bebe stores, inc. (Form: 10-Q, Received: 05/10/2012 13:56:40)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

March 31, 2012 For the quarterly period ended March 31, 2012

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-24395

bebe stores, inc.

(Exact name of registrant as specified in its charter)

California

94-2450490

(State or Jurisdiction of

Incorporation or Organization)

(IRS Employer

Identification Number)

400 Valley Drive

Brisbane, California 94005

(Address of principal executive offices)

Telephone: (415) 715-3900

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes ¨ No x

The number of shares of the registrant’s common stock, par value $0.001 per share, outstanding as of April 30, 2012 was 84,335,141.

bebe stores, inc.

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		Page No.

PART I.	FINANCIAL INFORMATION

ITEM 1.	Condensed Consolidated Financial Statements

	Condensed Consolidated Balance Sheets as of March 31, 2012, July 2, 2011 and April 2, 2011		3

	Condensed Consolidated Statements of Operations for the three and nine months ended March 31, 2012 and April 2, 2011		4

	Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2012 and April 2, 2011		5

	Notes to Condensed Consolidated Financial Statements		6

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13

ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk		17

ITEM 4.	Controls and Procedures		17

PART II.	OTHER INFORMATION

ITEM 1.	Legal Proceedings		18

ITEM 1A.	Risk Factors		18

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds		21

ITEM 3.	Defaults Upon Senior Securities		21

ITEM 4.	Reserved		21

ITEM 5.	Other Information		21

ITEM 6.	Exhibits		21

SIGNATURE			22

EXHIBIT INDEX			23

PART I. FINANCIAL INFORMATION

ITEM 1.

Condensed Consolidated Financial Statements

bebe stores, inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(unaudited)


	As of March 31, 2012			As of July 2, 2011			As of April 2, 2011
Assets:
Current assets:
Cash and equivalents	$	113,239		$	95,177		$	88,251
Available for sale securities		79,926			96,371			85,519
Receivables (net of allowance of $1,255, $1,247 and $1,242)		6,196			5,222			4,658
Inventories, net		34,234			33,448			34,051
Deferred income taxes, net		4,930			4,930			6,595
Prepaid and other		12,807			14,207			20,376

Total current assets		251,332			249,355			239,450
Available for sale securities		64,410			64,964			73,747
Property and equipment, net		93,871			92,500			89,801
Deferred income taxes, net		32,534			29,440			27,125
Intangible assets		912			885			885
Other assets		4,646			3,978			3,787

Total assets	$	447,705		$	441,122		$	434,795

Liabilities and Shareholders’ Equity:
Current liabilities:
Accounts payable	$	17,783		$	17,684		$	17,663
Accrued liabilities		29,735			26,974			24,082

Total current liabilities		47,518			44,658			41,745
Deferred rent and other lease incentives		37,626			38,152			38,682
Uncertain tax positions		2,086			2,059			2,615

Total liabilities		87,230			84,869			83,042

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 135,000,000 shares at $0.001 par value per share; issued and outstanding 84,327,578, 84,096,558 and 84,063,596 shares		84			84			84
Additional paid-in capital		144,477			141,829			141,432
Accumulated other comprehensive loss		(879	)		(5	)		(1,474	)
Retained earnings		216,793			214,345			211,711

Total shareholders’ equity		360,475			356,253			351,753

Total liabilities and shareholders’ equity	$	447,705		$	441,122		$	434,795

See accompanying notes to condensed consolidated financial statements.

bebe stores, inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(unaudited)


	Three Months Ended						Nine Months Ended
	March 31, 2012			April 2, 2011			March 31, 2012		April 2, 2011
Net sales	$	121,035		$	109,490		$	399,294	$	360,956
Cost of sales, including production and occupancy		74,220			69,212			241,073		223,581

Gross margin		46,815			40,278			158,221		137,375
Selling, general and administrative expenses		47,196			45,026			144,165		139,329

Operating income (loss)		(381	)		(4,748	)		14,056		(1,954	)
Interest and other income, net		232			144			642		694

Income (loss) from continuing operations before income taxes		(149	)		(4,604	)		14,698		(1,260	)
Income tax provision (benefit)		65			(1,969	)		5,997		(579	)

Income (loss) from continuing operations, net of tax		(214	)		(2,635	)		8,701		(681	)
Loss from discontinued operations, net of tax		—			—			—		(5,835	)

Net income (loss)	$	(214	)	$	(2,635	)	$	8,701	$	(6,516	)

Basic per share amounts:
Income (loss) from continuing operations, net of tax	$	(0.00	)	$	(0.03	)	$	0.10	$	(0.01	)
Loss from discontinued operations, net of tax		—			—			—		(0.07	)

Net loss	$	(0.00	)	$	(0.03	)	$	0.10	$	(0.08	)

Diluted per share amounts:
Income (loss) from continuing operations, net of tax	$	(0.00	)	$	(0.03	)	$	0.10	$	(0.01	)
Loss from discontinued operations, net of tax		—			—			—		(0.07	)

Net income (loss)	$	(0.00	)	$	(0.03	)	$	0.10	$	(0.08	)

Basic weighted average shares outstanding		84,280			84,050			84,198		84,403
Diluted weighted average shares outstanding		84,280			84,050			84,443		84,403

See accompanying notes to condensed consolidated financial statements.

bebe stores, inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)


	Nine Months Ended
	March 31, 2012			April 2, 2011
Cash flows from operating activities:
Net income (loss)	$	8,701		$	(6,516	)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Non-cash compensation expense		1,627			2,200
Depreciation and amortization		15,098			16,971
Non-cash charge for asset impairment		391			1,060
Net gain on disposal of property		(481	)		(179	)
Tax benefit from exercise of stock options and awards		279			133
Excess tax benefit from exercise of stock options and awards		(120	)		(15	)
Deferred rent and other lease incentives		173			69
Deferred income taxes		(3,539	)		3,000
Changes in operating assets and liabilities:
Receivables		(217	)		1,123
Inventories		(826	)		(468	)
Prepaid expenses and other		600			(2,732	)
Accounts payable		(265	)		(4,596	)
Accrued liabilities		1,202			(3,388	)
Long term income taxes payable		27			(848	)

Net cash provided by operating activities		22,650			5,814

Cash flows from investing activities:
Purchase of property and equipment		(17,478	)		(6,987	)
Insurance proceeds from property and equipment		763			—
Purchase of intangible assets		(27	)		(885	)
Purchase of marketable securities		(69,750	)		(95,878	)
Proceeds from sales of investment securities		86,771			93,122

Net cash provided (used) by investing activities		279			(10,628	)

Cash flows from financing activities:
Net proceeds from issuance of common stock		1,165			252
Excess tax benefit from exercise of stock options and awards		120			15
Cash dividends paid		(6,318	)		(90,344	)
Purchase of common stock		—			(12,472	)

Net cash used by financing activities		(5,033	)		(102,549	)

Net increase (decrease) in cash and equivalents		17,896			(107,363	)
Effect of exchange rate changes on cash		166			924
Cash and equivalents:
Beginning of period		95,177			194,690

End of period	$	113,239		$	88,251

See accompanying notes to condensed consolidated financial statements.

bebe stores, inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

INTERIM FINANCIAL STATEMENTS

The accompanying condensed consolidated balance sheets of bebe stores, inc. (the “Company”) as of March 31, 2012, July 2, 2011 and April 2, 2011, the condensed consolidated statements of operations for the three and nine months ended March 31, 2012 and April 2, 2011 and the condensed consolidated statements of cash flows for the nine months ended March 31, 2012 and April 2, 2011 have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X, without audit. Accordingly, they do not include all of the information required by accounting principles generally accepted in the United States of America for annual financial statements. Therefore, these condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended July 2, 2011.

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary to present fairly the financial position at the balance sheet dates and the results of operations for the periods presented have been included. The condensed consolidated balance sheet at July 2, 2011, presented herein, was derived from the audited balance sheet included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 2, 2011.

The Company’s business is affected by the pattern of seasonality common to most retail apparel businesses. The results for the periods presented are not necessarily indicative of future financial results.

FISCAL YEAR

The Company’s fiscal year is a 52 or 53 week period, each period ending on the first Saturday after June 30. Fiscal years 2012 and 2011 each include 52 weeks.

The three month periods ended March 31, 2012 and April 2, 2011 each include 13 weeks. The nine month periods ended March 31, 2012 and April 2, 2011 each include 39 weeks.

RECENT ACCOUNTING PRONOUNCEMENTS

Fair Value

In May 2011, the FASB issued guidance to amend the accounting and disclosure requirements on fair value measurements. The new guidance limits the highest-and-best-use measure to nonfinancial assets, permits certain financial assets and liabilities with offsetting positions in market or counterparty credit risks to be measured on a net basis and provides guidance on the applicability of premiums and discounts. Additionally, the new guidance expands the disclosures on Level 3 inputs by requiring quantitative disclosure of the unobservable inputs and assumptions, as well as description of the valuation processes and the sensitivity of the fair value to changes in unobservable inputs. The new guidance will be effective for the Company beginning fiscal 2013, which is July 1, 2012. The Company does not anticipate a material impact on its financial statements upon adoption.

Other Comprehensive Income

In June 2011, the FASB issued an accounting standards update to revise the manner in which entities present comprehensive income in their financial statements. This guidance requires entities to present each component of net income along with total net income, each component of other comprehensive income (“OCI”) along with a total for OCI, and a total amount for comprehensive income, either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This accounting standards update is effective for fiscal years beginning after December 15, 2011. The Company will adopt the provisions of this accounting standards update in the first quarter of fiscal 2013.

DISCONTINUED OPERATION OF PH8 STORES

In the fourth quarter of fiscal 2010, the Company decided to discontinue operations of the PH8 division, allowing the Company to focus its efforts on improving bebe sales and profitability, expanding internationally and continuing to develop its 2b bebe business. The Company closed 24 PH8 stores in the first fiscal quarter of 2011 and during the second fiscal quarter of 2011, closed the remaining 25 PH8 stores. The results of the PH8 stores closed to date, net of income tax benefit, which consisted of 49 stores for the nine months ended March 31, 2012 and 65 stores for both the three and nine months ended April 2, 2011, have been presented as a discontinued operation in the accompanying consolidated statements of operations for all periods presented and are as follows:


	Three Months Ended				Nine Months Ended
	March 31, 2012		April 2, 2011		March 31, 2012		April 2, 2011
	(In thousands)
Net sales	$	—	$	—	$	—	$	7,850
Cost of sales, including production and occupancy		—		—		—		13,368

Gross margin		—		—		—		(5,518	)
Selling, general and administrative expenses		—		—		—		4,116

Loss from discontinued operations, before income tax benefit		—		—		—		(9,634	)
Add: tax benefit		—		—		—		(3,799	)

Loss from discontinued operations, net of tax benefit	$	—	$	—	$	—	$	(5,835	)

Costs associated with exit or disposal activities are recorded when the liability is incurred. As of March 31, 2012, the Company has a remaining reserve of $0.2 million for future costs associated with discontinued operations. This reserve has been included within the “Accrued liabilities” line in the condensed consolidated balance sheets.

INVESTMENTS

The Company’s investment portfolio consists of treasury bills, certificates of deposit and auction rate securities. The Company also holds a variety of interest bearing auction rate securities (“ARS”) consisting of federally insured student loan backed securities and insured municipal authority bonds. As of March 31, 2012, the Company’s ARS portfolio totaled approximately $64.4 million classified as available for sale securities, net of a temporary impairment charge of $9.6 million. As of that date, the Company’s ARS portfolio included approximately 95% federally insured student loan backed securities and 5% municipal authority bonds and consisted of approximately 30% AAA rated investments, 24% AA rated investments, 30% A rated investments, 7% BBB rated investments and 9% CCC rated investments. As of July 2, 2011, the Company’s ARS consisted of 42% AAA rated investments, 7% AA rated investments, 35% A rated investments, 7% BBB rated investments and 9% CCC rated investments. These ARS investments are intended to provide liquidity via an auction process that resets the applicable interest rate at predetermined calendar intervals, allowing investors to either roll over their holdings or gain immediate liquidity by selling such interests at par. The uncertainties in the credit markets that began in February 2008 have affected the Company’s holdings in ARS investments and auctions for the Company’s investments in these securities have failed to settle on their respective settlement dates. Historically the fair value of ARS investments had approximated par value due to the frequent resets through the auction process. While the Company continues to earn interest on its ARS investments at the maximum contractual rate, these investments are not currently trading actively and therefore do not currently have a readily determinable market value. Accordingly, the estimated fair value of ARS no longer approximates par value. Consequently, the investments are not currently liquid, and the Company will not be able to access these funds until a future auction of these investments is successful, the issuer redeems the securities or at maturity. Maturity dates for these ARS investments range from 2016 to 2044 with principal distributions occurring on certain securities prior to maturity. To date, principal distributions and maturities of the securities held by the Company have all been at par value. During the nine months ended March 31, 2012, $1.0 million of ARS were settled at par.

The Company reviews its impairments in accordance with guidance issued by the FASB and SEC in order to determine the classification of the impairment as “temporary” or “other-than-temporary”. A temporary impairment charge results in an unrealized loss being recorded in the accumulated other comprehensive income component of shareholders’ equity. Such an unrealized loss does not affect net income for the applicable accounting period. An other-than-temporary impairment charge is recorded as a loss in the condensed consolidated statements of operations for the applicable accounting period. When evaluating the investments for other-than-temporary impairment, the Company estimates the expected cash flows of the underlying collateral by reviewing factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and the Company’s intent to sell, or whether it is more likely than not it will be required to sell, the investment before recovery of the investment’s amortized cost basis. The Company has not recorded any impairment loss from its available for sale investments as other-than-temporary based on such analysis.

The valuation of the Company’s investment portfolio is subject to uncertainties that are difficult to predict. Factors that may impact its valuation include changes to credit ratings of the securities as well as to the underlying assets supporting those securities, rates of default of the underlying assets, underlying collateral value, discount rates and ongoing strength and quality of market credit and liquidity.

The following is a summary of our available for sale securities:


	As of March 31, 2012
	Cost		Unrealized Losses Less Than 12 Months		Unrealized Losses 12 Months or Greater			Estimated Fair Value
	(In thousands)
Short term treasury bills	$	56,952	$	—	$	—		$	56,952
Short term certificates of deposit		22,974		—		—			22,974

		79,926		—		—			79,926
Long term auction rate securities		74,000		—		(9,590	)		64,410

	As of July 2, 2011
	Cost		Unrealized Losses Less Than 12 Months		Unrealized Losses 12 Months or Greater			Estimated Fair Value
	(in thousands)
Short term treasury bills	$	81,929	$	—	$	—		$	81,929
Short term certificates of deposit		14,442		—		—			14,442

		96,371		—		—			96,371
Long term auction rate securities		75,000		—		(10,036	)		64,964

	As of April 2, 2011
	Cost		Unrealized Losses Less Than 12 Months		Unrealized Losses 12 Months or Greater			Estimated Fair Value
	(In thousands)
Short term treasury bills	$	71,945	$	—	$	—		$	71,945
Short term certificates of deposit		13,574		—		—			13,574

		85,519		—		—			85,519
Long term auction rate securities		85,325		—		(11,578	)		73,747

FAIR VALUE MEASUREMENTS

The FASB has established a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

As of March 31, 2012, the Company held financial instruments that are measured at fair value on a recurring basis. These included cash equivalents and available for sale securities. Cash equivalents consist of money market funds. Short term available for sale securities consist of government treasury bills and certificates of deposit. Long term available for sale securities consist of ARS. These securities consist of federally insured student loan backed securities and insured municipal authority bonds.

The Company determined the estimated fair value of its investment in ARS as of March 31, 2012 using a discounted cash flow model. The assumptions used in preparing the discounted cash flow model include estimates for liquidity, interest rates, timing, credit ratings, credit wrap and amount of cash flows and expected holding periods of the ARS.

The following items are measured at fair value on a recurring basis as of March 31, 2012:


Description	March 31, 2012		Using Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
			(Level 1)		(Level 2)		(Level 3)
	Fair value measurements at reporting date
	(In thousands)
Cash equivalents	$	46,385	$	46,385	$	—	$	—
Current available for sale securities		79,926		56,952		22,974		—
Non-current available for sale securities		64,410		—		—		64,410

Total	$	190,721	$	103,337	$	22,974	$	64,410

The following items are measured at fair value on a recurring basis as of April 2, 2011:


Description	April 2, 2011		Using Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
			(Level 1)		(Level 2)		(Level 3)
	Fair value measurements at reporting date
	(In thousands)
Cash equivalents	$	53,654	$	53,654	$	—	$	—
Current available for sale securities		85,519		85,519		—		—
Non-current available for sale securities		73,747		—		—		73,747

Total	$	212,920	$	139,173	$	—	$	73,747

Beginning in the quarter ended March 31, 2012, certificates of deposit previously classified as Level 1 are now being classified as Level 2. As discussed above, an impairment charge has been recorded that reduces the carrying amount of the applicable non-current assets of $74.0 million to their fair value of $64.4 million as of March 31, 2012. The following table presents the Company’s activity for assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended March 31, 2012:


	Three Months Ended March 31, 2012		Nine Months Ended March 31, 2012
	(In thousands)
Balance at beginning of period	$	64,047	$	64,964
Total gains or (losses) (realized or unrealized)
Included in net loss		—		—
Included in accumulated other comprehensive loss		363		446
Settlements		—		(1,000	)

Balance at end of period	$	64,410	$	64,410

Non-Financial Assets:

The Company measures certain non-financial assets and liabilities, including long-lived assets, at fair value on a non-recurring basis. During the 13 weeks ended March 31, 2012 and April 2, 2011, the Company recorded no impairment charges related to under-performing stores in its continuing operations. During the 39 weeks ended March 31, 2012 and April 2, 2011, the Company recorded impairment charges of approximately $0.4 million and $1.1 million, respectively, related to under-performing stores in its continuing operations. The fair market value of these assets was determined using the income approach and Level 3 inputs, which required management to make significant estimates about future operating plans and projected cash flows. Management estimates the amount and timing of future cash flows based on its experience and knowledge of the retail market in which each store operates. This impairment charge is included in selling, general and administrative expenses (“SG&A”) in the accompanying condensed consolidated statements of operations. The Company was not required to measure any other significant non-financial assets and liabilities at fair value.

INVENTORIES

The Company’s inventories consisted of:


	As of
	March 31, 2012		July 2, 2011		April 2, 2011
	(In thousands)
Raw materials	$	1,050	$	1,622	$	658
Merchandise available for sale		33,184		31,826		33,393

Inventories, net	$	34,234	$	33,448	$	34,051

CREDIT FACILITIES

The Company has an unsecured commercial line of credit agreement which provides for borrowings and issuance of letters of credit of up to a combined total of $25.0 million and expires on May 15, 2015. This agreement was renewed during the third quarter of fiscal 2012. The outstanding balance bears interest at either the bank’s reference rate (which was 3.25% as of March 31, 2012) or the LIBOR rate (which was 0.24% as of March 31, 2012) plus 1.75 percentage points. As of March 31, 2012, there were no outstanding cash borrowings or trade letters of credit outstanding and $3.0 million of an outstanding stand-by letter of credit. To date, no beneficiary has drawn upon the stand-by letter of credit.

This credit facility requires the Company to maintain a $2.5 million compensating balance and to comply with certain covenants, including amounts for minimum tangible net worth, unencumbered liquid assets and profitability, and certain restrictions on making loans and investments. As of March 31, 2012, the Company was in compliance with all covenants.

UNCERTAIN TAX POSITIONS

During the first quarter of fiscal 2011, the New York State Department of Taxation and Finance completed its review of the Company’s fiscal 2005 through 2007 state income tax returns. There was no material impact on the Company’s effective tax rate and tax expense for the quarter. The gross unrecognized tax benefits decreased approximately $0.7 million during the first quarter of 2011 primarily due to this event. During the third quarter of fiscal 2012, $0.2 million have been released due to expiration of statute of limitations. The Company does not anticipate any significant changes to the unrecognized tax benefits over the next twelve month period.

COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) consists of net income (loss) and other comprehensive income (income, expenses, gains and losses that bypass the income statement and are reported directly as a separate component of equity). The Company’s comprehensive income (loss) consists of net income (loss), gain (loss) on available for sale securities and foreign currency translation adjustments for all periods presented.


	Three Months Ended						Nine Months Ended
	March 31, 2012			April 2, 2011			March 31, 2012			April 2, 2011
	(In thousands)
Net income (loss)	$	(214	)	$	(2,635	)	$	8,701		$	(6,516	)
Gain on available for sale securities		363			586			446			1,483
Accumulated translation adjustments		657			957			(1,320	)		3,519

Total comprehensive income (loss)	$	806		$	(1,092	)	$	7,827		$	(1,514	)

EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is computed as net earnings (loss) divided by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share reflects the potential dilution that could occur from common shares issuable through the exercise of dilutive stock options.

The following is a reconciliation of the number of shares used in the basic and diluted earnings (loss) per share computations:


	Three Months Ended				Nine Months Ended
	March 31, 2012		April 2, 2011		March 31, 2012		April 2, 2011
	(In thousands)
Basic weighted average number of shares outstanding		84,280		84,050		84,198		84,403
Incremental shares from the assumed issuance of stock options		—		—		245		—

Diluted weighted average number of shares outstanding		84,280		84,050		84,443		84,403

Excluded from the computation of the number of diluted weighted average shares outstanding were options to purchase 1,820,788 and 4,327,302 shares of common stock for the three months ended March 31, 2012 and April 2, 2011, respectively, and 2,739,179 and 4,268,503 for the nine months ended March 31, 2012 and April 2, 2011, respectively, which would have been anti-dilutive.

COMMON STOCK PURCHASES

In October 2008, the board of directors authorized a program to repurchase up to $30 million of the Company’s common stock. The Company intends, from time to time, as business conditions warrant, to purchase stock in the open market or through private transactions. Purchases may be increased, decreased or discontinued at any time without prior notice. The plan does not obligate the Company to repurchase any specific number of shares and may be suspended at any time at management’s discretion. As of March 31, 2012, the Company has repurchased the full authorization of $30 million of shares.

STOCK BASED COMPENSATION

The following table summarizes the stock based compensation expense recognized under the Company’s equity incentive plan during the three and nine months ended March 31, 2012 and April 2, 2011:


	Three Months Ended				Nine Months Ended
	March 31, 2012		April 2, 2011		March 31, 2012		April 2, 2011
	(In thousands)
Stock options	$	454	$	437	$	1,434	$	1,976
Nonvested stock awards/units		84		104		193		224

Total stock based compensation expense	$	538	$	541	$	1,627	$	2,200

Unrecognized compensation cost related to nonvested stock options and nonvested stock awards/units totaled approximately $2.9 million and $0.2 million, respectively, as of March 31, 2012. This cost is expected to be recognized over a weighted average period of 3.1 years. The weighted average fair value of stock options at their grant date during the three months ended March 31, 2012 and April 2, 2011 was $3.02 and $2.09, respectively. For the nine month periods ended March 31, 2012 and April 2, 2011, the weighted average fair values of stock options at their grant date were $2.78 and $2.28, respectively.

LEGAL MATTERS

As of the date of this filing, the Company is involved in ongoing legal proceedings as described below.

A former employee sued the Company in a complaint filed July 27, 2006 in the Superior Court of California, San Mateo County (case No. CIV 456550) alleging a failure to pay all wages, failure to pay overtime wages, failure to pay minimum wages, failure to provide meal periods, violation of Labor Code §450, violation of Labor Code §2802 and California Code of Regulations §11040(9)(A), statutory wage violations (late payment of wages), unlawful business practices under Business and Professions Code §16720 and §17200, conversion of wages and violation of Civil Code §52.1. The plaintiff purports to bring the action also on behalf of current and former California bebe employees who are similarly situated. The lawsuit seeks compensatory, statutory, punitive, restitution and injunctive relief. In September 2011, the Court certified a class of store managers who allege they were required to buy and wear our product as a condition of employment and denied certification relating to claims of missed meal periods and rest breaks. The Court has directed for a trial on only the claim that the employees were required to buy and wear our product which will likely be set for summer or fall, 2012.

A former employee sued the Company in a complaint filed a second amended complaint on or about September 7, 2010 in the Superior Court of California, Los Angeles County (Case No. BC429140) alleging the Company failed to provide adequate disclosure of its commission policy and wrongfully reduced and delayed commission payments. The plaintiff purports to bring the action also on behalf of current and former California bebe employees who are similarly situation. The lawsuit seeks compensatory, statutory, punitive, restitution and injunctive relief. Due to reassignment of the case to another court, the company’s pending summary judgment motion and the trial date have been postponed.

The Company is also involved in various other legal proceedings arising in the normal course of business. None of these matters nor the matters listed above are expected, individually or in the aggregate, to have a material adverse effect on its business, financial condition or results of operations.

The Company intends to defend itself vigorously against each of these claims. However, the results of any litigation are inherently uncertain. The Company cannot assure you that it will be able to successfully defend itself in these lawsuits. Where required, and/or otherwise appropriate, the Company has recorded an estimate of potential liabilities that it believes is reasonable. Any estimates are revised as further information becomes available.

SUBSEQUENT EVENTS

In the fourth quarter of fiscal 2012, the Company purchased its distribution center in Benicia, California for the amount of $18 million. The current annual minimum rent expense is $0.8 million.

