer spending or preferences in apparel, and/or other factors
discussed in "Risk Factors" and elsewhere in this Form 10-K.
COMPANY OVERVIEW
We design, develop and produce a distinctive line of contemporary women's
apparel and accessories. We market our products under the bebe, bebe moda and
bbsp brand names through our 124 specialty retail stores located in 27 states,
the District of Columbia, Canada, the United Kingdom and our on-line store at
www.bebe.com. While we attract a broad audience, our target customers are 18- to
35-year-old women who seek current fashion trends interpreted to suit their
lifestyle needs. The "bebe look," with an unmistakable hint of sensuality,
appeals to a hip, sophisticated, body-conscious woman who takes pride in her
appearance. The bebe customer is a discriminating consumer who demands value in
the form of quality at a competitive price. Our broad product offering includes
suits, tops, pants, skirts, dresses, logo and other activewear, outerwear, and
handbags and other accessories. We design and develop most of our merchandise
in-house. The merchandise is then manufactured to our specifications. The
balance is developed primarily in conjunction with third-party apparel
manufacturers or, in some cases, selected directly from these manufacturers'
lines.
Founded by Manny Mashouf, our current Chairman, President and Chief
Executive Officer, we opened our first store in San Francisco, California in
1976. In the last four years, we significantly strengthened our employee base
and have implemented several strategic initiatives that have contributed to our
strong performance. These strategic initiatives address various aspects of our
operations, in particular the merchandising, planning, manufacturing and
distribution functions. Our merchandising initiatives focus primarily on
expanding our product line to include a broader selection of tops, pants,
dresses, accessories and logo items. While the traditional bebe product offering
spoke to the "nine to five" needs of a young professional woman, the expanded
product line provides head-to-toe lifestyle dressing at a competitive price that
easily adapts from day into evening. Also, the logo portion of the product line,
which highlights the bebe logo on a variety of active and casual styles,
enhances brand awareness while providing younger, "aspirational" customers an
entry to the bebe product line at lower price points. The strategic initiatives
that relate to the planning, manufacturing and distribution functions focus
primarily on implementing more sophisticated procedures. Also, these initiatives
involve a more disciplined approach to our business operations.
We reinforce our brand with a distinctive lifestyle image advertising
campaign, using prominent fashion photographers. We believe that our emphasis on
non-product specific lifestyle advertising
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promotes brand awareness and attracts customers who are intrigued by the
playfully sensual and evocative imagery. We communicate the images to consumers
through a variety of advertising vehicles including fashion magazines, bus
shelters, in-store displays and customer mailings. We further enhance the bebe
brand image by designing our on-line and retail stores to create an upscale,
inviting boutique environment.
OPERATING STRATEGY
While the market for women's apparel is extremely large, we believe that our
distinctive, contemporary point of view that offers quality merchandise to a
specialized market segment, presents us with opportunities for future growth.
Our objective is to become a global brand, offering quality merchandise that
enhances the spirit and playful sensuality of the contemporary woman. The
principal elements of our operating strategy to achieve this objective are as
follows:
1. PROVIDE DISTINCTIVE FASHION THROUGHOUT A BROAD PRODUCT LINE. Fashion
from throughout the world inspires our designers and merchandisers. They
interpret contemporary ideas for silhouettes, fabrications and colors into
products and styles to meet the everyday lifestyle needs of the bebe customer.
While many of our styles and products are represented season after season with
variations in color, fabric or trim, our designers and merchandisers are
committed to bringing newness into the merchandise mix in response to emerging
trends. We carefully plan our product lines to represent a broad selection of
sleek, fashionable goods, emphasizing career wear, evening wear and weekend
wear, with a continued focus on day-into-evening styles. Our product line is
further supported by a broad selection of accessories that help our customers
create a distinctive ensemble, while logo-embellished items provide an entry
point for younger, aspirational customers.
2. VERTICALLY INTEGRATE DESIGN, PRODUCTION, MERCHANDISING AND RETAIL
FUNCTIONS. We believe that our vertical integration of processes from design to
market coupled with our financial discipline enable us to produce distinctive
quality merchandise of exceptional value. We maintain flexibility in our
sourcing by subcontracting production of our own designs, developing exclusive
products in conjunction with third-party apparel manufacturers, or selecting
exclusive merchandise directly from manufacturers' lines. This approach also
enables us to respond quickly to changing fashion trends, while reducing our
risk of excess inventory.
3. MANAGE MERCHANDISE MIX. We believe that a disciplined approach to
merchandising and a proactive inventory management program is critical to our
success. By actively monitoring sell-through rates and managing the mix of
categories and products in our stores, we believe that we are able to respond to
emerging trends in a timely manner, minimize our dependence on any particular
category, style or fabrication, and preserve a balanced, coordinated
presentation of merchandise within each store.
4. CONTROL DISTRIBUTION OF MERCHANDISE. We believe that distributing our
core apparel line through bebe stores, our on-line web-site and licensee stores
greatly enhances our brand image. This controlled distribution strategy enables
us to display the full assortment of our products, control the pricing, visual
presentation and flow of goods, test new products and reinforce the brand's
identity in the eyes of our customers.
5. ENHANCE BRAND IMAGE. Through an edgy, high-impact, visual advertising
campaign using print, outdoor, in-store and direct mail communication vehicles,
we attract customers who are intrigued by the playfully sensual and evocative
imagery of the bebe lifestyle. We also offer a line of merchandise branded with
the distinctive bebe logo to increase brand awareness. Within our stores and
through our on-line virtual store, we seek to create an upscale, inviting
environment that further enhances the bebe brand and builds customer loyalty and
demand for bebe merchandise. Furthermore, we train our sales associates to be
responsive and knowledgeable and encourage them to reflect the bebe image.
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GROWTH STRATEGY
We plan to grow our operations in a controlled manner, primarily through the
opening of new stores. We opened 24 stores in fiscal 2000, we currently plan to
open approximately 25 to 30 stores in fiscal 2001, the majority of which will be
in existing markets. We continually review our store base and have identified
five under-performing stores that we are considering closing during fiscal 2001.
We also plan to grow by introducing new product categories. These can either
be internally developed or developed in conjunction with licensees. During
fiscal 2000, we introduced a denim product line, and our footwear licensee
expanded its product offering. We continually explore opportunities for
licensing the bebe name. To date, we have entered into licensing agreements for
footwear, eyewear, watches and swimwear. Under the terms of these agreements,
the licensees will manufacture and distribute products branded with the bebe
logo to be sold at bebe stores and selected retailers.
To support the introduction of new product categories in recent years and to
handle higher sales volumes, we have developed a store prototype larger than the
average of 3,250 square feet for our existing stores. Our new store prototype is
approximately 3,000 to 5,000 square feet. However, in selected markets, we may
open larger flagship stores. As opportunities arise, we also may expand certain
existing stores.
We are currently testing a new concept store format for the bbsp product
line and are monitoring the results of these bbsp stores before expanding with
this concept. The bbsp product line is a combination of activewear and
streetwear featuring cotton logo knits, fleece, casual woven bottoms and denim,
down and accessories that are easy, sexy and modern. The average bbsp store is
1,500 square feet, which allows us to display the full bbsp assortment. We plan
to open bbsp stores in high traffic malls and tourist locations. As of June 30,
2000, we operate two bbsp concept stores with a third opened in July 2000.
Additionally, we are upgrading our on-line store to simplify and enhance our
customers' on-line shopping experience and expect to continue to invest in such
upgrades to further capitalize on the encouraging performance of our on-line
store.
In addition to our domestic expansion, we are expanding internationally
primarily through licensing agreements. Our licensees currently operate stores
in Greece, Israel, United Arab Emirates and Singapore. Under the terms of these
agreements, licensees will open bebe stores that will be stocked with inventory
purchased from us.
MERCHANDISING
Our merchandising strategy is to provide current, timely fashions in a broad
selection of categories to suit the lifestyle needs of our customers. We market
all of our merchandise under the bebe, bebe moda and bbsp brand names. We design
and develop most of our merchandise in-house and contract to have the
merchandise manufactured to our specifications. In some cases, we select
merchandise directly from third-party apparel manufacturers' lines. We do not
have long-term contracts with any third party apparel manufacturers and purchase
all of the merchandise from such manufacturers by purchase order. Such
merchandise always carries our "bebe," "bebe moda" or "bbsp" labels and in most
instances is supplied to us on an exclusive basis.
PRODUCT CATEGORIES. After building a strong suiting business in the early
1990s, we diversified our product line in response to a decrease in demand for
our suiting in fiscal 1996. We significantly increased the breadth of our
product offerings by expanding categories such as knits, tops, related
separates, leather, dresses, logo and accessories. While each category's
contribution as a percentage of total net sales varies seasonally, each of the
product classifications is represented throughout the year.
We regularly evaluate new categories that may be appropriate for
introduction. In fall 1999, we introduced a denim product line. We have also
entered into licensing agreements pursuant to which licensees will manufacture
and distribute footwear, eyewear, swimwear and watches branded with the bebe
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logo to be sold at bebe stores and selected retailers. We believe additional
licensing opportunities exist for other product categories such as fragrance and
handbags.
PRODUCT DEVELOPMENT. We take a disciplined approach to the product
development process. This allows our merchants to gain as much information as
possible concerning current fashion trends before making fabric or product
purchase commitments. We control the process with a detailed product development
calendar, which highlights key color selection, fabric order, pattern
development and production order deadlines. We establish the deadlines to ensure
an adequate flow of inventory into the stores. While the product development
calendar is established on a seasonal basis, we make commitments monthly based
on current sales and fashion trends. This enhances our ability to react promptly
to customer demand. Merchandising teams and designers work together to
continuously develop new styles to be presented at monthly product review and
selection meetings. These new styles incorporate variations on existing styles
in an effort to capitalize further on the more popular silhouettes or, to a
lesser extent, entirely new styles and fabrications that respond to emerging
trends or customer preferences.
In addition, a detailed merchandising plan supports the product development
process. This merchandising plan includes sales, inventory and profitability
targets for each product classification. The plan is reconciled with our store
sales plan, a compilation of individual store sales projections. We update the
merchandising plan on a semi-monthly basis to reflect current sales and
inventory trends. The plan is then distributed throughout the merchandising
department. We use the updated merchandising plan to adjust production orders as
needed to meet inventory and sales targets. If we miscalculate consumer demand
for our products, we may be faced with significant excess inventory and fabric
for some products and missed opportunities for others. Weak sales and resulting
markdowns could cause our profitability to be impaired.
MARKETING
In recent years, we have initiated an extensive image advertising program,
which addresses the lifestyles and aspirations of our target customers. Through
an edgy, high-impact, visual advertising campaign, we attract customers who are
intrigued by the playfully sensual and evocative imagery. We believe that our
emphasis on non-product specific lifestyle advertising promotes brand awareness
and supports numerous product line expansion opportunities. An outside
advertising agency works with our internal Marketing Department to create a
lifestyle advertising campaign. This campaign, which emphasizes a
forward-looking view of fashion, is communicated to consumers through a variety
of means including fashion magazines, bus shelters, in-store displays and
customer mailings. In addition, our Public Relations Department communicates
directly with fashion editors and supplies them with a continuous flow of
product information. On occasion, we have co-sponsored promotional events with
fashion magazines, such as ELLE, GLAMOUR, MARIE CLAIRE, VOGUE and VANITY FAIR.
STORES
STORE LOCATIONS AND ENVIRONMENT. As of June 30, 2000, we operated 124
stores in 27 states, the District of Columbia, Canada and the United Kingdom.
Our stores average approximately 3,250 square feet and are primarily located in
regional shopping malls and freestanding street locations. Our stores are
designed to create a clean, upscale boutique environment, featuring contemporary
finished floors and recessed lighting. Glass exteriors allow passersby to see
easily into the store. The open floor design allows customers to readily view
the majority of the merchandise on display while store fixtures allow for the
efficient display of garments and accessories.
We provide the stores with specific merchandise display directions on a
weekly or bi-weekly basis from the corporate office based on currently available
merchandise receipts. Our in-store product presentation utilizes a variety of
different fixtures to highlight the product line's breadth and versatility.
Complete outfits are displayed throughout the store using garments from a
variety of product categories. By
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emphasizing outfits in this manner, we allow the customer to see how different
pieces can be combined to create multiple ensembles.
EXPANSION OPPORTUNITIES. In fiscal 1998, we, together with a real estate
consulting firm, developed a profile of current customers and applied the
profile to the largest 150 metropolitan areas in the United States. We currently
operate bebe stores in approximately 45 of these top geographic market areas and
have identified additional geographic markets that we believe can support one or
more bebe stores. Also, we believe that there is a significant opportunity to
expand the number of stores in many markets within which bebe stores are
currently located. We, together with our real estate consultant, also have
identified specific mall and street locations within many markets to be
considered for new bebe store locations. In selecting a specific site, we look
for high traffic locations primarily in regional shopping centers and in free-
standing street locations. We evaluate proposed sites based on the traffic
pattern, co-tenancies, average sales per square foot achieved by neighboring
stores, lease economics and other factors considered important within the
specific location.
We opened 24 new stores in fiscal 2000 and plan to open approximately 25 to
30 stores in fiscal 2001, the majority of which will be in existing markets. Our
new store prototype is approximately 3,000 to 5,000 square feet, although in
selected markets we may open larger stores that will be designed to enhance
further the bebe image.
During fiscal 2000, the average new store size was approximately 3,850
square feet. New store construction costs (before tenant allowances) averaged
$397,000. The average gross inventory investment was $114,000 while pre-opening
costs, which are expensed as incurred, were approximately $29,000 per store. Our
stores typically have achieved profitability at the store operating level within
the first full quarter of operation; however, we cannot assure that our stores
will do so in the future. Actual store growth and future store profitability and
rates of return will depend on a number of factors that include, but are not
limited to, individual store economics and suitability of available sites.
