Document:

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                                                                   EXHIBIT 10.16

                              EMPLOYMENT AGREEMENT

     This Employment Agreement is made as of the 19th day of February, 2000 (the
"Agreement") by and between Service Merchandise Company, Inc., a Tennessee
corporation (the "Company"), and Eric Kovats (the "Executive").

                                    RECITALS

     WHEREAS, the Company desires to provide for the employment of the Executive
in accordance with the terms and conditions provided herein; and

     WHEREAS, the Executive wishes to perform services for the Company in
accordance with the terms and conditions provided herein.

     NOW, THEREFORE, in consideration of the premises hereof and of the mutual
promises and agreements contained herein, the parties hereto, intending to be
legally bound, hereby agree as follows:

     1. Employment. The Company hereby agrees to employ the Executive, and the
Executive hereby agrees to perform services for the Company, on the terms and
conditions set forth herein.

     2. Term. The term of employment of the Executive by the Company hereunder
shall commence effective as of February 19, 2000 (the "Effective Date"), and
shall end on February 18, 2002, unless further extended or sooner terminated as
hereinafter provided. Commencing on February 19, 2002, and on each anniversary
thereafter (each such date, an "Anniversary Date"), the term of the Executive's
employment shall automatically be extended for one additional year unless, not
later than the December 31, immediately preceding an Anniversary Date, either
party shall have given notice to the other party that it does not wish to extend
this Agreement (a "Notice of Non-Renewal"). References herein to the "Term" of
this Agreement shall refer to both the initial term and any extended term of the
Executive's employment hereunder. Notwithstanding the foregoing, if a Change of
Control (as defined in Section 6) occurs during the Term, in no event shall the
Term end prior to the end of the twenty-fourth (24th) month following the month
in which such Change of Control occurs.

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     3. Position and Duties.

          (a) The Executive shall serve as Senior Vice President, Stores of the
     Company and shall have such responsibilities, duties and authority as are
     generally consistent and customary with such position. Executive shall
     report solely to the Chief Executive Officer of the Company. The Executive
     shall also serve, if requested by the Board of Directors (the "Board"), as
     a director or officer of any of the Company's present or future direct or
     indirect subsidiaries.

          (b) During the Term, and excluding any periods of vacation and sick
     leave to which the Executive is entitled, the Executive shall devote
     reasonable attention and time during normal business hours to the business
     and affairs of the Company and, to the extent necessary to discharge the
     responsibilities assigned to the Executive under this Agreement, use the
     Executive's reasonable best efforts to carry out such responsibilities
     faithfully and efficiently. It shall not be considered a violation of the
     foregoing for the Executive to serve on corporate, industry, civic or
     charitable boards or committees, so long as such activities do not
     significantly interfere with the performance of the Executive's
     responsibilities as an employee of the Company in accordance with this
     Agreement.

     4. Compensation.

          (a) Base Salary. During the Term, the Executive shall receive an
     annual base salary ("Annual Base Salary") of $275,000. The Annual Base
     Salary shall be payable in accordance with the Company's regular payroll
     practice for its senior executives, as in effect from time to time. During
     the Term, the Annual Base Salary shall be reviewed by the Compensation
     Committee of the Board for possible increase at least annually. Any
     increase in the Annual Base Salary shall not limit or reduce any other
     obligation of the Company under this Agreement. The Annual Base Salary
     shall not be reduced after any such increase, and the term "Annual Base
     Salary" shall thereafter refer to the Annual Base Salary as so increased.

          (b) Annual Bonus; Retention Program. During the Term, the Executive
     shall be entitled to receive an annual bonus ("Annual Bonus") pursuant to
     the Company's annual bonus plan, as in effect from time to time, and shall
     be entitled to participate in the Company's Retention Program for

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     Key Employees (the "Program") as a Tier III employee, which Program was
     approved by an order (the "Order") of the U.S. Bankruptcy Court for the
     Middle District of Tennessee (the "Court") entered on May 5, 1999 in
     connection with the Company's Chapter 11 case (the "Case").

          (c) Other Benefits. During the Term, the Executive shall be entitled
     to participate in other employee benefit plans, programs and arrangements
     of the Company, other than Annual Bonus plans (covered by Section 4(b)
     above) (the "Benefit Plans"), now or hereinafter in effect, that are
     applicable to the Company's employees generally or to its executive
     officers, as the case may be, subject to and on a basis consistent with the
     terms, conditions and overall administration of the Benefit Plans. During
     the Term, the Company shall provide to the Executive all of the fringe
     benefits and perquisites that are provided to senior executives of the
     Company, and the Executive shall be entitled to participate in and receive
     any other fringe benefits or perquisites that become available to the
     Company's senior executives. The Company shall provide to the Executive an
     automobile or car allowance commensurate with that received by other senior
     vice presidents of the Company. The value of the benefit received by the
     Executive pursuant to the previous sentence shall be subject to applicable
     withholding pursuant to Section 13.

          (d) Vacation and Other Leaves. The Executive shall be entitled to
     vacation in accordance with the Company's vacation policy (and to compen
     sation in respect of earned but unused vacation days) in the amount of four
     weeks per year, and all paid holidays and personal leave days that are
     available generally to executive officers of the Company.

          (e) Expenses. During the Term, the Executive shall be entitled to
     receive prompt reimbursement for all reasonable and customary expenses
     incurred by the Executive in performing his services hereunder, including
     all expenses of travel and accommodations while engaged in business of the
     Company, provided that such expenses are incurred and accounted for in
     accordance with the policies and procedures established by the Company.

          (f) Services Furnished. The Company shall furnish the Executive with
     office space, secretarial and/or administrative assistance, office
     supplies, support services and such other facilities and services as shall
     be suitable to

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     the Executive's position and adequate for the performance of his duties
     hereunder.

     5. Compensation on Termination of Employment (Except Within Two Years
Following a Change of Control).

     This Section 5 shall apply to termination of the Executive's employment
during the Term and prior to a Change of Control (as hereinafter defined in
Section 6) and to termination of the Executive's employment more than two (2)
years following a Change of Control. This Section 5 shall not apply to
termination of Executive's employment during the Change of Control Period (as
hereinafter defined in Section 6):

          (a) Disability. If the Executive's employment with the Company is
     terminated by the Executive or the Company due to the Executive's
     inability to perform Executive's duties as a result of physical or mental
     incapacity ("Disability"), the Executive shall be paid such amounts, if
     any, as the Executive is entitled to receive under the Company's disability
     insurance policies then 'in effect for Company officers, but shall be
     entitled to no further compensation or benefits (unless previously accrued
     under the Company's benefit plans).

