FORM S-1
REGISTRATION STATEMENT
UNDER
BEBE STORES, INC.
(Exact name of Registrant as specified in its charter)
CALIFORNIA 5621 94-2450490
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Number) Identification
incorporation or organization) No.)
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380 VALLEY DRIVE BRISBANE, CALIFORNIA 94005
(415) 715-3900
(Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices)
MANNY MASHOUF
PRESIDENT AND CHIEF EXECUTIVE OFFICER
BEBE STORES, INC.
380 VALLEY DRIVE
BRISBANE, CALIFORNIA 94005
(415) 715-3900
COPIES TO:
ERIC J. LAPP, ESQ. ALAN K. AUSTIN, ESQ.
JOHN M. FOGG, ESQ. SUSAN L. STAPLETON, ESQ.
LILLIEMAE I. STEPHENS, ESQ. JAMES C. CREIGH, ESQ.
Gray Cary Ware & Freidenrich LLP Wilson Sonsini Goodrich & Rosati
400 Hamilton Avenue Professional Corporation
Palo Alto, California 94301-1825 650 Page Mill Road
(650) 328-6561 Palo Alto, California 94304-1050
(650) 493-9300
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If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. / /
CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED (1) PER SHARE (2) PRICE (2) REGISTRATION FEE
Common Stock ($0.001 par value)....... 2,875,000 shares $13.00 $37,375,000 $11,026
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(1) Includes 375,000 shares which the Underwriters have the option to purchase to cover over-allotments, if any.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED APRIL 17, 1998
[BEBE LOGO]
2,500,000 SHARES
COMMON STOCK
Of the 2,500,000 shares of Common Stock offered hereby, 1,250,000 shares are being sold by bebe stores, inc. ("bebe" or the "Company") and 1,250,000 shares are being sold by a shareholder of the Company (the "Selling Shareholder"). See "Principal and Selling Shareholder." The Company will not receive any proceeds from the sale of shares by the Selling Shareholder. Prior to this offering, there has been no public market for the Common Stock of the Company. It is estimated currently that the initial public offering price will be between $11.00 and $13.00 per share. See "Underwriting" for information related to the method of determining the initial public offering price.
Upon consummation of this offering, Manny Mashouf, the Company's Chief Executive Officer, President and Chairman of the Board, will own approximately 88.4% (approximately 86.9% if the Underwriters' over-allotment option is exercised in full) of the outstanding shares of Common Stock. As a result, Mr. Mashouf will continue to have effective control over the outcome of substantially all issues submitted to the Company's shareholders, including the election of all of the Company's directors. See "Principal and Selling Shareholder."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING AT PAGE 7.
OFFENSE.
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS COMPANY (1) SHAREHOLDER
Per Share............. $ $ $ $
Total (2)............. $ $ $ $
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(1) Before deducting estimated offering expenses of $700,000, all of which are payable by the Company.
(2) The Selling Shareholder has granted the Underwriters a 30-day option to purchase up to an additional 375,000 shares of Common Stock solely to cover over-allotments, if any. See "Underwriting." If such over-allotment option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions, and Proceeds to Selling Shareholder will be $ , $ , and $ , respectively.
The Common Stock is offered by the Underwriters as stated herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that delivery of such shares will be made through the offices of BancAmerica Robertson Stephens, San Francisco, California, on or about , 1998.
BANCAMERICA ROBERTSON STEPHENS BEAR, STEARNS & CO. INC.
The date of this Prospectus is , 1998
[WOMAN IN BEBE CLOTHING]
GATEFOLD
(1) [WOMAN IN BEBE CLOTHING]
(2) [WOMAN IN BEBE CLOTHING]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDER OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR ANY OFFER TO OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
TABLE OF CONTENTS
PAGE
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Summary.................................................................................................... 4
Risk Factors............................................................................................... 7
Use of Proceeds............................................................................................ 14
Dividend Policy............................................................................................ 14
Capitalization............................................................................................. 15
Dilution................................................................................................... 16
Selected Financial and Operating Data...................................................................... 17
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 18
Business................................................................................................... 24
Management................................................................................................. 34
Certain Transactions....................................................................................... 39
Principal and Selling Shareholder.......................................................................... 40
Description of Capital Stock............................................................................... 41
Shares Eligible for Future Sale............................................................................ 43
Underwriting............................................................................................... 45
Legal Matters.............................................................................................. 46
Experts.................................................................................................... 46
Change in Accountants...................................................................................... 46
Additional Information..................................................................................... 47
Index to Financial Statements.............................................................................. F-1
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"bebe," "bebe moda" and the bebe logo are registered trademarks of the Company in the United States and certain foreign jurisdictions. All other trademarks or trade names referred to in this Prospectus are the property of their respective owners. The Company was incorporated in California in June 1976.
The Company's principal executive offices are located at 380 Valley Drive, Brisbane, California 94005, and its telephone number at that address is (415) 715-3900.
SUMMARY
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. REFERENCES TO A FISCAL YEAR RELATE TO THE FISCAL YEAR ENDING JUNE 30 OF SUCH YEAR. ALL SHARE NUMBERS IN THIS PROSPECTUS REFLECT A 2.83-FOR-1 SPLIT IN THE COMPANY'S COMMON STOCK EFFECTED APRIL 9, 1998. THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS," AND THE FINANCIAL STATEMENTS AND NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
bebe designs, develops and produces a distinctive line of contemporary women's apparel and accessories, which it markets under the bebe and bebe moda brand names through its 85 specialty retail stores located in 22 states. While bebe attracts a broad audience, the Company's target customers are 18 to 35 year-old women who seek current fashion trends interpreted to suit their lifestyle needs. The "bebe look," with an unmistakable hint of sensuality, appeals to a hip, sophisticated, body-conscious woman who takes pride in her appearance. The bebe customer is a discriminating consumer who demands value in the form of quality at a competitive price. bebe's broad product offering includes suits, tops, pants, skirts, dresses, logo and other activewear, outerwear, and handbags and other accessories. Much of the Company's merchandise is designed and developed in-house and manufactured to its specifications. The balance is developed primarily in conjunction with third party apparel manufacturers or, in some cases, selected directly from these manufacturers' lines.
Founded by Manny Mashouf, the Company's current Chairman, President and Chief Executive Officer, bebe opened its first store in San Francisco, California in 1976 and grew to 73 stores by the end of fiscal 1996. Since the end of fiscal 1996, bebe has significantly strengthened its management team and has begun implementing several strategic initiatives which management believes have contributed to the Company's recent strong performance and positioned it to support significant growth over the next several years. These initiatives were directed to all aspects of the Company's operations and in particular the merchandising, planning, manufacturing and distribution functions. The Company's merchandising initiatives focused primarily on expansion of its product line to include a broader array of tops, pants, dresses, accessories and logo items. While the Company's traditional bebe product offering spoke to the "nine to five" needs of a young professional woman, the expanded product line provides head-to-toe lifestyle dressing at a competitive price that easily adapts from day into evening. Additionally, the logo portion of the product line, which highlights the bebe logo on a variety of active and casual styles, enhances brand awareness while providing younger, "aspirational" customers an entry to the bebe product line at lower price points. The strategic initiatives relating to the planning, manufacturing and distribution functions primarily involve the implementation of more sophisticated procedures and a more disciplined approach to the operational aspects of the business.
The Company's net sales have grown from $18.1 million in fiscal 1993 to $95.1 million in fiscal 1997, representing a compounded average growth rate of 51.4%. As a result of the management team additions and strategic initiatives implemented beginning at the end of fiscal 1996, the Company has experienced a significant improvement in performance. In particular, the Company's net sales grew from $71.6 million in fiscal 1996 to $95.1 million in fiscal 1997, an increase of 32.8%, due in part to an increase in comparable store sales of 18.0%. In addition, the Company's income from operations as a percentage of net sales grew from 0.7% to 8.9% during the same period. Furthermore, for the six months ended December 31, 1997, the Company's net sales reached $74.8 million, an increase of 65.1%, compared to the same six-month period in fiscal 1997 and its income from operations increased from 8.9% of net sales to 20.7%.
OPERATING STRATEGY
While the market for women's apparel is extremely large, the Company believes that the distinctive, contemporary, bebe point-of-view addresses an underserved market segment and presents the Company with opportunities for future growth. The Company's objective is to become a global brand, offering quality merchandise that enhances the spirit and playful sensuality of the contemporary woman. The principal elements of the Company's operating strategy to achieve this objective are as follows:
- PROVIDE DISTINCTIVE FASHION THROUGHOUT A BROAD PRODUCT LINE. bebe merchandisers take their fashion inspiration from throughout the world, interpreting contemporary ideas for silhouettes, fabrications and colors
into products and styles to meet the everyday lifestyle needs of the bebe customer. While many of the Company's styles and products are represented season after season with variations in color, fabric or trim, its merchandisers are committed to bringing newness into the merchandise mix in response to emerging trends. bebe's product lines are carefully planned to represent a broad array of sleek, fashionable goods, with particular emphasis on career wear, related separates and day-into-evening styles. The bebe product line is further supported by a broad selection of accessories that help bebe customers create a distinctive ensemble, while logo-embellished items provide an entry point for younger, aspirational customers.
- VERTICALLY INTEGRATE DESIGN, PRODUCTION, MERCHANDISING AND RETAIL FUNCTIONS. The Company believes that its vertical integration of processes from design to market coupled with its financial discipline enable it to produce distinctive quality merchandise of exceptional value. Once a line is conceived by the merchandise team, bebe maintains flexibility in its sourcing by subcontracting production of its own designs, developing exclusive products in conjunction with third party apparel manufacturers, or selecting merchandise directly from these manufacturers' lines. This approach also enables the Company to respond quickly to changing fashion trends, while reducing its risk of excess inventory.
- CONTROL DISTRIBUTION OF MERCHANDISE. bebe believes that its brand image is greatly enhanced by distributing its products exclusively through bebe stores. This controlled distribution strategy enables the Company to display the full assortment of its products, control the pricing, visual presentation and flow of goods, test new products and reinforce the brand's identity in the eyes of its customers.
- ENHANCE BRAND IMAGE. Through an edgy, high-impact, visual advertising campaign utilizing print, outdoor, in-store and direct mail communication vehicles, the Company attracts customers who are intrigued by the playfully sensual and evocative imagery of the bebe lifestyle. The Company also offers a line of merchandise branded with the distinctive bebe logo to increase brand awareness. Within its stores, the Company seeks to create an upscale boutique environment that further enhances the bebe brand and builds customer loyalty and demand for bebe merchandise. Furthermore, the Company trains bebe sales associates to be responsive and knowledgeable and encourages them to reflect the bebe image.
- MANAGE MERCHANDISE MIX. The Company believes that a disciplined approach to merchandising and a proactive inventory management program is critical to its success. By actively monitoring sell-through rates and managing the mix of categories and products in its stores, the Company believes it is able to respond to emerging trends in a timely manner, minimize its dependence on any particular category, style or fabrication and preserve a balanced, coordinated presentation of merchandise within each store.
GROWTH STRATEGY
bebe's objective is to grow its operations in a controlled manner, primarily through the opening of new stores. After intentionally slowing its store expansion in fiscal 1997 and 1998 while implementing strategic initiatives begun in fiscal 1996, the Company believes it is now positioned to accelerate its store opening program. With seven stores planned for opening in fiscal 1998, five of which have been opened to date, the Company currently plans to open approximately 15 stores in each of fiscal 1999 and 2000, the majority of which will be in existing markets. In addition to its domestic expansion, the Company is considering international expansion primarily through licensing arrangements and has entered into a license agreement with a company in Mexico. Additionally, the Company continually reviews its existing store base and has identified five underperforming stores that it is considering closing prior to the end of fiscal 1999.
In addition, the Company plans to grow through product line extensions, introduction of new product categories, such as intimate apparel, and incremental operational improvements. The Company has recently hired a Vice President of Licensing to explore opportunities for licensing the bebe name for the development of product line extensions or new product categories that may include eyewear, footwear and swimwear.
To support the introduction of new product categories in recent years as well as to handle higher sales volumes, the Company has developed a store prototype that is larger than the average of 2,700 square feet for the Company's existing stores. The Company's new store prototype is approximately 3,000 to 5,000 square feet, although in certain selected markets the Company may open larger stores.
The Company was founded in 1970 and incorporated under the name Babe, Inc. in California in June 1976, and changed its name to bebe stores, inc. in April 1998. The Company's principal offices are located at 380 Valley Drive, Brisbane, CA 94005. The Company's telephone number is 415-715-3900.
THE OFFERING
Common Stock offered by the Company............ 1,250,000 shares
Common Stock offered by the Selling 1,250,000 shares
Shareholder...................................
Common Stock to be outstanding after the 23,889,997 shares (1)
offering......................................
Use of Proceeds................................ Capital expenditures for new, expanded and
relocated stores, improvements to the Company's
management information systems and expansion or
relocation of its corporate offices and
distribution center, with the remainder to be
used for working capital and general corporate
purposes. See "Use of Proceeds."
Proposed Nasdaq National Market symbol......... BEBE
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SUMMARY FINANCIAL AND OPERATING DATA
(Number of shares and $ in thousands, except per share data)
SIX MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, DECEMBER 31,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1996 1997
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(NUMBER OF SHARES AND $ IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Net sales............................................ $ 18,077 $ 32,603 $ 65,411 $ 71,563 $ 95,086 $ 45,251 $ 74,776
Cost of sales, including buying and occupancy........ 9,606 17,222 32,653 44,701 53,969 26,382 36,710
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Gross profit......................................... 8,471 15,381 32,758 26,862 41,117 18,869 38,066
Selling, general and administrative expenses......... 7,745 13,015 23,138 26,364 32,649 14,820 22,565
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Income from operations............................... 726 2,366 9,620 498 8,468 4,049 15,501
Interest and other expenses (income), net............ 59 128 87 472 209 157 (312)
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Earnings before income taxes......................... 667 2,238 9,533 26 8,259 3,892 15,813
Provision (benefit) for income taxes................. 263 912 4,050 (48) 3,110 1,466 6,493
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Net earnings......................................... $ 404 $ 1,326 $ 5,483 $ 74 $ 5,149 $ 2,426 $ 9,320
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Basic earnings per share (1)......................... $ 0.02 $ 0.06 $ 0.24 $ 0.00 $ 0.23 $ 0.11 $ 0.41
Diluted earnings per share (1)....................... $ 0.02 $ 0.06 $ 0.24 $ 0.00 $ 0.23 $ 0.11 $ 0.39
Dividends Declared (2)............................... -- -- -- -- -- -- --
Basic weighted average shares outstanding (1)........ 22,640 22,640 22,640 22,640 22,640 22,640 22,640
Diluted weighted average shares outstanding (1)...... 22,640 22,640 22,640 22,640 22,651 22,640 23,664
SELECTED OPERATING DATA:
Number of stores:
Opened during period............................... 11 8 24 18 10 6 5
Closed during period............................... 0 0 0 (1) 0 0 (3)
Open at end of period.............................. 24 32 56 73 83 79 85
Net sales per average store (3)...................... $ 958 $ 1,155 $ 1,480 $ 1,065 $ 1,211 $ 590 $ 876
Comparable store sales increase (decrease) (4)....... 18.7% 29.5% 35.4% (16.5)% 18.0% 7.9% 49.4%
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DECEMBER 31, 1997
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ACTUAL AS ADJUSTED (5)
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BALANCE SHEET DATA:
Working capital............................................................................... $ 17,006 $ 30,256
Total assets.................................................................................. 43,563 56,813
Long-term debt; including current portion..................................................... 253 253
Shareholders' equity.......................................................................... 25,047 38,297
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(1) Excludes 1,782,900 shares issuable upon exercise of options outstanding at March 31, 1998 at a weighted average exercise price of $2.29 per share. See "Management--Stock Plans."
(2) See Note 1 of Notes to Financial Statements for the method used to calculate earnings per share amounts.
(3) Based on the sum of average monthly net sales per open store for the period.
(4) Based on net sales; stores are considered comparable beginning on the first day of the first month following the first anniversary of their opening.
(5) As adjusted to reflect the sale of 1,250,000 shares of Common Stock offered hereby by the Company, after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company, and the application of the estimated net proceeds therefrom. See "Use of Proceeds."
RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and uncertainties. The statements contained in this Prospectus that are not purely historical are forward-looking statements, including without limitation, statements regarding the Company's expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements in this document are based upon information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth in the following risk factors and elsewhere in this Prospectus. In evaluating the Company's business, prospective investors should consider carefully the following factors in addition to the other information in this Prospectus.
FASHION AND APPAREL INDUSTRY RISKS
The apparel industry is subject to rapidly evolving fashion trends, shifting consumer demands and intense competition. The Company believes that its future success will be dependent, in part, on its ability to anticipate, identify and capitalize upon emerging fashion trends, including products, styles, fabrics and colors, and to distinguish itself within the women's apparel market. If, for any reason, the Company misinterprets the current fashion trends or consumer tastes shift and the Company fails to respond, consumer demand for bebe products and the Company's profitability and brand image could be significantly impaired. Additionally, there can be no assurance that competitors of the Company will not carry similar designs, thus undermining bebe's distinctive image and potentially having an adverse effect on the Company's financial condition and results of operation. Furthermore, success in the apparel industry is dependent on a company's ability to manage its inventory of merchandise in proportion to the demand for such merchandise. If bebe miscalculates the consumer demand for its products it may be faced with significant excess inventory and excess fabric for some products and missed opportunities for others. Weak sales and resulting markdowns and/or write-offs could cause its profitability to be significantly impaired. See "Business--Merchandising" and "--Competition."
RISKS OF GROWTH STRATEGY
The Company's continued growth is dependent, to a significant degree, on its ability to identify sites and open and operate new stores on a profitable basis. bebe opened 24 stores in fiscal 1995, 18 stores in fiscal 1996, 10 stores in fiscal 1997 and five stores in the nine months ended March 31, 1998. The Company expects to open two new stores during the remainder of fiscal 1998 and approximately 15 additional stores in each of fiscal 1999 and 2000. Such expansion may include the opening in selected markets of flagship stores that will be larger and more expensive to operate than existing stores. If the Company does not generate sufficient revenues from these flagship stores to cover their higher costs, the Company's financial results could be negatively affected. The success of this expansion plan is dependent upon a number of factors, including the availability of desirable locations, the successful negotiation of acceptable leases for such locations, the ability to manage the expansion of the store base, the ability to source inventory adequate to meet the needs of new stores, the ability to operate stores profitably once opened, the development of adequate management information systems to support expanded activity, the ability to recruit and retain new employees, the availability of capital, and general economic and business conditions affecting consumer confidence and spending. There can be no assurance that the Company will be able to achieve its planned expansion on a timely and profitable basis, if at all. In addition, most of the Company's new store openings in fiscal 1999 and 2000 will be in existing markets. There can be no assurance that these openings will not result in reduced net sales volumes and profitability in existing stores in those markets. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business--Growth Strategy" and "--Stores."
FUTURE RESULTS OF OPERATIONS
Although the Company has been profitable on an annual basis for each of the past five fiscal years, profitability rates have varied widely from quarter-to-quarter and from year-to-year. In particular, in fiscal 1996, the Company experienced a significant financial downturn due to, among other things, a significant disruption in supply of the Company's key fabrication, difficulty in obtaining a replacement fabrication, certain related fashion misjudgments, failure to obtain product deliveries in a timely manner, rapid expansion of the Company's store base, and lack of sufficient controls and personnel to support such expanded activity. There can be no assurance that the Company will remain profitable in the future. Future results of operations will depend on, among other things, the number and timing of new store openings, the Company's ability to identify and capitalize upon changing fashion trends, hire and retain qualified management and other personnel, maintain appropriate inventory levels, obtain needed raw materials, identify and negotiate favorable leases for successful store locations, reduce shrinkage and control operating costs. Future results of operations will also depend on factors outside of the Company's control, such as general economic conditions, availability of third party sourcing and raw materials, and actions of competitors. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business--Growth Strategy," "--Merchandising," "--Stores" and "--Competition."
The Company believes that the rate of comparable store sales growth achieved in recent periods is not sustainable and expects that such growth, if any, in the current and future periods will be more moderate. Furthermore, during these periods of relatively high comparable store sales growth, the Company has experienced favorable merchandise margins due to strong sell-through rates and attendant low markdown rates. As comparable store sales growth moderates, the Company anticipates a decline in merchandise margins and accordingly a reduction in gross margins. In addition, the Company's selling, general and administrative expenses have decreased as a percentage of net sales in recent periods due in part to the rapid growth in net sales. However, the Company believes that such expenses will increase as a percentage of net sales during the current and the next several quarters as the Company makes planned investments to its infrastructure and sales growth moderates. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
RELIANCE ON MANAGEMENT INFORMATION SYSTEMS
In the past, the Company's investments in information systems have focused on its core store, merchandise and financial accounting systems. Currently, the Company's focus is on upgrading its capabilities and systems associated with its production, merchandise allocation and distribution functions, which have not kept pace with the Company's growth. The Company intends to make significant investments to improve existing management information systems and implement new systems in these areas and to implement them during fiscal 1999. There can be no assurance that these enhancements will be successfully implemented. Failure to implement and integrate such systems could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business-- Information Services and Technology."
NEW MANAGEMENT TEAM; DEPENDENCE ON KEY PERSONNEL
The Company is dependent upon the efforts of its key employees, particularly Manny Mashouf, the founder, Chairman, President and Chief Executive Officer. In addition, most of the Company's officers and other key personnel have joined the Company since the middle of fiscal 1996 and, therefore, have relatively little experience with the Company. None of the Company's executive officers is bound by an employment agreement, and the relationships of such officers with the Company are, therefore, at will. The Company does not have "key person" life insurance policies on any of its employees. The loss of the services of Mr. Mashouf or any of its key officers or employees could have a material adverse effect on the Company's business, financial condition and results of operations. Furthermore, the Company will need to hire experienced executive personnel to support the planned improvements and expansions of its business;
however, there can be no assurance that the Company will be successful in hiring such personnel in a time frame necessary to manage and support its expansion plans. See "Management."
The Company's success also depends to a significant degree on its ability to attract and retain experienced employees. There is substantial competition for experienced personnel, which the Company expects to continue. Many of the companies with which bebe competes for experienced personnel have greater financial resources than the Company. In the past, the Company has experienced significant turnover of its retail store personnel. The Company's failure to attract, motivate and retain qualified personnel could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Store Operations."
DEPENDENCE ON INDEPENDENT MANUFACTURING FACILITIES AND RAW MATERIAL SUPPLIERS
The Company does not own any production facilities and therefore is dependent on third parties for the manufacturing of its products. Company merchandise designed by the bebe in-house design team is manufactured by independent manufacturers with raw materials purchased from independent mills and other suppliers. The Company places all of its orders for production of merchandise and raw materials by purchase order and does not have any long-term contracts with any manufacturer or supplier. The Company competes with other companies for production facilities and raw materials. In the past, particularly in fiscal 1996, the Company had difficulty obtaining needed quantities of raw materials on a timely basis because of competition with other apparel vendors for raw materials. Such failure to obtain sufficient quantities of raw materials has had an adverse effect on the Company's financial condition in the past and may in the future. Furthermore, the Company has received in the past, and may receive in the future, shipments of products from manufacturers that fail to conform to the Company's quality control standards. In such event, unless the Company is able to obtain replacement products in a timely manner, the Company may lose sales. The Company's failure to maintain favorable relationships with these production facilities and to obtain an adequate supply of quality raw materials on commercially reasonable terms could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Merchandising" and "--Sourcing, Quality Control and Distribution."
The violation of labor or other laws by an independent manufacturer of the Company, or the divergence of an independent manufacturer's labor practices from those generally accepted as ethical in the United States, could have a material adverse effect on the Company's business, financial condition, results of operations and brand image. While the Company recently adopted a policy to monitor the operations of its independent manufacturers by retaining an independent firm to inspect these manufacturing sites, the Company cannot control the actions of such manufacturers, and there can be no assurance that these manufacturers will conduct their businesses using ethical practices.
DEPENDENCE ON THIRD PARTY APPAREL MANUFACTURERS
A significant portion of the Company's merchandise is developed in conjunction with third party apparel manufacturers and, in some cases, selected directly from these manufacturers' lines. The Company does not have long-term contracts with any third party apparel manufacturers and purchases all of the merchandise from such manufacturers by purchase order. Furthermore, the Company has received in the past, and may receive in the future, shipments of products from manufacturers that fail to conform to the Company's quality control standards. In such event, unless the Company is able to obtain replacement products in a timely manner, the Company may lose sales. There can be no assurance that third party manufacturers will not supply similar products to the Company's competitors, will not cease supplying products to the Company completely or will supply products that satisfy the Company's quality control standards. See "Business--Merchandising" and "--Sourcing, Quality Control and Distribution."
RISK OF FOREIGN SOURCING OF APPAREL
The Company purchases its raw materials from mills and other suppliers, a significant portion of which is purchased from suppliers outside the United States, primarily in Japan. A significant portion of the manufacturing of its merchandise is sourced outside the United States, primarily in Europe and Asia. The Company is subject to the risks associated with doing business abroad. These risks include adverse fluctuations in currency exchange rates (particularly those of the U.S. dollar against certain foreign currencies), changes in import duties or quotas, the imposition of taxes or other charges on imports, the impact of foreign government regulation, political unrest, disruption or delays of shipments and changes in economic conditions in countries in which the Company's suppliers are located. The occurrence of any one or more of the foregoing could adversely affect the Company's business, financial condition and results of operations. See "Business--Sourcing, Quality Control and Distribution."
The Company's import operations are subject to constraints imposed by bilateral textile agreements between the United States and a number of foreign countries. These agreements, which have been negotiated bilaterally either under the framework established by the Arrangement Regarding International Trade in Textiles, known as the Multifiber Agreement, or other applicable treaties, impose quotas on the amounts and types of merchandise which may be imported into the United States from these countries. These agreements also allow the United States to impose restraints at any time on the importation of categories of merchandise that, under the terms of the agreements, are not currently subject to specified limits. The Company's imported products are also subject to United States customs duties which comprise a material portion of the cost of the merchandise. A substantial increase in customs duties would have an adverse effect on the Company's business, financial condition and results of operations. The United States and the countries in which the Company's products are produced or sold may, from time to time, impose new quotas, duties, tariffs, or other restrictions, or adversely adjust prevailing quota, duty, or tariff levels, any of which could have a material adverse effect on the Company's business, financial condition and results of operations.
In addition, a significant portion of the Company's foreign-supplied products is produced by manufacturing facilities in China. There have been a number of recent trade disputes between China and the United States during which the United States has threatened to impose punitive tariffs and duties on products imported from China and to withdraw China's "most favored nation" trade status. The loss of the most favored nation status for China, changes in current tariff or duty structures or the adoption by the United States of other trade polices or sanctions adverse to China could have a material adverse effect on the Company's business, financial condition and results of operations.
DEPENDENCE ON INTELLECTUAL PROPERTY
The Company believes that its trademarks and other proprietary rights are important to its success and has registered "bebe," "bebe moda" and the bebe logo in the United States and certain foreign jurisdictions. There can be no assurance that actions taken by the Company to establish and protect its trademarks and other proprietary rights will prevent imitation of its products or infringement of its intellectual property rights by others. In addition there can be no assurance that others will not resist or seek to block the sale of the Company's products as violative of their trademark and proprietary rights.
The Company is seeking to register its trademarks in targeted international markets which it believes represent large potential markets for the Company's products. In some of these markets, local companies currently have registered competing marks, and/or regulatory obstacles exist that may prevent the Company from obtaining a trademark for the bebe name or related names. In such countries, the Company may be unable to use the bebe name unless it purchases the right or obtains a license to use the bebe name. There can be no assurance that the Company will be able to register trademarks in such international markets, purchase the right or obtain a license to use the bebe name on commercially reasonable terms, if at all. Failure to obtain either trademark, ownership or license rights would limit the
Company's ability to expand into certain international markets or enter such markets with the bebe name, and to capitalize on the value of its brand.
The Company currently is evaluating its opportunities to expand its product offering and extend its geographic reach through licensing or joint venture arrangements. The Company has no prior experience with any such arrangements, and there can be no assurance that such arrangements will be successful. Furthermore, while the Company intends to maintain control of the presentation and pricing of bebe merchandise through the terms of any such agreement, there can be no assurance that any licensee or joint venture partner will comply with such contractual provisions. Any deviation from the terms of these contracts may have a material adverse effect on the Company's brand image. See "Business--Intellectual Property and Proprietary Rights."
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company has experienced historically, and expects to continue to experience, quarterly fluctuations in its sales volumes and levels of profitability. The Company tends to generate larger sales and, to an even greater extent, profitability levels in the first and second quarters (which include the fall and holiday selling seasons) of its fiscal year. If for any reason, sales were below seasonal norms during the first and second quarters of its fiscal year, as they were in fiscal 1996, the Company's quarterly and annual results of operations would be adversely affected. bebe's quarterly financial performance may also fluctuate widely as a result of a number of other factors such as the number and timing of new store openings, acceptance of product offerings, timing of product deliveries, actions by competitors and effectiveness of advertising campaigns. Due to these factors, the results of interim periods are not necessarily indicative of the results for the year. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Seasonality of Business and Quarterly Fluctuations."
COMPETITION
The retail and apparel industries are highly competitive and are characterized by low barriers to entry, and the Company expects competition in its markets to increase. The primary competitive factors in the Company's markets include brand name recognition, product styling, product presentation, product pricing, store ambiance, customer service and convenience. The Company competes with traditional department stores, specialty store retailers, off-price retailers and direct marketers for, among other things, raw materials, market share, retail space, finished goods, sourcing and personnel. Many of these competitors are larger and have substantially greater financial, distribution and marketing resources than the Company. Any failure to compete would have a material adverse effect on the Company's business, financial condition and results of operations. See "--Fashion and Apparel Industry Risks" and "Business--Competition."
SENSITIVITY TO ECONOMIC CONDITIONS AND CONSUMER SPENDING
The retail and apparel industries historically have been subject to substantial cyclical variation. A recession in the general economy or a decline in consumer spending in the apparel industry could have a material adverse effect on the Company's financial performance. Purchases of apparel and related merchandise tend to decline during recessionary periods and may decline at other times. There can be no assurance that a prolonged economic downturn would not have a material adverse impact on the Company or that the Company's customers would continue to make purchases during a recession.
CONTROL BY PRINCIPAL SHAREHOLDER; POTENTIAL ANTI-TAKEOVER EFFECTS
Upon the completion of this offering, Manny Mashouf, the Chairman, President and Chief Executive Officer of the Company will beneficially own approximately 88.4% (86.9% if the Underwriters' over-allotment option is exercised) of the outstanding shares of the Company's Common Stock and as a result,
acting alone, can control the election of directors of the Company and the outcome of all issues submitted to the shareholders of the Company. These factors may make it more difficult for a third party to acquire shares, may discourage acquisition bids for the Company and could limit the price that certain investors might be willing to pay for shares of Common Stock. Such concentration of stock ownership may have the effect of delaying, deferring or preventing a change in control of the Company. See "Principal and Selling Shareholder" and "Description of Capital Stock."
The Board of Directors has authority to issue up to 1,000,000 shares of Preferred Stock of the Company, $0.001 par value per share ("Preferred Stock"), and to fix the rights, preferences, privileges and restrictions, including voting rights, of these shares without any vote or action by the shareholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company, thereby delaying, deferring or preventing a change in control of the Company. Furthermore, such Preferred Stock may have other rights, including economic rights, senior to the Common Stock, and as a result, the issuance of such Preferred Stock could have a material adverse effect on the market value of the Common Stock. The Company has no present plan to issue shares of Preferred Stock. See "Description of Capital Stock."
DEPENDENCE ON SINGLE FACILITY
The Company currently operates a single corporate office and distribution center in Brisbane, California. Any serious disruption at this facility whether due to fire, earthquake or otherwise would have a material adverse effect on the Company's operations and could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Properties."
YEAR 2000 COMPLIANCE
The Company has created a Year 2000 Task Force, which is implementing a 6-phase plan that the Company believes will ensure that its management information systems will record, store, process, calculate and present calendar dates falling on or after (and if applicable, spans of time including) January 1, 2000 in the same manner, and with the same functionality as it has in years prior to 2000 (collectively, "Year 2000 Compliant"). There can be no assurance that this 6-phase plan will be successful or that Year 2000 Compliant issues will not arise with respect to products furnished by third party manufacturers or suppliers that may result in unforeseen costs or delays to the Company and therefore have a material adverse effect on the Company. See "Business--Information Services and Technology."
SUBSTANTIAL DILUTION
The assumed initial public offering price is substantially higher than the net tangible book value per share of the outstanding Common Stock. As a result, purchasers of Common Stock offered hereby will incur immediate, substantial dilution in the amount of $10.40 per share based on the offering price. The Company has granted in the past a substantial number of options to purchase Common Stock to employees and directors as part of their compensation or remuneration package, and the Company expects that it will continue to grant a substantial number of options in the future. In addition, the Company adopted a stock purchase plan that will allow employees an opportunity to purchase shares below prevailing market value. The Company also may issue shares of Common Stock in connection with strategic acquisitions or alliances, which could also result in dilution to shareholders. See "Dilution."
ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common Stock. The initial public offering price of the Common Stock will be determined by negotiations among the Company, the Selling Shareholder and the Underwriters. There can be no assurance that an active trading market will develop for the Common Stock or that the Common Stock will trade in the public market at or above the initial public offering price. See "Underwriting."
The stock market has from time to time experienced extreme price and volume volatility. In addition, the market price of the Company's Common Stock, like that of the stock of other retail and apparel companies, may be highly volatile due to certain risks inherent in the apparel industry. Factors such as quarter-to-quarter variations in the Company's net sales and earnings and changes in financial estimates by equity research analysts or other events or factors could cause the market price of the Common Stock to fluctuate significantly. Further, due to the volatility of the stock market and the prices of stocks of retail and apparel companies generally, the price of the Common Stock could fluctuate for reasons unrelated to the operating performance of the Company.
ABSENCE OF DIVIDENDS
Following the completion of this offering, the Company intends to retain any future earnings for use in its business and, therefore, does not anticipate paying any cash dividends on Common Stock in the foreseeable future. Future dividend policy will depend on the Company's earnings, capital requirements and financial condition as well as any restrictions imposed by existing credit agreements and other factors considered relevant by the Board of Directors. See "Dividend Policy."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public market following this offering could adversely affect the market price of the Common Stock. Upon completion of this offering, the Company will have outstanding an aggregate of 23,889,997 shares of Common Stock (based upon the number of shares outstanding as of March 31, 1998 and assuming no exercise of outstanding options or of the Underwriters' over-allotment option). Of these shares, all of the shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act of 1933, as amended (the "Securities Act"), unless such shares are purchased by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act ("Affiliates"). The remaining 21,389,997 shares of Common Stock held by the existing shareholders are "restricted securities," as that term is defined in Rule 144 under the Securities Act ("Restricted Shares"). Restricted Shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 promulgated under the Securities Act. As a result of the provisions of Rule 144 and certain contractual restrictions, no Restricted Shares will be eligible for immediate sale in the public market on the date of this Prospectus or prior to the expiration of a lock-up period pursuant to lock-up agreements or provisions under the 1997 Stock Option Plan (collectively, the "Lock-Up Arrangements") 180 days after the date of this Prospectus at which time all Restricted Shares will be eligible to be sold, subject to certain volume and other limitations under Rule 144.
As of March 31, 1998, options to purchase 1,782,900 shares of Common Stock were outstanding and exercisable, subject to certain vesting and repurchase restrictions. The Company intends to file a registration statement on Form S-8 under the Securities Act within 90 days after the date of this Prospectus to register 2,830,000 shares of Common Stock reserved for issuance under the Company's 1997 Stock Plan and 750,000 shares reserved for issuance under the Company's 1998 Employee Stock Purchase Plan. See "Management--Stock Plans" and "Shares Eligible for Future Sale."
USE OF PROCEEDS
The net proceeds to the Company from the sale of 1,250,000 shares of Common Stock offered by the Company hereby, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company, are estimated to be approximately $13,250,000. The Company will not receive any proceeds from the sale of shares by the Selling Shareholder.
The Company intends to use the net proceeds for capital expenditures for new, expanded and relocated stores, improvements to its management information systems and expansion or relocation of its corporate offices and distribution center, with the remainder to be used for working capital and general corporate purposes. Pending such uses, the net proceeds will be invested in investment-grade, interest bearing securities. See "Capitalization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
DIVIDEND POLICY
The Company currently intends to retain its earnings, if any, for use in its business and does not anticipate paying any cash dividends in the foreseeable future. In addition, the Company's line of credit agreement prohibits the payment of cash dividends without the lender's prior approval.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of December 31, 1997 on an actual basis and on an as adjusted basis to give effect to the sale and issuance of the 1,250,000 shares of Common Stock offered hereby by the Company at an assumed initial public offering price of $12.00 per share and receipt and application of the estimated net proceeds (after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company) to the Company therefrom. See "Use of Proceeds." This table should be reviewed in conjunction with the Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
DECEMBER 31, 1997
----------------------------
ACTUAL AS ADJUSTED
------------- -------------
Current portion of long-term debt.................................................. $ 127,835 $ 127,835
------------- -------------
------------- -------------
Long-term debt (1)................................................................. $ 125,598 $ 125,598
Shareholders' equity:
Preferred stock-authorized 1,000,000 shares at $0.001 par value per share; no
shares issued and outstanding.................................................. 0 0
Common Stock-authorized 40,000,000 shares $0.001 par value; issued and
outstanding 22,639,997, actual; issued and outstanding 23,889,997, as adjusted
(2)............................................................................ 22,640 23,890
Additional paid-in capital....................................................... 5,205,610 18,454,360
Deferred Compensation............................................................ (2,305,579) (2,305,579)
Retained earnings................................................................ 22,124,181 22,124,181
------------- -------------
Total shareholders' equity..................................................... 25,046,852 38,296,852
------------- -------------
Total capitalization......................................................... $ 25,172,450 $ 38,422,450
------------- -------------
------------- -------------
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(1) See Note 3 of Notes to Financial Statements.
(2) Excludes 2,830,000 shares of Common Stock reserved for issuance under the Company's Stock Plan of which 1,782,900 shares issuable upon exercise of options outstanding at March 31, 1998 at a weighted average exercise price of $2.29 per share. See "Management--Stock Plans."
DILUTION
As of December 31, 1997, the Company's net tangible book value was approximately $25,047,000, or $1.11 per share of Common Stock, based on 22,639,997 shares of Common Stock outstanding. Net tangible book value per share is equal to the Company's total tangible assets less its total liabilities, divided by the total number of shares of Common Stock outstanding. After giving effect to the sale by the Company of 1,250,000 shares of Common Stock offered hereby at an assumed initial public offering price of $12.00 per share, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by the Company, the as adjusted net tangible book value of the Company as of December 31, 1997 would have been approximately $38,297,000, or $1.60 per share. This represents an immediate increase in net tangible book value of $0.49 per share of Common Stock to existing shareholders and an immediate dilution in net tangible book value of $10.40 per share to investors purchasing shares of Common Stock in this offering. The following table illustrates this per share dilution:
Assumed initial public offering price per share............................. $ 12.00
Net tangible book value per share as of December 31, 1997................. $ 1.11
Increase in net tangible book value per share attributable to new
investors............................................................... 0.49
---------
Net tangible book value per share after offering............................ 1.60
---------
Dilution per share to new investors......................................... $ 10.40
---------
---------
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The following table summarizes, as adjusted as of December 31, 1997, with respect to existing shareholders and the new investors in this offering, a comparison of the number of shares of Common Stock acquired from the Company, the percentage ownership of such shares, the total cash consideration paid, the percentage of total cash consideration paid and the average price per share.
SHARES PURCHASED (1) TOTAL CONSIDERATION
------------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- ----------- -------------
Existing shareholders.......... 22,639,997 94.8% $ 2,488,250 14.2% $ 0.11
New investors.................. 1,250,000 5.2 15,000,000 85.8 12.00
------------ ----- ------------- -----
23,889,997 100.0% $ 17,488,250 100.0%
------------ ----- ------------- -----
------------ ----- ------------- -----
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(1) Sales by the Selling Shareholder in the offering will cause the number of shares held by existing shareholders to be reduced to 21,389,997 shares, or 89.5% (21,014,997 shares, or 88.0%, if the Underwriters' over-allotment option is exercised in full), of the total number of shares of Common Stock to be outstanding after this offering, and will increase the number of shares held by new investors to 2,500,000 shares, or 10.5% (2,875,000 shares, or 12.0%, if the Underwriters' over-allotment option is exercised in full), of the total number of shares of Common Stock to be outstanding after this offering. See "Principal and Selling Shareholder."
