KIRKLANDS INC (Form: S-1/A, Received: 06/05/2002 17:23:14)

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 5, 2002

REGISTRATION NO. 333-86746

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

AMENDMENT NO. 1

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 KIRKLAND'S, INC.
(Exact name of Registrant as specified in its charter)

            TENNESSEE                                 5990                                62-1287151
   (State or other jurisdiction           (Primary Standard Industrial                 (I.R.S. Employer
of incorporation or organization)         Classification Code Number)                Identification No.)

805 N. PARKWAY
JACKSON, TENNESSEE 38305
(731) 668-2444
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)

ROBERT E. ALDERSON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
805 N. PARKWAY
JACKSON, TENNESSEE 38305
(731) 668-2444
(Name, address, including zip code, and telephone
number, including area code, or agent for service)

COPIES TO:

  BARRY M. ABELSON, ESQ.                                   VALERIE FORD JACOB, ESQ.
  ROBERT A. FRIEDEL, ESQ.                          FRIED, FRANK, HARRIS, SHRIVER & JACOBSON
    PEPPER HAMILTON LLP                                       ONE NEW YORK PLAZA
   3000 TWO LOGAN SQUARE                                      NEW YORK, NY 10004
   18TH AND ARCH STREETS                                        (212) 859-8000
PHILADELPHIA, PA 19103-2799
      (215) 981-4000

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as

practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ]

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ]

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY DETERMINE.

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.

SUBJECT TO COMPLETION

PRELIMINARY PROSPECTUS DATED JUNE 5, 2002

PROSPECTUS

(KIRKLAND'S, INC. LOGO)

COMMON STOCK

This is Kirkland's, Inc.'s initial public offering. We are selling shares and the selling shareholders are selling shares. The underwriters are offering all of the shares in the U.S. and Canada.

We expect the public offering price to be between $ and $ per share. Currently, no public market exists for the shares. After pricing of the offering, we expect that the shares will be quoted on the Nasdaq National Market under the symbol "KIRK."

INVESTING IN THE COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE

"RISK FACTORS" SECTION BEGINNING ON PAGE 9 OF THIS PROSPECTUS.

                                                              PER SHARE               TOTAL
                                                              ---------               -----
Public offering price.......................................     $                      $
Underwriting discount.......................................     $                      $
Proceeds, before expenses, to Kirkland's, Inc...............     $                      $
Proceeds, before expenses, to the selling shareholders......     $                      $

Approximately $ million of Kirkland's net proceeds from this offering will be used to repurchase stock held by affiliates of Kirkland's. See the "Use of Proceeds" section beginning on page 19 of this prospectus.

The underwriters may also purchase up to an additional shares from the selling shareholders at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover overallotments.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The shares will be ready for delivery on or about , 2002.

MERRILL LYNCH & CO.
CIBC WORLD MARKETS

SUNTRUST ROBINSON HUMPHREY
U.S. BANCORP PIPER JAFFRAY

The date of this prospectus is , 2002.

KIRKLAND'S, INC.

STORE LOCATIONS

[Map of states where Kirkland's stores are located, and photographs depicting scenes inside typical Kirkland's stores.]

TABLE OF CONTENTS

                                                               PAGE
                                                               ----
Prospectus Summary..........................................      1
Risk Factors................................................      9
Disclosure Regarding Forward-Looking Statements.............     18
About This Prospectus.......................................     18
Use of Proceeds.............................................     19
Dividend Policy.............................................     20
Dilution....................................................     21
Capitalization..............................................     23
Selected Consolidated Financial Data........................     24
Management's Discussion and Analysis of Financial Condition
  and Results of Operations.................................     28
Business....................................................     41
Management..................................................     54
Related Party Transactions..................................     66
Principal and Selling Shareholders..........................     72
Description of Capital Stock................................     77
Shares Eligible for Future Sale.............................     82
United States Tax Consequences to Non-United States
  Holders...................................................     84
Underwriting................................................     88
Legal Matters...............................................     91
Experts.....................................................     91
Where You Can Find More Information.........................     92
Index to Financial Statements...............................    F-1
Unaudited Pro Forma Consolidated Condensed Financial
  Statements................................................    P-1

You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer and sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

PROSPECTUS SUMMARY

The following summary highlights information contained elsewhere in this prospectus. We urge you to read this entire prospectus carefully, including the "risk factors" section. In this prospectus, "Kirkland's," "we," "our" and "us" refer to Kirkland's, Inc. and its subsidiaries, unless the context requires otherwise. On January 1, 2001, we changed our fiscal reporting year from a calendar year to a 52/53-week basis ending on the Saturday closest to January
31. As used herein, the term "fiscal 2001" refers to the 52 weeks ended February 2, 2002 and any reference to any fiscal year prior to fiscal 2001 refers to the 12 months ended December 31 of that fiscal year. Adjusted EBITDA is defined in "Summary Consolidated Financial and Other Data."

KIRKLAND'S

We are a leading specialty retailer of home decor in the United States, operating 236 stores in 28 states. Our stores present a broad selection of distinctive merchandise, including framed art, mirrors, candles, lamps, picture frames, accent rugs, garden accessories and artificial floral products. Our stores also offer an extensive assortment of holiday merchandise, as well as items carried throughout the year suitable for giving as gifts. In addition, we use innovative design and packaging to market home decor items as gifts. We provide our predominantly female customers an engaging shopping experience characterized by a diverse, ever-changing merchandise selection at surprisingly attractive prices. Our stores offer a unique combination of style and value that has led to our emergence as a leader in home decor and has enabled us to develop a strong customer franchise. As a result, we have achieved substantial growth over the last five fiscal years. Since the beginning of 1997, our sales have grown at a compounded annual growth rate of 19%. For the fiscal year ended February 2, 2002, we recorded net sales of $307.2 million and Adjusted EBITDA of $35.2 million, or 11.4% of net sales. For the fiscal quarter ended May 4, 2002, we recorded net sales of $66.2 million and Adjusted EBITDA of $5.0 million, or 7.6% of net sales.

Kirkland's was co-founded in 1966 by our current Chairman, Carl Kirkland. We opened our first store in Jackson, Tennessee and have grown steadily thereafter. Although originally focused in enclosed malls in the Southeast, we have expanded beyond that region and also have begun to open stores in selected non-mall venues. Currently, over 40% of our stores are located outside the Southeast, including 60 of the 100 new stores opened since the beginning of fiscal 1997. We currently operate in major metropolitan markets like Houston, Texas and Atlanta, Georgia, middle markets such as Birmingham, Alabama and Buffalo, New York and smaller markets such as Appleton, Wisconsin and Panama City, Florida.

As we more than doubled our store base from 104 stores at the end of fiscal 1995 to 226 stores at the end of fiscal 1999, we realized the need to strengthen our infrastructure and enhance several aspects of our operations in order to execute a rapid national expansion. Beginning in late 1999, we undertook a series of initiatives that enabled us to make faster and smarter inventory buying and distribution decisions, to manage the flow of merchandise to our stores more efficiently and to improve overall financial performance. These initiatives included:

COMPLETING KEY INVESTMENTS IN INFORMATION TECHNOLOGY. Since late 1999, we have invested $6.5 million in several key information systems projects that provide our decision makers with better tools to increase sales, improve operational efficiency, control and distribute inventory and monitor critical performance indicators on a daily basis.

DEVELOPING A MORE SCALABLE DISTRIBUTION INFRASTRUCTURE. In March 2001,

we consolidated our central distribution operations into one 303,000-square-foot, leased facility in Jackson, Tennessee, which allowed us to increase our dollar volume of centrally distributed merchandise by 25% from fiscal 2000 to fiscal 2001. In May 2002, we expanded our central distribution operations through the lease of a 168,000-square-foot warehouse near our other distribution facility. These modern facilities, together with other improvements to our supply chain, have helped us to keep our stores stocked with fresh merchandise and to reduce significantly the cost of managing inventories at the store level.

STRENGTHENING EXECUTIVE MANAGEMENT. Since the second half of 1999, we have added six senior managers, including key hires in merchandising, store operations and information technology. These additions, along with several other key hires and promotions, have broadened the abilities of our management team and have provided leadership to key areas of our business. We believe our management team has valuable experience both from Kirkland's and from other national retailers.

IMPROVING STORE-LEVEL OPERATING PERFORMANCE. In January 2001, we instituted a plan to improve sales, increase cash flow and return our stores to higher levels of profitability. The cornerstone of this plan was to reduce store-level inventories and improve inventory turnover. We also intensified our efforts to control and lower store operating expenses and close under-performing stores.

We believe the convergence of these operational initiatives led to the significant improvement in our fiscal 2001 operating results as compared to fiscal 2000. For fiscal 2001, our comparable store net sales increased 13.3% over the 53-week period ended February 3, 2001 and our Adjusted EBITDA margin expanded to 11.4% from 7.6% in fiscal 2000. Net cash provided by operating activities increased to $37.5 million as compared to $1.3 million in fiscal 2000, and inventory turnover in fiscal 2001 increased to 3.48x as compared to 2.45x in fiscal 2000. As evidenced by the improvement in our operating results, we believe these initiatives have positioned us to expand our proven retail concept and strengthen our position as a leading specialty retailer of home decor in the United States.

KEY OPERATING STRENGTHS

Our goal is to be the leading specialty retailer of home decor in each of our markets. We believe the following elements of our business strategy differentiate us from our competitors and position us for profitable growth:

ITEM-FOCUSED MERCHANDISING. While our stores contain items covering a broad range of complementary product categories, we emphasize key items within our targeted categories rather than merchandising complete product classifications. Although we do not attempt to be a fashion leader, our experienced buyers work closely with our vendors to identify and develop stylish merchandise reflecting the latest trends. We estimate that over 60% of our merchandise is designed or packaged exclusively for Kirkland's, which distinguishes us in the marketplace and enhances our margins.

EVER-CHANGING MERCHANDISE MIX. We believe our ever-changing merchandise mix of over 5,000 stock keeping units, or "SKUs," creates an exciting "treasure hunt" environment, encouraging strong customer loyalty and frequent return visits to our stores. The merchandise in our stores typically is traditionally styled for broad market appeal, yet it reflects an understanding of our customer's desire for newness and freshness.

STIMULATING VISUAL PRESENTATION. Our stores have a distinctive, "interior design" look that helps customers visualize the merchandise in their own homes and inspires decorating and gift-giving ideas. Using multiple merchandise arrangements to simulate home settings, we group complementary merchandise creatively throughout the store, rather than displaying products strictly by category or product type. We believe this cross-category merchandising strategy encourages customers to browse for longer periods of time, promoting add-on sales.

STRONG VALUE PROPOSITION. Our customers regularly experience the satisfaction of paying noticeably less for items similar or identical to those sold by other retail stores or through catalogs. This strategy of providing a unique combination of style and value is an important element in making Kirkland's a destination store. While we carry items in our stores that sell for several hundred dollars, most items sell for under $50 and are perceived by our customers as affordable luxuries.

FLEXIBLE APPROACH TO REAL ESTATE. Our stores operate successfully across a wide spectrum of different regions, market sizes and real estate venues. The flexibility of our concept enables us to select the most promising real estate opportunities that meet requisite economic and demographic criteria within our target markets.

GROWTH STRATEGY

Key elements of our growth strategy are outlined below:

OPENING NEW STORES USING OUR PROVEN STORE MODEL. Over the past six years, we have more than doubled our store base, principally through new store openings. We intend to continue opening new stores both in existing and new markets. We believe there are currently more than 800 additional locations in the United States that could support a Kirkland's store. Although our rate of expansion will depend on the continued availability of adequate capital, we expect to open approximately 15 new stores during fiscal 2002, two of which have been opened through May 4, 2002, and approximately 35 new stores during fiscal 2003.

We believe our proven store model produces strong store-level cash flow and provides an attractive store-level return on investment. In fiscal 2001, our average store generated net sales of approximately $1.3 million and store-level EBITDA of approximately $227,000, or 17.4% of net sales. The average first full year cash return on investment for the 93 stores opened from 1997 through 2000 was approximately 47%.

INCREASING STORE PRODUCTIVITY. We plan to increase our sales per square foot and store profitability by leveraging our recent investments in information systems and central distribution, which together contributed to our 18.5% increase in net sales and our 15.1% increase in average net sales per square foot in fiscal 2001. We also believe that our store productivity will benefit from our strong customer franchise, our continuing efforts to enhance the Kirkland's brand, and favorable consumer and demographic trends.

The future success of our operating and growth strategies is subject to risks. See "Risk Factors" and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of the common stock.

We are incorporated in Tennessee, our principal executive offices are located at 805 N. Parkway, Jackson, Tennessee 38305, and our telephone number is
(731) 668-2444. Our Internet web site address is www.kirklands.com. The information contained or incorporated in our web site is not a part of this prospectus.

THE OFFERING

Common stock offered:
By us..........................
By the selling shareholders....

Total.......................

Shares outstanding after the
offering.........................

Use of proceeds..................    We estimate that our net proceeds from this
                                     offering will be approximately $
                                     million. We intend to use these net

proceeds principally to:

- repay certain indebtedness, including all of our outstanding subordinated debt and a portion of our new revolving credit facility; and

- purchase a portion of the outstanding shares of Class A Preferred Stock, Class B Preferred Stock, Class C Preferred Stock, Class D Preferred Stock and common stock.

We will not receive any proceeds from the sale of shares of common stock by the selling shareholders. See "Use of Proceeds."

Risk factors.....................    See "Risk Factors" and other information
                                     included in this prospectus for a
                                     discussion of factors you should carefully
                                     consider before deciding to invest in
                                     shares of the common stock.

Proposed Nasdaq symbol...........    "KIRK"

The number of shares outstanding after the offering is based on an assumed initial public offering price of $ per share (the midpoint of the range on the front cover of this prospectus). The number of shares of common stock to be issued to existing shareholders upon conversion of their preferred stock will be determined by reference to the actual initial public offering price. See "Related Party Transactions - Pre-Offering Transactions." The number of shares outstanding after the offering excludes an aggregate of shares of common stock reserved for issuance under our 1996 Executive Incentive and Non-Qualified Stock Option Plan, 2002 Incentive Plan and Employee Stock Purchase Plan. Options to purchase 13,287 shares of common stock will be outstanding upon completion of this offering, of which options to purchase 4,087 shares will be exercisable upon completion of this offering.

Unless the context otherwise requires, all information in this prospectus
(i) gives retroactive effect to a -for-one stock split of the common stock which will occur immediately prior to the completion of this offering, and (ii) assumes that this offering is consummated at an initial public offering price of $ per share (the midpoint of the range on the front cover of this prospectus) on , 2002. See "Use of Proceeds" and "Related Party Transactions - Pre-Offering Transactions."

PRE-OFFERING TRANSACTIONS

The following transactions will occur immediately prior to the completion of this offering: (i) a -for-one stock split of the common stock, (ii) an amendment and restatement of our charter, which will provide for an authorized capitalization of 100 million shares of common stock and 10 million shares of preferred stock, (iii) the exercise of all of our outstanding warrants and the resulting purchase of an aggregate of 38,124 shares of common stock at an exercise price of $0.01 per share, (iv) the repurchase of shares of common stock and/or Class A, Class B, Class C and Class D Preferred Stock from certain of our shareholders (assuming an initial public offering price of $ , an aggregate of shares of common stock, shares of Class A Preferred Stock, shares of Class B Preferred Stock, shares of Class C Preferred Stock and shares of Class D Preferred Stock will be repurchased at an aggregate price of $ ), (v) the exchange of $7.9 million of the aggregate stated value of 258,425 shares of Class C Preferred Stock for shares of common stock (assuming an initial public offering price of $ ) and (vi) the conversion in accordance with our charter of the stated value and accrued dividends of the shares of our Class A, Class B and Class D Preferred Stock not repurchased by us as described in (iv) above into shares of common stock. The number of shares of common stock to be issued upon conversion of the Class A, Class B and Class D Preferred Stock will equal the aggregate stated value plus accrued dividends on the preferred stock to be converted, divided by the actual initial public offering price. Assuming an initial public offering price of $ (the midpoint of the range on the front cover of this prospectus) and a consummation of this offering on , shares of common stock will be issued to existing shareholders for their preferred stock. All of these transactions are herein collectively referred to as the "Pre-Offering Transactions." See "Use of Proceeds" and "Related Party Transactions - Pre-Offering Transactions."

SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

The following summary consolidated financial data for the fiscal years ended December 31, 1997, 1998, 1999 and 2000 and for the fiscal year ended February 2, 2002 presented below under the captions "Statement of Operations Data" and "Other Financial Data" have been derived from our audited consolidated financial statements for those periods. The following summary consolidated financial data for the fiscal years ended December 31, 1997, 1998, 1999 and 2000, the fiscal year ended February 2, 2002 and the 13-week periods ended May 5, 2001 and May 4, 2002 presented below under the caption "Store Data" have been derived from internal records of our operations. The following summary consolidated financial data for the 13-week period ended May 5, 2001 and as of and for the 13-week period ended May 4, 2002 presented below under the captions "Statement of Operations Data," "Other Financial Data" and "Balance Sheet Data" have been derived from our unaudited consolidated financial statements, which, in our opinion, include all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the information set forth therein. You should read the information set forth below in conjunction with other sections of this prospectus, including "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes.

                                                                                           13 WEEKS ENDED
                                        YEAR ENDED DECEMBER 31,            YEAR ENDED    ------------------
                               -----------------------------------------   FEBRUARY 2,    MAY 5,    MAY 4,
                                 1997       1998       1999       2000       2002(1)       2001      2002
                               --------   --------   --------   --------   -----------   --------   -------
                               (IN THOUSANDS, EXCEPT SHARE, PER SHARE AND STORE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales....................  $153,584   $192,250   $236,622   $259,240    $307,213     $ 55,961   $66,184
Gross profit.................    56,706     70,386     82,518     87,014     107,150       15,239    21,899
Depreciation and
  amortization...............     3,141      4,401      5,969      6,522       6,370        1,372     1,653
Non-cash stock compensation
  charge(2)..................        --         --         --         --         578           --     1,140
Operating income (loss)......    17,805     20,165     18,655     13,070      28,209       (1,512)    2,251
Interest expense:
  Senior, subordinated and
    other notes payable......     7,990      9,254     10,232     11,221       9,759        2,607     1,486
  Class C Preferred Stock....     1,800      1,541      1,647      1,850       2,007          499       544
  Amortization of debt issue
    costs....................     1,001      1,009      1,307      1,305       1,308          252       366
  Accretion of common stock
    warrants(3)..............       389         --         --         --       7,759           --        --
Net income (loss)............     3,922      6,427      4,059     (1,315)      4,579       (2,725)      (52)
PRO FORMA DATA:
Pro forma as adjusted net
  income(4)..................                                               $                       $
                                                                           -----------              -------
Pro forma as adjusted
  earnings per common
  share(4)...................                                               $                       $
                                                                           ===========              =======
Pro forma as adjusted shares
  outstanding(4).............
                                                                           ===========              =======
OTHER FINANCIAL DATA:
Gross profit margin(5).......      36.9%      36.6%      34.9%      33.6%       34.9%        27.2%     33.1%
Adjusted EBITDA(6)...........  $ 20,946   $ 24,566   $ 24,624   $ 19,592    $ 35,157         (140)    5,044
Net cash provided by (used
  in) operating activities...  $  8,669   $  4,326   $ 12,945   $  1,336    $ 37,510      (11,834)   (3,680)
Net cash (used in) investing
  activities.................    (5,479)   (14,669)   (10,825)    (5,981)     (4,724)      (1,406)   (1,785)
Net cash (used in) provided
  by financing activities....    (3,537)    13,658     (3,370)    19,855     (29,949)        (954)   (1,175)

                                                                                           13 WEEKS ENDED
                                        YEAR ENDED DECEMBER 31,            YEAR ENDED    ------------------
                               -----------------------------------------   FEBRUARY 2,    MAY 5,    MAY 4,
                                 1997       1998       1999       2000       2002(1)       2001      2002
                               --------   --------   --------   --------   -----------   --------   -------
                               (IN THOUSANDS, EXCEPT SHARE, PER SHARE AND STORE DATA)
STORE DATA:
Comparable store net sales
  increase(7)................       5.2%       1.0%       3.7%       0.6%       13.3%         3.9%     18.0%
Number of stores at the end
  of period(8)...............       138        198        226        240         234          235       236
Average net sales per store
  (in thousands)(9)..........  $  1,178   $  1,169   $  1,111   $  1,112    $  1,307
Average gross square footage
  per store(10)..............     4,186      4,392      4,364      4,437       4,528
Average net sales per square
  foot(9)(10)................  $    281   $    266   $    255   $    251    $    289

                                                                           AS OF MAY 4, 2002
                                                              -------------------------------------------
                                                                                             PRO FORMA
                                                               ACTUAL     PRO FORMA(11)   AS ADJUSTED(12)
                                                              ---------   -------------   ---------------
                                                                            (IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents...................................  $  23,111     $   5,398        $
Working capital(13).........................................      7,400        18,936
Total assets................................................     94,117        76,404
Total debt, including mandatorily redeemable preferred stock
  (Class C).................................................     74,250        68,073
Redeemable convertible preferred stock (Class A, Class B,
  and Class D)(14)..........................................     86,605        86,605
Common stock................................................        229           229
Additional paid-in capital..................................      8,383         8,383
Accumulated (deficit) equity(15)............................   (109,580)     (109,580)

(1) Effective January 1, 2001, we changed our fiscal reporting year from a calendar year to a 52/53-week basis ending on the Saturday closest to January 31. Our 2001 fiscal year began on February 4, 2001 and ended on February 2, 2002.

(2) Reflects a non-cash stock compensation charge related to certain outstanding stock options.

(3) Reflects the accretion to fair value of detachable put warrants to purchase common stock, issued by us in connection with our issuance of subordinated debt. The put rights associated with these warrants were terminated as of January 1, 1998, were restored as of December 31, 1999, and were terminated again as of February 3, 2002.

(4) Assumes the following transactions were effected as of February 4, 2001:
(i) the Pre-Offering Transactions, (ii) the termination of the put rights associated with the put warrants discussed in note (3) above, (iii) the refinancing of our former senior credit facility with our new senior credit facility, as discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" and (iv) the sale by us of shares in this offering at an assumed initial public offering price of $ per share and the application of the estimated net proceeds from the sale after deducting estimated offering expenses and underwriting discounts and commissions. Pro forma as adjusted net income and pro forma as adjusted earnings per common share exclude the $0.6 million and $1.1 million non-cash stock compensation charge in fiscal 2001 and the 13-week period ended May 4, 2002, respectively, related to certain outstanding stock options.

(5) Defined as gross profit as a percentage of net sales. Gross profit represents net sales less cost of product sold, freight, store occupancy and central distribution expenses.

(6) The term Adjusted EBITDA as used herein represents operating income before depreciation and amortization expense and a non-cash stock compensation charge related to certain outstanding stock options. While Adjusted EBITDA should not be considered in isolation or as a substitute for net income, cash flow from operations or any other measure of income or cash flow that is prepared in accordance with generally accepted accounting principles or as a measure of a company's profitability or liquidity, Adjusted EBITDA has been presented

because we believe it is commonly used in this or a similar format by investors to analyze and compare operating performance as well as to provide additional information with respect to our ability to meet our future debt service, capital expenditure and working capital requirements. Adjusted EBITDA may differ in method of calculation from similarly titled measures used by other companies. This information should be read in conjunction with our consolidated statements of cash flows contained in our consolidated financial statements and notes thereto included elsewhere in this prospectus.

(7) We include new stores in comparable store net sales calculations after the store has been in operation one full fiscal year. We exclude from comparable store net sales calculations each store that was expanded, remodeled or relocated during the applicable period. Each expanded, remodeled or relocated store is returned to the comparable store base after it has been excluded from the comparable store base for one full fiscal year. The comparable store net sales increase for fiscal 2001 reflects the increase in comparable store net sales for the 52-week period ended February 2, 2002 compared to the 53-week period ended February 3, 2001. The comparable store net sales increase for the 13-week period ended May 4, 2002 reflects the increase in comparable store net sales for the 13-week period ended May 4, 2002 compared to the 13-week period ended May 5, 2001.

(8) Our store count excludes our warehouse outlet store located adjacent to our central distribution facilities in Jackson, Tennessee.

(9) Calculated using net sales of all stores open at both the beginning and the end of the period.

(10) Calculated using gross square footage of all stores open at both the beginning and the end of the period. Gross square footage includes the storage, receiving and office space that generally occupies approximately 30% of total store space.

(11) Assumes the refinancing of our former senior credit facility with our new senior credit facility was effected as of May 4, 2002, as discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources."

(12) Gives effect to the refinancing described in note (11) as well as (i) the Pre-Offering Transactions and (ii) the sale by us of shares in this offering at an assumed initial public offering price of $ per share and the application of the estimated net proceeds from the sale after deducting estimated offering expenses and underwriting discounts and commissions.

(13) Defined as current assets excluding cash and cash equivalents, less current liabilities excluding current maturities of long-term debt.

(14) As of May 4, 2002, the liquidation value of our Class A, Class B and Class D Preferred Stock including $28.0 million of accrued dividends, was $89.4 million. The book value of this preferred stock has been adjusted from the liquidation value in connection with the reduction of the dividend rate on the Class A Preferred Stock, Class D Preferred Stock and a portion of our Class B Preferred Stock. See Note 6 of the Notes to our consolidated financial statements.

(15) In connection with our 1996 recapitalization, distributions of cash and securities to our pre-recapitalization shareholders were recorded as reductions in retained earnings, creating an accumulated deficit balance of $116 million at June 13, 1996. See "Related Party Transactions - Recapitalization."

RISK FACTORS

You should consider carefully the risks and uncertainties described below and other information included in this prospectus before you decide to buy our common stock. If any of the risks described below occur, our business, financial condition or results of operations could be adversely affected in a material way. This could cause the value of our common stock to decline, perhaps significantly, and you may lose all or part of your investment.

RISKS RELATED TO OUR BUSINESS

IF WE ARE UNABLE TO PROFITABLY OPEN AND OPERATE NEW STORES AND MAINTAIN THE PROFITABILITY OF OUR EXISTING STORES, WE MAY NOT BE ABLE TO ADEQUATELY IMPLEMENT OUR GROWTH STRATEGY RESULTING IN A DECREASE IN NET SALES AND NET INCOME.

One of our strategies is to open new stores by focusing on both existing markets and by targeting new geographic markets. We have opened 100 new stores since the beginning of fiscal 1997. We intend to open approximately 15 new stores in fiscal 2002 and approximately 35 new stores in fiscal 2003, and our future operating results will depend to a substantial extent upon our ability to open and operate new stores successfully. To date we have signed leases for five new stores in fiscal 2002, two of which have already opened. We have not yet identified sites or signed leases for any new stores that we intend to open in fiscal 2003. We also have an ongoing expansion, remodeling and relocation program, and intend to expand, remodel or relocate four stores in fiscal 2002.

There can be no assurance that we will be able to open, expand, remodel and relocate stores at this rate, or at all. Our ability to open new stores and to expand, remodel and relocate existing stores depends on a number of factors, including our ability to:

- obtain adequate capital resources for leasehold improvements, fixtures and inventory on acceptable terms, or at all;

- locate and obtain favorable store sites and negotiate acceptable lease terms;

- construct or refurbish store sites;

- obtain and distribute adequate product supplies to our stores;

- maintain adequate warehousing and distribution capability at acceptable costs;

- hire, train and retain skilled managers and personnel; and

- continue to upgrade our information and other operating systems to control the anticipated growth and expanded operations.

The rate of our expansion will also depend on the availability of adequate capital, which in turn will depend in large part on cash flow generated by our business and the availability of equity and debt capital. There can be no assurance that we will be able to obtain equity or debt capital on acceptable terms or at all. Moreover, our new senior credit facility contains provisions that restrict the amount of debt we may incur in the future. In addition, the cost of opening, expanding, remodeling and relocating new or existing stores may increase in the future compared to historical costs. The increased cost could be material. If we are not successful in obtaining sufficient capital, we may be unable to open additional stores or expand, remodel and relocate existing stores as planned, which may adversely affect our growth strategy resulting in a decrease in net sales. As a result, there can be no assurances that we will be able to achieve our current plans for the opening of new stores and the expansion, remodeling or relocation of existing stores.

