<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
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] 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:
(4) Date Filed:
<PAGE> 2
(SERVICE MERCHANDISE LOGO)
March 13, 1998
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 15,
1998 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 three Class III
directors and to approve the selection of Deloitte & Touche LLP as the Company's
independent public accountants for fiscal year 1998. 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 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/ James E. Poole
James E. Poole
Chairman of the Board
<PAGE> 3
(SERVICE MERCHANDISE LOGO)
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 15, 1998
---------------
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 15, 1998 at 10:00 a.m., local time, for the
following purposes:
1. To elect three Class III directors to serve for a term of three
years or 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 1998; 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 2, 1998 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/ C. Steven Moore
C. Steven Moore
Secretary
Brentwood, Tennessee
March 13, 1998
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 15, 1998, 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 13, 1998 to all shareholders of record on March 2,
1998.
The purposes of the Annual Meeting are: (i) to elect three Class III
directors; (ii) to approve the selection of Deloitte & Touche LLP as the
Company's independent public accountants for fiscal 1998; and (iii) 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 the same 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 the proxy is 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
three Class III director nominees and FOR the approval of the selection of
Deloitte & Touche LLP as the Company's independent public accountants for fiscal
1998.
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 2, 1998 as
the record date for the Annual Meeting. On that date, the Company had
outstanding 100,373,649 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 shall be approved by a 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. The selection of Deloitte & Touche LLP
as independent public accountants for fiscal 1998 shall be approved by a
majority of the votes cast by the holders of the shares of Common Stock present,
or represented, and entitled to vote at the Annual Meeting.
<PAGE> 5
Pursuant to rules promulgated by the Securities and Exchange Commission
(the "SEC"), boxes and a designated blank space are provided on the proxy card
for shareholders to mark if they wish to vote "for" or "withhold authority" (or
abstain) to vote for one or more of the director nominees, and to vote "for,"
"against" or "abstain" from voting on any other matters submitted to the
shareholders. Under applicable law, and the Company's charter and bylaws, an
abstention or withholding of authority to vote will have no effect on the
aforementioned matters since each of these matters is determined by the number
of votes cast. With regard to such 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 will 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 terms 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, two of which were elected as Class
II directors in 1997. The Board of Directors approved a policy subjecting all
members of the Board of Directors to mandatory retirement upon the expiration of
their term of service during which they attain seventy (70) years of age,
provided, however, that no director shall be required to retire until the
expiration of their term of service determined as of April 16, 1998. There are
three nominees for reelection as Class III directors. The three-year terms of
Harold Roitenberg, Gary M. Witkin and Raymond Zimmerman expire upon the election
and qualification of new directors at the Annual Meeting.
The Board of Directors has designated Harold Roitenberg, Gary M. Witkin and
Raymond Zimmerman as the three nominees for reelection as Class III directors
for a term expiring at the annual meeting in 2001 or until their successors
shall have been elected and qualified. Messrs. Roitenberg, Witkin and Zimmerman
are each currently Class III directors of the Company previously elected by the
shareholders.
2
<PAGE> 6
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 the three Class III 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 nominee under consideration. The
information relating to the three nominees and the four directors continuing in
office set forth herein has been furnished to the Company by such nominees and
directors.
CLASS III NOMINEES STANDING 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>
Harold Roitenberg, 71 1990 President of Roitenberg Investments, 2001
Director Inc., Minneapolis, Minnesota; Board
member of Syratech Corporation and
Damark International, Inc.
Gary M. Witkin, 49 1994 President and Chief Executive Officer 2001
President, Chief Executive Officer of the Company; President and Chief
and Director Operating Officer of the Company
1994-1997; Vice Chairman and Board
member, Saks Fifth Avenue
1992-1994; Board member of Genesco,
Inc.
Raymond Zimmerman, 65 1960 Chairman of the Board and Chief 2001
Director Executive Officer of the Company
1981-1997; Board member of The
Limited Stores, Columbus, Ohio.
</TABLE>
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>
James E. Poole, 73 1983 Chairman of the Board 1998; Former 2000
Chairman of the Board President of Poole Enterprises,
Inc., Nashville, Tennessee.
Richard P. Crane, Jr., 58 1975 Practicing Attorney; Partner, Crane & 1999
Director McCann, Santa Monica, California;
Board member of North American
Gaming, Inc.
R. Maynard Holt, J.D., 57 1971 R. Maynard Holt, Business Consulting 2000
Director & Insurance, Nashville, Tennessee.
