SERVICE MERCHANDISE CO INC, DEF 14A, 1996-03-11

SERVICE MERCHANDISE CO INC
DEF 14A, 1996-03-11
MISC GENERAL MERCHANDISE STORES

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<PAGE> 1
SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )

Filed by the Registrant /X/

Filed by a Party other than the Registrant / /

Check the appropriate box:

<TABLE>
<S> <C>
/ / 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 Rule 14a-11(c) or Rule 14a-12
</TABLE>
Service Merchandise Company, Inc.
- - --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

- - --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

/X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.

/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).

/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) 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:

(4) Date Filed:
<PAGE> 2

LOGO

March 11, 1996

DEAR FELLOW SHAREHOLDER:

You are cordially invited to attend the Annual Meeting of Shareholders of
Service Merchandise Company, Inc. scheduled to be held on Wednesday, April 17,
1996 at 10:00 a.m., local time, at the offices of the Company, 7100 Service
Merchandise Drive, Brentwood, Tennessee. Your Board of Directors and management
look forward to greeting personally those shareholders able to attend.

At the meeting, shareholders will be asked to elect two Class I directors
and approve the selection of Deloitte & Touche LLP as the Company's independent
public accountants for fiscal year 1996. Information regarding these matters is
set forth in the accompanying Notice of Annual Meeting of Shareholders and Proxy
Statement to which you are urged to give your prompt attention.

It is important that your shares be represented and voted at the meeting.
Whether or not you plan to attend, please take a moment to sign, date and
promptly mail your proxy card in the enclosed prepaid envelope. This will not
limit your right to vote in person should you attend the meeting.

On behalf of your Board of Directors, thank you for your continued support
and interest in Service Merchandise.

Sincerely,
/s/ Raymond Zimmerman
------------------------
Raymond Zimmerman
Chairman of the Board and
Chief Executive Officer
<PAGE> 3

[LOGO -- SERVICE MERCHANDISE]

7100 SERVICE MERCHANDISE DRIVE
BRENTWOOD, TN 37027

MAILING ADDRESS:
P. O. BOX 24600
NASHVILLE, TENNESSEE 37202-4600
---------------

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON WEDNESDAY, APRIL 17, 1996
---------------

Notice is hereby given that the Annual Meeting of Shareholders of SERVICE
MERCHANDISE COMPANY, INC. (hereinafter called the "Company"), will be held at
the offices of the Company located at 7100 Service Merchandise Drive, Brentwood,
Tennessee on Wednesday, April 17, 1996 at 10:00 a.m., local time, for the
following purposes:

(1) To elect two Class I directors to serve for a term of three years
and until their successors are duly elected and qualified;

(2) To consider and act upon a proposal to approve the selection of
Deloitte & Touche LLP as the Company's independent public accountants for
fiscal year 1996; and

(3) To transact such other business as may properly be brought before
the Annual Meeting or any adjournment thereof.

The Board of Directors has fixed the close of business on March 1, 1996 as
the record date for the determination of shareholders entitled to notice of and
to vote at the Annual Meeting.

Your attention is directed to the Proxy Statement accompanying this notice
for a more complete statement regarding matters to be acted upon at the Annual
Meeting.

By Order of the Board of Directors
/s/ Glen A. Bodzy
-----------------------
Glen A. Bodzy
Secretary

Brentwood, Tennessee
March 11, 1996

IT IS IMPORTANT THAT YOUR SHARES ARE REPRESENTED AND VOTED AT THE MEETING.
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE SIGN, DATE AND
PROMPTLY MAIL YOUR PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE. YOUR COOPERATION
IS APPRECIATED.
<PAGE> 4

SERVICE MERCHANDISE COMPANY, INC.
7100 SERVICE MERCHANDISE DRIVE
BRENTWOOD, TENNESSEE 37027

MAILING ADDRESS:
P.O. BOX 24600
NASHVILLE, TENNESSEE 37202-4600
---------------

PROXY STATEMENT
---------------

The accompanying proxy is solicited by the Board of Directors of Service
Merchandise Company, Inc. (the "Company") for use at the Annual Meeting of
Shareholders to be held on April 17, 1996, and any adjournments thereof, notice
of which meeting is attached hereto.

This Proxy Statement and the Company's Annual Report to Shareholders have
been mailed on or about March 11, 1996 to all shareholders of record on March 1,
1996.

The purposes of the Annual Meeting are: to elect two Class I directors; to
approve the selection of Deloitte & Touche LLP as the Company's independent
public accountants for fiscal 1996; and to transact such other business as may
properly be brought before the Annual Meeting or any adjournment thereof.

A shareholder who signs and returns a proxy in the accompanying form may
revoke such proxy at any time before the authority granted thereby is exercised
by attending the Annual Meeting and electing to vote in person, by filing with
the Secretary of the Company a written revocation or by duly executing a proxy
bearing a later date. Unless so revoked, the shares of the Company's common
stock (the "Common Stock") represented by the proxy will be voted at the Annual
Meeting. Where a choice is specified on the proxy, the shares represented
thereby will be voted in accordance with such specifications. If no
specification is made, such shares will be voted FOR the election of the two
Class I director nominees, and FOR the approval of the selection of Deloitte &
Touche LLP as the Company's independent public accountants for fiscal 1996.

The Board of Directors knows of no other matters which are to be brought to
a vote at the Annual Meeting. However, if any other matter does come before the
Annual Meeting, the persons appointed in the proxy or their substitutes will
vote in accordance with their best judgment on such matters.

The Board of Directors has fixed the close of business on March 1, 1996 as
the record date for the Annual Meeting. On that date, the Company had
outstanding 99,718,813 shares of Common Stock. Only record holders of the Common
Stock at the close of business on that date will be entitled to notice of and to
vote at the Annual Meeting. Holders of the Common Stock will be entitled to one
vote for each share of Common Stock so held, which may be given in person or by
proxy duly authorized in writing.

The election of directors and the approval of the selection of Deloitte &
Touche LLP as the Company's independent public accountants for fiscal year 1996
shall each be approved by the plurality of the votes cast by the holders of the
shares of Common Stock present, or represented, and entitled to vote at the
Annual Meeting.

Pursuant to rules promulgated by the Securities and Exchange Commission,
boxes and a designated blank space are provided on the proxy card for
shareholders to mark if they wish to vote "for" or "against," or "withhold
authority" to vote (abstain from voting) for one or more director nominees, and
to vote "for" or "against," or "abstain" from voting, on any other matters
submitted to the shareholders. Under applicable
<PAGE> 5

securities laws, Tennessee law and the Company's charter and bylaws, an
abstention or withholding of authority to vote will have no effect on the
outcome of the election of directors or the approval of the selection of
Deloitte & Touche LLP as the Company's independent public accountants for fiscal
year 1996, as each of these matters are determined by the number of votes cast.
With regard to these matters, however, shares represented at the meeting by
proxies containing instructions to abstain, or withholding authority to vote,
will nonetheless be counted as present for purposes of determining whether a
quorum exists at the Annual Meeting.