There also can be no assurance that our existing stores will maintain their current levels of sales and profitability or that new stores will generate sales levels necessary to achieve store-level profitability, much less profitability comparable to that of existing stores. New stores that we open in our existing

markets may draw customers from our existing stores and may have lower sales growth relative to stores opened in new markets. New stores also may face greater competition and have lower anticipated sales volumes relative to previously opened stores during their comparable years of operations. New stores opened in new markets, where we are less familiar with the target customer and less well known, may face different or additional risks and increased costs compared to stores operated in existing markets. Also, stores opened in non-mall locations may require greater marketing costs in order to attract customer traffic. These factors, together with increased pre-opening expenses at our new stores, may reduce our average store contribution and operating margins. If we are unable to profitably open and operate new stores and maintain the profitability of our existing stores, our net income could suffer.

The success of our growth plan will be dependent on our ability to promote and/or recruit enough qualified district managers, store managers and sales associates to support the expected growth in the number of our stores, and the time and effort required to train and supervise a large number of new managers and associates may divert resources from our existing stores and adversely affect our operating and financial performance. Our operating expenses would also increase as a result of any increase in the minimum wage or other factors that would require increases in the compensation paid to our employees.

THE AGREEMENTS GOVERNING OUR DEBT IMPOSE RESTRICTIONS ON OUR BUSINESS WHICH MAY AFFECT OUR ABILITY TO OPERATE OUR BUSINESS IN ACCORD WITH OUR BUSINESS AND GROWTH STRATEGY.

We entered into a new senior credit facility in May 2002. Our new senior credit facility contains a number of covenants imposing significant restrictions on our business. These restrictions may affect our ability to operate our business and consummate our business strategy and growth strategy, and may limit our ability to take advantage of potential business opportunities as they arise. These covenants place restrictions on our ability to, among other things:

- incur additional indebtedness;

- create liens;

- pay dividends or make other distributions;

- make investments;

- sell assets;

- enter into transactions with affiliates;

- repurchase capital stock; and

- enter into certain mergers and consolidations.

The new credit facility has two financial covenants. One covenant requires us to maintain cash flow, net of capital expenditures, at levels varying between $26.7 million and $17.2 million each quarter based upon our projections taking into account the seasonality of our business. The other covenant requires us to keep our senior debt within a specified ratio of our cash flow ranging from 1.0:1.0 to 1.8:1.0 each quarter based upon our projections taking into account the seasonality of our business and our anticipated utilization of the revolving credit facility. Any failure to comply with these or other financial covenants would allow the lenders to accelerate repayment of their debt, prohibit further borrowing under the revolving portion of the credit facility, declare an event of default, take possession of their collateral, or take other actions available to a secured senior creditor.

If compliance with our debt obligations materially hinders our ability to operate our business and adapt to changing industry conditions, we may lose market share, our revenue may decline and our operating results may suffer. This would have a material adverse effect on the market value and marketability of our common stock.

WE MAY NOT BE ABLE TO SUCCESSFULLY ANTICIPATE CONSUMER TRENDS AND OUR FAILURE TO DO SO MAY LEAD TO LOSS OF CONSUMER ACCEPTANCE OF OUR PRODUCTS RESULTING IN REDUCED NET SALES.

Our success depends on our ability to anticipate and respond to changing merchandise trends and consumer demands in a timely manner. If we fail to identify and respond to emerging trends, consumer acceptance of the merchandise in our stores and our image with our customers may be harmed, which could materially adversely affect our net sales. Additionally, if we misjudge market trends, we may significantly overstock unpopular products and be forced to take significant inventory markdowns, which would have a negative impact on our gross profit and cash flow. Conversely, shortages of items that prove popular could reduce our net sales. In addition, a major shift in consumer demand away from home decor could also have a material adverse effect on our business, results of operations and financial condition.

WE DEPEND ON A NUMBER OF VENDORS TO SUPPLY OUR MERCHANDISE, AND ANY DELAY IN MERCHANDISE DELIVERIES FROM CERTAIN VENDORS MAY LEAD TO A DECLINE IN INVENTORY WHICH COULD RESULT IN A LOSS OF NET SALES.

We purchase our products from approximately 200 vendors with which we have no long-term purchase commitments or exclusive contracts. None of our vendors supplied more than 12% of our merchandise purchases during the 12 months ended May 4, 2002. Historically, we have retained our vendors and we have generally not experienced difficulty in obtaining desired merchandise from vendors on acceptable terms. However, our arrangements with these vendors do not guarantee the availability of merchandise, establish guaranteed prices or provide for the continuation of particular pricing practices. Our current vendors may not continue to sell products to us on current terms or at all, and we may not be able to establish relationships with new vendors to ensure delivery of products in a timely manner or on terms acceptable to us.

We may not be able to acquire desired merchandise in sufficient quantities on terms acceptable to us in the future. Also, our business would be adversely affected if there were delays in product shipments to us due to freight difficulties, strikes or other difficulties at our principal transport providers or otherwise. We have from time to time experienced delays of this nature. We are also dependent on vendors for assuring the quality of merchandise supplied to us. Our inability to acquire suitable merchandise in the future or the loss of one or more of our vendors and our failure to replace any one or more of them may harm our relationship with our customers resulting in a loss of net sales.

WE ARE DEPENDENT ON FOREIGN IMPORTS FOR A SIGNIFICANT PORTION OF OUR MERCHANDISE, AND ANY CHANGES IN THE TRADING RELATIONS AND CONDITIONS BETWEEN THE UNITED STATES AND THE RELEVANT FOREIGN COUNTRIES MAY LEAD TO A DECLINE IN INVENTORY RESULTING IN A DECLINE IN NET SALES, OR AN INCREASE IN THE COST OF SALES RESULTING IN REDUCED GROSS PROFIT.

Many of our vendors are importers of merchandise manufactured in the Far East and India. While we believe that buying from vendors instead of directly from manufacturers reduces or eliminates the risks involved with relying on products manufactured abroad, our vendors are subject to those risks, and we remain subject to those risks to the extent that their effects are passed through to us by our vendors or cause disruptions in supply. These risks include changes in import duties, quotas, loss of "most favored nation" ("MFN") trading status with the United States for a particular foreign country, work stoppages, delays in shipments, freight cost increases, economic uncertainties (including inflation, foreign government regulations, and political unrest) and trade restrictions (including the United States imposing antidumping or countervailing duty orders, safeguards, remedies or compensation and retaliation due to illegal foreign trade practices). If any of these or other factors were to cause a disruption of trade from the countries in which the suppliers of our vendors are located, our inventory levels may be reduced or the cost of our products may increase.

We currently purchase a majority of our merchandise from importers of goods manufactured in China. China has been granted permanent normal trade relations by the United States effective January 1, 2002, based on its entry into the World Trade Organization ("WTO"), and now enjoys MFN trading status. China's recent entry into the WTO potentially stabilizes the trading relationship between it and the

United States, but the possibility of trade disputes concerning merchandise currently imported from China continues to create risks. These risks could result in sanctions against China, and the imposition of new duties on certain imports from China, including products supplied to us. Any significant increase in duties or any other increase in the cost of the products imported for us from China could result in an increase in the cost of our products to our customers which may correspondingly cause a decrease in net sales, or could cause a reduction in our gross profit.

Historically, instability in the political and economic environments of the countries in which our vendors obtain our products has not had a material adverse effect on our operations. However, we cannot predict the effect that future changes in economic or political conditions in such foreign countries may have on our operations. Although we believe that we could access alternative sources in the event of disruptions or delays in supply due to economic or political conditions in foreign countries on our vendors, such disruptions or delays may adversely affect our results of operations unless and until alternative supply arrangements could be made. In addition, merchandise purchased from alternative sources may be of lesser quality or more expensive than the merchandise we currently purchase abroad.

Countries from which our vendors obtain these products may, from time to time, impose new or adjust prevailing quotas or other restrictions on exported products, and the United States may impose new duties, quotas and other restrictions on imported products. This could disrupt the supply of such products to us and adversely affect our operations. The United States Congress periodically considers other restrictions on the importation of products obtained for us by vendors. The cost of such products may increase for us if applicable duties are raised, or import quotas with respect to such products are imposed or made more restrictive.

We are also subject to the risk that the manufacturers abroad who ultimately manufacture our products may employ labor practices that are not consistent with acceptable practices in the United States. In any such event we could be hurt by negative publicity with respect to those practices and, in some cases, face liability for those practices.

OUR SUCCESS IS HIGHLY DEPENDENT ON OUR PLANNING AND CONTROL PROCESSES AND OUR SUPPLY CHAIN, AND ANY DISRUPTION IN OR FAILURE TO CONTINUE TO IMPROVE THESE PROCESSES MAY RESULT IN A LOSS OF NET SALES AND NET INCOME.

An important part of our efforts to achieve efficiencies, cost reductions and sales growth is the continued identification and implementation of improvements to our planning, logistical and distribution infrastructure and our supply chain, including merchandise ordering, transportation and receipt processing. We also need to ensure that our distribution infrastructure and supply chain keep pace with our anticipated growth and increased number of stores. In particular, we may need to expand our existing infrastructure to the extent we open new stores in regions of the United States where we presently do not have stores. The cost of this enhanced infrastructure could be significant. In addition, a significant portion of the distribution to our stores is coordinated through our distribution facilities in Jackson, Tennessee. Any significant disruption in the operations of these facilities would have a material adverse effect on our ability to maintain proper inventory levels in our stores which could result in a loss of net sales and net income.

WE FACE AN EXTREMELY COMPETITIVE SPECIALTY RETAIL BUSINESS MARKET, AND SUCH COMPETITION COULD RESULT IN A REDUCTION OF OUR PRICES AND A LOSS OF OUR MARKET SHARE.

The retail market is highly competitive. We compete against a diverse group of retailers, including specialty stores, department stores, discount stores and catalog retailers, which carry merchandise in one or more categories also carried by us. Our product offerings also compete with a variety of national, regional and local retailers, including such specialty retailers as Bed, Bath & Beyond, Cost Plus, Linens 'n Things, Michaels Stores, Pier 1 Imports and Williams-Sonoma. We also compete with these and other retailers for suitable retail locations, suppliers, qualified employees and management personnel. One or more of our competitors are present in substantially all of the malls in which we have stores. Many of our competitors are larger and have significantly greater financial, marketing and other resources than we do. This

competition could result in the reduction of our prices and a loss of our market share. Our sales are also impacted by store liquidations of our competitors. We believe that our stores compete primarily on the basis of merchandise quality and selection, price, visual appeal of the merchandise and the store and convenience of location. There can be no assurance that we will continue to be able to compete successfully against existing or future competition. Our expansion into the markets served by our competitors, and the entry of new competitors or expansion of existing competitors into our markets, may have a material adverse effect on our market share and could result in a reduction in our prices in order for us to remain competitive.

OUR BUSINESS IS HIGHLY SEASONAL AND OUR FOURTH QUARTER CONTRIBUTES A DISPROPORTIONATE AMOUNT OF OUR OPERATING INCOME AND NET INCOME, AND ANY FACTORS NEGATIVELY IMPACTING US DURING OUR FOURTH QUARTER COULD REDUCE OUR NET SALES, NET INCOME AND CASH FLOW, LEAVING US WITH EXCESS INVENTORY AND MAKING IT MORE DIFFICULT FOR US TO FINANCE OUR CAPITAL REQUIREMENTS.

We have experienced, and expect to continue to experience, substantial seasonal fluctuations in our sales and operating results, which are typical of many mall-based specialty retailers and common to most retailers generally. Due to the importance of the fall selling season, which includes Thanksgiving and Christmas, the last quarter of our fiscal year has historically contributed, and is expected to continue to contribute, a disproportionate amount of our operating income and net income for the entire fiscal year. We expect this pattern to continue during the current fiscal year and anticipate that in subsequent fiscal years the last quarter of our fiscal year will continue to contribute disproportionately to our operating results. Any factors negatively affecting us during the last quarter of our fiscal year, including unfavorable economic conditions, could have a material adverse effect on our financial condition and results of operations, reducing our cash flow, leaving us with excess inventory and making it more difficult for us to finance our capital requirements.

WE MAY EXPERIENCE SIGNIFICANT VARIATIONS IN OUR QUARTERLY RESULTS.

Our quarterly results of operations may also fluctuate significantly based upon such factors as the timing of new store openings, pre-opening expenses associated with new stores, the relative proportion of new stores to mature stores, net sales contributed by new stores, increases or decreases in comparable store sales, adverse weather conditions, shifts in the timing of holidays, the timing and level of markdowns, changes in fuel and other shipping costs, changes in our product mix and actions taken by our competitors.

A PROLONGED ECONOMIC DOWNTURN COULD RESULT IN REDUCED NET SALES AND PROFITABILITY.

Our sales are also subject to a number of factors relating to consumer spending, including general economic conditions affecting disposable consumer income such as unemployment rates, business conditions, interest rates, levels of consumer confidence, energy prices, mortgage rates, the level of consumer debt and taxation. A weak retail environment could also adversely affect our sales. Purchases of home decor items may decline during recessionary periods or a prolonged recession may have a material adverse effect on our business, financial condition and results of operations. In addition, economic downturns during the last quarter of our fiscal year could adversely affect us to a greater extent than if such downturns occurred at other times of the year. There is also no assurance that consumers will continue to focus on their homes or on home-oriented products or that trends in favor of "cocooning" and new home purchases will continue.

OUR COMPARABLE STORE NET SALES FLUCTUATE DUE TO A VARIETY OF FACTORS AND MAY NOT BE A MEANINGFUL INDICATOR OF FUTURE PERFORMANCE.

Numerous factors affect our comparable store net sales results, including among others, weather conditions, retail trends, the retail sales environment, economic conditions, the impact of competition and our ability to execute our business strategy efficiently. Our comparable store net sales results have experienced fluctuations in the past. Our comparable store net sales increased 3.7% in fiscal 1999 over fiscal 1998, increased 0.6% in fiscal 2000 over fiscal 1999 and increased 13.3% in fiscal 2001 over the

53-week period ended February 3, 2001. In addition, we anticipate that opening new stores in existing markets may result in decreases in comparable store net sales for existing stores in such markets. Past comparable store net sales results may not be indicative of future results. Our comparable store net sales may not increase from quarter to quarter and may decline. As a result, the unpredictability of our comparable store net sales may cause our revenues and operating results to vary quarter to quarter, and an unanticipated decline in revenues or comparable store net sales may cause the price of our common stock to fluctuate significantly.

REDUCED CONSUMER SPENDING IN THE SOUTHEASTERN PART OF THE UNITED STATES WHERE A MAJORITY OF OUR STORES ARE CONCENTRATED COULD REDUCE OUR NET SALES.

Approximately 55% of our stores are located in the southeastern region of the United States. Consequently, economic conditions, weather conditions, demographic and population changes and other factors specific to this region may have a greater impact on our results of operations than on the operations of our more geographically diversified competitors. In addition, changes in regional factors that reduce the appeal of our stores and merchandise to local consumers could reduce our net sales.

WE ARE HIGHLY DEPENDENT ON CUSTOMER TRAFFIC IN MALLS, AND ANY REDUCTION IN THE OVERALL LEVEL OF MALL TRAFFIC COULD REDUCE OUR NET SALES AND INCREASE OUR SALES AND MARKETING EXPENSES.

Substantially all of our existing stores are located in enclosed malls. As a result, we largely rely on the ability of mall anchor tenants and other tenants to generate customer traffic in the vicinity of our stores.
Historically, we have not relied on extensive media advertising and promotion in order to attract customers to our stores. Our future operating results will also depend on many other factors that are beyond our control, including the overall level of mall traffic and general economic conditions affecting consumer confidence and spending. Any significant reduction in the overall level of mall traffic could reduce our net sales.

OUR HARDWARE AND SOFTWARE SYSTEMS ARE VULNERABLE TO DAMAGE THAT COULD HARM OUR BUSINESS.

We rely upon our existing management information systems for operating and monitoring all major aspects of our business, including sales, warehousing, distribution, purchasing, inventory control, merchandise planning and replenishment, as well as various financial functions. These systems and our operations are vulnerable to damage or interruption from:

- fire, flood and other natural disasters;

- power loss, computer systems failures, internet and telecommunications or data network failure, operator negligence, improper operation by or supervision of employees, physical and electronic loss of data or security breaches, misappropriation and similar events; and

- computer viruses.

Any disruption in the operation of our management information systems, the loss of employees knowledgeable about such systems or our failure to continue to effectively modify such systems could interrupt our operations or interfere with our ability to monitor inventory, which could result in reduced net sales and affect our operations and financial performance. We also need to ensure that our systems are consistently adequate to handle our anticipated store growth and are upgraded as necessary to meet our needs. The cost of any such system upgrades or enhancements would be significant.

WE DEPEND ON KEY PERSONNEL, AND IF WE LOSE THE SERVICES OF ANY OF OUR PRINCIPAL EXECUTIVE OFFICERS, INCLUDING CARL KIRKLAND, OUR CHAIRMAN, AND ROBERT E. ALDERSON, OUR CHIEF EXECUTIVE OFFICER, WE MAY NOT BE ABLE TO RUN OUR BUSINESS EFFECTIVELY.

We have benefited substantially from the leadership and performance of our senior management, especially Carl Kirkland, our Chairman, and Robert E. Alderson, our President and Chief Executive

Officer. Our success will depend on our ability to retain our current management and to attract and retain qualified personnel in the future. Competition for senior management personnel is intense and there can be no assurances that we will be able to retain our personnel. Although we maintain key man insurance in the amount of $3 million on each of Messrs. Kirkland and Alderson, the loss of the services of either of these individuals for any reason could have a material adverse effect on our business, financial condition and results of operations. In addition, the loss of certain of our other principal executive officers could affect our ability to run our business effectively. We have recently entered into new employment agreements with Mr. Kirkland and Mr. Alderson and other members of senior management. The employment agreements with Messrs. Kirkland and Alderson run through May 2006 and continue on successive one-year renewal terms unless terminated by either party. The loss of a member of senior management would require the remaining executive officers to divert immediate and substantial attention to seeking a replacement.

TERRORISM AND THE UNCERTAINTY OF WAR MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR OPERATING RESULTS.

Terrorist attacks and other acts of violence or war may affect the market on which our common stock will trade, the markets in which we operate, our operations and profitability and your investment. The potential near-term and long-term effects any terrorist or other attacks on the United States or U.S. businesses may have for our customers, the market for our common stock, the demand for merchandise sold by our stores and the U.S. economy are uncertain. The consequences of any terrorist attacks, or any armed conflicts which may result, are unpredictable, and we may not be able to foresee events that could have an adverse effect on our business or your investment.

OUR CHARTER AND BYLAW PROVISIONS AND CERTAIN PROVISIONS OF TENNESSEE LAW MAY MAKE IT DIFFICULT IN SOME RESPECTS TO CAUSE A CHANGE IN CONTROL OF KIRKLAND'S AND REPLACE INCUMBENT MANAGEMENT.

Our charter authorizes the issuance of "blank check" preferred stock with such designations, rights and preferences as may be determined from time to time by our Board of Directors. Accordingly, the Board of Directors is empowered, without shareholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights that could materially adversely affect the voting power or other rights of the holders of our common stock (including purchasers in this offering). Holders of the common stock will not have preemptive rights to subscribe for a pro rata portion of any capital stock which may be issued by us. In the event of issuance, such preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of Kirkland's. Although we have no present intention to issue any new shares of preferred stock, we may do so in the future.

Our charter and bylaws contain certain corporate governance provisions that may make it more difficult to challenge management, may deter and inhibit unsolicited changes in control of Kirkland's and may have the effect of depriving our shareholders of an opportunity to receive a premium over the prevailing market price of our common stock in the event of an attempted hostile takeover. First, the charter provides for a classified Board of Directors, with directors (after the expiration of the terms of the initial classified board of directors in 2003, 2004 and 2005) serving three year terms from the year of their respective elections and being subject to removal only for cause and upon the vote of 80% of the voting power of all outstanding capital stock entitled to vote (the "Voting Power"). Second, our charter and bylaws do not generally permit shareholders to call, or require that the Board of Directors call, a special meeting. The charter and bylaws also limit the business permitted to be conducted at any such special meeting. In addition, Tennessee law permits action to be taken by the shareholders by written consent only if the action is consented to by holders of the number of shares required to authorize shareholder action and if all shareholders entitled to vote are parties to the written consent. Third, the bylaws establish an advance notice procedure for shareholders to nominate candidates for election as directors or to bring other business before meetings of the shareholders. Only those shareholder nominees who are nominated in accordance with this procedure will be eligible for election as directors of Kirkland's, and only such shareholder proposals may be considered at a meeting of shareholders as have been presented to Kirkland's in accordance with the procedure. Finally, the charter provides that the amendment or repeal of any of the

foregoing provisions of the charter mentioned previously in this paragraph requires the affirmative vote of at least 80% of the Voting Power. In addition, the bylaws provide that the amendment or repeal by shareholders of any bylaws made by our Board of Directors requires the affirmative vote of at least 80% of the Voting Power.

Furthermore, Kirkland's is subject to certain provisions of Tennessee law, including certain Tennessee corporate takeover acts that are, or may be, applicable to us. These acts include the Investor Protection Act, the Business Combination Act and the Tennessee Greenmail Act, and these acts seek to limit the parameters in which certain business combinations and share exchanges occur. The charter, bylaws and Tennessee law provisions may have an anti-takeover effect, including possibly discouraging takeover attempts that might result in a premium over the market price for our common stock. See "Description of Capital Stock - Anti-Takeover Effect of Charter and Bylaw Provisions and Tennessee Laws."

RISKS ASSOCIATED WITH THIS OFFERING

WE WILL INCUR NON-CASH CHARGES IN THE FISCAL QUARTER IN WHICH THIS OFFERING IS EXPECTED TO BE COMPLETED.

We will incur non-cash charges in the second quarter of fiscal 2002, the quarter in which this offering is expected to be completed. These charges include a $2.1 million non-cash stock compensation charge related to the July 2001 grant of an option to a consultant to purchase shares of common stock and $600,000 of interest expense in connection with the inducement associated with the exchange of certain Class C Preferred Stock for common stock as a part of the Pre-Offering Transactions. As a result of these charges and the fact that they are being incurred in the second fiscal quarter, in which we have historically realized net losses, we expect to incur a net loss for the quarter in which this offering is completed.

AN ACTIVE PUBLIC MARKET FOR OUR COMMON STOCK MAY NOT DEVELOP OR BE SUSTAINED, AND THE MARKET PRICE OF OUR COMMON STOCK MAY FALL BELOW THE INITIAL PUBLIC OFFERING PRICE.

Prior to this offering, you could not buy or sell our common stock publicly. An active public market for our common stock may not develop or be sustained after this offering, and the market price might fall below the initial public offering price. The initial public offering price may bear no relationship to, and may be higher than, the price at which our common stock will trade upon completion of this offering. The initial public offering price will be determined by negotiations between us and the representatives of the underwriters based on factors that may not be indicative of future performance.

THE MARKET PRICE FOR OUR COMMON STOCK MIGHT BE VOLATILE AND COULD RESULT IN A DECLINE IN THE VALUE OF YOUR INVESTMENT.

Following this offering, the price at which our common stock will trade may be volatile. The market price of our common stock could be subject to significant fluctuations in response to our operating results, general trends in prospects for the retail industry, announcements by our competitors, analyst recommendations, our ability to meet or exceed analysts' or investors' expectations, the condition of the financial markets and other factors. In addition, the stock market in recent years has experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of companies. These fluctuations, as well as general economic and market conditions, may adversely affect the market price of our common stock notwithstanding our actual operating performance.

FUTURE SALES OF SHARES OF OUR COMMON STOCK IN THE PUBLIC MARKET, OR THE PERCEPTION THAT SUCH SALES MAY OCCUR, MAY DEPRESS OUR STOCK PRICE AND MAKE IT DIFFICULT FOR YOU TO RECOVER THE FULL VALUE OF YOUR INVESTMENT IN OUR SHARES.

If our existing shareholders sell substantial amounts of our common stock in the public market following this offering or if there is a perception that these sales may occur, the market price of our

common stock could decline. Upon completion of this offering we will have outstanding approximately shares of common stock. Of these shares, only the shares of common stock (plus any of the shares purchased pursuant to the exercise of the underwriters' overallotment option) sold in this offering will be freely tradable, without restriction, in the public market.

After the lockup agreements pertaining to this offering expire 180 days from the date of this prospectus, unless waived, an additional shares will be eligible for sale in the public market at various times, subject to volume limitations under Rule 144 of the Securities Act of 1933, as amended (the "Securities Act"). Holders of all of such shares of common stock have the right to require us to register the shares for sale under the Securities Act in certain circumstances and also have the right to include those shares in a registration initiated by us. If we are required to include the shares of common stock of these shareholders pursuant to these registration rights in a registration initiated by us, sales made by such shareholders may adversely affect the price of the common stock and our ability to raise needed capital. In addition, if these shareholders exercise their demand registration rights and cause a large number of shares to be registered and sold in the public market or demand that we register their shares on a shelf registration statement, such sales or shelf registration may have an adverse effect on the market price of the common stock.

Following this offering, we also intend to file registration statements with the Securities and Exchange Commission covering shares of common stock issued or reserved for issuance under our 1996 Executive Incentive and Non-Qualified Stock Option Plan, 2002 Incentive Plan and Employee Stock Purchase Plan. Upon effectiveness of such registration statements, any shares subsequently issued under such plans will be eligible for sale in the public market, except to the extent that they are restricted by the lock-up agreements referred to above and subject to compliance with Rule 144 in the case of our affiliates. Sales of a large number of shares of common stock issued under these plans in the public market may have an adverse effect on the market price of the common stock. For more information regarding the sale of shares subsequently issued under such plans and the permissible sale of common stock by existing shareholders after the closing of this offering, see "Shares Eligible for Future Sale."

CONCENTRATION OF OWNERSHIP AMONG OUR EXISTING DIRECTORS, EXECUTIVE OFFICERS, AND SHAREHOLDERS MAY PREVENT NEW INVESTORS FROM INFLUENCING SIGNIFICANT CORPORATE DECISIONS.

Upon completion of this offering, our current directors, executive officers, existing shareholders and their affiliates will, in the aggregate, beneficially own approximately % of our outstanding common stock, assuming no exercise of the underwriters' overallotment option. As a result, these shareholders will be able to exercise a controlling influence over matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions, and will have significant control over our management and policies. These shareholders may support proposals and actions with which you may disagree or which are not in your interests.

YOU WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION AS A RESULT OF THIS OFFERING.

The initial public offering price is substantially higher than the book value per share of the common stock. As a result, purchasers in this offering will experience immediate and substantial dilution of $ per share in the tangible book value of the common stock from the initial public offering price. In addition, to the extent that currently outstanding options to purchase common stock are exercised, there will be further dilution. See "Dilution."

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements relating to future events or our future financial performance. Such statements may relate to, but are not limited to, expectations of future operating results or financial performance, capital expenditures, construction or expansion of facilities (including new stores), plans for growth and future operations, or financing, as well as assumptions relating to the foregoing. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Such risks include, but are not limited to, the matters discussed in the foregoing paragraphs under "Risk Factors." Future events and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements. Except as required by applicable law, including the securities laws of the United States, and the rules and regulations of the Securities and Exchange Commission, we do not plan to publicly update or revise any forward-looking statements after we distribute this prospectus, whether as a result of any new information, future events or otherwise.

ABOUT THIS PROSPECTUS

Market data used throughout this prospectus is based on the good faith estimates of management, which estimates are based upon their review of internal surveys, independent industry publications and other publicly available information. Although we believe that these sources are reliable, we do not guarantee the accuracy or completeness of this information, and we have not independently verified this information.

The Kirkland's logo, the Kirkland Collection(R) and Cedar Creek(R) private label brand are registered trademarks and/or service marks of Kirkland's. We also claim common law trademark rights in Briar Patch(TM), Kirkland's Outlet(TM), Kirkland's Home(TM) and other marks. We are exploring the possibility of federal registration of several of these marks. All other trademarks or service marks appearing in this prospectus are trademarks or service marks of the companies that utilize them.