Charles V. Moore, 58 1972 President and Board member of 1999
Director Trainer, Wortham & Company, Inc.,
Investment Counselors, New York,
New York.
</TABLE>
A plurality of the votes cast is necessary for election of each nominee.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE NOMINEES.
3
<PAGE> 7
BOARD OF DIRECTORS AND COMMITTEES
To permit the Board of Directors to discharge its duties more efficiently,
the Board has established four standing committees: the Compensation Committee;
the Audit Committee; the Nominating Committee; and the Corporate Governance
Committee.
The Company has a Compensation Committee for the purposes of setting
executive officers' salaries, annual incentive (bonus) compensation goals for
the Company's management under the 1997 Incentive Bonus Plan 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 the 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 nonemployee directors, are Charles V.
Moore, Chairman, R. Maynard Holt and Harold Roitenberg. The Compensation
Committee held four meetings during the fiscal year ended December 28, 1997.
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 nonemployee directors, are R. Maynard Holt,
Chairman, Richard P. Crane, Jr., Charles V. Moore, James E. Poole and Harold
Roitenberg. The Audit Committee held four meetings during the fiscal year ended
December 28, 1997.
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 its committees.
The Nominating Committee gives appropriate consideration to qualified persons
recommended by shareholders for nomination as directors, provided such
recommendations are accompanied by sufficient information to permit the
Nominating Committee to evaluate the qualifications and experience of the
nominees. 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 28, 1997.
The Board of Directors established a Corporate Governance Committee on
October 22, 1997 for the purpose of recommending to the Board changes in
corporate governance matters. This committee is charged with establishing
corporate governance procedures designed to enhance and maintain Board
professionalism and independent oversight of senior management and corporate
performance. The members of the Corporate Governance Committee are James E.
Poole, Chairman, Charles V. Moore, Richard P. Crane and Gary M. Witkin. The
Corporate Governance Committee held one meeting during the fiscal year ended
December 28, 1997.
During the fiscal year ended December 28, 1997, the Board of Directors held
four (4) regular meetings and no special meetings. All directors attended at
least 75% of the aggregate number of meetings of the Board and Committees of the
Board on which they serve.
4
<PAGE> 8
DIRECTORS' COMPENSATION
In fiscal 1997, directors not otherwise employed as officers of the Company
initially received fees of $5,750 per quarter. 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 Directors' Equity Plan, as amended, each director who is not an
employee of the Company is entitled to receive 188 restricted shares of 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 also 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 nonemployee director also receives, on
the date of the Annual Meeting of Shareholders, options to purchase 750 shares
of Common Stock at an exercise price equal to the fair market value of such
shares on the date of grant. The options expire 10 years from the date of grant
and are exercisable in installments of twenty percent each year beginning one
year 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 Stock Incentive Plan. See "Change in Control Provisions Under
the Company's Stock Incentive Plans." The Director's Equity Plan, as amended,
provides nonemployee directors the option to apply their cash retainer payment
to acquire options to purchase shares of Common Stock of the Company.
Effective January 29, 1998, Mr. Poole was elected Chairman of the Board.
The Company and Mr. Poole have entered into an agreement providing that so long
as Mr. Poole serves as Chairman of the Board he will receive $10,000 per month
as additional compensation. Such compensation will be in addition to the
compensation paid to each nonemployee director and Mr. Poole will continue to
participate in the Directors' Equity Plan for nonemployee directors. The
agreement also provides for certain compensation upon death, disability or
removal from office and other benefits, including office and secretarial
assistance and reimbursement of reasonable expenses.
5
<PAGE> 9
SECURITY OWNERSHIP OF MANAGEMENT
AND CERTAIN BENEFICIAL OWNERS
The following table sets forth, as of January 31, 1998, 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. The Company
believes each director or officer, except as otherwise indicated, 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..................................... 5,258,490(2)
392,070(3)
566,280(4)
---------
6,216,840(5) 6.1%
Gary M. Witkin........................................ 589,516(6)
Richard P. Crane, Jr.................................. 12,425(7)
Charles V. Moore...................................... 105,453(8)(9)
James E. Poole........................................ 12,691(7)
R. Maynard Holt....................................... 9,501(7)(10)
Harold Roitenberg..................................... 40,123(8)(11)
S. Cusano............................................. 121,038(12)
Harold Mulet.......................................... 66,666(13)
Charles Septer........................................ 157,909(14)
All directors and executive officers as a group (16
persons)............................................ 7,532,444 7.4%
</TABLE>
- ---------------
(1) Percentages representing less than 1% of the outstanding shares of Common
Stock are not shown.