ITEM 2.

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, which involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements. Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” “thinks,” and similar expressions are forward-looking statements. Forward-looking statements include statements about our expected results of operations, capital expenditures and store openings. Although we believe that these statements are based upon reasonable assumptions, we cannot assure you that our goals will be achieved. These forward-looking statements are made as of the date of this Form 10-Q, and we assume no obligation to update or revise them or provide reasons why actual results may differ. Factors that might cause such a difference include, but are not limited to, our ability to respond to changing fashion trends, obtain raw materials and find manufacturing facilities, attract and retain key management personnel, develop new concepts, successfully open future stores, successfully manage our online business, maintain and protect information technology, respond effectively to competitive pressures in the apparel industry and adverse economic conditions and protect our intellectual property as well as declines in comparable store sales performance, changes in the level of consumer spending or preferences in apparel and/or other factors discussed in “Risk Factors” and elsewhere in this Form 10-Q.

OVERVIEW

We design, develop and produce a distinctive line of contemporary women’s apparel and accessories. While we attract a broad audience, our target customer is a 21 to 34-year-old woman who seeks current fashion trends to suit her lifestyle. The “bebe look” appeals to a hip, sexy, sophisticated, body-conscious woman who takes pride in her appearance. The bebe customer expects value in the form of current fashion and high quality at a competitive price.

Our distinctive product offering includes a full range of separates, tops, sweaters, dresses, active wear and accessories in the following lifestyle categories: career, evening, casual and active. We design and develop the majority of our merchandise in-house, which is manufactured to our specifications. The remainder of our merchandise is sourced directly from third-party manufacturers.

We market our products under the bebe, BEBE SPORT, bbsp and 2b bebe brand names through our 251 retail stores, of which 207 are bebe stores, including an on-line store at www.bebe.com, and 44 are 2b bebe stores, including an on-line store at www.2bstores.com, as of March 31, 2012. These stores are located in 36 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Canada and Japan. In addition, our licensees operate 110 international point-of-sale locations in 19 countries as of March 31, 2012. During the nine months ended March 31, 2012, we opened 2 bebe stores and 4 2b bebe stores, as well as migrated our 2b product offerings from www.bebe.com to www.2bstores.com. During the remainder of fiscal 2012, we expect to open up to 3 2b bebe stores; our international licensees are also anticipated to grow by up to 5 point-of-sale locations. Also during the last quarter of this fiscal year we entered into a termination agreement with our bebe.com third-party service provider. We anticipate migrating to a company managed platform in the first quarter of fiscal 2013. In addition, as part of our long-term strategy to manage store distribution as well as direct to consumer fulfillment for both bebe.com and 2bstores.com, in the fourth quarter of fiscal 2012, we have purchased our existing distribution facility in Benicia, California for $18 million. We believe both of these decisions will support our long-term growth objectives across our multi-channel platform.

bebe stores. We were founded by Manny Mashouf, our Chief Executive Officer and Chairman of the Board. We opened our first store in San Francisco, California in 1976, which was also the year we incorporated. bebe.com is our bebe on-line retail store and an extension of the bebe store experience that provides a complete assortment of bebe and BEBE SPORT merchandise and is used as a vehicle to communicate with our clients.

PH8. In the fourth quarter of fiscal 2010, we decided to discontinue operations of our PH8 division, allowing us to focus our efforts on improving bebe sales and profitability, expanding internationally and continuing to develop our 2b bebe business. We closed all of our 49 PH8 stores during fiscal 2011, converting one store to a 2b bebe store. We have recorded the net costs associated with the disposition of these stores during fiscal 2011 as the stores closed and the related assets are disposed of. Prior year results for these stores have been classified within discontinued operations on our consolidated statements of operations.

2b bebe stores . As of March 31, 2012, we operated 26 2b bebe stores and 18 stores operating in the outlet store design under the 2b bebe name. The stores operating in the 2b bebe design sell bebe logo, 2b bebe merchandise and a small percentage of bebe retail markdowns. The stores operating in the outlet design sell bebe logo, 2b bebe merchandise and a larger percentage of bebe retail markdowns. 2bstores.com is our 2b bebe on-line retail store and an extension of the 2b bebe store experience that provides a complete assortment of 2b bebe merchandise and is also used as a vehicle to communicate with our clients.

CRITICAL ACCOUNTING POLICIES

Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America.

The preparation of these financial statements requires the appropriate application of certain accounting policies, many of which require us to make estimates and assumptions about future events and their impact on amounts reported in our financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could be material to the financial statements. We believe our application of accounting policies, and the estimates inherently required therein, are reasonable. Our most critical accounting policies are those related to revenue recognition, stock based compensation, inventories, marketable securities, impairment of long lived assets and uncertain tax positions. We continually evaluate these accounting policies and estimates, and we make adjustments when facts and circumstances dictate a change. Our accounting policies are described in Note 1 to the consolidated financial statements in our annual report on Form 10-K for the fiscal year ended July 2, 2011. This discussion and analysis should be read in conjunction with such discussion and with our condensed consolidated financial statements and related notes included in Part 1, Item 1 of this quarterly report.

RESULTS OF OPERATIONS

Our fiscal year is a 52 or 53 week period, each period ending on the first Saturday after June 30. Fiscal years 2012 and 2011 each include 52 weeks. The three months ended March 31, 2012 and April 2, 2011 each include 13 weeks. The nine months ended March 31, 2012 and April 2, 2011 each include 39 weeks.

The following table sets forth certain financial data as a percentage of net sales for the periods indicated:


	Three Months Ended						Nine Months Ended
	March 31, 2012			April 2, 2011			March 31, 2012			April 2, 2011
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales, including production and occupancy (1)		61.3			63.2			60.4			61.9

Gross margin		38.7			36.8			39.6			38.1
Selling, general and administrative expenses (2)		39.0			41.1			36.1			38.6

Operating income (loss)		(0.3	)		(4.3	)		3.5			(0.5	)
Interest and other income, net		0.2			0.1			0.2			0.2

Income (loss) from continuing operations before income taxes		(0.1	)		(4.2	)		3.7			(0.3	)
Provision (benefit) for income taxes		0.1			(1.8	)		1.5			(0.1	)

Income (loss) from continuing operations, net of tax		(0.2	)		(2.4	)		2.2			(0.2	)
Loss from discontinued operations, net of tax		—			—			—			(1.6	)

Net income (loss)		(0.2	)%		(2.4	)%		2.2	%		(1.8	)%

(1)	Cost of sales includes the cost of merchandise, occupancy costs, distribution center costs and production costs.

(2)	Selling, general and administrative expenses primarily consist of non-occupancy store costs, corporate overhead and advertising costs.

Net Sales. Net sales from continuing operations increased to $121.0 million during the three months ended March 31, 2012 from $109.5 million for the comparable period of the prior year, an increase of $11.5 million, or 10.5%. The increase in net sales was primarily due to a 7.2% increase in comparable store sales driven by better customer acceptance of our bebe and 2b merchandise, as well as a $3.1 million increase in wholesale sales to our international licensees.

For the nine months ended March 31, 2012, net sales from continuing operations increased to $399.3 million from $361.0 million for the comparable period of the prior year, an increase of $38.3 million, or 10.6%. The increase in net sales was primarily due to an 8.1% increase in comparable store sales driven by better customer acceptance of our bebe and 2b merchandise, as well as a $9.4 million increase in wholesale sales to our international licensees.


	Three Months Ended						Nine Months Ended
	March 31, 2012			April 2, 2011			March 31, 2012			April 2, 2011
Net sales (In thousands)	$	121,035		$	109,490		$	399,294		$	360,956
Total net sales increase percentage		10.5	%		0.6	%		10.6	%		0.9	%
Comparable store increase (decrease) percentage (1)		7.2	%		(0.7	)%		8.1	%		(1.8	)%
Net sales per average square foot (2)	$	95		$	108		$	325		$	339
Square footage at end of period (In thousands)		998			998			998			998
Number of store locations:
Beginning of period		256			253			253			298
New store locations		3			2			8			6
Closed store locations		8			6			10			55
Number of stores open at end of period		251			249			251			249

(1)

We calculate comparable store sales by including the net sales of stores that have been open at least one year. Therefore, a store is included in the comparable store sales base beginning with its thirteenth month. Stores that have been expanded or remodeled by 15 percent or more or have been permanently relocated are excluded from the comparable store sales base. In addition, we calculate comparable store sales using a same day sales comparison. Beginning in the first quarter of fiscal 2012, we are reporting comparable store sales results inclusive of our on-line stores. We believe that given the similar nature and process of inventory planning, allocation and return policy for the on-line stores and all other retail stores, the inclusion of the on-line stores is a more meaningful way of reporting our comparable store sales results. In addition, we have been implementing cross-channel marketing initiatives, which benefit all retail sales, including our on-line stores. The inclusion of the on-line stores increased the comparable store percentage by 4.2% and 3.4% for the three and nine month periods ended March 31, 2012.

(2)	We calculate net sales per average square foot using net store sales less on-line net sales and monthly average store square footage.

Gross Margin. Gross margin from continuing operations increased to $46.8 million during the three months ended March 31, 2012 from $40.3 million for the comparable period of the prior year, an increase of $6.5 million, or 16.2%. As a percentage of net sales, gross margin increased to 38.7% for the three months ended March 31, 2012 from 36.8% in the comparable period of the prior year. The increase in gross margin as a percentage of net sales was primarily due to positive occupancy leverage and an increase in merchandise margin.

For the nine months ended March 31, 2012, gross margin from continuing operations increased to $158.2 million from $137.4 million for the comparable period of the prior year, an increase of $20.8 million, or 15.2%. As a percentage of net sales, gross margin from continuing operations increased to 39.6% for the nine months ended

March 31, 2012 from 38.1% in the comparable period of the prior year. The increase in gross margin as a percentage of net sales was primarily due to positive occupancy leverage and an increase in merchandise margin, partially offset by an increase in reserves and write-offs. The increase in merchandise margin was fueled by lower markdowns, partially offset by the growth of 2b and international wholesale sales which were at a lower merchandise margin.

Selling, General and Administrative Expenses. Selling, general and administrative expenses from continuing operations increased to $47.2 million during the three months ended March 31, 2012 from $45.0 million for the comparable period of the prior year, an increase of $2.2 million, or 4.8 %. As a percentage of net sales, selling, general and administrative expenses decreased to 39.0% during the three months ended March 31, 2012 from 41.1% in the comparable period of the prior year. The dollar increase over the prior year was primarily due to higher compensation expense.

For the nine months ended March 31, 2012, selling, general and administrative expenses from continuing operations increased to $144.2 million from $139.3 million for the comparable period of the prior year, an increase of $4.8 million, or 3.5%. As a percentage of net sales, selling, general and administrative expenses decreased to 36.1% from 38.6% in the comparable period of the prior year. The dollar increase over the prior year was primarily due to higher compensation expenses and advertising cost partially offset by insurance and settlement proceeds combined with lower impairment and store closure costs.

Provision for Income Taxes. Our effective tax rate from continuing operations is 43.8% expense for the three months ended March 31, 2012 from 42.8% benefit for the comparable period in the prior year. The tax expense of $65 thousand for the current year third quarter was unfavorably affected by discrete items incurred during the quarter.

For the nine months ended March 31, 2012, our effective tax rate from continuing operations decreased to 40.8% expense from 46.0% benefit for the comparable period for the prior year. The effective tax rate varies due to fluctuation in the various discrete items year over year.

Discontinued Operations . In the fourth quarter of fiscal 2010, we decided to discontinue operations of the PH8 division, allowing us to focus our efforts on improving bebe sales and profitability, expanding internationally and continuing to develop our 2b bebe business. We closed 24 PH8 stores in the first fiscal quarter of 2011 and during the second fiscal quarter of 2011, closed the remaining 25 PH8 stores. The results of the PH8 stores closed to date, net of income tax benefit, which consisted of 49 stores for the three and nine months ending April 2, 2011 have been presented as a discontinued operation in the accompanying consolidated statements of operations for all periods presented and are as follows:


	Three Months Ended				Nine Months Ended
	March 31, 2012		April 2, 2011		March 31, 2012		April 2, 2011
	(In thousands)
Net sales	$	—	$	—	$	—	$	7,850
Cost of sales, including production and occupancy		—		—		—		13,368

Gross margin		—		—		—		(5,518	)
Selling, general and administrative expenses		—		—		—		4,116

Loss from discontinued operations, before income tax benefit		—		—		—		(9,634	)
Income tax benefit		—		—		—		(3,799	)

Loss from discontinued operations, net of tax benefit	$	—	$	—	$	—	$	(5,835	)

SEASONALITY OF BUSINESS AND QUARTERLY RESULTS

Our business varies with general seasonal trends that are characteristic of the retail and apparel industries. As a result, our typical store generates a higher percentage of our annual net sales and profitability in the second quarter of our fiscal year, which includes the holiday selling season, compared to the other quarters of our fiscal year. If for any reason our sales were below seasonal norms during the second quarter of our fiscal year, our annual operating results would be negatively impacted. Because of the seasonality of our business, results for any quarter are not necessarily indicative of results that may be achieved for a full fiscal year.

LIQUIDITY AND CAPITAL RESOURCES

Our working capital requirements vary widely throughout the year and generally peak during the first and second fiscal quarters. As of March 31, 2012, we had approximately $257.6 million of cash and equivalents and investments on hand of which $113.2 million were cash and equivalents, $57.0 million were invested in government treasury bills, $23.0 million were invested in certificates of deposit and $64.4 million, net of temporary impairment charges of $9.6 million, were invested in auction rate securities (“ARS”). We do not anticipate the lack of liquidity in the ARS to impact our ability to fund our operations in the foreseeable future and believe we have sufficient cash and equivalents to fund ongoing operations. In addition, we have a revolving line of credit, under which we may borrow or issue letters of credit up to a combined total of $25 million. As of March 31, 2012, there were no cash borrowings or trade letters of credit outstanding under the line of credit, and a standby letter of credit outstanding that totaled $3.0 million. This credit facility requires us to maintain a $2.5 million compensating balance and to comply with certain covenants, including amounts for minimum tangible net worth, unencumbered liquid assets and profitability, and certain restrictions on making loans and investments. As of March 31, 2012, we were in compliance with all covenants.

As of March 31, 2012, we had cash and equivalents of $113.2 million held in accounts managed by third-party financial institutions consisting of invested cash and cash in our operating accounts. The invested cash is invested in interest bearing funds managed by third-party financial institutions. These funds invest in direct obligations of the government of the United States. To date, we have experienced no loss or lack of access to our invested cash or equivalents; however, we can provide no assurances that access to our invested cash and equivalents will not be impacted by adverse conditions in the financial markets.

We hold our operating and invested cash and cash in accounts that are with third-party financial institutions. These balances exceed the Federal Deposit Insurance Corporation insurance limits. While we monitor daily the cash balances in our operating accounts and adjust the cash balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail or could be subject to other adverse conditions in the financial markets. To date, we have experienced no loss or lack of access to invested cash or cash in our operating accounts.

Net cash provided by operating activities for the nine months ended March 31, 2012 was $22.7 million versus $5.8 million for the nine months ended April 2, 2011. The increase of $16.9 million from the comparable period was due to an overall increase in net income of $15.2 million over the prior period, a decrease in our

prepaid income tax balance over the prior year primarily related to income tax paid in the current period, as well as an increase in accounts payable related to the timing of payments. These increases have been partially offset by non-cash decreases to deferred income tax assets due to rule changes and our treatment of prior period deferred tax balances.

Net cash provided by investing activities for the nine months ended March 31, 2012 was $0.3 million versus $10.6 million used for investing activities for the nine months ended April 2, 2011. The increase of $10.9 million versus the prior year comparable period was primarily due to proceeds received from sales of short term available for sale securities, partially offset by increased capital expenditures over the prior year. We expect that total capital expenditures will be approximately $45 million in fiscal 2012. The total capital expenditures for the year include the purchase of our distribution center in Benicia, California completed in the fourth quarter of fiscal 2012 for $18 million.

Net cash used by financing activities was $5.0 million for the nine months ended March 31, 2012 versus $102.5 million for the nine months ended April 2, 2011. The decrease of $97.5 million from the prior year comparable period was primarily due to the payout of the special $1 per share dividend declared in the fourth quarter of fiscal 2010 and the increased purchases of our common stock made during the prior year period.

We hold a variety of interest bearing ARS consisting of federally insured student loan backed securities and insured municipal authority bonds. As of March 31, 2012, our ARS portfolio totaled approximately $64.4 million classified as available for sale securities. As of that date, our ARS portfolio included approximately 95% federally insured student loan backed securities and 5% municipal authority bonds and consisted of approximately 30% AAA rated investments, 24% AA rated investments, 30% A rated investments, 7% BBB rated investments and 9% CCC rated investments. As of July 2, 2011, our ARS portfolio consisted of 42% AAA rated investments, 7% AA rated investments, 35% A rated investments, 7% BBB rated investments and 9% CCC rated investments. These ARS investments are intended to provide liquidity via an auction process that resets the applicable interest rate at predetermined calendar intervals, allowing investors to either roll over their holdings or gain immediate liquidity by selling such interests at par. The uncertainties in the credit markets that began in February 2008 have affected our holdings in ARS investments and auctions for our investments in these securities have failed to settle on their respective settlement dates. Historically the fair value of ARS investments had approximated par value due to the frequent resets through the auction process. While we continue to earn interest on our ARS investments at the maximum contractual rate, these investments are not currently trading and therefore do not currently have a readily determinable market value. Accordingly, the estimated fair value of ARS no longer approximates par value. Consequently, the investments are not currently liquid, and we will not be able to access these funds until a future auction of these investments is successful, the issuer redeems the securities, or at maturity. Maturity dates for these ARS investments range from 2016 to 2044 with principal distributions occurring on certain securities prior to maturity. During the nine months ended March 31, 2012, $1.0 million of ARS were settled at par.

We also hold short-term available for sale securities totaling $79.9 million at March 31, 2012 that consist of treasury bills and certificates of deposit.

In October 2008, our board of directors authorized a program to repurchase up to $30 million of our common stock. No shares were repurchased during the nine months ended March 31, 2012. During the nine months ended April 2, 2011, we repurchased 2,137,344 shares at an average price per share of $5.84. We have repurchased the full authorization of $30 million of shares, but may repurchase additional shares in the future.

We believe that our cash and cash equivalents on hand will be sufficient to meet our capital and operating requirements for at least the next twelve months. Our future capital requirements, however, will depend on numerous factors, including without limitation, liquidity of our auction rate securities, the size and number of new and expanded stores and/or store concepts, investment costs for management information systems, potential acquisitions and/or joint ventures, repurchase of stock and future results of operations.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks, which include changes in U.S. interest rates and, to a lesser extent, foreign exchange rates. We do not engage in financial transactions for trading or speculative purposes.

Interest Rate Risk

We currently maintain a portfolio of variable interest rate investments consisting of cash equivalents, government treasury bills, guaranteed investment certificates and both short-term and long-term investments consisting of ARS. According to our investment policy, we may invest in taxable and tax-exempt instruments. In addition, the policy establishes limits on credit quality, maturity, issuer and type of instrument. Marketable securities are classified as “trading” or “available for sale”. We do not use derivative financial instruments in our investment portfolio.

All highly liquid investments with a maturity of three months or less at the date of purchase are considered to be cash equivalents. Investments are considered short-term available for sale securities if the original maturity is between three months and twelve months, or long term investments if the original maturity is greater than twelve months. The uncertainties in the credit markets that began in February 2008 have affected our holdings in ARS investments and auctions for our investments in these securities have failed to settle on their respective settlement dates. Historically the fair value of ARS investments had approximated par value due to the frequent resets through the auction process. While we continue to earn interest on our ARS investments at the maximum contractual rate, these investments are not currently trading and therefore do not currently have a readily determinable market value. Accordingly, the estimated fair value of ARS no longer approximates par value. We determined the estimated fair value of our investment in ARS as of March 31, 2012 using a discounted cash flow model to estimate the fair value of our investments in ARS. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, timing and amount of cash flows and expected holding periods of the ARS. We have modified our investment strategy and increased our investments in more liquid money market investments.

The following table lists our cash, cash equivalents and investments as of March 31, 2012:


	Fair Value
	(Dollars in thousands)
Cash	$	66,854
Weighted average interest rate		0.00	%
Cash equivalents	$	46,385
Weighted average interest rate		0.10	%
Current available for sale securities	$	79,926
Weighted average interest rate		0.44	%
Non-current available for sale securities	$	64,410
Weighted average interest rate		0.39	%
Total	$	257,575

The interest payable on outstanding cash borrowings under our bank line of credit is based on variable interest rates and is therefore affected by changes in market interest rates. If interest rates rise significantly, our results from operations and cash flows would not be materially affected since we have no outstanding borrowings.

Foreign Currency Risks

We enter into a significant amount of purchase obligations outside of the United States, substantially all of which are negotiated and settled in U.S. Dollars and, therefore, have only minimal exposure to foreign currency exchange risks. We also operate a subsidiary for which the functional currency is the Canadian Dollar. We translate assets and liabilities of Canada’s operations into U.S. dollars at month-end rates, while we translate income and expenses at the weighted average exchange rates for the month. We record the related translation adjustments in accumulated other comprehensive income as a separate component of shareholders’ equity. Fluctuations in exchange rates therefore impact our financial condition and results of operations, as reported in U.S. Dollars. We do not hedge against foreign currency risks and believe that foreign currency exchange risk is immaterial.

ITEM 4.

CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report at the reasonable assurance level.

There has been no change in our internal control over financial reporting during the quarter ended March 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

See the Legal Matters section of the Notes to the Condensed Consolidated Financial Statements for a discussion of legal proceedings.

ITEM 1A.

RISK FACTORS

Our past performance may not be a reliable indicator of future performance because actual future results and trends may differ materially depending on a variety of factors, including, but not limited to, the risks and uncertainties discussed below. In addition, historical trends should not be used to anticipate results or trends in future periods.

Factors that might cause our actual results to differ materially from the forward looking statements discussed elsewhere in this report, as well as affect our ability to achieve our financial and other goals, include, but are not limited to, those set forth below. Except for the addition of the security risk factor, there have been no material changes in our risk factors from those disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended July 2, 2011.

1. The success of our business depends in large part on our ability to identify fashion trends as well as to react to changing customer demand in a timely manner. Consequently, we depend in part upon the customer response to the creative efforts of our merchandising, design and marketing teams and their ability to anticipate trends and fashions that will appeal to our consumer base. If we miscalculate our customers’ product preferences or the demand for our products, we may be faced with excess inventory. Historically, this type of occurrence has resulted in excess fabric for some products and markdowns and/or write-offs, which has impaired our profitability, and may do so in the future. Similarly, any failure on our part to anticipate, identify and respond effectively to changing customer demands and fashion trends will adversely affect our sales. In addition, from time to time, we may pursue new concepts, and if the new concepts are not successful, our financial condition may be harmed.

2. We face increasing product costs from our manufacturing partners, which could result in significant margin erosion. Worldwide prices for raw materials have increased significantly year-over-year. We currently estimate that these increasing product costs could result in significant margin erosion. Additionally, a significant percentage of our apparel products are manufactured in China. Manufacturers in that country are currently experiencing increased costs due to shortages of labor and the fluctuation of the Chinese Yuan in relation to the U.S. dollar. In addition, our business and operating results may be affected by changes in the political, social or economic environment in China. If we are unable to successfully mitigate a significant portion of such product costs, our results of operations may be materially adversely affected.

3. If we are unable to obtain raw materials or unable to find manufacturing facilities or our manufacturers perform unacceptably, our sales may be negatively affected and our financial condition may be harmed. We do not own any manufacturing facilities and therefore depend on contractors and third parties to manufacture our products. We place all of our orders for production of merchandise and raw materials by purchase order and do not have any long-term contracts with any manufacturer or supplier. If we fail to maintain favorable relationships with our manufacturers and suppliers or are unable to obtain sufficient quantities of quality raw materials on commercially reasonable terms, it could harm our business and results of operations.

We cannot assure you that contractors and third-party manufacturers (1) will not supply similar products to our competitors, (2) will not stop supplying products to us completely or (3) will supply products in a timely manner. Untimely receipt of products may result in lower than anticipated sales and markdowns which would have a negative impact on earnings. Furthermore, we have received in the past, and may receive in the future, shipments of products from manufacturers that fail to conform to our quality control standards. In such event, unless we are able to obtain replacement products in a timely manner, we may lose sales. Certain of our third-party manufacturers store our raw materials. In the event our inventory was damaged or destroyed and we were unable to obtain replacement raw materials, our earnings could be negatively impacted.

4. We face significant competition in the retail and apparel industry, which could harm our sales and profitability. The retail and apparel industries are highly competitive and are characterized by low barriers to entry. We expect competition in our markets to increase. The primary competitive factors in our markets are: brand name recognition, sourcing, product styling, quality, presentation and pricing, timeliness of product development and delivery, store ambiance, customer service and convenience. We compete with traditional department stores, specialty store retailers, lower price point retailers, business to consumer websites, off-price retailers and direct marketers for, among other things, raw materials, market share, retail space, finished goods, sourcing and personnel. Because many of these competitors are larger and have substantially greater financial, distribution and marketing resources than we do or maintain comparatively lower cost of operations, we may lack the resources to adequately compete with them. If we fail to remain competitive in any way, it could harm our business, financial condition and results of operations.

