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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, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-24395
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BEBE STORES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2450490
(State or Jurisdiction of Incorporation (IRS Employer Identification
or Organization) 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 $33,781,250 as of September 1, 1998, based upon the
closing sale price per share 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, 1998, 23,889,997 shares of
Common Stock, $0.001 per share par value, of the registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive Proxy
Statement for the 1998 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.
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PART I
ITEM 1. BUSINESS
COMPANY OVERVIEW
bebe designs, develops and produces a distinctive line of contemporary
women's apparel and accessories, which it markets under the bebe and bebe moda
brand names through its 86 specialty retail stores located in 21 states. While
bebe attracts a broad audience, the Company's 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. bebe's broad product offering
includes suits, tops, pants, skirts, dresses, logo and other activewear,
outerwear, and handbags and other accessories. Much of the Company's merchandise
is designed and developed in-house and manufactured to its 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, the Company's current Chairman, President and
Chief Executive Officer, bebe opened its first store in San Francisco,
California in 1976 and grew to 73 stores by the end of fiscal 1996. Since the
end of fiscal 1996, bebe has significantly strengthened its management team and
has begun implementing several strategic initiatives which management believes
have contributed to its recent strong performance and positioned it to support
significant new store growth over the next several years. These initiatives were
directed to all aspects of the Company's operations and in particular the
merchandising, planning, manufacturing and distribution functions. The Company's
merchandising initiatives focused primarily on expansion of its product line to
include a broader array of tops, pants, dresses, accessories and logo items.
While the Company's 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. Additionally, 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 relating
to the planning, manufacturing and distribution functions primarily involve the
implementation of more sophisticated procedures and a more disciplined approach
to the operational aspects of the business.
bebe reinforces its brand with a distinctive lifestyle image advertising
campaign, using prominent fashion photographers. The Company believes that its
emphasis on non-product specific lifestyle advertising promotes brand awareness
and attracts customers who are intrigued by the playfully sensual and evocative
imagery. The images are communicated to consumers through a variety of vehicles
including fashion magazines, bus shelters, in-store displays and customer
mailings. The Company further enhances the bebe brand image by designing its
stores to create an upscale, inviting, boutique environment.
OPERATING STRATEGY
While the market for women's apparel is extremely large, the Company
believes that the distinctive, contemporary, bebe point-of-view addresses an
underserved market segment and presents the Company with opportunities for
future growth. The Company's 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 the Company's operating strategy
to achieve this objective are as follows:
- PROVIDE DISTINCTIVE FASHION THROUGHOUT A BROAD PRODUCT LINE. bebe
merchandisers take their fashion inspiration from throughout the world,
interpreting contemporary ideas for silhouettes, fabrications and colors
into products and styles to meet the everyday lifestyle needs of the bebe
customer. While many of the Company's styles and products are represented
season after season with variations in
2
color, fabric or trim, its merchandisers are committed to bringing newness
into the merchandise mix in response to emerging trends. bebe's product
lines are carefully planned to represent a broad array of sleek,
fashionable goods, with particular emphasis on career wear, related
separates and day-into-evening styles. The bebe product line is further
supported by a broad selection of accessories that help bebe customers
create a distinctive ensemble, while logo-embellished items provide an
entry point for younger, aspirational customers.
- VERTICALLY INTEGRATE DESIGN, PRODUCTION, MERCHANDISING AND RETAIL
FUNCTIONS. The Company believes that its vertical integration of processes
from design to market coupled with its financial discipline enable it to
produce distinctive quality merchandise of exceptional value. Once a line
is conceived by the merchandise team, bebe maintains flexibility in its
sourcing by subcontracting production of its own designs, developing
exclusive products in conjunction with third party apparel manufacturers,
or selecting merchandise directly from these manufacturers' lines. This
approach also enables the Company to respond quickly to changing fashion
trends, while reducing its risk of excess inventory.
- MANAGE MERCHANDISE MIX. The Company believes that a disciplined approach
to merchandising and a proactive inventory management program is critical
to its success. By actively monitoring sell-through rates and managing the
mix of categories and products in its stores, the Company believes it is
able to respond to emerging trends in a timely manner; minimize its
dependence on any particular category, style or fabrication; and preserve
a balanced, coordinated presentation of merchandise within each store.
- CONTROL DISTRIBUTION OF MERCHANDISE. bebe believes that its brand image is
greatly enhanced by distributing its products through bebe stores. This
controlled distribution strategy enables the Company to display the full
assortment of its products, control the pricing, visual presentation and
flow of goods, test new products and reinforce the brand's identity in the
eyes of its customers.
- ENHANCE BRAND IMAGE. Through an edgy, high-impact, visual advertising
campaign utilizing print, outdoor, in-store and direct mail communication
vehicles, the Company attracts customers who are intrigued by the
playfully sensual and evocative imagery of the bebe lifestyle. The Company
also offers a line of merchandise branded with the distinctive bebe logo
to increase brand awareness. Within its stores, the Company seeks to
create an upscale, inviting, boutique environment that further enhances
the bebe brand and builds customer loyalty and demand for bebe
merchandise. Furthermore, the Company trains bebe sales associates to be
responsive and knowledgeable and encourages them to reflect the bebe
image.
GROWTH STRATEGY
bebe's objective is to grow its operations in a controlled manner, primarily
through the opening of new stores. After intentionally slowing its store
expansion in fiscal 1997 and 1998 while implementing strategic initiatives begun
in fiscal 1996, the Company believes it is now positioned to accelerate its
store opening program. With seven stores opened in fiscal 1998, the Company
currently plans to open approximately 15 stores in each of fiscal 1999 and 2000,
the majority of which will be in existing markets. In addition to its domestic
expansion, the Company is considering international expansion primarily through
licensing arrangements and has entered into a license agreement with a company
in Mexico. Additionally, the Company continually reviews its store base and has
identified three underperforming stores that it is considering closing prior to
the end of fiscal 1999.
In addition, the Company plans to grow through the extension of current
product lines, introduction of new product categories, such as intimate apparel,
and incremental operational improvements. The Company's Vice President of
Licensing continually explores opportunities for licensing the bebe name for the
development of product line extensions or new product categories that may
include footwear and swimwear. The Company recently entered into a license
agreement pursuant to which the licensee will
3
manufacture and distribute eyewear products branded with the bebe logo to be
sold at bebe stores and other retailers.
To support the introduction of new product categories in recent years as
well as to handle higher sales volumes, the Company has developed a store
prototype that is larger than the average of 2,700 square feet for the Company's
existing stores. The Company's new store prototype is approximately 3,000 to
5,000 square feet, although in certain selected markets the Company may open
larger stores. As opportunities arise, the Company also may expand certain
existing stores.
MERCHANDISING
The Company's merchandising strategy is to provide current, timely fashions
in a broad array of categories to suit the lifestyle needs of its customers. All
of the Company's merchandise is marketed under the bebe or bebe moda brand
names. Much of this merchandise is designed and developed in-house and
manufactured to the Company's specifications. The balance is developed primarily
in conjunction with third party apparel manufacturers or, in some cases,
selected directly from these manufacturers' lines.
PRODUCT CATEGORIES. After building a strong suiting business in the early
1990's, the Company diversified its product line in response to a decrease in
demand for its suiting in fiscal 1996. The Company significantly increased the
breadth of its product offerings by expanding categories such as related
separates, dresses, leather, logo and accessories and began to plan and monitor
its business by product classifications during fiscal 1997 and 1998. As volume
has increased in these expanded categories, the Company's dependence on suiting
has declined. While each category's contribution as a percentage of total net
sales varies seasonally, each of the product classifications is represented
throughout the year.
bebe regularly evaluates new categories that may be appropriate for
introduction and is currently producing an intimate apparel product line which
the Company plans to introduce into stores in fall 1998. The Company recently
entered into a license agreement pursuant to which the licensee will manufacture
and distribute eyewear products branded with the bebe logo to be sold at bebe
stores and other retailers. Additionally, the Company believes opportunities
exist for other new product categories such as denim, footwear and watches.
PRODUCT DEVELOPMENT. The Company takes a disciplined approach to the
product development process. The goal of this approach is to allow its merchants
to gain as much information as possible concerning product sell-through and
current fashion trends before making fabric or product purchase commitments. The
process is controlled by a detailed product development calendar which
highlights key color selection, fabric order, pattern development and production
order deadlines. The deadlines are established to ensure an adequate flow of
inventory into the stores. While the product development calendar is established
on a seasonal basis, commitments are made semi-monthly based on current sales
and fashion trends thereby enhancing the Company's ability to react promptly to
customer demand. In collaboration with the merchandising teams, designers
continuously develop new styles to be presented at monthly product review and
selection meetings. Styles presented at these meetings 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, the product development process is supported by a detailed
merchandising plan. This merchandising plan includes sales, inventory and
profitability targets for each product classification and is reconciled with the
Company's store sales plan, a compilation of individual store sales projections.
On a semi-monthly basis, the merchandising plan is updated to reflect current
sales and inventory trends and distributed throughout the merchandising
department. The updated merchandising plan is used to adjust production orders
as needed to meet inventory and sales targets. If bebe miscalculates consumer
demand for its products, it may be faced with significant excess inventory and
fabric for some products and missed opportunities for others. Weak sales and
resulting markdowns could cause the Company's profitability to be impaired.
4
MARKETING
The Company in recent years initiated an extensive image advertising program
which addresses the lifestyles and aspirations of its target customers. Through
an edgy, high-impact, visual advertising campaign, the Company attracts
customers who are intrigued by the playfully sensual and evocative imagery. The
Company believes that its emphasis on non-product specific lifestyle advertising
promotes brand awareness and supports numerous product line expansion
opportunities. The Company retains an outside advertising agency to create and
implement a lifestyle advertising campaign in conjunction with the Company. This
campaign, which emphasizes a forward-looking view of fashion, is communicated to
consumers through a variety of vehicles including fashion magazines, bus
shelters, in-store displays and customer mailings. In addition, the Company
maintains a public relations department to communicate directly with fashion
editors and supply them with a continuous flow of product information. On
occasion, the Company has co-sponsored promotional events with fashion
magazines, such as Elle, Glamour, Marie Claire and Vanity Fair.
STORES
STORE LOCATIONS AND ENVIRONMENT. As of June 30, 1998, bebe operated 86
stores in 21 states. The Company's stores average approximately 2,700 square
feet and are primarily located in regional shopping malls, and in several cases,
free-standing street locations. The Company's stores are designed to create a
clean, upscale boutique environment, featuring hardwood or marble 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. An average store has between 14 and 20 product display
bays with a flexible modular design that can be transformed easily to handle
display racks, storage racks or shelving units.
Stores are provided specific merchandise display directions on a weekly or
bi-weekly basis from the corporate office based on currently available
merchandise receipts. bebe's 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 emphasizing outfits in this manner, the
Company allows the customer to see how different pieces can be combined to
create multiple ensembles.
