<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
<TABLE>
<S> <C>
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)
</TABLE>
Payment of Filing Fee (Check the appropriate box):
<TABLE>
<S> <C> <C>
/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.:
----------------------------------------------------------
(3) Filing Party:
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(4) Date Filed:
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</TABLE>
<PAGE>
FACTORY 2-U STORES, INC.
4000 RUFFIN ROAD, SAN DIEGO, CALIFORNIA 92123
(858) 627-1800
------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
JUNE 27, 2000
------------------------
TO THE STOCKHOLDERS OF FACTORY 2-U STORES, INC.:
Notice is hereby given that we will hold the Annual Meeting of the
stockholders of Factory 2-U Stores, Inc. at the U.S. Grant Hotel, 326 Broadway,
San Diego, California, on Tuesday, June 27, 2000 at ten o'clock a.m. for the
following purposes:
1. To elect one Class I director to hold office until the Annual Meeting of
Stockholders in 2003 and until his successor is elected.
2 To consider and act on a proposal to approve the Factory 2-U
Stores, Inc. Employee Stock Purchase Plan pursuant to which our employees
may purchase up to 350,000 shares of our common stock.
3. To consider and act on a proposal to approve an amendment to the Amended
and Restated Factory 2-U Stores, Inc. 1997 Stock Option Plan which
increases by 350,000 the number of shares of common stock issuable upon
exercise of options from 1,807,980 to 2,157,980.
4. To consider a proposal to ratify the selection of our independent
accountants.
5. To transact such other business as may properly come before the meeting.
Only stockholders of record as of the close of business on May 1, 2000 will
be entitled to notice of or to vote at the meeting or any adjournment or
postponement of the meeting. Our 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
San Diego, California
May 22, 2000
<PAGE>
PROXY STATEMENT
SOLICITATION AND REVOCATION OF PROXY
The Board of Directors of Factory 2-U Stores, Inc. is soliciting the
accompanying Proxy. We will vote all shares represented by proxies in the manner
designated; or if no designation is made, we will vote for the election of the
directors named below, for approval of the adoption of the Employee Stock
Purchase Plan, for approval of the adoption of the amendment to the Stock Option
Plan and for ratification of the selection of our independent accountants.
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 22, 2000 TO ALL STOCKHOLDERS OF RECORD ON MAY 1, 2000.
REVOCATION
Any stockholder giving a proxy has the power to revoke it at any time before
it is voted by delivering a written instrument of revocation to our office, 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
We will bear the cost of soliciting proxies. We are soliciting proxies by
mail and, in addition, our directors, officers and employees may solicit proxies
personally or by telephone or telegraph. We 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 1, 2000 (the
"Record Date"), will be entitled to vote at the meeting. The only outstanding
voting securities on that date were 12,430,342 shares of common stock. Each
outstanding share of common stock is entitled to one vote. The holders of a
majority of the shares of our common stock entitled to vote at the Annual
Meeting, present in person or by proxy, will constitute a quorum. Directors are
elected by a plurality of votes cast. Stockholders may not accumulate their
votes for any nominee for election. If a quorum is present, the affirmative vote
of a majority of the shares represented and voting at the Annual Meeting is
required for approval of the adoption of the Employee Stock Purchase Plan, for
approval of the adoption of the amendment to the Stock Option Plan, for
ratification of the selection of our independent accountants and for any other
matters that might be submitted to the stockholders for consideration at the
Annual Meeting. Abstentions and broker non-votes are counted for purposes of
determining the presence or absence of a quorum for the transaction of business
but have the effect of a "No" vote for purposes of determining whether a
proposal has been approved.
You may vote stock in person or by proxy appointed by a writing signed by
you. We will deem as sufficient any message sent to us prior to the time for
voting which appears to have been transmitted by a stockholder, or any
reproduction of a proxy. The death or incapacity of the maker will not revoke a
proxy, unless the fiduciary having control of the shares represented by the
proxy gives us written notice of that death or incapacity.
1
<PAGE>
PROPOSAL 1
ELECTION OF DIRECTORS
Our Board of Directors 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. Mr. Wagner
is nominated to serve for a three-year term extending until the Annual Meeting
of Stockholders in 2003 and until a successor is elected. Information concerning
Mr. Wagner as a nominee for election as a director is set forth under the
caption "Management."
Unless a proxy contains a contrary instruction, all proxies submitted in the
accompanying form will be voted for the election of the nominee. If the nominee
becomes unable or unwilling to serve, the accompanying proxy may be voted for
the election of another person designated by the Board of Directors. The
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.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" ELECTION OF THE
ABOVE-NAMED NOMINEE AS A DIRECTOR.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following persons are known by us to have owned beneficially more than
5% of any class of our voting securities as of the Record Date:
<TABLE>
<CAPTION>
COMMON STOCK
NAME AND ADDRESS ----------------------------
OF BENEFICIAL OWNER NUMBER PERCENT OF CLASS
- ------------------- --------- ----------------
<S> <C> <C>
Three Cities Fund II L.P (1)............................... 2,541,848 20.4%
Three Cities Offshore II C.V. (1).......................... 1,503,163 12.1%
Putnam Investment Management, Inc. (2)..................... 466,903 3.8%
The Putnam Advisory Company, Inc. (2)...................... 370,352 3.0%
</TABLE>
- ------------------------
(1) The address of the beneficial owners is c/o Three Cities Research, Inc., 650
Madison Avenue, New York, NY 10022. As the investment advisor 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.
("TCR") may be deemed to be the beneficial owner of the total 4,045,011
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. he may be deemed to be a beneficial owner of the shares owned by Three
Cities Fund II L.P.
(2) The address of the beneficial owner is One Post Office Square, Boston, MA
02109. Putnam Investments, Inc. ("PI"), which is a wholly-owned subsidiary
of Marsh & McLennan Companies, Inc., wholly owns Putnam Investment
Management, Inc. ("PIM") and The Putnam Advisory Company, Inc. ("PAC"). Both
subsidiaries have dispository power over the shares as investment managers,
but each of the mutual fund's trustees have voting power over the shares
held by each fund. PAC has shared voting power over the 274,808 shares held
by institutional clients. As the parent company of both PIM and PAC, PI may
be deemed to be the beneficial owner of the total 837,255 owned by both
subsidiaries.
2
<PAGE>
On the Record Date, The Depository Trust Company owned of record 7,116,215
shares of common stock, constituting 57.2% of our outstanding common stock. We
understand 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.
MANAGEMENT STOCKHOLDERS
As of the Record Date, our directors and executive officers beneficially
owned the following amounts of our voting securities:
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT OF
NAME OF BENEFICIAL OWNER OWNERSHIP (1) CLASS
- ------------------------ ------------- ----------
<S> <C> <C>
William F. Cass (2)................................... 31,266 *
Douglas C. Felderman.................................. 19,320 *
Peter V. Handal....................................... 71,023 *
B. Mary McNabb........................................ 92,380 *
Ira Neimark........................................... 4,252 *
Tracy W. Parks........................................ 36,003 *
Norman G. Plotkin..................................... 36,381 *
Ronald Rashkow (3).................................... 137,190 1.1%
Michael M. Searles.................................... 536,205 4.3%
H. Whitney Wagner (4)................................. 13,759 *
Wm. Robert Wright II.................................. 4,901 *
Directors and Officers as a Group (11 persons)........ 982,680 7.9%
</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. Cass, 22,600 shares;
Mr. Felderman, 12,000 shares; Mr. Handal, 5,137 shares; Ms. McNabb, 51,678
shares; Mr. Neimark, 2,000 shares; Mr. Parks, 17,044 shares; Mr. Plotkin,
10,013 shares, Mr. Rashkow, 5,137 shares; Mr. Searles, 247,357 shares;
Mr. Wagner, 2,500 shares; Mr. Wright, 2,500 shares; all officers and
directors as a group, 377,966 shares.
(2) As of April 21, 2000, Mr. Cass was no longer an employee.
(3) Includes 50,091 shares of common stock held by members of Mr. Rashkow's
family and 5,137 shares which Mr. Rashkow may acquire within 60 days through
the exercise of stock options.
(4) Does not include shares owned by Three Cities Fund II L.P. Mr. Wagner is an
officer of the indirect general partner of Three Cities Fund II L.P. TCR, of
which Mr. Wagner is an officer, and of which Mr. Wright is a partner, is the
advisor to Three Cities Fund II L.P. and to Three Cities Offshore II C.V.,
which own a total of 4,045,011 shares and has the power to direct the voting
and disposition of those shares.
3
<PAGE>
MANAGEMENT
DIRECTORS
The following table sets forth certain information regarding the 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>
H. Whitney Wagner *.......... 44 Director 1997 2000
Peter V. Handal.............. 57 Director 1997 2001
Ronald Rashkow............... 59 Director 1997 2001
Wm. Robert Wright II......... 32 Director 1998 2001
Michael M. Searles........... 51 Director, Chairman of the 1998 2002
Board, President and Chief
Executive Officer
Ira Neimark.................. 78 Director 1998 2002
</TABLE>
- ------------------------
* Nominee for election.
H. WHITNEY WAGNER has been a director since January 1997. He is a Managing
Director of TCR. He joined TCR in 1983, was elected Vice President in 1986, and
was elected to his present position in 1989. Mr. Wagner also serves on the board
of directors of Pameco Corporation and Leslie Fay Company. From 1992 to 1999,
Mr. Wagner served on the board of directors of Garden Ridge Corporation and from
January 1993 to January 1998, Mr. Wagner served on the board of directors of MLX
Corp.
PETER V. HANDAL has been a director since February 1997. Mr. Handal is
President and Chief Executive Officer of Dale Carnegie & Associates. 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 Dale Carnegie & Associates, Cole National Corporation, Jos. S. Bank
Clothiers and W. Kruk, S.A.
RONALD RASHKOW has been a director 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.
WM. ROBERT WRIGHT II has been a director since November 1998. He has been
employed by TCR 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 partner
of TCR since 1999. Before joining TCR, Mr. Wright worked for Marriott
International in its strategic planning department. He is our Corporate
Secretary (but not an employee).
MICHAEL M. SEARLES has been a director since March 1998 and Chairman of the
Board since November 1998. Mr. Searles is the President and Chief Executive
Officer. He 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
4
<PAGE>
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.
IRA NEIMARK became a director 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 TCR. 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.
COMPENSATION OF DIRECTORS
We pay each director who is not an employee an annual fee of $12,000 plus
$1,250 for attendance at each meeting of the Board of Directors. In addition, at
the end of each fiscal quarter, we grant each director who is not an employee
options to purchase 500 shares of our common stock and 250 shares of common
stock. We reimburse all directors 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. Handal, Neimark, Rashkow,
Searles and Wright. This Committee met four times in fiscal 1999. Its principal
functions are reviewing and evaluating the results and scope of the audit and
other services provided by our independent accountants, as well as our
accounting principles and system of internal accounting controls. Our by-laws
provide that the Audit Committee must approve affiliated transactions and
acquisitions by us of businesses not within certain SIC Codes (primarily
covering wholesale apparel trade, retail stores, and apparel stores).
