<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
April 30, 1999
DEAR FELLOW SHAREHOLDER:
You are invited to attend the Annual Meeting of Shareholders of
Service Merchandise Company, Inc. scheduled to be held on Thursday, July 1, 1999
at 9:00 a.m., local time, at the Cool Springs Marriott Conference Center, 700
Cool Springs Boulevard, Franklin, Tennessee 37067, telephone (615) 771-0889.
At the meeting, shareholders will be asked to elect two Class I
directors, one Class II director, and one Class III director, and to approve the
selection of Deloitte & Touche LLP as the Company's independent public
accountants for fiscal year 1999. 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,
Raymond Zimmerman
Chairman of the Board
<PAGE> 3
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 Thursday, July 1, 1999
----------
Notice is hereby given that the Annual Meeting of Shareholders of
SERVICE MERCHANDISE COMPANY, INC. (hereinafter called the "Company"), will be
held at the Cool Springs Marriott Conference Center, 700 Cool Springs Boulevard,
Franklin, Tennessee 37067, telephone (615) 771-0889 on Thursday, July 1, 1999 at
9:00 a.m., local time, for the following purposes:
(1) To elect two Class I directors to serve for a
term of three years or until their successors are duly elected
and qualified, to elect one Class II director to serve for a term
of one year or until his successor is duly qualified and to elect
one Class III director to serve for a term of two years or until
his successor is duly 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 1999; 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 April
29, 1999 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
C. Steven Moore
Secretary
Brentwood, Tennessee
April 30, 1999
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 July 1, 1999, 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 May 3, 1999 to all shareholders of
record on April 29, 1999.
The purposes of the Annual Meeting are: (i) to elect two Class I
directors, one Class II director, and one Class III director; (ii) to approve
the selection of Deloitte & Touche LLP as the Company's independent public
accountants for fiscal 1999; 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 two Class I director nominees, FOR the election of the Class II
director nominee, FOR the election of the Class III director nominee and FOR the
approval of the selection of Deloitte & Touche LLP as the Company's independent
public accountants for fiscal 1999.
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 April
29, 1999 as the record date for the Annual Meeting. On that date, the Company
had outstanding 101,003,258 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 1999 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," "against" 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 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 involves
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.
RECENT DEVELOPMENTS
On March 15, 1999, five of the Company's vendors filed an
involuntary petition for reorganization under Chapter 11 ("Chapter 11") of title
11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United
States Bankruptcy Court for the Middle District of Tennessee (the "Bankruptcy
Court") seeking court supervision of the Company's restructuring efforts. On
March 27, 1999, the Company and 31 of its subsidiaries (collectively, the
"Debtors") filed voluntary petitions with the Bankruptcy Court for
reorganization under Chapter 11 under case numbers 399-02649 through 399-02680
(the "Chapter 11 Cases") and orders for relief were entered by the Bankruptcy
Court. The Chapter 11 Cases have been consolidated for the purpose of joint
administration under Case No. 399-02649. The Company is currently operating its
business as a debtor-in-possession pursuant to the Bankruptcy Code.
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. Directors who were elected to fill a vacancy in a class whose term of
office expires in a later year are elected for a term equal to the remaining
term for their respective class. The total number of directors is currently set
at seven, two of which were elected as Class III directors in 1998 and 1999,
respectively. 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 and that an exception to
the policy shall be made with respect to Raymond Zimmerman. There are two
nominees for reelection as Class I directors, one nominee for election as a
Class II director and one nominee for election as a Class III director. The
three-year terms of Class I directors Richard P. Crane, Jr. and Charles V. Moore
expire upon the election and qualification of new directors at the Annual
Meeting.
2
<PAGE> 6
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 2002 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. The Board of
Directors has designated Charles Septer as the nominee for election as a Class
II director for a term expiring at the annual meeting in 2000 or until his
successor shall have been elected and qualified. The Board of Directors has
designated S. Cusano as the nominee for election as a Class III director for a
term expiring at the annual meeting in 2001 or until his successor shall have
been elected and qualified. Both Mr. Septer and Mr. Cusano are currently serving
as directors of the Company having been previously elected by the Board of
Directors to fill vacancies on the Board of Directors.
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 two Class I nominees, the
Class II nominee and the Class III nominee 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 four nominees and the three directors continuing in office set forth
herein has been furnished to the Company by such nominees and directors.
<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>
CLASS I NOMINEES STANDING FOR REELECTION:
Richard P. Crane, Jr., 59 1975 Practicing Attorney, Partner, Musick, 2002
Director Peeler & Garrett, Los Angeles, California;
Board member of North American Gaming,
Inc.