Because of their higher cost structure, larger stores are not expected to
achieve operating margins comparable to our other stores.
In addition to opening new stores, we expanded or relocated five existing
stores to larger spaces during fiscal 2000. We believe that as awareness of
bebe's brand name increases, our product offering expands and our stores mature,
additional expansions may be appropriate.
Our ability to expand will depend on a number of factors, including the
availability of desirable locations, the negotiation of acceptable leases and
our ability to manage expansion and to source adequate inventory. We cannot
assure you that we will be able to achieve our planned expansion on a timely and
profitable basis. Furthermore, we cannot assure you that store openings in
existing markets will not result in reduced net sales volumes and profitability
of existing stores in those markets.
OUTLET STORES. As of June 30, 2000, ten of our 124 stores were located in
outlet malls throughout the United States. In order to promote a better
merchandise presentation within the full price specialty stores, the products
offered in outlet stores are primarily slow moving inventory. Additionally, we
round out the inventory of our outlet stores with casual logo styles sold at
full price and, to a lesser extent, garments specifically produced for the
outlet stores.
The average outlet store size was approximately 2,900 square feet. New store
construction costs (before tenant allowances) averaged approximately $275,000,
and the average inventory investment was approximately $142,000. Of the 24
stores opened in fiscal 2000, two were outlet stores. Of the 25 to 30 stores
planned to be opened in fiscal 2001, 3 to 5 are expected to be outlet stores.
BBSP CONCEPT STORES. We are currently testing a new concept store format
for the bbsp product line and are monitoring the results of these bbsp stores
before expanding with this concept. The bbsp product line is a combination of
activewear and streetwear featuring cotton logo knits, fleece, casual woven
bottoms and denim, down and accessories that are easy, sexy and modern. The
average bbsp store is 1,500
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square feet, which allows us to display the full bbsp assortment. We plan to
open bbsp stores in high traffic malls and tourist locations. As of June 30,
2000, we operate two bbsp concept stores with a third opened in July 2000.
STORE CLOSURES. We monitor the financial performance of our stores and,
from time to time, have closed in the past and will close in the future, stores
that we do not consider to be viable. Many of the store leases contain early
termination options that allow us to close the stores in certain specified years
of the leases if certain minimum sales levels are not achieved. We closed one
store during fiscal 2000. We have reviewed our existing store base and have
identified three to five under-performing stores that we plan to close prior to
the end of fiscal 2001. Two of these underperforming stores are our two stores
in the United Kingdom. We are currently reviewing alternatives to maintain our
presence in such market, such as a licensing or joint venture arrangement.
STORE OPERATIONS
Store operations are organized into four regions and twenty districts. Each
region is managed by a regional manager, and each district is managed by a
district manager. Each regional manager is typically responsible for four to six
districts, and each district manager is typically responsible for four to eight
stores. Each store is typically staffed with two to four managers in addition to
sales associates and store support employees.
We seek to instill enthusiasm and dedication in our store management
personnel and sales associates through incentive programs and regular
communication with the stores. Sales associates receive commissions on sales
with a guaranteed minimum hourly compensation. Store managers receive base
compensation plus incentive compensation based on sales and inventory control.
Regional and district managers receive base compensation plus incentive
compensation based on meeting profitability benchmarks.
We have well-established store operating policies and procedures and use an
in-store training regimen for all new store employees. The Visual Merchandising
staff provides the stores with merchandise presentation instructions, which
include photographs of fixture presentations on a regular basis. In addition, we
provide product descriptions to sales associates to enable them to gain
familiarity with our product offerings. We offer our sales associates a discount
on bebe merchandise to encourage them to wear our apparel and reflect the bebe
image while on the selling floor.
We also maintain a Loss Prevention Department that develops and implements
programs for controlling losses. These programs include installing electronic
surveillance systems in all stores, monitoring returns, voids, employee sales
and deposits, and educating store personnel on loss prevention.
SOURCING, QUALITY CONTROL AND DISTRIBUTION
All of our merchandise is marketed under the bebe, bebe moda and bbsp brand
names. Much of this merchandise is designed and developed in-house and
manufactured to our specifications. The balance is developed primarily in
conjunction with third-party apparel manufacturers. In some cases, we select
merchandise directly from these manufacturers' lines. When we contract for
merchandise production, we use facilities in the United States and foreign
manufacturers. These facilities produce garments based on designs, patterns and
detailed specifications produced by us.
We use computer aided design systems to develop patterns and production
markers as part of our product development process. We fit test sample garments
before production to make sure patterns are accurate. We maintain a formalized
quality control program. This program includes inspection of fabrics upon
receipt at our distribution center. Additionally, a percentage of merchandise
receipts are inspected and fit tested a second time prior to being shipped to
our stores. Garments that do not pass inspection are returned to the
manufacturer for rework or accepted at reduced prices for sale in our outlet
stores.
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All of the merchandise for our domestic stores is received, inspected,
processed, warehoused and distributed through our distribution center that is
adjacent to our corporate offices. Details about each receipt are supplied to
merchandise planners who determine how the product should be distributed among
the stores based on current inventory levels, sales trends and specific product
characteristics. Advance shipping notices are electronically communicated to the
stores and any goods not shipped are stored for replenishment purposes.
Merchandise typically is shipped to the stores on a weekly basis using common
carriers; however, during peak selling periods, or for high volume stores,
shipments may be made two or even three times a week.
We do not have any long-term contracts with any manufacturer or supplier and
place all of our orders by purchase order. If we fail to obtain sufficient
quantities of manufacturing capacity or raw materials, it would have a harmful
effect on our business, financial condition and results of operations. We have
received in the past, and may receive in the future, shipments of products from
manufacturers that fail to conform to our quality control standards. In such
event, unless we are able to obtain replacement products in a timely manner, we
may lose sales which could harm our operating results.
COMPETITION
The retail and apparel industries are highly competitive and are
characterized by low barriers to entry. We expect competition in our markets to
increase. The primary competitive factors in our markets are:
1. brand name recognition;
2. product styling;
3. product quality;
4. product presentation;
5. product pricing;
6. store ambiance;
7. customer service; and
8. convenience.
We compete with traditional department stores, specialty store retailers,
business to consumer websites, off-price retailers and direct marketers for,
among other things, raw materials, market share, retail space, finished goods,
sourcing and personnel. Because many of these competitors are larger and have
substantially greater financial, distribution and marketing resources than we
do, we may lack the resources to adequately compete with them. If we fail to
compete in any way, it may have a harmful effect on our business, financial
condition and results of operations.
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LICENSING, INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
LICENSING. We strive to provide our customers with high quality products
and to maintain a consistent image in all of our advertising and marketing
programs. We regularly evaluate opportunities to expand our product offering.
Accordingly, we may from time to time selectively enter into licensing or joint
venture agreements with third parties. In entering into such licensing and joint
venture agreements, we seek to preserve the integrity of our brand by closely
monitoring the design and quality of the products sold by licensees or joint
venture partners and by controlling the manner in which our products are
advertised, marketed and distributed. In addition to distributing such new
products through bebe stores, we may elect to distribute these licensed products
with the bebe logo through other channels. We have entered into license
agreements where licensees manufacture and distribute footwear, eyewear, watches
and swimwear branded with the bebe logo to be sold at bebe stores and other
retailers.
We have also signed licensing agreements to license the bebe brand name
internationally to licensees who will open bebe stores. We have signed licensing
agreements with companies who currently operate bebe retail stores in Greece,
Israel, United Arab Emirates and Singapore. Under these agreements, we provide
the use of our name, store design and advertising images, and the licensees
purchase inventory from us.
TRADEMARKS AND SERVICE MARKS. We believe that our trademarks and other
proprietary rights are important to our success. We have registered "bebe" and
"bebe moda" in the United States and certain foreign jurisdictions and have
applied for "bbsp" in the United States and certain foreign jurisdictions. Even
though we take actions to establish and protect our trademarks and other
proprietary rights, we cannot assure that others will not imitate our products
or infringe on our intellectual property rights. In addition, we cannot assure
that others will not resist or seek to block the sale of our products as
infringements of their trademark and proprietary rights. In certain
jurisdictions, other entities may have rights to names that contain the word
"bebe," which could limit our ability to expand in such jurisdictions.
We are seeking to register our trademarks in targeted international markets
that we believe represent large potential markets for our products. In some of
these markets, local companies currently have registered competing marks, and/or
regulatory obstacles exist that may prevent us from obtaining a trademark for
the bebe name or related names. In such countries, we may be unable to use the
bebe name unless we purchase the right or obtain a license to use the bebe name.
We may not be able to register trademarks in these international markets,
purchase the right or obtain a license to use the bebe name on commercially
reasonable terms. If we fail to obtain trademark, ownership or license rights,
it would limit our ability to expand into certain international markets or enter
such markets with the bebe name, and to capitalize on the value of our brand.
Furthermore in some jurisdictions, despite successful registration of our
trademarks, third parties may allege infringement and bring actions against us.
INFORMATION SERVICES AND TECHNOLOGY
We are committed to utilizing technology to enhance our competitive
position. Our information systems provide integration of the store,
merchandising, distribution and financial systems. The core business systems,
which consist of both purchased and internally developed software, are accessed
over a Company-wide network providing corporate employees with access to all key
business applications. Daily sales and cash deposit information are
electronically collected from the stores' point-of-sale terminals nightly.
During this process, we also obtain information concerning inventory receipts
and transfers and send to the stores pricing, markdown and shipment notification
data. In addition, we collect customer names and addresses to update our
customer database. The merchandising staff evaluates the sales and inventory
information collected from the stores to make key merchandise planning
decisions, including replenishment and markdowns. These decisions enhance our
ability to optimize sales while limiting
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markdowns and minimizing inventory risk by properly marking down slow selling
styles, reordering existing styles and effectively distributing new inventory
receipts to the stores.
In the past, our investments in information systems have focused on our core
store, merchandise and financial accounting systems. Currently, our focus is on
upgrading our capabilities and systems associated with our production,
merchandise allocation and distribution functions, which have not kept pace with
our growth. We made significant investments to improve existing management
information systems and implemented new systems during fiscal 2000 and plan to
make significant additional investments in fiscal 2001. We cannot assure you
that we will be successful with the implementation of these new systems or
plans. Failure to implement and integrate such systems or plans could have a
harmful effect on our business, financial condition and results of operations.
EMPLOYEES
As of June 30, 2000, we had approximately 1,900 employees, of whom
approximately 340 were employed in general and administrative functions at the
corporate offices and distribution center. The remaining 1,560 employees were
employed in store operations. Approximately 810 were full-time employees and
1,090 were employed on a part-time basis. None of our employees are represented
by a labor union, and we believe our relationship with our employees is good.
EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY PERSONNEL
The following table sets forth certain information with respect to the
executive officers, directors and other officers and key personnel of the
Company as of June 30, 2000:
NAME AGE POSITION
- ---- -------- --------
Manny Mashouf(1).......................... 62 Chairman, President and Chief Executive
Officer
Barbara Bass(2)........................... 49 Director
Corrado Federico(2)....................... 59 Director
Neda Mashouf.............................. 37 Director and Merchandising Advisor
Philip Schlein(2)......................... 66 Director
George Arvan(1)........................... 53 Vice President of Sourcing and Production
Karen Ioli................................ 40 Vice President of Licensing
Blair Lambert(1).......................... 42 Chief Financial Officer
Tim Millen................................ 40 Vice President of Information Services and
Technology
Ferrell Ostrow............................ 41 Vice President of Loss Prevention
Christina Perozzi......................... 31 Vice President of Finance
Lilliemae Stephens(1)..................... 29 Vice President, General Counsel and
Corporate Secretary
- ------------------------
(1) Executive Officer.
(2) Member, Audit Committee and Compensation Committee.
MANNY MASHOUF founded the Company and has served as Chairman, Chief
Executive Officer and President of the Company since the Company's incorporation
in 1976. Mr. Mashouf is the husband of Neda Mashouf, a Director of the Company.
BARBARA BASS has served as a Director of the Company since February 1997.
Since 1993, Ms. Bass has served as the President of the Gerson Bakar Foundation.
From 1989 to 1992, Ms. Bass served as President
11
and Chief Executive Officer of the Emporium Weinstock Division of Carter Hawley
Hale Stores, Inc., a department store chain. Ms. Bass also serves on the Board
of Directors of Starbucks Corporation, DFS Group Limited and The Bombay
Company, Inc.
CORRADO FEDERICO has served as a Director of the Company since
November 1996. Mr. Federico is President of Solaris Properties and has served as
the President of Corado, Inc., a land development firm, since 1991. From 1986 to
1991, Mr. Federico held the position of President and Chief Executive Officer of
Esprit de Corp, Inc., a wholesaler and retailer of junior and children's
apparel, footwear and accessories ("Esprit"). Mr. Federico also serves on the
Board of Directors of Hot Topic, Inc.
NEDA MASHOUF has served as a Director of the Company since September 1984
and has been employed by the Company since 1984, most recently as Merchandising
Advisor. Ms. Mashouf is the wife of Manny Mashouf, the Chairman, President and
Chief Executive Officer of the Company.
PHILIP SCHLEIN has served as a Director of the Company since December 1996.
Since April 1985, Mr. Schlein has been a general partner of U.S. Venture
Partners, a venture capital firm specializing in retail and consumer products
companies. From January 1974 to January 1985, Mr. Schlein served as President
and Chief Executive Officer of Macy's California, a division of R. H. Macy &
Co, Inc., a department store chain. Mr. Schlein also serves on the Board of
Directors of Ross Stores, Inc., NBC Internet, Inc., QRS Corporation and Burnham
Pacific Properties, Inc.
