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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
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, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-24395
bebe stores, inc.
(Exact name of registrant as specified in its charter)
CALIFORNIA 94-2450490
(State or Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)
380 VALLEY DRIVE
BRISBANE, CALIFORNIA 94005
(Address of principal executive offices)
TELEPHONE: (415) 715-3900
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) 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 $92,851,390.00 as of September 22, 1999, based upon
the closing sale price per share of $25.50 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 22, 1999, 24,411,448
shares of Common Stock, $0.001 per share par value, of the registrant were
outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive Proxy
Statement for the 1999 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
The following discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results may differ materially from the
results discussed in the forward-looking statements. This Form 10-K includes
forward-looking statements that could differ from actual future results.
Statements that are predictive in nature, that depend upon or refer to future
events or conditions or that include words such as "expects," "anticipates,"
"intends," "plans," "believes," "estimates," "thinks" and similar expressions
are forward-looking statements. These statements involve known and unknown
risks, uncertainties and other factors, including the factors described above,
that may cause our actual results and performance to be materially different
from any future results or performance expressed or implied by these forward-
looking statements. Although we believe that these statements are based upon
reasonable assumptions, we cannot assure you that our goals will be achieved.
These forward-looking statements are made as of the date of this Form 10-K, and
we assume no obligation to update or revise them or provide reasons why actual
results may differ. Factors that might cause such a difference include, but are
not limited to, those discussed in "Risk Factors" and elsewhere in this Form
10-K.
COMPANY OVERVIEW
We design, develop and produce a distinctive line of contemporary women's
apparel and accessories. We market our products under the bebe, bebe moda and
bbsp brand names through our 101 specialty retail stores located in 23 states,
Canada, the United Kingdom and our on-line store at www.bebe.com. While we
attract a broad audience, our target customers are 18- to 35-year-old women who
seek current fashion trends interpreted to suit their lifestyle needs. The "bebe
look," with an unmistakable hint of sensuality, appeals to a hip, sophisticated,
body-conscious woman who takes pride in her appearance. The bebe customer is a
discriminating consumer who demands value in the form of quality at a
competitive price. Our broad product offering includes suits, tops, pants,
skirts, dresses, logo and other activewear, outerwear, and handbags and other
accessories. We design and develop most of our merchandise in-house. The
merchandise is then manufactured to our specifications. The balance is developed
primarily in conjunction with third-party apparel manufacturers or, in some
cases, selected directly from these manufacturers' lines.
Founded by Manny Mashouf, our current Chairman, President and Chief
Executive Officer, we opened our first store in San Francisco, California in
1976. We believe that we are positioned to sustain significant new store growth
over the next several years. In the last few years, we have significantly
strengthened our management team and have implemented several strategic
initiatives that have contributed to our recent strong performance. These
strategic initiatives address all aspects of our operations and in particular
the merchandising, planning, manufacturing and distribution functions. Our
merchandising initiatives focus primarily on expanding our product line to
include a broader selection of tops, pants, dresses, accessories and logo items.
While the traditional bebe product offering spoke to the "nine to five" needs of
a young professional woman, the expanded product line provides head-to-toe
lifestyle dressing at a competitive price that easily adapts from day into
evening. Also, the logo portion of the product line, which highlights the bebe
logo on a variety of active and casual styles, enhances brand awareness while
providing younger, "aspirational" customers an entry to the bebe product line at
lower price points. The strategic initiatives that relate to the planning,
manufacturing and distribution functions focus primarily on implementing more
sophisticated procedures. Also, these initiatives involve a more disciplined
approach to our business operations.
We reinforce our brand with a distinctive lifestyle image advertising
campaign, using prominent fashion photographers. We believe that our emphasis on
non-product specific lifestyle advertising promotes brand awareness and attracts
customers who are intrigued by the playfully sensual and evocative imagery. We
communicate the images to consumers through a variety of advertising vehicles
including
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fashion magazines, bus shelters, in-store displays and customer mailings. We
further enhance the bebe brand image by designing our stores to create an
upscale, inviting boutique environment.
OPERATING STRATEGY
While the market for women's apparel is extremely large, we believe that our
distinctive, contemporary point of view addresses an underserved market segment
and presents us with opportunities for future growth. Our objective is to become
a global brand, offering quality merchandise that enhances the spirit and
playful sensuality of the contemporary woman. The principal elements of our
operating strategy to achieve this objective are as follows:
1. PROVIDE DISTINCTIVE FASHION THROUGHOUT A BROAD PRODUCT LINE. Fashion
from throughout the world inspires our merchandisers. They interpret
contemporary ideas for silhouettes, fabrications and colors into products
and styles to meet the everyday lifestyle needs of the bebe customer. While
many of our styles and products are represented season after season with
variations in color, fabric or trim, our merchandisers are committed to
bringing newness into the merchandise mix in response to emerging trends. We
carefully plan our product lines to represent a broad selection of sleek,
fashionable goods, with particular emphasis on career wear, related
separates and day-into-evening styles. Our product line is further supported
by a broad selection of accessories that help our customers create a
distinctive ensemble, while logo-embellished items provide an entry point
for younger, aspirational customers.
2. VERTICALLY INTEGRATE DESIGN, PRODUCTION, MERCHANDISING AND RETAIL
FUNCTIONS. We believe that our vertical integration of processes from
design to market coupled with our financial discipline enable us to produce
distinctive quality merchandise of exceptional value. Once the merchandise
team conceives a line, we maintain flexibility in our sourcing by
subcontracting production of our own designs, developing exclusive products
in conjunction with third-party apparel manufacturers, or selecting
exclusive merchandise directly from manufacturers' lines. This approach also
enables us to respond quickly to changing fashion trends, while reducing our
risk of excess inventory.
3. MANAGE MERCHANDISE MIX. We believe that a disciplined approach to
merchandising and a proactive inventory management program is critical to
our success. By actively monitoring sell-through rates and managing the mix
of categories and products in our stores, we believe that we are able to
respond to emerging trends in a timely manner, minimize our dependence on
any particular category, style or fabrication, and preserve a balanced,
coordinated presentation of merchandise within each store.
4. CONTROL DISTRIBUTION OF MERCHANDISE. We believe that distributing our
products through bebe stores and our on-line web-site greatly enhances our
brand image. This controlled distribution strategy enables us to display the
full assortment of our products, control the pricing, visual presentation
and flow of goods, test new products and reinforce the brand's identity in
the eyes of our customers.
5. ENHANCE BRAND IMAGE. Through an edgy, high-impact, visual advertising
campaign using print, outdoor, in-store and direct mail communication
vehicles, we attract customers who are intrigued by the playfully sensual
and evocative imagery of the bebe lifestyle. We also offer a line of
merchandise branded with the distinctive bebe logo to increase brand
awareness. Within our stores and through our on-line virtual store, we seek
to create an upscale, inviting environment that further enhances the bebe
brand and builds customer loyalty and demand for bebe merchandise.
Furthermore, we train our sales associates to be responsive and
knowledgeable and encourage them to reflect the bebe image.
GROWTH STRATEGY
We plan to grow our operations in a controlled manner, primarily through the
opening of new stores. We intentionally slowed our store expansion in fiscal
1997 and 1998 while we implemented our strategic operational initiatives. We
believe that we are now positioned to accelerate our store opening program.
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With seventeen stores opened in fiscal 1999, we currently plan to open
approximately twenty stores in each of fiscal 2000 and 2001, the majority of
which will be in existing markets. We continually review our store base and have
identified two under-performing stores that we may consider closing during
fiscal 2000.
In addition to our domestic expansion, we are expanding internationally
primarily through licensing arrangements. We have entered into license
agreements with companies in Mexico, Greece, Israel and Singapore. Under the
terms of these agreements, licensees will open bebe stores that will be stocked
with inventory purchased from us.
Additionally, we are reviewing the need to upgrade our on-line virtual store
to simplify and enhance our customers' on-line shopping experience and expect to
invest in such upgrades to further capitalize on the encouraging performance of
our on-line sales.
We also plan to grow by extending current product lines, introducing new
product categories, and incrementally improving the operational aspects of our
business. In fiscal 1999, we introduced footwear, lingerie and swimwear lines.
Our Vice President of Licensing continually explores opportunities for licensing
the bebe name. To date, we have entered into licensing agreements for footwear,
eyewear and watches. Under the terms of these agreements, the licensees will
manufacture and distribute products branded with the bebe logo to be sold at
bebe stores and other retailers.
To support the introduction of new product categories in recent years as
well as to handle higher sales volumes, we have developed a store prototype that
is larger than the average of 3,000 square feet for our existing stores. Our new
store prototype is approximately 3,000 to 5,000 square feet. However, in
selected markets, we may open larger flagship stores. As opportunities arise, we
also may expand certain existing stores.
MERCHANDISING
Our merchandising strategy is to provide current, timely fashions in a broad
selection of categories to suit the lifestyle needs of our customers. We market
all of our merchandise under the bebe or bebe moda brand names. We design and
develop most of our merchandise in-house and contract to have the merchandise
manufactured to our specifications. In some cases, we select merchandise
directly from third-party apparel manufacturers' lines. We do not have long-term
contracts with any third party apparel manufacturers and purchase all of the
merchandise from such manufacturers by purchase order. Such merchandise always
carries our "bebe," "bebe moda" or "bbsp" labels and in most instances is
supplied to us on an exclusive basis.
PRODUCT CATEGORIES. After building a strong suiting business in the early
1990s, we diversified our product line in response to a decrease in demand for
our suiting in fiscal 1996. We significantly increased the breadth of our
product offerings by expanding categories such as related separates, dresses,
leather, logo and accessories. We also began to plan and monitor our business by
product classifications during fiscal 1997 and 1998. As we have increased volume
in these expanded categories, we depend less on our suiting. While each
category's contribution as a percentage of total net sales varies seasonally,
each of the product classifications is represented throughout the year.
We regularly evaluate new categories that may be appropriate for
introduction. In fall 1998, we introduced an intimate apparel product line, and
in spring 1999, we introduced a footwear product line that was developed by our
footwear licensee. We have also entered into licensing agreements where
licensees will manufacture and distribute eyewear and watches branded with the
bebe logo to be sold at bebe stores and other retailers. Finally, we believe
licensing opportunities exist for other product categories such as fragrance and
swimwear.
PRODUCT DEVELOPMENT. We take a disciplined approach to the product
development process. This allows our merchants to gain as much information as
possible concerning product sell-through and current fashion trends before
making fabric or product purchase commitments. We control the process with a
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detailed product development calendar which highlights key color selection,
fabric order, pattern development and production order deadlines. We establish
the deadlines to ensure an adequate flow of inventory into the stores. While the
product development calendar is established on a seasonal basis, we make
commitments semi-monthly based on current sales and fashion trends. This
enhances our ability to react promptly to customer demand. Merchandising teams
and designers work together to continuously develop new styles to be presented
at monthly product review and selection meetings. These new styles incorporate
variations on existing styles in an effort to capitalize further on the more
popular silhouettes or, to a lesser extent, entirely new styles and fabrications
that respond to emerging trends or customer preferences.
In addition, a detailed merchandising plan supports the product development
process. This merchandising plan includes sales, inventory and profitability
targets for each product classification. The plan is reconciled with our store
sales plan, a compilation of individual store sales projections. We update the
merchandising plan on a semi-monthly basis to reflect current sales and
inventory trends. The plan is then distributed throughout the merchandising
department. We use the updated merchandising plan to adjust production orders as
needed to meet inventory and sales targets. If we miscalculate consumer demand
for our products, we may be faced with significant excess inventory and fabric
for some products and missed opportunities for others. Weak sales and resulting
markdowns could cause our profitability to be impaired.