Charles V. Moore, 59 1972 President and Board member of Trainer, 2002
Director Wortham & Company, Inc., Investment
Counselors, New York, New York.
CLASS II NOMINEE STANDING FOR ELECTION:
Charles Septer, 47 1999 President and Chief Operating Officer since 2000
Director March 1999; Senior Vice President, Jewelry
Merchandising since 1988.
CLASS III NOMINEE STANDING FOR ELECTION:
S. Cusano, 45 1998 Chief Executive Officer since March 1999; 2001
Director Executive Vice President and Chief
Financial Officer from April 1997 to March
1999; Vice President and Chief Financial
Officer from July 1993 to April 1997; Group
Vice President - Finance from December 1991
to July 1993.
</TABLE>
3
<PAGE> 7
CURRENT DIRECTORS WHOSE TERMS HAVE NOT EXPIRED AND WHO ARE THEREFORE NOT UP FOR
REELECTION:
<TABLE>
<S> <C> <C> <C>
Raymond Zimmerman, 66 1960 Chairman of the Board since January 1999; 2001
Chairman of the Board Chairman of the Board from October 1981
through January 1998 Chief Executive
Officer from October 1981 to April 1997;
President from July 1984 to November 1994
and from 1981 to October 1983; Board member
of The Limited Stores, Columbus, Ohio.
R. Maynard Holt, J.D., 59 1971 R. Maynard Holt, Business Consulting & 2000
Director Insurance, Nashville, Tennessee.
Harold Roitenberg, 72 1990 President of Roitenberg Investments, Inc., 2001
Director Minneapolis, Minnesota; Board member of
Damark International, Inc.
</TABLE>
A plurality of the votes cast is necessary for election of each
nominee. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE NOMINEES.
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 six meetings during the fiscal year ended January 3, 1999.
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. and Harold Roitenberg. The Audit Committee held
four meetings during the fiscal year ended January 3, 1999.
4
<PAGE> 8
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. Currently, Mr. Zimmerman is the sole member of the Nominating
Committee. The Nominating Committee held three meetings during the fiscal year
ended January 3, 1999.
The Board of Directors has a Corporate Governance Committee 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 Raymond Zimmerman, Charles V.
Moore, and Richard P. Crane, Jr. The Corporate Governance Committee held one
meeting during the fiscal year ended January 3, 1999.
During the fiscal year ended January 3, 1999, the Board of
Directors held eleven 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 other than Mr. Crane who attended three of five Committee meetings.
DIRECTORS' COMPENSATION
In fiscal 1998, each director not otherwise employed as an
officer of the Company received an annual retainer of $23,000. In addition, each
director received $1,250 for each board meeting he physically attended, and $300
for each board meeting he attended telephonically. Each Committee chairman
received $1,000 per Committee meeting and each Committee member received $250
per Committee meeting. Under the Directors' Deferred Compensation Plan,
implemented in 1991, directors have the option of deferring receipt of their
cash fees until a period following their service as a director or until
retirement age.
Under the Second Amended and Restated Directors' Equity Plan (the
"Directors' Equity Plan") each nonemployee director receives on the date of the
Annual Meeting of Shareholders, options to purchase 3,000 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
Amended and Restated 1989 Employee Stock Incentive Plan (the "Stock Incentive
Plan"). The Directors' Equity Plan provides nonemployee directors the option to
apply their cash retainer payment to acquire options to purchase shares of
Common Stock of the Company.
From January 29, 1998 until his resignation on January 7, 1999,
James E. Poole served as Chairman of the Board. The Company and Mr. Poole
entered into an agreement providing that so long as Mr. Poole served as Chairman
of the Board he was to receive $10,000 per month as additional compensation.
Such compensation was in addition to the compensation paid to each nonemployee
director and Mr. Poole continued to participate in the Directors' Equity Plan
for nonemployee directors. The agreement also provided for certain compensation
upon death, disability or removal from office, secretarial assistance and
reimbursement of reasonable expenses. In connection with his resignation as
Chairman of the Board and his retirement from the Board of Directors, the
Company paid Mr. Poole $250,000.
5
<PAGE> 9
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of February 28, 1999, certain
information regarding the beneficial ownership of Common Stock by all directors
of the Company (unless otherwise noted), the Company's Chief Executive Officer
as of January 3, 1999, the four most highly compensated executive officers of
the Company other than such Chief Executive Officer, all directors and executive
officers as a group, and all other persons beneficially owning greater than five
percent of the Common Stock. 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 ............................. 4,396,624
24,341 (2)
392,070 (3)
566,280 (4)
---------
5,379,315 (5) 5.4%
Richard P. Crane .............................. 13,363 (6)
Charles V. Moore .............................. 162,945 (7)(8)
R. Maynard Holt ............................... 10,439 (6)(9)
Harold Roitenberg ............................. 42,813 (10)
S. Cusano ..................................... 32,206 (11)
Harold Mulet .................................. --
Charles Septer ................................ 46,175 (12)
Gary M. Witkin ................................ 415,350 (13)
Gary Sease .................................... 10,000
FPA Paramount Fund, Inc. ...................... 9,500,000 (14) 9.5%
All directors and executive officers as a group
(15 persons) .................................. 6,228,606 6.2%
</TABLE>
- -------------------
(1) Percentages representing less than 1% of the outstanding shares of
Common Stock are not shown.
