<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
FACTORY 2-U STORES, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
-----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------------
(5) Total fee paid:
-----------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE>
FACTORY 2-U STORES, INC.
4000 RUFFIN ROAD, SAN DIEGO, CALIFORNIA 92123
(619) 627-1800
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
JUNE 23, 1999
------------------------
TO THE STOCKHOLDERS OF FACTORY 2-U STORES, INC.:
Notice is hereby given that the Annual Meeting of the stockholders of
Factory 2-U Stores, Inc. will be held at the Marriott Hotel & Marina, 333 West
Harbor Drive, San Diego, California, on Wednesday, June 23, 1999 at 10:00
o'clock a.m. for the following purposes:
1. To elect two (2) Class III directors to hold office until the Annual
Meeting of Stockholders in 2002 and until their successors are elected.
2. To vote upon a proposal to amend the Certificate of Incorporation to
reduce to 35,000,000 the number of shares of common stock the Company is
authorized to issue.
3. To consider a proposal to ratify the selection of the Company's
independent accountants.
4. To transact such other business as may properly come before the meeting.
Only stockholders of record as of the close of business on May 14, 1999 will
be entitled to notice of or to vote at the meeting or any adjournment of the
meeting. The Company's transfer books will not be closed.
IF YOU DO NOT INTEND TO BE PRESENT IN PERSON AT THE MEETING, PLEASE SIGN AND
PROMPTLY RETURN THE ENCLOSED PROXY. IF YOU ATTEND THE MEETING AND VOTE IN
PERSON, THE PROXY WILL NOT BE USED.
By Order of the Board of Directors
Wm. Robert Wright II
SECRETARY
Dated: May 24, 1999
<PAGE>
PROXY STATEMENT
---------------------
SOLICITATION AND REVOCATION OF PROXY
The accompanying Proxy is solicited by the Board of Directors of Factory 2-U
Stores, Inc. (the "Company"). All shares represented by proxies will be voted in
the manner designated; or if no designation is made, they will be voted for the
election of the directors named below. Shares represented by proxies which
instruct the proxy holders to abstain (or which are marked by brokers to show
that specified numbers of shares are not to be voted) with regard to particular
matters will not be voted (or will not be voted as to the specified numbers of
shares) with regard to those matters. THIS PROXY STATEMENT AND THE ACCOMPANYING
FORM OF PROXY ARE BEING MAILED ON OR ABOUT MAY 24, 1999 TO ALL STOCKHOLDERS OF
RECORD ON MAY 14, 1999.
REVOCATION
Any stockholder giving a proxy has the power to revoke it at any time before
it is voted by delivery of a written instrument of revocation to the office of
the Company, 4000 Ruffin Road, San Diego, California 92123, or in open meeting,
without, however, affecting any vote previously taken. The presence of a
stockholder at the meeting will not operate to revoke a proxy, but the casting
of a ballot by a stockholder who is present at the meeting will revoke a proxy
as to the matter on which the ballot is cast.
COST AND METHOD OF SOLICITATION
The Company will bear the cost of soliciting proxies. Proxies are being
solicited by mail and, in addition, directors, officers and employees of the
Company may solicit proxies personally or by telephone or telegraph. The Company
will reimburse custodians, brokerage houses, nominees and other fiduciaries for
the cost of sending proxy material to their principals.
VOTING RIGHTS AND PROXIES
Only stockholders of record as of the close of business on May 14, 1999 (the
"Record Date"), will be entitled to vote at the meeting. The only outstanding
voting securities of the Company on that date were 12,114,501 shares of Common
Stock. Each outstanding share of Common Stock is entitled to one vote.
Stock may be voted in person or by proxy appointed by a writing signed by a
stockholder. Any message sent to the Company prior to the time for voting which
appears to have been transmitted by a stockholder, or any reproduction of a
proxy, will be deemed sufficient. No proxy will be revoked by the death or
incapacity of the maker, unless written notice of that death or incapacity is
given to the Company by the fiduciary having control of the shares represented
by the proxy.
<PAGE>
PRINCIPAL STOCKHOLDERS
The following persons are known by the Company to have owned beneficially
more than 5% of any class of the Company's voting securities as of the Record
Date:
<TABLE>
<CAPTION>
COMMON STOCK
NAME AND ADDRESS -----------------------------
OF BENEFICIAL OWNER(1) NUMBER PERCENT OF CLASS
- ---------------------------------------------------------------- ---------- -----------------
<S> <C> <C>
Three Cities Fund II L.P(2)..................................... 1,506,531 12.4
Three Cities Offshore II C.V(2)................................. 2,538,313 21.0
Quilvest American Equity, Ltd................................... 1,184,193 9.8
Craigmuir Chambers
P.O. Box 71, Road Town
Tortola, British Virgin Islands
</TABLE>
- ------------------------
1. Except as otherwise indicated, the address of the beneficial owners is c/o
Three Cities Research, Inc., 650 Madison Avenue, New York, NY 10022.
2. As the investment adviser to both Three Cities Fund II L.P. and Three Cities
Offshore C.V., with power to direct voting and disposition by both those
Funds, Three Cities Research, Inc. may be deemed to be the beneficial owner
of the total 4,044,844 shares owned by both funds. In addition, because H.
Whitney Wagner is a principal officer of the indirect general partner of
Three Cities Fund II L.P. and J. William Uhrig is the sole stockholder of
the indirect general partner of Three Cities Offshore II C.V., Mr. Wagner
may be deemed to be a beneficial owner of the shares owned by Three Cities
Fund II L.P. and Mr. Uhrig may be deemed to be a beneficial owner of the
shares owned by Three Cities Offshore II C.V.
On the Record Date, The Depository Trust Company owned of record 5,257,048
shares of Common Stock, constituting 43.4% of the outstanding Common Stock. The
Company understands those shares were held beneficially for members of the New
York Stock Exchange, some of whom may in turn have been holding shares
beneficially for customers.