(2) Includes currently exercisable options to acquire 721,875 shares and 19,247
shares held by the trustee under the Service Merchandise Company, Inc.
Savings and Investment Plan.
(3) Represents 239,748 shares owned of record by Mr. Zimmerman as trustee for
two nieces and 152,322 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.
(5) The address for Mr. Zimmerman is 7100 Service Merchandise Drive, Brentwood,
Tennessee 37027.
(6) Includes 87,500 restricted shares of Common Stock held by the Company until
restrictions lapse, currently exercisable options to acquire 104,166
shares, and 6,665 shares held by the trustee under the Service Merchandise
Company, Inc. Savings and Investment Plan.
(7) Includes 188 restricted shares of Common Stock granted under the Directors'
Equity Plan, held by the Company until restrictions lapse on April 16,
1998, and currently exercisable options to acquire 3,000 shares granted
under the Directors' Equity Plan.
(8) Includes 188 restricted shares of Common Stock granted under the Directors'
Equity Plan, held by the Company until restrictions lapse on April 16,
1998, and currently exercisable options to acquire 10,243 shares granted
under the Directors' Equity Plan.
(9) Includes 9,280 shares owned by Mr. Moore as custodian for two minor
children.
6
<PAGE> 10
(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 88,832 shares and 26,667
restricted shares of Common Stock held by the Company until restrictions
lapse.
(13) Includes currently exercisable options to purchase 66,666 shares.
(14) Includes currently exercisable options to acquire 99,819 shares, 1,148
shares held by Mr. Septer's wife (who is an employee of the Company) and
11,915 shares under currently exercisable options held by Mr. Septer's
wife.
SECURITY OWNERSHIP OF CERTAIN PERSONS
The following table sets forth, to the best knowledge of the Company, the
name and security ownership information of the person (other than Raymond
Zimmerman whose security ownership is listed in the preceding table) who, as of
December 31, 1997, owned more than five percent of the outstanding shares of
Common Stock:
<TABLE>
<CAPTION>
NUMBER OF PERCENT
NAME SHARES OF CLASS
---- --------- --------
<S> <C> <C>
FPA Paramount Fund, Inc.(1) 7,000,000 7.0%
11400 West Olympic Boulevard
Suite 1200
Los Angeles, CA 90064
</TABLE>
- ---------------
(1) According to its most recent Schedule 13G, FPA Paramount Fund, Inc. is a
Maryland corporation registered as an investment company under the
Investment Company Act of 1940. First Pacific Advisors, Inc., a
Massachusetts corporation registered as an investment adviser under the
Investment Advisers Act of 1940, exercises shared dispositive power over
such shares of Common Stock.
7
<PAGE> 11
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table provides information as to annual, long-term and other
compensation during fiscal years 1997, 1996 and 1995 for the Company's Chief
Executive Officer and the persons who, in fiscal 1997, 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 ALL OTHER
COMPENSATION COMPEN-
ANNUAL COMPENSATION AWARDS SATION
---------------------------------------- ----------------------------- ---------
OTHER
ANNUAL RESTRICTED SECURITIES
COMPEN- STOCK UNDERLYING
SALARY BONUS SATION AWARDS OPTIONS/SARS
NAME AND PRINCIPAL POSITION YEAR ($)(3) ($)(4) ($) ($)(8) (#) ($)(11)
- --------------------------- ---- ------ ------ ------- ---------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Raymond Zimmerman............ 1997 $803,468 -- -- -- 275,000 $41,004
Chairman of the Board(1) 1996 781,604 -- -- -- -- 39,538
1995 781,575 -- -- -- -- 38,062
Gary M. Witkin............... 1997 773,614 $108,150 -- -- 1,000,000 5,474
President and CEO 1996 752,605 108,150 $189,415(5) -- 200,000 5,908
1995 730,000 105,000 429,357(6) -- -- 4,899
S. Cusano.................... 1997 369,616 25,000 -- $ 31,250(9) 425,000 2,300
Executive Vice President 1996 326,105 -- -- 123,438(10) 50,000 2,315
and CFO 1995 316,575 -- -- -- 55,000 2,308
Harold Mulet................. 1997 319,492 50,000 -- -- 240,000 2,848
Senior Vice President, 1996 309,226 50,000 -- -- 50,000 3,068
Stores 1995(2) 98,077 75,000 80,157(7) -- 75,000 94
Charles Septer............... 1997 349,860 -- -- -- 240,000 2,757
Senior Vice President, 1996 340,607 -- -- -- 50,000 2,769
Jewelry Merchandising 1995 330,373 -- -- -- 45,000 1,821
</TABLE>
- ---------------
(1) Mr. Poole was elected as Chairman of the Board on January 29, 1998 and Mr.