(2) Shares held by the Equitable Trust Company in an IRA account.
(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 Mark 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 188 restricted shares of Common Stock granted under the
Directors' Equity Plan, held by the Company until restrictions lapse on
April 15,1999, and currently exercisable options to acquire 3,750
shares granted under the Directors' Equity Plan.
(7) Includes 188 restricted shares of Common Stock granted under the
Directors' Equity Plan, held by the Company until restrictions lapse on
April 15,1999, and currently exercisable options to acquire 67,547
shares granted under the Directors' Equity Plan.
(8) Includes 9,280 shares owned by Mr. Moore as custodian for two minor
children.
(9) 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, 2,100 shares owned by Mr. Holt's wife and
2,000 shares owned by Mr. Holt's mother.
6
<PAGE> 10
(10) Includes 28,564 shares owned by Roitenberg Investments, Inc., which is
100% owned by Mr. Roitenberg, 188 restricted shares of Common Stock
granted under the Directors' Equity Plan, held by the Company until
restrictions lapse on April 15, 1999, and currently exercisable options
to acquire 12,745 shares granted under the Directors' Equity Plan.
(11) Includes 32,206 restricted shares of Common Stock held by the Company
until restrictions lapse.
(12) Includes 1,148 shares held by Mr. Septer's wife (who is an employee of
the Company).
(13) Reflects Mr. Witkin's ownership as of January 3, 1999.
(14) Address: 11400 West Olympic Boulevard, Suite 1200, Los Angeles,
California 90064. According to its Schedule 13G/A dated February 12,
1999, 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 1998, 1997 and 1996 for the Company's
Chief Executive Officer and the persons who, in fiscal 1998, were the other four
most highly compensated executive officers of the Company and one additional
person (such six officers are referred to collectively as the "Named Officers"):
<TABLE>
<CAPTION>
Long-Term Compensation
Annual Compensation Awards
------------------------------------------------------- ------------------------------------------
Securities
Other Restricted Underlying
Annual Stock Options/ All Other
Name and Principal Position Salary Bonus Compensation Awards SARs Compensation
During Fiscal 1998 Year ($) ($) ($)(5) ($)(7) (#) ($)(10)
- -------------------------- ------ ----------- --------- ------------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gary M. Witkin(1) 1998 $ 756,911 $ -- $ 30,000 $ -- 999,999 $ 8,794
President and CEO 1997 773,614 108,150 30,000 -- 1,000,000 5,474
1996 752,605 108,150 107,300 -- 200,000 179,996(6)
S. Cusano 1998 406,906 -- -- -- 579,500 4,050
Executive Vice President 1997 369,616 25,000 -- 31,250 (8) 425,000 2,300
and CFO 1996 326,105 -- -- 123,438 (9) 50,000 2,315
Harold Mulet(2) 1998 357,692 -- -- -- 365,000 3,428
Senior Vice President, 1997 319,492 50,000 -- -- 240,000 2,848
Store Operations 1996 309,226 50,000 -- -- 50,000 3,068
Charles Septer 1998 366,296 -- -- -- 402,153 2,818
Senior Vice President 1997 349,860 -- -- -- 240,000 2,757
Jewelry Merchandising 1996 340,607 -- -- -- 50,000 2,769
Gary Sease(3) 1998 324,861 -- -- -- 290,000 5,765
Senior Vice President 1997 309,000 50,000 -- -- -- 12,173
Logistics 1996 80,503 -- -- -- -- 5,212(11)
Raymond Zimmerman(4) 1998 322,730 -- 30,000 -- -- 3,362,629(12)
Chairman of the Board 1997 803,468 -- 30,000 -- 275,000 41,004
1996 781,604 -- 30,000 -- -- 39,538
</TABLE>
(1) Mr. Witkin resigned as President and CEO on January 4, 1999.
(2) Mr. Mulet's employment with the Company ceased on March 26, 1999.
(3) Mr. Sease's employment with the Company began on September 15, 1996.
(4) Mr. Zimmerman resigned as Chairman on January 29, 1998 and was
re-elected as Chairman on January 4, 1999.