2
<PAGE>
As of the Record Date, the Company's directors and executive officers
beneficially owned the following voting securities of the Company:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) OF CLASS
- --------------------------------------------------- ------------------------ -------------------
<S> <C> <C>
John J. Borer III.................................. 116,950 1.0%
William F. Cass.................................... 29,258 *
Peter V. Handal.................................... 68,274 *
B. Mary McNabb..................................... 90,112 *
Ira Neimark........................................ 1,502 *
Tracy W. Parks..................................... 21,662 *
Ronald Rashkow(2).................................. 120,690 1.0%
Michael M. Searles................................. 270,742 2.2%
James D. Somerville................................ 185,148 1.5%
Jonathan W. Spatz.................................. 105,897 *
H. Whitney Wagner(3)............................... 11,009 *
Wm. Robert Wright II............................... 2,151 *
Directors and Officers as a Group.................. 1,023,395 8.4%
</TABLE>
- ------------------------
* Less than 1%.
1. Includes shares which may be acquired within 60 days through the exercise of
stock options or warrants, as follows: Mr. Borer, 92,164 shares; Mr. Cass,
20,591 shares; Mr. Handal, 3,137 shares; Ms. McNabb, 51,678 shares; Mr.
Neimark, 1,252 shares; Mr. Parks, 5,022 shares; Mr. Rashkow, 3,137 shares;
Mr. Searles, 18,080 shares; Mr. Somerville, 39,173 shares; Mr. Spatz, 29,631
shares; Mr. Wagner, 500 shares; Mr. Wright, 500 shares; all officers and
directors as a group, 264,865 shares.
2. Includes 41,591 shares of Common Stock held by members of Mr. Rashkow's
family and 3,137 shares which Mr. Rashkow may acquire within 60 days through
the exercise of stock options. Does not include shares owned by Mr.
Rashkow's adult children.
3. Does not include shares owned by Three Cities Fund II L.P. A corporation of
which Mr. Wagner is an officer is an indirect general partner of that Fund.
Three Cities Research, Inc., of which Mr. Wagner is an officer, and of which
Mr. Wright is a principal, is the adviser to Three Cities Fund II L.P. and
to Three Cities Offshore II C.V., which own a total of 4,044,844 shares and
has the power to direct the voting and disposition of those shares.
PROPOSAL 1
ELECTION OF DIRECTORS
The Board of Directors (the "Board") of the Company is divided into three
classes. Directors are elected, by class, for three year terms. Successors to
the class of directors whose term expires at any annual meeting are elected for
a new three-year term. Messrs. Neimark and Searles are nominated to serve for a
three-year term extending until the Annual Meeting of Stockholders in 2002 and
until a successor is elected.
Unless a proxy contains a contrary instruction, all proxies submitted in the
accompanying form will be voted for the election of the three nominees. If any
nominee becomes unable or unwilling to serve, the accompanying proxy may be
voted for the election of another person designated by the Board. Each director
will be elected by a plurality of the votes cast, assuming a quorum is present.
Stockholders do not have cumulative voting rights in the election of directors.
3
<PAGE>
DIRECTORS
The following table sets forth certain information regarding each nominee
for election as a director and each director whose term of office will continue
after the Annual Meeting.
<TABLE>
<CAPTION>
SERVED ON THE EXPIRATION OF
NAME AGE POSITION BOARD SINCE TERM AS DIRECTOR
- ------------------------------------- --- ------------------------------------ --------------- -----------------
<S> <C> <C> <C> <C>
Michael M. Searles(1)(2)............. 50 Director, Chairman of the Board, 1998 1999
President and Chief Executive
Officer
John J. Borer III(3)................. 41 Director 1994 1999
Ira Neimark(2)....................... 77 Director 1998 1999
H. Whitney Wagner(1)................. 43 Director 1997 2000
Peter V. Handal...................... 56 Director 1997 2001
Ronald Rashkow....................... 56 Director 1997 2001
James D. Somerville(1)(4)............ 57 Director 1997 2001
Wm. Robert Wright II................. 31 Director 1998 2001
</TABLE>
- ------------------------
(1) Member of the Executive Committee.
(2) Nominee for election.
(3) Mr. Borer has advised the Company that he will not stand for re-election.
The Company does not currently expect to fill Mr. Borer's position.
(4) Mr. Somerville has advised the Company that he will resign as a member of
the Board effective June 23, 1999. The Company does not currently expect to
fill Mr. Somerville's position.
MICHAEL SEARLES has been a director of the Company since March 1998. In
addition Mr. Searles has been Chairman of the Board of the Company since
November 1998. Mr. Searles was President and Chief Executive Officer of General
Textiles and Factory 2-U from March 1998 until November 1998. Between May 1996
and June 1997, Mr. Searles held the position of President, Merchandising and
Marketing, at Montgomery Ward Inc. Montgomery Ward, Inc. filed a voluntary
petition under Chapter 11 of the United States Bankruptcy Code in July 1997.
Prior to that, from April 1993 to July 1995, Mr. Searles served as President and
Chief Executive Officer of the Women's Special Retail Group (Casual Corner
Group), a division of U.S. Shoe Corp. Earlier in his career, from 1984 to 1993,
Mr. Searles was President of Kids "R" US, a division of Toys "R" US, Inc.
JOHN J. BORER III has been a director of the Company since August 1994. From
October 1991 to March 1998, Mr. Borer was a Managing Director of Rodman and
Renshaw, Inc., an investment banking firm. On March 18, 1998, Rodman & Renshaw,
Inc. and its parent holding company filed petitions for liquidation under
Chapter 7 of the U.S. Bankruptcy Code. Since March 1998, Mr. Borer has been a
Senior Managing Director of R&R Capital Group, Inc. (which has since been
renamed Rodman & Renshaw, Inc.).