USE OF PROCEEDS

We estimate that our net proceeds from the sale of the shares of common stock offered by us will be approximately $ million, at an assumed initial public offering price of $ , after deducting underwriting discounts and commissions and estimated offering expenses. We will not receive any proceeds from the sale of shares by the selling shareholders.

We expect to use the net proceeds from this offering as follows:

- $ million to repay all of our outstanding subordinated debt, including accrued and unpaid interest;

- $ million to redeem $9.2 million of aggregate stated value of mandatorily redeemable Class C Preferred Stock and $ of amounts classified as interest associated with the Class C Preferred Stock (all of the shares of Class C Preferred Stock are held by affiliates of Kirkland's); and

- $ million to redeem $ million of aggregate stated value and accrued and unpaid dividends of Class A Preferred Stock, Class B Preferred Stock and Class D Preferred Stock and shares of common stock (substantially all of the shares of Class A Preferred Stock, Class B Preferred Stock and Class D Preferred Stock and common stock being redeemed are held by affiliates of Kirkland's);

- $ million to repay outstanding indebtedness under our new revolving credit facility.

Our subordinated debt consists of $20.0 million subordinated notes bearing interest at 12.5% per year and maturing on June 30, 2003. By their terms, the subordinated notes are required to be repaid in full with the proceeds of this offering.

We issued our Class C Preferred Stock to affiliates in connection with our 1996 recapitalization and the Class C Preferred Stock has an aggregate stated value of $17.1 million at May 4, 2002. See "Management's Discussion & Analysis of Financial Condition and Results of Operations" and "Related Party Transactions - Recapitalization." We accrue an annual amount equal to 9% of the outstanding stated value of the Class C Preferred Stock, which has been reflected as interest expense in our consolidated financial statements. As of May 4, 2002, the aggregate unpaid accrual with respect to the Class C Preferred Stock amounted to $7.7 million. A portion of the proceeds from our new credit facility was used to repay $5.7 million of the aggregate unpaid accrual with respect to the Class C Preferred Stock. The Class C Preferred Stock is required to be redeemed with the proceeds of this offering. Of the outstanding shares of Class C Preferred Stock, a total 258,425 shares are not being redeemed but are being exchanged for shares of common stock, at an assumed initial public offering price of $ per share. These shares of common stock are being sold in this offering.

We issued our Class A Preferred Stock, Class B Preferred Stock and Class D Preferred Stock in connection with various financings between 1996 and 2000. At May 4, 2002, the outstanding Class A, B and D Preferred Stock had an aggregate liquidation value of $89.4 million, including $28.0 million of accrued dividends. The Class A, B and D Preferred Stock currently accrue cumulative dividends at a rate of 10% per year compounded quarterly. All outstanding shares of Class A, B and D Preferred Stock that are not being redeemed with proceeds of this offering will be converted into common stock immediately prior to the completion of this offering. See "Prospectus Summary - Pre-Offering Transactions," "Management's Discussion & Analysis of Financial Condition and Results of Operations" and "Related Party Transactions - Pre-Offering Transactions."

We entered into a new three-year revolving credit facility in May 2002 that includes a $45 million revolving credit facility ($30 million for the first six months of each calendar year) bearing interest at a floating rate equal to the prime rate or 2.25% above LIBOR, at our election. As of June 3, 2002, $16.0 million was outstanding under this facility. We expect the amount outstanding under the revolving credit facility to be between $ million and $ million as of the consummation of this offering.

DIVIDEND POLICY

We intend to retain all future earnings to finance the continued growth and development of our business, and do not, therefore, anticipate paying any cash dividends on our common stock in the foreseeable future. In addition, our new senior credit facility restricts the payment of cash dividends. No dividends have been paid on our common stock subsequent to 1995. Future cash dividends, if any, will be determined by our Board of Directors, and will be based upon our earnings, capital requirements, financial condition, debt covenants and other factors deemed relevant by our Board of Directors.

DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock after this offering.

Our pro forma net negative tangible book value as of May 4, 2002, after giving effect to the Pre-Offering Transactions, was $ million, or $ per share of outstanding common stock. Pro forma net negative tangible book value per share is determined by dividing our pro forma net negative tangible book value (total tangible assets less total liabilities) by the number of shares of common stock outstanding on a pro forma basis, giving effect to the Pre-Offering Transactions.

Without taking into effect any changes in pro forma net negative tangible book value after May 4, 2002, other than to give effect to the sale by us of the shares of common stock offered by us in this offering and the application of the estimated net proceeds from the sale (after deducting estimated offering expenses and the underwriting discounts and commissions), our as adjusted pro forma net negative tangible book value as of May 4, 2002 would have been $ million, or $ per share.

This represents an immediate increase in pro forma net tangible book value of $ per share to existing shareholders and an immediate dilution of $ per share to purchasers of common stock in this offering. The following table illustrates this per share dilution:

Assumed initial public offering price per share........               $
  Net negative tangible book value per share at May 4,
     2002..............................................  $    ( )
  Adjustment for Pre-Offering Transactions.............
                                                         --------
  Pro forma net negative tangible book value per share
     before the Offering...............................       ( )
  Increase attributable to new shareholders............
                                                         --------
  Adjusted pro forma net negative tangible book value
     per share after the offering......................                    ( )
                                                                      --------
Dilution per share to new shareholders.................               $

The following table sets forth, on a pro forma basis as of May 4, 2002, giving effect to the Pre-Offering Transactions, the number of shares of common stock purchased from us, the total consideration paid to us, the average price per share paid by existing shareholders, and the average price per share to be paid by purchasers of common stock in this offering:

                            SHARES PURCHASED      TOTAL CONSIDERATION
                           -------------------   ----------------------   AVERAGE PRICE
                            NUMBER     PERCENT      AMOUNT      PERCENT     PER SHARE
                           ---------   -------   ------------   -------   -------------
Existing
  shareholders(1)........                    %   $                    %      $
New investors............                                                    $
                           ---------    -----    ------------    -----
     Total...............               100.0%                   100.0%
                           =========    =====    ============    =====

(1) With respect to our executive officers, directors and greater-than-10% shareholders, and assuming the exercise of all outstanding stock options, the number of shares of common stock purchased from us, the total consideration paid to us, and the average price per share paid by such persons, are as follows:

 SHARES PURCHASED      TOTAL CONSIDERATION
-------------------   ----------------------   AVERAGE PRICE
 NUMBER     PERCENT      AMOUNT      PERCENT     PER SHARE
---------   -------   ------------   -------   -------------
                  %                        %

Except as otherwise indicated, the foregoing tables do not include (i) 13,287 shares of common stock issuable upon exercise of options that will be outstanding upon completion of this offering at exercise prices ranging from $0.01 to $95.00 per share, of which 4,087 shares are subject to options which will be exercisable upon completion of this offering, and (ii) shares of common stock reserved for future issuance under our 1996 Executive Incentive and Non-Qualified Stock Option Plan, 2002 Incentive Plan and Employee Stock Purchase Plan. See "Management - Employee Benefit Plans."

CAPITALIZATION

The following table describes our capitalization as of May 4, 2002. Our capitalization is presented:

- on an actual basis;

- on a pro forma basis to give effect to the refinancing of our former senior credit facility with our new senior credit facility, as discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources;" and

- on a pro forma as adjusted basis to give effect to (i) the refinancing discussed in the preceding paragraph, (ii) the Pre-Offering Transactions and (iii) the sale by us of shares in this offering at an assumed initial offering price of $ per share and the application of the estimated net proceeds from the sale (after deducting estimated offering expenses and underwriting discounts and commissions).

This presentation should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this prospectus.

                                                       AS OF MAY 4, 2002
                                              -----------------------------------
                                                                       PRO FORMA
                                               ACTUAL     PRO FORMA   AS ADJUSTED
                                              ---------   ---------   -----------
                                                        (IN THOUSANDS)
Cash and cash equivalents...................  $  23,111   $   5,398      $
                                              =========   =========      ====
Long-term debt, including current portion:
  Former senior credit facility(1)..........     38,299          --
  New senior credit facility(2).............         --      31,000
  Subordinated debt(3)......................     24,688      19,951
  Mandatorily redeemable preferred stock
     (Class C)(4)...........................     24,863      19,186
                                              ---------   ---------      ----
Total long-term debt, including current
  portion...................................     87,850      70,137
                                              ---------   ---------      ----
Redeemable convertible preferred stock
  (Class A, Class B and Class D)(5).........     86,605      86,605
Shareholders' equity (deficit):
  Common stock, at stated value:
             shares authorized,
             shares issued and outstanding,
     actual;         shares authorized,
             shares issued and outstanding,
     pro forma; and 100,000,000 shares
     authorized,         shares issued and
     outstanding, pro forma as
     adjusted(6)............................        229         229
Additional paid-in capital..................      8,383       8,383
Loan to shareholder.........................       (217)       (217)
Accumulated deficit.........................   (109,580)   (109,580)
                                              ---------   ---------      ----
Total shareholders' equity (deficit)........   (100,968)   (101,185)
                                              ---------   ---------      ----
Total capitalization........................  $  73,487   $  55,557      $
                                              =========   =========      ====

(1) Includes $1.1 million in the aggregate of accrued and unpaid interest on our former senior term loan as of May 4, 2002.

(2) Consists of a $15 million term loan and a revolving credit facility.

(3) Includes $4.7 million in the aggregate of accrued and unpaid interest on our subordinated debt as of May 4, 2002.

(4) Includes $7.7 million in the aggregate of accrued and unpaid interest on our Class C Preferred Stock as of May 4, 2002.

(5) Includes $28.0 million in the aggregate of accrued and unpaid dividends on our Class A Preferred Stock, Class B Preferred Stock and Class D Preferred Stock. As of May 4, 2002, the liquidation value of our Class A, Class B and Class D Preferred Stock including $28.0 million of accrued dividends, was $89.4 million. The book value of this preferred stock has been adjusted from the liquidation value in connection with the reduction of the dividend rate on the Class A Preferred Stock, Class D Preferred Stock and a portion of our Class B Preferred Stock. See Note 6 of the Notes to our consolidated financial statements.

(6) Excludes approximately 21,187 shares of common stock reserved for issuance upon the exercise of options outstanding at May 4, 2002 (13,287 shares upon completion of this offering) at exercise prices ranging from $0.01 to $95.00 per share, of which 4,087 shares were subject to options which will be exercisable upon completion of this offering.

SELECTED CONSOLIDATED FINANCIAL DATA

The selected "Statement of Operations Data" and the "Other Financial Data" for the fiscal years ended December 31, 1999 and December 31, 2000, the 34-day period ended February 3, 2001 and the fiscal year ended February 2, 2002 and the selected "Balance Sheet Data" as of December 31, 2000 and February 2, 2002 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected "Balance Sheet Data" as of December 31, 1997, 1998 and 1999 and the selected "Statement of Operations Data" and the "Other Financial Data" for the years ended December 31, 1997 and 1998 have been derived from our audited consolidated financial statements not included in this prospectus. The "Store Data" for all periods presented below have been derived from internal records of our operations. The selected "Statement of Operations Data" and "Other Financial Data" for the 13-week period ended May 5, 2001 and May 4, 2002 and the selected "Balance Sheet Data" as of May 4, 2002 have been derived from our unaudited consolidated financial statements, which, in our opinion, include all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the information set forth therein. The selected consolidated financial data should be read in conjunction with our consolidated financial statements and notes thereto, and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus.

                                                                                34-DAY                      13 WEEKS ENDED
                                          YEAR ENDED DECEMBER 31,            PERIOD ENDED   YEAR ENDED    -------------------
                                 -----------------------------------------   FEBRUARY 3,    FEBRUARY 2,    MAY 5,     MAY 4,
                                   1997       1998       1999       2000       2001(1)        2002(2)       2001       2002
                                 --------   --------   --------   --------   ------------   -----------   --------   --------
                                                       (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net sales......................  $153,584   $192,250   $236,622   $259,240     $23,875       $307,213     $ 55,961   $ 66,184
Cost of sales(3)...............    96,878    121,864    154,104    172,226      18,990        200,063       40,722     44,285
                                 --------   --------   --------   --------     -------       --------
Gross profit...................    56,706     70,386     82,518     87,014       4,885        107,150       15,239     21,899
Operating expenses:
  Other operating expenses.....    35,760     45,820     57,894     67,422       7,388         71,993       15,379     16,855
  Depreciation and
    amortization...............     3,141      4,401      5,969      6,522         517          6,370        1,372      1,653
                                 --------   --------   --------   --------     -------       --------     --------   --------
  Non-cash stock compensation
    charge(4)..................        --         --         --         --          --            578           --      1,140
Operating income (loss)........    17,805     20,165     18,655     13,070      (3,020)        28,209       (1,512)     2,251
Interest expense:
  Senior, subordinated and
    other notes payable........     7,990      9,254     10,232     11,221       1,043          9,759        2,607      1,486
  Class C Preferred Stock......     1,800      1,541      1,647      1,850         154          2,007          499        544
  Amortization of debt issue
    costs......................     1,001      1,009      1,307      1,305          84          1,308          252        366
  Accretion of common stock
    warrants(5)................       389         --         --         --          --          7,759           --         --
Interest income................       (80)      (113)       (27)        (1)         --           (278)          --        (67)
Offering and financing
  costs(6).....................        --         --        852        782          --             --           --         --
Other expense (income), net....       (34)      (173)      (222)      (199)        (26)          (109)         (30)         7
Income tax provision
  (benefit)....................     2,817      2,220        807       (573)     (1,619)        (3,184)      (2,115)       (33)
                                 --------   --------   --------   --------     -------       --------     --------   --------
Net income (loss)..............     3,922      6,427      4,059     (1,315)     (2,656)         4,579       (2,725)       (52)
Accretion of redeemable
  preferred stock and dividends
  accrued(7)...................    (3,755)    (3,832)    (5,053)    (6,555)       (778)        (6,439)      (1,931)    (1,311)
                                 --------   --------   --------   --------     -------       --------     --------   --------
Net income (loss) allocable to
  common stock.................  $    167   $  2,595   $   (994)  $ (7,870)    $(3,434)      $ (1,860)    $ (4,656)  $ (1,363)
                                 ========   ========   ========   ========     =======       ========     ========   ========
Income (loss) per common share
  Basic........................  $   1.67   $  28.13   $ (10.79)  $ (71.49)    $(25.11)      $ (13.60)    $ (33.83)  $  (9.95)
  Diluted......................  $   1.35   $   8.88   $ (10.79)  $ (71.49)    $(25.11)      $ (13.60)    $ (33.83)  $  (9.95)
Weighted average number of
  common shares outstanding
  Basic........................   100,000     92,252     92,101    110,084     136,751        136,752      136,751    137,006
                                                                                                          ========   ========
  Diluted......................   123,549    292,305     92,101    110,084     136,751        136,752      136,751    137,006
                                                                                                          ========   ========

                                                                                                      13 WEEKS ENDED
                                                 YEAR ENDED DECEMBER 31,              YEAR ENDED    ------------------
                                      ---------------------------------------------   FEBRUARY 2,    MAY 5,    MAY 4,
                                        1997        1998        1999        2000        2002(2)       2001      2002
                                      ---------   ---------   ---------   ---------   -----------   --------   -------
                                                   (IN THOUSANDS, EXCEPT SHARE DATA)
PRO FORMA DATA:
Pro forma as adjusted net
  income(8).........................                                                   $                       $
                                                                                       --------                -------
Pro forma as adjusted earnings per
  common share(8)...................                                                   $                       $
                                                                                       ========                =======
Pro forma as adjusted shares
  outstanding(8)....................                                                   $                       $
                                                                                       ========                =======
OTHER FINANCIAL DATA:
Gross profit margin.................       36.9%       36.6%       34.9%       33.6%       34.9%        27.2%     33.1%
Adjusted EBITDA(9)..................  $  20,946   $  24,566   $  24,624   $  19,592    $ 35,157         (140)    5,044
Net cash provided by (used in)
  operating activities..............  $   8,669   $   4,326   $  12,945   $   1,336    $ 37,510      (11,834)   (3,680)
Net cash (used in) investing
  activities........................     (5,479)    (14,669)    (10,825)     (5,981)     (4,724)      (1,406)   (1,785)
Net cash (used in) provided by
  financing activities..............     (3,537)     13,658      (3,370)     19,855     (29,949)        (954)   (1,175)
STORE DATA:
Comparable store net sales
  increase(10)......................        5.2%        1.0%        3.7%        0.6%       13.3%         3.9%     18.0%
Number of stores at the end of
  period(11)........................        138         198         226         240         234          235       236
Average net sales per store (in
  thousands)(12)....................  $   1,178   $   1,169   $   1,111   $   1,112    $  1,307
Average gross square footage per
  store(13).........................      4,186       4,392       4,364       4,437       4,528
Average net sales per square
  foot(12)(13)......................  $     281   $     266   $     255   $     251    $    289

                                                           AS OF DECEMBER 31,                    AS OF        AS OF
                                              ---------------------------------------------   FEBRUARY 2,    MAY 4,
                                                1997        1998        1999        2000        2002(2)       2002
                                              ---------   ---------   ---------   ---------   -----------   ---------
                                                                    (IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents...................  $  10,881   $  14,196   $  12,946   $  28,156    $  29,751    $  23,111
Working capital(14).........................      9,332      14,368      11,716      18,717        1,634        9,118
Total assets................................     49,884      82,474      92,600     113,382       95,648       94,117
Total debt, including mandatorily redeemable
  preferred stock (Class C).................     88,597     106,241     103,466     104,360       75,239       74,250
Common stock warrants.......................        879          --          --          --        7,759           --
Redeemable convertible preferred stock
  (Class A, Class B and Class D)(15)........     50,591      50,418      55,471      81,909       85,294       86,605
Common stock................................        210         229         229         229          229          229
Additional paid-in capital..................      2,293          --          --          --           --        8,383
Accumulated deficit(16).....................   (104,991)    (99,224)   (100,218)   (108,088)    (109,528)    (109,580)

(1) Effective January 1, 2001, we changed our fiscal reporting year from a calendar year to a 52/53-week basis ending on the Saturday closest to January 31 resulting in a 34-day stub period as presented. At the beginning of 2001, we instituted a plan to improve sales, increase cash flow and return our stores to higher levels of profitability. The cornerstone of our plan was a strategy to reduce store-level inventories during January and February 2001. This strategy necessitated significant markdown activity that resulted in a reduced gross margin for January and February 2001. However, markdowns were offset by increased net sales, and, as a result, we believe our operating loss for the 34-day period ended February 3, 2001 of $3.0 million was substantially consistent with our operating loss for the 31-day period ended January 31, 2000 of $2.5 million. For the period from February 1, 2000 through February 3, 2001, our net sales were $266.3 million, our gross profit was $87.8 million and our Adjusted EBITDA was $19.0 million. This approximately 53-week period is derived from our internal records and was not audited or reviewed by our auditors.

(2) Effective January 1, 2001, we changed our fiscal reporting year from a calendar year to a 52/53-week basis ending on the Saturday closest to January 31. Our 2001 fiscal year began on February 4, 2001 and ended on February 2, 2002.

(3) Cost of sales includes cost of product sold, freight, store occupancy and central distribution costs.

(4) Reflects a non-cash stock compensation charge related to certain outstanding stock options.

(5) Reflects the accretion to the fair value of detachable put warrants to purchase common stock, issued by us in connection with our issuance of subordinated debt. The put rights associated with these warrants were terminated as of January 1, 1998, were restored as of December 31, 1999 and were terminated again as of February 3, 2002.

(6) Represents the write down of certain costs associated with a withdrawn equity offering in fiscal 1999 and an unsuccessful refinancing effort in fiscal 2000.

(7) Reflects the accretion of the Class A Preferred Stock, Class B Preferred Stock and Class D Preferred Stock to its redemption value and the accrual of dividends on such preferred stock.

(8) Assumes the following transactions were effected as of February 4, 2001:
(i) the Pre-Offering Transactions, (ii) the termination of the put rights associated with the put warrants discussed in note (5) above, (iii) the refinancing of our former senior credit facility with our new senior credit facility, as discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" and (iv) the sale by us of shares in this offering at an assumed initial public offering price of $ per share and the application of the estimated net proceeds from the sale after deducting estimated offering expenses and underwriting discounts and commissions. Pro forma as adjusted net income and pro forma as adjusted earnings per common share exclude the $0.6 million and $1.1 million non-cash stock compensation charge in fiscal 2001 and the 13-week period ended May 4, 2002, respectively, related to certain outstanding stock options.

(9) The term Adjusted EBITDA as used herein represents operating income before depreciation and amortization expense and a non-cash stock compensation charge related to certain outstanding stock options. While Adjusted EBITDA should not be considered in isolation or as a substitute for net income, cash flow from operations or any other measure of income or cash flow that is prepared in accordance with generally accepted accounting principles or as a measure of a company's profitability or liquidity, Adjusted EBITDA has been presented because we believe it is commonly used in this or a similar format by investors to analyze and compare operating performance as well as to provide additional information with respect to our

ability to meet our future debt service, capital expenditure and working capital requirements. Adjusted EBITDA may differ in method of calculation from similarly titled measures used by other companies. This information should be read in conjunction with our consolidated statements of cash flows contained in our consolidated financial statements and notes thereto included elsewhere in this prospectus.

(10) We include new stores in comparable store net sales calculations after the store has been in operation one full fiscal year. We exclude from comparable store net sales calculations each store that was expanded, remodeled or relocated during the applicable period. Each expanded, remodeled or relocated store is returned to the comparable store base after it has been excluded from the comparable store base for one full fiscal year. The comparable store net sales increase for fiscal 2001 reflects the increase in comparable store net sales for the 52-week period ended February 2, 2002 compared to the 53-week period ended February 3, 2001. The comparable store net sales increase for the 13-week period ended May 4, 2002 reflects the increase in comparable store net sales for the 13-week period ended May 4, 2002 compared to the 13-week period ended May 5, 2001.

(11) Our store count excludes our warehouse outlet store located adjacent to our central distribution facilities in Jackson, Tennessee.

(12) Calculated using net sales of all stores open at both the beginning and the end of the period.

(13) Calculated using gross square footage of all stores open at both the beginning and the end of the period. Gross square footage includes the storage, receiving and office space that generally occupies approximately 30% of total store space.

(14) Defined as current assets excluding cash and cash equivalents, less current liabilities excluding current maturities of long-term debt and revolving line of credit.

(15) As of May 4, 2002, the liquidation value of our Class A, Class B and Class D Preferred Stock including $28.0 million of accrued dividends, was $89.4 million. The book value of this preferred stock has been adjusted from the liquidation value in connection with the reduction of the dividend rate on the Class A Preferred Stock, Class D Preferred Stock and a portion of our Class B Preferred Stock. See Note 6 of the Notes to our Consolidated Financial Statements.

(16) In connection with our 1996 recapitalization, distributions of cash and securities to our pre-recapitalization shareholders were recorded as reductions in retained earnings, creating an accumulated deficit balance of $116 million at June 13, 1996. See "Related Party Transactions - Recapitalization."

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

A number of the matters and subject areas discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" and elsewhere in this prospectus are not limited to historical or current facts and deal with potential future circumstances and developments, and are accordingly "forward-looking statements." You are cautioned that such forward-looking statements, which may be identified by words such as "anticipate," "believe," "expect," "estimate," "intend," "plan" and similar expressions, are only predictions and that actual events or results may differ materially.

OVERVIEW

We are a leading specialty retailer of home decor in the United States, operating 236 stores in 28 states. Our stores present a broad selection of distinctive merchandise, including framed art, mirrors, candles, lamps, picture frames, accent rugs, garden accessories and artificial floral products. Our stores also offer an extensive assortment of holiday merchandise, as well as items carried throughout the year suitable for giving as gifts. As a result of our emergence as a leader in home decor and our development of a strong customer franchise, we have achieved substantial growth over the last five fiscal years. Since the beginning of 1997, our sales have grown at a compounded annual growth rate of 19%. For the fiscal year ended February 2, 2002, we recorded net sales of $307.2 million and Adjusted EBITDA of $35.2 million, or 11.4% of net sales. For the fiscal quarter ended May 4, 2002, we recorded net sales of $66.2 million, and Adjusted EBITDA of $5.0 million or 7.6% of net sales.

Kirkland's was co-founded in 1966 by our current Chairman, Carl Kirkland. In 1996, we completed a recapitalization through which Advent International Group (through affiliated entities) became the largest beneficial owner of our equity. The 1996 recapitalization permitted the then-existing shareholders, consisting of Carl Kirkland, Robert E. Alderson, our current President and Chief Executive Officer, and two other shareholders, to realize a portion of the value of their interest in Kirkland's.

- Completing Key Investments in Information Technology.

- Developing a More Scalable Distribution Infrastructure.

- Strengthening Executive Management.

- Improving Store-Level Operating Performance.

RESULTS OF OPERATIONS

On January 1, 2001, we elected to change our fiscal reporting year from a calendar year basis to a 52/53-week year ending on the Saturday closest to January 31. Consequently, the results of operations table and discussion below compare the 52 weeks ended February 2, 2002 and the twelve months ended

December 31, 2000. The results for the 34-day "stub period" ended February 3, 2001 are included separately in our consolidated financial statements.

In January 2001, we implemented a plan to improve sales, increase cash flow and return our stores to higher levels of productivity. The cornerstone of our plan was a strategy to reduce store-level inventories during January and February 2001. This strategy necessitated significant markdown activity that resulted in a reduced gross margin for January and February 2001. However, markdowns were offset by increased net sales, and, as a result, we believe our operating loss for the 34-day period ended February 3, 2001 of $3.0 million was substantially consistent with our operating loss for the 31-day period ended January 31, 2000 of $2.5 million. For the period from February 1, 2000 through February 3, 2001, our net sales were $266.3 million, our gross profit was $87.8 million and our Adjusted EBITDA was $19.0 million. This approximately 53-week period is derived from our internal records and was not audited or reviewed by our auditors.

The table below sets forth selected results of our operations expressed as a percentage of net sales for the periods indicated.

                                                  FISCAL YEAR ENDED                QUARTER ENDED
                                      -----------------------------------------   ---------------
                                      DECEMBER 31,   DECEMBER 31,   FEBRUARY 2,   MAY 5,   MAY 4,
                                          1999           2000         2002(1)      2001     2002
                                      ------------   ------------   -----------   ------   ------
Net sales...........................     100.0%         100.0%         100.0%     100.0%   100.0%
Cost of sales(2)....................      65.1           66.4           65.1       72.8     66.9
                                         -----          -----          -----      -----    -----
Gross profit........................      34.9           33.6           34.9       27.2     33.1
Operating expenses:
  Other operating expenses..........      24.5           26.0           23.4       27.4     25.5
  Depreciation and amortization.....       2.5            2.5            2.1        2.5      2.5
  Non-cash stock compensation
    charge..........................        --             --            0.2         --      1.7
                                         -----          -----          -----      -----    -----
Operating income....................       7.9            5.1            9.2       (2.7)     3.4
Interest expense:
  Senior, subordinated and other
    notes payable...................       4.3            4.3            3.2        4.7      2.2
  Class C Preferred Stock...........       0.7            0.7            0.7        0.9      0.8
  Amortization of debt issue
    costs...........................       0.6            0.5            0.4        0.4      0.6
  Accretion of common stock
    warrants........................                       --            2.5         --       --
Interest income.....................       0.0            0.0           (0.1)        --     (0.1)
Offering and financing costs(3).....       0.4            0.3             --         --       --
Other expense (income), net.........      (0.1)          (0.0)          (0.0)       0.0      0.0
                                         -----          -----          -----      -----    -----
Income (loss) before income taxes...       2.0           (0.7)           2.5       (8.7)    (0.1)
Income tax provision (benefit)......       0.3           (0.2)           1.0       (3.8)    (0.0)
                                         -----          -----          -----      -----    -----
Net income (loss)...................       1.7%          (0.5)%          1.5%      (4.9)    (0.1)
                                         =====          =====          =====      =====    =====

(1) Effective January 1, 2001, we changed our fiscal year from a calendar year basis to a 52/53-week year ending on the Saturday closest to January 31. Accordingly, the fiscal year ended February 2, 2002 encompasses the 52-week period beginning on February 4, 2001 and ending on February 2, 2002.