          (b) Other Termination Not Giving Rise to Salary Continuation. If the
     Executive's employment shall be terminated for Cause (as hereinafter
     defined) or if the Executive dies or if the Executive terminates
     Executive's employment for any reason other than for a material breach of
     this Agreement by the Company, the Company shall pay the Executive any
     installments of Executive's Annual Base Salary as then in effect that would
     otherwise be due through the date on which Executive's employment is
     terminated. The Company shall then have no further obligations to the
     Executive under this Agreement except that in the event of termination by
     death, the Executive's estate or beneficiaries, as the case may be, shall
     be paid such amounts as may be payable to the Executive under the Company's
     insurance policies and/or other benefit plans. For the purposes of this
     Agreement, the Company shall have "Cause" to terminate the Executive's
     employment upon (i) the willful engaging by the Executive in misconduct
     materially injurious to the Company, (ii) acts of dishonesty or fraud by
     the Executive, or (iii) the willful violation by the Executive of the
     provisions of Section 8 or Section 9 hereof

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          (c) Termination Giving Rise to Salary Continuation. If the Company
     shall terminate the Executive's employment with the Company or shall
     provide a Notice of Non-Renewal for any reason other than due to the
     Executive's death or Disability or for Cause, or if the Executive
     terminates this Agreement because of a material breach of this Agreement by
     the Company, then, subject to the compliance by the Executive with the
     provisions of Sections 8 and 9 hereof, the Company shall pay, as salary
     continuation, to the Executive an amount equal to two (2) times the
     Executive's maximum Annual Base Salary paid during the prior five (5) year
     period (inclusive of the Annual Bonus paid to Executive during the 12-month
     period preceding the date of termination or the Annual Bonus earned by the
     Executive with respect to the fiscal year immediately preceding the date of
     termination, whichever Annual Bonus is higher, but excluding unearned
     bonuses negotiated by Executive at the time of the Executive's employment
     with the Company), payable in a lump sum, but no other compensation or
     benefits (unless accrued under the Company's benefit plans prior to the
     date of termination of employment or as provided in Section 4(e) hereof)
     shall be paid to the Executive.

          (d) Healthcare Coverage. If the Executive's employment with the
     Company is terminated by the Company for any reason other than due to the
     Executive's death or Disability or for Cause, the Company will reimburse
     the Executive for the premium paid by the Executive for continued coverage
     for the Executive (and any dependents of the Executive covered by the
     Company's healthcare plans at the time the Executive's employment was
     terminated) under the Company's healthcare plan pursuant to "COBRA" (or any
     other mandatory healthcare continuation law then in effect), such coverage
     then being substantially similar to that provided by the Company to its
     senior executives and their eligible dependents. The Executive will be
     entitled to reimbursement for such coverage for the period commencing with
     the date of termination of employment and ending on the earlier of (i) the
     second anniversary of termination of employment, or (ii) the date the
     Executive becomes eligible to receive any healthcare coverage from another
     employer of the Executive or Executive's spouse, or any governmental
     entity, that does not contain any exclusion or limitation with respect to
     any pre-existing condition of the Executive or Executive's covered
     dependents. If the Executive (or Executive's dependents covered at the time
     of termination of employment) elects not to continue coverage under COBRA
     (or any other mandatory healthcare continuation law then in effect) or is
     not eligible to continue coverage under such healthcare continuation law,
     and is otherwise eligible

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     under this Section 5(d), the Company will reimburse the Executive for the
     cost of purchasing substantially similar coverage or a supplement required
     to achieve substantially similar coverage under another arrangement
     approved by the Company for the same period; however, such reimbursement
     shall be limited to the then current premium charged to others by the
     Company for substantially similar coverage under COBRA (or other mandatory
     healthcare continuation law then in effect). Any amount payable to the
     Executive shall be subject to withholding of applicable taxes as provided
     in Section 13 hereof. In the event of Executive's death following
     termination giving rise to the benefit described in this Section 5(d), but
     before the expiration of such benefits, Executive's dependents shall be
     entitled to such benefits.

          (e) Sole Remedy. The Executive hereby agrees that amounts payable
     under this Section 5 shall be Executive's sole and exclusive remedy against
     the Company on account of termination of employment during the Term and
     prior to a Change of Control and on account of termination of employment
     more than two (2) years following a Change of Control.

     6. Compensation on Termination of Employment Within Two Years Following A
Change of Control.

     This Section 6 shall apply to termination of Executive's employment during
the "Change of Control Period" (as defined in this Section 6). This Section 6
shall not apply to termination of Executive's employment prior to a Change of
Control or more than two (2) years following a Change of Control:

          (a) Definition of Certain Terms.

               (i) "Good Reason" shall mean the occurrence or continuation,
          without consent of Executive, after a Change of Control, of any of the
          following events within the Change of Control Period:

                    (A) the assignment to Executive of any duties inconsistent
               with the customary powers and duties that Executive held
               immediately prior to the Change of Control, or an adverse change
               in the status, position or conditions of Executive's employment
               or the nature of Executive's responsibilities in effect

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               immediately prior to such Change of Control, or any removal of
               Executive from, or any failure to re-elect Executive to, any of
               such positions;

                    (B) a reduction by the Company in Executive's Annual Base
               Salary as in effect immediately prior to such Change of Control;

                    (C) the relocation of Executive's principal office to a
               location outside a 35 mile radius from Executive's principal
               office immediately prior to such Change of Control, except for
               required travel on the Company's business to an extent
               substantially consistent with Executive's business travel
               obligations immediately prior to such Change of Control;

                    (D) the failure by the Company to continue in effect any
               benefit or compensation plan in which Executive participates
               immediately prior to the Change of Control which is material to
               Executive's total compensation, including but not limited to any
               stock or stock option, employee stock ownership, bonus,
               insurance, disability and vacation plans which the Company
               currently has or any substitute or additional plans adopted prior
               to the Change of Control, unless an equitable arrangement
               (embodied in an ongoing substitute or alternative plan or plans)
               has been made with respect to such plan, or the failure by the
               Company to continue Executive's participation therein (or in such
               substitute or alternative plan) on a basis not materially less
               favorable, both in terms of the amount of benefits provided and
               the level of Executive's participation relative to other
               participants, as in existence immediately prior to such Change of
               Control; or

                    (E) the failure of the Company to obtain an agreement from
               any successor to assume and agree to perform this Agreement as
               contemplated herein.