5. General economic conditions, including increases in energy and commodity prices, that are largely out of our control may adversely affect our financial condition and results of operations. We are sensitive to changes in general economic conditions, both nationally and locally. Recessionary economic cycles, higher interest rates, higher fuel and other energy costs, inflation, deflation, increases in commodity prices, higher levels of unemployment, higher consumer debt levels, higher tax rates and other changes in tax laws or other economic factors that may affect consumer spending or buying habits could adversely affect the demand for products we sell in our stores. In addition, the recent turmoil in the financial markets may have an adverse effect on the U.S. and world economy, which could negatively impact consumer spending patterns. We cannot assure you that government responses to the disruptions in the financial markets will restore consumer confidence.

Furthermore, we could experience reduced traffic in our stores or limitations on the prices we can charge for our products, either of which could reduce our sales and profit margins and have a material adverse effect on our financial condition and results of operations. Also, economic factors such as those listed above and increased transportation costs, inflation, higher costs of labor, insurance and healthcare, and changes in other laws and regulations may increase our cost of sales and our operating, selling, general and administrative expenses, and otherwise adversely affect our financial condition and results of operations.

6. We cannot assure that future store openings will be successful and new store openings may impact existing stores. We expect to open approximately 11 stores for bebe and 2b bebe in fiscal 2012 as well as up to 55 international licensee operated point-of-sale locations. In the past, we have closed stores as a result of poor performance, and we cannot assure that the stores that we plan to open in fiscal 2012, or any other stores that we might open in the future, will be successful or that our overall operating profit will increase as a result of opening these stores. During fiscal 2011, we closed 55 stores, primarily due to the PH8 discontinued operations discussed previously, and during fiscal 2012, we anticipate closing up to 13 stores. Most of our new store openings in fiscal 2012 will be in existing markets. These openings may affect the existing stores’ net sales and profitability. Our failure to predict accurately the demographic or retail environment at any future store location could have a material adverse effect on our business, financial condition and results of operations.

Our ability to effectively obtain real estate to open new stores depends upon the availability of real estate that meets our criteria, including traffic, square footage, co-tenancies, average sales per square foot, lease economics, demographics, and other factors, and our ability to negotiate terms that meet our financial targets. In addition, we must be able to effectively renew our existing store leases. Failure to secure real estate locations adequate to meet annual targets as well as effectively managing the profitability of our existing fleet of stores could have a material adverse effect on our business, financial condition and results of operations.

7. Our sales, margins and operating results are subject to seasonal and quarterly fluctuations. Our business varies with general seasonal trends that are characteristic of the retail and apparel industries, such as the timing of seasonal wholesale shipments and other events affecting retail sales. As a result, our stores typically generate a higher percentage of our annual net sales and profitability in the second quarter of our fiscal year (which includes the holiday selling season) compared to other quarters.

In addition, our comparable store sales have fluctuated significantly in the past, and we expect that they will continue to fluctuate in the future. A variety of factors affect comparable store sales, including fashion trends, competition, current economic conditions, the timing of release of new merchandise and promotional events, changes in our merchandise mix, the success of marketing programs and weather conditions. Our ability to deliver strong comparable store sales results and margins depends in large part on accurately forecasting demand and fashion trends, selecting effective marketing techniques, providing an appropriate mix of merchandise for our customer base, managing inventory effectively, and optimizing store performance by closing under-performing stores.

Such fluctuations may adversely affect the market price of our common stock.

8. Our success depends on our ability to attract and retain key employees in order to support our existing businesses and future expansion. From time to time we actively recruit qualified candidates to fill key executive positions from within our company. There is substantial competition for experienced personnel, which we expect will continue. We compete for experienced personnel with companies who have greater financial resources than we do. In the past, we have experienced significant turnover of our executive management team and retail store personnel. We are also exposed to employment practice litigation due to the large number of employees and high turnover of our sales associates. If we fail to attract, motivate and retain qualified personnel, it could harm our business and limit our ability to expand.

In addition, we depend upon the expertise and execution of our key employees, particularly: Manny Mashouf, our founder, Chief Executive Officer and Chairman of the Board of Directors; and Emilia Fabricant, President. If we lose the services of Mr. Mashouf, Ms. Fabricant, or any key officers or employees, it could harm our business and results of operations.

9. Because Manny Mashouf beneficially owns a substantial portion of the outstanding shares, other shareholders may not be able to influence the direction the company takes. As of April 30, 2012, Manny Mashouf, our Chief Executive Officer and Chairman of the Board, beneficially owned approximately 54% of the outstanding shares of our common stock. As a result, he can control the election of directors and the outcome of all issues submitted to the shareholders. This may make it more difficult for a third party to acquire shares, may discourage acquisition bids, and could limit the price that certain investors might be willing to pay for shares of common stock. This concentration of stock ownership may have the effect of delaying, deferring or preventing a change in control of our company.

10. We rely on information technology, the disruption of which could adversely impact our business. We rely on various information systems to help manage our operations and regularly assess the cost-benefit analysis associated with making additional investments to upgrade, enhance or replace such systems. If at any time we do not have adequate systems in place, or should we experience any delays or difficulties in transitioning to these or other new systems, or in integrating these systems with our current systems, or we experience any other disruptions affecting our information systems, we could experience a material adverse impact on our business. Should we experience unauthorized access, disclosure or use of any of our systems, or if our security controls, computer assets and sensitive data, including client data, are breached, this could also damage our reputation with our clients. Further, with increased technology and other patent litigation hitting the industry, and especially given our reliance on our vendor’s purported ownership of third party software we license, we face the potential of receiving claims that the technology we use or license infringes on another’s proprietary rights. Should this occur, and while we may secure indemnification rights in certain transactions, we may be subject to having to defend ourselves from such claims and/or be subject to unanticipated license fees or the necessity to transition away from technology we are using or abandon such use altogether.

11. We are subject to risks associated with our on-line sales. We operate on-line stores at www.bebe.com and www.2bstores.com to sell our merchandise. Although our on-line sales encompass a relatively small percentage of our total sales, our on-line operations are subject to numerous risks, including unanticipated operating problems, reliance on third-party computer hardware and software providers and system failures. The on-line operations also involve other risks that could have an impact on our results of operations including but not limited to diversion of sales from our other stores, rapid technological change, liability for on-line content, credit card fraud and loss of sensitive data. In addition, with the anticipated migration from a third-party platform for our bebe.com store, we may be faced with unforeseen transition challenges. We cannot assure that our on-line stores will continue to achieve sales and profitability growth or even remain at their current level.

12. We are subject to cyber-security risks and may incur increasing costs in an effort to minimize those risks and to respond to cyber incidents. There is an increased dependence on digital technologies by public companies and an increasing frequency and severity of cyber incidents. Our business involves the storage and transmission of customers’ personal information, consumer preferences and credit card information. We also use mobile devices, social networking and other online activities to connect with our customers. While we have implemented measures to prevent security breaches and cyber incidents, given the ever increasing abilities of those intent on breaching cyber-security measures and given our reliance on the security and other efforts of third-party vendors, the total security effort at any point in time may not be completely effective and any such security breaches and cyber incidents could adversely affect our business.

13. Any serious disruption at our major facilities could have a harmful effect on our business. We currently operate a corporate office in Brisbane, California, a distribution facility in Benicia, California, and a design studio in Los Angeles, California. Any serious disruption at these facilities whether due to construction, relocation, fire, earthquake, terrorist acts or otherwise could harm our operations and could negatively affect our business and results of operations. Furthermore, we have little experience operating essential functions away from our main corporate offices and are uncertain what effect operating such satellite facilities might have on business, personnel and results of operations.

14. Our business could be adversely impacted by unfavorable international political conditions. Due to our international operations, our sales and operating results are, and will continue to be, affected by international social, political, legal and economic conditions. In particular, our business could be adversely impacted by instability or changes resulting in the disruption of trade with the countries in which our contractors, suppliers or customers are located, significant fluctuations in the value of the dollar against foreign currencies or restrictions on the transfer of funds, or additional trade restrictions imposed by the United States and other foreign governments. Trade restrictions, including increased tariffs or quotas, embargoes and customs restrictions could increase the cost or reduce the supply of merchandise available to us and adversely affect our financial condition and results of operations. In addition, we purchase a substantial amount of our raw materials from China and our business and operating results may be affected by changes in the political, social or economic environment in China.

15. If we are not able to protect our intellectual property our ability to capitalize on the value of our brand name may be impaired. Even though we take actions to establish, register and protect our trademarks and other proprietary rights, we cannot assure you that we will be successful or that others will not imitate our products or infringe upon our intellectual property rights. In addition, we cannot assure that others will not resist or seek to block the sale of our products as infringements of their trademark and proprietary rights.

We are seeking to register our trademarks domestically and internationally. Obstacles may exist that may prevent us from obtaining a trademark for the bebe, BEBE SPORT, bbsp and 2b bebe names or related names. We may not be able to register certain trademarks, purchase the right or obtain a license to use these names or related names on commercially reasonable terms. If we fail to obtain trademark, ownership or license the requisite rights, it would limit our ability to expand. In some jurisdictions, despite successful registration of our trademarks, third parties may allege infringement and bring actions against us. In addition, if our licensees fail to use our intellectual property correctly, the reputation and value associated with our trademarks may be diluted. Furthermore, if we do not demonstrate use of our trademarks, our trademark rights may lapse over time.

16. If an independent manufacturer violates labor or other laws, or is accused of violating any such laws, or if their labor practices diverge from those generally accepted as ethical, it could harm our business and brand image. While we maintain a policy to monitor the operations of our independent manufacturers by having an independent firm inspect these manufacturing sites, and all manufacturers are contractually required to comply with such labor practices, we cannot control the actions or the public’s perceptions of such manufacturers, nor can we assure that these manufacturers will conduct their businesses using ethical or legal labor practices. Apparel companies, in certain conditions, may be held jointly liable for the wrongdoings of the manufacturers of their products. While we do not control our manufacturers’ employment conditions or business practices, and the manufacturers act in their own interest, they may act in a manner that results in negative public perceptions of us and/or employee allegations or court determinations that we are jointly liable.

17. We may be required to record losses in future quarters as a result of the decline in value of our investments in auction rates securities or as a result of a change in our ability to hold our investments in auction rate securities. We hold a variety of interest bearing ARS comprised of federally insured student loan backed securities and insured municipal authority bonds. These ARS investments are intended to provide liquidity via an auction process that resets the applicable interest rate at predetermined calendar intervals, allowing investors to either roll over their holdings or gain immediate liquidity by selling such interests at par. The recent uncertainties in the credit markets that began in February 2008 have affected our holdings in ARS investments and the majority of auctions for our investments in these securities have failed to settle on their respective settlement dates. Consequently, $64.4 million of our ARS are not currently liquid and we will not be able to access these funds until a future auction of these investments is successful or securities are purchased or redeemed outside of the auction process. Maturity dates for these ARS investments range from 2016 to 2044, with principal distributions occurring on certain securities prior to maturity.

The valuation of our investment portfolio is subject to uncertainties that are difficult to predict. Factors that may impact its valuation include changes to credit ratings of the securities as well as to the underlying assets supporting those securities, rates of default of the underlying assets, underlying collateral value, discount rates and ongoing strength and quality of market credit and liquidity. If the current market conditions deteriorate further, or the anticipated recovery in market values does not occur, we may be required to record additional losses in other comprehensive income or losses in net income in future quarters.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4.

RESERVED

ITEM 5.

OTHER INFORMATION

Not applicable.

ITEM 6.

EXHIBITS

(a) Exhibits. The following is a list of exhibits filed as part of this Report on Form 10-Q.


Exhibit		Description

10.24		Amendment to Credit Agreement and Revolving Line of Credit Note between Registrant and Wells Fargo

10.25		Contract of Sale for Purchase of Real Estate dated March 13, 2012 by and among bebe Studio Realty, inc. and MP Benicia Logistics, LLC.

31.1		Section 302 Certification of Chief Executive Officer

31.2		Section 302 Certification of Chief Financial Officer

32.1		Section 906 Certification of Chief Executive Officer

32.2		Section 906 Certification of Chief Financial Officer

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema

101.CAL		XBRL Taxonomy Calculation Linkbase

101.LAB		XBRL Taxonomy Extension Label Linkbase

101.PRE		XBRL Taxonomy Presentation Linkbasae

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated May 10, 2012

bebe stores, inc.

/s/ Walter Parks

Walter Parks, Chief Operating Officer and Chief Financial Officer

EXHIBIT INDEX


Exhibit Number		Description

10.24		Amendment to Credit Agreement and Revolving Line of Credit Note between Registrant and Wells Fargo

10.25		Contract of Sale for Purchase of Real Estate dated March 13, 2012 by and among bebe Studio Realty, Inc. and MP Benicia Logistics, LLC.

31.1		Section 302 Certification of Chief Executive Officer

31.2		Section 302 Certification of Chief Financial Officer

32.1		Section 906 Certification of Chief Executive Officer

32.2		Section 906 Certification of Chief Financial Officer

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema

101.CAL		XBRL Taxonomy Calculation Linkbase

101.LAB		XBRL Taxonomy Extension Label Linkbase

101.PRE		XBRL Taxonomy Presentation Linkbasae

Exhibit 10.24

SECOND AMENDMENT TO CREDIT AGREEMENT

THIS AMENDMENT TO CREDIT AGREEMENT (this “Amendment”) is entered into as of December 31, 2011, by and between BEBE STORES, INC., a California corporation (“Borrower”), and WELLS FARGO BANK, NATIONAL ASSOCIATION (“Bank”).

RECITALS

WHEREAS, Borrower is currently indebted to Bank pursuant to the terms and conditions of that certain Credit Agreement between Borrower and Bank dated as of May 15, 2009, as amended from time to time (“Credit Agreement”).

WHEREAS, Bank and Borrower have agreed to certain changes in the terms and conditions set forth in the Credit Agreement and have agreed to amend the Credit Agreement to reflect said changes.

NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree that the Credit Agreement shall be amended as follows:

1. Section 1.1. is hereby amended by deleting “May 15, 2012” as the last day on which Bank will make advances under the Line of Credit, and by substituting for said date “May 15, 2015,” with such change to be effective upon the execution and delivery to Bank of a promissory note dated as of December 31, 2011 (which promissory note shall replace and be deemed the Line of Credit Note defined in and made pursuant to the Credit Agreement) and all other contracts, instruments and documents required by Bank to evidence such change.

2. Section 4.3. (d) is hereby deleted in its entirety, and the following substituted therefor:

“4.3 (d) contemporaneously with each annual and quarterly financial statement of Borrower required hereby, a certificate of chief financial officer of Borrower that said financial statements are accurate and that there exists no Event of Default nor any condition, act or event which with the giving of notice or the passage of time or both would constitute an Event of Default;”

3. Section 5.2. is hereby deleted in its entirety, and the following substituted therefor:

“SECTION 5.2 OTHER INDEBTEDNESS. Create, incur, assume or permit to exist any indebtedness or liabilities resulting from borrowings, loans or advances, whether secured or unsecured, matured or unmatured, liquidated or unliquidated, joint or several, except:

(a) Borrower’s and Guarantor’s indebtedness to Bank under the Loan Documents;

(b) indebtedness existing as of, and disclosed to Bank prior to, the date hereof;

(d) unsecured indebtedness to trade creditors incurred in the ordinary course of business;

(e) indebtedness, in an aggregate maximum principal amount not to exceed $5,000,000.00 during the term of this Agreement, relating to the acquisition of machinery or equipment of Borrower or any Guarantor , so long as any security interest in connection therewith attaches only to such asset; and

(f) indebtedness incurred as a result of endorsing negotiable instruments received in the ordinary course of business.”

4. Section 5.5. is hereby deleted in its entirety, and the following substituted therefor:

“SECTION 5.5 LOANS, ADVANCES, INVESTMENTS. Make any loans or advances to or investments in any person or entity, except:

(a) investments existing as of, and disclosed to Bank prior to, the date hereof;

(b) investments for which Bank has provided its prior written consent;

(c) investments consisting of (a) marketable direct obligations issued or unconditionally guaranteed by the United States or any agency or any State thereof having maturities of not more than one (1) year from the date of acquisition; (b) commercial paper maturing no more than one (1) year after its creation and having the highest rating from either Standard & Poor’s Ratings Group or Moody’s Investors Service, Inc.; and (c) Bank’s certificates of deposit issued maturing no more than one (1) year after issue;

(d) investments consisting of the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of Borrower or any Guarantor;

(e) investments consisting of deposit accounts in which Bank has a first priority perfected security interest;

(f) investments of subsidiaries in or to other subsidiaries or Borrower and investments by Borrower in subsidiaries; provided however that any subsidiary receiving any such investment (if not already a Guarantor) shall execute and deliver to Bank a guaranty of Borrower’s obligations to Bank (in the same form as required under Section 1.4) and shall thereafter be deemed to constitute a “Guarantor” for all purposes of this Agreement. As used herein the term “subsidiary” means each entity with respect to which Borrower, directly or indirectly, owns or controls more than 50% of the voting equity interests;

(g) investments consisting of (i) in an outstanding principal amount not to exceed an aggregate of $500,000.00, travel advances and employee relocation loans and other employee loans and advances in the ordinary course of business, and (ii) in an outstanding principal amount not to exceed $500,000.00, loans to employees, officers or directors relating to the purchase of equity securities of Borrower or its subsidiaries pursuant to employee stock purchase plans or agreements approved by Borrower’s board of directors;

(h) investments (including debt obligations) received in connection with the bankruptcy or reorganization of customers or suppliers and in settlement of delinquent obligations of, and other disputes with, customers or suppliers arising in the ordinary course of business;

(i) investments consisting of notes receivable of, or prepaid royalties and other credit extensions, to customers and suppliers who are not affiliates, in the ordinary course of business;

(j) investments permitted by Borrower’s investment policy;

(k) without duplication, investments in entities which are not subsidiaries in an aggregate amount not to exceed $1,000,000.00 during the term of this Agreement.”

5. Section 5.6. is hereby deleted in its entirety, and the following substituted therefor:

“SECTION 5.6. PLEDGE OF ASSETS. Mortgage, pledge, grant or permit to exist a security interest in, or lien upon, all or any portion of Borrower’s or any Guarantor’s assets now owned or hereafter acquired, except:

(a) liens existing as of, and disclosed to Bank prior to, the date hereof;

(b) liens incurred with Bank’s prior written consent;

(c) liens for taxes, fees, assessments or other government charges or levies, either not delinquent or being contested in good faith and for which Borrower maintains adequate reserves on its books, provided that no notice of any such lien has been filed or recorded under the Internal Revenue Code of 1986, as amended, and the Treasury Regulations adopted thereunder;

(d) purchase money liens (i) on equipment acquired or held by Borrower incurred for financing the acquisition of the Equipment, subject to the terms of Section 5.2(f); (ii) purchase money liens existing as of, and disclosed to Bank prior to, the date hereof, or (iii) liens existing on equipment when acquired, if the lien is confined to the property and improvements and the proceeds of the equipment;

(e) liens of carriers, warehousemen, suppliers, or other persons that are possessory in nature arising in the ordinary course of business which are not delinquent or remain payable without penalty or which are being contested in good faith and by appropriate proceedings which proceedings have the effect of preventing the forfeiture or sale of the property subject thereto;

(f) liens to secure payment of workers’ compensation, employment insurance, old-age pensions, social security and other like obligations incurred in the ordinary course of business (other than liens imposed by ERISA);

(g) liens incurred in the extension, renewal or refinancing of the indebtedness secured by liens described in (a) through (c), but any extension, renewal or replacement lien must be limited to the property encumbered by the existing lien and the principal amount of the indebtedness may not increase;

(h) leases or subleases of real property granted in the ordinary course of business, and leases, subleases, non-exclusive licenses or sublicenses of property (other than real property) granted in the ordinary course of Borrower’s business; and

(i) liens arising from attachments or judgments, orders, or decrees in circumstances not constituting an Event of Default under Section 6.1.”

6. Except as specifically provided herein, all terms and conditions of the Credit Agreement remain in full force and effect, without waiver or modification. All terms defined in the Credit Agreement shall have the same meaning when used in this Amendment. This Amendment and the Credit Agreement shall be read together, as one document.

7. Borrower hereby remakes all representations and warranties contained in the Credit Agreement and reaffirms all covenants set forth therein. Borrower further certifies that as of the date of this Amendment there exists no Event of Default as defined in the Credit Agreement, nor any condition, act or event which with the giving of notice or the passage of time or both would constitute any such Event of Default.

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first written above.


BEBE STORES, INC.		WELLS FARGO BANK NATIONAL ASSOCIATION

By:	/s/ Walter Parks	By:	/s/ Sunil Pandya
Walter Parks, Chief Financial Officer,		Sunil Pandya, Vice President
Chief Operating Officer

REVOLVING LINE OF CREDIT NOTE


$25,000,000.00				San Francisco, California
				December 31, 2011

FOR VALUE RECEIVED, the undersigned BEBE STORES, INC. (“Borrower”) promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION (“Bank”) at its office at San Francisco RCBO, 420 Montgomery Street, 9th Floor, San Francisco, California, or at such other place as the holder hereof may designate, in lawful money of the United States of America and in immediately available funds, the principal sum of Twenty Five Million Dollars ($25,000,000.00), or so much thereof as may be advanced and be outstanding, with interest thereon, to be computed on each advance from the date of its disbursement as set forth herein.

DEFINITIONS:

As used herein, the following terms shall have the meanings set forth after each, and any other term defined in this Note shall have the meaning set forth at the place defined:

(a) “Business Day” means any day except a Saturday, Sunday or any other day on which commercial banks in California are authorized or required by law to close.

(b) “Daily One Month LIBOR” means, for any day, the rate of interest equal to LIBOR then in effect for delivery for a one (1) month period.

(a) “Fixed Rate Term” means a period commencing on a Business Day and continuing for one (1) or three (3) months, as designated by Borrower, during which all or a portion of the outstanding principal balance of this Note bears interest determined in relation to LIBOR; provided however, that no Fixed Rate Term may be selected for a principal amount less than Two Hundred Fifty Thousand Dollars ($250,000.00); and provided further, that no Fixed Rate Term shall extend beyond the scheduled maturity date hereof. If any Fixed Rate Term would end on a day which is not a Business Day, then such Fixed Rate Term shall be extended to the next succeeding Business Day.

(d) “LIBOR” means the rate per annum (rounded upward, if necessary, to the nearest whole 1/8 of 1%) and determined pursuant to the following formula:


LIBOR =		Base LIBOR .
		100% - LIBOR Reserve Percentage

(i) “Base LIBOR” means the rate per annum for United States dollar deposits quoted by Bank (A) for the purpose of calculating effective rates of interest for loans making reference to LIBOR, as the Inter-Bank Market Offered Rate, with the understanding that such rate is quoted by Bank for the purpose of calculating effective rates of interest for loans making reference thereto, on the first day of a Fixed Rate Term for delivery of funds on said date for a period of time approximately equal to the number of days in such Fixed Rate Term and in an amount approximately equal to the principal amount to which such Fixed Rate Term applies, or (B) for the purpose of calculating effective rates of interest for loans making reference to the Daily One Month LIBOR Rate, as the Inter-Bank Market Offered Rate in effect from time to time

for delivery of funds for one (1) month in amounts approximately equal to the principal amount of such loans. Borrower understands and agrees that Bank may base its quotation of the Inter-Bank Market Offered Rate upon such offers or other market indicators of the Inter-Bank Market as Bank in its discretion deems appropriate including, but not limited to, the rate offered for U.S. dollar deposits on the London Inter-Bank Market.

(ii) “LIBOR Reserve Percentage” means the reserve percentage prescribed by the Board of Governors of the Federal Reserve System (or any successor) for “Eurocurrency Liabilities” (as defined in Regulation D of the Federal Reserve Board, as amended), adjusted by Bank for expected changes in such reserve percentage during the applicable term of this Note.

INTEREST:

(a) Interest . The outstanding principal balance of this Note shall bear interest (computed on the basis of a 360-day year, actual days elapsed) either (i) at a fluctuating rate per annum determined by Bank to be one and three-quarters percent (1.75%) above the Daily One Month LIBOR Rate in effect from time to time, or (ii) at a fixed rate per annum determined by Bank to be one and three-quarters percent (1.75%) above LIBOR in effect on the first day of the applicable Fixed Rate Term. When interest is determined in relation to the Daily One Month LIBOR Rate, each change in the interest rate shall become effective each Business Day that the Bank determines that the Daily One Month LIBOR Rate has changed. Bank is hereby authorized to note the date, principal amount and interest rate applicable thereto and any payments made thereon on Bank’s books and records (either manually or by electronic entry) and/or on any schedule attached to this Note, which notations shall be prima facie evidence of the accuracy of the information noted, absent manifest error.