The calculation of net tangible book value and other computations above assume no exercise of outstanding options. As of December 31, 1997, 1,782,900 shares of Common Stock were issuable upon exercise of outstanding stock options that were immediately exercisable upon grant at a weighted average exercise price of $2.29 per share. To the extent the outstanding options are exercised with exercise prices below the initial public offering price, there will be further dilution to new investors. See "Management-- Stock Plans" and "Shares Eligible for Future Sale."
SELECTED FINANCIAL AND OPERATING DATA
The following selected financial data of the Company is qualified by reference to, and should be read in conjunction with, the Financial Statements and Notes thereto and the other financial information appearing elsewhere in this Prospectus. The following selected statements of operations data for the years ended June 30, 1995, 1996 and 1997 and the balance sheet data as of June 30, 1995, 1996 and 1997 are derived from the financial statements of the Company, which have been audited by Deloitte & Touche LLP, independent auditors, and, except for the balance sheet data as of June 30, 1995, are included elsewhere in this Prospectus. The statements of operations data for the years ended June 30, 1993 and 1994 and the balance sheet data as of June 30, 1993 and 1994 are derived from the unaudited financial statements of the Company. The selected statements of operations data for the six-month periods ended December 31, 1996 and 1997 and the balance sheet data as of December 31, 1996 and 1997, have been derived from the unaudited financial statements of the Company. In the opinion of management, all adjustments, consisting of only normal recurring accruals, considered necessary for a fair presentation have been made. These historical results are not necessarily indicative of the results to be expected in the future.
SIX MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, DECEMBER 31,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1996 1997
--------- --------- --------- --------- --------- --------- ---------
(NUMBER OF SHARES AND $ IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Net sales...................................... $ 18,077 $ 32,603 $ 65,411 $ 71,563 $ 95,086 $ 45,251 $ 74,776
Cost of sales, including buying and
occupancy.................................... 9,606 17,222 32,653 44,701 53,969 26,382 36,710
--------- --------- --------- --------- --------- --------- ---------
Gross profit................................... 8,471 15,381 32,758 26,862 41,117 18,869 38,066
Selling, general and administrative expenses... 7,745 13,015 23,138 26,364 32,649 14,820 22,565
--------- --------- --------- --------- --------- --------- ---------
Income from operations......................... 726 2,366 9,620 498 8,468 4,049 15,501
Interest and other expenses (income), net...... 59 128 87 472 209 157 (312)
--------- --------- --------- --------- --------- --------- ---------
Earnings before income taxes................... 667 2,238 9,533 26 8,259 3,892 15,813
Provision (benefit) for income taxes........... 263 912 4,050 (48) 3,110 1,466 6,493
--------- --------- --------- --------- --------- --------- ---------
Net earnings................................... $ 404 $ 1,326 $ 5,483 $ 74 $ 5,149 $ 2,426 $ 9,320
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Basic earnings per share (1)................... $ 0.02 $ 0.06 $ 0.24 $ 0.00 $ 0.23 $ 0.11 $ 0.41
Diluted earnings per share (1)................. $ 0.02 $ 0.06 $ 0.24 $ 0.00 $ 0.23 $ 0.11 $ 0.39
Dividends Declared (2)......................... -- -- -- -- -- -- --
Basic weighted average shares outstanding
(1).......................................... 22,640 22,640 22,640 22,640 22,640 22,640 22,640
Diluted weighted average shares outstanding
(1).......................................... 22,640 22,640 22,640 22,640 22,651 22,640 23,664
SELECTED OPERATING DATA:
Number of stores:
Opened during period......................... 11 8 24 18 10 6 5
Closed during period......................... 0 0 0 (1) 0 0 (3)
Open at end of period........................ 24 32 56 73 83 79 85
Net sales per average store (3)................ $ 958 $ 1,155 $ 1,480 $ 1,065 $ 1,211 $ 590 $ 876
Comparable store sales increase (decrease)
(4).......................................... 18.7% 29.5% 35.4% (16.5)% 18.0% 7.9% 49.4%
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AS OF JUNE 30, AS OF DECEMBER 31,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1996 1997
--------- --------- --------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Working capital................................. $ 487 $ 2,639 $ 2,722 $ 5,496 $ 8,275 $ 5,027 $ 17,006
Total assets.................................... 5,054 11,076 19,520 22,200 29,109 23,764 43,563
Long-term debt, including current portion....... 500 500 321 3,680 320 329 253
Shareholders' equity............................ 1,773 4,577 10,060 10,143 15,295 12,569 25,047
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(1) See Note 1 of Notes to Financial Statements for the method used to calculate earnings per share amounts.
(2) See Note 3 of Notes to Financial Statements and "Dividend Policy" for details about dividend restrictions.
(3) Based on the sum of average monthly sales per open store for the period.
(4) Based on net sales; stores are considered comparable beginning on the first day of the first month following the first anniversary of their opening.
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 contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors" and elsewhere in this Prospectus. The following section is qualified in its entirety by the more detailed information, including "Risk Factors," and the Financial Statements and Notes thereto, appearing elsewhere in this Prospectus.
OVERVIEW
bebe designs, develops and produces a distinctive line of contemporary women's apparel and accessories, which it markets under the bebe and bebe moda brand names through its 85 specialty retail stores located in 22 states. The Company's stores average approximately 2,700 square feet and are located primarily in regional shopping malls, and in several cases, free-standing street locations. bebe's broad product offering includes suits, tops, pants, skirts, dresses, logo and other activewear, outerwear, and handbags and other accessories. Much of the Company's merchandise is designed and developed in-house and manufactured to its specifications. The balance is developed primarily in conjunction with third party apparel manufacturers or, in some cases, selected directly from these manufacturers' lines.
The Company's net sales have grown from $18.1 million in fiscal 1993 to $95.1 million in fiscal 1997, representing a compounded average growth rate of 51.4%. After building a strong suiting business in the early 1990's, in fiscal 1995 the Company achieved $65.4 million in net sales with an operating margin of 14.7% and strong comparable store sales growth. However, the Company was vulnerable because of its dependence on a narrow product line emphasizing suiting in a limited selection of fabrics and because it had not developed an adequate infrastructure to keep pace with the growth of its business. In fiscal 1996, the Company experienced a significant financial downturn due to, among other things, a significant disruption in supply of the Company's key fabrication, difficulty in obtaining a replacement fabrication, certain related fashion misjudgments, failure to obtain product deliveries in a timely manner, rapid expansion of the Company's store base, and lack of sufficient controls and personnel to support such expanded activity.
In response to the difficulties encountered in fiscal 1996, bebe has strengthened significantly its management team and has begun implementing several strategic initiatives which management believes have contributed to its recent strong performance and positioned it to support significant new store growth over the next several years. These initiatives were directed to all aspects of the Company's operations, particularly the merchandising, planning, manufacturing and distribution functions. Primarily as a result of these management team additions and strategic initiatives implemented beginning at the end of fiscal 1996, the Company has experienced a significant improvement in performance. In particular, the Company's net sales grew from $71.6 million in fiscal 1996 to $95.1 million in fiscal 1997, an increase of 32.8%, due in part to an increase in comparable store sales of 18.0%. In addition, the Company's income from operations grew from 0.7% of net sales to 8.9% during the same period. Furthermore, for the six months ended December 31, 1997, the Company's net sales reached $74.8 million, an increase of 65.1%, compared to the same six-month period in fiscal 1997, and its income from operations increased from 8.9% of net sales to 20.7%.
The Company's comparable store sales growth per quarter for the fiscal quarter ending March 31, 1997 through the fiscal quarter March 31, 1998 was 18.2%, 38.6%, 53.7%, 46.4% and 32.0%, respectively. The Company believes that the rate of comparable store sales growth achieved in recent periods is not sustainable and expects that such growth, if any, in the current and future periods will be more moderate. Furthermore, during these periods of relatively high comparable store sales growth, the Company has experienced favorable merchandise margins due to strong sell-through rates and attendant low markdown rates. As comparable store sales growth moderates, the Company anticipates a decline in merchandise
margins and accordingly a reduction in gross margins. In addition, the Company's selling, general and administrative expenses have decreased as a percentage of net sales in recent periods due in part to the rapid growth in net sales. However, the Company believes that such expenses will increase as a percentage of net sales during the next several quarters as the Company makes planned investments to its infrastructure and sales growth moderates.
The Company's fiscal year ends on June 30 of each calendar year.
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of net sales for the periods indicated:
SIX MONTHS ENDED
FISCAL YEAR ENDED JUNE 30,
DECEMBER 31,
------------------------------- --------------------
1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
STATEMENTS OF OPERATIONS DATA:
Net sales.......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales, including buying and occupancy...... 49.9 62.5 56.8 58.3 49.1
--------- --------- --------- --------- ---------
Gross profit....................................... 50.1 37.5 43.2 41.7 50.9
Selling, general and administrative expenses....... 35.4 36.8 34.3 32.8 30.2
--------- --------- --------- --------- ---------
Income from operations............................. 14.7 0.7 8.9 8.9 20.7
Interest and other expenses (income), net.......... 0.1 0.7 0.2 0.3 (0.4)
--------- --------- --------- --------- ---------
Earnings before income taxes....................... 14.6 -- 8.7 8.6 21.1
Provision (benefit) for income taxes............... 6.2 (0.1) 3.3 3.2 8.7
--------- --------- --------- --------- ---------
Net earnings....................................... 8.4% 0.1% 5.4% 5.4% 12.5%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Comparable store sales increase (decrease)......... 35.4% (16.5%) 18.0% 7.9% 49.4%
Stores opened during the period.................... 24 18 10 6 5
Stores closed during the period.................... 0 (1) 0 0 (3)
Stores open at the end of the period............... 56 73 83 79 85
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SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996
NET SALES. Net sales increased to $74.8 million during the six-month period ended December 31, 1997 from $45.3 million for the same six-month period in 1996, an increase of $29.5 million, or 65.1%. Of this increase, $22.1 million was attributable to the 49.4% increase in comparable store sales, and $7.4 million was attributable to stores not included in the comparable store sales base. The increase in comparable store sales was attributable to a broader product line offering, strong consumer acceptance of the product line and improvements in the operational aspects of the Company's business.
GROSS PROFIT. Gross profit, which includes the cost of merchandise, buying and occupancy, increased to $38.1 million during the six-month period ended December 31, 1997 from $18.9 million for the same period in 1996, an increase of $19.2 million, or 101.6%. As a percentage of net sales, gross profit increased to 50.9% during the six-month period ended December 31, 1997 from 41.7% during the same six-month period in 1996. The increase in gross profit as a percentage of net sales resulted from higher initial markups and lower markdowns associated with higher sell-through rates, as well as reduced occupancy costs as a percentage of net sales resulting from higher average store sales. The Company believes that the gross margins attained during this most recent six-month period 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
$22.6 million during the six-month period ended December 31, 1997 from $14.8 million for the same six-month period in 1996, an increase of $7.8 million, or 52.7%. As a percentage of net sales, these expenses decreased to 30.2% during the six-month period ended December 31, 1997 from 32.8% during the same six-month period in 1996. 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.
INTEREST AND OTHER EXPENSE (INCOME), NET. The Company generated $312,000 of interest income (net of other expenses) during the six-month period ended December 31, 1997 as compared to $157,000 of net interest and other expense for the same six-month period in 1996. The Company had no borrowings under its line of credit during the six months ended December 31, 1997 due to increases in average cash balances arising from its improved operating results compared to net borrowing in the same six-month period in 1996.
PROVISION (BENEFIT) FOR INCOME TAXES. The effective tax rate for the six-month period ended December 31, 1997 was 41.1% as compared to 37.7% in the same six-month period in 1996. The higher effective tax rate for the six-month period ended December 31, 1997 was primarily attributable to a higher applicable federal tax rate and greater profitability in high tax rate states. See Note 6 of Notes to Financial Statements.
YEARS ENDED JUNE 30, 1997 AND 1996
NET SALES. Net sales increased to $95.1 million in fiscal 1997 from $71.6 million in fiscal 1996, an increase of $23.5 million, or 32.8%. Of this increase, $12.7 million was attributable to an 18.0% increase in comparable store sales, and $10.8 million was attributable to stores not included in the comparable store sales base. The increase in comparable sales was attributable to a broader product line offering, strong consumer acceptance of the product line and improvements in the operational aspects of the business.
GROSS PROFIT. Gross profit increased to $41.1 million in fiscal 1997 from $26.9 million in fiscal 1996, an increase of $14.2 million, or 52.8%. As a percentage of net sales, gross profit increased to 43.2% in fiscal 1997 from 37.5% in fiscal 1996. The increase in gross profit as a percentage of net sales resulted from higher initial markups and lower markdowns associated with higher sell-through rates, as well as reduced occupancy costs as a percentage of net sales resulting from higher average store sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased to $32.6 million in fiscal 1997 from $26.4 million in fiscal 1996, an increase of $6.2 million, or 23.5%. As a percentage of net sales, these expenses decreased to 34.3% in fiscal 1997 from 36.8% in fiscal 1996. This reduction as a percentage of net sales was largely due to economies of scale related to the net sales increases offset in part by expenses related to additions to the management team and an increase in advertising expenses as a percentage of net sales.
INTEREST AND OTHER EXPENSE (INCOME), NET. Net interest and other expense decreased to $209,000 in fiscal 1997 from $472,000 in fiscal 1996, a decrease of $263,000 due to reduced borrowing needs as a result of net cash generated from operations in fiscal 1997 as compared to fiscal 1996.
PROVISION (BENEFIT) FOR INCOME TAXES. The Company's effective tax rate was 37.7% for fiscal 1997 compared to a tax benefit for fiscal 1996. See Note 6 of Notes to Financial Statements.
YEARS ENDED JUNE 30, 1996 AND 1995
NET SALES. Net sales increased to $71.6 million in fiscal 1996 from $65.4 million in fiscal 1995, an increase of $6.2 million, or 9.5%. Of this increase, $16.7 million was attributable to stores not included in the comparable store sales base. This increase was offset significantly by a 16.5% decline in comparable store sales. The decline in comparable store sales was due to, among other things, lower sell-through of the Company's merchandise related to changing consumer trends, a significant disruption in supply of the Company's key fabrication, difficulty in obtaining replacement fabrication of similar appeal in desired
colors in a timely manner, certain related fashion misjudgments and failure to manage product deliveries in order to obtain merchandise in a timely manner.
GROSS PROFIT. Gross profit decreased to $26.9 million in fiscal 1996 from $32.8 million in fiscal 1995, a decrease of $5.9 million, or 18.0%. As a percentage of net sales, gross profit decreased to 37.5% in fiscal 1996 from 50.1% in fiscal 1995. The decrease in gross profit as a percentage of net sales primarily resulted from the decrease in comparable store sales that led to a high level of markdowns. In addition, the Company experienced increased occupancy costs as a percentage of net sales related to the decline in average store sales combined with the significant growth of the Company's store base.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased to $26.4 million in fiscal 1996 from $23.1 million in fiscal 1995, an increase of $3.3 million, or 14.3%. As a percentage of net sales, these expenses increased to 36.8% in fiscal 1996 from 35.4% in fiscal 1995. This increase as a percentage of net sales is primarily related to the decline in average store sales.
INTEREST AND OTHER EXPENSE (INCOME), NET. Net interest and other expense increased to $472,000 in fiscal 1996 from $87,000 in fiscal 1995, an increase of $385,000 as a result of increased net borrowings required to fund operations.
PROVISION (BENEFIT) FOR INCOME TAXES. The Company realized a tax benefit in fiscal 1996 as a result of minimal taxable earnings offset by certain tax credits compared to an effective tax rate of 42.5% for fiscal 1995 associated with greater taxable earnings in fiscal 1995. See Note 6 of Notes to Financial Statements.
SEASONALITY OF BUSINESS AND QUARTERLY RESULTS
The Company's business varies with general seasonal trends that are characteristic of the retail and apparel industries. As a result, the Company generates a disproportionate amount of its annual net sales in the first half of its fiscal year (which includes the fall and holiday selling seasons) compared to the second half of its fiscal year. If for any reason the Company's sales were below seasonal norms during the first half of its fiscal year, as they were in fiscal 1996, the Company's annual operating results would be affected adversely. Because of the seasonality of the Company's business, results for any quarter are not necessarily indicative of results that may be achieved for a full fiscal year.
The following table sets forth certain unaudited statements of operations data for each of the four quarters ended December 31, 1997, as well as such data expressed as a percentage of the Company's total net sales for the periods indicated. This data has been derived from unaudited financial statements that, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments)
necessary for fair presentation of such information when read in conjunction with the Company's Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
FISCAL QUARTER ENDED
----------------------------------------------------------
SEPT. 30, DEC. 31,
MARCH 31, 1997 JUNE 30, 1997 1997 1997
-------------- ------------- ------------- ------------
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Net sales............................................ $ 23,146 $ 26,689 $ 31,218 $ 43,558
Gross profit......................................... 9,228 13,020 15,653 22,413
Selling, general and administrative expenses......... 7,742 10,086 9,382 13,183
Income from operations............................... 1,486 2,934 6,271 9,230
Earnings before income taxes......................... 1,516 2,852 6,439 9,374
Net earnings......................................... 945 1,778 3,797 5,523
Basic earnings per share............................. $ 0.04 $ 0.08 $ 0.17 $ 0.24
Diluted earnings per share........................... $ 0.04 $ 0.08 $ 0.16 $ 0.23
AS A PERCENTAGE OF NET SALES:
Net sales............................................ 100.0% 100.0% 100.0% 100.0%
Gross profit......................................... 39.9 48.8 50.1 51.5
Selling, general and administrative expenses......... 33.4 37.8 30.1 30.3
Income from operations............................... 6.4 11.0 20.1 21.2
Earnings before income taxes......................... 6.5 10.7 20.6 21.5
Net earnings......................................... 4.1 6.7 12.2 12.7
OPERATING DATA:
Comparable store sales increase (decrease) (1)....... 18.2% 38.6% 53.7% 46.4%
Stores open at end of period......................... 80 83 83 85
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(1) Comparable store sales increased 32.0% for the quarter ended March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
During the first six months of fiscal 1998, and the preceding three years, bebe has satisfied its cash requirements principally through cash flow from operations, borrowings under its revolving lines of credit and term loans. Primary uses of cash have been to purchase merchandise inventory, fund the construction of new stores and to remodel and renovate stores.
The Company's working capital requirements vary widely throughout the year and generally peak in the first and second fiscal quarters. At December 31, 1997, the Company had approximately $22.1 million of cash and cash equivalents on hand. In addition, the Company had a revolving line of credit, under which it could borrow or issue letters of credit up to a combined total of $7.0 million. As of December 31, 1997, there were no borrowings under the line of credit and letters of credit outstanding totaled $544,000.
Net cash provided by operating activities in fiscal 1997 was $13.0 million, while net cash used by operating activities was $2.2 million in fiscal 1996. In fiscal 1995, net cash provided by operating activities was $8.9 million. The increase in cash provided by operating activities in fiscal 1997 compared to 1996 was primarily the result of increases in income from operations. The increase in cash used by operating activities in 1996 compared to 1995 was primarily a result of reduced income from operations.
Net cash used by investing activities was $1.0 million, $1.5 million and $6.9 million in fiscal 1997, 1996 and 1995, 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. In addition, in fiscal 1995, the Company incurred approximately $540,000 in tenant improvement costs in connection with the lease of new corporate offices.
The Company expects to make substantial capital expenditures in connection with the opening and expansion of stores, the implementation of new systems to support store and corporate office functions and the expansion or relocation of its corporate offices and distribution center. The Company estimates that capital expenditures will be between $3.5 million and $4.5 million in fiscal 1998, of which approximately $1.5 million had been expended as of December 31, 1997, and will be between $9.0 million and $11.0 million in fiscal 1999. The Company opened five new stores during the nine months ended March 31, 1998 and expects to open two additional stores during the remainder of fiscal 1998. The Company also expects to open approximately fifteen stores in each of fiscal 1999 and 2000, the majority of which will be in existing markets. During fiscal 1997, new store construction costs (before tenant allowances) averaged $304,000. The average gross inventory investment was $108,000 while pre-opening costs, which are expensed as incurred, averaged approximately $12,500 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 used by financing activities was $4.6 million in fiscal 1997 while net cash provided by financing activities was $4.3 million in fiscal 1996. In fiscal 1995, net cash used by financing activities was $1.6 million. Net cash used by financing activities in fiscal 1997 primarily related to the repayment of the term note and revolving line of credit. In fiscal 1996, net cash provided by financing activities was related to proceeds from the term note and drawdowns under the revolving line of credit. Net cash used by financing activities in fiscal 1995 related to the paydown of amounts outstanding under the revolving line of credit and repayment of the long term note payable to the Company's then sole shareholder.
The Company believes that its cash on hand, together with its cash flow from operations and the net proceeds to the Company from this offering, will be sufficient to meet its capital and operating requirements through fiscal 1999. The Company's future capital requirements, however, will depend on numerous factors, including without limitation, the size and number of new and expanded stores, investment costs for management information systems, potential acquisitions and/or joint ventures, and future results of operations.
YEAR 2000 COMPLIANCE
The Company has created a Year 2000 Task Force, which is implementing a 6-phase plan that the Company believes will ensure that its management information systems will record, store, process, calculate and present calendar dates falling on or after (and if applicable, spans of time including) January 1, 2000 in the same manner, and with the same functionality as it has in years prior to 2000. The costs associated with the implementation of this 6-phase plan are expected to be approximately $400,000 to $600,000 during fiscal 1998 and 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, REPORTING
COMPREHENSIVE INCOME, and SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION. SFAS No. 130 requires that an enterprise
report, by major components and as a single total, the change in its net assets
during the period from nonowner sources; and SFAS No. 131 establishes annual and
interim reporting standards for an enterprise's operating segments and related
disclosures about its products, services, geographic areas and major customers.
Adoption of these statements will not have a material impact on the Company's
financial position, results of operations or cash flows, and any effect will be
limited to the form and content of its disclosures. Both statements are
effective for fiscal years beginning after December 15, 1997, with earlier
application permitted.
INFLATION
The Company does not believe that inflation has had a material effect on results of operations for the past three fiscal years. However, there can be no assurance that the Company's business will not be affected by inflation in the future.
BUSINESS
The following discussion contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors" and elsewhere in this Prospectus. The following section is qualified in its entirety by the more detailed information, including "Risk Factors," and the Financial Statements and Notes thereto, appearing elsewhere in this Prospectus.
COMPANY OVERVIEW
bebe designs, develops and produces a distinctive line of contemporary women's apparel and accessories, which it markets under the bebe and bebe moda brand names exclusively through its 85 specialty retail stores located in 22 states. While bebe attracts a broad audience, the Company's target customers are 18 to 35 year-old women who seek current fashion trends interpreted to suit their lifestyle needs. The "bebe look," with an unmistakable hint of sensuality, appeals to a hip, sophisticated, body-conscious woman who takes pride in her appearance. The bebe customer is a discriminating consumer who demands value in the form of quality at a competitive price. bebe's broad product offering includes suits, tops, pants, skirts, dresses, logo and other activewear, outerwear, and handbags and other accessories. Much of the Company's merchandise is designed and developed in-house and manufactured to its specifications. The balance is developed primarily in conjunction with third party apparel manufacturers or, in some cases, selected directly from these manufacturers' lines.
Founded by Manny Mashouf, the Company's current Chairman, President and Chief Executive Officer, bebe opened its first store in San Francisco, California in 1976 and grew to 73 stores by the end of fiscal 1996. Since the end of fiscal 1996, bebe has significantly strengthened its management team and has begun implementing several strategic initiatives which management believes have contributed to its recent strong performance and positioned it to support significant new store growth over the next several years. These initiatives were directed to all aspects of the Company's operations and in particular the merchandising, planning, manufacturing and distribution functions. The Company's merchandising initiatives focused primarily on expansion of its product line to include a broader array of tops, pants, dresses, accessories and logo items. While the Company's traditional bebe product offering spoke to the "nine to five" needs of a young professional woman, the expanded product line provides head-to-toe lifestyle dressing at a competitive price that easily adapts from day into evening. Additionally, the logo portion of the product line, which highlights the bebe logo on a variety of active and casual styles, enhances brand awareness while providing younger, "aspirational" customers an entry to the bebe product line at lower price points. The strategic initiatives relating to the planning, manufacturing and distribution functions primarily involve the implementation of more sophisticated procedures and a more disciplined approach to the operational aspects of the business.
bebe reinforces its brand with a distinctive lifestyle image advertising campaign, using prominent fashion photographers. The Company believes that its emphasis on non-product specific lifestyle advertising promotes brand awareness and attracts customers who are intrigued by the playfully sensual and evocative imagery. The images are communicated to consumers through a variety of vehicles including fashion magazines, bus shelters, in-store displays and customer mailings. The Company further enhances the bebe brand image by designing its stores to create an upscale, inviting, boutique environment.
OPERATING STRATEGY
While the market for women's apparel is extremely large, the Company believes that the distinctive, contemporary, bebe point-of-view addresses an underserved market segment and presents the Company with opportunities for future growth. The Company's objective is to become a global brand, offering
quality merchandise that enhances the spirit and playful sensuality of the contemporary woman. The principal elements of the Company's operating strategy to achieve this objective are as follows:
- PROVIDE DISTINCTIVE FASHION THROUGHOUT A BROAD PRODUCT LINE. bebe merchandisers take their fashion inspiration from throughout the world, interpreting contemporary ideas for silhouettes, fabrications and colors into products and styles to meet the everyday lifestyle needs of the bebe customer. While many of the Company's styles and products are represented season after season with variations in color, fabric or trim, its merchandisers are committed to bringing newness into the merchandise mix in response to emerging trends. bebe's product lines are carefully planned to represent a broad array of sleek, fashionable goods, with particular emphasis on career wear, related separates and day-into-evening styles. The bebe product line is further supported by a broad selection of accessories that help bebe customers create a distinctive ensemble, while logo-embellished items provide an entry point for younger, aspirational customers.
- VERTICALLY INTEGRATE DESIGN, PRODUCTION, MERCHANDISING AND RETAIL FUNCTIONS. The Company believes that its vertical integration of processes from design to market coupled with its financial discipline enable it to produce distinctive quality merchandise of exceptional value. Once a line is conceived by the merchandise team, bebe maintains flexibility in its sourcing by subcontracting production of its own designs, developing exclusive products in conjunction with third party apparel manufacturers, or selecting merchandise directly from these manufacturers' lines. This approach also enables the Company to respond quickly to changing fashion trends, while reducing its risk of excess inventory.
- CONTROL DISTRIBUTION OF MERCHANDISE. bebe believes that its brand image is greatly enhanced by distributing its products exclusively through bebe stores. This controlled distribution strategy enables the Company to display the full assortment of its products, control the pricing, visual presentation and flow of goods, test new products and reinforce the brand's identity in the eyes of its customers.
- ENHANCE BRAND IMAGE. Through an edgy, high-impact, visual advertising campaign utilizing print, outdoor, in-store and direct mail communication vehicles, the Company attracts customers who are intrigued by the playfully sensual and evocative imagery of the bebe lifestyle. The Company also offers a line of merchandise branded with the distinctive bebe logo to increase brand awareness. Within its stores, the Company seeks to create an upscale, inviting, boutique environment that further enhances the bebe brand and builds customer loyalty and demand for bebe merchandise. Furthermore, the Company trains bebe sales associates to be responsive and knowledgeable and encourages them to reflect the bebe image.
- MANAGE MERCHANDISE MIX. The Company believes that a disciplined approach to merchandising and a proactive inventory management program is critical to its success. By actively monitoring sell-through rates and managing the mix of categories and products in its stores, the Company believes it is able to respond to emerging trends in a timely manner, minimize its dependence on any particular category, style or fabrication and preserve a balanced, coordinated presentation of merchandise within each store.
GROWTH STRATEGY
bebe's objective is to grow its operations in a controlled manner, primarily through the opening of new stores. After intentionally slowing its store expansion in fiscal 1997 and 1998 while implementing strategic initiatives begun in fiscal 1996, the Company believes it is now positioned to accelerate its store opening program. With seven stores planned for opening in fiscal 1998, five of which have been opened to date, the Company currently plans to open approximately 15 stores in each of fiscal 1999 and 2000, the majority of which will be in existing markets. In addition to its domestic expansion, the Company is considering international expansion primarily through licensing arrangements and has entered into a license agreement
with a company in Mexico. Additionally, the Company continually reviews its store base and has identified five underperforming stores that it is considering closing prior to the end of fiscal 1999.
In addition, the Company plans to grow through product line extensions, introduction of new product categories, such as intimate apparel, and incremental operational improvements. The Company has recently hired a Vice President of Licensing to explore opportunities for licensing the bebe name for the development of product line extensions or new product categories that may include eyewear, footwear and swimwear.
To support the introduction of new product categories in recent years as well as to handle higher sales volumes, the Company has developed a store prototype that is larger than the average of 2,700 square feet for the Company's existing stores. The Company's new store prototype is approximately 3,000 to 5,000 square feet, although in certain selected markets the Company may open larger stores. As opportunities arise, the Company also may expand certain existing stores.
MERCHANDISING
The Company's merchandising strategy is to provide current, timely fashions in a broad array of categories to suit the lifestyle needs of its customers. All of the Company's merchandise is marketed under the bebe or bebe moda brand names. Much of this merchandise is designed and developed in-house and manufactured to the Company's specifications. The balance is developed primarily in conjunction with third party apparel manufacturers or, in some cases, selected directly from these manufacturers' lines.
PRODUCT CATEGORIES. After building a strong suiting business in the early 1990's, the Company diversified its product line in response to a decrease in demand for its suiting in fiscal 1996. The Company significantly increased the breadth of its product offerings by expanding categories such as related separates, dresses, leather, logo and accessories and began to plan and monitor its business by product classifications during fiscal 1997 and 1998. As volume has increased in these expanded categories, the Company's dependence on suiting has declined. While each category's contribution as a percentage of total net sales varies seasonally, each of the product classifications is represented throughout the year.
bebe regularly evaluates new categories that may be appropriate for introduction and currently plans to introduce an intimate apparel product line in the fall of 1998. Additionally, the Company believes opportunities exist for other new product categories such as eyewear, swimwear and footwear, although these categories are not currently under development.
PRODUCT DEVELOPMENT. The Company takes a disciplined approach to the product development process. The goal of this approach is to allow its merchants to gain as much information as possible concerning product sell-through and current fashion trends before making fabric or product purchase commitments. The process is controlled by a detailed product development calendar which highlights key color selection, fabric order, pattern development and production order deadlines. The deadlines are established to ensure an adequate flow of inventory into the stores. While the product development calendar is established on a seasonal basis, commitments are made semi-monthly based on current sales and fashion trends thereby enhancing the Company's ability to react promptly to customer demand. In collaboration with the merchandising teams, designers continuously develop new styles to be presented at monthly product review and selection meetings. Styles presented at these meetings incorporate variations on existing styles in an effort to capitalize further on the more popular silhouettes or, to a lesser extent, entirely new styles and fabrications that respond to emerging trends or customer preferences.
In addition, the product development process is supported by a detailed merchandising plan. This merchandising plan includes sales, inventory and profitability targets for each product classification and is reconciled with the Company's store sales plan, a compilation of individual store sales projections. On a semi-monthly basis, the merchandising plan is updated to reflect current sales and inventory trends and distributed throughout the merchandising department. The updated merchandising plan is used to adjust
production orders as needed to meet inventory and sales targets. If bebe miscalculates consumer demand for its products, it may be faced with significant excess inventory and fabric for some products and missed opportunities for others. Weak sales and resulting markdowns could cause the Company's profitability to be impaired.
MARKETING
The Company in recent years initiated an extensive image advertising program which addresses the lifestyles and aspirations of its target customers. Through an edgy, high-impact, visual advertising campaign, the Company attracts customers who are intrigued by the playfully sensual and evocative imagery. The Company believes that its emphasis on non-product specific lifestyle advertising promotes brand awareness and supports numerous product line expansion opportunities. Since fiscal 1997, the Company has retained an outside advertising agency to create and implement a lifestyle advertising campaign in conjunction with the Company. This campaign, which emphasizes a forward-looking view of fashion, is communicated to consumers through a variety of vehicles including fashion magazines, bus shelters, in-store displays and customer mailings. In addition, the Company maintains a public relations department to communicate directly with fashion editors and supply them with a continuous flow of product information. On occasion, the Company has co-sponsored promotional events with fashion magazines, such as Elle, Glamour, Marie Claire and Vanity Fair.
STORES
STORE LOCATIONS AND ENVIRONMENT. As of March 31, 1998, bebe operated 85 stores in 22 states. The Company's stores average approximately 2,700 square feet and are primarily located in regional shopping malls, and in several cases, free-standing street locations. The Company's stores are designed to create a clean, upscale boutique environment, featuring hardwood or marble floors and recessed lighting. Glass exteriors allow passersby to see easily into the store. The open floor design allows customers to readily view the majority of the merchandise on display while store fixtures allow for the efficient display of garments and accessories. An average store has between 18 and 22 product display bays with a flexible modular design that can be transformed easily to handle display racks, storage racks or shelving units.
Stores are provided specific merchandise display directions on a weekly or bi-weekly basis from the corporate office based on currently available merchandise receipts. bebe's in-store product presentation utilizes a variety of different fixtures to highlight the product line's breadth and versatility. Complete outfits are displayed throughout the store using garments from a variety of product categories. By emphasizing outfits in this manner, the Company allows the customer to see how different pieces can be combined to create multiple ensembles.
The following map and store list shows the number of bebe stores in each state and the cities in which stores are located as of March 31, 1998:
[MAP OF STORE LOCATIONS IN THE UNITED STATES]
ARIZONA (2) --------------------------- Scottsdale Tempe* CALIFORNIA (28) --------------------------- Camarillo* Corte Madera La Jolla Los Angeles (11): Beverly Hills (2) Brea Canoga Park Glendale Redondo Beach Santa Anita Santa Monica Sherman Oaks Thousand Oaks West Los Angeles Milpitas* Montclair Newport Beach Ontario* Sacramento San Diego San Francisco (3) San Jose San Mateo Santa Ana Stanford Walnut Creek FLORIDA (9) --------------------------- Boca Raton Brandon Fort Lauderdale Miami (2) Palm Beach Sanford Sawgrass* Tampa GEORGIA (4) --------------------------- Atlanta (4) HAWAII (1) --------------------------- Honolulu ILLINOIS (4) --------------------------- Chicago (4): Michigan Avenue Northbrook Schaumberg Skokie INDIANA (1) --------------------------- Indianapolis MARYLAND (2) --------------------------- Annapolis Bethesda MASSACHUSETTS (3) --------------------------- Boston Burlington Natick MICHIGAN (2) --------------------------- Novi Troy MINNESOTA (1) --------------------------- Minnetonka NEW JERSEY (3) --------------------------- Hackensack Menlo Park Woodridge NEW YORK (6) --------------------------- Garden City Nanuet Manhattan (3) White Plains NEVADA (3) --------------------------- Henderson Las Vegas (2) NORTH CAROLINA (1) --------------------------- Charlotte OHIO (1) --------------------------- Cincinnati OKLAHOMA (1) --------------------------- Tulsa PENNSYLVANIA (2) --------------------------- King of Prussia Willow Grove TENNESSEE (1) --------------------------- Knoxville TEXAS (4) --------------------------- Austin Dallas Grapevine* Houston VIRGINIA (2) --------------------------- Arlington McLean WASHINGTON (3) --------------------------- Auburn* Bellevue Seattle WASHINGTON D.C. (1) --------------------------- Washington D.C. |
* Outlet store.
The following table highlights the number of stores opened and closed in each of the last seven fiscal years and the nine months ended March 31, 1998:
NINE
MONTHS
ENDED
FISCAL YEAR ENDED JUNE 30, MARCH 31,
----------------------------------------------- ---------
1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ----- ---------
Number of stores:
Open at beginning of period.................. 6 8 13 24 32 56 73 83
Opened..................................... 4 5 11 8 24 18 10 5
Closed..................................... (2) 0 0 0 0 (1) 0 (3)
---- ---- ---- ---- ---- ---- ----- --
Open at end of period........................ 8 13 24 32 56 73 83 85
---- ---- ---- ---- ---- ---- ----- --
---- ---- ---- ---- ---- ---- ----- --
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EXPANSION OPPORTUNITIES. In developing its store opening plan, the Company, in conjunction with a real estate consulting firm, in fiscal 1997 developed a profile of current customers and applied the profile to the largest 150 metropolitan areas in the United States. The Company currently operates bebe stores in 37 of these top geographic market areas and has identified additional geographic markets that it believes can support one or more bebe stores. In addition, management believes that there is a significant opportunity to expand the number of stores in most of the markets within which bebe stores are currently located. The Company, in conjunction with its real estate consultant, also has identified specific mall and street locations within each market to be considered for new bebe store locations. In selecting a specific site, the Company looks for high traffic locations primarily in regional shopping centers and in free-standing street locations. Proposed sites are evaluated based on the traffic pattern, co-tenancies, average sales per square foot achieved by neighboring stores, lease economics and other factors considered important within the specific location.
The Company opened five new stores during the nine months ended March 31, 1998 and expects to open two additional stores during the remainder of 1998. The Company also plans to open approximately 15 stores in each of fiscal 1999 and 2000, the majority of which will be in existing markets. The Company's new store prototype is approximately 3,000 to 5,000 square feet, although in certain selected markets the Company may open larger stores. Additionally, in selected markets the Company may open high-profile flagship stores that will be designed to enhance further the bebe image. The Company currently plans to open approximately two such flagship stores ranging in size from approximately 5,000 to 7,000 square feet in each of fiscal 1999 and 2000.
During fiscal 1997, the average new store size was approximately 3,300 square feet. New store construction costs (before tenant allowances) averaged $304,000. The average gross inventory investment was $108,000 while pre-opening costs, which are expensed as incurred, averaged approximately $12,500 per store. bebe stores typically have achieved profitability at the store operating level within the first full quarter of operation; however, there can be no assurance that the Company's stores will do so in the future. Actual store growth and future store profitability and rates of return will depend on a number of factors which include, but are not limited to, individual store economics and suitability of sites that become available. Because of their higher cost structure, flagship stores are not expected to achieve operating margins comparable to the Company's other stores.
In addition to opening new stores, the Company plans to expand or relocate four existing stores to larger spaces within the same malls during calendar 1998. The Company believes that as awareness of bebe's brand name increases, product lines expand and stores mature, additional expansion may be warranted.
The Company's ability to expand will depend on a number of factors, including the availability of desirable locations, the negotiation of acceptable leases and the Company's ability to manage expansion and to source adequate inventory. There can be no assurance that the Company will be able to achieve its
planned expansion on a timely and profitable basis, if at all. Furthermore, there can be no assurance that store openings in existing markets will not result in reduced net sales volumes and profitability in existing stores in those markets.
OUTLET STORES. As of March 31, 1998, seven of the Company's 85 stores were located in outlet malls throughout the United States. The Company originally used these outlet stores to dispose of slow moving inventory in order to promote a better merchandise presentation within the specialty stores. More recently, the Company has rounded out the inventory of its outlet stores with casual logo styles at full price and, to a lesser extent, garments specifically bought or produced for the outlet stores.
During fiscal 1997, the average new outlet store size was approximately 3,000 square feet. New store construction costs (before tenant allowances) averaged approximately $149,000, and the average inventory investment was approximately $103,000. Of the seven stores planned to be opened in fiscal 1998, two that have been opened to date were outlet stores. Of the 15 stores planned to be opened in fiscal 1999, two are expected to be outlet stores.
STORE CLOSURES. In 1996, the Company initiated a program to monitor more vigorously the financial performance of its stores and, from time to time, has closed in the past and will close in the future stores that it does not consider to be viable. Many of the store leases contain early termination options which allow the Company to close the stores if certain minimum sales levels are not achieved. During the nine months ended March 31, 1998, the Company closed three such stores. The Company has reviewed its existing store base and has identified five underperforming stores that it is considering closing prior to the end of fiscal 1999.
STORE OPERATIONS
Store operations are organized into five regions and seventeen districts. Each region is managed by a regional manager, and each district is managed by a district manager. Each regional manager is typically responsible for three to four districts, and each district manager is typically responsible for three to six stores. Each store is typically staffed with two to four managers in addition to hourly sales associates.
The Company seeks to instill enthusiasm and dedication in its store management personnel and sales associates through incentive programs and regular communication with the stores. Sales associates receive commissions on sales with a guaranteed minimum compensation. Store managers receive base compensation plus incentive compensation based on sales. Regional and district managers receive base compensation plus incentive compensation based on meeting profitability benchmarks.