(2) Cost of sales includes cost of product sold, freight, store occupancy and central distribution costs.

(3) During the year ended December 31, 2000, we recorded an impairment of deferred financing costs that were connected with a refinancing effort that was not consummated. Additionally, during the year ended December 31, 1999, we indefinitely postponed plans for an initial public offering that resulted in the impairment of previously deferred offering costs.

FISCAL QUARTER ENDED MAY 4, 2002 COMPARED TO FISCAL QUARTER ENDED MAY 5, 2001

Net Sales. Net sales increased by 18.3% to $66.2 million for the first quarter of fiscal 2002 from $56.0 million for the first quarter of fiscal 2001. The net sales increase for the quarter was primarily the result of an increase in comparable store net sales of 18.0%. Also, the addition of two new stores during the first quarter combined with the impact of the five new stores added during fiscal 2001 offset by the closure of 11 stores since the end of fiscal 2000 contributed to the overall sales increase. The increase in comparable store net sales accounted for approximately $9.6 million of the total net sales increase, or 93.5%, and the net changes in the store base accounted for approximately $0.6 million, or 6.5%, of the total net sales increase. Our first quarter net sales performance resulted from an improved inventory position and fresher merchandise mix as compared to the prior year period. The net sales increase was a result of increased unit sales and customer traffic as well as an increase in the average retail price per item sold.

Gross Profit. Gross profit, defined as net sales less the cost of sales including cost of product sold, freight, store occupancy and central distribution costs, increased $6.7 million, or 43.7%, to $21.9 million for the quarter from $15.2 million for the prior year period. Gross profit expressed as a percentage of net sales increased to 33.1% for the quarter from 27.2% for the prior year period. The increase in gross profit as a percentage of net sales was largely the result of lower product cost of sales, including freight expenses, as a percentage of sales. This decline was the result of the fresher merchandise mix during the quarter in comparison to the prior year period during which significant markdowns were taken in order to reduce inventory levels. The leveraging of store occupancy and central distribution costs through higher net sales also contributed to the improvement in gross profit percentage.

Other Operating Expenses. Other operating expenses, including both store and corporate costs, were $16.9 million, or 25.5% of net sales, for the quarter as compared to $15.4 million, or 27.4% of net sales, for the prior year period. The decline in these operating expenses as a percentage of net sales was primarily the result of strong sales that leveraged the fixed component of operating expenses. Additionally, we have continued to control expenses associated with our stores' use of local storage facilities and related truck rentals. During the quarter, we were able to save $0.4 million in these areas as compared to the prior year period.

Non-Cash Stock Compensation Charge. During the quarter, we incurred a non-cash stock compensation charge related to certain outstanding stock options of $ 1.1 million, or 1.7% of net sales. No such charge was incurred in the prior year period.

Depreciation and Amortization. Depreciation and amortization expense $1.7 million, or 2.5% of net sales, for the quarter as compared to $1.4 million, or 2.5% of net sales, for the prior year period. The dollar increase was due primarily to capital investments in information technology made during fiscal 2001, including the implementation of a new merchandise management system in April 2001.

Interest Expense. Interest expense on senior, subordinated and other notes payable was $1.5 million, or 2.2% of net sales, for the quarter as compared to $2.6 million, or 4.7% of sales, for the prior year period. The decrease was the result of improved operating cash flow which resulted in lower average debt balances during the quarter combined with lower interest rates as compared to the prior year. Interest expense associated with mandatorily redeemable Class C Preferred Stock was $0.5 million, or 0.8% of net sales, for the quarter as compared to $0.5 million, or 0.9% of net sales, for the prior year period. Interest expense related to the amortization of debt issue costs was $0.4 million, or 0.6% of net sales, for the quarter as compared to $0.3 million, or 0.4% of net sales, for the prior year period.

Income Taxes. Income tax benefit was $33,000, or 39.0% of pre-tax loss, for the quarter as compared to a benefit of $2.1 million, or 43.7% of pre-tax loss, for the prior year period.

Net Income. As a result of the foregoing, net loss was $52,000, or
(0.1)% of net sales, for the quarter compared to a net loss of $2.7 million, 4.9% of sales, for the prior year period.

FISCAL YEAR ENDED FEBRUARY 2, 2002 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
2000

Net Sales. Net sales increased by 18.5% to $307.2 million for fiscal 2001 from $259.2 million for fiscal 2000. The net sales increase in fiscal 2001 resulted primarily from an increase in comparable store net sales. Also, the addition of five new stores in fiscal 2001 and the full year impact of the 17 new stores added in fiscal 2000 offset by the closure of 11 stores after fiscal 2000 and three stores in fiscal 2000 contributed to the overall net sales increase. The increase in comparable store net sales accounted for approximately $37.2 million of the total net sales increase, or 77.5%, and the net increase in the store base over the last two fiscal years accounted for approximately $10.8 million, or 22.5%, of the total net sales increase. One of our key operating initiatives during 2001 was a concerted effort to reduce inventory levels and SKU counts to offer a better, sharper array of merchandise without changing the core categories of merchandise that we offer. Much of this inventory reduction was accomplished from January through April 2001 through markdowns and promotional activities. As a result of this effort, merchandise flow improved during the balance of the year, allowing our customers to experience a steady flow of fresh product. In addition, the installation of a fully integrated retail information management system at our home office in April 2001 significantly increased our ability to maintain a fresh merchandise mix and appropriate inventory levels in our stores. The comparable store net sales increase was primarily the result of increased unit sales and customer traffic, although we did experience favorable trends in our average retail price per item sold.

Gross Profit. Gross profit, defined as net sales less the cost of sales including cost of product sold, freight, store occupancy and central distribution costs, increased $20.1 million, or 23.1%, to $107.1 million for fiscal 2001 from $87.0 million for fiscal 2000. Gross profit expressed as a percentage of net sales increased to 34.9% for fiscal 2001, from 33.6% for fiscal 2000. The increase in gross profit as a percentage of net sales resulted primarily from the leveraging of store occupancy costs through higher net sales. Additionally, as a result of our aggressive inventory reduction in the first quarter of fiscal 2001, product cost of sales, including freight expenses, declined as a percentage of net sales particularly in the second half of fiscal 2001, due to the strong sell-through and fresher merchandise mix. These factors were partially offset by an increase in central distribution costs as a percentage of net sales as we leased additional distribution center space and increased staffing levels during fiscal 2001.

Other Operating Expenses. Other operating expenses, including both store and corporate costs, were $72.0 million, or 23.4% of net sales, for fiscal 2001 as compared to $67.4 million, or 26.0% of net sales, for fiscal 2000. The decline in these operating expenses as a percentage of net sales was primarily the result of strong sales that leveraged the fixed component of operating expenses. The percentage decrease in operating expenses also benefited from several expense control initiatives at the store and corporate levels. Two of the most significant initiatives were directly related to our fiscal 2001 plan to improve store-level operating performance. First, we initiated a concerted effort to restrain growth in store payroll expense. By operating stores with lower inventory levels and improving merchandise distribution and allocation, we were able to reduce store payroll expense to 12.2% of net sales for fiscal 2001 as compared to 13.6% of net sales for fiscal 2000. This improvement is partially the result of our completion of a planned reduction in the number of store assistant manager positions. Second, we were able to save over $1 million by reducing our stores' use of local storage facilities and related truck rentals. During fiscal 2002, we will seek to further reduce the costs associated with these local storage facilities as we continue to increase the volume of our centrally distributed merchandise.

Non-Cash Stock Compensation Charge. In fiscal 2001, we incurred a non-cash stock compensation charge related to certain outstanding stock options of $0.6 million, or 0.2% of net sales. No such charge was incurred in fiscal 2000. See Note 8 of the Notes to our consolidated financial statements.

Depreciation and Amortization. Depreciation and amortization expense was $6.4 million, or 2.1% of net sales, for fiscal 2001 as compared to $6.5 million, or 2.5% of net sales, for fiscal 2000. The decline as a percentage of net sales was the result of the strong sales performance as well as a decline in capital expenditures over the last two fiscal years in relation to previous fiscal years.

Interest Expense. Interest expense on senior, subordinated and other notes payable was $9.8 million, or 3.2% of net sales, for fiscal 2001 as compared to $11.2 million, or 4.3% of net sales, for fiscal 2000. The decrease was the result of significantly improved operating cash flow which led to lower average debt balances in fiscal 2001 in comparison to fiscal 2000 combined with lower interest rates. Interest expense associated with the mandatorily redeemable Class C Preferred Stock was $2.0 million, or 0.7% of net sales, for fiscal 2001 as compared to $1.9 million, or 0.7% of net sales, for fiscal 2000. Amortization of debt issue costs was $1.3 million, or 0.4% of net sales, for fiscal 2001 as compared to $1.3 million, or 0.5% of net sales, for fiscal 2000. The accretion of common stock warrants of $7.8 million, or 2.5% of net sales, reflects the accretion to fair value of detachable put warrants issued by us in connection with our issuance of subordinated debt in 1996. No such charge was recorded in fiscal 2000.

Income Taxes. Income tax expense was $3.2 million, or 41.0% of pre-tax income, for fiscal 2001 as compared to a benefit of $0.6 million, or 30.3% of pre-tax loss, for fiscal 2000.

Net Income. As a result of the foregoing, net income was $4.6 million, or 1.5% of net sales, for fiscal 2001 compared to a net loss of $1.3 million, or 0.5% of net sales for fiscal 2000.

FISCAL YEAR ENDED DECEMBER 31, 2000 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1999

Net Sales. Net sales increased by 9.6% to $259.2 million for fiscal 2000 from $236.6 million for fiscal 1999. The net sales increase in fiscal 2000 resulted primarily from the addition of 17 new stores in fiscal 2000 and the full year impact of the 29 new stores added in fiscal 1999 offset by the closure of three stores in fiscal 2000 and one store in fiscal 1999. Comparable store net sales increased 0.6% in fiscal 2000. The increase in comparable store net sales accounted for $1.1 million, or 4.9%, of the increase in net sales and the net increase in the number of stores over the last two fiscal years accounted for $21.5 million, or 95.1% of the increase. During the first two quarters of fiscal 2000, comparable store net sales increased 7.7% due to successful promotions in select categories. Comparable store net sales decreased 3.9% for the last two quarters of fiscal 2000 and were down 5.4% in the fourth quarter of fiscal 2000. We believe that many factors contributed to the weak second half net sales performance including supply chain inefficiencies, an overall lackluster retail holiday season and a build-up of inventory at the store level as holiday sales did not materialize.

Gross Profit. Gross profit increased $4.5 million, or 5.5%, to $87.0 million for fiscal 2000 from $82.5 million for fiscal 1999. Gross profit expressed as a percentage of net sales decreased to 33.6% for fiscal 2000, from 34.9% for fiscal 1999. The decline in gross profit as a percentage of net sales was primarily the result of increases in store occupancy and central distribution costs outpacing the relatively small comparable store net sales growth experienced in fiscal 2000. Expense increases in central distribution resulting from additional throughput volume contributed to the decline in gross profit as a percentage of net sales. Additionally, product cost of sales, including freight expenses, increased as a percentage of net sales due to fourth quarter markdowns taken in an effort to generate sales momentum.

Operating Expenses. Operating expenses were $67.4 million, or 26.0% of net sales, for fiscal 2000 as compared to $57.9 million, or 24.5% of net sales, for fiscal 1999. The increase as a percentage of net sales was primarily the result of increases in store payroll and occupancy costs outpacing the modest increase in comparable store net sales. Store payroll expense increased to 13.6% of net sales for fiscal 2000 as compared to 12.8% of net sales for fiscal 1999. The increase in store payroll expense was primarily the result of an increase in the average compensation for store managers along with an increase in the average hourly wage. We also experienced increases in certain corporate operating expenses, including payroll expense in information technology and store operations management.

Depreciation and Amortization. Depreciation and amortization expense was $6.5 million, or 2.5% of net sales, for fiscal 2000 as compared to $6.0 million, or 2.5% of net sales, for fiscal 1999. The dollar increase in depreciation expense was the result of relatively high capital expenditures in the years prior to fiscal 2000.

Interest Expense. Interest expense on senior, subordinated and other notes payable was $11.2 million, or 4.3% of net sales, for fiscal 2000 as compared to $10.2 million, or 4.3% of net sales, for fiscal 1999. The increase was the result of higher average debt balances in comparison to the prior year combined with higher interest rates. Interest expense associated with the mandatorily redeemable Class C Preferred Stock was $1.9 million, or 0.7% of net sales, for fiscal 2000 as compared to $1.6 million, or 0.7% of net sales, for fiscal 1999. Amortization of debt issue costs was $1.3 million, or 0.5% of net sales, for fiscal 2000 as compared to $1.3 million, or 0.6% of net sales, for fiscal 1999.

Income Taxes. For fiscal 2000, we recorded an income tax benefit in the amount of $0.6 million, or 30.3% of pre-tax loss, as compared to an expense of $0.8 million, or 16.6% of pre-tax income, for fiscal 1999. In fiscal 1999, we received a tax benefit from surtax exemptions that lowered the statutory rate by 21.2% of pre-tax income. As a result of our December 31, 1999 reorganization (see "Certain Transactions - Reorganization"), this benefit was not available to us in fiscal 2000, nor will it be available to us in the future due to our consolidated corporate structure.

Net Income. As a result of the foregoing, we recorded a net loss of $1.3 million, or 0.5%, of net sales for fiscal 2000, as compared to net income of $4.1 million or 1.7% of net sales for fiscal 1999.

LIQUIDITY AND CAPITAL RESOURCES

Most of our capital requirements relate to new store openings, existing store expansions, remodelings or relocations, seasonal working capital and payment of interest on our outstanding indebtedness. Our working capital requirements are primarily for merchandise inventories, which typically reach their peak by the end of the third quarter of each fiscal year. Historically, we have funded our store openings, expansions, remodelings and relocations and met our working capital requirements from internally generated funds, borrowings under our credit facilities and proceeds from the sale of equity securities.

During fiscal 1999, 2000 and 2001, net cash provided by operating activities was $12.9 million, $1.3 million and $37.5 million, respectively. During the quarter ended May 4, 2002, net cash of $3.7 million was used in operating activities. All of our revenues are realized at the point-of-sale in our stores. Thus, our sales are essentially on a cash basis. The cash flow from operating our stores is a significant source of liquidity. This operating cash flow is used primarily to purchase inventory, make interest payments on our indebtedness and pay income taxes.

During fiscal 1999, 2000 and 2001 and the quarter ended May 4, 2002, net cash used in investing activities was $10.8 million, $6.0 million, $4.7 million and $1.8 million, respectively. We use cash in investing activities to build new stores and expand, remodel or relocate existing stores. Furthermore, net cash used in investing activities includes purchases of information technology assets and equipment for our distribution facilities and corporate headquarters. During fiscal 1999, 2000 and 2001 and the quarter ended May 4, 2002, we opened 29, 17, five and two new stores, respectively, and expanded or remodeled 14, four, two and two stores, respectively.

We expect to open approximately 15 new stores during fiscal 2002, two of which were opened prior to the date of this prospectus. Capital expenditures, including leasehold improvements and furniture and fixtures, for the five new stores opened during fiscal 2001 averaged approximately $148,000 (net of landlord allowances), and initial gross inventory requirements (which were partially financed by trade credit) averaged approximately $142,000 per store. Opening inventory requirements at new stores vary significantly depending upon the time of year when the store is opened, expected sales volume and store size. We also intend to expand or remodel four stores in fiscal 2002 and perform minor refurbishments on several other stores. The cost of remodeling two stores in fiscal 2001 was approximately $153,000 per store.

Our total planned capital expenditures for fiscal 2002 are $8.5 million. In addition to providing for new stores, together with expanded, relocated and remodeled stores, these planned capital expenditures include $0.6 million for equipment in our distribution facilities and $2.4 million for various investments in information technology assets.

Our principal indebtedness during the past three fiscal years consisted of (i) our former principal credit facility, which included a term loan of $57 million and a $20 million revolver, (ii) $20 million of senior subordinated notes due in June 2003, (iii) a $5 million subordinated note payable to our Chairman and (iv) our mandatorily redeemable Class C Preferred Stock, with a stated value of $17.1 million as of February 2, 2002, originally issued in connection with our 1996 recapitalization. See "Related Party Transactions - Recapitalization."

During fiscal 1999, cash of $3.4 million was used in financing activities. During fiscal 1999, we made $5.8 million of principal payments on our long-term debt and repaid $7 million under our revolving line of credit. In addition, in July 1999 we borrowed an additional $7.5 million, including $3.4 million from certain of our shareholders and $4.1 million from our existing senior lenders. The $4.1 million was collateralized with cash and letters of credit supplied by certain of our warrantholders and shareholders. Our securityholders who participated in this loan financing received warrants to purchase 15,847 shares of our common stock as consideration. During fiscal 1999 we also incurred $2.5 million in additional long-term borrowings.

In fiscal 2000, financing activities contributed cash of $19.9 million. During fiscal 2000, we drew $20.0 million under our former revolving line of credit and received $7.4 million of net proceeds (net of $0.1 million of transaction expenses) from an equity investment by certain of our warrantholders and shareholders. We also repaid the $5 million note due to our Chairman through his conversion of the principal portion of the loan into additional equity. In addition, the $7.5 million of borrowings from July 1999 was repaid as our lenders drew on the $4.1 million of cash collateral posted by certain warrantholders and shareholders, in consideration of which we issued additional equity to these securityholders, and other shareholders converted $3.4 million of these borrowings into additional equity. See "Related Party Transactions - 2000 Equity Transaction."

In fiscal 2001, $30.0 million was used in financing activities. In fiscal 2001, the principal uses of cash in financing activities were repayments on our former credit facility consisting of $20.0 million on the line of credit and $9.2 million on the term loan principal. See "Related Party Transactions" for a description of various financing transactions from 1996 through 2000 involving related parties.

Due to our failure to comply with certain financial covenants in our old principal credit agreement during fiscal 2000, our former senior lenders prevented us from continuing to pay current cash interest to our subordinated lenders. We subsequently entered into negotiations with our former senior lenders and our existing subordinated lenders to amend our agreements with those respective lenders. Pursuant to these negotiations, in June 2001 we entered into amended credit agreements with these lenders and these lenders waived the events of default under their respective facilities. With respect to the former senior credit facility, the maturity date remained June 30, 2002 and the covenants were made less restrictive. With respect to the subordinated loan agreement, the maturity date remained June 30, 2003 and the interest rate was increased from 12.5% to 15% effective January 1, 2001 and 15.5% effective January 1, 2002. We also reduced the dividend rate on our Class A and Class D Preferred Stock and most of our Class B Preferred Stock from 10% to 4%. Between June 2001 and the termination of our former credit facility, we complied with all covenants in our former senior credit agreement and subordinated loan agreement. We repaid all indebtedness under our former senior credit facility in May 2002 with proceeds from our new senior credit facility. We are currently in compliance with all of our lending agreements.

In May 2002, we entered into a new, three-year senior secured credit facility that includes a $45 million revolving credit facility ($30 million for the first six months of each calendar year) and a $15 million term loan. The revolving credit facility bears interest at a floating rate equal to the prime rate or LIBOR plus 2.25%, at our election. Borrowings under the new revolving credit facility are subject to certain customary conditions and contain customary events of default, including an event of default upon a material adverse change in the business. The term loan bears interest at the prime rate plus 7.25%. Borrowings under our new senior credit facility are collateralized by substantially all of our assets and real estate and guaranteed by all of our subsidiaries. The maximum availability under the revolving credit facility is limited by a borrowing base which consists of a percentage of eligible inventory less reserves.

The lender may from time to time reduce the lending formula with respect to the eligible inventory to the extent the lender determines that the liquidation value of the eligible inventory has decreased. The lender also from time to time may decrease the borrowing base by adding reserves with respect to matters such as inventory shrinkage. The revolving credit facility terminates in May 2005. The term loan must be repaid in twelve consecutive quarterly installments payable in the last day of each calendar quarter commencing June 30, 2002, each installment to be in the amount of $562,500, with the entire unpaid balance of the term loan due on the last day of the term. We used the proceeds of the term loan, together with a total of approximately $33.6 million of a combination of available cash and borrowings under the revolving credit facility, (1) to repay all indebtedness (including accrued interest outstanding) outstanding under our former senior secured credit facility under which $38.3 million was outstanding at May 4, 2002, (2) to pay all accrued and unpaid interest on our subordinated debt, of which there was $4.7 million as of May 4, 2002 and (3) to pay $5.7 million of accrued interest on the Class C Preferred Stock, of which there was $7.7 million accrued and unpaid as of May 4, 2002. As a result, the interest rate on the subordinated notes was reduced from 15.5% to 12.5% and the dividend rate on the Class A, Class B and Class D Preferred Stock was increased from 4% to 10%. As of June 3, 2002, $16.0 million was outstanding under the revolving credit facility and $5.7 million was available for borrowing. A portion of the proceeds from this offering will be used to pay down a portion of the balance expected to be outstanding on the new revolving credit facility.

We issued Class A Preferred Stock, Class B Preferred Stock and Class C Preferred Stock in June 1996 and December 1999 and Class D Preferred Stock in August 2000. As of May 4, 2002, the liquidation value, including accrued dividends, on our Class A Preferred Stock, Class B Preferred Stock and Class D Preferred Stock was $49.4 million, $17.4 million and $22.5 million, respectively. Dividends accrue at an annual rate of 10% for the Class A Preferred Stock, Class B Preferred Stock and the Class D Preferred Stock. Dividends on the Class A Preferred Stock, Class B Preferred Stock and Class D Preferred Stock have accrued and have not been paid. The Class A Preferred Stock, Class B Preferred Stock and Class D Preferred Stock are redeemable at our option after the earliest to occur of June 12, 2004 or the closing of a liquidity event (which includes this offering). The Class A Preferred Stock, Class B Preferred Stock and Class D Preferred Stock are redeemable at the option of the holders after June 12, 2004. At the option of 60% of the holders, all of the outstanding Class A Preferred Stock, Class B Preferred Stock and Class D Preferred Stock, other than any shares being redeemed at our option, will automatically convert into common stock upon the occurrence of this offering at a rate equal to the liquidation value of the preferred stock plus accrued dividends, divided by the initial public offering price. The Class C Preferred Stock is mandatorily redeemable at the earliest to occur of June 12, 2004 or the closing of a liquidity event (including this offering). The Class C Preferred Stock has no conversion privileges. The liquidation value of the Class C Preferred Stock, including accrued amounts classified as interest, was $24.8 million at May 4, 2002. Amounts classified as interest associated with the Class C Preferred Stock accrue at 9% annually on the outstanding balance of the Class C Preferred Stock, compounded semi-annually. The payments representing such accruals after 1997 had not been made as a result of subordination provisions under our existing senior credit facility. In May 2002, in connection with the refinancing of our former senior credit facility, $5.7 million of the unpaid accruals were paid to the holders of the Class C Preferred Stock.

The following table summarizes our material contractual obligations, including both on- and off-balance sheet arrangements in effect at February 2, 2002, and as adjusted to give effect to the sale by us of shares of common stock in this offering at an assumed initial public offering price of

$ per share and the application of the net proceeds from the sale (after deducting estimated offering expenses and underwriting discounts and commissions):

CONTRACTUAL OBLIGATIONS          FISCAL 2002   FISCAL 2003   FISCAL 2004   THEREAFTER   TOTAL    AS ADJUSTED
-----------------------          -----------   -----------   -----------   ----------   ------   -----------
                                                                (IN MILLIONS)
Lease financing:
  Operating lease obligations
    (store leases).............     $21.7         $20.2        $ 19.6        $66.1      $127.6     $127.6
  Operating lease obligations
    (other)....................       0.7           0.4           0.2           --         1.3        1.3
Employment and consulting
  contracts(a).................       0.7           0.7           0.7          0.9         3.0        3.0
Long-term borrowings:
  Senior credit facility(b)....       1.1           2.2           2.2          9.5        15.0       15.0
  Subordinated debt(c).........        --          23.8            --           --        23.8         --
  Class C preferred stock(c)...        --            --          18.6           --        18.6         --
Redeemable convertible
  preferred stock:
  Class D preferred stock(d)...        --            --          22.4           --        22.4         --
  Class A preferred stock(d)...        --            --          48.9           --        48.9         --
  Class B preferred stock(d)...        --            --          17.2           --        17.2         --
                                    -----         -----        ------        -----      ------     ------
      Total obligations........     $24.2         $43.5        $129.8        $76.5      $274.0     $146.9
                                    =====         =====        ======        =====      ======     ======

(a) Includes employment agreements with members of our senior management team entered into in June 2002.

(b) This refers to our new credit facility entered into in May 2002 (excludes $39.5 million which was outstanding under our former senior credit facility as of February 2, 2002).

(c) Gives effect to the repayment of accrued and unpaid interest in May 2002 with the proceeds of our new senior credit facility.

(d) Represents liquidation value of preferred stock, including accrued and unpaid dividends.

Our new senior credit facility and existing subordinated loan agreements contain provisions that could result in changes in the presented terms of the agreements or the acceleration of maturity. Circumstances that could lead to such changes in terms or acceleration include, but are not limited to, a material adverse change in the business or an event of default under the applicable loan agreement. The new credit facility has two financial covenants. One covenant requires us to maintain cash flow, net of capital expenditures, at levels varying between $26.7 million and $17.2 million each quarter based upon our projections taking into account the seasonality of our business. The other covenant requires us to keep our senior debt within a specified ratio of our cash flow ranging from 1.0:1.0 to 1.8:1.0 each quarter based upon our projections taking into account the seasonality of our business and our anticipated utilization of the revolving credit facility. Any failure to comply with these or other financial covenants would allow the lenders to accelerate repayment of their debt, prohibit further borrowing under the revolving portion of the credit facility, declare an event of default, take possession of their collateral, or take other actions available to a secured senior creditor.

We believe that net cash provided by operations and availability under our new credit facility, together with the anticipated proceeds from this offering, will be adequate to carry out our fiscal 2002 growth plans in full and fund our planned capital expenditures, interest payments and working capital requirements for at least the next 12 months. To the extent we seek to accelerate our growth plans, and with respect to periods beyond fiscal 2002, we may need to raise additional capital either through the issuance of debt or equity securities or through additional credit facilities. We cannot assure you that such capital would be available on acceptable terms or at all.

SEASONALITY AND QUARTERLY FLUCTUATIONS

We have historically experienced and expect to continue to experience substantial seasonal fluctuations in our net sales and operating income. We believe this is the general pattern typical of our segment of the retail industry and, as a result, expect that this pattern will continue in the future. Our quarterly results of operations may also fluctuate significantly as a result of a variety of other factors, including the timing of new store openings, net sales contributed by new stores, shifts in the timing of certain holidays and competition. Consequently, comparisons between quarters are not necessarily meaningful and the results for any quarter are not necessarily indicative of future results.

Our strongest sales period is the winter holiday season. We generally realize a disproportionate amount of our net sales and a substantial majority of our operating and net income during the fourth quarter of our fiscal year. In anticipation of the increased sales activity during the fourth quarter of our fiscal year, we purchase large amounts of inventory and hire temporary staffing help for our stores. Our operating performance could suffer if net sales were below seasonal norms during the fourth quarter of our fiscal year. Our net sales, operating income and net income are typically weakest in the first quarter of our fiscal year. We expect this trend to continue.

The following table sets forth certain unaudited financial and operating data for Kirkland's in each fiscal quarter during fiscal 2000 and fiscal 2001. The unaudited quarterly information includes all normal recurring adjustments that we consider necessary for a fair presentation of the information shown.