IRA NEIMARK became a director of the Company in August 1998. From 1975 to
1992, he held various positions with Bergdorf Goodman & Co., most recently as
Chairman of the Board and Chief Executive Officer. Since 1992, he has been a
consultant on retailing activities. Currently, he is an advisor to Mitsukushi
Department Stores of Japan and to Three Cities Research. Mr. Neimark is a
director of Garden Ridge corporation (a specialty retailing company) and of
Hermes of Paris, as well as a director of The Fashion Institute Foundation.
H. WHITNEY WAGNER has been director of the Company since January 1997. He is
a Managing Director of Three Cities Research, Inc. He joined Three Cities
Research, Inc. in 1983, was elected a Vice President
4
<PAGE>
in 1986, and was elected to his present position in 1989. Mr. Wagner also serves
on the board of directors of Garden Ridge Corporation, Pameco Corporation and
Leslie Fay Company. From January 1993 to January 1998, Mr. Wagner served on the
board of directors of MLX.
PETER V. HANDAL has been a director of the Company since February 1997.
Since 1990, he has been President of COWI International Group (a management
consulting firm). Mr. Handal is also Chief Executive Officer of J4P Associates
LP (a real estate developer) and President of Fillmore Leasing Company, Inc.
(which leases automobiles, computers and warehouse equipment). He serves on the
Board of Directors of Cole National Corporation, Jos. S. Bank Clothiers, Buster
Brown Apparel (as non-executive Chairman) and W. Kruk, S.A..
RONALD RASHKOW has been a director of the Company since February 1997. He
has been a principal of Chapman Partners, L.L.C., an investment banking firm,
since its founding in September 1995. For more than five years prior to that, he
served as Chief Executive Officer and Chairman of the Board of Directors of
Handy Andy Home Improvement Centers, Inc. (a building supply retailer started by
his family in 1946). Handy Andy Home Improvement Centers, Inc. filed a voluntary
petition under Chapter 11 of the U.S. Bankruptcy Code in October 1995 and was
consensually liquidated in 1996. From 1989 to 1993, Mr. Rashkow was a director,
vice president and consultant to Spirit Holdings Company, Inc., Central Hardware
Company, Inc. and Witte Hardware Corporation (each a retailer and wholesaler of
hardware and building materials). Spirit Holdings Company, Inc., Central
Hardware Company, Inc. and Witte Hardware Corporation filed in voluntary
petition under Chapter 11 of the United States Bankruptcy Code in March 1993 and
emerged from bankruptcy in February 1994.
JAMES D. SOMERVILLE has been a director of the Company since February 1997.
He served as Chairman of the Board from February 1997 to November 1998. He has
more than 30 years of broad-based experience in both consulting and general
management. Since 1996, Mr. Somerville has headed his own firm, Somerville &
Associates, consulting to senior managements and boards of directors. From 1991
until 1996, he served as Executive Vice President of BET, Inc. and as a director
of BET plc, an international services conglomerate.
WM. ROBERT WRIGHT II has been a director of the Company since November 1998.
He has been employed by Three Cities Research, Inc. since 1992, except for a
period from July 1993 to August 1995 when he was in a graduate program at
Harvard University. He has been a Principal of Three Cities Research, Inc. since
1998. Before joining Three Cities Research, Inc., Mr. Wright worked for Marriott
International in its strategic planning department. He is the Secretary (but not
an employee) of the Company.
EXECUTIVE OFFICERS
The following table sets forth certain information concerning the executive
officers of the Company, who are not directors.
<TABLE>
<CAPTION>
OFFICER OF THE
NAME AGE POSITION COMPANY SINCE
- ----------------------------- --- -------------------------------------------------------------- ---------------
<S> <C> <C> <C>
B. Mary McNabb............... 50 Executive Vice President, Merchandising and General 1990
Merchandise Manager
William F. Cass.............. 50 Executive Vice President, Store Operations 1996
Jonathan W. Spatz............ 43 Executive Vice President and Chief Operating Officer 1997
Tracy W. Parks............... 39 Executive Vice President, Information Systems and Chief 1998
Information Officer
Norman G. Plotkin............ 45 Executive Vice President, Store Development and General 1998
Counsel
</TABLE>
5
<PAGE>
B. MARY MCNABB is the Executive Vice President of Merchandising and General
Merchandise Manager of the Company. Ms. McNabb joined the Company in 1990.
WILLIAM F. CASS is the Executive Vice President of Store Operations of the
Company. Mr. Cass joined the Company in March 1996. Prior to joining the
Company, Mr. Cass held positions as Managing Director, Director of New Business
Development and Senior Vice President of Merchandising at Clothestime.
JONATHAN W. SPATZ was appointed Chief Operating Officer of the Company in
December 1998. Mr. Spatz joined the Company in June 1997 as Executive Vice
President and Chief Financial Officer of the Company and served in those
positions until December 1998. Prior to joining the Company, from July 1994 to
June 1997, Mr. Spatz was the Chief Financial Officer of Strouds.
TRACY W. PARKS is the Executive Vice President of Information Systems and
the Chief Information Officer of the Company. Mr. Parks joined the Company in
March 1998. Prior to joining the Company, from April 1996 to March 1998, Mr.
Parks was the Vice President of Management Information Systems of Guess? Inc.
NORMAN G. PLOTKIN is the Executive Vice President of Store Development and
General Counsel of the Company. Mr. Plotkin joined the Company in July 1998.
Prior to joining the Company. Mr. Plotkin was the President of Normark Real
Estate Services, Ltd., a commercial real estate firm based in Des Plaines,
Illinois. Mr. Plotkin was the Senior Vice President of Finance and
Administration and General Counsel of Handy Andy Home Improvement Centers, Inc.