The Company has well-established store operating policies and procedures and utilizes an in-store training regimen for all new store employees. Merchandise presentation instructions, which include photographs of fixture presentations, are provided to the stores on a weekly basis by the Visual Merchandising staff. Detailed product descriptions also are provided to sales associates to enable them to gain familiarity with bebe product offerings. The Company offers bebe sales associates a discount on bebe merchandise to encourage them to wear the Company's apparel and reflect the bebe image while on the selling floor. In addition, the Company has developed a store management training program which allows new district managers and certain field management personnel to receive training at the corporate offices.
As part of its focus on better procedures and controls, the Company established a Loss Prevention Department in fiscal 1997 to develop and implement better programs for controlling losses. The initial results have been encouraging. These programs include installing electronic article surveillance systems in all stores, monitoring returns, voids, employee sales and deposits, and educating store personnel on loss prevention.
SOURCING, QUALITY CONTROL AND DISTRIBUTION
All of the Company's merchandise is marketed under the bebe or bebe moda brand names. Much of this merchandise is designed and developed in-house and manufactured to the Company's specifications. The balance is developed primarily in conjunction with third party apparel manufacturers or, in some cases, selected directly from these manufacturers' lines. When contracting for the production of merchandise, the Company uses a combination of facilities, primarily located in California, and, to a lesser degree, foreign manufacturers, to produce garments based on designs, patterns and detailed specifications produced by the Company. bebe uses computer aided design (CAD) systems to develop its patterns and production markers as part of its product development process. Sample garments are fit tested prior to production to validate the accuracy of the patterns. After being received at the Company's distribution facility, a percentage of receipts are inspected and fit tested a second time. The Company recently implemented a formalized quality control program which involves inspection of merchandise and fabrics upon receipt at the Company's distribution center. Garments that do not pass inspection are returned to the manufacturer for rework or accepted at reduced prices for sale in the Company's outlet stores.
All of the Company's merchandise is received, inspected, processed, warehoused and distributed through its distribution center that is adjacent to its corporate offices. Details about each receipt are supplied to merchandise planners who determine how the product should be distributed among the stores based on current inventory levels, sales trends and specific product characteristics. Advance shipping notices are electronically communicated to the stores and any goods not shipped are stored for replenishment purposes. Merchandise typically is shipped to the stores on a weekly basis using common carriers; however, during peak selling periods shipments may be made twice or even three times a week.
The Company does not have any long-term contracts with any manufacturer or supplier and places all of its orders by purchase order. The failure to obtain sufficient quantities of manufacturing capacity or raw materials would have a material adverse effect on the Company's business, financial condition and results of operations. The Company has received in the past, and may receive in the future, shipments of products from manufacturers that fail to conform to the Company's quality control standards. In such event, unless the Company is able to obtain replacement products in a timely manner, the Company may lose sales which could have an adverse effect on operating results.
COMPETITION
The Company believes it distinguishes itself from its competitors primarily through its distinctive, contemporary point-of-view and product design, in combination with exceptional quality and value to the consumer. However, the retail and apparel industries are highly competitive and are characterized by low barriers to entry, and the Company expects competition in its markets to increase. The retail and apparel industries are highly competitive and are characterized by low barriers to entry, and the Company expects competition in its markets to increase. The primary competitive factors in the Company's markets include brand name recognition, product styling, product presentation, product pricing, store ambiance, customer service and convenience. The Company competes with traditional department stores, specialty store retailers, off-price retailers and direct marketers for, among other things, raw materials, market share, retail space, finished goods, sourcing and personnel. Many of these competitors are larger and have substantially greater financial, distribution and marketing resources than the Company. Any failure to compete would have a material adverse effect on the Company's business, financial condition and results of operations.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
TRADEMARKS AND SERVICE MARKS. The Company believes that its trademarks and other proprietary rights are important to its success and has registered "bebe," "bebe moda" and the bebe logo in the United States and certain foreign jurisdictions. The Company is seeking to register its trademarks in targeted
international markets which it believes represent large potential markets for the Company's products. In some of these markets, local companies currently have registered competing marks, and/or regulatory obstacles exist that may prevent the Company from obtaining a trademark for the bebe name or related names. In such countries, the Company may be unable to use the bebe name unless it purchases the right or obtains a license to use the bebe name. There can be no assurance that the Company will be able to register trademarks in such international markets, purchase the right or obtain a license to use the bebe name on commercially reasonable terms, if at all. Failure to obtain either trademark, ownership or license rights would limit the Company's ability to expand into certain international markets or enter such markets with the bebe name, and to capitalize on the value of its brand.
LICENSING. The Company strives to provide its customers with high quality products and to maintain a consistent image in all of its advertising and marketing programs. bebe currently is evaluating opportunities to expand its product offerings and extend its geographic reach through licensing or joint venture arrangements. Accordingly, although to date the Company has received substantially no revenue from any licensing source, it may from time to time selectively enter into licensing or joint venture agreements with third parties. In entering into such licensing and joint venture agreements, the Company will seek to preserve the integrity of its brand name by closely monitoring the design and quality of the products sold by such licensees or joint venture partners and by controlling the manner in which the Company's products are advertised, marketed and distributed. In addition to distributing such new products through bebe stores, the Company may elect to distribute these licensed products with the bebe logo through other channels. The Company recently hired a Vice President of Licensing to develop this program. See "Management."
The Company also believes that opportunities may exist to license the bebe brand name internationally to licensees who will open bebe stores. As an initial test, the Company has recently signed a licensing agreement with a Mexican company to open and operate a retail bebe store in Mexico City. Under this agreement, the Company will provide the use of its name, store design and advertising images, and the licensee will purchase its inventory from the Company.
INFORMATION SERVICES AND TECHNOLOGY
The Company is committed to utilizing technology to enhance its competitive position. To this end, the Company recently hired an experienced Vice President of Information Technology to lead the Company's efforts in this area. bebe's information systems provide integration of the store, merchandising, distribution and financial systems. The core business systems, which consist of both purchased and internally developed software, run on a UNIX platform and are accessed over a Company-wide network providing corporate employees with access to all key business applications. Daily sales and cash deposit information are electronically collected from the stores' point-of-sale terminals nightly. During this process, the Company also obtains information concerning inventory receipts and transfers (primarily to the outlet stores) and sends to the stores pricing, markdown and shipment notification data. In addition, the Company collects customer names and addresses to update its customer database. The merchandising staff evaluates the sales and inventory information collected from the stores to make key merchandise planning decisions, including replenishment and markdowns. These decisions enhance the Company's ability to optimize sales while limiting markdowns and minimizing inventory risk by properly marking down slow selling styles, reordering existing styles and effectively distributing new inventory receipts to the stores.
In the past, the Company's investments in information systems have focused on its core store, merchandise and financial accounting systems. Currently, the Company's focus is on upgrading its capabilities and systems associated with its production, merchandise allocation and distribution functions, which have not kept pace with the Company's growth. The Company intends to make significant investments to improve existing management information systems and implement new systems in these areas and to implement them during fiscal 1999. Additionally, the Company has created a Year 2000 Task
Force, which is implementing a 6-phase plan that the Company believes will ensure that its management information systems will be Year 2000 Compliant. There can be no assurance that the Company will be successful with the implementation of these new systems or plans. Failure to implement and integrate such systems or plans could have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors--Reliance on Management Information Systems" and "--Year 2000 Compliance."
PROPERTIES
As of March 31, 1998, the Company's 85 stores, all of which are leased, encompassed approximately 231,000 total square feet. The typical store lease is for a 10-year term and requires the Company to pay a base rent and a percentage rent if certain minimum sales levels are achieved. Many of the leases provide the Company a lease termination option in certain specified years of the lease if certain minimum sales levels are not achieved. In addition, leases for locations typically require the Company to pay property taxes, utilities and repairs and maintenance. In addition, leases for mall locations also may require the Company to pay common area maintenance fees.
The Company's corporate headquarters and distribution center are located in an approximately 70,000 square foot leased facility located at 380 Valley Drive in Brisbane, California. The lease expires in August 2001. The Company is currently seeking alternative or additional space for its administrative offices and distribution center in order to accommodate its future needs and believes it will be able to obtain such space on commercially reasonable terms.
EMPLOYEES
As of March 31, 1998, the Company had approximately 1,012 employees, of whom approximately 220 were employed in general and administrative functions at the corporate offices and distribution center. The remaining 792 employees were employed in store operations. Of these remaining employees, approximately 333 were full-time employees and 459 were employed on a part-time basis. None of the Company's employees is represented by a labor union and the Company believes its relationship with its employees is good.
LEGAL PROCEEDINGS
From time to time, the Company may be involved in litigation relating to claims arising out of its operations. As of the date of this Prospectus, the Company is not engaged in any legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on the Company's business, financial condition or results of operations.
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 March 31, 1998:
NAME AGE POSITION ---------------------------------------------------- --- ------------------------------------------------------ Manny Mashouf (1)................................... 59 Chairman, President and Chief Executive Officer Greg Scott (1)...................................... 35 Vice President of Merchandising Blair Lambert (1)................................... 40 Chief Financial Officer Neda Mashouf........................................ 35 Director and Design Director Barbara Bass (2).................................... 47 Director Corrado Federico (2)................................ 57 Director Philip Schlein (2).................................. 63 Director Julie Elliott....................................... 34 Director of Stores George Arvan........................................ 51 Vice President of Sourcing and Production Karen Ioli.......................................... 38 Vice President of Licensing Tim Millen.......................................... 38 Vice President of Information Technology Bonnie Schultz...................................... 47 Executive Director of Human Resources |
(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.
GREG SCOTT has served as Vice President of Merchandising of the Company since January 1996. From January 1994 to January 1996, Mr. Scott was a Senior Merchant at AnnTaylor, Inc., a women's apparel retail company. From January 1993 to January 1994, Mr. Scott served as a merchant at Henri Bendel, a women's apparel retailer. From September 1985 to January 1993, Mr. Scott was employed by Macy's West, a subsidiary of Federated Department Stores, Inc., most recently as a buyer.
BLAIR LAMBERT has served as Chief Financial Officer of the Company since June 1996. From 1988 to 1996, Mr. Lambert was employed by Esprit de Corp, Inc., a wholesaler and retailer of junior and children's apparel, footwear and accessories ("Esprit"), most recently as Corporate Vice President of Finance. Mr. Lambert is a Certified Public Accountant.
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 Design Director. Ms. Mashouf is the wife of Manny Mashouf, the Chairman, President and Chief Executive Officer 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. Since 1991, Mr. Federico has served as the President of Corado, Inc., a land development firm. From 1986 to 1991, Mr. Federico held the position of President and Chief Executive Officer of 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.
JULIE ELLIOTT has been employed with the Company since June 1989, most recently as Director of Stores. From October 1986 to June 1989, Ms. Elliott was employed by The Limited, Inc., a women's apparel retailer.
GEORGE ARVAN has served as the Vice President of Sourcing and Production of the Company since September 1997. Prior to his employment with bebe, Mr. Arvan founded New Planet Sourcing, an apparel sourcing company, and served as its President from September 1996 to September 1997. During the period from 1991 to 1996, Mr. Arvan was the Chief Operating Officer of Berkeley Shirt Company, a men's wholesale apparel company.
KAREN IOLI has served as Vice President of Licensing of the Company since January 1998. From January 1996 to January 1998, Ms. Ioli served as Vice President of Licensing for Mossimo, Inc., an apparel wholesale company. From July 1992 to September 1995, Ms. Ioli was employed by Guess?, Inc., an apparel retail and wholesale company, as Vice President of Licensing.
TIM MILLEN has served as Vice President of Information 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.
BONNIE SCHULTZ has served as the Executive Director of Human Resources of the Company since October 1997. From July 1993 to September 1997, Ms. Schultz served as Director of Human Resources for Host Marriott Corporation, a hotel company. From October 1982 to June 1993, Ms. Schultz was employed by Target Stores, a subsidiary of Dayton Hudson Corporation, a retail company, most recently as a Regional Human Resources Director.
BOARD OF DIRECTORS COMMITTEES
The Audit Committee, which consists of all of the non-employee directors, oversees actions taken by the Company's independent auditors, recommends the engagement of auditors and reviews the results and scope of the audit and other services provided by the Company's independent auditors, reviews and evaluates the Company's control functions and reviews the Company's investment policy.
The Compensation Committee, which consists of all of the non-employee directors makes recommendations to the Board of Directors concerning salaries and incentive compensation for employees and consultants of the Company. The Compensation Committee also administers the Company's 1997 Stock Plan. Prior to June 1997 the Board of Directors made recommendations regarding compensation for employees and consultants of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee, which was established in June 1997, is comprised of the three outside members of the Board of Directors, Ms. Bass, Mr. Federico and Mr. Schlein.
DIRECTOR COMPENSATION
The Company's non-employee directors are paid a fee of $500 for each meeting of the Board of Directors which they attend. The Company also reimburses all directors for their expenses incurred in attending such meetings. In addition, certain directors have been granted options to purchase Common Stock in the past, and options may be granted to Directors of the Company in the future. Specifically, each of Ms. Bass, Mr. Federico and Mr. Schlein have received options to purchase 212,250 shares of the Company's Common Stock, at an exercise price of $1.77 per share.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to (i) the Chief Executive Officer and (ii) the Company's other most highly compensated executive officers (collectively with the Chief Executive Officer, the "Named Executive Officers") for services rendered in all capacities to the Company during the fiscal year ended June 30, 1997:
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION --------------------
----------------------- NO. OF SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($)(1) UNDERLYING OPTIONS COMPENSATION ($)
----------------------------------------------- ---------- ----------- -------------------- -----------------
Manny Mashouf ................................. $ 449,921 $ 155,754 -- $ 1,572(2)
Chairman, President and
Chief Executive Officer
Greg Scott .................................... 159,288 50,210 141,500 --
Vice President of
Merchandising
Blair Lambert ................................. 139,694 43,373 141,500 --
Chief Financial Officer
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(1) Bonuses are based on Company net sales and profitability targets.
(2) Represents a matching contribution by the Company to Mr. Mashouf's 401(k) contribution. See"--401(k) Plan."
The following table sets forth information regarding stock options granted during the fiscal year ended June 30, 1997 to each of the Named Executives Officers:
OPTION GRANTS IN FISCAL 1997
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------------------- ANNUAL RATES OF STOCK
NUMBER OF PRICE APPRECIATION FOR
SECURITIES % OF TOTAL OPTIONS EXERCISE OPTION TERM (3)
UNDERLYING OPTIONS GRANTED TO EMPLOYEES PRICE PER EXPIRATION ----------------------
NAME GRANTED (1) IN FISCAL 1997 (2) SHARE DATE 5% 10%
---------------------------- ------------------ --------------------- ----------- ----------- ---------- ----------
Manny Mashouf............... -- -- -- -- -- --
Greg Scott.................. 141,500 8.9% $ 1.77 6/30/07 $ 157,224 $ 398,436
Blair Lambert............... 141,500 8.9 1.77 6/30/07 157,224 398,436
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(1) These options were granted under the Company's 1997 Stock Plan. The options granted are immediately exercisable, but are subject to repurchase 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 to 1/5th of the shares one year from the grant date, 1/60th of the shares in each of the successive twelve months and 1/40th of the shares in each of the successive 24 months with full lapse of the repurchase option occurring on the fourth anniversary date. The options have a 10-year term, subject to earlier termination in certain situations related to termination of employment. See "--Stock Plans."
(2) Based on a total of 1,587,630 options granted to all employees, consultants and directors during fiscal 1997.
(3) The 5% and 10% assumed rates of appreciation are mandated by the rules of the Securities and Exchange Commission and do not represent the Company's estimate or projection of the future Common Stock price.
The following table provides specified information concerning unexercised options held as of June 30, 1997 by each of the Named Executive Officers. No options to purchase Common Stock were exercised in the fiscal year ended June 30, 1997.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING
VALUE OF UNEXERCISED IN-THE- MONEY
UNEXERCISED OPTIONS AT 6/30/97 OPTIONS AT 6/30/97(1)
-------------------------------- ------------------------------------
NAME EXERCISABLE (2) UNEXERCISABLE EXERCISABLE (2) UNEXERCISABLE
---------------------------------------------------- ------------- ----------------- ----------------- -----------------
Manny Mashouf....................................... -- -- -- --
Greg Scott.......................................... 141,500 -- -- --
Blair Lambert....................................... 141,500 -- -- --
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(1) Calculated by determining the difference between the fair market value of the securities underlying the option at June 30, 1997 as determined by the Company's Board of Directors ($1.77) and the exercise price of the Named Executive Officer's option ($1.77).
(2) Under the 1997 Stock Plan, options granted are immediately exercisable, but are subject to repurchase 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 to 1/5th of the shares one year from the grant date, 1/60th of the shares in each of the successive 12 months and 1/40th of the shares in each of the successive 24 months with full lapse of the repurchase option occurring on the fourth anniversary date.
STOCK PLANS
1997 STOCK PLAN
In June 1997, the Board of Directors adopted and the Company's then sole shareholder approved the 1997 Stock Plan to recognize the contributions made to the Company by its employees and certain consultants or advisors, to provide these individuals with additional incentives to devote themselves to the Company's future success and to improve the Company's ability to attract, retain and motivate individuals upon whom the Company's sustained growth and financial success depend. The 1997 Stock Plan is also intended as an additional incentive to directors of the Company who are not employees of the Company to serve on the Board of Directors and to devote themselves to the future success of the Company. Awards under the 1997 Stock Plan may be made to all employees, directors, consultants or advisors of the Company.
The 1997 Stock Plan is administered by the Compensation Committee. The aggregate maximum number of shares of Common Stock available for award under the 1997 Stock Plan is 2,830,000 shares (subject to adjustment to reflect changes in the Company's capitalization). Options granted under the 1997
Stock Plan may be either incentive stock options ("ISO's"), non-qualified stock options, stock purchase rights or stock awards. ISO's are intended to qualify as "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code. Unless an option is specifically designated at the time of grant as an ISO, options under the 1997 Stock Plan will be non-qualified options.
The exercise price of the options will be determined by the Board of
Directors or the Compensation Committee, although the exercise price of an ISO
will be at least 100% of the fair market value of a share of Common Stock on the
date it is granted, or at least 110% of the fair market value of a share of
Common Stock on the date the option is granted if the recipient owns, directly
or by attribution under Section 424(d) of the Internal Revenue Code, shares
possessing more than 10% of the total combined voting power of all classes of
stock of the Company. No awards can be made under the 1997 Stock Plan after June
26, 2007. The maximum term of an ISO granted under the 1997 Stock Plan shall not
exceed 10 years from the date of grant or five years from the date of grant if
the recipient on the date of grant owns, directly or by attribution under
Section 424(d) of the Internal Revenue Code, shares possessing more than 10% of
the total combined voting power of all classes of stock of the Company.
The options granted are immediately exercisable, but are subject to repurchase 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 to 1/5th of the shares one year from the grant date, 1/60th of the shares in each of the successive 12 months and 1/40th of the shares in each of the successive 24 months with full lapse of the repurchase option occurring on the fourth anniversary date. The options have a 10-year term, subject to earlier termination in certain situations related to termination of employment. Additionally, in the event of a Change of Control (as defined in the 1997 Stock Plan), options granted to the outside directors and Mr. Lambert shall accelerate and become fully vested and the Company's right of repurchase shall lapse.
As of March 31, 1998, the Company had granted options to purchase an aggregate of 1,913,080 shares of Common Stock at exercise prices ranging from $1.77 to $5.65 per share under the 1997 Stock Plan, of which 1,782,900 were outstanding, exercisable and subject to repurchase by the Company under certain circumstances as of such date.
1998 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1998 Employee Stock Purchase Plan (the "Purchase Plan") was adopted by the Company's Board of Directors and approved by the shareholders of the Company on April 7, 1998. A total of 750,000 shares of Common Stock has been reserved for issuance under the Purchase Plan. The Purchase Plan, which is intended to qualify under Section 423 of the Code, is administered by the Board of Directors or by a committee appointed by the Board of Directors. The Board of Directors has authorized the Executive Director of Human Resources to determine eligibility requirements for the Purchase Plan. The Purchase Plan will allow eligible employees to purchase the Company's Common Stock in an amount which may not exceed 10% of the employee's compensation. The Purchase Plan will be implemented by sequential 24-month offerings. Generally, each offering will be comprised of four, six-month purchase periods, with shares purchased on the last day of each purchase period (a "Purchase Date"). The price at which stock may be purchased is equal to 85% of the lower of fair market value of the Company's Common Stock on the first day of the offering period or the Purchase Date.
401(K) PLAN
The Company maintains a retirement and deferred saving plan for its employees (the "401(k) Plan") that is intended to qualify as a tax-qualified plan under the Internal Revenue Code of 1986, as amended. The 401(k) Plan provides that each participant may contribute up to 15% of his or her pre-tax gross compensation (up to a statutory limit, which was $10,000 in calendar year 1998). Under the 401(k) Plan, the Company may make discretionary matching contributions. The Company's contributions to the 401(k)
Plan in fiscal 1996 and 1997 were $35,947 and $32,688, respectively. A matching contribution made by the Company vests at 20% per year commencing on the first anniversary of a participant's date of employment with the Company. All amounts contributed by participant's and earnings on such contributions are fully vested at all times.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Bylaws provide that the Company may indemnify its directors, officers, employees and agents to the fullest extent permitted by law.
The Company has entered into agreements to indemnify its directors and officers, in addition to the indemnification provided for in the Company's Amended and Restated Articles of Incorporation (the "Amended and Restated Articles"). These agreements, among other things, indemnify the Company's directors and officers for certain expenses (including attorneys' fees), judgments, fines and settlement amounts incurred by any such person in any action or proceeding, including any action by or in the right of the Company, arising out of such person's services as a director or officer of the Company, any subsidiary of the Company or any other company or enterprise to which the person provides services at the request of the Company. The Company believes that these provisions and agreements are necessary to attract and retain qualified directors and officers.
At present, there is no pending litigation or proceeding involving any director, officer, employee or agent of the Company where indemnification will be required. The Company is not aware of any threatened litigation or proceeding that might result in a claim for such indemnification.
CERTAIN 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 December 31, 1997, there were no borrowings due to Mr. Mashouf from the Company or advances owed to the Company by Mr. Mashouf.
PRINCIPAL AND SELLING SHAREHOLDER
The following table sets forth certain information regarding the beneficial ownership of Common Stock, as of March 31, 1998 as adjusted to reflect the sale of the shares of Common Stock offered hereby by (a) each person or entity known by the Company to own beneficially more than 5% of the outstanding shares of Common Stock, (b) each director of the Company, (c) each of the Named Executive Officers and (d) all directors and executive officers of the Company as a group:
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING (1) AFTER OFFERING (1)
------------------------- SHARES TO BE SOLD -------------------------
NAME OF BENEFICIAL OWNERS NUMBER PERCENT IN OFFERING (1) NUMBER PERCENT
--------------------------------------------- ------------ ----------- ------------------- ------------ -----------
Manny Mashouf (2)............................ 22,377,217 98.8% 1,250,000 21,127,217 88.4%
Barbara Bass (3)............................. 212,250 * 0 212,250 *
Corrado Federico (3)......................... 212,250 * 0 212,250 *
Neda Mashouf (4)............................. 0 * 0 0 *
Philip Schlein (3)........................... 212,250 * 0 212,250 *
Greg Scott (5)............................... 141,500 * 0 141,500 *
Blair Lambert (5)............................ 141,500 * 0 141,500 *
All directors and executive officers as a
group (7 persons) (6)...................... 23,296,967 98.9% 1,250,000 22,046,967 88.9%
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* Represents less than 1% of the total outstanding.
(1) Number of shares beneficially owned and the percentage of shares beneficially owned are based on (i) 22,639,997 shares outstanding as of March 31, 1998 and (ii) 23,889,997 shares outstanding after this offering assuming no exercise of the Underwriter's over-allotment option. If such option is exercised in full, the number of shares outstanding after the offering will be 23,889,997 and the number of shares owned by Mr. Mashouf after the offering will be 20,752,217 (86.9%). Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. All shares of Common Stock subject to options currently exercisable or exercisable within 60 days after March 31, 1998 are deemed to be outstanding and to be beneficially owned by the person holding such options for the purpose of computing the number of shares beneficially owned and the percentage of ownership of such person, but are not deemed to be outstanding and to be beneficially owned for the purpose of computing the percentage of ownership of any other person. Except as indicated in the footnotes to the table and subject to applicable community property laws, based on information provided by the persons named in the table, such persons have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them.
(2) Mr. Mashouf's address is c/o bebe stores, inc., 380 Valley Drive, Brisbane, California 94005. Excludes 262,780 shares held by trusts for Mr. Mashouf's children, as to which shares Mr. Mashouf disclaims beneficial ownership. Mr. Mashouf is the Chairman, President and Chief Executive Officer of the Company.
(3) Represents 212,250 shares issuable upon exercise of options, all of which are subject to vesting and the Company's right of repurchase under certain circumstances within 60 days of March 31, 1998.
(4) Excludes 22,377,217 shares held by Mr. Mashouf, Ms. Mashouf's husband, and 262,780 shares held by trusts for Mr. Mashouf's children, as to which shares Ms. Mashouf disclaims beneficial ownership.
(5) Represents 141,500 shares issuable upon exercise of options, all of which are subject to vesting and the Company's right of repurchase under certain circumstances within 60 days of March 31, 1998.
(6) Includes an aggregate of 919,750 shares issuable pursuant to options currently exercisable held by the directors and officers, all of which are subject to vesting and the Company's right of repurchase under
certain circumstances within 60 days of March 31, 1998. Excludes 262,780 shares held by trusts for Mr. Mashouf's children, as to which shares Mr. and Ms. Mashouf disclaim beneficial ownership.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 40,000,000 shares of Common Stock, $0.001 par value per share, and 1,000,000 shares of Preferred Stock, $0.001 par value per share. The following summary of the Company's capital stock does not purport to be complete and is qualified in its entirety by reference to the Amended and Restated Articles and Bylaws, copies of which have been filed as exhibits to the Registration Statement of which this Prospectus is a part.
As of March 31, 1998, there were 22,639,997 shares of Common Stock held of record by five shareholders. Immediately after the completion of this offering, the Company estimates that there will be outstanding an aggregate of 23,889,997 shares of Common Stock. An additional 2,830,000 shares have been reserved for issuance of options, of which 1,782,900 shares are subject to currently outstanding and exercisable options, subject to certain vesting and repurchase restrictions.
COMMON STOCK
VOTING RIGHTS. Under the Amended and Restated Articles and Bylaws, holders of Common Stock will not have cumulative voting rights after the Company becomes a "listed corporation" (as defined in Section 301.5 of the California Corporations Code). Until such time, holders of Common Stock will be able to cumulate votes for the election of directors. On all other matters, holders of Common Stock are entitled to cast one vote for each share owned. The Company anticipates that it will qualify as a listed corporation as of the first annual meeting of shareholders following this offering, provided that the Company has at least 800 holders of its equity securities as of the record date for such annual meeting.
DIVIDEND, PREEMPTIVE AND LIQUIDATION RIGHTS. The holders of Common Stock are entitled to participate in cash dividends, pro rata based on the number of shares held, when, as and if declared by the Board of Directors out of funds legally available therefor. See "Dividend Policy." Such holders do not have any preemptive or other rights to subscribe for additional shares. All holders of Common Stock are entitled to share ratably in any assets for distribution to shareholders upon the liquidation, dissolution or winding up of the Company. There are no conversion, redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares of Common Stock are fully paid and nonassessable and the shares of Common Stock offered hereby, when issued and paid for in accordance with the Underwriting Agreement, will be fully paid and nonassessable.
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
The authorized but unissued shares of Common Stock are available for future issuance without shareholder approval except as required by law or applicable requirements of the Nasdaq National Market ("Nasdaq"). For example, current Nasdaq rules require approval by a company's shareholders if the number of shares of Common Stock to be issued in a particular transaction or series of related transactions equals or exceeds 20% of the number of shares of Common Stock outstanding immediately prior to such issuance. These additional shares may be utilized for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans.
The existence of authorized but unissued and unreserved Common Stock may enable the Board of Directors to issue shares to persons friendly to current management which could render more difficult or discourage an attempt to obtain control of the Company by means of a proxy contest, tender offer, merger, or otherwise, and thereby protect the continuity of the Company's management.
PREFERRED STOCK
The Board of Directors has the authority to issue up to 1,000,000 shares of Preferred Stock and to fix the rights, preferences, privileges and restrictions, including voting rights, of these shares without any vote or action by the shareholders. Accordingly, the rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company, thereby delaying, deferring or preventing a change in control of the Company. Furthermore, such Preferred Stock may have other rights, including economic rights, senior to the Common Stock, and as a result, the issuance of such Preferred Stock could have a material adverse effect on the market value of the Common Stock.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is to be determined by management.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 23,889,997 shares of Common Stock outstanding (based upon shares of Common Stock outstanding as of March 31, 1998 and assuming no exercise of outstanding options, or the Underwriters over-allotment option). Of these shares, the 1,250,000 shares being sold by the Company and the 1,250,000 shares being sold by the Selling Shareholder in this offering, plus any additional shares sold upon exercise of the Underwriters' over-allotment option, will be freely tradable without restriction or further registration under the Securities Act, except that any shares purchased by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act ("Affiliates"), may generally only be sold in compliance with the limitations of Rule 144 described below. The remaining 21,389,997 shares of Common Stock (the "Restricted Shares") held by existing shareholders upon completion of this offering are "restricted" securities within the meaning of Rule 144 and may not be sold except in compliance with the registration requirements of the Securities Act or an applicable exemption under the Securities Act, including an exemption pursuant to Rule 144 or Rule 701.
LOCK-UP ARRANGEMENTS
All shareholders of the Company (who in aggregate hold 22,639,997 shares of Common Stock) and all holders of options exercisable for Common Stock (who in the aggregate have the right to purchase 1,782,900 shares of Common Stock), have agreed, pursuant to certain lock-up agreements or certain provisions under the 1997 Stock Plan, that they will not, without the prior written consent of BancAmerica Robertson Stephens, offer, sell contract to sell or otherwise dispose of any shares of Common Stock beneficially owned by them (except for shares sold in this offering) for a period of 180 days after the date of this Prospectus. BancAmerica Robertson Stephens may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements. See "Underwriting."
SALES OF RESTRICTED SHARES
Upon the expiration of the 180-day lock-up period, all of the 21,389,997 Restricted Shares will eligible for sale in the public market pursuant to Rule 144.
In general, under Rule 144, a person (or persons whose shares are aggregated) including an Affiliate, who has beneficially owned shares for at least one year (including the holding period of certain prior owners), will be entitled to sell in "brokers' transactions" or to market makers, within any three-month period commencing 90 days after the Company becomes subject to the reporting requirements of Section 13 or 15 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), a number of shares that does not exceed the greater of (i) one percent (1%) of the then-outstanding shares of Common Stock (approximately 238,900 shares immediately after this offering based upon shares of Common Stock outstanding as of March 31, 1998 and assuming no exercise of outstanding options, or the Underwriters over-allotment option) or (ii) the average weekly trading volume of the Common Stock during the four calendar weeks immediately preceding such sale, subject, generally, to the filing of a Form 144 with the Commission with respect to such sales and certain other limitations and restrictions relating to manner of sale and availability of public information. In addition, a person (or person whose shares are aggregated), who is not deemed to have been an Affiliate at any time during the 90 days immediately preceding the sale and who has beneficially owned shares proposed to be sold for at least two years, is entitled to sell such shares under Rule 144 (k) without regard to limitations described above.
OPTIONS
In general, under Rule 701 under the Securities Act, any employee, director, consultant or advisor of the Company who purchases shares from the Company in connection with a compensatory stock or option plan or other written compensatory agreement is entitled to resell such shares without having to comply with the public information, holding period, volume limitation or notice provisions of Rule 144, and
Affiliates are eligible to resell such shares 90 days after the effective date of this offering in reliance on Rule 144, subject to the provisions of the Lock-Up Arrangements.
As of March 31, 1998, options to purchase 1,782,900 shares were outstanding and exercisable under the 1997 Stock Plan. Upon expiration of the 180-day lock-up period and subject to certain vesting and repurchase restrictions, all the shares issued pursuant to the exercise of these stock options may be re-sold pursuant to Rule 701. In addition, 1,047,100 shares of Common Stock are reserved for issuance under the 1997 Stock Plan. The Company intends to file a registration statement on Form S-8 under the Securities Act within 90 days after the date of this Prospectus to register the shares issuable under the 1997 Stock Plan. Such registration statement is expected to become effective upon filing of such Form S-8. After the effective date of such registration statement and the expiration of the lock-up period, shares of Common Stock issued under the 1997 Stock Plan will be immediately eligible for sale in the public market, subject to certain vesting, repurchase and exercisability restrictions.
UNDERWRITING
The Underwriters named below, acting through their representatives,
BancAmerica Robertson
Stephens and Bear, Stearns & Co. Inc. (the "Representatives"), have severally
agreed with the Company and the Selling Shareholder, subject to the terms and
conditions of the Underwriting Agreement, to purchase the number of shares of
Common Stock set forth opposite their respective names below. The Underwriters
are committed to purchase and pay for all such shares if any are purchased.
UNDERWRITER NUMBER OF SHARES
--------------------------------------------------------------------------- -----------------
BancAmerica Robertson Stephens.............................................
Bear, Stearns & Co. Inc....................................................
-----------------
Total.................................................................... 2,500,000
-----------------
-----------------
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The Representatives have advised the Company and the Selling Shareholder that the Underwriters propose to offer the shares of Common Stock to the public at the initial public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession of not in excess of $ per share, of which $ may be reallowed to other dealers. After the initial public offering, the offering price, concession and reallowance to dealers may be reduced by the Representatives. No such reduction shall change the amount of proceeds to be received by the Company as set forth on the cover page of this Prospectus.
The Selling Shareholder has granted to the Underwriters an option, exercisable during the 30-day period after the date of this Prospectus, to purchase up to 375,000 additional shares of Common Stock at the same price per share as the Company and the Selling Shareholder will receive for the 2,500,000 shares that the Underwriters have agreed to purchase. To the extent that the Underwriters exercise this option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage of such additional shares that the number of shares of Common Stock to be purchased by it shown in the above table represents as a percentage of the 2,500,000 shares offered hereby. If purchased, such additional shares will be sold by the Underwriters on the same terms as those on which the 2,500,000 shares are being sold.
The Underwriting Agreement contains covenants of indemnity among the Underwriters, the Company and the Selling Shareholder against certain civil liabilities, including liabilities under the Securities Act.
Each officer and director of the Company, and all shareholders of the Company, have agreed with the Representatives for a period of 180 days after the date of this Prospectus (the "Lock-Up Period"), subject to certain exceptions, not to offer to sell, contract to sell, or otherwise, sell, dispose of, loan, pledge or grant any rights with respect to any shares of Common Stock, any options or warrants to purchase any shares of Common Stock, or any securities convertible into or exchangeable for shares of Common Stock now owned or hereafter acquired directly by such holders or with respect to which they have or hereafter acquire the power of disposition, without the prior written consent of BancAmerica Robertson Stephens. BancAmerica Robertson Stephens may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to the Lock-Up Arrangements. Pursuant to pre-existing agreements, all shareholders and holders of options to purchase Common Stock have agreed not to sell shares issuable upon the exercise of options for at least 180 days after the effective date of the Registration Statement without the prior written consent of the Company. In addition, the Company has agreed that during the Lock-Up Period, the Company will not, without the prior written consent of BancAmerica Robertson Stephens, subject to certain exceptions, issue, sell, contract to sell, or otherwise dispose of, any shares of Common Stock, any options or warrants to purchase any shares of Common Stock or any securities convertible into, exercisable for or exchangeable for shares of Common Stock other than the Company's
sale of shares in this offering, the issuance of Common Stock upon the exercise of outstanding options and the Company's issuance of options and stock under the 1997 Stock Plan.
Prior to this offering, there has been no public market for the Common Stock. Consequently, the initial public offering price for the Common Stock is being determined through negotiations among the Company, the Selling Shareholder and the Representatives. Among the factors considered in such negotiations are prevailing market conditions, certain financial information of the Company, market valuations of other companies that the Company and the Representatives believe to be comparable to the Company, estimates of the business potential of the Company, the present state of the Company's development and other factors deemed relevant.
The Underwriters do not intend to confirm sales of the Common Stock offered hereby to any accounts over which they exercise discretionary authority.
The Representatives have advised the Company that certain persons participating in this offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids that may have the effect of stabilizing or maintaining the market price of the Common Stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of the Common Stock on behalf of the Underwriters for the purpose of fixing or maintaining the price of the Common Stock. A "syndicate covering transaction" is the bid for or the purchase of the Common Stock on behalf of the Underwriters to reduce a short position incurred by the Underwriters in connection with this offering. A "penalty bid" is an arrangement permitting the Representatives to reclaim the selling concession otherwise accruing to an Underwriter or syndicate member in connection with the offering if the Common Stock originally sold by such Underwriter or syndicate member is purchased by the Representatives in a syndicate covering transaction and has therefore not been effectively placed by such Underwriter or syndicate member. The Representatives have advised the Company that such transactions may be effected on Nasdaq or otherwise and, if commenced, may be discontinued at any time.
From time to time, the Company purchases commercial paper from BancAmerica Robertson Stephens. In addition, the Company has a line of credit with Bank of America, National Trust and Savings Association ("Bank of America"), which is an affiliate of BancAmerica Robertson Stephens. The Company also uses Bank of America for its cash management services.
LEGAL MATTERS
The validity of the issuance of shares of Common Stock offered hereby will be passed upon for the Company by Gray Cary Ware & Freidenrich LLP, Palo Alto, California. Certain legal matters in connection with this offering will be passed upon for the Underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California.
EXPERTS
The financial statements as of June 30, 1996 and 1997 and for each of the three years in the period ended June 30, 1997 included in this Prospectus and the related financial statement schedule included elsewhere in the registration statement have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein and elsewhere in the registration statement, and are included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing.
CHANGE IN ACCOUNTANTS
Effective June 1996, the Company's Board of Directors engaged Deloitte & Touche LLP as its independent auditors to replace Wilson, McCall & Daoro, who were dismissed as auditors of the Company effective February 1996. In connection with the audit of the prior fiscal year ended June 30, 1995 (the first
full year audit of the Company's financial statements), there were no disagreements with Wilson, McCall & Daoro on any matter of accounting principles or practices, financial statement disclosure, or auditing scope and procedures which, if not resolved to the satisfaction of Wilson, McCall & Daoro, would have caused them to make reference to the matter in their report. The report of Wilson, McCall & Daoro on the financial statements of the Company for the year ended June 30, 1995 did not contain an adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope, or accounting principle. The decision to change accountants was approved by the Board of Directors.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1 (the "Registration Statement") under the Securities Act with respect to the securities offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and in the exhibits and schedules thereto. For further information with respect to the Company and the Common Stock, reference is made to the Registration Statement, exhibits and schedules. Statements contained in this Prospectus regarding the contents of any contract or any other document are summaries and, in each such instance, reference is hereby made to the copy of such contracts and other documents filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. The Registration Statement, and the exhibits and schedules thereto, may be inspected without charge at the public reference facilities maintained by the Commission at 450 Fifth Street N.W., Judiciary Plaza, Washington, D.C., 20549, and at the regional offices of the Commission located at Seven World Trade Center, 13th Floor: New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of all or any part thereof may be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Judiciary Plaza, Washington, DC 20549 at the prescribed rates. Also, the Commission maintains a Website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the Website is http://www.sec.gov.
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
Independent Auditors' Report............................................................................... F-2
Balance Sheets............................................................................................. F-3
Statements of Operations................................................................................... F-4
Statements of Shareholders' Equity......................................................................... F-5
Statements of Cash Flows................................................................................... F-6
Notes to Financial Statements.............................................................................. F-7
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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, 1996 and 1997 and the related statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended June 30, 1997. 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, 1996 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1997 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
San Francisco, California
April 14, 1998
BEBE STORES, INC.