                                                               FISCAL QUARTER ENDED(1)
                             --------------------------------------------------------------------------------------------
                             MAR. 31,   JUNE 30,   SEP. 30,   DEC. 31,   MAY 5,    AUG. 4,   NOV. 3,   FEB. 2,    MAY 4,
                               2000       2000       2000       2000      2001      2001      2001       2002      2002
                             --------   --------   --------   --------   -------   -------   -------   --------   -------
                                                   (IN THOUSANDS, EXCEPT STORE AND PERCENTAGE DATA)
Net sales..................  $ 50,094   $53,869    $55,291    $99,986    $55,961   $63,614   $66,822   $120,816    66,184
Gross profit...............    14,949    16,475     16,560     39,030     15,239    20,820    22,093     48,998    21,899
Operating income (loss)....    (2,682)     (835)    (1,299)    17,886     (1,512)    2,572     3,022     24,127     2,251
Net income (loss)..........    (3,560)   (2,796)    (3,020)     8,061     (2,725)   (1,117)      (10)     8,431       (52)
Adjusted EBITDA(2).........    (1,051)      796        372     19,475       (140)    4,295     4,764     26,238     5,044
Net cash from operating
  activities...............   (23,239)   (3,556)    (4,956)    33,087    (11,834)    3,146     1,869     44,329    (3,680)
Net cash (used in)
  investing activities.....    (1,596)   (1,411)    (1,107)    (1,867)    (1,406)     (772)     (709)    (1,837)   (1,785)
Net cash (used in) provided
  by financing
  activities...............    18,969    (1,066)     5,880     (3,928)      (954)   (7,986)    1,969    (22,978)   (1,175)
Stores open at end of
  period...................       226       231        233        240        235       233       234        234       236
Comparable store net sales
  increase (decrease)(3)...       6.4%      9.0%      (1.1)%     (5.4)%      3.9%     11.9%     22.9%      13.9%     18.0%

                                                                     FISCAL QUARTER ENDED(1)
                                    -----------------------------------------------------------------------------------------
                                    MAR. 31,   JUNE 30,   SEP. 30,   DEC. 31,   MAY 5,   AUG. 4,   NOV. 3,   FEB. 2,   MAY 4,
                                      2000       2000       2000       2000      2001     2001      2001      2002      2002
                                    --------   --------   --------   --------   ------   -------   -------   -------   ------
As a percentage of sales:
Net sales.........................   100.0%     100.0%     100.0%     100.0%    100.0%    100.0%    100.0%    100.0%   100.0%
Gross profit......................    29.8       30.6       30.0       39.0      27.2      32.7      33.1      40.6     33.1
Operating income (loss)...........    (5.3)      (1.6)      (2.3)      17.9      (2.7)      4.0       4.5      20.0      3.4
Net income (loss).................    (7.1)      (5.2)      (5.5)       8.1      (4.9)     (1.7)     (0.1)      6.7     (0.1)
Adjusted EBITDA(2)................    (2.1)       1.5        0.7       19.5      (0.3)      6.8       7.1      21.7      7.6

(1) Effective January 1, 2001, we changed our fiscal reporting year to a 52-53 week basis ending on the Saturday closest to January 31. Previously, we had reported our results on a calendar year basis. Consequently, the quarterly data for fiscal 2000 were prepared according to the calendar year. The quarterly results for fiscal 2001 were prepared using the 52-53 week basis. The financial and operating data for the 34-day period ended February 3, 2001 is not presented as this period is not included in any of our fiscal quarters.

(2) The term Adjusted EBITDA as used herein represents operating income before depreciation and amortization expense and a non-cash stock compensation charge related to certain outstanding stock options. While Adjusted

EBITDA should not be considered in isolation or as a substitute for net income, cash flow from operations or any other measure of income or cash flow that is prepared in accordance with generally accepted accounting principles or as a measure of a company's profitability or liquidity, Adjusted EBITDA has been presented because we believe it is commonly used in this or a similar format by investors to analyze and compare operating performance as well as to provide additional information with respect to our ability to meet our future debt service, capital expenditure and working capital requirements. Adjusted EBITDA may differ in method of calculation from similarly titled measures used by other companies. This information should be read in conjunction with our consolidated statement of cash flows contained in our consolidated financial statements and notes thereto included elsewhere in this prospectus.

(3) We include new stores in comparable store net sales calculations after the store has been in operation one full fiscal year. We exclude from comparable store net sales calculations each store that was expanded, remodeled or relocated during the applicable period. Each expanded, remodeled or relocated store is returned to the comparable store base after it has been excluded from the comparable store base for one full fiscal year. The comparable store net sales calculations for the fiscal 2001 quarters and the quarter ended May 4, 2002 reflect the results of comparing our net sales for each such quarter to the corresponding quarter in the prior year, where the prior year quarters are measured on a 4-5-4-week basis.

INFLATION

We do not believe that our operating results have been materially affected by inflation during the preceding three fiscal years. There can be no assurance, however, that our operating results will not be adversely affected by inflation in the future.

CRITICAL ACCOUNTING POLICIES

Our critical accounting policies are discussed in the notes to our consolidated financial statements. Certain judgments and estimates utilized in implementing these accounting policies are likewise discussed in each of the notes to our consolidated financial statements. The following discussion aggregates the various critical accounting policies addressed throughout the financial statements, the judgments and uncertainties affecting the application of these policies and the likelihood that materially different amounts would be reported under varying conditions and assumptions.

Revenue Recognition - Sales and the related gross profit are recorded at the time our customers provide a satisfactory form of payment and take ownership of the merchandise. There are minimal accounting judgments and uncertainties affecting the application of this policy. We estimate the amount of merchandise that will be returned for a refund and reduce net sales and gross profit by that amount. Given that the vast majority of returns occur within a matter of days of the selling transaction, the risk of us realizing a materially different amount for net sales and gross profit than reported in the consolidated financial statements is minimal.

Cost of Sales and Inventory Valuation - Our inventory is stated at the lower of cost or market with cost determined using the average cost method with average cost approximating current cost. We estimate the amount of shrinkage that has occurred through theft or damage and adjust that to actual at the time of our physical inventory counts which occur near our fiscal year-end. We also evaluate the cost of our inventory in relation to the estimated sales price giving consideration to markdowns that will occur prior to or at the point of sale. This evaluation is performed to ensure that we do not carry inventory at a value in excess of the amount we expect to realize upon the sale of the merchandise. We believe we have the appropriate merchandising valuation and pricing controls in place to minimize the risk that our inventory values would be materially misstated.

Depreciation and Recoverability of Long-Lived Assets - Approximately 25% of our assets at May 4, 2002 represent investments in property and equipment and goodwill. Determining appropriate

depreciable lives and reasonable assumptions in evaluating the carrying value of capital assets requires judgments and estimates.

- We utilize the straight-line method of depreciation and a variety of depreciable lives. Land is not depreciated. Buildings are depreciated over 40 years. Furniture, fixtures and equipment are depreciated over 5 to 7 years. Leasehold improvements are amortized over the shorter of the useful lives of the asset or the lease term. Our average lease term is 10 years.

- To the extent we replace or dispose of fixtures or equipment prior to the end of its assigned depreciable life, we could realize a loss or gain on the disposition. To the extent our assets are used beyond their assigned depreciable life, no depreciation expense is being realized. We reassess the depreciable lives in an effort to reduce the risk of significant losses or gains arising from either the disposition of our assets or the utilization of assets with no depreciation charges.

- Recoverability of the carrying value of store assets is assessed annually and upon the occurrence of certain events or changes in circumstances such as store closings or upcoming lease renewals. The assessment requires judgment and estimates for future store generated cash flows. The review includes a comparison of the carrying value of the store assets to the future cash flows expected to be generated by the store. The underlying estimates for cash flows include estimates for future net sales, gross profit, and store expense increases and decreases. During fiscal 2001 and fiscal 2000, we recorded impairments of $82,000 and $103,000, respectively. To the extent our estimates for net sales, gross profit and store expenses are not realized, future assessments of recoverability could result in additional impairment charges.

Insurance Reserves - Workers' compensation, general liability and employee medical insurance programs are partially self-insured. It is our policy to record a self-insurance liability using estimates of claims incurred but not yet reported or paid, based on historical claims experience and trends. Actual results can vary from estimates for many reasons, including, among others, inflation rates, claim settlement patterns, litigation trends, and legal interpretations. We monitor our claims experience in light of these factors and revise our estimates of insurance reserves accordingly. The level of our insurance reserves may increase or decrease as a result of these changing circumstances or trends.

Offering and Financing Costs - In previous years, we have incurred costs related to refinancing efforts and an offering of our common stock. Costs incurred related to financing activities are typically capitalized and amortized over the life of the debt. Costs incurred related to common stock offerings are deducted from the proceeds of the successful offering. Occasionally, the anticipated financing activity or stock offering is not consummated. When that occurs, we expense the costs related to such activities that had been previously deferred in anticipation of the transaction.

Stock Options and Warrants - Certain of our stock options require us to record a non-cash stock compensation charge in our financial statements. The amount of the charge is determined based upon the fair value of our common stock. Other options have been granted to employees with an exercise price that is equal to or greater than the fair value of our common stock on the date of grant. Stock options, which have been granted to non-employees in exchange for services, must be valued using an option-pricing model. Stock warrants have been issued in connection with several of our debt issuances and in some cases the warrants contain a feature allowing the holder to put the warrant to us for fair value. In each of these cases, the fair value of our common stock is a significant element of determining the value of the stock option or warrant, or the amount of the non-cash stock compensation charge to be recorded for our variable stock option awards or for non-employee stock option grants. Since our common stock is not traded on a stock exchange, the market value of our stock is not easily determinable. To determine the value of our common stock we first consider the amount paid to us for our common stock in a recent transaction for the sale of our common stock. Absent a recent sale of our common stock, we obtain a valuation from an independent appraiser. In each case, the determination of the fair value of our common stock requires judgment and the valuation has a direct impact on our financial statements. We believe that reasonable methods and assumptions have been used for determining the fair value of our common stock.

IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years beginning after December 15, 2001. SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Under SFAS 142, goodwill (and intangible assets deemed to have indefinite lives) will no longer be amortized but will be subject to annual impairment tests. Other intangible assets will continue to be amortized over their useful lives. As of February 2, 2002, we had goodwill, net of accumulated amortization, in the amount of $1.4 million recorded on our balance sheet. For fiscal 2001, we recorded $83,000 in amortization expense on our consolidated statement of operations. We applied the new rules of accounting for goodwill and other intangible assets beginning in the first quarter of fiscal 2002. The Company ceased amortization of goodwill in accordance with SFAS 142 and performed a test for impairment as of the date of adoption and will test again during 2002 in the month the Company expects to perform its annual testing in future years. The Company will test for impairment on an annual basis or more frequently when events and circumstances indicate that an impairment may have occurred. The application of SFAS 141 and SFAS 142 did not have a significant impact on our financial condition or results of operations.

In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment or Disposal of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions of Accounting Principles Board (APB) Opinion No. 30, "Reporting the Results of Operations" for a disposal of a segment of a business. SFAS 144 is effective for fiscal years beginning December 15, 2001. Adoption of this standard did not have a significant impact on our financial condition or results of operations.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risks related to our operations result primarily from changes in short-term London Interbank Offered Rates, or LIBOR, as our new senior credit facility will utilizes short-term LIBOR contracts. LIBOR contracts are fixed rate instruments for a period of between one and six months, at our discretion. From time to time, we enter into one or more LIBOR contracts. These LIBOR contracts vary in length and interest rate, such that adverse changes in short-term interest rates could affect our overall borrowing rate when contracts are renewed.

As of May 4, 2002, we had no borrowings outstanding under our former line of credit facility. As of May 4, 2002, we had one LIBOR contract outstanding for $37.2 million for our entire former term loan facility. Based on this debt level for the former term loan facility, a hypothetical 10% increase in LIBOR from the applicable rate at May 4, 2002 would have increased net interest expense by approximately $75,000 on an annual basis, and likewise would have decreased both net income and cash flows for that annual period by a corresponding amount. We cannot predict market fluctuations in interest rates and their impact on debt, nor can there be any assurance that long-term fixed-rate debt will be available at favorable rates, if at all. Consequently, our future results may differ materially from estimated results due to adverse changes in interest rates or debt availability.

We did not have any material foreign exchange or other significant market risk as of May 4, 2002.

BUSINESS

GENERAL

CORPORATE HISTORY AND RECENT INITIATIVES

Kirkland's was co-founded in 1966 by our current Chairman, Carl Kirkland. Although originally focused in enclosed malls in the Southeast, we have grown beyond that region and also have begun to open stores in selected non-mall venues. We accelerated our expansion in fiscal 1995, more than doubling our store base from 104 stores at the end of fiscal 1995 to 226 stores at the beginning of fiscal 2000. We also expanded our geography during this period by opening 66 stores outside our core Southeastern base. We operate in major metropolitan markets such as Houston, Texas and Atlanta, Georgia, middle markets such as Birmingham, Alabama and Buffalo, New York and smaller markets such as Appleton, Wisconsin and Panama City, Florida.

Beginning in late 1999, we undertook a series of initiatives with the goals of strengthening our infrastructure and enhancing several aspects of our operations in order to position ourselves for profitable growth. These measures have enabled us to make faster and smarter inventory buying and distribution decisions, to manage the flow of merchandise to our stores more efficiently and to improve overall financial performance. These initiatives included:

Completing Key Investments in Information Technology. Since late 1999, we have invested $6.5 million in several key information systems projects that provide our decision makers with better tools to increase sales, improve operational efficiency, control and distribute inventory and monitor critical performance indicators on a daily basis. We installed new, state-of-the-art POS software and servers in all of our stores in November 1999. In April 2001, we installed an integrated retail management system at our home office. This system provides greatly enhanced functionality to our merchandise buyers and planners. For example, although our buyers have had access to basic daily sales data for many years, our new retail management system produces much more detailed information via our nightly polling process. This information includes daily sales, inventory and gross margin analyzed by merchandise category, classification or SKU for every store. Finally, in March 2002, we completed the installation of new cash registers in approximately two-thirds of our stores.

Developing a More Scalable Distribution Infrastructure. Prior to 2000, we distributed our products primarily through direct shipments from our vendors to each of our individual stores. As our store base grew, we decided to develop a more scalable central distribution strategy. In March 2001, we consolidated our central distribution operations into one 303,000-square-foot, leased facility in Jackson, Tennessee, which allowed us to increase our dollar volume of centrally distributed merchandise by 25% from fiscal 2000 to fiscal 2001. In May 2002, we expanded our central distribution operations through the lease of a 168,000-square-foot warehouse near our other distribution facility. We plan to continue

expanding our proportion of centrally distributed merchandise, from 62% of total inventory purchases in fiscal 2001 to as much as 90% by fiscal 2005.

Our modern central distribution facilities, together with other improvements to our supply chain, have helped us to keep our stores stocked with fresh merchandise and to reduce significantly the cost of managing inventories at the store level. We believe our distribution facilities, which we have the option to expand, provide us with adequate distribution capacity at least until fiscal 2004.

Strengthening Executive Management. Since the second half of 1999, we have added six senior managers, including key hires in merchandising, store operations and information technology. These additions, along with several other key hires and promotions, have broadened the abilities of our management team and have provided leadership to key areas of our business. In addition, in March 2001 we elevated Robert Alderson, a 16-year Kirkland's veteran and previously our Chief Operating Officer, to the position of Chief Executive Officer. Carl Kirkland, our co-founder and author of the Kirkland's concept, serves as Chairman of the Board and is a strategic advisor to our Merchandising team. We believe our management team has valuable experience both from Kirkland's and from other national retailers.

Improving Store-Level Operating Performance. In January 2001, we instituted a plan to improve sales, increase cash flow and return our stores to higher levels of profitability. Key components of the plan included:

- Reducing Store-Level Inventories. We aggressively marked down inventory in January and February 2001 resulting in a significant reduction in store-level inventory. These reduced inventory levels, in conjunction with our central distribution and systems investments, facilitated the flow of fresh inventory to our stores. As a result, store management has been able to spend more of their time focusing on our customers and the appearance of the store and less time on the management of inventory in the stockroom and local storage facilities.

- Controlling and Reducing Store Operating Expenses. We intensified our efforts to control and reduce store operating expenses. In particular, significant savings were achieved by slowing the growth of store payroll expenses and reducing the costs associated with local storage facilities and related truck rentals.

- Closing Under-Performing Stores. We closely reviewed our store base and, as a result, we closed 11 stores after fiscal 2000. Of our stores that were open during all of fiscal 2001, only nine did not generate positive store-level EBITDA.

We believe the convergence of these operational initiatives led to the significant improvement in our fiscal 2001 operating results as compared to fiscal 2000. Financial highlights included:

- A 13.3% increase in comparable store net sales over the 53-week period ended February 3, 2001.

- An 18% reduction in average inventory per store from $214,000 to $176,000 and an increase in average inventory turnover to 3.48x from 2.45x.

- An 79% increase in Adjusted EBITDA to $35.2 million, or 11.4% of net sales.

- An increase in net cash provided by operating activities to $37.5 million from $1.3 million.

As evidenced by the improvement in our operating results, we believe these initiatives have positioned us to expand our proven retail concept and strengthen our position as a leading specialty retailer of home decor in the United States.

KEY OPERATING STRENGTHS

Item-Focused Merchandising. While our stores contain items covering a broad range of complementary product categories, we emphasize key items within our targeted categories rather than merchandising complete product classifications. Although we do not attempt to be a fashion leader, our experienced buyers work closely with our vendors to identify and develop stylish merchandise reflecting the latest trends. We take a disciplined approach to test-marketing products and monitoring individual item sales, which enables us to identify and quickly reorder appropriate items in order to maximize sales of popular products. We also evaluate market trends and merchandise sales data to help us develop additional products to be made by our vendors and marketed in our stores, frequently on an exclusive basis. In most cases, this exclusive merchandise is the result of our buying team's experience in interpreting market and merchandise trends in a way that appeals to our customer. We estimate that over 60% of our merchandise is designed or packaged exclusively for Kirkland's, which distinguishes us in the marketplace and enhances our margins.

Ever-Changing Merchandise Mix. We believe our ever-changing merchandise mix of over 5,000 SKUs creates an exciting "treasure hunt" environment, encouraging strong customer loyalty and frequent return visits to our stores. The merchandise in our stores is typically traditionally styled for broad market appeal, yet it reflects an understanding of our customer's desire for newness and freshness. Our information systems permit close tracking of individual item sales, enabling us to react quickly to both fast-selling and slow-moving items. Accordingly, we actively change our merchandise throughout the year in response to market trends, sales results, and changes in seasons. We also strategically increase selling space devoted to gifts and seasonal merchandise in advance of holidays.

Stimulating Visual Presentation. Our stores have a distinctive, "interior design" look that helps customers visualize the merchandise in their own homes and inspires decorating and gift-giving ideas. Using multiple merchandise arrangements to simulate home settings, we group complementary merchandise creatively throughout the store, rather than displaying products strictly by category or product type. We believe this cross-category merchandising strategy encourages customers to browse for longer periods of time, promoting add-on sales.

Strong Value Proposition. Our customers regularly experience the satisfaction of paying noticeably less for items similar or identical to those sold by other retail stores or through catalogs. This strategy of providing a unique combination of style and value is an important element in making Kirkland's a destination store. While we carry items in our stores that sell for several hundred dollars, most items sell for under $50 and are perceived by our customers as affordable luxuries. Our longstanding relationships with vendors and our ability to place large orders of a single item enhances our ability to attain favorable product pricing from vendors.

Flexible Approach to Real Estate. Our stores operate successfully across a wide spectrum of different regions, market sizes and real estate venues. We operate our stores in 28 states, and over 40% of our stores are located outside the Southeast. We operate successfully in major metropolitan markets such as Houston, Texas and Atlanta, Georgia, middle markets such as Birmingham, Alabama and Buffalo, New York and smaller markets such as Appleton, Wisconsin and Panama City, Florida. In addition, although our stores are predominantly located in enclosed malls, we also operate successfully in non-mall venues, including selected outlet centers and strip centers. The flexibility of our concept enables us to select the most promising real estate opportunities that meet requisite economic and demographic criteria within our target markets.

GROWTH STRATEGY

Our growth strategy is to continue to build on our position as a leading specialty retailer of home decor in the United States by:

Opening New Stores Using our Proven Store Model. Over the past six years, we have more than doubled our store base, principally through new store openings. We intend to continue opening new stores both in existing and new markets. We anticipate our growth will include mall and non-mall locations in major metropolitan markets, middle markets and in selected smaller communities. We believe there are currently more than 800 additional locations in the United States that could support a Kirkland's store. Assuming the continued availability of adequate capital, we expect to open approximately 15 new stores during fiscal 2002 and approximately 35 new stores during fiscal 2003. As of the date of this prospectus, we have opened two new stores in fiscal 2002.

Our proven store model produces strong store-level cash flow and provides an attractive store-level return on investment. In fiscal 2001, our average store generated net sales of approximately $1.3 million and store-level Adjusted EBITDA of approximately $227,000, or 17.4% of net sales. These results were relatively consistent across a wide spectrum of different market sizes and real estate venues. Our stores typically generate positive store-level EBITDA in their first full year of operation. From 1997 to 2000, we opened 93 new stores and all but six produced positive store-level Adjusted EBITDA in their first full fiscal year. The average first full year cash return on investment of these stores was approximately 47%. For the stores we opened in fiscal 2000, our first year cash return on investment was significantly higher than the four-year average, which we believe is due largely to the improvements in management, systems and distribution instituted since late 1999.

Increasing Store Productivity. We plan to increase our sales per square foot and store profitability by leveraging our recent investments in information systems and central distribution, which together contributed to our 18.5% increase in net sales and our 15.1% increase in average net sales per square foot in fiscal 2001. In fiscal 2001, we installed an advanced merchandise management system, relocated our central distribution operations to a more modern facility and increased the volume of centrally distributed merchandise.

Furthermore, we believe that the sales productivity of our stores will benefit from our strong existing customer franchise and our continuing efforts to enhance the Kirkland's brand. Our distinctive and often proprietary merchandise offering, together with carefully coordinated in-store marketing, visual presentation and product packaging, enables us to establish a distinct brand identity and to solidify our bond with customers, further enhancing our store-level productivity. We also believe our comparable store sales will continue to benefit from the discretionary income available to consumers in their prime earning years as well as other consumer and demographic trends favoring home-oriented purchases.

INDUSTRY OVERVIEW

We compete in the U.S. home accessories and gifts market, which encompasses such varied product groups as candles, framed art, table top decoration, wall decor, figurines, decorative pillows, accent rugs and holiday merchandise. According to industry research, sales in the U.S. retail market for decorative home accessories and gifts were approximately $55 billion in 2000. Within this market, we estimate that sales in the principal product categories carried by our stores were approximately $29 billion in 2000. We believe that the industry will continue to benefit from the following characteristics and trends:

Highly Fragmented Industry. The market for home furnishings is highly fragmented with no single company holding a dominant market position. The market includes numerous smaller specialty retailers, as well as department stores, larger mass merchandisers and home furnishings stores, with department stores commanding a decreasing percentage of the home furnishings industry compared to specialty retailers.

Favorable Demographic Trends. The U.S. Census Bureau reports that the percentage of the U.S. population represented by people between the ages of 40 and 64 was approximately 30.9% at July 1, 2001

and is expected to increase to approximately 32.7% by 2005. We believe that our industry will benefit as individuals in this group become homeowners (and second home-owners) and reach their peak earnings potential. New and existing single family home sales have been steadily increasing since 1995 and reached a record 6.15 million homes in 2001.

Increased Lifestyle Focus on Home and Family. The "cocooning" trend continues to have a significant impact on our market. More consumers have been retreating to their homes to spend more time with family and friends, new home-related magazines have seen increased circulation and television programming related to the home has been increasing.

Value-Focused Retailing. We believe that consumers are increasingly seeking retailers who offer value. For example, between 1995 and 2000, retail sales in discount department stores grew at a compounded annual rate of 8.9% compared to 2.1% for conventional department store chains, according to the U.S. Census Bureau. We believe that this consumer-driven emphasis on value should continue to positively impact our growth opportunity.

MERCHANDISING

Merchandising Strategy. Our merchandising strategy is to (i) offer distinctive, and often exclusive, high quality home decor at affordable prices,
(ii) maintain a breadth of product categories, (iii) provide a carefully edited selection of key items within targeted categories, rather than merchandising complete product classifications, (iv) emphasize new and fresh merchandise by continually updating our merchandise mix and (v) present merchandise in a visually appealing manner to create an inviting atmosphere which inspires decorating and gift-giving ideas. We believe that this strategy creates a shopping experience that appeals to shoppers, both style-conscious and price-conscious. Although we do not attempt to be a fashion leader, we identify and capitalize on existing or emerging trends when identifying or developing merchandise for sale.

Our information systems permit close tracking of individual item sales, which enables us to react quickly to market trends and best sellers. As a result, we minimize the accumulation of slow-moving inventory and resulting markdowns. Regional differences in home decor are addressed by tailoring inventories to geographic considerations and store net sales results.

We continuously introduce new and often exclusive products to our merchandise assortment in order to (i) maintain customer interest due to the freshness of our product selections, encouraging frequent return visits to our stores, (ii) enhance our reputation as a leader in identifying or developing high quality, fashionable products and (iii) allow merchandise which has peaked in sales to be quickly discontinued and replaced by new items. In addition, we strategically increase selling space devoted to gifts and holiday merchandise during the third and fourth quarters of the calendar year. Our flexible store design and layout allow for selling space changes as needed to capitalize on selling trends.

While our stores generally carry over 5,000 SKUs, we are constantly monitoring the sell-through on each item and are typically reordering approximately 2,500 active SKUs at any point in time. The make-up of our active SKUs is likewise constantly changing based on changes in selling trends. New and different SKUs are introduced to our stores on a weekly or more frequent basis, and a substantial portion of the inventory carried in our stores is replaced with new SKUs every few months.

We purchase merchandise from approximately 200 vendors, and our buying team works closely with many of these vendors to differentiate Kirkland's merchandise from that of our competitors. We estimate that over 60% of our merchandise assortment is designed or packaged exclusively for Kirkland's, generally based on our buyers' experience in modifying certain merchandise characteristics or interpreting market trends into a product and price point that will appeal to our customer. For products that are not manufactured specifically for Kirkland's, we may create custom packaging as a way to differentiate our merchandise offering and reinforce our brand names. Exclusive or proprietary products distinguish us from our competition, enhance the value of our merchandise, and improve our net sales and gross margin. We market a substantial portion of our exclusive or custom-packaged merchandise assortment under the Cedar

Creek private label brand and other proprietary names. Our strategy is to continue to grow our exclusive and proprietary products and custom-packaged products within our merchandise mix.

Product Assortment. Our major merchandise categories include wall decor (framed art and mirrors), lamps, candles and various holders, photo frames, textiles, garden accessories, floral products and decorative accessories. Our stores also offer an extensive assortment of holiday merchandise, as well as items carried throughout the year suitable for giving as gifts. Consistent with our item-focused strategy, a vital part of the product mix is a variety of home decor and other assorted merchandise that does not necessarily fit into a specific product category. Decorative accessories consist of such varied products as sconces, vases, and clocks. Other merchandise includes accent furniture, novelty items and housewares. Throughout the year and especially in the fourth quarter of the calendar year, our buying team uses its experience in home decor to develop products that are as appropriate for gift-giving as they are for personal purchase. Innovative product design and packaging are important elements of this effort.

The following table presents the percentage of fiscal 2001 net sales contributed by our major merchandise categories:

                                            PERCENTAGE OF
                                             FISCAL 2001
MERCHANDISE CATEGORY                          NET SALES
--------------------                        -------------
Wall Decor (including framed art and
  mirrors)...............................         24%
Holiday..................................         11
Lamps....................................         11
Decorative Accessories...................         10
Garden...................................         10
Candles..................................          9
Floral...................................          5
Frames...................................          5
Other....................................         15
                                                 ---
     Total...............................        100%
                                                 ===

Value to Customer. Through our distinctive merchandising, together with carefully coordinated in-store marketing, visual presentation and product packaging, we continually strive to increase the perceived value of our products to our customers. Our shoppers regularly experience the satisfaction of paying noticeably less for items similar or identical to those sold by other retail stores or through catalogs. Our stores typically have two semi-annual clearance events, one in January and one in July. We also run category promotions periodically throughout the year. We believe our value-oriented pricing strategy, coupled with an adherence to high quality standards, is an important element in establishing our distinct brand identity and solidifying our connection with our customers.