The following store list shows the number of bebe stores in each state in
which stores are located as of June 30, 1998:
STATE NUMBER OF STORES STATE NUMBER OF STORES
- ------------------------------------- --------------------- ------------------------------------- ---------------------
Arizona.............................. 2 North Carolina....................... 1
California........................... 29 New Jersey........................... 3
Florida.............................. 9 Nevada............................... 3
Georgia.............................. 4 New York............................. 6
Hawaii............................... 1 Ohio................................. 1
Illinois............................. 4 Pennsylvania......................... 2
Indiana.............................. 1 Tennessee............................ 1
Massachusetts........................ 4 Texas................................ 4
Maryland............................. 2 Virginia............................. 2
Michigan............................. 2 Washington........................... 3
Minnesota............................ 1 Washington D.C. 1
5
The following table highlights the number of stores opened and closed in
each of the last three fiscal years:
FISCAL YEAR ENDED JUNE 30,
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1996 1997 1998
----- ----- -----
Number of Stores:
Open at beginning of period.............................................. 56 73 83
Opened................................................................. 18 10 7
Closed................................................................. (1) 0 (4)
-- -- --
Open at end of period.................................................... 73 83 86
-- -- --
-- -- --
EXPANSION OPPORTUNITIES. In developing its store opening plan, the Company,
in conjunction with a real estate consulting firm, in fiscal 1997 developed a
profile of current customers and applied the profile to the largest 150
metropolitan areas in the United States. The Company currently operates bebe
stores in 36 of these top geographic market areas and has identified additional
geographic markets that it believes can support one or more bebe stores. In
addition, management believes that there is a significant opportunity to expand
the number of stores in most of the markets within which bebe stores are
currently located. The Company, in conjunction with its real estate consultant,
also has identified specific mall and street locations within each market to be
considered for new bebe store locations. In selecting a specific site, the
Company looks for high traffic locations primarily in regional shopping centers
and in free-standing street locations. Proposed sites are evaluated 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.
The Company opened seven new stores in fiscal 1998 and plans to open
approximately 15 stores in each of fiscal 1999 and 2000, the majority of which
will be in existing markets. The Company's new store prototype is approximately
3,000 to 5,000 square feet, although in certain selected markets the Company may
open larger stores. Additionally, in selected markets the Company may open
high-profile flagship stores that will be designed to enhance further the bebe
image. The Company currently plans to open approximately two such flagship
stores ranging in size from approximately 5,000 to 7,000 square feet in each of
fiscal 1999 and 2000.
During fiscal 1998, the average new store size was approximately 3,100
square feet. New store construction costs (before tenant allowances) averaged
$339,000. The average gross inventory investment was $109,000 while pre-opening
costs, which are expensed as incurred, averaged less than $5,000 per store. bebe
stores typically have achieved profitability at the store operating level within
the first full quarter of operation; however, there can be no assurance that the
Company's 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 which
include, but are not limited to, individual store economics and suitability of
sites that become available. Because of their higher cost structure, flagship
stores are not expected to achieve operating margins comparable to the Company's
other stores.
In addition to opening new stores, the Company plans to expand or relocate
selected existing stores to larger spaces within the same malls during fiscal
1999. The Company believes that as awareness of bebe's brand name increases,
product lines expand and stores mature, additional expansions may be warranted.
The Company's ability to expand will depend on a number of factors,
including the availability of desirable locations, the negotiation of acceptable
leases and the Company's ability to manage expansion and to source adequate
inventory. There can be no assurance that the Company will be able to achieve
its planned expansion on a timely and profitable basis, if at all. Furthermore,
there can be no assurance that store openings in existing markets will not
result in reduced net sales volumes and profitability in existing stores in
those markets.
6
OUTLET STORES. As of June 30, 1998, seven of the Company's 86 stores were
located in outlet malls throughout the United States. The Company originally
used these outlet stores to dispose of slow moving inventory in order to promote
a better merchandise presentation within the specialty stores. More recently,
the Company has rounded out the inventory of its outlet stores with casual logo
styles at full price and, to a lesser extent, garments specifically bought or
produced for the outlet stores.
During fiscal 1998, the average new outlet store size was approximately
3,300 square feet. New store construction costs (before tenant allowances)
averaged approximately $173,000, and the average inventory investment was
approximately $114,000. Of the seven stores opened in fiscal 1998, two were
outlet stores. Of the 15 stores planned to be opened in fiscal 1999, two are
expected to be outlet stores.
STORE CLOSURES. In 1996, the Company initiated a program to monitor more
vigorously the financial performance of its stores and, from time to time, has
closed in the past and will close in the future, stores that it does not
consider to be viable. Many of the store leases contain early termination
options which allow the Company to close the stores in certain specified years
of the leases if certain minimum sales levels are not achieved. The Company
closed four stores during fiscal 1998. The Company has reviewed its existing
store base and has identified three underperforming stores that it is
considering closing prior to the end of fiscal 1999.
STORE OPERATIONS
Store operations are organized into five regions and eighteen 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 three to
four districts, and each district manager is typically responsible for three to
six stores. Each store is typically staffed with two to four managers in
addition to hourly sales associates.
The Company seeks to instill enthusiasm and dedication in its 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 compensation. Store managers receive base compensation
plus incentive compensation based on sales. Regional and district managers
receive base compensation plus incentive compensation based on meeting
profitability benchmarks.
The Company has well-established store operating policies and procedures and
utilizes an in-store training regimen for all new store employees. Merchandise
presentation instructions, which include photographs of fixture presentations,
are provided to the stores on a weekly basis by the Visual Merchandising staff.
Detailed product descriptions also are provided to sales associates to enable
them to gain familiarity with bebe product offerings. The Company offers bebe
sales associates a discount on bebe merchandise to encourage them to wear the
Company's apparel and reflect the bebe image while on the selling floor. In
addition, the Company has developed a store management training program which
allows new district managers and certain field management personnel to receive
training at the corporate offices.
As part of its focus on better procedures and controls, the Company
established a Loss Prevention Department in fiscal 1997 to develop and implement
better programs for controlling losses. The fiscal 1998 results have been
encouraging. These programs include installing electronic article 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 the Company's merchandise is marketed under the bebe or bebe moda
brand names. Much of this merchandise is designed and developed in-house and
manufactured to the Company's specifications. The balance is developed primarily
in conjunction with third party apparel manufacturers or, in some cases,
selected directly from these manufacturers' lines. When contracting for the
production of merchandise, the Company uses a combination of facilities,
primarily located in California, and, to a lesser degree,
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foreign manufacturers, to produce garments based on designs, patterns and
detailed specifications produced by the Company.
bebe uses computer aided design (CAD) systems to develop its patterns and
production markers as part of its product development process. Sample garments
are fit tested prior to production to validate the accuracy of the patterns.
After being received at the Company's distribution facility, a percentage of
receipts are inspected and fit tested a second time. The Company recently
implemented a formalized quality control program which involves inspection of
merchandise and fabrics upon receipt at the Company's distribution center.
Garments that do not pass inspection are returned to the manufacturer for rework
or accepted at reduced prices for sale in the Company's outlet stores.
All of the Company's merchandise is received, inspected, processed,
warehoused and distributed through its distribution center that is adjacent to
its 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 shipments may be made twice or
even three times a week.
The Company does not have any long-term contracts with any manufacturer or
supplier and places all of its orders by purchase order. The failure to obtain
sufficient quantities of manufacturing capacity or raw materials would have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company has received in the past, and may receive in
the future, shipments of products from manufacturers that fail to conform to the
Company's quality control standards. In such event, unless the Company is able
to obtain replacement products in a timely manner, the Company may lose sales
which could have an adverse effect on operating results.
COMPETITION
The Company believes it distinguishes itself from its competitors primarily
through its distinctive, contemporary point-of-view and product design, in
combination with exceptional quality and value to the consumer. However, the
retail and apparel industries are highly competitive and are characterized by
low barriers to entry, and the Company expects competition in its markets to
increase. The primary competitive factors in the Company's markets include brand
name recognition, product styling, product presentation, product pricing, store
ambiance, customer service and convenience. The Company competes with
traditional department stores, specialty store retailers, off-price retailers
and direct marketers for, among other things, raw materials, market share,
retail space, finished goods, sourcing and personnel. Many of these competitors
are larger and have substantially greater financial, distribution and marketing
resources than the Company. Any failure to compete would have a material adverse
effect on the Company's business, financial condition and results of operations.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
TRADEMARKS AND SERVICE MARKS. The Company believes that its trademarks and
other proprietary rights are important to its success and has registered "bebe"
and "bebe moda" in the United States and certain foreign jurisdictions. The
Company is seeking to register its trademarks in targeted international markets
which it believes represent large potential markets for the Company's products.
In many of these markets, local companies currently have registered competing
marks, and/or regulatory obstacles exist that may prevent the Company from
obtaining a trademark for the bebe name or related names. In such countries, the
Company may be unable to use the bebe name unless it purchases the right or
obtains a license to use the bebe name. There can be no assurance that the
Company will be able to register trademarks in such international markets,
purchase the right or obtain a license to use the bebe name on commercially
reasonable terms, if at all. Failure to obtain either trademark, ownership or
license rights
8
would limit the Company's ability to expand into certain international markets
or enter such markets with the bebe name, and to capitalize on the value of its
brand.
LICENSING. The Company strives to provide its customers with high quality
products and to maintain a consistent image in all of its advertising and
marketing programs. bebe currently is evaluating opportunities to expand its
product offerings and extend its geographic reach through licensing or joint
venture arrangements. Accordingly, although to date the Company has received
substantially no revenue from any licensing source, it 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, the Company will
seek to preserve the integrity of its brand name by closely monitoring the
design and quality of the products sold by such licensees or joint venture
partners and by controlling the manner in which the Company's products are
advertised, marketed and distributed. In addition to distributing such new
products through bebe stores, the Company may elect to distribute these licensed
products with the bebe logo through other channels. The Company recently hired a
Vice President of Licensing to develop this program. The Company recently
entered into a license agreement pursuant to which the licensee will manufacture
and distribute eyewear products branded with the bebe logo to be sold at bebe
stores and other retailers.
The Company also believes that opportunities may exist to license the bebe
brand name internationally to licensees who will open bebe stores. As an initial
test, the Company has recently signed a licensing agreement with a Mexican
company to open and operate a retail bebe store in Mexico City. Under this
agreement, the Company provides the use of its name, store design and
advertising images, and the licensee purchases its inventory from the Company.
INFORMATION SERVICES AND TECHNOLOGY
The Company is committed to utilizing technology to enhance its competitive
position. To this end, during fiscal 1998, the Company hired an experienced Vice
President of Information Services and Technology to lead the Company's efforts
in this area. bebe's 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, run on a UNIX
platform and 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, the Company also obtains information
concerning inventory receipts and transfers (primarily to the outlet stores) and
sends to the stores pricing, markdown and shipment notification data. In
addition, the Company collects customer names and addresses to update its
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 the
Company's ability to optimize sales while limiting 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, the Company's investments in information systems have focused
on its core store, merchandise and financial accounting systems. Currently, the
Company's focus is on upgrading its capabilities and systems associated with its
production, merchandise allocation and distribution functions, which have not
kept pace with the Company's growth. The Company intends to make significant
investments to improve existing management information systems and implement new
systems in these areas and to implement them during fiscal 1999. Additionally,
the Company has created a year 2000 Task Force, which is implementing a 6-phase
plan with the objective of ensuring that its management information systems will
be Year 2000 compliant. The Company believes that this 6-phase plan will be
completed by October 31, 1999. There can be no assurance that the Company will
be successful with the implementation of these new systems or plans. Failure to
implement and integrate such systems or plans could have a material adverse
effect on the Company's business, financial condition and results of operations.
9
EMPLOYEES
As of June 30, 1998, the Company had approximately 1,101 employees, of whom
approximately 256 were employed in general and administrative functions at the
corporate offices and distribution center. The remaining 845 employees were
employed in store operations. Of these remaining employees, approximately 365
were full-time employees and 480 were employed on a part-time basis. None of the
Company's employees is represented by a labor union, and the Company believes
its relationship with its employees is good.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
executive officers of the Company as of June 30, 1998:
NAME AGE POSITION
- ------------------------------------------- --- -------------------------------------------
Manny Mashouf.............................. 60 Chairman, President and Chief Executive
Officer
Greg Scott................................. 35 Vice President of Merchandising
Blair Lambert.............................. 40 Vice President of Finance and Chief
Financial Officer
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,
and the father of Paul Mashouf, the Secretary of the Company.