BALANCE SHEETS
AS OF JUNE 30,
----------------------
1996 1997
---------- ---------- AS OF DECEMBER 31,
------------------
1997
------------------
(UNAUDITED)
ASSETS:
Current assets:
Cash and equivalents.............................................. $1,760,612 $9,191,919 $ 22,112,142
Marketable securities............................................. 78,262 80,390
Receivables:
Income tax refund............................................... 1,721,648 17,378
Construction allowance.......................................... 404,815 296,656 6,416
Other (net of allowance of $13,500, $76,668 and $88,970)........ 48,557 40,201 108,145
Inventories, net.................................................. 8,310,729 9,461,698 9,964,480
Deferred income taxes............................................. 204,857 451,217 674,447
Prepaid and other................................................. 112,011 86,901 56,966
---------- ---------- ------------------
Total current assets.......................................... 12,641,491 19,626,360 32,922,596
Equipment and improvements, net..................................... 7,890,433 7,539,461 8,367,425
Assets held for sale................................................ 693,712
Deferred income taxes............................................... 231,680 1,131,625 1,527,595
Other assets........................................................ 742,455 811,848 744,981
---------- ---------- ------------------
Total other assets............................................ 1,667,847 1,943,473 2,272,576
---------- ---------- ------------------
Total assets........................................................ $22,199,771 $29,109,294 $ 43,562,597
---------- ---------- ------------------
---------- ---------- ------------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable.................................................. $3,211,460 $5,064,629 $ 5,369,305
Accrued liabilities............................................... 1,995,184 5,604,430 8,883,533
Revolving line of credit.......................................... 969,287
Current portion of long-term debt................................. 845,950 151,746 127,835
Income taxes payable.............................................. 530,354 1,536,198
Note due to shareholder........................................... 123,685
---------- ---------- ------------------
Total current liabilities..................................... 7,145,566 11,351,159 15,916,871
Long-term debt...................................................... 2,710,053 168,099 125,598
Deferred rent....................................................... 2,201,595 2,295,453 2,473,276
---------- ---------- ------------------
Total liabilities................................................... 12,057,214 13,814,711 18,515,745
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 22,639,997 shares................. 22,640 22,640 22,640
Additional paid-in capital........................................ 2,465,610 5,270,610 5,205,610
Deferred compensation............................................. (2,805,000) (2,305,579)
Retained earnings................................................. 7,654,307 12,806,333 22,124,181
---------- ---------- ------------------
Total shareholders' equity.................................... 10,142,557 15,294,583 25,046,852
---------- ---------- ------------------
Total liabilities and shareholders' equity........................ $22,199,771 $29,109,294 $ 43,562,597
---------- ---------- ------------------
---------- ---------- ------------------
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See accompanying notes to financial statements.
BEBE STORES, INC.
STATEMENTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER
FISCAL YEAR ENDED JUNE 30, 31,
------------------------------------------- ----------------------------
1995 1996 1997 1996 1997
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
Net sales............................ $ 65,410,936 $ 71,562,769 $ 95,086,125 $ 45,251,199 $ 74,775,621
Cost of sales, including buying and
occupancy.......................... 32,652,584 44,701,044 53,968,849 26,382,491 36,709,630
------------- ------------- ------------- ------------- -------------
Gross profit......................... 32,758,352 26,861,725 41,117,276 18,868,708 38,065,991
Selling, general and administrative
expenses........................... 23,138,025 26,363,957 32,648,788 14,819,808 22,565,227
------------- ------------- ------------- ------------- -------------
Income from operations............... 9,620,327 497,768 8,468,488 4,048,900 15,500,764
Other expense (income):
Interest........................... 86,904 349,001 94,809 183,829 (335,341)
Other.............................. 123,059 114,175 (26,740) 23,318
------------- ------------- ------------- ------------- -------------
Earnings before income taxes......... 9,533,423 25,708 8,259,504 3,891,811 15,812,787
Provision (benefit) for income
taxes.............................. 4,050,516 (47,935) 3,109,985 1,465,434 6,492,432
------------- ------------- ------------- ------------- -------------
Net earnings......................... $ 5,482,907 $ 73,643 $ 5,149,519 $ 2,426,377 $ 9,320,355
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Basic earnings per share............. $ 0.24 $ 0.00 $ 0.23 $ 0.11 $ 0.41
Diluted earnings per share........... $ 0.24 $ 0.00 $ 0.23 $ 0.11 $ 0.39
Basic weighted average shares
outstanding........................ 22,639,997 22,639,997 22,639,997 22,639,997 22,639,997
Diluted weighted average shares
outstanding........................ 22,639,997 22,639,997 22,650,871 22,639,997 23,664,198
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See accompanying notes to financial statements.
BEBE STORES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
COMMON STOCK
----------------------- ADDITIONAL
NUMBER OF PAID-IN DEFERRED RETAINED
SHARES AMOUNT CAPITAL COMPENSATION EARNINGS TOTAL
------------ --------- ------------ ------------- ------------- -------------
Balance as of July 1,
1994...................... 22,639,997 $ 22,640 $ 2,465,610 $ $ 2,088,940 $ 4,577,190
Net earnings................ 5,482,907 5,482,907
------------ --------- ------------ ------------- ------------- -------------
Balance as of June 30,
1995...................... 22,639,997 22,640 2,465,610 7,571,847 10,060,097
Net earnings................ 73,643 73,643
Unrealized gain on
marketable securities..... 8,817 8,817
------------ --------- ------------ ------------- ------------- -------------
Balance as of June 30,
1996...................... 22,639,997 22,640 2,465,610 7,654,307 10,142,557
Net earnings................ 5,149,519 5,149,519
Deferred compensation....... 2,805,000 (2,805,000) 0
Unrealized gain on
marketable securities..... 2,507 2,507
------------ --------- ------------ ------------- ------------- -------------
Balance as of June 30,
1997...................... 22,639,997 22,640 5,270,610 (2,805,000) 12,806,333 15,294,583
Net earnings (unaudited).... 9,320,355 9,320,355
Amortization of deferred
compensation
(unaudited)............... (65,000) 499,421 434,421
Unrealized gain on
marketable securities
(unaudited)............... (2,507) (2,507)
------------ --------- ------------ ------------- ------------- -------------
Balance as of December 31,
1997 (unaudited).......... 22,639,997 $ 22,640 $ 5,205,610 $(2,305,579) $ 22,124,181 $ 25,046,852
------------ --------- ------------ ------------- ------------- -------------
------------ --------- ------------ ------------- ------------- -------------
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See accompanying notes to financial statements.
BEBE STORES, INC.
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, DECEMBER 31,
---------------------------------- ----------------------
1995 1996 1997 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
Cash flows from operating activities:
Net earnings.................................... $5,482,907 $ 73,643 $5,149,519 $2,426,377 $9,320,355
Adjustments to reconcile net earnings to cash
provided (used) by operating activities:
Non-cash compensation expense................. 434,421
Depreciation and amortization................. 1,098,537 1,302,318 1,802,538 875,363 1,039,729
Loss on disposal of property.................. 78,887 58,927 64,567 119,307
Net (gain) loss on sales of securities........ 70,310 (12,369)
Valuation reserve on rental real estate....... 80,000
Impairment loss............................... 271,543 300,883
Net loss from partnership..................... 83,444 79,171 74,910
Deferred income taxes......................... (256,516) 98,781 (1,146,305) (417,783) (619,199)
Deferred rent................................. 537,232 1,081,863 842,035 318,811 (215,777)
Changes in operating assets and liabilities:
Receivables................................. (19,446) (1,678,035) 1,712,625 1,217,018 (51,105)
Inventories................................. (1,910,047) (335,558) (1,150,969) (897,738) (502,782)
Other assets................................ (228,738) (98,145) (269,965) (17,797) 6,970
Prepaid expenses............................ 106,650 (27,011) 25,110 (28,704) 29,935
Accounts payable............................ 540,341 (104,413) 1,853,169 (49,308) 304,676
Accrued liabilities......................... 446,080 890,958 3,283,514 1,311,451 3,279,103
Income taxes payable........................ 2,828,534 (3,600,000) 530,354 1,877,050 1,005,844
---------- ---------- ---------- ---------- ----------
Net cash provided (used) by operating
activities.............................. 8,858,175 (2,189,870) 13,042,645 6,614,740 14,452,360
Cash flows from investing activities:
Purchase of equipment and improvements.......... (6,418,526) (1,608,078) (1,716,637) (1,055,576) (1,544,649)
Proceeds from sales of equipment................ 22,288 1,040
Sale (purchase) of rental real estate........... (589,430) 693,007
Purchase of marketable securities............... (291,965) (253,915) (379)
Proceeds from sale of marketable securities..... 390,384 390,967 84 77,883
---------- ---------- ---------- ---------- ----------
Net cash used by investing activities..... (6,909,537) (1,471,026) (1,001,721) (1,055,492) (1,465,726)
Cash flows from financing activities:
Borrowings from (repayments to) shareholder..... (660,002) 55,104 (123,685) 2,888
Net proceeds from (repayments on) revolving line
of credit..................................... (937,995) 969,287 (969,287) (969,288)
Repayments on capital leases & other............ (168,945) (23,150) (66,411)
Proceeds from term loan......................... 4,084,367
Repayment of term loan.......................... (780,354) (3,347,700) (3,330,411)
---------- ---------- ---------- ---------- ----------
Net cash provided (used) by financing
activities.............................. (1,597,997) 4,328,404 (4,609,617) (4,319,961) (66,411)
Net increase in cash.............................. 350,641 667,508 7,431,307 1,239,287 12,920,223
Cash:
Beginning of year............................... 742,463 1,093,104 1,760,612 1,760,612 9,191,919
---------- ---------- ---------- ---------- ----------
End of year..................................... $1,093,104 $1,760,612 $9,191,919 $2,999,899 $22,112,142
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Supplemental information:
Cash paid for interest.......................... $ 86,905 $ 177,313 $ 216,617 $ 184,020 $ 7,800
---------- ---------- ---------- ---------- ----------
Cash paid for income taxes...................... $1,797,035 $5,123,567 $3,907,703 $ 1,607 $6,143,790
---------- ---------- ---------- ---------- ----------
|
See accompanying notes to financial statements.
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 85 specialty retail stores located in 22 states.
STOCK SPLIT--The Company's Board of Directors authorized an eight thousand-for-one split of its common stock in the form of a stock dividend for Shareholders of record at the close of business on June 26, 1997. Share and per share amounts in the accompanying financial statements have been restated to give effect to the stock split (See also Note 13).
USE OF ESTIMATES--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Actual results could differ from those estimates.
CASH AND EQUIVALENTS represent cash and short-term, highly liquid investments with original maturities of three months or less.
MARKETABLE SECURITIES (classified as available-for-sale securities) are reported at fair value. Fair values are based on quoted market prices. Unrealized gains and losses are excluded from income and are reported as an increase or decrease in shareholders' equity.
INVENTORIES, net are stated at the lower of FIFO (first-in, first-out) cost or market. Cost includes certain indirect purchasing, merchandise handling and storage costs.
EQUIPMENT AND IMPROVEMENTS, NET are stated at cost. Depreciation on equipment is computed using the double declining balance method for items purchased prior to July 1, 1995 and the straight-line method is used for all improvements as well as equipment purchased after July 1, 1995. Equipment and improvements are depreciated over the estimated useful lives of the related assets ranging from three to 12 years.
LEASING COMMISSIONS associated with negotiating new store leases are capitalized in other assets and amortized over the lease term. Accumulated amortization on leasing commissions at June 30, 1996 and 1997 and December 31, 1997 was $117,866, $176,571 and $209,347 (unaudited), 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 pre-opening 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 $1,624,000, $1,560,000 and $2,861,162, respectively, during fiscal 1995,
BEBE STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 1996 and 1997. For the six months ended December 31, 1996 and 1997, advertising expense was $1,001,236 and $2,940,042 (unaudited), respectively.
INCOME TAXES are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In estimating future tax consequences, expected future events are considered other than changes in the tax law or rates.
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS--The carrying values of cash and equivalents, investments, receivables, accounts payable, and long-term debt approximates their estimated fair values.
IMPAIRMENT OF LONG-LIVED ASSETS--The Company adopted Statement of Financial Accounting Standards 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. The Company has identified a group of underperforming stores and anticipates the closure of some of these locations in the future. Included in selling, general and administrative expenses for fiscal 1997 is $271,543 related to the recognition of an impairment loss.
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 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 June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income, and SFAS No. 31, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 130 requires that an enterprise report, by major components and as a single total, the change in its net assets during the period from nonowner sources; and SFAS No. 131 establishes annual and interim reporting standards for an enterprise's operating segments and related disclosures about its products, services, geographic areas and major customers. Adoption of these statements will not significantly impact the Company's financial position, results of operations or cash flows and any effect will be limited to the form and content of its disclosures. Both statements are effective for fiscal years beginning after December 15, 1997, with earlier application permitted.
INTERIM FINANCIAL STATEMENTS--The accompanying unaudited interim financial statements, in the opinion of management, include all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of December 31, 1997, and the interim results of operations and cash flows for the six months ended December 31, 1996 and 1997. The results of operations for the six-month period ended December 31, 1997, are not necessarily indicative of the results to be expected for the full year. The
BEBE STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) information in the notes to financial statements which relates to the six-month periods ended December 31, 1996 and 1997 is unaudited.
RECLASSIFICATIONS--Certain reclassifications have been made to the prior year financial statements to conform with the fiscal 1997 financial statement presentation.
2. INVENTORIES
The Company's inventories consist of:
AS OF JUNE 30, AS OF
-------------------------- DECEMBER 31,
1996 1997 -------------
------------ ------------ 1997
-------------
(UNAUDITED)
Raw materials...................................... $ 2,620,452 $ 2,785,382 $ 4,207,631
Merchandise available for sale..................... 6,070,277 7,497,872 7,591,568
------------ ------------ -------------
Less: valuation allowance.......................... (380,000) (821,556) (1,834,719)
------------ ------------ -------------
Inventories, net................................... $ 8,310,729 $ 9,461,698 $ 9,964,480
------------ ------------ -------------
------------ ------------ -------------
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3. CREDIT FACILITIES
Debt consists of the following:
AS OF JUNE 30, AS OF
-------------------------- DECEMBER 31,
1996 1997 -------------
------------ ------------ 1997
-------------
(UNAUDITED)
Term loan.......................................... $ 3,347,700
Note due to shareholder............................ 123,685
Capital leases..................................... $ 157,495 $ 119,233
Note payable....................................... 208,303 162,350 134,200
------------ ------------ -------------
Total.............................................. 3,679,688 319,845 253,433
Less: current portion.............................. (969,635) (151,746) (127,835)
------------ ------------ -------------
Total long-term debt............................... $ 2,710,053 $ 168,099 $ 125,598
------------ ------------ -------------
------------ ------------ -------------
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As of December 31, 1997 and June 30, 1997, the Company had a revolving line of credit, with a facility for letters of credit, with interest at the bank's reference rate (which was 8.5% as of June 30, 1997) allowing for up to $7 million in borrowings including outstanding letters of credit. As of June 30, 1997 and December 31, 1997 there was $751,391 and $544,376, respectively, outstanding in letters of credit. The line expired on April 1, 1998 and was replaced by a $5,000,000 revolving line of credit (See also Note 13).
As of June 30, 1997 and December 31, 1997 the line of credit was 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, 1997, the Company was in compliance with such covenants.
BEBE STORES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. CREDIT FACILITIES (CONTINUED) The Company purchased 48.35% of a housing partnership in fiscal 1994. The note payable of $162,350 at June 30, 1977 is the remaining amount due on the purchase. The note will be paid off in increments through fiscal year 2001.
Scheduled maturities of debt outstanding at June 30, 1997 are as follows:
Fiscal year ending June 30,
1998.............................................................. $ 157,906
1999.............................................................. 95,833
2000.............................................................. 57,138
2001.............................................................. 18,364
---------
Total minimum payments............................................ 329,241
Less: imputed interest............................................ (9,396)
---------
Present value of future minimum payments.......................... $ 319,845
---------
---------
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4. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
AS OF JUNE 30, AS OF
-------------------------- DECEMBER 31,
1996 1997 -------------
------------ ------------ 1997
-------------
(UNAUDITED)
Employee compensation.............................. $ 1,060,244 $ 1,287,263 $ 2,583,917
Sales and use taxes................................ 370,214 546,120 1,242,587
Store credits and gift certificates................ 160,321 1,371,839 1,763,859
Lease termination costs............................ 1,687,327 1,487,327
Other.............................................. 404,405 711,881 1,805,843
------------ ------------ -------------
Total.............................................. $ 1,995,184 $ 5,604,430 $ 8,883,533
------------ ------------ -------------
------------ ------------ -------------
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Other accrued liabilities relate primarily to advertising, percentage rents, employee benefits and certain store expenses.
5. OPERATING LEASES
The Company has operating leases for its retail store locations, corporate headquarters, distribution 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, provide for terms of renewal and/or early termination based on the net sales volumes achieved.
Rent expense for the years ended June 30, 1995, 1996 and 1997 was $7,397,035, $11,066,614 and $13,481,105, respectively, and $6,532,563 and $7,719,196 for the unauditied six-month periods ended December 31, 1996 and 1997, respectively. Rent expense includes percentage rent and other lease-required expenses for the years ended June 30, 1995, 1996 and 1997 of $2,511,224, $3,741,920 and $4,776,148, respectively, and $2,344,086 and $3,092,904 for the unaudited six-month periods ended December 31, 1996 and 1997, respectively.
Future minimum lease payments under operating leases at June 30, 1997 are as follows:
Fiscal year ending June 30:
1998......................................................... $8,900,683
1999......................................................... 9,292,058
2000......................................................... 9,347,031
2001......................................................... 9,134,815
2002......................................................... 8,509,794
Thereafter................................................... 25,076,186
----------
Total minimum lease payments................................... $70,260,567
----------
----------
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6. INCOME TAXES
A summary of the provision (benefit) for income taxes is as follows:
SIX MONTHS ENDED DECEMBER
FISCAL YEAR ENDED JUNE 30, 31,
---------------------------------------- --------------------------
1995 1996 1997 1996 1997
------------ ----------- ------------- ------------ ------------
(UNAUDITED)
Current:
Federal.............. $ 3,287,130 $ (213,716) $ 3,572,949 $ 1,400,485 $ 5,639,706
State................ 1,019,902 67,000 683,341 482,732 1,471,925
------------ ----------- ------------- ------------ ------------
4,307,032 (146,716) 4,256,290 1,883,217 7,111,631
Deferred:
Federal.............. (256,516) 98,781 (847,313) (235,061) (562,709)
State................ (298,992) (182,722) (56,490)
------------ ----------- ------------- ------------ ------------
(256,516) 98,781 (1,146,305) (417,783) (619,199)
------------ ----------- ------------- ------------ ------------
Provision
(benefit)........ $ 4,050,516 $ (47,935) $ 3,109,985 $ 1,465,434 $ 6,492,432
------------ ----------- ------------- ------------ ------------
------------ ----------- ------------- ------------ ------------
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Temporary differences arise primarily from certain accruals, including California franchise taxes, which are not currently deductible for tax purposes, and differences between financial and tax depreciation methods. Deferred income taxes are recognized for tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date.
6. INCOME TAXES (CONTINUED) A reconciliation of the statutory federal income tax rate with the Company's effective income tax rate is as follows:
SIX MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, DECEMBER 31,
------------------------------------- ------------------------
1995 1996 1997 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
Federal statutory rate:................. 35.0% 35.0% 35.0% 35.0% 35.0%
State rate, net of federal benefit...... 6.3 18.8 5.5 4.6% 5.6
Valuation adjustment.................... 0.3 19.5 (1.2)
Benefit of graduated rate............... (1.0) (1.0) (1.2) (1.0) (0.4)
Tax credits............................. (311.2) (1.0) (1.7) (0.5)
Permanent items and other............... 1.9 52.2 0.6 0.8 1.4
----- ----------- ----- ----- -----
Effective tax rate...................... 42.5% (186.7)% 37.7% 37.7% 41.1%
----- ----------- ----- ----- -----
----- ----------- ----- ----- -----
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Significant components of the Company's deferred tax assets (liabilities) are as follows:
AS OF JUNE 30,
-------------------------
1996 1997
----------- ------------ AS OF
DECEMBER 31,
------------
1997
------------
(UNAUDITED)
Current:
Inventory reserve................................. $ 160,962 $ 357,133 $ 391,233
State taxes....................................... 101,055 377,052
Accrued vacation.................................. 90,895 57,615 3,788
Uniform capitalization............................ (19,881) (90,145) (119,543)
Other accurals.................................... 12,186 25,559 21,917
----------- ------------ ------------
Total current................................... 244,162 451,217 674,447
Noncurrent:
Basis difference in fixed assets.................. 152,866 280,795 411,350
Store closure accrual............................. 709,930 745,093
Deferred rent..................................... 147,153 140,900 195,211
Deferred compensation............................. 175,941
----------- ------------ ------------
Total noncurrent................................ 300,019 1,131,625 1,527,595
----------- ------------ ------------
Valuation allowance............................... (107,644)
----------- ------------ ------------
Net deferred tax assets............................. $ 436,537 $ 1,582,842 $2,202,042
----------- ------------ ------------
----------- ------------ ------------
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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 state deferred asset at June 30, 1996 due to the uncertainty of realizing future tax benefits from its state net operating loss carryforwards (NOLs) and other deferred tax assets. Since the benefits of the NOLs is now expected to be realized, the Company was able to reverse the entire valuation allowance in fiscal 1997.
The Company has committed to the acquisition of low income tax credits from a real estate partnership totaling $214,479 through fiscal 2000. The Company utilized $80,428 of credits during fiscal 1997 to reduce its federal income taxes payable.
7. EQUIPMENT AND IMPROVEMENTS
Equipment and improvements consist of the following:
AS OF JUNE 30,
--------------------------
1996 1997
------------ ------------ AS OF
DECEMBER 31,
------------
1997
------------
(UNAUDITED)
Leasehold improvements................................................. $ 6,148,752 $ 6,435,588 $7,978,098
Furniture, fixtures, equipment and vehicles............................ 3,265,417 3,156,982 3,774,426
Computer hardware and software......................................... 1,415,590 1,890,684 1,908,253
Assets under capital leases............................................ 459,444 431,289
Construction in progress............................................... 155,972 161,818 82,168
------------ ------------ ------------
Total................................................................ 10,985,731 12,104,516 14,172,234
Less accumulated depreciation and amortization......................... 3,095,298 4,565,055 5,804,809
------------ ------------ ------------
Equipment and improvements, net........................................ $ 7,890,433 $ 7,539,461 $8,367,425
------------ ------------ ------------
------------ ------------ ------------
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8. EMPLOYEE BENEFIT PLAN
In fiscal 1995, the Company implemented a 401(k) pension plan for all eligible employees. Employees are eligible to participate in the plan if they have been employed by the Company for one year, have reached age 21, and work at least 1,000 hours annually. Generally, employees can defer up to 15% of their gross wages up to the maximum limit allowable under the Internal Revenue Code. The employer can make a discretionary matching contribution for the employee. Employer contributions to the plan for the years ended June 30, 1996 and 1997 were $35,947 and $32,688, respectively. No matching payments have been made by the Company for the six months ended December 31, 1997.
9. 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.
On June 26, 1997 and December 31, 1997, options to purchase 1,587,630 and 325,450 shares of common stock were granted at exercise prices of $1.77 and $5.65, respectively. 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, $434,421 was expensed for the six-month period ended December 31, 1997. As of June 30, 1997, there were 1,587,630 options outstanding, exercisable and subject to repurchase and 1,242,370 shares available for future grant.
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 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 $5,147,785, $0.23, and $0.23, respectively.
9. STOCK OPTIONS (CONTINUED) The weighted average fair value of options granted during the fiscal year ended June 30, 1997 was $2.44. The fair value of each option grant was estimated on the date of the grant using the minimum value method with the following assumptions: expected volatility and dividend rates of 0%; risk-free interest rate of 6% and expected lives of eight years.
10. LITIGATION
The Company is subject to legal proceedings and claims that arise in the ordinary course of business. Management believes, based on the advice of counsel, that ultimate resolution of these matters will not have a material adverse effect on the financial statements taken as a whole.
11. RELATED PARTY TRANSACTIONS
In March 1995, the Company purchased from Manny Mashouf, the Chairman, President and Chief Executive Officer of the Company, certain residential property for $800,000. In February 1997, the Company sold the property to an unaffiliated third party for $696,000, net of selling costs. During the last three fiscal years, Mr. Mashouf has loaned to or borrowed from the Company various amounts of cash ranging from loans to the Company of up to $500,000 and advances from the Company of up to $150,000. As of December 31, 1997, there were no borrowings due to Mr. Mashouf from the Company or advances owed to the Company by Mr. Mashouf.
12. EARNINGS PER SHARE
Under SFAS No. 128, the Company provides dual presentation of EPS on a basic and diluted basis. The Company's granting of certain stock options resulted in potential dilution of basic EPS. The following table summarizes the difference between basic weighted average shares outstanding and diluted weighted average shares outstanding used to compute diluted EPS.
SIX MONTHS ENDED DECEMBER
FISCAL YEAR ENDED JUNE 30, 31,
---------------------------------------- --------------------------
1995 1996 1997 1996 1997
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
Basic weighted average number of shares
outstanding.............................. 22,639,997 22,639,997 22,639,997 22,639,997 22,639,997
Incremental shares from assumed issuance of
stock options............................ 10,874 1,024,201
------------ ------------ ------------ ------------ ------------
Diluted weighted average number of shares
outstanding.............................. 22,639,997 22,639,997 22,650,871 22,639,997 23,664,198
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
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The number of incremental shares from the assumed issuance of stock options is calculated applying the treasury stock method.
13. SUBSEQUENT EVENTS
LINE OF CREDIT. On April 1, 1998, the Company entered into an unsecured commercial line of credit agreement with a bank which provides for borrowings and issuance of letters of credit of up to $5,000,000 and expires on April 1, 2000. The outstanding balance bears interest at either the bank's reference rate or the LIBOR rate plus 1.75 percentage points. The agreement requires maintenance of certain financial covenants and total liabilities to tangible net worth ratios, and places restrictions on capital expenditures and the payment of cash dividends and repurchase of shares.
13. SUBSEQUENT EVENTS (CONTINUED) STOCK SPLIT AND CHANGE IN PAR VALUE. On April 7, 1998, the Company's Board of Directors authorized a 2.83-for-1 stock split and restated its common stock par value from $0.00 to $0.001 per share. Accordingly, a transfer was made from additional paid-in capital to common stock. All information in the financial statements concerning common shares and per share amounts have been restated to give retroactive effect to the stock split and change in par value.
PREFERRED STOCK. On April 7, 1998, the Company shareholders granted the Board of Directors the authority to issue up to 1,000,00 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.
STOCK PURCHASE PLAN. On April 7, 1998, the Company's 1998 Employee Stock Purchase Plan (the "Plan") was adopted and approved by the shareholders. A total of 750,000 shares of common stock has been reserved for issuance under the Plan. The Plan will allow eligible employees to purchase the Company's common stock in an amount which may not exceed 10% of the employee's compensation. The Plan will be implemented by sequential 24-month offerings. Each offering will generally be comprised of four, six-month purchase periods, with shares purchased on the last day of each purchase period (a "Purchase Date"). The price at which stock may be purchased is equal to 85% of the lower of fair market value of the Company's common stock on the first day of the offering period or the Purchase Date.
[PICTURES OF STORE EXTERIORS AND INTERIORS]
[BEBE LOGO]
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than the underwriting discounts and commissions payable by the Registrant in connection with the sale of the Common Stock being registered. The Company is paying all of the expenses incurred on behalf of the Selling Shareholder (other than underwriting discounts and commissions). All amounts shown are estimates except for the registration fee and the NASD filing fee.
AMOUNT TO
BE PAID
----------
SEC Registration Fee.................................................................................. $ 11,026
NASD Filing Fee....................................................................................... 4,238
Nasdaq National Market Application Fee................................................................ 27,795
Printing and Engraving Expenses....................................................................... 100,000
Legal Fees and Expenses............................................................................... 200,000
Accounting Fees and Expenses.......................................................................... 300,000
Transfer Agent and Registrar Fees..................................................................... 2,500
Miscellaneous Expenses................................................................................ 54,441
----------
Total............................................................................................... $ 700,000
----------
----------
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ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The California Corporations Code provides for the indemnification of directors, officers, employees and agents of the corporation under certain circumstances set forth in section 317. Section 317 permits a corporation to indemnify its agents, typically directors and officers, for expenses incurred or settlements or judgments paid in connection with certain legal proceedings. Only those legal proceedings arising out of such persons' actions as agents of the corporation may be grounds for indemnification.
Whether or not indemnification may be paid in a particular case depends upon whether the agent wins, loses or settles the suit and upon whether a third party or the corporation itself is the plaintiff. The section provides for mandatory indemnification, no matter who the plaintiff is, when an agent is successful on the merits of a suit. In all other cases, indemnification is permissive.
If the agent loses or settles a suit brought by a third party, he or she may be indemnified for expenses incurred and settlements or judgments paid. Such indemnification may be authorized upon finding that the agent acted in good faith and in a manner he or she reasonably believed to be in the best interests of the corporation.
If the agent loses or settles a suit brought by or on behalf of the corporation, his or her right to indemnification is more limited. If he or she is adjudged to be liable to the corporation, the court in which such proceeding was held must determine whether it would be fair and reasonable to indemnify him or her for expenses which such court shall determine. If the agent settles such a suit with court approval, he or she may be indemnified for expenses incurred upon a finding that the agent acted in good faith and in a manner he or she reasonably believed to be in the best interest of the corporation and, in addition, that he or she acted with the care, including reasonable inquiry of an ordinarily prudent person.
The indemnification discussed above may be authorized by a majority vote of the disinterested directors or shareholders (the person to be indemnified is excluded from voting his or her shares) or the
II-1
court in which the proceeding was brought. The corporation's Board of Directors makes all decisions regarding the indemnification of its officers and directors on a case-by-case basis.
Any provision in the corporation's Articles of Incorporation or Bylaws contained in a shareholder or director resolution that indemnifies its officers or directors must be consistent with section 317. Moreover, such a provision may prohibit permissive, but not mandatory, indemnification as described above. Lastly, a corporation has the power to purchase indemnity insurance for its agents even if it would not have the power to indemnify them.
The Registrant's Amended and Restated Articles of Incorporation authorize the Board of Directors to provide indemnification of its agents through bylaw provisions or indemnification agreements, or both, in excess of the indemnification otherwise permitted by section 317, subject to the limits on such excess indemnification set forth in section 204 of the California Corporations Code.
The Registrant has entered into agreements to indemnify its directors and officers. These agreements, among other things, indemnify the Registrant's directors and officers for certain expenses (including attorneys' fees), judgments, fines and settlement amounts incurred by any such person in any action or proceeding, including any action by or in the right of the Registrant, arising out of such person's services as a director or officer of the Registrant, any subsidiary of the Registrant or any other Registrant or enterprise to which the person provides services at the request of the Registrant.
Insofar as indemnification for liabilities under the Securities Act of 1933 may be permitted to directors, officers or persons controlling the Registrant pursuant to the foregoing provisions, the Registrant has been informed that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the act and is therefore unenforceable. See also related undertakings in Item 17 below.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In June 1997 and December 1997, the Registrant issued to its directors and employees options to purchase an aggregate of 1,913,080 shares of Common Stock, at exercise prices ranging from $1.77 to $5.65 per share, pursuant to the Registrant's 1997 Stock Plan. The granting of these stock options did not require registration under the Securities Act, as amended (the "Securities Act"), or an exemption therefrom, insofar as such grants did not involve a "sale" of securities as such term is used in Section 2(3) of the Securities Act.
II-2
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
----------- --------------------------------------------------------------------------------------------------------
1.1* Form of Underwriting Agreement.
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).
5.1 Opinion of Gray Cary Ware & Freidenrich LLP.
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.
11.1* Statement of Computation of Net Income Per Share.
16.1 Letter from Wilson, McCall & Daoro dated April 10, 1998 regarding change in certifying accountants.
23.1 Independent Auditors' Consent and Report on Schedule.
23.2 Consent of Gray Cary Ware & Freidenrich LLP (see Exhibit 5.1).
24.1 Power of Attorney (see signature page).
27.1 Financial Data Schedule (EDGAR filed version only).
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* Documents to be filed by amendment.
+ Certain information in this exhibit has been omitted and filed separately with the Securities and Exchange Commission pursuant to a confidential treatment request under 17 C.F.R. Sections 200.80(b), 200.83 and 230.406.
(b) Financial Statement Schedules.
Schedule II--Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification by the Registrant for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions referenced in Item 14 of this Registration Statement or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
II-3
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the Offerings of such securities at the time shall be deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Brisbane, State of California, on the 17th day of April, 1998.
BEBE STORES, INC.
By: /s/ MANNY MASHOUF
-----------------------------------------
Manny Mashouf
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
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POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Manny Mashouf and Blair W. Lambert, and each of them acting individually, as his true and lawful attorneys-in-fact and agents, each with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Registration Statement (including post-effective amendments or any abbreviated registration statement and any amendments thereto filed pursuant to Rule 462(b) increasing the number of securities for which registration is sought), and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, with full power of each to act alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully for all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration Statement 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 April 17, 1998
Manny Mashouf Executive Officer)
Vice President, Finance
/s/ BLAIR W. LAMBERT and Chief Financial
------------------------------ Officer (Principal April 17, 1998
Blair W. Lambert Financial and Accounting
Officer)
/s/ NEDA MASHOUF
------------------------------ Director April 17, 1998
Neda Mashouf
/s/ BARBARA BASS
------------------------------ Director April 17, 1998
Barbara Bass
/s/ CORRADO FEDERICO
------------------------------ Director April 17, 1998
Corrado Federico
/s/ PHILIP SCHLEIN
------------------------------ Director April 17, 1998
Philip Schlein
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II-5
SCHEDULE II
BEBE STORES, INC.
VALUATION AND QUALIFYING ACCOUNTS
COLUMN C
------------------------
COLUMN B ADDITIONS
------------ ------------------------ COLUMN E
COLUMN A BALANCE AT CHARGED TO CHARGED TO COLUMN D -------------
----------------------------------------------- BEGINNING OF COSTS AND OTHER ---------- BALANCE AT
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTION END OF PERIOD
----------------------------------------------- ------------ ----------- ----------- ---------- -------------
YEAR ENDED JUNE 30, 1995
Inventory obsolescence reserve................. $ 200,000 $ 200,000 $ 400,000
Allowance for doubtful accounts receivable..... 5,000 105,969 $ 75,969 35,000
Deferred tax asset valuation allowance......... 35,990 66,654 102,644
------------ ----------- ----------- ---------- -------------
$ 240,990 $ 372,623 $ $ 75,969 $ 537,644
------------ ----------- ----------- ---------- -------------
------------ ----------- ----------- ---------- -------------
YEAR ENDED JUNE 30, 1996
Inventory obsolescence reserve................. $ 400,000 $ 80,000 $ 100,000 $ 380,000
Allowance for doubtful accounts receivable..... 35,000 53,587 75,087 13,500
Deferred tax asset valuation allowance......... 102,644 5,000 107,644
------------ ----------- ----------- ---------- -------------
$ 537,644 $ 138,587 $ $ 175,087 $ 501,144
------------ ----------- ----------- ---------- -------------
------------ ----------- ----------- ---------- -------------
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......... 107,644 107,644 0
Reserve for store closures..................... 271,543 271,543
------------ ----------- ----------- ---------- -------------
$ 501,144 $ 791,748 $ $ 123,125 $ 1,169,767
------------ ----------- ----------- ---------- -------------
------------ ----------- ----------- ---------- -------------
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
----------- --------------------------------------------------------------------------------------------------------
1.1* Form of Underwriting Agreement.
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).
5.1 Opinion of Gray Cary Ware & Freidenrich LLP.
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.
11.1* Statement of Computation of Net Income Per Share.
16.1 Letter from Wilson, McCall & Daoro dated April 10, 1998 regarding change in certifying accountants.
23.1 Independent Auditors' Consent and Report on Schedule.
23.2 Consent of Gray Cary Ware & Freidenrich LLP (see Exhibit 5.1).
24.1 Power of Attorney (see signature page).
27.1 Financial Data Schedule (EDGAR filed version only).
|
* Documents to be filed by amendment.
+ Certain information in this exhibit has been omitted and filed separately with the Securities and Exchange Commission pursuant to a confidential
treatment request under 17 C.F.R. Sections 200.80(b), 200.83 and 230.406.
EXHIBIT 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
BABE, INC.
A California Corporation
Manny Mashouf and Paul Mashouf certify that:
1. They are the duly elected and acting President and Secretary, respectively, of Babe, Inc., a California corporation (the "Corporation").
2. The Articles of Incorporation of this Corporation, as amended to the date of the filing of this certificate, are amended and restated to read in full as follows:
I.
The name of this Corporation is: bebe stores, inc.
II.
The purpose of this Corporation is to engage in any lawful act or activity for which a corporation may be organized under the California General Corporation Law ("CGCL") other then the banking business, the trust company business, or the practice of a profession permitted to be incorporated by the California Corporation Code.
III.
This Corporation is authorized to issue two classes of shares, designated "Common Stock" and "Preferred Stock." The total number of shares which this Corporation is authorized to issue is 41,000,000. The number of shares of Preferred Stock which this Corporation is authorized to issue is 1,000,000. The number of shares of Common Stock which this Corporation is authorized to issue is 40,000,000. Upon the filing of this Certificate of Amendment of Articles of Incorporation, each outstanding share of Common Stock shall, without any further action on the part of the Corporation, be split up and converted into 2.83 fully paid and validly issued shares of Common Stock.
The Preferred Stock authorized by these Articles of Incorporation may be issued in one or more series. The Board of Directors of the Corporation is authorized to determine or alter the rights, preferences, privileges and restrictions granted or imposed upon any wholly unissued series of Preferred Stock, and within the limitations or restrictions stated in any resolution or resolutions of the Board of Directors originally fixing the number of shares constituting any series, to increase or decrease (but not below the number of shares of any such series then outstanding) the number of shares of any such series subsequent to the issue of shares of that series, to determine the designation and par value of any series and to fix the numbers of shares of any series.
IV.
(a) The liability of the directors of this Corporation for monetary damages shall be eliminated to the fullest extent permissible under California law.
(b) This Corporation is authorized to provide, whether by bylaw,
agreement or otherwise, for the indemnification of agents (as defined in
Section 317 of the CGCL) of this Corporation in excess of that expressly
permitted for those agents by Section 317 of the CGCL, for breach of duty to
this Corporation and its shareholders to the extent permissible under
California law (as now or hereafter in effect). In furtherance and not in
limitation of the powers conferred by statue:
(i) this Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of this Corporation, or is serving at the request of this Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise (each an "Indemnifies Party"), against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not this Corporation would have the power to indemnify against such liability under the provisions of law; and
(ii) this Corporation may create a trust fund, grant a security interest and/or use other means (including, without limitation, letters of credit, surety bonds and/or other similar arrangements), as well as enter into contracts providing indemnification, to the fullest extent authorized or permitted by law and including as part thereof provisions with respect to any or all of the foregoing to ensure the payment of such amounts as may become necessary to effect indemnification as provided therein, or elsewhere.
No such agreement or other form of indemnification shall be interpreted as limiting in any manner the rights which such agents would have to indemnification in the absence of such bylaw, agreement or other form of indemnification.
(c) Any repeal or modification of the foregoing provisions of this Article IV by the shareholders of this Corporation shall not adversely affect any right or protection of a current or former Indemnified party existing at the time of such repeal of modification
V.
Cumulative voting for the election of directors of the Corporation shall
be eliminated effective upon the date when the Corporation becomes, and for as
long as the Corporation is, a "listed corporation" within the meaning of
Section 301.5 of the CGCL.
3. The foregoing Amended and Restated Articles of Incorporation have been duly approved by the Board of Directors of the Corporation.
4. The foregoing Amended and Restated Article of Incorporation have been duly approved by the required vote of shareholders in accordance with Section 902 of the CGCL. The Corporation has only one class of shares, and the total number of outstanding shares of the Corporation is 8,000,000 shares of Common Stock. The number of shares voting in favor of the amendment equaled or exceed the vote required. The percentage vote required was more than 50% of the Common Stock.
Each of the undersigned declares under penalty of perjury under the laws of the State of California that the matters set forth in this Certificate are true and correct of his own knowledge.
Date: April 7, 1998
/s/ MANNY MASHOUF
-----------------------------------
Manny Mashouf, President
/s/ PAUL MASHOUF
-----------------------------------
Paul Mashouf, Secretary
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EXHIBIT 5.1
[LETTERHEAD]
April 13, 1998
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: bebe stores, inc. REGISTRATION STATEMENT ON FORM S-1
Ladies and Gentlemen:
As counsel to bebe stores, inc. (the "Company"), we are rendering this opinion in connection with a proposed sale of those certain shares of the Company's newly-issued Common Stock and those certain additional shares of the Company's Common Stock held by a certain shareholder as set forth in the Registration Statement on Form S-1 to which this opinion is being filed as Exhibit 5.1 (the "Shares"). We have examined all instruments, documents and records which we deemed relevant and necessary for the basis of our opinion hereinafter expressed. In such examination, we have assumed the genuineness of all signatures and the authenticity of all documents submitted to us as originals and the conformity to the originals of all documents submitted to us as copies.