STORE OPERATIONS

General. We currently operate 236 stores in 28 states, all of which are open seven days a week. In addition to corporate management, five Regional Managers and 27 District Managers (who generally have responsibility for eight to ten stores within a geographic district) manage store operations. A Store Manager and one or two Assistant Store Managers manage individual stores. The Store Manager is responsible for the day-to-day operation of the store, including sales, merchandise display and control, personnel functions, and store security. A typical store has one full-time sales associate, one full-time stock person and six to 12 part-time sales associates, depending on the season. Additional part-time sales associates are typically hired to assist with increased traffic and sales volume in the fourth quarter of the calendar year.

Format. The prototype Kirkland's store is between 4,200 and 4,800 square feet, of which approximately 70% typically represents selling space. Merchandise is generally displayed according to

display guidelines and directives given to each store from the Visual Merchandising team with input from Merchandising and Store Operations personnel. This procedure ensures uniform display standards throughout the chain. Using multiple types of fixtures, we group complementary merchandise creatively throughout the store, rather than displaying products strictly by category or product type.

Visual Merchandising. Because of the nature of our merchandise and our focus on identifying and developing best-selling items, we believe adherence to our visual merchandising standards is an important responsibility of our store and field supervisory management. We emphasize visual merchandising in our training efforts and our dedicated team of visual merchants provides valuable leadership and support to this aspect of Store Operations. The Visual Merchandising team provides Store Managers with recommended display directives such as photographs and drawings, weekly placement guides and display manuals. In addition, each Store Manager has some flexibility to creatively highlight those products that are expected to have the greatest appeal to local shoppers. The Visual Merchandising team also assists Regional Managers and District Managers in opening new stores. We believe effective and consistent visual merchandising enhances a store's ability to reach its full sales potential.

Personnel Recruitment and Training. We believe our continued success is dependent in part on our ability to attract, retain and motivate quality employees. In particular, the success of our expansion program depends on our ability to promote and/or recruit qualified District and Store Managers and maintain quality sales associates. To date, the majority of our District Managers previously have been Kirkland's Store Managers. A nine-week training program is provided for new District Managers. Store Managers and Assistant Managers, many of whom begin their Kirkland's career as sales associates, currently complete a formal training program before taking responsibility for a store. This training program includes five to 10 days in a designated "training store," working directly with a qualified Store Manager. District Managers are primarily responsible for recruiting new Store Managers. Store Managers are responsible for the hiring and training of new sales associates, assisted where appropriate by a full-time recruiter. We constantly look for motivated and talented people to promote from within Kirkland's, in addition to recruiting from outside Kirkland's.

Compensation and Incentives. We compensate our Regional, District and Store Managers with a base salary plus a quarterly performance bonus based on store sales and store-level profit contribution. Sales associates are compensated on an hourly basis. In addition, we regularly run a variety of contests that reward associates for outstanding sales achievement.

BRIAR PATCH

In July 1998, we acquired The Briar Patch Management Corporation, a specialty retailer of home accessories and gifts based in Savannah, Georgia. Briar Patch operated 35 stores in six southeastern states primarily in markets that were smaller than Kirkland's markets. We applied our merchandising expertise, management, operational disciplines and financial resources to improve the performance of these stores. Under our management, the average net sales per Briar Patch store increased 34% to $1.1 million for fiscal 2001 from approximately $800,000 in the first 12 full months that we owned the stores (August 1998 through July 1999). Furthermore, the store-level EBITDA margin and sales per square foot of the Briar Patch stores in fiscal 2001 was approximately the same as the store-level EBITDA margin and sales per square foot of the other Kirkland's stores.

We currently operate the Briar Patch stores under the name "Briar Patch by Kirkland's." These stores are operated and merchandised in the same fashion as our stores operated under the "Kirkland's" name. As these stores are remodeled or relocated, we intend to change the name of these stores to "Kirkland's." As of the date of this prospectus, five of the 35 stores acquired from Briar Patch have been remodeled or relocated and are now operating under the "Kirkland's" name, and two of the 35 stores have been closed.

REAL ESTATE

Strategy. Our real estate strategy is to identify retail properties that are convenient and attractive to our target female customer. The flexibility and broad appeal of our stores and our merchandise allows us to operate successfully in major metropolitan markets such as Houston, Texas and Atlanta, Georgia, middle markets such as Birmingham, Alabama and Buffalo, New York and smaller markets such as Appleton, Wisconsin and Panama City, Florida.

Site Selection. We locate our stores in enclosed malls or non-mall venues which are destinations for large numbers of shoppers and which reinforce our quality image and brand. To assess potential new locations, we review financial and demographic criteria and analyze the quality of tenants and competitive factors, square footage availability, frontage space and other relevant criteria to determine the overall acceptability of a property and the optimal locations within it.

Until recent years, we preferred to locate stores in regional or super-regional malls with a history of high sales per square foot and multiple national department stores as anchors, and generally we sought approximate store frontage of 35 to 40 feet on average. Today, we operate 217 of our 236 stores in enclosed malls, but our flexible store format has allowed us to successfully operate stores in a variety of venues including outlet centers, "lifestyle" strip centers and community strip centers.

We believe we are a desirable tenant to developers because of our long and successful operating history, sales productivity, ability to attract customers and our strong position in the home decor category. The following table provides a history of our store openings and closings since the beginning of fiscal 1997.

                             FISCAL   FISCAL   FISCAL   FISCAL   FISCAL    QUARTER ENDED
                              1997     1998     1999     2000    2001(1)    MAY 4, 2002
                             ------   ------   ------   ------   -------   -------------
Stores open at beginning of
  period...................    120      138      198      226       240          234
New stores opened(2).......     20       27       29       17         5            2
Briar Patch stores
  acquired.................     --       35       --       --        --           --
Stores closed..............     (2)      (2)      (1)      (3)      (11)          --
                             -----    -----    -----    -----     -----        -----
Stores open at end of
  period...................    138      198      226      240       234          236
Average gross square
  footage per store(3).....  4,186    4,392    4,364    4,437     4,528        4,525

(1) Also includes the period beginning on January 1, 2001 and ending on February 3, 2001.

(2) Excludes our warehouse outlet store located adjacent to our central distribution facilities in Jackson, Tennessee.

(3) Calculated using gross square footage of all stores open at both the beginning and the end of the period. Gross square footage includes the storage, receiving and office space that generally occupies approximately 30% of total store space.

PURCHASING AND INVENTORY MANAGEMENT

Merchandise Sourcing and Product Development. Our merchandise team purchases inventory on a centralized basis to take advantage of our technology and our consolidated buying power and to closely control the merchandise mix in our stores. Our buying team selects all of our products, negotiates with all of our vendors and works closely with our planning and allocation team to optimize store-level merchandise mix by category, classification and item. The seven members of our buying team have an average of 14 years of retail experience, and four of the seven have tenure with Kirkland's ranging from eight to 33 years. We believe this level of experience gives us a competitive advantage in understanding our customer and identifying or developing merchandise suitable to her tastes and budget. We estimate that over 60% of our merchandise assortment is designed or packaged exclusively for Kirkland's, generally based on our buyers' experience in modifying certain merchandise characteristics or interpreting market trends into a product and price point that will appeal to our customer. The amount of exclusively designed or packaged merchandise continues to grow annually. Non-exclusive merchandise is often boxed or packaged exclusively for Kirkland's utilizing Kirkland's proprietary brands.

We purchase merchandise from approximately 200 vendors. Approximately 75% of our total purchases are from importers of merchandise manufactured primarily in the Far East and India, with the balance purchased from domestic manufacturers and wholesalers. For our purchases of merchandise manufactured abroad, we believe buying from importers or U.S.-based representatives of foreign manufacturers rather than directly from foreign manufacturers enables us to maximize flexibility and minimize product liability and credit risks. Further, we believe our executive management and buyers are more effective by focusing on managing the retail business and allowing importers to handle the procurement and shipment of foreign-manufactured merchandise for our stores. For certain categories and items, the strategic use of domestic manufacturers and wholesalers enables us to reduce the lead times between ordering products and offering them in our stores.

Planning and Allocation. Our merchandise planning and allocation team works closely with our buying team, field management and store personnel to meet the requirements of individual stores for appropriate merchandise in sufficient quantities. This team also manages inventory levels, allocates merchandise to stores and replenishes inventory based upon information generated by our management information systems. Our inventory control systems monitor current inventory levels at each store and for our operations as a whole. If necessary, we can shift slow-moving inventory to other stores for sell-through prior to instituting corporate-wide markdowns. We also continually monitor recent selling history within each store by category, classification and item to properly allocate further purchases to maximize sales and gross margin.

Each of our stores is internally classified for merchandising purposes based on certain criteria including store sales, size, location and historical performance. Although all of our stores carry similar merchandise, the variety and depth of products in a given store may vary depending on the store's rank and classification. Inventory purchases and allocation are also tailored based on regional or demographic differences between stores.

In April 2001, we installed a state-of-the-art merchandise management system improving the efficiency of our planning and allocation process. This system provides our buyers and planners with daily information on sales, gross margin and inventory by category, classification and item. This information is available for each store, permitting our planners to assess merchandise trends and manage inventory levels and flow at the individual store level.

DISTRIBUTION

Prior to fiscal 2000, we distributed our products primarily through direct shipments from our vendors to each of our individual stores. Inventory backstock was held both in the store's stockroom and in local storage facilities managed by each Store Manager. We maintained a modest central distribution capability in Jackson, Tennessee through a collection of low-cost warehouses to process certain merchandise shipments and to hold inventory for new store openings. As our store base grew, this legacy distribution system became cumbersome and inefficient, and we recognized the need to develop a more scalable central distribution strategy to permit greater inventory control and to reduce freight costs.

During fiscal 2000, we began working with Kurt Salmon & Associates, a leading supply chain consulting firm, to improve our distribution practices and to formulate a long-term distribution strategy. In March 2001, we consolidated our central distribution operations into one modern, 303,000-square-foot facility in Jackson, Tennessee, which allowed us to increase our dollar volume of centrally distributed merchandise by 25% from fiscal 2000 to fiscal 2001. In fiscal 2001, we distributed approximately 62% of our merchandise purchases centrally while the remaining 38% of our purchases were shipped directly from vendors to our stores. In May 2002, we expanded our central distribution capacity through our lease of a second, 168,000-square-foot warehouse in close proximity to our original 303,000-square-foot central distribution facility in Jackson, Tennessee. We have the option to expand both of our distribution facilities, and also have an option to purchase an additional 22-acre tract of land adjacent to these facilities.

Central distribution offers a number of important benefits. In addition to allowing us to reduce freight costs and to manage the flow of merchandise to our stores more efficiently, central distribution

allows us to increase the percentage of our purchases that are pre-ticketed by vendors (approximately 90% as of April 2002). Increased use of central distribution has enabled us to significantly reduce the use of costly local storage facilities, which our stores traditionally have used to store surplus inventory, and has also resulted in reduced truck rental costs. Our overall distribution expense decreased as a percentage of net sales from 6.5% in fiscal 2000 to 5.7% in fiscal 2001.

We will seek to expand our proportion of centrally distributed merchandise to 90% by fiscal 2005, which we believe will facilitate further reductions in our use of local storage facilities during fiscal 2002 and fiscal 2003. We believe that our combined distribution facilities provide us with adequate distribution capacity at least until fiscal 2004. As we continue to capitalize on the benefits of central distribution, we will continue to take advantage of the benefits that direct shipment capability offers, such as maximizing sales during the late fall season.

E-COMMERCE

We believe the Internet offers opportunities to complement our "brick-and-mortar" stores and to increase our retail commerce and consumer brand awareness of our products. We maintain a web site at www.kirklands.com, which provides our customers with a resource to locate a store, preview our merchandise and purchase products online. We sell a modest amount of merchandise through our web site and we have a small customer service department to handle e-mail and phone inquiries from our store and e-commerce customers. The information contained or incorporated in our web site is not a part of this prospectus.

MANAGEMENT INFORMATION SYSTEMS

We have invested significant resources developing an information systems infrastructure to support our business. These investments included $6.5 million of software and hardware replacements or upgrades since late 1999. Recent projects included new point-of-sale (POS) software and servers in all stores (fiscal 1999), integrated retail management software at our home office (fiscal 2001) and an upgrade of POS hardware in approximately two-thirds of our stores (fiscal 2001/fiscal 2002). We believe these newly enhanced systems provide our key decision makers, both in stores and at our home office, with the timely information needed to drive our sales and profitability.

Our store information systems include a server in each store that runs our automated POS application on multiple POS registers. The server provides managers with convenient access to detailed sales and inventory information for the store. Our POS registers provide price look-up (all merchandise is bar-coded), time and attendance and automated check and credit card processing. Through automated nightly two-way electronic communication with each store, we upload SKU-level sales, gross margin information and payroll hours to our home office system and download new merchandise pricing, price changes for existing merchandise, purchase orders and system maintenance tasks to the store server. Based upon the evaluation of information obtained through daily polling, our planning and allocation team implements merchandising decisions regarding inventory levels, reorders, price changes and allocation of merchandise to our stores.

The core of our home office information system is the integrated GERS retail management software installed in April 2001. This system integrates all merchandising and financial applications, including category, classification and SKU inventory tracking, purchase order management, automated ticket making, general ledger, sales audit, accounts payable and fixed asset management. Our distribution center also uses certain elements of the GERS software package. We utilize a Lawson Software package for our payroll and human resource functions.

MARKETING

Our marketing efforts emphasize in-store signage, store and window banners and displays and other techniques to attract customers and provide an exciting shopping experience. Historically, we have not engaged in extensive media advertising because we believe that we have benefited from our strategic

locations in high-traffic shopping malls and valuable "word-of-mouth" advertising by our customers. Many shopping mall leases historically required some advertising, although an industry shift to "media funds" has largely been implemented, whereby a retailer contributes at agreed levels to the shopping mall's advertising fund based on the square footage of the store. We supplement our in-store marketing efforts with periodic local newspaper advertisements to promote specific events in our stores, including our semi-annual clearance events.

TRADEMARKS

All of our stores operate under the name "Kirkland's" other than 28 stores which operate under the name "Briar Patch by Kirkland's." We acquired these stores in 1998. As these stores are remodeled or relocated, we intend to change the name of these stores to the "Kirkland's" name.

We registered our "Kirkland's" logo with the United States Patent and Trademark Office on the Principal Register. In addition, we hold several trademark registrations in connection with our Cedar Creek private label brand as well as a registration of "the Kirkland Collection." We believe the "Kirkland's" logo, "the Kirkland Collection" and the Cedar Creek private label brand have become important components in our merchandising and marketing strategy. We also claim common law trademark rights in Briar Patch, Kirkland's Outlet, Kirkland's Home and other marks. We are exploring the possibility of federal registration of several of these marks. We are not aware of any claims of infringement or other challenges to our right to use our marks in the United States.

COMPETITION

The retail market for home decor is highly competitive. Accordingly, we compete with a variety of specialty stores, department stores, discount stores and catalog retailers that carry merchandise in one or more categories also carried by our stores. Our product offerings also compete with a variety of national, regional and local retailers, including such specialty retailers as Bed, Bath & Beyond, Cost Plus, Linens 'n Things, Michaels Stores, Pier 1 Imports and Williams-Sonoma. We believe that the principal competitive factors influencing our business are merchandise quality and selection, price, visual appeal of the merchandise and the store and the convenience of location. Although we face competition from a broad range of retailers, we believe that few competitors focus exclusively on home decor, primarily in a mall environment. Specialty retailers tend to have higher prices and a narrower assortment of products than our stores. Department stores typically have higher prices than our stores for similar merchandise. Wholesale clubs may have lower prices than our stores, but the product assortment is generally considerably more limited.

The number of companies offering a selection of home decor products that overlaps generally with our product assortment has increased over the last five years. However, we believe that our stores still occupy a distinct niche in the marketplace: traditionally styled merchandise, reflective of current market trends typically offered at a discount to catalog and department store prices. We believe we compete effectively with other retailers due to our experience in identifying a broad collection of distinctive merchandise, pricing it to be attractive to the target Kirkland's customer and presenting it in a visually appealing manner.

In addition to competing for customers, we compete with other retailers for suitable store locations and qualified management personnel. Many of our competitors are larger and have substantially greater financial, marketing and other resources than we do. See "Risk Factors - We face an extremely competitive specialty retail business market, and such competition could result in a reduction of our prices and a loss of our market share."

PROPERTIES

We lease all of our store locations and expect to continue our policy of leasing rather than owning. Our leases typically provide for 10-year terms, many with the ability for Kirkland's (or the landlord) to terminate the lease in the middle of the term if sales at the leased premises do not reach a certain annual

level. The leases typically provide for payment of percentage rent (i.e., a percentage of sales in excess of a specified level) and the rate of increase in key ancillary charges is generally capped.

As current leases expire, we believe we will be able either to obtain lease renewals if desired for present store locations or to obtain leases for equivalent or better locations in the same general area. To date, we have not experienced unusual difficulty in either renewing leases for existing locations or securing leases for suitable locations for new stores. A majority of our store leases contain provisions permitting the landlord to terminate the lease upon a change in control of Kirkland's.

We own our corporate headquarters in Jackson, Tennessee, which currently consists of approximately 40,000 square feet of office space. We lease two distribution facilities, consisting of a combined 471,000-square-feet, also located in Jackson, Tennessee.

The following table indicates the states and cities where our stores are located and the number of stores within each state:

ALABAMA(14)
Auburn
Birmingham
Decatur
Dothan
Florence
Gadsden
Hoover
Huntsville
Mobile
Montgomery(2)
Oxford
Prattville
Tuscaloosa

ARKANSAS(3)
Fayetteville
Little Rock
North Little Rock

FLORIDA(31)
Altamonte Springs
Boynton Beach
Bradenton
Brandon
Clearwater
Coral Springs
Daytona Beach
Destin
Ft. Myers
Gainesville
Jacksonville(2)
Lake Wales
Mary Esther
Naples
Ocoee
Orange Park
Oviedo
Panama City
Pembroke Pines
Pensacola
Sanford
Sarasota
Sebring
St. Petersburg
Sunrise
Tallahassee
Tampa(3)
Vero Beach

GEORGIA(21)
Albany
Alpharetta
Athens
Atlanta(2)
Augusta
Buford
Columbus
Commerce
Douglasville
Duluth
Kennesaw
Lithonia
Macon(2)
Morrow
Peachtree City
Rome
Savannah(2)
Valdosta

ILLINOIS(6)
Aurora
Bloomington
Fairview Heights
Gurnee
Moline
Orland Park

INDIANA(7)
Evansville
Ft. Wayne
Greenwood
Indianapolis
Lafayette
Mishawaka
Terre Haute

IOWA(4)
Cedar Rapids
Coralville
Davenport
West Des Moines

KANSAS(4)
Leawood
Overland Park
Topeka
Wichita

KENTUCKY(7)
Bowling Green
Florence
Lexington
Louisville(2)
Owensboro
Paducah

LOUISIANA(10)
Baton Rouge(2)
Gretna
Houma
Kenner
Lafayette
Lake Charles
Monroe
Shreveport
Slidell

MARYLAND(5)
Baltimore
Frederick
Glen Burnie
Hanover
Waldorf

MICHIGAN(3)
Auburn Hills
Grandville
Okemos

MISSISSIPPI(10)
Biloxi
Columbus
Flowood
Greenville
Hattiesburg
Jackson
McComb
Meridian
Ridgeland
Tupelo

MISSOURI(3)
Joplin
Springfield
St. Louis

NEBRASKA(1)
Lincoln

NEW JERSEY(1)
Elizabeth

NEW MEXICO(2)
Albuquerque(2)

NEW YORK(2)
Buffalo
West Nyack

NORTH CAROLINA(16)
Asheville
Cary
Charlotte
Concord
Durham(2)
Fayetteville
Greensboro(2)
Hickory
High Point
Pineville
Raleigh
Rocky Mt.
Wilmington
Winston-Salem

OHIO(10)
Akron
Beaver Creek
Canton
Cincinnati(2)
Dublin
Niles
Parma
St. Clairsville
Youngstown

OKLAHOMA(2)
Oklahoma City
Tulsa

PENNSYLVANIA(6)
Altoona
Camp Hill
Erie
Exton
Lancaster
Pittsburgh

SOUTH CAROLINA(11)
Anderson
Bluffton
Charleston(2)
Columbia(3)
Florence
Greenville
Myrtle Beach
Spartanburg

TENNESSEE(14)
Chattanooga
Clarksville
Franklin
Goodlettsville
Jackson
Johnson City
Knoxville(2)
Memphis(3)
Nashville(2)
Sevierville

TEXAS(27)
Amarillo
Arlington
Austin
Cedar Park
Corpus Christi
El Paso
Friendswood
Frisco
Grapevine
Houston(4)
Humble
Hurst
Katy
Lubbock
McAllen
Mesquite
Midland
Plano
San Antonio
San Marcos
Sugar Land
The Woodlands
Tyler
Waco

VIRGINIA(11)
Charlottesville
Chesapeake
Colonial Heights
Dulles
Glen Allen
Lynchburg
Newport News
Norfolk
Richmond
Roanoke
Winchester

WEST VIRGINIA(3)
Barboursville
Bridgeport
Charleston

WISCONSIN(2)
Appleton
Eau Claire

EMPLOYEES

We employed approximately 1,600 full-time and approximately 2,200 part-time employees at December 1, 2001. Of these, approximately 200 were corporate and warehouse center personnel and 3,600 were store employees. The number of part-time employees fluctuates with seasonal needs. None of our employees is covered by a collective bargaining agreement. We believe our employee relations are good.

LEGAL PROCEEDINGS

We are involved in various routine legal proceedings incidental to the conduct of our business. We believe any resulting liability from existing legal proceedings, individually or in the aggregate, will not have a material adverse effect on our operations or financial condition.

MANAGEMENT

DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES

Our directors, executive officers and key employees and their respective ages as of February 2, 2002, are as follows:

            NAME               AGE                      POSITION
            ----               ---                      --------
DIRECTORS AND EXECUTIVE
  OFFICERS:
Carl Kirkland(a).............  61    Chairman of the Board
Robert E. Alderson...........  55    President, Chief Executive Officer and Director
Reynolds C. Faulkner.........  38    Executive Vice President, Chief Financial
                                     Officer and Director
H.R. Harvey..................  44    Senior Vice President of Merchandising
C. Edmond Wise, Jr...........  51    Senior Vice President of Store Operations
Alexander S. McGrath.........  40    Director
David M. Mussafer(a).........  39    Director
R. Wilson Orr, III(a,b)......  39    Director
John P. Oswald(b)............  42    Director
Murray Spain(b)..............  58    Director
KEY EMPLOYEES:
Chris T. LaFont..............  41    Vice President of Merchandising - Product
                                     Development
Grey W. Satterfield..........  39    Vice President of Merchandising - Planning
Toni F. Warren...............  46    Vice President of Merchandising - Replenishment
James W. Harris..............  55    Vice President of Operations and Personnel
Deborah A. McDonald..........  35    Vice President of Visual Merchandising
Connie L. Scoggins...........  47    Vice President of Finance and Treasurer/
                                     Controller
Lowell E. Pugh, II...........  45    Vice President and General Counsel

(a) Member of Compensation Committee

(b) Member of Audit Committee

DIRECTORS AND EXECUTIVE OFFICERS

Carl Kirkland has been Chairman of the Board since June 1996. Mr. Kirkland co-founded Kirkland's in 1966 and served as Chief Executive Officer from 1966 through March 2001 and President from 1966 through November 1997. He has over 30 years of experience in the retail industry. Mr. Kirkland also serves on the board of directors of Hibbett Sporting Goods, Inc.

Robert E. Alderson has been a Director of Kirkland's since September 1986, President of Kirkland's since November 1997 and Chief Executive Officer of Kirkland's since March 2001. He served as Chief Operating Officer of Kirkland's from November 1997 through March 2001 and as Senior Vice President of Kirkland's since joining in 1986 through November 1997. He also served as Chief Administrative Officer of Kirkland's from 1986 to 1997. Prior to joining Kirkland's, he was a senior partner at the law firm of Menzies, Rainey, Kizer & Alderson.

Reynolds C. Faulkner has been a Director of Kirkland's since September 1996 and joined Kirkland's as Senior Vice President and Chief Financial Officer in February 1998. He was promoted to Executive Vice President in February 2002. Prior to joining Kirkland's, from July 1989 to January 1998,

Mr. Faulkner was an investment banker in the corporate finance department of The Robinson-Humphrey Company, LLC, most recently serving as a Managing Director and head of the retail practice group. In this capacity, Mr. Faulkner was involved in numerous public and private financings and mergers and acquisitions of companies in the retail industry.

H.R. Harvey has been Senior Vice President of Merchandising since joining Kirkland's in June 2001. Prior to joining Kirkland's, Mr. Harvey was Vice President of Merchandising at Homeplace of America from July 2000 to June 2001 and Senior Vice President of Merchandising at Saks Incorporated from February 1996 to July 2000. Prior to that, he was with Federated Department Stores for over 16 years, most recently as Merchandising Vice President.

C. Edmond Wise, Jr. has been Senior Vice President of Store Operations since joining Kirkland's in December 2000. Prior to joining Kirkland's, Mr. Wise was a Director of Retail Operations for Payless ShoeSource from October 1998 to November 2000. Prior to that, Mr. Wise had 26 years of retail operations experience, including eight years with Edison Brothers Stores from October 1990 to October 1998.

Alexander S. McGrath has been a director of Kirkland's since June 1996. Mr. McGrath is currently a general partner of Capital Resource Partners II, L.P., a mezzanine and private equity investment firm which is the general partner of Capital Resource Lenders II, L.P., a warrantholder of and subordinated lender to Kirkland's. He joined Capital Resource Lenders in 1988 as an associate, and has been a general partner of Capital Resource Partners II, L.P. since 1993. Prior to that, he was an associate at Investments Orange Nassau Inc., a private equity investment firm. See "Principal and Selling Shareholders."

David M. Mussafer has been a Director of Kirkland's since June 1996. Mr. Mussafer is currently a Managing Director of Advent International Corporation and is responsible for Advent's North American private equity operations. Advent is a private equity investment firm which beneficially owns common stock of Kirkland's through its interests in certain members of Kirkland Holdings L.L.C., one of Kirkland's principal shareholders. Mr. Mussafer joined Advent in 1991 and has been a principal of the firm since 1993. Prior to joining Advent, Mr. Mussafer worked in corporate lending at Chemical Bank from 1985 to 1988. See "Principal and Selling Shareholders."

R. Wilson Orr, III has been a Director of Kirkland's since June 1996. Since 1993, Mr. Orr has been a principal of SSM Corporation, a private equity investment firm and an affiliate of SSM Venture Partners, L.P. which is a member of Kirkland Holdings L.L.C., one of Kirkland's principal shareholders. He joined SSM Corporation in 1988 as a Vice President and partner. From 1984 to 1988, he worked in corporate lending at Chemical Bank. See "Principal and Selling Shareholders."

John P. Oswald has been a Director of Kirkland's since June 1996. Since 1994, Mr. Oswald has been a partner of the Capital Trust Group, a private equity investment firm and an affiliate of CT/ Kirkland Equity Partners, L.P., which is a member of Kirkland Holdings L.L.C., one of Kirkland's principal shareholders. Mr. Oswald is a beneficial owner of Capital Trust Investments, Ltd., a warrantholder of and subordinated lender to Kirkland's. He is also President and Chief Executive Officer of Bridge East Capital, a private equity investment partnership, which is an affiliate of the Capital Trust Group. Prior to joining Capital Trust Group he was a partner with the law firm of Lord, Day & Lord from 1986 to 1994 and an associate with Arthur Andersen LLP from 1984 to 1986. See "Principal and Selling Shareholders."