(b) Selection of Interest Rate Options . At any time any portion of this Note bears interest determined in relation to LIBOR for a Fixed Rate Term, it may be continued by Borrower at the end of the Fixed Rate Term applicable thereto so that all or a portion thereof bears interest determined in relation to the Daily One Month LIBOR Rate or to LIBOR for a new Fixed Rate Term designated by Borrower. At any time any portion of this Note bears interest determined in relation to the Daily One Month LIBOR Rate, Borrower may at any time convert all or a portion thereof so that it bears interest determined in relation to LIBOR for a Fixed Rate Term designated by Borrower. At such time as Borrower requests an advance hereunder or wishes to select an interest rate determined in relation to the Daily One Month LIBOR Rate or a Fixed Rate Term for all or a portion of the outstanding principal balance hereof, and at the end of each Fixed Rate Term, Borrower shall give Bank notice specifying: (i) the interest rate option selected by Borrower; (ii) the principal amount subject thereto; and (iii) for each LIBOR selection for a Fixed Rate Term, the length of the applicable Fixed Rate Term. Any such notice may be given by telephone (or such other electronic method as Bank may permit) so long as, with respect to each LIBOR selection for a Fixed Rate Term, (A) if requested by Bank, Borrower provides to Bank written confirmation thereof not later than three (3) Business Days after such notice is given, and (B) such notice is given to Bank prior to 10:00 a.m. on the first day of the Fixed Rate Term, or at a later time during any Business Day if Bank, at its sole option but without obligation to do so, accepts Borrower’s notice and quotes a fixed rate to Borrower. If Borrower does not immediately accept a fixed rate when quoted by Bank, the quoted rate shall expire and any subsequent LIBOR request from Borrower shall be subject to a redetermination by Bank of the applicable fixed rate. If no specific designation of interest is made at the time any advance is requested hereunder or at the end of any Fixed Rate Term, Borrower shall be deemed to have made a Daily One Month LIBOR Rate interest selection for such advance or the principal amount to which such Fixed Rate Term applied.

(c) Taxes and Regulatory Costs . Borrower shall pay to Bank immediately upon demand, in addition to any other amounts due or to become due hereunder, any and all (i) withholdings, interest equalization taxes, stamp taxes or other taxes (except income and franchise taxes) imposed by any domestic or foreign governmental authority and related in any manner to LIBOR, and (ii) future, supplemental, emergency or other changes in the LIBOR Reserve Percentage, assessment rates imposed by the Federal Deposit Insurance Corporation, or similar requirements or costs imposed by any domestic or foreign governmental authority or resulting from compliance by Bank with any request or directive (whether or not having the force of law) from any central bank or other governmental authority and related in any manner to LIBOR to the extent they are not included in the calculation of LIBOR. In determining which of the foregoing are attributable to any LIBOR option available to Borrower hereunder, any reasonable allocation made by Bank among its operations shall be conclusive and binding upon Borrower.

(d) Payment of Interest . Interest accrued on this Note shall be payable on the first Business Day of each month, commencing January 1, 2012.

(e) Default Interest . From and after the maturity date of this Note, or such earlier date as all principal owing hereunder becomes due and payable by acceleration or otherwise, the outstanding principal balance of this Note shall bear interest until paid in full at an increased rate per annum (computed on the basis of a 360-day year, actual days elapsed) equal to two percent (2%) above the rate of interest from time to time applicable to this Note.

BORROWING AND REPAYMENT:

(a) Borrowing and Repayment. Borrower may from time to time during the term of this Note borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions of this Note and of any document executed in connection with or governing this Note; provided however, that the total outstanding borrowings under this Note shall not at any time exceed the principal amount stated above. The unpaid principal balance of this obligation at any time shall be the total amounts advanced hereunder by the holder hereof less the amount of principal payments made hereon by or for Borrower, which balance may be endorsed hereon from time to time by the holder. The outstanding principal balance of this Note shall be due and payable in full on May 15, 2015.

(b) Advances. Advances hereunder, to the total amount of the principal sum stated above, may be made by the holder at the oral or written request of (i) Walter Parks (or his successor as Chief Financial Officer, as evidenced by a certificate of incumbency delivered, and in form and content acceptable, to Bank) acting alone, who is authorized to request advances and direct the disposition of any advances until written notice of the revocation of such authority is received by the holder at the office designated above. The holder shall have no obligation to verify the identity of any person requesting an advance, provided such person is believed in good faith by Bank to be the Chief Financial Officer of Borrower.

(c) Application of Payments. Each payment made on this Note shall be credited first, to any interest then due and second, to the outstanding principal balance hereof. All payments credited to principal shall be applied first, to the outstanding principal balance of this Note which bears interest determined in relation to the Daily One Month LIBOR Rate, if any, and second, to the outstanding principal balance of this Note which bears interest determined in relation to LIBOR, with such payments applied to the oldest Fixed Rate Term first.

PREPAYMENT:

(a) Daily One Month LIBOR Rate . Borrower may prepay principal on any portion of this Note which bears interest determined in relation to the Daily One Month LIBOR Rate at any time, in any amount and without penalty.

(b) LIBOR . Borrower may prepay principal on any portion of this Note which bears interest determined in relation to LIBOR at any time and in the minimum amount of Two Hundred Fifty Thousand Dollars ($250,000.00); provided however, that if the outstanding principal balance of such portion of this Note is less than said amount, the minimum prepayment amount shall be the entire outstanding principal balance thereof. In consideration of Bank providing this prepayment option to Borrower, or if any such portion of this Note shall become due and payable at any time prior to the last day of the Fixed Rate Term applicable thereto by acceleration or otherwise, Borrower shall pay to Bank immediately upon demand a fee which is the sum of the discounted monthly differences for each month from the month of prepayment through the month in which such Fixed Rate Term matures, calculated as follows for each such month:

(i)

Determine the amount of interest which would have accrued each month on the amount prepaid at the interest rate applicable to such amount had it remained outstanding until the last day of the Fixed Rate Term applicable thereto.

(ii)

Subtract from the amount determined in (i) above the amount of interest which would have accrued for the same month on the amount prepaid for the remaining term of such Fixed Rate Term at LIBOR in effect on the date of prepayment for new loans made for such term and in a principal amount equal to the amount prepaid.

(iii)

If the result obtained in (ii) for any month is greater than zero, discount that

difference by LIBOR used in (ii) above.

Borrower acknowledges that prepayment of such amount may result in Bank incurring additional costs, expenses and/or liabilities, and that it is difficult to ascertain the full extent of such costs, expenses and/or liabilities. Borrower, therefore, agrees to pay the above-described prepayment fee and agrees that said amount represents a reasonable estimate of the prepayment costs, expenses and/or liabilities of Bank. If Borrower fails to pay any prepayment fee within three (3) Business Days after the due date, the amount of such prepayment fee shall thereafter bear interest until paid at a rate per annum two percent (2.00%) above the Daily One Month LIBOR Rate in effect from time to time (computed on the basis of a 360-day year, actual days elapsed).

EVENTS OF DEFAULT:

This Note is made pursuant to and is subject to the terms and conditions of that certain Credit Agreement between Borrower and Bank dated as of May 15, 2009, as amended from time to time (the “Credit Agreement”). Any default in the payment or performance of any obligation under this Note, or any defined event of default under the Credit Agreement, shall constitute an “Event of Default” under this Note.

MISCELLANEOUS:

(a) Remedies . Upon the occurrence of any Event of Default, the holder of this Note, at the holder’s option, may declare all sums of principal and interest outstanding hereunder to be immediately due and payable without presentment, demand, notice of nonperformance, notice of protest, protest or notice of dishonor, all of which are expressly waived by Borrower, and the obligation, if any, of the holder to extend any further credit hereunder shall immediately cease and terminate. Borrower shall pay to the holder immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys’ fees (to include outside counsel fees and all allocated costs of the holder’s in-house counsel), expended or incurred by the holder in connection with the enforcement of the holder’s rights and/or the collection of any amounts which become due to the holder under this Note, and the prosecution or defense of any action in any way related to this Note, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to Borrower or any other person or entity; provided however, that Borrower shall not be liable for such fees if Bank does not prevail in any such action.

(b) Obligations Joint and Several . Should more than one person or entity sign this Note as a Borrower, the obligations of each such Borrower shall be joint and several.

IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first written above.


BEBE STORES, INC.

By:		/s/ Walter Parks
Walter Parks, Chief Financial Officer,
Chief Operating Officer

Exhibit 10.25

CONTRACT OF SALE

THIS CONTRACT OF SALE (this “ Agreement ”) is made and entered into as of the 13th day of March, 2012 (the “ Effective Date ”) by and between MP BENECIA LOGISTICS, LLC , a Delaware limited liability company (“ Seller ”) and BEBE STUDIO REALTY, INC ., a California corporation (“ Purchaser ”).

W I T N E S S E T H:

A. Seller is the owner of that certain industrial building commonly referred to as “Benecia Logistics Center” and located at 4935-4995 Industrial Way, Benicia, California 94510.

B. Seller shall sell to Purchaser, and Purchaser shall purchase from Seller, at the price and upon the terms and conditions set forth in this Agreement, (a) the land described in Exhibit A attached hereto (the “ Land ”), (b) the buildings, improvements, fixtures and structures located upon the Land (collectively, the “ Improvements ”), (c) all other easements, rights and privileges appurtenant to the Land, if any (collectively, the “ Appurtenant Rights ” and together with the Land and the Improvements, the “ Real Property ”), (d) all right, title and interest of Seller in, to and under the “Leases” (as hereinafter defined), to the extent assignable, and the “Contracts” (as hereinafter defined) relating to the Real Property, (e) all right, title and interest of Seller, if any, in and to the fixtures, equipment and other tangible personal property owned by Seller and used exclusively in connection with the Real Property described on Exhibit B attached hereto (collectively, the “ Personal Property ”) and (f) to the extent assignable without payment of any kind, all right, title and interest of Seller in, to and under any governmental permits, licenses and approvals, warranties and guarantees that Seller has received in connection with any work or services performed with respect to, or equipment installed in, the Improvements (collectively, the “ Intangible Property ”; and together with the Real Property, the Leases, the Contracts, the Personal Property and the Intangible Property, the “ Property ”).

C. Purchaser acknowledges that the Property is being sold on an “AS IS” “WHERE IS” and “WITH ALL FAULTS” basis on the terms and conditions hereinafter set forth.

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows:

1. Purchase and Sale . Upon the terms and conditions hereinafter set forth, Seller shall sell to Purchaser, and Purchaser shall purchase from Seller, the Property.

2. Certain Defined Terms .

2.1 “ Additional Deposit ” shall mean the sum of $500,000, together with all interest thereon.

2.2 “ Due Diligence Period ” shall mean the period commencing on the Effective Date and expiring at 5:00 p.m. (Pacific time) on the date that is thirty (30) days thereafter.

2.3 “ Initial Deposit ” shall mean the sum of $500,000, together with all interest thereon.

2.4 “ Purchase Price ” shall mean the sum of Eighteen Million Dollars ($18,000,000).

2.5 “ Scheduled Closing Date ” shall mean the date that is fifteen (15) “Business Days” (as hereinafter defined) following the expiration of the Due Diligence Period.

3. Payment of Purchase Price . The Purchase Price shall be paid to Seller by Purchaser as follows:

3.1 Deposits .

3.1.1 Initial Deposit . Within three (3) Business Days after the date this Agreement is executed by Seller and Purchaser, Purchaser shall deposit with First American Title Insurance Company (in its capacity as escrow agent, “ Escrowee ”), by wire transfer of immediately available federal funds to an account designated by Escrowee (the “ Escrow Account ”), the Initial Deposit, which Initial Deposit shall be held by Escrowee pursuant to the escrow agreement (the “ Escrow Agreement ”) attached hereto as Exhibit L . If Purchaser shall fail to deposit the Initial Deposit with Escrowee within one (1) Business Day after the date this Agreement shall be executed and delivered by Seller and Purchaser, then at Seller’s election, this Agreement shall be null, void ab initio and of no force or effect.

3.1.2 Additional Deposit . Simultaneously with the delivery of the “Approval Notice” (as hereinafter defined), Purchaser shall deposit with Escrowee, by wire transfer of immediately available federal funds to the Escrow Account, the Additional Deposit (which, together with the Initial Deposit, shall be referred to as the “ Deposit ”), which Additional Deposit shall be held by Escrowee in accordance with the terms and conditions of the Escrow Agreement. If Purchaser shall not have timely delivered an Approval Notice and the Additional Deposit to Escrowee prior to the expiration of the Due Diligence Period, then Escrowee shall promptly return the Initial Deposit to Purchaser, and this Agreement shall be automatically deemed terminated and Seller and Purchaser shall be released from further obligation or liability hereunder, except for those obligations and liabilities which, pursuant to the terms of this Agreement, expressly survive such termination (collectively, the “ Surviving Obligations ”).

3.2 Independent Consideration . A portion of the amount deposited by Purchaser pursuant to Section 3.1.1, in the amount of One Thousand Dollars ($1,000) (the “ Independent Consideration ”), shall be earned by Seller upon execution and delivery of this Agreement by Seller and Purchaser. The Independent Consideration represents adequate bargained for consideration for Seller’s execution and delivery of this Agreement and Purchaser’s right to have inspected the Property pursuant to the terms hereof. The Independent Consideration is in addition to and independent of any other consideration or payment provided for herein and is nonrefundable in all events. Upon the “Closing” (as hereinafter defined) or earlier termination of this Agreement, the Independent Consideration shall be paid to Seller.

3.3 Closing Payment . The Purchase Price, as adjusted by the application of the Deposit and by the prorations and credits specified herein, shall be paid by Purchaser, by wire transfer of immediately available federal funds to the Escrow Account on the “Closing Date” (as hereinafter defined) (the amount being paid under this Section 3.4 being herein called the “ Closing Payment ”).

4. Title Matters; Due Diligence Review; Conditions Precedent .

4.1 Title Matters .

4.1.1 Title to the Real Property .

(a) As a condition to the Closing, First American Title Insurance Company (in its capacity as title insurer, the “ Title Company ”) shall have irrevocably committed to insure Purchaser as the fee owner of the Real Property in the amount of the Purchase Price by issuance of an ALTA extended coverage owner’s title insurance policy (the “ Owner’s Policy ”), subject only to the “Permitted Exceptions” (as hereinafter defined). Purchaser shall satisfy itself prior to the expiration of the Due Diligence Period that the Title Company will be willing to issue the Owner’s Policy and any endorsements required by Purchaser at Closing. The issuance of a CLTA owner’s title insurance policy in the standard form issued by the Title Company in the State of California shall be a condition to Closing for Purchaser’s benefit, it being understood that the issuance of the ALTA extended coverage and endorsements to such policy shall not be such a condition to Closing. Seller shall execute the Title Company’s so-called customary “Owner’s Affidavit” in connection with the issuance of the Owner’s Policy and Purchaser’s requested endorsements.

(b) Seller has delivered to Purchaser a copy of a preliminary title report for an owner’s fee title insurance policy or policies with respect to the Real Property (the “ Title Commitment ”) from the Title Company, together with legible copies of each of the title exceptions noted therein. Purchaser may, at its sole cost and expense, obtain a survey of the Real Property (the “ Survey ”). If any exceptions(s) to title to the Real Property should appear in the Title Commitment or the Survey other than the “Permitted Exceptions” (as hereinafter defined) (such exception(s) being herein called, collectively, the “ Unpermitted Exceptions ”), subject to which Purchaser is unwilling to accept title, and Purchaser shall provide Seller with written notice (the “ Title Objection Notice ”) thereof no later than ten (10) Business Days prior to the expiration of the Due Diligence Period (the “ Title Objection Notice Date ”), then Seller, in its sole and absolute discretion, may undertake to eliminate the same subject to the terms and conditions of this Section 4.1. Purchaser waives any right Purchaser may have to advance, as objections to title or as grounds for Purchaser’s refusal to close this transaction, any Unpermitted Exception of which Purchaser does not notify Seller before the Title Objection Notice Date unless (i) such Unpermitted Exception was first raised by the Title Company or company retained by Purchaser to provide the Survey (the “ Surveyor ”) subsequent to the date of the Title Commitment or date of Survey, respectively, and (ii) Purchaser shall notify Seller of the same on or before the later of (A) three (3) Business Days after the Title Company or Surveyor shall notify Purchaser of such Unpermitted Exception and (B)

the Title Objection Notice Date (failure to so notify Seller shall be deemed to be a waiver by Purchaser of its right to raise such Unpermitted Exception as an objection to title or as a ground for Purchaser’s refusal to close the transaction contemplated by this Agreement). Notwithstanding anything to the contrary contained in this Agreement, Seller, in its sole discretion, shall have the right, upon written notice to Purchaser at least two (2) Business Days prior to the Scheduled Closing Date, to adjourn the Scheduled Closing Date for up to thirty (30) days, provided that Seller shall notify Purchaser, in writing, no later than five (5) Business Days prior to the expiration of the Due Diligence Period (the “ Seller Response Notice Date ”), whether or not it will endeavor to eliminate such Unpermitted Exceptions (the “ Seller Response ”), and if Seller fails to notify Purchaser on or before the Seller Response Notice Date, Seller shall be deemed to have elected not to cure such Unpermitted Exceptions. Notwithstanding the foregoing or anything to the contrary set forth herein, Seller shall not under any circumstance be required or obligated to cause the cure or removal of any Unpermitted Exception including to bring any action or proceeding, to make any payments or otherwise to incur any expense in order to eliminate any Unpermitted Exception or to arrange for title insurance insuring against enforcement of such Unpermitted Exception against, or collection of the same out of, the Property, notwithstanding that Seller may have attempted to do so, or may have adjourned the Scheduled Closing Date for such purpose; provided, however, Seller shall satisfy (x) any mortgage or deed of trust placed on the Real Property by Seller, (y) all monetary liens, judgment liens, mechanics’ liens or tax liens placed on the Real Property by Seller, and (z) all other exceptions to title and survey matters voluntarily created by Seller on or after the Effective Date without the prior written consent of Purchaser (such consent not to be unreasonably withheld or delayed with respect to such matters created on or before the expiration of the Due Diligence period, and in Purchaser’s sole and absolute discretion thereafter) (collectively, the “ Monetary Liens ”).

(c) If Seller is unable, elects not or is deemed to elect not, to eliminate all Unpermitted Exceptions in accordance with the provisions of this Section 4.1.1 (other than any Monetary Liens or as otherwise set forth in the Seller Response), or to arrange for title insurance or special endorsements, insuring against enforcement of such Unpermitted Exceptions against, or collection of the same out of, the Property, and to convey title to the Real Property in accordance with the terms hereof on or before the Closing Date (whether or not the Closing is adjourned as provided in Section 4.1.1(b)), then Seller shall notify Purchaser that it elects not to remove the same, in which event Purchaser shall have the right, as its sole remedy for such election of Seller, by delivery of written notice to Seller within three (3) Business Days following receipt of notice from Seller of its election not to remove such Unpermitted Exceptions, to either (i) terminate this Agreement by written notice delivered to Seller (in which event Escrowee shall return the Deposit to Purchaser and no party hereto shall have any further obligations in connection herewith except for the Surviving Obligations), or (ii) accept title to the Real Property subject to such Unpermitted Exception(s) without a reduction in, abatement of, or credit against, the Purchase Price. The failure of Purchaser to deliver timely any written notice of election under this Section 4.1.1(c) shall be conclusively deemed to be an election under clause (ii) above.

(d) If, on the Closing Date, there are any liens or encumbrances that Seller is obligated to discharge under this Agreement (including, without limitation, any Monetary Liens), then Seller shall have the right (but not the obligation) to either (i) arrange, at Seller’s cost and expense, for affirmative title insurance or special endorsements insuring against enforcement of such liens or encumbrances against, or collection of the same out of, the Property, without special premium or other cost or expense to Purchaser, or (ii) use any portion of the Purchase Price to pay and discharge the same, either by way of payment or by alternative manner reasonably satisfactory to the Title Company, and the same shall not be deemed to be Unpermitted Exceptions.

4.1.2 Permitted Exceptions to Title . The Real Property shall be sold and conveyed subject to the following exceptions to title (the “ Permitted Exceptions ”):

(a) any state of facts that an accurate survey may show;

(b) any zoning laws and property-related codes or ordinances promulgated by the United States, the State of California, or any agency, department, commission, bureau or instrumentality of any of the foregoing having jurisdiction over the Property (each, a “ Governmental Authority ”), as the same may now exist or may be hereafter modified, supplemented or promulgated;

(d) any exceptions that Purchaser shall have agreed or be deemed to have agreed to waive as an Unpermitted Exception; and

(e) the printed exceptions which appear in the standard form owner’s policy of title insurance issued by the Title Company in the State of California.

4.2 Due Diligence Reviews . Seller shall, within five (5) Business Days following the Effective Date, subject to the terms set forth in this Section 4.2 below, deliver to Purchaser copies of all documents readily available in Seller’s possession relevant to the ownership, operation, management and/or leasing of the Property, including, without limitation, the materials pertaining to the Property which are listed on Exhibit C attached hereto (the “ Due Diligence Items ”). Notwithstanding the foregoing, in the event the duplication and delivery of any such Due Diligence Items to Purchaser is not commercially reasonable, then Seller shall make such other Due Diligence Items available to Purchaser through commercially reasonable accommodations to allow Purchaser to review such materials. Except for title and survey matters (which shall be governed by the provisions of Section 4.1 above), Purchaser shall have until the expiration of the Due Diligence Period to perform and complete all of Purchaser’s due diligence examinations, reviews and inspections of all matters pertaining to the purchase of the Property, including all leases and service contracts, and all physical, environmental and compliance matters and conditions respecting the Property (collectively, the “ Investigations ”), which Investigations shall at all times be subject to Purchaser’s compliance with the provisions of this Section 4.2. During the Due Diligence Period, Seller shall provide Purchaser with reasonable access to the Property during ordinary business hours upon reasonable advance notice and shall also make available to Purchaser at the offices of the property manager of the Property,

which is located at 2185 N. California Blvd., Suite 275, Walnut Creek, California 94596, access to the Due Diligence Items and any other documents as Purchaser shall reasonably request, all upon reasonable advance written notice; provided, however, excepting for the Due Diligence Items specifically enumerated in Exhibit C , in no event shall Seller be obligated to make available: (1) any document or correspondence which would be subject to the attorney-client privilege; (2) any document or item which Seller is contractually bound (or bound under applicable laws) to keep confidential; (3) any documents pertaining to the marketing of the Property for sale to prospective purchasers; (4) any internal memoranda, reports or assessments relating to the Property; (5) appraisals of the Property whether prepared internally by Seller or Seller’s affiliates or externally; or (6) any documents which Seller reasonably considers confidential or proprietary. Any entry upon the Property and all Investigations shall be made or performed during ordinary business hours and at the sole risk and expense of Purchaser, and shall not interfere with the activities on or about the Property of Seller, its tenants and their employees and invitees. Purchaser shall:

(a) promptly repair any damage to the Property resulting from any such Investigations and replace, refill and regrade any holes made in, or excavations of, any portion of the Property used for such Investigations so that the Property shall be in the same condition that it existed in prior to such Investigations, ordinary wear and tear excepted;

(b) fully comply with all laws applicable to the Investigations and all other activities undertaken in connection therewith;

(d) take reasonable actions and implement reasonable protections to ensure that the Investigations and the equipment, materials, and substances generated, used or brought onto the Property in connection with the Investigations, pose no threat to the safety or health of persons or the environment, and cause no damage to the Property or other property of Seller or other persons;

(e) furnish to Seller, at no cost or expense to Seller, copies of the Survey, soil test results, engineering, asbestos, environmental and other studies and reports (other than internal analysis and proprietary information of Purchaser) relating to the Investigations which Purchaser shall obtain with respect to the Property promptly after Purchaser’s receipt of same;

(f) maintain or cause to be maintained, at Purchaser’s expense, a policy of commercial general liability insurance, with a broad form contractual liability endorsement and with a combined single limit of not less than $2,000,000 per occurrence for bodily injury and property damage, automobile liability coverage including owned and hired vehicles with a combined single limit of $2,000,000 per occurrence for bodily injury and property damage, and an excess umbrella liability policy for bodily injury and property damage in the amount of $5,000,000, insuring Purchaser, Seller, J.P. Morgan Investment Management Inc., and JPMorgan Chase Bank, N.A., as additional insureds,

against any injuries or damages to persons or property that may result from or are related to (i) Purchaser’s and/or “Purchaser’s Representatives” (as hereinafter defined) entry upon the Property, (ii) any Investigations or other activities conducted thereon, and/or (iii) any and all other activities undertaken by Purchaser and/or “Purchaser’s Representatives”, all of which insurance shall be on an “occurrence form” and otherwise in such forms acceptable to Seller and with an insurance company acceptable to Seller, and deliver a copy of such insurance policy to Seller prior to the first entry on the Property;

(g) not permit the Investigations or any other activities undertaken by Purchaser or Purchaser’s Representatives to result in any liens, judgments or other encumbrances being filed or recorded against the Property, and Purchaser shall, at its sole cost and expense, promptly discharge of record any such liens or encumbrances that are so filed or recorded (including liens for services, labor or materials furnished); and

(h) indemnify Seller and any agent, advisor, representative, affiliate, employee, director, partner, member, beneficiary, investor, servant, shareholder, trustee or other person or entity acting on Seller’s behalf or otherwise related to or affiliated with Seller (collectively, “ Seller Related Parties ”) and hold harmless Seller and Seller Related Parties from and against any and all claims, demands, causes of action, losses, damages, liabilities, costs and expenses (including attorneys’ fees and disbursements) (collectively, “ Claims ”), suffered or incurred by Seller or any Seller Related Party and arising out of or in connection with (i) Purchaser’s and/or Purchaser’s Representatives’ entry upon the Property, (ii) any Investigations or other activities conducted thereon by Purchaser or Purchaser’s Representatives, (iii) any liens or encumbrances filed or recorded against the Property as a consequence of the Investigations and/or (iv) any and all other activities undertaken by Purchaser or Purchaser’s Representatives with respect to the Property, except to the extent arising out of or in connection with the gross negligence or willful misconduct of Seller or any Seller Related Party. The foregoing indemnity shall not include any Claims that result solely from the mere discovery, by Purchaser or Purchaser’s Representatives, of pre-existing conditions on the Property during Investigations conducted pursuant to, and in accordance with, the terms of this Agreement.