We express no opinion with respect to (i) the availability of equitable remedies, including specific performance, or (ii) the effect of bankruptcy, insolvency, reorganization, moratorium or equitable principles relating to or limiting creditors' rights generally.
Based on such examination, we are of the opinion that the Shares identified in the above-referenced Registration Statement will be, upon effectiveness of the Registration Statement and receipt by the Company of payment therefor, validly authorized, legally issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the above-referenced Registration Statement and to the use of our name wherever it appears in said Registration Statement, including the Prospectus constituting a part thereof, as originally filed or as subsequently amended.
Respectfully submitted,
/s/ Gray Cary Ware & Freidenrich GRAY CARY WARE & FREIDENRICH LLP |
EXHIBIT 10.4
[AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION LOGO]
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE--NET
(DO NOT USE THIS FORM FOR MULTI-TENANT PROPERTY)
1. BASIC PROVISIONS ("BASIC PROVISIONS")
1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes only, ____________________ 1994 is made by and between California State Teachers' Retirement System, a retirement system created pursuant to the laws of the State of California ("LESSOR") and Babe, Inc., a California corporation, dba Bebe ("LESSEE"), (collectively the "PARTIES," or individually a "PARTY").
1.2 PREMISES: That certain real property, including all improvements therein or to be provided by Lessor under the terms of this Lease, and commonly known by the street address of 380 Valley Drive, Brisbane located in the County of San Mateo, State of California and generally described as (describe briefly the nature of the property) all that property and improvements thereon, including an approximately 69,743 square foot building, located on Assessor's Parcel #005-171-050 ("PREMISES"). (See Paragraph 2 for further provisions.)
1.3 TERM: 7 years and 6 months ("ORIGINAL TERM") commencing SEE
ADDENDUM ("COMMENCEMENT DATE") and ending _______________________ ("EXPIRATION
DATE"). (See Paragraph 3 for further provisions.)
1.4 EARLY POSSESSION: _________________________ ("EARLY POSSESSION
DATE"). (See Paragraphs 3.2 and 3.3 for further provisions.)
2. PREMISES.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor. the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of square footage set forth in this Lease, or
that may have been used in calculating rental, is an approximation which Lessor
and Lessee agree is reasonable and the rental based thereon is not subject to
revision whether or not the actual square footage is more or less.
2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it has been advised by the Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical and fire sprinkler systems, security, environmental aspects, compliance with Applicable Law, as defined in Paragraph 6.3) and the present and future suitability of the Premises for Lessee's intended use, (b) that Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to Lessee's occupancy of the Premises and/or the term of this Lease, and (c) that neither Lessor, nor any of Lessor's agents, has made any oral or written representations or warranties with respect to the said matters other than as set forth in this Lease. SEE ADDENDUM
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3.
3.2 EARLY POSSESSION. If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Lease, however, (including but not limited to the obligations to pay Real Property Taxes and insurance premiums and to maintain the Premises) shall be in effect during such period. Any such early possession shall not affect nor advance the Expiration Date of the Original Term.
3.3 DELAY IN POSSESSION. If for any reason Lessor cannot deliver possession of the Premises to Lessee as agreed herein by the Early Possession Date, if one is specified in Paragraph 1.4, or, if no Early Possession Date is specified, by the Commencement Date, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease, or the obligations of Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not, except as otherwise provided herein, be obligated to pay rent or perform any other obligation of Lessee under the terms of this Lease until Lessor delivers possession of the Premises to Lessee. SEE ADDENDUM
4. RENT.
4.1 BASE RENT. Lessee shall cause payment of Base Rent and other rent or charges, as the same may be adjusted from time to time, to be received by Lessor in lawful money of the United States, without offset or deduction, on or before the day on which it is due under the terms of this Lease. Base Rent and all other rent and charges for any period during the term hereof which is for less than one (1) full calendar month shall be prorated based upon the actual number of days of the calendar month involved. Payment of Base Rent and other charges shall be made to Lessor at its address stated herein or to such other persons or at such other addresses as Lessor may from time to time designate in writing to Lessee.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's faithful performance of Lessee's obligations under this Lease. If Lessee fails to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, cost, expense, loss or damage (including attorneys' fees) which Lessor may suffer or incur by reason thereof. It Lessor uses or applies all or any portion of said Security Deposit, Lessee shall within (10) days after written request therefor deposit moneys with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. Any time the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional moneys with Lessor sufficient to maintain the same ratio between the Security Deposit and the Base Rent as those amounts are specified in the Basic Provisions. Lessor shall not be required to keep all or any part of the Security Deposit separate from its general accounts. Lessor shall, at the expiration or earlier termination of the term hereof and after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option, to the last assignee, if any, of Lessee's interest herein), that portion of the Security Deposit not used or applied by Lessor. Unless otherwise expressly agreed in writing by Lessor, no part of the Security Deposit shall be considered to be held in trust, SEE ADDENDUM, or to be prepayment for any moneys to be paid by Lessee under this Lease.
6. USE.
6.1 USE. Lessee shall use and occupy the Premises only for the purposes set forth in Paragraph 1.8, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that creates waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to, neighboring premises or properties.
6.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE" as used in this Lease shall mean any product, substance, chemical, material or waste whose presence, nature, quantity and/or intensity of existence, use, manufacture, disposal, transportation, spill, release or effect, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substance shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products, by-products or fractions thereof. SEE ADDENDUM
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance, or a condition involving or resulting from same, has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor. Lessee shall also immediately give Lessor a copy of any statement, report, notice, registration, application, permit, business plan, license, claim, action or proceeding given to, or received from, any governmental authority or private party, or persons entering or occupying the Premises, concerning the presence, spill, release, discharge of, or exposure to, any Hazardous Substance or contamination in, on, or about the Premises.
(c) INDEMNIFICATION. Lessee shall indemnify, protect, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, and the Premises, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, costs, claims, liens, expenses, penalties, permits and attorney's and consultant's fees arising out of or involving any Hazardous Substance or storage tank brought onto the Premises by or for Lessee or under Lessee's control. Lessee's obligations under this Paragraph 6 shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation (including consultant's and attorney's fees and testing), removal, remediation, restoration and/or abatement thereof, or of any contamination therein involved, and shall survive the expiration or earlier termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances or storage tanks, unless specifically so agreed by Lessor in writing at the time of such agreement.
6.3 LESSEE'S COMPLIANCE WITH LAW. Except as otherwise provided in this Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently and in a timely manner, comply with all "APPLICABLE LAW," which term is used in this Lease to include all laws, rules, regulations, ordinances, directives, covenants, easements and restrictions of record, permits, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants, relating in any manner to the Premises (including but not limited to matters pertaining to (i) industrial hygiene, (ii) environmental conditions on, in, under or about the Premises, including soil and groundwater conditions, and (iii) the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, spill or release of any Hazardous Substance or storage tank), now in effect or which may hereafter come into effect, and whether or not reflecting a change in policy from any previously existing policy. Lessee shall, within five (5) days after receipt of Lessor's written request, provide Lessor with copies of all documents and information, including, but not limited to, permits, registrations, manifests, applications, reports and certificates, evidencing Lessee's compliance with any Applicable Law specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving failure by Lessee or the Premises to comply with any Applicable Law.
6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's Lender(s) (as defined in Paragraph 8.3(a)) shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times and upon reasonable prior written notice to Lessee for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease and all Applicable Laws (as defined in Paragraph 6.3), and to employ experts and/or consultants in connection therewith and/or to advise Lessor with respect to Lessee's activities, including but not limited to the installation, operation, use, monitoring, maintenance, or removal of any Hazardous Substance or storage tank on or from the Premises. The costs and expenses of any such inspections shall be paid by the party requesting same, unless a Default or Breach of this Lease, violation of Applicable Law, or a contamination, caused or materially contributed to by Lessee is found to exist or be imminent. In any such case, Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case may be, for the costs and expenses of such inspections.
7. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES AND ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS.
(a) Subject to the provisions of Paragraph
7.2 (Lessor's obligations to repair), 9 (damage and destruction), and 14
(condemnation), Lessee shall, at Lessee's sole cost and expense and at all
times, keep the non-structural portions of the Premises and every part
thereof in good order, condition and repair (whether or not such portion of
the Premises requiring repairs, or the means of repairing the same, are
reasonably or readily accessible to Lessee, and whether or not the need for
such repairs occurs as a result of Lessee's use, any prior use, the elements
or the age of such portion of the Premises), including, without limiting the
generality of the foregoing, all equipment or facilities serving the
Premises, such as plumbing, heating, air conditioning, ventilating,
electrical, lighting facilities, boilers, fired or unfired pressure vessels,
fire sprinkler and/or standpipe and hose or other automatic fire
extinguishing system, including fire alarm and/or smoke detection systems and
equipment, fire hydrants, fixtures, walls (interior and exterior), ceilings,
roofs, floors, windows, doors, plate glass, skylights landscaping, driveways,
parking lots, fences, retaining walls, signs (other than signs identifying
Lessor, which shall be maintained by Lessor) and sidewalks located in, on,
about, or adjacent to the Premises. Lessee shall not cause or permit any
Hazardous Substance to be spilled or released in, on, under or about the
Premises (including through the plumbing or sanitary sewer system) and shall
promptly, at Lessee's expense, take all investigatory and/or remedial action
reasonably recommended, whether or not formally ordered or required, for the
cleanup of any contamination of, and for the maintenance, security and/or
monitoring of the Premises, the elements surrounding same, or neighboring
properties, that was caused or materially contributed to by Lessee, or
pertaining to or involving any Hazardous Substance and/or storage tank
brought onto the Premises by or for Lessee or under its control. Lessee, in
keeping the Premises in good order, condition and repair, shall exercise and
perform good maintenance practices. Lessee's obligations shall include
restorations, replacements or renewals when necessary to keep the Premises
and all improvements thereon or a part thereof in good order, condition and
state of repair. If Lessee occupies the Premises for ten (10) years or more,
Lessor may require Lessee to repaint the exterior of the buildings on the
Premises as reasonably required, but not more frequently than once every ten
(10) years. SEE ADDENDUM
(b) Lessee shall at Lessee's sole cost and expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in the inspection, maintenance and service of the following equipment and improvements, if any, located on the Premises: (i) heating, air conditioning and ventilation equipment, (ii) boiler, fired or unfired pressure vessels, (iii) fire sprinkler and/or standpipe and hose or other automatic fire extinguishing systems, including fire alarm and/or smoke detection, (iv) landscaping and irrigation systems, (v) roof covering and drain maintenance and (vi) asphalt and parking lot maintenance.
7.2 LESSOR'S OBLIGATIONS. Except for the warranties and agreements of
Lessor contained in Paragraphs 9 (relating to destruction of the Premises) and
14 (relating to condemnation of the Premises), it is intended by the Parties
hereto that Lessor have no obligation, in any manner whatsoever, to repair and
maintain the Premises, the improvements located thereon, or the equipment
therein, whether structural or non structural, all of which obligations are
intended to be that of the Lessee under Paragraph 7.1 hereof. It is the
intention of the Parties that the terms of this Lease govern the respective
obligations of the Parties as to maintenance and repair of the Premises. Lessee
and Lessor expressly waive the benefit of any statute now or hereafter in effect
to the extent it is inconsistent with the terms of this Lease with respect to,
or which affords Lessee the right to make repairs at the expense of Lessor or to
terminate this Lease by reason of any needed repairs. SEE ADDENDUM
7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS. SEE ADDENDUM
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS" is used in this Lease to refer to all carpeting, window coverings, air lines, power panels, electrical distribution, security, fire protection systems, communication systems, lighting fixtures, heating, ventilating, and air conditioning equipment, plumbing, and fencing in, on or about the Premises. The term "TRADE FIXTURES" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term "ALTERATIONS" shall mean any modification of the improvements on the Premises from that which are provided by Lessor under the terms of this Lease, other than Utility Installations or Trade Fixtures, whether by addition or deletion. "LESSEE OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as Alterations and/or Utility Installations made by lessee that are not yet owned by Lessor as defined in Paragraph 7.4(a). Lessee shall not make any Alterations or Utility Installations in, on, under or about the Premises without Lessor's prior written consent. Lessee may, however, make non-structural Utility Installations to the interior of the Premises (excluding the roof), as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, and the cumulative cost thereof does not exceed $75,000 in any four year period.
(b) CONSENT. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with proposed detailed plans. All consents given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent, shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits required by governmental authorities, (ii) the furnishing of copies of such permits together with a copy of the plans and specifications for the Alteration or Utility Installation to Lessor prior to commencement of the work thereon, and (iii) the compliance by Lessee with all conditions of said permits in a prompt and expeditious manner. Any Alterations or Utility Installations by Lessee during the term of this Lease shall be done in a good and workmanlike manner, with good and sufficient materials, and in compliance with all Applicable Law. Lessee shall promptly upon completion thereof furnish Lessor with as-built plans and specifications therefor.
(c) INDEMNIFICATION. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanics' or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility in or on the Premises as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises. If Lessor shall require, in connection with the contest of any such lien, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to one and one-half times the amount of such contested lien claim or demand, indemnifying Lessor against liability for the same, as required by law for the holding of the Premises free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's attorney's fees and costs in participating in such action if Lessor shall decide it is to its best interest to do so.
7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require their removal or become the owner thereof as hereinafter provided in this Paragraph 7.4, all alterations and Utility Installations made to the Premises by Lessee shall be the property of and owned by Lessee, but considered a part of the Premises. Lessor may, at any time and at its option, elect in writing to Lessee to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per subparagraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or earlier termination of this Lease, become the property of Lessor and remain upon and be surrendered by Lessee with the Premises.
(c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by the end of the last day of the Lease term or any earlier termination date, with all of the improvements, parts and surfaces thereof clean and free of debris and in good operating order, condition and state of repair, ordinary wear and tear excepted. "ORDINARY WEAR AND TEAR" shall not include any damage or deterioration that would have been prevented by good maintenance practice or by Lessee performing all of its obligations under this Lease. Except as otherwise agreed or specified in writing by Lessor, the Premises, as surrendered, shall include the Utility Installations. The obligation of Lessee shall include the repair of any damage occasioned by the installation, maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and Alterations and/or Utility Installations, as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or ground water contaminated by Lessee, all as may then be required by Applicable Law and/or good service practice. Lessee's Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee subject to its obligation to repair and restore the Premises per this Lease.
8. INSURANCE; INDEMNITY.
8.1 PAYMENT FOR INSURANCE. Regardless of whether the Lessor or Lessee is the Insuring Party, Lessee shall pay for all insurance required under this Paragraph 8. Premiums for policy periods commencing prior to or extending beyond the Lease term shall be prorated to correspond to the Lease term. Payment shall be made by Lessee to Lessor within ten (10) days following receipt of an invoice for any amount due. SEE ADDENDUM
8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force during the term of this Lease a Commercial General Liability policy of insurance protecting Lessee and Lessor and AMB Institutional Realty Advisors, Inc. (each as an additional insured) against claims for bodily injury, personal injury and property damage based upon, involving or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an "Additional Insured-Managers or Lessors of Premises" Endorsement and contain the "Amendment of the Pollution Exclusion" for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance required by this Lease or as carried by Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only.
(b) CARRIED BY LESSOR. In the event Lessor is the Insuring Party, Lessor shall also maintain liability insurance described in Paragraph 8.2(a), above, in addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein.
8.3 PROPERTY INSURANCE--BUILDING, IMPROVEMENTS AND RENTAL VALUE. SEE ADDENDUM
(a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and to the holders of any mortgages, deeds of trust or ground leases on the Premises ("LENDER(S)"), insuring loss or damage to the Premises. The amount of such insurance shall be equal to the full replacement cost of the Premises, as the same shall exist from time to time, or the amount required by Lenders, but in no event more than the commercially reasonable and available insurable value thereof if, by reason of the unique nature or age of the improvements involved, such latter amount is less than full replacement cost. If Lessor is the Insuring Party, however, Lessee Owned Alterations and Utility Installations shall be insured by Lessee under Paragraph 8.4 rather than by Lessor. If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for any additional costs resulting from debris removal and reasonable amounts of coverage for the enforcement of any ordinance or law regulating the reconstruction or replacement of any undamaged sections of the Premises required to be demolished or removed by reason of the enforcement of any building, zoning, safety or land use laws as the result of a covered cause of loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $1,000 per occurrence, and Lessee shall be liable for such deuctible amount in the event of an Insured Loss, as defined in Paragraph 9.1(c).
(b) RENTAL VALUE. The Insuring Party shall, in addition,
obtain and keep in force during the term of this Lease a policy or policies
in the name of Lessor, with loss payable to Lessor and Lender(s), insuring
the loss of the full rental and other charges payable by Lessee to Lessor
under this Lease for one (1) year (including all real estate taxes, insurance
costs, and any scheduled rental increases). Said insurance shall provide
that in the event the Lease is terminated by reason of an insured loss, the
period of indemnity for such coverage shall be extended beyond the date of
the completion of repairs or replacement of the Premises, to provide for one
full year's loss of rental revenues from the date of any such loss. Said
insurance shall contain an agreed valuation provision in lieu of any
coinsurance clause, and the amount of coverage shall be adjusted annually to
reflect the projected rental income, property taxes, insurance premium costs
and other expenses, if any, otherwise payable by Lessee, for the next twelve
(12) month period. Lessee shall be liable for any deductible amount in the
event of such loss.
(c) ADJACENT PREMISES. If the Premises are part of a larger building, or if the Premises are part of a group of buildings owned by Lessor which are adjacent to the Premises, the Lessee shall pay for any increase in the premiums for the property insurance of such building or buildings if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises.
(d) TENANT'S IMPROVEMENTS. If the Lessor is the Insuring Party, the Lessor shall not be required to insure Lessee Owned Alterations and Utility Installations unless the item in question has become the property of Lessor under the terms of this Lease. If Lessee is the Insuring Party, the policy carried by Lessee under this Paragraph 8.3 shall insure Lessee Owned Alterations and Utility Installations.
8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of Paragraph 8.5, Lessee at its cost shall either by separate policy or, at Lessor's option, by endorsement to a policy already carried, maintain insurance coverage on all of Lessee's personal property, Lessee Owned Alterations and Utility Installations in, on, or about the Premises similar in coverage to that carried by the Insuring Party under Paragraph 8.3. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property or the restoration of Lessee Owned Alterations and Utility Installations. Lessee shall be the Insuring Party with respect to the insurance required by this Paragraph 8.4 and shall provide Lessor with written evidence that such insurance is in force.
8.5 INSURANCE POLICIES. Insurance required hereunder shall be in companies duly licensed to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least B+, V, or such other rating as may be required by a Lender having a lien on the Premises, as set forth in the most current issue of "Best's Insurance Guide." Lessee shall not do or permit to be done anything which shall invalidate the insurance policies referred to in this Paragraph 8. If Lessee is the Insuring Party, Lessee shall cause to be delivered to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of such insurance with the insureds and loss payable clauses as required by this Lease. No such policy shall be cancellable or subject to modification except after thirty (30) days prior written notice to Lessor. Lessee shall at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. If the Insuring Party shall fail to procure and maintain the insurance required to be carried by the Insuring Party under this Paragraph 8, the other Party may, but shall not be required to, procure and maintain the same, but at Lessee's expense. SEE ADDENDUM
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or remedies, Lessee and Lessor ("WAIVING PARTY") each hereby release and relieve the other, and waive their entire right to recover damages (whether in contract or in tort) against the other, for loss of or damage to the Waiving Party's property arising out of or incident to the perils required to be insured against under Paragraph 8. The effect of such releases and waivers of the right to recover damages shall not be limited by the amount of insurance carried or required, or by any deductibles applicable thereto. SEE ADDENDUM
8.7. INDEMNITY. Except for Lessor's negligence and/or breach of
express warranties, Lessee shall indemnify, protect, defend and hold harmless
the Premises, Lessor and its agents, Lessor's master or ground lessor, partners
and Lenders, from and against any and all claims, loss of rents and/or damages,
costs, liens, judgments, penalties, permits, attorney's and consultant's fees,
expenses and/or liabilities arising out of, involving, or in dealing with, the
occupancy of the Premises by Lessee, the conduct of Lessee's business, any act,
omission or neglect of Lessee, its agents, contractors, employees or invitees,
and out of any Default or Breach by Lessee in the performance in a timely manner
of any obligation on Lessee's part to be performed under this Lease. The
foregoing shall include, but not be limited to, the defense or pursuit of any
claim or any action or proceeding involved therein, and whether or not (in the
case of claims made against Lessor) litigated and/or reduced to judgment, and
whether well founded or not. In case any action or proceeding be brought
against Lessor by reason of any of the foregoing matters, Lessee upon notice
from Lessor shall defend the same at Lessee's expense by counsel reasonably
satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense.
Lessor need not have first paid any such claim in order to be so indemnified.
SEE ADDENDUM
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the building of which the Premises are a part, or from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is accessible or not. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, the repair cost of which damage or destruction is less than 50% of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations the repair cost of which damage or destruction is 50% or more of the then Replacement Cost of the Premises immediately prior to such damage or destruction, excluding from such calculation the value of the land and Lessee Owned Alterations and Utility Installations.
(c) "INSURED LOSS" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of applicable building codes, ordinances or laws, and without deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises.
9.2 PARTIAL DAMAGE--INSURED LOSS. If a Premises Partial Damage
that is an Insured Loss occurs, then Lessor shall, at Lessor's expense,
repair such damage (but not Lessee's Trade Fixtures or Lessee Owned
Alterations and Utility Installations) as soon as reasonably possible and
this Lease shall continue in full force and effect. Notwithstanding the
foregoing, if the required insurance was not in force or the insurance
proceeds are not sufficient to effect such repair, the Insuring Party shall
promptly contribute the shortage in proceeds (except as to the deductible
which is Lessee's responsibility) as and when required to complete said
repairs. In the event, however, the shortage in proceeds was due to the fact
that, by reason of the unique nature of the improvements, full replacement
cost insurance coverage was not commercially reasonable and available,
Lessor shall have no obligation to pay for the shortage in insurance proceeds
or to fully restore the unique aspects of the Premises unless Lessee provides
Lessor with the funds to cover same, or adequate assurance thereof, within
ten (10) days following receipt of written notice of such shortage and
request therefor. If Lessor receives said funds or adequate assurance
thereof within said ten (10) day period, the party responsible for making the
repairs shall complete them as soon as reasonably possible and this Lease
shall remain in full force and effect. If Lessor does not receive such funds
or assurance within said period, Lessor may nevertheless elect by written
notice to Lessee within (10) days thereafter to make such restoration and
repair as is commercially reasonable with Lessor paying any shortage in
proceeds, in which case this Lease shall remain in full force and effect. If
in such case Lessor does not so elect, then this Lease shall terminate sixty
(60) days following the occurrence of the damage or destruction.
Premises Partial Damage due to flood or earthquake shall be treated in the manner provided for Premises Partial Damage that is not an Insured Loss rather than Paragraph 9.2, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs (including any destruction required by any authorized public authority), this Lease shall terminate sixty (60) days following the date of such Premises Total Destruction, whether or not the damage or destruction is an Insured Loss or was caused by a negligent or willful act of Lessee. In the event, however, that the damage or destruction was caused by Lessee, Lessor shall have the right to recover Lessor's damages from Lessee except as released and waived in Paragraph 8.6. SEE ADDENDUM
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6) months of the term of this Lease there is damage for which the cost to repair exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may, at Lessor's option, terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within thirty (30) days after the date of occurrence of such damage. Provided, however, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, within twenty (20) days following the occurrence of the damage, or before the expiration of the time provided in such option for its exercise, whichever is earlier ("EXERCISE PERIOD"), (i) exercising such option and (ii) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs. If Lessee duly exercises such option during said Exercise Period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's expense repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during said Exercise Period, then Lessor may at Lessor's option terminate this Lease as of the expiration of said sixty (60) day period following the occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within ten (10) days after the expiration of the Exercise Period, notwithstanding any term or provision in the grant of option to the contrary.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of damage described in Paragraph 9.2 (Partial Damage--Insured), whether or not Lessor or Lessee repairs or restores the Premises, the Base Rent, Real Property Taxes, insurance premiums, and other charges, if any, payable by Lessee hereunder for the period during which such damage, its repair or the restoration continues from and after the date of the casualty (not to exceed the period for which rental value insurance is required under Paragraph 8.3(b)), shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired. Except for abatement of Base Rent, Real Property Taxes, insurance premiums, and other charges, if any, as aforesaid, all other obligations of Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim against Lessor for any damage suffered by reason of any such repair or restoration. SEE ADDENDUM
(b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this Paragraph 9 and shall not commence, in a substantial and meaningful way, the repair or restoration of the Premises within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice to Lessor and such Lenders and such repair or restoration is not commenced within thirty (30) days after receipt of such notice, this Lease shall terminate as of the date specified in said notice. If Lessor or a Lender commences the repair or restoration of the Premises within thirty (30) days after receipt of such notice, this Lease shall continue in full force and effect. "Commence" as used in this Paragraph shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs.
9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance
Condition occurs, unless Lessee is legally responsible therefor (in which
case Lessee shall make the investigation and remediation thereof required by
Applicable Law and this Lease shall continue in full force and effect, but
subject to Lessor's rights under Paragraph 13), Lessor may at Lessor's option
either (i) investigate and remediate such Hazardous Substance Condition, if
required, as soon as reasonably possible at Lessor's expense, in which event
this Lease shall continue in full force and effect, or (ii) if the estimated
cost to investigate and remediate such condition exceeds twelve (12) times
the then monthly Base Rent or $100,000, whichever is greater, give written
notice to Lessee within thirty (30) days after receipt by Lessor of knowledge
of the occurrence of such Hazardous Substance Condition of Lessor's desire to
terminate this Lease as of the date sixty (60) days following the giving of
such notice. In the event Lessor elects to give such notice of Lessor's
intention to terminate this Lease, Lessee shall have the right within ten
(10) days after the receipt of such notice to give written notice to Lessor
of Lessee's commitment to pay for the investigation and remediation of such
Hazardous Substance Condition totally at Lessee's expense and without
reimbursement from Lessor except to the extent of an amount equal to twelve
(12) times the then monthly Base Rent or $100,000, whichever is greater.
Lessee shall provide Lessor with the funds required of Lessee or satisfactory
assurance thereof within thirty (30) days following Lessee's said commitment.
In such event this Lease shall continue in full force and effect, and Lessor
shall proceed to make such investigation and remediation as soon as
reasonably possible and the required funds are available. If Lessee does not
give such notice and provide the required funds or assurance thereof within
the times specified above, this Lease shall terminate as of the date
specified in Lessor's notice of termination. If a Hazardous Substance
Condition occurs for which Lessee is not legally responsible, there shall be
abatement of Lessee's obligations under this Lease to the same extent as
provided in Paragraph 9.6(a) for a period of not to exceed twelve (12) months.
9.8 TERMINATION--ADVANCE PAYMENTS. Upon termination of this Lease pursuant to this Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor.
9.9 WAIVE STATUTES. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith.
10. REAL PROPERTY TAXES. SEE ADDENDUM
10.1 (a) PAYMENT OF TAXES. Lessee shall pay the Real Property Taxes, as defined in Paragraph 10.2, applicable to the Premises during the term of this Lease. Subject to Paragraph 10.1(b), all such payments shall be made at least ten (10) days prior to the delinquency date of the applicable installment Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes have been paid. If any such taxes to be paid by Lessee shall cover any period of time prior to or after the expiration or earlier termination of the term hereof, Lessee's share of such taxes shall be equitably prorated to cover only the period of time within the tax fiscal year this Lease is in effect, and Lessor shall reimburse Lessee for any overpayment after such proration. If Lessee shall fail to pay any Real Property Taxes required by this Lease to be paid by Lessee, Lessor shall have the right to pay the same, and Lessee shall reimburse Lessor therefor upon demand.
(b) ADVANCE PAYMENT. In order to insure payment when due and before delinquency of any or all Real Property Taxes, Lessor reserves the right Lessor's option, to estimate the current Real Property Taxes applicable to the Premises, and to require such current year's Real Property Taxes to be paid in advance to Lessor by Lessee, either: )i) in a lump sum amount equal to the installment due, at least twenty (20) days prior to the applicable delinquency date, or (ii) monthly in advance with the payment of the Base Rent. If Lessor elects to require payment monthly in advance, the monthly payment shall be that equal monthly amount which, over the number of months remaining before the month in which the applicable tax installment would become delinquent (and without interest thereon), would provide a fund large enough to fully discharge before delinquency the estimated installment of taxes to be paid. When the actual amount of the applicable tax bill is known, the amount of such equal monthly advance payment shall be adjusted as required to provide the fund needed to pay the applicable taxes before delinquency. If the amounts paid to Lessor by Lessee under the provisions of this Paragraph are insufficient to discharge the obligations of Lessee to pay such Real Property Taxes as the same become due, Lessee shall pay to Lessor upon Lessor's demand, such additional sums as are necessary to pay such obligations. All moneys paid to Lessor under this Paragraph may be intermingled with other moneys of Lessor and shall not bear interest. In the event of a Breach by Lessee in the performance of the obligations of Lessee under this Lease, then any balance of funds paid to Lessor under the provisions of this Paragraph may, subject to proration as provided in Paragraph 10.1(a) at the option of Lessor, be treated as an additional Security Deposit under Paragraph 5.
10.2 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term "REAL PROPERTY TAXES" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed upon the Premises by any authority having the direct or indirect power to tax, including any city, state or federal government, or any school, agricultural, sanitary, fire, street, drainage or other improvement district thereof, levied against any legal or equitable interest of Lessor in the Premises or in the real property of which the Premises are a part, Lessor's right to rent or other income therefrom, and/or Lessor's business of leasing the Premises. The term "REAL PROPERTY TAXES" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring, or changes in applicable law taking effect, during the term of this Lease, including but not limited to a change in the ownership of the Premises or in the improvements thereon, the execution of this Lease, or any modification, amendment or transfer thereof, and whether or not contemplated by the Parties. SEE ADDENDUM
10.3 JOINT ASSESSMENT. If the Premises are not separately assessed, Lessee's liability shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations
assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive.
10.4 PERSONAL PROPERTY TAXES. Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee Owned Alterations, Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises or elsewhere. When possible, Lessee shall cause its Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property or, at Lessor's option, as provided in Paragraph 10.1(b).
11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to Lessee, Lessee shall pay a reasonable proportion, to be determined by Lessor, of all charges jointly metered with other premises.
12. ASSIGNMENT AND SUBLETTING. SEE ADDENDUM
12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or otherwise transfer or encumber (collectively, "ASSIGNMENT") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent given under and subject to the terms of Paragraph 36.
(d) An assignment or subletting of Lessee's interest in this Lease without Lessor's specific prior written consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable Breach without the necessity of any notice and grace period.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor shall be limited to compensatory damages and injunctive relief.
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or
subletting shall not: (i) be effective without the express written assumption
by such assignee or sublessee of the obligations of Lessee under this Lease,
(ii) release Lessee of any obligations hereunder, or (iii) alter the primary
liability of Lessee for the payment of Base Rent and other sums due Lessor
hereunder or for the performance of any other obligations to be performed by
Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of any rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the Default or Breach by Lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or anyone else liable on the Lease or sublease and without obtaining their consent, and such action shall not relieve such persons from liability under this Lease or sublease.
(d) In the event of any Default or Breach of Lessee's obligations under this Lease, Lessor may proceed directly against Lessee, any Guarantors or any one else responsible for the performance of the Lessee's obligations under this Lease, including the sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor or Lessee.
(e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented in writing.
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney is consulted by Lessor in connection with a Lessee Default or Breach (as hereinafter defined) under Paragraph 13.1(b) below, $350.00 is a reasonable minimum sum per such occurrence for legal services and costs in the preparation and service of a notice of Default, and that Lessor may include the cost of such services and costs in said notice as rent due and payable to cure said Default. A "DEFAULT" is defined as a failure by the Lessee to observe, comply with or perform any of the terms, covenants, conditions or rules applicable to Lessee under this Lease. A "BREACH"
is defined as the occurrence of any one or more of the following Defaults, and, where a grace period for cure after notice is specified herein, the failure by Lessee to cure such Default prior to the expiration of the applicable grace period, shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3:
(a) The vacating of the Premises without the intention to reoccupy same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the
failure by Lessee to make any payment of Base Rent or any other monetary payment
required to be made by Lessee hereunder, whether to Lessor or to a third party,
as and when due, the failure by Lessee to provide Lessor with reasonable
evidence of insurance or surety bond required under this Lease, or the failure
of Lessee to fulfill any obligation under this Lease which endangers or
threatens life or property, where such failure continues for a period of three
(3) days following written notice thereof by or on behalf of Lessor to Lessee.
(c) Except as expressly otherwise provided in this Lease,
the failure by Lessee to provide Lessor with reasonable written evidence (in
duly executed original form, if applicable) of (i) compliance with Applicable
Law per Paragraph 6.3, (ii) the inspection, maintenance and service contracts
required under Paragraph 7.1(b), (iii) the recission of an unauthorized
assignment or subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per
Paragraphs 16 or 37, (v) the subordination or non-subordination of this Lease
per Paragraph 30, (vi) the guaranty of the performance of Lessee's
obligations under this Lease if required under Paragraphs 1.11 and 37, (vii)
the execution of any document requested under Paragraph 42 (easements), or
(viii) any other documentation or information which Lessor may reasonably
require of Lessee under the terms of this Lease, where any such failure
continues for a period of ten (10) days following written notice by or on
behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof, that are to be observed, complied with or performed by Lessee, other than those described in subparagraphs (a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice thereof by or on behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach of this Lease by Lessee if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) The making by lessee of any general arrangement or assignment for the benefit of creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. Section 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days; provided, however, in the event that any provision of this subparagraph (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions.
(f) The discovery by Lessor that any financial statement given to Lessor by Lessee or any Guarantor of Lessee's obligations hereunder was materially false.
13.2 REMEDIES. If Lessee fails to perform any affirmative duty or obligation of Lessee under this Lease, within ten (10) days after written notice to Lessee (or in case of an emergency, without notice), Lessor may at its option (but without obligation to do so), perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require all future payments to be made under this Lease by Lessee to be made only by cashier's check. In the event of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach, Lessor may: SEE ADDENDUM
(a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the worth at the time of the award of the unpaid rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of the leasing commission paid by Lessor applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the prior sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of this Lease shall not waive Lessor's right to recover damages under this Paragraph. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding the unpaid rent and damages as are recoverable therein, or Lessor may reserve thereinthe right to recover all or any part thereof in a separate suit for such rent and/or damages. If a notice and grace period required under subparagraphs 13.1(b), (c) or (d) was not previously given, a notice to pay rent or quit, or to perform or quit, as the case may be, given to Lessee under any statute authorizing the forfeiture of leases for unlawful detainer shall also constitute the applicable notice for grace period purposes required by subparagraphs 13.1(b), (c) or (d). In such case, the applicable grace period under subparagraphs 13.1(b), (c) or (d) and under the unlawful detainer statute shall run concurrently after the one such statutory notice, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute.
(b) Continue the Lease and Lessee's right to possession in effect (in California under California Civil Code Section 1951.4) after Lessee's Breach and abandonment and recover the rent as it becomes due, provided Lessee has the right to sublet or assign, subject only to reasonable limitations. See Paragraphs 12 and 36 for the limitations on assignment and subletting which limitations Lessee and Lessor agree are reasonable. Acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver to protect the Lessor's interest under the Lease, shall not constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located.
(d) The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee to Lessor of rent and other sums due hereunder will cause Lessor to
incur costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited
to, processing and accounting charges, and late charges which may be imposed
upon Lessor by the terms of any ground lease, mortgage or trust deed covering
the Premises. Accordingly, if any installment of rent or any other sum due
from Lessee shall not be received by Lessor or Lessor's designee within ten
(10) days after such amount shall be due, more than once in any 12 month
period then, without any requirement for notice to Lessee, and Lessee shall
pay to Lessor a late charge equal to six percent (6%) of such overdue amount.
The parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor will incur by reason of late payment
by Lessee. Acceptance of such late charge by Lessor shall in no event
constitute a waiver of Lessee's Default or Breach with respect to such
overdue amount, nor prevent Lessor from exercising any of the other rights
and remedies granted hereunder. In the event that a late charge is payable
hereunder, whether or not collected, for three (3) consecutive installments
of Base Rent, then notwithstanding Paragraph 4.1 or any other provision of
this Lease to the contrary, Base Rent shall, at Lessor's option, become due
and payable quarterly in advance.
13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor and by the holders of any ground lease, mortgage or deed of trust covering the Premises whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days after such notice are reasonably required for its performance, then Lessor shall not be in breach of this Lease if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. SEE ADDENDUM
14. CONDEMNATION. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes
title or possession, whichever first occurs. If more than ten percent (10%) of the floor area of the Premises, or more than twenty-five percent (25%) of the land area not occupied by any building, is taken by condemnation, Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in the same proportion as the rentable floor area of the Premises taken bears to the total rentable floor area of the building located on the Premises. No reduction of Base Rent shall occur if the only portion of the Premises taken is land on which there is no building. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any compensation separately awarded to Lessee for Lessee's relocation expenses and/or loss of Lessee's Trade Fixtures in the event that this Lease is not terminated by reason of such condemnation. Lessor shall to the extent of its net severance damages received, over and above the legal and other expenses incurred by Lessor in the condemnation matter, repair any damage to the Premises caused by such condemnation, except to the extent that Lessee has been reimbursed therefor by the condemning authority. Lessee shall be responsible for the payment of any amount in excess of such net severance damages required to complete such repair.
15. BROKER'S FEE.
15.1 The Brokers named in Paragraph 1.10 are the procuring causes of this Lease.
15.2 Upon execution of this Lease by both Parties, Lessor shall pay to said Brokers jointly, or in such separate shares as they may mutually designate in writing, a fee as set forth in a separate written agreement between Lessor and said Brokers.
15.5 Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder (other than the Brokers, if any named in Paragraph 1.10) in connection with the negotiation of this Lease and/or the consummation of the transaction contemplated hereby, and that no broker or other person, firm or entity other than said named Brokers is entitled to any commission or finder's fee in connection with said transaction. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, attorneys' fees reasonably incurred with respect thereto.
15.6 Lessor and Lessee hereby consent to and approve all agency relationships, including any dual agencies, indicated in Paragraph 1.10.
16. TENANCY STATEMENT.
16.1 Each Party (as "RESPONDING PARTY") shall within ten (10) days after written notice from the other Party (the "REQUESTING PARTY") execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current "TENANCY STATEMENT" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party.
16.2 If Lessor desires to finance, refinance, or sell the Premises, any part thereof, or the building of which the Premises are a part, Lessee and all Guarantors of Lessee's performance hereunder shall deliver to any potential lender or purchaser designated by Lessor such financial statements of Lessee and such Guarantors as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth.
17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the Lessee's interest in the prior lease. In the event of a transfer of Lessor's title or interest in the Premises or in this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor at the time of such transfer or assignment. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor provided that if any uncured Lessor default then exists, such relief of liability shall not be effective until the cure of such default. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined.
18. SEVERABILITY. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction shall in no way affect the validity of any other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor within thirty (30) days following the date on which it was due, shall bear interest from the thirty-first (31st) day after it was due at the rate of 12% per annum, but not exceeding the maximum rate allowed by law, in addition to the late charge provided for in Paragraph 13.4.
20. TIME OF ESSENCE. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease.
21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms of this Lease are deemed to be rent.
22. NO PRIOR OR OTHER AGREEMENTS. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party.
23. NOTICES
23.1 All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by messenger or courier service) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notice purposes. Either Party may by written notice to the other specify a different address for notice purposes, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for the purpose of mailing or delivering notices to Lessee. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by written notice to Lessee.
23.2 Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given forty-eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantees next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the United States Postal Service or courier. If notice is received on a Sunday or legal holiday, it shall be deemed received on the next business day.
24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. Regardless of Lessor's knowledge of a Default or Breach at the time of accepting rent, the acceptance of rent by Lessor shall not be a waiver of any preceding Default or Breach by Lessee of any provision hereof, other than the failure of Lessee to pay the particular rent so accepted. Any payment given Lessor by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or earlier termination of this Lease. SEE ADDENDUM
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity.