Murray Spain has been a Director of Kirkland's since September 2001. In September 2000, Mr. Spain co-founded World Wide Basics, an importer of general merchandise, and has served as its President since inception. Prior to this, he was the co-founder of Dollar Express, Inc. and acted as Dollar Express's President and Chief Operating Officer from its inception in 1961 until May 2000, when Dollar Express merged with Dollar Tree Stores, Inc. At that time, Dollar Express was a chain of 126 retail stores in 5 states. Mr. Spain was not working from May to September 2000.

KEY EMPLOYEES

Chris T. LaFont has been Vice President of Merchandising since September 1997. Mr. LaFont is responsible for all merchandise buying decisions for Kirkland's. From 1988 to September 1997, he served as Vice President of Visual Merchandising for Kirkland's. Mr. LaFont started his career with Kirkland's in 1981 as a management trainee.

Grey W. Satterfield has been Vice President of Merchandising since joining Kirkland's in January 2000. Mr. Satterfield is responsible for merchandise planning and inventory management efforts, including receipt flow management and the maintenance of all open-to-buy reports. Prior to joining Kirkland's, Mr. Satterfield was with Saks Incorporated from October 1996 to December 1999, most recently as Vice President of Product Development. Prior to that, Mr. Satterfield had nine years of buying experience with the Macy's and Federated Stores organizations.

Toni F. Warren has been Vice President of Merchandising since January 2000. Ms. Warren is responsible for merchandise allocation and replenishment. Ms. Warren has been with Kirkland's for over 30 years and her experience includes 16 years in store operations and 14 years in purchasing, allocation and merchandise information systems.

James W. Harris has been Vice President of Operations and Personnel since 1987. Mr. Harris is responsible for store personnel recruitment and training as well as general store operations. Prior to joining Kirkland's, Mr. Harris was with Goldsmith's, a division of Federated Department Stores, from 1972 to 1987, where he held various positions in store operations.

Deborah A. McDonald has been Vice President of Visual Merchandising since August 2000 and has been with Kirkland's since 1984. She has served as Store Manager, Corporate Specialist and most recently as Director of Visual Merchandising. Ms. McDonald is responsible for creation and implementation of all visual merchandising plans for new and existing stores.

Connie L. Scoggins has been Vice President of Finance since January 2000. Ms. Scoggins has been with Kirkland's since 1986 serving as Treasurer and Controller. Prior to joining Kirkland's, Ms. Scoggins was employed by Owens Corning Fiberglass as Accounting Manager.

Lowell E. Pugh, II, has been a Vice President since January 2000. He has also served as Secretary since November 1997. Mr. Pugh joined Kirkland's in August 1996 and has served since that time as Assistant Vice President and General Counsel. Prior to that Mr. Pugh served as General Counsel to United Foods, Inc., and prior to that he was a partner with Johnson & Gibbs, a Dallas, Texas law firm.

CLASSIFIED BOARD OF DIRECTORS

Upon completion of this offering, our Board of Directors will be divided into three classes of directors, each containing, as nearly as possible, an equal number of directors. Directors within each class are elected to serve three-year terms and approximately one-third of the directors sit for election at each annual meeting of our shareholders. The terms of Messrs. McGrath, Orr and Oswald will expire in 2003, the terms of Messrs. Faulkner and Spain will expire in 2004 and the terms of Messrs. Kirkland, Alderson and Mussafer will expire in 2005. A classified board of directors may have the effect of deterring or delaying any attempt by any person or group to obtain control of us by a proxy contest since such third party would be required to have its nominees elected at two separate annual meetings of the Board of Directors in order to elect a majority of the members of the Board of Directors. Directors who are elected to fill a vacancy (including vacancies created by an increase in the number of directors) must be confirmed by the shareholders at the next annual meeting of shareholders whether or not such director's term expires at such annual meeting. See "Risk Factors - Our charter and bylaw provisions and certain provisions of Tennessee law may make it difficult in some respects to cause a change in control of Kirkland's and replace incumbent management."

DIRECTOR COMPENSATION

To date, directors who are affiliated with us or any of our shareholders have not received separate compensation for their services in that capacity. In the future, we intend to compensate our non-employee directors. The amount of such compensation has not been determined but will be consistent with amounts paid by comparable public companies.

COMMITTEES OF THE BOARD

The audit committee of the Board of Directors is composed of Messrs. Orr, Oswald and Spain. The principal functions of the audit committee include:

- making recommendations to the Board of Directors regarding the selection of our independent public accountants to audit annually our books and records;

- reviewing the proposed scope of each audit;

- meeting periodically with the independent public accountants and our Chief Financial Officer to review matters relating to our financial statements, our accounting principles and our system of internal accounting controls; and

- reporting its recommendations as to the approval of our financial statements to the Board of Directors.

The compensation committee of the Board of Directors is composed of Messrs. Kirkland, Mussafer and Orr. The compensation committee is responsible for establishing the salaries of our executive officers, incentives and other forms of compensation and for administering our employee benefit plans.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Other than Carl Kirkland, the members of the compensation committee of the Board of Directors, Messrs. Mussafer and Orr, have not at any time served as officers or employees of Kirkland's, but are affiliated with entities that participated in our 1996 recapitalization, in subsequent equity financings and in the Pre-Offering Transactions. We rent aircraft for business travel from a company owned by Carl Kirkland. We spent $23,000 for the rental of aircraft from this company for fiscal 2001, $92,000 in fiscal 2000 and $63,000 in fiscal 1999. See "Related Party Transactions." None of our executive officers presently serves, or in the past has served, on the board of directors or compensation committee of any other entity that has an executive officer who is serving, or who in the past has served, as a member of our Board of Directors or our compensation committee.

EXECUTIVE COMPENSATION

The following table sets forth certain compensation information with respect to our Chief Executive Officer and our other executive officers whose salary and bonus exceeded $100,000 for our fiscal year ended February 2, 2002 (the "Named Executive Officers"):

SUMMARY COMPENSATION TABLE

                                                                                        LONG TERM
                                                                                       COMPENSATION
                                                                                       ------------
                                                                                          AWARDS
                                               ANNUAL COMPENSATION                     ------------
                             -------------------------------------------------------    SECURITIES     ALL OTHER
                                                                     OTHER ANNUAL       UNDERLYING    COMPENSATION
NAME AND PRINCIPAL POSITION  FISCAL YEAR   SALARY($)   BONUS($)   COMPENSATION($)(4)    OPTIONS(#)       ($)(5)
---------------------------  -----------   ---------   --------   ------------------   ------------   ------------
Carl Kirkland.............      2001        103,125         --              --               --           867
  Chairman of the Board(1)
Robert E. Alderson........      2001        275,000     40,000              --            2,500           867
  President and Chief
  Executive Officer(2)
Reynolds C. Faulkner......      2001        226,250     40,000              --            1,000           867
  Executive Vice President
  and Chief Financial
  Officer
H.R. Harvey...............      2001        140,625     30,000              --              550            --
  Senior Vice President of
  Merchandising(3)
C. Edmond Wise, Jr........      2001        176,250     30,000          37,855              550            --
  Senior Vice President of
  Store Operations

(1) Mr. Kirkland also served as our Chief Executive Officer until March 2001.

(2) Mr. Alderson became our Chief Executive Officer in March 2001. Mr. Alderson also served as our Chief Operating Officer until March 2001.

(3) Mr. Harvey became our Senior Vice President of Merchandising in June 2001.

(4) Amounts for Mr. Wise consists of $30,655 in relocation expenses and $7,200 in automobile allowance.

(5) Represents amounts contributed under our 401(k) plan for the benefit of Messrs. Kirkland, Alderson and Faulkner.

STOCK OPTIONS GRANTED TO CERTAIN EXECUTIVE OFFICERS DURING FISCAL YEAR 2001

The following table sets forth certain information regarding options for the purchase of common stock that were awarded to our Named Executive Officers during the fiscal year ended February 2, 2002:

OPTION GRANTS IN FISCAL 2001

                                                                                       POTENTIAL REALIZABLE
                                                                                         VALUE AT ASSUMED
                                             PERCENT OF                                ANNUAL RATES OF STOCK
                             NUMBER OF         TOTAL                                           PRICE
                            SECURITIES        OPTIONS                                    APPRECIATION FOR
                            UNDERLYING        GRANTED       EXERCISE OR                  OPTION TERM($)(2)
                              OPTIONS       TO EMPLOYEES    BASE PRICE    EXPIRATION   ---------------------
NAME                       GRANTED(#)(1)   IN FISCAL 2001     ($/SH)         DATE         5%          10%
----                       -------------   --------------   -----------   ----------   ---------   ---------
Carl Kirkland............         --             --               --              --
Robert E. Alderson.......      2,500             27%          $71.00      11/27/2011   $111,629    $282,889
Reynolds C. Faulkner.....      1,000             11%          $71.00      11/27/2011   $ 44,652    $113,156
H.R. Harvey..............        550              6%          $71.00      11/27/2011   $ 24,558    $ 62,236
C. Edmond Wise, Jr.......        550              6%          $71.00      11/27/2011   $ 24,558    $ 62,236

(1) These options will become exercisable as to 33% of such shares on the first anniversary of the option grant date and then will become exercisable for an additional 8.33% on each of our next eight quarter ends.

(2) These amounts represent assumed rates of appreciation in the price of our common stock during the terms of the options in accordance with rates specified in applicable federal securities regulations. Actual gains, if any, on stock option exercises will depend on the future price of our common stock and overall stock market conditions. There is no representation that the rates of appreciation reflected in this table will be achieved.

STOCK OPTIONS EXERCISED BY CERTAIN EXECUTIVE OFFICERS DURING FISCAL 2001 AND YEAR-END OPTION VALUES.

The following table sets forth certain information regarding options for the purchase of common stock that were held by our Named Executive Officers during the fiscal year ended February 2, 2002. None of the Named Executive Officers exercised stock options during the fiscal year ended February 2, 2002.

AGGREGATED OPTION EXERCISES IN FISCAL YEAR ENDED
FEBRUARY 2, 2002 AND YEAR-END OPTION VALUES

                                                        NUMBER OF SECURITIES            VALUE OF UNEXERCISED
                                                       UNDERLYING UNEXERCISED               IN-THE-MONEY
                                                             OPTIONS AT                      OPTIONS AT
                           SHARES                        FEBRUARY 2, 2002(#)             FEBRUARY 2, 2002($)
                         ACQUIRED ON      VALUE      ---------------------------   -------------------------------
NAME                     EXERCISE(#)   REALIZED($)   EXERCISABLE   UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE (1)
----                     -----------   -----------   -----------   -------------   -----------   -----------------
Carl Kirkland(2).......       --            --              0          3,950               0         1,372,823
Robert E.
  Alderson(2)..........       --            --              0          6,450               0         2,065,323
Reynolds C. Faulkner...       --            --          2,283(3)       1,000         577,599           277,000
H.R. Harvey............       --            --              0            550               0           152,350
C. Edmond Wise, Jr.....       --            --              0            550               0           152,350

(1) There was no public trading market for our common stock as of February 2, 2002. Accordingly, these values have been calculated based on our board of directors' determination of the fair market values of the underlying shares as of February 2, 2002 of $348 per share, less the applicable exercise price per share, multiplied by the underlying shares.

(2) Upon completion of this offering, the options held by each of Messrs. Kirkland and Alderson to purchase 3,950 shares of common stock, with a value of $1,372,823 as of February 2, 2002, will automatically terminate.

(3) These options were exercised in May 2002.

EMPLOYEE BENEFIT PLANS

1996 EXECUTIVE INCENTIVE AND NON-QUALIFIED STOCK OPTION PLAN

We maintain the Kirkland's, Inc. 1996 Executive Incentive and Non-Qualified Stock Option Plan (as amended, the "1996 Plan"). We believe the 1996 Plan promotes our long-term growth and profitability by providing key employees with incentives to improve shareholder value and to contribute to our growth and financial success. Moreover, we believe the 1996 Plan helps us attract, retain and reward quality employees.

The Board of Directors or a committee of the Board of Directors administers the 1996 Plan. Under the terms of the 1996 Plan, the committee will be composed of three directors. The Board of Directors or the committee interprets the 1996 Plan, selects option recipients and determines the number of shares subject to each option and establishes the price, vesting and other terms of each option. While there are no predetermined performance formulas or measures or other specific criteria used to determine recipients of options under the 1996 Plan, grants are based generally upon consideration of the grantee's position and responsibilities, the nature of services provided, the value of the services to us, the present and potential contribution of the grantee to our success, the anticipated number of years of service remaining and other factors which the Board of Directors or the committee deems relevant.

Participation in the 1996 Plan is limited to our employees or any of our subsidiaries' employees. Awards under the 1996 Plan may be in the form of incentive stock options or non-qualified stock options.

In the event of any stock split, reverse stock split, stock dividend, recapitalization, reclassification or other similar event, appropriate proportional adjustments may be made to the number of shares reserved

for issuance under the 1996 Plan and the number, kind and price of shares covered by outstanding options. Stock options may not be exercised more than 10 years after the date of grant. Shares subject to forfeited, cancelled or expired stock options become available for grant again under the 1996 Plan. Stock options grants under the 1996 Plan are not transferable by the participants, except upon death.

The exercise price of an incentive stock option must be not less than the fair market value of the common stock on the date the option is granted. Although the 1996 Plan permits the exercise price of a non-qualified stock option to be less than the fair market value of the common stock on the date the option is granted, the exercise price of all non-qualified stock options granted under the 1996 Plan to date have been equal to the fair market value of the common stock on the date of grant. The exercise price of stock options granted under the 1996 Plan may be paid in cash or by tender of previously acquired shares of our common stock.

As of the date of this prospectus, options to purchase 11,399 shares of common stock are outstanding under the 1996 Plan at exercise prices ranging from $71.00 to $95.00 per share, and no additional options may be granted under the 1996 Plan. Of these options, 4,087 have vested as of the date of the prospectus. No additional shares of common stock are available for issuance in connection with future grants under the 1996 Plan.

2002 INCENTIVE PLAN

Prior to the completion of this offering, we intend to adopt the Kirkland's, Inc. 2002 Incentive Plan (the "Incentive Plan"). The Incentive Plan provides for the award of restricted shares of common stock, and incentive stock options, non-qualified stock options and stock appreciation rights with respect to shares of common stock, to our employees, directors, consultants and other individuals who perform services for us.

The maximum number of shares of common stock with respect to which awards may be made under the Incentive Plan is 2,500,000. No Participant will receive an award of stock options or stock appreciation rights under the Incentive Plan with respect to more than 500,000 shares of common stock in any calendar year. In the event of any stock split, reverse stock split, stock dividend, recapitalization, reclassification or other similar event, adjustments may be made at the Board of Directors' discretion to the number of shares reserved for issuance under the Incentive Plan, to the limit on the number of shares that may be subject to stock options or stock appreciation rights granted to a single person in any calendar year and to the number, kind and price of shares covered by outstanding awards. Shares subject to forfeited, cancelled or expired awards become available for grant again under the Incentive Plan. In addition, shares surrendered in payment of any exercise price or in satisfaction of any withholding obligation arising in connection with an award granted under the Incentive Plan become available for grant again under the Incentive Plan.

The Board of Directors or the compensation committee of the Board of Directors administers the Incentive Plan. Under the terms of the Incentive Plan, the compensation committee must consist of two or more directors. The Board of Directors or the compensation committee interprets the Incentive Plan, selects award recipients, determines the number of shares subject to each award and establishes the price, vesting and other terms of each award. While there are no predetermined performance formulas or measures or other specific criteria used to determine recipients of awards under the Incentive Plan, awards are based generally upon consideration of the grantee's position and responsibilities, the nature of services provided, the value of the services to us, the present and potential contribution of the grantee to our success, the anticipated number of years of service remaining and other factors which the Board of Directors or the compensation committee deems relevant.

The Incentive Plan has no specified term, although incentive stock options will not be granted more than 10 years after the adoption of the Incentive Plan.

Stock Options. The Incentive Plan permits the grant of incentive stock options to our employees and the employees of our subsidiaries. The Incentive Plan also provides for the grant of non-qualified stock

options to our employees, directors, and consultants and other individuals who perform services for us (as well as to employees, directors, consultants and service providers of our subsidiaries). The exercise price of any incentive stock options granted under the Incentive Plan may not be less than 100% of the fair market value of our common stock on the date of grant. There is no restriction applicable to the exercise price of non-qualified options granted under the Incentive Plan. Options granted under the Incentive Plan may be exercised for cash or in exchange for shares of common stock owned by the option holder for more than six months having a fair market value on the date of exercise equal to the option exercise price.

Under the Incentive Plan, each option is exercisable at such time and to such extent as specified in the pertinent option agreement between the option recipient and us. However, no award shall be exercisable with respect to any shares of common stock later than ten years after the date of such award. Unless otherwise specified by the Board of Directors or the compensation committee with respect to a particular option, all options are non-transferable, except upon death.

Upon or in anticipation of a change of control in Kirkland's, the Board of Directors or the compensation committee may: (i) cause outstanding options to become immediately exercisable, (ii) provide for the cancellation of options in exchange for comparable options to purchase shares in a successor corporation, or (iii) provide for the cancellation of options in exchange for a cash and/or other substitute consideration.

Stock Appreciation Rights. The Incentive Plan also provides for the grant of stock appreciation rights, either alone or in tandem with a stock option. A stock appreciation right entitles its holder to a cash payment of the excess of the fair market value of our common stock on the date of exercise, over the fair market value of our common stock on the date of grant. No stock appreciation right issued under the Incentive Plan will have a term of more than ten years.

Upon or in anticipation of a change of control in Kirkland's, the Board of Directors or the compensation committee may: (i) cause outstanding stock appreciation rights to become immediately exercisable or (ii) provide for the cancellation of stock appreciation rights in exchange for a cash and/or other substitute consideration.

Restricted Stock. Restricted stock consists of shares of our common stock issued to an employee that will be forfeited to us if certain vesting conditions established by the Board of Directors or the compensation committee at the time of grant (such as a specified period of continued employment or the fulfillment of specified individual or corporate performance goals) are not met. Restricted stock may be sold under the Incentive Plan (at its full value or at a discount) or may be granted solely in consideration for services.

Upon or in anticipation of an event of a change of control in Kirkland's, the Board of Directors or the compensation committee may: (i) cause restrictions on shares of restricted stock to lapse, (ii) cancel restricted stock in exchange for shares of restricted stock of a successor corporation or (iii) redeem restricted stock for cash or other substitute consideration.

EMPLOYEE STOCK PURCHASE PLAN

Prior to the completion of this offering, we intend to adopt an Employee Stock Purchase Plan (the "Stock Purchase Plan"), which allows substantially all of our full-time employees who have been employees for 12 consecutive months, subject to certain limitations, to purchase shares of our common stock at a discount from the prevailing market price at the time of purchase. These shares are either issued by us from our authorized and unissued common stock or purchased by us on the open market. Any employee owning (or having a right to acquire) five percent or more of our voting power or value will not be eligible to participate in the Stock Purchase Plan. 500,000 shares of our common stock will be available for purchase under the Stock Purchase Plan (subject to adjustment in the event of a stock dividend, split, reverse split or distribution, or other similar change in our common stock). Any future increase in the number of shares of our common stock subject to the Stock Purchase Plan will require shareholder approval.

An eligible employee will be eligible to participate in offerings under the Stock Purchase Plan. Offerings under the Stock Purchase Plan will begin upon the completion of this offering and on each subsequent February 1st and August 1st. Each offering will be 24 months long (except for the first offering, which will begin upon completion of this offering and will end on July 31, 2004), so that offerings under the Stock Purchase Plan will overlap. Each offering will include four six-month purchase periods, ending on each July 31st and January 31st (except for the first offering, which will have five purchase periods, the first of which will begin upon completion of this offering and end on July 31, 2002).

Once enrolled in a specific offering, an eligible employee will be able to specify an amount (not greater than 15% of pay) to be withheld from his or her paycheck and credited to a bookkeeping account established for him or her (the "Participation Account"). Amounts in the Participation Account will be applied to the purchase of shares of our common stock on the last day of each purchase period. The price of such shares will be equal to 85% of the lesser of:
(i) the price of our shares on the last day of the purchase period and (ii) the price of our shares on the first day of the offering (or, for purposes of the first offering, the public offering price).

No employee may purchase more than $25,000 worth of common stock (determined based on the price on the first day of the offering) in any calendar year under the Stock Purchase Plan (and any other employee stock purchase plans later established by us or our subsidiaries), with amounts not used in any one year transferable to the following year. In addition, no employee may purchase more than shares of our common stock under the Stock Purchase Plan in any purchase period.

Once enrolled in a specific offering, that offering will continue to apply to an eligible employee until he or she withdraws from the offering or terminates from employment, unless the price of our common stock is lower at the end of any purchase period than at the start of the offering. If the price of our common stock is lower at the end of any purchase period than at the start of the offering, then, after the completion of that purchase period, each eligible employee's participation in that offering will terminate and those employees will be enrolled automatically in the offering beginning immediately after that purchase period.

Only whole shares of common stock may be purchased under the Stock Purchase Plan. Amounts withheld from an employee's paycheck and that are insufficient to purchase a whole share of common stock will remain credited to the employee's Participation Account. A participating employee may change the rate of his or her payroll withholding under the Stock Purchase Plan from time to time, and may cease participation in any offering altogether by requesting a withdrawal of his or her Participation Account. However, once an employee has withdrawn from an offering, he or she may not resume participation in the Stock Purchase Plan until the start of the next offering. Upon termination of an employee's employment, all amounts credited to his or her Participation Account will be returned to him or her (without interest).

If we merge or consolidate with another company, if we sell substantially all our assets, or if we liquidate or dissolve, the end of the then-current purchase period will be accelerated and shares will be purchased under the Stock Purchase Plan immediately before the merger, consolidation, asset sale, liquidation or dissolution (unless the Stock Purchase Plan is assumed by a successor entity).

The compensation committee of the Board of Directors will administer the Stock Purchase Plan. The Board of Directors may amend or terminate the Stock Purchase Plan. The Stock Purchase Plan is intended to comply with the requirements of Section 423 of the Internal Revenue of 1986, as amended (the "Code"). The Board of Directors may terminate the Plan at any time.

401(K) PLAN

We maintain the Kirkland's, Inc. Retirement Plan ("401(k) Plan") for the benefit of our eligible employees. The 401(k) Plan is intended to be qualified under Code section 401(a) and consists of a 401(k) component, a 401(m) matching component and a profit-sharing component. Employees eligible to

participate in the 401(k) Plan are those employees who have completed at least one year of service and attained the age of 21.

Under the 401(k) component, participants may elect to defer up to the maximum permitted by the Code per year to the 401(k) Plan. Under the 401(m) matching component, we may match each participant's elective deferrals, up to 6% of compensation. Currently, we match 50% of each participant's elective deferrals. Under the profit-sharing component, we may make additional contributions in amounts to be determined by us in our sole discretion. Our profit-sharing contributions are allocated among eligible participants in proportion to each participant's compensation.

Matching contributions and profit-sharing contributions vest ratably over six years, or earlier upon attainment of the appropriate retirement age, upon retirement for disability, upon death, or upon termination of the 401(k) Plan. All assets of the 401(k) Plan are currently invested, subject to participant-directed elections, in annuity contracts underwritten by ING Aetna Financial Services.

Payment of 401(k) Plan benefits are made in cash in the form of a single lump sum, periodic installments or an annuity. Distribution of a participant's vested interest generally occurs upon termination of employment (including by reason of retirement, death or disability).

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

Following the completion of this offering, we intend to adopt a non-qualified deferred compensation plan known as a supplemental executive retirement plan ("SERP"). Only a select group of highly compensated management employees chosen by the Board of Directors will be eligible to participate in the SERP. Pursuant to the SERP, participants will be entitled to elect, in advance, to reduce salary or bonus income and have that reduction credited to an account under the SERP. To the extent all or a portion of the participant's deferral relates to amounts that could have been contributed to the 401(k) Plan, but for the application of certain legal restrictions, we will also credit a matching contribution amount to the SERP equal to what would have been contributed to the 401(k) Plan, in the absence of those restrictions.

EMPLOYMENT AGREEMENTS

CARL KIRKLAND AND ROBERT E. ALDERSON

In June 2002, we entered into new employment agreements with Carl Kirkland and Robert Alderson to replace the former agreements we had entered into with them in connection with our 1996 recapitalization, which were scheduled to expire on June 12, 2002. Under their new employment agreements, which expire in June 2006, subject to automatic successive one-year extensions if not terminated, Mr. Kirkland's current salary is $150,000 and Mr. Alderson's current salary is $300,000. In addition, as agreed in connection with our 1996 recapitalization, Mr. Kirkland and Mr. Alderson are entitled to receive a special bonus of $712,500 and $149,500, respectively, per year until an initial public offering or other specified liquidity event occurs. A portion of the proceeds of this offering will be used to pay all accrued and unpaid special bonus amounts (including special bonus amounts accrued and unpaid under their former employment agreements), after which no further special bonus amounts will be paid.

The new employment agreements with Messrs. Kirkland and Alderson also provide that each of them is eligible to receive an annual bonus beginning with the fiscal year ended December 31, 2002. Both Messrs. Kirkland and Alderson are eligible to receive an annual bonus of up to 100 percent of their annual salary. For both Mr. Kirkland and Mr. Alderson, the amount of the annual bonus is at the discretion of the Compensation Committee of the Board of Directors and is based on the achievement of specified personal performance goals and/or specified corporate performance goals, as determined by the Compensation Committee of the Board of Directors.

In addition, under the new employment agreements, if Mr. Kirkland is terminated by us without cause and/or terminates his employment with us for specified reasons, he is entitled to a lump sum severance payment equal to the discounted present value of 24 months' salary or, at the discretion of the

Board of Directors, the payment of monthly severance payments equal to 1/12th his annual salary for 24 months, as well as continued health benefits and use of his office space until the earlier of attainment of age 72 or death. If Mr. Alderson is terminated by us without cause and/or terminates his employment with us for specified reasons, he is entitled to a lump sum severance payment equal to the discounted present value of 24 months' salary or, at the discretion of the Board of Directors, the payment of monthly severance payments equal to 1/12th his annual salary for 24 months, as well as continued health benefits for 24 months.

Each of Messrs. Kirkland and Alderson received an option currently representing the right to purchase 3,950 shares of common stock at a per share exercise price of $0.45 in connection with our 1996 recapitalization. The vesting of these options requires that the investors in our 1996 recapitalization achieve a specified internal rate of return on their invested funds upon an initial public offering or sale of Kirkland's. Because this offering will not result in the specified internal rate of return, these options will automatically terminate upon completion of this offering.

Each of the employment agreements described above also contains non-competition provisions prohibiting the executive from competing against us during the term of the employment agreement and for three years thereafter without our prior written consent. Messrs. Kirkland and Alderson are also entitled to certain additional benefits (beyond those generally available to our employees) including an automobile allowance and additional life insurance.

REYNOLDS C. FAULKNER

In February 1998, we entered into an employment agreement with Reynolds C. Faulkner. Mr. Faulkner currently serves as our Executive Vice President and Chief Financial Officer. Mr. Faulkner currently receives an annual salary of $250,000 and is eligible to receive an annual bonus of up to $100,000 at the discretion of the Board of Directors. In addition, Mr. Faulkner received a signing bonus of $100,000 upon commencement of his employment. The term of Mr. Faulkner's agreement has been extended through June 12, 2002, and negotiations have commenced concerning the terms on which the agreement will be further extended. If Mr. Faulkner's employment is terminated prior to June 12, 2002 by us without cause or by Mr. Faulkner under specified circumstances, Mr. Faulkner is entitled to a severance payment equal to the discounted present value of 12 months' salary and benefits, together with a pro-rated annual bonus.

On February 2, 1998, Mr. Faulkner received a fully vested option for 2,283 shares of our common stock under the 1996 Plan, which was exercised by Mr. Faulkner in May 2002 at a per share exercise price of $95.00.

Mr. Faulkner's employment agreement also contains a non-competition provision prohibiting him from competing against us during the term of the employment agreement and for three years thereafter without our prior written consent. Mr. Faulkner is also entitled to certain additional benefits (beyond those generally available to our employees) including an automobile allowance and additional life insurance.