GEORGE ARVAN has served as the Vice President of Sourcing and Production of
the Company since September 1997. Prior to his employment with bebe, Mr. Arvan
founded New Planet Sourcing, an apparel sourcing company, and served as its
President from September 1996 to September 1997. During the period from 1991 to
1996, Mr. Arvan was the Chief Operating Officer of Berkeley Shirt Company, a
men's wholesale apparel company.
KAREN IOLI has served as Vice President of Licensing of the Company since
January 1998. From January 1996 to January 1998, Ms. Ioli served as Vice
President of Licensing for Mossimo, Inc., an apparel wholesale company. From
July 1992 to September 1995, Ms. Ioli was employed by Guess?, Inc., an apparel
retail and wholesale company, as Vice President of Licensing.
BLAIR LAMBERT has served as Chief Financial Officer of the Company since
June 1996. From 1988 to 1996, Mr. Lambert was employed by Esprit, most recently
as Corporate Vice President of Finance. Mr. Lambert is a Certified Public
Accountant.
TIM MILLEN has served as Vice President of Information Services and
Technology of the Company since November 1997. From July 1996 to November 1997,
Mr. Millen served as Vice President of Information Systems for AZ3 Inc. (d.b.a.
BCBG), a women's apparel retail and wholesale company. From August, 1994 to
July 1996, Mr. Millen served as Vice President of Management Information Systems
for Francine Browner Inc., an apparel wholesale company. From 1991 to 1994,
Mr. Millen was an independent information technology consultant, focusing on the
retail and wholesale apparel market.
FERRELL OSTROW has served as Vice President of Loss Prevention for the
Company since March 1999. From February 1998 to February 1999, Mr. Ostrow served
as the Director of Loss Prevention for The Wet Seal Inc. From February 1988 to
February 1998, Mr. Ostrow served as Director of Loss Prevention with Pacific
Sunwear of California Inc.
CHRISTINA PEROZZI has been employed by the Company since April 1995, most
recently as Vice President of Finance. From October 1993 to April 1995,
Ms. Perozzi served as Revenue Manager at Gap Inc.
LILLIEMAE STEPHENS has served as General Counsel of the Company since
January 1999. In June 2000, Ms. Stephens became the Company's Vice President of
Legal and Business Affairs. In October 1999, Ms. Stephens became the Company's
Corporate Secretary. From October 1996 to January 1999, Ms. Stephens served as
an attorney at Gray Cary Ware & Freidenrich LLP.
12
ITEM 2. PROPERTIES
As of June 30, 2000, our 124 stores, all of which are leased, encompassed
approximately 404,500 total square feet. The typical store lease is for a
10-year term and requires us to pay a base rent and a percentage rent if certain
minimum sales levels are achieved. Many of the leases provide a lease
termination option after a number of specified years if certain minimum sales
levels are not achieved. In addition, leases for locations typically require us
to pay property taxes, utilities and repairs and maintenance. Also, leases for
mall locations may include common area maintenance fees.
Our corporate headquarters and distribution center are located in an
approximately 70,000 square foot leased facility located at 380 Valley Drive,
Brisbane, California, and a 35,000 square foot leased facility located at 400
Valley Drive, Brisbane, California. These leases expire in August 2001 and
April 2006, respectively. In addition, we lease approximately 20,000 square feet
of warehouse space for fabric inspection, storage and distribution in South San
Francisco, which expires in August 2001. We are evaluating our need for
additional administrative offices and distribution center. We have entered into
an amendment to the lease for the corporate facility located at 400 Valley
Drive, Brisbane, California which would allow us to extend the term of the lease
under certain conditions.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our operations. As of the date of this filing, we are not engaged
in any legal proceedings that are expected, individually or in the aggregate, to
have a harmful effect on our business, financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our shareholders since June 30, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock trades on the Nasdaq National Market under the symbol
"BEBE". The following table sets forth the high and low sales of bebe common
stock for the two years ended June 30, 2000 as reported by Nasdaq:
HIGH LOW
-------- --------
FISCAL 1999
First Quarter............................................... 20.00 10.00
Second Quarter.............................................. 38.00 12.75
Third Quarter............................................... 44.50 28.50
Fourth Quarter.............................................. 50.00 21.00
FISCAL 2000
First Quarter............................................... 35.13 22.50
Second Quarter.............................................. 35.13 18.13
Third Quarter............................................... 28.84 10.50
Fourth Quarter.............................................. 13.31 6.88
As of September 1, 2000 the number of holders of record of our common stock
was approximately 60 and the number of beneficial holders of our common stock
was estimated to be in excess of 6,400.
We have never declared or paid any dividends on our common stock and do not
intend to pay any dividends on our common stock in the foreseeable future. In
addition, our current line of credit arrangements prohibit the payment of cash
dividends on our capital stock.
13
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL AND OPERATING DATA
The following selected financial data of the Company is qualified by
reference to, and should be read in conjunction with, the Financial Statements
and Notes thereto and the other financial information appearing elsewhere in
this filing. These historical results are not necessarily indicative of results
to be expected in the future.
FISCAL YEAR ENDED JUNE 30,
----------------------------------------------------
2000 1999 1998 1997 1996
Statements of Operations Data: -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales................................... $241,802 $201,341 $146,756 $95,086 $71,563
Cost of sales, including buying and
occupancy................................. 119,850 95,440 71,713 53,969 44,701
-------- -------- -------- ------- -------
Gross profit................................ 121,952 105,901 75,043 41,117 26,862
Selling, general and administrative
expenses.................................. 76,294 61,069 46,359 32,649 26,353
-------- -------- -------- ------- -------
Income from operations...................... 45,658 44,832 28,684 8,468 509
Interest and other expenses (income), net... (3,201) (2,242) (838) (128) 392
-------- -------- -------- ------- -------
Earnings before income taxes................ 48,859 47,074 29,522 8,596 117
Provision (benefit) for income taxes........ 19,454 19,065 12,103 3,218 (10)
-------- -------- -------- ------- -------
Net earnings................................ $ 29,405 $ 28,009 $ 17,419 $ 5,378 $ 127
======== ======== ======== ======= =======
Basic earnings per share.................... $ 1.20 $ 1.16 $ 0.77 $ 0.24 $ 0.01
Diluted earnings per share.................. $ 1.17 $ 1.11 $ 0.73 $ 0.24 $ 0.01
Basic weighted average shares outstanding... 24,481 24,055 22,688 22,640 22,640
Diluted weighted average shares
outstanding............................... 25,226 25,327 23,862 22,651 22,640
Selected Operating Data:
Number of stores:
Opened during period...................... 24 17 7 10 18
Closed during the period.................. 1 2 4 0 1
Open at end of period..................... 124 101 86 83 73
Net sales per average store(1).............. $ 2,164 $ 2,181 $ 1,719 $ 1,211 $ 1,065
Comparable store sales increase
(decrease)(2)............................. 0.4% 25.1% 41.3% 18.0% (16.5)%
AS OF JUNE 30,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Balance Sheet Data:
Working capital.............................. $80,711 $ 62,144 $ 35,904 $ 8,275 $ 5,462
Total assets................................. 137,662 107,366 64,209 29,109 22,005
Long-term debt, including current portion.... 173 260 187 320 3,680
Shareholders' equity......................... 111,800 80,094 45,263 15,295 9,914
- ------------------------
(1) Based on the sum of average monthly sales per open store for the period.
(2) Based on net sales; stores are considered comparable beginning on the first
day of the first month following the first anniversary of their opening.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with the Financial
Statements and Notes thereto included elsewhere in this Form 10-K. The following
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements, which involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including
those set forth under "Risks That May Affect Results" in this section. Our
fiscal year ends on June 30 of each calendar year.
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of net
sales for the periods indicated:
FISCAL YEAR ENDED JUNE 30,
------------------------------
2000 1999 1998
-------- -------- --------
STATEMENTS OF OPERATIONS DATA:
Net sales................................................. 100.0% 100.0% 100.0%
Cost of sales, including buying and occupancy(1).......... 49.6 47.4 48.9
------ ------ ------
Gross profit.............................................. 50.4 52.6 51.1
Selling, general and administrative expenses(2)........... 31.6 30.3 31.6
------ ------ ------
Income from operations.................................... 18.8 22.3 19.5
Interest and other expenses (income), net................. (1.3) (1.1) (0.6)
------ ------ ------
Earnings before income taxes.............................. 20.1 23.4 20.1
Provision for income taxes................................ 8.1 9.5 8.2
------ ------ ------
Net earnings.............................................. 12.0% 13.9% 11.9%
====== ====== ======
- ------------------------
(1) Cost of sales includes the cost of merchandise, store occupancy costs and
buying costs.
(2) Selling, general and administrative expenses primarily consist of
non-occupancy store costs, corporate overhead and advertising costs.
YEARS ENDED JUNE 30, 2000 AND 1999
NET SALES. Net sales increased to $241.8 million during the year ended
June 30, 2000 from $201.3 million in fiscal 1999, an increase of $40.5 million,
or 20.1%. Of this increase, $1.0 million was attributable to the 0.4% increase
in comparable store sales, and $39.5 million was attributable to new, remodeled
or expanded stores not included in the comparable store sales base. Comparable
store sales for the first half of fiscal 2000 increased 11.0%. Comparable store
sales for the second half of fiscal 2000 decreased 10.1%. The decrease in
comparable store sales in the second half of fiscal 2000 was attributable to
missed opportunities in key product categories, our failure to provide a
balanced product assortment that addressed our customer needs and increased
competition. We expect to continue to experience decreases in comparable store
sales volumes in the current quarter as compared to the same period last year.
We also expect that comparable store growth, if any, in the future periods will
be lower than rates achieved in fiscal 1998 and 1999 and the first half of
fiscal 2000.
GROSS PROFIT. Gross profit, which includes the cost of merchandise, buying
and occupancy, increased to $122.0 million for the year ended June 30, 2000 from
$105.9 million in fiscal 1999, an increase of $16.1 million, or 15.2%. As a
percentage of net sales, gross profit decreased to 50.4% for the year from
15
52.6% during fiscal 1999. The decrease in gross profit as a percentage of net
sales resulted from negative occupancy expense leverage and reduced merchandise
margins. Negative occupancy expense leverage was attributed to the lower sales
productivity. Reduced merchandise margins was attributable to our failure to
provide a balanced product assortment that addressed our customer's needs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, which primarily consist of non-occupancy store costs,
corporate overhead and advertising costs, increased to $76.3 million during the
year ended June 30, 2000 from $61.1 million in fiscal 1999, an increase of
$15.2 million, or 24.9%. As a percentage of net sales, these expenses increased
to 31.6% during the year ended June 30, 2000 from 30.3% in fiscal 1999. This
increase as a percentage of net sales was largely the result of increased
depreciation expense and higher compensation.
We recorded deferred compensation of $2.8 million in connection with option
grants in June 1997, of which $673,000 was charged to expense for the year ended
June 30, 2000. The remaining deferred compensation expense will be amortized
over the vesting period of the options. See Note 8 of Notes to Financial
Statements.
INTEREST AND OTHER EXPENSE (INCOME), NET. We generated $3.2 million of
interest and other income (net of other expenses) during the year ended
June 30, 2000 as compared to $2.2 million in fiscal 1999 due to increases in
average cash balances arising from operating results.
PROVISION FOR INCOME TAXES. The effective tax rate for the year ended
June 30, 2000 was 39.8% as compared to 40.5% in fiscal 1999. The lower effective
tax rate for fiscal 2000 was primarily attributable to interest on tax
advantaged investments. See Note 5 of Notes to Financial Statements.
YEARS ENDED JUNE 30, 1999 AND 1998
NET SALES. Net sales increased to $201.3 million during the year ended
June 30, 1999 from $146.8 million in fiscal 1998, an increase of $54.5 million,
or 37.1%. Of this increase, $33.4 million was attributable to the 25% increase
in comparable store sales, and $21.1 million was attributable to stores not
included in the comparable store sales base. The increase in comparable store
sales was attributable to a broader product line offering, strong consumer
acceptance of the product line and improvements in the operational aspects of
our business.
GROSS PROFIT. Gross profit, which includes the cost of merchandise, buying
and occupancy, increased to $105.9 million for the year ended June 30, 1999 from
$75.0 million in fiscal 1998, an increase of $30.9 million, or 41.2%. As a
percentage of net sales, gross profit increased to 52.6% for the year from 51.1%
during fiscal 1998. The increase in gross profit as a percentage of net sales
resulted from reduced occupancy costs as a percentage of net sales resulting
from higher average store sales and, to a lesser extent, higher merchandise
margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, which primarily consist of non-occupancy store costs,
corporate overhead and advertising costs, increased to $61.1 million during the
year ended June 30, 1999 from $46.4 million in fiscal 1998, an increase of
$14.7 million, or 31.7%. As a percentage of net sales, these expenses decreased
to 30.3% during the year ended June 30, 1999 from 31.6% in fiscal 1998. This
reduction as a percentage of net sales was largely due to favorable compensation
expense leverage offset by increases in professional fees related to
international trademark protection, registration and acquisition.
We recorded deferred compensation of $2.8 million in connection with option
grants in June 1997, of which $538,000 was charged to expense for the year ended
June 30, 1999. The remaining deferred compensation expense will be amortized
over the vesting period of the options. See Note 8 of Notes to Financial
Statements.
16
INTEREST AND OTHER EXPENSE (INCOME), NET. We generated $2.2 million of
interest and other income (net of other expenses) during the year ended
June 30, 1999 as compared to $838,000 in fiscal 1998 due to increases in average
cash balances arising from operating results and proceeds of the Company's
initial public offering of shares in June, 1998.
PROVISION FOR INCOME TAXES. The effective tax rate for the year ended
June 30, 1999 was 40.5% as compared to 41.0% in fiscal 1998. The lower effective
tax rate for fiscal 1999 was primarily attributable to interest on tax
advantaged investments. See Note 5 of Notes to Financial Statements.