MARKETING
In recent years, we have initiated an extensive image advertising program
which addresses the lifestyles and aspirations of our target customers. Through
an edgy, high-impact, visual advertising campaign, we attract customers who are
intrigued by the playfully sensual and evocative imagery. We believe that our
emphasis on non-product specific lifestyle advertising promotes brand awareness
and supports numerous product line expansion opportunities. An outside
advertising agency works with our internal Marketing Department to create a
lifestyle advertising campaign. This campaign, which emphasizes a
forward-looking view of fashion, is communicated to consumers through a variety
of means including fashion magazines, bus shelters, in-store displays and
customer mailings. In addition, our Public Relations Department communicates
directly with fashion editors and supplies them with a continuous flow of
product information. On occasion, we have co-sponsored promotional events with
fashion magazines, such as ELLE, GLAMOUR, MARIE CLAIRE, VOGUE and VANITY FAIR.
STORES
STORE LOCATIONS AND ENVIRONMENT. As of June 30, 1999, we operated 101
stores in 23 states. Our stores average approximately 3,000 square feet and are
primarily located in regional shopping malls and free-standing street locations.
Our 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.
We provide the stores with specific merchandise display directions on a
weekly or bi-weekly basis from the corporate office based on currently available
merchandise receipts. Our in-store product presentation utilizes a variety of
different fixtures to highlight the product line's breadth and versatility.
Complete outfits are displayed throughout the store using garments from a
variety of product categories. By emphasizing outfits in this manner, we allow
the customer to see how different pieces can be combined to create multiple
ensembles.
EXPANSION OPPORTUNITIES. In fiscal 1998, we, together with a real estate
consulting firm, developed a profile of current customers and applied the
profile to the largest 150 metropolitan areas in the United States. We currently
operate bebe stores in approximately 40 of these top geographic market areas and
have identified additional geographic markets that we believe can support one or
more bebe stores. Also, we believe that there is a significant opportunity to
expand the number of stores in most of the markets within which bebe stores are
currently located. We, together with our real estate consultant, also have
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identified specific mall and street locations within each market to be
considered for new bebe store locations. In selecting a specific site, we look
for high traffic locations primarily in regional shopping centers and in
free-standing street locations. We evaluate proposed sites based on the traffic
pattern, co-tenancies, average sales per square foot achieved by neighboring
stores, lease economics and other factors considered important within the
specific location.
We opened seventeen new stores in fiscal 1999 and plan to open approximately
twenty stores in each of fiscal 2000 and 2001, the majority of which will be in
existing markets. Our new store prototype is approximately 3,000 to 5,000 square
feet, although in certain selected markets we may open larger stores.
Additionally, we may open larger stores in selected markets that will be
designed to enhance further the bebe image.
During fiscal 1999, the average new store size was approximately 3,481
square feet. New store construction costs (before tenant allowances) averaged
$422,000. The average gross inventory investment was $135,000 while pre-opening
costs, which are expensed as incurred, averaged less than $30,000 per store. Our
stores typically have achieved profitability at the store operating level within
the first full quarter of operation; however, we cannot assure that our stores
will do so in the future. Actual store growth and future store profitability and
rates of return will depend on a number of factors that include, but are not
limited to, individual store economics and suitability of sites that become
available. Because of their higher cost structure, flagship stores are not
expected to achieve operating margins comparable to our other stores.
In addition to opening new stores, we expanded or relocated six existing
stores to larger spaces within the same malls during fiscal 1999. We believe
that as awareness of bebe's brand name increases, product lines expand and
stores mature, additional expansions may be appropriate.
Our ability to expand will depend on a number of factors, including the
availability of desirable locations, the negotiation of acceptable leases and
our ability to manage expansion and to source adequate inventory. We cannot
assure you that we will be able to achieve our planned expansion on a timely and
profitable basis. Furthermore, we cannot assure you that store openings in
existing markets will not result in reduced net sales volumes and profitability
in existing stores in those markets.
OUTLET STORES. As of June 30, 1999, eight of our 101 stores were located in
outlet malls throughout the United States. We 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, we have
rounded out the inventory of our 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 1999, the average new outlet store size was approximately
3,026 square feet. New store construction costs (before tenant allowances)
averaged approximately $212,579, and the average inventory investment was
approximately $159,208. Of the seventeen stores opened in fiscal 1999, two were
outlet stores. Of the twenty stores planned to be opened in fiscal 2000, four
are expected to be outlet stores.
STORE CLOSURES. In 1996, we initiated a program to monitor more vigorously
the financial performance of our stores and, from time to time, have closed in
the past and will close in the future, stores that we do not consider to be
viable. Many of the store leases contain early termination options that allow us
to close the stores in certain specified years of the leases if certain minimum
sales levels are not achieved. We closed two stores during fiscal 1999. We have
reviewed our existing store base and have identified two under-performing stores
that we are considering closing prior to the end of fiscal 2000.
STORE OPERATIONS
Store operations are organized into five regions and twenty districts. Each
region is managed by a regional manager, and each district is managed by a
district manager. Each regional manager is typically
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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.
We seek to instill enthusiasm and dedication in our store management
personnel and sales associates through incentive programs and regular
communication with the stores. Sales associates receive commissions on sales
with a guaranteed minimum 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.
We have well-established store operating policies and procedures and use an
in-store training regimen for all new store employees. The Visual Merchandising
staff provides the stores with merchandise presentation instructions, which
include photographs of fixture presentations on a weekly basis. In addition, we
provide detailed product descriptions to sales associates to enable them to gain
familiarity with our product offerings. We offer our sales associates a discount
on bebe merchandise to encourage them to wear our apparel and reflect the bebe
image while on the selling floor.
As part of our focus on better procedures and controls, we established a
Loss Prevention Department in fiscal 1997 to develop and implement better
programs for controlling losses. The results in fiscal 1998 and 1999 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 our merchandise is marketed under the bebe or bebe moda brand names.
Much of this merchandise is designed and developed in-house and manufactured to
our specifications. The balance is developed primarily in conjunction with
third-party apparel manufacturers. In some cases, we select merchandise directly
from these manufacturers' lines. When we contract out for the production of
merchandise, we primarily use facilities located in California, and, to a lesser
degree, foreign manufacturers. These facilities produce garments based on
designs, patterns and detailed specifications produced by us.
We use computer aided design systems to develop our patterns and production
markers as part of our product development process. We fit test sample garments
before production to make sure the patterns are accurate. After our distribution
facility receives the garments, a percentage of receipts are inspected and fit
tested a second time. Recently, we implemented a formalized quality control
program that involves inspection of merchandise and fabrics upon receipt at our
distribution center. Garments that do not pass inspection are returned to the
manufacturer for rework or accepted at reduced prices for sale in our outlet
stores.
All of the merchandise for our domestic stores is received, inspected,
processed, warehoused and distributed through our distribution center that is
adjacent to our corporate offices. Details about each receipt are supplied to
merchandise planners who determine how the product should be distributed among
the stores based on current inventory levels, sales trends and specific product
characteristics. Advance shipping notices are electronically communicated to the
stores and any goods not shipped are stored for replenishment purposes.
Merchandise typically is shipped to the stores on a weekly basis using common
carriers; however, during peak selling periods shipments may be made twice or
even three times a week.
We do not have any long-term contracts with any manufacturer or supplier and
place all of our orders by purchase order. If we fail to obtain sufficient
quantities of manufacturing capacity or raw materials, it would have a harmful
effect on our business, financial condition and results of operations. We have
received in the past, and may receive in the future, shipments of products from
manufacturers that fail to conform to our quality control standards. In such
event, unless we are able to obtain replacement products in a timely manner, we
may lose sales which could harm our operating results.
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COMPETITION
The retail and apparel industries are highly competitive and are
characterized by low barriers to entry. We expect competition in our markets to
increase. The primary competitive factors in our markets are:
- brand name recognition;
- product styling;
- product presentation;
- product pricing;
- store ambiance;
- customer service; and
- convenience.
We compete 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. Because many
of these competitors are larger and have substantially greater financial,
distribution and marketing resources than we do, we may lack the resources to
adequately compete with them. If we fail to compete in any way, it may have a
harmful effect on our business, financial condition and results of operations.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
TRADEMARKS AND SERVICE MARKS. We believe that our trademarks and other
proprietary rights are important to our success. We have registered "bebe" and
"bebe moda" in the United States and certain foreign jurisdictions. Even though
we take actions to establish and protect our trademarks and other proprietary
rights, we cannot assure that others will not imitate our products or infringe
on our intellectual property rights. In addition, we cannot assure that others
will not resist or seek to block the sale of our products as infringements of
their trademark and proprietary rights. In certain states, other entities may
have rights to names that contain the word "bebe," which could limit our ability
to expand in such states.
We are seeking to register our trademarks in targeted international markets
that we believe represent large potential markets for our products. In some of
these markets, local companies currently have registered competing marks, and/or
regulatory obstacles exist that may prevent us from obtaining a trademark for
the bebe name or related names. In such countries, we may be unable to use the
bebe name unless we purchase the right or obtain a license to use the bebe name.
We may not be able to register trademarks in these international markets,
purchase the right or obtain a license to use the bebe name on commercially
reasonable terms. If we fail to obtain trademark, ownership or license rights,
it would limit our ability to expand into certain international markets or enter
such markets with the bebe name, and to capitalize on the value of our brand.
LICENSING. We strive to provide our customers with high quality products
and to maintain a consistent image in all of our advertising and marketing
programs. We currently are evaluating opportunities to expand our product
offerings through licensing or joint venture arrangements. Accordingly, we may
from time to time selectively enter into licensing or joint venture agreements
with third parties. In entering into such licensing and joint venture
agreements, we will seek to preserve the integrity of our 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 our products are
advertised, marketed and distributed. In addition to distributing such new
products through bebe stores, we may elect to distribute these licensed products
with the bebe logo through other channels. In fiscal 1998, we hired a Vice
President of Licensing to develop this program. We have already entered into
license agreements where the licensees will manufacture and distribute footwear,
eyewear and watches branded with the bebe logo to be sold at bebe stores and
other retailers.
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We also believe that opportunities may exist to license the bebe brand name
internationally to licensees who will open bebe stores. We have signed a
licensing agreement with companies in Mexico, Greece, Israel and Singapore to
open and operate retail bebe stores. Under these agreements, we provide the use
of our name, store design and advertising images, and the licensee purchases
inventory from us.
INFORMATION SERVICES AND TECHNOLOGY
We are committed to utilizing technology to enhance our competitive
position. To this end, during fiscal 1998, we hired an experienced Vice
President of Information Services and Technology to lead our efforts in this
area. Our information systems provide integration of the store, merchandising,
distribution and financial systems. The core business systems, which consist of
both purchased and internally developed software, 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, we also obtain information concerning inventory receipts
and transfers and send to the stores pricing, markdown and shipment notification
data. In addition, we collect customer names and addresses to update our
customer database. The merchandising staff evaluates the sales and inventory
information collected from the stores to make key merchandise planning
decisions, including replenishment and markdowns. These decisions enhance our
ability to optimize sales while limiting markdowns and minimizing inventory risk
by properly marking down slow selling styles, reordering existing styles and
effectively distributing new inventory receipts to the stores.
In the past, our investments in information systems have focused on our core
store, merchandise and financial accounting systems. Currently, our focus is on
upgrading our capabilities and systems associated with our production,
merchandise allocation and distribution functions, which have not kept pace with
our growth. We made significant investments to improve existing management
information systems and implemented new systems during fiscal 1999.
Additionally, we have created a year 2000 Task Force, which is implementing a
six-phase plan with the objective of ensuring that its management information
systems will be Year 2000 Compliant. We believe that this six-phase plan will be
completed by October 31, 1999. We cannot assure you that we will be successful
with the implementation of these new systems or plans. Failure to implement and
integrate such systems or plans could have a harmful effect on our business,
financial condition and results of operations.
EMPLOYEES
As of June 30, 1999, we had approximately 1,475 employees, of whom
approximately 344 were employed in general and administrative functions at the
corporate offices and distribution center. The remaining 1,131 employees were
employed in store operations. Of these remaining employees, approximately 352
were full-time employees and 779 were employed on a part-time basis. None of our
employees are represented by a labor union, and we believe our relationship with
our employees is good.