GREG SCOTT has served as the Company's senior merchant since January 1996.
From January 1994 to January 1996, Mr. Scott was a Senior Merchant at AnnTaylor,
Inc., a women's apparel retail company. From January 1993 to January 1994, Mr.
Scott served as a merchant at Henri Bendel, a women's apparel retailer. From
September 1985 to January 1993, Mr. Scott was employed by Macy's West, a
subsidiary of Federated Department Stores, Inc., most recently as a buyer.
BLAIR LAMBERT has served as Vice President of Finance and Chief Financial
Officer of the Company since June 1996. From 1988 to 1996, Mr. Lambert was
employed by Esprit de Corp, Inc., a wholesaler and retailer of junior and
children's apparel, footwear and accessories ("Esprit"), most recently as
Corporate Vice President of Finance. Mr. Lambert is a Certified Public
Accountant.
ITEM 2. PROPERTIES
As of June 30, 1998, the Company's 86 stores, all of which are leased,
encompassed approximately 238,470 total square feet. The typical store lease is
for a 10-year term and requires the Company to pay a base rent and a percentage
rent if certain minimum sales levels are achieved. Many of the leases provide
the Company a lease termination option in certain specified years of the lease
if certain minimum sales levels are not achieved. In addition, leases for
locations typically require the Company to pay property taxes, utilities and
repairs and maintenance. In addition, leases for mall locations also may require
the Company to pay common area maintenance fees.
The Company's corporate headquarters and distribution center are located in
an approximately 70,000 square foot leased facility located at 380 Valley Drive
in Brisbane, California. The lease expires in August 2001. In addition, the
Company leases approximately 20,000 square feet of warehouse space for fabric
inspection, storage and distribution in South San Francisco. The lease expires
in August, 2001. The Company is currently seeking alternative or additional
space for its administrative offices and distribution center in order to
accommodate its future needs and believes it will be able to obtain such space
on commercially reasonable terms.
10
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company may be involved in litigation relating to
claims arising out of its operations. As of the date of this filing, the Company
is not engaged in any legal proceedings that are expected, individually or in
the aggregate, to have a material adverse effect on the Company's business,
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on the Nasdaq National Market under the
symbol "BEBE." The following table sets forth for the period from the Company's
initial public offering through June 30, 1998 as reported by the Nasdaq National
Market:
FISCAL 1998 HIGH LOW
- ------------------------------------------------------------------------- --------- ---------
Fourth Quarter (1)....................................................... $ 14.125 $ 11.00
- ------------------------
(1) From the date of the Company's initial public offering on June 17, 1998 to
June 30, 1998
As of September 1, 1998, the number of holders of record of common stock of
the Company was approximately 18 and the number of beneficial holders of the
common stock was estimated to be in excess of 1,500.
The Company has never declared nor paid any dividends on its common stock
and does not intend to pay any dividends on its common stock in the foreseeable
future. In addition, the Company's current line of credit arrangements prohibit
the payment of cash dividends on its capital stock.
During fiscal 1998, the Company issued to employees and officers of the
Company options to purchase an aggregate of 383,450 shares of its Common Stock,
at an average exercise price of $6.78 per share pursuant to the Company's 1997
Stock Plan, as amended. The granting of such options did not require
registration under the Securities Act of 1993, as amended (the "Securities
Act"), or an exemption therefrom, insofar as such grants did not involve a
"sale" of securities as such term is used in section 2(3) of the Securities Act.
(See Note 9 to the Financial Statements).
11
ITEM 6. SELECTED FINANCIAL 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 Form 10-K. These historical results are not necessarily indicative of
results to be expected in the future.
FISCAL YEAR ENDED JUNE 30,
---------------------------------------------------------
1998 1997 1996 1995 1994
---------- --------- ------------ --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statements of Operations Data:
Net sales............................................. $ 146,756 $ 95,086 $ 71,563 $ 65,411 $ 32,603
Cost of sales, including buying and occupancy......... 71,713 53,969 44,701 32,653 17,222
---------- --------- ------------ --------- ---------
Gross profit.......................................... 75,043 41,117 26,862 32,758 15,381
Selling, general and adminstrative expenses........... 46,359 32,649 26,353 23,134 13,015
---------- --------- ------------ --------- ---------
Income from operations................................ 28,684 8,468 509 9,624 2,366
Interest and other expenses (income), net............. (838) (128) 392 87 128
---------- --------- ------------ --------- ---------
Earnings before income taxes.......................... 29,522 8,596 117 9,537 2,238
Provision (benefit) for income taxes.................. 12,103 3,218 (10) 4,052 912
---------- --------- ------------ --------- ---------
Net earnings.......................................... $ 17,419 $ 5,378 $ 127 $ 5,485 $ 1,326
---------- --------- ------------ --------- ---------
---------- --------- ------------ --------- ---------
Basic earnings per share (1).......................... $ 0.77 $ 0.24 $ 0.01 $ 0.24 $ 0.06
Diluted earnings per share (1)........................ $ 0.73 $ 0.24 $ 0.01 $ 0.24 $ 0.06
Basic weighted average shares outstanding (1)......... 22,688 22,640 22,640 22,640 22,640
Diluted weighted average shares outstanding (1)....... 23,862 22,651 22,640 22,640 22,640
Selected Operating Data:
Number of stores:
Opened during period................................ 7 10 18 24 8
Closed during the period............................ 4 0 1 0 0
Open at end of period............................... 86 83 73 56 32
Net sales per average store (2)....................... $ 1,719 $ 1,211 $ 1,065 $ 1,480 $ 1,155
Comparable store sales increase (decrease) (3)........ 41.3% 18.0% (16.5)% 35.4% 29.5%
AS OF JUNE 30,
---------------------------------------------------------
1998 1997 1996 1995 1996
---------- --------- ------------ --------- ---------
Balance Sheet Data:
Working capital....................................... $ 35,904 $ 8,275 $ 5,462 $ 2,722 $ 2,639
Total assets.......................................... 64,209 29,109 22,005 19,239 11,076
Long-term debt, including current portion............. 187 320 3,680 321 500
Shareholders' equity.................................. 45,263 15,295 9,914 9,778 4,577
- ------------------------
(1) See Notes 1, 9 and 12 of Notes to Financial Statements for the method used
to calculate earnings per share amounts.
(2) Based on the sum of average monthly sales per open store for the period.
(3) Based on net sales; stores are considered comparable beginning on the first
day of the first month following the first anniversary of their opening.
12
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 of the Company 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. The Company's 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.
The Company's 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,
-------------------------------
1998 1997 1996
--------- --------- ---------
Statements of Operations Data:
Net sales.............................................................................. 100.0% 100.0% 100.0%
Cost of sales, including buying and occupancy (1)...................................... 48.9 56.8 62.5
--------- --------- ---------
Gross profit........................................................................... 51.1 43.2 37.5
Selling, general and adminstrative expenses (2)........................................ 31.6 34.3 36.8
--------- --------- ---------
Income from operations................................................................. 19.5 8.9 0.7
Interest and other expenses (income), net.............................................. (0.6) (0.1) 0.5
--------- --------- ---------
Earnings before income taxes........................................................... 20.1 9.0 0.2
Provision (benefit) for income taxes................................................... 8.2 3.3 0.0
--------- --------- ---------
Net earnings........................................................................... 11.9% 5.7% 0.2%
--------- --------- ---------
--------- --------- ---------
- ------------------------
(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, 1998 AND 1997
NET SALES. Net sales increased to $146.8 million during the year ended June
30, 1998 from $95.1 million in fiscal 1997, an increase of $51.7 million, or
54.3%. Of this increase, $38.5 million was attributable to the 41.3% increase in
comparable store sales, and $13.2 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
the Company's business.
GROSS PROFIT. Gross profit, which includes the cost of merchandise, buying
and occupancy, increased to $75.0 million for the year ended June 30, 1998 from
$41.1 million in fiscal 1997, an increase of $33.9 million, or 82.5%. As a
percentage of net sales, gross profit increased to 51.1% for the year from 43.2%
during fiscal 1997. The increase in gross profit as a percentage of net sales
resulted from higher initial markups and lower markdowns associated with higher
sell-through rates, as well as reduced occupancy costs as a percentage of net
sales resulting from higher average store sales. In addition, during fiscal
1998,
13
the Company reviewed its fabric inventory and, for fabrics not directly
associated with planned garment production orders, the Company took a charge
against cost of sales and increased its inventory valuation allowance by $1.5
million to reflect more appropriately the net realizable value of such fabrics.
The Company believes that the gross margins attained during this most recent
fiscal year are not sustainable and that gross margins will likely be lower in
the current and future periods.
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 $46.4 million during the
year ended June 30, 1998 from $32.6 million in fiscal 1997, an increase of $13.8
million, or 42.3%. As a percentage of net sales, these expenses decreased to
31.6% during the year ended June 30, 1998 from 34.3% in fiscal 1997. This
reduction as a percentage of net sales was largely a result of economies of
scale related to the net sales increases offset in part by an increase in
advertising expenses as a percentage of net sales. For the year, advertising
expense was $6.7 million, or 4.6% of net sales, compared to $2.9 million, or
3.0% of net sales, in fiscal 1997. The Company currently plans to maintain
approximately the same level of advertising as a percentage of net sales in the
future. The Company has recorded deferred compensation of $2.8 million in
connection with option grants in June 1997, of which $664,000 was charged to
expense for the year ended June 30, 1998. The remaining deferred compensation
expense will be amortized over the vesting period of the options. See Note 9 of
Notes to Financial Statements.
INTEREST AND OTHER EXPENSE (INCOME), NET. The Company generated $838,000 of
interest and other income (net of other expenses) during the year ended June 30,
1998 as compared to $128,000 in fiscal 1997. The Company had no borrowings under
its line of credit during the year ended June 30, 1998 due to increases in
average cash balances arising from its improved operating results compared to
net borrowing in the prior fiscal year.
PROVISION (BENEFIT) FOR INCOME TAXES. The effective tax rate for the year
ended June 30, 1998 was 41.0% as compared to 37.4% in fiscal 1997. The higher
effective tax rate for fiscal 1998 was primarily attributable to increased
taxable earnings and greater profitability in high tax rate states. See Note 6
of Notes to Financial Statements.
YEARS ENDED JUNE 30, 1997 AND 1996
NET SALES. Net sales increased to $95.1 million in fiscal 1997 from $71.6
million in fiscal 1996, an increase of $23.5 million, or 32.8%. Of this
increase, $12.7 million was attributable to an 18.0% increase in comparable
store sales, and $10.8 million was attributable to stores not included in the
comparable store sales base. The increase in comparable sales was attributable
to a broader product line offering, strong consumer acceptance of the product
line and improvements in the operational aspects of the business.
GROSS PROFIT. Gross profit increased to $41.1 million in fiscal 1997 from
$26.9 million in fiscal 1996, an increase of $14.2 million, or 52.8%. As a
percentage of net sales, gross profit increased to 43.2% in fiscal 1997 from
37.5% in fiscal 1996. The increase in gross profit as a percentage of net sales
resulted from higher initial markups and lower markdowns associated with higher
sell-through rates, as well as reduced occupancy costs as a percentage of net
sales resulting from higher average store sales. In addition, during fiscal
1997, the Company reviewed its fabric inventory and, for fabrics not directly
associated with planned garment production orders, the Company took a charge
against cost of goods sold and increased its inventory valuation allowance by
$442,000 to reflect more appropriately the net realizable value of such fabrics.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $32.6 million in fiscal 1997 from $26.4
million in fiscal 1996, an increase of $6.2 million, or 23.5%. As a percentage
of net sales, these expenses decreased to 34.3% in fiscal 1997 from 36.8% in
fiscal 1996. This reduction as a percentage of net sales was largely due to
economies of scale related to the net sales
14
increases offset in part by expenses related to additions to the management team
and an increase in advertising expenses as a percentage of net sales. In June of
1997, the Company completed a review of its entire store base. As a result, the
Company established an impairment reserve for fixed assets (equipment and
improvements) related to certain underperforming stores in the amount of
$272,000.