Zimmerman intends to retire as an employee of the Company effective April
15, 1998.
(2) Mr. Mulet's employment with the Company began on August 28, 1995.
(3) Includes for fiscal 1997 estimated amounts of $1,400 for each Messrs.
Zimmerman, Witkin, Cusano, Mulet and Septer 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 each of Mr. Zimmerman and Mr.
Witkin in fiscal years 1997, 1996 and 1995 a non-accountable expense
allowance of $30,000.
(4) The bonuses paid to Gary M. Witkin and Harold Mulet were paid pursuant to
the negotiated terms of their employment arrangements. The bonus paid to S.
Cusano in 1997 was awarded based on his outstanding performance during
fiscal year 1996.
(5) Includes $174,088 in relocation expense.
(6) Consists of $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.
(7) Includes $74,881 in relocation expense.
8
<PAGE> 12
(8) The value of outstanding restricted stock awards as of December 28, 1997
are as follows:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES VALUE
---- ------------- --------
<S> <C> <C>
Gary M. Witkin.............................................. 87,500 $169,531
S. Cusano................................................... 26,667 51,667
</TABLE>
Dividends are payable on restricted stock when and if paid on unrestricted
stock. No dividends were paid in fiscal 1997.
(9) Represents the value of 10,000 shares of restricted stock granted on April
16, 1997, at the then current market price of $3.125. These shares vest in
equal one-third increments in 1998, 1999 and 2000.
(10) Represents the value of 25,000 shares of restricted stock granted on
February 7, 1996, at the then current market price of $4.9375. Eight
thousand three hundred thirty-three of these shares vested on February 7,
1997. The remainder will vest on February 7, 1998 and February 7, 1999.
(11) Represents estimated Company contributions to the defined contribution
plan, benefits derived from payments by the Company for group term life
insurance and benefits derived from split dollar life insurance. The amount
of such benefits for 1997 is set forth in the following table:
<TABLE>
<CAPTION>
DEFINED CONTRIBUTION PLAN GROUP TERM LIFE INSURANCE SPLIT DOLLAR LIFE INSURANCE
------------------------- ------------------------- ---------------------------
<S> <C> <C> <C>
Raymond Zimmerman........ $500 $20,902 $19,602
Gary M. Witkin........... 500 4,974 N/A
S. Cusano................ 500 1,400 400
Harold Mulet............. 500 2,046 302
Charles Septer........... 500 2,257 N/A
</TABLE>
The Company is the owner of the split dollar life insurance policies with
respect to each of Messrs. Zimmerman, Cusano and Mulet. The Company paid
premiums of approximately $114,166, $24,000 and $19,000, respectively, in
1997. For each policy, upon the payment of the policy proceeds, the Company
will receive, net of any tax liability, an amount equal to the aggregate
premiums paid by the Company. The remaining proceeds from such policy will
be paid to the designated beneficiaries of Messrs. Zimmerman, Cusano and
Mulet, respectively. None of these individuals has any interest in the cash
surrender value of the respective policies for which there are split dollar
agreements. Either party may terminate the split dollar agreements at any
time on thirty days written notice.
9
<PAGE> 13
OPTION/SAR GRANTS TABLE
The following table provides information as to options granted to the five
Named Officers during fiscal 1997. No stock appreciation rights ("SARs") were
granted during fiscal 1997.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
- -------------------------------------------------------------------------------------------------- POTENTIAL REALIZABLE
NUMBER OF VALUE AT ASSUMED
SECURITIES PERCENT OF TOTAL ANNUAL RATES OF STOCK
UNDERLYING OPTIONS/SARS PRICE APPRECIATION OF
OPTIONS/SARS GRANTED TO EXERCISE OR OPTION TERM
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION ------------------------
NAME (#)(1) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
---- ------------ ---------------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Raymond Zimmerman..................... 275,000(2) 5.48% $3.9375 02/05/07 $ 680,975 $1,725,724
Gary M. Witkin........................ 200,000(2) 3.99 3.9375 02/05/07 495,255 1,255,072
800,000(3) 15.95 4.3750 10/22/07 2,201,131 5,578,099
S. Cusano............................. 110,000(2) 2.19 3.9375 02/05/07 272,390 690,290
15,000(4) 0.30 3.1250 04/16/07 29,479 74,707
300,000(3) 5.98 4.3750 10/22/07 825,424 2,091,787
Harold Mulet.......................... 80,000(2) 1.59 3.9375 02/05/07 198,102 502,029
160,000(3) 3.19 4.3750 10/22/97 440,226 1,115,620
Charles Septer........................ 80,000(2) 1.59 3.9375 02/05/07 198,102 502,029
160,000(3) 3.19 4.3750 10/22/07 440,226 1,115,620
</TABLE>
- ---------------
(1) There are no criteria for vesting other than continued employment through
the vesting dates and no other material terms of the options except as
disclosed under "Change in Control Provisions Under the Company's Stock
Incentive Plans."