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EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY PERSONNEL
The following table sets forth certain information with respect to the
executive officers, directors and other officers and key personnel of the
Company as of June 30, 1999:
NAME AGE POSITION
- ------------------------------------------ --- ---------------------------------------------------------------
Manny Mashouf(1).......................... 61 Chairman, President and Chief Executive Officer
Barbara Bass(2)........................... 48 Director
Corrado Federico(2)....................... 58 Director
Philip Schlein(2)......................... 65 Director
George Arvan.............................. 52 Vice President of Sourcing and Production
Kenneth Charles........................... 42 Vice President of Retail Operations
Karen Ioli................................ 39 Vice President of Licensing
Blair Lambert(1).......................... 41 Chief Financial Officer
Neda Mashouf.............................. 36 Merchandising Advisor
Tim Millen................................ 39 Vice President of Information Services and Technology
Greg Scott(1)............................. 36 Vice President of Merchandising
Lilliemae Stephens........................ 28 General Counsel
- ------------------------
(1) Executive Officer.
(2) Member, Audit Committee and Compensation Committee.
MANNY MASHOUF founded the Company and has served as Chairman, Chief
Executive Officer and President of the Company since the Company's incorporation
in 1976. Mr. Mashouf is the husband of Neda Mashouf, a Director of the Company,
and the father of Paul Mashouf, the Secretary of the Company.
BARBARA BASS has served as a Director of the Company since February 1997.
Since 1993, Ms. Bass has served as the President of the Gerson Bakar Foundation.
From 1989 to 1992, Ms. Bass served as President and Chief Executive Officer of
the Emporium Weinstock Division of Carter Hawley Hale Stores, Inc., a department
store chain. Ms. Bass also serves on the Board of Directors of Starbucks
Corporation, DFS Group Limited and The Bombay Company, Inc.
CORRADO FEDERICO has served as a Director of the Company since November
1996. Mr. Federico is President of Solaris Properties and has served as the
President of Corado, Inc., a land development firm, since 1991. From 1986 to
1991, Mr. Federico held the position of President and Chief Executive Officer of
Esprit de Corp, Inc., a wholesaler and retailer of junior and children's
apparel, footwear and accessories ("Esprit"). Mr. Federico also serves on the
Board of Directors of Hot Topic, Inc.
PHILIP SCHLEIN has served as a Director of the Company since December 1996.
Since April 1985, Mr. Schlein has been a general partner of U.S. Venture
Partners, a venture capital firm specializing in retail and consumer products
companies. From January 1974 to January 1985, Mr. Schlein served as President
and Chief Executive Officer of Macy's California, a division of R. H. Macy & Co,
Inc., a department store chain. Mr. Schlein also serves on the Board of
Directors of Ross Stores, Inc., ReSound Corporation, Quick Response Services and
Burnham Pacific Properties, Inc.
GEORGE ARVAN has served as the Vice President of Sourcing and Production of
the Company since September 1997. Prior to his employment with bebe, Mr. Arvan
founded New Planet Sourcing, an apparel
11
sourcing company, and served as its President from September 1996 to September
1997. During the period from 1991 to 1996, Mr. Arvan was the Chief Operating
Officer of Berkeley Shirt Company, a men's wholesale apparel company.
KENNETH CHARLES has been employed with the Company since October 1998 as
Vice President of Retail Operations. From 1982 to 1998, Mr. Charles was employed
by The Limited, Inc., a women's apparel retailer most recently as a Vice
President of stores.
KAREN IOLI has served as Vice President of Licensing of the Company since
January 1998. From January 1996 to January 1998, Ms. Ioli served as Vice
President of Licensing for Mossimo, Inc., an apparel wholesale company. From
July 1992 to September 1995, Ms. Ioli was employed by Guess?, Inc., an apparel
retail and wholesale company, as Vice President of Licensing.
BLAIR LAMBERT has served as Chief Financial Officer of the Company since
June 1996. From 1988 to 1996, Mr. Lambert was employed by Esprit, most recently
as Corporate Vice President of Finance. Mr. Lambert is a Certified Public
Accountant.
NEDA MASHOUF has served as a Director of the Company since September 1984
and has been employed by the Company since 1984, most recently as Merchandising
Advisor. Ms. Mashouf is the wife of Manny Mashouf, the Chairman, President and
Chief Executive Officer of the Company.
TIM MILLEN has served as Vice President of Information Services and
Technology of the Company since November 1997. From July 1996 to November 1997,
Mr. Millen served as Vice President of Information Systems for AZ3 Inc. (d.b.a.
BCBG), a women's apparel retail and wholesale company. From August, 1994 to July
1996, Mr. Millen served as Vice President of Management Information Systems for
Francine Browner Inc., an apparel wholesale company. From 1991 to 1994, Mr.
Millen was an independent information technology consultant, focusing on the
retail and wholesale apparel market.
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.
LILLIEMAE STEPHENS has served as General Counsel of the Company since
January 1999. From October 1996 to January 1999, Ms. Stephens served as an
associate at Gray Cary Ware & Freidenrich LLP.
ITEM 2. PROPERTIES
As of June 30, 1999, our 101 stores, all of which are leased, encompassed
approximately 302,947 total square feet. The typical store lease is for a
10-year term and requires us to pay a base rent and a percentage rent if certain
minimum sales levels are achieved. Many of the leases provide a lease
termination option in certain specified years of the lease if certain minimum
sales levels are not achieved. In addition, leases for locations typically
require us to pay property taxes, utilities and repairs and maintenance. Also,
leases for mall locations may include common area maintenance fees.
In fiscal 1999, we leased additional space for our administrative offices
and distribution center in order to accommodate our future needs. Our corporate
headquarters and distribution center are now located in an approximately 70,000
square foot leased facility located at 380 Valley Drive, Brisbane, California,
and a 35,000 square foot leased facility located at 400 Valley Drive, Brisbane,
California. These leases expires in August 2001 and April 2006, respectively. In
addition, we lease approximately 20,000 square feet of warehouse space for
fabric inspection, storage and distribution in South San Francisco. The lease
expires in August 2001.
12
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our operations. As of the date of this filing, we are not engaged
in any legal proceedings that are expected, individually or in the aggregate, to
have a harmful effect on our business, financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our shareholders since June 30, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock trades on the Nasdaq National Market under the symbol
"BEBE". The following table sets forth for the period from the company's initial
public offering through June 30, 1999 as reported by Nasdaq:
HIGH LOW
--------- ---------
FISCAL 1998
Fourth Quarter(1)........................................................ 14.125 11.375
FISCAL 1999
First Quarter............................................................ 20.00 10.00
Second Quarter........................................................... 38.00 12.75
Third Quarter............................................................ 44.50 28.50
Fourth Quarter........................................................... 50.00 21.00
- ------------------------
(1) From the date of our initial public offering on June 17, 1998 to June 30,
1998.
As of September 22, 1999 the number of holders of record of our common stock
was approximately 36 and the number of beneficial holders of our common stock
was estimated to be in excess of 1,500.
We have never declared or paid any dividends on our common stock and do not
intend to pay any dividends on our common stock in the foreseeable future. In
addition, our current line of credit arrangements prohibit the payment of cash
dividends on our capital stock.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL AND OPERATING DATA
The following selected financial data of the Company is qualified by
reference to, and should be read in conjunction with, the Financial Statements
and Notes thereto and the other financial information
13
appearing elsewhere in this filing. These historical results are not necessarily
indicative of results to be expected in the future.
FISCAL YEAR ENDED JUNE 30,
-------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Statements of Operations Data:
Net sales............................................... $ 201,341 $ 146,756 $ 95,086 $ 71,563 $ 65,411
Cost of sales, including buying and occupancy........... 95,440 71,713 53,969 44,701 32,653
---------- ---------- --------- --------- ---------
Gross profit............................................ 105,901 75,043 41,117 26,862 32,758
Selling, general and adminstrative expenses............. 61,069 46,359 32,649 26,353 23,134
---------- ---------- --------- --------- ---------
Income from operations.................................. 44,832 28,684 8,468 509 9,624
Interest and other expenses (income), net............... (2,242) (838) (128) 392 87
---------- ---------- --------- --------- ---------
Earnings before income taxes............................ 47,074 29,522 8,596 117 9,537
Provision (benefit) for income taxes.................... 19,065 12,103 3,218 (10) 4,052
---------- ---------- --------- --------- ---------
Net earnings............................................ $ 28,009 $ 17,419 $ 5,378 $ 127 $ 5,485
---------- ---------- --------- --------- ---------
---------- ---------- --------- --------- ---------
Basic earnings per share................................ $ 1.16 $ 0.77 $ 0.24 $ 0.01 $ 0.24
Diluted earnings per share.............................. $ 1.11 $ 0.73 $ 0.24 $ 0.01 $ 0.24
Basic weighted average shares outstanding............... 24,055 22,688 22,640 22,640 22,640
Diluted weighted average shares outstanding............. 25,327 23,862 22,651 22,640 22,640
Selected Operating Data:
Number of stores:
Opened during period.................................. 17 7 10 18 24
Closed during the period.............................. 2 4 0 1 0
Open at end of period................................. 101 86 83 73 56
Net sales per average store(1).......................... $ 2,181 $ 1,719 $ 1,211 $ 1,065 $ 1,480
Comparable store sales increase (decrease)(2)........... 25.1% 41.3% 18.0% (16.5)% 35.4%
AS OF JUNE 30,
------------------------------------------------------
1999 1998 1997 1996 1995
---------- --------- --------- --------- ---------
Balance Sheet Data:
Working capital........................................... $ 62,144 $ 35,904 $ 8,275 $ 5,462 $ 2,722
Total assets.............................................. 107,366 64,209 29,109 22,005 19,239
Long-term debt, including current portion................. 260 187 320 3,680 321
Shareholders' equity...................................... 80,094 45,263 15,295 9,914 9,778
- ------------------------
(1) Based on the sum of average monthly sales per open store for the period.
(2) Based on net sales; stores are considered comparable beginning on the first
day of the first month following the first anniversary of their opening.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations should be read in conjunction with the Financial
Statements and Notes thereto included elsewhere in this Form 10-K. The following
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements which involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of
14
certain factors, including those set forth under "Risks That May Affect Results"
in this section. Our fiscal year ends on June 30 of each calendar year.
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of net
sales for the periods indicated:
FISCAL YEAR ENDED JUNE 30,
-------------------------------
1999 1998 1997
--------- --------- ---------
(IN THOUSANDS)
STATEMENTS OF OPERATIONS DATA:
Net sales........................................................ 100.0% 100.0% 100.0%
Cost of sales, including buying and occupancy(1)................. 47.4 48.9 56.8
--------- --------- ---------
Gross profit..................................................... 52.6 51.1 43.2
Selling, general and administrative expenses(2).................. 30.3 31.6 34.3
--------- --------- ---------
Income from operations........................................... 22.3 19.5 8.9
Interest and other expenses (income), net........................ (1.1) (0.6) (0.1)
--------- --------- ---------
Earnings before income taxes..................................... 23.4 20.1 9.0
Provision for income taxes....................................... 9.5 8.2 3.3
--------- --------- ---------
Net earnings..................................................... 13.9% 11.9% 5.7%
--------- --------- ---------
--------- --------- ---------
- ------------------------
(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, 1999 AND 1998
NET SALES. Net sales increased to $201.3 million during the year ended June
30, 1999 from $146.8 million in fiscal 1998, an increase of $54.5 million, or
37.1%. Of this increase, $33.4 million was attributable to the 25% increase in
comparable store sales, and $21.1 million was attributable to stores not
included in the comparable store sales base. The increase in comparable store
sales was attributable to a broader product line offering, strong consumer
acceptance of the product line and improvements in the operational aspects of
our business.
GROSS PROFIT. Gross profit, which includes the cost of merchandise, buying
and occupancy, increased to $105.9 million for the year ended June 30, 1999 from
$75.0 million in fiscal 1998, an increase of $30.9 million, or 41.2%. As a
percentage of net sales, gross profit increased to 52.6% for the year from 51.1%
during fiscal 1998. The increase in gross profit as a percentage of net sales
resulted from reduced occupancy costs as a percentage of net sales resulting
from higher average store sales and, to a lesser extent, higher merchandise
margins. We believe 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 $61.1 million during the
year ended June 30, 1999 from $46.4 million in fiscal 1998, an increase of $14.7
million, or 31.7%. As a percentage of net sales, these expenses decreased to
30.3% during the year ended June 30, 1999 from 31.6% in fiscal 1998. This
reduction as a percentage of net sales was largely due to favorable compensation
expense leverage offset by increases in professional fees related to
international trademark protection, registration and acquisition.