The current Compensation Committee consists of Messrs. Handal, Neimark,
Rashkow, Wagner and Wright. This Committee met four times in fiscal 1999. Its
principal functions are reviewing, approving and recommending to the full Board
compensation arrangements for senior management and employee compensation
programs. Our Board of Directors determines the compensation of our executive
officers based on recommendations from the Compensation Committee.
The Executive Committee consists of Messrs. Searles 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 and special meetings when
required. During fiscal 1999, the Board met four 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.
5
<PAGE>
EXECUTIVE OFFICERS
The following table sets forth as of the Record Date certain information
concerning our executive officers at the end of fiscal 1999, who are not
directors.
<TABLE>
<CAPTION>
OFFICER
NAME AGE POSITION SINCE
- ---- -------- -------- --------
<S> <C> <C> <C>
B. Mary McNabb................... 51 Executive Vice President, 1990
Merchandising and General
Merchandise Manager
Tracy W. Parks................... 40 Executive Vice President, 1998
Logistics and Chief Information
Officer
Norman G. Plotkin................ 46 Executive Vice President, Store 1998
Development and General Counsel
Douglas C. Felderman............. 47 Executive Vice President, Chief 1999
Financial Officer
David E. Hensley................. 45 Executive Vice President, Store 2000
Operations
</TABLE>
B. MARY MCNABB is Executive Vice President, Merchandising and General
Merchandise Manager. Ms. McNabb joined us in 1990.
TRACY W. PARKS is Executive Vice President, Logistics and Chief Information
Officer. Mr. Parks joined us in March 1998 in the position of Senior Vice
President, Information Systems and Chief Information Officer. Prior to joining
us, from April 1996 to March 1998, Mr. Parks was the Vice President of
Management Information Systems of Guess? Inc.
NORMAN G. PLOTKIN is Executive Vice President, Store Development and General
Counsel. Mr. Plotkin joined us in July 1998 in the position of Senior Vice
President, Store Development and General Counsel. Prior to joining us,
Mr. Plotkin was the President of Normark Real Estate Services, Ltd., a
commercial real estate firm based in Des Plaines, Illinois. Prior to that, from
1988 until 1996, 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.
DOUGLAS C. FELDERMAN is Executive Vice President and Chief Financial
Officer. Mr. Felderman joined us in May 1999. Prior to joining us, from July
1997 to May 1999, Mr. Felderman served as Senior Vice President--Finance and
Chief Financial Officer of Strouds, Inc. and from 1995 to 1997, he was the Vice
President--Finance of Strouds, Inc. Mr. Felderman served as Vice President,
Chief Financial Officer for Crocodile Enterprises, Inc. from April 1994 to
September 1995 (a restaurant operator of casual full service and quick service
restaurants). From September 1990 to April 1994 he was a business consultant.
DAVID E. HENSLEY is Executive Vice President, Store Operations. Mr. Hensley
joined us in April 2000. Prior to joining us, from 1996 to April 2000,
Mr. Hensley served as Senior Vice President of Operations of Eckerd Corporation,
a drug store retailer. Mr. Henley served as Regional Vice President of Eckerd
Corporation from 1991 to 1996.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT
In March 1997, we entered into an agreement for TCR to act as our financial
advisor. Under this agreement, we pay TCR an annual fee of $50,000 and reimburse
TCR all of its out-of-pocket expenses incurred for services rendered, up to an
aggregate of $50,000 annually. We reimbursed TCR for out-of-
6
<PAGE>
pocket expenses in the amounts of $46,000, $48,000 and $47,000 during fiscal
year 1999, 1998 and 1997, respectively. TCR controls approximately 33% of our
outstanding common stock and certain principals of TCR are members of our Board
of Directors.
During fiscal 1999, we paid Ira Neimark, a director, $75,000 for rendering
consulting services to us.
INDEBTEDNESS OF MANAGEMENT
During fiscal years 1997 and 1998, we sold to our executive management
shares of our Series B Preferred Stock, which were subsequently converted to
common stock. With the exception of Mr. Searles, each of the executives paid for
his or her shares by giving us a full-recourse note receivable secured by the
issued stock. Mr. Searles' promissory note 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 the date it
was made.
As of the Record Date, the following amounts were outstanding:
<TABLE>
<CAPTION>
AMOUNT
NAME OF DIRECTOR/OFFICER OUTSTANDING
- ------------------------ -----------
<S> <C>
Michael M. Searles.......................................... $1,400,000
B. Mary McNabb.............................................. 215,541
Tracy W. Parks.............................................. 108,661
Norman G. Plotkin........................................... 94,510
</TABLE>
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors is composed entirely of
outside directors. The Compensation Committee is responsible for establishing
and administering the compensation policies applicable to our executive
officers. All decisions by the Compensation Committee are subject to review and
approval by the full Board of Directors.
Our executive compensation philosophy and specific compensation plans tie a
significant portion of executive compensation to our success in meeting specific
profit, growth and performance goals.
Our compensation objectives include attracting and retaining the best
possible executive talent, motivating executive officers to achieve our
performance objectives, rewarding individual performance and contributions, and
linking executives' and stockholders' interests through equity based plans.
Our 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 our 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 Chief
Executive Officer 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 our executive officers. We base the recommended base
salaries of the executive officers on an evaluation of the individual
performance of the executive officer, including satisfaction of annual
objectives. The recommended base salary of the Chief Executive Officer is based
on achievement of our annual goals relating to financial objectives, including
earnings growth and return on capital employed, and an evaluation of individual
performance.
7
<PAGE>
Recommended base salaries of the executive officers are also based in part
upon an evaluation of the salaries of executives who hold comparable positions
at comparable companies.
ANNUAL INCENTIVE COMPENSATION. Our 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 our success in attaining financial
objectives, and subjective factors established from time to time by the
Compensation Committee or the Board of Directors. The Compensation Committee
normally considers aggregate incentive cash and stock bonus payments to the
executive officers, as a group, of up to 50% of their base salaries, and bonus
payments in stock in excess of 50% of the aggregate base salaries. Because of
the success of attaining financial objectives for fiscal 1999, the Compensation
Committee awarded to each of the executive officers bonuses in an amount equal
to 100% of their base salaries. With the exception of Mr. Cass, whose bonus was
paid in cash, each executive officer received 75% of such bonus in cash and 25%
in the form of a grant of our common stock.
STOCK OPTIONS. The primary objective of the stock option program is to link
our interests and those of our executive officers and other selected employees
to those of the stockholders through significant grants of stock options. The
Compensation Committee bases the aggregate number of options it recommends on
practices of comparable companies, while grants of stock options to specific
employees reflect their expected long-term contribution to our success.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER. During fiscal year 1999, we
paid Mr. Searles a base salary of $600,000, which the Compensation Committee
believes is commensurate with the salaries paid to other executives with similar
experience in comparable companies. We base Mr. Searles' annual bonus on the
achievement of corporate objectives set annually by the Compensation Committee
after consultation with Mr. Searles. We target Mr. Searles' annual bonus at 50%
of his base salary, but it may vary depending on Company performance. For fiscal
1999, the Compensation Committee awarded Mr. Searles a bonus in the amount equal
to 100% of his annual salary, of which 25% was paid in the form of our common
stock.
AMENDED EMPLOYMENT AGREEMENT AND REPRICING OF OPTIONS
We employed Michael Searles, President and Chief Executive Officer and a
member of our Board of Directors, pursuant to a five-year employment agreement
dated March 30, 1998 that expires in March 2003. This employment agreement was
amended on August 31, 1999.
Under the original employment agreement, we granted Mr. Searles
(a) incentive stock options, that vest over ten years, to purchase 90,399 shares
of our common stock at an exercise price per share of $5.81 (the closing market
price of our stock on March 10, 1998), and (b) non-qualified options to purchase
271,197 shares of our common stock at an exercise price per share of $6.64.
Options to purchase 135,999 shares become exercisable if and when the market
price of the common stock is at least $19.91 for 60 days in any twelve-month
period. 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, we made a loan to Mr. Searles of $1,400,000 with which he purchased
from us 1,400 shares of Series B Preferred Stock (which were converted into
242,662 shares of common stock). We have the option to repurchase these shares
at various prices if Mr. Searles' employment terminates before his employment
agreement expires.
In connection with the amendment of his employment agreement in
August 1999, we (a) decreased by 13,879 Mr. Searles' previously granted
incentive stock options with an exercise price of $6.534 per share (which was
the closing market price on March 30, 1998) and (b) granted Mr. Searles
nonqualified stock options, which vest over five years, to purchase 13,880
shares at an exercise price of $5.27 per share.
In December 1999, Mr. Searles voluntarily forfeited to us options to
purchase 60,000 shares which had an exercise price of $6.64 per share.
Compensation Committee:
8
<PAGE>
Peter V. Handal
Ira Neimark
Ronald Rashkow
H. Whitney Wagner
Wm. Robert Wright II
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee of the Board of Directors was,
during fiscal 1999 or at any other time, one of our officers or employees or an
officer or employee of our subsidiaries.
SUMMARY OF CASH AND OTHER COMPENSATION
The following table contains information about the compensation during
fiscal 1999 of our principal executive officer and each of our four other most
highly paid executive officers:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------
--------------------- SECURITIES ALL OTHER
FISCAL SALARY BONUS(2) UNDERLYING COMPENSATION(3)
NAME AND PRINCIPAL POSITION YEAR(1) ($) ($) OPTIONS ($)
- --------------------------- -------- -------- ---------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Michael M. Searles.................. 1999 $600,000 $ 600,000 -- $349,113
President, Chief Executive Officer 1998 $484,617 $1,834,835 301,597 -- $101,613 --
and Chairman of the Board(4) 1997 -- --
William F. Cass..................... 1999 $200,000 $ 200,000 -- $ 929
Executive Vice President, Store 1998 $200,000 $ 100,000 -- $ 960
Operations (5) 1997 $199,038 $ 32,500 33,147 $ 3,900
B. Mary McNabb...................... 1999 $213,846 $ 220,000 -- $ 939
Executive Vice President, 1998 $200,000 $ 100,000 -- $ 960
Merchandising and General 1997 $197,596 $ 42,500 82,865 $ 900
Merchandise Manager
Tracy W. Parks...................... 1999 $215,385 $ 225,000 52,082 $ 67,127
Executive Vice President, 1998 $152,885 $135,000 -- 15,066 -- 4$0,208 --
Logistics and Chief Information 1997 --
Officer
Norman G. Plotkin................... 1999 $191,154 $ 200,000 57,392 $ 38,457
Executive Vice President, Store 1998 -- -- -- --
Development and General Counsel 1997 -- -- -- --
</TABLE>
- ------------------------
(1) We refer to a fiscal year by the year in which most of the activity occurred
(for example, we refer to fiscal year ended January 29, 2000 as fiscal
1999).