A broker non-vote occurs when a broker holding shares registered in a
street name is permitted to vote, in the broker's discretion, on routine matters
without receiving instructions from the client, but is not permitted to vote
without instructions on non-routine matters, and the broker returns a proxy card
with no vote (the "non-vote") on the non-routine matter. Under Tennessee law and
the Company's charter and bylaws, broker non-votes will have no impact on any of
the matters submitted to the shareholders, but shares represented by a proxy
card marked with a non-vote would be counted as present for purposes of
determining the existence of a quorum. Under New York Stock Exchange rules, each
of the matters subject to vote by shareholders at the Annual Meeting involve
matters on which a broker has the discretion to vote if instructions are not
received from the client at least 10 days prior to the Annual Meeting.

The cost of solicitation of proxies will be borne by the Company, including
expenses incurred in connection with preparing, assembling and mailing this
Proxy Statement. Such solicitation will be made by mail, and may also be made by
the Company's officers, directors and regular employees personally or by
telephone or telegram. No officers, directors or regular employees will receive
additional compensation for soliciting proxies. The Company may reimburse
brokers, custodians and nominees for their expenses in sending proxies and proxy
material to beneficial owners. The Company has retained Kissel-Blake Inc. to
assist in the solicitation at a fee of $5,000 plus reimbursement of reasonable
expenses.

PROPOSAL NO. 1: ELECTION OF DIRECTORS

The Company's charter provides for a classified Board of Directors. Each
class shall consist, as nearly as may be possible, of one-third of the total
number of directors constituting the entire Board of Directors. The directors
are classified with respect to the time for which they shall hold office by
dividing them into three classes. At each Annual Meeting, directors of the class
whose term of office expires in that year are elected for a three-year term. The
total number of current directors is seven, three of which were elected as Class
III directors in 1995. There are two nominees for reelection as Class I
directors. The three-year terms of Richard P. Crane, Jr. and Charles V. Moore
expire upon the election and qualification of new directors at the Annual
Meeting.

The Board of Directors has designated Richard P. Crane, Jr. and Charles V.
Moore as the two nominees for reelection as Class I directors for a term
expiring at the Annual Meeting in 1999 or until their successors shall have been
elected and qualified. Both Mr. Crane and Mr. Moore are currently Class I
directors of the Company previously elected by the shareholders.

Unless contrary instructions are received, it is intended that the shares
represented by proxies solicited by the Board of Directors will be voted in
favor of the election as directors of both Class I nominees named herein. If for
any reason any nominee is not available for election, the persons named in the
form of proxy have advised the Company that they will vote for such substitute
nominee or nominees as the Board of Directors of the Company may propose. The
Board of Directors has no reason to expect that any of these nominees will not
be available for election at the Annual Meeting, and therefore does not at this
time have any substitute

2
<PAGE> 6

nominee under consideration. The information relating to the two nominees and
the five directors continuing in office set forth herein has been furnished to
the Company by such nominees and directors.

CLASS I NOMINEES STANDING FOR REELECTION:

CURRENT DIRECTORS WHOSE TERMS HAVE NOT EXPIRED AND WHO ARE THEREFORE NOT UP FOR
REELECTION:

<TABLE>
<CAPTION>
YEAR
FIRST YEAR TERM
NAME, AGE, POSITION(S) BECAME A BUSINESS EXPERIENCE DURING TO
WITH THE COMPANY DIRECTOR PAST FIVE YEARS EXPIRE IN
- - ------------------------------ --------- -------------------------------------- ----------
<S> <C> <C> <C>
R. Maynard Holt, 56 1971 President of R. Maynard Holt & Co., 1997
Director business consulting and stock market
software firm located in Nashville,
Tennessee.
James E. Poole, 71 1983 President of Poole Enterprises, Inc., 1997
Director Nashville, Tennessee from October
1985.
Raymond Zimmerman, 63 1960 Chairman of the Board and Chief 1998
Chairman of the Board and Executive Officer of the Company;
Chief Executive Officer Board member of The Limited Stores,
Columbus, Ohio.
Harold Roitenberg, 69 1990 President of Roitenberg Investments, 1998
Director Inc., Minneapolis, Minnesota; Board
member of Syratech Corporation and
Damark International, Inc.
Gary M. Witkin, 47 1994 President and Chief Operating Officer 1998
President, Chief Operating of the Company; Vice Chairman and
Officer and Director Board member, Saks Fifth Avenue
1992-1994; Executive Vice-President
of Dayton Hudson Corp. 1991-1992;
President of the Marshall Fields
division of Dayton Hudson Corp.
1990-1991; Executive Vice President
of Stores for Marshall Fields & Co.,
1983-1990.
</TABLE>

A plurality of the votes cast is necessary for election of each nominee.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ALL NOMINEES.

BOARD OF DIRECTORS AND COMMITTEES

To permit the Board of Directors to discharge its duties more efficiently,
the Board has established three standing committees: the Compensation Committee;
the Audit Committee; and the Nominating Committee.

3
<PAGE> 7

The Company has a Compensation Committee for the purpose of setting
executive officers' salaries, determining annual incentive (bonus) compensation
goals for the Company's management under the Executive Management Incentive
Program and similar incentive compensation programs, reviewing and approving
compensation policies and plans for officers and other key employees, reviewing
and approving salary and other compensation of officers and other key employees,
making recommendations to the Board of Directors with respect to the
compensation of directors and administering the Company's stock-based incentive
plans. The members of the Compensation Committee, all non-employee directors,
are Charles V. Moore, Chairman, James E. Poole and Harold Roitenberg. The
Compensation Committee held two meetings during the fiscal year ended December
31, 1995.

The Company has an Audit Committee for the purposes of recommending the
Company's independent public accountants, reviewing the scope of their
engagement, consulting with such auditors, reviewing the results of the audit
examination prior to finalization thereof, acting as a liaison between the Board
of Directors and internal auditors and reviewing various Company policies,
including those relating to accounting and internal control matters. The members
of the Audit Committee, all non-employee directors, are R. Maynard Holt,
Chairman, Richard P. Crane, Jr., Charles V. Moore, James E. Poole, and Harold
Roitenberg. During the fiscal year ended December 31, 1995, there were four
meetings of the Audit Committee.

The Company has a Nominating Committee for the purpose of recommending
nominees for election as directors of the Board of Directors. The Nominating
Committee makes recommendations to the Board with regard to qualified nominees
for election as directors of the Company, considers other matters pertaining to
the size and composition of the Board and designates members of the Board of
Directors' committees. The Nominating Committee gives appropriate consideration
to qualified persons recommended by shareholders for nomination as directors,
provided such recommendations are accompanied by information sufficient to
permit the Nominating Committee to evaluate the qualifications and experience of
the nominee. The members of the Nominating Committee are Raymond Zimmerman,
Chairman, Harold Roitenberg and James E. Poole. The Nominating Committee held
two meetings during the fiscal year ended December 31, 1995.

During the fiscal year ended December 31, 1995, the Board of Directors held
four regular meetings and no special meetings. All incumbent directors attended
at least 75% of the aggregate number of meetings of the Board and Committees of
the Board on which they serve.