15
We recorded deferred compensation of $2.8 million in connection with option
grants in June 1997, of which $538,000 was charged to expense for the year ended
June 30, 1999. The remaining deferred compensation expense will be amortized
over the vesting period of the options. See Note 8 of Notes to Financial
Statements.
INTEREST AND OTHER EXPENSE (INCOME), NET. We generated $2.2 million of
interest and other income (net of other expenses) during the year ended June 30,
1999 as compared to $838,000 in fiscal 1998 due to increases in average cash
balances arising from operating results and proceeds of the Company's initial
public offering of shares in June, 1998.
PROVISION FOR INCOME TAXES. The effective tax rate for the year ended June
30, 1999 was 40.5% as compared to 41.0% in fiscal 1998. The lower effective tax
rate for fiscal 1999 was primarily attributable to investments in tax advantaged
investments. See Note 5 of Notes to Financial Statements.
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
our 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, we reviewed our fabric inventory and, for fabrics not directly associated
with planned garment production orders, we took a charge against cost of sales
and increased our inventory valuation allowance by $1.5 million to reflect more
appropriately the net realizable value of such fabrics.
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. We currently plan to maintain approximately
the same level of advertising as a percentage of net sales in the future. As
previosly mentioned, we 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. See Note 8 of Notes to Financial
Statements.
INTEREST AND OTHER EXPENSE (INCOME), NET. We 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. We have no borrowings under our line of
credit during the year ended June 30, 1998 due to increases in average cash
balances arising from our improved operating results compared to net borrowing
in the prior fiscal year.
PROVISION 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
16
increased taxable earnings and greater profitability in high tax rate states.
See Note 5 of Notes to Financial Statements.
SEASONALITY OF BUSINESS AND QUARTERLY RESULTS
Our business varies with general seasonal trends that are characteristic of
the retail and apparel industries. As a result, we generate a disproportionate
amount of our annual net sales in the first half of our fiscal year (which
includes the fall and holiday selling seasons) compared to the second half of
our fiscal year. If for any reason our sales were below seasonal norms during
the first half of our fiscal year, our annual operating results would be harmed.
Because of the seasonality of our business, results for any quarter are not
necessarily indicative of results that may be achieved for a full fiscal year.
The following table sets forth certain unaudited statements of operations
data for each of the four quarters ended June 30, 1999, as well as such data
expressed as a percentage of our total net sales for the periods indicated. This
data has been derived from unaudited financial statements that, in the opinion
of management, include all adjustments (consisting only of normal recurring
adjustments) necessary for fair presentation of such information when read in
conjunction with our Financial Statements and Notes thereto appearing elsewhere
in this annual report on Form 10-K.
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
1999 1999 1998 1998
--------- ----------- ------------ -------------
STATEMENTS OF OPERATIONS DATA:
Net sales.............................. $ 54,250 $ 46,047 $ 59,491 $ 41,552
Gross profit........................... 28,314 23,560 32,276 21,752
Selling, general and administrative
expenses............................. 16,404 15,158 16,307 13,201
Income from operations................. 11,910 8,402 15,969 8,551
Earnings before income taxes........... 12,499 9,017 16,523 9,035
Net earnings........................... 7,664 5,363 9,652 5,331
Basic earnings per share................. $ 0.32 $ 0.22 $ 0.40 $ 0.22
Diluted earnings per share............... $ 0.30 $ 0.21 $ 0.38 $ 0.21
AS A PERCENTAGE OF NET SALES:
Net sales.............................. 100.0% 100.0% 100.0% 100.0%
Gross profit........................... 52.2 51.2 54.3 52.3
Selling, general and administrative
expenses............................. 30.2 32.9 27.4 31.8
Income from operations................. 22.0 18.2 26.8 20.6
Earnings before income taxes........... 23.0 19.6 27.8 21.7
Net earnings........................... 14.1 11.6 16.2 12.8
LIQUIDITY AND CAPITAL RESOURCES
During the three years ended June 30, 1999, we have satisfied our cash
requirements principally through cash flow from operations, borrowings under our
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.
Our working capital requirements vary widely throughout the year and
generally peak in the first and second fiscal quarters. At June 30, 1999, we had
approximately $59.3 million of cash and cash equivalents on hand. In addition,
we 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, 1999, there
were no borrowings under the line of credit and letters of credit outstanding
totaled $2.2 million.
17
Net cash provided by operating activities in fiscal 1999, 1998 and 1997, was
$33.3 million, $19.3 million, and $13.0 million, respectively. The increase in
cash provided by operating activities in fiscal 1999 and 1998 compared to 1997
was primarily the result of increases in income from operations and changes in
working capital.
Net cash used by investing activities was $12.0 million, $3.6 million and
$1.0 million in fiscal 1999, 1998 and 1997, 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.
We made 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 our corporate
offices and distribution center. Our capital expenditures was $12.9 million in
fiscal 1999. We opened seventeen new stores in fiscal 1999. We also expect to
open approximately twenty stores in each of fiscal 2000 and 2001, the majority
of which will be in existing markets.
During fiscal 1999, new store construction costs (before tenant allowances)
averaged $422,000. The average gross inventory investment was $135,000 while
pre-opening costs, which are expensed as incurred, was less than $30,000 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 $1.4 million and $11.8 million
in fiscal 1999 and fiscal 1998, respectively. In fiscal 1997, net cash used by
financing activities was $4.6 million. In fiscal 1999, net cash provided by
financing activities primarily was derived from proceeds from the issuance of
common stock arising from stock option exercises. In fiscal 1998, net cash
provided by financing activities related primarily to proceeds from the sale of
1.25 million shares in our initial public offering of stock. Net cash used by
financing activities in fiscal 1997 primarily related to the repayment of the
term note and revolving line of credit.
We believe that our cash on hand, together with our cash flow from
operation, will be sufficient to meet our capital and operating requirements
through fiscal 2000. Our future capital requirements, however, will depend on
numerous factors, including without limitation, the size and number of new and
expanded stores, investment costs for management information systems, potential
acquisitions and/or joint ventures, and future results of operations.
INFLATION
We do not believe that inflation has had a material effect on the results of
operations in the recent past. However, we cannot assure that our business will
not be affected by inflation in the future.
YEAR 2000 DATE CONVERSION
We have created a Year 2000 Task Force that is implementing a six phase plan
with the objective of ensuring that our 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"). We have completed a comprehensive review of our
information systems and have updated our computer systems and applications in
preparation for the year 2000. We are currently in the sixth phase of our plan,
the contingency plan, which will be completed by October 31, 1999.
Total expenditures related to identification, testing, conversion,
contingency, replacement and upgrading system applications are expected to range
from $300,000 to $500,000 during fiscal 1999 and 2000. In certain cases, the
conversions to applications which are Year 2000 Compliant have been made in
conjunction with planned business system upgrades or enhancements. In the most
reasonably likely worst case scenario, our store operating and back end
inventory management systems could fail. If these systems
18
fail, we may be unable to record sales transactions in our stores, which would
result in a breakdown in the supply chain. If this occurs, we would have to
revert to a number of manual systems for recording sales, ordering product and
replenishing our stores. This would likely result in a loss of revenue, and it
is not possible to quantify the possible range of such loss.
We have contacted the majority of our vendors and others on whom we rely to
confirm that their systems will be converted before January 1, 2000. However, we
cannot assure that the systems of other companies on which our systems rely will
be Year 2000 Compliant by December 31, 1999. If another company fails to
convert, it would have a harmful effect on our systems. In a most reasonably
likely worst case scenario, one or more significant suppliers could be unable to
continue to adequately supply us after 1999. Our fallback position would be to
seek an alternative source of supply. However, we cannot assure that such
alternative sources of supply would be available. Such a contingency plan will
be in place by the end of October 31, 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 our business.
Furthermore, we cannot assure that any or all of our 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 harmful effect on our financial condition.
RISK FACTORS
Factors that might cause our actual results to differ materially from the
forward looking statements discussed elsewhere in this report, as well as affect
our ability to achieve our financial and other goals, include, but are not
limited to, the following:
RISKS RELATING TO OUR BUSINESS:
1. IF WE MISCALCULATE THE DEMAND FOR OUR PRODUCTS, OUR SALES AND
PROFITABILITY MAY BE HARMED. Our success depends on our ability to balance
our inventory of merchandise with the demand for such merchandise. If we
miscalculate the demand for our products, we may be faced with significant
excess inventory. This would result in excess fabric for some products and
missed opportunities for others. This may result in weak sales and markdowns
and/or write-offs, which could impair our profitability.
2. IF WE ARE NOT ABLE TO EFFECTIVELY MANAGE OUR GROWTH, OUR PROFITABILITY
MAY BE HARMED. Our continued growth depends, to a significant degree, on
our ability to identify sites and open and operate new stores on a
profitable basis. We expect to open approximately 20 stores in each of
fiscal 2000 and 2001. Our plan to expand successfully depends on the
following factors:
- the availability of desirable locations;
- the ability to negotiate acceptable leases for such locations;
- the ability to manage the expansion of the store base;
- the ability to source inventory adequate to meet the needs of new
stores;
- the ability to operate stores profitably once opened;
- the development of adequate management information systems to support
expanded activity;
- the ability to recruit and retain new employees;
- the availability of capital; and
- general economic and business conditions affecting consumer confidence
and spending.
In selected markets, we plan to open flagship stores that will be larger
and more expensive to operate than existing stores. If these flagship stores
do not generate sufficient revenues to cover their higher costs, our
financial results could be negatively affected.
19
We cannot assure that we will achieve our planned expansion on a timely
and profitable basis. In addition, most of our new store openings in fiscal
2000 and 2001 will be in existing markets. These openings may affect the
existing stores' net sales volumes and profitability. Furthermore, we will
need to hire experienced executive personnel to support the planned
improvements and expansions of our business. We cannot assure that we will
be successful in hiring such personnel in a time frame necessary to manage
and support our expansion plans.
3. WE MAY EXPERIENCE A DECLINE IN OUR RATE OF COMPARABLE STORE SALES
GROWTH, WHICH COULD AFFECT OUR PROFITABILITY. We do not think that we can
sustain the rate of comparable store sales growth achieved in recent
periods. We expect that such growth, if any, in the current and future
periods will be lower than rates achieved in fiscal 1998 and 1999. During
the recent periods of relatively high comparable store sales growth, we
experienced favorable merchandise margins primarily because we were able to
sell our merchandise with lower markdown rates due in part to the higher
growth of same store sales. As comparable store sales growth rates continue
to moderate, we anticipate a decline in merchandise margins, which will
reduce gross margins. In addition, as newer and expanded stores become a
larger percentage of the entire store base, we anticipate that we will see a
rise in occupancy cost as a percentage of sales. We anticipate that this
rise will further reduce gross margins. In addition, our selling, general
and administrative expenses have decreased as a percentage of net sales in
recent periods due in part to the rapid growth in net sales. If same store
sales growth rates slow, it will be more difficult for us to generate
favorable selling, general and administrative expense leverage.
4. IF WE ARE NOT ABLE TO OPERATE ON A PROFITABLE BASIS, OUR STOCK PRICE MAY
BE NEGATIVELY AFFECTED. We cannot guarantee that we will remain profitable
in the future. In the past 5 years, profitability rates have varied widely
from quarter-to-quarter and from year-to-year. In particular, in fiscal
1996, we experienced a significant financial downturn. This was caused
partly by problems in obtaining fabrication, misjudging related fashion
trends, failing to obtain product deliveries in a timely manner, rapidly
expanding our store base, and lacking sufficient controls and personnel to
support such expanded activity.