(2) With the exception of Mr. Cass, each executive officer that was awarded a
bonus for fiscal 1999 received 25% of such bonus in the form of our common
stock. The fair market value of our common stock included in the total bonus
amount for fiscal 1999 was $150,011 for Mr. Searles, $55,023 for
Ms. McNabb, $56,260 for Mr. Parks and $50,004 for Mr. Plotkin. The aggregate
amount of other annual compensation is less than the lesser of $50,000 or
10% of such person's total annual salary and bonus.
(3) "All Other Compensation" for fiscal 1999 includes (i) matching contributions
under our 401(k) Savings Plan of $825 for Mr. Searles, $929 for Mr. Cass,
$939 for Ms. McNabb, $243 for Mr. Parks and $462 for Mr. Plotkin;
(ii) forgiveness of interest in the amounts of $348,288 for Mr. Searles,
$12,925 for Mr. Parks and $5,615 for Mr. Plotkin; (iii) reimbursement of
moving expenses of $34,209 to
9
<PAGE>
Mr. Parks and $32,380 to Mr. Plotkin; and (iv) $19,750 of consulting fees to
Mr. Parks for which we received reimbursement from TCR.
(4) Mr. Searles was granted 361,597 options pursuant to his employment
agreement. During fiscal 1999, Mr. Searles voluntarily forfeited 60,000 of
those stock options to us.
(5) As of April 21, 2000, Mr. Cass was no longer an employee.
GRANTS OF STOCK OPTIONS
The following table sets forth information concerning the award of stock
options during fiscal 1999. We have never granted stock appreciation rights.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM (1)
OPTIONS EMPLOYEES IN EXERCISE OF BASE EXPIRATION ---------------------
NAME GRANTED (#) FISCAL YEAR PRICE ($/SH) DATE 5% ($) 10%($)
- ---- ----------- ------------ ---------------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Michael M. Searles....... -- -- -- -- -- --
William F. Cass.......... -- -- -- -- -- --
B. Mary McNabb........... -- -- -- -- -- --
Tracy W. Parks........... 35,000 7.99% $12.13 3/24/2009 $266,997 $676,623
17,082 3.90% $25.50 12/8/2009 $273,941 $694,220
Norman G. Plotkin........ 35,000 7.99% $12.13 3/24/2009 $266,997 $676,623
22,392 5.11% $25.50 12/8/2009 $359,096 $910,021
</TABLE>
- ------------------------
(1) Amounts shown represent the potential value of granted options if the
assumed annual rates of stock appreciation are maintained over the ten-year
terms of the granted options. The assumed rates of appreciation are
established by regulation and are not intended to be a forecast of our
performance or to represent our expectations with respect to the
appreciation, if any, of the common stock.
10
<PAGE>
EXERCISE OF STOCK OPTIONS AND HOLDINGS
The following table sets forth information concerning exercises of stock
options during fiscal 1999 and the fiscal year-end value of unexercised options.
We have never granted stock appreciation rights.
AGGREGATED OPTION EXERCISES IN FISCAL 1999
FISCAL 1999 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS AT MONEY OPTIONS AT
SHARES VALUE FISCAL YEAR END (#) FISCAL YEAR END ($)
ACQUIRED REALIZED --------------------------- -----------------------------
NAME ON EXERCISE ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael M. Searles......... -- -- 229,277 72,320 $3,972,612 $1,273,082
William F. Cass............ -- -- 20,591 15,569 $ 347,902 $ 256,421
B. Mary McNabb............. -- -- 51,678 38,721 $ 873,058 $ 637,735
Tracy W. Parks............. -- -- 5,022 62,126 $ 78,243 $ 569,836
Norman G. Plotkin.......... -- -- 3,014 63,418 $ 47,742 $ 508,802
</TABLE>
PERFORMANCE CHART
The following chart compares the five-year cumulative total return (change
in stock price plus reinvested dividends) on our 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 27 companies, and the companies
in the Family Clothing Retail industry (SIC Code 5651), a group currently
encompassing 20 companies (the "SIC Index"). This information is provided
through January 29, 2000, the end of fiscal 1999.
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>
FISCAL YEAR ENDING
<S> <C> <C> <C> <C> <C> <C>
COMPANY/INDEX/MARKET 1995 1996 1997 1998 1999 2000
Factory 2-U Stores 100.00 133.33 133.33 102.09 800.00 1,595.83
Family Clothing Stores 100.00 121.28 143.94 254.01 519.71 477.49
Retail, Broadline 100.00 105.30 124.52 180.23 292.28 330.14
NASDAQ Market Index 100.00 140.02 194.26 217.04 338.74 506.71
</TABLE>
11
<PAGE>
FISCAL YEAR 1999
(1991 = 100)
<TABLE>
<CAPTION>
NASDAQ
MEASUREMENT PERIOD FACTORY 2-U COMPOSITE INDUSTRY
(FISCAL YEAR COVERED) STORES, INC. INDEX INDEX SIC INDEX
- --------------------- ------------- --------- -------- ---------
<S> <C> <C> <C> <C>
1994.............................. 100.00 100.00 100.00 100.00
1995.............................. 133.62 140.02 105.30 121.28
1996.............................. 133.33 184.26 124.52 143.94
1997.............................. 102.09 217.04 180.23 254.01
1998.............................. 800.00 338.74 292.28 519.71
1999.............................. 1,595.83 506.71 330.14 477.49
</TABLE>
The composition of the Industry Index is as follows: Ames Department Store,
BJ's Wholesale Club, Inc., Bon-Ton Stores, Inc., Coles Myer Ltd., Controladora
Comer Mex, Cost-U-Less, Inc., Costco Wholesale Corp., Daiei Inc ADR, Dillard's
Inc., Dollar General Corp., Duckwall-Alco Stores, Inc., Elder-Beerman Stores CP,
Family Dollar Stores, Inc., Federated Dept. Stores, Fred's, Inc., J.W. Mays,
Inc., K Mart Corp., May Department Stores, J.C. Penney Co. Inc., Pricesmart,
Inc., Saks, Inc., Sears, Roebuck & Co., Shopko Stores Inc., Stein Mart, Inc.,
Target Corporation, 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., Gadzooks, Inc., Gap, Inc., Goody's Family
Clothing, Gymboree Corp., Harold's Stores, Inc., Nordstrom, Inc., Ross Stores,
Inc., Stein Mart, Inc., Syms Corp., Urban Outfitters, Inc., and Wilsons the
Leather Expt.
Source: Media General Financial Services
PROPOSAL 2
PROPOSAL TO ADOPT AN EMPLOYEE STOCK PURCHASE PLAN
Our Board of Directors has adopted the Factory 2-U Stores, Inc. Employee
Stock Purchase Plan (the "Stock Purchase Plan"), and has directed that the
Purchase Plan be submitted to the stockholders for approval. The Stock Purchase
Plan is intended to enable our employees (including officers) who desire to do
so to purchase common stock at a discount from market price through accumulated
payroll deductions. The Stock Purchase Plan is intended to satisfy the
requirements of Section 423 of the Internal Revenue Code of 1986, as amended
(the "Code"). This summary of the material terms of the Stock Purchase Plan is
qualified in its entirety by reference to the full text of the Stock Purchase
Plan which is attached to this Proxy Statement as Appendix A.
DESCRIPTION OF THE STOCK PURCHASE PLAN
Our Board of Directors or, in its discretion, a Committee appointed by the
Board for that purpose, administers the Stock Purchase Plan. The Board of
Directors or such Committee has full authority to interpret and apply the terms
of the Stock Purchase Plan, including the power to determine: (i) when each
offering of rights to purchase shares of common stock will be made and the
duration of such offering pursuant to the Purchase Plan; (ii) the date on which
the Offering Period (as defined below) shall begin and end; and (iii) the total
number of shares offered in each Offering Period.
Participating employees may purchase an aggregate maximum of 350,000 of
shares of our common stock under the Stock Purchase Plan. This number may be
adjusted in certain events, such as a stock split
12
<PAGE>
or other changes in our capitalization. The shares delivered under the Stock
Purchase Plan may be either authorized but unissued shares or shares that have
been reacquired by us.
All of our employees or employees of any subsidiary or parent (i) whose
customary employment is 20 hours or more per week for more than five months per
calendar year and (ii) who have been employed at least one year as of the start
date of any Offering Period, will generally be permitted to participate in the
Stock Purchase Plan.
The Stock Purchase Plan provides for Offering Periods of six months each,
beginning January 1 and July 1 of each year. However, the Board of Directors has
the right to change the commencement dates and duration of future Offering
Periods.
Prior to the beginning of an Offering Period, each eligible employee may
authorize payroll deductions for the duration of the Offering Period, in an
amount up to 10% of base salary during the Offering Period. We will maintain for
each participating employee a payroll deduction account that does not bear
interest. At any time prior to the end of an applicable Offering Period, a
participating employee may increase (to a maximum of 10%) or decrease the amount
of his or her payroll deduction; provided, however, that no participant shall be
entitled to increase or decrease his or her payroll deduction more than once
during any Offering Period.
A participating employee may at any time for any reason withdraw the entire
cash balance then accumulated in his or her payroll deduction account and
thereby withdraw from participation in an Offering Period. Upon withdrawal, the
employee would cease to be eligible to participate in the Offering Period
pursuant to which withdrawn funds were withheld and could not resume making
payroll deductions until the start of the next Offering Period.
At the end of the Offering Period, the accumulated payroll deductions of
each participant that have not been withdrawn are automatically applied to
purchase our common stock. The price paid for each share of common stock
purchased under the Stock Purchase Plan is 85% of the fair market value of the
stock on the first day or the last day of that Offering Period, whichever is
lower. On the Record Date, the last reported sale price of our common stock as
reported by NASDAQ was $33.25 per share.
As of the last day of the Offering Period, we will total the payroll
deduction account for each participating employee, and the employee will
purchase, without any further action, the maximum whole and fractional number of
shares of common stock that can be purchased with the funds in his or her
account. In no case may a participant purchase more than 2,500 shares of common
stock (subject to adjustment for changes in our capitalization) in any Offering
Period. In addition, no participant's right to purchase shares under the Stock
Purchase Plan may accrue at a rate greater than $25,000 worth of stock (measured
as of the beginning of each Offering Period) in any calendar year. We will
reduce payroll deductions as necessary to comply with these limits, and will
return any excess payroll deductions at the end of an Offering Period to the
participant.