Handy Andy Home Improvement Centers, Inc. filed a voluntary petition under
Chapter 11 of the U.S. Bankruptcy Code in October 1995 and was consensually
liquidated in 1996.
6
<PAGE>
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
The following table contains information about the compensation during
fiscal 1998 of the Company's principal executive officer and each of its other
four most highly paid executive officers:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------------
ANNUAL COMPENSATION AWARDS
------------------------------------- ------------------------- PAYOUTS
OTHER RESTRICTED -------
ANNUAL STOCK SECURITIES LTIP ALL OTHER
NAME AND SALARY BONUS COMPENSATION(1) AWARDS UNDERLYING PAYOUTS COMPENSATION(2)
PRINCIPAL POSITION YEAR(1) ($) ($) ($) ($) OPTIONS/SARS ($) ($)
- ------------------------- ------- -------- ---------- --------------- ---------- ------------ ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael M. Searles ...... 1998 $438,463 $1,834,835 (3) -- 361,596 -- $101,613
President, Chief
Executive Officer and
Chairman of the
Board(4)
William F. Cass ......... 1998 $200,000 $ 100,000 (3) -- -- -- $ 960
Executive Vice 1997 $199,038 $ 32,500 (3) -- 33,147 -- $ 3,900
President Store 1996 $110,769 -- (3) -- 3,013 -- --
Operations
B. Mary McNabb .......... 1998 $200,000 $ 100,000 (3) -- -- -- $ 960
Executive Vice 1997 $197,596 $ 42,500 (3) -- 82,865 -- $ 900
President Merchandising 1996 $168,846 -- (3) -- 2,234 -- $ 1,042
Tracy W. Parks .......... 1998 $137,500 $ 135,000 (3) -- 15,066 -- $ 40,208
Senior Vice President
Information Systems and
Chief Information
Officer(5)
James D. 1998 $150,000 -- (3) -- -- -- --
Somerville(6) ......... 1997 $137,308 -- (3) -- 77,593 -- --
Jonathan W. Spatz ....... 1998 $228,769 $ 122,000 (3) -- 18,080 -- $ 6,296
Executive Vice 1997 $139,423 $ 65,000 (3) -- 36,159 -- --
President and Chief
Operating Officer
</TABLE>
- ------------------------------
(1) The Company refers to a fiscal year by the year in which most of the
activity occurred (for example, the fiscal year ended January 30, 1999 is
referred to as fiscal 1998).
(2) "All Other Compensation" for 1998 includes (i) matching contributions under
the Company's 401(k) Savings Plan and (ii) reimbursement of moving expenses
of $40,208 to Mr. Parks, $101,613 to Mr. Searles and $6,296 to Mr. Spatz.
(3) The aggregate amount of such compensation is less than the lesser of $50,000
or 10% of such person's total annual salary and bonus.
(4) Mr. Searles was appointed President and Chief Executive Officer of the
Company in March 1998 and was appointed Chairman of the Board in November
1998. Mr. Searles' bonus includes $255,616 paid as a sign-on bonus and
$1,579,219 as a supplemental bonus to provide Mr. Searles with a home in
California comparable to his prior residence. Mr. Searles has voluntarily
forgone a performance-based bonus for fiscal 1998 in the amount of $300,000.
(5) Mr. Parks was appointed Senior Vice President of Information Systems and
Chief Information Officer of the Company in March 1998. Mr. Parks' bonus
includes $35,000 paid as a sign-on bonus in March 1998.
(6) Mr. Somerville served as Chairman of the Board until November 1998.
7
<PAGE>
GRANTS OF STOCK OPTIONS
The following table sets forth information concerning the award of stock
options during fiscal 1998.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS/ SARS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO TERM(1)
OPTIONS/SARS EMPLOYEES IN EXERCISE OF BASE -------------------------
NAME GRANTED (#) FISCAL YEAR PRICE ($/SH) EXPIRATION DATE 5% ($) 10% ($)
- ------------------------ ------------- --------------- ----------------- --------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael M. Searles...... 90,399 20.04% $ 5.81 3/10/2003 $ 144,877 $ 320,360
271,197 60.13% $ 6.64 3/10/2007 $ 642,768 $ 1,913,284
William F. Cass......... -- -- -- -- -- --
B. Mary McNabb.......... -- -- -- -- -- --
Tracy W. Parks.......... 15,066 3.34% $ 8.36 4/29/2003 $ 34,606 $ 76,652
James D. Somerville..... -- -- -- -- -- --
Jonathan W. Spatz....... 18,080 4.01% $ 8.36 4/29/2003 $ 41,529 $ 91,987
</TABLE>
- ------------------------
(1) These amounts represent assumed rates of appreciation only. Actual gains, if
any, on stock option exercises are dependent on the future performance of
the Common Stock.
EXERCISE OF STOCK OPTIONS
The following table sets forth information concerning exercises of stock
options during fiscal 1998 and the fiscal year-end value of unexercised options.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/
OPTIONS/SARS AT FY END SARS AT FY END
(#) ($)
SHARES ACQUIRED ----------------------- -----------------------
NAME ON EXERCISE VALUE ($) REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------------- ------------------- --------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C>
Michael Searles................ -- -- 0/361,596 $0/2,013,186
William F. Cass................ -- -- 15,870/20,290 $80,659/91,914
B. Mary McNabb................. -- -- 51,678/38,721 $256,022/175,406
Tracy Parks.................... -- -- 0/15,066 $0/54,840
James D. Somerville............ -- -- 38,419/39,174 $174,038/177,458
Jonathan W. Spatz.............. -- -- 12,053/42,186 $54,600/175,011
</TABLE>
8
<PAGE>
COMPENSATION OF DIRECTORS
During fiscal 1998, directors who were not salaried employees of the Company
received a $10,000 annual fee payable quarterly and a fee of $1,000 for each
meeting of the Board of Directors attended. In addition, since June 20, 1997,
the directors of the Company who were not employees of the Company or of Three
Cities Research, Inc., Messrs. Borer, Handal and Rashkow, and since August 1998,
Mr. Neimark, received at the end of each fiscal quarter, options to purchase
approximately 377 shares of Common Stock. Beginning in fiscal 1999, directors
who are not salaried employees of the Company receive a $12,000 annual fee
payable quarterly and a fee of $1,250 for each meeting of the Board of Directors
attended. In addition, all directors of the Company who are not employees of the
Company receive at the end of each fiscal quarter options to purchase 500 shares
of Common Stock. Each director is also granted 2,000 shares of Common Stock per
year. All directors are reimbursed for any out-of-pocket travel expenses
incurred in attending meetings.