28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "SECURITY DEVICE"), now or hereafter placed by Lessor upon the real property of which the Premises are a part, to any and all advances made on the security thereof, and to all renewals, modifications, consolidations, replacements and extensions thereof. Lessee agrees that the Lenders holding any such Security Device shall have no duty, liability or obligation to perform any of the obligations of Lessor under this Lease, but that in the event of Lessor's default with respect to any such obligation, Lessee will give any Lender whose name and address have been furnished Lessee in writing for such purpose notice of Lessor's default and allow such Lender thirty (30) days following receipt of such notice for the cure of said default before invoking any remedies Lessee may have by reason thereof. If any Lender shall elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of
Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who
acquires ownership of the Premises by reason of a foreclosure of a Security
Device, and that in the event of such foreclosure, such new owner shall not:
(i) be liable for any act or omission of any prior lessor or with respect to
events occurring prior to acquisition of ownership, (ii) be subject to any
offsets or defenses which Lessee might have against any prior lessor, or
(iii) be bound by prepayment of more than one (1) month's rent.
30.3 NON-DISTURBANCE. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's subordination of this Lease shall be subject to receiving assurance (a "NON-DISTURBANCE AGREEMENT") from the Lender that Lessee's possession and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises.
30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any such subordination or non-subordination, attornment and/or non-disturbance agreement as is provided for herein.
31. ATTORNEY'S FEES. If any Party brings an action or proceeding to enforce the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorney's fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term, "PREVAILING PARTY" shall include, without limitation, a Party who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party of its claim or defense. The attorney's fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorney's fees reasonably incurred. Lessor shall be entitled to attorney's fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or additions to the Premises or to the building of which they are a part, as Lessor may reasonably deem necessary Lessor may at any time place on or about the Premises or building any ordinary "For Sale" signs and Lessor may at any time during the last one hundred twenty (20) days of the term hereof place on or about the Premises any ordinary "For Lease" signs. All such activities of Lessor shall be without abatement of rent or liability to Lessee.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Premises without first having obtained Lessor's prior written consent, Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent.
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, Lessor shall, in the event of any such surrender, termination or cancellation, have the option to continue any one or all of any existing subtenancies. Lessor's failure within ten (10) days following any such event to make a written election to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest.
36. CONSENTS.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' or other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent pertaining to the presence or use of a Hazardous Substance, practice or storage tank, shall be paid by Lessee to Lessor upon receipt of an invoice and supporting documentation therefore. Subject to Paragraph 12.2(e) (applicable to assignment or subletting), Lessor may, as a condition to considering any such request by Lessee, require that Lessee deposit with Lessor an amount of money (in addition to the Security Deposit held under Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor will incur in considering and responding to Lessee's request. Except as otherwise provided, any unused portion of said deposit shall be refunded to Lessee without interest. Lessor's consent to any act, assignment of this Lease or subletting of the Premises by Lessee shall not constitute an acknowledgement that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent.
(b) All conditions to Lessor's consent authorized by this Lease are acknowledged by Lessee as being reasonable. The failure to specify herein any particular condition to Lessor's consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given.
38. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises and the observance and performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease.
39. OPTIONS. SEE ADDENDUM
39.1 DEFINITION. As used in this Paragraph 39 the word "OPTION" has the following meaning: (a) the right to extend the term of this Lease or to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor.
SEE ADDENDUM
39.3 MULTIPLE OPTIONS. In the event that Lessee has any Multiple Options to extend or renew this Lease, a later Option cannot be exercised unless the prior Options to extend or renew this Lease have been validly exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary, if Lessee is in monetary Default of this Lease, which is not cured within the cure period set forth in Paragraph 13.1(b) after Lessee's receipt of written notice thereof.
(b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a).
40. MULTIPLE BUILDINGS. If the Premises are part of a group of buildings controlled by Lessor, Lessee agrees that it will abide by, keep and observe all reasonable rules and regulations which Lessor may make from time to time for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of such other buildings and their invitees, and that Lessee shall pay its fair share of common expenses incurred in connection therewith.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties.
42. RESERVATIONS. Lessor reserves to itself the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease.
44. AUTHORITY. It either Party hereto is a corporation, trust, or general or limited partnership, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. If Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after request by Lessor, deliver to Lessor evidence satisfactory to Lessor of such authority.
45. CONFLICT. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions.
46. OFFER. Preparation of this Lease by Lessor or Lessor's agent and submission of same to Lessee shall not be deemed an offer to lease to Lessee. This tone is not intended to be binding until executed by all Parties hereto.
47. AMENDMENTS. This Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. The parties shall amend this Lease from time to time to reflect any adjustments that are made to the Base Rent or other rent payable under this Lease. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by an institutional, insurance company, or pension plan Lender in connection with the obtaining of normal financing or refinancing of the property of which the Premises are a part.
48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if more than one person or entity is named herein as either Lessor or Lessee, the obligations of such Multiple Parties shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE OF ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES: THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS LOGGED IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED.
The parties hereto have executed this Lease at the place on the dates specified above to their respective signatures.
Executed at _____________________________ Executed at San Francisco on ______________________________________ on Aug 8th, '94 by LESSOR: by LESSEE: STATE TEACHERS' RETIREMENT SYSTEM, a Babe, Inc., a California corporation retirement system created pursuant to dba Bebe the laws of the State of California By: AMB INSTITUTIONAL REALTY ADVISORS, INC., a By /s/ Manny Mashouf Name Printed: California corporation Name Printed: MANNY MASHOUF Title: as advisor Title: President By /s/ Gayle P. Starr By ______________________________________ Name Printed: ___________________________ Name Printed: ___________________________ Title: __________________________________ Title: __________________________________ Address: ________________________________ Address: ________________________________ _________________________________________ _________________________________________ Tel. No (___) ______Fax No. (___) _______ Tel. No (___) ______Fax No. (___) _______ |
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NOTICE: These forms are often modified to meet changing requirements of law and industry needs. Always write or call to make sure you are utilizing the most current form. American Industrial Real Estate Association, 345 South Figueroa Street, Suite M-1, Los Angeles, Ca 90071, (213) 687-87777. Fax. No. (213) 687-8616.
COPYRIGHT 1990--BY AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION.
ALL RIGHTS RESERVED.
ADDENDUM TO STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE-NET
THIS ADDENDUM TO STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE-NET (this "ADDENDUM") is made as of the _____ day of _____, 1994, by and between CALIFORNIA STATE TEACHERS' RETIREMENT SYSTEM, a retirement system created pursuant to the laws of the State of California ("LESSOR"), and BABE, INC., a California corporation, dba Bebe ("LESSEE").
RECITALS
A. Concurrently herewith, Lessor and Lessee have entered into that certain Standard Industrial/Commercial Single-Tenant Lease-Net (the "LEASE"), with respect to the lease of certain "PREMISES" located at 380 Valley Drive, Brisbane, California, as more particularly described in the Lease. All terms used herein and defined in the Lease but not herein defined shall have the meaning ascribed to such terms in the Lease.
B. Lessor and Lessee now desire to enter into this Addendum to amend and supplement the Lease as herein provided.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Lessor and Lessee agree as follows:
1. The "COMMENCEMENT DATE" shall be deemed to occur on the date which is thirty (30) days following Lessee's receipt from Lessor of the Lease and this Addendum fully executed by Lessor and Lessee. If Lessor is unable to deliver possession of the Premises to Lessee upon the Commencement Date, Lessee shall have no right to terminate the Lease or other remedy or claim against Lessor, except that Lessee shall be entitled to one day of abatement of Base Rent applicable to Base Rent first otherwise coming due under the Lease for each day following the Commencement Date until such delivery of possession of the Premises.
2. Notwithstanding anything to the contrary contained in the Lease (including, without limitation, Lease ARTICLE 2):
(a) Following the Commencement Date, the building located upon the Premises (the "BUILDING") shall be improved pursuant to SCHEDULE 1 attached hereto and incorporated herein by this reference. Lessee's obligation for the payment of Base Rent shall commence on the date which is six (6) months following the Commencement Date, provided that such six (6) month period shall be extended on a day for day basis, for any delay in the occurrence of the "SUBSTANTIAL COMPLETION" of the "LESSEE IMPROVEMENTS" due to the occurrence of any "FORCE MAJEURE EVENT" (as such terms are defined in SCHEDULE 1), provided that in no event shall such six (6) month period be extended pursuant hereto (i) by a period in excess of sixty (60) days due to Force Majeure Events in obtaining necessary building permits for the construction of the Lessee Improvements, or (ii) by an aggregate period in excess of ninety (90) days due to any and all Force Majeure Events.
(b) Notwithstanding anything to the contrary contained in the Lease, Lessor makes no representation or warranty as to whether the Premises complies with Applicable Laws, including, without limitation, Applicable Laws respecting accessibility and/or use of the Premises by disabled persons (collectively, "DISABLED PERSONS LAWS"), including, without limitation, the Americans with Disabilities Act of 1990; except, however, that Lessor hereby represents that it has not received any written notice from applicable governmental authorities stating that the Premises is in violation of Applicable Laws. Without in any manner limiting the other obligations of Lessee under the Lease, as hereby amended, the "LESSEE IMPROVEMENTS" (as defined in SCHEDULE 1 attached hereto) shall include, without limitation, all alterations and improvements necessary to cause the Premises (including, without limitation, the Building entry area, entrance door and restrooms) to comply with all Disabled Persons Laws, and Lessee, at its sole cost and expense, shall cause the Premises to comply with all Disabled Persons Laws throughout the Lease term.
(c) Prior to the Commencement Date, Lessor shall cause the abatement of certain asbestos-containing materials upon the Premises such that upon the Commencement Date, to Lessor's actual knowledge, the Premises shall comply with Applicable Laws respecting asbestos-containing materials. Throughout the term of the Lease, Lessor shall indemnify, defend and hold harmless Lessee from and against any and all liability, cost, loss, demand, claim, cause of action, cost and/or expense (including, without limitation, attorneys' fees and expenses), arising as a result of the presence of any "HAZARDOUS SUBSTANCES" (as hereinafter defined), including, without limitation, asbestos, existing upon the Premises as of the Commencement Date.
3. Monthly Base Rent payable by Lessee pursuant to the Lease shall be adjusted on the commencement of the nineteenth (19th) month following the Commencement Date and at the expiration of each twelve (12) month period thereafter occurring during the Lease term (each such date is referred to herein as an "ADJUSTMENT DATE") to equal the product obtained by multiplying the monthly Base Rent in effect immediately preceding such Adjustment Date by a fraction, the numerator of which is the "INDEX" (as hereinafter defined) for the calendar month which is three (3) full months preceding the calendar month containing the Adjustment Date, and the denominator of which is the Index for the calendar month which is fifteen (15) full months preceding the calendar month containing the Adjustment Date. In no event shall any such adjustment upon an Adjustment Date result in an increase in monthly Base Rent in excess of four percent (4%) per annum on a cumulative and compounding basis or in a decrease in the monthly Base Rent. As used herein, the "INDEX" shall mean the Consumer Price Index for All Urban Consumers (San Francisco-Oakland-San Jose Area; Base 1982-84 = 100), as published by the United States Department of Labor, Bureau of Labor Statistics (the "BUREAU"). Should the Bureau discontinue the publication of the Index, publish the same less frequently or alter the same in some other manner, then Lessor shall adopt a substitute index or substitute procedure which reasonably reflects and monitors consumer prices.
4. Notwithstanding anything to the contrary contained in Lease ARTICLE 6, Lessee's Security Deposit shall accrue interest at the money market interest rates in effect from time to time during the Lease term, which interest shall be held, applied and/or refunded by Lessor in the manner set forth in the Lease with respect to the Security Deposit.
5. Notwithstanding anything to the contrary contained in Lease ARTICLE 7:
(a) Lessor shall be responsible, at Lessor's sole cost, for all maintenance and repairs required with respect to the Building foundation and structural components (and repairs to other portions of the Building where such repairs are necessitated by such repair of structural components) during the Lease term, except that Lessee shall be responsible for the cost of any such maintenance and/or repairs necessitated by the acts or omissions of Lessee and/or its employees, agents, representatives and/or contractors.
(b) In the event Lessee's cumulative costs for roof repairs during the initial term of the Lease made following the Substantial Completion of the Lessee Improvements (exclusive of (i) routine maintenance such as clearing of downspouts and gutters, and (ii) roof repairs necessitated by the acts or omissions of Lessee and/or its employees, agents, representatives and/or contractors) exceed Twenty-Four Thousand Dollars ($24,000.00), Lessor shall thereafter be responsible, at its sole cost, for all repairs and maintenance and replacements to the Building roof during the Lease term (exclusive of roof repairs necessitated by the acts or omissions of Lessee and/or its employees, agents, representatives and/or contractors, which shall remain the responsibility of Lessee); except that if Lessor shall replace the Building roof (such replacement to be completed at Lessor's sole cost), Lessee shall thereafter be obligated for maintenance and repair of the Building roof in the manner set forth in the Lease.
(c) In the event that the aggregate cost incurred by Lessee for repairs made following the Substantial Completion of the Lessee Improvements to any fence, sidewalk, driveway, parking lot or retaining wall upon the Premises during the Lease term (exclusive of (i) routine maintenance such as clearing of leaves, litter or debris, and (ii) repairs necessitated by the acts or omissions of Lessee and/or its employees, agents, representatives and/or contractors) is greater than or equal to the cost of replacement of such item, Lessor shall thereafter be responsible for all repairs and replacements (as necessary) to such item.
(d) Lessor shall be responsible for making such repairs to other portions of the Building as are necessitated by damage caused by Lessor's performance of repairs and maintenance which are Lessor's responsibility pursuant to the Lease (as herein amended). For purposes of this SECTION 5, Lessee's costs of repairs shall be evidenced by paid invoices.
(e) Lessee shall not be obligated to remove any Lessee Owned Alterations or Utility Installations upon the expiration of the Lease term or earlier termination of the Lease, except that Lessor may require Lessee, at Lessee's sole cost, to (i) remove such Lessee Alterations and/or Utility Installations which are particular to Lessee's use of the Premises and/or are located in the warehouse area of the Building and do not constitute office area or extensions of the office area of the Building, and (ii) promptly repair any damage to the Building or Premises resulting from such removal and restore the affected portion of the Building and/or Premises to the condition existing prior to the installation thereof, ordinary wear and tear excepted. Other than the "PARTITIONS" (as defined in SCHEDULE 1), Lessee shall remove its Trade Fixtures from the Premises upon such expiration or earlier termination, and repair any damage resulting from such removal, ordinary wear and tear excepted.
(f) The parties hereby acknowledge that the word "parkways" has been deleted from Lease PARAGRAPH 7.1(a) because there are no parkways existing upon the Building or other portions of the Premises.
6. Notwithstanding anything to the contrary contained in Lease PARAGRAPH 6.2:
(a) Lessee warrants that Lessee's business and all activities to be performed by Lessee in, on or about the Premises shall comply with all Applicable Laws respecting Hazardous Substances and Lessee agrees to change any such activity or install any equipment, safety devices, pollution control systems and/or other installations as may be required at any time during the Lease term to comply therewith.
(b) Lessee shall not cause or permit any Hazardous Substance to be brought upon, kept, or used in or about the Premises by Lessee, its agents, employees, contractors or invitees, without the prior written consent of Lessor. If Lessee breaches the obligations stated in the preceding sentence, or if the presence of Hazardous Substance on the Premises caused or permitted by Lessee or otherwise caused to be located upon the Premises during the Lease term results in contamination of the Premises or any adjacent property, then Lessee shall indemnify, defend and hold Lessor harmless from any and all claims, judgments, damages, penalties, fines, costs, liabilities or losses (including, without limitation, diminution in value of the Premises and/or adjacent property, damages for the loss or restriction on use of rentable or usable space or of any amenity of the Premises and/or adjacent property, damages arising from any adverse impact on marketing of the Premises and/or adjacent property, and sums paid in settlement of claims, attorneys' fees, consultant fees and expert fees) which arise during or after the Lease term (including any Option Term) as a result of such contamination. This indemnification of Lessor by Lessee includes, without limitation, costs incurred in connection with any investigation of site conditions or any cleanup, remedial, removal or restoration work required by any federal, state or local governmental agency or political subdivision because of Hazardous Substance present in the soil or ground water on or under the Premises and/or adjacent property. Without limiting the foregoing, if the presence of any Hazardous Substance on the Premises caused or permitted by Lessee results in any contamination of the Premises and/or adjacent property, Lessee shall promptly take all actions at its sole expense as are necessary to return the Premises and/or adjacent property to the condition existing prior to the introduction of any such Hazardous Substance to the Premises and/or adjacent property; provided that Lessor's approval of such actions shall first be obtained, which approval shall not be unreasonably withheld so long as such actions would not potentially have any material adverse long-term or short-term effect on the Premises or adjacent property.
(c) Lessor shall have the right, but not the duty, to inspect the Premises at any time to determine whether Lessee is complying with the requirements of the Lease (as hereby amended). If Lessee is not in compliance with the requirements of the provisions of the Lease (as hereby amended) relating to Hazardous Substances, Lessor shall have the right, but not the obligation, to immediately enter upon the Premises to remedy any condition caused by Lessee's failure to comply with the requirements of the Lease (as hereby amended). Lessor shall use reasonable efforts to minimize interference with Lessee's business as a result of any such entry by Lessor but shall not be liable for any interference caused thereby.
7. Notwithstanding anything to the contrary in Lease ARTICLE 8:
(a) Any policy of insurance required by the Lease and/or this Addendum (including, without limitation, SCHEDULE 1 attached hereto) to be maintained by Lessee in connection with the Premises shall name both Lessor and AMB Institutional Realty Advisors, Inc. as additional insureds, and shall be primary and non-contributing with respect to any insurance maintained by Lessor.
(b) If the waiver of subrogation pursuant to Lease PARAGRAPH 8.6 results in an additional premium charge to Lessor, Lessee agrees to promptly pay Lessor such additional charge upon receiving a written billing therefor. However, if such insurance policies cannot be obtained with a waiver of subrogation, the parties are relieved of the obligation to obtain such a waiver hereunder.
(c) Lessor shall have the right to require Lessee to make payment for Lessor's insurance costs to be reimbursed by Lessee pursuant to Lease PARAGRAPH 8.1 monthly in advance on the basis of Lessor's reasonable estimate of the
amount of such costs, subject to annual reconciliation Lessee payment or Lessor refund, as applicable, to be made within thirty (30) days following Lessor's delivery to Lessee of a statement of such insurance costs for the applicable year. In the event Lessor so requires such payment on a monthly estimated basis subject to annual reconciliation, (i) Lessor shall deliver a statement of actual insurance costs to be so reimbursed by Lessee within ninety (90) days following the close of each applicable year during the Lease term for which such payment is made on such estimated basis or as soon thereafter as information pertaining thereto becomes available to Lessor, and (ii) Lessor shall have the right to adjust its estimate of such costs from time to time during the Lease term upon written notice to Lessee, based upon reasonably anticipated changes in the amount of such costs.
(d) In the event Lessor elects to maintain earthquake insurance pursuant to Lease PARAGRAPH 8.3(a) and the occurrence of any Insured Loss, in no event shall Lessee be liable for the amount of any deductible under such policy of earthquake insurance. Lessor shall maintain such earthquake insurance with respect to the Premises for so long as maintenance thereof is commercially reasonable in Lessors reasonable business judgment. Lessor presently maintains such earthquake insurance with respect to the Premises and shall promptly notify Lessee in writing in the event Lessor ceases to maintain such earthquake insurance.
(e) Lessee's obligation for indemnity pursuant to Lease PARAGRAPH 8.7 shall only apply to the extent (i) Lessor does not receive proceeds covering the applicable matter from any policy of insurance maintained by Lessee pursuant to the provisions of Lease PARAGRAPH 8, or (ii) the applicable matter is not covered by any policy of insurance required to be maintained by Lessor pursuant to the provisions of Lease PARAGRAPH 8.
(f) Lessor shall indemnify, defend and hold harmless Lessee from and against any and all liability, claim, demand, cause of action, loss, cost and/or expense (including, without limitation, attorneys' fees and expenses) to the extent incurred as a result of the negligence or wilful misconduct of Lessor its employees or agents, except to the extent the same is covered by insurance maintained by Lessee or such insurance as Lessee is required to maintain pursuant to the Lease (as hereby amended).
8. Notwithstanding anything to the contrary in Lease PARAGRAPH 9:
(a) In the event of a Premises Total Destruction, the repair and/or restoration of which, in the judgment of a licensed general contractor designated by Lessor, subject to Lessee's prior approval (which approval shall not be unreasonably withheld), is capable of being substantially completed to a condition so as to permit the operation of Lessee's business from the Premises within one hundred eighty (180) days following the date of casualty, Lessor may elect by written notice to Lessee delivered within forty-five (45) days following the date of casualty, to repair the Premises in the same manner as if such casualty had constituted Premises Partial Damage that was an Insured Loss under Lease PARAGRAPH 9.2 in the event of which election, the Lease shall not terminate, Lessor shall repair the Premises in the same manner as if such casualty had constituted Premises Partial Damage that was an Insured Loss under Lease PARAGRAPH 9.2, and the Lease (as hereby amended) shall continue in full force and effect.
(b) If a Premises Partial Damage that is not an Insured Loss
occurs, unless caused by a negligent or willful act of Lessee and/or any of
Lessee's employees, agents, representatives and/or contractors (in which event
Lessee shall make the repairs at Lessee's expense and the Lease shall continue
in full force and effect, but subject to Lessor's rights under Lease PARAGRAPH
13 (as herein modified)), and such damage materially interferes with the
operation of Lessee's business from the Premises for its intended use, then
either party may elect within sixty (60) days following the occurrence of the
casualty either (i) to pay the cost of repair and/or restoration of the
Premises, in which event the Lease (as hereby amended) shall continue in full
force and effect, or (ii) to terminate the Lease by written notice to the other
party; provided that the party receiving such termination notice may elect to
nullify such termination by agreeing in written notice to the terminating party
(delivered by the later to occur of (A) ten (10) days following receipt of such
termination notice, or (B) sixty (60) days following the occurrence of the
casualty) to pay the cost of repair and/or restoration of the Premises, in the
event of which election, the election to terminate shall be null and void, the
party making such election shall be responsible for the cost of repair and/or
restoration of the Premises, and the Lease (as hereby amended) shall continue in
full force and effect. In the event either party agrees to pay the cost of
repair and/or restoration of the Premises, Lessor shall perform such repair
and/or restoration of the Premises in the same manner as if such casualty had
constituted Premises Partial Damage that was an Insured Loss under Lease
PARAGRAPH 9.2 at the cost of the party so agreeing to pay the cost of such
repair and/or restoration; provided that if Lessee is the party so electing to
pay the cost of repair and/or restoration of the Premises, as a condition to
Lessor's obligation to repair (which condition may be waived by Lessor without
in any manner limiting Lessee's responsibility for the making of such payment),
Lessee shall within thirty (30) days following such election, provide Lessor
with funds equal to the estimated cost thereof (or security for the payment
thereof satisfactory to Lessor), and if such funds (or such security) is not so
received by Lessor within such thirty (30) day period, Lessor may terminate the
Lease by written notice to Lessee.
(c) In the event of a casualty to the Premises which is not an Insured Loss but which does not result in the termination of the Lease, provided such casualty was not caused by the negligence or willful act of Lessee and/or any of Lessee's employees, agents, representatives and/or contractors, Lessee shall be entitled to a proportionate abatement of its rental and other monetary obligations under the Lease from and after the date of such casualty during the course of repair and/or restoration, in the same manner as is provided in Lease PARAGRAPH 9.6(a) with respect to a casualty which is a Partial Damage Insured Loss.
9. Notwithstanding anything contained in the Lease (including, without limitation, Lease ARTICLE 10) to the contrary:
(a) Lessee acknowledges and agrees that for so long as Lessor's interest in the Premises is owned by the state or any local public entity or government, including without limitation a state public retirement system, the Lease (as herein amended) and Lessee's interest thereunder may constitute a possessory interest subject to property taxation and as a result Lessee may be subject to the payment of real estate taxes levied on that interest (in which event, Lessee shall promptly pay such taxes). In addition, for so long as the Lessor's interest in the Premises is owned by a state public retirement system, the full cash value, as defined in Sections 110 and 110.1 of the Revenue and Taxation Code, of the possessory interest upon which Real Estate Taxes will be based shall equal the greater of (a) the full cash value of the possessory interest, or (b) Lessee's allocable share of the full cash value of the property that would have been taxed if the property had been subject to property tax upon acquisition by the state public retirement system.
(b) In the event of the occurrence of any "change in ownership" as defined in Section 60 of the California Revenue and Taxation Code during the initial seven (7) year and six (6) month Original Term of the Lease, Lessee shall be liable for
fifty percent (50%) of any increase in Real Property Taxes attributable to a reassessment due to such change in ownership, which increase shall be measured from the amount of Real Property Taxes which would have been payable by Lessee prior to such change in ownership if Lessor were not a public entity (resulting in the payment by Lessee of possessory interest taxes pursuant to subsection (a) above) and Real Property Taxes had been payable under the Proposition 13 method of calculation (based upon Lessors purchase price for the Premises, subject to annual increases in assessment value permitted under the Proposition 13 method of calculation).
(c) "REAL PROPERTY TAXES" shall not include any taxes or assessments imposed in order to finance the initial development or construction of the Premises.
10. Notwithstanding anything to the contrary contained in Lease ARTICLE 12:
(a) In determining whether to reasonably consent to a proposed assignment or subletting, (i) it shall not be unreasonable for Lessor to withhold its consent to any such assignment or subletting if a proposed assignee's or subtenant's anticipated or proposed use of the Premises involves the generation storage, use, treatment or disposal of any Hazardous Substance; and (ii) Lessor may consider, among other things, whether the use of the Premises by the proposed assignee or subtenant will involve the generation, storage, use, treatment or disposal of any Hazardous Substances, or will in any way increase any potential risk or liability to Lessor arising out of or relating to Hazardous Substances.
(b) Should Lessee desire to enter into an assignment or subletting, Lessee shall provide not less than thirty (30) days prior written notice thereof to Lessor setting forth the name of the proposed assignee or subtenant, the term, use, rental rate and other relevant particulars of the proposed assignment or subletting, including, without limitation, evidence satisfactory to Lessor that the proposed assignee or subtenant will not use, store or dispose of any Hazardous Substances in or on the Premises, and that the proposed assignee or subtenant will immediately occupy and thereafter use the Premises for the entire term of the Lease or the sublease (as the case may be). Such notice shall be accompanied by a copy of the proposed assignment or sublease agreement and any documents or financial information Lessor may require in order to make a determination as to the suitability of the assignee or subtenant.
(c) In addition to Lessor's right of approval of any proposed assignment or subletting as provided herein, Lessor shall have the option, in the event of any proposed assignment or subletting of all or substantially all of the Premises, to terminate the Lease as to the affected portion of the Premises as of the proposed effective date of the proposed assignment or subletting set forth in Lessee's notice. Such option to terminate shall be exercised, if at all, by Lessor giving Lessee written notice thereof within thirty (30) days following Lessor's receipt of Lessee's written request. In the event of such termination by Lessor, from and after the effective date of such termination, Lessor and Lessee shall have no further obligations or liabilities to each other with respect to the affected portion of the Premises, except with respect to obligations or liabilities which have accrued as of, or survive, such termination (in the same manner as if such termination date were the date originally fixed for the expiration of the Lease term). Without in any manner limiting the rights of Lessor, following any such termination by Lessor, Lessor may lease the affected portion of the Premises to the prospective assignee or subtenant proposed by Lessee, without liability to the Lessee. Lessor's failure to exercise such termination right as herein provided shall not be construed as Lessor's consent to the proposed assignment or subletting.
(d) Notwithstanding anything to the contrary contained in the Lease (as hereby amended):
(i) Lessee shall be permitted to assign the Lease
without Lessor's prior consent and without being subject to the provisions of
SECTION 1O(c) above, but upon fifteen (15) days prior written notice to Lessor,
in the event that (1) at the time of the proposed assignment, Lessee is not in
monetary default beyond the applicable cure period set forth in the Lease, (2)
the proposed assignee shall agree in writing to assume all of Lessee's
obligations under the Lease, as hereby amended, (3) Lessee shall assign
substantially all of its other leases for premises leased by Lessee to such
assignee, and (4) the proposed assignee has a tangible no worth of at bast Two
Million Dollars ($2,000,000.00); and
(ii) Without the same being deemed to constitute an assignment requiring Lessor's consent pursuant hereto, provided the business operated from the Premises continues to be operated in accordance with the provisions of the Lease (as hereby amended), (1) Lessee shall be permitted to sell or offer to sell up to ninety-five percent (95%) of Lessee's capital stock to a private corporation or the public in accordance with the qualifications or registration requirements of the laws and regulations of the State of California; and/or (2) Lessee may transfer its ownership interest by bequest or inheritance between or among the present majority shareholders of Lessee, to their immediate family (IE., spouses, parents, siblings, children and/or grandchildren), or any trust created for the benefit of such immediate family member or members.
However, any transfer of stock or other ownership interest of Lessee which is made with the primary purpose of circumventing the restrictions imposed under Lease PARAGRAPH 12 or the other provisions of this Addendum shall be deemed to be an assignment requiring Lessor's consent.
11. Notwithstanding anything to the contrary contained in the
Lease, following the first Lessee Default pursuant to Lease PARAGRAPH 13.1
(a), (b), (c) or (d), Lessor shall not pursue the remedy set forth in Lease
PARAGRAPH 13.2(a) unless Lessee shall have failed to cure the applicable
Default within ninety (90) days following such Default; provided, however,
that nothing contained herein shall be deemed to (a) limit Lessor's right to
pursue any other rights and/or remedies with respect to such initial Default
available under the Lease, at law and/or in equity (including, without
limitation, the right to repossess the Premises pursuant to an unlawful
detainer action), without regard to such ninety (90) day period, (b) limit
Lessor's right to pursue any rights and/or remedies with respect to any
subsequent Default by Lessee pursuant to Lease PARAGRAPH 13.1 (a), (b), (c)
or (d), available under the Lease, at law and/or in equity, without regard to
such ninety (90) day period, or (c) limit Lessor's right to pursue any rights
and/or remedies with respect to any Default by Lessee pursuant to Lease
PARAGRAPH 13.1 (e) or (f), available under the Lease, at law and/or in
equity, without regard to such ninety (90) day period.
12. Notwithstanding anything to the contrary contained in the Lease, in the event of any default by Lessor under the Lease which results in imminent threat of personal injury or material property damage such that the giving of notice thereof is not reasonably practical, Lessee shall have the right to cure such default in which event Lessor shall reimburse Lessee for the reasonable cost of such cure within thirty (30) days following Lessee's submission to Lessor of invoices or other reasonable evidence of the amount of such cost.
13. (a) Subject to all terms of PARAGRAPH 39 of the Lease, Lessee shall have the option (the "EXTENSION OPTION") to extend the term of the Lease by one additional five (5) year period (the "OPTION TERM") commencing upon the expiration of the initial Lease term by delivering written notice to Lessor of the irrevocable exercise of such option not earlier than twelve (12) months, and not later than six (6) months, prior to the expiration of the initial Lease term. Lessee's occupancy of the Premises during such Option Term shall be subject to all terms and conditions of the Lease applicable prior to the expiration of the initial term, except that (i) monthly Base Rent shall be adjusted as of the commencement of such Option Term to equal the then monthly "FAIR MARKET RENTAL VALUE" (as hereinafter defined) of the Premises as determined pursuant to SECTION 13(b) below, provided that in no event shall such monthly Base Rent as adjusted be less than the monthly Base Rent in effect immediately prior to the expiration of the initial Lease term, and (ii) Lessee shall have no further option to extend the term of the Lease. All references in the Lease and/or this Addendum to the Lease term or to the term of the Lease shall be deemed to refer to the initial Lease term, as extended by the Option Term, as applicable.
(b) The Fair Market Rental Value of the Premises shall be
determined as follows. Within fifteen (15) days following Lessor's receipt of
Lessee's notice electing to exercise the Extension Option, Lessor shall deliver
notice to Lessee setting forth Lessor's determination of the Fair Market Rental
Value of the Premises. Within ten (10) days following receipt of such notice
from Lesson Lessee shall deliver written notice ("LESSEE'S RESPONSE NOTICE") to
Lessor electing either to accept or dispute Lessor's determination of Fair
Market Rental Value of the Premises. If Lessee disputes Lessor's determination,
the parties shall thereafter promptly meet and endeavor in good faith to agree
upon the Fair Market Rental Value of the Premises. If, despite the exercise of
such good faith efforts, the parties are unable to agree upon the Fair Market
Rental Value of the Premises by the date (the "START DATE") which is fifteen
(15) days following Lessor's receipt of Lessee's Response Notice (, the Fair
Market Rental Value of the Premises shall be determined by appraisal as follows:
Within fifteen (15) days following the Start Date, each party shall deliver
written notice to the other of its determination of the Fair Market Rental Value
of the Premises. Failure by either party to make a determination of the Fair
Market Rental Value of the Premises within such fifteen (15) day period shall
conclusively be deemed such party's approval of the Fair Market Rental Value
determined by the other party. If both parties make such determination within
such fifteen (15) day period, within ten (10) days following the date such
determination has been made by each party, each party shall appoint an appraiser
who shall be M.A.I. and shall have at least five (5) years experience, ending on
the date of their appointment, in the appraisal of industrial properties
comparable to the Premises in the vicinity of the Premises who shall have not
been employed by, or affiliated with, either of the parties during the five (5)
year period immediately prior to such appointment, and provide written notice to
the other party of such appointment. The determination of the appraisers shall
be limited solely to the issue of whether Lessor's or Lessee's submitted
determination of Fair Market Rental Value of the Premises is closest to the
actual Fair Market Rental Value as determined by the appraisers, taking into
account the definition of Fair Market Rental Value set forth herein. If either
party fails to appoint an appraiser within such ten (10) day period provided
herein, the appraiser appointed by one of them shall reach a decision, notify
the parties thereof, and such appraiser's decision shall be binding upon the
parties. If two (2) appraisers are appointed as provided herein, the two (2)
appraisers so appointed shall, within ten (10) days of the date of the
appointment of the last appointed appraiser, agree upon and appoint a third
appraiser meeting the qualifications set forth above with respect to the initial
two (2) appraisers, and deliver written notice of such appointment to the
parties. If the two (2) appraisers are unable to agree on the third appraiser
within such ten (10) day period, either party may request the M.A.I. President
of the Chapter of the American Institute of Real Estate Appraisers with
jurisdiction over the area of the Premises to select a third appraiser meeting
the qualifications stated herein. The three (3) appraisers so appointed shall,
within thirty (30) days of the appointment of the third appraiser, reach a
decision as to whether the parties shall use Lessor's or Lessee's submitted
determination of the Fair Market Rental Value of the Premises, and shall notify
Lessor and Lessee thereof. The decision of the majority of the appraisers shall
be binding upon Lessor and Lessee. Each party shall pay the cost of its own
appraiser and one-half of the cost of the third appraiser.
(c) As used herein, the "FAIR MARKET RENTAL VALUE" of the Premises shall mean an amount per square foot within the Premises equivalent to what a willing, comparable, non-expansion, non-equity tenant would pay, and a willing, comparable landlord of an industrial facility comparable to the Premises in terms of location, quality, level of service, amenities, age and appearance, would accept, at arm's length for a comparable amount of space for a comparable amount of time (as if such transaction were entered into with respect to a lease of premises commencing upon the commencement of the Option Term).
(d) The original Lessee signatory to the Lease shall remain liable for the performance of the obligations of "Lessee" under the Lease (as hereby amended) during any Option Term, notwithstanding any assignment, subletting and/or other transfer by Lessee pursuant to the Lease, whether with or without Lessor's consent.
14. Neither the Lease, this Addendum, nor any memorandum of either thereof shall be recorded by either Lessor or Lessee.
15. Lessee shall vacate the Premises upon the expiration of the Lease term or earlier termination of the Lease. Lessee indemnify, defend and hold harmless Lessor from and against any and all claims, losses, liabilities, causes of action, damages, costs and/or expenses (including, without limitation, attorneys' fees and expenses) arising as a result of any delay by Lessee in vacating the Premises, including, without limitation, damages sought by the next prospective lessee due to Lessor's inability to deliver the premises as agreed with new lessee. If Lessee does not vacate the Premises upon the expiration of the Lease term or earlier termination of the Lease, Lessee's occupancy of the Premises shall be deemed to be as a tenant at sufferance only, subject to all applicable provisions of the Lease, except that the month Base Rent payable during such holding over shall equal one hundred fifty percent (150%) of the monthly Base Rent in effect immediately prior to such expiration or termination.
16. It is expressly understood and agreed that notwithstanding anything in the Lease, as hereby amended, to the contrary, and notwithstanding any Applicable Law to the contrary, the liability of Lessor hereunder (including any successor to Lessor) and any recourse by Lessee against Lessor shall be limited solely and exclusively to the equity interest of Lessor in and to the Premises, Lessor shall not have any personal liability therefor, and Lessee hereby expressly waives and releases such personal liability on behalf of itself and all persons claiming by, through or under Lessee. If the Lease is being executed by AMB Institutional Realty Advisors, Inc. ("AMB"), on behalf of Lessor, no present or future officer, director, employee, trustee, member, investment manager or agent of AMB shall have any personal liability, directly or indirectly, and recourse shall not be had against any such officer, director, employee, trustee, member, investment manager or agent under or in connection with the Lease, as hereby amended, or any other document or instrument heretofore or hereafter executed in connection with the Lease or this Addendum. Lessee hereby waives and releases any and all such personal liability and recourse. The limitations of liability provided in this Section are in addition to, and not in limitation of, any limitation on liability applicable to Lessor provided by law or in any other contract, agreement or instrument.
17. Lessor is a unit of the California State and Consumer Services
Agency established pursuant to Title I, Division 1, Part 13 of the California
Education Code, Sections 22000 et seq., as amended (the "EDUCATION CODE"). As a
result, Lessor is prohibited from engaging in certain transactions with a
"school district or other employing agency" as a "member, retirant or
beneficiary" (as those terms are defined in the Education Code). In addition,
Lessor may be subject to certain restrictions and requirements under the
Internal Revenue Code, 26 USC Section 1 et seq. (the "CODE"). Accordingly,
Lessee hereby certifies, represents and warrants that: (a) Lessee is neither a
school district or other employing agency nor a member, retirant or beneficiary;
(b) Lessee has not made any contribution or contributions to Lessor; (c) neither
a school district or other employing agency, nor a member, retirant or
beneficiary, nor any person who has made any contribution to Lessor, nor any
combination thereof, is related to Lessee by any relationship described in
Section 267(b) of the Education Code; (d) neither Lessor, AMB, their affiliates,
related entities, officers or employees, nor any Lessor board member, employee
or internal investment contractor (collectively, "LESSOR AFFILIATES") has
received or will receive, directly or indirectly, any payment considered or
other benefit from, nor does any Lessor Affiliate have any agreement or
arrangement with, Lessee or any person or entity affiliated with Lessee,
relating to the transactions contemplated by the Lease as hereby amended, except
as expressly stated therein; and (e) to the best of Lessee's knowledge, no
Lessor Affiliate has any direct or indirect ownership in Lessee or any person or
entity affiliated with Lessee.
18. Lessee hereby agrees and acknowledges that the Premises is presently leased by Lessor to an alternate occupant and that it shall be a condition precedent to the effectiveness of the Lease and this Addendum (the "CONDITION PRECEDENT") that Lessor enter into an agreement for the termination of the lease of the Premises by such existing occupant on terms and conditions acceptable to Lessor in its sole and absolute discretion. If such Condition Precedent is not satisfied by October 1, 1994, it shall be deemed that the Condition Precedent shall not be satisfied and the Lease and this Addendum shall be of no further force or effect and neither party shall have any further obligation or liability thereunder.
IN WITNESS WHEREOF, the parties hereto have entered into this Addendum as of the date first written above.