Participating employees will have all rights and privileges of our
stockholders with respect to any shares of stock that may be purchased under the
Stock Purchase Plan.
In the event of a participant's termination of employment for any reason,
including death, we will return the payroll deductions credited to the
participant's account in the Stock Purchase Plan to the participant (or his
beneficiary in the event of death), and no stock purchase under the Stock
Purchase Plan will occur for the Offering Period in which such termination of
employment occurred. A participant's rights to purchase stock under the Stock
Purchase Plan are not transferable.
The Board of Directors may amend the Stock Purchase Plan from time to time.
Such amendments may be made without stockholder approval except to the extent
necessary to comply with Section 423 of the Code or other applicable law. The
Stock Purchase Plan will continue in effect until terminated by the
13
<PAGE>
Board of Directors or until all shares authorized for issuance under the Stock
Purchase Plan have been purchased.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of the principal federal income tax
consequences of the Stock Purchase Plan based on current provisions of the Code
and applicable regulations.
An employee will not recognize federal income tax on the grant of purchase
rights (at the commencement of an Offering Period) or on the purchase of shares
under the Stock Purchase Plan.
If the employee disposes of the shares in a "qualifying disposition" (that
is, one which occurs more than two years after the start of the Offering Period
in which the shares were acquired and more than one year after the date the
shares were purchased), the employee will recognize ordinary income per share
equal to the lesser of: (i) the excess of the fair market value of the common
stock on the first day of the applicable Offering Period over 85% of such value,
and (ii) the excess of the fair market value of the common stock on the date of
disposition over the employee's purchase price for the stock. If the employee
disposes of the shares before the completion of the above holding periods (a
"disqualifying disposition"), the employee will recognize ordinary income equal
to the excess of the fair market value of the common stock on the date of
purchase over the employee's purchase price for the stock. In either case, the
balance of the gain, if any, and any loss will be treated as a capital gain or
loss.
We will not be entitled to a federal income tax deduction with respect to
any shares acquired under the Stock Purchase Plan which were disposed of in a
qualifying disposition. In the case of a disqualifying disposition, we will
generally be entitled to a federal income tax deduction in an amount equal to
the ordinary income recognized by the employee in the year in which the employee
recognizes such income, to the extent such income is considered reasonable
compensation under the Code. However, Section 162(m) of the Code limits our
deduction to the extent compensation in excess of $1 million is paid during any
year to an executive officer named in the summary compensation table of the
proxy statement who was employed by us at year-end, unless such compensation
qualifies as "performance-based" under Section 162(m) of the Code or certain
exceptions apply. In addition, we will not be entitled to a deduction with
respect to payments which are deemed to constitute "excess parachute payments"
under Section 280G of the Code and do not qualify as reasonable compensation
pursuant to that Section; such payments will subject the recipients to a 20%
excise tax.
PURCHASE RIGHTS UNDER THE STOCK PURCHASE PLAN
It is not possible to state the number of shares that will be purchased by
any employee under the Stock Purchase Plan because that decision is in the
discretion of each employee. However, no employee may purchase more than $25,000
worth of stock in any calendar year (with such value determined as of the start
of each Offering Period) or more than 5,000 shares of common stock in any fiscal
year.
Approval of the adoption of the Stock Purchase Plan requires the affirmative
vote of the holders of at least a majority of the shares of common stock
represented and voting at the Annual Meeting.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE APPROVAL OF
THE EMPLOYEE STOCK PURCHASE PLAN
PROPOSAL 3
PROPOSED AMENDMENT TO 1997 STOCK OPTION PLAN
Our Board of Directors has approved an amendment to the Amended and Restated
Family Bargain Corporation 1997 Stock Option Plan (the "Stock Option Plan"),
subject to stockholder approval, to increase from 1,807,980 to 2,157,980 the
number of shares of common stock issuable upon exercise of
14
<PAGE>
options granted under the Stock Option Plan. The purpose of the amendment is to
enable us to grant additional options in the future in order to attract and
retain key employees. As of the Record Date, we have granted a net amount of
1,783,954 options under the Stock Option Plan, which is the total number of
options granted less the number of options cancelled. In adopting the amendment,
for administrative convenience, the Board of Directors restated the Stock Option
Plan. The following summary of the material terms of the Stock Option Plan is
qualified in its entirety by reference to the full text of the Amended and
Restated Factory 2-U Stores, Inc. 1997 Stock Option Plan which is attached to
this Proxy Statement as Appendix B.
DESCRIPTION OF THE STOCK OPTION PLAN
The Board of Directors adopted the Stock Option Plan in 1997 and the
stockholders approved it in June 1997. The Board of Directors believes that the
selective grant of stock options is an effective and efficient means of
attracting, motivating and retaining key employees, officers and directors. The
Stock Option Plan provides for the grant of options to purchase common stock
either that are intended to qualify as "incentive stock options" within the
meaning of Section 422 of the Code, or that are not intended to so qualify
("non-qualified stock options"). All officers, directors and employees are
eligible to receive options under the Stock Option Plan, except that only
employees may receive incentive stock options. The maximum number of shares
available for issuance under the Stock Option Plan is 1,807,980 (2,157,980 if
the proposed amendment is approved). No person eligible to receive options under
the Stock Option Plan may receive options for the purchase of more than an
aggregate of 361,596 shares.
A committee appointed by the Board of Directors for that purpose (the
"Committee") currently administers the Stock Option Plan. Subject to the terms
of the Stock Option Plan, the Committee has the authority in its sole discretion
to determine: (a) the individuals to whom options shall be granted; (b) the time
or times at which options may be exercised; (c) the number of shares subject to
each option, the option price and the duration of each option granted; and (d)
all of the other terms and conditions of options granted under the Stock Option
Plan.
The exercise price of incentive stock options granted under the Stock Option
Plan must be at least equal to the fair market value of the shares on the date
of grant (110% of fair market value in the case of participants who own shares
possessing more than 10% of the combined voting power of our shares). The
aggregate fair market value (determined as of the time the option is granted) of
the shares with respect to which incentive stock options (granted under all of
our plans or those of our subsidiaries) are exercisable for the first time by an
optionee in any calendar year may not exceed $100,000. No incentive stock option
may be exercisable later than 10 years after the date it is granted (five years
in the case of participants who are more than 10% stockholders).
Options granted under the Stock Option Plan are not transferable other than
by will or the laws of descent and distribution. In the case of death, options
may be exercised by the person or persons to whom the rights under the options
pass by will or by the laws of descent or distribution.
An optionee must pay the exercise price upon exercise of an option in cash
or, in the discretion of the Committee, by the delivery of shares of common
stock, by the withholding of shares of common stock for which a stock option is
exercisable, or by a combination of these methods. In the discretion of the
Committee, an optionee may also pay by delivering a properly executed exercise
notice to us together with a copy of irrevocable instructions to a broker to
deliver promptly to us the amount of sale or loan proceeds to pay the exercise
price.
If the number of outstanding shares of common stock is increased or
decreased, or if such shares are exchanged for a different number or kind of
shares through reorganization, merger, recapitalization, reclassification, stock
dividend, stock split, split up, spinoff, combination of shares, exchange of
shares, dividend in kind or other like change in capital structure or
distribution to our stockholders, the Committee will appropriately adjust the
aggregate number of shares available for issuance under the Stock
15
<PAGE>
Option Plan, the number of shares subject to outstanding options, the per share
exercise price of outstanding options and the aggregate number of shares with
respect to which options may be granted to a single participant.
No grant of options may be made under the Stock Option Plan more than 10
years after its date of adoption. The Board of Directors has authority to
terminate or to amend the Stock Option Plan, subject to the approval of our
stockholders under certain specified circumstances, provided that such action
does not impair the rights of any holder of outstanding options without the
consent of such holder.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of the principal federal income tax
consequences of the Stock Option Plan based on current provisions of the Code
and applicable regulations thereunder.
INCENTIVE STOCK OPTIONS. An optionee does not recognize income at the time
of grant of an incentive stock option or at the time of exercise of such option
while employed by us (or within limited periods after termination of
employment). However, the exercise of an incentive stock option may result in an
alternative minimum tax liability for the optionee. If the optionee continues to
hold the shares received upon the exercise of the option for at least two years
from the date the option was granted and one year from the date the option was
exercised, the optionee will recognize capital gain or loss when he disposes of
the shares. Such gain or loss will be measured by the difference between the
option price and the amount received for the shares at the time of disposition.
If the optionee disposes of shares acquired upon exercise of an incentive
stock option before the expiration of the one-year and two-year holding periods
described above, the optionee will recognize ordinary income in the year of
disposition, in an amount equal to the excess of the fair market value of the
shares on the date the option was exercised (or, if less, the amount received
upon disposition of the shares) over the option price. Any amount realized upon
such a disposition in excess of the fair market value of the shares on the date
of exercise will be treated as capital gain.
NON-QUALIFIED STOCK OPTIONS. An optionee recognizes no income at the time a
non-qualified stock option is granted. At the time a non-qualified stock option
is exercised, an optionee will recognize ordinary income in an amount equal to
the excess of the fair market value of the shares on the date of exercise over
the exercise price. An optionee will recognize capital gain or loss on the
subsequent sale of the option shares in an amount equal to the difference
between the amount realized and the tax basis of such shares. The tax basis will
equal the option price paid plus the amount included in the optionee's income by
reason of the exercise of the option.
COMPANY DEDUCTIONS. As a general rule, we will be entitled to a deduction
for federal income tax purposes at the same time and in the same amount that an
employee recognizes ordinary income from options granted under the Stock Option
Plan, to the extent such income is considered reasonable compensation under the
Code. We will not, however, be entitled to a deduction to the extent
compensation in excess of $1 million is paid during any year to an executive
officer named in the Summary Compensation Table of the proxy statement who was
employed by us at year-end, unless the compensation qualifies as
"performance-based" under Section 162(m) of the Code or certain other exceptions
apply. In addition, we will not be entitled to a deduction with respect to
payments to employees which are deemed to constitute "excess parachute payments"
under Section 280G of the Code and do not qualify as reasonable compensation
pursuant to that Section; such payments will subject the recipients to a 20%
excise tax.
Approval of the proposed amendment to the Stock Option Plan requires the
affirmative vote of the holders of at least a majority of the shares of common
stock represented and voting at the Annual Meeting.
16
<PAGE>
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" THE APPROVAL OF
THE AMENDMENT TO THE STOCK OPTION PLAN.
PROPOSAL 4
INDEPENDENT PUBLIC ACCOUNTANTS AND ANNUAL REPORT
Upon recommendation of the Audit Committee, the Board of Directors has
appointed Arthur Andersen LLP as our independent accounting firm to audit our
financial statements for the year ending February 3, 2001. We are asking the
stockholders to ratify that appointment.