(5) Mr. Zimmerman and Mr. Witkin received a non-accountable expense
allowance of $30,000 in fiscal 1998, 1997 and 1996.
(6) Includes $174,068 in relocation expense.
(7) The value of outstanding restricted stock awards as of January 3, 1999
are as follows:
<TABLE>
<CAPTION>
Number of
Name Shares Value
---- ---------- --------
<S> <C> <C>
Gary M. Witkin 70,000 $135,625
S. Cusano 15,001 29,054
</TABLE>
Dividends are payable on restricted stock when and if it is paid
on unrestricted stock. No dividends were paid in the reported
fiscal years.
8
<PAGE> 12
(8) Represents the value of 10,000 shares of restricted stock granted on
April 16, 1997, which had a market price of $3.125 on the grant date.
On April 16, 1998, 3,333 of the shares vested. The remainder will vest
on April 16, 1999 and 2000 respectively.
(9) Represents the value of 25,000 shares of restricted stock granted on
February 7, 1996, which had a market price of $4.937 on the grant date.
As of February 7, 1998, 16,666 of the shares had vested. The remainder
will vest on February 7, 1999.
(10) Represents estimated Company contributions in the defined contribution
plan, benefits derived from payments by the Company for group life
insurance, and benefits derived from split dollar life insurance. The
amount of such benefits for 1998 is set forth in the following table:
<TABLE>
<CAPTION>
Defined Contribution Group Term Life Split Dollar Life
Plan Insurance Insurance
-------------------- --------------- -----------------
<S> <C> <C> <C>
Raymond Zimmerman $500 $ 12,500 $ 21,580
Gary M. Witkin $600 $ 8,294 --
S. Cusano $500 $ 2,318 $ 957
Harold Mulet $500 $ 2,205 $ 723
Charles Septer $500 $ 2,593 --
Gary Sease $500 $ 5,265 --
</TABLE>
The Company is the owner of the split dollar life insurance policies on
Messrs. Zimmerman, Cusano and Mulet. In 1998, the Company paid premiums
of approximately $114,116, $114,116 and $24,000, respectively. 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. The remaining policy proceeds will be paid to the duly
named beneficiaries. None of these individuals have an interest in the
cash surrender value of the respective policies. Either party may
terminate the split dollar agreements at any time with thirty days
written notice.
(11) These amounts represent relocation expense.
(12) Includes $2,748 with respect to office equipment; $25,000 as a
relocation expense; $17,800 pertaining to the purchase of an
automobile; $160,000 as an office allowance; $3,111,837 in retirement
and benefit payments; $9,522 for reimbursed cobra costs; and $1,042 for
supplementary medical expense.
9
<PAGE> 13
OPTION/SAR GRANTS TABLE
The following table provides information as to options granted to
the six Named Officers during fiscal 1998. No stock appreciation rights ("SARS")
were granted during fiscal 1998.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZED VALUE AT
ASSUMED ANNUAL RATES
OF STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
- ---------------------------------------------------------------------------------------- --------------------------------
NUMBER OF
SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS/SARS
OPTION/SAR GRANTED TO EXERCISE OR
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION
NAME (#)(1) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- ------------------ ----------- ----------------- ------------ ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Raymond Zimmerman -- -- -- -- --
Gary M. Witkin 999,999 13.73% $ 1.2500 10/16/02 $ 1,503,722 $ 1,794,113
S. Cusano 579,500 7.96 1.2500 10/16/02 871,408 1,039,690
Harold Mulet 365,000 5.01 1.2500 10/16/02 559,686 667,770
Charles Septer 402,153 5.52 1.2500 10/16/02 604,727 721,509
Gary Sease 290,000 3.98 1.2500 10/16/02 436,080 520,293
</TABLE>
- ------------------
(1) Options granted effective as of October 16, 1998 at the fair market
value on the date of grant which vest 33.33% per year with the first
33.33% vesting on October 16, 1999 in exchange for outstanding options.
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 EXERCISE AND YEAR-END VALUE TABLE
The following table provides information as to opinions exercised
or held by the six Named Officers during fiscal 1998. None of the Named Officers
has been granted SARs.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTION/SARS AT
SHARES ACQUIRED VALUE FISCAL YEAR-END (#) FISCAL YEAR-END (#)
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE(1) EXERCISABLE/UNEXERCISABLE(1)
- ---------------------- ---------------- ----------- ----------------------------- ----------------------------
<S> <C> <C> <C> <C>
Raymond Zimmerman -- -- 279,166 / 0 $0/$0
Gary M. Witkin -- -- 191,667 / 1,133,333 $0/$0
S. Cusano -- -- 0 / 579,500 $0/$0
Harold Mulet -- -- 0 / 365,000 $0/$0
Charles Septer -- -- 0 / 402,153 $0/$0
Gary Sease -- -- 0 / 290,000 $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.