DIRECTORS' COMPENSATION

In fiscal 1995, directors not otherwise employed as officers of the Company
received fees of $5,000 per quarter. Each director is entitled to receive an
additional fee of $2,000 per meeting for attendance at certain special meetings.
There were no special meetings during 1995. Mr. Holt, Chairman of the Audit
Committee, received an additional $3,000 for the year.

Under the Directors' Deferred Compensation Plan, implemented in 1991,
directors have the option of deferring receipt of their fees until a period
following their service as a director or until retirement age.

Under the Company's 1991 Directors' Equity Plan, each director who is not
an employee of the Company is entitled to receive 188 restricted shares of the
Company's Common Stock annually on the date of the Annual Meeting. Each director
is immediately entitled to vote the granted shares and receive any dividends or
other distributions declared on the shares. Vesting of the shares occurs one
year from the date of the grant. The restricted shares will vest immediately
upon a director's death or disability or on the date a "change in control" is
deemed to occur under the Company's Amended and Restated 1989 Employee Stock
Incentive Plan (the "Stock Incentive Plan"). Each non-employee director also
receives, on the date of the Annual

4
<PAGE> 8

Meeting, options to purchase 750 shares of the Company's Common Stock under the
1991 Directors' Equity Plan. The options are exercisable in 20% installments
beginning one year from the date of grant. The exercise price is the fair market
value of the Company's Common Stock on the date of grant. The options expire 10
years from the date of grant. The options become immediately exercisable on a
director's death or disability or on the date a "change in control" is deemed to
occur under the Company's Stock Incentive Plan.

SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN BENEFICIAL OWNERS

MANAGEMENT'S STOCK OWNERSHIP

The following table sets forth, as of January 31, 1996, certain information
regarding the beneficial ownership of Common Stock by all directors of the
Company, the Company's Chief Executive Officer and the four most highly
compensated executive officers of the Company other than the Chief Executive
Officer, and by all directors and executive officers as a group. Except as
otherwise indicated, each director or officer has sole voting and investment
power over the shares of Common Stock listed as beneficially owned by him.

<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OF
NAME BENEFICIALLY OWNED CLASS(1)
----------------------------------------------- ------------------ ----------
<S> <C> <C>
Raymond Zimmerman.............................. 5,189,390(2)
1,502,663(3)
566,280(4)
------------------
7,258,333(5) 7.2%
Gary M. Witkin................................. 491,185(6)
Richard P. Crane, Jr........................... 10,549(7)(8)
Charles V. Moore............................... 96,334(7)(8)(9)
James E. Poole................................. 10,815(7)(8)
R. Maynard Holt................................ 7,625(7)(8)(10)
Harold Roitenberg.............................. 28,564(7)(8)(11)
Charles Septer................................. 92,615(12)(13)
S. Cusano...................................... 15,700(14)
Glen A. Bodzy.................................. 287,877(15)
All directors and executive officers as a group
(14 persons)................................. 8,357,597 8.3%
</TABLE>

- - ---------------

(1) Percentages representing less than 1% of the outstanding shares of Common
Stock are not shown.
(2) Includes currently exercisable options to acquire 661,875 shares, and
14,207 shares held by the trustee under the Service Merchandise Company,
Inc. Savings and Investment Plan.
(3) Represents 1,045,696 shares owned of record by Mr. Zimmerman as trustee for
five nieces and 456,967 shares as to which Mr. Zimmerman is trustee under
the will of Mary K. Zimmerman.
(4) Represents 405,000 shares owned of record by the Raymond Zimmerman Family
Foundation and 161,280 shares owned of record by the Zimmerman Foundation,
of which Mr. Zimmerman is a trustee.
(5) The address for Mr. Zimmerman is 7100 Service Merchandise Drive, Brentwood,
Tennessee 37027.

5
<PAGE> 9

(6) Consists of 12,500 shares of Common Stock, 466,185 restricted shares of
Common Stock held by the Company until restrictions lapse on a graduated
basis over the next four years, and exercisable options to acquire 12,500
shares.
(7) Includes 188 restricted shares of Common Stock granted under the 1991
Directors' Equity Plan held by the Company until restrictions lapse on
April 19, 1996.
(8) Includes currently exercisable options to acquire 1,500 shares granted
under the 1991 Directors' Equity Plan.
(9) Includes 9,280 shares owned by Mr. Moore as custodian for two children.
(10) Includes 1,937 shares owned of record by Mr. Holt as trustee for the R.
Maynard Holt Profit Sharing Plan, a qualified profit sharing plan under the
Internal Revenue Code, 2,000 shares owned by Mr. Holt's wife and 2,000
shares owned by Mr. Holt's mother.
(11) Includes 28,564 shares owned by Roitenberg Investments, Inc., which is 100%
owned by Mr. Roitenberg.
(12) Includes currently exercisable options to acquire 33,953 shares.
(13) Includes 9,542 shares held by Mr. Septer's wife (who is an employee of the
Company) and 4,093 shares under currently exercisable options held by Mr.
Septer's wife.
(14) Consists of currently exercisable options to acquire 15,700 shares.
(15) Includes currently exercisable options to acquire 34,548 shares.

SECURITY OWNERSHIP OF CERTAIN PERSONS

To the best knowledge of the Company, as of December 31, 1995, other than
Raymond Zimmerman, whose security ownership is listed in the preceding table,
the only other beneficial owners of more than 5% of the outstanding shares of
Common Stock are set forth in the following table:

<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER PERCENT
OF BENEFICIAL OWNER OF SHARES OF CLASS
- - --------------------------------------- ---------- --------
<S> <C> <C>
Heine Securities Corporation(1) 10,820,600 10.9%
Michael F. Price
51 John F. Kennedy Parkway
Short Hills, NJ 07078
Clover Capital Management, Inc.(2) 5,389,300 5.4%
11 Tobey Village Office Park
Pittsford, NY 14534
State of Wisconsin Investment Board(3) 7,627,400 7.7%
P.O. Box 7842
Madison, WI 53707
</TABLE>

- - ---------------

(1) According to its most recent Schedule 13G, Heine Securities Corporation is a
Delaware corporation that is a registered investment advisor under the
Investment Advisors Act of 1940. Michael F. Price is the President of Heine
Securities Corporation and exercises voting control and disposition power
over the shares.
(2) According to its most recent Schedule 13G, Clover Capital Management, Inc.
is a New York corporation that is a registered investment advisor under the
Investment Advisors Act of 1940.
(3) According to its most recent Schedule 13G, the State of Wisconsin Investment
Board is a government agency that manages public pension funds.