INTEREST AND OTHER EXPENSE (INCOME), NET. The Company generated $128,000 of
interest and other income (net of other expenses) in fiscal 1997 as compared to
$392,000 of net interest and other expense in fiscal 1996. This increase of
$520,000 was due to the gain on sale of property and reduced borrowing needs as
a result of net cash generated from operations in fiscal 1997 as compared to
fiscal 1996.
PROVISION (BENEFIT) FOR INCOME TAXES. The Company's effective tax rate was
37.4% for fiscal 1997 compared to a tax benefit for fiscal 1996. See Note 6 of
Notes to Financial Statements.
SEASONALITY OF BUSINESS AND QUARTERLY RESULTS
The Company's business varies with general seasonal trends that are
characteristic of the retail and apparel industries. As a result, the Company
generates a disproportionate amount of its annual net sales in the first half of
its fiscal year (which includes the fall and holiday selling seasons) compared
to the second half of its fiscal year. If for any reason the Company's sales
were below seasonal norms during the first half of its fiscal year, as they were
in fiscal 1996, the Company's annual operating results would be affected
adversely. Because of the seasonality of the Company's 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, 1998, as well as such data
expressed as a percentage of the Company's 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 the Company's Financial Statements and Notes thereto
appearing elsewhere in this annual report on Form 10-K.
FISCAL QUARTER ENDED
----------------------------------------------------------
SEPT. 30, DEC. 31,
1997 1997 MARCH 31, 1998 JUNE 30, 1998
------------- ------------ -------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statements of Operations Data:
Net sales............................................ $ 31,218 $ 43,558 $ 33,296 $ 38,684
Gross profit......................................... 15,653 22,413 16,248 20,729
Selling, general and administrative expenses......... 9,382 13,183 10,994 12,800
Income from operations............................... 6,271 9,230 5,254 7,929
Earnings before income taxes......................... 6,439 9,374 5,444 8,265
Net earnings......................................... 3,797 5,523 3,222 4,877
Basic earnings per share............................. $ 0.17 $ 0.24 $ 0.14 $ 0.21
Diluted earnings per share........................... $ 0.16 $ 0.23 $ 0.13 $ 0.20
As a Percentage of Net Sales:
Net sales............................................ 100.0% 100.0% 100.0% 100.0%
Gross profit......................................... 50.1 51.5 48.8 53.6
Selling, general and administrative expenses......... 30.1 30.3 33.0 33.1
Income from operations............................... 20.1 21.2 15.8 20.5
Earnings before income taxes......................... 20.6 21.5 16.4 21.4
Net earnings......................................... 12.2 12.7 9.7 12.6
Operating Data:
Comparable store sales increases..................... 53.7% 46.4% 32.0% 35.6%
Stores open at end of period......................... 83 85 85 86
15
LIQUIDITY AND CAPITAL RESOURCES
During the three years ended June 30, 1998, bebe has satisfied its cash
requirements principally through cash flow from operations, borrowings under its
revolving lines of credit and term loans. Primary uses of cash have been to
purchase merchandise inventory, fund the construction of new stores and to
remodel and renovate stores.
The Company's working capital requirements vary widely throughout the year
and generally peak in the first and second fiscal quarters. At June 30, 1998,
the Company had approximately $36.7 million of cash and cash equivalents on
hand. In addition, the Company had a revolving line of credit, under which it
could borrow or issue letters of credit up to a combined total of $5.0 million.
As of June 30, 1998, there were no borrowings under the line of credit and
letters of credit outstanding totaled $2.4 million.
Net cash provided by operating activities in fiscal 1998 and 1997 was $19.3
million and $13.0 million, respectively, while net cash used by operating
activities was $2.2 million in fiscal 1996. The increase in cash provided by
operating activities in fiscal 1998 and 1997 compared to 1996 was primarily the
result of increases in income from operations and changes in working capital.
Net cash used by investing activities was $3.6 million, $1.0 million and
$1.5 million in fiscal 1998, 1997 and 1996, respectively. The primary use of
these funds was for the opening of new stores and, to a lesser degree, the
implementation of new computer systems within the stores and the corporate
office.
The Company expects to make substantial capital expenditures in connection
with the opening and expansion of stores, the implementation of new systems to
support store and corporate office functions and the expansion or relocation of
its corporate offices and distribution center. The Company estimates that
capital expenditures will be between $9.0 million and $11.0 million in fiscal
1999. The Company opened seven new stores in fiscal 1998. The Company also
expects to open approximately fifteen stores in each of fiscal 1999 and 2000,
the majority of which will be in existing markets.
During fiscal 1998, new store construction costs (before tenant allowances)
averaged $290,000. The average gross inventory investment was $110,000 while
pre-opening costs, which are expensed as incurred, was less than $5,000 per
store. The average total cost to build new stores will vary in the future,
depending on various factors, including local construction expenses, changes in
store format and design and tenant improvement allowances.
Net cash provided by financing activities was $11.8 million in fiscal 1998
while net cash used by financing activities was $4.6 million in fiscal 1997. In
fiscal 1996, net cash provided by financing activities was $4.3 million. In
fiscal 1998, net cash provided by financing activities related primarily to
proceeds from the sale of 1.25 million shares in the Company's initial public
offering of stock. Net cash used by financing activities in fiscal 1997
primarily related to the repayment of the term note and revolving line of
credit. In fiscal 1996, net cash provided by financing activities was related to
proceeds from the term note and draw downs under the revolving line of credit.
The Company believes that its cash on hand, together with its cash flow from
operation, will be sufficient to meet its capital and operating requirements
through fiscal 1999. The Company's 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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, REPORTING
COMPREHENSIVE INCOME, and SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. SFAS No. 130 requires that an enterprise
report, by major components and as a single total, the
16
change in its net assets during the period from nonowner sources; and SFAS No.
131 establishes annual and interim reporting standards for an enterprise's
operating segments and related disclosures about its products, services,
geographic areas and major customers. Adoption of these statements will not have
a material impact on the Company's financial position, results of operations or
cash flows, and any effect will be limited to the form and content of its
disclosures. Both statements are effective for the Company's fiscal year 1999.
INFLATION
The Company does not believe that inflation has had a material effect on the
results of operations in the recent past. There can be no assurance that the
Company's business will not be affected by inflation in the future.
YEAR 2000 DATE CONVERSION
The Company has created a Year 2000 Task Force that is implementing a six
phase plan with the objective of ensuring that its management information
systems will record, store, process, calculate and present calendar dates
falling on or after (and if applicable, spans of time including) January 1, 2000
in the same manner, and with the same functionality as it has in years prior to
2000 (collectively, "Year 2000 Compliant"). As part of this six phase plan, the
Company has completed a comprehensive review of its information systems and is
involved in a program to update computer systems and applications in preparation
for the year 2000. The Company currently believes that this six phase plan will
be completed by July 31, 1999; however, the Company has intentionally planned
its completion date well in advance of January 1, 2000 to assure that there is
adequate time to further test and modify all mission critical applications
should such further work be necessary.
Total expenditures related to identification, testing, conversion,
contingency, replacement and upgrading system applications are expected to range
from $400,000 to $600,000 during fiscal 1999 and 2000. In certain cases, the
conversions to applications which are year 2000 compliant will be made in
conjunction with planned business system upgrades or enhancements. In the most
reasonably likely worst case scenario, the Company's store operating and back
end inventory management systems could fail. The consequence of such failure
could include the inability to record sales transactions in the Company's stores
and a breakdown in the supply chain. Such an occurrence would likely result in a
loss of revenue; it is not possible to quantify the possible range of such loss.
This would necessitate reverting to a number of manual systems for recording
sales, ordering product and replenishing the Company's stores.
The Company is attempting to contact vendors and others on whom it relies to
assure that their systems will be converted before January 1, 2000. However,
there can be no assurance that the systems of other companies on which the
Company's systems rely will be year 2000 compliant by December 31, 1999. Any
such failure to convert by another company may have an adverse effect on the
Company's systems. In a most reasonably likely worst case scenario, one or more
significant suppliers could be unable to continue to adequately supply the
Company after 1999. The Company's fallback position would be to seek an
alternative source of supply. However, there can be no assurance that such
alternative sources of supply would be available. Such a contingency plan will
be in place by the end of fiscal year 1999. It is not practical for management
to estimate the range of financial loss, if any, which could result from the
negative effect that a disruption in supply would have on the Company's
business. Furthermore, no assurance can be given that any or all of the
Company's systems are or will be year 2000 compliant, or that the ultimate costs
required to address the year 2000 issue or the impact of any failure to achieve
substantial year 2000 compliance will not have a material adverse effect on the
Company's financial condition.
17
RISKS THAT MAY AFFECT RESULTS
FASHION AND APPAREL INDUSTRY RISKS. The apparel industry is subject to
rapidly evolving fashion trends, shifting consumer demands and intense
competition. The Company believes that its future success will be dependent, in
part, on its ability to anticipate, identify and capitalize upon emerging
fashion trends, including products, styles, fabrics and colors, and to
distinguish itself within the women's apparel market. If, for any reason, the
Company misinterprets the current fashion trends or consumer tastes shift and
the Company fails to respond, consumer demand for bebe products and the
Company's profitability and brand image could be significantly impaired.
Additionally, there can be no assurance that competitors of the Company will not
carry similar designs, thus undermining bebe's distinctive image and potentially
having an adverse effect on the Company's financial condition and results of
operations. See "Business-- Merchandising;--Competition."
MANAGEMENT OF INVENTORY. Success in the apparel industry is dependent on a
company's ability to manage its inventory of merchandise in proportion to the
demand for such merchandise. If bebe miscalculates the consumer demand for its
products it may be faced with significant excess inventory and excess fabric for
some products and missed opportunities for others. Weak sales and resulting
markdowns and/or write-offs could cause the Company's profitability to be
significantly impaired and may have a material adverse effect on the Company's
financial condition and results of operations. See "Business-- Merchandising."
RISKS OF GROWTH STRATEGY. The Company's continued growth is dependent, to a
significant degree, on its ability to identify sites and open and operate new
stores on a profitable basis. bebe opened 24 stores in fiscal 1995, 18 stores in
fiscal 1996, 10 stores in fiscal 1997 and seven stores in fiscal 1998. The
Company expects to open approximately 15 stores in each of fiscal 1999 and 2000.
Such expansion may include the opening in selected markets of flagship stores
that will be larger and more expensive to operate than existing stores. If the
Company does not generate sufficient revenues from these flagship stores to
cover their higher costs, the Company's financial results could be negatively
affected. The success of this expansion plan is dependent upon a number of
factors, including the availability of desirable locations, the successful
negotiation of 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. There can be no assurance that the Company will be able
to achieve its planned expansion on a timely and profitable basis, if at all. In
addition, most of the Company's new store openings in fiscal 1999 and 2000 will
be in existing markets. There can be no assurance that these openings will not
result in reduced net sales volumes and profitability in existing stores in
those markets. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business--Growth Strategy" and "--Stores."