10
<PAGE> 14
SEVERANCE AND INDEMNIFICATION AGREEMENTS; EMPLOYMENT AGREEMENTS; CHANGE IN
CONTROL PROVISIONS
During fiscal 1998, the Company had severance agreements with
each of the Named Officers employed by the Company other than Mr. Zimmerman. The
severance agreements were entered into in December 1998 and replaced severance
agreements previously in place with the Named Officers. Mr. Cusano's severance
agreement was subsequently amended as described below, and Mr. Cusano and Mr.
Septer subsequently entered into employment agreements as described below.
The severance agreements in place during fiscal 1998 with Messrs.
Cusano, Mulet, Sease 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 payable in a lump sum or in twenty-four
(24) equal monthly installments, if the employment of the Named Officer is
terminated for any reason other than the officer's death, disability, or for
cause. If the Named Officer is terminated or deemed to be terminated within two
years of a Change in Control, he will be entitled to salary continuation in the
amount of three times the officer's maximum annual base salary. A Change in
Control under these agreements is the same as that used in the Stock Incentive
Plan described below. 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; (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 the 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 has requested the Bankruptcy
Court to reject the agreement with Mr. Mulet.
On June 25, 1998, the Company entered into an agreement with
Raymond Zimmerman, wherein in light of Mr. Zimmerman's more than 40 years of
service and other valuable contributions to the Company, the Company agreed to
pay Mr. Zimmerman a retirement payment of $750,000; to cause Mr. Zimmerman's
outstanding options to vest pursuant to the terms of the Stock Incentive Plan;
to provide for the continuation of certain healthcare and life insurance
benefits; and to provide for an automobile and a moving expenses allowance. The
agreement also provided for the payment of $2,361,837, which together with
amounts payable under the Company's Executive Security Plan approximated on a
discounted basis the amount of retirement benefits which would have been payable
to Mr. Zimmerman under the Restated Retirement Plan if such plan did not contain
maximum payment limits.
On January 8, 1999, the Company entered into an agreement with
James Poole, then the Chairman of the Board of Directors. The agreement provides
for the payment on January 11, 1999 of $250,000 in connection with his
resignation as Chairman of the Board of Directors and his retirement from the
Board. The agreement requires Mr. Poole to cooperate with the Company in
litigation and related proceedings. Mr. Poole is obligated under the agreement
to maintain certain matters in confidence and not to engage in various
activities competitive with the business of the Company.
On January 7, 1999, Gary M. Witkin entered into an agreement with
the Company pursuant to which he resigned as President, Chief Executive Officer,
and as a director. The agreement provides for (i) the payment to Mr. Witkin of
$2,317,890, (ii) continuation of health care coverage for the shorter of two
years or his eligibility for coverage with another employer, (iii) the transfer
of title to his Company provided automobile. The agreement requires Mr. Witkin
to cooperate with the Company in litigation and related proceedings. Mr. Witkin
is obligated under the agreement to maintain certain matters in confidence and
not to compete with the Company.
11
<PAGE> 15
Effective February 1, 1999, the Company entered into an agreement
with S. Cusano, then the Executive Vice President and Chief Financial Officer,
amending and restating his severance agreement with the Company. Under the terms
of this restated agreement, Mr. Cusano resigned effective May 20, 1999, but
agreed to continue as Executive Vice President and Chief Financial Officer
through the effective date of his resignation. The agreement provides for (i)
the payment to Mr. Cusano of $1,288,000 in installments payable through May 20,
1999, in addition to his regular pay while employed with the Company, (ii) the
vesting of all unvested stock options held by him on May 20, 1999, (iii) the
immediate transfer of title to his Company provided automobile, (iv) the
continuation of health care benefits for the shorter of two years or his
eligibility for coverage with another employer, and (v) the payment of Mr.
Cusano's attorney's fees. The Company has the right to terminate him at any
time. If he is terminated for Cause (defined as (a) the willful engaging in
misconduct materially injurious to the Company, (b) acts of dishonesty or fraud,
or (c) the willful violation of obligations not to compete with the Company or
disclose confidential information) the Company can stop further payments and
recoup prior incentive payments made. If his employment is terminated for death
or for cause, he will be entitled only to his base salary through the date of
termination. If the 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 agreement provides that Mr. Cusano will not
compete with the Company during the term of the Agreement.
In connection with his appointment as Chief Executive Officer, on
March 23, 1999, the Company and Mr. Cusano entered into an employment agreement
with an initial term of three years which renews automatically for additional
one year terms unless either party gives appropriate notice to the other party.