INFORMATION REGARDING THE BOARD OF DIRECTORS
The Board has Audit, Nominating, Executive and Compensation Committees.
The Audit Committee currently consists of Messrs. Borer, Rashkow and Wright.
This Committee met five times in fiscal 1998. Its principal functions are
reviewing and evaluating the results and scope of the audit and other services
provided by the Company's independent accountants, as well as the Company's
accounting principles and system of internal accounting controls. The Company's
By-Laws provide that affiliated transactions and acquisitions by the Company of
businesses not within certain SIC Codes (primarily covering wholesale apparel
trade, retail stores, and apparel stores) must be approved by the Audit
Committee.
The current Compensation Committee consists of Messrs. Handal, Neimark,
Somerville and Wagner. This Committee met five times in fiscal 1998. Its
principal functions are reviewing, approving and recommending to the full Board
compensation arrangements for senior management and employee compensation
programs. The Company's Board of Directors determines the compensation of the
Company's executive officers based on recommendations from the Compensation
Committee.
The Executive Committee consists of Messrs. Searles, Somerville and Wagner.
It is authorized to take such action as the Board of Directors may from time to
time direct.
The Nominating Committee consists of Messrs. Handal, Neimark, Searles and
Wagner. Its principal function is to consider potential nominees for election to
the Board by either incumbent, directors or stockholders.
The Board normally holds meetings quarterly, but holds additional special
meetings when required. During fiscal 1998, the Board met five times. Each
director attended more than three-fourths of the total number of meetings of the
Board and more than three-fourths of the total number of meetings of all
committees of the Board on which he served.
EMPLOYMENT CONTRACTS
Mr. Michael Searles, President and Chief Executive Officer and a member of
the Company's Board of Directors, is employed pursuant to a five-year employment
agreement which expires in March 2003. Under that agreement, Mr. Searles is
entitled to receive an annual salary of not less than $600,000 and an annual
bonus targeted at 50% of the base salary.
In connection with the execution of his employment agreement, the Company
granted Mr. Searles (a) options, which vest over five years, to purchase 90,399
shares for $5.81, which was the closing market price on the day the options were
granted, and (b) options to acquire 271,197 shares for $6.64 per share, of which
options to purchase 135,999 shares become exercisable if and when the market
price of the Common
9
<PAGE>
Stock is at least $19.91 for 60 days in any twelve month period and the
remaining options become exercisable if and when the market price of the Common
Stock is at least $24.89 for 60 days in any twelve month period. In addition,
the Company loaned Mr. Searles $1,400,000 with which to purchase from the
Company what then were 1,400 shares of Series B Preferred Stock (and now are
242,662 shares of Common Stock). The Company has the option to repurchase these
shares at various prices if Mr. Searles' employment terminates before his
employment agreement expires.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT
In connection with Mr. Searles' employment, the Company purchased Mr.
Searles' home in Connecticut for $1.3 million, the fair market value of the
property, to facilitate his relocation to California. The Company subsequently
sold the home.
During fiscal 1998, Ira Neimark, a director, received $125,000 for rendering
consulting services to the Company.
INDEBTEDNESS OF MANAGEMENT
On March 21, 1997, the Company sold 500 shares of Series B Preferred Shares
to Mr. Somerville for $500,000. On March 25, 1997, the Company sold 200 shares
of Series B Preferred Shares for $200,000 to Ms. McNabb and 50 shares to Mr.
Cass for $50,000. On June 16, 1997, the Company sold 250 shares of Series B
Preferred Shares to Mr. Spatz for $250,000. On April 29, 1998, the Company sold
an aggregate of 1,686 shares of Series B Preferred Stock to the following Named
Executive Officers: Mr. Searles 1,400 shares for $1,400,000; Mr. Parks 96 shares
for $120,000; and Mr. Spatz 190 shares for $250,000. Each Series B Preferred
Share has subsequently become 173.33 shares of Common Stock.
The purchase price for all shares were paid in the form of full-recourse
notes receivable secured by the issued stock, for all individuals except that
Mr. Searles' promissory note is partial-recourse and Mr. Spatz's promissory note
dated April 29, 1999 is partial-recourse. The notes accrue interest at 8% per
annum and require principal payments equivalent to 16.25% of the annual bonus of
each purchaser and a balloon payment of the unpaid principal and interest at
maturity. Each of the notes matures five years after its date.
As of the Record Date, the following amounts were outstanding:
<TABLE>
<CAPTION>
NAME OF AMOUNT
DIRECTOR/OFFICER OUTSTANDING
- -------------------------------------------------------------------------------- ------------
<S> <C>
Michael M. Searles.............................................................. $ 1,400,000
William F. Cass................................................................. 40,770
B. Mary McNabb.................................................................. 217,415
Tracy W. Parks.................................................................. 110,928
James D. Somerville............................................................. 584,164
Jonathan W. Spatz............................................................... 522,695
</TABLE>
10
<PAGE>
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors (the "Committee") is
composed entirely of outside directors. The Committee is responsible for
establishing and administering the compensation policies applicable to the
Company's executive officers. All decisions by the Committee are subject to
review and approval by the full Board of Directors.