FUTURE RESULTS OF OPERATIONS. Although the Company has been profitable on
an annual basis for each of the past five fiscal years, profitability rates have
varied widely from quarter-to-quarter and from year-to-year. In particular, in
fiscal 1996, the Company experienced a significant financial downturn due to,
among other things, a significant disruption in supply of the Company's key
fabrication, difficulty in obtaining a replacement fabrication, certain related
fashion misjudgments, failure to obtain product deliveries in a timely manner,
rapid expansion of the Company's store base, and lack of sufficient controls and
personnel to support such expanded activity. There can be no assurance that the
Company will remain profitable in the future. Future results of operations will
depend on, among other things, the number and timing of new store openings and
the Company's ability to identify and capitalize upon changing fashion trends,
hire and retain qualified management and other personnel, maintain appropriate
inventory levels, obtain needed raw materials, identify and negotiate favorable
leases for successful store locations, reduce shrinkage and control operating
costs. Future results of operations will also depend on factors outside of the
Company's
18
control, such as general economic conditions, availability of third party
sourcing and raw materials, and actions of competitors. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business--Growth Strategy," "--Merchandising," "--Stores" and "--Competition."
The Company believes that the rate of comparable store sales growth achieved
in recent periods is not sustainable and expects that such growth, if any, in
the current and future periods will be more moderate. Furthermore, during these
recent periods of relatively high comparable store sales growth, the Company has
experienced favorable merchandise margins due to strong sell-through rates and
attendant low markdown rates. As comparable store sales growth moderates, the
Company anticipates a decline in merchandise margins and, accordingly, a
reduction in gross margins. In addition, the Company's 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. However, the Company
believes that such expenses will increase as a percentage of net sales during
the current and the next several quarters as the Company makes planned
investments to its infrastructure and sales growth moderates. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
RELIANCE ON MANAGEMENT INFORMATION SYSTEMS. In the past, the Company's
investments in information systems have focused on its core store, merchandise
and financial accounting systems. Currently, the Company's focus is on upgrading
its capabilities and systems associated with its production, merchandise
allocation and distribution functions, which have not kept pace with the
Company's growth. The Company intends to make significant investments to improve
existing management information systems and implement new systems in these areas
and to implement them during fiscal 1999. There can be no assurance that these
enhancements will be successfully implemented. Failure to implement and
integrate such systems could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business--Information Services and Technology."
NEW MANAGEMENT TEAM; DEPENDENCE ON KEY PERSONNEL. The Company is dependent
upon the efforts of its key employees, particularly Manny Mashouf, the founder,
Chairman, President and Chief Executive Officer. In addition, most of the
Company's officers and other key personnel have joined the Company since the
middle of fiscal 1996 and, therefore, have relatively little experience with the
Company. None of the Company's executive officers is bound by an employment
agreement, and the relationships of such officers with the Company are,
therefore, at will. The Company does not have "key person" life insurance
policies on any of its employees. The loss of the services of Mr. Mashouf or any
of its key officers or employees could have a material adverse effect on the
Company's business, financial condition and results of operations. Furthermore,
the Company will need to hire experienced executive personnel to support the
planned improvements and expansions of its business; however, there can be no
assurance that the Company will be successful in hiring such personnel in a time
frame necessary to manage and support its expansion plans. See "Executive
Officers of the Registrant."
The Company's success also depends to a significant degree on its ability to
attract and retain experienced employees. There is substantial competition for
experienced personnel, which the Company expects to continue. Many of the
companies with which bebe competes for experienced personnel have greater
financial resources than the Company. In the past, the Company has experienced
significant turnover of its retail store personnel. The Company's failure to
attract, motivate and retain qualified personnel could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business--Store Operations."
DEPENDENCE ON INDEPENDENT MANUFACTURING FACILITIES AND RAW MATERIAL
SUPPLIERS. The Company does not own any production facilities and therefore is
dependent on third parties for the manufacturing of its products. Company
merchandise designed by the bebe in-house design team is manufactured by
independent manufacturers with raw materials purchased from independent mills
and other suppliers. The Company places all of its orders for production of
merchandise and raw materials by purchase order and does not have any long-term
contracts with any manufacturer or supplier. The Company competes with
19
other companies for production facilities and raw materials. In the past,
particularly in fiscal 1996, the Company had difficulty obtaining needed
quantities of raw materials on a timely basis because of competition with other
apparel vendors for raw materials. Such failure to obtain sufficient quantities
of raw materials has had an adverse effect on the Company's financial condition
in the past and may in the future. Furthermore, the Company has received in the
past, and may receive in the future, shipments of products from manufacturers
that fail to conform to the Company's quality control standards. In such event,
unless the Company is able to obtain replacement products in a timely manner,
the Company may lose sales. The Company's failure to maintain favorable
relationships with these production facilities and to obtain an adequate supply
of quality raw materials on commercially reasonable terms could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Merchandising" and "--Sourcing, Quality Control and
Distribution."
The violation of labor or other laws by an independent manufacturer of the
Company, or the divergence of an independent manufacturer's labor practices from
those generally accepted as ethical in the United States, could have a material
adverse effect on the Company's business, financial condition, results of
operations and brand image. While the Company recently adopted a policy to
monitor the operations of its independent manufacturers by having an independent
firm inspect these manufacturing sites, the Company cannot control the actions
of such manufacturers, and there can be no assurance that these manufacturers
will conduct their businesses using ethical labor practices.
DEPENDENCE ON THIRD PARTY APPAREL MANUFACTURERS. A significant portion of
the Company's merchandise is developed in conjunction with third party apparel
manufacturers and, in some cases, selected directly from these manufacturers'
lines. The Company does not have long-term contracts with any third party
apparel manufacturers and purchases all of the merchandise from such
manufacturers by purchase order. Furthermore, the Company has received in the
past, and may receive in the future, shipments of products from manufacturers
that fail to conform to the Company's quality control standards. In such event,
unless the Company is able to obtain replacement products in a timely manner,
the Company may lose sales. There can be no assurance that third party
manufacturers will not supply similar products to the Company's competitors,
will not cease supplying products to the Company completely or will supply
products that satisfy the Company's quality control standards. See
"Business--Merchandising" and "--Sourcing, Quality Control and Distribution."
RISK OF FOREIGN SOURCING OF APPAREL. The Company purchases its raw
materials from mills and other suppliers, a significant portion of which is
purchased from suppliers outside the United States, primarily in Japan. A
significant portion of the manufacturing of its merchandise is sourced outside
the United States, primarily in Europe and Asia.
The Company is subject to the 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, the impact of foreign government regulation, political unrest,
disruption or delays of shipments and changes in economic conditions in
countries in which the Company's suppliers are located. The occurrence of any
one or more of the foregoing could adversely affect the Company's business,
financial condition and results of operations. See "Business--Sourcing, Quality
Control and Distribution."
The Company's import operations are subject to constraints imposed by
bilateral textile agreements between the United States and a number of foreign
countries. 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,
impose quotas on the amounts and types of merchandise which may be imported into
the United States from these countries. These agreements also allow the United
States to impose restraints at any time on the importation of categories of
merchandise that, under the terms of the agreements, are not currently subject
to specified limits. The Company's imported products are also subject to United
States customs duties which comprise
20
a material portion of the cost of the merchandise. A substantial increase in
customs duties would have an adverse effect on the Company's business, financial
condition and results of operations. The United States and the countries in
which the Company's products are produced or sold may, from time to time, impose
new quotas, duties, tariffs, or other restrictions, or adversely adjust
prevailing quota, duty, or tariff levels, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
In addition, a significant portion of the Company's foreign-supplied
products is produced by manufacturing facilities in China. There have been a
number of recent trade disputes between China and the United States during which
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. The loss of the most favored nation status for China, changes in current
tariff or duty structures or the adoption by the United States of other trade
polices or sanctions adverse to China could have a material adverse effect on
the Company's business, financial condition and results of operations.
DEPENDENCE ON INTELLECTUAL PROPERTY. The Company believes that its
trademarks and other proprietary rights are important to its success and has
registered "bebe" and "bebe moda" in the United States and certain foreign
jurisdictions. There can be no assurance that actions taken by the Company to
establish and protect its trademarks and other proprietary rights will prevent
imitation of its products or infringement of its intellectual property rights by
others. In addition there can be no assurance that others will not resist or
seek to block the sale of the Company's products as violative of their trademark
and proprietary rights. In certain states other entities may have rights to
names that contain the word "bebe," which could limit the ability of the Company
to expand in such states.
The Company is seeking to register its trademarks in targeted international
markets which it believes represent large potential markets for the Company's
products. In some of these markets, local companies currently have registered
competing marks, and/or regulatory obstacles exist that may prevent the Company
from obtaining a trademark for the bebe name or related names. In such
countries, the Company may be unable to use the bebe name unless it purchases
the right or obtains a license to use the bebe name. There can be no assurance
that the Company will be able to register trademarks in such international
markets, purchase the right or obtain a license to use the bebe name on
commercially reasonable terms, if at all. Failure to obtain either trademark,
ownership or license rights would limit the Company's ability to expand into
certain international markets or enter such markets with the bebe name, and to
capitalize on the value of its brand.
The Company currently is evaluating its opportunities to expand its product
offering and extend its geographic reach through licensing or joint venture
arrangements. The Company has limited experience with any such arrangements, and
there can be no assurance that such arrangements will be successful.
Furthermore, while the Company intends to maintain control of the presentation
and pricing of bebe merchandise through the terms of any such agreement, there
can be no assurance that any licensee or joint venture partner will comply with
such contractual provisions. Any deviation from the terms of these contracts may
have a material adverse effect on the Company's brand image. See
"Business--Intellectual Property and Proprietary Rights."
SEASONALITY AND QUARTERLY FLUCTUATIONS. The Company has experienced
historically, and expects to continue to experience, quarterly fluctuations in
its sales volumes and levels of profitability. The Company tends 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 its
fiscal year. If for any reason sales were below seasonal norms during the first
and second quarters of its fiscal year, as they were in fiscal 1996, the
Company's quarterly and annual results of operations would be adversely
affected. bebe's 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,
the results of interim periods
21
are not necessarily indicative of the results for the year. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Seasonality of Business and Quarterly Results."
COMPETITION. The retail and apparel industries are highly competitive and
are characterized by low barriers to entry, and the Company expects competition
in its markets to increase. The primary competitive factors in the Company's
markets include brand name recognition, product styling, product presentation,
product pricing, store ambiance, customer service and convenience. The Company
competes with traditional department stores, specialty store retailers,
off-price retailers and direct marketers for, among other things, raw materials,
market share, retail space, finished goods, sourcing and personnel. Many of
these competitors are larger and have substantially greater financial,
distribution and marketing resources than the Company. Any failure to compete
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "See "Management's Discussion and
Analysis of Financial Condition and Results of Operations --Fashion and Apparel
Industry Risks" and "Business-- Competition."
SENSITIVITY TO ECONOMIC CONDITIONS AND CONSUMER SPENDING. The retail and
apparel industries historically have been subject to substantial cyclical
variation. A recession in the general economy or a decline in consumer spending
in the apparel industry could have a material adverse effect on the Company's
financial performance. Purchases of apparel and related merchandise tend to
decline during recessionary periods and may decline at other times. There can be
no assurance that a prolonged economic downturn would not have a material
adverse impact on the Company or that the Company's customers would continue to
make purchases during a recession.
CONTROL BY PRINCIPAL SHAREHOLDER. Manny Mashouf, the Chairman, President
and Chief Executive Officer of the Company beneficially own approximately 86.9%
of the outstanding shares of the Company's Common Stock and as a result, acting
alone, can control the election of directors of the Company and the outcome of
all issues submitted to the shareholders of the Company. These factors may make
it more difficult for a third party to acquire shares, may discourage
acquisition bids for the Company and could limit the price that certain
investors might be willing to pay for shares of Common Stock. Such concentration
of stock ownership may have the effect of delaying, deferring or preventing a
change in control of the Company.