LESSOR: LESSEE
CALIFORNIA STATE TEACHERS' BABE, INC., a California corporation
RETIREMENT SYSTEM, a retirement dba Bebe
system created pursuant to the
laws of the State of California By: /s/ Manny Mashouf
By: AMB INSTITUTIONAL REALTY Print Name: Manny Mashouf
ADVISORS, INC., a
California corporate, Its: President
as advisor
By: /s/ Gayle P. Starr By: ________________________
Print Name: Gayle P. Staff Print Name: ________________
Its: Asset Manager Its: _______________________
Date: ______________, 1994 Date: ______________, 1994
|
AGREED AS TO PERFORMANCE OF THE OBLIGATIONS OF "MASHOUF" SET FORTH IN SCHEDULE 1:
/s/ Manny Mashouf ------------------ MANNY MASHOUF Aug 8th, 1994 |
SCHEDULE 1
IMPROVEMENT OF THE PREMISES
1 AS IS LEASE. Within sixty (60) days following the Commencement Date, Lessor shall cause the performance of that certain work described in SCHEDULE 2 attached to the Addendum of which this SCHEDULE 1 is a part and incorporated in the Addendum by this reference under the heading "Lessor Work Within 60 Days Following the Commencement Date", and promptly following the completion of the Lessee Improvements, by June 1, 1995, subject to delays due to "FORCE MAJEURE EVENTS" (as hereinafter defined), Lessor shall cause the performance of that certain work described in SCHEDULE 2 attached to the Addendum under the heading "Lessor Work Following the Completion of the Lessee Improvements". At the conclusion of such construction by Lessor, Lessor shall deliver to Lessee a copy of all warranties, guaranties, and operating manuals and information relating to the improvements, equipment, and systems in the Premises installed or constructed as a part of such work set forth on SCHEDULE 2. Except as otherwise expressly provided in the Lease or the Addendum of which this SCHEDULE 1 is a part, Lessee and Lessor hereby agree and acknowledge that the lease of the Premises by Lessee shall be on an entirely "AS IS" basis, Lessee having inspected the Premises and agreeing (a) to accept the Premises in the condition existing as of the Commencement Date, with Lessor having no obligation for the alteration or improvement of the Premises, and (b) that neither Lessor nor any of Lessor's agents or representatives, nor broker or any other person or entity has made any representations or warranties as to the condition of the Premises or any part thereof or anything therein or thereon.
2 LESSEE IMPROVEMENTS.
2.1 Lessee shall be entitled to a one-time tenant improvement allowance (the "Allowance") in the amount of Two Hundred Thirty Thousand Dollars ($230,000.00) for the costs ("PERMITTED IMPROVEMENT COSTS") relating to the design, architecture, engineering (including mechanical work) and initial construction of Lessee's improvements which are actually permanently affixed to the Premises and pre-fabricated partitions (the "PARTITIONS") which, notwithstanding anything to the contrary contained in the Lease of the Addendum of which this SCHEDULE 1 is a part, shall not be removed by Lessee during the Lease term without Lessor's prior written consent, and which shall become the sole property of Lessor upon the expiration of the Lease term or earlier termination of the Lease (the "LESSEE IMPROVEMENTS"). In no event shall Lessor be obligated to make disbursements pursuant to this SCHEDULE 1 in a total amount which exceeds the Allowance. The parties hereby agree and acknowledge that Permitted Improvement Costs shall not include costs of design, construction or installation of any of Lessee's Trade Fixtures (other than the Partitions), furniture or other personal property including, without limitation, computer systems, telephone systems, shelving, tables, chairs and desks.
2.2 Payment of the Allowance shall be made in two (2) equal installments as follows. The first installment of the Allowance shall be paid by Lessor to Lessee by check payable to Lessee within fifteen (1 5) business days following completion of not less fifty percent (50%) of the Lessee Improvements and Lessee's submission to Lessor of certification executed by Lessee, the Contractor and Manny Mashouf, an individual ("MASHOUF"), certifying that the Lessee Improvements have then been completed to an extent of not less than fifty percent (50%) and that such payment shall be used to pay for Permitted Improvement Costs theretofore incurred by Lessee and/or to reimburse Lessee for Permitted Improvement Costs theretofore paid by Lessee. The second installment of the Allowance shall be paid by Lessor to Lessee by check payable to Lessee within fifteen (15) business days following the last to occur of (a) full completion of the Lessee Improvements and Lessor's receipt of certification thereof executed by Lessee, the Contractor and Mashouf, which certification shall also state that all materials and all property constituting Lessee's Improvements are free and clear of encumbrances, liens or charges irrespective of whether or not said liens have been filed or otherwise placed in public record, that the Permitted Improvement Costs are equal to exceed the amount of the Allowance, and that such payment shall be used to pay for Permitted Improvement Costs theretofore incurred by Lessee and/or to reimburse Lessee for Permitted Improvement Costs theretofore paid by Lessee, (b) delivery to Lessor of final unconditional lien waivers and releases, in statutorily-required form, from the General Contractor and all of Lessee's Agents with respect to all work in connection with the Lessee Improvements, (c) Lessee's receipt of a certificate of occupancy with respect to the Premises, opening for business from the Premises and commencement of payment of Base Rent. In the event any portion of the Allowance is not so paid by Lessor to Lessee when due in accordance with this SECTION 2, notwithstanding anything to the contrary contained in the Lease, Lessee shall have the right to offset such amounts as remain unpaid and are so owing from Lessor to Lessee against Lessee's rental obligations first otherwise coming due under the Lease.
2.3 Lessor shall only be obligated to make disbursements from the Allowance to the extent costs are incurred by Lessee for Allowance Items. All Allowance Items for which the Allowance has been made available shall be deemed Lessor's property under the terms of the Lease. Lessee shall not be entitled to the payment of, use, or offset against rental in the amount of, any unused portion of the Allowance remaining following the completion of the Lessee Improvements.
3 FINAL PLANS AND SPECIFICATIONS. Lessee shall, subject to Lessor's approval, which approval shall not be unreasonably withheld, retain an architect or space planner (the "ARCHITECT") to prepare the "FINAL PLANS AND SPECIFICATIONS" (as hereinafter defined), and engineering consultants (the "ENGINEERS"), to prepare all plans and engineering working drawings relating to the structural, mechanical, electrical, plumbing, HVAC, lifesafety, and sprinkler work to be completed in the Premises. Promptly following the satisfaction of the "CONDITION PRECEDENT" (as defined in the Addendum of which this SCHEDULE 1 is a part) but in no event later than ten (10) business days thereafter, Lessee shall cause the Architect and Engineers to prepare the architectural and engineering drawings for the Premises, and Architect shall compile a fully coordinated set of architectural, structural, mechanical, electrical and plumbing working drawings in a form which is complete to allow subcontractors to bid on the work and to obtain all applicable permits (collectively, the "FINAL PLANS AND SPECIFICATIONS") and shall submit four complete sets of the same to Lessor for Lessor's approval. Lessor shall advise Lessee within five (5) business days after Lessor's receipt of the Final Plans and Specifications for the Premises if the same are unsatisfactory or incomplete in any respect. If Lessee is so advised, Lessee shall immediately revise the Final Plans and Specifications in accordance with such review and any disapproval of Lessor in connection therewith, and resubmit the such revised Final Plans and Specifications for Lessor's approval. Lessor shall advise Lessee within five (5) business days after Lessor's receipt of any such revised Final Plans and Specifications if the same are unsatisfactory or incomplete in any respect, and in the event of any disapproval, the parties shall continue with the process of revision and resubmission of the Final Plans and Specifications in accordance herewith until the approval of the Final Plans and Specifications by Lessor. The Final Plans and Specifications shall be approved by Lessor prior to the commencement of construction of the Lessee Improvements by Lessee. As used herein, the "APPROVED WORKING DRAWINGS" shall mean the Final Plans and Specifications approved by Lessor. Within three (3) business days after approval by Lessor of the Approved Working Drawings, Lessee shall submit the same to the applicable governmental authorities for all applicable building permits. Lessee hereby agrees that neither Lessor nor
SCHEDULE 1 - PAGE 1
Lessor's consultants shall be responsible for obtaining any building permit or certificate of occupancy for the Premises and that obtaining the same shall be Lessee's responsibility; provided, however, that Lessor shall cooperate with Lessee in executing permit applications and performing other ministerial acts reasonably necessary to enable Lessee to obtain any such permit or certificate of occupancy. No changes, modifications or alterations in the Approved Working Drawings may be made without the prior written consent of Lessor, which consent shall not be unreasonably withheld. Lessor's review of the Final Plans and Specification as set forth herein, shall be for its sole purpose and shall not imply Lessor's review of the same, or obligate Lessor to review the same, for quality, design, compliance with Applicable Laws or other like matters. Accordingly, notwithstanding that the Approved Working Drawings are reviewed by Lessor or its space planner, architect, engineers and consultants, and notwithstanding any advice or assistance which may be rendered to Lessee by Lessor or Lessor's space planner, architect, engineers, and consultants, Lessor shall have no liability whatsoever in connection therewith and shall not be responsible for any omissions or errors contained in the Approved Working Drawings, and Lessee's indemnity and waiver set forth in the PARAGRAPHS 8.7 and 8.8 of the Lease shall specifically apply to the Approved Working Drawings. Furthermore, Lessee and Architect shall verify, in the field, the existing improvements in the Premises, and Lessee and Architect shall be solely responsible for such verification.
4 CONSTRUCTION OF THE LESSEE IMPROVEMENTS.
4.1 Lessee shall retain a licensed general contractor (the "CONTRACTOR"), as contractor for the construction of the Lessee Improvements designated by Lessee and reasonably approved by Lessor. All subcontractors, laborers, materialmen, and suppliers used by Lessee (such subcontractors, laborers, materialmen, and suppliers, and the Contractor to be known collectively as "Lessee's Agents") must be approved in writing by Lessor, which approval shall not be unreasonably withheld or delayed.
4.2 (a) Prior to Lessee's execution of the construction contract and general conditions with Contractor (the "CONTRACT"), Lessee shall submit the Contract to Lessor for its approval, which approval shall not be unreasonably withheld or delayed. Prior to the commencement of the construction of the Lessee Improvements, and after Lessee has accepted all bids for the Lessee Improvements, Lessee shall provide Lessor with a detailed breakdown, by trade, of the final costs to be incurred or which have been incurred in connection with the design and construction of the Lessee Improvements to be performed by or at the direction of Lessee or the Contractor. Mashouf hereby guaranties for the benefit of Lessor the payment by Lessee of all amounts owing to the Contractor pursuant to the Contract. The execution of the Addendum of which this SCHEDULE 1 is a part by Mashouf shall constitute Mashouf's agreement to such guaranty.
(b) (i) The Lessee Improvements shall be constructed in
strict accordance with the Approved Working Drawings, all Applicable Laws,
applicable standards of the American Insurance Association (formerly, the
National Board of Fire Underwriters), the National Electrical Code, and building
material manufacturer's specifications. Each of Lessee's Agents shall guarantee
to Lessee and for the benefit of Lessor that the portion of the Lessee
Improvements for which it is responsible shall be free from any defects in
workmanship and materials for a period of not less than one (1) year from the
date of completion thereof. Each of Lessee's Agents shall be responsible for
the replacement or repair, without additional charge, of all work done or
furnished in accordance with its contract that shall become defective within one
(1) year after the completion of the work performed by such contractor or
subcontractor. The correction of such work shall include, without additional
charge, all additional expenses and damages incurred in connection with such
removal or replacement of all or any part of the Lessee Improvements, the
Building and/or Premises that may be damaged or disturbed thereby. All such
warranties or guarantees as to materials or workmanship of or with respect to
the Lessee Improvements shall be contained in the Contract or subcontract and
shall be written such that such guarantees or warranties shall inure to the
benefit of both Lessor and Lessee, as their respective interests may appear, and
can be directly enforced by either. Lessee covenants to give to Lessor any
assignment or other assurances which may be necessary to effect such right of
direct enforcement.
(ii) Lessee's indemnity of Lessor as set forth in PARAGRAPH 8.7 of the Lease shall also apply with respect to any and all costs, losses, damages, injuries and liabilities related in any way to any act or omission of Lessee or Lessee's Agents, or anyone directly or indirectly employed by any of them, or in connection with Lessee's non-payment of any amount arising out of the Lessee Improvements and/or Lessee's disapproval of all or any portion of any request for payment. Such indemnity by Lessee, as set forth in PARAGRAPH 8.7 of the Lease, shall also apply with respect to any and all cases, losses, damages, injuries and liabilities related in any way to Lessor's performance of any ministerial acts reasonably necessary to permit Lessee to complete the Lessee Improvements, and to enable Lessee to obtain any building permit or certificate of occupancy for the Premises. All of Lessee's Agents shall carry worker's compensation insurance covering all of their respective employees. Lessee, any construction manager retained by Lessee and the Contractor shall carry commercial general liability insurance covering the construction of the Lessee Improvements by Lessee's Agents, naming both Lessor and AMB Institutional Realty Advisors, Inc. as additional insureds, which insurance shall be primary and non-contributing with respect to any insurance maintained by Lessor and otherwise comply with the limits, be in the form, and be provided by companies, all as set forth in PARAGRAPH 8.2(a) of the Lease. Lessee shall carry "Builder's All Risk" insurance in an amount approved by Lessor covering the construction of the Lessee Improvements and including such extended coverage endorsements as may be reasonably required by Lessor, it being understood and agreed that the Lessee Improvements shall be insured by Lessee pursuant to PARAGRAPH 8.3 of the Lease immediately upon completion thereof. Certificates for all insurance carried pursuant to this SECTION 4.2(b)(ii) shall be delivered to Lessor before the commencement of construction of the Lessee Improvements and before the Contractor's equipment is moved onto the site. All such policies of insurance must contain a provision that the company writing said policy will give Lessor thirty (30) days prior written notice of any cancellation or lapse of the effective date or any reduction in the amounts of such insurance. In the event that the Lessee Improvements are damaged by any cause during the course of the construction thereof, Lessee shall immediately repair the same at Lessee's sole cost and expense. All of the foregoing insurance coverage shall be maintained in force until the Lessee Improvements are fully completed and accepted by Lessor, except that Products and Completed Operation Coverage insurance shall be maintained by the Contractor for five (5) years following completion of the work and acceptance by Lessor and Lessee. All insurance maintained by Lessee's Agents shall preclude subrogation claims by the insurer against anyone insured thereunder. Such insurance shall provide that it is primary insurance as respects Lessor and that any other insurance maintained by Lessor is excess and noncontributing with the insurance required hereunder.
(c) Lessor shall have the right to inspect the Lessee Improvements at all times, provided however, that Lessor's failure to inspect the Lessee Improvements shall in no event constitute a waiver of any of Lessor's rights hereunder nor shall Lessor's inspection of the Lessee Improvements constitute Lessor's approval of the same. Should Lessor disapprove any portion of the Lessee Improvements, Lessor shall notify Lessee in writing of such disapproval and shall specify the items disapproved, Any defects or deviations in, and/or disapproval by Lessor of, the Lessee Improvements shall be rectified by Lessee at no expense to Lessor.
SCHEDULE 1 - PAGE 2
4.3 NOTICE OF COMPLETION: COPY OF "AS BUILT" PLANS. Within ten (10) days after completion of construction of the Lessee Improvements, Lessee shall cause a Notice of Completion to be recorded in the office of the Recorder of the County of San Mateo in accordance with Section 3093 of the Civil Code of the State of California or any successor statute, and shall furnish a copy thereof to Lessor upon such recordation. If Lessee fails to do so, Lessor may execute and file the same on behalf of Lessee as Lessee's agent for such purpose, at Lessee's sole cost and expense. At the conclusion of construction, Lessee shall cause the Architect and Contractor (a) to update the Approved Working Drawings as necessary to reflect all changes made to the Approved Working Drawings during the course of construction, (b) to certify to the best of their knowledge that the "record-set" of as-built drawings are true and correct, which certification shall survive the expiration or termination of the Lease, and (c) to deliver to Lessor two (2) sets of sepias of such as-built drawings within ninety (90) days following issuance of a certificate of occupancy for the Premises. In addition, at the conclusion of construction, Lessee shall deliver to Lessor a copy of all warranties, guaranties, and operating manuals and information relating to the improvements, equipment, and systems in the Premises.
5 MISCELLANEOUS.
5.1 The "SUBSTANTIAL COMPLETION OF THE LESSEE IMPROVEMENTS" shall be deemed to occur for purposes of the Lease on such date as the Lessee Improvements have been substantially completed but for such customary "punch list" items (to be promptly completed by Lessee) which do not materially interfere with Lessee's operation of its business from the Premises.
5.2 Notwithstanding any provision to the contrary contained herein, in the event of the occurrence of any Lessee default under the Lease (as amended by the Addendum of which this SCHEDULE 1 is a part) at any time on or before the completion of the Lessee Improvements, then (a) in addition to all other rights and remedies granted to Lessor pursuant to the Lease, Lessor shall have the right to withhold payment of all or any portion of the Allowance and/or Lessor may cause Contractor to cease the construction of the Lessee Improvements in the Premises, and (b) all other obligations of Lessor under the terms of this SCHEDULE 1 shall be forgiven until such time as such default is cured pursuant to the terms of the Lease (as amended by the Addendum).
5.3 The time for performance by either party of any obligation under this
SCHEDULE 1 (other than monetary payments, except as specifically provided in
SECTION 2 (a) of the Addendum of which this SCHEDULE 1 is a part) shall be
extended on a day for day basis to the extent of any delay resulting from the
occurrence of any of the following (collectively, any "FORCE MAJEURE EVENT"):
fire, earthquake, explosion, flood, weather, the elements, acts of God or the
public enemy, strike, other labor trouble, interference of governmental
authorities or agents, or shortages of fuel, supplies or labor resulting
therefrom or any other cause, whether similar or dissimilar to the above, beyond
the reasonable control of the party obligated for such performance (financial
inability excepted); provided, however, that the parties hereby agree that
obtaining necessary building permits for construction of Lessee Improvements,
with Lessee using its best efforts and diligence, is estimated to require six
(6) weeks to obtain, with Lessee using its best efforts and due diligence to
obtain such building permits, and therefore, delays in obtaining such building
permits shall only be deemed to constitute a Force Majeure Event to the extent
the time for obtaining such permits exceeds six (6) weeks following submission
by Lessee of all necessary fees, plans, specifications and other materials
required by the applicable governmental authority in order to issue such
building permits, with Lessee using its best efforts and diligence to obtain
such permits. Notwithstanding anything to the contrary contained herein, the
acts or omissions of Lessee's Agents shall not constitute Force Majeure Events.
Lessee shall provide Lessor with written notice (the "FORCE MAJEURE NOTICE") of
the occurrence of any Force Majeure Event within three (3) business days
following Lessee's or any of Lessee's Agents' first learning of the occurrence
thereof, and if Lessee fails to deliver such Force Majeure Notice within such
three (3) business day period, (i) such Force Majeure Event shall not be deemed
to have occurred for all purposes of the Lease (as amended by the Addendum of
which this SCHEDULE 1 is a part) until the date Lessee provides such Force
Majeure Notice to Lessor, and (ii) Lessee shall not be entitled to any extension
of the commencement date for payment of Base Rent for delays due to such Force
Majeure Event occurring prior to Lessee's delivery of such Force Majeure Notice
to Lessor.
SCHEDULE 1 - PAGE 3
SCHEDULE 2
LESSOR WORK WITHIN 60 DAYS FOLLOWING THE COMMENCEMENT DATE
1. Certain HVAC work as set forth in that certain proposal dated May 10, 1994 from Burlingame Heating & Ventilation, Inc.
2. Certain roof repair work as set forth in that certain roof survey dated April 28, 1994 from Alliance Roofing.
3. Certain repairs to the roll-up doors, dock levelers and dock bumpers as set forth in that certain proposal dated June 3, 1994 from Trucking Equipment Supply Co.
4. Certain repairs to the fire protection system as set forth in that certain proposal dated July 14, 1994 from Allen Automatic Sprinkler.
LESSOR WORK FOLLOWING THE COMPLETION OF THE LESSEE IMPROVEMENTS
1. Certain exterior painting and paving repairs as set forth in that certain proposal dated May 4, 1994 from Dibble & Company Construction Consultants.
2. Certain landscape upgrades as set forth in that certain proposal dated May 3, 1994 from Industrial Park Landscape Maintenance.
The parties hereby acknowledge that reference to the foregoing proposals is only for purposes of describing work to be performed and that Lessor may use the party providing such proposal and/or any other contractor, consultant or other entity for the performance of such work.
SCHEDULE 2 - PAGE 1
EXHIBIT 10.5
RETAIL STORE LICENSE AGREEMENT
Between
BABE, INC.
a California corporation
and
BEBE MODA S.A. de C.V.,
a Mexican company
RETAIL STORE LICENSE AGREEMENT
THIS RETAIL STORE LICENSE AGREEMENT (" Agreement") is made and entered into effective as of April 1, 1998, between Babe, Inc., a California corporation having its principal place of business at 380 Valley Drive, Brisbane, CA 94005 ("bebe"), and Bebe Moda S.A. de C.V., a Mexican company having its principal place of business at Avenida Presidente Mazaryk 310, Vis Polanco Mexico C.P. 11560 ("LICENSEE").
RECITALS
1. A glossary of terms used with initial capital letters and other terms defined for purposes of this Agreement is set forth in Exhibit "A" at the end of this Agreement.
2. bebe is the owner of the Marks and Property and the Marks represent the substantial goodwill created by bebe through the sale of high quality products and by distributing its products only through retail outlets that conform to bebe's strict standards for appearance, image, customer service and overall high quality.
3. LICENSEE desires to secure the right and license to use the Marks and Property solely in connection with the establishment and operation of a store or stores for retail sale of the products of bebe and bebe is willing to grant LICENSEE a license on the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the recitals, promises and mutual convenants in this Agreement, the parties agree as follows:
SECTION 1. TERM
1.1 INITIAL TERM. The term of this Agreement shall commence on the effective date of this Agreement and shall continue until March 30, 2001, unless sooner terminated in accordance with this Agreement ("Initial Term").
1.2 RENEWAL TERM. LICENSEE shall have the option to renew this Agreement for a three year term through March 30, 2004 ("Renewal Term"), if LICENSEE:
(a) requests renewal in writing at least one hundred eighty (180) days but not more than two hundred seventy (270) days before the expiration of the Initial Term;
(b) at the time it requests renewal and as of the expiration of the Initial Term, is in compliance with all the terms of any and all agreements between LICENSEE and bebe;
(c) LICENSEE shall have renewed or have the right to renew the lease for its existing Store(s) for a term equal to or greater than the Renewal Term;
(d) LICENSEE shall have opened at least [***] by [***]. At the end of the [***] of the Initial Term, [***]. By the end of the Initial Term, LICENSEE shall have opened the number of Stores required hereunder and done any construction/renovation required to bring the existing Stores in compliance with Section 3 of this Agreement; and
(e) During each Contract Year of the Initial Term, LICENSEE shall have met or exceeded retail sales of U.S. [***] per Store. If Licensee does not meet the minimum retail sales quota in any Contract Year for any reason other than bebe's failure to ship LICENSEE Product, bebe shall have the right to terminate this Agreement.
The terms of the renewal, including new Store requirements, sales quotas, and Product purchase terms shall be negotiated between bebe and LICENSEE six months prior to the expiration of the Initial Term. If bebe and LICENSEE do not reach an agreement in writing by three months prior to the expiration of the Initial Term, then the Agreement will expire without renewal. If LICENSEE breaches the Agreement in any respect, then its option to renew the Agreement will automatically lapse. Neither party has an obligation to renew this Agreement at the end of the Renewal Term and LICENSEE expressly waives any rights it may have under state, federal or other law to be compensated in any way, including for goodwill, if the Agreement terminates either at the end of the Initial Term or the Renewal Term.
SECTION 2. LICENSE
2.1 GRANT AND TERRITORY. For the Term and subject to the other terms and conditions of this Agreement, bebe hereby grants to LICENSEE a limited, exclusive, nontransferable right and license to use the Licensed Rights solely on or in connection with the promotion and Retail Sale of the Products and the operation of the Stores in the Territory. The Licensed Rights may not be used in connection with the design, manufacture, advertisement, promotion or distribution at wholesale of any of the Products or in connection with any other product or service. LICENSEE does not have the right to use any variation of the Marks that now exist or hereafter are developed by bebe, LICENSEE or any other person. LICENSEE agrees and acknowledges that bebe reserves the right either to sell in retail stores or appoint other licensees or distributors in the Territory to sell in retail stores, lines of products whether similar or dissimilar to the Products, that bear the Marks and variations of the Marks, subject to any manufacturing license agreement between bebe and LICENSEE, if any.
2.2 NO SUBLICENSES. This Agreement does not confer upon LICENSEE a right to sublicense or grant any concession in respect to any of the rights or licenses granted to
[***] Confidential Treatment Requested.
LICENSEE under this Agreement. Such rights may be granted at bebe's sole discretion and only in writing from bebe to LICENSEE.
2.3 USE OF LICENSED RIGHTS. LICENSEE acknowledges that it may be difficult for bebe to obtain registered title to all of its Licensed Rights in the Territory and that the rights and licenses granted under this Agreement only exist to the extent that bebe owns such Licensed Rights. LICENSEE shall not use the Licensed Rights in any manner that conflicts with the rights of any third party. If LICENSEE's use of the Licensed Rights infringes the rights of any third party or weakens or impairs bebe's rights in the Licensed Rights, as determined solely by bebe, then LICENSEE shall immediately terminate or modify such use in accordance with bebe's instructions, and LICENSEE shall have no right of damages, offset or termination in connection with this Agreement.
2.4 USE OF MARKS. The presentation and image of the Marks shall be uniform and consistent with respect to all Products bearing the Marks. All packaging, business advertising and promotional material used in connection with the Products shall be of the highest standard and quality and of such style, appearance and distinctiveness as to protect and enhance the prestige, image, reputation and goodwill of bebe and the Products. Accordingly, LICENSEE shall use the Marks (i) solely for the purpose of identifying the Products and identifying LICENSEE as an authorized licensee of bebe and (ii) solely in the manner that bebe, in its sole discretion, shall specify from time to time and in compliance with all applicable laws.
2.5 RELATIONSHIP OF PARTIES. The relationship between bebe and LICENSEE is that of licensor and licensee of intellectual property rights. In its capacity as licensee, LICENSEE shall be acting only as an independent contractor, and not as a partner, co-venturer, agent, employee or representative of bebe. Accordingly, LICENSEE shall have no authority, either express or implied, to make any commitment or representation on behalf of bebe or incur any debt or obligation on behalf of bebe. To the extent that LICENSEE purchases any Products from bebe, it will do so for its own account and for resale in the Territory, and not under consignment or representation. The parties acknowledge that LICENSEE is not a commercial agent of bebe and further acknowledge this Agreement does not constitute a franchise under United States federal or state law or under any law of the Territory or any sovereignty within the Territory and does not create a fiduciary relationship between the parties.
SECTION 3. APPROVAL OF STORES
3.1 RETAIL STORES. LICENSEE shall open at least [***] in the Territory by [***]. [***]. Before establishing any Store, LICENSEE shall submit to bebe for approval any and all information reasonably requested by bebe, using the RETAIL STORE LOCATION APPROVAL FORM (Exhibit "B"), and shall comply with all of the other obligations set forth in this Section 3.
[***] Confidential Treatment Requested.
3.2 STORE LOCATION. The Stores must be free-standing, in-mall stores, or in strip malls located in areas in the Territory that are consistent with the reputation for high quality associated with the Licensed Rights and the Products. In all cases the choice of location requires the written prior approval of bebe.
3.3 STORE DESIGN AND CONSTRUCTION. The Stores must be designed, constructed and furnished in all respects in accordance with any plans, standards and specifications required by bebe. In particular, all fittings, fixtures, furnishings, signs, equipment and methods of exterior and interior design must conform to bebe's specifications, including the manner of use of the Marks and other Licensed Rights. LICENSEE shall submit the original design construction plans as well as any changes that LICENSEE wishes to make to any approved Store design to bebe in advance for written approval, using (1) the RETAIL STORE LOCATION APPROVAL FORM (Exhibit "B") and (2) the RETAIL STORE MATERIAL AND FIXTURE LAYOUT APPROVAL FORM (Exhibit "C"). If any regulation, ordinance or law prevents LICENSEE from complying with any signage specification, LICENSEE shall submit a photograph or drawing of the proposed sign that complies with such regulation, ordinance or law to bebe for its prior written approval.
3.4 STORE OWNERSHIP. Unless expressly permitted otherwise by bebe, the business conducted at any Store shall be entirely owned by LICENSEE.
3.5 STORE LEASES/TERMINATION OF AGREEMENT/LEASE CONTINUATION. The Store premises may by leased by LICENSEE provided that the terms of any lease contract are acceptable to bebe. Each lease must contain a provision, satisfactory to bebe, granting bebe, at no expense to bebe, the option, but not the obligation, at its sole discretion, to assume the lease if this Agreement expires or terminates for any reason prior to the expiration of the lease.
3.6 TERMINATION OF LEASE/CLOSURE OF STORE. In the event a lease for a Store terminates, with or without fault of LICENSEE, or if a Store is destroyed, condemned or otherwise rendered unusable, or if the landlord for said premises requires a Store to be moved within a mall or shopping center, bebe may in its sole discretion withhold permission for relocation of the Store, and if such permission is withheld, the rights granted to LICENSEE under this Agreement shall terminate as to that Store.
3.7 RISK. BEBE'S APPROVAL OF A LOCATION FOR A STORE DOES NOT CONSTITUTE A WARRANTY OR GUARANTY THAT A STORE OPERATED AT THAT LOCATION WILL BE SUCCESSFUL. LICENSEE assumes all risks associated with the selection of the location, and the operation and profitability, or lack thereof, of any Store.
3.8 INSPECTION PRIOR THE OPENING. LICENSEE shall notify bebe at least twenty (20) days in advance of the proposed opening date of each Store. bebe shall have the right to inspect the Store at any time prior to its opening. No Store shall commence operation until any deficiencies noted by bebe are remedied to the complete satisfaction of bebe.
3.9 PHOTOGRAPHS OF STORE UPON OPENING. Within ten (10) days after the opening of each Store, LICENSEE shall deliver to bebe two (2) sets of photographs of the Store, each set consisting of one (1) 8 inch x 10 inch photograph that shows the interior and one (1) 8 inch x 10 inch photograph that shows the exterior, of the Store.
SECTION 4. OPERATION OF STORES
4.1 QUALITY STANDARDS. LICENSEE acknowledges that bebe has made a substantial investment in developing and manufacturing Products of high quality and design and developing and fostering an image and reputation of high quality, design, prestige and integrity under its Marks and Property and that the consuming public and industry now associate the Marks and Property with products of consistently high quality and design. LICENSEE further acknowledges that the terms and conditions of this Agreement are reasonable and necessary to assure that the Store premises are maintained and the Stores are operated in a manner that is consistent with bebe's image and reputation. LICENSEE shall comply with the standards of operations and merchandising established by bebe from time to time. bebe may change, review, amend or extend such standards, in its sole discretion, upon reasonable notice to LICENSEE. Without limitation to the foregoing, LICENSEE agrees to the following:
(a) to stock at each of the Stores the minimum variety of the Products in commercial quantities of styles and sizes specified by bebe from time to time, but not less than those quantities sufficient to meet the demands of customers of the Stores:
(b) to follow and adhere to the standards, requirements, systems, training, procedures and forms dictated by bebe:
(c) not to sell at the Stores, without the prior written approval of bebe, products bearing any trademark other than the bebe Marks;
(d) not to use or associate the Marks or other Licensed Rights with any other name, trademarks, character or personality;
(e) to maintain the interior and exterior of the Stores and the surrounding premises in safe, good, clean and attractive condition, equal to the standards of the stores operated by bebe in the United States of America;
(f) that all products offered for sale by LICENSEE in the Stores must bear tags, labels or other items incorporating the Marks and Property;
(g) to comply with all applicable laws, regulations, ordinances, zoning codes, orders and the like as they pertain to the construction, appearance, and operation of the Stores;
(h) to notify bebe immediately of any orders or regulations directed at, or affecting, the
Stores, the reasons therefor, and the responsive actions taken and/or plans to be taken by LICENSEE in connection therewith;
(i) to operate the Stores continuously on such dates and during such minimum hours as are required by the commercial district or other development within which each Store is located, or, if there are no such requirements, on such days and during such minimum hours as are customary for similar businesses in the community within which that Store is located;
(j) not to conduct any liquidation sales, going-out-of business sales, auctions, sales to jobbers or other sales that are not in the ordinary course of business or that do not conform to the marketing standards of bebe, without the prior written consent of bebe; and
(k) not to permit any lien or other encumbrance to be placed on the Stores or their inventory, without prior written approval by bebe.
4.2 SIGNS, PACKAGING, ETC. LICENSEE shall submit to bebe for prior written approval all interior and exterior display sign, hangers, price tags, shopping bags, gift boxes, stationery, forms of invoices and receipts, and similar items using the LICENSED RIGHTS APPROVAL FORM (Exhibit "D").
4.3 SEQUENTIAL INVOICING. All sales of the Products at the Stores shall be documented on sequentially numbered sales slips.
4.4 INTERNAL TRANSACTIONS. All transactions between LICENSEE's wholesale manufacturing business, if any, and the Stores shall be arm's length transactions recorded on the books and records in the same manner as a sale to other parties. Upon request, LICENSEE shall forward to bebe copies of all documents incidental to such transactions including orders, invoices and packing slips.
4.5 SECONDS. LICENSEE shall not sell any damages, imperfect, substandard quality or defective goods ("Seconds") under the Marks without the prior written approval of bebe. All Seconds approved for sale shall be marked "B Grade," "Seconds" or "Irregular" and all Seconds not approved shall be destroyed.
SECTION 5. PURCHASE OF PRODUCT
5.1 TERMS. LICENSEE shall purchase Product on the terms and conditions specified in the PRODUCT PURCHASE TERMS, Exhibit E hereto, which may be modified from time to time by written agreement of the parties.
5.2 NET PRICE. The price which LICENSEE pays for Product purchased hereunder shall be net of any taxes. If bebe's cost of operation increases due to a portion of bebe's income being deemed a royalty subject to withholding taxes, then the price of Product to
LICENSEE' may be increased proportionately at bebe's sole discretion.
SECTION 6. ADVERTISING
6.1 CONTRACT YEAR MARKETING PLAN. LICENSEE shall prepare a marketing plan for each Contract Year, including planned sales presentation, fashion shows, special events and special promotions and other advertising, with a budget and specifying the media, the date and the time of publication of each planned advertisement or promotional event, which shall be suitable for the Territory and be based upon bebe's marketing program. LICENSEE shall submit such plan to bebe by no later than thirty (30) days following the date of the Agreement, and thereafter by no later than 30 days prior to the first day of each Contract Year of the Agreement. LICENSEE shall support any marketing program for the Stores that bebe may develop.
6.2 PRIOR APPROVAL. LICENSEE shall submit to bebe, for its prior approval, samples of all advertising and other promotional plans and materials, including media placement and scheduling, that LICENSEE desires to use to promote the Stores or the Marks that have not been prepared or previously approved by bebe, including without limitation, press releases and interviews for publication in any media. All requests for approval shall be submitted on an ADVERTISING APPROVAL FORM in the form of Exhibit "F" hereto, as modified by bebe from time to time.
6.3 NOTICE OF OWNERSHIP OF MARKS AND COPYRIGHTS. All Licensed Products sold by LICENSEE and all advertising and promotional materials shall state that the Marks are owned by bebe. LICENSEE shall use the following form of such notice for all Licensed Products, which bebe may change from time to time, in its sole discretion:
BEBE and BEBE MODA
are trademarks of Babe, Inc., California, U.S.A., used by Bebe Moda S.A. de C.V., Mexico, D.F., under license.
LICENSEE shall use the following form of such notice for all advertising and promotional materials, which bebe may change from time to time, in its sole discretion:
All Rights Reserved -C- Babe, Inc., California, U.S.A. 19__
6.4 LEGAL NOTICES. LICENSEE shall use the proper trademark and copyright notices in connection with the Licensed Rights and any associated copyrightable works, which notices bebe shall, from time to time, in its sole discretion, specify.
SECTION 7. INSURANCE
Upon execution of this Agreement and throughout the Term, LICENSEE, at its sole cost and expense, shall obtain and maintain in full force and effect a policy of insurance insuring against those risks customarily insured under broad occurrence form comprehensive general liability policies, including without limitation, product liability, completed operations, advertising injury, and contractual liability for LICENSEE's obligations under this Agreement. Such policies of insurance shall have endorsements or coverage with combined single limits of not less than One Million Dollars ($1,000,000) plus defense costs and shall name bebe as an additional insured thereunder. Such insurance policy shall provide that it cannot be canceled, modified or renewed without sixty (60) days prior written notice to bebe, the "other insurance" clause, if any, will be deleted from such policy, the insurance under such policy shall be primary, and any other insurance of force shall be neither primary nor contributing. The policy shall provide that the insurer waives its right of subrogation in favor of bebe. Within thirty (30) days of the date of execution of this Agreement, LICENSEE shall furnish to bebe current certificates of insurance issued by the insurer and showing bebe as an additional insured. During the Term, LICENSEE may not engage in the sale or promotion of any Product or the operation of Stores unless the required insurance coverage is in full force and effect.
SECTION 8. COVENANTS REGARDING ORGANIZATION AND OPERATION OF LICENSEE
8.1 STAFFING AND NOTICE OF INTERNAL CHANGES. In granting the license to LICENSEE, bebe is relying upon the personal skills, judgment, abilities and attributes of the persons named in Exhibit "H" as principals of LICENSEE and upon their personal involvement in the business. LICENSEE represents and agrees that these named individuals are and will continue to be dedicated to the full time executive management and operation of LICENSEE's business. LICENSEE shall employ at each Store: (1) an individual or individuals with suitable qualifications and experience in the high quality retail apparel industry to manage the business and operations of the Store; and (2) a staff of trained employees sufficient to operate each of the Stores in accordance with this Agreement and bebe's specifications;
LICENSEE shall immediately notify bebe of (i) any change in the activities of LICENSEE; (ii) the termination of employment for any reason of a store manager or merchandiser; (ii) the addition of any "competing" line, if otherwise allowed hereunder; and (iii) any transaction affecting ownership or control of LICENSEE, including without limitation, any transaction affecting (a) beneficial or record ownership of its capital stock, if a corporation, (b) the respective interests of its partners, if a partnership, or (c) ownership of any part of the business, if a sole proprietorship.
8.2 FINANCIAL STANDING. LICENSEE shall maintain a debt to equity ratio of at least percent ( %) and tangible net worth of not less than ($ ).
8.3 CUSTOMER RELATIONS. LICENSEE shall maintain good customer relations in accordance with prudent and reasonable business practices.
8.4 SCOPE OF OBLIGATIONS. LICENSEE shall not permit or suffer any action to be taken by or through any principal or spouse, directly or indirectly, which would be a violation of this Agreement if carried out by LICENSEE. LICENSEE shall not permit or suffer any substantial change in ownership, management or control.
A substantial change in ownership, management or control of LICENSEE shall be deemed to have occurred if more than twenty percent (20%) ( by vote or value) of the equity securities of LICENSEE are transferred to any person who did not own equity securities of LICENSEE at the time of execution of this Agreement or if any person who owned or controlled more than twenty percent (20%) (by vote or value) of the equity securities of LICENSEE at the time of execution of this Agreement reduces to twenty percent (20%) or less any such ownership or control. For purposes of the foregoing, a person shall not be deemed to own or control an equity security if such person has sold, assigned, conveyed, donated or made a gift of, pledged, hypothecated or transferred (voluntarily or by operation of law), any interest in the equity security in question, or agreed to do any of the foregoing.
A substantial change in ownership, management or control of LICENSEE also shall be deemed to have occurred if for any reason any of the individuals identified as principals at the time of execution of this Agreement are not involved in the day to day management of LICENSEE or do not personally manage and control LICENSEE's relationship with bebe and its activities under this Agreement. The foregoing is not intended to be an exhaustive list of what constitutes a substantial change in ownership, management or control of LICENSEE.
8.5 CHANGE IN FORM OF BUSINESS. LICENSEE may change its form of business (for example, from partnership to corporation) only after obtaining the prior written approval of bebe. No such change shall release LICENSEE, any principal of LICENSEE or any other person from any liability or obligation under this Agreement.
8.6 CURRENT OWNERSHIP. LICENSEE warrants and represents that Exhibit "H" sets forth completely and accurately all ownership and control of all equity ownership of LICENSEE as of the date of this Agreement and that Exhibit "G" identifies all of the principals of LICENSEE.
8.7 NOTICE OF PROCEEDINGS. LICENSEE shall notify bebe in writing within five (5) days of the commencement or threat of any action, suit, proceedings or investigation or the issuance of any order, writ, injunction, award, judgment or decree before or of any court, tribunal, arbitration panel, agency or governmental instrumentality that may adversely affect the Products or the operations or financial condition of LICENSEE.