6
<PAGE> 10

EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table provides information as to annual, long-term and other
compensation during fiscal years 1995, 1994 and 1993 for the Company's Chief
Executive Officer and the persons who, in fiscal 1995, were the other four most
highly compensated executive officers of the Company (such five officers are
referred to collectively as the "Named Officers"):

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------------- AWARDS
OTHER ----------------------------- ALL OTHER
ANNUAL RESTRICTED SECURITIES COMPEN-
COMPEN- STOCK UNDERLYING SATION
SALARY BONUS SATION AWARDS OPTIONS/SARS ------------
NAME AND PRINCIPAL POSITION YEAR ($)(2) ($) ($) ($)(6) (#) ($)(7)(8)
- - --------------------------- ---- -------- -------- --------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Raymond Zimmerman.......... 1995 $781,575 -- -- -- -- $ 38,062
Chairman and CEO 1994 751,677 -- -- -- -- 32,243
1993 750,000 -- -- -- -- 29,590
Gary M. Witkin............. 1995 730,000 $105,000 $ 429,357(3) -- -- 4,899
President and COO 1994 80,769 105,000 1,502,167(4) $2,812,274(5) 125,000 --
1993(1) N/A N/A -- N/A N/A N/A
Charles Septer............. 1995 330,373 -- -- -- 45,000 1,821
Sr. Vice President 1994 287,491 -- -- -- 25,000 2,568
Jewelry Merchandising 1993 285,804 -- -- -- 20,000 4,238
S. Cusano.................. 1995 316,575 -- -- -- 55,000 2,308
Vice President and CFO 1994 301,680 -- -- -- 25,000 3,782
1993 225,679 -- -- -- 20,000 5,301
Glen A. Bodzy.............. 1995 297,875 -- -- -- 20,000 2,237
Vice President, General 1994 292,204 -- -- -- 25,000 3,913
Counsel and Secretary 1993 290,524 -- -- -- 20,000 5,575
</TABLE>

- - ---------------

(1) Mr. Witkin's employment with the Company began on November 21, 1994.
(2) Includes for fiscal 1995 estimated amounts of $1,575, $1,773, $1,575 and
$1,575 for Messrs. Zimmerman, Septer, Cusano and Bodzy, respectively, in
contributions to the defined contribution plan that are to be returned to
the Named Officers as a result of the application of the rules of such plan
applicable to highly compensated individuals. Also includes for Mr.
Zimmerman and Mr. Witkin in fiscal 1995 a non-accountable expense allowance
of $30,000.
(3) Includes $250,000 for the loss in value incurred on the sale of Mr. Witkin's
home in Connecticut, as well as tax reimbursements, relocation expenses,
reimbursement of COBRA expenses, the use of a company car and executive
medical benefits, as required by Mr. Witkin's employment agreement.
(4) Includes reimbursement of $1,484,450 in taxes paid by Mr. Witkin with
respect to the grant of restricted stock (see Note 5) and reimbursement of
personal legal expenses and relocation expenses as required by Mr. Witkin's
employment agreement.
(5) Represents the value of 478,685 shares of restricted stock granted on
November 21, 1994, at the then current market price of $5.875, pursuant to
Mr. Witkin's employment agreement. Twelve thousand five hundred of these
shares vested on November 21, 1995 and an additional 12,500 of these shares
will vest on November 21, 1996. The remainder will vest between November
21, 1997 and November 21, 2000.

7
<PAGE> 11

(6) The value of outstanding restricted stock awards as of December 31, 1995 is
as follows:

<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES VALUE
--------------------------------------------------------------------------------- ------------- ----------
<S> <C> <C>
Gary M. Witkin................................................................... 466,185 $2,272,652
</TABLE>

Dividends are payable on restricted stock when and if paid on unrestricted
stock. No dividends were paid in fiscal 1995.
(7) Represents Company contributions to the defined contribution plan and
benefits derived from payments by the Company for group term life
insurance. Company contributions to the defined contribution plan (net of
estimated amounts to be returned to Named Officers as described in Note 2
above) were $1,125, $969, $603, $1,125 and $1,125 for Messrs. Zimmerman,
Witkin, Septer, Cusano and Bodzy, respectively, in fiscal 1995. Company
contributions to the defined contribution plan (net of amounts returned to
Named Officers) were $2,823, $1,501, $2,820 and $2,820 for Messrs.
Zimmerman, Septer, Cusano and Bodzy, respectively, in fiscal 1994 and
$4,497 for each Named Officer in 1993 other than Mr. Witkin and Mr. Septer.
A contribution of $3,185 was made to the plan for Mr. Septer in 1993. The
benefits derived by Mr. Zimmerman from payments by the Company for group
term life insurance were $20,428 in fiscal 1995, 1994 and 1993. The
benefits derived by Messrs. Witkin, Septer, Cusano and Bodzy from payments
by the Company for group term life insurance were $3,930, $1,218, $1,183
and $1,112, respectively, in fiscal 1995; $0, $1,067, $962 and $1,093,
respectively, in fiscal 1994; and $0, $1,053, $804 and $1,078,
respectively, in fiscal 1993.
(8) The benefits derived by Mr. Zimmerman from life insurance policies with
respect to which the Company and Mr. Zimmerman are parties to split dollar
agreements were $16,509, $8,992 and $4,665 for fiscal 1995, 1994 and 1993,
respectively. Pursuant to these agreements, the Company is the owner of the
policies. The Company paid premiums of approximately $114,166 in fiscal
1995 and, upon the payment of the policy proceeds, will receive, net of any
tax liability, an amount equal to the aggregate premiums paid by the
Company. The remaining policy proceeds will be paid to Mr. Zimmerman's
designated beneficiaries. Mr. Zimmerman does not have any interest in the
cash surrender value of the policies for which there are split dollar
agreements. Either party may terminate the split dollar agreements at any
time on thirty days written notice. There are no split dollar life
insurance agreements for the other Named Officers.

8
<PAGE> 12

OPTION/SAR GRANTS TABLE

The following table provides information as to options granted to the five
Named Officers during fiscal 1995. No separate stock appreciation rights
("SARs") were granted during fiscal 1995.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
- - ---------------------------------------------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS/SARS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION -----------------------
NAME GRANTED(#)(1) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- - ------------------------------- ------------- ------------ ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Raymond Zimmerman.............. -- -- -- -- -- --
Gary M. Witkin................. -- -- -- -- -- --
Charles Septer................. 45,000 2.16% $4.6875 6/27/05 $132,657 $336,180
S. Cusano...................... 55,000 2.64% 4.6875 6/27/05 162,137 410,887
Glen A. Bodzy.................. 20,000 0.96% 4.6875 6/27/05 58,959 149,413
</TABLE>

- - ---------------

(1) Options were granted on June 27, 1995 and will vest 33.33% annually over the
next three years. There are no criteria for vesting other than continued
employment through the vesting dates and no other material terms of the
options except as disclosed under "Change in Control Provisions Under the
Company's Stock Incentive Plans."

OPTIONS/SAR EXERCISES AND YEAR-END VALUE TABLE

The following table provides information as to options exercised or held by
the five Named Officers during fiscal 1995. None of the Named Officers has been
granted separate SARs.

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTIONS/SAR VALUES

<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
NUMBER OF OPTIONS/SARS AT OPTIONS/SARS AT
SHARES FY-END(#) FY-END($)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE(1) UNEXERCISABLE(1)
- - ----------------------------------------------------- ------------ ------------ ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Raymond Zimmerman.................................... -- -- 661,875/ 60,000 $968,484/$0
Gary M. Witkin....................................... -- -- 12,500/ 112,500 $0/$0
Charles Septer....................................... -- -- 33,953/ 78,200 $22,644/$8,438
S. Cusano............................................ -- -- 15,700/ 88,800 $0/$10,313
Glen A. Bodzy........................................ -- -- 34,548/ 53,200 $22,639/$3,750
</TABLE>

- - ---------------

(1) The number of unexercised options and/or SARs available at fiscal year-end,
whether exercisable or unexercisable, includes out-of-the-money options, and
the value of unexercised options and/or SARs available at fiscal year-end
does not include out-of-the-money options.