Arthur Andersen LLP audited our financial statements for the year ended
January 29, 2000. Representatives of that firm will 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 LLP as our
independent accountants.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" RATIFICATION OF
THE APPOINTMENT OF ARTHUR ANDERSEN LLP AS INDEPENDENT ACCOUNTANTS.
OTHER MATTERS
Our 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.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
To the best of our knowledge, no director, officer, or beneficial owner of
more than 10% of our 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
fiscal year ended January 29, 2000.
STOCKHOLDERS' PROPOSALS FOR NEXT YEAR'S ANNUAL MEETING
We must receive proposals which stockholders wish included in next year's
Proxy Statement at our principal executive offices at 4000 Ruffin Road, San
Diego, California 92109 no later than February 3, 2001.
We will furnish without charge to each stockholder, upon written request
addressed to us at 4000 Ruffin Road, San Diego, California 92123, attention:
Chief Financial Officer, a copy of our Annual Report on Form 10-K for the fiscal
year ended January 29, 2000 (excluding the exhibits thereto), as filed with the
Securities and Exchange Commission. Our Annual Report for the fiscal year ended
January 29, 2000 accompanies this proxy statement, but is not deemed to be a
part of the proxy soliciting material.
PLEASE COMPLETE, SIGN AND RETURN THE ENCLOSED PROXY PROMPTLY.
By Order of the Board of Directors
Wm. Robert Wright II
SECRETARY
San Diego, California
May 22, 2000
17
<PAGE>
APPENDIX A
FACTORY 2-U STORES, INC.
EMPLOYEE STOCK PURCHASE PLAN
ARTICLE
PURPOSE
1.1. NAME. This Stock Purchase Plan shall be known as the Employee Stock
Purchase Plan (the "Plan") and is dated as of December 8, 1999, the date on
which it received the approval of the Board.
1.2. PURPOSE. The Plan is intended to provide a method whereby employees of
Factory 2-U Stores, Inc., a Delaware corporation (the "Company") and its
participating subsidiaries will have an opportunity to acquire a proprietary
interest in the Company through the purchase of shares of the Common Stock of
the Company at a discount from market price.
1.3. QUALIFICATION. It is the intention of the Company to have the Plan
qualify as an "employee stock purchase plan" under Section 423 of the Internal
Revenue Code of 1986, as amended (the "Code"). The provisions of the Plan will
be construed in a manner consistent with the requirements of that section of the
Code.
1.4. DEFINITIONS. Capitalized terms used in this Plan document are defined
in Article X.
ARTICLE II
ADMINISTRATION
2.1. COMMITTEE POWERS. The Plan shall be administered by the Committee,
which is a committee comprised of two or more non-employee Board members
appointed from time to time by the Board. The Committee shall have full
authority to administer the Plan, including authority to interpret and construe
any provision of the Plan and to adopt such rules and regulations for
administering the Plan as it may deem necessary or appropriate. The Committee
may correct any defect or omission or reconcile any inconsistency in the Plan,
in the manner and to the extent it shall deem desirable. Decisions of the
Committee shall be final and binding on all parties who have an interest in the
Plan. The Board may from time to time appoint members of the Committee in
substitution for or in addition to members previously appointed and may fill
vacancies, however caused, in the Committee.
2.2. ACTION BY COMMITTEE. The Committee may select one of its members as
its Chairman and shall hold its meetings at such times and places as it shall
deem advisable and may hold telephonic meetings. A majority of its members shall
constitute a quorum. All determinations of the Committee at a meeting shall be
made by a majority of its members. Any decision or determination reduced to
writing and signed by all of the members of the Committee shall be as fully
effective as if it had been made by a majority vote at a meeting duly called and
held. The Committee may appoint a secretary and shall make such rules and
regulations for the conduct of its business as it shall deem advisable.
ARTICLE III
OFFERING PERIODS
3.1. GENERAL. Shares of Common Stock shall be offered for purchase under
the Plan through a series of successive offering periods (each, an "Offering
Period") until such time as (a) the maximum number of shares of Common Stock
available for issuance under the Plan shall have been purchased or (b) the Plan
shall have been sooner terminated in accordance with Article VIII. The initial
Offering Period shall commence upon the date specified by the Board and have a
duration of 5 months, and each subsequent
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Offering Period shall commence immediately after the conclusion of the prior
Offering Period and have a duration of 6 months unless, prior to the start of
the Offering Period, the Committee establishes a different commencement date or
a shorter duration for the particular Offering Period.
3.2. PURCHASE RIGHTS. The Participant shall be granted a separate Purchase
Right for each Offering Period in which he/she participates. The Purchase Right
shall be granted on the Start Date of each Offering Period.
ARTICLE IV
ELIGIBILITY AND PARTICIPATION
4.1. SERVICE REQUIREMENT. An individual who is an Eligible Employee with at
least one year of Service prior to the Start Date of an Offering Period may
enter that Offering Period on its Start Date, provided he/ she enrolls in the
Offering Period on or before such date in accordance with Section 4.2 below. An
Eligible Employee who completes his/her first year of Service during an Offering
Period may not participate in the Plan until the next Offering Period.
4.2. ENROLLMENT. To participate for a particular Offering Period, the
Eligible Employee must complete the enrollment forms prescribed by the Committee
(including a purchase agreement and payroll deduction authorization) and file
such forms with the Committee (or its designate) at least five business days
before the Start Date of the Offering Period.
4.3. PAYROLL DEDUCTION AMOUNT. The payroll deduction authorized by the
Participant for purposes of acquiring shares of Common Stock under the Plan may
be any multiple of one percent (1%) of the gross Earnings paid to the
Participant, up to a maximum of ten percent (10%). The payroll deduction rate so
authorized shall be applied to each pay period in the Offering Period, and shall
continue in effect for the remainder of the Offering Period and all subsequent
Offering Periods, except to the extent such rate is changed in accordance with
Sections 4.4, 4.5 and 4.6.
4.4. CHANGES DURING PERIOD. Any Participant may, at any time during an
Offering Period, increase or reduce his/her rate of payroll deduction. Such
increase or reduction shall become effective as soon as administratively
practicable after filing of the requisite change form with the Committee (or its
designate), but the Participant may not effect more than one such change during
the same Offering Period.
4.5. CHANGES FOR SUBSEQUENT PERIODS. Any Participant may, prior to the
commencement of an Offering Period, increase or decrease the rate of his/her
payroll deduction effective for such Offering Period by filing the appropriate
form with the Committee (or its designate). If the form is filed at least 5
business days before the Start Date of the Offering Period, the new rate shall
become effective as of the Start Date of the first Offering Period following the
filing of such form.
4.6. TERMINATION OF PAYROLL DEDUCTIONS. Payroll deductions will
automatically cease upon the termination of the Participant's Purchase Right in
accordance with the applicable provisions of Article VI below. In addition, if a
Participant elects to reduce his/her payroll deductions to zero, this will cause
a termination of his/her Purchase Rights under Section 6.6. Any change pursuant
to this Section 4.6 shall be in addition to the changes permitted under Sections
4.4 and 4.5.
ARTICLE V
STOCK SUBJECT TO PLAN
5.1. SHARES AVAILABLE. Subject to adjustment under Section 5.2 below,
350,000 shares are reserved for issuance pursuant to the Plan. The Common Stock
purchasable under the Plan shall, solely in the discretion of the Committee, be
made available from either authorized but unissued shares of Common
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Stock or from shares of Common Stock reacquired by the Company, including shares
of Common Stock purchased on the open market.
5.2. ADJUSTMENTS. In the event any change is made to the outstanding Common
Stock by reason of any stock dividend, stock split, combination of shares,
recapitalization, reorganization, merger in which the Company is the surviving
corporation, spin-off, extraordinary dividend or other change affecting such
outstanding Common Stock as a class without the Company's receipt of
consideration, adjustments shall be made by the Board or the Committee, as it
deems appropriate in its discretion, to (a) the class and maximum number of
securities issuable pursuant to the Plan, (b) the class and maximum number of
securities purchasable per Participant during any one Offering Period, and (c)
the class and number of securities and the price per share in effect under each
Purchase Right outstanding under the Plan. Such adjustments shall be designed to
preclude the enhancement or dilution of rights and benefits under the Plan. Any
determination under this Section 5.2 shall be binding and conclusive.
ARTICLE VI
PURCHASE RIGHTS
6.1. PURCHASE RIGHT. An Eligible Employee who participates in the Plan for
a particular Offering Period shall have the right to purchase shares of Common
Stock on the Purchase Date for such Offering Period, upon the terms and
conditions set forth below.
6.2. PURCHASE PRICE. Common Stock shall be purchased at the end of each
Offering Period at a purchase price equal to eighty-five percent (85%) of the
lower of (a) the fair market value per share on the Start Date of that Offering
Period or (b) the fair market value per share on the Purchase Date of such
Offering Period.
6.3. CALCULATION OF FAIR MARKET VALUE OF COMMON STOCK. The fair market
value of a share of Common Stock on any relevant date shall be determined in
accordance with the following provisions:
(a) If the Common Stock is listed on a national securities exchange or the
Nasdaq National Market or the Nasdaq SmallCap Market, its fair market value
shall be the closing sales price for such stock on such exchange or market as is
determined by the Board to be the primary market for the Common Stock on the
date in question (or if shares of Common Stock were not traded on such date,
then on the next preceding trading day on which a sale of Common Stock
occurred).
(b) If the Common Stock is regularly quoted by a recognized securities
dealer but selling prices are not reported, its fair market value shall be the
mean of the highest bid and lowest asked prices for the Common Stock on the date
in question (or if there were no reported bid and asked prices for such date,
then on the next preceding trading day for which such quotations exist).
6.4. NUMBER OF PURCHASABLE SHARES. Subject to the limitations set forth in
Article VII, the number of shares purchasable per Participant for an Offering
Period shall be the number of whole and fractional shares (to four decimal
places) obtained by dividing the amount collected from the Participant through
payroll deductions during that Offering Period by the purchase price in effect
for such Offering Period; provided, however, such number may not exceed 2,500
shares in any Offering Period. Under no circumstances shall Purchase Rights be
granted under the Plan to any Eligible Employee if such individual would,
immediately after the grant, own (within the meaning of Code Section 424(d)) or
hold outstanding options or other rights to purchase, stock possessing five
percent or more of the total combined voting power or value of all classes of
stock of the Company or any of its Corporate Affiliates.