SEASONALITY OF BUSINESS AND QUARTERLY RESULTS
Our business varies with general seasonal trends that are characteristic of
the retail and apparel industries. As a result, our typical store generates a
disproportionate amount of our annual net sales in the first half of our fiscal
year (which includes the fall and holiday selling seasons) compared to the
second half of our fiscal year. If for any reason our sales were below seasonal
norms during the first half of our fiscal year, our annual operating results
would be negatively impacted. Because of the seasonality of our business,
results for any quarter are not necessarily indicative of results that may be
achieved for a full fiscal year.
The following table sets forth certain unaudited statements of operations
data for each of the four quarters ended June 30, 2000, as well as such data
expressed as a percentage of our total net sales for the periods indicated. This
data has been derived from unaudited financial statements that, in the opinion
of management, include all adjustments (consisting only of normal recurring
adjustments) necessary for fair presentation of such information when read in
conjunction with our Financial Statements and Notes thereto appearing elsewhere
in this annual report on Form 10-K.
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
2000 2000 1999 1999
-------- --------- ------------ -------------
STATEMENTS OF OPERATIONS DATA
(IN THOUSANDS):
Net sales...................................... $54,132 $52,895 $78,138 $56,637
Gross profit................................... 25,144 25,896 41,194 29,718
Selling, general and administrative expenses... 18,988 18,211 21,241 17,854
Income from operations......................... 6,155 7,685 19,953 11,864
Earnings before income taxes................... 7,050 8,587 20,758 12,463
Net earnings................................... 3,990 5,421 12,504 7,490
Basic earnings per share......................... $ 0.16 $ 0.22 $ 0.51 $ 0.31
Diluted earnings per share....................... $ 0.16 $ 0.22 $ 0.49 $ 0.30
AS A PERCENTAGE OF NET SALES:
Net sales...................................... 100.0% 100.0% 100.0% 100.0%
Gross profit................................... 46.4% 49.0% 52.7% 52.5%
Selling, general and administrative expenses... 35.1% 34.5% 27.2% 31.5%
Income from operations......................... 11.3% 14.5% 25.5% 21.0%
Earnings before income taxes................... 13.0% 16.2% 26.5% 22.1%
Net earnings................................... 7.4% 10.2% 16.0% 13.2%
LIQUIDITY AND CAPITAL RESOURCES
Our working capital requirements vary widely throughout the year and
generally peak in the first and second fiscal quarters. At June 30, 2000, we had
approximately $72.5 million of cash and cash equivalents on hand. In addition,
we had a revolving line of credit, under which we could borrow or issue letters
of credit up to a combined total of $7.0 million. As of June 30, 2000, there
were no borrowings under the line of credit and letters of credit outstanding
totaled $2.8 million.
17
Net cash provided by operating activities in fiscal 2000, 1999 and 1998 was
$30.2 million, $33.3 million and $19.3 million, respectively. The decrease in
cash provided by operating activities in fiscal 2000 compared to fiscal 1999 was
primarily the result of increases in income from operations offset by decreases
in tax benefits arising from option exercises and changes in working capital.
The increase in cash provided by operating activities in fiscal 1999 compared to
fiscal 1998 was primarily the result of increases in income from operations, tax
benefits arising from option exercises and changes in working capital.
Net cash used by investing activities was $18.0 million, $12.0 million and
$3.6 million in fiscal 2000, 1999 and 1998, respectively. The primary use of
these funds was for the opening of new stores, investments in management
information systems and the expansion of our corporate offices. We opened 24 new
stores in fiscal 2000 and expect to open approximately 25 to 30 stores in fiscal
2001.
During fiscal 2000, new store construction costs (before tenant allowances)
averaged $387,000. The average gross inventory investment was $117,000 while
pre-opening costs, which are expensed as incurred, was less than $28,000 per
store. The average total cost to build new stores will vary in the future,
depending on various factors, including local construction costs, changes in
store format and design and tenant improvement allowances.
Net cash provided by financing activities was $1.1 million, $1.4 million and
$11.8 million in fiscal 2000, fiscal 1999 and fiscal 1998, respectively. In
fiscal 2000 and fiscal 1999, net cash provided by financing activities primarily
was derived from proceeds from the issuance of common stock arising from stock
option exercises. In fiscal 1998, net cash provided by financing activities
related primarily to proceeds from the sale of 1.25 million shares in our
initial public offering of stock.
We believe that our cash on hand, together with our cash flow from
operation, will be sufficient to meet our capital and operating requirements
through fiscal 2001. Our future capital requirements, however, will depend on
numerous factors, including without limitation, the size and number of new and
expanded stores, investment costs for management information systems, potential
acquisitions and/or joint ventures, and future results of operations.
INFLATION
We do not believe that inflation has had a material effect on the results of
operations in the recent past. However, we cannot assure that our business will
not be affected by inflation in the future.
RISKS THAT MAY AFFECT RESULTS
Factors that might cause our actual results to differ materially from the
forward looking statements discussed elsewhere in this report, as well as affect
our ability to achieve our financial and other goals, include, but are not
limited to, the following:
RISKS RELATING TO OUR BUSINESS:
1. IF WE MISCALCULATE THE DEMAND FOR OUR PRODUCTS, OUR SALES AND
PROFITABILITY MAY BE NEGATIVELY IMPACTED. Our success depends on our ability to
balance our inventory of merchandise with the demand for such merchandise. If we
miscalculate the demand for our products, we may be faced with significant
excess inventory. This would result in excess fabric for some products and
missed opportunities for others. This may result in weak sales and markdowns
and/or write-offs, which could impair our profitability.
2. IF WE ARE NOT ABLE TO EFFECTIVELY MANAGE OUR GROWTH, OUR PROFITABILITY
MAY BE NEGATIVELY IMPACTED. Our continued growth depends, to a significant
degree, on our ability to identify sites and open and operate new stores on a
profitable basis. We expect to open approximately 25 to 30 stores in fiscal
2001. Our plan to expand successfully depends on the following factors:
- the availability of desirable locations;
18
- the ability to negotiate acceptable leases for such locations;
- the ability to manage the expansion of the store base;
- the ability to source inventory adequate to meet the needs of new stores;
- the ability to operate stores profitably once opened;
- the development of adequate management information systems to support
expanded activity;
- the ability to recruit and retain new employees;
- the availability of capital; and
- general economic and business conditions affecting consumer confidence and
spending.
In selected markets, we may open flagship stores that will be larger and
more expensive to operate than existing stores. If these flagship stores do not
generate sufficient revenues to cover their higher costs, our financial results
could be negatively affected.
We cannot assure that we will achieve our planned expansion on a timely and
profitable basis. In addition, most of our new store openings in fiscal 2000 and
2001 will be in existing markets. These openings may affect the existing stores'
net sales volumes and profitability. Furthermore, we will need to hire
experienced executive personnel to support the planned improvements and
expansions of our business. We cannot assure that we will be successful in
hiring such personnel in a time frame necessary to manage and support our
expansion plans.
3. WE HAVE IN THE PAST AND MAY IN THE FUTURE EXPERIENCE A DECLINE IN OUR
COMPARABLE STORE SALES PERFORMANCE, WHICH COULD AFFECT OUR PROFITABILITY. In the
second half of fiscal 2000, we experienced a decrease in comparable store sales
volumes. We expect to continue to experience decreases in comparable store sales
volumes in the current quarter as compared to the same period last year. We also
expect that comparable store growth, if any, in the future periods will be lower
than rates achieved in fiscal 1998 and 1999 and the first half of fiscal 2000.
During those recent periods of relatively high comparable store sales growth, we
experienced favorable merchandise margins primarily because (i) we were able to
sell our merchandise with lower markdown rates due in part to increases in same
store sales and (ii) large comparable store sales increases resulted in
favorable occupancy expense leverage. As comparable store sales performance has
moderated, the decline in merchandise margins has reduced gross margins. In
addition, newer and expanded stores have become a larger percentage of the
entire store base, which has increased occupancy costs as a percentage of sales.
These factors may further reduce gross margins. In addition, our selling,
general and administrative expenses have decreased as a percentage of net sales
in recent periods due in part to the rapid growth in net sales. To the extent
same store sales growth rates continue to moderate, it will be more difficult
for us to generate favorable selling, general and administrative expense
leverage.
4. IF WE ARE NOT ABLE TO OPERATE ON A PROFITABLE BASIS, OUR STOCK PRICE MAY
BE NEGATIVELY AFFECTED. We cannot guarantee that we will remain profitable in
the future. In the past five years, profitability rates have varied widely from
quarter-to-quarter and from year-to-year. In particular, in fiscal 1996, we
experienced a significant financial downturn. This was caused partly by problems
in obtaining fabrication, misjudging related fashion trends, failing to obtain
product deliveries in a timely manner, rapidly expanding our store base, and
lacking sufficient controls and personnel to support such expanded activity.
Our future results of operations will depend on the number and timing of new
store openings. Also, it will depend on, among other things, our ability to:
- identify and capitalize upon changing fashion trends;
- hire and retain qualified management and other personnel;
19
- maintain appropriate inventory levels;
- obtain needed raw materials;
- identify and negotiate favorable leases for successful store locations;
- reduce shrinkage; and
- control operating costs.
In addition, future results of operations will depend on factors outside of
our control, such as general economic conditions, availability of third party
sourcing and raw materials, and actions of competitors.
5. IF WE ARE NOT ABLE TO EFFECTIVELY UPGRADE AND EXPAND OUR MANAGEMENT
INFORMATION SYSTEMS, OUR OPERATIONS MAY BE HARMED. We have made significant
investments to improve existing management information systems and implement new
systems in the areas of production, merchandise allocation and distribution
functions. We cannot assure that these enhancements will be successfully
implemented. If we fail to implement and integrate such systems, it can have a
harmful effect on our results of operations.
6. IF WE ARE NOT ABLE TO EFFECTIVELY UPGRADE AND ENHANCE OUR ON-LINE STORE,
WE MAY LOSE ON-LINE SALES AND OUR IMAGE MAY BE HARMED. We intend to continue to
make significant investments to improve the performance and content of our
existing web site over the next two fiscal years. We cannot assure you that
these enhancements will be successfully implemented. If we fail to implement and
integrate such enhancements successfully, our results of operations may be
harmed. Moreover, if we cannot develop an effective and engaging web site,
potential future revenue that we would have otherwise gained through sales
conducted over the internet and our image may be harmed.
7. IF WE ARE UNABLE TO OBTAIN RAW MATERIALS OR FIND PRODUCTION FACILITIES,
OUR FINANCIAL CONDITION MAY BE HARMED. We do not own any production facilities
and therefore depend on a limited number of third parties to manufacture our
products. Independent manufacturers make merchandise designed by the bebe
in-house design team with raw materials purchased from independent mills and
other suppliers. We place all of our orders for production of merchandise and
raw materials by purchase order and do not have any long-term contracts with any
manufacturer or supplier. We compete with many other companies for production
facilities and raw materials. If we fail to obtain sufficient quantities of raw
materials, it would have a harmful effect on our financial condition. For
example, in fiscal 1996, we had difficulty obtaining needed quantities of raw
materials on a timely basis because of competition with other apparel vendors
for raw materials. This resulted in a loss of sales and a decrease in gross
profit. Furthermore, we have received in the past, and may receive in the
future, shipments of products from manufacturers that fail to conform to our
quality control standards. In such event, unless we are able to obtain
replacement products in a timely manner, we may lose sales. If we fail to
maintain favorable relationships with these production facilities and to obtain
an adequate supply of quality raw materials on commercially reasonable terms, it
could harm our business and results of operations. Furthermore, we cannot assure
that these production facilities will not supply similar raw materials to or
manufacture similar products for our competitors.
If an independent manufacturer violates labor or other laws, or if their
labor practices diverge from those generally accepted as ethical in the United
States, it could harm our business and brand image. While we maintain a policy
to monitor the operations of our domestic independent manufacturers by having an
independent firm inspect these manufacturing sites, and all domestic and foreign
manufacturers are contractually required to comply with such labor practices, we
cannot control the actions of such manufacturers, nor can we assure that these
manufacturers will conduct their businesses using ethical labor practices.
8. WE DEPEND ON THIRD PARTY APPAREL MANUFACTURERS, AND OUR SALES MAY BE
NEGATIVELY AFFECTED IF THE MANUFACTURERS DO NOT PERFORM ACCEPTABLY. We develop a
significant portion of our merchandise in conjunction with third party apparel
manufacturers. In some cases, we select merchandise directly from these
manufacturers' lines. We do not have long-term contracts with any third party
apparel manufacturers
20
and purchase all of the merchandise from such manufacturers by purchase order.
Furthermore, we have received in the past, and may receive in the future,
shipments of products from manufacturers that fail to conform to our quality
control standards. In such event, unless we are able to obtain replacement
products in a timely manner, we may lose sales. We cannot assure that third
party manufacturers (1) will not supply similar products to our competitors,
(2) will not stop supplying products to us completely or (3) will supply
products that satisfy our quality control standards.
9. IF OUR FOREIGN MANUFACTURERS ARE NOT ABLE TO PROVIDE US WITH SUFFICIENT
MERCHANDISE TO MEET CUSTOMER DEMAND OR IF OUR IMPORTS ARE DISRUPTED, OUR SALES
AND PROFITABILITY MAY BE HARMED. We purchase our raw materials from mills and
other suppliers, a significant portion of which is purchased from suppliers
outside the United States, primarily in Europe and Asia. We purchase a portion
of our merchandise outside the United States, primarily in Israel, China, Hong
Kong and Singapore.
We are subject to risks associated with doing business abroad. These risks
include:
- adverse fluctuations in currency exchange rates (particularly those of the
U.S. dollar against certain foreign currencies);
- changes in import duties or quotas;
- the imposition of taxes or other charges on imports;
- changes in foreign government regulation, political unrest, shipment
disruption or delays; and
- changes in economic conditions in countries in which our suppliers are
located.