The agreement provides for a base salary of $650,000 with the opportunity to
receive an annual incentive bonus. Any such annual incentive bonus would be
subject to offset by up to one-third of the amounts paid to Mr. Cusano pursuant
to the February 1, 1999 agreement between the Company and Mr. Cusano. In the
event of Mr. Cusano's termination other than for death, disability or cause
within the term of the agreement, Mr. Cusano would receive salary continuation
in an amount of two times his base salary and continuation of certain health
care benefits. This agreement is subject to Bankruptcy Court approval.
In connection with his appointment as President and Chief
Operating Officer, on March 23, 1999, the Company and Mr. Septer entered into an
employment agreement with an initial term of three years which renews
automatically for additional one year terms unless either party gives
appropriate notice to the other party. The agreement provides for a base salary
of $500,000. The agreement provides that Mr. Septer will be paid a bonus of
$250,000 on each of March 26, 1999 and April 23, 1999 (the "Special Bonus") and
that he will be entitled to receive an annual incentive bonus pursuant to the
Company's annual bonus plan offset by up to one-third of the amount of the
Special Bonus. In the event of Mr. Septer's termination other than for death,
disability or cause within the term of the agreement, Mr. Septer would receive
salary continuation in an amount of two times his base salary and continuation
of certain health care benefits. This agreement is subject to Bankruptcy Court
approval.
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.
12
<PAGE> 16
CHANGE IN CONTROL PROVISIONS UNDER THE COMPANY'S STOCK INCENTIVE PLANS
Under the Stock Incentive Plan, any stock options and SAR's 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 is 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 (i) approval by the shareholders of an
aggregate which, if completed, would constitute a change in control, or (ii) 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.
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 full-time 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 on years of service. Participants in the Pension Plan as of
January 1, 1998 are provided certain minimum benefits reflecting the provisions
of the prior Pension Plan based on compensation received during 1998.
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 compensations:
<TABLE>
<CAPTION>
YEARS OF SERVICE
---------------------------------------------------------------------
REMUNERATION 15 20 25 30 35
---- ---- ---- ---- ---
<S> <C> <C> <C> <C> <C>
$125,000 $20,430 $27,240 $34,050 $40,860 $47,670
150,000 26,055 34,740 43,425 52,110 60,795
175,000 28,305 34,740 47,175 56,610 66,045
200,000 28,305 34,740 47,175 56,610 66,045
225,000 28,305 34,740 47,175 56,610 66,045
250,000 28,305 34,740 47,175 56,610 66,045
300,000 28,305 34,740 47,175 56,610 66,045
400,000 28,305 34,740 47,175 56,610 66,045
450,000 28,305 34,740 47,175 56,610 66,045
500,000 28,305 34,740 47,175 56,610 66,045
</TABLE>
13
<PAGE> 17
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 non-wage 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 $130,000 by Section 415 of the Code. These limitations are indexed
periodically for inflation.
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 December 31, 1998 As of Age 65
----------------------- ------------
<S> <C> <C>
Raymond Zimmerman 42 42
Gary M. Witkin 4 19
S. Cusano 7 27
Harold Mulet 3 21
Charles Septer 17 35
Gary Sease 2 12
</TABLE>
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.
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 age 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 death benefits. Salary continuation benefits are paid from
the general assets of the Company. There are approximately 156 active employees
covered. Twenty-nine retirees currently received 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, only Raymond Zimmerman and Charles
Septer are participants in the ESP. Mr. Zimmerman's annual installment benefit
is $154,600. Upon retirement and if Mr. Septer chose to waive 100% of the death
benefit, Mr. Septer's annual installment benefit would be approximately $71,900.
Continuation of the ESP is subject to Bankruptcy Court approval.
14
<PAGE> 18
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 non-employee 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 and 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 store
format versus other selling concepts and markets served, the number of stores
and employees, the level of compensation needed to retain executive officers,
organizational structure levels and comparability of executive responsibility
among companies. Based on its analysis of the survey data and the current proxy
statements of the companies included in the Composite Index Average the
Committee believes that the Company's levels of executive base compensation for
fiscal 1998 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.
15
<PAGE> 19
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 1998, Mr. Cusano received a
base compensation increase of 15% of his base salary. There were no other base
compensation increases made with respect to a Named Officer. During 1998, the
Company hired or promoted four new senior executive officers, whose base salary
and other compensation for fiscal 1998 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 1998, the Committee designated Gary M. Witkin as a
participant in the 1997 Program and determined, in writing, the profit objective
for the plan with respect to fiscal 1998. The fiscal 1998 target was not met and
no incentive compensation was paid under the 1997 Program.