6.5. PAYMENT. Payment for the Common Stock purchased under the Plan shall
be effected by means of the Participant's authorized payroll deductions. Such
deductions shall begin with the first pay date immediately following the Start
Date of the Offering Period and shall (unless sooner terminated by the
Participant) continue through the pay day ending with or immediately prior to
the last business day of the
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Offering Period. The amounts so collected shall be credited to the book account
established for the Participant under the Plan. No interest shall be paid on
accumulated payroll deductions. The amounts collected from a Participant may be
commingled with the general assets of the Company and may be used for general
corporate purposes.
6.6. TERMINATION OF PURCHASE RIGHT. The following provisions shall govern
the termination of outstanding Purchase Rights:
(a) A Participant may, at any time prior to the last five business days of
the Offering Period, terminate his/her outstanding Purchase Right under the Plan
for the Offering Period by filing the prescribed notification form with the
Committee (or its designate). No further payroll deductions shall be collected
from the Participant with respect to the terminated Purchase Right, and any
payroll deductions collected for the Offering Period in which such termination
occurs shall be refunded to the Participant (without interest) as soon as
administratively practicable. If a Participant elects to reduce his/her payroll
deductions to zero under Section 4.6, this will also constitute a termination of
his/her Purchase Right.
(b) The termination by a Participant of his/her Purchase Rights under
Section 6.6(a) shall be irrevocable, and the Participant may not subsequently
rejoin the Offering Period for which the terminated Purchase Right was granted.
In order to resume participation in any subsequent Offering Period, such
individual must re-enroll in the Plan (by making a timely filing of a new
purchase agreement and payroll deduction authorization) in accordance with
Section 4.2.
(c) If the Participant ceases to be employed by a Participating Company or
otherwise ceases to be an Eligible Employee while his/her Purchase Right remains
outstanding, then such Purchase Right shall immediately terminate, and the
payroll deductions collected from such Participant for the Offering Period in
which the Purchase Right so terminates shall be refunded to the Participant as
soon as administratively practicable.
6.7. STOCK PURCHASE. Shares of Common Stock shall automatically be
purchased on behalf of each Participant (other than Participants whose Purchase
Rights have been terminated in accordance with Section 6.6) on each Purchase
Date. The purchase shall be effected by applying each Participant's payroll
deductions for the Offering Period ending on such Purchase Date to the purchase
of whole and fractional shares of Common Stock (subject to the limitations on
the maximum number of purchasable shares set forth in Section 6.4 and Article
VII) at the purchase price in effect for such Offering Period. Any payroll
deductions not applied to the purchase of Common Stock by reason of the
limitations on the maximum number of shares purchasable by the Participant for
the Offering Period shall be refunded to the Participant as soon as
administratively practicable.
6.8. PRORATION OF PURCHASE RIGHTS. Should the total number of shares of
Common Stock which are to be purchased pursuant to outstanding Purchase Rights
on any particular Purchase Date exceed the number of shares then available for
issuance under the Plan, the Committee shall make a pro rata allocation of the
available shares on a uniform and nondiscriminatory basis, and the payroll
deductions of each Participant, to the extent in excess of the aggregate
purchase price payable for the Common Stock pro-rated to such individual, shall
be refunded to such Participant as soon as administratively practicable.
6.9. RIGHTS AS SHAREHOLDER. A Participant shall have no shareholder rights
with respect to the shares subject to his/her outstanding Purchase Right until
the shares are actually purchased on the Participant's behalf in accordance with
the applicable provisions of the Plan. No adjustments shall be made for
dividends, distributions or other rights for which the record date is prior to
the date of such purchase.
6.10. ASSIGNABILITY. No Purchase Right granted under the Plan shall be
assignable or transferable by the Participant.
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6.11. DEATH OF PARTICIPANT. If a Participant dies while his/her Purchase
Right remains outstanding, his/ her accumulated payroll deductions shall be paid
to his/her designated beneficiary, or in the absence of a designated
beneficiary, to his/her estate as soon as is administratively practicable.
6.12. HOLDING PERIOD. Shares of Common Stock purchased under the Plan shall
not be sold until six months after the Purchase Date with respect to such Common
Stock. During such six-month period, stock certificates for the purchased shares
shall be held for the Participant in a brokerage account at a nationally
recognized brokerage firm designated by the Company. At the conclusion of the
six-month holding period, the Participant may instruct the broker to sell the
shares or to deliver the certificates to the Participant free of all
restrictions.
6.13. SALE OF STOCK. If a Participant sells, disposes, or in any way
transfers shares of Common Stock purchased under the Plan prior to (i) two years
after the Start Date of the Offering Period or (ii) one year after the Purchase
Date, the Participant shall immediately provide to the Company information,
including, without limitation, the manner of the transfer, the date of the
transfer, the number of shares involved and the transfer price, as well as other
such information the Company may request. By executing the enrollment forms,
each Participant obligates himself or herself to provide such information to the
Company.
6.14. CORPORATE TRANSACTIONS. Should a Corporate Transaction occur during
the Offering Period, unless the surviving or successor corporation shall have
agreed to assume the Plan, the Offering Period then in progress shall be
shortened by setting a new Purchase Date, which shall be a date determined by
the Board or the Committee which is before the effective date of the proposed
Corporate Transaction. In such event, all accumulated payroll deductions for
such Offering Period (which have not been timely withdrawn) shall be
automatically applied to purchase Common Stock on the newly designated Purchase
Date. The applicable share limitations of Articles V, VI and VII shall continue
to apply to any such purchase.
6.15. NOTICE OF CORPORATE TRANSACTION. The Company shall use its best
efforts to provide at least ten (10) days advance written notice of the
occurrence of a designation of a Purchase Date pursuant to Section 6.14, and
Participants shall, following the receipt of such notice, have the right to
terminate their outstanding Purchase Rights in accordance with the applicable
provisions of this Article VI.
ARTICLE VII
LIMITATION ON PARTICIPATION
7.1. GENERAL. No Participant shall be entitled to accrue rights to acquire
Common Stock pursuant to any Purchase Right outstanding under this Plan if and
to the extent such accrual, when aggregated with (a) rights to purchase Common
Stock accrued under any other Purchase Right outstanding under this Plan and (b)
similar rights accrued under other employee stock purchase plans (within the
meaning of Section 423 of the Code) of the Company or its Corporate Affiliates,
would otherwise permit such Participant to purchase more than $25,000 worth of
stock of the Company and its Corporate Affiliates (determined on the basis of
the fair market value of such stock on the date or dates such Purchase Rights
are granted the Participant) for each calendar year such rights are at any time
outstanding.
7.2. ACCRUAL OF PURCHASE RIGHTS. For purposes of applying the limitation
set forth in Section 7.1, the right to acquire Common Stock pursuant to each
Purchase Right outstanding under the Plan shall accrue as follows:
(a) The right to acquire Common Stock under a Purchase Right shall accrue
(i) on the Purchase Date for the applicable Offering Period, in the case of this
Plan, and (ii) when the Purchase Right first becomes exercisable, in the case of
any other employee stock purchase plan.
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(b) No right to acquire Common Stock under any outstanding Purchase Right
shall accrue to the extent the Participant has already accrued in the same
calendar year the right to acquire $25,000 worth of Common Stock (determined on
the basis of the fair market value on the date or dates of grant) pursuant to
one or more Purchase Rights held by the Participant during such calendar year.
(c) If by reason of such limitation, any Purchase Right of a Participant
does not accrue for a particular Offering Period, then the payroll deductions
which the Participant made during that Offering Period with respect to such
Purchase Right shall be promptly refunded.
7.3. PRIORITY. In the event there is any conflict between the provisions of
this Article VII and one or more provisions of the Plan or any instrument issued
thereunder, the provisions of this Article VII shall be controlling.
ARTICLE VIII
AMENDMENT AND TERMINATION
8.1. AMENDMENTS. The Board may amend, suspend or discontinue the Plan at
any time or from time to time, provided that any such action which adversely
affects Purchase Rights previously granted shall only be effective following the
close of any Offering Period. Shareholder approval of any such action shall not
be required except as necessary to continue the Plan's qualification under
Section 423 of the Code or as required by law.
8.2. TERMINATION. The Plan shall terminate upon the date on which all
shares available for issuance under the Plan shall have been sold pursuant to
Purchase Rights exercised under the Plan. The Company shall have the right,
exercisable in the sole discretion of the Board, to terminate the Plan at any
earlier time. Upon termination of the Plan by the Board during an Offering
Period, the Offering Period then in progress shall be shortened by setting a new
Purchase Date, which shall be a date determined by the Board. The Company shall
give Participants at least 10 business days notice of the new Purchase Date and
then all accumulated payroll deductions for such Offering Period, which have not
been withdrawn as of 5 business days before the new Purchase Date, shall be
automatically applied to purchase Common Stock on the newly designated Purchase
Date. Should the Company elect to exercise such right, then the Plan shall
terminate in its entirety, in which case no further Purchase Rights shall
thereafter be granted or exercised, and no further payroll deductions shall
thereafter be collected, under the Plan. All shares purchased under the Plan
prior to termination of the Plan shall be subject to the six-month holding
period under Section 6.12 unless the Board determines otherwise.
ARTICLE IX
GENERAL PROVISIONS
9.1. PLAN COMMENCEMENT. The Plan shall be effective as of February 1, 2000,
subject to Section 9.2.
9.2. SHAREHOLDER APPROVAL. No shares shall be purchased under the Plan
prior to shareholder approval of the Plan. In the event shareholder approval has
not been obtained prior to the Purchase Date of the initial Offering Period,
then the initial Offering Period shall be extended until the time such
shareholder approval is obtained. The Plan and all rights to purchase Common
Stock granted pursuant to the Plan shall be void if the stockholders do not
approve the Plan within twelve (12) months from the date the Plan is approved by
the Board.
9.3. COSTS. The Company shall pay all costs and expenses incurred in the
administration of the Plan, except the costs of disposition, transfer or sale of
Common Stock (or stock certificates) by a Participant.
9.4. NO EMPLOYMENT RIGHTS. Neither the action of the Company in
establishing the Plan, nor any action taken under the Plan by the Board or the
Committee, nor any provision of the Plan itself shall be construed so as to
grant any person the right to remain in the employ of the Company or any of its
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Corporate Affiliates for any period or interfere in any way with the right of
the Company and its Corporate Affiliates to terminate the employment of any
employee.
9.5. EQUAL RIGHTS AND PRIVILEGES. All Eligible Employees shall have equal
rights and privileges with respect to the Plan to the extent necessary to
satisfy the requirements of Section 423 of the Code. This provision shall take
precedence over any conflicting provision of the Plan.
9.6. CONFLICT OF LAWS. The provisions of the Plan shall be governed by the
laws of the State of Delaware without resort to that State's conflict-of-laws
rules.
ARTICLE X
DEFINITIONS
For purposes of the Plan, the following terms shall have the meanings
indicated:
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Committee" means the Compensation Committee of the Board.