Our future results of operations will depend on the number and timing of
new store openings. Also, it will depend on, among other things, our ability
to:
- identify and capitalize upon changing fashion trends;
- hire and retain qualified management and other personnel;
- maintain appropriate inventory levels;
- obtain needed raw materials;
- identify and negotiate favorable leases for successful store locations;
- reduce shrinkage; and
- control operating costs.
In addition, future results of operations will depend on factors outside
of our control, such as general economic conditions, availability of third
party sourcing and raw materials, and actions of competitors.
5. IF WE ARE NOT ABLE TO EFFECTIVELY UPGRADE AND EXPAND OUR MANAGEMENT
INFORMATION SYSTEMS, OUR OPERATIONS MAY BE HARMED. We have made significant
investments to improve existing management information systems and implement
new systems in the areas of production, merchandise allocation and
distribution functions. We cannot assure that these enhancements will be
successfully implemented. If we fail to implement and integrate such
systems, it can have a harmful effect on our results of operations.
20
6. IF WE ARE UNABLE TO OBTAIN RAW MATERIALS OR FIND PRODUCTION FACILITIES,
OUR FINANCIAL CONDITION MAY BE HARMED. We do not own any production
facilities and therefore depend on third parties to manufacture our
products. Independent manufacturers make merchandise designed by the bebe
in-house design team with raw materials purchased from independent mills and
other suppliers. We place all of our orders for production of merchandise
and raw materials by purchase order and do not have any long-term contracts
with any manufacturer or supplier. We compete with approximately 20 other
companies for production facilities and raw materials. If we fail to obtain
sufficient quantities of raw materials, it would have a harmful effect on
our financial condition. For example, in fiscal 1996, we had difficulty
obtaining needed quantities of raw materials on a timely basis because of
competition with other apparel vendors for raw materials. This resulted in a
loss of sales and a decrease in gross profit. Furthermore, we have received
in the past, and may receive in the future, shipments of products from
manufacturers that fail to conform to our quality control standards. In such
event, unless we are able to obtain replacement products in a timely manner,
we may lose sales. If we fail to maintain favorable relationships with these
production facilities and to obtain an adequate supply of quality raw
materials on commercially reasonable terms, it could harm our business and
results of operations.
If an independent manufacturer violates labor or other laws, or if their
labor practices diverge from those generally accepted as ethical in the
United States, it could harm our business and brand image. While we recently
adopted a policy to monitor the operations of our independent manufacturers
by having an independent firm inspect these manufacturing sites, we cannot
control the actions of such manufacturers, nor can we assure that these
manufacturers will conduct their businesses using ethical labor practices.
7. WE DEPEND ON THIRD PARTY APPAREL MANUFACTURERS, AND OUR SALES MAY BE
NEGATIVELY AFFECTED IF THE MANUFACTURERS DO NOT PERFORM ACCEPTABLY. We
develop a significant portion of our merchandise in conjunction with third
party apparel manufacturers. In some cases, we select merchandise directly
from these manufacturers' lines. We do not have long-term contracts with any
third party apparel manufacturers and purchase all of the merchandise from
such manufacturers by purchase order. Furthermore, we have received in the
past, and may receive in the future, shipments of products from
manufacturers that fail to conform to our quality control standards. In such
event, unless we are able to obtain replacement products in a timely manner,
we may lose sales. We cannot assure that third party manufacturers (1) will
not supply similar products to our competitors, (2) will not stop supplying
products to us completely or (3) will supply products that satisfy our
quality control standards.
8. IF WE ARE NOT ABLE TO EFFECTIVELY UPGRADE AND ENHANCE OUR ON-LINE
VIRTUAL STORE WE MAY LOSE ON-LINE SALES AND OUR IMAGE MAY BE HARMED. We
plan to make additional significant investments to improve the performance
and content of our existing web site over the next fiscal year. We cannot
assure you that these enhancements will be successfully implemented. If we
fail to implement and integrate such enhancements successfully, our results
of operations may be harmed. Moreover, if we cannot develop an effective and
engaging web site, potential future revenue that we would have otherwise
gained through sales conducted over the internet and our image may be
harmed.
9. IF OUR FOREIGN MANUFACTURERS ARE NOT ABLE TO PROVIDE US WITH SUFFICIENT
MERCHANDISE TO MEET CUSTOMER DEMAND OR IF OUR IMPORTS ARE DISRUPTED, OUR
SALES AND PROFITABILITY MAY BE HARMED. We purchase our raw materials from
mills and other suppliers, a significant portion of which is purchased from
suppliers outside the United States, primarily in Europe and Asia. We
purchase a portion of our merchandise outside the United States, primarily
in Israel, China, Hong Kong and Singapore.
We are subject to risks associated with doing business abroad. These
risks include:
- adverse fluctuations in currency exchange rates (particularly those of
the U.S. dollar against certain foreign currencies);
21
- changes in import duties or quotas;
- the imposition of taxes or other charges on imports;
- changes in foreign government regulation, political unrest, disruption
or delays of shipments; and
- changes in economic conditions in countries in which our suppliers are
located.
If any of the foregoing occurs, it could harm our business, financial
condition and results of operations.
Bilateral textile agreements between the United States and a number of
foreign countries impose constraints on our import operations. These
agreements, which have been negotiated bilaterally either under the
framework established by the Arrangement Regarding International Trade in
Textiles, known as the Multifiber Agreement, or other applicable treaties,
limit the amounts and types of merchandise which may be imported into the
United States from these countries. Also, these agreements allow the United
States to impose restraints at any time on importing merchandise that, under
the terms of the agreements, are not currently subject to specified limits.
In addition, our imported products are subject to United States customs
duties which make up a material portion of the cost of the merchandise. If
customs duties are substantially increased, it would harm our business and
results of operations. The United States and the countries in which our
products are produced or sold may impose new quotas, duties, tariffs, or
other restrictions, or adversely adjust prevailing quota, duty, or tariff
levels, any of which could have a harmful effect on our business and results
of operations.
Also, manufacturing facilities in China produce a significant portion of
our foreign-supplied products. Recently, China and the United States have
been in a number of trade disputes. The United States has threatened to
impose punitive tariffs and duties on products imported from China and to
withdraw China's "most favored nation" trade status. If China loses the most
favored nation status, there are changes in the current tariff or duty
structures or United States adopts other trade polices or sanctions adverse
to China, it could harm our sales and profitability.
9. OUR BUSINESS IS SEASONAL AND OUR QUARTERLY RESULTS MAY FLUCTUATE WHICH
MAY HARM OUR STOCK PRICE. Our sales volumes and levels of profitability
fluctuate on a quarterly basis. We tend to generate larger sales and, to an
even greater extent, profitability levels in the first and second quarters,
which include the fall and holiday selling seasons, of our fiscal year. If
for any reason sales are below seasonal norms during the first and second
quarters of our fiscal year, as they were in fiscal 1996, our quarterly and
annual results of operations would be harmed. Our quarterly financial
performance may also fluctuate widely as a result of a number of other
factors such as:
- the number and timing of new store openings;
- acceptance of product offerings;
- timing of product deliveries;
- actions by competitors; and
- effectiveness of advertising campaigns.
Due to these factors, we believe that quarter to quarter comparisons of
our operating results are not necessarily meaningful and that these
comparisons cannot be relied upon as indicators of future performance.
10. OUR SUCCESS DEPENDS ON OUR KEY EMPLOYEES, THE LOSS OF WHOM COULD
DISRUPT OUR BUSINESS. We depend upon the efforts of our key employees,
particularly Manny Mashouf, the founder, Chairman,
22
President and Chief Executive Officer. None of our executive officers are
bound by an employment agreement and therefore their employment is at will.
Except for Mr. Mashouf, we do not carry "key person" life insurance policies
on any of our employees. If we lose the services of Mr. Mashouf or any key
officers or employees, it could harm our business and results of operations.
In addition, our success depends to a significant degree on our ability
to attract and retain experienced employees. There is substantial
competition for experienced personnel, which we expect to continue. We
compete for experienced personnel with companies who have greater financial
resources than we do. In the past, we have experienced significant turnover
of our retail store personnel. If we fail to attract, motivate and retain
qualified personnel, it could harm our business and results of operations.
11. IF WE ARE NOT ABLE TO REGISTER OR PROTECT OUR TRADEMARKS, OUR ABILITY
TO CAPITALIZE ON THE VALUE OF OUR BRAND NAME MAY BE IMPAIRED. We believe
that our trademarks and other proprietary rights are important to our
success. We have registered "bebe" and "bebe moda" in the United States and
certain foreign jurisdictions. Even though we take actions to establish and
protect our trademarks and other proprietary rights, we cannot assure you
that others will not imitate our products or infringe on our intellectual
property rights. In addition, we cannot assure that others will not resist
or seek to block the sale of our products as violative of their trademark
and proprietary rights. In certain jurisdictions, other entities may have
rights to names that contain the word "bebe," which could limit our ability
to expand in such jurisdictions.
We are seeking to register our trademarks in targeted international
markets which we believe represents large potential markets for our
products. In some of these markets, local companies currently have
registered competing marks, and/or regulatory obstacles exist that may
prevent us from obtaining a trademark for the bebe name or related names. In
such countries, we may be unable to use the bebe name unless we purchase the
right or obtain a license to use the bebe name. We may not be able to
register trademarks in these international markets, purchase the right or
obtain a license to use the bebe name on commercially reasonable terms. If
we fail to obtain trademark, ownership or license rights, it would limit our
ability to expand into certain international markets or enter such markets
with the bebe name, and to capitalize on the value of our brand.
Furthermore in some jurisdictions, despite successful registration of
our trademarks, third parties may allege infringement and bring actions
against us.
Currently, we are evaluating our opportunities to expand our product
offering and extend our geographic reach through licensing or joint venture
arrangements. We have limited experience with any such arrangements, and we
cannot assure that such arrangements will be successful. Furthermore, while
we intend to maintain control of the presentation and pricing of bebe
merchandise through the terms of any such agreement, we cannot assure that
any licensee or joint venture partner will comply with such contractual
provisions. Any deviation from the terms of these contracts may harm our
brand image.
12. WE DEPEND ON TWO ADJACENT FACILITIES, THE LOSS OF WHICH COULD SERIOUSLY
DISRUPT OUR BUSINESS. Currently, we operate corporate offices and a
distribution center in Brisbane, California. Any serious disruption at this
facility whether due to fire, earthquake or otherwise would harm our
operations and could have a harmful effect on our business and results of
operations.
23
13. YEAR 2000 FAILURES MAY HARM OUR OPERATIONS. 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 change in the century. If not corrected, many computer applications
could create erroneous results by or at the year 2000.
We have created a Year 2000 Task Force, which is implementing a
six-phase plan with the objective of ensuring that our management
information systems will be Year 2000 Compliant. We believe that the final
phase of the plan will be completed by October 31, 1999. We cannot assure
that this six-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. This may result in unforeseen costs or delays to
us and therefore harm the Company.
RISKS RELATING TO OUR INDUSTRY:
1. WE FACE SIGNIFICANT COMPETITION IN THE RETAIL AND APPAREL INDUSTRY,
WHICH COULD HARM OUR SALES AND PROFITABILITY. The retail and apparel industries
are highly competitive and are characterized by low barriers to entry. We expect
competition in our markets to increase. The primary competitive factors in our
markets are:
- brand name recognition;
- product styling;
- product presentation;
- product pricing;
- store ambiance;
- customer service; and
- convenience.
We compete 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. Because many
of these competitors are larger and have substantially greater financial,
distribution and marketing resources than we do, we may lack the resources to
adequately compete with them. If we fail to compete in any way, it could harm
our business, financial condition and results of operations.
2. IF WE FAIL TO DEAL WITH THE RISKS INHERENT IN THE FASHION AND APPAREL
INDUSTRY, OUR PROFITABILITY AND BRAND IMAGE MAY BE IMPAIRED. The apparel
industry is subject to rapidly evolving fashion trends, shifting consumer
demands and intense competition. If we misinterpret the current fashion trends
or if we fail to respond to shifts in consumer tastes, demand for bebe products,
profitability and brand image could be impaired. Also, we cannot assure that our
competitors will not carry similar designs, which would undermine bebe's
distinctive image and may harm our brand image. Our future success partly
depends on our ability to anticipate, identify and capitalize upon emerging
fashion trends, including products, styles, fabrics and colors. In addition, our
success depends on our ability to distinguish ourselves within the women's
apparel market.