SEVERANCE AND INDEMNIFICATION AGREEMENTS; EMPLOYMENT AGREEMENTS; CHANGE IN
CONTROL PROVISIONS

The Company has severance agreements with each of the Named Officers other
than Mr. Witkin, whose employment agreement contains severance provisions
described below. The severance agreements with Messrs. Zimmerman, Bodzy and
Septer were executed in the fall of 1994 and were intended to replace

9
<PAGE> 13

employment agreements executed by each of them in 1988. Mr. Cusano executed a
severance agreement in the fall of 1994.

The severance agreements with Messrs. Zimmerman, Cusano, Bodzy and Septer
provide for the payment of compensation in the form of salary continuation to
the Named Officer in the amount of two times the officer's maximum annual base
salary in effect from the date of execution of the agreement through the date of
termination, if the employment of the Named Officer is terminated for any reason
other than the officer's death or disability, or "Cause." These agreements also
provide for reimbursement of the Named Officer if his employment is terminated
for any reason other than for death, disability, or Cause, for a maximum period
of two years, for the premiums paid by the Named Officer for continued health
care coverage of himself and his family for coverage similar to that provided by
the Company to senior executives at the time of termination. Under the terms of
these agreements, the employment of the Named Officer is deemed terminated for
Cause if he engages in: (i) willful misconduct materially injurious to the
Company; (ii) acts of dishonesty or fraud; or (iii) willful violations of
obligations not to compete with the Company or disclose confidential
information. If the employment of the Named Officer is terminated for death or
for Cause, he will be entitled only to his base salary through the date of
termination. If employment is terminated by reason of disability, the officer
will be entitled only to his base salary through the date of termination and
such amounts as he is entitled to receive under the Company's disability
insurance policies. The agreements provide that these Named Officers will not
engage in various activities competitive with the business of the Company for a
period of one year from the date of any termination giving rise to salary
continuation payments.

The Company also has indemnification agreements with each of its directors
and Named Officers providing for contractual rights of indemnification to the
fullest extent permitted by Tennessee law.

On November 2, 1994 the Company entered into an employment agreement with
Gary M. Witkin to serve as President and Chief Operating Officer and as a
director of the Company (the "Employment Agreement"). The Employment Agreement
provides for a minimum annual base salary of $700,000 and a minimum cash bonus
of 15% of his base salary in 1994, 1995 and 1996. Depending on the Company's
performance, Mr. Witkin's total bonus could amount to 60% of his base salary. In
years following 1996, Mr. Witkin is not guaranteed a minimum cash bonus, but
will be awarded an annual bonus that is contingent upon the Company's
performance. Mr. Witkin was also granted, pursuant to the terms of the
Employment Agreement, 478,685 shares of restricted stock and non-qualified
options to purchase 125,000 shares under the Company's Stock Incentive Plan. The
Employment Agreement also entitles Mr. Witkin to a non-accountable expense
allowance of $30,000 annually.

Upon the occurrence of certain triggering events, the Employment Agreement
entitles Mr. Witkin to (i) salary continuation in the amount of two times his
annual base salary and any unpaid minimum bonus, (ii) reimbursement for a
maximum period of two years for premiums paid by Mr. Witkin for continued health
care coverage of him and his family for coverage similar to that provided by the
Company to senior executives at the time of termination; and (iii) the immediate
vesting and lapse of any remaining restrictions on shares of restricted stock
held by Mr. Witkin. The triggering events include termination of the Employment
Agreement by Mr. Witkin in response to (i) a diminution of his responsibilities
by the Company; (ii) an acquisition of the Company or substantially all of the
Company's assets if the Company fails to obtain the agreement of the successor
to assume the Company's obligations under the Employment Agreement; (iii) a
material breach by the Company without cure of the terms of the Employment
Agreement; or (iv) the failure of the Board of Directors to elect Mr. Witkin as
its Chief Executive Officer within ninety (90) days of the earlier of (a) the
resignation, retirement or termination of employment of Raymond Zimmerman as
Chief Executive Officer or (b) April 30, 1998. Additional triggering events
include termination of the Employment Agreement by the

10
<PAGE> 14

Company for any reason other than Mr. Witkin's death or disability or "Cause."
Under the Employment Agreement, Mr. Witkin's employment can be terminated for
Cause if (i) he is convicted or fails to contest prosecution of a felony, (ii)
he engages in willful misconduct or dishonesty harmful to the reputation of the
Company, (iii) he violates his obligation not to compete with the Company, or
(iv) he breaches the Employment Agreement and fails subsequently to cure the
breach. If Mr. Witkin's employment is terminated for Cause or on account of his
death or disability, or if he resigns other than in response to a triggering
event, he will be entitled only to his earned base salary.

The Employment Agreement further provides that Mr. Witkin will not engage
in various activities competitive with the business of the Company during the
period of his employment under the Employment Agreement and for a period of
thirteen months following termination thereof. Mr. Witkin is also restricted,
during the term of his employment, from disclosing confidential information or
making false or damaging statements with respect to the Company.

CHANGE IN CONTROL PROVISIONS UNDER THE COMPANY'S STOCK INCENTIVE PLANS

Under the Company's Stock Incentive Plan, any stock options and SARs which
are not then exercisable will become fully exercisable and vested upon a change
in control or a potential change in control. Similarly, a change in control or a
potential change in control will result in the lapsing of restrictions
applicable to restricted stock and other stock-based awards and such shares and
awards being deemed fully vested. Stock options, SARs, limited SARs, restricted
stock and other stock-based awards will, in such instances, unless otherwise
determined by the Compensation Committee in its sole discretion, be cashed out
on the basis of the change in control price as defined in the plan. A change in
control occurs if (1) any person becomes a beneficial owner directly or
indirectly of 20% or more of the total voting stock of the Company (subject to
certain exceptions), (2) as a result of, or in connection with, any cash tender
or exchange offer, merger or other business combination or similar transaction
less than a majority of the combined voting power of the then outstanding
securities of the Company is held in the aggregate by the holders of Company
securities entitled to vote generally in the election of directors immediately
prior to such transaction, or (3) during any period of two consecutive years,
individuals who at the beginning of such period constitute the Board of
Directors cease for any reason to constitute at least a majority thereof. A
potential change in control means (1) approval by the shareholders of an
aggregate which, if completed, would constitute a change in control, or (2) the
acquisition by a person of 5% or more of the total voting stock of the Company
and the adoption by the Board of a resolution that a potential change in
control, as defined in the Stock Incentive Plan, has occurred.

Options and shares of restricted stock granted under the Company's 1991
Directors' Equity Plan become immediately exercisable on the date a change in
control is deemed to occur under the Company's Stock Incentive Plan.