If any of these occur, it could harm our business, financial condition and
operating results.
Bilateral textile agreements between the United States and a number of
foreign countries impose constraints on our import operations. These agreements,
which have been negotiated bilaterally either under the framework established by
the Arrangement Regarding International Trade in Textiles, known as the
Multifiber Agreement, or other applicable treaties, limit the amounts and types
of merchandise which may be imported into the United States from these
countries. Also, these agreements allow the United States to impose restraints
at any time on importing merchandise that, under the terms of the agreements,
are not currently subject to specified limits.
In addition, our imported products are subject to United States customs
duties, which make up a material portion of the cost of the merchandise. If
customs duties are substantially increased, it would harm our business and
results of operations. The United States and the countries in which our products
are produced or sold may impose new quotas, duties, tariffs, or other
restrictions, or adversely adjust prevailing quota, duty, or tariff levels, any
of which could have a harmful effect on our business and results of operations.
Also, manufacturing facilities in China produce a significant portion of our
foreign-supplied products. Recently, China and the United States have been in a
number of trade disputes. The United States has threatened to impose punitive
tariffs and duties on products imported from China and to withdraw China's "most
favored nation" trade status. If China loses the most favored nation status,
there are changes in the current tariff or duty structures or United States
adopts other trade polices or sanctions adverse to China, it could harm our
sales and profitability.
10. OUR BUSINESS IS SEASONAL AND OUR QUARTERLY RESULTS MAY FLUCTUATE WHICH
MAY HARM OUR STOCK PRICE. OUR SALES VOLUMES AND LEVELS OF PROFITABILITY
FLUCTUATE ON A QUARTERLY BASIS. We tend to generate larger sales and, to an even
greater extent, profitability levels in the first and second quarters, which
include the fall and holiday selling seasons, of our fiscal year. If for any
reason sales are below seasonal norms during the first and second quarters of
our fiscal year, as they were in fiscal 1996, our quarterly and annual results
of
21
operations would be harmed. Our quarterly financial performance may also
fluctuate widely as a result of a number of other factors such as:
- the number and timing of new store openings;
- acceptance of product offerings;
- timing of product deliveries;
- actions by competitors; and
- effectiveness of advertising campaigns.
Due to these factors, we believe that quarter to quarter comparisons of our
operating results are not necessarily meaningful and that these comparisons
cannot be relied upon as indicators of future performance.
11. OUR SUCCESS DEPENDS ON OUR KEY EMPLOYEES, THE LOSS OF WHOM COULD DISRUPT
OUR BUSINESS. WE DEPEND UPON THE EFFORTS OF OUR KEY EMPLOYEES, PARTICULARLY
MANNY MASHOUF, THE FOUNDER, CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER.
None of our executive officers are bound by an employment agreement and
therefore their employment is at will. Except for Mr. Mashouf, we do not carry
"key person" life insurance policies on any of our employees. If we lose the
services of Mr. Mashouf or any key officers or employees, it could harm our
business and results of operations.
In addition, our success depends to a significant degree on our ability to
attract and retain experienced employees. There is substantial competition for
experienced personnel, which we expect to continue. We compete for experienced
personnel with companies who have greater financial resources than we do. In the
past, we have experienced significant turnover of our retail store personnel. If
we fail to attract, motivate and retain qualified personnel, it could harm our
business and results of operations.
12. IF WE ARE NOT ABLE TO REGISTER OR PROTECT OUR TRADEMARKS, OUR ABILITY TO
CAPITALIZE ON THE VALUE OF OUR BRAND NAME MAY BE IMPAIRED. We believe that our
trademarks and other proprietary rights are important to our success. We have
registered "bebe" and "bebe moda" and have applied for "bbsp" in the United
States and certain foreign jurisdictions. Even though we take actions to
establish and protect our trademarks and other proprietary rights, we cannot
assure you that others will not imitate our products or infringe on our
intellectual property rights. In addition, we cannot assure that others will not
resist or seek to block the sale of our products as violative of their trademark
and proprietary rights. In certain jurisdictions, other entities may have rights
to names that contain the word "bebe," which could limit our ability to expand
in such jurisdictions.
We are seeking to register our trademarks in targeted international markets,
which we believe represents large potential markets for our products. In some of
these markets, local companies currently have registered competing marks, and/or
regulatory obstacles exist that may prevent us from obtaining a trademark for
the bebe name or related names. In such countries, we may be unable to use the
bebe name unless we purchase the right or obtain a license to use the bebe name.
We may not be able to register trademarks in these international markets,
purchase the right or obtain a license to use the bebe name on commercially
reasonable terms. If we fail to obtain trademark, ownership or license rights,
it would limit our ability to expand into certain international markets or enter
such markets with the bebe name, and to capitalize on the value of our brand.
Furthermore in some jurisdictions, despite successful registration of our
trademarks, third parties may allege infringement and bring actions against us.
Currently, we are evaluating our opportunities to expand our product
offering and extend our geographic reach through licensing or joint venture
arrangements. We have limited experience with any such arrangements, and we
cannot assure that such arrangements will be successful. Furthermore, while we
intend to maintain control of the presentation and pricing of bebe merchandise
through the terms of any such agreement, we cannot assure that any licensee or
joint venture partner will comply with such contractual provisions. Any
deviation from the contracts' terms may harm our brand image.
22
13. WE DEPEND ON TWO ADJACENT FACILITIES AND A NEARBY FABRIC WAREHOUSE, THE
LOSS OF WHICH COULD SERIOUSLY DISRUPT OUR BUSINESS. CURRENTLY, WE OPERATE
CORPORATE OFFICES AND A DISTRIBUTION CENTER IN BRISBANE, CALIFORNIA AND A FABRIC
WAREHOUSE IN SOUTH SAN FRANCISCO. Any serious disruption at these facilities
whether due to fire, earthquake or otherwise would harm our operations and could
have a harmful effect on our business and results of operations.
14. IF WE ARE NOT ABLE TO SUCCESSFULLY ENTER INTERNATIONAL MARKETS, OUR
ABILITY TO EXPAND BEYOND THE UNITED STATES MAY BE IMPAIRED. We currently operate
two stores in Canada and two stores in the United Kingdom. We are evaluating our
opportunities to expand our geographic reach in additional markets. We have
limited experience with doing business in foreign countries and our brand names
do not have the same recognition in such markets as they do in the United
States. Accordingly, we continually review the performance of these
international stores and cannot assure that such expansion will be successful.
Although we are currently reviewing alternatives to maintain our presence in
such market, such as a licensing or joint venture arrangement, we plan to close
the two stores in the United Kingdom prior to the end of fiscal 2001. We cannot
assure you that we will be able to maintain our presence in such market or that
any licensing or joint venture arrangement will be successful.
15. IF WE ARE NOT ABLE TO SUCCESSFULLY DEVELOP PRODUCT LINES OR NEW STORE
CONCEPTS, OUR ABILITY TO EXPAND OUR REVENUE BASE MAY BE IMPAIRED.From time to
time, we may introduce new categories of products or new store concepts. For
example, we are currently testing in certain markets a "bbsp concept store" in
which our product offering is limited to a combination of activewear and
streetwear branded with the "bebe" and "bbsp" logos. If this limited product
offering is not successful or if the bbsp brand name does not achieve the same
recognition as the bebe and bebe moda brand names, our ability to expand into
additional markets with this concept store may be impaired.
RISKS RELATING TO OUR INDUSTRY:
1. WE FACE SIGNIFICANT COMPETITION IN THE RETAIL AND APPAREL INDUSTRY,
WHICH COULD HARM OUR SALES AND PROFITABILITY. The retail and apparel industries
are highly competitive and are characterized by low barriers to entry. We expect
competition in our markets to increase. The primary competitive factors in our
markets are:
- brand name recognition;
- product styling;
- product quality;
- product presentation;
- product pricing;
- store ambiance;
- customer service; and
- convenience.
We compete with traditional department stores, specialty store retailers,
business to consumer websites, off-price retailers and direct marketers for,
among other things, raw materials, market share, retail space, finished goods,
sourcing and personnel. Because many of these competitors are larger and have
substantially greater financial, distribution and marketing resources than we
do, we may lack the resources to adequately compete with them. If we fail to
compete in any way, it could harm our business, financial condition and results
of operations.
2. IF WE FAIL TO DEAL WITH THE RISKS INHERENT IN THE FASHION AND APPAREL
INDUSTRY, OUR PROFITABILITY AND BRAND IMAGE MAY BE IMPAIRED. The apparel
industry is subject to rapidly evolving fashion trends, shifting
23
consumer demands and intense competition. If we misinterpret the current fashion
trends or if we fail to respond to shifts in consumer tastes, demand for bebe
products, profitability and brand image could be impaired. Also, we cannot
assure that our competitors will not carry similar designs, which would
undermine bebe's distinctive image and may harm our brand image. Our future
success partly depends on our ability to anticipate, identify and capitalize
upon emerging fashion trends, including products, styles, fabrics and colors. In
addition, our success depends on our ability to distinguish ourselves within the
women's apparel market.
3. IF ECONOMIC CONDITIONS DETERIORATE, THEN IT COULD HAVE A NEGATIVE IMPACT
ON OUR BUSINESS, SALES AND PROFITABILITY. The retail and apparel industries are
subject to substantial cyclical variation. A recession in the general economy or
a decline in consumer spending in the apparel industry could harm our financial
performance. Consumers generally purchase less apparel and related merchandise
during recessionary periods and consumer spending may decline at other times. A
prolonged economic downturn could harm our financial condition. We cannot assure
that our customers would continue to make purchases during a recession.
RISKS RELATING TO OUR COMMON STOCK:
1. OUR STOCK PRICE MAY FLUCTUATE BECAUSE OF THE SMALL NUMBER OF SHARES THAT
CAN BE PUBLICLY TRADED AND THE LOW AVERAGE DAILY TRADING VOLUMES. The vast
majority of our outstanding shares of our common stock are not registered and
are subject to trading restrictions. As of June 30, 2000, only 3,687,754 shares
of our common stock were available to be publicly traded, and as a result, our
average daily trading volumes are relatively low, and our stock price is
vulnerable to market swings due to large purchases, sales and short sales of our
common stock.
2. BECAUSE A PRINCIPAL SHAREHOLDER CONTROLS THE COMPANY, OTHER SHAREHOLDERS
MAY NOT BE ABLE TO INFLUENCE THE DIRECTION THE COMPANY TAKES. As of June 30,
2000, Manny Mashouf, the Chairman, President and Chief Executive Officer,
beneficially owned approximately 84.3% the outstanding shares of our common
stock. As a result, he alone can control the election of directors and the
outcome of all issues submitted to the shareholders. This may make it more
difficult for a third party to acquire shares, may discourage acquisition bids,
and could limit the price that certain investors might be willing to pay for
shares of common stock. This concentration of stock ownership may have the
effect of delaying, deferring or preventing a change in control of our company.
3. IF WE ISSUE PREFERRED STOCK IN THE FUTURE, IT MAY HARM THE MARKET PRICE
OF OUR COMMON STOCK. The Board of Directors has authority to issue up to
1,000,000 shares of preferred stock at $0.001 par value per share. They also can
fix the rights, preferences, privileges and restrictions, including voting
rights, of these shares without any vote or action by the shareholders. If
preferred stock is issued in the future, the rights of the holders of common
stock will be subject to, and may be harmed by, the rights of the holders of any
preferred stock. If we issue preferred stock, it would provide us with desirable
flexibility in connection with possible acquisitions and other corporate
purposes. However, it could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of our
company, thereby delaying, deferring or preventing a change in control of our
company. Furthermore, such preferred stock may have other rights, including
economic rights, senior to the common stock. As a result, the issuance of such
preferred stock could harm the market value of the common stock. We have no
present plan to issue shares of preferred stock.
4. OUR STOCK PRICE MAY BE VOLATILE BECAUSE OF RISKS INHERENT IN THE RETAIL
INDUSTRY. THE STOCK MARKET HAS FROM TIME TO TIME EXPERIENCED EXTREME PRICE AND
VOLUME VOLATILITY. In addition, the market price of our common stock, like that
of the stock of other retail and apparel companies, may be highly volatile due
to certain risks inherent in the apparel industry. Factors such as
quarter-to-quarter variations in the our net sales and earnings and changes in
financial estimates by equity research analysts or other events or factors could
cause the market price of the common stock to fluctuate significantly. Further,
due to the volatility of
24
the stock market and the prices of stocks of retail and apparel companies
generally, the price of the common stock could fluctuate for reasons unrelated
to our operating performance.
5. WE DO NOT ANTICIPATE PAYING CASH DIVIDENDS, WHICH MAY AFFECT THE MARKET
PRICE OF OUR COMMON STOCK. We intend to retain any future earnings for use in
our business and, therefore, do not anticipate paying any cash dividends on
common stock in the foreseeable future. Our future dividend policy will depend
on our earnings, capital requirements and financial condition. In addition, it
will depend on any restrictions imposed by existing credit agreements and other
factors considered relevant by the Board of Directors.
6. ALL OF OUR RESTRICTED SECURITIES ARE ELIGIBLE TO BE SOLD, WHICH MAY
CAUSE DILUTION OF OUR COMMON STOCK. As of June 30, 2000, we had a total of
24,589,361 shares of common stock outstanding. Of these shares, 20,901,607 are
held by the existing shareholders as "restricted securities," which means they
acquired these securities from our company in a transaction that did not involve
a public offering. These shares may be sold in the public market only if they
are registered or if they qualify for an exemption from registration under
Rule 144 of the Securities Act. At this time, all restricted securities will be
eligible to be sold, subject to certain volume and other limitations under
Rule 144.
As of June 30, 2000, options to purchase 1,680,027 shares of common stock
were outstanding and exercisable, subject to certain vesting and repurchase
restrictions.