Without limiting the foregoing, in no event shall Purchaser or Purchaser’s Representatives, without the prior written consent of Seller, which consent may be withheld in Seller’s sole and absolute discretion, make any intrusive physical testing (environmental, structural or otherwise) at the Property (such as soil borings, water samplings or the like). Furthermore, Purchaser or Purchaser’s Representatives shall not contact any Governmental Authority having jurisdiction over the Property or contact any other tenants at the Property without providing advance written notice to Seller, and Seller shall have the right to be present at the time of Purchaser’s communications with such Governmental Authority or other tenants, provided that if Seller is not reasonably available within three (3) Business Days of Purchaser’s request therefor, Purchaser shall be entitled to conduct such communications without Seller’s presence.

The provisions of this Section 4.2 shall survive the Closing or a termination of this Agreement.

4.2.1 Property Information and Confidentiality . All “Information” (as hereinafter defined) provided to Purchaser shall be subject to the following terms and conditions:

(a) Any information provided or to be provided with respect to the Property is solely for the convenience of Purchaser and Purchaser’s Representatives and was or will be obtained from a variety of sources. Neither Seller nor any Seller Related Party has made any independent investigation or verification of such information and makes no (and expressly disclaims all) representations and warranties as to the truth, accuracy or completeness of the Information, or any other studies, documents, reports or other information provided to Purchaser hereunder and expressly disclaims any implied representations as to any matter disclosed or omitted. Neither Seller nor any Seller Related Party shall be liable for any mistakes, omissions, misrepresentations or any failure to investigate the Property nor shall Seller or any Seller Related Party be bound in any manner by any verbal or written statements, representations, appraisals, environmental assessment reports, or other information pertaining to the Property or the operation thereof, except as expressly set forth in this Agreement.

(b) Neither Purchaser nor Purchaser’s Representatives shall, at any time or in any manner, either directly or indirectly, divulge, disclose or communicate to any person, entity or association the Information, or any other knowledge or information acquired by Purchaser or Purchaser’s Representatives from Seller, any Seller Related Party or by Purchaser’s own inspections and investigations, other than matters that were in the public domain at the time of receipt by Purchaser or Purchaser’s Representatives or become a part of the public domain thereafter through no fault or action of Purchaser or Purchaser’s Representatives. Without Seller’s prior written consent, Purchaser shall not disclose and Purchaser shall direct Purchaser’s Representatives not to disclose to any person, entity or association or any of the terms, conditions or other facts with respect to this Agreement, including the status hereof, and shall not market or offer the Property for sale prior to the Closing. Notwithstanding the foregoing, Purchaser may disclose such of the Information and its other reports, studies, documents and other matters generated by it and the terms of this Agreement (i) as required by law or court order (provided prior written notice of such disclosure shall be provided to Seller) and (ii) as Purchaser deems necessary or desirable to Purchaser’s Representatives in connection with Purchaser’s Investigation and the transaction contemplated hereby, provided that those to whom such Information is disclosed are informed of the confidential nature thereof and agree(s) to keep the same confidential in accordance with the terms and conditions hereof.

(c) Purchaser shall indemnify and hold harmless Seller and all Seller Related Parties from and against any and all Claims suffered or incurred by Seller or any Seller Related Party and arising out of or in connection with a breach by Purchaser or Purchaser’s Representatives of the provisions of this Section 4.2.1, except to the extent caused by the gross negligence or willful misconduct of Seller or any Seller Related Party.

(d) Purchaser and Purchaser’s Representatives shall use reasonable care to maintain in good condition all of the Information furnished or made available to Purchaser and/or Purchaser’s Representatives in accordance with this Section 4.2.1. If this Agreement is terminated, then Purchaser and Purchaser’s Representatives shall promptly deliver to Seller all originals and copies of the Information in the possession of Purchaser and Purchaser’s Representatives.

(e) As used in this Agreement, the term “ Information ” shall mean any of the following: (i) all information and documents in any way relating to the Property, the operation thereof or the sale thereof, including, all leases and contracts furnished to, or otherwise made available for review by, Purchaser or its directors, officers, employees, affiliates, partners, members, brokers, agents or other representatives, including attorneys, accountants, contractors, consultants, engineers and financial advisors (collectively, “ Purchaser’s Representatives ”), by Seller or any Seller Related Party or their agents or representatives, including their contractors, engineers, attorneys, accountants, consultants, brokers or advisors, and (ii) all analyses, compilations, data, studies, reports or other information or documents prepared or obtained by Purchaser or Purchaser’s Representatives containing or based on, in whole or in part, the information or documents described in the preceding clause (i), the Investigations, or otherwise reflecting their review or investigation of the Property.

(f) In addition to any other remedies available to Seller, Seller shall have the right to seek equitable relief, including injunctive relief or specific performance, against Purchaser or Purchaser’s Representatives in order to enforce the provisions of this Section 4.2.1.

(g) Notwithstanding any terms or conditions in this Agreement to the contrary, no conditions of confidentiality within the meaning of IRC §6111(d) or the Treasury Regulations promulgated under IRC Sec. 6011 are intended, and the parties hereto are expressly authorized to disclose every U.S. federal income tax aspect of any transaction covered by this Agreement with any and all persons, without limitation of any kind.

(h) The provisions of this Section 4.2.1 shall survive the Closing or a termination of this Agreement for a period of twelve (12) months after such applicable date.

4.2.2 Termination Right . If, on or before the expiration of the Due Diligence Period, based upon the Investigations and/or the Information, Purchaser shall determine that Purchaser intends to acquire the Property, then Purchaser shall promptly notify Seller of such determination in writing on or before the expiration of the Due Diligence Period (such notice being herein called the “ Approval Notice ”), and, in connection therewith, Purchaser shall be required to deliver the Additional Deposit to Escrowee in accordance with Section 3.1.2. If Purchaser shall deliver the Approval Notice to Seller, and the Additional Deposit to Escrowee, on or before the expiration of the Due Diligence Period, then Purchaser shall be deemed to have agreed that the foregoing matters are acceptable to Purchaser, including, that the Property and its physical condition, zoning and land use approvals and restrictions, and all systems, utilities, and access rights pertaining to the Property are suitable for Purchaser, and that Purchaser intends to proceed with the acquisition of the Property without a reduction in, or an abatement of or credit against, the Purchase Price (and, thereafter, Purchaser shall have no further right to terminate this Agreement pursuant to this Section 4.2.2 and, except as expressly provided otherwise in this Agreement, the Deposit shall be nonrefundable to Purchaser). If Purchaser shall fail to deliver an Approval Notice to Seller on or before the expiration of the Due Diligence Period or shall fail to deliver the Additional Deposit to Escrowee in accordance with Section 3.1.2, TIME BEING OF THE ESSENCE, Purchaser shall be deemed to have elected to terminate this Agreement and shall receive a refund of the Initial Deposit immediately upon Purchaser’s written demand therefor to Escrowee, without any further action or instruction by Seller, and the obligations of the parties hereunder shall terminate (and no party hereto shall have any further obligations in connection herewith except for the Surviving Obligations).

4.3 Conditions Precedent to Obligations of Purchaser . The obligation of Purchaser to consummate the transactions contemplated by this Agreement shall be subject to the performance and observance, in all material respects, by Seller of all covenants and agreements of this Agreement to be performed or observed by Seller prior to or on the Closing Date and the fulfillment on or before the Closing Date of all other conditions precedent to Closing benefiting Purchaser specifically enumerated in this Agreement, including, without limitation, (i) the condition that Title Company be irrevocably committed and prepared to issue to Purchaser the Owner’s Policy as described in Section 4.1 above, and (ii) the condition set forth in Section 4.5 below, any or all of which may be waived by Purchaser in its sole discretion. The representations and warranties of Seller set forth in Section 7.1.1 shall be true and correct in all material respects on the Closing Date.

4.4 Conditions Precedent to Obligations of Seller . The obligation of Seller to consummate the transactions contemplated by this Agreement shall be subject to the performance and observance, in all material respects, by Purchaser of all covenants and agreements of this Agreement to be performed or observed by Purchaser prior to or on the Closing Date (provided that Purchaser shall have delivered the full amount of the Closing Payment) and the fulfillment on or before the Closing Date of all other conditions precedent to Closing benefiting Seller specifically set forth in this Agreement, any or all of which may be waived by Seller in its sole discretion. The representations and warranties of Purchaser set forth in Section 7.3 shall be true and correct in all material respects on the Closing Date.

4.5 Tenant Estoppel Certificates .

4.5.1 Requirements . Receipt of estoppel certificates (the “ Tenant Estoppel Certificates ”) from Encore Glass, Inc. (“ Encore ”), Hayes Distributing, Inc. (“ Hayes ”) and DGA, Inc. (“ DGA ”), shall, subject to the terms of Section 7.2.3(b), be a condition precedent to Purchaser’s obligation to purchase the Property. Seller shall use commercially reasonable efforts to obtain the Tenant Estoppel Certificates. If the Tenant Estoppel Certificates disclose matters which are materially adverse to the purchase of the Property, and such matters have not been disclosed to Purchaser prior to the expiration of the Due Diligence Period (and, in each case, are not cured or satisfied by Seller prior to the Closing), then the applicable Tenant Estoppel Certificate shall not satisfy the condition to Closing set forth herein for the benefit of Purchaser. Once the Tenant Estoppel Certificates have been executed by Encore and Hayes, as applicable, Seller shall submit the applicable Tenant Estoppel Certificate to Purchaser for Purchaser’s approval. The Tenant Estoppel Certificates received by Purchaser shall be deemed acceptable unless Purchaser objects to the applicable Tenant Estoppel Certificate not later than two (2) Business Days following actual receipt thereof. The failure of Seller to deliver the Tenant Estoppel Certificates shall not be a breach or default by Seller under this Agreement, and shall only be a failure of a condition to closing for Purchaser’s benefit, in which event Purchaser’s sole recourse hereunder in the event of any such failure shall be, in Purchaser’s sole and absolute discretion, to either (i) waive the requirement regarding the Tenant Estoppel Certificates and proceed to the Closing, or (ii) terminate this Agreement by written notice delivered to Seller (in which event Escrowee shall return the Deposit, to the extent deposited

with Escrowee, to Purchaser and no party hereto shall have any further obligations in connection herewith except for the Surviving Obligations). Seller may, in compliance with its obligations hereunder, deliver the Tenant Estoppel Certificates to Encore, Hayes and DGA in any form which does not materially vary from the representations made in the form of Tenant Estoppel Certificate set forth in Exhibit K-1 attached hereto (as modified to make the statements contained therein factually correct with respect to each tenant) or in the form prescribed by the applicable Lease. Notwithstanding anything contained in this Agreement to the contrary, if Seller is unable to obtain the Tenant Estoppel Certificate from DGA, Seller shall have the right (but not the obligation) to deliver to Purchaser on the Closing Date a certificate (a “ Seller’s Estoppel Certificate ”) in the form attached hereto as Exhibit K-2 , executed by Seller, and in such event, Seller shall be deemed to have delivered the Tenant Estoppel Certificate with respect to DGA for purposes of satisfying the condition under this Section 4.5. In addition, Seller shall be released from any liability with respect to such Seller’s Estoppel Certificate upon the sooner to occur of (i) ninety (90) days following the Closing Date and (ii) the date of delivery to Purchaser of the Tenant Estoppel Certificate executed by DGA.

4.5.2 Closing Date Extension . Seller, in its sole and absolute discretion, shall have the right, upon written notice to Purchaser at least two (2) Business Days prior to the Scheduled Closing Date, to adjourn the Scheduled Closing Date for up to thirty (30) days to deliver the Tenant Estoppel Certificates.

5. Closing . The closing (the “ Closing ”) of the sale and purchase contemplated herein shall occur at 8:00 a.m. (Pacific Time) on or before the Scheduled Closing Date (as the same may be extended as expressly provided herein), pursuant to escrow instructions consistent with the terms of this Agreement and otherwise mutually satisfactory to Seller and Purchaser (the date on which the Closing shall occur being herein referred to as the “ Closing Date ”). The Closing shall constitute approval by each party of all matters to which such party has a right of approval and a waiver of all conditions precedent.

5.1 Seller Deliveries . At the Closing, Seller shall deliver or cause to be delivered to Escrowee the following items executed and acknowledged by Seller, as appropriate:

(a) a deed (the “ Deed ”) in the form attached hereto as Exhibit D .

(b) an assignment and assumption of leases and contracts (the “ Assignment and Assumption of Leases and Contracts ”), in the form attached hereto as Exhibit E ;

(d) a certification of non-foreign status in the form attached hereto as Exhibit G , and any required state certificate that is sufficient to exempt Seller from any state withholding requirements with respect to the transactions contemplated hereby;

(e) all existing surveys, blueprints, drawings, plans and specifications for or with respect to the Property or any part thereof, to the extent the same are in Seller’s possession;

(f) all keys to the Improvements, to the extent the same are in Seller’s possession;

(g) originals of all Leases and Contracts that shall remain in effect on the Closing Date, to the extent the same are in Seller’s possession (all items in clauses (e) through (g) may be either delivered at Closing or left at the management office of the Property to the extent not previously delivered to Purchaser);

(h) such further instruments as may be reasonably required by Purchaser or the Title Company to consummate the transactions hereunder;

(i) notices to each of the tenants under the Leases (“ Tenant Notices ”) in the form attached hereto as Exhibit H duly executed by Seller, advising such tenants of the sale of the Property to Purchaser and directing them to make all payments to Purchaser or its designee, which Tenant Notices Purchaser shall, at Purchaser’s sole cost and expense, either mail by certified mail return receipt requested or hand-deliver to each applicable tenant; and

(j) evidence reasonably satisfactory to the Title Company respecting the due organization of Seller and the due authorization and execution by Seller of this Agreement and the documents required to be delivered hereunder.

5.2 Purchaser Deliveries . At the Closing, Purchaser shall deliver or cause to be delivered to Escrowee the following items executed and acknowledged by Purchaser, as appropriate:

(a) payment of the Closing Payment to be made in accordance with Section 3;

(b) the Assignment and Assumption of Leases; and Contracts;

(d) such further instruments as may be reasonably required by Seller and the Title Company to consummate the transactions hereunder; and

(e) evidence reasonably satisfactory to the Title Company respecting the due organization of Purchaser and the due authorization and execution by Purchaser of this Agreement and the documents required to be delivered hereunder.

5.3 Closing Costs . Seller shall pay (a) all transfer taxes payable in connection with the transaction contemplated herein, and (b) the title insurance premium for a CLTA standard coverage policy with coverage in the amount of the Purchase Price, including the cost of endorsements or modifications to the policy that Seller has agreed to make or is required to make to insure against any Monetary Liens. Purchaser shall pay (a) the amount by which the

title insurance premium for the Owner’s Policy and all endorsements exceeds the cost of CLTA standard coverage, other than those endorsements or modifications that Seller has agreed to make or is required to make to insure against any Monetary Liens, (b) all recording charges payable in connection with the recording of the Deed, (c) all of the costs of Escrowee, (d) the cost of the Survey, and (e) all fees, costs or expenses in connection with Purchaser’s due diligence reviews hereunder. Any other closing costs shall be allocated in accordance with local custom. Except as expressly provided in the indemnities set forth in this Agreement, Seller and Purchaser shall pay their respective legal, consulting and other professional fees and expenses incurred in connection with this Agreement and the transactions contemplated hereby and their respective shares of prorations as hereinafter provided. The provisions of this Section 5.3 shall survive the Closing or a termination of this Agreement.

5.4 Prorations .

5.4.1 The following provisions shall govern the adjustments and prorations that shall be made at Closing and the allocation of income and expenses from the Property between Seller and Purchaser. Except as expressly provided in this Section 5.4.1, all items of operating revenue and operating expenses of the Property, with respect to the period prior to and ending at 11:59 p.m. local time at the Property on the day immediately preceding the Closing Date (the “ Cut-off Time ”), shall be for the account of Seller and all items of operating revenue and operating expenses of the Property with respect to the period from and after the Cut-off Time, shall be for the account of Purchaser. Without limitation on the foregoing the following shall be prorated between Purchaser and Seller as of the Cut-off Time:

(a) All non-delinquent real estate taxes, water charges, sewer rents, vault charges and assessments on the Property on the basis of the fiscal year for which assessed. In no event shall Seller be charged with or be responsible for any increase in the taxes on the Property resulting from the sale of the Property or from any improvements made or leases entered into on or after the Closing Date. If any assessments on the Property are payable in installments, then the installment for the current period shall be prorated (with Purchaser assuming the obligation to pay any installments due after the Closing Date).

(b) Subject to this Section 5.4.1(b), all fixed rent and regularly scheduled items of additional rent under the Leases, and other tenant charges if, as and when received. Seller shall deliver or provide a credit in an amount equal to all prepaid rentals for periods after the Closing Date and all refundable cash security deposits (to the extent the foregoing were made by tenants under the Leases and are not applied or forfeited prior to the Closing Date) to Purchaser on the Closing Date. Rents which are delinquent as of the Closing Date shall not be prorated on the Closing Date. Purchaser shall include such delinquencies in its normal billing and shall diligently pursue the collection thereof in good faith after the Closing Date (but Purchaser shall not be required to litigate or declare a default in any Lease and in no event shall Purchaser incur any liability to Seller for failure to collect such delinquencies). To the extent Purchaser receives rents on or after the Closing Date, such payments shall be applied first toward the rents for the month in which such payment is collected, second to the rents for the month in which Closing occurs, third to any delinquent rents owed to Seller, with Seller’s share thereof being held by Purchaser in trust for Seller and promptly delivered to Seller by Purchaser, and fourth toward any rents that shall then be due and payable to Purchaser.

Purchaser may not waive any delinquent rents nor modify a Lease so as to reduce or otherwise affect amounts owed thereunder for any period in which Seller is entitled to receive a share of charges or amounts without first obtaining Seller’s written consent. Seller reserves the right to pursue any remedy against any tenant owing delinquent rents and any other amounts to Seller (but shall not be entitled to terminate or threaten to terminate any lease or any tenant’s right to possession), which right shall include the right to continue or commence legal actions or proceedings against any tenant, provided that with respect to any rents or other amounts so collected by Seller, Purchaser’s share thereof, if any, shall be held by Seller in trust for Purchaser and promptly delivered to Purchaser by Seller following the conclusion of such legal action or proceeding, if any. Delivery of the Assignment and Assumption of Leases and Contracts shall not constitute a waiver by Seller of such right, and such right shall survive the Closing. Purchaser shall reasonably cooperate with Seller in any collection efforts hereunder (but shall not be required to litigate or declare a default under any Lease). With respect to delinquent rents and any other amounts or other rights of any kind respecting tenants who are no longer tenants of the Property as of the Closing Date, Seller shall retain all rights relating thereto.

(c) Tenants of the Property may be obligated to pay, as additional rent, certain percentage rent, escalations in base rent and pass throughs of operating and similar expenses pursuant to the terms of the Leases (collectively, “ Additional Rents ”). Seller shall send all tenants at the Property reconciliation statements for calendar year 2011 prior to Closing and shall remain exclusively liable for any Additional Rents attributable to such calendar year. Purchaser shall cooperate with Seller and the applicable tenants to conduct and conclude such reconciliation; provided, however, Purchaser shall not be required to incur any third party out-of-pocket costs or expenses in connection with such cooperation with Seller. If Seller collected estimated prepayments of Additional Rents during calendar year 2011 in excess of any tenant’s share of such expenses, then Seller shall be solely responsible for crediting or repaying those amounts to the appropriate tenants under the Leases. If Seller under-collected estimated prepayments of Additional Rents during calendar year 2011, then Seller shall be solely entitled to any reimbursement from the tenants with respect to such amounts and Purchaser shall promptly remit to Seller any amounts received by Purchaser from such tenants with respect to such Additional Rents if received after Closing; Purchaser shall reasonably cooperate with Seller to pursue the collection of any such amount in the ordinary course of business (but Purchaser shall not be required to incur any third party out-of-pocket costs or expenses in connection therewith or litigate or declare a default in any Lease and, provided that Purchaser shall have complied with the foregoing obligations, in no event shall Purchaser incur any liability to Seller for failure to collect such amounts). With respect to any Additional Rents for calendar year 2012, the only proration to be made at Closing, if any, shall be a credit to Seller if Seller fully paid the operating expenses but did not receive payment of the Additional Rents for the period commencing on January 1, 2012 and ending on the Closing Date (the “ Stub Period ”), or a credit to Purchaser if Seller did not pay the operating expenses but received the Additional Rents for the Stub Period (in each case the credit being the amount of the Additional Rents billed to the tenants for the Stub Period). There shall be no further reconciliation after the Closing with respect to 2012 Additional Rents. Seller shall be entitled to collect any Additional Rents directly from tenants who are no longer in occupancy of space at the Property, to the extent relating to its period of ownership.

(d) Charges and payments under Contracts or permitted renewals or replacements thereof assigned to Purchaser pursuant to the Assignment and Assumption of Leases and Contracts and any fees or expenses in connection with any agreements recorded against the Property and which are not eliminated as an Unpermitted Exception pursuant to Section 4.1.

(e) Any prepaid items, including fees for licenses which are transferred to Purchaser at the Closing and annual permit and inspection fees required by applicable law.

(f) Utilities, including telephone, steam, electricity and gas, on the basis of the most recently issued bills therefor, subject to adjustment after the Closing when the next bills are available (but in no event later than one hundred twenty (120) days following the date of Closing), or if current meter readings are available, on the basis of such readings.

(g) Deposits with telephone and other utility companies, and any other persons or entities who supply goods or services in connection with the Property if the same are assigned to Purchaser at the Closing, which shall be credited in their entirety to Seller.

(h) Such other items as are customarily apportioned between sellers and purchasers of real properties of a type similar to the Property and located in the same geographic area as the Property, subject to Section 7.2.3(a).

5.4.2 At Closing Seller shall receive a credit for the “Purchaser Leasing Costs” (as defined below) incurred by Seller in connection with the “CytoSport Lease” (as defined below). As used herein, the term “Purchaser Leasing Costs” shall mean any brokerage and leasing commissions (in an amount not to exceed $17,000), tenant improvement costs and other costs and expenses in connection with the lease with “CytoSport” (as defined below). If Purchaser has approved any extension, renewal or expansion of any existing Lease exercised or entered into from and after the Effective Date in accordance with Section 7.2.3, then the parties shall agree to prorate any cost or expense incurred in connection with such extension, renewal or expansion at the time of such approval. Notwithstanding the foregoing, Seller shall be solely responsible for any attorneys’ fees incurred by Seller in connection with the execution of the CytoSport Lease.

5.4.3 If any of the items described in Section 5.4.1 cannot be apportioned at the Closing because of the unavailability of information as to the amounts which are to be apportioned or otherwise, or are incorrectly apportioned at Closing or subsequent thereto, such items shall be apportioned or reapportioned, as the case may be, as soon as practicable after the Closing Date or the date such error is discovered, as applicable; provided that neither party shall have the right to request apportionment or reapportionment of any such item at any time following the one hundred twentieth (120 ^th ) day after the Closing Date. If the Closing shall occur before a real estate tax rate or assessment is fixed for the tax year in which the Closing occurs, the apportionment of taxes at the Closing shall be upon the basis of the tax rate or assessment for the preceding fiscal year applied to the latest assessed valuation. Promptly after the new tax rate or assessment is fixed, but in no event later than one (1) year following the Closing Date, the apportionment of taxes or assessments shall be recomputed and any

discrepancy resulting from such recomputation and any errors or omissions in computing apportionments at Closing shall be promptly corrected and the proper party reimbursed, which obligations shall survive the Closing.

5.4.4 The provisions of this Section 5.4 shall, subject to Section 5.4.3, survive the Closing.

6. Condemnation or Destruction of Property . If after the date hereof but prior to the Closing Date, either a material portion of the Real Property is taken pursuant to eminent domain proceedings or condemnation or any of the Improvements are materially damaged or destroyed by fire or other casualty, Seller shall promptly deliver, or cause to be delivered, to Purchaser, notice of any such eminent domain proceedings or casualty. Seller shall have no obligation to restore, repair or replace any portion of the Real Property or any such damage or destruction. Purchaser may, at its option to be exercised by delivery of written notice to Seller within ten (10) days of Seller’s notice to the Purchaser of the occurrence of such casualty or condemnation, elect not to purchase the Property, in which case the Deposit shall be promptly returned to Purchaser, and this Agreement and the obligations of the parties hereunder shall terminate (and no party hereto shall have any further obligations in connection herewith except for the Surviving Obligations). If Purchaser elects to purchase the Property notwithstanding the casualty or condemnation, Seller shall, at the Closing, assign to Purchaser all of Seller’s interest in all awards or other proceeds for such taking by eminent domain or condemnation or the proceeds of any insurance collected by Seller for such damage or destruction (unless Seller shall have repaired such damage or destruction prior to the Closing and except to the extent any such awards, proceeds or insurance are attributable to lost rents or items applicable to any period prior to the Closing), less the amount of all costs incurred by Seller in connection with the repair of such damage or destruction or collection costs of Seller respecting any awards or other proceeds for such taking by eminent domain or condemnation. In connection with any assignment of awards, proceeds or insurance hereunder, Seller shall credit Purchaser with an amount equal to the applicable deductible amount under Seller’s insurance (but not more than the amount by which the cost, as of the Closing Date, to repair the damage is greater than the amount of insurance proceeds assigned to Purchaser). For purposes of this Section 6, material damage or material condemnation shall be defined as a casualty or condemnation or eminent domain proceeding which causes damage to the Property or results in the taking of a portion of the Property valued at greater than Three Hundred Thousand Dollars ($300,000). The parties hereby waive the provisions of any statute which provides for a different outcome or treatment in the event of a casualty or a condemnation or eminent domain proceeding. The provisions of this Section 6 shall survive the Closing.