POTENTIAL ANTI-TAKEOVER EFFECTS. The Board of Directors has authority to
issue up to 1,000,000 shares of Preferred Stock of the Company, $0.001 par value
per share ("Preferred Stock"), and to fix the rights, preferences, privileges
and restrictions, including voting rights, of these shares without any vote or
action by the shareholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding voting
stock of the Company, thereby delaying, deferring or preventing a change in
control of the Company. Furthermore, such Preferred Stock may have other rights,
including economic rights, senior to the Common Stock, and as a result, the
issuance of such Preferred Stock could have a material adverse effect on the
market value of the Common Stock. The Company has no present plan to issue
shares of Preferred Stock.
DEPENDENCE ON SINGLE FACILITY. The Company currently operates a corporate
office and distribution center in Brisbane, California. Any serious disruption
at this facility whether due to fire, earthquake or otherwise would have a
material adverse effect on the Company's operations and could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business-- Properties."
YEAR 2000 COMPLIANCE. Many existing computer programs use only two digits
to identify a year in the date field. These programs were designed and developed
without considering the impact of the upcoming
22
change in the century. If not corrected, many computer applications could fail
or create erroneous results by or at the year 2000.
The Company has created a Year 2000 Task Force, which is implementing a
6-phase plan with the objective of ensuring that its management information
systems will be year 2000 compliant. The Company believes that this 6-phase plan
will be completed by July 31, 1999. There can be no assurance that this 6-phase
plan will be successful or that year 2000 compliant issues will not arise with
respect to products furnished by third party manufacturers or suppliers that may
result in unforeseen costs or delays to the Company and therefore have a
material adverse effect on the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000 Date
Conversion."
ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior
to the Company's initial public offering on June 17, 1998, there has been no
public market for the Company's Common Stock. There can be no assurance that an
active trading market will develop for the Common Stock or that the Common Stock
will trade in the public market at or above the initial public offering price.
The stock market has from time to time experienced extreme price and volume
volatility. In addition, the market price of the Company's 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 Company's 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 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 the operating performance of the
Company.
ABSENCE OF DIVIDENDS. The Company intends to retain any future earnings for
use in its business and, therefore, does not anticipate paying any cash
dividends on Common Stock in the foreseeable future. Future dividend policy will
depend on the Company's earnings, capital requirements and financial condition
as well as any restrictions imposed by existing credit agreements and other
factors considered relevant by the Board of Directors.
SHARES ELIGIBLE FOR FUTURE SALE. The Company has outstanding an aggregate
of 23,889,997 shares of Common Stock. Of these shares, 21,014,997 shares of
Common Stock held by the existing shareholders are "restricted securities," as
that term is defined in Rule 144 under the Securities Act ("Restricted Shares").
Restricted Shares may be sold in the public market only if registered or if they
qualify for an exemption from registration under Rule 144 promulgated under the
Securities Act. As a result of the provisions of Rule 144 and certain
contractual restrictions, no Restricted Shares will be eligible for sale in the
public market prior to the expiration of a lock-up period pursuant to lock-up
agreements or provisions under the 1997 Stock Plan 180 days after June 16, 1998
at which time all Restricted Shares will be eligible to be sold, subject to
certain volume and other limitations under Rule 144.
As of September 1, 1998, options to purchase 1,798,421 shares of Common
Stock were outstanding and exercisable, subject to certain vesting and
repurchase restrictions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET FLUCTUATION
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information with respect to this item is set forth in "Index to Financial
Statements."
23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to Executive Officers of the Company is set forth
in Part I of this Form 10-K. Information with respect to Directors of the
Company is incorporated by reference to the information set forth under the
heading "Proposal 1: Election of Directors" in 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 to the
information set forth under the heading "Executive Compensation and Other
Matters" in the Registrant's definitive Proxy Statement for the 1998 Annual
Meeting of Shareholders 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 to the
information set forth under the heading "Security Ownership of Certain
Beneficial Owners and Management" in the Registrant's definitive Proxy Statement
for the 1998 Annual Meeting of Shareholders 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 to the
information set forth under the heading "Certain Transactions" in the
Registrant's definitive Proxy Statement for the 1998 Annual Meeting of
Shareholders to be filed with the Commission not later than 120 days after the
end of the registrant's fiscal year.
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.
Schedule II--Valuation and Qualifying Accounts
Schedules not listed above 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.
24
SIGNATURES
Pursuant to the requirements of the Securities 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 18th day of September, 1998.
bebe stores, inc.
By:
-----------------------------------------
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 W. 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 Securities Exchange Act of 1934, 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
- ------------------------------ -------------------------- -------------------
President, Chief Executive
/s/ MANNY MASHOUF Officer and Chairman of
- ------------------------------ the Board (Principal September 18, 1998
Manny Mashouf Executive Officer)
Vice President, Finance
/s/ BLAIR W. LAMBERT and Chief Financial
- ------------------------------ Officer (Principal September 18, 1998
Blair W. Lambert Financial and Accounting
Officer)
/s/ NEDA MASHOUF
- ------------------------------ Director September 18, 1998
Neda Mashouf
- ------------------------------ Director September 18, 1998
Barbara Bass
25
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ CORRADO FEDERICO
- ------------------------------ Director September 18, 1998
Corrado Federico
/s/ PHILIP SCHLEIN
- ------------------------------ Director September 18, 1998
Philip Schlein
26
BEBE STORE, INC.
INDEX TO FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998, JUNE 30, 1997 AND JUNE 30, 1996:
FINANCIAL STATEMENTS:
Independent Auditors' Report........................................................ F-2
Balance Sheets as of June 30, 1998 and June 30, 1997................................ F-3
Statements of Operations............................................................ F-4
Statements of Shareholders' Equity.................................................. F-5
Statements of Cash Flows............................................................ F-6
Notes to Financial Statements....................................................... F-7
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors
bebe stores, inc.:
We have audited the accompanying balance sheets of bebe stores, inc. (dba
bebe), the "Company", as of June 30, 1998, and June 30, 1997 and the related
statements of operations, shareholders' equity, and cash flows for each of the
three fiscal years in the period ended June 30, 1998. 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 generally accepted auditing
standards. 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 financial statements present fairly, in all material
respects, the financial position of bebe stores, inc. as of June 30, 1998 and
June 30, 1997, and the results of its operations and its cash flows for each of
the three fiscal years in the period ended June 30, 1998 in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
San Francisco, California
July 29, 1998
F-2
BEBE STORES, INC.
BALANCE SHEETS
AS OF JUNE 30,
----------------------------
1998 1997
------------- -------------
ASSETS:
Current assets:
Cash and equivalents............................................................. $ 36,651,617 $ 9,191,919
Marketable securities............................................................ 80,390
Receivables:
Income tax refund.............................................................. 169,443 17,378
Construction allowance......................................................... 296,656
Other (net of allowance of $51,785 and $76,668)................................ 87,124 40,201
Inventories, net................................................................. 14,405,213 9,461,698
Deferred income taxes............................................................ 842,835 451,217
Prepaid and other................................................................ 134,760 86,901
------------- -------------
Total current assets........................................................... 52,290,992 19,626,360
Equipment and improvements, net.................................................... 9,213,358 7,539,461
Deferred income taxes.............................................................. 1,811,126 1,131,625
Other assets....................................................................... 893,252 811,848
------------- -------------
Total other assets............................................................. 2,704,378 1,943,473
------------- -------------
Total assets....................................................................... $ 64,208,728 $ 29,109,294
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable................................................................. $ 6,921,981 $ 5,064,629
Accrued liabilities.............................................................. 8,470,623 5,604,430
Current portion of long-term debt................................................ 104,286 151,746
Income taxes payable............................................................. 890,258 530,354
------------- -------------
Total current liabilities...................................................... 16,387,148 11,351,159
Long-term debt..................................................................... 82,218 168,099
Deferred rent...................................................................... 2,475,883 2,295,453
------------- -------------
Total liabilities.................................................................. 18,945,249 13,814,711
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 23,889,997 and 22,639,997 shares............................... 23,890 22,640
Additional paid-in capital....................................................... 17,078,200 5,270,610
Deferred compensation............................................................ (2,061,227) (2,805,000)
Retained earnings................................................................ 30,222,616 12,806,333
------------- -------------
Total shareholders' equity..................................................... 45,263,479 15,294,583
------------- -------------
Total liabilities and shareholders' equity......................................... $ 64,208,728 $ 29,109,294
------------- -------------
------------- -------------
See accompanying notes to financial statements.
F-3
BEBE STORES, INC.
STATEMENTS OF OPERATIONS
FISCAL YEAR ENDED JUNE 30,
--------------------------------------------
1998 1997 1996
-------------- ------------- -------------
Net sales.......................................................... $ 146,756,847 $ 95,086,125 $ 71,562,769
Cost of sales, including buying and occupancy...................... 71,713,445 53,968,849 44,701,044
-------------- ------------- -------------
Gross profit..................................................... 75,043,402 41,117,276 26,861,725
Selling, general and administrative expenses....................... 46,359,495 32,648,788 26,353,003
-------------- ------------- -------------
Income from operations............................................. 28,683,907 8,468,488 508,722
Other expense (income):
Interest expense................................................. 19,663 216,618 349,001
Interest income.................................................. (981,165) (121,809)
Other............................................................ 122,940 (222,278) 43,059
-------------- ------------- -------------
Earnings before income taxes....................................... 29,522,469 8,595,957 116,662
Provision (benefit) for income taxes............................... 12,103,680 3,218,063 (10,235)
-------------- ------------- -------------
Net earnings................................................... $ 17,418,789 $ 5,377,894 $ 126,897
-------------- ------------- -------------
-------------- ------------- -------------
Basic earnings per share........................................... $ 0.77 $ 0.24 $ 0.01
Diluted earnings per share......................................... $ 0.73 $ 0.24 $ 0.01
Basic weighted average shares outstanding.......................... 22,687,942 22,639,997 22,639,997
Diluted weighted average shares outstanding........................ 23,862,387 22,650,871 22,639,997
See accompanying notes to financial statements.
F-4
BEBE STORES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK
----------------------- ADDITIONAL
NUMBER OF PAID-IN DEFERRED RETAINED
SHARES AMOUNT CAPITAL COMPENSATION EARNINGS TOTAL
------------ --------- ------------- ------------- ------------- -------------
Balance as of June 30, 1995........... 22,639,997 $ 22,640 $ 2,465,610 $ 7,290,219 $ 9,778,469
Net earnings........................ 126,897 126,897
Unrealized gain on marketable
securities........................ 8,817 8,817
------------ --------- ------------- ------------- ------------- -------------
Balance as of June 30, 1996........... 22,639,997 22,640 2,465,610 7,425,933 9,914,183
Net earnings........................ 5,377,894 5,377,894
Deferred compensation............... 2,805,000 $(2,805,000) 0
Unrealized gain on marketable
securities........................ 2,506 2,506
------------ --------- ------------- ------------- ------------- -------------
Balance as of June 30, 1997........... 22,639,997 22,640 5,270,610 (2,805,000) 12,806,333 15,294,583
Net earnings........................ 17,418,789 17,418,789
Amortization of deferred
compensation...................... (80,000) 743,773 663,773
Unrealized gain on marketable
securities........................ (2,506) (2,506)
Initial public offering, net of
related expenses.................. 1,250,000 1,250 11,887,590 11,888,840
------------ --------- ------------- ------------- ------------- -------------
Balance as of June 30, 1998........... 23,889,997 $ 23,890 17,078,200 $(2,061,227) $ 30,222,616 $ 45,263,479
------------ --------- ------------- ------------- ------------- -------------
------------ --------- ------------- ------------- ------------- -------------
See accompanying notes to financial statements.