"Company" means Factory 2-U Stores, Inc., a Delaware corporation, and any
corporate successor to all or substantially all of the assets or voting stock of
Factory 2-U Stores, Inc., which shall by appropriate action adopt the Plan.
"Common Stock" means shares of the Company's common stock.
"Corporate Affiliate" means any parent or subsidiary corporation of the
Company (as determined in accordance with Code Section 424), including any
parent or subsidiary corporation which becomes such after the effective date of
the Plan.
"Corporate Transaction" means a merger or other reorganization in which the
Company will not be the surviving corporation (other than a reorganization
effected primarily to change the State in which the company is incorporated), a
sale of all or substantially all of the Company's assets, or a liquidation or
dissolution of the Company.
"Earnings" means the regular base salary or wages paid by the Company to the
Participant.
"Eligible Employee" means any person who is engaged, on a
regularly-scheduled basis of more than 20 hours per week for more than five
months per calendar year, in the rendition of personal services to the Company
or any other Participating Company for earnings considered wages under Section
3121(a) of the Code.
"Offering Period" means the designated period for accumulation of payroll
deductions as specified in Section 3.1 hereof. Except as otherwise designated by
the Committee, each Offering Period shall be six months (except for the initial
Offering Period, which shall be five) and shall end on the last business day of
June and December, respectively.
"Participant" means any Eligible Employee of a Participating Company who is
actively participating in the Plan.
"Participating Company" means the Company and those Corporate Affiliates as
may be designated from time to time by the Board for participation in the Plan.
"Plan" means the Factory 2-U Stores, Inc. Employee Stock Purchase Plan as
from time to time in effect.
"Purchase Date" means the last business day of each Offering Period, on
which shares of Common Stock are automatically purchased for Participants under
the Plan.
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"Purchase Right" means the right to purchase Common Stock at the end of an
Offering Period, which right is granted at the Start Date of such Offering
Period, subject to the terms of the Plan.
"Service" means the period during which an individual performs services as
an employee of a Participating Company and shall be measured from his or her
hire date, whether that date is before or after the effective date of the Plan.
"Start Date" shall mean the first day of any Offering Period.
FACTORY 2-U STORES, INC.
<TABLE>
<S> <C> <C>
By: /s/ MICHAEL M. SEARLES
-----------------------------------------
Michael M. Searles,
PRESIDENT
</TABLE>
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APPENDIX B
THE AMENDED AND RESTATED
FACTORY 2-U STORES, INC.
1997 STOCK OPTION PLAN
1. PURPOSE.
This Amended and Restated Factory 2-U Stores, Inc. 1997 Stock Option Plan
(the "Plan") is intended to provide incentives which will attract, retain and
motivate highly competent persons as key employees of Factory 2-U Stores, Inc.
(the "Company") and of any subsidiary now existing or hereafter formed or
acquired, by providing them opportunities to acquire shares of the common stock,
par value $0.01 per share, of the Company ("Common Stock"). Furthermore, the
Plan is intended to assist in aligning the interests of the Company's key
employees with those of its stockholders.
2. ADMINISTRATION.
(a) The Plan shall be administered by a committee (the "Committee")
appointed by the Board of Directors of the Company (the "Board") from among
its members. The Committee shall be comprised of not less than two members.
Each member of the Committee shall at all times be (i) a "Non-Employee
Director" within the meaning of Rule 16b-3(b)(3) (or any successor rule)
promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and (ii) an "outside director" within the meaning of
Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), and the regulations promulgated thereunder. Subject to the
provisions of the Plan, the Committee is authorized to establish such rules
and regulations as it deems necessary for the proper administration of the
Plan and to make such determinations and interpretations and to take such
action in connection with the Plan and any Stock Options (as described in
Section 5 below) granted hereunder as it deems necessary or advisable. All
determinations and interpretations made by the Committee shall be binding
and conclusive on all participants and their legal representatives. No
member of the Board, no member of the Committee and no employee of the
Company shall be liable for any act or failure to act hereunder, except in
circumstances involving his or her bad faith, gross negligence or willful
misconduct, or for any act or failure to act hereunder by any other member
or employee or by any agent to whom duties in connection with the
administration of this Plan have been delegated. The Company shall indemnify
members of the Committee and any agent of the Committee who is an employee
of the Company, against any and all liabilities or expenses to which they
may be subjected by reason of any act or failure to act with respect to
their duties on behalf of the Plan, except in circumstances involving such
person's bad faith, gross negligence or willful misconduct.
(b) The Committee may delegate to one or more of its members, or to one
or more agents, such administrative duties as it may deem advisable, and the
Committee, or any person to whom it has delegated duties as aforesaid, may
employ one or more persons to render advice with respect to any
responsibility the Committee or such person may have under the Plan. The
Committee may employ such legal or other counsel, consultants and agents as
it may deem desirable for the administration of the Plan and may rely upon
any opinion or computation received from any such counsel, consultant or
agent. Expenses incurred by the Committee in the engagement of such counsel,
consultant or agent shall be paid by the Company, or the subsidiary or
affiliate whose employees have benefitted from the Plan, as determined by
the Committee.
3. PARTICIPANTS.
Participants shall consist of such key employees, directors, consultants and
suppliers of the Company and any of its subsidiaries, as the Committee in its
sole discretion determines to be significantly responsible for the success and
future growth and profitability of the Company and whom the Committee may
designate from time to time to receive Stock Options under the Plan. Designation
of a participant in any
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year shall not require the Committee to designate such person to receive a Stock
Option in any other year or, once designated, to receive the same type or amount
of Stock Option as granted to the participant in any other year. The Committee
shall consider such factors as it deems pertinent in selecting participants and
in determining the type and amount of their respective Stock Options.
4. COMMON STOCK AVAILABLE UNDER THE PLAN.
The aggregate number of shares of Common Stock that may be subject to Stock
Options granted under this Plan shall be 2,157,980 shares of Common Stock, which
may be authorized and unissued or treasury shares, subject to any adjustments
made in accordance with Section 6 hereof. The maximum number of shares of Common
Stock with respect to which Stock Options may be granted to any individual
participant under the Plan during the term of the Plan shall not exceed 361,596
shares, subject to any adjustments made in accordance with Section 6 hereof. Any
shares of Common Stock subject to a Stock Option which for any reason is
cancelled, terminated without having been exercised, forfeited, or delivered to
the Company as pan of full payment for the exercise of a Stock Option shall
again be available for Stock Options under the Plan. The preceding sentence
shall apply only for purposes of determining the aggregate number of shares of
Common Stock subject to Stock Options and shall not apply for purposes of
determining the maximum number of shares of Common Stock subject to Stock
Options that any individual participant may receive.
5. STOCK OPTIONS.
(a) IN GENERAL. The Committee is authorized to grant Stock Options to
key employees, directors, consultants and suppliers of the Company and any
of its subsidiaries, and shall, in its sole discretion, determine the key
employees, directors, consultants and suppliers who will receive Stock
Options and the number of shares of Common Stock underlying each Stock
Option. Stock Options may be (i) "incentive stock options" ("Incentive Stock
Options"), within the meaning of Section 422 of the Code, or (ii) Stock
Options which do not constitute Incentive Stock Options ("Nonqualified Stock
Options"). The Committee shall have the authority to grant to any key
employee one or more Incentive Stock Options, Nonqualified Stock Options, or
both types of Stock Options, and to grant to any other participant one or
more Nonqualified Stock Options. Each Stock Option shall be subject to such
terms and conditions consistent with the Plan as the Committee may impose
from time to time. In addition, each Stock Option shall be subject to the
following limitations set forth in this Section 5.
(b) STOCK OPTION AGREEMENTS. Stock Options shall be evidenced by
agreements (which need not be identical) in such forms as the Committee may
from time to time approve; PROVIDED, HOWEVER, that in the event of any
conflict between the provisions of the Plan and any such agreements, the
provisions of the Plan shall prevail.
(c) EXERCISE PRICE. Subject to the provisions of Section 5(f) hereof,
each Stock Option granted hereunder shall have such exercise price as the
Committee may determine at the date of grant; PROVIDED, HOWEVER, that the
exercise price of any Incentive Stock Option shall not be less than
100 percent of the Fair Market Value (as defined in Section 9 below) of the
Common Stock on the date such Incentive Stock Option is granted.
(d) PAYMENT OF EXERCISE PRICE. The Stock Option exercise price may be
paid in cash or, in the discretion of the Committee, by the delivery of
shares of Common Stock then owned by the participant, by the withholding of
shares of Common Stock for which a Stock Option is exercisable, or by a
combination of these methods. In the discretion of the Committee, payment
may also be made by delivering a properly executed exercise notice to the
Company together with a copy of irrevocable instructions to a broker to
deliver promptly to the Company the amount of sale or loan proceeds to pay
the exercise price. To facilitate the foregoing, the Company may enter into
agreements for coordinated procedures with one or more brokerage firms. The
Committee may prescribe any other
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method of paying the exercise price that it determines to be consistent with
applicable law and the purpose of the Plan, including, without limitation,
in lieu of the exercise of a Stock Option by delivery of shares of Common
Stock then owned by a participant, providing the Company with a notarized
statement attesting to the number of shares owned, where upon verification
by the Company, the Company would issue to the participant only the number
of incremental shares to which the participant is entitled upon exercise of
the Stock Option. In determining which methods a participant may utilize to
pay the exercise price, the Committee may consider such factors as it
determines are appropriate; PROVIDED, HOWEVER, that with respect to
Incentive Stock Options, all such discretionary determinations by the
Committee shall be made at the time of grant and specified in the Stock
Option agreement.
(e) EXERCISE PERIOD. Stock Options granted under the Plan shall be
exercisable at such time or times and subject to such terms and conditions
as shall be determined by the Committee; PROVIDED, HOWEVER, that no Stock
Option shall be exercisable later than 10 years after the date it is
granted. All Stock Options shall terminate at such earlier times and upon
such conditions or circumstances as the Committee shall in its discretion
set forth in such Stock Option agreement at the date of grant.
(f) LIMITATIONS ON INCENTIVE STOCK OPTIONS. Incentive Stock Options may
be granted only to participants who are key employees of the Company or any
of its subsidiaries at the date of grant. The aggregate market value
(determined as of the time the Stock Option is granted) of the Common Stock
with respect to which Incentive Stock Options (under all option plans of the
Company) are exercisable for the first time by a participant during any
calendar year shall not exceed $100,000. For purposes of the preceding
sentence, (i) Incentive Stock Options shall be taken into account in the
order in which they are granted and (ii) Incentive Stock Options granted
before 1987 shall not be taken into account. Incentive Stock Options may not
be granted to any participant who, at the time of grant, owns stock
possessing (after the application of the attribution rules of
Section 424(d) of the Code) more than 10 percent of the total combined
voting power of all outstanding classes of stock of the Company or any of
its subsidiaries, unless the option price is fixed at not less than
110 percent of the Fair Market Value of the Common Stock on the date of
grant and the exercise of such option is prohibited by its terms after the
expiration of 5 years from the date of grant of such option. In addition, no
Incentive Stock Option shall be issued to a participant in tandem with a
Nonqualified Stock Option.