7. Representations, Warranties and Covenants .

7.1 Representations, Warranties and Covenants of Seller .

7.1.1 Representations and Warranties of Seller . Subject to the provisions of this Section 7.1.1, Seller hereby represents to Purchaser that:

(a) Leases . Seller has not entered into any leases, licenses or other occupancy agreements to which Seller is a party or is bound affecting any portion of the Property

which will be in force after the Closing, other than the Leases. As used herein, “ Leases ” shall mean, collectively, (i) subject to Section 7.2.3(b), the leases described on Exhibit I attached hereto (the “ Lease Exhibit ”) and (ii) the CytoSport Lease, if applicable. The Leases are in full force and effect and have not, except as set forth in the Lease Exhibit, been amended and there are no security deposits under the Leases, except as set forth in the Lease Exhibit.

(b) Litigation . There are no actions, suits or proceedings pending (including condemnation actions) that have been served on Seller, or to Seller’s actual knowledge, threatened, before any commission, board, bureau, agency, arbitrator, court or tribunal affecting, or that would adversely affect, the Property or the right to occupy or utilize same (other than personal injury or property damage matters which are fully covered by Seller’s insurance and for which Purchaser shall have no liability).

(d) Non-Foreign Person . Seller is not a “foreign person” as defined in Section 1445 of the Internal Revenue Code, as amended.

(e) Contracts . Seller has not entered into any service or equipment leasing contracts relating to the Property which will be in force after the Closing, other than the Contracts. As used herein, “ Contracts ” shall mean, collectively, (i) the contracts described on Exhibit J attached hereto, (ii) contracts which are cancelable on thirty (30) days notice or less without premium or penalty, and (iii) contracts entered into by Seller after the date hereof in accordance with the terms hereof.

(f) Due Authority . This Agreement and all agreements, instruments and documents herein provided to be executed or to be caused to be executed by Seller are, or on the Closing Date will be, duly authorized, executed and delivered by and are binding upon Seller. Seller is a Delaware limited liability company, duly organized and validly existing and in good standing under the laws of the State of Delaware, and is duly authorized and qualified to do all things required of it under this Agreement.

(g) Compliance . Seller has not received any written notice from any Governmental Authority having jurisdiction over the Property which remains uncured as to the violation of any federal, state or local laws, statutes, codes, acts, ordinances, orders, judgments, decrees, injunctions, rules, regulations, permits, licenses, authorizations, directions, zoning ordinances, fire safety laws and regulations, building codes, health code or building pollution laws.

(h) Hazardous Materials . To Seller’s actual knowledge, Seller has not received any written notice from any Governmental Authority or other party of any violation of any laws, rules or regulations pertaining to the protection of the environment or Hazardous Materials (as defined below) which has not been cured. For purposes herein, “ Hazardous Materials ” shall mean any substance or material that is described as a toxic or hazardous substance, waste, material, pollutant, contaminant or infectious waste, or any matter that in certain specified quantities would be injurious to the public health or welfare, or words of similar

import, in any of the Environmental Laws (as defined below) or any other words which are intended to define, list or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, toxicity or reproductive toxicity and includes, without limitation, asbestos, petroleum (including crude oil or any fraction thereof, natural gas, natural gas liquids, liquefied natural gas, or synthetic gas usable for fuel, or any mixture thereof), petroleum products, polychlorinated biphenyls, methane, urea formaldehyde, radon gas, radioactive matter, medical waste, and chemicals which may cause cancer or reproductive toxicity. “ Environmental Laws ” shall mean all federal, state, local and quasi-governmental laws (whether under common law, statute or otherwise), ordinances, decrees, codes, rulings, awards, rules, regulations and guidance documents now or hereafter be enacted or promulgated as amended from time to time, in any way relating to or regulating Hazardous Materials.

Notwithstanding and without limiting the foregoing, if any of the representations or warranties of Seller that survive Closing contained in this Agreement or in any document or instrument delivered in connection herewith are materially false or inaccurate, or Seller is in material breach or default of any of its obligations under this Agreement that survive Closing, and Purchaser nonetheless closes the transactions hereunder and purchases the Property, then Seller shall have no liability or obligation respecting such false or inaccurate representations or warranties or other breach or default (and any cause of action resulting therefrom shall terminate upon the Closing) if either (x) on or prior to Closing, Purchaser shall have had knowledge of the false or inaccurate representations or warranties or other breach or default, or (y) the accurate state of facts pertinent to such false or inaccurate representations or warranties or other breach or default was contained in any of the Information furnished, reasonably made available to or otherwise obtained by Purchaser.

The provisions of this Section 7.1.1 shall survive the Closing for a period of six (6) months.

7.1.2 GENERAL DISCLAIMER . EXCEPT AS SPECIFICALLY SET FORTH IN THIS AGREEMENT, THE SALE OF THE PROPERTY HEREUNDER IS AND WILL BE MADE ON AN “AS IS”, “WHERE IS” AND “WITH ALL FAULTS” BASIS, WITHOUT REPRESENTATIONS AND WARRANTIES OF ANY KIND OR NATURE, EXPRESS, IMPLIED OR OTHERWISE, INCLUDING ANY REPRESENTATION OR WARRANTY CONCERNING TITLE TO THE PROPERTY, THE PHYSICAL CONDITION OF THE PROPERTY (INCLUDING THE CONDITION OF THE SOIL, AIR, WATER OR THE IMPROVEMENTS), THE ENVIRONMENTAL CONDITION OF THE PROPERTY (INCLUDING THE PRESENCE OR ABSENCE OF HAZARDOUS SUBSTANCES ON OR AFFECTING THE PROPERTY), THE COMPLIANCE OF THE PROPERTY WITH APPLICABLE LAWS AND REGULATIONS (INCLUDING ZONING AND BUILDING CODES OR THE STATUS OF DEVELOPMENT OR USE RIGHTS RESPECTING THE PROPERTY), THE FINANCIAL CONDITION OF THE PROPERTY OR ANY OTHER REPRESENTATION OR WARRANTY RESPECTING ANY INCOME, EXPENSES, CHARGES, LIENS OR ENCUMBRANCES, RIGHTS OR CLAIMS ON, AFFECTING OR PERTAINING TO THE PROPERTY OR ANY PART THEREOF. PURCHASER ACKNOWLEDGES THAT, DURING THE DUE DILIGENCE PERIOD, PURCHASER WILL EXAMINE, REVIEW AND INSPECT ALL MATTERS WHICH IN PURCHASER’S JUDGMENT BEAR UPON THE PROPERTY AND ITS VALUE AND SUITABILITY FOR

PURCHASER’S PURPOSES. PURCHASER IS A SOPHISTICATED PURCHASER WHO IS FAMILIAR WITH THE OWNERSHIP AND OPERATION OF REAL ESTATE PROJECTS SIMILAR TO THE PROPERTY AND THAT PURCHASER HAS OR WILL HAVE ADEQUATE OPPORTUNITY TO COMPLETE ALL PHYSICAL AND FINANCIAL EXAMINATIONS (INCLUDING ALL OF THE EXAMINATIONS, REVIEWS AND INVESTIGATIONS REFERRED TO IN SECTION 4) RELATING TO THE ACQUISITION OF THE PROPERTY HEREUNDER IT DEEMS NECESSARY, AND WILL ACQUIRE THE SAME SOLELY ON THE BASIS OF AND IN RELIANCE UPON SUCH EXAMINATIONS AND THE TITLE INSURANCE PROTECTION AFFORDED BY THE OWNER’S POLICY AND NOT ON ANY INFORMATION PROVIDED OR TO BE PROVIDED BY SELLER (OTHER THAN AS EXPRESSLY PROVIDED HEREIN). EXCEPT AS TO MATTERS SPECIFICALLY SET FORTH IN THIS AGREEMENT: (A) PURCHASER WILL ACQUIRE THE PROPERTY SOLELY ON THE BASIS OF ITS OWN PHYSICAL AND FINANCIAL EXAMINATIONS, REVIEWS AND INSPECTIONS AND THE TITLE INSURANCE PROTECTION AFFORDED BY THE OWNER’S POLICY, AND (B) WITHOUT LIMITING THE FOREGOING, PURCHASER WAIVES ANY RIGHT IT OTHERWISE MAY HAVE AT LAW OR IN EQUITY, INCLUDING THE RIGHT TO SEEK DAMAGES FROM SELLER IN CONNECTION WITH THE ENVIRONMENTAL CONDITION OF THE PROPERTY, INCLUDING ANY RIGHT OF CONTRIBUTION UNDER THE COMPREHENSIVE ENVIRONMENTAL RESPONSE COMPENSATION AND LIABILITY ACT, EXCEPT TO THE EXTENT SUCH DAMAGE IS CAUSED BY SELLER’S BREACH OF ANY REPRESENTATION AND WARRANTY SET FORTH IN SECTION 7.1 ABOVE. THE PROVISIONS OF THIS SECTION 7.1.2 SHALL SURVIVE THE CLOSING.

7.2 Interim Covenants of Seller . Until the Closing Date or the sooner termination of this Agreement in accordance with the terms hereof:

7.2.1 Seller shall maintain the Property in substantially the same manner as prior hereto pursuant to Seller’s normal course of business (but not including the obligation to perform capital expenditures or expenditures which are not incurred in such normal course of business), subject to reasonable wear and tear and further subject to destruction by casualty or other events beyond the control of Seller.

7.2.2 Subject to the terms set forth in this Section 7.2.2, Seller may cancel, modify, extend, renew or permit the expiration of contracts or enter into any new service contract without Purchaser’s consent. After the expiration of the Due Diligence Period, Seller shall not modify, extend, renew or cancel (except as a result of a default by the other party thereunder) or enter into any additional service contracts or other similar agreements without the prior consent of Purchaser, which consent shall not be unreasonably withheld or delayed; provided, however, Purchaser’s consent shall not be required if such contract is cancelable upon not more than thirty (30) days notice without premium or penalty. Purchaser’s failure to disapprove any request for consent by Seller under this Section 7.2.2 within three (3) Business Days following Seller’s request therefor shall be deemed to constitute Purchaser’s consent thereto.

7.2.3

(a) Prior to the expiration of the Due Diligence Period, Seller shall not enter into any new leases, or modifications of existing Leases without obtaining Purchaser’s consent thereto, which consent shall not be unreasonably withheld or delayed. Following the expiration of the Due Diligence Period, Seller shall not enter into any new leases, or modifications of existing Leases without obtaining Purchaser’s consent thereto, which consent may be withheld in Purchaser’s sole and absolute discretion. Notwithstanding the foregoing, Seller has recently executed a lease (the “ CytoSport Lease ”) for 24,000 square feet of space at the Property to “CytoSport, Inc.” (“ CytoSport ”). Seller acknowledges receipt of an executed copy of the CytoSport Lease, CytoSport’s financial statements and any other information that has been delivered by CytoSport to Seller and Purchaser hereby approves the same.

(b) Notwithstanding anything to the contrary contained in this Agreement: (i) Seller makes no representations and assumes no responsibility with respect to the continued occupancy of the Property or any part thereof by any tenant, (ii) the removal of a tenant whether by summary proceedings or otherwise prior to the Closing Date as a result of a tenant default under its respective lease shall not give rise to any claim on the part of Purchaser and (iii) it shall not be grounds for Purchaser’s refusal to close this transaction that any tenant is a holdover tenant or in default under its Lease on the Closing Date and Purchaser shall accept title subject to such holding over or default without an abatement in or credit against the Purchase Price.

7.2.4 Seller shall keep in force and effect with respect to the Property the insurance policies currently carried by Seller or policies providing similar coverage through the Closing Date.

7.2.5 From the Effective Date until Closing, Seller shall not transfer or remove any Personal Property from the Property except for the purpose of repair or replacement thereof. Any items of Personal Property replaced after the Effective Date will be installed prior to Closing and will be of substantially similar quality of the item of Personal Property being replaced. Seller shall promptly provide Purchaser with written notice of any such transfer, removal, or replacement of Personal Property.

7.2.6 From the Effective Date until Closing, Seller shall not knowingly take any action that Seller knows would result (or would likely result) in a failure to comply in all material respects with all laws, ordinances, rules and regulations of any Governmental Authority (collectively, the “ Governmental Regulations ”), applicable to the Property, it being understood and agreed that prior to Closing, Seller will have the right to contest any such Governmental Regulations without Purchaser’s reasonable consent.

7.3 Representations, Warranties and Covenants of Purchaser . Purchaser hereby represents and warrants to Seller that this Agreement and all agreements, instruments and documents herein provided to be executed or caused to be executed by Purchaser are, or on the Closing Date will be, duly authorized, executed and delivered by and are binding upon Purchaser. Purchaser is a corporation, duly organized and validly existing and in good standing under the laws of the State of California and is duly authorized and qualified to do all things required of it under this Agreement. Purchaser is not a debtor in any state or federal insolvency, bankruptcy or receivership proceeding. The representations and warranties of Purchaser shall survive the Closing for a period of twelve (12) months.

8. Release .

8.1 RELEASE . EFFECTIVE AS OF THE CLOSING, PURCHASER SHALL BE DEEMED TO HAVE RELEASED SELLER AND ALL SELLER RELATED PARTIES FROM ALL CLAIMS WHICH PURCHASER OR ANY AGENT, REPRESENTATIVE, AFFILIATE, EMPLOYEE, DIRECTOR, OFFICER, PARTNER, MEMBER, SERVANT, SHAREHOLDER OR OTHER PERSON OR ENTITY ACTING ON PURCHASER’S BEHALF OR OTHERWISE RELATED TO OR AFFILIATED WITH PURCHASER (EACH, A “ PURCHASER RELATED PARTY ”) HAS OR MAY HAVE ARISING FROM OR RELATED TO ANY MATTER OR THING RELATED TO OR IN CONNECTION WITH THE PROPERTY INCLUDING THE DOCUMENTS AND INFORMATION REFERRED TO HEREIN, THE LEASES AND THE TENANTS THEREUNDER, ANY CONSTRUCTION DEFECTS, ERRORS OR OMISSIONS IN THE DESIGN OR CONSTRUCTION OF ALL OR ANY PORTION OF THE PROPERTY AND ANY ENVIRONMENTAL CONDITIONS, AND PURCHASER SHALL NOT LOOK TO SELLER OR ANY SELLER RELATED PARTIES IN CONNECTION WITH THE FOREGOING FOR ANY REDRESS OR RELIEF. THIS RELEASE SHALL BE GIVEN FULL FORCE AND EFFECT ACCORDING TO EACH OF ITS EXPRESSED TERMS AND PROVISIONS, INCLUDING THOSE RELATING TO UNKNOWN AND UNSUSPECTED CLAIMS, DAMAGES AND CAUSES OF ACTION, PROVIDED THAT THIS RELEASE SHALL NOT BE APPLICABLE TO CLAIMS ARISING OUT OF THE EXPRESS COVENANTS, REPRESENTATIONS, OR WARRANTIES SET FORTH IN THIS AGREEMENT THAT SHALL EXPRESSLY SURVIVE THE CLOSING.

AS PART OF THE PROVISIONS OF THIS SECTION, BUT NOT AS A LIMITATION THEREON, PURCHASER HEREBY AGREES THAT THE MATTERS RELEASED HEREIN ARE NOT LIMITED TO MATTERS WHICH ARE KNOWN OR DISCLOSED, AND PURCHASER HEREBY WAIVES ANY AND ALL RIGHTS AND BENEFITS WHICH IT NOW HAS, OR IN THE FUTURE MAY HAVE CONFERRED UPON IT, BY VIRTUE OF THE PROVISIONS OF FEDERAL, STATE OR LOCAL LAW, RULES OR REGULATIONS, INCLUDING SECTION 1542 OF THE CIVIL CODE OF THE STATE OF CALIFORNIA, WHICH PROVIDES AS FOLLOWS:

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.

IN THIS CONNECTION AND TO THE FULLEST EXTENT PERMITTED BY LAW, PURCHASER HEREBY AGREES THAT PURCHASER REALIZES AND ACKNOWLEDGES THAT FACTUAL MATTERS NOW UNKNOWN TO PURCHASER MAY HAVE GIVEN OR MAY HEREAFTER GIVE RISE TO CAUSES OF ACTION, CLAIMS, DEMANDS, DEBTS, CONTROVERSIES, DAMAGES, COSTS, LOSSES AND EXPENSES WHICH ARE PRESENTLY UNKNOWN, UNANTICIPATED AND UNSUSPECTED, AND PURCHASER FURTHER AGREES, REPRESENTS AND WARRANTS THAT THE WAIVERS AND RELEASES HEREIN HAVE BEEN NEGOTIATED AND AGREED UPON IN LIGHT OF THAT REALIZATION AND THAT PURCHASER NEVERTHELESS HEREBY INTENDS TO RELEASE, DISCHARGE AND ACQUIT SELLER AND ALL SELLER RELATED PARTIES FROM ANY SUCH UNKNOWN CAUSES OF ACTION, CLAIMS, DEMANDS, DEBTS, CONTROVERSIES, DAMAGES, COSTS, LOSSES AND EXPENSES WHICH MIGHT IN ANY WAY BE INCLUDED IN THE WAIVERS AND MATTERS RELEASED AS SET FORTH IN THIS PARAGRAPH. THE PROVISIONS OF THIS SECTION ARE MATERIAL AND INCLUDED AS A MATERIAL PORTION OF THE CONSIDERATION GIVEN TO SELLER BY PURCHASER IN EXCHANGE FOR SELLER’S PERFORMANCE HEREUNDER.


PURCHASER’S INITIAL:		/s/ WP				SELLER’S INITIAL:		/s/ EC

8.2 Survival . The provisions of this Section 8 shall survive the Closing or the termination of this Agreement.

9. Remedies For Default and Disposition of the Deposit .

9.1 SELLER DEFAULT . IF THE TRANSACTION HEREIN PROVIDED SHALL NOT BE CLOSED BY REASON OF SELLER’S DEFAULT HEREUNDER, THEN PURCHASER SHALL HAVE, AS ITS SOLE AND EXCLUSIVE REMEDIES (ALL OTHER RIGHTS AND/OR REMEDIES, WHETHER AVAILABLE AT LAW OR IN EQUITY, BEING IRREVOCABLY WAIVED) THE RIGHT TO EITHER (A) TERMINATE THIS AGREEMENT (IN WHICH EVENT THE DEPOSIT SHALL BE RETURNED TO PURCHASER AND PURCHASER SHALL BE ENTITLED TO THE “PURCHASER’S TRANSACTION COSTS” (AS DEFINED BELOW)) AND NEITHER PARTY HERETO SHALL HAVE ANY FURTHER OBLIGATION OR LIABILITY TO THE OTHER EXCEPT WITH RESPECT TO THE SURVIVING OBLIGATIONS, PURCHASER HEREBY WAIVING ANY RIGHT OR CLAIM TO DAMAGES FOR SELLER’S BREACH, OR (B) SPECIFICALLY ENFORCE SELLER’S OBLIGATION TO TRANSFER THE PROPERTY (IT BEING ACKNOWLEDGED THAT THE REMEDY OF SPECIFIC PERFORMANCE SHALL NOT BE APPLICABLE TO ANY OTHER COVENANT OR AGREEMENT OF SELLER CONTAINED HEREIN); PROVIDED THAT ANY ACTION BY PURCHASER FOR SPECIFIC PERFORMANCE MUST BE FILED, IF AT ALL, WITHIN THIRTY (30) DAYS OF DISCOVERY OF SELLER’S DEFAULT, AND THE FAILURE TO FILE WITHIN SUCH PERIOD SHALL CONSTITUTE A WAIVER BY PURCHASER OF SUCH RIGHT AND REMEDY. IF PURCHASER SHALL NOT HAVE FILED AN ACTION FOR SPECIFIC PERFORMANCE WITHIN THE AFOREMENTIONED TIME PERIOD OR SO NOTIFIED SELLER OF ITS ELECTION TO TERMINATE THIS AGREEMENT, PURCHASER’S SOLE REMEDY SHALL BE TO TERMINATE THIS AGREEMENT IN ACCORDANCE WITH CLAUSE (A) ABOVE. NOTWITHSTANDING THE FOREGOING, NOTHING CONTAINED IN THIS SECTION 9.1 WILL LIMIT PURCHASER’S REMEDIES AT LAW, IN EQUITY OR AS HEREIN PROVIDED IN THE EVENT OF A BREACH BY SELLER OF ANY OF THE SURVIVING OBLIGATIONS. In the event Purchaser terminates this Agreement as a result of Seller’s default, then Seller shall reimburse to Purchaser, within ten (10) Business Days after Purchaser’s written request therefor, Purchaser’s actual, third party, out-of-pocket costs and expenses incurred in connection with this Agreement and the transaction contemplated by this Agreement (which were incurred prior to or after the date of this Agreement), including, without limitation, the actual, third party, out-of-pocket costs and expenses in an amount not to exceed $50,000 incurred by Purchaser in connection with: (A) negotiating this Agreement, (B) obtaining the Survey, and (C) Purchaser’s investigations and due diligence activities with respect to the Property (collectively, “ Purchaser’s Transaction Costs ”), provided, that Purchaser shall deliver to Seller a copy of third-party invoices, together with reasonable supporting documentation of such costs and expenses and evidence of payment of such costs.

9.2 PURCHASER DEFAULT . IF THE TRANSACTION HEREIN PROVIDED SHALL NOT BE CLOSED BY REASON OF PURCHASER’S DEFAULT HEREUNDER, THEN THIS AGREEMENT SHALL TERMINATE AND THE RETENTION

OF THE DEPOSIT SHALL BE SELLER’S SOLE AND EXCLUSIVE REMEDY UNDER THIS AGREEMENT, SUBJECT TO THE SURVIVING OBLIGATIONS; PROVIDED, HOWEVER, NOTHING IN THIS AGREEMENT SHALL BE CONSTRUED TO LIMIT SELLER’S RIGHTS OR DAMAGES UNDER ANY INDEMNITIES GIVEN BY PURCHASER TO SELLER UNDER THIS AGREEMENT. IN CONNECTION WITH THE FOREGOING, THE PARTIES RECOGNIZE THAT SELLER WILL INCUR EXPENSE IN CONNECTION WITH THE TRANSACTION CONTEMPLATED BY THIS AGREEMENT AND THAT THE PROPERTY WILL BE REMOVED FROM THE MARKET; FURTHER, THAT IT IS EXTREMELY DIFFICULT AND IMPRACTICABLE TO ASCERTAIN THE EXTENT OF DETRIMENT TO SELLER CAUSED BY THE BREACH BY PURCHASER UNDER THIS AGREEMENT AND THE FAILURE OF THE CONSUMMATION OF THE TRANSACTION CONTEMPLATED BY THIS AGREEMENT OR THE AMOUNT OF COMPENSATION SELLER SHOULD RECEIVE AS A RESULT OF PURCHASER’S BREACH OR DEFAULT.

IN PLACING THEIR INITIALS AT THE PLACES PROVIDED, EACH PARTY SPECIFICALLY CONFIRMS THE ACCURACY OF THE STATEMENTS MADE ABOVE AND THE FACT THAT EACH PARTY WAS REPRESENTED BY COUNSEL WHO EXPLAINED THE CONSEQUENCES OF THIS LIQUIDATED DAMAGES PROVISION AT THE TIME THIS AGREEMENT WAS MADE. THE PAYMENT OF SUCH AMOUNT AS LIQUIDATED DAMAGES IS NOT INTENDED AS A FORFEITURE OR PENALTY WITHIN THE MEANING OF CALIFORNIA CIVIL CODE SECTIONS 3275 OR 3369, BUT IS INTENDED TO CONSTITUTE LIQUIDATED DAMAGES TO SELLER PURSUANT TO CALIFORNIA CIVIL CODE SECTIONS 1671, 1676 AND 1677. FURTHERMORE, EXCEPT FOR PURCHASER’S RIGHT TO SPECIFICALLY ENFORCE THIS AGREEMENT PURSUANT TO SECTION 9.1, PURCHASER SHALL HAVE NO RIGHT TO SEEK DECLARATORY AND/OR INJUNCTIVE RELIEF AND/OR EQUITABLE RELIEF, OR TO RECORD A NOTICE OF THIS AGREEMENT OR ANY RIGHTS IT MAY HAVE HEREUNDER, OR TO RECORD OR FILE A NOTICE OF PENDENCY OF ANY ACTION OR PROCEEDINGS TO ENFORCE THIS AGREEMENT.