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               (ii) A "Change of Control" shall be deemed to have taken place if
          (i) any person or entity, including a "group" as defined in Section
          13(d)(3) of the Securities and Exchange Act of 1934, other than
          Company or a wholly-owned subsidiary thereof or any employee benefit
          plan of Company or any of its it subsidiaries, becomes the beneficial
          owner of the Company securities having 20% or more of the combined
          voting power of the then outstanding securities of the Company that
          may be cast for the election of directors of the Company (other than
          as a result of an in issuance of securities initiated by the Company
          in the ordinary course of business); or (ii) as the result of, or in
          connection with, any cash tender or exchange offer, merger or other
          business combination, sale of assets or contested election, or any
          combination of the foregoing transactions, less than a majority of
          the combined voting power of the then outstanding securities of the
          Company or any successor corporation or entity entitled to vote
          generally in the election of the directors of the Company or such
          other corporation or entity after such transaction is held in the
          aggregate by the holders of the Company's securities entitled to vote
          generally in the election of directors of the Company immediately
          prior to such transaction; or (iii) the following individuals cease
          for any reason to constitute a majority of the number of directors
          then serving: individuals who, as of the Effective Date, constitute
          the Board and any new director (other than a director whose initial
          assumption of office is in connection with an actual or threatened
          election contest, including but not limited to, a consent
          solicitation, relating to the election of directors of the Company)
          whose appointment or election by the Board or nomination for election
          by the Company's shareholders, was approved or recommended by a vote
          of at least two-thirds of the directors of the Company then still in
          office who were directors of the Company on the Effective Date or
          whose appointment, election or nomination for election was previously
          so approved or recommended; provided, however, that a "Change of
          Control" shall not be deemed to have taken place if any of the events
          specified (i), (ii) or (iii) of this paragraph occur in connection
          with the substantial consummation of a

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          confirmed plan of reorganization under Chapter 11 of the Bankruptcy
          Code prosecuted by the Company.

               (iii) "Change of Control Period" shall mean the two (2) year
          period following a Change of Control.

               (iv) "Change of Control Severance Benefits" shall mean all of the
          following payments:

                    (A) any installments of Executive's Annual Base Salary
               through the date of termination of employment at the rate in
               effect at the time the Notice of Termination is given,

                    (B) the Special Termination Payment; and

                    (C) the Medical Benefits.

               (v) "Change of Control Date" shall mean the date on which a
          Change of Control occurs.

               (vi) "Medical Benefits" shall mean the reimbursement for
          continued medical coverage for Executive and Executive's dependents
          described in Section 5(d) hereof.

               (vii) "Notice of Termination" shall refer to written notice
          described in Section 6(d) indicating the specific termination
          provision of this Agreement relied upon, setting forth in reasonable
          detail the facts and circumstances claimed to provide the basis for
          termination of Executive's employment under the provision so indicated
          and stating the date of termination.

               (viii) "Special Termination Payment" shall mean an amount payable
          in a single lump sum equal to the product of (x) an amount equal to
          the Executive's maximum Annual Base Salary paid in any year of the
          five (5) year period preceding the date of termination (inclusive of
          the Annual Bonus paid to Executive during the 12-month period
          preceding the date of

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              termination or the Annual Bonus earned by the Executive with
              respect to the fiscal year immediately preceding the date of
              termination, whichever Annual Bonus is higher, but excluding
              unearned bonuses negotiated by Executive at the time of
              Executive's employment with the Company), multiplied by (y) the
              number three (3), except that in the event that the Change in
              Control is the result of a liquidation of the Company, the amount
              specified in (x) will be multiplied by (y) the number two (2)
              instead of the number three (3).

          (b) Termination Not Giving Rise To Special Termination Payments or
     Medical Benefits. If Executive's employment is terminated during the Change
     of Control Period for Cause (as defined in Section 5(b), or on account of
     Disability (as defined in Section 5(a)), or if Executive dies during the
     Change of Control Period, or if Executive terminates Executive's employment
     during the Change of Control Period without Good Reason, the Company shall
     pay to Executive any installments of Executive's Annual Base Salary as then
     in effect that would otherwise be due through the date on which Executive's
     employment is terminated. The Company shall then have no further
     obligations to the Executive under this Agreement (unless accrued under the
     Company's benefit plans) except that in the event of termination by death,
     the Executive's estate or beneficiaries, as the case may be, shall be paid
     such amounts as may be payable to the Executive under the Company's
     insurance policies and/or other benefit plans, and except that in the event
     of termination by Disability, the Executive shall be paid such amounts as
     Executive is entitled to receive under the Company's disability insurance
     policies and plans then in effect covering the Executive.

          (c) Termination Giving Rise to Change of Control Severance Benefits.
     If the Executive's employment is terminated or a Notice of Non-Renewal is
     given by the Company during the Change of Control Period for any reason
     other than Cause, death of the Executive or Disability, or if the Executive
     terminates his employment during the Change of Control Period for Good
     Reason, then Executive shall be entitled to receive the Change of Control
     Severance Benefits, all of which (except the Medical Benefits) shall be
     paid to Executive within ten (10) days following the date of termination.

          (d) Notice of Termination. Any termination of Executive's employment
     by the Company or by Executive pursuant to this Section 6 shall

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     be communicated by written notice of termination (the "Notice of
     Termination") to the other party hereto, which shall indicate the specific
     termination provision in the Agreement relied upon, shall set forth in
     reasonable detail the facts and circumstances claimed to provide a basis
     for termination of Executive's employment and shall state the date of
     termination.

          (e) Sole Remedy. The Executive hereby agrees that the Change of
     Control Severance Benefits shall be Executive's sole and exclusive remedy
     against the Company or any successor on account of termination of
     employment during the Change of Control Period.

     7. Certain Reduction in Payments by the Company.

          (a) Definition of Certain Terms.

               (i) A "Payment" shall mean any payment or distribution in the
          nature of compensation to or for the benefit of Executive, whether
          paid or payable pursuant to this Agreement or otherwise.

               (ii) An "Agreement Payment" shall mean a Payment paid or payable
          on account of termination of employment during the Change in Control
          Period pursuant to Section 6 of this Agreement (disregarding the
          reduction provided by Section 7(b)).

               (iii) "Net After Tax Receipt" shall mean the Present Value (as
          defined below) of all Payments that are contingent on a Change of
          Control within the meaning of Section 280G of the Internal Revenue
          Code of 1986, as amended (the "Code"), net of all taxes imposed on
          Executive with respect thereto under Sections I and 4999 of the Code,
          determined by applying the highest marginal rate under Section I of
          the Code which applied to Executive's taxable income for the
          immediately preceding taxable year.

               (iv) "Present Value" shall mean such value determined in
          accordance with Section 28OG(d)(4) of the Code.

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          (b) Limitation on Agreement Payments. It is intended that all
     Agreement Payments hereunder, together with all other Payments to
     Executive contingent upon or in connection with a Change of Control, are
     reasonable compensation for Executive's service to Company and its
     subsidiaries. Notwithstanding the foregoing, should Company determine,
     based upon the opinion of the independent accounting advisors of Company
     immediately prior to the Change of Control ("Accounting Firm"), that the
     Agreement Payments and other Payments, together with any other amounts
     received by Employee that must be included in such determination, would
     result in the payment of an "excess parachute payment" as defined in
     Section 28OG of the Code, then Company will reduce the Agreement Payments
     to the minimum extent necessary so that no portion of the aggregate
     Payments would result in the payment of an "excess parachute payment;"
     provided, however, that such reduction will be made if, but only if, the
     value of all such Payments (without regard to the foregoing reduction)
     would result in Net After Tax Receipts which are less than the Net After
     Tax Receipts that would result after taking into account any such
     reduction.