F-5
BEBE STORES, INC.
STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED JUNE 30
-------------------------------------------
1998 1997 1996
------------- ------------- -------------
Cash flows from operating activities:
Net earnings....................................................... $ 17,418,789 $ 5,377,894 $ 126,897
Adjustments to reconcile net earnings to cash provided (used) by
operating activities:
Non-cash compensation expense.................................... 663,773
Depreciation and amortization.................................... 2,170,618 1,802,538 1,291,365
Net loss (gain) on disposal of property.......................... 253,433 (163,808) 58,927
Net (gain) loss on sales of securities........................... (12,369)
Impairment loss.................................................. (31,593) 271,543
Net loss from partnership........................................ 14,754 74,910 79,171
Deferred income taxes............................................ (1,071,119) (1,146,305) 102,505
Deferred rent.................................................... (5,544) 842,035 1,081,863
Changes in operating assets and liabilities:
Receivables.................................................... (199,527) 1,712,625 (1,678,035)
Inventories.................................................... (4,943,515) (1,150,969) (335,558)
Other assets................................................... (217,948) (269,965) (98,145)
Prepaid expenses............................................... (47,859) 25,110 (27,011)
Accounts payable............................................... 1,857,352 1,853,169 (104,413)
Accrued liabilities............................................ 3,053,703 3,283,514 890,958
Income taxes payable........................................... 359,904 530,354 (3,566,025)
------------- ------------- -------------
Net cash provided (used) by operating activities............. 19,275,221 13,042,645 (2,189,870)
Cash flows from investing activities:
Purchase of equipment and improvements............................. (3,652,213) (1,716,637) (1,608,078)
Proceeds from sales of equipment................................... 2,768 22,288
Sale (purchase) of rental real estate.............................. 693,007
Purchase of marketable securities.................................. (379) (253,915)
Proceeds from sale of marketable securities........................ 77,883 390,967
------------- ------------- -------------
Net cash used by investing activities........................ (3,571,562) (1,001,721) (1,471,026)
Cash flows from financing activities:
Borrowings from (repayments to) shareholder........................ 539 (123,685) 55,104
Net proceeds from (repayments on) revolving line of credit......... (969,287) 969,287
Repayments on capital leases & other............................... (133,340) (168,945)
Proceeds from term loan............................................ 4,084,367
------------- ------------- -------------
Net Proceeds from initial public offering.......................... 11,888,840
Repayment of term loan............................................. (3,347,700) (780,354)
------------- ------------- -------------
Net cash provided (used) by financing activities............. 11,756,039 (4,609,617) 4,328,404
Net increase in cash................................................. 27,459,698 7,431,307 667,508
Cash:
Beginning of year.................................................. 9,191,919 1,760,612 1,093,104
------------- ------------- -------------
End of year........................................................ $ 36,651,617 $ 9,191,919 $ 1,760,612
------------- ------------- -------------
------------- ------------- -------------
Supplemental information:
Cash paid for interest............................................. $ 19,664 $ 216,617 $ 177,313
------------- ------------- -------------
Cash paid for income taxes......................................... $ 12,764,904 $ 3,907,703 $ 5,123,567
------------- ------------- -------------
See accompanying notes to financial statements.
F-6
BEBE STORES, INC.
NOTES TO 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 and bebe moda brand
names primarily through its 86 specialty retail stores located in 21 states.
STOCK SPLIT AND CHANGE IN PAR VALUE--On April 7, 1998, the Company's Board
of Directors authorized a 2.83-for-1 stock split and restated its common stock
par value from $0.00 to $0.001 per share. Accordingly, a transfer was made from
additional paid-in capital to common stock. All information in the financial
statements concerning common shares and per share amounts have been restated to
give retroactive effect to the stock split and change in par value.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles 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 revenue and expenses during the reported
period. Actual results could differ from those estimates.
CASH AND EQUIVALENTS represent cash and short-term, highly liquid
investments with original maturities of three months or less.
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 income and are reported as an
increase or decrease in shareholders' equity.
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 IMPROVEMENTS, NET are stated at cost. Depreciation on
equipment is computed using the double declining balance method for items
purchased prior to July 1, 1995 and the straight-line method is used for all
improvements as well as equipment purchased after July 1, 1995. Equipment and
improvements are depreciated over the estimated useful lives of the related
assets ranging from three to 12 years.
LEASING COMMISSIONS associated with negotiating new store leases are
capitalized in other assets and amortized over the lease term. Accumulated
amortization on leasing commissions at June 30, 1998 and 1997 was $249,549 and
$176,571, respectively.
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.
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 charged to expense as incurred.
F-7
BEBE STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING COSTS--Costs associated with advertising are charged to expense
when the advertising first takes place. Advertising costs were $6,735,543,
$2,861,162, and $1,560,000, respectively, during fiscal 1998, 1997 and 1996.
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,
expected future events are considered other than changes in the tax law or
rates.
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS--The carrying values of cash
and equivalents, investments, receivables, accounts payable, and long-term debt
approximates their estimated fair values.
IMPAIRMENT OF LONG-LIVED ASSETS--The Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF as of June 30,
1997. Whenever events or changes in circumstances have indicated 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 of the carrying value of long-lived assets. The
Company has identified a group of underperforming stores and anticipates the
closure of some of these locations in the future. The Company generated a net
increase to income of $31,593 and net expense of $271,543 in fiscal 1998 and
1997, respectively, related to this impairment loss. No additional stores were
identified as under performing, during fiscal year 1998. Adjustments were made
to the store closing reserves due to changes in the net book value of the
stores' assets.
STOCK-BASED COMPENSATION--The Company accounts for stock-based awards to
employees using the intrinsic value-based method under Accounting Principles
Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. The
Company has adopted the disclosure provisions of SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION.
REVENUE RECOGNITION--Net sales consist of all product sales, net of returns,
paid by check, credit card, cash, gift certificate or store credit. Gift
certificates sold are carried as a liability and no sale is recognized until 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.
EARNINGS PER SHARE--In the second quarter of fiscal 1998, the Company
adopted SFAS No. 128, EARNINGS PER SHARE, which requires dual presentation of
basic earnings per share ("EPS") and diluted EPS on the face of all statements
of operations issued after December 15, 1997. Basic 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 stock options.
NEW ACCOUNTING PRONOUNCEMENTS--In June 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME,
and SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION. SFAS No. 130 requires that an enterprise report, by major
components and as a single total, the change in its net assets during the period
from nonowner sources; and SFAS No. 131 establishes annual and interim reporting
standards for an enterprise's operating segments and related disclosures about
its products, services, geographic areas and major customers. Both statements
are effective for the Company's fiscal year 1999. Adoption of these statements
will not
F-8
BEBE STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
significantly impact the Company's financial position, results of operations or
cash flows and any effect will be limited to the form and content of its
disclosures.
RECLASSIFICATIONS--Certain reclassifications have been made to the prior
year financial statements to conform with the fiscal 1998 financial statement
presentation.
2. INVENTORIES, NET
The Company's inventories consist of:
AS OF JUNE 30,
----------------------------
1998 1997
------------- -------------
Raw materials.................................................. $ 5,277,878 $ 2,785,382
Merchandise available for sale................................. 12,296,588 7,497,872
------------- -------------
Total.......................................................... 17,574,466 10,283,254
Less: valuation allowance...................................... (3,169,253) (821,556)
------------- -------------
Inventories, net............................................... $ 14,405,213 $ 9,461,698
------------- -------------
------------- -------------
Included in the valuation allowance at June 30, 1998 is a reserve for raw
materials not directly associated with planned garment production.
3. CREDIT FACILITIES
Debt consists of the following:
AS OF JUNE 30,
------------------------
1998 1997
----------- -----------
Capital leases...................................................... $ 72,637 $ 157,495
Note payable........................................................ 113,867 162,350
----------- -----------
Total............................................................... 186,504 319,845
Less: current portion............................................... (104,286) (151,746)
----------- -----------
Total long-term debt................................................ $ 82,218 $ 168,099
----------- -----------
----------- -----------
As of June 30, 1998 the Company had a revolving line of credit, with a
facility for letters of credit, with interest at the bank's reference rate
(which was 8.5%, as of June 30, 1998) allowing for up to $5 million in
borrowings including outstanding letters of credit. As of June 30, 1998 and 1997
there was $2,424,432 and $751,391, respectively, outstanding in letters of
credit. This credit facility required the Company to comply with several
financial covenants, including but not limited to a minimum current ratio,
minimum tangible net worth, and maximum liabilities to tangible net worth. As of
June 30, 1998, the Company was in compliance with such covenants. The agreement,
which expires March 31, 2000, also places restrictions on capital expenditures
and the payment of cash dividends and repurchase of shares.
F-9
BEBE STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. CREDIT FACILITIES (CONTINUED)
The Company purchased 48.35% of a housing partnership in fiscal 1994. The
note payable of $113,867 and $162,350 at June 30, 1998 and 1997, respectively,
is the remaining amount due on the purchase. The note will be paid off in
increments through fiscal year 2001.
Scheduled maturities of debt outstanding at June 30, 1998 are as follows:
Fiscal year ending June 30,
1999............................................................ $ 105,113
2000............................................................ 65,606
2001............................................................ 20,801
---------
Total minimum payments.......................................... 191,520
Less: imputed interest.......................................... (5,016)
---------
Present value of future minimum payments........................ $ 186,504
---------
---------
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
AS OF JUNE 30,
--------------------------
1998 1997
------------ ------------
Employee compensation............................................. $ 2,895,507 $ 1,287,263
Sales and use taxes............................................... 742,394 546,120
Store credits and gift certificates............................... 1,763,952 1,371,839
Lease termination costs........................................... 1,299,622 1,687,327
IPO Costs......................................................... 399,427
Other............................................................. 1,369,721 711,881
------------ ------------
Total........................................................... $ 8,470,623 $ 5,604,430
------------ ------------
------------ ------------
Other accrued liabilities relate primarily to advertising, percentage rents,
employee benefits and certain store expenses.
5. OPERATING LEASES
The Company has operating leases for its retail store locations, corporate
headquarters, distribution centers 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 years ended June 30, 1998, 1997 and 1996 was
$15,509,575, $13,481,105 and $11,066,614, respectively. Rent expense includes
percentage rent and other lease-required expenses for the years ended 1998, 1997
and 1996 of $6,307,118, $4,776,148 and $3,741,920, respectively.