The Company's executive compensation philosophy and specific compensation
plans tie a significant portion of executive compensation to the Company's
success in meeting specific profit, growth and performance goals.
The Company's compensation objectives include attracting and retaining the
best possible executive talent, motivating executive officers to achieve the
Company's performance objectives, rewarding individual performance and
contributions, and linking executives' and stockholders' interests through
equity based plans.
The Company's executive compensation consists of three key components: base
salary, annual incentive compensation and stock options, each of which is
intended to complement the others and, taken together, to satisfy the Company's
compensation objectives. The Compensation Committee's policies with respect to
each of the three components are discussed below.
BASE SALARY. In the early part of each fiscal year, the Compensation
Committee reviews the base salary of the Chief Executive Officer (subject to
requirements of his employment agreement) and the recommendations of the CEO
with regard to the base salary of all other executive officers and approves,
with any modifications it deems appropriate, annual base salaries for each of
the Company's executive officers. Recommended base salaries of the executive
officers, other than the CEO, are based on an evaluation of the individual
performance of the executive officer, including satisfaction of annual
objectives. The recommended base salary of the CEO is based on achievement of
the Company's annual goals relating to financial objectives, including earnings
growth and return on capital employed, and an evaluation of individual
performance.
Recommended base salaries of the executive officers are also in part based
upon an evaluation of the salaries of people who hold comparable positions at
comparable companies.
ANNUAL INCENTIVE COMPENSATION. The Company's executive officers participate
in a discretionary incentive bonus plan which provides for the payment of annual
bonuses in cash or stock (or both), based on the Company's success in attaining
financial objectives, and subjective factors, established from time to time by
the Committee or the Board of Directors. The Committee will consider aggregate
incentive cash and stock bonus payments to the executive officers, as a group,
of up to 50% of their base salaries, and will consider bonus payments in stock
in excess of 50% of the aggregate base salaries. The Committee awarded cash
bonuses of $457,000 to its executive officers for fiscal 1998.
STOCK OPTIONS. The primary objective of the stock option program is to link
the interests of the Company's, executive officers and other selected employees
to those of the stockholders through significant grants of stock options. The
aggregate number of options recommended by the Committee is based on practices
of comparable companies, while grants of stock options to specific employees
reflect their expected long-term contribution to the success of the Company.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER. As of March 30, 1998, the
Company entered into an employment agreement with Michael Searles, who has been
its Chief Executive Officer since October 1998 (and was the chief executive
officer of its operating subsidiaries before then) and paid Mr. Searles a
signing bonus and a housing bonus, as described under "Employment Contract". The
committee believed Mr. Searles' base salary of $600,000 per year was
commensurate with the salaries paid to other executives with similar experience
in comparable companies. Mr. Searles' annual bonus is based on the achievement
of corporate objectives set annually by the Committee after consultation with
Mr. Searles. Mr. Searles'
11
<PAGE>
annual bonus is targeted at 50% of his base salary, but may vary depending on
Company performance. In addition, Mr. Searles received options to purchase
shares of Common Stock (subject to vesting provisions tied to increases in the
market value of the Company's common stock). The Board felt these were
commensurate with Mr. Searles' senior position. Also, the Company made a $1.4
million partial recourse loan to Mr. Searles, which he used to purchase stock of
the Company. This helped carry out the Committee's belief that the most
significant portion of Mr. Searles potential compensation should be tied to the
appreciation of the share price of the Company's Common Stock.
Compensation Committee:
Peter V. Handal
Ira Neimark
James D. Somerville
H. Whitney Wagner
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Except for Mr. Somerville, no member of the Compensation Committee of the
Board of Directors of the Company was, during fiscal 1998, an officer or
employee of the Company or any of its subsidiaries, or was formerly an officer
of the Company or any of its subsidiaries. Mr. Somerville was Chairman of the
Board until November 1998. He is an employee of the Company and received a
salary of $150,000.
12
<PAGE>
PERFORMANCE CHART
The following chart compares the five-year cumulative total return (change
in stock price plus reinvested dividends) on the Common Stock with the total
returns of the Nasdaq Composite Index, a broad market index covering stocks
listed on the Nasdaq National Market, the Dow Jones Retailers Broadline Index
("Industry Index") which currently encompasses 26 companies, and the companies
in the Family Clothing Retail industry (SIC Code 5651), a group currently
encompassing 22 companies (the "SIC Index"). This information is provided
through January 30, 1999, the end of fiscal 1998.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
AMONG FACTORY 2-U STORES, INC., NASDAQ MARKET INDEX,
INDUSTRY INDEX AND SIC INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
FACTORY 2-U NASDAQ MARKET DOW JONES SIC CODE
STORES, INC. INDEX RETAILERS-BROADLINE INDEX
<S> <C> <C> <C> <C>
1994 100 100 100 100
1995 21.62 94.51 87.31 82.47
1996 28.83 132.32 92.09 100.02
1997 28.83 174.14 108.17 118.71
1998 22.07 205.11 157.26 209.49
1999 172.97 320.12 252.76 428.62
</TABLE>
ASSUMES $100 INVESTED ON FEB. 1, 1994
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING JAN. 30, 1999
FISCAL YEAR 1998
(1991=100)
<TABLE>
<CAPTION>
FACTORY 2-U NASDAQ
MEASUREMENT PERIOD STORES, COMPOSITE INDUSTRY
(FISCAL YEAR COVERED) INC. INDEX INDEX SIC INDEX
- --------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1994 100.00 100.00 100.00 100.00
1995 21.62 94.51 87.31 82.47
1996 28.83 132.32 92.09 100.02
1997 28.83 174.14 108.17 118.71
1998 22.07 205.11 157.26 209.49
1999 172.97 320.12 252.76 428.62
</TABLE>
The composition of the Industry Index is as follows: Ames Department Store,
BJ's Wholesale Club Inc., Bon-Ton Stores Inc., Buckle Inc., Coles Myer Ltd.,
Controladora Comer Mex, Daiei Inc ADR,
13
<PAGE>
Dayton Hudson Corp., Dillard's Inc., Dollar General Corp., Duckwall-Alco Stores
Inc., Family Dollar Stores Inc., Federated Dept Stores, Fred's Inc., J.W. Mays
Inc., K Mart Corp., May Department Stores, Pamida Holdings Corp., J.C. Penney
Co. Inc., Pricesmart Inc., Saks Inc., Sears, Roebuck & Co., Shopko Stores Inc.,
Stein Mart Inc., Value City Dept Stores and Wal Mart Stores Inc.