          (c) Opinion of Accounting Firm. Company may reduce the Agreement
     Payments pursuant to this Section 7 only if within thirty (30) days of
     Executive's termination it provides Executive with an opinion of the
     Accounting Firm that Executive will be considered to have received "excess
     parachute payments" as defined in Section 280G of the Code if Executive
     were to receive the full amounts owing pursuant to the terms of this
     Agreement and that the reduced amount proposed to be paid by the Company
     will result in Net After Tax Receipts that are equal to or greater than the
     Net After Tax Receipts which would result from reduction in the Agreement
     Payments by any other amount.

     8. Unauthorized Disclosure.

          (a) During the period in which the Executive is employed by the
     Company, the Executive shall not, without the prior written consent of the
     Board, or a person authorized thereby, disclose to any person, other than a
     person to whom disclosure is necessary or appropriate in connection with
     the performance by the Executive of Executive's duties as an officer of the
     Company, or its subsidiaries or its affiliates, any confidential
     information obtained by Executive while in the employ of the Company with
     respect to any of the Company's products, improvements, formulae, designs
     or styles,

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     processes, customers, methods of marketing or distribution, systems,
     procedures, plans, proposals, policies or methods of manufacture, the
     disclosure of which Executive knows, or should have reason to know, will be
     damaging to the Company or its subsidiaries or its affiliates, nor shall
     Executive make any false statements regarding the Company or its
     subsidiaries or its affiliates or take any other action which Executive
     knows, or should have reason to know, will be damaging to the Company or
     its subsidiaries or its affiliates; provided, however, that confidential
     information shall not include any information known generally to the public
     (other than as a result of unauthorized disclosures by the Executive) or
     any information of a type not otherwise considered confidential by persons
     engaged in the same business or a business similar to that conducted by the
     Company. Following the termination of the Executive's employment with the
     Company for any reason, the Executive shall not disclose any confidential
     information of the type described above or take any action of type
     described above except as may be required in the opinion of the Executive's
     counsel in connection with any judicial or administrative proceeding or
     inquiry. The provisions of this Section 8 shall be binding upon the
     Executive's heirs, successors and legal representatives.

          (b) Company agrees to refrain from making derogatory or defamatory
     statements about or concerning Executive.

     9. Non-Competition. During the period in which the Executive is employed by
the Company and for a period of two (2) years following any termination giving
rise to salary continuation payments pursuant to Section 5(c) or to Change of
Control Severance Benefits pursuant to Section 6(c), the Executive will not
(a) directly or indirectly own, manage, operate, control or participate in the
ownership, management, operation or control of, or be connected as an officer,
employee, partner, director or otherwise with, or have any financial interest
in, or aid or assist anyone else in the conduct of, any business which is in
substantial competition with any business conducted by the Company or by any
group, division or subsidiary of the Company in any area where such business is
being conducted at the time of such termination (provided that ownership of five
percent (5%) or less of the voting stock of any publicly held corporation shall
not constitute a violation hereof) or (b) directly or indirectly employ, solicit
for employment, or advise or recommend to any other persons that they employ or
solicit for employment any employee of the Company or any of its subsidiaries or
affiliates.

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     10. Specific Performance. The Executive acknowledges and agrees that, in
the event of a breach of Section 8 or Section 9 hereof by the Executive, the
Company would be irreparably harmed and that monetary damages would be an
inadequate remedy in favor of the Company. Accordingly, the Executive and the
Company agree that in the event of such a breach, the Company shall be entitled
to injunctive relief against the Executive.

     11. Binding Agreement. This Agreement and all obligations of the Company
hereunder shall be binding upon the successors and assigns of the Company. This
Agreement and all rights of the Executive hereunder shall inure to the benefit
of and be enforceable by the Executive's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees.

     12. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed as
follows:

         If to the Executive:

         Eric Kovats
         4532 Saddleworth Circle
         Orlando Florida  32826

         If to the Company:

         Service Merchandise Company, Inc.
         7100 Service Merchandise Drive
         Brentwood, Tennessee 37027
         Attn: General Counsel

or to such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.

     13. Withholding of Taxes. The Company may withhold from any amounts payable
under this Agreement, all federal, state, city or other taxes as shall be
required pursuant to any law or government regulation or ruling.

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     14. Governing Law. This Agreement shall be construed according to the laws
of Tennessee, without giving effect to the principles of conflicts of laws of
such State.

     15. Amendment, Modification, Waiver. This Agreement may not be amended
except by the written agreement of the parties hereto. No provisions of this
Agreement may be modified, waived or discharged unless such waiver,
modification or discharge is agreed to in writing signed by Executive and the
Company. No waiver by either party hereto at any time of any breach by the other
party hereto or compliance with any condition or provision of this Agreement to
be performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time. However, notwithstanding anything in this Agreement to the contrary, if in
the opinion of the Company's accountants, any provision of this Agreement would
preclude the use of "pooling of interest" accounting treatment for a Change of
Control transaction that (i) would otherwise qualify for such accounting
treatment and (ii) is contingent upon qualifying for such accounting treatment,
then to the extent any provision of this Agreement disqualifies the transaction
as a "pooling of interest" transaction (including, if applicable, the entire
Agreement), such provision(s) shall be null and void as of the date hereof.

     16. Binding Effect. This Agreement is personal in nature and neither of the
parties hereto shall, without the consent of the other, assign, transfer or
delegate this Agreement or any rights or obligations hereunder except as
expressly provided for herein. Without limiting the generality of the foregoing,
Executive's right to receive payments hereunder shall not be assignable,
transferable or delegable, whether by pledge, creation of a security interest or
other-wise, other than by a transfer by his will or by the laws of descent and
distribution and, in the event of any attempted assignment or transfer contrary
to this paragraph, the Company shall have no liability to pay any amount so
attempted to be assigned, transferred or delegated.

     17. Entire Contract. This Agreement constitutes the entire agreement and
supersedes all other prior agreements, employment contracts and understandings,
both written and oral, express or implied with respect to the subject matter of
this Agreement, including, without limitation, any employment agreement or any
severance or indemnification, by and between the Company and the Executive, all
of such agreements being rendered null and void by this Agreement.

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     18. Termination. This Agreement shall be terminable only upon the
occurrence of any one of the following events: (a) expiration of the Term
without Executive's employment having been previously terminated; (b) the
termination of Executive with payment in full of all the payments/benefits
described in Sections 5 or 6 hereof as appropriate; or (c) the Company (or its
successor in interest) and Executive so agree in writing; provided, however,
that the provisions of Sections 8 and 9 hereof shall survive without limitation.

                                       16

<PAGE>   17

                   IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.

                                             SERVICE MERCHANDISE COMPANY, INC.