3. IF ECONOMIC CONDITIONS DETERIORATE, THEN IT COULD HAVE A NEGATIVE IMPACT
ON OUR BUSINESS, SALES AND PROFITABILITY. The retail and apparel industries are
subject to substantial cyclical variation. A recession in the general economy or
a decline in consumer spending in the apparel industry could harm our financial
performance. Consumers generally purchase less apparel and related merchandise
during recessionary periods and consumer spending may decline at other times. A
prolonged economic downturn could harm our financial condition. We cannot assure
that our customers would continue to make purchases during a recession.
24
RISKS RELATING TO OUR COMMON STOCK:
1. OUR STOCK PRICE MAY FLUCTUATE BECAUSE OF THE SMALL NUMBER OF SHARES
WHICH CAN BE PUBLICLY TRADED AND THE LOW AVERAGE DAILY TRADING VOLUMES. The vast
majority of our outstanding shares of our common stock are not registered and
are subject to trading restrictions. As of September 22, 1999, only 3,444,146
shares of our Common Stock were available to be publicly traded, and as a
result, our average daily trading volumes are relatively low, and our stock
price is vulnerable to market swings due to large purchases, sales and short
sales of our common stock.
2. BECAUSE A PRINCIPAL SHAREHOLDER CONTROLS THE COMPANY, OTHER SHAREHOLDERS
MAY NOT BE ABLE TO INFLUENCE THE DIRECTION THE COMPANY TAKES. Manny Mashouf, the
Chairman, President and Chief Executive Officer, beneficially owns approximately
86.2% of the outstanding shares of our common stock. As a result, he alone can
control the election of directors and the outcome of all issues submitted to the
shareholders. This may make it more difficult for a third party to acquire
shares, may discourage acquisition bids, and could limit the price that certain
investors might be willing to pay for shares of common stock. This concentration
of stock ownership may have the effect of delaying, deferring or preventing a
change in control of our company.
3. IF WE ISSUE PREFERRED STOCK IN THE FUTURE, IT MAY HARM THE MARKET PRICE
OF OUR COMMON STOCK. The Board of Directors has authority to issue up to
1,000,000 shares of preferred stock at $0.001 par value per share. They also can
fix the rights, preferences, privileges and restrictions, including voting
rights, of these shares without any vote or action by the shareholders. If
preferred stock is issued in the future, the rights of the holders of common
stock will be subject to, and may be harmed by, the rights of the holders of any
preferred stock. If we issue preferred stock, it would provide us with desirable
flexibility in connection with possible acquisitions and other corporate
purposes. However, it could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of our
company, thereby delaying, deferring or preventing a change in control of our
company. Furthermore, such preferred stock may have other rights, including
economic rights, senior to the common stock. As a result, the issuance of such
preferred stock could harm the market value of the common stock. We have no
present plan to issue shares of preferred stock.
4. OUR STOCK PRICE MAY BE VOLATILE BECAUSE OF RISKS INHERENT IN THE RETAIL
INDUSTRY. The stock market has from time to time experienced extreme price and
volume volatility. In addition, the market price of our common stock, like that
of the stock of other retail and apparel companies, may be highly volatile due
to certain risks inherent in the apparel industry. Factors such as
quarter-to-quarter variations in the our net sales and earnings and changes in
financial estimates by equity research analysts or other events or factors could
cause the market price of the common stock to fluctuate significantly. Further,
due to the volatility of the stock market and the prices of stocks of retail and
apparel companies generally, the price of the common stock could fluctuate for
reasons unrelated to our operating performance.
5. WE DO NOT ANTICIPATE PAYING CASH DIVIDENDS, WHICH MAY AFFECT THE MARKET
PRICE OF OUR COMMON STOCK. We intend to retain any future earnings for use in
our business and, therefore, do not anticipate paying any cash dividends on
common stock in the foreseeable future. Our future dividend policy will depend
on our earnings, capital requirements and financial condition. In addition, it
will depend on any restrictions imposed by existing credit agreements and other
factors considered relevant by the Board of Directors.
6. ALL OF OUR RESTRICTED SECURITIES ARE ELIGIBLE TO BE SOLD, WHICH MAY
CAUSE DILUTION OF OUR COMMON STOCK. We have a total of 24,387,733 shares of
common stock outstanding. Of these shares, 21,032,997 are held by the existing
shareholders as "restricted securities," which means they acquired these
securities from our company in a transaction that did not involve a public
offering. These shares may be sold in the public market only if they are
registered or if they qualify for an exemption from registration under Rule 144
of the Securities Act. At this time, all restricted securities will be eligible
to be sold, subject to certain volume and other limitations under Rule 144.
25
As of June 30, 1999, options to purchase 1,684,894 shares of common stock
were outstanding and exercisable, subject to certain vesting and repurchase
restrictions.
STOCK PLANS
On June 26, 1997 the Board of Directors adopted the 1997 Stock Plan (the
"Stock Plan"). Options granted under the Stock Plan have a ten-year term and may
be either incentive stock options, non-qualified stock options, stock purchase
rights or stock awards. We have reserved 2,830,000 shares of common stock for
issuance under the Stock Plan. The options granted are immediately exercisable,
but are subject to repurchase at the original exercise price in the event that
the optionee's employment ceases for any reason. Our right of repurchase
generally lapses over a four-year period as follows: 20% in each of the first
two years after the grant date and 30% in the third and fourth years after the
grant date, with full lapse of the repurchase option occurring on the fourth
anniversary date. See Note 9 of Notes to Financial Statements.
STOCK PURCHASE PLAN
On April 7, 1998, our 1998 Employee Stock Purchase Plan (the "Plan") was
adopted and approved by the shareholders. A total of 750,000 shares of common
stock has been reserved for issuance under the Plan. The Plan will allow
eligible employees to purchase our common stock in an amount which may not
exceed 10% of the employee's compensation. The Plan will be implemented by
sequential 24-month offerings. Each offering will generally be comprised of
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 our common stock on the
first day of the offering period or the Purchase Date. There were 35,625 shares
issued under the Purchase plan in the fiscal year ended June 30, 1999.
PREFERRED STOCK
On April 7, 1998, our shareholders granted the Board of Directors the
authority to issue up to 1,000,000 shares of $0.001 par value preferred stock
and to fix the rights, preferences, privileges and restrictions including voting
rights, of these shares without any further vote or approval by the
shareholders. No preferred stock has been issued to date.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information with respect to this item is set forth in "Index to Financial
Statements."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to this item is incorporated by reference from the
Registrant's definitive Proxy Statement to be filed with the Commission not
later than 120 days after the end of the registrant's fiscal year.
26
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item is incorporated by reference from the
Registrant's definitive Proxy Statement to be filed with the Commission not
later than 120 days after the end of the registrant's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this item is incorporated by reference from the
Registrant's definitive Proxy Statement to be filed with the Commission not
later than 120 days after the end of the Registrant's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this item is incorporated by reference from the
Registrant's definitive Proxy Statement to be filed with the Commission not
later than 120 days after the end of the Registrant's fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)
1. The financial statements listed in the "Index to Financial Statements" at
page F-1 are filed as a part of this report.
2. Financial statement schedules are omitted because they are not applicable or
the required information is shown in the financial statements or notes
thereto.
3. Exhibits included or incorporated herein: See Index to Exhibits.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the last quarter of the
fiscal year covered by this report.
27
SIGNATURES
Pursuant to the requirements of the Exchange Act of 1934, as amended, the
Registrant has duly caused this Annual Report on Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Brisbane,
State of California, on the 28th day of September 1999.
BEBE STORES, INC.
By: /s/ MANNY MASHOUF
-----------------------------------------
Manny Mashouf
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Manny Mashouf and Blair Lambert, and each
of them acting individually, as his true and lawful attorneys-in-fact and
agents, each with full power of substitution, for him in any and all capacities,
to sign any and all amendments to this Annual Report on Form 10-K, and to file
the same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, with full power of each to act alone, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully for all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or his or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Exchange Act, this Annual Report on Form
10-K has been signed by the following persons in the capacities and on the dates
indicated:
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
President, Chief Executive
/s/ MANNY MASHOUF Officer and Chairman of
- ------------------------------ the Board (Principal September 28, 1999
Manny Mashouf Executive Officer)
Vice President, Finance
/s/ BLAIR LAMBERT and Chief Financial
- ------------------------------ Officer (Principal September 28, 1999
Blair Lambert Financial and Accounting
Officer)
/s/ NEDA MASHOUF
- ------------------------------ Director September 28, 1999
Neda Mashouf
/s/ BARBARA BASS
- ------------------------------ Director September 28, 1999
Barbara Bass
28
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ CORRADO FEDERICO
- ------------------------------ Director September 28, 1999
Corrado Federico
/s/ PHILIP SCHLEIN
- ------------------------------ Director September 28, 1999
Philip Schlein
29
BEBE STORES, INC.
INDEX TO FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1999, JUNE 30, 1998 AND JUNE 30, 1997
FINANCIAL STATEMENTS:
Independent auditors' report....................................................... F-2
Balance sheets as of June 30, 1999 and June 30, 1998............................... F-3
Statements of operations for the fiscal years ended June 30, 1999, 1998 and 1997... F-4
Statements of shareholders' equity for the fiscal years ended June 30, 1999, 1998
and 1997......................................................................... F-5
Statements of cash flows for the fiscal years ended June 30, 1999, 1998 and 1997... 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) as of June 30, 1999 and June 30, 1998 and the related statements of
operations, shareholders' equity, and cash flows for each of the three fiscal
years ended June 30, 1999. 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, 1999 and
June 30, 1998, and the results of its operations and its cash flows for each of
the three fiscal years ended June 30, 1999 in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
San Francisco, California
July 27, 1999
F-2
BEBE STORES, INC.
BALANCE SHEETS
AS OF JUNE 30,
-----------------------------
1999 1998
-------------- -------------
ASSETS:
Current assets:
Cash and equivalents............................................................ $ 59,341,655 $ 36,651,617
Receivables:
Income tax refund............................................................. 59,303 169,443
Construction allowance........................................................ 356,360
Other (net of allowance of $108,078 and $51,785).............................. 343,793 87,124
Inventories, net................................................................ 22,541,994 14,405,213
Deferred income taxes, net...................................................... 1,660,374 842,835
Prepaid and other............................................................... 1,559,348 134,760
-------------- -------------
Total current assets.......................................................... 85,862,827 52,290,992
Equipment and improvements, net................................................... 17,999,980 9,213,358
Deferred income taxes, net........................................................ 2,002,960 1,811,126
Other assets...................................................................... 1,500,176 893,252
-------------- -------------
Total other assets............................................................ 3,503,136 2,704,378
-------------- -------------
Total assets...................................................................... $ 107,365,943 $ 64,208,728
-------------- -------------
-------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable................................................................ $ 13,318,007 $ 6,921,981
Accrued liabilities............................................................. 9,931,755 8,470,623
Current portion of long-term debt............................................... 138,906 104,286
Income taxes payable............................................................ 330,014 890,258
-------------- -------------
Total current liabilities..................................................... 23,718,682 16,387,148
Long-term debt.................................................................... 120,646 82,218
Deferred rent..................................................................... 3,432,639 2,475,883
-------------- -------------
Total liabilities................................................................. 27,271,967 18,945,249
-------------- -------------
Commitments and contingencies
Shareholders' equity:
Preferred stock-authorized 1,000,000 shares at $0.001 par value per share; no
shares issued and outstanding.................................................