STOCK PLANS. On June 26, 1997 the Board of Directors adopted the 1997 Stock
Plan (the "Stock Plan"). Options granted under the Stock Plan have a ten-year
term and may be either incentive stock options, non-qualified stock options,
stock purchase rights or stock awards. We have reserved 2,830,000 shares of
common stock for issuance under the Stock Plan. The options granted are
immediately exercisable, but are subject to repurchase at the original exercise
price in the event that the optionee's employment ceases for any reason. Our
right of repurchase generally lapses over a four-year period as follows: 20% in
each of the first two years after the grant date and 30% in the third and fourth
years after the grant date, with full lapse of the repurchase option occurring
on the fourth anniversary date. See Note 8 of Notes to Financial Statements.
STOCK PURCHASE PLAN. On April 7, 1998, our 1998 Employee Stock Purchase
Plan (the "Plan") was adopted and approved by the shareholders. A total of
750,000 shares of common stock has been reserved for issuance under the Plan.
The Plan will allow eligible employees to purchase our common stock in an
amount, which may not exceed 10% of the employee's compensation. The Plan will
be implemented by sequential 24-month offerings. Each offering will generally be
comprised of eight, three-month purchase periods, with shares purchased on the
last day of each purchase period (a "Purchase Date"). The price at which stock
may be purchased is equal to 85% of the lower of fair market value of our common
stock on the first day of the purchase period or the Purchase Date. There were
36,965 shares issued under the Purchase plan in the fiscal year ended June 30,
2000.
PREFERRED STOCK. On April 7, 1998, our shareholders granted the Board of
Directors the authority to issue up to 1,000,000 shares of $0.001 par value
preferred stock and to fix the rights, preferences, privileges and restrictions
including voting rights, of these shares without any further vote or approval by
the shareholders. No preferred stock has been issued to date.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks, which include changes in U.S.
interest rates and, to a lesser extent, foreign exchange rates. The Company does
not engage in financial transactions for trading or speculative purposes.
25
INTEREST RATE RISK
The Company has fixed and variable income investments consisting of cash
equivalents and short-term investments, which are affected by changes in market
interest rates. The Company does not use derivative financial instruments in its
investment portfolio.
The interest payable on the Company's bank line of credit is based on
variable interest rates and therefore affected by changes in market interest
rates. If interest rates rose .95 basis points (a 10% change from the bank's
reference rate as of June 30, 2000), the Company's results from operations and
cash flows would not be materially affected.
FOREIGN CURRENCY RISKS
The Company enters into a significant amount of purchase obligations outside
of the U.S. which are settled in U.S. Dollars and, therefore, has only minimal
exposure to foreign currency exchange risks. The Company also operates two
subsidiaries with a base currency other than the U.S. Dollar. These subsidiaries
represented less than one percent of total revenues for fiscal year 2000 and,
therefore, present only minimal exposure to foreign currency exchange risks. The
Company does not hedge against foreign currency risks and believes that foreign
currency exchange risk is immaterial.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information with respect to this item is set forth in "Index to Financial
Statements."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to this item is incorporated by reference from the
Registrant's definitive Proxy Statement to be filed with the Commission not
later than 120 days after the end of the registrant's fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item is incorporated by reference from the
Registrant's definitive Proxy Statement to be filed with the Commission not
later than 120 days after the end of the registrant's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this item is incorporated by reference from the
Registrant's definitive Proxy Statement to be filed with the Commission not
later than 120 days after the end of the Registrant's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this item is incorporated by reference from the
Registrant's definitive Proxy Statement to be filed with the Commission not
later than 120 days after the end of the Registrant's fiscal year.
26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)
1. THE FINANCIAL STATEMENTS LISTED IN THE "INDEX TO FINANCIAL STATEMENTS"
AT PAGE F-1 ARE FILED AS A PART OF THIS REPORT.
2. FINANCIAL STATEMENT SCHEDULES ARE INCLUDED ON PAGE F-18 OR ARE OMITTED
BECAUSE THEY ARE NOT APPLICABLE OR THE REQUIRED INFORMATION IS SHOWN IN
THE FINANCIAL STATEMENTS OR NOTES THERETO.
3. EXHIBITS INCLUDED OR INCORPORATED HEREIN: SEE INDEX TO EXHIBITS.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the last quarter of the
fiscal year covered by this report.
27
SIGNATURES
Pursuant to the requirements of the Exchange Act of 1934, as amended, the
Registrant has duly caused this Annual Report on Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Brisbane,
State of California, on the 28th day of September 1999.
bebe stores, inc.
By: /s/ MANNY MASHOUF
-----------------------------------------
Manny Mashouf
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Manny Mashouf and Blair Lambert, and each
of them acting individually, as his true and lawful attorneys-in-fact and
agents, each with full power of substitution, for him in any and all capacities,
to sign any and all amendments to this Annual Report on Form 10-K, and to file
the same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, with full power of each to act alone, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully for all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or his or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Exchange Act, this Annual Report on
Form 10-K has been signed by the following persons in the capacities and on the
dates indicated:
NAME TITLE DATE
- ---- ----- ----
/s/ MANNY MASHOUF President, Chief Executive Officer
- ------------------------ and
Manny Mashouf Chairman of the Board (Principal
Executive Officer) September 28, 2000
/s/ BLAIR LAMBERT Chief Financial Officer (Principal
- ------------------------ Financial and Accounting Officer)
Blair Lambert September 28, 2000
/s/ NEDA MASHOUF Director
- ------------------------
Neda Mashouf September 28, 2000
/s/ BARBARA BASS Director
- ------------------------
Barbara Bass September 28, 2000
/s/ CORRADO FEDERICO Director
- ------------------------
Corrado Federico September 28, 2000
/s/ PHILIP SCHLEIN Director
- ------------------------
Philip Schlein September 28, 2000
S-1
BEBE STORES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2000, JUNE 30, 1999 AND JUNE 30, 1998:
FINANCIAL STATEMENTS:
Independent auditors' report................................ F-2
Balance sheets as of June 30, 2000 and June 30, 1999........ F-3
Statements of operations for the fiscal years ended June 30,
2000, 1999 and 1998....................................... F-4
Statements of shareholders' equity for the fiscal years
ended June 30, 2000, 1999 and 1998........................ F-5
Statements of cash flows for the fiscal years ended June 30,
2000, 1999 and 1998....................................... F-6
Notes to financial statements............................... F-7
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders of
bebe stores, inc.
We have audited the accompanying consolidated balance sheets of bebe
stores, inc. (dba bebe) as of June 30, 2000 and 1999 and the related statements
of operations, shareholders' equity, and cash flows for each of the three fiscal
years in the period ended June 30, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of bebe stores, inc. as of
June 30, 2000 and 1999 and the results of its operations and its cash flows for
each of the three fiscal years ended in the period June 30, 2000 in conformity
with accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
San Francisco, California
August 4, 2000
F-2
BEBE STORES, INC.
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30,
---------------------------
2000 1999
------------ ------------
ASSETS:
Current assets:
Cash and equivalents........................... $ 72,540,720 $ 59,341,655
Receivables (net of allowance of $163,771 and
$108,078).................................... 2,198,862 759,456
Inventories, net............................... 24,346,643 22,541,994
Deferred income taxes, net..................... 2,901,980 1,660,374
Prepaid and other.............................. 1,148,573 1,559,348
------------ ------------
Total current assets......................... 103,136,778 85,862,827
Equipment and leasehold improvements, net........ 30,602,719 17,999,980
Deferred income taxes, net....................... 2,261,159 2,002,960
Other assets..................................... 1,661,044 1,500,176
------------ ------------
Total assets..................................... $137,661,700 $107,365,943
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable............................... $ 12,966,116 $ 13,318,007
Accrued liabilities............................ 9,173,670 9,931,755
Current portion of long-term debt.............. 114,342 138,906
Income taxes payable........................... 171,448 330,014
------------ ------------
Total current liabilities.................... 22,425,576 23,718,682
Long-term debt................................... 58,307 120,646
Deferred rent.................................... 3,377,881 3,432,639
------------ ------------
Total liabilities................................ $ 25,861,764 $ 27,271,967
------------ ------------
Commitments and contingencies
Shareholders' equity:
Preferred stock-authorized 1,000,000 shares
at $0.001 par value per share; no shares
issued and outstanding
Common stock-authorized 40,000,000 shares at
$0.001 par value per share; issued and
outstanding 24,589,361 and 24,387,733
shares..................................... $ 24,590 $ 24,388
Additional paid-in capital..................... 24,661,509 23,147,795
Deferred compensation and other................ (523,158) (1,310,160)
Retained earnings.............................. 87,636,995 58,231,953
------------ ------------
Total shareholders' equity................... 111,799,936 80,093,976
------------ ------------
Total liabilities and shareholders' equity....... $137,661,700 $107,365,943
============ ============
See accompanying notes to consolidated financial statements
F-3
BEBE STORES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FISCAL YEAR ENDED JUNE 30,
------------------------------------------
2000 1999 1998
------------ ------------ ------------
Net sales.......................................... $241,801,958 $201,341,258 $146,756,847
Cost of sales, including buying and occupancy...... 119,850,018 95,439,510 71,713,445
------------ ------------ ------------
Gross profit....................................... 121,951,940 105,901,748 75,043,402
Selling, general and administrative expenses....... 76,294,384 61,069,273 46,359,495
------------ ------------ ------------
Income from operations............................. 45,657,556 44,832,475 28,683,907
Other expense (income):
Interest expense................................... 20,529 13,608 19,663
Interest income.................................... (3,241,172) (2,266,861) (981,165)
Other.............................................. 19,479 11,820 122,940
------------ ------------ ------------
Earnings before income taxes....................... 48,858,720 47,073,908 29,522,469
Provision for income taxes......................... 19,453,678 19,064,571 12,103,680
------------ ------------ ------------
Net earnings....................................... $ 29,405,042 $ 28,009,337 $ 17,418,789
============ ============ ============
Basic earnings per share........................... $ 1.20 $ 1.16 $ 0.77
Diluted earnings per share......................... $ 1.17 $ 1.11 $ 0.73
Basic weighted average shares outstanding.......... 24,481,256 24,054,865 22,687,942
Diluted weighted average shares outstanding........ 25,225,657 25,326,580 23,862,387
See accompanying notes to consolidated financial statements
F-4
BEBE STORES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK
---------------------
COMPREHENSIVE NUMBER OF ADDITIONAL PAID- DEFERRED RETAINED
INCOME SHARES AMOUNT IN CAPITAL COMPENSATION EARNINGS
-------------- ---------- -------- ---------------- ------------- -----------
Balance as of June 30, 1997.... 22,639,997 $22,640 $ 5,270,610 $(2,805,000) $12,803,827
Net earnings................... $17,418,789 17,418,789
Unrealized loss on marketable
securities................... (2,506)
-----------
Total comprehensive income..... $17,416,283
===========
Deferred compensation.......... (80,000) 743,773
Common stock issued in public
offering..................... 1,250,000 1,250 11,887,590
----------------------------------------------------------------------
Balance as of June 30, 1998.... 23,889,997 23,890 17,078,200 (2,061,227) 30,222,616
Net earnings................... $28,009,337 28,009,337
Foreign currency translation
adjustment................... (28,013)
-----------
Total comprehensive income..... $27,981,324
===========
Deferred compensation.......... (240,801) 779,080
Common stock issued under stock
plans including tax
benefit...................... 497,736 498 6,310,396
----------------------------------------------------------------------
Balance as of June 30, 1999.... 24,387,733 24,388 23,147,795 (1,282,147) 58,231,953
Net earnings................... $29,405,042 29,405,042
Foreign currency translation
adjustment................... (61,984)
-----------
Total comprehensive income..... $29,343,058
===========
Deferred compensation.......... (175,624) 848,986
Common stock issued under stock
plans including tax
benefit...................... 201,628 202 1,689,338
----------------------------------------------------------------------
Balance as of June 30, 2000.... 24,589,361 $24,590 $24,661,509 $ (433,161) $87,636,995
======================================================================
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME (LOSS) TOTAL
-------------- ------------
Balance as of June 30, 1997.... $ 2,506 $ 15,294,583
Net earnings................... 17,418,789
Unrealized loss on marketable
securities................... (2,506) (2,506)
-------- ------------
Total comprehensive income.....
Deferred compensation.......... 663,773
Common stock issued in public
offering..................... 11,888,840
-----------------------------
Balance as of June 30, 1998.... -- 45,263,479
Net earnings................... 28,009,337
Foreign currency translation
adjustment................... (28,013) (28,013)
-------- ------------
Total comprehensive income.....
Deferred compensation.......... 538,279
Common stock issued under stock
plans including tax
benefit...................... 6,310,894
-----------------------------
Balance as of June 30, 1999.... (28,013) 80,093,976
Net earnings................... 29,405,042
Foreign currency translation
adjustment................... (61,984) (61,984)
-------- ------------
Total comprehensive income.....