                                             By: /s/ C. Steven Moore
                                                 -----------------------------

Accepted and Agreed:

/s/ Eric Kovats
-----------------------------
Eric Kovats

                                       17<PAGE>   1
                                                                   EXHIBIT 10.17

                              EMPLOYMENT AGREEMENT

     This Employment Agreement is made as of the 24th day of January, 2001 (the
"Agreement") by and between Service Merchandise Company, Inc., a Tennessee
corporation (the "Company"), and Michael E. Hogrefe (the "Executive").

                                    RECITALS

     WHEREAS, the Company desires to provide for the employment of the Executive
in accordance with the terms and conditions provided herein; and

     WHEREAS, the Executive wishes to perform services for the Company in
accordance with the terms and conditions provided herein.

     NOW, THEREFORE, in consideration of the premises hereof and of the mutual
promises and agreements contained herein, the parties hereto, intending to be
legally bound, hereby agree as follows:

     1. Employment. The Company hereby agrees to employ the Executive, and the
Executive hereby agrees to perform services for the Company, on the terms and
conditions set forth herein.

     2. Term. The term of employment of the Executive by the Company hereunder
shall commence effective as of January 24, 2001 (the "Effective Date"), and
shall end on January 23, 2003, unless further extended or sooner terminated as
hereinafter provided. Commencing on January 24, 2003, and on each anniversary
thereafter (each such date, an "Anniversary Date"), the term of the Executive's
employment shall automatically be extended for one additional year unless, not
later than the December 31, immediately preceding an Anniversary Date, either
party shall have given notice to the other party that it does not wish to extend
this Agreement (a "Notice of Non-Renewal"). References herein to the "Term" of
this Agreement shall refer to both the initial term and any extended term of the
Executive's employment hereunder. Notwithstanding the foregoing, if a Change of
Control (as defined in Section 6) occurs during the Term, in no event shall the
Term end prior to the end of the twenty-fourth (24th) month following the month
in which such Change of Control occurs.

     3. Position and Duties.

          (a) The Executive shall serve as Senior Vice President, Chief
Financial Officer of the Company and shall have such responsibilities, duties
and authority as are generally consistent and customary with such position.
Executive shall report solely to the Chief Executive Officer of the Company. The
Executive shall also serve, if requested by the Board of Directors (the
"Board"), as a director or officer of any of the Company's present or future
direct or indirect subsidiaries.

<PAGE>   2

          (b) During the Term, and excluding any periods of vacation and sick
leave to which the Executive is entitled, the Executive shall devote reasonable
attention and time during normal business hours to the business and affairs of
the Company and, to the extent necessary to discharge the responsibilities
assigned to the Executive under this Agreement, use the Executive's reasonable
best efforts to carry out such responsibilities faithfully and efficiently. It
shall not be considered a violation of the foregoing for the Executive to serve
on corporate, industry, civic or charitable boards or committees, so long as
such activities do not significantly interfere with the performance of the
Executive's responsibilities as an employee of the Company in accordance with
this Agreement.

     4. Compensation.

          (a) Base Salary. During the Term, the Executive shall receive an
annual base salary ("Annual Base Salary") of $300,000. The Annual Base Salary
shall be payable in accordance with the Company's regular payroll practice for
its senior executives, as in effect from time to time. During the Term, the
Annual Base Salary shall be reviewed by the Compensation Committee of the Board
for possible increase at least annually. Any increase in the Annual Base Salary
shall not limit or reduce any other obligation of the Company under this
Agreement. The Annual Base Salary shall not be reduced after any such increase,
and the term "Annual Base Salary" shall thereafter refer to the Annual Base
Salary as so increased.

          (b) Annual Bonus; Retention Program. During the Term, the Executive
shall be entitled to receive an annual bonus ("Annual Bonus") pursuant to the
Company's annual bonus plan, as in effect from time to time, and shall be
entitled to participate in the Company's Retention Program for Key Employees
(the "Program"), as modified by the Company's Enhanced Retention Program (the
"Modification"), as a Tier III employee, which Program and Modification were
approved by orders (the "Orders") of the U.S. Bankruptcy Court for the Middle
District of Tennessee (the "Court") entered on May 5, 1999 and April 5, 2000,
respectively, in connection with the Company's Chapter 11 case (the "Case").

          (c) Signing Bonus. Executive shall receive a one time signing bonus of
$100,000 upon execution of the Employment Agreement. To the extent the Executive
does not receive an Annual Bonus as referred to in sections 5(c) or 6(viii) of
this Agreement, then the Signing Bonus shall be considered the Annual Bonus.

          (d) Other Benefits. During the Term, the Executive shall be entitled
to participate in other employee benefit plans, programs and arrangements of the
Company, other than Annual Bonus plans (covered by Section 4(b) above) (the
"Benefit Plans"), now or hereinafter in effect, that are applicable to the
Company's employees generally or to its executive officers, as the case may be,
subject in and on a basis consistent with the terms, conditions and overall
administration of the Benefit Plans. During the Term, the Company shall provide
to the Executive all of the fringe benefits and perquisites that are provided to
senior executives of the Company, and the Executive shall be entitled to
participate in and receive any other fringe benefits or perquisites that become
available to the Company's senior executives. The Company shall provide to the
Executive an automobile or car allowance commensurate with that received by
other senior vice presidents of the Company. The value of the benefit received
by the

                                       2
<PAGE>   3

Executive pursuant to the previous sentence shall be subject to applicable
withholding pursuant to Section 13.

          (e) Vacation and Other Leaves. The Executive shall be entitled to
vacation in accordance with the Company's vacation policy (and to compensation
in respect of earned but unused vacation days) in the amount of four weeks per
year, and all paid holidays and personal leave days that are available generally
to executive officers of the Company.

          (f) Expenses. During the Term, the Executive shall be entitled to
receive prompt reimbursement for all reasonable and customary expenses incurred
by the Executive in performing his services hereunder, including all expenses of
travel and accommodations while engaged in business of the Company, provided
that such expenses are incurred and accounted for in accordance with the
policies and procedures established by the Company.

          (g) Services Furnished. The Company shall furnish the Executive with
office space, secretarial and/or administrative assistance, office supplies,
support services and such other facilities and services as shall be suitable to
the Executive's position and adequate for the performance of his duties
hereunder.

     5. Compensation on Termination of Employment (Except Within Two Years
Following a Change of Control).

     This Section 5 shall apply to termination of the Executive's employment,
during the Term and prior to a Change of Control (as hereinafter defined in
Section 6) and to termination of the Executive's employment more than two (2)
years following a Change of Control. This Section 5 shall not apply to
termination of Executive's employment during the Change of Control Period (as
hereinafter defined in Section 6);

          (a) Disability. If the Executive's employment with the Company is
terminated by the Executive or the Company due to the Executive's inability to
perform Executive's duties as a result of physical or mental incapacity
("Disability"), the Executive shall be paid such amounts, if any, as the
Executive is entitled to receive under the Company's disability insurance
policies then in effect for Company officers, but shall be entitled to no
further compensation or benefits (unless previously accrued under the Company's
benefits plans).