(2) Options granted effective as of February 5, 1997 at the fair market value on
the date of grant which vest 33.33% annually over the three years following
the date of grant.
(3) Options granted effective as of October 22, 1997 at the fair market value on
the date of grant which vest 20.00% annually over the five years following
the date of grant.
(4) Options granted effective as of April 16, 1997 at the fair market value on
the date of grant which vest 33.33% annually over the three years following
the date of grant.
10
<PAGE> 14
OPTIONS/SAR EXERCISES AND YEAR-END VALUE TABLE
The following table provides information as to options exercised or held by
the five Named Officers during fiscal 1997. None of the Named Officers has been
granted SARs.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTIONS/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS
FY-END(#) AT FY-END($)
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) REALIZED($) UNEXERCISABLE(1) UNEXERCISABLE(1)
---- --------------- ----------- ---------------------- --------------------
<S> <C> <C> <C> <C>
Raymond Zimmerman................ -- -- 721,875/275,000 $0/$0
Gary M. Witkin................... -- -- 104,166/1,208,834 $0/$0
S. Cusano........................ -- -- 88,832/490,668 $0/$0
Harold Mulet..................... -- -- 66,666/298,334 $0/$0
Charles Septer................... -- -- 99,819/302,334 $0/$0
</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 the severance provisions
described below. The severance agreements with Mr. Zimmerman and Mr. Septer were
executed in the fall of 1994 and were intended to replace employment agreements
executed by each of them in 1988. Mr. Cusano executed a severance agreement in
the fall of 1994, and Mr. Mulet executed a severance agreement in the summer of
1995.
The severance agreements with Messrs. Zimmerman, Mulet, Septer and Cusano
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, disability, voluntary resignation or cause.
These agreements also provide for reimbursement for continued health care
coverage for up to two years for any Named Officer whose employment is
terminated for any reason other than for death, disability, or cause. Under the
terms of these agreements, the employment of a 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 a 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.
11
<PAGE> 15
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, 478,685 shares of
restricted stock and non-qualified options to purchase 125,000 shares of Common
Stock under the 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; (ii) reimbursement for up to two years for continued health
care coverage; 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; or (iii) a material breach by the Company of the
terms of the Employment Agreement. Additional triggering events include
termination of the Employment Agreement by the 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 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 (i) 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); (ii) 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 (iii) 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 (a) approval by the shareholders of an
agreement which, if completed, would constitute a change in control, or (b) 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 plan, has occurred.
12
<PAGE> 16
Options and shares of restricted stock granted under the Directors' Equity
Plan become immediately vested on the date a "change in control" is deemed to
occur under the 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 (the "Code")
includes all employees who are at least age twenty-one with one year of
qualified service as defined by the Pension Plan. Directors who are not officers
or employees of the Company do not participate. In 1996, the Pension Plan was
changed to a traditional final average compensation plan, with monthly benefits
based on years of service. 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.
The following table shows the estimated annual pension benefits payable to
a covered participant at normal retirement age, based on selected compensation
and years of service combinations:
<TABLE>
<CAPTION>
YEARS OF SERVICE
---------------------------------------------------
REMUNERATION 15 20 25 30 35
------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
$ 125,000........................ $20,768 $27,690 $34,613 $41,535 $48,458
150,000........................ 26,393 35,190 43,988 52,785 61,583
200,000........................ 28,643 38,190 47,738 57,285 66,833
750,000........................ 28,643 38,190 47,738 57,285 66,833
1,000,000........................ 28,643 38,190 47,738 57,285 66,833
</TABLE>
Compensation covered by the plan generally includes all compensation earned
by a participant, including elective deferrals to qualified plans, but excluding
severance payments, expense reimbursements and allowances, and other nonwage
items. However, for purposes of determining benefits, compensation covered by
the plan is limited to $160,000. As a result, covered compensation for each of
the Named Officers is limited to $160,000 by Section 401(a)(17) of the Code. In
addition, annual benefits payable from the plan are limited to $125,000 by
Section 415 of the Code. These limitations are indexed periodically for
inflation. Retirement benefits are computed on the basis of a straight life
annuity, unless the participant elects another method of payment. If the
participant is married, the benefit is converted into an actuarially equivalent
joint and 50% survivor benefit. The benefits shown in the table above are not
subject to deduction for Social Security or other offset amounts. Mr.