PENSION PLAN

The Company's pension plan (the "Pension Plan"), which is qualified under
Section 401(a) of the Internal Revenue Code of 1986, as amended, includes all
employees who have worked a minimum of one thousand (1,000) hours and who are at
least twenty-one years of age with one year of qualified service as defined by
the Pension Plan. However, an employee's benefits under the Pension Plan do not
vest until the employee's fifth year of qualifying service. Directors who are
not officers or employees of the Company do not participate in the Pension Plan.
In 1989, the Pension Plan was changed to an account balance plan which bases
benefits on annual service credits and annual interest credits for each
participant. At retirement, the account balance may, at the participant's
election, be actuarially converted into a monthly pension.

11
<PAGE> 15

Participants in the Pension Plan as of January 1, 1989 are provided certain
minimum benefits reflecting the provisions of the prior Pension Plan based on
compensation received during 1988.

Annual service credits ranging from 3% to 5% are based on each
participant's years of service at the beginning of the current year and applied
to total compensation, which includes base wages, salaries and bonuses before
deferrals pursuant to the Company's Savings and Investment Plan. Annual interest
credits will be based on interest rate indices prescribed in the Pension Plan.
The account balances of participants were credited with interest at the annual
rate of 6% during 1995.

The estimated annual benefits payable to Raymond Zimmerman, Gary M. Witkin,
Charles Septer, S. Cusano and Glen A. Bodzy under the Pension Plan upon
retirement at normal retirement age in life only are approximately $120,000,
$19,062, $56,513, $38,420 and $80,899, respectively. These estimates assume
vesting and continued compensation at the present amounts (subject to the
$150,000 limit as discussed below) until normal or anticipated retirement age
and continued crediting of interest at the current rate while disregarding
probable future cost-of-living increases to the limit on the amount of
compensation that may be taken into account.

All benefits provided under the Pension Plan are subject to annual
limitations as specified under Section 415 of the Internal Revenue Code of 1986,
as amended. Benefits were limited to $120,000 during 1995. In addition,
compensation considered under the Pension Plan during 1995 and all future years
is limited to $150,000, subject to adjustment based on increases in the cost of
living.

EXECUTIVE SECURITY PROGRAM (ESP)

The Company maintains a non-qualified supplemental retirement plan which
covers certain management employees hired or promoted to their job level prior
to February 28, 1989. The plan provides salary continuation and/or death
benefits equal to two times the participant's annual salary at retirement or at
age 65 if the former employee participating in the ESP completed 20 years of
vesting service prior to termination. Salary continuation benefits are paid from
the general assets of the Company. There are approximately 225 active employees
covered. Twenty-three retirees currently receive benefits and 14 terminated
vested participants are entitled to a future benefit. The Company maintains
Corporate Owned Life Insurance (COLI) policies purchased on participants covered
by the plan prior to the Tax Reform Act of 1986. The Company continues to
maintain COLI policies following termination or retirement of covered employees.

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

The Compensation Committee (the "Committee") sets executive officers'
salaries, formulates bonuses for the Company's management awarded under the
Executive Management Incentive Program and other annual incentive compensation
programs, reviews and approves compensation policies and plans for officers and
other key employees, reviews and approves salary and other compensation of
officers and other key employees, makes recommendations to the Board of
Directors with respect to the compensation of directors and administers the
Company's stock-based incentive plans. The members of the Committee are all non-
employee directors of the Company, although Mr. Poole served as President and
Chief Operating Officer of the Company from October 1983 to May 1984. The
Committee reviews the Company's executive compensation policies when the
financial results of the prior fiscal year become available. The policies are
reviewed in light of their overall consistency, in the subjective view of the
Committee, with the Company's financial performance, its business plan and its
position within the retail industry, as well as the compensation policies of
similar companies in the retail business as discussed further below. The
compensation of individual

12
<PAGE> 16

executives is then evaluated by the Committee in accordance with its established
executive compensation policies. The Committee has adopted a statement of policy
concerning compensation of the Company's executive officers. This statement of
policy sets forth the following primary objectives:

- to attract and retain talented executives by providing a compensation
program that is competitive with the compensation provided to executives
at companies of comparable size and position in the retail business, while
maintaining compensation within levels consistent with the Company's
business plan, financial objectives and operating performance;

- to provide appropriate incentives for executives to work toward the
achievement of the Company's annual performance targets established in the
Company's business plan; and

- to more closely align the interests of executives with those of
shareholders and the long-term interests of the Company by providing
long-term incentive compensation in the form of stock options, restricted
stock or other equity-based long-term incentive compensation.

In reviewing the comparability of the Company's overall levels of base
executive compensation, the Committee looks to a variety of sources. The Company
participates in externally prepared compensation surveys, the most comprehensive
of which is the Retail Management Compensation Study prepared by Management
Compensation Services ("MCS"), a subsidiary of Hewitt Associates, a nationally
recognized management consulting firm. The Retail Management Compensation Study
provides data on compensation practices of other retailers with annual revenues
of at least $3 billion, by job classification category. In 1995, the Company
requested MCS to prepare a specific analysis of participating retail companies
which are included in the Composite Index Average shown in the performance graph
on page 17. The Company also reviews compensation information disclosed in
current proxy statements for all companies included in the Composite Index
Average.

The survey and proxy data is used to obtain an overall perspective on base
retail executive compensation. However, the Committee also takes into account
other factors which, in its subjective judgment, affect the comparability of
this data to the Company. These factors include differences in: the Company's
mix of product offerings and levels of sales, the Company's catalog store format
versus other selling concepts and markets served, the number of stores and
employees, organizational structure levels and comparability of executive
responsibility among companies. Analysis of the MCS survey data and the current
proxy statements of the companies included in the Composite Index Average
indicated that the Company's levels of executive base compensation fell within
the mid-range of companies included in the survey data or in the Composite Index
Average.

COMPENSATION OF EXECUTIVE OFFICERS OTHER THAN THE CHIEF EXECUTIVE
OFFICER. The Company offers its executive officers base salary, annual
incentive compensation and long-term incentive compensation, determined in
accordance with the general principles set forth below.

Base Compensation. In determining annual base compensation adjustments for
each executive officer, the Committee predicates its decision on a subjective
assessment of the individual executive's performance in light of that
executive's job responsibilities. During fiscal 1995, executive officers, below
the level of the President and Chief Operating Officer, generally received base
compensation increases ranging from 2% to 5% of their base salary, with the
exception of one executive whose compensation was increased by approximately 15%
to bring his compensation in line with the compensation of executives in similar
positions at comparable companies. During fiscal 1995, the Company hired three
new senior executive officers, whose base salary and other compensation were
determined in negotiations with the individuals prior to their hire and
generally

13
<PAGE> 17

reflect market conditions as well as the Company's commitment to assembling a
new management team. The salary of the President and Chief Operating Officer is
determined under his Employment Agreement, entered into in November 1994.