          (b) Other Termination Not Giving Rise to Salary Continuation. If the
Executive's employment shall be terminated for Cause (as hereinafter defined) or
if the Executive dies or if the Executive terminates Executive's employment for
any reason other than for a material breach of this Agreement by the Company,
the Company shall pay the Executive any installments of Executive's Annual Base
Salary as then in effect that would otherwise be due through the date on which
Executive's employment is terminated. The Company shall then have no further
obligations to the Executive under this Agreement except that in the event of
termination by death, the Executive's estate or beneficiaries, as the case may
be, shall be paid such amounts as may be payable to the Executive under the
Company's insurance policies and/or other benefit plans. For the purposes of
this Agreement, the Company shall have "Cause" to terminate the Executive's
employment upon (i) the willful engaging by the Executive in

                                        3
<PAGE>   4

misconduct materially injurious to the Company, (ii) acts of dishonesty or fraud
by the Executive, or (iii) the willful violation by the Executive of the
provisions of Section 8 or Section 9 hereof.

          (c) Termination Giving Rise to Salary Continuation. If the Company
shall terminate the Executive's employment with the Company or shall provide a
Notice of Non-Renewal for any reason other than due to the Executive's death or
Disability or for Cause, or if the Executive terminates this Agreement because
of a material breach of this Agreement by the Company, then, subject to the
compliance by the Executive with the provisions of Sections 8 and 9 hereof, the
Company shall pay, as salary continuation, to the Executive an amount equal to
two (2) times the Executive's maximum Annual Base Salary paid during the prior
five (5) year period (inclusive of the Annual Bonus paid to Executive during the
12-month period preceding the date of termination or the Annual Bonus earned by
the Executive with respect to the fiscal year immediately preceding the date of
termination, whichever Annual Bonus is higher), payable in a lump sum, but no
other compensation or benefits (unless accrued under the Company's benefit plans
prior to the date of termination of employment or as provided in Section 4(e)
hereof) shall be paid to the Executive.

          (d) Healthcare Coverage. If the Executive's employment with the
Company is terminated by the Company for any reason other than due to the
Executive's death or Disability or for Cause, the Company will reimburse the
Executive for the premium paid by the Executive for continued coverage for the
Executive (and any dependents of the Executive covered by the Company's
healthcare plans at the time the Executive's employment was terminated) under
the Company's healthcare plan pursuant to "COBRA" (or any other mandatory
healthcare continuation law then in effect), such coverage then being
substantially similar to that provided by the Company to its senior executives
and their eligible dependents. The Executive will be entitled to reimbursement
for such coverage for the period commencing with the date of termination of
employment and ending on the earlier of (i) the second anniversary of
termination of employment, or (ii) the date the Executive becomes eligible to
receive any healthcare coverage from another employer of the Executive or
Executive's spouse, or any governmental entity, that does not contain any
exclusion or limitation with respect to any pre-existing condition of the
Executive or Executive's covered dependents. If the Executive (or Executive's
dependents covered at the time of termination of employment) elects not to
continue coverage under COBRA (or any other mandatory healthcare continuation
law then in effect) or is not eligible to continue coverage under such
healthcare continuation law, and is otherwise eligible under this Section 5(d),
the Company will reimburse the Executive for the cost of purchasing
substantially similar coverage or a supplement required to achieve substantially
similar coverage under another arrangement approved by the Company for the same
period; however, such reimbursement shall be limited to the then current premium
charged to others by the Company for substantially similar coverage under COBRA
(or other mandatory healthcare continuation law then in effect). Any amount
payable to the Executive shall be subject to withholding of applicable taxes as
provided in Section 13 hereof. In the event of Executive's death following
termination giving rise to the benefit described in this Section 5(d), but
before the expiration of such benefits, Executive's dependents shall be entitled
to such benefits.

                                       4
<PAGE>   5

          (e) Sole Remedy. The Executive hereby agrees that amounts payable
under this Section 5 shall be Executive's sole and exclusive remedy against the
Company on account of termination of employment during the Term and prior to a
Change of Control and on account of termination of employment more than two (2)
years following a Change of Control.

     6. Compensation on Termination of Employment Within Two Years Following A
Change of Control.

     This Section 6 shall apply to termination of Executive's employment during
the "Change of Control Period" (as defined in this Section 6). This Section 6
shall not apply to termination of Executive's employment prior to a Change of
Control or more than two (2) years following a Change of Control:

          (a) Definition of Certain Terms.

               (i) "Good Reason" shall mean the occurrence or continuation,
          without consent of Executive, after a Change of Control, of any of the
          following events within the Change of Control Period:

                    (A) the assignment to Executive of any duties inconsistent
               with the customary powers and duties that Executive held
               immediately prior to the Change of Control, or an adverse change
               in the status, position or conditions of Executive's employment
               or the nature of Executive's responsibilities in effect
               immediately prior to such Change of Control, or any removal of
               Executive from, or any failure to re-elect Executive to, any of
               such positions;

                    (B) a reduction by the Company in Executive's Annual Base
               Salary as in effect - immediately prior to such Change of
               Control;

                    (C) the relocation of Executive's principal office to a
               location outside a 35 mile radius from Executive's principal
               office immediately prior to such Change of Control, except for
               required travel on the Company's business to an extent
               substantially consistent with Executive's business travel
               obligations immediately prior to such Change of Control;

                    (D) the failure by the Company to continue in effect any
               benefit or compensation plan in which Executive participates
               immediately prior to the Change of Control which is material to
               Executive's total compensation, including but not limited to any
               stock or stock option, employee stock ownership, bonus,
               insurance, disability and vacation plans which the Company
               currently has or any substitute or additional plans adopted prior
               to the Change of Control, unless an equitable arrangement
               (embodied in an ongoing substitute or alternative plan or plans)
               has been made with respect to such plan, or the failure by the
               Company to continue Executive's participation therein (or in such
               substitute or alternative plan) on a basis not materially less
               favorable, both in terms of the amount of benefits provided and
               the level of Executive's participation relative to other
               participants, as in existence immediately prior to such Change of
               Control; or

                                       5
<PAGE>   6

                    (E) the failure of the Company to obtain an agreement from
               any successor to assume and agree to perform this Agreement as
               contemplated herein.