The composition of the SIC Index is as follows: Abercrombie & Fitch Co.,
American Eagle Outfitter, Big Dog Holdings Inc., Buckle Inc., Burlington Coat
Factory Warehouse, Chico's FAS Inc., Children's Place Retail Stores, Designs
Inc., Factory 2-U Stores, Inc., Filene's Basement Corp., Gadzooks Inc., Gap
Inc., Goody's Family Clothing, Gymboree Corp., Harold's Stores Inc., K&G Mens
Center Inc, Nordstrom Inc., Ross Stores Inc., Stein Mart Inc., Syms Corp., Urban
Outfitters Inc., and Wilsons the Leather Expt.
- ------------------------
Source: Media General Financial Services
14
<PAGE>
PROPOSAL 2
PROPOSAL TO REDUCE AUTHORIZED COMMON STOCK
We believe the number of shares of Common Stock we are authorized to issue
is unusually high compared with the number of shares which are outstanding or
which we are committed to issue. Therefore, on March 23, 1999, our Board of
Directors approved an amendment to our Certificate of Incorporation which would
reduce the number of shares of Common Stock we are authorized to issue to
35,000,000 shares. Our Board of Directors recommends that our stockholders vote
to approve that amendment to our Certificate of Incorporation.
Currently, our Certificate of Incorporation authorizes us to issue up to
80,000,000 shares of Common Stock. However, we have only 12,114,501 shares
outstanding and 1,878,462 shares reserved for issuance on exercise of
outstanding stock options or warrants. We believe it is unusual for a company
with publicly traded shares to be authorized to issue that high a multiple of
the number of shares which are outstanding or which the company is committed to
issue. The high number of authorized shares compared to outstanding or committed
shares reduces one element of stockholder control of issuances of additional
shares (however NASDAQ rules give stockholders control over significant share
issuances so long as we are subject to those rules). Also, because the annual
Delaware Franchise Tax we must pay is based on the number of shares we are
AUTHORIZEd to issue, not the number of shares which are OUTSTANDING, the large
number of shares we are authorized to issue significantly increases our Delaware
Franchise Tax. At the current price of our shares, reducing the number of shares
we are authorized to issue to 35,000,000 shares would lower our Delaware
Franchise Tax payments by approximately $80,000 per year.
Until November 1998, there was a reason for us to be authorized to issue a
large number of shares of Common Stock. As recently as September 30, 1998, we
had 5,004,122 outstanding shares of Common Stock and 3,638,690 outstanding
shares of Series A Preferred Stock and 35,360 outstanding shares of Series B
Preferred Stock (which were convertible into a total of 27,921,352 shares of
Common Stock) and outstanding options and warrants entitling the holders to
purchase as many as 5,083,440 shares of Common Stock and warrants to purchase as
many as 320,000 shares of Series A Preferred Stock (which were convertible into
819,520 shares of Common Stock). Therefore, if all our outstanding Series A and
Series B Preferred Stock had been converted, and all the outstanding options and
warrants had been exercised, we would have had 38,828,434 shares of Common Stock
outstanding. That would have been approximately half the number of shares we
were authorized to issue.
In November 1998, however, we carried out a Recapitalization under which our
outstanding Common Stock became a smaller number of shares, all our Series A and
Series B Preferred Stock was converted into a reduced number of shares of Common
Stock and the number of shares subject to options and warrants was reduced.
Following the Recapitalization, we had 11,275,381 outstanding shares of Common
Stock, we had no outstanding convertible securities and our outstanding options
and warrants entitled the holders to acquire 1,811,081 shares. We then sold
800,000 shares to people who exercised stock purchase rights we distributed to
our stockholders. We currently have 12,114,501 outstanding shares of Common
Stock and options and warrants entitling the holders to purchase an additional
1,878,462 shares.
Our Board of Directors believes it is appropriate for us to be authorized to
issue, without further stockholder action (other than as required by NASDAQ
rules or rules of a stock exchange or other market on which our shares may in
the future be traded) between two and three times the number of shares which are
outstanding or subject to outstanding options or warrants. Our Board believes
that our being authorized to issue more shares than that (a) unduly reduces the
control our stockholders have over when we can issue additional Common Stock and
(b) unnecessarily increases the Delaware Franchise Tax we are required to pay.
If the number of shares we are authorized to issue is reduced, as proposed, to
35,000,000 shares, we will still be authorized to issue more than twice the
number of shares which currently are outstanding or are subject to outstanding
options or warrants. Our Board believes that is sufficient. If, in
15
<PAGE>
the future, it appears we may need authorization to issue more than 35,000,000
million shares, we can seek stockholder approval to increase the number of
shares we are authorized to issue.
VOTE REQUIRED
Approval of the proposed amendment to our Certificate of Incorporation
requires the affirmative vote of holders of a majority of the outstanding shares
of our Common Stock. Three Cities Fund II L.P. and Three Cities Offshore II,
C.V., which together own 33.4% of our Common Stock, have said they intend to
vote in favor of the proposed amendment. Therefore, the proposed amendment will
be approved if it receives the affirmative vote of holders of 25% of the shares
which the two Three Cities funds do not own.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE PROPOSAL TO
REDUCE THE NUMBER OF SHARES OF COMMON STOCK WE ARE AUTHORIZED TO ISSUE TO
35,000,000 SHARES.