F-10
BEBE STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. OPERATING LEASES (CONTINUED)
Future minimum lease payments under operating leases at June 30, 1998 are as
follows:
Fiscal year ending June 30,
1999......................................................... $9,990,753
2000......................................................... 10,163,108
2001......................................................... 10,039,528
2002......................................................... 9,505,666
2003......................................................... 9,021,621
Thereafter................................................... 23,249,391
----------
Total minimum lease payments............................... $71,970,067
----------
----------
6. INCOME TAXES
A summary of the provision (benefit) for income taxes is as follows:
FISCAL YEAR ENDED JUNE 30,
-----------------------------------------
1998 1997 1996
------------- ------------- -----------
Current:
Federal......................................... $ 10,444,465 $ 3,545,749 $ (179,740)
State........................................... 2,730,336 676,565 67,000
------------- ------------- -----------
13,174,801 4,222,314 (112,740)
Deferred:
Federal......................................... (859,558) (705,259) 102,505
State........................................... (211,563) (298,992)
------------- ------------- -----------
(1,071,121) (1,004,251) 102,505
------------- ------------- -----------
Provision (benefit)........................... $ 12,103,680 $ 3,218,063 $ (10,235)
------------- ------------- -----------
------------- ------------- -----------
A reconciliation of the statutory federal income tax rate with the Company's
effective income tax rate is as follows:
FISCAL YEAR ENDED JUNE 30,
-------------------------------
1998 1997 1996
--------- --------- ---------
Federal statutory rate:.......................................... 35.0% 35.0% 35.0%
State rate, net of federal benefit............................... 5.6 5.5 9.9
Valuation adjustment............................................. (1.2) 4.4
Benefit of graduated rate........................................ (1.2) (1.0)
Tax credits...................................................... (0.3) (1.0) (68.6)
Permanent items and other........................................ 0.7 0.3 11.5
--- --- ---------
Effective tax rate............................................. 41.0% 37.4% (8.8)%
--- --- ---------
--- --- ---------
Temporary differences arise primarily from certain accruals, including
California franchise taxes, which are not currently deductible for tax purposes,
and differences between financial and tax depreciation
F-11
BEBE STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
methods. Deferred income taxes are recognized for tax consequences of temporary
differences by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
basis of existing assets and liabilities. The effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Significant components of the Company's deferred tax assets (liabilities)
are as follows:
FISCAL YEAR ENDED JUNE 30,
--------------------------
1998 1997
------------ ------------
Current:
Inventory reserve............................................... $ 914,141 $ 357,133
State taxes..................................................... 224,799 101,055
Accrued vacation................................................ 64,835 57,615
Uniform capitalization.......................................... (261,451) (90,145)
Other........................................................... (99,489) 25,559
------------ ------------
Total current................................................. 842,835 451,217
Noncurrent:
Depreciation.................................................... 575,932 280,795
Store closure accrual........................................... 709,171 709,930
Deferred rent................................................... 213,041 140,900
Deferred compensation........................................... 249,439
Other........................................................... 63,543
------------ ------------
Total noncurrent.............................................. 1,811,126 1,131,625
------------ ------------
Net deferred tax assets....................................... $ 2,653,961 $ 1,582,842
------------ ------------
------------ ------------
The Company has committed to the acquisition of low income tax credits from
a real estate partnership totaling $214,479 through fiscal 2000. The Company
utilized $80,430 of credits during both fiscal 1998 and fiscal 1997 to reduce
its federal income taxes payable.
7. EQUIPMENT AND IMPROVEMENTS, NET
Equipment and improvements consist of the following:
AS OF JUNE 30,
----------------------------
1998 1997
------------- -------------
Leasehold improvements......................................... $ 7,812,316 $ 6,435,588
Furniture, fixtures, equipment and vehicles.................... 3,824,802 3,156,982
Computer hardware and software................................. 2,633,157 1,890,684
Assets under capital leases.................................... 363,488 459,444
Construction in progress....................................... 717,647 161,818
------------- -------------
Total........................................................ 15,351,410 12,104,516
Less accumulated depreciation and amortization................. 6,138,052 4,565,055
------------- -------------
Equipment and improvements, net.............................. $ 9,213,358 $ 7,539,461
------------- -------------
------------- -------------
F-12
BEBE STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. EMPLOYEE BENEFIT PLAN
In fiscal 1995, the Company implemented a 401(k) pension plan for all
eligible employees. Employees are 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, 1998, 1997 and
1996 were $72,503, $32,688, and $35,947, respectively.
9. STOCK PLANS
STOCK OPTION 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. 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
The following summarizes all stock option transactions for the years ended
June 30, 1998 and 1997.
SHARES OUTSTANDING PRICE PER SHARE
------------------ ---------------
Balance, June 30, 1996...................................
Options granted.......................................... 1,587,630 $1.77
----------
Balance, June 30, 1997................................... 1,587,630 1.77
Options granted.......................................... 383,450 5.65 - 13.12
Options canceled......................................... (138,670) 1.77 - 5.65
----------
Balance, June 30, 1998................................... 1,832,410 $1.77 - 13.12
----------
----------
The options granted in June 1997 resulted in deferred compensation of
$2,805,000 (assuming all such options become fully vested) to be amortized over
the vesting period of the related options, of which $663,773 was expensed for
the year ended June 30, 1998. As of June 30, 1998 there were 997,590 shares
available for future grant.
F-13
BEBE STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. STOCK PLANS (CONTINUED)
The following table summarizes information about stock options outstanding
at June 30, 1998:
EXERCISABLE OPTIONS NOT
SUBJECT TO REPURCHASE
(VESTED)
OPTIONS OUTSTANDING ----------------------------
-------------------------------------------------- WEIGHTED
WEIGHTED AVERAGE WEIGHTED NUMBER OF AVERAGE
NUMBER OF REMAINING LIFE AVERAGE OPTIONS AT EXERCISE
EXERCISABLE PRICES OPTIONS (IN YEARS) EXERCISE PRICE JUNE 30, 1998 PRICE
- ---------------------------------- ---------- --------------------- --------------- ------------- -------------
$ 1.77............................ 1,542,350 9.00 $ 1.77 375,682 $ 1.77
5.65............................ 232,060 9.50 5.65 0 5.65
13.12............................ 58,000 10.00 13.12 0 13.12
---------- -------------
1,832,410 375,682
---------- -------------
---------- -------------
STOCK PURCHASE PLAN
On April 7, 1998, the Company's 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 the Company's 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 four, six-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 the Company's
common stock on the first day of the offering period or the Purchase Date.
There were no shares issued under the Purchase plan in the fiscal year ended
June 30, 1998.
PREFERRED STOCK
On April 7, 1998, the Company 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 granted to date.
ADDITIONAL STOCK PLAN INFORMATION
The Company accounts for the Stock Plan in accordance with APB Opinion No.
25, under which no compensation cost has been recognized for stock option awards
granted at fair market value. Had compensation expense for the Stock Plan been
determined based on the fair value at the grant dates for
F-14
BEBE STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. STOCK PLANS (CONTINUED)
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,
---------------------------
1998 1997
------------- ------------
Net income As reported..................................... $ 17,418,789 $ 5,377,894
Pro forma....................................... 17,249,741 5,376,160
Basic EPS As reported..................................... $ 0.77 $ 0.24
Pro forma....................................... 0.76 0.24
Diluted EPS As reported..................................... $ 0.73 $ 0.24
Pro forma....................................... 0.72 0.24
The weighted average fair value of options granted during the fiscal years
ended June 30, 1998 and 1997 was $2.89 and $2.44, 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,
----------------------
1998 1997
--------- -----
Expected dividend rate....................................................... 0.0% 0.0%
Expected volatility.......................................................... 15.2% 0.0%
Risk-free interest rate...................................................... 5.7% 6.0%
Expected lives (years)....................................................... 5.6 8.0
10. 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.
11. RELATED PARTY TRANSACTIONS
In March 1995, the Company purchased from Manny Mashouf, the Chairman,
President and Chief Executive Officer of the Company, certain residential
property for $800,000. In February 1997, the Company sold the property to an
unaffiliated third party for $696,000, net of selling costs. During the last
three fiscal years, Mr. Mashouf has loaned to or borrowed from the Company
various amounts of cash ranging from loans to the Company of up to $500,000 and
advances from the Company of up to $150,000. As of June 30, 1998, there were no
borrowings due to Mr. Mashouf from the Company or advances owed to the Company
by Mr. Mashouf.
F-15
BEBE STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. 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
----------------------------------------
1998 1997 1996
------------ ------------ ------------
Basic weighted average number of shares
outstanding....................................... 22,687,942 22,639,997 22,639,997
Incremental shares from assumed issuance of stock
options........................................... 1,174,445 10,874
------------ ------------ ------------
Diluted weighted average number of shares
outstanding....................................... 23,862,387 22,650,871 22,639,997
------------ ------------ ------------
------------ ------------ ------------
The number of incremental shares from the assumed issuance of stock options
is calculated applying the treasury stock method.
13. 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.
1998 QUARTER ENDED
--------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1997 1997 1998 1998
--------- --------- ----------- ---------
Net sales............................................................ $ 31,218 $ 43,558 $ 33,296 $ 38,684
Gross profit......................................................... 15,653 22,413 16,248 20,729
Selling, general and administrative expenses......................... 9,382 13,183 10,994 12,801
Income from operations............................................. 6,271 9,230 5,254 7,928
Earnings before income taxes......................................... 6,439 9,374 5,444 8,264
Net Earnings......................................................... 3,797 5,523 3,222 4,877
Basic earnings per share............................................. $ 0.17 $ 0.24 $ 0.14 $ 0.21
Diluted earnings per share........................................... $ 0.16 $ 0.23 $ 0.13 $ 0.20
F-16
BEBE STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)
1997 QUARTER ENDED
--------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1996 1996 1997 1997
--------- --------- ----------- ---------
Net sales............................................................ $ 18,554 $ 26,697 $ 23,146 $ 26,689
Gross profit......................................................... 6,824 12,045 9,228 13,020
Selling, general and administrative expenses......................... 6,985 7,835 7,742 10,086
Income (loss) from operations...................................... (161) 4,210 1,486 2,934
Earnings before income taxes......................................... (249) 4,140 1,852 2,852
Net Earnings (loss).................................................. (155) 2,581 1,174 1,778
Basic earnings (loss) per share...................................... $ (0.01) $ 0.11 $ 0.05 $ 0.08
Diluted earnings (loss) per share.................................... $ (0.01) $ 0.11 $ 0.05 $ 0.08
F-17
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).
10.5* Retail Store License Agreement between the Registrant and Bebe Moda S.A. de C.V., a Mexican company,
effective as of April 1, 1998.
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.
SCHEDULE II
BEBE STORES, INC.
VALUATION AND QUALIFYING ACCOUNTS
COLUMN C
-------------------------
COLUMN B ADDITIONS
------------ ------------------------- COLUMN E
COLUMN A BALANCE AT CHARGED TO CHARGED TO COLUMN D --------------
- ------------------------------------------- BEGINNING OF COSTS AND OTHER ------------ BALANCE AT END
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTION OF PERIOD
- ------------------------------------------- ------------ ------------ ----------- ------------ --------------
YEAR ENDED JUNE 30, 1995
Inventory obsolescence reserve............. $ 200,000 $ 200,000 $ 400,000
Allowance for doubtful accounts
receivable............................... 5,000 105,969 $ 75,969 35,000
Deferred tax asset valuation allowance..... 35,990 66,654 102,644
------------ ------------ ------------ --------------
$ 240,990 $ 372,623 $ 75,969 $ 537,644
------------ ------------ ------------ --------------
------------ ------------ ------------ --------------
YEAR ENDED JUNE 30, 1996
Inventory obsolescence reserve............. $ 400,000 $ 80,000 $ 100,000 $ 380,000
Allowance for doubtful accounts
receivable............................... 35,000 53,587 75,087 13,500
Deferred tax asset valuation allowance..... 102,644 42,000 144,644
------------ ------------ ------------ --------------
$ 537,644 $ 175,587 $ 175,087 $ 538,144
------------ ------------ ------------ --------------
------------ ------------ ------------ --------------
YEAR ENDED JUNE 30, 1997
Inventory obsolescence reserve............. $ 380,000 $ 441,556 $ 821,556
Allowance for doubtful accounts
receivable............................... 13,500 78,649 15,481 76,668
Deferred tax asset valuation allowance..... 144,644 144,644
Reserve for store closures................. 271,543 271,543
------------ ------------ ------------ --------------
$ 538,144 $ 791,748 $ 160,125 $ 1,169,767
------------ ------------ ------------ --------------
------------ ------------ ------------ --------------
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
------------ ------------ ----------- ------------ --------------
------------ ------------ ----------- ------------ --------------