               (ii) A "Change of Control" shall be deemed to have taken place if
          (i) any person or entity, including a "group" as defined in Section
          13(d)(3) of the Securities and Exchange Act of 1934, other than
          Company or a wholly-owned subsidiary thereof or any employee benefit
          plan of Company or any of its subsidiaries, becomes the beneficial
          owner of the Company securities having 20% or more of the combined
          voting power of the then outstanding securities of the Company that
          may be cast for the election of directors of the Company (other than
          as a result of an issuance of securities initiated by the Company in
          the ordinary course of business); or (ii) as the result of, or in
          connection with, any cash tender or exchange offer, merger or other
          business combination, sale of assets or contested election, or any
          combination of the foregoing transactions, less than a majority of the
          combined voting power of the then outstanding securities of the
          Company or any successor corporation or entity entitled to vote
          generally in the election of the directors of the Company or such
          other corporation or entity after such transaction is held in the
          aggregate by the holders of the Company's securities entitled to vote
          generally in the election of directors of the Company immediately
          prior to such transaction; or (iii) the following individuals cease
          for any reason to constitute a majority of the number of directors
          then serving: individuals who, as of the Effective Date, constitute
          the Board and any new director (other than a director whose initial
          assumption of office is in connection with an actual or threatened
          election contest, including but not limited to, a consent
          solicitation, relating to the election of directors of the Company)
          whose appointment or election by the Board or nomination for election
          by the Company's shareholders, was approved or recommended by a vote
          of at least two-thirds of the directors of the Company then still in
          office who were directors of the Company on the Effective Date or
          whose appointment, election or nomination for election was previously
          so approved or recommended; provided, however, that a "Change of
          Control" shall not be deemed to have taken place if any of the events
          specified (i), (ii) or (iii) of this paragraph occur in connection
          with the substantial consummation of a confirmed plan of
          reorganization under Chapter 11 of the Bankruptcy Code prosecuted by
          the Company.

               (iii) "Change of Control Period" shall mean the two (2) year
          period following a Change of Control.

               (iv) "Change of Control Severance Benefits" shall mean all of the
          following payments:

                    (A) any installments of Executive's Annual Base Salary
               through the date of termination of employment at the rate in
               effect at the time the Notice of Termination is given,

                    (B) the Special Termination-Payment; and

                    (C) the Medical Benefits.

                                       6
<PAGE>   7

               (v) "Change of Control Date" shall mean the date on which a
          Change of Control occurs.

               (vi) "Medical Benefits" shall mean the reimbursement for
          continued medical coverage for Executive and Executive's dependents
          described in Section 5(d) hereof.

               (vii) "Notice of Termination" shall refer to written notice
          described in Section 6(d) indicating the specific termination
          provision of this Agreement relied upon, setting forth in reasonable
          detail the facts and circumstances claimed to provide the basis for
          termination of Executive's employment under the provision so indicated
          and stating the date of termination.

               (viii) "Special Termination Payment" shall mean an amount payable
          in a single lump sum equal to the product of (x) an amount equal to
          the Executive's maximum Annual Base Salary paid in any year of the
          five (5) year period preceding the date of termination (inclusive of
          the Annual Bonus paid to Executive during the 12-month period
          preceding the date of termination or the Annual Bonus earned by the
          Executive with respect to the fiscal year immediately preceding the
          date of termination, whichever Annual Bonus is higher), multiplied by
          (y) the number three (3), except that in the event that the Change in
          Control is the result of a liquidation of the Company, the amount
          specified in (x) will be multiplied by (y) the number two (2) instead
          of the number three (3).

          (b) Termination Not Giving Rise to Special Termination Payments or
Medical Benefits. If Executive's employment is terminated during the Change of
Control Period for Cause (as defined in Section 5(b), or on account of
Disability (as defined in Section 5(a)), or if Executive dies during the Change
of Control Period, or if Executive terminates Executive's employment during the
Change of Control Period without Good Reason, the Company shall pay to Executive
any installments of Executive's Annual Base Salary as then in effect that would
otherwise be due through the date on which Executive's employment is terminated.
The Company shall then have no further obligations to the Executive under this
Agreement (unless accrued under the Company's benefit plans) except that in the
event of termination by death, the Executive's estate or beneficiaries, as the
case may be, shall be paid such amounts as may be payable to the Executive under
the Company's insurance policies and/or other benefit plans, and except that in
the event of termination by Disability, the Executive shall be paid such amounts
as Executive is entitled to receive under the Company's disability insurance
policies and plans then in effect covering the Executive.

          (c) Termination Giving Rise to Change of Control Severance Benefits.
If the Executive's employment is terminated or a Notice of Non-Renewal is given
by the Company during the Change of Control Period for any reason other than
Cause, death of the Executive or Disability, or if the Executive terminates his
employment during the Change of Control Period for Good Reason, then Executive
shall be entitled to receive the Change of Control Severance Benefits, all of
which (except the Medical Benefits) shall be paid to Executive within ten (10)
days following the date of termination.

                                       7
<PAGE>   8

          (d) Notice of Termination. Any termination of Executive's employment
by the Company or by Executive pursuant to this Section 6 shall be communicated
by written notice of termination (the "Notice of Termination") to the other
party hereto, which shall indicate the specific termination provision in the
Agreement relied upon, shall set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of Executive's
employment and shall state the date of termination.

          (e) Sole Remedy. The Executive hereby agrees that the Change of
Control Severance Benefits shall be Executive's sole and exclusive remedy
against the Company or any successor on account of termination of employment
during the Change of Control Period.

     7. Certain Reduction in Payments by the Company.

          (a) Definition of Certain Terms.

               (i) A "Payment" shall mean any payment or distribution in the
          nature of compensation to or for the benefit of Executive, whether
          paid or payable pursuant to this Agreement or otherwise.

               (ii) An "Agreement Payment" shall mean a Payment paid or payable
          on account of termination of employment during the Change in Control
          Period pursuant to Section 6 of this Agreement (disregarding the
          reduction provided by Section 7(b)).

               (iii) "Net After Tax Receipt" shall mean the Present Value (as
          defined below) of all Payments that are contingent on a Change of
          Control within the meaning of Section 280G of the Internal Revenue
          Code of 1986, as amended (the "Code"), net of all taxes imposed on
          Executive with respect thereto under Sections I and 4999 of the Code,
          determined by applying the highest marginal rate under Section I of
          the Code which applied to Executive's taxable income for the
          immediately preceding taxable year.

               (iv) "Present Value" shall mean such value determined in
          accordance with Section 280G(d)(4) of the Code.

          (b) Limitation on Agreement Payments. It is intended that all
Agreement Payments hereunder, together with all other Payments to Executive
contingent upon or in connection with a Change of Control, are reasonable
compensation for Executive's service to Company and its subsidiaries.
Notwithstanding the foregoing, should Company determine, based upon the opinion
of the independent accounting advisors of Company immediately prior to the
Change of Control ("Accounting Firm"), that the Agreement Payments and other
Payments, together with any other amounts received by Employee that must be
included in such determination, would result in the payment of an "excess
parachute payment" as defined in Section 280G of the Code, then Company will
reduce the Agreement Payments to the minimum extent necessary so that no portion
of the aggregate Payments would result in the payment of an "excess parachute
payment;" provided, however, that such reduction will be made if, but only if,
the value of all such Payments (without regard to the foregoing reduction) would
result in Net After Tax Receipts which are less than the Net After Tax Receipts
that would result after taking into account any such reduction.