Annual Incentive Compensation. In April 1995, the Company's shareholders
approved the Company's Executive Management Incentive Program (the "Program").
The Program provides for the payment of annual incentive (bonus) compensation
for executive officers determined by achievement of a pre-determined,
Company-wide financial target for net income (exclusive of extraordinary items,
cumulative effect of changes in accounting principles and other like items),
established in the first quarter of each fiscal year in conjunction with the
Company's annual business plan. Executive officers receive a bonus based on
whether, and to what extent, the Company, as a whole, achieves or exceeds the
target. Bonuses are paid to the President and Chief Operating Officer and other
officers above the group vice president level (which includes all Named Officers
for 1995 other than the Chairman and Chief Executive Officer), based on the
following percentages of their base salary during the performance measurement
period:

<TABLE>
<CAPTION>
ACHIEVEMENT OF TARGET PERCENTAGE BONUS
- - --------------------- --------------------------------------------
<S> <C> <C>
(Officers above Group
(President & COO) Vice President)
less than 100% none* none
100% 20% 15%
110% 25% 20%
125% 35% 30%
140% 50% 40%
150% 60% 50%
</TABLE>

- - ---------------

* Pursuant to his Employment Agreement, Mr. Witkin is entitled to a minimum
bonus of 15% of his annual base salary for 1994, 1995 and 1996, which is
payable only if Mr. Witkin would not otherwise receive this amount under the
Program.

The percentages upon which officers above the group vice president level
could earn bonuses, which previously ranged from 10% to 30% of base salary, were
increased in fiscal 1995 based on the determination by the Committee that
further incentives were required to attract and retain upper level executive
officers and provide incentives to meet new goals with respect to sales, service
and efficiency.

The targeted net income, exclusive of extraordinary items, cumulative
effect of changes in accounting principles and other like items, is established
by the Committee in its subjective judgment prior to April 1 of each year,
taking into consideration the Company's net income for the previous year, the
Company's economic and financial forecasts of its prospects for producing net
income in the current fiscal year, and the goal of challenging and providing
incentives for executive officers to increase net income. Although no single
consideration is determinative in establishing the target, the Company's annual
budget and economic and financial forecasts constitute the primary foundation
upon which the Committee subjectively establishes targets designed to maximize
the benefits derived by shareholders. The target is not intended to predict
future financial performance; rather, the target is set high enough to provide a
challenge to greater achievement on the part of executive officers. The fiscal
1995 target of $77 million in net income, exclusive of extraordinary items,
cumulative effect of changes in accounting principles and other like items, was
not met; accordingly, no bonus compensation was awarded under the Program.

14
<PAGE> 18

Long-Term Incentive Compensation. The Company uses stock options and
restricted stock awards as the primary vehicles for long-term incentive
compensation. In fiscal 1995, the Named Officers (other than the Chairman and
Chief Executive Officer and the President and Chief Operating Officer) were
granted options to purchase the number of shares of Common Stock described
below:

<TABLE>
<CAPTION>
# OF OPTIONS
NAMED OFFICER GRANTED
----------------------------------------------------------------------- ------------
<S> <C>
Charles Septer......................................................... 45,000
S. Cusano.............................................................. 55,000
Glen A. Bodzy.......................................................... 20,000
</TABLE>

Options to purchase an aggregate of 1,967,045 shares were granted during
1995 to approximately 800 other employees of the Company, including store and
distribution center managers as well as various levels of corporate management.
The size of the option grant to each executive officer was determined by the
Committee based upon a subjective assessment of such executive officer's
performance and his or her respective level in the organization. The Committee
does not consider the number of shares beneficially owned by executive officers
other than the President and Chief Operating Officer and the Chairman and Chief
Executive Officer when making such grants. The exercise price of each option
equaled the fair market value of the Common Stock as of the date of grant. The
typical vesting period of options granted in fiscal 1995 was shortened from the
vesting rate of 20% annually for five years to a vesting rate of 33.33% annually
for three years, in an effort to increase incentives for improving Company
performance, and to tie the interests of employees closer to those of
shareholders. The vesting of options is not contingent upon any performance or
other criteria other than continued employment through the vesting dates. All
options expire ten years from the date of grant.

Although the Company's Stock Incentive Plan permits the Committee to grant
non-qualified stock options exercisable at less than their fair market value on
the date of grant, but not below 50% of such fair market value, the Committee
has not done so in recent years and has no current intention of doing so.

COMPENSATION OF THE CHIEF EXECUTIVE OFFICER. The Committee believes
compensation of the Chairman and Chief Executive Officer (the "CEO") should be
more closely linked to the performance of the Company's Common Stock than
compensation of other executive officers. In accordance with this philosophy,
the CEO and the Committee agreed in 1992 that, for a period of five years, (i)
the CEO's annual base salary would be frozen at its then current level of
$750,000, (ii) he would receive no annual incentive compensation, and (iii) he
would be eligible to receive long-term incentive compensation in the form of
stock options, restricted stock awards and other equity-based rights to provide
value that is largely contingent upon increases in the market value of the
Company's Common Stock. Grants of such long-term incentive compensation would be
made in amounts which reflect the fact that his base salary has been frozen and
he has agreed to forego any annual incentive compensation. The Committee
anticipates that such awards of long-term incentive compensation will be
considered annually, concurrent with awards to other executive officers, and
will generally consist of the same types of rights as awards to other executive
officers. Awards will be based in part upon the Committee's judgment that such
awards are merited in light of performance in the market price of the Company's
Common Stock. The Committee also takes into account the fact that the CEO
already beneficially owns 7.2% of the outstanding shares of Common Stock. During
fiscal 1995, the CEO did not receive any grants of stock options or other
long-term incentive compensation. For fiscal 1995, the CEO received a
non-accountable expense allowance of $30,000.

15
<PAGE> 19

FEDERAL INCOME TAX DEDUCTIBILITY LIMITATIONS. The Omnibus Budget
Reconciliation Act ("OBRA") passed by Congress in 1993 imposes a $1,000,000
limit on the deductibility of certain compensation paid to the CEO and other
Named Officers. Compensation paid to these officers in excess of $1,000,000 that
is not performance-based cannot be claimed by the Company as a tax deduction.

The Committee believes it is appropriate to take into account the
$1,000,000 limit on the deductibility of executive compensation and to seek, to
the greatest extent possible, to qualify executive compensation awards as
performance-based compensation excluded from the $1,000,000 limit. Annual cash
awards under the Company's Executive Management Incentive Program (other than
the minimum cash bonuses payable to the President and Chief Operating Officer in
years 1995 and 1996) will qualify for the exemption for performance-based
compensation. Stock options and SARs awarded under the Company's Stock Incentive
Plan through the present date also qualify as performance-based compensation
under OBRA.

None of the Named Officers received compensation in fiscal 1995 that would
exceed the $1,000,000 limit on deductibility under OBRA, except for
approximately $288,000 paid to Mr. Witkin as expense reimbursements required
under his Employment Agreement. It is anticipated that a portion of Mr. Witkin's
compensation in 1996 or thereafter may exceed the $1,000,000 limitation unless
it qualifies for the performance-based exemption. Mr. Witkin's annual incentive
compensation for 1996, if any is earned, will not be treated as
performance-based compensation under OBRA, but his annual incentive compensation
for years after 1996 is expected to qualify as performance-based compensation.

It is the Committee's intention to utilize to the greatest extent possible
performance-based compensation, which should minimize the effect of OBRA on the
Company. However, the Committee believes that its primary responsibility is to
provide a compensation program that will attract, retain and reward the
executive talent necessary to maximize the return to shareholders, and that the
loss of a tax deduction may be necessary in some instances to achieve this
purpose.