Seller:		Purchaser:

Initial here:	/s/ EC	Initial here:	/s/ WP

9.3 Disposition of Deposit . If the transaction contemplated by this Agreement shall close, then the Deposit shall be applied as a partial payment of the Purchase Price.

10. Intentionally Omitted .

11. Miscellaneous .

11.1 Brokers .

11.1.1 Except as provided in Section 11.1.2 below, Seller represents and warrants to Purchaser, and Purchaser represents and warrants to Seller, that no broker or finder has been engaged by it, respectively, in connection with the sale contemplated under this Agreement. In the event of a claim for broker’s or finder’s fee or commissions in connection with the sale contemplated by this Agreement, then Seller shall indemnify, defend and hold harmless Purchaser from the same if it shall be based upon any statement or agreement alleged to have been made by Seller, and Purchaser shall indemnify, defend and hold harmless Seller from the same if it shall be based upon any statement or agreement alleged to have been made by Purchaser.

11.1.2 If and only if the sale contemplated hereunder closes, Seller has agreed to pay a brokerage commission to Cornish and Carey (“ Broker ”) pursuant to a separate written agreement between Seller and Broker. Section 11.1.1 is not intended to apply to leasing commissions incurred in accordance with this Agreement.

11.2 Limitation of Liability .

11.2.1 Notwithstanding anything to the contrary contained in this Agreement or any documents executed in connection herewith, if the Closing of the transaction contemplated hereunder shall have occurred, (i) the aggregate liability of Seller arising pursuant to or in connection with the representations, warranties, indemnifications, covenants or other obligations (whether express or implied) of Seller under this Agreement or any document or certificate executed or delivered in connection herewith shall not exceed Five Hundred Fifty Thousand Dollars ($550,000) (the “ Liability Ceiling ”) and (ii) in no event shall Seller have any liability to Purchaser unless and until the aggregate liability of Seller arising pursuant to or in connection with the representations, warranties, indemnifications, covenants or other obligations (whether express or implied) of Seller under this Agreement or any document or certificate executed or delivered in connection herewith shall exceed Fifty Thousand and 00/100 Dollars ($50,000) (the “ Liability Floor ”). If Seller’s aggregate liability to Purchaser shall exceed the Liability Floor, then Seller shall be liable for the entire amount thereof up to but not exceeding the Liability Ceiling.

11.2.2 No shareholder or agent of Seller or Purchaser, nor any Seller Related Parties or Purchaser Related Parties, shall have any personal liability, directly or indirectly, under or in connection with this Agreement or any agreement made or entered into under or pursuant to the provisions of this Agreement, or any amendment or amendments to any of the foregoing made at any time or times, heretofore or hereafter, and Purchaser or Seller, as the case may be, and its respective successors and assigns and, without limitation, all other persons and entities, shall look solely to Seller’s or Purchaser’s assets, respectively (which, with respect to Seller, shall include Seller’s proceeds from the sale contemplated in this Agreement), for the payment of any claim or for any performance, and Purchaser and Seller, on behalf of itself and its respective successors and assigns, hereby waive any and all such personal liability.

11.3 Exhibits; Entire Agreement; Modification . All exhibits attached and referred to in this Agreement are hereby incorporated herein as if fully set forth in (and shall be deemed to be a part of ) this Agreement. This Agreement contains the entire agreement between the parties respecting the matters herein set forth and supersedes any and all prior agreements between the parties hereto respecting such matters. This Agreement may not be modified or amended except by written agreement signed by both parties.

11.4 Time of the Essence; Business Days . Time is of the essence of this Agreement. However, whenever any action must be taken (including the giving of notice or the delivery of documents) under this Agreement during a certain period of time (or by a particular date) that ends (or occurs) on a non-Business Day, then such period (or date) shall be extended until the next succeeding Business Day. As used herein, the term “ Business Day ” shall be deemed to mean any day, other than a Saturday or Sunday or a day on which commercial banks in the State of New York or in the State of California are not required to be open or are authorized to be closed for business.

11.5 Interpretation . Section headings shall not be used in construing this Agreement. Each party acknowledges that such party and its counsel, after negotiation and consultation, have reviewed and revised this Agreement. As such, the terms of this Agreement shall be fairly construed and the usual rule of construction, to wit, that ambiguities in this Agreement should be resolved against the drafting party, shall not be employed in the interpretation of this Agreement or any amendments, modifications or exhibits hereto or thereto. Whenever the words “including”, “include” or “includes” are used in this Agreement, they shall be interpreted in a non-exclusive manner. Except as otherwise indicated, all Exhibit and Section references in this Agreement shall be deemed to refer to the Exhibits and Sections in this Agreement.

11.6 Governing Law . This Agreement shall be construed and enforced in accordance with the laws of the State of California.

11.7 Successors and Assigns . Prior to Closing and upon at least three (3) Business Days notice, Purchaser may assign this Agreement and all rights and obligations hereunder without Seller’s consent to any parent, subsidiary or affiliate of Purchaser under the control of or common control with Purchaser. For the purposes of this Section 11.7, “control” shall mean the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person or entity, whether through the ownership of voting securities, by contract or otherwise. Except as set forth in the immediately preceding sentence, Purchaser may not assign or transfer its rights or obligations under this Agreement without the prior written consent of the Seller, which consent may be given or withheld in the sole and absolute discretion of Seller, provided that, in the event of such an assignment or transfer, the transferee shall assume in writing all of the transferor’s obligations hereunder (but Purchaser or any subsequent transferor shall not be released from obligations hereunder). Notwithstanding and without limiting the foregoing, no consent given by Seller to any transfer or assignment of Purchaser’s rights or obligations hereunder shall be deemed to constitute a consent to any other transfer or assignment of Purchaser’s rights or obligations hereunder and no transfer or assignment in violation of the provisions hereof shall be valid or enforceable. Subject to the foregoing, this Agreement and the terms and provisions hereof shall inure to the benefit of and be binding upon the successors and assigns of the parties.

11.8 Notices . All notices, requests or other communications which may be or are required to be given, served or sent by either party hereto to the other shall be (a) delivered in person or by facsimile transmission, with receipt thereof confirmed by printed facsimile acknowledgment (with a confirmation copy delivered in person or by overnight delivery contemporaneously therewith), (b) by overnight delivery with any reputable overnight courier service, or (c) by deposit in any post office or mail depository regularly maintained by the United States Postal Office and sent by registered or certified mail, postage paid, return receipt requested, and shall be effective upon receipt (whether refused or accepted) and, in each case, addressed as follows:


		To Seller:

		c/o J.P. Morgan Investment Management Inc. 2029 Century Park East Suite 4150
		Los Angeles, California 90067
		Attention:		Michael Yoo
		Facsimile:		(310) 860-7047
		Telephone:		(310) 860-7126

		With a Copy To:

		c/o J.P. Morgan Investment Management Inc. P.O. Box 5005 New York, New York 10163-5005

		With a Copy To:

		Stroock & Stroock & Lavan LLP
		2029 Century Park East, 16th Floor Los Angeles, California 90067
		Attention:		Stuart Graiwer, Esq.
		Facsimile:		(310) 407-6483
		Telephone:		(310) 556-5983

		To Purchaser:

		Bebe Studio Realty, Inc. 400 Valley Drive Brisbane, California 94005
		Attention:		COO/CFO
		Facsimile:		(415) 657-4437
		Telephone:		(415) 657-4424


		With a Copy To:

		Bebe Studio Realty, Inc. 400 Valley Drive Brisbane, California 94005
		Attention:		General Counsel and Vice President
		Facsimile:		(415) 657-4437
		Telephone:		(415) 657-4424

		With a Copy To:

		Allen Matkins Leck Gamble Mallory & Natsis LLP
		1901 Avenue of the Stars, Suite 1800
		Los Angeles, California 90067
		Attention:		Gerben Hoeksma, Esq.
		Facsimile:		(310) 788-2410
		Telephone:		(310) 788-2400

11.9 Third Parties . Nothing in this Agreement, whether expressed or implied, is intended to confer any rights or remedies under or by reason of this Agreement upon any other person other than the parties hereto and their respective permitted successors and assigns, nor is anything in this Agreement intended to relieve or discharge the obligation or liability of any third persons to any party to this Agreement, nor shall any provision give any third parties any right of subrogation or action over or against any party to this Agreement. This Agreement is not intended to and does not create any third party beneficiary rights whatsoever.

11.10 Legal Costs . The parties hereto agree that they shall pay directly any and all legal costs which they have incurred on their own behalf in the preparation of this Agreement, all deeds and other agreements pertaining to this transaction, and that such legal costs shall not be part of the closing costs. In addition, if either Purchaser or Seller brings any suit or other proceeding with respect to the subject matter or the enforcement of this Agreement, the prevailing party (as determined by the court, agency, arbitrator or other authority before which such suit or proceeding is commenced), in addition to such other relief as may be awarded, shall be entitled to recover reasonable attorneys’ fees, expenses and costs of investigation actually incurred. The foregoing includes attorneys’ fees, expenses and costs of investigation (including those incurred in appellate proceedings), costs incurred in establishing the right to indemnification, or in any action or participation in, or in connection with, any case or proceeding under Chapter 7, 11 or 13 of the Bankruptcy Code (11 United States Code Sections 101 et seq.), or any successor statutes.

11.11 Counterparts . This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same document. Executed copies hereof may be delivered by facsimile, PDF or email, and, upon receipt, shall be deemed originals and binding upon the parties hereto. Without limiting or otherwise affecting the validity of executed copies hereof that have been delivered by facsimile, PDF or email, the parties will use diligent efforts to deliver originals as promptly as possible after execution.

11.12 Effectiveness . In no event shall any draft of this Agreement create any obligation or liability, it being understood that this Agreement shall be effective and binding only when a counterpart hereof has been executed and delivered by each party hereto. Seller shall have the right to discontinue negotiations and withdraw any draft of this Agreement at any time prior to the full execution and delivery of this Agreement by each party hereto. Except as otherwise expressly set forth in this Agreement, Purchaser assumes the risk of all costs and expenses incurred by Purchaser in any negotiations or due diligence investigations undertaken by Purchaser with respect to the Property.

11.13 No Implied Waivers . No failure or delay of either party in the exercise of any right or remedy given to such party hereunder or the waiver by any party of any condition hereunder for its benefit (unless the time specified in this Agreement for exercise of such right or remedy has expired) shall constitute a waiver of any other or further right or remedy nor shall any single or partial exercise of any right or remedy preclude other or further exercise thereof or any other right or remedy. No waiver by either party of any breach hereunder or failure or refusal by the other party to comply with its obligations shall be deemed a waiver of any other or subsequent breach, failure or refusal to so comply.

11.14 Discharge of Seller’s Obligations . Except as otherwise expressly provided in this Agreement, Purchaser’s acceptance of the Deed shall be deemed a discharge of all of the obligations of Seller hereunder and all of Seller’s representations, warranties, covenants and agreements in this Agreement shall merge in the documents and agreements executed at the Closing and shall not survive the Closing, except and to the extent that, pursuant to the express provisions of this Agreement, any of such representations, warranties, covenants or agreements are to survive the Closing.

11.15 No Recordation . Neither this Agreement nor any memorandum thereof shall be recorded and any attempted recordation hereof shall be void and shall constitute a default hereunder.

11.16 Unenforceability . If all or any portion of any provision of this Agreement shall be held to be invalid, illegal or unenforceable in any respect, then such invalidity, illegality or unenforceability shall not affect any other provision hereof, and such provision shall be limited and construed as if such invalid, illegal or unenforceable provision or portion thereof were not contained herein unless doing so would materially and adversely affect a party or the benefits that such party is entitled to receive under this Agreement.

11.17 Waiver of Trial by Jury . TO THE FULLEST EXTENT PERMITTED BY LAW, SELLER AND PURCHASER HEREBY WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER ARISING IN TORT OR CONTRACT) BROUGHT BY EITHER AGAINST THE OTHER ON ANY MATTER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS AGREEMENT.

11.18 Disclosure . All of the terms and conditions of this Agreement (including the identity of Purchaser and the existence of this Agreement) are confidential, and neither party shall disclose such terms and conditions or the existence of this Agreement to anyone other than

to legal counsel, lenders and potential lenders and other agents and representatives who need to know such information in connection with the transactions contemplated herein. Subject to the requirements of applicable laws, neither Seller nor Purchaser shall make any news releases or any public disclosure with respect to the transactions contemplated herein without the prior written consent of the other party, which consent may not be unreasonably withheld; provided, however, that Seller and Purchaser shall be permitted to make any disclosure required by law.

11.19 Consents and Approvals . Except as otherwise expressly provided herein, any determination, election, approval, consent or waiver provided to be given by a party hereunder must be in a form of written communication in order to be effective and may be given or withheld in the sole and absolute discretion of such party.

11.20 California Required Natural Hazard Disclosure . Seller has commissioned the Title Company to prepare the natural hazard disclosure statement in the form required by California Civil Code Section 1103 and shall cause Title Company to deliver the same to Purchaser prior to Closing. Purchaser acknowledges that this transaction is not subject to that Civil Code Section, but that nevertheless the form promulgated therein serves to satisfy other statutory disclosure requirements of the Government Code and Public Resources Code. Seller does not warrant or represent either the accuracy or completeness of the information on such natural hazard disclosure statement, and Purchaser shall use same merely as a guideline in its overall investigation of the Property. THESE HAZARDS MAY LIMIT PURCHASER’S ABILITY TO DEVELOP THE PROPERTY, TO OBTAIN INSURANCE, OR TO RECEIVE ASSISTANCE AFTER A DISASTER. THE MAPS ON WHICH THESE DISCLOSURES ARE BASED ON ESTIMATE WHERE NATURAL HAZARDS EXIST. THEY ARE NOT DEFINITIVE INDICATORS OF WHETHER OR NOT A PROPERTY WILL BE AFFECTED BY A NATURAL DISASTER. PURCHASER MAY WISH TO OBTAIN PROFESSIONAL ADVICE REGARDING THOSE HAZARDS AND OTHER HAZARDS THAT MAY AFFECT THE PROPERTY

11.21 Survival . The provisions of this Section 11 shall survive the Closing or the termination of this Agreement.

[Remainder of Page Intentionally Left Blank]

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

SELLER:

MP BENICIA LOGISTICS, LLC,

a Delaware limited liability company

By:

PRIT Core 501 (c)(25) LLC,

its Sole Member

By:

PRIT Core Realty Holdings LLC,

its Managing Member

By:

Pension Reserves Investment Trust Fund,

its Managing Member

By:

Pension Reserve Investment Management Board, as trustee of the Pension Reserves Investment Trust Fund

By:

JP Morgan Investment Management Inc.,

its Authorized Agent

By:

/s/ Edwin Chin

Name:

Edwin Chin

Title:

Vice President

PURCHASER:

BEBE STUDIO REALTY, INC.,

a California corporation

By:

/s/ Walter Parks

Name:

Walter Parks

Title:

Chief Operating Officer and Chief Financial Officer

EXHIBIT A

(Land)

Real property in the City of Benecia, County of Solano, State of California, described as follows:

PARCEL ONE:

BEGINNING AT THE MOST SOUTHERLY CORNER OF LOT 6 AS SHOWN ON THE SUBDIVISION MAP FOR “FLEETSIDE INDUSTRIAL PARK”, RECORDED JULY 24, 1985 IN BOOK 45 OF MAPS, AT PAGES 57 – 60, SOLANO COUNTY RECORDS, SAID POINT BEING A POINT ON A CURVE CONCAVE TO THE SOUTHEAST HAVING A RADIUS OF 2,032 FEET AND WHOSE RADIAL BEARS NORTH 53° 48' 41" WEST; THENCE NORTH 56° 33' 10" WEST 698.33 FEET; THENCE NORTH 33° 26' 50" EAST 82.16 FEET TO THE BEGINNING OF A NON-TANGENT CURVE CONCAVE TO THE SOUTHEAST HAVING A RADIUS OF 11,359.17 FEET AND WHOSE RADIAL BEARS NORTH 56° 39' 25" WEST; THENCE NORTHERLY ALONG THE CURVE 123.91 FEET THROUGH A CENTRAL ANGLE OF 0° 37' 30" TO A POINT ON A COMPOUND CURVE CONCAVE TO THE SOUTHEAST HAVING A RADIUS OF 5,629.60 FEET AND WHOSE RADIAL BEARS NORTH 55° 55' 35" WEST; THENCE NORTHERLY ALONG THE CURVE 629.34 FEET (629.35 RECORD) THROUGH A CENTRAL ANGLE OF 6° 24' 19"; THENCE SOUTH 52° 07' 58" EAST 710.95 FEET TO A POINT ON A NONTANGENT CURVE CONCAVE TO THE NORTHWEST HAVING A RADIUS OF 968.00 FEET AND WHOSE RADIAL BEARS NORTH 58° 41' 58" WEST; THENCE SOUTHERLY ALONG THE CURVE 110.94 FEET THROUGH A CENTRAL ANGLE OF 6° 34' 00"; THENCE SOUTH 37° 52' 02" WEST 610.43 FEET TO THE BEGINNING OF A TANGENT CURVE CONCAVE TO THE SOUTHEAST HAVING A RADIUS OF 2,032 FEET; THENCE SOUTHERLY ALONG THE CURVE 59.53 FEET THROUGH A CENTRAL ANGLE OF 1° 40' 43" TO THE POINT OF BEGINNING.

PARCEL TWO:

A NON-EXCLUSIVE STORM DRAIN EASEMENT FOR CONSTRUCTION, MAINTENANCE OF STORM DRAINAGE FACILITIES, WORKS, STRUCTURES AND LINES, INCLUDING REASONABLE RIGHTS OF ACCESS THERETO, AS GRANTED IN THE EASEMENT DEED RECORDED APRIL 9, 1996, SERIES NO. 96-22958, SOLANO COUNTY RECORDS, AND BEING DESCRIBED AS FOLLOWS: BEING A PORTION OF “NEW LOT 7” AS SHOWN ON THE LOT LINE ADJUSTMENT MAP RECORDED JUNE 15, 1994, SERIES NO. 1994-58782, SOLANO COUNTY RECORDS, BEGINNING AT THE MOST SOUTHERLY CORNER OF SAID “NEW LOT 7”; THENCE ALONG THE GENERAL SOUTHWEST PROPERTY LINE NORTH 52° 07' 58" WEST 10.03 FEET; THENCE NORTH 30° 42' 31" EAST 8.75 FEET; THENCE SOUTH 59° 17' 29" EAST 10.00 FEET TO A POINT ON A CURVE CONCAVE TO THE NORTHWEST HAVING A RADIUS OF 968.00 FEET AND WHOSE RADIAL BEARS NORTH 59° 17' 29" WEST; THENCE SOUTHWEST ALONG THE CURVE 10.00 FEET THROUGH A CENTRAL ANGLE OF 0° 35' 31" TO THE POINT OF BEGINNING.

APN: 0080-301-200 AND 0080-301-210

A-1

EXHIBIT B

INTENTIONALLY OMITTED.

B-1

EXHIBIT C

DUE DILIGENCE ITEMS

1. A current preliminary title report from Title Company, together with legible copies of all documents referenced or described therein.

2. A list and complete copy of all soil reports, engineering and architectural studies, grading plans, topographical maps and similar data respecting the Property in Seller’s possession.

3. A complete copy of a survey with respect to the Property.

4. Copies of all property tax bills respecting the Property for the current year-to-date and for the preceding three (3) calendar years.

5. A written statement from Seller disclosing any material adverse facts known to Seller respecting the Property, if any.

6. Copies of any environmental or hazardous materials tests, reports, analyses, and reports regarding remediation, demolition or other similar work on or about the Property, together with any correspondence, test results, recommendations and the like, relating thereto.

7. All governmental correspondence, notices and documentation relating to use, zoning, building codes or other regulatory matters, to the extent in Seller’s possession.

8. A detailed rent roll with respect to all tenants or occupants of the Property, and complete copies of all leases and occupancy agreements, including, without limitation, all exhibits, amendments, riders and/or modifications thereto, and copies of all financial data relating to such tenants. Seller shall also provide a security deposit schedule and delinquency report with respect to the tenants and occupants of the Property.

9. A list and complete copies of all service contracts, maintenance contracts, operating contracts, management contracts and warranties relating to the Property.

10. Detailed and complete monthly operating statements respecting the Property for the current year-to-date and for the preceding three (3) calendar years. Seller shall continue to provide such operating statements to Purchaser on a monthly basis until the Closing.

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EXHIBIT D

(Deed)

GRANT DEED

THIS GRANT DEED (this “ Deed ”) is executed as of the day of , 2012, from MP Benicia Logistics, LLC, a Delaware limited liability company (“ Grantor ”), to [ ], a [ ] (“ Grantee ”).

W I T N E S S E T H:

NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged by Grantor, Grantor does hereby grant, bargain and sell, unto Grantee, all the real property more particularly described on Exhibit A attached hereto and made a part hereof, together with all of Grantor’s right, title and interest in all buildings, improvements, fixtures, easements, tenements, hereditaments, and appurtenances of every kind or nature belonging thereto (hereinafter collectively referred to as the “ Property ”), subject to the “ Permitted Exceptions ” (i.e., unrecorded leases with tenants in actual possession, all matters of record and all matters that would be reflected on an accurate survey, as of the time of recordation of this Deed, including the matters set forth on Exhibit B attached hereto).

D-1

WITNESS my hand.

WITNESS:

SELLER:

MP BENICIA LOGISTICS, LLC,

a Delaware limited liability company

By:

PRIT Core 501 (c)(25) LLC,

its Sole Member

By:

PRIT Core Realty Holdings LLC,

its Managing Member

By:

Pension Reserves Investment Trust Fund,

its Managing Member

By:

Pension Reserve Investment Management Board, as trustee of the Pension Reserves Investment Trust Fund

By:

JP Morgan Investment Management Inc.,

its Authorized Agent

By:

Name:

Title:

D-2

ACKNOWLEDGMENT

On , before me, , personally appeared , who proved to me on the basis of satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.

I certify under PENALTY OF PERJURY under the laws of the State of California that the foregoing paragraph is true and correct.

WITNESS my hand and official seal.



Notary Public Signature		Notary Public Seal

D-3

EXHIBITS :

Exhibit A – Property Description

Exhibit B – Permitted Exceptions

D-4

EXHIBIT A

PROPERTY DESCRIPTION

D-5

EXHIBIT B

PERMITTED EXCEPTIONS

D-6

EXHIBIT E

ASSIGNMENT AND ASSUMPTION OF LEASES AND CONTRACTS

THIS ASSIGNMENT AND ASSUMPTION OF LEASES AND CONTRACTS (this “ Assignment ”) is executed as of the day of , 2012 by and between MP Benicia Logistics, LLC, a Delaware limited liability company, having an address c/o J.P. Morgan Investment Management Inc., c/o J.P. Morgan Investment Management Inc. 2029 Century Park East, Suite 4150, Los Angeles, CA 90067 (“ Assignor ”) and [ ] , a [ ] , having an address c/o [ ] (“ Assignee ”).

WHEREAS, Assignee is this day purchasing from Assignor and Assignor is conveying to Assignee the Property (as such term is described in that certain Contract of Sale dated as of between Assignor and Assignee).

WHEREAS, the Property is encumbered by those certain tenants (the “ Tenants ”) occupying space under the leases listed and described on Exhibit A attached hereto and made a part hereof (collectively, the “ Tenant Leases ”).

WHEREAS, in connection with its ownership and management of the Property, Assignor has entered into those certain maintenance, service and supply contracts and equipment leases, in effect on the date hereof, listed and described on Exhibit B attached hereto and made a part hereof (collectively, the “ Contracts ”).

WHEREAS, Assignor desires to transfer and assign to Assignee, and Assignee desires to assume as provided herein, all of Assignor’s right, title and interest in and to the Tenant Leases and the Contracts.

NOW, THEREFORE, in consideration of Ten Dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

Assignor hereby transfers and assigns to Assignee all right, title and interest of Assignor in and to the Tenant Leases and the Contracts.

Assignee hereby affirmatively and unconditionally assumes all of Assignor’s obligations and liabilities under the Tenant Leases and the Contracts arising from and after the date hereof.

Assignor hereby agrees to protect, defend, indemnify and hold Assignee harmless from and against any claims, liabilities, judgments or costs (including, without limitation, reasonable attorneys’ fees and third party out-of-pocket costs) (collectively, “ Claims ”), in connection with the Tenant Leases or Contracts that arise or accrue prior to the date hereof, except to the extent caused by the negligence or willful misconduct of Assignee. Assignee hereby agrees to protect, defend, indemnify and hold

E-1

Assignor harmless from and against any Claims in connection with the Tenant Leases or Contracts that arise or accrue from and after date hereof, except to the extent caused by the negligence or willful misconduct of Assignor.

This Assignment may be executed in any number of counterparts, each of which may be executed by any one or more of the parties hereto, but all of which shall constitute one and the same instrument, and shall be binding and effective when all parties hereto have executed and delivered at least one counterpart.

The terms and provisions of this Assignment shall be binding upon and inure to the benefit of the respective parties hereto, and their respective successors and assigns.

IN WITNESS WHEREOF, the parties hereto have caused this Assignment to be duly executed as of the day and year first written above.