                                        8
<PAGE>   9

          (c) Opinion of Accounting Firm. Company may reduce the Agreement
Payments pursuant to this Section 7 only if within thirty (30) days of
Executive's termination it provides Executive with an opinion of the Accounting
Firm that Executive will be considered to have received "excess parachute
payments" as defined in Section 280G of the Code if Executive were to receive
the full amounts owing pursuant to the terms of this Agreement and that the
reduced amount proposed to be paid by the Company will result in Net After Tax
Receipts that are equal to or greater than the Net After Tax Receipts which
would result from reduction in the Agreement Payments by any other amount.

     8. Unauthorized Disclosure.

          (a) During the period in which the Executive is employed by the
Company, the Executive shall not, without the prior written consent of the
Board, or a person authorized thereby, disclose to any person, other than a
person to whom disclosure is necessary or appropriate in connection with the
performance by the Executive of Executive's duties as an officer of the Company,
or its subsidiaries or its affiliates, any confidential information obtained by
Executive while in the employ of the Company with respect to any of the
Company's products, improvements, formulae, designs or styles, processes,
customers, methods of marketing, or distribution, systems, procedures, plans,
proposals, policies or methods of manufacture, the disclosure of which Executive
knows, or should have reason to know, will be damaging to the Company or its
subsidiaries or its affiliates, nor shall Executive make any false statements
regarding the Company or its subsidiaries or its affiliates or take any other
action which Executive knows, or should have reason to know, will be damaging to
the Company or its subsidiaries or its affiliates; provided, however, that
confidential information shall not include any information known generally to
the public (other than as a result of unauthorized disclosures by the Executive)
or any information of a type not otherwise considered confidential by persons
engaged in the same business or a business similar to that conducted by the
Company. Following the termination of the Executive's employment with the
Company for any reason, the Executive shall not disclose any confidential
information of the type described above or take any action of type described
above except as may be required in the opinion of the Executive's counsel in
connection with any judicial or administrative proceeding or inquiry. The
provisions of this Section 8 shall be binding upon the Executive's heirs,
successors and legal representatives.

          (b) Company agrees to refrain from making derogatory or defamatory
statements about or concerning Executive.

     9. Non-Competition. During the period in which the Executive is employed by
the Company and for a period of two (2) years following any termination giving
rise to salary continuation payments pursuant to Section 5(c) or to Change of
Control Severance Benefits pursuant to Section 6(c), the Executive will not (a)
directly or indirectly own, manage, operate, control or participate in the
ownership, management, operation or control of, or be connected as an officer,
employee, partner, director or otherwise with, or have any financial interest
in, or aid or assist anyone else in the conduct of any business which is in
substantial competition with any business conducted by the Company or by any
group, division or subsidiary of the Company in any area where such business is
being conducted at the time of such termination (provided that

                                        9
<PAGE>   10

ownership of five percent (5%) or less of the voting stock of any publicly held
corporation shall not constitute a violation hereof) or (b) directly or
indirectly employ, solicit for employment, or advise or recommend to any other
persons that they employ or solicit for employment any employee of the Company
or any of its subsidiaries or affiliates.

     10. Specific Performance. The Executive acknowledges and agrees that, in
the event of a breach of Section 8 or Section 9 hereof by the Executive, the
Company would be irreparably harmed and that monetary damages would be an
inadequate remedy in favor of the Company. Accordingly, the Executive and the
Company agree that in the event of such a breach, the Company shall be entitled
to injunctive relief against the Executive.

     11. Binding Agreement. This Agreement and all obligations of the Company
hereunder shall be binding upon the successors and assigns of the Company. This
Agreement and all rights of the Executive hereunder shall inure to the benefit
of and be enforceable by the Executive's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees.

     12. Notice. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed as
follows:

     If to the Executive:

     Michael E. Hogrefe
     1518 Wesley Court
     Brentwood, Tennessee 37027

     If to the Company:

     Service Merchandise Company, Inc.
     7100 Service Merchandise Drive
     Brentwood, Tennessee 37027
     Attn: General Counsel

or to such other address as any party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.

     13. Withholding of Taxes. The Company may withhold from any amounts payable
under this Agreement, all federal, state, city or other taxes as shall be
required pursuant to any law or government regulation or ruling.

     14. Governing Law. This Agreement shall be construed according to the laws
of Tennessee, without giving affect to the principles of conflicts of laws of
such State.

     15. Amendment, Modification, Waiver. This Agreement may not be amended
except by the written agreement of the parties hereto. No provisions of this
Agreement may be modified, waived or discharged unless such waiver, modification
or discharge is agreed to in

                                       10
<PAGE>   11

writing signed by Executive and the Company. No waiver by either party hereto at
any time of any breach by the other party hereto or compliance with any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. However, notwithstanding anything
in this Agreement to the contrary, if the opinion of the Company's accountants,
any provision of this Agreement would preclude the use of "pooling of interest"
accounting treatment for a Change of Control transaction that (i) would
otherwise qualify for such accounting treatment and (ii) is contingent upon
qualifying for such accounting treatment, then to the extent any provision of
this Agreement disqualifies the transaction as a "pooling of interest"
transaction (including, if applicable, the entire Agreement), such provision(s)
shall be null and void as of the date hereof.

     16. Binding Effect. This Agreement is personal in nature and neither of the
parties hereto shall, without the consent of the other, assign, transfer or
delegate this Agreement or any rights or obligations hereunder except as
expressly provided for herein. Without limiting the generality of the foregoing,
Executive's right to receive payments hereunder shall not be assignable,
transferable or delegable, whether by pledge, creation of a security interest or
otherwise, other than by a transfer by his will or by the laws of descent and
distribution and, in the event of any attempted assignment or transfer contrary
to this paragraph, the Company shall have no liability to pay any amount so
attempted to be assigned, transferred or delegated.

     17. Entire Contract. This Agreement constitutes the entire agreement and
supersedes all other prior agreements, employment contracts and understandings,
both written and oral, express or implied with respect to the subject matter of
this Agreement, including, without limitation, any employment agreement or any
severance or indemnification, by and between the Company and the Executive, all
of such agreements being rendered null and void by this Agreement.

     18. Termination. This Agreement shall be terminable only upon the
occurrence of any one of the following events: (a) expiration of the Term
without Executive's employment having been previously terminated; (b) the
termination of Executive with payment in full of all the payments/benefits
described in Section 5 or 6 hereof as appropriate; or (c) the Company (or its
successor in interest) and Executive so agree in writing; provided, however,
that the provisions of Sections 8 and 9 hereof shall survive without limitation.

                                       11
<PAGE>   12

     IN WITNESS WHEREOF, the parties herein have executed this Agreement as of
the date first above written.

                                         SERVICE MERCHANDISE COMPANY, INC.

                                         By:    /s/ C. Steven Moore
                                             -------------------------------

Accepted and Agreed:

  /s/ Michael E. Hogrefe
---------------------------

                                       12

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