The Company's 1998 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 1998 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 participating officers above the
group vice president level (which includes all Named Officers for 1998 other
than Messrs. Zimmerman and 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 1998, 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 1998 target was not met; accordingly, no
bonus compensation was awarded under the Bonus Plan.
LONG-TERM INCENTIVE COMPENSATION. Traditionally, the Company has
used stock options and restricted stock awards as the primary vehicles for
long-term incentive compensation. However, given the limited availability of
shares under the Stock Incentive Plan, fewer new options were awarded in fiscal
1998 than in certain prior years. New options to purchase an aggregate of
841,670 shares were granted during fiscal 1998 to key management-level
employees of the Company. The exercise price of each such option equaled the
fair market value of the Common Stock as of the date of grant. The new options
granted in fiscal 1998 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. All such options
expire ten years from the date of grant. In
16
<PAGE> 20
addition to new option grants, the Committee determined that it was in the best
interest of the Company and its shareholders to approve the repricing of
outstanding employee stock options. See "Report of the Compensation Committee on
Repricing of Options."
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.
In addition to the general principles set forth above, in
connection with the retirement of Mr. Zimmerman as an employee of the Company
effective April 15, 1998 and the determination of his retirement benefits, the
Committee also considered, in its subjective judgment, Mr. Zimmerman's valuable
contributions and over forty years of service to the Company.
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 1998, Mr. Witkin, then the Company's CEO, received
no increase in annual base salary 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 1998, the Committee
designated Mr. Witkin 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 1998 target was not met and no compensation was paid to Mr. Witkin
under the 1997 Program. For fiscal 1998, pursuant to his negotiated employment
agreement, Mr. Witkin 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
17
<PAGE> 21
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 (other than Mr. Zimmerman in
connection with his retirement as an employee of the Company) received
compensation in fiscal 1998 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.
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
REPORT OF THE COMPENSATION COMMITTEE ON REPRICING OF OPTIONS
On October 8, 1998, in light of the significant challenges facing
the Company and the need to retain key executives and employees, and to
strengthen the mutuality of interests between such persons and the Company's
shareholders, the Committee approved the repricing of options then outstanding
granted to employees under the Stock Incentive Plan. The Committee believed the
repricing of stock options was in the best interest of the Company and its
shareholders. In the Committee's view, the repricing provided performance and
retention incentives to key executives and employees, whose efforts were
essential to the Company's turnaround efforts. Employees holding options under
the Stock Incentive Plan were given the opportunity to exchange or amend such
options on a one for one ratio (one new or amended option for each repriced
option). All such repriced options vest 33.33% per year with the first 33.33%
vesting on October 16, 1999. The repriced options expire five years from their
date of grant and the exercise price equals the fair market value of the Common
Stock on October 16, 1998, which was $1.25. There are no vesting criteria other
than continued employment through the vesting dates and no other material terms
of the options except as disclosed under "Change in Control Provisions under the
Company's Stock Incentive Plan." No options held by non-employee directors were
amended.
The following table contains information concerning the amendment
with respect to the Named Officers, which has been the only repricing of an
option held by an executive officer of the Company in the last ten years:
10-YEAR OPTION/SAR REPRICINGS
<TABLE>
<CAPTION>
Length of
Number of Original
Securities Market Price Option Term
Underlying of Stock at Exercise Price Remaining at
Options/SARS Time of At Time of New Date of
Repriced or Repricing or Repricing or Exercise Repricing or
Name Date Amended (#) Amendment ($) Amendment ($) Price ($) Amendment
---- ---- ----------- ------------- -------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Raymond Zimmerman -- -- -- -- -- --
Gary M. Witkin 10/16/98 125,000 1.25 5.9375 1.25 6.08
10/16/98 200,000 1.25 4.6875 1.25 8.00
10/16/98 674,999 1.25 4.3750 1.25 9.00
----------
999,999
----------
S. Cusano 10/16/98 4,500 1.25 10.0800 1.25 3.50
10/16/98 10,000 1.25 10.1250 1.25 4.52
10/16/98 10,000 1.25 10.3750 1.25 5.01
10/16/98 25,000 1.25 7.0625 1.25 5.52