Zimmerman's benefit under the Plan is approximately $124,000 based on the
pre-1989 formula, as limited by Section 415 of the Code.
The estimated credited years of service covered by the plan for each of the
persons named in the compensation table are:
<TABLE>
<CAPTION>
AS OF 12/31/97 AS OF AGE 65
-------------- ------------
<S> <C> <C>
Raymond Zimmerman................................. 42 42
Gary M. Witkin.................................... 3 19
S. Cusano......................................... 6 27
Harold Mulet...................................... 2 21
Charles Septer.................................... 16 35
</TABLE>
13
<PAGE> 17
EXECUTIVE SECURITY PROGRAM
The Company maintains a non-qualified supplemental retirement plan (the
"ESP") 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. Employees who complete 20 years of service and terminate
employment prior to attaining retirement age are entitled to a death benefit up
to age 65, at which time they can elect salary continuation and/or a death
benefit. Salary continuation benefits are paid from the general assets of the
Company. There are approximately 156 active employees covered. Twenty-nine
retirees currently receive benefits and twenty-six 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. Of the Named
Officers, Raymond Zimmerman is the only vested participant in the ESP.
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
Company's 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 nonemployee directors of the Company. The
Committee reviews the Company's executive compensation policies as soon as is
practicable after 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 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 align more closely 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. The
14
<PAGE> 18
Company also reviews compensation information disclosed in current proxy
statements for all companies included in the Composite Index Average used in the
Company's performance graph.
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 level of sales, the Company's current 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 for fiscal 1997 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 1997, executive officers each
received base compensation increases of 3% of their base salaries, except for
Mr. Cusano who received a 19% increase in base salary due to a promotion and
increased responsibilities. During 1997, the Company hired or promoted two new
senior executive officers, whose base salary and other compensation for fiscal
1997 were determined in large part in negotiations with the individuals prior to
their hire or promotion and generally reflect market conditions at the time of
their hire as well as the Company's commitment to attract and to retain a
talented management team.
Annual Incentive Compensation. Under the 1997 Executive Incentive
Compensation Program (the "1997 Program"), which was approved by the Company's
shareholders in April 1997, awards to any participant may not exceed the greater
of (i) 0.75% of the Company's earnings before interest, income taxes,
extraordinary items and cumulative effects of changes in accounting principles;
or (ii) 150% of the participant's base salary as of the beginning of the
applicable fiscal year. Participants are chosen by the Committee prior to April
1 in each year from among eligible executive officers. Participants in the 1997
Program are not eligible to participate in any other annual incentive plan.
However, executive officers who are not selected for participation may receive
other incentive compensation from the Company. Awards under the 1997 Program are
calculated based upon a dollar amount or a formula for determining a dollar
amount and the achievement by the Company of a profit objective, determined in
writing by the Committee prior to April 1 in each year. The Committee has the
discretion to pay a lower amount of bonus to any officer under certain
circumstances.
In March 1997, the Committee designated Raymond Zimmerman and Gary M.
Witkin as participants in the 1997 Program and determined, in writing, the
profit objective for the plan with respect to fiscal 1997. The fiscal 1997
target was not met and no incentive compensation was paid under the 1997
Program.
The Company's 1997 Incentive Bonus Plan (the "Bonus Plan") provides for the
payment of annual incentive (bonus) compensation for executive officers, 100% of
which is determined by achievement of a pre-determined, Company-wide financial
target for net income (exclusive of extraordinary and unusual items) and was
established in the first quarter of fiscal 1997 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
15
<PAGE> 19
exceeds the target. Bonuses are paid to participating officers above the group
vice president level (which includes all Named Officers for 1997 other than Mr.
Zimmerman and Mr. Witkin), based on predetermined percentages of their
respective base salaries during the performance measurement period.