6. ADJUSTMENT PROVISIONS.
If there shall be any change in the Common Stock, through merger,
consolidation, reorganization, recapitalization, stock dividend, stock split,
reverse stock split, split up, spinoff, combination of shares, exchange of
shares, dividend in kind or other like change in capital structure or
distribution (other than normal cash dividends) to stockholders of the Company,
an adjustment shall be made to each outstanding Stock Option such that each such
Stock Option shall thereafter be exercisable for such securities, cash and/or
other property as would have been received in respect of the Common Stock
subject to such Stock Option had such Stock Option been exercised in full
immediately prior to such change or distribution, and such an adjustment shall
be made successively each time any such change shall occur. In addition, in the
event of any such change or distribution, in order to prevent dilution or
enlargement of participants' rights under the Plan, the Committee shall have
authority to adjust, in an equitable manner, the number and kind of shares that
may be issued under the Plan, the number and kind of shares subject to
outstanding Stock Options, the exercise price applicable to outstanding Stock
Options, and the Fair Market Value of the Common Stock and other value
determinations applicable to outstanding Stock Options. Appropriate adjustments
may also be made by the Committee in the terms of any Stock Options under the
Plan to reflect such changes or distributions and to modify any other terms of
outstanding Stock Options on an equitable basis, including modifications of
performance targets and changes in the length of performance periods.
Notwithstanding the foregoing, (i) any adjustment with respect to an Incentive
Stock Option shall comply with the rules of Section 424(a) of the Code, and
(ii) in no event shall any adjustment be made
B-3
<PAGE>
which would render any Incentive Stock Option granted hereunder other than an
incentive stock option for purposes of Section 422 of the Code.
7. CHANGE IN CONTROL.
(a) Notwithstanding any other provision of this Plan, if there is a
Change in Control of the Company, all then outstanding Stock Options shall
immediately become exercisable. For purposes of this Section 7, a "Change in
Control" of the Company shall be deemed to have occurred upon any of the
following events:
(i) any person or group within the meaning of Section 13(d)(3) of the
Exchange Act (other than the persons who do so on the Effective Date)
shall beneficially own (within the meaning of Rule 13d-3 under the
Exchange Act) more than 50% of the total voting power of all classes of
capital stock of the Company entitled to vote generally in the election
of directors of the Company;
(ii) the Company consolidates with, merges into, or sells, leases or
conveys all or substantially all of its assets to, any other person; or
(iii) the Company enters into or approves any agreement, transaction
or proposal that would result in the occurrence of any event described in
clauses (i) or (ii) (including without limitation any agreement,
transaction or proposal that would have such result with the passage of
time, upon the payment of money or other consideration, or upon the
occurrence of any contingency or contingencies).
(b) The Committee, in its discretion, may determine that, upon the
occurrence of a Change in Control of the Company, each Stock Option
outstanding hereunder shall terminate within a specified number of days
after notice to the holder, and such holder shall receive, with respect to
each share of Common Stock subject to such Stock Option, an amount equal to
the excess of the Fair Market Value of such shares of Common Stock
immediately prior to the occurrence of such Change in Control over the
exercise price per share of such Stock Option; such amount shall be payable
in cash, in one or more kinds of property (including the property, if any,
payable in the transaction) or in a combination thereof, as the Committee,
in its discretion, shall determine.
8. TRANSFERABILITY.
Each Stock Option granted under the Plan to a participant shall be
exercisable, during the participant's lifetime, only by the participant and no
such Stock Option shall be transferable otherwise than by will or the laws of
descent and distribution. In the event of the death of a participant, each Stock
Option theretofore granted to him or her shall be exercisable during such period
after his or her death as the Committee shall in its discretion set forth in
such option or right at the date of grant and then only by the executor or
administrator of the estate of the deceased participant or the person or persons
to whom the deceased participant's rights under the Stock Option shall pass by
will or the laws of descent and distribution.
9. FAIR MARKET VALUE.
For purposes of this Plan and any Stock Option granted hereunder, Fair
Market Value shall be (i) the closing price of the Common Stock on the date of
calculation (or on the last preceding trading date if Common Stock was not
traded on such date) if the Common Stock is readily tradeable on a national
securities exchange or other market system or (ii) if the Common Stock is not
readily tradeable, the amount determined in good faith by the Committee as the
fair market value of the Common Stock.
B-4
<PAGE>
10. WITHHOLDING.
All payments or distributions made pursuant to the Plan shall be net of any
amounts required to be withheld pursuant to applicable federal, state and local
tax withholding requirements. If the Company proposes or is required to
distribute Common Stock pursuant to the Plan, it may require the recipient to
remit to it or to the corporation that employs such recipient an amount
sufficient to satisfy such tax withholding requirements prior to the delivery of
any certificates for such Common Stock. In lieu thereof, the Company or the
employing corporation shall have the right to withhold the amount of such taxes
from any other sums due or to become due from such corporation to the recipient
as the Committee shall prescribe. The Committee may, in its discretion and
subject to such rules as it may adopt (including any as may be required to
satisfy applicable tax and/or non-tax regulatory requirements), permit a
participant to pay all or a portion of the federal, state and local withholding
taxes arising in connection with any Stock Option consisting of shares of Common
Stock by electing to have the Company withhold shares of Common Stock having a
Fair Market Value equal to the amount of tax to be withheld, such tax calculated
at rates required by statute or regulation.
11. TENURE.
A participant's right, if any, to continue to serve the Company as a
director, officer, employee, or otherwise, shall not be enlarged or otherwise
affected by his or her designation as a participant under the Plan.
12. UNFUNDED PLAN.
Participants shall have no right, title, or interest whatsoever in or to any
investments which the Company may make to aid it in meeting its obligations
under the Plan. Nothing contained in the Plan, and no action taken pursuant to
its provisions, shall create or be construed to create a trust of any kind, or a
fiduciary relationship between the Company and any participant, beneficiary,
legal representative or any other person. To the extent that any person acquires
a right to receive payments from the Company under the Plan, such right shall be
no greater than the right of an unsecured general creditor of the Company. All
payments to be made hereunder shall be paid from the general funds of the
Company and no special or separate fund shall be established and no segregation
of assets shall be made to assure payment of such amounts except as expressly
set forth in the Plan. The Plan is not intended to be subject to the Employee
Retirement Income Security Act of 1974, as amended.
13. NO FRACTIONAL SHARES.
No fractional shares of Common Stock shall be issued or delivered pursuant
to the Plan. The Committee shall determine whether cash or other property shall
be issued or paid in lieu of fractional shares or whether such fractional shares
or any rights thereto shall be forfeited or otherwise eliminated.
14. DURATION, AMENDMENT AND TERMINATION.
No Stock Option shall be granted more than 10 years after the Effective Date
(as defined below). The Board may amend the Plan from time to time or suspend or
terminate the Plan at any time; PROVIDED, HOWEVER, that no action authorized by
this Section 14 shall reduce the amount of any existing Stock Option or change
the terms and conditions thereof without the participant's consent. No amendment
of the Plan shall, without approval of the stockholders of the Company,
(i) increase the total number of shares which may be issued under the Plan,
(ii) increase the maximum number of shares underlying all Stock Options that may
be granted to any individual during the term of the Plan, (iii) modify the
requirements as to eligibility for Stock Options grants under the Plan, or
(iv) disqualify any Incentive Stock Options granted hereunder.
B-5
<PAGE>
15. GOVERNING LAW.
This Plan, Stock Options granted hereunder and actions taken in connection
herewith shall be governed and construed in accordance with the laws of the
State of Delaware (regardless of the law that might otherwise govern under
applicable Delaware principles of conflict of laws).
16. EFFECTIVE DATE.
(a) The Plan shall be effective as of the date on which the Plan, having
been theretofore adopted by the Committee, shall be ratified by the Board
(the "Effective Date"); PROVIDED, HOWEVER, that the Plan shall thereafter be
approved by the stockholders of the Company at an annual meeting or any
special meeting of stockholders of the Company within 12 months after the
Effective Date, and such approval of stockholders shall be a condition to
the right of each participant to receive Stock Options hereunder. Any Stock
Option granted under the Plan prior to such approval of stockholders shall
be effective as of the date of grant (unless, with respect to any Stock
Option, the Committee specifies otherwise at the time of grant), but no such
Stock Option may be exercised or settled and no restrictions relating to any
Stock Option may lapse prior to such stockholder approval, and if
stockholders fail to approve the Plan as specified hereunder, any such Stock
Option shall be cancelled.
(b) This Plan shall terminate on the tenth anniversary of the Effective
Date (unless sooner terminated by the Board).
B-6
<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 M. Searles, Douglas C. Felderman 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 27, 2000, 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 ONE DIRECTOR TO HOLD OFFICE UNTIL THE ANNUAL MEETING OF
STOCKHOLDERS IN 2003, FOR THE PROPOSAL TO APPROVE THE FACTORY 2-U STORES,
INC. EMPLOYEE STOCK PURCHASE PLAN, FOR THE PROPOSAL TO AMEND THE AMENDED AND
RESTATED FACTORY 2-U STORES, INC. 1997 STOCK OPTION PLAN, 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 27, 2000
-arrow- PLEASE DETACH AND MAIL IN THE ENVELOPE PROVIDED -arrow-
Please mark your
A /X/ votes as indicated
in this example.
For the Without
nominee listed at right Authority
(except as marked to to vote for the
the contary below) nominee listed at right
(1) ELECTION
OF / / / / NOMINEE: H. Whitney Wagner
DIRECTOR: (to serve until the 2003
Annual Meeting)
INSTRUCTION: To withhold authority to vote for the nominee, write the
nominee's name in the space provided below.
_______________________________________
_______________________________________
(2) Approval of the Factory 2-U Stores, Inc. FOR AGAINST ABSTAIN
Employee Stock Purchase Plan. / / / / / /
(3) Approval of the proposal to amend the FOR AGAINST ABSTAIN
Amended and Restated Factory 2-U Stores, Inc. / / / / / /
1997 Stock Option Plan.
(4) Ratification of the appointment of Arthur FOR AGAINST ABSTAIN
Anderson LLP as independent accountants for / / / / / /
Factory 2-U Stores, Inc.
(5) In their discretion, the Proxies are FOR AGAINST ABSTAIN
authorized to vote upon any other business / / / / / /
that may properly come before the meeting.
_________________________________ __________________________ DATE _____, 2000
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, EXECUTIVE,
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.