Deferred compensation.......... 673,362
Common stock issued under stock
plans including tax
benefit...................... 1,689,540
-----------------------------
Balance as of June 30, 2000.... $(89,997) $111,799,936
=============================
See accompanying notes to consolidated financial statements
F-5
BEBE STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED JUNE 30,
-----------------------------------------
2000 1999 1998
------------ ------------ -----------
Cash flows from operating activities:
Net earnings................................................ $ 29,405,042 $ 28,009,337 $17,418,789
Adjustments to reconcile net earnings to cash provided by
operating activities:
Non-cash compensation expense............................. 673,362 538,279 663,773
Depreciation and amortization............................. 5,059,586 3,197,426 2,170,617
Tax benefit from options exercised........................ 514,531 5,002,913
Net loss on disposal of property.......................... 307,733 803,106 253,433
Net loss from partnership................................. -- -- 14,754
Deferred income taxes..................................... (1,500,784) (1,009,780) (1,071,119)
Deferred rent............................................. (37,724) 396,816 (5,544)
Changes in operating assets and liabilities:
Receivables............................................... (1,320,397) (152,599) (199,527)
Inventories............................................... (1,813,547) (8,132,159) (4,943,515)
Other assets.............................................. (149,371) (663,794) (217,948)
Prepaid expenses.......................................... 400,395 (1,425,571) (47,859)
Accounts payable.......................................... (335,822) 6,396,465 1,857,352
Accrued liabilities....................................... (892,456) 892,758 3,022,110
Income taxes payable...................................... (158,293) (560,190) 359,904
------------ ------------ -----------
Net cash provided by operating activities................... 30,152,255 33,293,007 19,275,220
Cash flows from investing activities:
Purchase of equipment and improvements...................... (18,018,281) (11,979,179) (3,652,213)
Proceeds from sales of equipment............................ 2,152 9,862 2,768
Proceeds from sale of marketable securities................. -- -- 77,883
------------ ------------ -----------
Net cash used by investing activities....................... (18,016,129) (11,969,317) (3,571,562)
Cash flows from financing activities:
Borrowings from shareholder................................. 539
Repayments on existing and additions of capital leases...... (42,455) 124,122 (133,340)
Repayments of investment note............................... (44,430) (51,077)
Net proceeds from issuance of common stock.................. 1,175,009 1,307,981 11,888,840
------------ ------------ -----------
Net cash provided by financing activities................... 1,088,124 1,381,026 11,756,039
Effect of exchange rate changes on cash..................... (25,185) (14,678) --
Net increase in cash and equivalents........................ 13,199,065 22,690,038 27,459,697
Cash and equivalents:
Beginning of year........................................... 59,341,655 36,651,617 9,191,919
------------ ------------ -----------
End of year................................................. $ 72,540,720 $ 59,341,655 $36,651,616
============ ============ ===========
Supplemental information:
Cash paid for interest...................................... $ 20,529 $ 13,710 $ 19,664
============ ============ ===========
Cash paid for income taxes.................................. $ 20,734,915 $ 15,400,731 $12,764,904
============ ============ ===========
See accompanying notes to consolidated financial statements
F-6
BEBE STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF THE BUSINESS. bebe stores, inc. (dba bebe), the "Company,"
designs, develops and produces a distinctive line of contemporary women's
apparel and accessories, which it markets under the bebe, bbsp and bebe moda
brand names primarily through its 124 specialty retail stores located in 27
states, the District of Columbia, Canada, the United Kingdom and an on-line
store at WWW.BEBE.COM.
The Company has one reportable segment and has one brand with product lines
of a similar nature. Revenues of the Company's international retail operations
represent less than one percent of total revenues for fiscal year 2000.
Therefore, the Company does not report segment results.
BASIS OF FINANCIAL STATEMENT PRESENTATION. The accounting and reporting
policies of the Company conform to accounting principles generally accepted in
the United States of America (GAAP) and general practice within the retail
industry. Those policies that materially affect the determination of financial
position, results of operations, and cash flow are summarized below.
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All material intercompany transactions and balances have
been eliminated. The preparation of financial statements in conformity with GAAP
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 date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Certain amounts for prior periods have been reclassified
to conform with current financial statement presentation.
Translation adjustments result from the translation of foreign subsidiaries
financial statements into US dollars. The results of operations of foreign
subsidiaries are translated using the average exchange rate during the period.
Balance sheet amounts are translated at the exchange rate in effect at the
balance sheet date. The resulting translation adjustment is included in
shareholders' equity.
CASH AND EQUIVALENTS represent cash and short-term, highly liquid
investments with original maturities of less than 90 days.
MARKETABLE SECURITIES (classified as available-for-sale securities) are
reported at fair value. Fair values are based on quoted market prices.
Unrealized gains and losses are excluded from earnings and are reported as an
increase or decrease in shareholders' equity and comprehensive income.
INVENTORIES, NET are stated at the lower of FIFO (first-in, first-out) cost
or market. Cost includes certain indirect purchasing, merchandise handling and
storage costs.
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET are stated at cost. Depreciation
on equipment and leasehold improvements is computed using the straight-line
method. Equipment and leasehold improvements are depreciated over the shorter of
the estimated useful lives or the lease term of the related assets ranging from
three to twelve years.
LEASING COMMISSIONS associated with negotiating new store leases are
capitalized in other assets and amortized over the lease term.
LONG-TERM INVESTMENT. The Company owns 48.35% of a limited partnership and
accounts for the investment using the equity method. Accordingly, the
investment, which is included in other assets, is carried at cost, adjusted for
the Company's percentage share of the partnership's cumulative net income or
loss.
F-7
BEBE STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED RENT. Many of the Company's operating leases contain predetermined
fixed increases of the minimum rental rate during the initial lease term. For
these leases, the Company recognizes the related rental expense on a
straight-line basis and records the difference between the amount charged to
expense and the rent paid as deferred rent.
STORE PREOPENING COSTS. Costs associated with the opening or remodeling of
stores, such as preopening rent and payroll, are expensed as incurred.
ADVERTISING COSTS are charged to expense when the advertising first takes
place. Advertising costs were $9,793,824, $8,357,456 and $6,735,543
respectively, during fiscal 2000, 1999 and 1998.
INCOME TAXES are accounted for using an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company's
financial statements or tax returns. In estimating future tax consequences, all
expected future events then known to management are considered other than
changes in the tax law or rates.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying values of cash and
equivalents, investments, receivables, accounts payable and long-term debt
approximates the estimated fair values.
IMPAIRMENT OF LONG-LIVED ASSETS. The Company regularly reviews the carrying
value of its long-lived assets. Whenever events or changes in circumstances
indicate that the carrying amount of its assets might not be recoverable, the
Company, using its best estimates based on reasonable and supportable
assumptions and projections, has reviewed for impairment the carrying value of
long-lived assets. Based on the Company's review at June 30, 2000, no material
adjustment was made to long-lived assets.
STOCK BASED COMPENSATION. The Company accounts for stock based awards to
employees using the intrinsic value-based method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related Interpretations.
EARNINGS PER SHARE. Basic earnings per share (EPS) is computed as net
earnings divided by the weighted average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution that could occur from
common shares issuable through the exercise of outstanding dilutive stock
options.
REVENUE RECOGNITION. Net sales consist of all product sales, net of
estimated returns. Gift certificates sold are carried as a liability and revenue
is recognized when the gift certificate is redeemed. Similarly, customers may
receive a store credit in exchange for returned goods. Store credits are carried
as a liability until redeemed.
COMPREHENSIVE INCOME consists of net income for the current period and
other comprehensive income (income, expenses, gains and losses that bypass the
income statement and are reported directly as a separate component of equity).
The Company's comprehensive income equals net income plus unrealized gains on
marketable securities plus foreign currency translation adjustments for all
periods presented. Such components of comprehensive income are shown in the
Statement of Shareholders' Equity.
F-8
BEBE STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities". The Statement will require the
Company to recognize all derivatives on the balance sheet at fair value. SFAS
No. 133, as amended by SFAS 138, requires that derivative instruments used to
hedge be identified specifically to assets, liabilities, firm commitments or
anticipated transactions and measured as to effectiveness and ineffectiveness
when hedging changes in fair value or cash flows.
Derivative instruments that do not qualify as either a fair value or cash
flow hedge will be valued at fair value with the resultant gain or loss
recognized in current earnings. Changes in the effective portion of fair value
hedges will be recognized in current earnings along with the change in fair
value of the hedged item. Changes in the effective portion of the fair value of
cash flow hedges will be recognized in other comprehensive income (loss) until
realization of the cash flows of the hedged item through current earnings. Any
ineffective portion of hedges will be recognized in current earnings. SFAS
No. 133 is effective July 1, 2000 for the Company.
The Company does not currently engage in any hedging activity or hold any
derivative instruments and has no immediate plans to do so in the future. The
adoption of SFAS No. 133 will not have a significant impact on the Company.
2. INVENTORIES
The Company's inventories consist of:
AS OF JUNE 30,
-------------------------
2000 1999
----------- -----------
Raw materials...................................... $ 8,723,973 $ 8,596,269
Merchandise available for sale..................... 18,546,708 16,548,012
----------- -----------
Total............................................ 27,270,681 25,144,281
Less: valuation allowance.......................... (2,924,038) (2,602,287)
----------- -----------
Inventories, net................................... $24,346,643 $22,541,994
=========== ===========
Included in the valuation allowance at June 30, 2000 and 1999 is a reserve
for raw materials not directly associated with planned garment production.
3. CREDIT FACILITIES
On April 1, 1998, the Company entered into an unsecured commercial line of
credit agreement with a bank, which provides for borrowings and issuance of
letters of credit of up to $7,000,000 and expires on June 1, 2002. The
outstanding balance bears interest at either the bank's reference rate (which
was 9.5% and 8.5%, as of June 30, 2000 and 1999, respectively) or the LIBOR rate
plus 1.75 percentage points. As of June 30, 2000 and 1999, there was $2,838,427
and $2,175,900, respectively, outstanding in letters of credit.
This credit facility required the Company to comply with certain financial
covenants, including but not limited to a minimum tangible net worth and certain
restrictions on making loans and investments. In
F-9
BEBE STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. CREDIT FACILITIES (CONTINUED)
addition, under the line of credit, cash dividends could not be paid without the
prior consent of the lending institution. As of June 30, 2000 and 1999, the
Company was in compliance with such covenants.
The Company purchased 48.35% of a housing partnership in fiscal 1994. The
note payable of $18,362 is the remaining amount due on the purchase. The note
will be paid off in increments through fiscal year 2001.
Long-term debt consists of the following:
AS OF JUNE 30,
---------------------
2000 1999
--------- ---------
Capital leases........................................ $ 154,287 $ 196,761
Note payable.......................................... 18,362 62,791
--------- ---------
Total............................................... 172,649 259,552
Less: current portion................................. (114,342) (138,906)
--------- ---------
Total long-term debt.................................. $ 58,307 $ 120,646
========= =========
Scheduled maturities of debt outstanding at June 30, 2000 are as follows:
Fiscal year ending June 30,
2001.................................................... $113,187
2002.................................................... 64,462
2003.................................................... 4,316
--------
Total minimum payments.................................... 181,965
Less: imputed interest.................................... (9,316)
--------
Present value of future minimum payments.................. $172,649
========
4. OPERATING LEASES
The Company has operating leases for its retail store locations, corporate
headquarters, distribution center and certain office equipment. Store leases
typically provide for payment by the Company of operating expenses, real estate
taxes and additional rent based on a percentage of net sales if a specified net
sales target is exceeded. In addition, certain leases have escalation clauses
and provide for terms of renewal and/or early termination based on the net sales
volumes achieved.
Rent expense for the fiscal years ended June 30, 2000, 1999 and 1998 was
$26,050,147, $19,205,735, and $15,509,575 respectively. Rent expense includes
percentage rent and other lease-required expenses for the years ended 2000, 1999
and 1998 of $9,143,433, $7,311,922, and $6,307,118, respectively.
F-10
BEBE STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. OPERATING LEASES (CONTINUED)
Future minimum lease payments under operating leases at June 30, 2000 are as
follows:
Fiscal year ending June 30,
2001.................................................... $ 15,133,146
2002.................................................... 14,606,186
2003.................................................... 14,416,796
2004.................................................... 13,928,876
2005.................................................... 12,571,639
Thereafter................................................ 34,385,719
------------
Total minimum lease payments................................ $105,042,362
============
5. INCOME TAXES
Significant components of the provision (benefit) for income taxes are as
follows:
FISCAL YEAR ENDED JUNE 30,
---------------------------------------
2000 1999 1998
----------- ----------- -----------
Current:
Federal............................................. $16,396,755 $15,862,695 $10,444,465
State............................................... 4,448,816 4,194,630 2,730,336
Foreign............................................. 107,911 16,620 --
----------- ----------- -----------
20,953,482 20,073,945 13,174,801
----------- ----------- -----------
Deferred
Federal............................................. (1,231,820) (685,785) (859,558)
State............................................... (266,586) (159,799) (211,563)
Foreign............................................. (1,398) (163,790) --
----------- ----------- -----------
(1,499,804) (1,009,374) (1,071,121)
----------- ----------- -----------
Provision........................................... $19,453,678 $19,064,571 $12,103,680
=========== =========== ===========
Reconciliation of the federal statutory tax rate with the Company's
effective income tax rate is as follows:
FISCAL YEAR ENDED JUNE 30,
------------------------------
2000 1999 1998
-------- -------- --------
Federal statutory rate............................. 35.0% 35.0% 35.0%
State rate, net of federal benefit................. 5.6 5.6 5.6
Change in valuation allowance...................... 0.6 0.5 --
Other.............................................. (1.4) (0.6) 0.4
---- ---- ----
Effective tax rate................................. 39.8% 40.5% 41.0%
==== ==== ====
F-11
BEBE STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax reporting purposes.
Significant components of the Company's deferred tax assets (liabilities)
are as follows:
AS OF JUNE 30,
-----------------------
2000 1999
---------- ----------
Current:
Gift Certificates/Store credits.................... $ 467,849 $ 249,286
Inventory reserve.................................. 1,602,821 1,128,645
State taxes........................................ 292,533 228,886
Accrued vacation................................... 245,217 127,368
Uniform capitalization............................. (143,598) (361,337)
Other.............................................. 437,158 287,526
---------- ----------
Total Current.................................... 2,901,980 1,660,374
Noncurrent:
Basis difference in fixed assets................... 1,010,073 1,009,232
Store closure reserve.............................. 134,386 199,706
Trademarks......................................... 181,431 331,234
Deferred rent...................................... 829,189 635,256
Deferred compensation.............................. 298,046 160,839
Foreign tax credit................................. (87,781) (149,035)
Net operation loss................................. 61,341 15,816
Other.............................................. 8,685 (63,219)
---------- ----------
Total Noncurrent................................. 2,435,370 2,139,829
Valuation allowance................................ (174,211) (136,869)
---------- ----------
Net deferred tax assets.............................. $5,163,139 $3,663,334
========== ==========
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. The Company had
established a valuation allowance for 100% of the net deferred asset related to
the United Kingdom operations at June 30, 2000 and 1999 due to the uncertainty
of realizing future tax benefits from its foreign net operating loss
carryforward (NOL) and other deferred tax assets.