PROPOSAL 3
INDEPENDENT PUBLIC ACCOUNTANTS AND ANNUAL REPORT
Upon recommendation of the Audit Committee, the Board of Directors has
appointed Arthur Andersen as the Company's independent accounting firm to audit
the Company's financial statements for the year ending January 29, 2000. The
stockholders are being asked to ratify that appointment.
Arthur Andersen LLP audited the Company's financial statements for the year
ended January 30, 1999. Representatives of that firm are expected to be present
at the Annual Meeting of Stockholders to answer questions. They will be given an
opportunity to make a statement if they wish to do so.
The affirmative vote of a majority of the votes cast on this proposal will
constitute ratification of the appointment of Arthur Andersen.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE COMPANY'S STOCKHOLDERS VOTE FOR
ADOPTION OF THIS PROPOSAL.
OTHER MATTERS
The Company's management knows of no other matters which will be presented
for action at the meeting. If any other matters properly come before the
meeting, the persons voting the management proxies will vote them in accordance
with their best judgment.
FILING OF REPORTS
To the best of the Company's knowledge, no director, officer, or beneficial
owner of more than 10% of the Company's stock failed to file on a timely basis
reports required by Section 16(a) of the Securities and Exchange Act of 1934, as
amended, during the year ended January 31, 1999, except that the following
reports were filed late: one report for one transaction by Michael M. Searles,
one report for one transaction by Jonathan W. Spatz, two reports for four
transactions for H. Whitney Wagner, three reports for five transactions by Peter
V. Handal, two reports for two transactions by James D. Somerville and one
report for five transactions by Ronald Rashkow.
16
<PAGE>
STOCKHOLDERS' PROPOSALS FOR NEXT YEAR'S ANNUAL MEETING
Proposals which stockholders wish included in next year's Proxy Statement
must be received at the Company's principal executive offices at 4000 Ruffin
Road, San Diego, California 92109 no later than January 29, 2000.
By Order of the Board of Directors
Wm. Robert Wright II
SECRETARY
Dated: May 24, 1999
17
<PAGE>
PROXY
FACTORY 2-U STORES, INC.
COMMON STOCK
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of FACTORY 2-U STORES, INC., hereby appoints
Michael Searles, Jonathan W. Spatz and Wm. Robert Wright II, or any of them
present, with full power of substitution, as attorneys and proxies of the
undersigned to appear at the Annual Meeting of Stockholders of FACTORY 2-U
STORES, INC., to be held on June 23, 1999, and at any and all adjournments of
that meeting, and there to act for the undersigned and vote all shares of
common stock of FACTORY 2-U STORES, INC. standing in the name of the
undersigned, with all the powers the undersigned would possess if personally
present, as indicated on the reverse side.
THIS PROXY IS BEING SOLICITED BY THE BOARD OF DIRECTORS OF FACTORY 2-U
STORES, INC. UNLESS OTHERWISE SPECIFIED, THIS PROXY WILL BE VOTED FOR THE
ELECTION OF TWO DIRECTORS TO HOLD OFFICE UNTIL THE ANNUAL MEETING OF
STOCKHOLDERS IN 2002, TO AMEND THE CERTIFICATE OF INCORPORATION TO REDUCE TO
35,000,000 THE NUMBER OF SHARES OF COMMON STOCK THE COMPANY IS AUTHORIZED TO
ISSUE, AND FOR THE PROPOSAL TO RATIFY THE SELECTION OF ARTHUR ANDERSEN LLP AS
INDEPENDENT ACCOUNTANTS.
(COMPLETE AND SIGN ON REVERSE SIDE)
<PAGE>
PLEASE DATE, SIGN AND MAIL YOUR
PROXY CARD BACK AS SOON AS POSSIBLE!
ANNUAL MEETING OF STOCKHOLDERS
FACTORY 2-U STORES, INC.
COMMON STOCK
JUNE 23, 1999
- PLEASE DETACH AND MAIL IN THE ENVELOPE PROVIDED -
- -------------------------------------------------------------------------------
/X/ PLEASE MARK YOUR
VOTES AS INDICATED
IN THIS EXAMPLE.
<TABLE>
<S> <C> <C> <C>
FOR ALL WITHHOLD NOMINEES: Ira Neimark
NOMINEES HELD AT RIGHT AUTHORITY Michael Searles
(EXCEPT AS MARKED TO TO VOTE FOR ANY (to serve until the 2002 Annual Meeting)
THE CONTRARY BELOW) NOMINEE LISTED AT RIGHT
(1) ELECTION OF DIRECTORS: / / / /
INSTRUCTION: To withhold authority to vote for
any individual nominee, write that nominee's
name in the space provided below.
- ----------------------------------------------
- ----------------------------------------------
(2) Approval of the proposal to amend the Certificate of Incorporation to reduce to 35,000,000
the number of shares of Common Stock Factory 2-U Stores, Inc. is authorized to issue.
FOR AGAINST ABSTAIN
/ / / / / /
(3) Ratification of the appointment of Arthur Andersen LLP as independent accountants for
Factory 2-U Stores, Inc.
FOR AGAINST ABSTAIN
/ / / / / /
(4) In their discretion, the Proxies are authorized to vote upon any other business that
may properly come before the meeting.
__________________________________________ ____________________________________ Dated: _________________, 199__
SIGNATURE SIGNATURE, IF HELD JOINTLY
NOTE: Please sign exactly as name appears above. When shares are held by joint tenants, both should sign. When signing as
attorney, executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign
in full corporate name by president or other authorized officer. If a partnership, please sign in partnership name
by authorized person.
</TABLE>