The targeted net income, exclusive of extraordinary and unusual items, was
established by the Committee in its subjective judgment in the first quarter of
fiscal 1997, 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 constituted the primary
foundation upon which the Committee subjectively established targets designed to
maximize the benefits derived by shareholders. The target was not intended to
predict future financial performance; rather, the target was set in order to
provide a challenge to greater achievement on the part of executive officers.
The fiscal 1997 target of $45.5 million in net income, exclusive of
extraordinary and unusual items, was not met; accordingly, no bonus compensation
was awarded under the Bonus Plan.
Long-Term Incentive Compensation. The Company uses stock options and
restricted stock awards as the primary vehicles for long-term incentive
compensation. Options to purchase an aggregate of 3,235,000 shares were granted
during fiscal 1997 to eleven executive officers and 1,781,244 shares to other
key management-level employees of the Company. 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 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. Certain of the options granted in fiscal 1997 vest 33.33%
annually for the next three years. The vesting of such options is not contingent
upon any performance or other criteria other than continued employment through
the vesting dates. Other options granted in fiscal 1997 vest 20% annually for
the next five years. However, such options may vest as early as 2000 if certain
performance criteria are satisfied. All options expire ten years from the date
of grant. The Committee also granted 610,000 shares of restricted stock to
certain executive officers below the Senior Vice President level. The shares
will be held by the Company until the earlier of October 2002 or the date upon
which, at any time after November 1999, the average daily price of the Company's
Common Stock is at least $10.00 per share for three consecutive calendar months.
The size of the restricted stock award to each such employee was based upon the
Committee's review of such employee's total compensation package for external
competitiveness and for internal fairness.
Although the 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.
In October 1996, the Board of Directors amended the Stock Incentive Plan to
permit the Benefits Committee (which is composed of certain officers of the
Company) to make, on behalf of the Committee, certain limited grants of stock
options having an exercise price no less than 100% of the fair market value on
the date of grant. The purpose of the amendment is to provide greater
flexibility to the Benefits Committee to respond to competitive conditions in
the attraction and retention of new and current employees.
16
<PAGE> 20
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER. The Committee believes
compensation of the President and Chief Executive Officer (the "CEO") should be
based upon the same policies applied with respect to executive compensation in
general, but 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's compensation includes (i) annual base salary; (ii)
the opportunity for annual incentive compensation; and (iii) the opportunity 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. 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 and the Committee's belief that the
CEO's compensation should be more closely linked to the performance of the
Company's Common Stock than compensation of other executive officers.
During fiscal 1997, the CEO received an increase in annual base salary of
2.75% based upon the Committee's subjective assessment of the CEO's performance
in light of his job responsibilities and the challenges existing in the
Company's business. In March 1997, the Committee designated the CEO as a
participant in the 1997 Program. Awards under the 1997 Program are calculated
based upon a dollar amount or a formula for determining a dollar amount and the
achievement by the Company of a profit objective, determined in writing by the
Committee prior to April 1 in each year. The fiscal 1997 target was not met and
no compensation was paid to the CEO under the 1997 Program. In fiscal 1997, the
CEO received grants of stock options to purchase an aggregate of 1,000,000
shares at exercise prices of $3.94 and $4.38 per share, the fair market value on
the respective dates of grant. This award of long-term incentive compensation
was based upon the Committee's subjective assessment of the CEO's performance in
light of the challenges existing in the Company's business, his level in the
organization and, in part, upon the Committee's belief that the CEO's
compensation should be more closely linked to the performance of the Company's
Common Stock than the compensation of other executive officers. For fiscal 1997,
pursuant to his negotiated employment agreement, the CEO received a
non-accountable expense allowance of $30,000.
FEDERAL INCOME TAX DEDUCTIBILITY LIMITATIONS. Section 162(m) of the Code
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 1997 Program were structured so as to qualify for the exemption
for performance-based compensation. Substantially all stock options awarded
under the Stock Incentive Plan through the present date also qualify as
performance-based compensation under Section 162(m) of the Code. Stock options
granted by the Benefits Committee will not qualify as performance-based
compensation.
None of the Named Officers received compensation in fiscal 1997 that would
exceed the $1,000,000 limit on deductibility under Section 162(m) of the Code.
It is anticipated that any compensation paid to Named Officers in future years
that may exceed the $1,000,000 limitation will qualify for the performance-based
exemption.