The Company has a net operating loss carryforward with an indefinite
carryforward period to offset future taxable income related to the United
Kingdom operations of approximately $367,000.
F-12
BEBE STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements consist of the following:
AS OF JUNE 30,
--------------------------
2000 1999
------------ -----------
Leasehold improvements............................ $ 19,316,369 $14,673,937
Furniture, fixtures, equipment and vehicles....... 8,371,602 5,969,419
Computer hardware and software.................... 8,960,720 5,483,719
Assets under capital lease........................ 355,504 640,225
Construction in progress.......................... 6,970,105 556,436
------------ -----------
Total......................................... 43,974,300 27,323,736
Less: accumulated depreciation and amortization... (13,371,581) (9,323,756)
------------ -----------
Equipment and leasehold improvements, net......... $ 30,602,719 $17,999,980
============ ===========
7. EMPLOYEE BENEFIT PLAN
The Company's 401(k) plan is for employees eligible to participate in the
plan if they have been employed by the Company for one year, have reached age
21, and work at least 1,000 hours annually. Generally, employees can defer up to
15% of their gross wages up to the maximum limit allowable under the Internal
Revenue Code. The employer can make a discretionary matching contribution for
the employee. Employer contributions to the plan for the years ended June 30,
2000, 1999 and 1998 were $68,120, $87,888, and $72,503, respectively.
8. STOCK PLANS AND PREFERRED STOCK
STOCK PLANS
Options granted under the 1997 Stock Plan (the "Stock Plan") have a ten-year
term and may be incentive stock options, non-qualified stock options, stock
purchase rights or stock awards. The Company has reserved 2,830,000 shares of
common stock for issuance under the Stock Plan.
The options granted are immediately exercisable, but are subject to
repurchase at the original exercise price in the event that the optionee's
employment with the Company ceases for any reason. The Company's right of
repurchase generally lapses over a four-year period as follows: 20% in each of
the first two years after the grant date and 30% in the third and fourth years
after the grant date, with full lapse of the repurchase option occurring on the
fourth anniversary date.
STOCK PURCHASE PLAN
The 1998 Employee Stock Purchase Plan (the "Plan") has a total of 750,000
shares of common stock reserved for issuance under the Plan. The Plan allows
eligible employees to purchase our common stock in an amount, which may not
exceed 10% of the employee's compensation. The Plan is implemented in sequential
24-month offerings. Each offering is generally comprised of eight, three-month
purchase periods, with shares purchased on the last day of each purchase period
(a "Purchase Date"). The price at which stock may be purchased is equal to 85%
of the lower of fair market value of our common stock on the first day of the
purchase period or the Purchase Date. There were 36,965 shares issued under the
Purchase plan in the fiscal year ended June 30, 2000.
F-13
BEBE STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK PLANS AND PREFERRED STOCK (CONTINUED)
PREFERRED STOCK
Our shareholders have granted the Board of Directors the authority to issue
up to 1,000,000 shares of $0.001 par value preferred stock and to fix the
rights, preferences, privileges and restrictions including voting rights, of
these shares without any further vote or approval by the shareholders. No
preferred stock has been issued to date.
The following summarizes stock option activity:
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
OUTSTANDING PER SHARE
----------- --------------
Balance June 30, 1997............................... 1,587,630 $ 1.77
Options granted..................................... 383,450 6.78
Options canceled.................................... (149,990) 4.19
---------
Balance June 30, 1998............................... 1,821,090 2.63
Options granted..................................... 479,360 21.08
Options exercised................................... (462,111) 2.11
Options canceled.................................... (153,445) 3.68
---------
Balance June 30, 1999............................... 1,684,894 7.92
Options granted..................................... 748,775 20.04
Options exercised................................... (164,663) 3.67
Options canceled.................................... (588,979) 18.23
---------
Balance June 30, 2000............................... 1,680,027 $10.24
=========
The options granted in June 1997 resulted in deferred compensation of
$2,805,000 (assuming all such options become fully vested) which will be
amortized over the vesting period of the related options, of which $673,362 and
$538,279 and $663,773 was expensed for the years ended June 30, 2000, 1999 and
1998, respectively. As of June 30, 2000 there were 523,199 shares available for
future grant.
F-14
BEBE STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK PLANS AND PREFERRED STOCK (CONTINUED)
The following table summarizes information about stock options outstanding
at June 30, 2000:
EXERCISABLE OPTIONS NOT SUBJECT
OPTIONS OUTSTANDING TO REPURCHASE (VESTED)
--------------------------------------------- ---------------------------------
WEIGHTED
AVERAGE WEIGHTED NUMBER OF WEIGHTED
NUMBER OF REMAINING LIFE AVERAGE EXERCISE OPTIONS AT AVERAGE
EXERCISE PRICES OPTIONS (IN YEARS) PRICE JUNE 30, 2000 EXERCISE PRICE
- --------------- --------- -------------- ---------------- --------------- ---------------
$1.77................ 777,153 6.99 $ 1.77 544,007 $ 1.77
5.65 to 9.00......... 180,583 8.22 6.31 72,233 6.31
9.06 to 13.25........ 211,199 8.75 12.24 42,240 12.24
13.75................ 159,074 9.63 13.75 -- 13.75
14.25................ 14,500 9.72 14.25 -- 14.25
18.81................ 45,000 9.59 18.81 -- 18.81
27.75................ 3,500 9.34 27.75 700 27.75
28.94................ 122,326 9.09 28.94 24,465 28.94
30.63................ 99,000 8.89 30.63 19,800 30.63
32.50................ 67,692 8.60 32.50 13,538 32.5
--------- -------
1,680,027 716,984
--------- -------
Had compensation expense for the Stock Plan been determined based on the
fair value at the grant dates for awards under the Stock Plan, consistent with
the method of SFAS No. 123, the Company's net earnings, basic EPS and diluted
EPS would have been reduced to the pro forma amounts indicated below:
FISCAL YEAR ENDED JUNE 30,
---------------------------------------
2000 1999 1998
----------- ----------- -----------
Net income As reported............... $29,405,042 $28,009,337 $17,418,789
Proforma.................. $27,798,031 $27,216,130 $17,249,741
Basic EPS As reported............... $ 1.20 $ 1.16 $ 0.77
Proforma.................. $ 1.14 $ 1.13 $ 0.76
Diluted EPS As reported............... $ 1.17 $ 1.11 $ 0.73
Proforma.................. $ 1.10 $ 1.07 $ 0.72
The weighted average fair value of options granted during the fiscal year
ended June 30, 2000, 1999 and 1998 was $12.38, $12.91 and $4.22, respectively.
The fair value of each option grant was estimated on the date of the grant using
the minimum value method with the following weighted-average assumptions:
FISCAL YEAR ENDED JUNE 30,
------------------------------
2000 1999 1998
-------- -------- --------
Expected dividend rate.............................. 0.00% 0.00% 0.00%
Volatility.......................................... 82.63% 81.38% 15.20%
Risk-free interest rate............................. 5.90% 5.74% 5.70%
Expected lives (years).............................. 5.94 6.07 5.60
F-15
BEBE STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. LITIGATION
The Company is subject to legal proceedings and claims that arise in the
ordinary course of business. Management believes, based on the advice of
counsel, that ultimate resolution of these matters will not have a material
adverse effect on the financial statements taken as a whole.
10. EARNINGS PER SHARE
Under SFAS No. 128, the Company provides dual presentation of EPS on a basic
and diluted basis. The Company's granting of certain stock options resulted in
potential dilution of basic EPS. The following table summarizes the difference
between basic weighted average shares outstanding and diluted weighted average
shares outstanding used to compute diluted EPS.
FISCAL YEAR ENDED JUNE 30,
------------------------------------
2000 1999 1998
---------- ---------- ----------
Basis weighted average number of shares outstanding...... 24,481,256 24,054,865 22,687,942
Incremental shares from assumed issuance of stock
options................................................ 744,401 1,271,715 1,174,445
---------- ---------- ----------
Diluted weighted average number of shares outstanding.... 25,225,657 25,326,580 23,862,387
========== ========== ==========
The number of incremental shares from the assumed issuance of stock options
is calculated applying the treasury stock method.
Excluded from the computation of the number of diluted weighted average
shares outstanding were antidilutive options of 935,626, 413,179 and 646,645 for
fiscal 2000, 1999 and 1998, respectively.
F-16
BEBE STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The quarterly financial information presented below reflects all adjustments
which, in the opinion of the Company's management, are of a normal and recurring
nature necessary to present fairly the results of operations for the periods
presented.
2000 QUARTER ENDED
-----------------------------------------
SEPT. 30 DEC. 31 MARCH 31 JUNE 30
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) -------- -------- -------- --------
Net sales............................................... $56,637 $78,138 $52,895 $54,132
Gross profit............................................ 29,718 41,194 25,896 25,144
Selling, general and administrative expenses............ 17,854 21,241 18,211 18,988
Income from operations.................................. 11,864 19,953 7,685 6,155
Earnings before income taxes............................ 12,463 20,758 8,587 7,050
Net Earnings............................................ 7,490 12,504 5,421 3,990
Basic earnings per share................................ $ 0.31 $ 0.51 $ 0.22 $ 0.16
Diluted earnings per share.............................. $ 0.30 $ 0.49 $ 0.22 $ 0.16
1999 QUARTER ENDED
-----------------------------------------
SEPT. 30 DEC. 31 MARCH 31 JUNE 30
-------- -------- -------- --------
Net sales............................................... $41,552 $59,491 $46,047 $54,250
Gross profit............................................ 21,752 32,276 23,560 28,314
Selling, general and administrative expenses............ 13,201 16,307 15,158 16,404
Income from operations.................................. 8,551 15,969 8,402 11,910
Earnings before income taxes............................ 9,035 16,523 9,017 12,499
Net Earnings............................................ 5,331 9,652 5,363 7,664
Basic earnings per share................................ $ 0.22 $ 0.40 $ 0.22 $ 0.32
Diluted earnings per share.............................. $ 0.21 $ 0.38 $ 0.21 $ 0.30
F-17
SCHEDULE
BEBE STORES, INC.
VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE AT
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTION END OF PERIOD
- -------------------------------------- ------------ ---------- ---------- --------- -------------
YEAR ENDED JUNE 30, 1998
Inventory obsolescence reserve........ 821,556 4,618,590 202,430 2,473,323 3,169,253
Allowance for doubtful accounts
receivable.......................... 76,668 84,002 108,886 51,784
Reserve for store closures............ 271,543 (135,795) (104,202) 239,950
--------- --------- ------- --------- ---------
1,169,767 4,566,797 202,430 2,478,007 3,460,987
========= ========= ======= ========= =========
YEAR ENDED JUNE 30, 1999
Inventory obsolescence reserve........ 3,169,253 2,686,008 3,252,974 2,602,287
Allowance for doubtful accounts
receivable.......................... 51,784 90,694 34,400 108,078
Reserve for store closures............ 239,950 466,375 140,542 565,783
--------- --------- --------- ---------
3,460,987 3,243,077 3,427,916 3,276,148
========= ========= ========= =========
YEAR ENDED JUNE 30, 2000
Inventory obsolescence reserve........ 2,602,287 7,068,964 6,747,214 2,924,038
Allowance for doubtful accounts
receivable.......................... 108,078 185,713 130,020 163,771
Reserve for store closures............ 565,783 623,588 487,860 701,511
--------- --------- --------- ---------
3,276,148 7,878,265 7,365,093 3,789,320
========= ========= ========= =========
F-18
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- --------------------- -----------------------
3.1* Amended and Restated Articles of Incorporation of the
Registrant.
3.2* Bylaws of the Registrant.
4.1* Specimen certificate representing the Common Stock (in
standard printer form, not provided).
10.1* 1997 Stock Plan.
10.2* 1998 Stock Purchase Plan.
10.3* Form of Indemnification Agreement.
10.4* Standard Industrial/Commercial-Tenant Lease-Net dated August
8, 1994 between the Registrant and California State
Teachers' Retirement System, as amended (lease for corporate
headquarters and distribution center in Brisbane,
California).
10.6** Standard Industrial/Commercial-Tenant Lease-Net dated
November 30, 1998 between Registrant and Far Western Land
and Investment Company, Inc., (lease for additional building
to house administrative departments in Brisbane,
California).
10.7** Retail Store License Agreement between the Registrant and
Sakal Duty Free LTD., a duly registered Israeli private
company, and Sakal Sports LTD., a duly registered Israeli
private company, effective as of November 1, 1998.
10.8*** Form of Retail Store License Agreement between Registrant
and [company].
10.9 Amendment No. 1 to Lease Agreement (amendment to Standard
Industrial/Commercial-Tenant Lease-Net dated November 30,
1998 between Registrant and Far Western Land and Investment
Company, Inc.)
23.1 Independent Auditors' Consent and Report on Schedule.
24.1 Power of Attorney (see signature page).
27.1 Financial Data Schedule (EDGAR filed version only).
- ------------------------
* Incorporated by reference from exhibits of the same number in Registrant's
Registration Statement on Form S-1 (Reg. No. 333-50333), effective June 16,
1998.
** Incorporated by reference from exhibits of the same number in Registrant's
Quarterly Report on Form 10-Q filed on February 16, 1999.
*** Incorporated by reference from exhibits of the same number in Registrant's
Annual Report on Form 10-K filed on September 28, 1999.
I-1