Charles V. Moore, Chairman James E. Poole Harold Roitenberg

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

James E. Poole, who currently serves on the Compensation Committee of the
Board of Directors, served as President of the Company from October 1983 until
May 1984. It is anticipated that Mr. Poole will not stand for re-appointment to
this Committee after the 1996 Annual Meeting, since he will no longer qualify as
an outside director under the phase-in provisions applicable to the
performance-based compensation exemption under OBRA.

16
<PAGE> 20

PERFORMANCE GRAPH

TOTAL RETURN TO SHAREHOLDERS

[GRAPH]

Service Merchandise Company, Inc. S&P Midcap 400 Index Composite Index Average
<S> <C> <C> <C>
1990 100 100 100
1991 219.38 150.10 163.01
1992 443.83 167.98 197.02
1993 306.09 191.41 191.08
1994 145.39 184.55 170.84
1995 149.22 241.66 187.71
</TABLE>

The above graph compares the performance of the Common Stock of Service
Merchandise Company, Inc. with that of the S & P Midcap 400 Index and a
composite index comprised of three published S & P retail group indices:
Department Stores, General Merchandise Chains and Specialty (the "Composite
Index Average"). The three groups include Dayton Hudson Corp., Dillard
Department Stores, Federated Department Stores, May Department Stores,
Mercantile Stores, Nordstrom, K Mart, J.C. Penney, Sears, Roebuck & Company,
Wal-Mart Stores, Woolworth Company, Circuit City Stores, Home Depot, Lowe's,
Melville Corp., Pep Boys--Manny, Moe and Jack, Blockbuster, Price/Costco Inc.,
Tandy Corp. and Toys R Us. Federated Department Stores was added to the
Composite Index Average in November 1995 and is included for that year only. In
November 1994, Blockbuster was acquired by Viacom, and it was deleted from the
Composite Index Average beginning in 1994.

The comparison of total return on investment (change in year-end stock
price plus reinvested dividends) for each of the periods assumes that $100 was
invested on January 1, 1990 in each of Service Merchandise Company, Inc. Common
Stock, the S & P Midcap 400 Index and the Composite Index Average with
investment weighted on the basis of market capitalization.

17
<PAGE> 21

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company leases two store properties from Raymond Zimmerman and Service
Realty Company, Inc., a corporation whose sole shareholder is Raymond Zimmerman.
For the fiscal year ended December 31, 1995, Raymond Zimmerman and Service
Realty Company, Inc. received an aggregate of $111,000 on account of properties
leased to the Company. The rentals that have been or may be paid under these
leases are and will be comparable to rentals paid by lessees of similar
properties in the same general locations, and the terms of such leases are at
least as favorable to the Company as could be obtained from unaffiliated
persons.

In August, 1995, Contel Cellular of Nashville, Inc. ("Contel") entered into
a Sublease and Tri-Party Agreement with one of the Company's wholly owned
subsidiaries (as sublessor) and Raymond Zimmerman (as primary lessor) relating
to Contel's rental of 1,000 square feet of unimproved real property for a
one-time lump sum rental of $125,000 which was paid 50% to the subsidiary and
50% to Mr. Zimmerman. The terms of this arrangement are fair to the Company and
the rental is comparable to rentals paid by lessees for similar properties in
the same general location.

PROPOSAL NO. 2: APPROVAL OF DELOITTE & TOUCHE LLP
AS INDEPENDENT PUBLIC ACCOUNTANTS

The Board of Directors has appointed Deloitte & Touche LLP as independent
public accountants of the Company for the 1996 fiscal year, subject to approval
by the shareholders. Deloitte & Touche LLP served as the Company's independent
public accountants for the fiscal year ended December 31, 1995. A representative
of Deloitte & Touche LLP is expected to be present at the Annual Meeting with
the opportunity to make a statement if such representative so desires and will
be available to respond to appropriate questions.

A majority of the votes cast is necessary for approval of this proposal.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF DELOITTE & TOUCHE LLP
AS INDEPENDENT PUBLIC ACCOUNTANTS OF THE COMPANY FOR THE 1996 FISCAL YEAR.

PROPOSALS OF SHAREHOLDERS

Shareholders intending to submit proposals for presentation at the next
Annual Meeting of Shareholders of the Company and inclusion in the proxy
statement and form of proxy for such meeting should forward such proposals to
Glen A. Bodzy, Vice President, General Counsel and Secretary, Service
Merchandise Company, Inc., P.O. Box 24600, Nashville, Tennessee 37202-4600.
Proposals must be in writing and must be received by the Company prior to
November 11, 1996. Proposals should be sent to the Company by certified mail,
return receipt requested.

By Order of the Board of Directors
GLEN A. BODZY
Secretary

March 11, 1996

YOUR VOTE IS IMPORTANT! SHAREHOLDERS ARE URGED TO PROMPTLY SIGN, DATE AND
MAIL THEIR PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE. PLEASE ACT TODAY.

18
<PAGE> 22
APPENDIX A

PROXY SERVICE MECHANDISE COMPANY, INC. PROXY

PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR THE
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON WEDNESDAY APRIL 17, 1996.

The undersigned hereby appoints Raymond Zimmerman and Glen A. Bodzy, and each
of them, as proxies, with full power of substitution, to vote all shares of the
undersigned as shown below on this proxy at the Annual Meeting of Shareholders
of Service Merchandise Company, Inc. to be held at the Company's offices
located at 7100 Service Merchandise Drive, Brentwood, Tennessee, on Wednesday,
April 17, 1996, at 10:00 a.m., local time, and any adjournments thereof.

YOUR SHARES WILL BE VOTED IN ACCORDANCE WITH YOUR INSTRUCTIONS. IF NO CHOICE
IS SPECIFIED, SHARES WILL BE VOTED FOR THE CLASS I DIRECTOR NOMINEES IN THE
ELECTION OF DIRECTORS; AND FOR THE APPROVAL OF DELOITTE & TOUCHE LLP.

(continue on reverse side)

SERVICE MERCHANDISE COMPANY, INC.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY.
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<S> <C> <C> <C>

[ ]
Withhold
1. PROPOSAL 1: ELECTION OF TWO Authority 3. In their discretion, on such other matters as
CLASS I DIRECTORS: For Against (Abstain) may properly come before the meeting.
Election of Richard P. Crane, Jr. [ ] [ ] [ ]

Withhold
Authority
For Against (Abstain)
Election of Charles V. Moore [ ] [ ] [ ]
PLEASE SIGN HERE AND RETURN PROMPTLY
For Against Abstain
2. PROPOSAL 2: APPROVAL OF DELOITTE & [ ] [ ] [ ]
TOUCHE LLP AS INDEPENDENT PUBLIC --------------------------------------------
ACCOUNTANTS SIGNATURE

--------------------------------------------
SIGNATURE (If held jointly)

Date: 1996
---------------------------
Please sign exactly as your name appears at
left. If registered in the names of two or
more persons, each should sign. Executors,
administrators, trustees, guardians,
attorneys, and corporate officers should
print their full names and titles.
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