ASSIGNOR:

MP BENICIA LOGISTICS, LLC,

a Delaware limited liability company

By:

PRIT Core 501 (c)(25) LLC,

its Sole Member

By:

PRIT Core Realty Holdings LLC,

its Managing Member

By:

Pension Reserves Investment Trust Fund,

its Managing Member

By:

Pension Reserve Investment Management Board, as trustee of the Pension Reserves Investment Trust Fund

By:

JP Morgan Investment Management Inc.,

its Authorized Agent

By:

Name:

Title:

E-2


ASSIGNEE:

[				]



By:
		Name:
		Title:

E-3

EXHIBIT A

(List of Tenant Leases)

E-4

EXHIBIT B

(List of Contracts)

E-5

EXHIBIT F

BILL OF SALE AND GENERAL ASSIGNMENT

THIS BILL OF SALE AND GENERAL ASSIGNMENT (this “ Assignment ”) is executed as of the day of , 2012 by MP Benicia Logistics, LLC, a Delaware limited liability company, having an address c/o J.P. Morgan Investment Management Inc., 2029 Century Park East, Suite 4150, Los Angeles, CA 90067 (“ Assignor ”) in favor of [ ] , a [ ] , having an address c/o [ ] (“ Assignee ”).

WHEREAS, Assignor desires to assign, transfer, setover and deliver to Assignee all of Assignor’s rights, if any, in and to the Personal Property and the Intangible Property (as such terms are defined in the Agreement) (collectively, the “ Assigned Properties ”) to the extent assignable.

NOW, THEREFORE, in consideration of Ten Dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

Assignor hereby assigns, transfers, sets over and delivers to Assignee, its successors and assigns, all of Assignor’s right, title and interest, if any, in and to the Assigned Properties.

This Assignment is made without warranty, representation, or guaranty by, or recourse against Assignor of any kind whatsoever.

The terms and provisions of this Assignment shall be binding upon and inure to the benefit of the respective parties hereto, and their respective successors and assigns.

F-1

IN WITNESS WHEREOF, Assignor has caused this Assignment to be duly executed as of the day and year first written above.

ASSIGNOR:

MP BENICIA LOGISTICS, LLC,

a Delaware limited liability company

By:

PRIT Core 501 (c)(25) LLC,

its Sole Member

By:

PRIT Core Realty Holdings LLC,

its Managing Member

By:

Pension Reserves Investment Trust Fund,

its Managing Member

By:

Pension Reserve Investment Management Board, as trustee of the Pension Reserves Investment Trust Fund

By:

JP Morgan Investment Management Inc.,

its Authorized Agent

By:

Name:

Title:

F-2

EXHIBIT G

CERTIFICATION OF NON-FOREIGN STATUS UNDER

TREASURY REGULATIONS SECTION 1.1445-2(b)

(NON-DISREGARDED ENTITY GRANTOR/TRANSFEROR)

Section 1445 of the Internal Revenue Code provides that a transferee of a U.S. real property interest must withhold tax if the transferor is a foreign person. For U.S. tax purposes (including section 1445), the owner of a disregarded entity (which has legal title to a U.S. real property interest under local law) will be the transferor of the property and not the disregarded entity. To inform the transferee that withholding of tax is not required upon the disposition of a U.S. real property interest by MP Benicia Logistics, a Delaware limited liability company (“MPBL”) the undersigned hereby certifies the following on behalf of MPBL:

1. MPBL is not a foreign corporation, foreign partnership, foreign trust, or foreign estate (as those terms are defined in the Internal Revenue Code and Income Tax Regulations);

2. MPBL is not a disregarded entity as defined in § 1.1445-2(b)(2)(iii);

3. MPBL’s U.S. employer identification number is ; and

4. MPBL’s office address is .

MPBL understands that this certification may be disclosed to the Internal Revenue Service by transferee and that any false statement contained herein could be punished by fine, imprisonment, or both.

Under penalties of perjury I declare that I have examined this certification and to the best of my knowledge and belief it is true, correct, and complete, and I further declare that I have authority to sign this document on behalf of MPBL.

G-1


Dated:

MP BENICIA LOGISTICS, LLC,

a Delaware limited liability company

By:

PRIT Core 501 (c)(25) LLC,

its Sole Member

By:

PRIT Core Realty Holdings LLC,

its Managing Member

By:

Pension Reserves Investment Trust Fund,

its Managing Member

By:

Pension Reserve Investment Management Board, as trustee of the Pension Reserves Investment Trust Fund

By:

JP Morgan Investment Management Inc.,

its Authorized Agent

By:

Name:

Title:

G-2

EXHIBIT H

(Form of Tenant Notice)

MP Benicia Logistics, LLC

c/o J. P Morgan Investment Management Inc.

2029 Century Park East, Suite 1800

Los Angeles, CA 90067

, 2012

By Certified Mail -

Return Receipt Requested

Re:	Lease (the “ Lease ”) dated between (“ Landlord ”) and encumbering certain real property known as , , (the “ Property ”)

Ladies and Gentlemen:

Please be advised that (1) Landlord has conveyed all of its right, title and interest in and to the Property, including its interest as landlord under the Lease, to (“ Purchaser ”), and (2) Purchaser has assumed Landlord’s obligations under the Lease.

Accordingly, effective as of the date hereof, you are hereby notified and directed to deliver all future rent and additional rent payments due under the Lease, and any notices, inquiries or requests relating thereto, to Purchaser at:

H-1

In addition, all security deposits held by Landlord, if any, together with any interest earned thereon, have been transferred to Purchaser.

Very truly yours,

“LANDLORD”:

MP BENICIA LOGISTICS, LLC,

a Delaware limited liability company

By:

PRIT Core 501 (c)(25) LLC,

its Sole Member

By:

PRIT Core Realty Holdings LLC,

its Managing Member

By:

Pension Reserves Investment Trust Fund,

its Managing Member

By:

Pension Reserve Investment Management Board, as trustee of the Pension Reserves Investment Trust Fund

By:

JP Morgan Investment Management Inc.,

its Authorized Agent

By:

Name:

Title:

H-2

EXHIBIT I

(Lease Exhibit)

I-1

EXHIBIT J

(Contracts)

J-1

EXHIBIT K-1

FORM OF TENANT ESTOPPEL CERTIFICATE

TO:	Bebe Studio Realty, Inc.

400 Valley Drive

Brisbane, California 94005

Attention: COO/CFO

The undersigned (the “ Tenant ”) hereby certifies to Bebe Studio Realty, Inc., a California corporation, and its successors and assigns (the “ Buyer ”), the Buyer’s lender and to MP Benecia Logistics, LLC, a Delaware limited liability company (the “ Landlord ”), the following information with respect to that certain Lease, dated (the “ Lease ”) and Tenant agrees that Landlord, Buyer and Buyer’s lender may rely upon the same:

1. A true, correct and complete copy of the Lease (including all addenda, riders, amendments, modifications and supplements to the Lease) is attached as Exhibit “1”) and each such document is listed below:



a.

b.

c.

d.

e.

f.

2. The Lease constitutes the entire agreement between Landlord and Tenant with respect to the Premises and the Lease has not been modified, changed, altered or amended in any respect except as set forth above.

3. The term of the Lease commenced on , , and, including any presently exercised option or renewal term, will expire on , . Tenant has accepted possession of the Premises and is the actual occupant in possession and has not sublet, assigned or hypothecated Tenant’s leasehold interest, except as follows: .

4. All improvements to be constructed on the Premises by Landlord have been completed and accepted by Tenant and Landlord has paid in full all construction allowances and any allowances and inducements due and payable to Tenant except: .

K-1

5. As of the date of this Estoppel Certificate, Tenant has neither delivered to Landlord nor received from Landlord notice of an event of default which remains uncured.

6. Tenant is currently obligated to pay base rental of $ in monthly installments of $ per month and monthly installments of base rental have been paid through , 20 . The Lease contains the following base rent step ups: .

7. Operating costs, taxes, common area expenses and other pass throughs are presently paid in monthly installments of $ for operating and common area expenses and $ for taxes. Percentage rent is paid as follows: . Percentage rent has been paid through , if applicable. No other rent has been paid more than one (1) month in advance and Tenant has no claim or defense against Landlord under the Lease and is asserting no offsets or credits against either the rent or Landlord. Tenant has no claim against Landlord for any security or other deposits except $ which was paid pursuant to the Lease.

8. Tenant has no option or preferential right to purchase all or any part of the Premises (or the real property of which the Premises are a part) nor any right or interest with respect to the Premises other than as Tenant under the Lease.

9. Tenant has no option, right of first offer or right of first refusal to lease or occupy any other space within the property of which the Premises are a part, except . Tenant has no right to renew or extend the terms of the Lease except .

10. Tenant has no preferential right to parking spaces or storage area except .

11. Tenant has made no agreement with Landlord or any agent, representative or employee of Landlord concerning free rent, partial rent, rebate of rental payments or any other type of rental or other concession except .

12. There has not been filed by or against Tenant a petition in bankruptcy, voluntary or otherwise, any assignment for the benefit of creditors, any petition seeking reorganization or arrangement under the bankruptcy laws of the United States, or any state thereof, or any other State action brought under such bankruptcy laws with respect to Tenant.

13. Tenant recognizes and acknowledges it is executing this Tenant Estoppel Certificate with the intent that Landlord, the Buyer and Buyer’s lenders may rely hereon.

K-2

Dated: , 2012


Very truly yours,

, a

By:
Name:
Title:

[IN THE EVENT THE LEASE IS GUARANTEED BY A THIRD PARTY, ADD THE GUARANTOR ESTOPPEL PROVISION BELOW.]

The undersigned is the guarantor (“ Guarantor ”) pursuant to that certain [Guaranty of Lease] dated , (the “ Guaranty ”) executed in connection with the above-referenced Lease. Guarantor certifies that there are no amendments, modifications or supplements to the Guaranty except as attached hereto as Exhibit “2”. Guarantor certifies that true, correct and complete copies of the Guaranty and all amendments, modifications and supplements thereto are attached hereto as Exhibit “2”, and the Guaranty (including all such amendments, modifications and supplements thereto), is in full force and effect, and represents the entire agreement between Guarantor and Landlord with respect to the Premises and the Building.


“Guarantor”

, a

By:
		Name:
		Title:

[ATTACH ALL DOCUMENTS COMPRISING THE GUARANTY AS EXHIBIT “2”]

K-3

EXHIBIT K-2

SELLER’S ESTOPPEL CERTIFICATE

This Seller’s Estoppel Certificate is executed and delivered as of the day of , 2012 pursuant to, and is subject to the terms and provisions of that certain Contract of Sale (the “ Contract ”) dated between MP Benicia Logistics, LLC, a Delaware limited liability company (“Seller”) and [ ] (“ Purchaser ”). All capitalized terms used but not otherwise defined herein shall have the meanings ascribed to such terms in the Contact.

In connection with the sale of the Property to Purchaser, (“ Tenant ”) has failed to sign and return a Tenant Estoppel Certificate pertaining to the lease (the “ Lease ”) dated as of , by and between Seller, as landlord, and Tenant, as tenant, which Lease encumbers a portion of the Property. Seller, therefore, represents and warrants to Purchaser the following with respect to the Lease:

To Seller’s actual knowledge, attached hereto and made a part hereof as Exhibit A is a true and correct copy of the Lease and all amendments and modifications thereto. To Seller’s actual knowledge, the documents described on Exhibit A attached hereto and made a part hereof represent the entire agreement between the parties as to the Property.

To Seller’s actual knowledge, the Lease commenced on .

To Seller’s actual knowledge, the current monthly amount of rent due under the Lease is $ , which rent has been paid in full through the month of , 2012

To Seller’s actual knowledge, all tenant improvements and other such construction work required to be performed by Landlord pursuant to the Lease has been completed.

References made hereunder to “Seller’s actual knowledge” shall refer only to the current actual (as opposed to constructive) knowledge of Michael Yoo and shall not be construed, by imputation or otherwise, to refer to the knowledge of Seller or any parent, subsidiary or affiliate of Seller or to any other officer, agent, manager, representative or employee of Seller or to impose upon Michael Yoo any duty to investigate the matter to which such actual knowledge, or the absence thereof, pertains.

The undersigned acknowledges that this Seller’s Estoppel Certificate is being delivered to Purchaser, and that said Purchaser will be relying upon the statements contained herein in purchasing the Property from Seller. Notwithstanding the foregoing, this Seller’s Estoppel Certificate shall be of no force or effect and Seller shall be relieved from any liability hereunder upon the sooner to occur of (a) ninety (90) days following the Closing Date and (b) the date of delivery to Purchaser of a Tenant Estoppel Certificate executed by Tenant.

K-1

IN WITNESS WHEREOF, Seller has caused this Seller’s Estoppel Certificate to be duly executed as of the day of , 2012.

SELLER:

MP BENICIA LOGISTICS, LLC,

a Delaware limited liability company

By:

PRIT Core 501 (c)(25) LLC,

its Sole Member

By:

PRIT Core Realty Holdings LLC,

its Managing Member

By:

Pension Reserves Investment Trust Fund,

its Managing Member

By:

Pension Reserve Investment Management Board, as trustee of the Pension Reserves Investment Trust Fund

By:

JP Morgan Investment Management Inc.,

its Authorized Agent

By:

Name:

Title:

K-2

EXHIBIT L

ESCROW AGREEMENT

THIS ESCROW AGREEMENT (this “ Agreement ”), dated as of the day of , 2012, is among First American Title Insurance Company, (“ Escrowee ”), MP Benicia Logistics, LLC, a Delaware limited liability company, (“ Seller ”), and Bebe Studio Realty, Inc., a California corporation (“ Purchaser ”).

W I T N E S S E T H

WHEREAS, Seller and Purchaser entered into that certain Contract of Sale dated as of , 2012, for the purchase and sale of the property known as “Benicia Logistics Center” (the “ Property ”), as more particularly described therein (hereinafter referred to as the “ Contract ”);

WHEREAS, the Contract provides for the terms and conditions applicable to the sale and purchase of the Property and the performance obligations and rights of Seller and Purchaser; and

WHEREAS, Seller and Purchaser agree, pursuant to the Contract, that Escrowee shall hold, in escrow the Deposit (capitalized terms not otherwise defined herein are defined pursuant to Paragraph 6 hereof) and any other documents required to be held by Escrowee pursuant to the Contract (collectively, the “ Closing Documents ”) in accordance with the terms and conditions of the Contract and this Agreement.

NOW, THEREFORE, the parties hereto agree as follows:

1. Appointment of Agent.

1.1 Purchaser and Seller hereby appoint Escrowee to act as their escrow agent on the terms and conditions hereinafter set forth, and Escrowee accepts such appointment.

1.2 Escrowee agrees to hold the Deposit and any other documents required to be held by Escrowee pursuant to the Contract on behalf of the parties to the Contract, and to apply, disburse and deliver the Deposit and Closing Documents as provided in the Contract and this Agreement. In the event of any conflict between the terms and conditions of the Contract and the terms or conditions of this Agreement, as to the obligations of Escrowee, the terms and conditions of this Agreement shall govern and control.

2. Disposition of the Deposit and Closing Documents.

2.1 Escrowee shall hold the Deposit in an interest bearing savings account which rate of interest need not be maximized. Escrowee shall not commingle the Deposit with any other funds.

2.2 Escrowee shall pay the Deposit to Seller or otherwise in accordance with the terms of the Contract. If prior to the Closing, either party makes a demand upon Escrowee for delivery of the Deposit or for the disbursement of any Closing Documents then being held by

L-1

Escrowee, Escrowee shall give notice to the other party of such demand, except with respect to a demand made by Purchaser pursuant to Section 4.2.2 of the Contract, in which event the Deposit shall be automatically delivered to Purchaser pursuant to the terms of such Section 4.2.2 and the terms set forth in this Section 2.2 shall not apply. If a notice of objection to the proposed payment is not received from the other party within seven (7) Business Days after the giving of notice by Escrowee, Escrowee is hereby authorized to deliver the Deposit or Closing Documents, as applicable, to the party who made the demand. If Escrowee receives a notice of objection within said period, then Escrowee shall continue to hold the Deposit or Closing Documents, as applicable, and thereafter pay or disburse it, as the case may be, to the party entitled when Escrowee receives (a) notice from the objecting party withdrawing the objection, or (b) a notice signed by both parties directing disposition of the Deposit or Closing Documents, or (c) a judgment or order of a court of competent jurisdiction.

2.3 Nothing in this Section 2 shall have any effect whatsoever upon Escrowee’s rights, duties, and obligations under Section 3.

3. Concerning Escrowee.

3.1 Escrowee shall be protected in relying upon the accuracy, acting in reliance upon the contents, and assuming the genuineness of any notice, demand, certificate, signature, instrument or other document which is given to Escrowee without verifying the truth or accuracy of any such notice, demand, certificate, signature, instrument or other document;

3.2 Escrowee shall not be bound in any way by any other contract or understanding between the Seller and Purchaser, whether or not Escrowee has knowledge thereof or consents thereto unless such consent is given in writing;

3.3 Escrowee’s sole duties and responsibilities shall be to hold and disburse the Deposit and Closing Documents in accordance with this Agreement and the Contract; provided, however, that Escrowee shall have no responsibility for the clearing or collection of the check representing the Deposit;

3.4 Upon the disbursement of the Deposit and Closing Documents in accordance with this Agreement, Escrowee shall be relieved and released from any liability under this Agreement;

3.5 Escrowee may resign at any time upon at least ten (10) Business Days prior written notice to the Seller and Purchaser hereto. If, prior to the effective date of such resignation, the Seller and Purchaser hereto shall have approved, in writing, a successor escrow agent, then upon the resignation of Escrowee, Escrowee shall deliver the Deposit and any Closing Documents then held by Escrowee to such successor escrow agent. From and after such resignation and the delivery of the Deposit and Closing Documents to such successor escrow agent, Escrowee shall be fully relieved of all of its duties, responsibilities and obligations under this Agreement, all of which duties, responsibilities and obligations shall be performed by the appointed successor escrow agent. If for any reason Seller and Purchaser shall not approve a successor escrow agent within such period, Escrowee may bring any appropriate action or proceeding for leave to deposit the Deposit and Closing Documents with a court of competent

L-2

jurisdiction, pending the approval of a successor escrow agent, and upon such deposit or transfer Escrowee shall be fully relieved of all of its duties, responsibilities and obligations under this Agreement;

3.6 Seller and Purchaser hereby agree to, jointly and severally, indemnify, defend and hold harmless Escrowee from and against any liabilities, damages, losses, costs or expenses incurred by, or claims or charges made against, Escrowee (including reasonable attorneys’ fees and disbursements) by reason of Escrowee performing its obligations pursuant to, and in accordance with, the terms of this Agreement, but in no event shall Escrowee be indemnified for its negligence, willful misconduct or breach of the terms of this Agreement;

3.7 In the event that a dispute shall arise in connection with this Agreement or the Contract, or as to the rights of Seller and Purchaser in and to, or the disposition of, the Deposit or Closing Documents, Escrowee shall have the right to (w) hold and retain all or any part of the Deposit or Closing Documents until such dispute is settled or finally determined by litigation, arbitration or otherwise, or (x) deposit the Deposit or Closing Documents in an appropriate court of law, following which Escrowee shall thereby and thereafter be relieved and released from any liability or obligation under this Agreement, or (y) institute an action in interpleader or other similar action permitted by stakeholders in the State of California, or (z) interplead Seller or Purchaser in any action or proceeding which may be brought to determine the rights of Seller and Purchaser to all or any part of the Deposit or Closing Documents; and

3.8 Escrowee shall not have any liability or obligation for loss of all or any portion of the Deposit by reason of the insolvency or failure of the institution of depository with whom the escrow account is maintained.

4. Termination.

This Agreement shall automatically terminate upon the delivery or disbursement by Escrowee of the Deposit or Closing Documents in accordance with the terms of the Contract and terms of this Agreement, as applicable.

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5. Notices.

All notices, requests or other communications which may be or are required to be given, served or sent by any party hereto to any other party hereto shall be deemed to have been properly given, if in writing and shall be deemed delivered (a) upon delivery, if delivered in person or by facsimile transmission with receipt thereof confirmed by printed facsimile acknowledgment (with a confirmation copy delivered in person or by overnight delivery), (b) one (1) Business Day after having been deposited for overnight delivery with any reputable overnight courier service, or (c) three (3) Business Days after having been deposited in any post office or mail depository regularly maintained by the United States Postal Office and sent by registered or certified mail, postage paid, return receipt requested, and in each case, addressed as follows:


If to Seller:

		c/o J.P. Morgan Investment Management Inc. 2029 Century Park East Suite 4150 Los Angeles, CA 90067 Attention: Michael Yoo Facsimile: (310) 860-7104

with a copy to:

		Stroock & Stroock & Lavan LLP
		2029 Century Park East, 16th Floor
		Los Angeles, CA 90067
		Attention: Stuart Graiwer, Esq.
		Facsimile: (310) 407-6483

If to Purchaser:

		Bebe Studio Realty, Inc.
		400 Valley Drive
		Brisbane, CA 94005
		Attention: COO/CFO
		Facsimile: (415) 657-4437

with a copy to:

		Bebe Studio Realty, Inc.
		400 Valley Drive
		Brisbane, CA 94005
		Attention: General Counsel and Vice President
		Facsimile: (415) 657-4437

and:

		Allen Matkins Leck Gamble Mallory & Natsis LLP
		1901 Avenue of the Stars, Suite 1800
		Los Angeles, CA 90067
		Attention: Gerben Hoeksma, Esq.
		Facsimile: (310) 788-2410

If to Escrowee:

		First American Title Insurance Company
		National Commercial Services, Fourth Floor
		777 South Figueroa Street
		Los Angeles, California 90017
		Attention: Barbara Laffer
		Facsimile: (877) 805-5021

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6. Capitalized Terms.

Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Contract.

7. Governing Law/Waiver of Trial by Jury.

THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO THE CONFLICTS OF LAW PRINCIPLES OF SUCH STATE. THE PARTIES HERETO HEREBY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT.

8. Successors.

This Agreement shall be binding upon and inure to the benefit of the respective successors and permitted assigns of the parties hereto; provided, however, that except as expressly provided herein as to the Escrowee, this Agreement may not be assigned by any party without the prior written consent of the other parties.

9. Entire Agreement.

This Agreement, together with the Contract, contains the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings relating to such subject matter.

10. Amendments.

Except as expressly provided in this Agreement, no amendment, modification, termination, cancellation, rescission or supersession to this Agreement shall be effective unless it shall be in writing and signed by each of the parties hereto.

11. Counterparts and/or Facsimile Signatures.

This Agreement may be executed in any number of counterparts, including counterparts transmitted by facsimile, any one of which shall constitute an original of this Agreement. When counterparts or facsimile copies have been executed by all parties, they shall have the same effect as if the signatures to each counterpart or copy were upon the same documents and copies of such documents shall be deemed valid as originals. The parties agree that all such signatures may be transferred to a single document upon the request of any party. This Agreement shall not be binding unless and until it shall be fully executed and delivered by all parties hereto. In the event that this Agreement is executed and delivered by way of facsimile transmission, each party delivering a facsimile counterpart shall promptly deliver an ink-signed original counterpart of the Agreement to the other party by overnight courier service; provided however, that the failure of a party to deliver an ink-signed original counterpart shall not in any way effect the validity, enforceability or binding effect of a counterpart executed and delivered by facsimile transmission.

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12. Severability.

If any provision of the Agreement or the application of any such provision to any person or circumstance shall be held invalid, illegal, or unenforceable in any respect by a court of competent jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision hereof.

[Remainder of Page Intentionally Left Blank]

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IN WITNESS WHEREOF, the parties have executed and delivered this Escrow Agreement as of the date and year first above written.

FIRST AMERICAN TITLE INSURANCE COMPANY

By:

Name:

Title:

ASSIGNOR:

MP BENICIA LOGISTICS, LLC,

a Delaware limited liability company

By:

PRIT Core 501 (c)(25) LLC,

its Sole Member

By:

PRIT Core Realty Holdings LLC,

its Managing Member

By:

Pension Reserves Investment Trust Fund,

its Managing Member

By:

Pension Reserve Investment Management Board, as trustee of the Pension Reserves Investment Trust Fund

By:

JP Morgan Investment Management Inc.,

its Authorized Agent

By:

Name:

Title:

PURCHASER

BEBE STUDIO REALTY, INC.

a California corporation

By:

Name:

Title:

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Exhibit 31.1

SECTION 302 CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Manny Mashouf, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of bebe stores, inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change to the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: May 10, 2012		/s/ Manny Mashouf
		Manny Mashouf
		Chief Executive Officer

Exhibit 31.2

SECTION 302 CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Walter Parks, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of bebe stores, inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: May 10 2012		/s/ Walter Parks
		Walter Parks
		Chief Operating Officer and Chief Financial Officer

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of bebe stores, inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Manny Mashouf, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, based on my knowledge:

(1)

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


Dated: May 10, 2012		/s/ Manny Mashouf
		Manny Mashouf
		Chief Executive Officer

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of bebe stores, inc. (the “Company”) on Form 10-Q for the quarter ended March 31, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Walter Parks, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, based on my knowledge:

(1)

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


Dated: May 10, 2012		/s/ Walter Parks
		Walter Parks
		Chief Operating Officer and Chief Financial Officer

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company