17
<PAGE> 21
It is the Committee's intention to continue to utilize performance-based
compensation, which should minimize the effect of Section 162(m) of the Code 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 R. Maynard Holt Harold Roitenberg
18
<PAGE> 22
PERFORMANCE GRAPH
TOTAL RETURN TO SHAREHOLDERS
<TABLE>
<CAPTION>
SERVICE
MEASUREMENT PERIOD MERCHANDISE S&P MIDCAP 400 COMPOSITE INDEX
(FISCAL YEAR COVERED) COMPANY, INC. INDEX AVERAGE
<S> <C> <C> <C>
1992 100 100 100
1993 68.97 113.95 96.98
1994 32.76 109.87 86.71
1995 33.62 143.86 95.10
1996 28.45 171.49 110.46
1997 14.66 226.80 155.81
</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, Harcourt General Inc., May Department Stores, Mercantile
Stores, Nordstrom, K Mart, J.C. Penney, Sears, Roebuck & Company, Wal-Mart
Stores, Woolworth Company, Pep Boys -- Manny, Moe and Jack, Costco Companies
Inc. and Toys R Us. In 1997 Standard and Poor's added Autozone to one of the
referenced retail group indices. In 1996 Standard and Poor's added Harcourt
General Inc. and removed Circuit City Stores, Home Depot, Lowe's, CVS Corp.
(formerly Melville Corp.) and Tandy Corp. from the retail group indices referred
to above. In November 1994, Blockbuster was acquired by Viacom, Inc. and deleted
from the Composite Index Average.
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 December 31, 1992 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.
19
<PAGE> 23
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leases one store property from Raymond Zimmerman. For the
fiscal year ended December 28, 1997, Mr. Zimmerman received $81,000 under this
lease. The rent that has been or may be paid under this lease is and will be
comparable to rent paid by lessees of similar properties in the same general
location, and the terms of such lease are at least as favorable to the Company
as the terms that could be obtained from unaffiliated persons.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors, the Company's executive officers and persons who
beneficially own more than ten percent of the Common Stock to file reports of
ownership and changes in ownership with the SEC. Such directors, officers and
greater than ten percent shareholders are required by SEC regulations to furnish
the Company with copies of all Section 16(a) forms they file.
Based solely on the Company's review of the copies of such forms furnished
to the Company, or written representations from certain reporting persons, the
Company believes that during fiscal 1997 its officers, directors and greater
than ten percent beneficial ownership were in compliance with all applicable
filing requirements.
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 1998 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 28, 1997. 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 FISCAL YEAR 1998.
20
<PAGE> 24
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 C.
Steven Moore, 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 16, 1998. Proposals should be sent to
the Company by certified mail, return receipt requested.
By Order of the Board of Directors
/s/ C. STEVEN MOORE
C. Steven Moore
Secretary
March 13, 1998
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.
21
<PAGE> 25
Appendix A
PROXY PROXY
SERVICE MERCHANDISE COMPANY, INC.
Proxy is solicited on behalf of the Board of Directors for the Annual Meeting of
Shareholders to be held on Wednesday April 15, 1998.
The undersigned hereby appoints C. Steven Moore and James W. Elrod, 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 15, 1998, at 10:00 a.m., local time, and at any adjournment
thereof.
YOUR SHARES WILL BE VOTED IN ACCORDANCE WITH YOUR INSTRUCTIONS. IF NO
CHOICE IS SPECIFIED, SHARES WILL BE VOTED FOR THE CLASS III DIRECTOR NOMINEES
IN THE ELECTION OF DIRECTORS AND FOR THE APPROVAL OF DELOITTE & TOUCHE LLP.
(continued on the reverse side)
- FOLD AND DETACH HERE -
Service Merchandise Company, Inc.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY.
[ ]
1. PROPOSAL 1: ELECTION OF THREE CLASS III DIRECTORS:
Nominees: Harold Roitenberg, Gary M. Witkin, Raymond Zimmerman
For Withhold For All
All All Except nominee(s) written below
[ ] [ ] [ ] _____________________________________
2. PROPOSAL 2: APPROVAL OF DELOITTE & TOUCHE LLP AS INDEPENDENT PUBLIC
ACCOUNTANTS
For Against Abstain
[ ] [ ] [ ]
3. In their discretion, on such other matters as may properly come before the
meeting.
PLEASE SIGN HERE AND RETURN PROMPTLY
_______________________________________
Signature
_______________________________________
Signature (if held jointly)
Date: ___________________________, 1998
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.
- --------------------------------------------------------------------------------
If you have changed your address please PRINT your new address on this line.
- FOLD AND DETACH HERE -