Common stock-authorized 40,000,000 shares at $0.001 par value per share; issued
and outstanding 24,387,733 and 23,889,997 shares.............................. 24,388 23,890
Additional paid-in capital...................................................... 23,147,795 17,078,200
Deferred compensation........................................................... (1,282,147) (2,061,227)
Retained earnings and other..................................................... 58,203,940 30,222,616
-------------- -------------
Total shareholders' equity.................................................... 80,093,976 45,263,479
-------------- -------------
Total liabilities and shareholders' equity........................................ $ 107,365,943 $ 64,208,728
-------------- -------------
-------------- -------------
See accompanying notes to financial statements.
F-3
BEBE STORES, INC.
STATEMENTS OF OPERATIONS
FISCAL YEAR ENDED JUNE 30,
---------------------------------------------
1999 1998 1997
-------------- -------------- -------------
Net sales........................................................ $ 201,341,258 $ 146,756,847 $ 95,086,125
Cost of sales, including buying and occupancy.................... 95,439,510 71,713,445 53,968,849
-------------- -------------- -------------
Gross profit..................................................... 105,901,748 75,043,402 41,117,276
Selling, general and administrative expenses..................... 61,069,273 46,359,495 32,648,788
-------------- -------------- -------------
Income from operations........................................... 44,832,475 28,683,907 8,468,488
Other expense (income):
Interest Expense............................................... 13,608 19,663 216,618
Interest Income................................................ (2,266,861) (981,165) (121,809)
Other.......................................................... 11,820 122,940 (222,278)
-------------- -------------- -------------
Earnings before income taxes..................................... 47,073,908 29,522,469 8,595,957
Provision for income taxes....................................... 19,064,571 12,103,680 3,218,063
-------------- -------------- -------------
Net earnings..................................................... $ 28,009,337 $ 17,418,789 $ 5,377,894
-------------- -------------- -------------
-------------- -------------- -------------
Basic earnings per share......................................... $ 1.16 $ 0.77 $ 0.24
Diluted earnings per share....................................... $ 1.11 $ 0.73 $ 0.24
Basic weighted average shares outstanding........................ 24,054,865 22,687,942 22,639,997
Diluted weighted average shares outstanding...................... 25,326,580 23,862,387 22,650,871
See accompanying notes to financial statements.
F-4
BEBE STORES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK ACCUMULATED
------------------- ADDITIONAL OTHER
COMPREHENSIVE NUMBER OF PAID-IN DEFERRED RETAINED COMPREHENSIVE
INCOME SHARES AMOUNT CAPITAL COMPENSATION EARNINGS INCOME (LOSS) TOTAL
------------- ---------- ------- ----------- ------------ ----------- ------------- -----------
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 5,377,894
Unrealized gain on
marketable
securities......... 2,506 2,506 2,506
Foreign Currency
Translation
Adjustment.........
-------------
Total Comprehension
Income............. $ 5,380,400
-------------
-------------
Deferred
Compensation....... 2,805,000 (2,805,000)
---------- ------- ----------- ------------ ----------- ------------- -----------
Balance as of June 30,
1997................. 22,639,997 22,640 5,270,610 (2,805,000) 12,803,827 2,506 15,294,583
Net earnings......... $17,418,789 17,418,789 17,418,789
Unrealized gain on
marketable
securities......... (2,506) (2,506) (2,506)
Foreign Currency
Translation
Adjustment.........
-------------
Total Comprehensive
Income............. $17,416,283
-------------
-------------
Deferred
compensation....... (80,000) 743,773 663,773
Common Stock Issued
under stock plans
including stock
benefit............ 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 0 45,263,479
Net earnings......... $28,009,337 28,009,337 28,009,337
Foreign Currency
Translation
Adjustment......... (28,013) (28,013) (28,013)
-------------
Total Comprehensive
Income............. $27,981,324
-------------
-------------
Deferred
Compensation....... (240,801) 779,080 538,279
Common Stock Issued
under stock plans
including stock
benefit............ 497,736 498 6,310,396 6,310,894
---------- ------- ----------- ------------ ----------- ------------- -----------
Balance as of June 30,
1999................. 24,387,733 $24,388 $23,147,795 $(1,282,147) $58,231,953 $(28,013) $80,093,976
---------- ------- ----------- ------------ ----------- ------------- -----------
---------- ------- ----------- ------------ ----------- ------------- -----------
See accompanying notes to financial statements.
F-5
STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED JUNE 30,
---------------------------------------
1999 1998 1997
------------ ------------ -----------
Cash flows from operating activities:
Net earnings.................................... $ 28,009,337 $ 17,418,789 $ 5,377,894
Adjustments to reconcile net earnings to cash
provided by operating activities:
Non-cash compensation expense................. 538,279 663,773
Depreciation and amortization................. 3,197,426 2,170,617 1,802,538
Tax benefit from options exercised............ 5,002,913
Net loss (gain) on disposal of property....... 803,106 253,433 (163,808)
Net loss from partnership..................... 14,754 74,910
Deferred income taxes......................... (1,009,780) (1,071,119) (1,146,305)
Deferred rent................................. 396,816 (5,544) 842,035
Changes in operating assets and liabilities:
Receivables................................. (152,599) (199,527) 1,712,625
Inventories................................. (8,132,159) (4,943,515) (1,150,969)
Other assets................................ (663,794) (217,948) (269,965)
Prepaid expenses............................ (1,425,571) (47,859) 25,110
Accounts payable............................ 6,396,465 1,857,352 1,853,169
Accrued liabilities......................... 892,758 3,022,110 3,555,057
Income taxes payable........................ (560,190) 359,904 530,354
------------ ------------ -----------
Net cash provided by operating
activities.............................. 33,293,007 19,275,220 13,042,645
Cash flows from investing activities:
Purchase of equipment and improvements.......... (11,979,179) (3,652,213) (1,716,637)
Proceeds from sales of equipment................ 9,862 2,768 22,288
Sale (purchase) of rental real estate........... 693,007
Purchase of marketable securities............... (379)
Proceeds from sale of marketable securities..... 77,883
------------ ------------ -----------
Net cash used by investing activities..... (11,969,317) (3,571,562) (1,001,721)
Cash flows from financing activities:
Borrowings from (repayments to) shareholder..... 539 (123,685)
Net proceeds from (repayments on) revolving line
of credit..................................... (969,287)
Repayments of capital leases.................... 124,122 (133,340) (168,945)
Repayments of investment note................... (51,077)
Net Proceeds from IPO........................... 11,888,840
Repayment of term loan.......................... (3,347,700)
Issuance of common stock........................ 1,307,981
------------ ------------ -----------
Net cash provided (used) by financing
activities.............................. 1,381,026 11,756,039 (4,609,617)
Effect of exchange rate changes on cash........... (14,678)
Net increase in cash and equivalents.............. 22,690,038 27,459,697 7,431,307
Cash and equivalents:
Beginning of year............................... 36,651,617 9,191,919 1,760,612
------------ ------------ -----------
End of year..................................... $ 59,341,655 $ 36,651,616 $ 9,191,919
------------ ------------ -----------
------------ ------------ -----------
Supplemental information:
Cash paid for interest.......................... $ 13,710 $ 19,664 $ 216,617
------------ ------------ -----------
------------ ------------ -----------
Cash paid for income taxes...................... $ 15,400,731 $ 12,764,904 $ 3,907,703
------------ ------------ -----------
------------ ------------ -----------
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 101 specialty retail stores located in 23 states,
the UK and Canada.
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 earnings and are reported as an
increase or decrease in shareholders' equity and comprehensive income.
INVENTORIES, NET are stated at the lower of FIFO (first-in, first-out) cost
or market. Cost includes certain indirect purchasing, merchandise handling and
storage costs.
EQUIPMENT AND 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 twelve 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, 1999 and 1998 was $317,913 and
$249,549, 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.
ADVERTISING COSTS--Costs associated with advertising are charged to expense
when the advertising first takes place. Advertising costs were $8,357,456,
$6,735,543, and $2,861,162 respectively, during fiscal 1999, 1998 and 1997.
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
F-7
BEBE STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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 the carrying value of long-lived 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.
EARNINGS PER SHARE--In February 1997, the Financial Accounting Standards
Board ("FASB") issued 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 for all entities
with complex capital structures. 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 fiscal year 1999, the Company implemented
SFAS No. 130, "Reporting Comprehensive Income." Comprehensive income consists of
net income or loss for the current period and other comprehensive income
(income, expenses, gains and losses that currently bypass the income statement
and are reported directly as a separate component of equity). The Company's
comprehensive income equals net income plus unrealized gains on marketable
securities plus foreign currency translation adjustments for all periods
presented. Such components of comprehensive earnings are shown in the Statement
of Shareholders' Equity.
The Company also adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, which establishes annual and interim
reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas and major customers.
The Company has one reportable segment given the fact that bebe has one brand
with product lines of a similar nature. Revenues of its international retail
operations represent less than one percent of bebe's total revenues for fiscal
year 1999 and did not exist in years prior.
RECLASSIFICATIONS--Certain reclassifications have been made to the prior
year financial statements to conform with the fiscal 1999 financial statement
presentation.
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.
F-8
BEBE STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. INVENTORIES
The Company's inventories consist of:
AS OF JUNE 30,
----------------------------
1999 1998
------------- -------------
Raw materials.................................................. $ 8,596,269 $ 5,277,878
Merchandise available for sale................................. 16,548,012 12,296,588
------------- -------------
Total........................................................ 25,144,281 17,574,466
Less: valuation allowance...................................... (2,602,287) (3,169,253)
------------- -------------
Inventories, net............................................... $ 22,541,994 $ 14,405,213
------------- -------------
------------- -------------
Included in the valuation allowance at June 30, 1999 and 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,
-----------------------
1999 1998
---------- -----------
Capital leases....................................................... $ 196,761 $ 72,637
Note payable......................................................... 62,791 113,867
---------- -----------
Total................................................................ 259,552 186,504
Less: current portion................................................ (138,906) (104,286)
---------- -----------
Total long-term debt................................................. $ 120,646 $ 82,218
---------- -----------
---------- -----------
On April 1, 1999, the Company entered into an unsecured commercial line of
credit agreement with a bank which provides for borrowings and issuance of
letters of credit of up to $5,000,000 and expires on April 1, 2000. The
outstanding balance bears interest at either the bank's reference rate (which
was 8.5%, as of June 30, 1999 and 1998) or the LIBOR rate plus 1.75 percentage
points. As of June 30, 1999 and 1998, there was $2,175,900 and $2,424,432,
respectively, outstanding in letters of credit.
The line of credit is secured by certain personal property of the Company,
primarily inventories, receivables and trademarks. 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. In addition, under the line of credit, cash
dividends could not be paid without the prior consent of the lending
institution. As of June 30, 1999 and 1998, the Company was in compliance with
such covenants.
The Company purchased 48.35% of a housing partnership in fiscal 1994. The
note payable of $62,791 is the remaining amount due on the purchase. The note
will be paid off in increments through fiscal year 2001.
F-9
BEBE STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. CREDIT FACILITIES (CONTINUED)
Scheduled maturities of debt outstanding at June 30, 1999 are as follows:
Fiscal year ending June 30,
2000............................................................ $ 138,565
2001............................................................ 92,985
2002............................................................ 46,292
---------
Total minimum payments.......................................... 277,842
Less: imputed interest.......................................... (18,290)
---------
Present value of future minimum payments........................ $ 259,552
---------
---------
4. OPERATING LEASES
The Company has operating leases for its retail store locations, corporate
headquarters, distribution center and certain office equipment. Store leases
typically provide for payment by the Company of operating expenses, real estate
taxes and additional rent based on a percentage of net sales if a specified net
sales target is exceeded. In addition, certain leases have escalation clauses
and provide for terms of renewal and/or early termination based on the net sales
volumes achieved.
Rent expense for the years ended June 30, 1999, 1998 and 1997 was
$19,205,735, $15,509,575 and $13,481,105 respectively. Rent expense includes
percentage rent and other lease-required expenses for the years ended 1999, 1998
and 1997 of $7,311,922, $6,307,118, and $4,776,148, respectively.