10/16/98 55,000 1.25 4.6875 1.25 6.70
10/16/98 50,000 1.25 4.9375 1.25 7.32
10/16/98 110,000 1.25 3.9375 1.25 8.34
10/16/98 15,000 1.25 3.1250 1.25 8.50
10/16/98 300,000 1.25 4.3750 1.25 9.02
----------
579,500
----------
Harold Mulet 10/16/98 75,000 1.25 7.1250 1.25 6.87
10/16/98 50,000 1.25 4.9375 1.25 7.32
10/16/98 80,000 1.25 3.9375 1.25 8.31
10/16/98 160,000 1.25 4.3750 1.25 9.02
---------
365,000
----------
Charles Septer 10/16/98 11,288 1.25 6.7300 1.25 0.79
10/16/98 8,465 1.25 2.2000 1.25 2.00
10/16/98 2,400 1.25 10.0800 1.25 3.50
10/16/98 20,000 1.25 10.1250 1.25 4.52
10/16/98 25,000 1.25 7.0625 1.25 5.52
10/16/98 45,000 1.25 4.6875 1.25 6.70
10/16/98 50,000 1.25 4.9375 1.25 7.32
10/16/98 80,000 1.25 3.9375 1.25 8.31
10/16/98 160,000 1.25 4.3750 1.25 9.02
----------
402,153
----------
Gary Sease 10/16/98 50,000 1.25 5.1250 1.25 7.92
10/16/98 80,000 1.25 3.9375 1.25 8.31
10/16/98 160,000 1.25 4.3750 1.25 9.02
----------
290,000
----------
</TABLE>
Charles V. Moore, Chairman R. Maynard Holt Harold Roitenberg
19
<PAGE> 23
PERFORMANCE GRAPH
TOTAL RETURN TO SHAREHOLDERS
<TABLE>
<CAPTION>
DEC 93 DEC 94 DEC 95 DEC 96 DEC 97 DEC 98
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
SERVICE MERCHANDISE CO 100 47.50 48.75 41.25 21.25 2.81
S&P MIDCAP 400 INDEX 100 96.42 126.25 150.49 199.03 237.05
PEER GROUP 100 89.41 98.06 113.90 160.66 261.42
</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, CVC 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 29, 1991 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.
20
<PAGE> 24
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company leases one store property from Raymond Zimmerman. For the
fiscal year ended January 3, 1999, 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 1998 its directors, officers
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 1999 fiscal year, subject
to approval by the shareholders. Deloitte & Touche LLP served as the Company's
independent public accountants for the fiscal year ended January 3, 1999. 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 1999.
21
<PAGE> 25
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 January 2, 2000. Proposals should be sent to
the Company by certified mail, return receipt requested. In addition, the
Company's bylaws contain an advance notice provision which provides that for a
shareholder proposal to be brought before and considered at the next annual
meeting of shareholders, such shareholder must provide written notice to the
Secretary of the Company no later than 120 calendar days before the date of the
proxy statement released to shareholders in connection with the previous year's
annual meeting. If the Company did not hold an annual meeting the previous year,
or if the date of the annual meeting has been changed by more than 30 calender
days from the date of the previous year's annual meeting, then, in order to be
timely, a proposal must be received by the Secretary of the Company no later
than 120 days before the date of such annual meeting. The Company's bylaws also
require the proposal and the shareholder to comply with Regulation 14A under the
Securities Exchange Act of 1934. In the event that a shareholder proposal
intended to be presented for action at the next annual meeting is not received
prior to March 3, 2000, then the persons designated as proxies in the proxies
solicited by the Board of Directors in connection with the annual meeting will
be permitted to use their discretionary voting authority with respect to the
proposal, whether or not the proposal is discussed in the proxy statement for
the annual meeting.
By Order of the Board of Directors
C. Steven Moore
Secretary
April 30, 1999
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.
22
<PAGE> 26
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 THURSDAY, JULY 1, 1999.
The undersigned hereby appoints Raymond Zimmerman and C. Steven Moore, 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 Cool Springs Marriott
Conference Center, 700 Cool Springs Boulevard, Franklin, Tennessee, on Thursday,
July 1, 1999, at 9:00 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 I DIRECTOR NOMINEES, FOR THE CLASS
II DIRECTOR NOMINEE, FOR THE CLASS III DIRECTOR NOMINEE 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.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
PROPOSAL I: For Withheld For All PROPOSAL 2: For Against Abstain
ELECTION OF CLASS I DIRECTORS, All All Except nominee(s) APPROVAL OF DELOITTE [ ] [ ] [ ]
written below & TOUCHE LLP AS
CLASS II DIRECTOR AND [ ] [ ] [ ]------------- INDEPENDENT PUBLIC ACCOUNTANTS
CLASS III DIRECTOR:
Class I Nominees:
Richard P. Crane, Jr. and Charles V. Moore In their discretion, on such matters as may properly come
Class II Nominee: before the meeting.
Charles Septer
Class III Nominee:
S. Cusano
PLEASE SIGN HERE AND RETURN PROMPTLY
--------------------------------------
Signature
--------------------------------------
Signature (if held jointly)
Date:---------------------------, 1999
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.
</TABLE>
- -------------------------------------------------------------------------------
* FOLD AND DETACH HERE *