8.8 RECORDS. LICENSEE shall maintain in reasonable detail and, where applicable, in
accordance with United States' generally accepted accounting principles, consistently applied, separate books of account and records with respect to the sale of all Products at each of the Stores; records of advertising and promotional campaigns with respect to the Products; records of all inventory of the Products; orders, inquiries, complaints, requests for service and other correspondence with respect to the Products; employment records with respect to persons who carry out activities and transactions of LICENSEE pursuant to this Agreement; and records of other services, activities and transactions of LICENSEE with respect to the Products. These records shall be retained and shall be open for inspection, copying, extracting and audit by bebe or its employees, agents or representatives during normal business hours during the Term and for at least three years following termination or expiration of this Agreement. LICENSEE shall inform bebe of any relocation of the books and records in writing. LICENSEE shall not relocate the books and records outside the Territory without bebe's prior written consent.
8.9 AUDITS. bebe and its employees, agents or representatives shall have the right, at reasonable times and without undue disruption of LICENSEE's normal business, to conduct audits with respect to the books, records, and all other documents and material in the possession or under the control of LICENSEE relating to this Agreement. bebe shall bear the cost of all audits. If any such audit, however, discloses that payments due to bebe under this Agreement exceed the amount of payments actually made to bebe by an amount greater than three percent (3%) of the payments made, LICENSEE shall immediately pay the cost of the audit and each unpaid payment discovered in the audit plus interest at a rate of ten percent (10%) per annum calculated from the date such payment was actually due until the date such payment is, in fact, actually paid.
8.10 FINANCIAL STATEMENTS. No later than ninety (90) days after the close of LICENSEE's fiscal year, LICENSEE shall provide to bebe in English annual financial statements of LICENSEE, which shall be audited by an independent certified accountant of LICENSEE's choice and acceptable to bebe, which statements shall include an income statement and a balance sheet of LICENSEE prepared in accordance with United States' generally accepted accounting principles, consistently applied.
8.11 PERIODIC REPORTS. LICENSEE shall submit to bebe the following reports, at the intervals indicated:
(a) thirty (30) days after the end of each month the bebe MONTHLY RETAIL STORE REPORT (Exhibit "I"), for each Store;
(b) each April 1st, and at such other times as bebe may reasonably request, a list of the addresses of all of the Stores as well as photographs of each Store that accurately show its current condition;
(c) any other information relating to the operation of the Stores and the sale of the Products that bebe may reasonably request from time to time, including, without limitation,
photographs of the Stores and daily sales reports.
SECTION 9. OWNERSHIP OF THE LICENSED RIGHTS
9.1 OWNERSHIP. LICENSEE acknowledges that (i) the Licensed Rights are
owned solely and exclusively by bebe, (ii) nothing contained in this Agreement
shall give to LICENSEE any right, title or interest in the Licensed Rights,
other than the express license granted in Section 2.1 of this Agreement, and
(iii) LICENSEE's use of the Licensed Rights shall inure only to the benefit of
bebe.
9.2 PROPERTY. LICENSEE shall not use any Licensed Rights except for the purpose of fulfilling its duties under this Agreement and in a manner authorized in writing by bebe.
9.3 NO USE OF NAME. LICENSEE shall not use any of the Licensed Rights as a trade name, service mark, business name, trade style, fictitious business name or d.b.a. except that LICENSEE is authorized to use the trade name and service mark "bebe" as its Store name and the trade name "Bebe Moda" as its company name. Any authorized or unauthorized use shall inure solely to the benefit of bebe, and authorized or unauthorized use by LICENSEE shall not confer on LICENSEE any right, title or interest in the Licensed Rights except as granted in Section 2.1 of this Agreement.
9.4 REGISTRATION. LICENSEE shall not seek or obtain any registration of the Marks (including any colorable imitations, translations or transliterations thereof) or the Property in any name or participate directly or indirectly in such registration anywhere in the world without bebe's prior written consent. If LICENSEE has obtained or obtains in the future, in any country, possession or territory in the world, any right, title or interest in the Marks (including any colorable imitations, translations or transliterations thereof) or the Property, or in any marks which are confusingly similar to the Marks (including any colorable imitations, translations or transliterations thereof) or the Property or in any other trademark or service mark owned by bebe, LICENSEE has so acted or will act as an agent and for the benefit of bebe for the limited purpose of obtaining such registrations and assigning them to bebe. LICENSEE shall execute any and all instruments deemed by bebe, or its respective attorneys or representatives, to be necessary to transfer such right, title or interest to bebe. If the laws of the Territory require or permit the registration of any Marks or Property, LICENSEE shall assist bebe in obtaining such registration in a timely and effective manner; provided, however, that the failure to obtain such registrations shall not affect the validity of the Agreement.
9.5 NO CHALLENGE. During the Term, LICENSEE shall not, directly or indirectly, take any actions challenging, questioning or opposing the validity of the Marks or any other trademarks or service marks owned by bebe.
9.6 INFRINGEMENT SUITS. LICENSEE shall be vigilant in detecting any possible infringements, claims or actions in derogation of any Licensed Rights, including any
counterfeiting, by any third parties and shall inform bebe promptly of any such infringement, claim or action; provided, however, that bebe shall have the sole right to determine whether any action shall be taken on account of such infringement, claim or action and LICENSEE shall not take any action on account of such infringement, claim or action without the prior written consent of bebe. If bebe initiates any legal proceedings on account of any such infringement, claim or action, LICENSEE shall cooperate with and assist bebe to the extent reasonably necessary to protect the Licensed Rights, including without limitation, being joined as a necessary or desirable party to such proceedings. The damages or other recovery received from such proceedings shall be received by the party who bore the expense of the litigation. LICENSEE shall have no claim against bebe for damages if bebe determines, in its sole discretion, that it is not in the best interest of bebe to initiate any legal proceedings on account of any such infringement, claim or action, or if bebe settles or resolves any such proceedings which may be initiated.
9.7 QUITCLAIM OF RIGHTS. LICENSEE acknowledges the exclusive right, title and interest of bebe in and to the Licensed Rights and hereby quitclaims to bebe any right, title or interest it has or may acquire with respect to the Licensed Rights, including without limitation any right, title or interest it may acquire through the unauthorized use of the Licensed Rights as a trade name, service mark, business name, trade style, fictitious business name or d.b.a. or the use of the bebe trade name and service mark as a Store name.
9.8 COPYRIGHTS. If LICENSEE, alone or with others, develops any written material pertaining to the Products or bebe which may be copyrighted, it hereby assigns all right to obtain such copyrights to bebe. Such material shall be deemed "made for hire" under U.S. copyright law, thereby vesting ownership in bebe.
9.9 POWER OF ATTORNEY. LICENSEE hereby irrevocably appoints bebe as its attorney-in-fact for the limited purpose of executing any and all documents and performing any and all other acts necessary to give effect and legality to the provisions of Section 10 of this Agreement.
9.10 CONFIDENTIAL INFORMATION. Before or during the Term, LICENSEE may or will be made aware of Confidential Information of bebe relating to the Products, the Licensed Rights, the license and arrangement created under this Agreement, present or anticipated products, processes, know-how, customers, sales, business affairs, contractual arrangements, identities of employees, agents or representatives or similar information. Information shall be considered Confidential Information if bebe so informs LICENSEE or if LICENSEE knows or reasonably should have known that the information was confidential. Information shall not be considered confidential if the information is in the public domain or if LICENSEE can demonstrate that it acquired the information from another source without the source or LICENSEE breaching a confidentiality agreement or other confidentiality obligation. During and after the Term, LICENSEE shall maintain in strict confidence and shall not disclose, except to employees of LICENSEE who must have access to it in order to exercise its rights and license under this
Agreement or as expressly permitted by any written agreement between LICENSEE and bebe, any Confidential Information. LICENSEE shall take every reasonable precaution to protect the confidentiality of the Confidential Information, consistent with the higher of the standard of care that LICENSEE exercises with respect to its own confidential information or the standard of care that an ordinarily prudent business would exercise to protect its own confidential information.
9.11 DISCLAIMER OF VALIDITY. bebe makes no representation or warranty as to the validity or enforceability of the Licensed Rights nor as to whether any Property infringes upon or interferes with any property rights of third parties. bebe is not certain if it will be successful in obtaining or maintaining registration of the Marks in the Territory. If it is determined at any time that bebe does not have the right to use the Licensed Rights, or any portion thereof, within the Territory, LICENSEE shall immediately refrain from using the Licensed Rights and selling the Products in the Territory and shall have no claims against bebe for damages caused by such cessation or termination or otherwise caused.
9.12 SURVIVAL. Notwithstanding anything in this Agreement to the contrary, this Section 9 shall survive termination or expiration of the Agreement.
SECTION 10. TERMINATION
10.1 TERMINATION FOR CAUSE. In the event LICENSEE breaches this Agreement, bebe may give written notice of the nature of the breach to LICENSEE and LICENSEE shall have ten calendar days to cure the breach. If LICENSEE does not cure the breach within the ten calendar days then bebe may terminate this Agreement effective upon written notice to LICENSEE. Failure of bebe to give such written notice will not in any event constitute a waiver of such breach. Upon the giving of a notice of breach for the third time during the Term, for any reason, LICENSEE shall no longer have the right to cure any violation, and termination shall be effective upon the giving of said third notice.
10.2 GROUNDS FOR TERMINATION FOR CAUSE. Set forth below is a nonexhaustive list of breaches by LICENSEE that would entitle bebe to terminate this Agreement and the rights and licenses granted to LICENSEE if the breaches were not cured during the applicable cure period:
10.2.1 Failure of LICENSEE to obtain a consent to use agreement, in form approved by bebe, for use of the mark "BEBE" in Mexico for women's apparel no later than the opening of the first Store.
10.2.2 Failure of LICENSEE to meet the minimum retail sales quota in any Contract Year;
10.2.3 Failure of LICENSEE to maintain or operate the Stores in accordance
with this
13
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Agreement;
10.2.4 Commission by LICENSEE of a material violation of any applicable
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law in the Territory in connection with the ownership or operation of the Store or the retail sale of the Products;
10.2.5 The making by LICENSEE of any warranties or representations on behalf of bebe that have not been specifically authorized in writing by bebe;
10.2.6 Sales by LICENSEE of the Products other than under the Marks, or the use of the Marks in any manner that violates this Agreement;
10.2.7 Sales by LICENSEE of Products other than through Stores unless expressly authorized under a separate license or distribution agreement with bebe;
10.2.8 Abandonment by LICENSEE of its business or the activities required under this Agreement; or
10.2.9 Failure of LICENSEE to cooperate in any legal proceedings or failure to bring any actions required to protect the Licensed Rights in the Territory.
10.3 BANKRUPTCY, INSOLVENCY OR DISSOLUTION. In the event of insolvency, bankruptcy or dissolution of LICENSEE, bebe shall have the option to terminate this Agreement immediately, WITHOUT GIVING LICENSEE AN OPPORTUNITY TO CURE, with the termination effective upon written notice to LICENSEE. The license and rights granted herein are personal to LICENSEE. No assignee for the benefit of creditors, receiver, debtor in possession, trustee in bankruptcy, sheriff or any other officer of court charged with taking over custody of LICENSEE's assets of business, shall have any right to continue performance to exploit or in any way use the Marks or the Licensed Rights if this Agreement is terminated, except as may be required by law.
10.4 TERMINATION OPTION/NO CURE POSSIBLE/ADDITIONAL CAUSES. bebe may terminate this Agreement immediately, WITHOUT ANY RIGHT TO CURE BY LICENSEE, upon the occurrence of any one or more of the following:
10.4.1 LICENSEE opens a Store that was not approved by bebe in advance in
writing;
10.4.2 LICENSEE uses or authorizes the use of signs, construction
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materials, advertising or packaging materials that are not approved by bebe in advance in writing or that bebe has disapproved;
10.4.3 LICENSEE sells or ships the Products to customers outside the
Territory;
10.4.4 LICENSEE sells products not bearing the Marks in the Stores;
14
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10.4.5 LICENSEE reports incorrect or false financial information,
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including sales information;
10.4.6 LICENSEE fails to open and operate at all times during the Term the number of Stores required by Section 3.1.
bebe may also terminate this Agreement immediately if any other agreement between bebe and LICENSEE is terminated or expires.
10.5 SUBSTANTIAL CHANGE IN OWNERSHIP, MANAGEMENT OR CONTROL OF LICENSEE OR COMMISSION OF CRIME. In the event that any substantial change in the ownership, management or control of LICENSEE occurs or in the event that LICENSEE or any of its principals commits any crime, act of dishonesty, fraud or other act that may substantially affect the business reputation of LICENSEE, any of its principals or bebe, then bebe shall have the option to immediately terminate this Agreement, effective upon written notice.
10.6 LIABILITY AFTER TERMINATION. Termination of this Agreement for any reason shall not, unless otherwise expressly provided in this Agreement, affect:
10.6.1 Obligations accrued prior to the effective date of termination; and
10.6.2 Any obligations which, either expressly or from the context of this Agreement, are intended to survive termination of this Agreement.
10.7 EFFECTS OF TERMINATION. Upon any termination of this Agreement:
10.7.1 Any indebtedness of LICENSEE to bebe shall become immediately due and payable and bebe may retain as security or apply as payment against any such indebtedness any Products of LICENSEE in the possession of bebe.
10.7.2 bebe shall not be liable to LICENSEE, either for compensation or for damages of any kind, whether on account of loss by LICENSEE or any other person, of present or prospective profits on present or prospective sales, investments or goodwill, and LICENSEE hereby waives any right which may be granted to it by sovereign entities or any political subdivision in the Territory or otherwise which are not granted to it by this Agreement.
10.7.3 Within three (3) days after the expiration or termination of this Agreement for any reason, LICENSEE shall remove and, within fourteen (14) days after expiration or termination of this Agreement, shall deliver to bebe, all exterior and interior Store sign and displays bearing the Marks and Licensed Rights as well as all other Store promotional material, including mailers, flyers, brochures, shopping bags, tags, business cards and letterhead, bearing the Marks or the Licensed Rights.
10.7.4 LICENSEE shall continue to maintain in confidence any and all Confidential Information, and, within fourteen (14) days after such expiration or termination, will return to bebe, at LICENSEE's expense, all exterior and interior signs and displays bearing the Marks or other Licensed Rights, all packaging, labels, tags, promotional or advertising materials and documents relating to the Products, Licensed Rights or any Confidential Information or, at the election of bebe, destroy or otherwise dispose of such material as bebe may direct.
10.7.5 Within five (5) days after the expiration or termination, LICENSEE shall notify in writing all telephone companies, business directories, chambers of commerce and appropriate governmental agencies of the expiration or termination of this Agreement and terminate any listing making reference to any of the Licensed Rights or the licensing arrangement and shall provide copies of such notices to bebe. If LICENSEE fails to notify such entities, LICENSEE authorizes bebe to do so as its agent for this limited purpose.
10.8 INVENTORY: RIGHT TO PURCHASE. Upon expiration or termination of this
Agreement for any reason, LICENSEE shall immediately notify bebe of the Products
remaining in LICENSEE's possession or under its control and unsold on the date
of termination or expiration (the "Remaining Inventory"). bebe shall have the
option (but not the obligation), upon notice to LICENSEE within thirty (30) days
after receipt of LICENSEE's inventory of the Products, to repurchase all or any
part of the Remaining Inventory at a price equal to the price paid by LICENSEE
for the Products plus freight and duties (unless LICENSEE can obtain duty
reimbursement). LICENSEE shall deliver products purchased by bebe within fifteen
(15) days after receipt of the notice of bebe's intention to purchase the
inventory. Payment shall be due upon delivery, provided, however, that bebe may
deduct from the purchase price for such Products any amount owed to it by
LICENSEE.
10.9 REMAINING PRODUCTS. Products may be sold, subject to the following provisions, only after the Marks and features embodying Licensed Rights have been removed therefrom (which removal may be inspected by bebe, its agents and/or representatives) prior to sale, unless the parties agree otherwise in writing. Products not sold by LICENSEE in accordance with this Section 9 shall be destroyed.
(a) IF AGREEMENT EXPIRED. In the event this Agreement has expired in accordance with its terms, as to any Products not purchased by bebe, LICENSEE may sell such Products on a non-exclusive basis in accordance with this Agreement; provided, however, LICENSEE shall have only ninety (90) days after the date of expiration to sell and ship such Products.
(b) IF AGREEMENT TERMINATED. If the rights granted to LICENSEE under this Agreement have been terminated for any reason or cause specified in Section 10.4 of this Agreement, LICENSEE may not sell any Products bearing the Marks.
SECTION 11. INDEMNIFICATION AND LIMITATION ON LIABILITY
11.1 INDEMNIFICATION. LICENSEE shall indemnify, hold harmless and defend bebe and its officers, directors, shareholders, employees, agents, independent contractors, representatives, and affiliates, from and against any loss, damage, liability, or expense, including attorneys fees and disbursements, whether or not LICENSEE's conduct was tortious and whether or not bebe's conduct contributed to the claim, arising in connection with:
11.1.1. Any activities of LICENSEE or its employees, agents, representatives or affiliates, under or in connection with this Agreement.
11.1.2 Any breach by LICENSEE of this Agreement;
11.1.3 Claims or demands for injury to property or persons, including payments made under any workers compensation or under any other plan for employees disability or death benefits, made by any person in connection with the advertising, promotion, distribution, sale or use of Products or the operation of the Stores by LICENSEE or by its employees, agents, representatives or affiliates or LICENSEE's customers or invitees; and
11.1.4 Claims or demands of any customer of LICENSEE arising out of the operation of the Store or any sale or use of the Products.
11.2 DEFENSE COUNSEL. LICENSEE shall defend bebe, with counsel acceptable to bebe, with respect to each and every claim for which bebe is indemnified by LICENSEE under this agreement. LICENSEE shall pay for the services of such counsel upon counsel's presentation of legal bills or requests for retainer.
11.3 NO REPRESENTATION OR WARRANTY BY BEBE. LICENSEE acknowledges that bebe has made no representation or warranty except as expressly provided in this Agreement.
11.4 LIMITATION OF LIABILITY. UNDER NO CIRCUMSTANCES, INCLUDING ANY BREACH OR ALLEGED BREACH OF THIS AGREEMENT BY BEBE OR ANY OTHER PERSON AND THE FAILURE OF THE ESSENTIAL PURPOSE OF ANY REMEDY INTENDED TO BENEFIT LICENSEE, SHALL BEBE OR ANY OF ITS OFFICERS, DIRECTORS, SHAREHOLDERS, EMPLOYEES, AGENTS, INDEPENDENT CONTRACTORS, REPRESENTATIVES, OR AFFILIATES, HAVE ANY LIABILITY OR OBLIGATION TO ANY CUSTOMER OF LICENSEE, OR TO LICENSEE OR TO ANY OF ITS OFFICERS, DIRECTORS, SHAREHOLDERS, EMPLOYEES, AGENTS, INDEPENDENT CONTRACTORS, REPRESENTATIVES, AUTHORIZED RETAILERS OR AFFILIATES, FOR ANY CONSEQUENTIAL OR INCIDENTAL DAMAGES, LOST PROFITS, ANTICIPATED INCOME OR PROFITS, OR OTHER SIMILAR DAMAGES.
SECTION 12. GENERAL
12.1 APPROVAL PROCEDURES. The approval of bebe or the exercise of its discretion as to
any request or proposal made by LICENSEE under any section of this Agreement shall be at the absolute and sole subjective discretion of bebe. A submission for approval shall be deemed DISAPPROVED unless bebe delivers a written notice of approval within twenty (20) business days. bebe has no obligation to approve, review or consider any item that does not strictly comply with the required submission procedures. Approval by bebe shall not be construed as a determination that the approved matter complies with all applicable regulations and laws.
12.2 EQUITABLE RELIEF. LICENSEE acknowledges that there will be no adequate remedy at law for its failure to comply with certain terms of this Agreement, including its obligation to cease the manufacture, sale, advertisement, promotion or distribution of the Products upon expiration or termination, its obligations with respect to the Licensed Rights and the obligation to maintain the confidentiality of Confidential Information. Accordingly, if LICENSEE fails to comply with the terms of this Agreement, bebe shall have the right to have any breach of this Agreement remedied by equitable relief by way of a temporary restraining order, preliminary injunction, permanent injunction, and such other alternative relief as may be appropriate without the necessity of bebe posting any bond or proving any damages.
12.3 ASSIGNMENTS, SUCCESSORS AND ASSIGNS. bebe shall be entitled to assign any or all of its rights or delegate any or all of its duties under this Agreement. LICENSEE shall not assign (by operation of law or otherwise) any of its rights or delegate any of its duties under this Agreement without the prior written consent of bebe. All representations, warranties, covenants and agreements of the parties shall bind their respective successors and assignees and shall inure to the benefit of their respective successors and permitted assignees.
12.4 NOTICES. Any notice, request, demand, or other communication required
or permitted under this Agreement, shall be deemed to be properly given by the
sender and received by the addressee: (i) if personally delivered; (ii) three
(3) days after deposit in the mails if mailed by certified or registered air
mail, postage prepaid; (iii) twenty-four (24) hours after being sent by
facsimile with confirmation sent as provided in (ii) above; or (iv) twenty-four
(24) hours after being sent by commercial overnight mail, addressed as follows,
and in the case of facsimile transmission, to the appropriate facsimile number
shown below:
To bebe: bebe
380 Valley Drive
Brisbane, California 94005
Phone No.: 415-715-3900
Facsimile No.: 415-715-3939
Attention: Vice President-Licensing
To LICENSEE: BEBE MODA, S.A. DE C.V.
AVENIDA PRESIDENTE MAZARIT #310 BIS
DELEGACION MIGUEL HIDALGO
MEXICO CITY
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Phone No.: 525-281-35-63 TEMPORARY NUMBERS
Facsimile No.: 525-280-45-00
ATTENTION: JACOBO LANIADO CATTAN
or to such other address or facsimile number as from time to time may be given in the manner permitted above.
12.5 NUMBER AND GENDER: HEADINGS. Each number and gender used in this Agreement shall be deemed to include each other number and gender as the context may require. The headings and captions contained in this Agreement shall not constitute a part thereof and shall not be used in its construction or interpretation.
12.6 SEVERABILITY. If any provision of this Agreement is found by any court of competent jurisdiction to be invalid or unenforceable, such provision shall be deemed to be modified to the maximum extent necessary to cause it to be valid and enforceable and the invalidity or unenforceability of such provision prior to such modification shall not affect the other provisions of this Agreement and all provisions not affected by the invalidity or unenforceability shall remain in full force and effect.
12.7 AMENDMENT AND MODIFICATION. Except as otherwise expressly stated herein, this Agreement may be amended or modified only by a writing executed by all parties.
12.8 GOVERNING LAW, CHOICE OF FORUM AND ATTORNEY'S FEES. This Agreement shall be construed and governed in accordance with the internal laws of the State of California. The parties agree that this Agreement is executed and delivered in the State of California. The parties agree that the United Nations Convention on Contracts for the International Sale of Goods shall not apply to this Agreement. In the event any legal action becomes necessary to enforce or interpret the terms of this Agreement, the parties agree that such action will be brought in the San Francisco County Superior Court or in the U.S. District Court for the Northern District of California, in the City and County of San Francisco, and the parties hereby submit to the exclusive jurisdiction of said courts.
However, in order to expedite the resolution of legal disputes, bebe may, at its sole option, elect to have this Agreement construed in accordance with the laws and regulations of the Territory or any portion thereof, or may elect to have such disputes arising in connection with this Agreement finally settled under the Rules of Conciliation and Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with said Rules, whose decision shall be binding on the parties. Such arbitration shall be conducted in the English language. bebe shall have the right to select, in its sole discretion, the place of arbitration within California or within the Territory.
In the event of a dispute between the parties, or if a party becomes involved in litigation because of wrongful acts of the other party, the arbitrator(s) or court will award reasonable attorney's fees to the prevailing or innocent party. The amount will be sufficient to compensate the prevailing or innocent party for all attorney's fees incurred in good faith.
12.9 TAXES. LICENSEE shall be responsible for the collection, remittance and payment of any and all taxes, charges, withholding obligations, levies, assessments or other fees of any kind imposed by any governmental authority with respect to the manufacture, sale, importation or other dispositions of the Products (other than taxes on the income or gross receipts of bebe). LICENSEE shall provide certified proof of payment to bebe within ten (10) days of payment thereof.
12.10 ENTIRE AGREEMENT. This Agreement covers all contracts and agreements between the parties relating to the subject matter of this Agreement. All other contracts and agreements between the parties which relate thereto are hereby terminated.
12.11 GOVERNMENT APPROVALS AND REMITTANCES. In the event that any approval with respect to this Agreement or any registration thereof will be required, initially or at any time during the Term, in order to give the Agreement legal effect, LICENSEE agrees immediately to take whatever steps may be necessary in this respect; and any charges incurred in connection therewith shall be borne by LICENSEE.
12.12 AFFILIATES OF LICENSEE. In the event that any affiliate of LICENSEE participates in any respect in the enjoyment of rights or the performance of any duties of LICENSEE hereunder, such affiliate shall be fully obligated under this Agreement to the same extent as LICENSEE.
12.13 AUTHORITY TO MAKE AGREEMENT. Each party warrants and represents that it has the power to enter into this Agreement and perform in accordance with the provisions hereof and that the execution and performance of the Agreement has been duly and validly authorized in accordance with all applicable laws and governing instruments.
12.14 NO WAIVER. No waiver of any breach of any of the provisions of this Agreement shall be construed to be a waiver of any succeeding breach of the same or any other provision.
12.15 REMEDIES NOT EXCLUSIVE. No remedy conferred by any of the specific provisions of this Agreement is intended to be exclusive of any other remedy. Except as expressly provided in this Agreement or any Exhibit thereto, each and every remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing in law or in equity or by statute or otherwise. The election of any one or more remedies shall not constitute a waiver of the right to pursue other available remedies.
NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, THE
REMEDIES OF LICENSEE SHALL BE LIMITED AS PROVIDED IN SECTION 11.4.
12.16 INTERPRETATION. The parties acknowledge that this Agreement has been jointly prepared by bebe and LICENSEE, and the language in all parts of this Agreement shall be, in all cases, construed according to its fair meaning and not strictly for or against bebe or LICENSEE.
12.17 OFFICIAL LANGUAGE OF AGREEMENT. The parties understand and agree that this document has been prepared only in the English language and that the English language is the official language of this Agreement. It is specifically understood and agreed that no party to this Agreement will assert or allege that it did not understand each and every term and condition of the Agreement, and each party further acknowledges that prior to entering into this Agreement, it had fair opportunity to seek interpretation of the Agreement in the native language of the persons signing the Agreement.
LICENSEE shall, solely at its own cost and expense, translate into English any and all documents which bebe has the right to examine hereunder and shall make available to bebe both the Spanish and English versions of each document.
12.18 CONSULTATION WITH ADVISORS. Each party acknowledges that it has been advised and has had fair opportunity to consult with its own attorneys, accountants and other expert advisors regarding the meaning and effects of this Agreement.
12.19 DEFINITIONS. The definitions set forth in Exhibit "A" are incorporated herein and made a part of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.
bebe: LICENSEE
Babe, Inc. Bebe Moda S.A. de C.V.
a California corporation
By: /s/ Manny Mashouf By: /s/ Jacobo Laniado Cattan
----------------------------- -------------------------------
Manny Mashouf Name: Jacobo Laniado Cattan
President Title: President
March 16, 1998
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LIST OF EXHIBITS
Exhibit A - Glossary
Exhibit B - Retail Store Location Approval Form
Exhibit C - Retail Store Material and Fixture Layout Approval Form
Exhibit D - Licensed Rights Approval Form
Exhibit E - Product Purchase Terms
Exhibit F - Advertising Approval Form
Exhibit G - Principals of Licensee
Exhibit H - Ownership of Licensee
Exhibit I - Monthly Retail Store Report
Exhibit J - Products
Exhibit K - Territory
EXHIBIT A
GLOSSARY OF TERMS
"Advertising" means any communication through any medium directed to the trade or public, including but not limited to trade and public directory listings, store window displays, posters, point of sale materials, hardcopy advertisements, electronic broadcasts and billboards.
"Confidential Information" has the meaning ascribed to it in Section 8.10.
"Contract Year" means (i) the twelve (12) month period beginning April 1,
1998 and through March 30, 1999, and (ii) thereafter, for the Term, each twelve
(12) month period beginning on April 1st, and ending on March 30th.
"Licensed Rights" means collectively the Marks and Property.
"Marks" means BEBE, BEBE MODA, BEBE COLLECTION; each whether alone or in combination; provided, however, that the appearance and/or style of the Marks may vary from time to time as specified by bebe in its sole discretion without affecting this Agreement.
"Products" means solely the products of bebe specified on Exhibit J attached hereto and incorporated herein by reference. bebe shall determine, in its sole discretion, whether a particular product or article falls within the definition of Products and bebe reserves the right, in its sole discretion, to eliminate any design as a Product at any time so long as the design is eliminated from bebe s lines. bebe also reserves the right to add new designs as Products.
"Property" means the intellectual property rights now or hereafter owned by bebe that bebe determines, in its sole discretion, to be desirable or necessary for LICENSEE to exercise the rights and license granted in the Agreement. Such Property shall include, without limitation, certain Products, styles, designs, samples, patterns, colors, materials, fabrics and retail store and fixture designs, titles, trademarks, names, logos, symbols, copyrights, art work, labels, advertising and other promotional material, inventions, trade secrets (patentable and unpatentable), patents and pending patent applications used in conjunction with any of the Marks or the Products whether created by or on behalf of bebe or by any third party engaged by bebe to create any thereof.
"Renewal Term" has the meaning ascribed to it in Section 1.2.
"Retail Sale" means a sale made at retail price to a consumer.
"Seconds" has the meaning ascribed to it in Section 4.5.
"Store" or "Stores" means free-standing, mall, and/or strip mall stores,
owned and
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operated entirely by LICENSEE that (a) carry the Products exclusively for sale to the general public, (b) bear as their store name, exclusively, the "bebe" service mark, and (c) conform to the requirements of bebe. "Store" or "Stores" does not include in-store shops or duty-free shops, unless bebe gives its prior written approval thereto.
"Term" means the Initial Term together with the Renewal Term, if applicable.
"Territory" means solely the geographic area designated specifically in Exhibit K attached hereto and incorporated herein by reference, as amended from time to time pursuant to this Agreement.
"Trade Secrets" means information including a formula, pattern, compilation, program, device, method, technique or process, that derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
EXHIBIT B (Check One)
New Store _____
Remodel _____
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RETAIL STORE LOCATION APPROVAL FORM
Name of Licensee/Distributor: Bebe Moda S.A. de C.V. Name of Store:__________
Proposed Opening Date:___________________________ Square Ftg:____________
Address of Store:________________________________________________________
(Including City, State)__________________________________________________
Who Owns the Store? (Circle One) LICENSEE DISTRIBUTOR SUB-LICENSEE
If there are multiple owners of the store, list the owners by percentage of ownership, and who has the controlling interest.
1). ___________________________________ 3). _________________________________
2). ___________________________________ 4). _________________________________
THE FOLLOWING ITEMS MUST ACCOMPANY THIS FORM:
A). Photo of Store Location, and a layout of adjacent vendors.
B). Demographic Information, including a map of the area where the store will
be located.
C). Retail sales projections for the first three years.
--------------------------------- ----------------------------
Licensee/Distributor Signature bebe Signature
Approved ______ Disapproved ______
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Note: All internal and external plans (including fixture layout) must be approved prior to beginning store construction. Please be aware that no store may be opened until bebe has given final written approval.
Comments:_____________________________________________________________________
(Check One)
New Store _____
Remodel _____
EXHIBIT C
RETAIL STORE MATERIAL AND FIXTURE
LAYOUT APPROVAL FORM
Name of Licensee/Distributor: Bebe Moda S.A. de C.V.
Name of Store:________________________________________________________________
Average Square Ftg:______________________________
New Materials Submitted: (Check One) Yes_____ No____
THE FOLLOWING ITEMS MUST ACCOMPANY THIS FORM:
A). Floor Plans showing Fixture Layout.
B). Exterior Store Front Elevation Plans with all Materials Specified.
C). Interior Elevations showing all signage, poster locations, stockroom
locations, mirrors, and all materials specified.
D). Sample and Material Board including flooring, wall treatments, hardware,
metal finishes, and paint color.
MATERIAL SAMPLES ONLY NEED TO BE SUBMITTED FOR THE FIRST STORE, OR WHEN MAKING CHANGES IN STORE DESIGN.
------------------------------- ----------------------------------------
Licensee/Distributor Signature bebe Signature
Approved ___ Disapproved ___
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Comments:_____________________________________________________________________
EXHIBIT D
LICENSED RIGHTS APPROVAL FORM
(ALL USES OF BEBE TRADEMARKS THAT ARE NOT ADVERTISING
E.G. TRIM, LABELS, STATIONARY, PACKAGING, DISPLAYS, ETC.)
Name of Licensee: Bebe Moda S.A. de C.V.
Licensed Product(s):__________________________________________________________
Description of Use:___________________________________________________________
___Concept Design ___Color Indication ___Finished Art ___Production Sample
___Final Sample
___Approval ___Disapproved
Comments/Suggestions:_________________________________________________________
____________________.
If Submission is a label or hangtag, name and address of supplier:
____________________.
ATTACH A SAMPLE OF USE IN THIS SPACE OR AFFIX TO A SEPARATE PAGE
---------------------------- ------------------------------- Signature of Licensee bebe Signature |
EXHIBIT E
PRODUCT PURCHASE TERMS
A. Initial Term
1) LICENSEE'S Cost: U.S. [***], net of any taxes. [***].
2) Payment Terms: For the first order, one hundred percent (100%) of the payment is due on placing the order.
For each order thereafter, one hundred percent (100%) of the payment is due thirty (30) days after LICENSEE receives the Product.
3) Shipping FOB Brisbane. LICENSEE at its sole cost and expense shall assign freight forwarder.
4) Method of Payment: In U.S. dollars by confirmed wire transfer or U.S. cashier's check. LICENSEE shall establish a standby letter of credit ("LC") for U.S.$100,000.00 to cover the amounts due under orders and bebe shall be entitled to draw on such LC if LICENSEE has not paid in full within 30 days of LICENSING receiving the Product.
5) Product Selection: A representative from LICENSEE shall visit bebe's corporate headquarters on a date to be mutually determined each month to make Product selections. LICENSEE shall pay all its own costs and expenses relating to such visits.
Alternatively, bebe shall send LICENSEE photos or line sheets and swatches of currently offered Products monthly and LICENSEE shall make its Product selection therefrom.
B. RENEWAL TERM
Product Purchase Terms for the Renewal Term of the Agreement shall be negotiated between bebe and LICENSEE six months prior to the expiration of the Initial Term.
1) LICENSEE'S Cost:
[***] Confidential Treatment Requested.
2) Terms:
3) Method of Payment:
4) Shipping:
5) Product Selection:
EXHIBIT F
ADVERTISING APPROVAL FORM
(SUBMISSIONS MAY BE APPROVED ONLY IN WRITING AND ONLY
IF ALL CHANGES ARE MADE).
Name of licensee: Bebe Moda S.A. de C.V.
Licensed Products(s)__________________________________________________________
ARTWORK SUBMISSION
Please check the media of advertising:
_____ Full Page ad _____ Billboard _____ Other
Name of Publication:__________________________________________________________
Country:________________________ Issue Date:_________________________________
As Position (As Detailed as
Possible:_____________________________________________________________________
___ Left Hand Page ___ Right Hand Page ___ Full Page Spread
FOR bebe USE ONLY
Please follow the applicable instructions:
Special Instructions:_________________________________________________________
Approved Approved with Changes Disapproved
PUBLICATION SUBMISSION
Name of Publication:
(A copy of the magazine or newspaper must be included)
Frequency (Check One): ___ Daily ___ Weekly ___ Monthly ___Other
Comments/Suggestions:_________________________________________________________
------------------ -------------------
Approved Disapproved
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EXHIBIT G
PRINCIPALS OF LICENSEE
BEBE MODA, S.A. DE C.V.
BOOK 92928
DATE 23 JANUARY 1998
NOTARY 129 D.F. MEXICO
LIC. IGNACIO SOTO BORGA
SOCIETY BY ADMINISTRATION: JACOBO LANIADO CATTAN
ADMINISTRATOR
WITH RIGHTS
VICTOR LANIADO CATTAN
LEGAL REPRESENTATIVE
WITH RIGHTS
MAURICIO TOVAR HERNANDEZ
COMISSARY
WITH NO RIGHTS
GENERAL MANAGER: JACOBO LANIADO CATTAN
CORPORATION : NONE
PRESIDENT : NONE
TREASURE : NONE
SECRETARY : NONE
/s/ Jacobo Laniado Cattan
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EXHIBIT H
OWNERSHIP OF LICENSEE
Equity Holder Percentage Equity ------------- ----------------- OWNERS: JACOBO LANIADO CATTAN [***] VICTOR LANIADO CATTAN [***] |
[***] Confidential Treatment Requested.
/s/ Jacobo Laniado Cattan |
EXHIBIT I
bebe INDIVIDUAL RETAIL STORE REPORT
(MONTHLY)
Licensee/Distributor: Bebe Moda, S.A. de C.V.
Store Name:___________________________________________________________________
City:_________________________________________________________________________
Country:______________________________________________________________________
Date Submitted:_______________________________________________________________
Month Reported:_______________________________________________________________
Please note if the figures are in U.S. dollars or local currency:
Net Sales (actual) Month Increase/Decrease($) Increase/Decrease(%) ------------------ ----- -------------------- -------------------- |
Please list reasons for increase or decrease from last year:__________________
EXHIBIT J
PRODUCTS
Women's apparel manufactured by bebe: namely, shirts, blouses, pants, jackets, coats, sweaters, suits and dresses.
EXHIBIT K
TERRITORY
Mexico, its territories and possessions
EXHIBIT 16.1
[WILSON MCCALL & ASSOCIATES LLP LETTERHEAD]
April 10, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
We have read the section entitled Change in Accountants in the Registration Statement on Form S-1 of bebe stores, inc. (formerly Babe, Inc.) to be filed with the Securities and Exchange Commission on or about April 10, 1998 and concur with the statements contained therein.
Very truly yours,
WILSON, McCALL & ASSOCIATES LLP
Formerly WILSON, McCALL & DAORO
/s/ Daniel R. McCall ------------------------------------ Daniel R. McCall |
DRW/cw
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
Board of Directors
bebe stores, inc.
We consent to the use in this Registration Statement of bebe stores, inc. on Form S-1 of our report dated April 14, 1998, appearing in the Prospectus, which is a part of this Registration Statement, and to the references to us under the headings "Selected Financial and Operating Data" and "Experts" in such Prospectus.
Our audits of the financial statements referred to in our aforementioned report also included the financial statement schedule of bebe stores, inc., listed in Item 16(b). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
Deloitte & Touche LLP
San Francisco, California
April 15, 1998
| ARTICLE 5 |
| PERIOD TYPE | 6 MOS | YEAR |
| FISCAL YEAR END | DEC 31 1997 | JUN 30 1997 |
| PERIOD END | DEC 31 1997 | JUN 30 1997 |
| CASH | 22112142 | 9191919 |
| SECURITIES | 0 | 80390 |
| RECEIVABLES | 95386 | 430903 |
| ALLOWANCES | 88970 | 76668 |
| INVENTORY | 9964480 | 9461698 |
| CURRENT ASSETS | 32922596 | 19626360 |
| PP&E | 14172234 | 12104516 |
| DEPRECIATION | 5804809 | 4565055 |
| TOTAL ASSETS | 43562597 | 29109294 |
| CURRENT LIABILITIES | 15916871 | 11351159 |
| BONDS | 0 | 0 |
| PREFERRED MANDATORY | 0 | 0 |
| PREFERRED | 0 | 0 |
| COMMON | 22640 | 22640 |
| OTHER SE | 25024212 | 15271943 |
| TOTAL LIABILITY AND EQUITY | 43562597 | 29109294 |
| SALES | 74775621 | 95086125 |
| TOTAL REVENUES | 74775621 | 95086125 |
| CGS | 36709630 | 53968849 |
| TOTAL COSTS | 22565227 | 32648788 |
| OTHER EXPENSES | 23318 | 114175 |
| LOSS PROVISION | 0 | 0 |
| INTEREST EXPENSE | 0 | 94809 |
| INCOME PRETAX | 15812787 | 8259504 |
| INCOME TAX | 6492432 | 3109985 |
| INCOME CONTINUING | 9320355 | 5149519 |
| DISCONTINUED | 0 | 0 |
| EXTRAORDINARY | 0 | 0 |
| CHANGES | 0 | 0 |
| NET INCOME | 9320355 | 5149519 |
| EPS PRIMARY | 0.41 | 0.11 |
| EPS DILUTED | 0.39 | 0.11 |