Future minimum lease payments under operating leases at June 30, 1999 are as
follows:
1999
--------------
Fiscal year ending June 30:
2000........................................................................ $ 13,707,772
2001........................................................................ 13,663,737
2002........................................................................ 13,011,323
2003........................................................................ 12,735,797
2004........................................................................ 12,190,127
Thereafter.................................................................. 35,908,631
--------------
Total minimum lease payments.................................................. $ 101,217,387
--------------
--------------
F-10
BEBE STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES
Significant components of the provision (benefit) for income taxes are as
follows:
FISCAL YEAR ENDED JUNE 30,
-------------------------------------------
1999 1998 1997
------------- ------------- -------------
Current:
Federal....................................... $ 15,862,695 $ 10,444,465 $ 3,545,749
State......................................... 4,194,630 2,730,336 676,565
Foreign....................................... 16,620
------------- ------------- -------------
20,073,945 13,174,801 4,222,314
Deferred:
Federal....................................... (685,785) (859,558) (705,259)
State......................................... (159,799) (211,563) (298,992)
Foreign....................................... (163,790)
------------- ------------- -------------
(1,009,374) (1,071,121) (1,004,251)
------------- ------------- -------------
Provision................................... $ 19,064,571 $ 12,103,680 $ 3,218,063
------------- ------------- -------------
------------- ------------- -------------
Reconciliation of the federal statutory tax rate with the Company's
effective income tax rate is as follows:
FISCAL YEAR ENDED JUNE 30,
-------------------------------
1999 1998 1997
--------- --------- ---------
Federal statutory rate:................................................ 35.0% 35.0% 35.0%
State rate, net of federal benefit..................................... 5.6 5.6 5.5
Valuation adjustment................................................... 0.5 (1.2)
Benefit of graduated rate.............................................. (1.2)
Tax exempt income...................................................... (0.1)
Tax credits............................................................ (0.2) (.3) (1.0)
Permanent items and other.............................................. (0.3) .7 0.3
--- --- ---
Effective tax rate..................................................... 40.5% 41.0% 37.4%
--- --- ---
--- --- ---
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax reporting purposes.
F-11
BEBE STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets (liabilities)
are as follows:
AS OF JUNE 30,
--------------------------
1999 1998
------------ ------------
Current:
Gift certificates/ Store credits................................ $ 249,286
Inventory reserve............................................... 1,128,645 $ 914,141
State taxes..................................................... 228,886 224,799
Accrued vacation................................................ 127,368 64,835
Uniform capitalization.......................................... (361,337) (261,451)
Other........................................................... 287,526 (99,489)
------------ ------------
Total current................................................. 1,660,374 842,835
Noncurrent:
Basis difference in fixed assets................................ 1,009,232 575,932
Store closure/Expansion reserve................................. 199,706 709,171
Trademarks...................................................... 331,234
Deferred rent................................................... 635,256 213,041
Deferred compensation........................................... 160,839 249,439
Foreign tax credit.............................................. (149,035)
Net operating loss.............................................. 15,816
Other........................................................... (63,219) 63,543
------------ ------------
Total noncurrent.............................................. 2,139,829 1,811,126
Valuation allowance............................................. (136,869) 0
------------ ------------
Net deferred tax assets........................................... $ 3,663,334 $ 2,653,961
------------ ------------
------------ ------------
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. The Company had
established a valuation allowance for 100% of the net deferred asset related to
the United Kingdom operations at June 30, 1999 due to the uncertainty of
realizing future tax benefits from its foreign net operating loss carryforward
(NOL) and other deferred tax assets.
The Company has a net operating loss carryforward with an indefinite
carryforward period to offset future taxable income related to the United
Kingdom operations of approximately $75,000.
The Company has committed to the acquisition of low income tax credits from
a real estate partnership totaling $134,049 through fiscal 2000. The Company
utilized $80,430 of credits during both fiscal 1998 and fiscal 1999 to reduce
its federal income taxes payable.
F-12
BEBE STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. EQUIPMENT AND IMPROVEMENTS
Equipment and improvements consist of the following:
AS OF JUNE 30,
----------------------------
1999 1998
------------- -------------
Leasehold improvements......................................... $ 14,673,937 $ 7,812,316
Furniture, fixtures, equipment and vehicles.................... 5,969,419 3,824,802
Computer hardware and software................................. 5,483,719 2,633,157
Assets under capital leases.................................... 640,225 363,488
Construction in progress....................................... 556,436 717,647
------------- -------------
Total........................................................ 27,323,736 15,351,410
Less accumulated depreciation and amortization................. (9,323,756) (6,138,052)
------------- -------------
Equipment and improvements, net................................ $ 17,999,980 $ 9,213,358
------------- -------------
------------- -------------
7. 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, 1999, 1998 and
1997 were $87,888, $72,503, and $32,688, respectively.
8. STOCK OPTIONS
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.
F-13
BEBE STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTIONS (CONTINUED)
The following summarizes all stock option transactions for the year ended
June 30, 1999 and 1998.
SHARES WEIGHTED AVERAGE
OUTSTANDING PRICE PER SHARE
----------- -----------------
Balance, June 30, 1997........................................ 1,587,630 $ 1.77
Options granted............................................... 383,450 6.78
Options canceled.............................................. (149,990) 4.19
-----------
Balance, June 30, 1998........................................ 1,821,090 2.63
Options granted............................................... 479,360 21.08
Options exercised............................................. (462,111) 2.11
Options cancelled............................................. (153,445) 3.68
-----------
Balance, June 30, 1999........................................ 1,684,894 7.92
-----------
-----------
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 $538,279 and $663,773 was expensed for
the years ended June 30, 1999 and 1998, respectively. As of June 30, 1999 there
were 682,995 shares available for future grant.
The following table summarizes information about stock options outstanding
at June 30, 1999:
EXERCISABLE OPTIONS NOT SUBJECT
OPTIONS OUTSTANDING TO REPURCHASE (VESTED)
-------------------------------------------------- --------------------------------
WEIGHTED AVERAGE NUMBER OF
NUMBER OF REMAINING LIFE WEIGHTED AVERAGE OPTIONS AT WEIGHTED AVERAGE
EXERCISABLE PRICES OPTIONS (IN YEARS) EXERCISE PRICE JUNE 30, 1999 EXERCISE PRICE
- ---------------------------------- ---------- ------------------- ----------------- ------------- -----------------
$ 1.77............................ 995,225 7.99 $ 1.77 398,090 $ 1.77
5.65............................ 163,309 8.50 5.65 48,993 5.65
13.13............................ 55,000 8.96 13.13 0 13.13
13.25............................ 269,000 9.26 13.25 0 13.25
30.63............................ 108,000 9.89 30.63 0 30.63
32.50............................ 94,360 9.60 32.50 0 32.50
---------- -------------
1,684,894 447,083
---------- -------------
---------- -------------
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)
8. STOCK OPTIONS (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,
----------------------------
1999 1998
------------- -------------
Net income As reported.................................... $ 28,009,337 $ 17,418,789
Pro forma...................................... $ 27,216,130 $ 17,249,741
Basic EPS As reported.................................... $ 1.16 $ .77
Pro forma...................................... $ 1.13 $ .76
Diluted EPS As reported.................................... $ 1.11 $ .73
Pro forma...................................... $ 1.07 $ .72
The weighted average fair value of options granted during the fiscal year
ended June 30, 1999 and 1998 was $7.92 and $2.63, 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 FISCAL YEAR ENDED
JUNE 30, 1999 JUNE 30, 1998
------------------- -------------------
Expected dividend rate................................... 0.0% 0.0%
Expected volatility...................................... 81.38% 15.2%
Risk-free interest rate.................................. 5.74% 5.7%
Expected lives (years)................................... 6.07 5.6
9. LITIGATION
The Company is subject to legal proceedings and claims that arise in the
ordinary course of business. Management believes, based on the advice of
counsel, that ultimate resolution of these matters will not have a material
adverse effect on the financial statements taken as a whole.
10. 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, 1999, there were no
borrowings due to Mr. Mashouf from the Company or advances owed to the Company
by Mr. Mashouf.
11. 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
F-15
BEBE STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. EARNINGS PER SHARE (CONTINUED)
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,
----------------------------------------
1999 1998 1997
------------ ------------ ------------
Basic weighted average number of shares outstanding..................... 24,054,865 22,687,942 22,639,997
Incremental shares from assumed issuance of stock options............... 1,271,715 1,174,445 10,874
------------ ------------ ------------
Diluted weighted average number of shares outstanding................... 25,326,580 23,862,387 22,650,871
------------ ------------ ------------
------------ ------------ ------------
The number of incremental shares from the assumed issuance of stock options
is calculated applying the treasury stock method.
12. 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.
1999 QUARTER ENDED
--------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1998 1998 1999 1999
--------- --------- ----------- ---------
Net sales............................................................ $ 41,552 $ 59,491 $ 46,047 $ 54,250
Gross profit......................................................... 21,752 32,276 23,560 28,314
Selling, general and administrative expenses......................... 13,201 16,307 15,158 16,404
Income from operations............................................... 8,551 15,969 8,402 11,910
Earnings before income taxes......................................... 9,035 16,523 9,017 12,499
Net Earnings......................................................... 5,331 9,652 5,363 7,664
Basic earnings per share............................................. $ 0.22 $ 0.40 $ 0.22 $ 0.32
Diluted earnings per share........................................... $ 0.21 $ 0.38 $ 0.21 $ 0.30
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)
12. 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
SCHEDULE
BEBE STORES, INC.
VALUATION AND QUALIFYING ACCOUNTS
COLUMN C
-------------------------
COLUMN B ADDITIONS COLUMN E
------------ ------------------------- ------------
COLUMN A BALANCE AT CHARGED TO CHARGED TO COLUMN D BALANCE AT
- --------------------------------------------- BEGINNING OF COSTS AND OTHER ------------ END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTION PERIOD
- --------------------------------------------- ------------ ------------ ----------- ------------ ------------
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
------------ ------------ ----------- ------------ ------------
------------ ------------ ----------- ------------ ------------
YEAR ENDED JUNE 30, 1999
Inventory obsolescence reserve............... $ 3,169,253 $ 2,686,008 $ 3,252,974 $ 2,602,287
Allowance for doubtful accounts receivable... 51,784 90,694 34,400 108,078
Reserve for store closures................... 239,950 466,375 140,542 565,783
------------ ------------ ------------ ------------
$ 3,460,987 $ 3,243,077 $ 3,427,916 $ 3,276,148
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
F-18
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- --------------------------------------------------------------------------------------------------------
3.1* Amended and Restated Articles of Incorporation of the Registrant.
3.2* Bylaws of the Registrant.
4.1* Specimen certificate representing the Common Stock (in standard printer form, not provided).
10.1* 1997 Stock Plan.
10.2* 1998 Stock Purchase Plan.
10.3* Form of Indemnification Agreement
10.4* Standard Industrial/Commercial-Tenant Lease-Net dated August 8, 1994 between the Registrant and
California State Teachers' Retirement System, as amended (lease for corporate headquarters and
distribution center in Brisbane, California).
10.5* Retail Store License Agreement between the Registrant and Bebe Moda S.A. de C.V., a Mexican company,
effective as of April 1, 1998.
10.6** Standard Industrial/Commercial-Tenant Lease-Net dated November 30, 1998 between Registrant and Far
Western Land and Investment Company, Inc., (lease for additional building to house administrative
departments in Brisbane, California).
10.7** Retail Store License Agreement between the Registrant and Sakal Duty Free LTD., a duly registered
Israeli private company, and Sakal Sports LTD., a duly registered Israeli private company, effective
as of November 1, 1998.
10.8 Form of Retail Store License Agreement between Registrant and [company].
23.1 Independent Auditors' Consent and Report on Schedule.
24.1 Power of Attorney (see signature page).
27.1 Financial Data Schedule (EDGAR filed version only).
- ------------------------
* Incorporated by reference from exhibits of the same number in Registrant's
Registration Statement on Form S-1 (Reg. No. 333-50333), effective June 16,
1998.
** Incorporated by reference from exhibits of the same number in Registrant's
Quarterly Report on Form 10-Q filed on February 16, 1999.
F-19