C. EDMOND WISE, JR. AND H.R. HARVEY

In December 2000, we entered into an employment agreement with C. Edmond Wise, Jr. Under the terms of that agreement, Mr. Wise serves as our Senior Vice President of Store Operations. Mr. Wise currently receives an annual salary of $190,000, and will be eligible to receive an annual bonus dependent upon the achievement of budgeted Adjusted EBITDA and other financial performance criteria. In addition, Mr. Wise received a signing bonus of $20,000. The term of Mr. Wise's agreement extends until termination by either party at any time with or without cause.

In June 2001, we entered into an employment agreement with H.R. Harvey. Under the terms of that agreement, Mr. Harvey serves as our Senior Vice President of Merchandising at an annual salary of $225,000, and will be eligible to receive an annual bonus dependent upon the achievement of budgeted Adjusted EBITDA and other financial performance criteria. In addition, Mr. Harvey received a signing

bonus of $20,000. The term of Mr. Harvey's agreement extends until termination by either party at any time with or without cause.

The employment agreements for Mr. Wise and Mr. Harvey also contain non-competition provisions prohibiting the executive from being, for a period of two years following termination, connected with management or control of any business similar to ours involving national or regional chain retail operations specializing in or having a substantial inventory mix involving home decor. These non-competition provisions do not restrict the ability of these executives from working in management positions for department stores.

RELATED PARTY TRANSACTIONS

RECAPITALIZATION

On June 12, 1996, we completed a recapitalization whereby Advent International Group (through affiliated entities (the "Advent Funds")) became the largest beneficial owner of our equity. The 1996 recapitalization permitted certain founding and management shareholders, consisting of Carl Kirkland, Robert E. Alderson and two other shareholders (collectively, the "Principal Shareholders"), to realize a portion of the value of their interest in Kirkland's.

In connection with our 1996 recapitalization:

- The Advent Funds together with other investors purchased a majority of our common stock and all of our Class A Preferred Stock;

- We redeemed a portion of our common stock held by the Principal Shareholders and all of our common stock held by all of our other shareholders; and

- We reclassified certain shares of our common stock held by the Principal Shareholders into shares of our Class B Preferred Stock and our Class C Preferred Stock.

Concurrent with the consummation of our 1996 recapitalization, we issued an aggregate of $20 million of subordinated notes to a group of institutional lenders. As of May 4, 2002, the aggregate balance of such subordinated notes, including accrued and unpaid interest, was $24.7 million. In May 2002 we repaid $4.7 million of accrued interest with proceeds of our new senior credit facility. These notes mature in June 2003 and will be redeemed with a portion of the proceeds of this offering. We also issued to these institutional lenders warrants to purchase 16,722 shares of our common stock at an exercise price of $0.01 per share.

The lender of $9.9 million of the outstanding subordinated debt is a mezzanine and private equity firm with which a member of our Board of Directors, Alexander S. McGrath, is affiliated. In fiscal 2001, interest in the amount of $1.5 million was paid to or accrued in favor of the lender affiliated with Mr. McGrath. In connection with the issuance of the subordinated note to the lender affiliated with Mr. McGrath, we issued 6,689 warrants to purchase common stock. These and other warrants held by such lender will be exercised at a price per share of $0.01 immediately prior to the completion of this offering.

The lender of $2.2 million of the outstanding subordinated debt is a private equity investment firm with which another member of our Board of Directors, John P. Oswald, is affiliated. In fiscal 2001, interest in the amount of $0.3 million was paid to or accrued in favor of the lender affiliated with Mr. Oswald. In May 2002, $0.4 million of accrued but unpaid interest was paid to this lender. In connection with the issuance of the subordinated note to the lender affiliated with Mr. Oswald, we issued 1,505 warrants to purchase common stock. These and other warrants held by such lender will be exercised at a price per share of $0.01 immediately prior to the completion of this offering.

LOANS INVOLVING OFFICERS

On October 15, 1998, we borrowed $5 million from Carl Kirkland, our current Chairman, pursuant to an unsecured promissory note that was subordinated to all of our senior indebtedness. The note was originally due as soon as we would have sufficient cash following the pay down of our existing senior revolving line of credit, and originally bore interest at the same rate as our existing senior revolving line of credit. The note contained a provision whereby, if the note was not repaid in full by May 1, 1999, the interest rate would increase to the senior revolving line of credit rate plus 2.0%. The note was amended and restated on July 7, 1999 to change the maturity date to June 30, 2001 and the timing of the interest payments. The note was again amended and restated on December 31, 1999 to change the maturity date to June 30, 2003, to fix the interest rate at 12.5% and to provide that, in the event the note was not repaid in full on or before June 30, 2000, Carl Kirkland would receive warrants to purchase 3,200 shares of our

common stock. In August 2000, the loan was discharged through our issuance to Mr. Kirkland of 11,111 shares of common stock, 11,111 shares of Class D Preferred Stock and warrants to purchase 1,389 shares of common stock at a per share purchase price of $.01. At that time, Mr. Kirkland received cash for the balance of the interest due under the note. At that time, Mr. Kirkland also purchased additional securities for cash. See "- 2000 Equity Transaction." In connection with this transaction, Mr. Kirkland agreed to forego receipt of the warrants to purchase 3,200 shares provided for under the note.

In May 2002, we loaned $217,000 to Reynolds Faulkner, our Executive Vice President and Chief Financial Officer. The note bears interest at the rate of 4.75% per year which is payable over the term of the note. The note matures in May 2005 and is due and payable in full at that time. The loan is collateralized by marketable securities having a value of no less than the principal amount of the loan together with 2,283 shares of our common stock owned by Mr. Faulkner. The pledge agreement between us and Mr. Faulkner requires Mr. Faulkner to supply additional collateral at any time the value of existing collateral falls below 125% of the then principal amount of the loan. In addition, at the request of Mr. Faulkner, we may lend up to an additional $500,000 principal amount under the note in April 2003. Any additional principal amount would be subject to the same interest rate, principal repayment and collateral provisions as the original principal amount. The loan was approved by our board of directors and audit committee.

1999 DEBT/EQUITY TRANSACTION

On July 7, 1999, we borrowed an aggregate of $7.5 million, of which $3.4 million was borrowed from the Advent Funds and $4.1 million was borrowed from our former senior lenders. The $4.1 million borrowed from our former senior lenders was collateralized by cash and letters of credit supplied by certain of our warrantholders and shareholders. In connection with this transaction, we issued warrants to purchase 15,847 shares of common stock to certain of our warrantholders and shareholders as consideration for their loan (in the case of the Advent Funds) or for posting cash or a letter of credit as collateral to secure the loan from the senior lenders. In connection with this borrowing, the following securityholders who are or were affiliated with members of our Board of Directors or who are or were holders of at least five percent of our common stock received the following number of warrants to purchase shares of common stock at a price per share of $0.01:

                                                                   DOLLAR AMOUNT OF
                                                                  LOAN OR COLLATERAL
SHAREHOLDER                                            WARRANTS        PROVIDED
-----------                                            --------   ------------------
Carl Kirkland........................................   1,287         $  608,940
Robert Kirkland......................................   1,287         $  608,940
Global Private Equity II Limited Partnership.........   5,018         $2,375,373
Advent Direct Investment Program Limited
  Partnership........................................   1,962         $  926,992
Advent Partners Limited Partnership..................     179         $   85,642
CT/Kirkland Equity Partners, L.P.....................   1,448         $  685,434
SSM/Kirkland Equity Partners, L.P....................   1,738         $  822,485
Capital Resource Lenders II, L.P.....................   1,089         $  515,580
Capital Trust Investments, Ltd.......................     245         $  115,975

REORGANIZATION

Prior to December 31, 1999, we operated our stores through separate corporations (ranging as high as 206 corporations) under common ownership and through a wholly-owned subsidiary. On December 31, 1999, we reorganized by merging each of the separate corporations that operated our stores and a wholly-owned subsidiary into a newly formed subsidiary of Kirkland's. In conjunction with the reorganization, we issued 206 additional shares of our common stock, 2,939,230 additional shares of our Class A Preferred Stock, 1,019,535 additional shares of our Class B Preferred Stock and 541,771

additional shares of our Class C Preferred Stock to all of our then-existing shareholders in the same proportion as their ownership interests in each such class prior to the merger.

2000 EQUITY TRANSACTION

On August 8, 2000, we issued $20 million of our Class D Preferred Stock and common stock to certain of our warrantholders and shareholders. In this transaction, (1) we received $7.5 million in cash, including $3.8 million from the Advent Funds and $3.7 million from Carl Kirkland, and issued 16,667 shares of common stock and 16,667 shares of Class D Preferred Stock, (2) Carl Kirkland's $5 million note originally issued on October 15, 1998 was cancelled and we issued to him 11,111 shares of common stock and 11,111 shares of Class D Preferred Stock and (3) the $7.5 million loan from July 7, 1999 was repaid through our existing senior lenders drawing on the $4.1 million of cash collateral posted by certain of our warrantholders and shareholders in exchange for our issuance of equity to these securityholders, and the Advent Funds converting their $3.4 million loan into newly issued securities. In these transactions, we issued 44,445 shares of common stock and 44,445 shares of Class D Preferred Stock to our securityholders at a purchase price of $0.01 per share for the common stock and $449.99 per share for the Class D Preferred Stock. In consideration for the purchase of these shares, we also issued 5,555 warrants to purchase common stock at a price per share of $0.01. The following table lists the number of shares of common stock, shares of Class D Preferred Stock and warrants issued to securityholders who are or were affiliated with members of our Board of Directors or who are or were holders of at least five percent of our common stock:

                                            COMMON         CLASS D                     PURCHASE
SECURITYHOLDER                               STOCK     PREFERRED STOCK    WARRANTS    PRICE PAID
--------------                              -------    ---------------    --------    -----------
Carl Kirkland(1)........................    20,686          20,686          2,586     $9,308,940
Robert Kirkland.........................     1,353           1,353            169     $  608,940
Global Private Equity II Limited
  Partnership ..........................    13,510          13,510          1,688     $6,079,317
Advent Direct Investment Program Limited
  Partnership...........................     2,060           2,060             51     $1,023,048
Advent Partners Limited Partnership.....       403             403            257     $   85,642
CT/Kirkland Equity Partners, L.P. ......     1,781           1,781            223     $  801,409
SSM/Kirkland Equity Partners, L.P. .....     1,828           1,828            228     $  822,485
Capital Resource Lenders II, L.P. ......     1,146           1,146            143     $  515,580

(1) $5 million of the purchase price for Carl Kirkland was paid through the cancellation of $5 million of subordinated indebtedness owed by Kirkland's to Mr. Kirkland. See " - Indebtedness to Officer."

2001 DIVIDEND AGREEMENT

In connection with the June 2001 amendment to our senior subordinated notes, we amended our charter in order to reduce the dividend rate on our Class A Preferred Stock and Class D Preferred Stock from 10% to 4% until accrued and unpaid interest on our subordinated debt was paid. We also agreed to use our best efforts to obtain the necessary shareholder consent to amend the charter to similarly reduce the dividend on our Class B Preferred Stock. Although we could not get the requisite shareholder consent, in October 2001 we entered into a Dividend Rate Agreement with Carl Kirkland and Robert E. Alderson in which these two shareholders agreed to reduce the dividend on their Class B Preferred Stock to 4%. As a result of the payment of accrued interest on our subordinated debt in connection with the May 2002 refinancing of our senior credit facility, the dividend rate on all of our outstanding Class A Preferred Stock, Class B Preferred Stock and Class D Preferred Stock was restored to 10%.

PRE-OFFERING TRANSACTIONS

Preferred Stock. As of the date of this prospectus, we have four classes of preferred stock. The Class A Preferred Stock, the Class B Preferred Stock and the Class D Preferred Stock currently accrue

dividends at 10% per year compounded quarterly. Amounts classified as interest associated with the Class C Preferred Stock currently accrue at a rate of 9% per year, compounded semi-annually. No dividends have been paid on the Class A Preferred Stock, the Class B Preferred Stock or the Class D Preferred Stock. In connection with the completion of this offering, the Class A Preferred Stock, the Class B Preferred Stock and the Class D Preferred Stock that is not repurchased by us will be converted into common stock, and the Class C Preferred Stock will become mandatorily redeemable. Kirkland Holdings LLC currently owns all of the Class A Preferred Stock. Carl Kirkland, Robert E. Alderson and Robert Kirkland own all of the Class B Preferred Stock and Class C Preferred Stock. Carl Kirkland, Robert Kirkland, the Advent Funds, certain other shareholders and certain of our subordinated lenders own the Class D Preferred Stock.

Stock Repurchase Agreement. In May 2002, we entered into a stock repurchase agreement with the holders of our preferred stock (other than Carl Kirkland). This agreement governs our repurchase of shares of our capital stock from these preferred shareholders with a portion of the proceeds from this offering. The purchase price for each share of Class A Preferred Stock, Class B Preferred Stock and Class D Preferred Stock will be equal to 93% of the sum of the stated value of such share plus all dividends with respect to such share accrued and unpaid through the completion of this offering. The purchase price for each share of Class C Preferred Stock will be equal to the stated value of each such share. As of May 4, 2002, the stated value plus accrued dividends per share for the Class A Preferred Stock, Class B Preferred Stock and Class D Preferred Stock was $ , $ and $ , respectively. The purchase price for each share of common stock will be an amount equal to 93% of the initial public offering price of this offering.

The following table lists the number of shares of Class A Preferred Stock, Class B Preferred Stock, Class C Preferred Stock and Class D Preferred Stock and common stock to be purchased by us from securityholders who are affiliated with members of our Board of Directors or who are holders of at least five percent of our common stock, as well as the purchase price to be paid for such shares, assuming an initial public offering price of $ .

                                      CLASS A     CLASS B     CLASS C     CLASS D
                                     PREFERRED   PREFERRED   PREFERRED   PREFERRED   COMMON    PURCHASE
SECURITYHOLDER                         STOCK       STOCK       STOCK       STOCK      STOCK     PRICE
--------------                       ---------   ---------   ---------   ---------   -------   --------
SSM Venture Partners, L.P. ........                                                            $
CT/Kirkland Equity Partners,
  L.P. ............................                                                            $
Capital Resource Lenders II,
  L.P. ............................                                                            $
Global Private Equity II Limited
  Partnership......................                                                            $
Advent Direct Investment Program
  Limited Partnership..............                                                            $
Advent Partners Limited
  Partnership......................                                                            $
Robert E. Kirkland.................                                                            $
Robert E. Alderson.................                                                            $

Carl Kirkland Exchange Agreement. In May 2002, Carl Kirkland, our current Chairman, entered into an agreement with us under which he agreed to exchange all of his outstanding shares of Class C Preferred Stock, having an aggregate stated value of $7.9 million, into shares of our common stock prior to the completion of this offering. The number of shares of common stock to be issued to Mr. Kirkland equals the stated value of the shares of Class C Preferred Stock divided by 93% of the initial offering price in this offering. Assuming an initial offering price of $ per share, the number of shares of common stock to be issued to Mr. Kirkland will be . All of the shares of common stock Mr. Kirkland is acquiring under the exchange agreement are being sold in this offering. See "Principal and Selling Shareholders."

Robert Kirkland Redemption Agreement. In June 2002, we entered into an agreement with Robert Kirkland, a cousin of our chairman and one of our significant shareholders. Under this agreement, we agreed to repurchase all of our stock owned by Mr. Kirkland upon completion of this offering in

accordance with the stock repurchase agreement discussed above. We also agreed to pay all accrued fees under Mr. Kirkland's consulting agreement through the completion of this offering, estimated at $ . Assuming an initial public offering price of $ per share, we will pay $ for all of Mr. Kirkland's stock.

In exchange for our agreement to redeem all of Mr. Kirkland's capital stock and warrants in us, Mr. Kirkland has agreed to a standstill agreement under which he will not do, or encourage anyone else to do, any of the following:

- acquire or seek to acquire assets, business, securities or options to acquire ownership of us,

- make or participate in a solicitation of proxies to vote our stock,

- form, join or participate in a voting group with respect to our stock,

- arrange or participate in a financing to purchase our stock,

- seek to propose any merger, restructuring or similar transaction with us or otherwise seek to influence or control us,

- seek to negotiate or influence terms of employment of our employees or any collective bargaining agreement, or

- disparage us or any of our officers, directors, shareholders or employees.

Conversion of Preferred Stock. Pursuant to the terms of our charter, immediately prior to completion of this offering and as a part of the Pre-Offering Transactions, any shares of our preferred stock not repurchased pursuant to the stock repurchase agreement will be converted into shares of common stock. The preferred stock will convert into common stock at a rate equal to the aggregate stated value of the preferred stock plus accrued dividends, divided by the initial public offering price. At an assumed initial public offering price of $ per share, we will issue shares of common stock upon conversion of our preferred stock.

Warrants. Immediately prior to the completion of this offering, our warrantholders will exercise all outstanding warrants to purchase 38,124 shares of common stock at a nominal exercise price.

Charter Amendment and Stock Split. In order to implement the above transactions, we will affect a -for-one stock split of our common stock prior to the consummation of this offering and we will amend and restate our charter to provide for an authorized capitalization of 100,000,000 shares of common stock and 10,000,000 shares of preferred stock.

SHAREHOLDERS AGREEMENT

We have entered into a shareholders agreement with our shareholders. Pursuant to this agreement, certain seats on our Board of Directors have historically been reserved for nominees of certain shareholders. We have agreed to take all necessary actions to cause the Board of Directors to be comprised of, subject to certain conditions, (1) two representatives nominated by Advent International Group and (2) one nominee of each of Capital Trust Investments, Ltd., Carl Kirkland, Robert E. Alderson, SSM Venture Partners, L.P. and Capital Resource Lenders II, L.P. The agreement will terminate upon consummation of this offering.

CONSULTING AGREEMENT

In connection with our 1996 recapitalization, we entered into a consulting agreement with Robert Kirkland, a shareholder of Kirkland's and a cousin of our Chairman. Under the provisions of the consulting agreement, Mr. Kirkland provides consulting services and advice regarding purchasing and marketing of merchandise, leasing, store selection, operations, internal management and other matters. The agreement provides for an annual consulting fee of $679,000 and a term expiring in June 2003. The consulting agreement automatically terminates upon the occurrence of certain events, including our sale, a change of control or an initial public offering. Accordingly, Mr. Kirkland's consulting agreement will

automatically terminate upon the completion of this offering. We do not intend to renew the consulting arrangement with Mr. Kirkland following this offering.

INVENTORY PURCHASES FROM SIGNIFICANT SHAREHOLDER

We purchase inventory from a wholesaler previously owned by Robert Kirkland, a shareholder of Kirkland's and a cousin of our Chairman. See "Principal and Selling Shareholders." These purchases aggregated approximately $332,000 during fiscal 2001, $128,000 during fiscal 2000 and $237,000 during fiscal 1999. There were no purchases of inventory from this wholesaler during the 13 weeks ended May 4, 2002.

INVENTORY PURCHASES FROM A FORMER AFFILIATE

In past years we purchased inventory from a manufacturer of which Advent International Group was a significant shareholder until November 1999. These purchases aggregated approximately $5,000 during fiscal 2000 and $292,000 during fiscal 1999. We purchased no inventory from such manufacturer in fiscal 2001 and no longer purchase inventory from them. Advent International Group, which (through the Advent Funds) is a member in Kirkland Holdings L.L.C., one of our principal shareholders, used to be a significant shareholder of such manufacturer. Two of our directors, David M. Mussafer and John P. Oswald, were members of the Board of Directors of such manufacturer until November 1999. Mr. Mussafer and Mr. Oswald are also affiliated with members of Kirkland Holdings L.L.C. See "Principal and Selling Shareholders."

CHARTER OF AIRPLANES

We rent aircraft for business travel from a company owned by Carl Kirkland. We spent $23,000 for the rental of aircraft from this company in fiscal 2001, $92,000 in fiscal 2000 and $63,000 in fiscal 1999. There were no such travel expenses incurred during the 13 weeks ended May 4, 2002.

RELATIONSHIP WITH SUNTRUST ROBINSON HUMPHREY

SunTrust Robinson Humphrey, a division of SunTrust Capital Markets, Inc., is one of the underwriters in this offering and it or its predecessor firm, The Robinson-Humphrey Company, LLC, has from time to time provided us investment banking services, including services rendered in connection with our 1996 recapitalization, and may continue to provide such services in the future.

We consider the terms of our transactions described in the preceding four paragraphs to be at arms length and reasonably equivalent to terms we could obtain through negotiations with an unaffiliated third party under similar economic conditions.

PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth certain information regarding the beneficial ownership of our common stock at May 31, 2002 (assuming that the Pre-Offering Transactions had occurred by (i) each director and Named Executive Officer, (ii) each person known by us to beneficially own more than 5% of our common stock, (iii) each selling shareholder and (iv) all directors and executive officers as a group, both before and after giving effect to the sale of common stock in this offering.

                                                                                      SHARES BENEFICIALLY
                                                                                        OWNED AFTER THE
                                            NUMBER OF SHARES                                OFFERING
                                           BENEFICIALLY OWNED     SHARES TO BE SOLD   --------------------
NAME                                      PRIOR TO THE OFFERING    IN THE OFFERING    NUMBER    PERCENTAGE
----                                      ---------------------   -----------------   -------   ----------
Carl Kirkland(1)........................           5,877
  805 N. Parkway
  Jackson, TN 38305
Robert E. Alderson(2)...................          34,518
  805 N. Parkway
  Jackson, TN 38305
Reynolds C. Faulkner....................           2,283
H.R. Harvey.............................              --                 --                           *
C. Edmond Wise, Jr......................              --                 --                           *
David M. Mussafer(3)....................          69,179
  75 State Street
  Boston, MA 02109
R. Wilson Orr, III(4)...................           9,660
  845 Crossover Lane, Suite 140
  Memphis, TN 38117
John P. Oswald(5).......................          14,114
  757 Fifth Avenue, 22nd Floor
  New York, NY 10017
Alexander S. McGrath(6).................           9,067
Murray Spain............................              --                 --                           *
Kirkland Holdings L.L.C.(7).............          68,552
  75 State Street
  Boston, MA 02109
Advent International Group(8)(9)(10)....          69,179
  75 State Street
  Boston, MA 02109
Capital Trust Investments, Ltd.(11).....           1,505
CT/Kirkland Equity Partners, L.P.(12)...          12,609
  757 Fifth Avenue, 22nd Floor
  New York, NY 10017
R-H Capital Partners, L.P.(13)..........           4,523
SSM Venture Partners, L.P.(14)..........           9,660
  845 Crossover Lane, Suite 140
  Memphis, TN 38117
Crescent/Mach I Partners, L.P.(15)......           1,505
The Marlborough Capital Investment Fund,
  L.P.(16)..............................           3,623
Robert E. Kirkland(17)..................              --
  c/o Kirkland's, Inc.
  805 N. Parkway
  Jackson, TN 38305

                                                                                      SHARES BENEFICIALLY
                                                                                        OWNED AFTER THE
                                            NUMBER OF SHARES                                OFFERING
                                           BENEFICIALLY OWNED     SHARES TO BE SOLD   --------------------
NAME                                      PRIOR TO THE OFFERING    IN THE OFFERING    NUMBER    PERCENTAGE
----                                      ---------------------   -----------------   -------   ----------
Capital Resource Lenders II, L.P.(18)...           9,067
Allied Capital Corporation(19)..........           7,254
Joseph R. Hyde, III(20).................           4,567
All executive officers and directors as
  a group (10 persons)(21)..............         144,698

* Represents less than 1% of the outstanding shares of common stock.

(1) Includes warrants to purchase 3,873 shares of common stock, shares of common stock to be issued upon conversion of Class B Preferred Stock and Class D Preferred Stock and shares of common stock to be issued upon exchange of Class C Preferred Stock. Also includes 2,004 shares of common stock held by Mr. Kirkland as Trustee for the benefit of the children of Robert E. Alderson.

(2) Includes 5,914 shares of common stock and shares of common stock to be issued upon conversion of Class B Preferred Stock. Also includes 28,604 shares of common stock held by Mr. Alderson as Trustee for the benefit of the children of Carl Kirkland. Excludes 604 shares of Class B Preferred Stock being repurchased by us as part of the Pre-Offering Transactions.

(3) In its capacity as the manager of funds affiliated with Advent International Group, Advent International Corporation exercises sole voting and investment power with respect to the 60,024 shares of common stock, warrants to purchase 9,155 shares of common stock and shares of common stock issuable upon the conversion of Class A Preferred Stock and Class D Preferred Stock beneficially owned by the Advent Funds and, accordingly, Advent International Group may be deemed to beneficially own such shares. Such beneficial ownership excludes 1,921,963 shares of Class A Preferred Stock and 7,996 shares of Class D Preferred Stock owned by the Advent Funds, which shares are being repurchased by us as part of the Pre-Offering Transactions. As a result, Mr. Mussafer, one of our directors and a Managing Director of Advent International Corporation, may be deemed to beneficially own these shares. See also note (7) below. If the underwriters' overallotment option is exercised in full, of the shares which may be deemed to be beneficially owned by Advent International Group will be sold, as a result of which Mr. Mussafer may be deemed to beneficially own shares of common stock, or % of the common stock then outstanding, following this offering. Mr. Mussafer disclaims beneficial ownership of all shares held by the Advent Funds other than the 148 shares that are indirectly beneficially owned by Mr. Mussafer.

(4) Mr. Orr may be deemed to beneficially own 1,219 shares of common stock, warrants to purchase 1,311 shares of common stock and shares of common stock issuable upon conversion of Class D Preferred Stock held by SSM Venture Partners, L.P. and 7,130 shares of common stock and shares of common stock issuable upon conversion of Class A Preferred Stock which SSM Venture Partners, L.P. beneficially owns as a member of Kirkland Holdings L.L.C. Such beneficial ownership excludes 306,474 shares of Class A Preferred Stock beneficially owned by SSM Venture Partners, L.P., which shares are being repurchased by us as part of the Pre-Offering Transactions. Mr. Orr, one of our directors, is a partner of SSM Corporation which is an affiliate of SSM Venture Partners, L.P. If the underwriters' overallotment option is exercised in full, of the shares owned by SSM Venture Partners, L.P. will be sold, as a result of which Mr. Orr may be deemed to beneficially own shares of common stock, or % of the common stock then outstanding, after this offering.

(5) Mr. Oswald may be deemed to beneficially own warrants to purchase 1,505 shares of common stock held by Capital Trust Investments, Ltd., 1,781 shares of common stock, warrants to purchase 1,916 shares of common stock and shares of common stock issuable upon conversion of Class D Preferred Stock held by CT/Kirkland Equity Partners, L.P. and 8,912 shares of common stock and shares of common stock issuable upon conversion of Class A Preferred Stock which CT/Kirkland Equity Partners, L.P. beneficially owns as a member of Kirkland Holdings L.L.C. Such beneficial ownership excludes 390,992 shares of Class A Preferred Stock and 180 shares of Class D Preferred Stock beneficially owned by CT/Kirkland Equity Partners, L.P., which shares are being repurchased by us as part of the Pre-Offering Transactions. Mr. Oswald, one of our directors, is a partner of CT Capital International which is an affiliate of Capital Trust Investments, Ltd. and CT/Kirkland Equity Partners, L.P. If the underwriters' overallotment option is exercised in full, of the shares owned by CT/Kirkland Equity Partners, L.P. will be sold, as a result of which

Mr. Oswald may be deemed to beneficially own shares of common stock, or % of the common stock then outstanding, following this offering.

(6) Mr. McGrath may be deemed to beneficially own 1,146 shares of common stock, warrants to purchase 7,921 shares of common stock and shares of common stock issuable upon the conversion of Class D Preferred Stock held by Capital Resource Lenders II, L.P. Mr. McGrath, one of our directors, is a general partner of Capital Resource Partners II, L.P., the general partner of Capital Resource Lenders II, L.P. Such beneficial ownership excludes 1,146 shares of Class D Preferred Stock owned by Capital Resource Lenders II, L.P., which shares are being repurchased by us as part of the Pre-Offering Transactions. If the underwriters' overallotment option is exercised in full of the shares owned by Capital Resource Lenders II, L.P. will be sold, as a result of which Mr. McGrath may be deemed to beneficially own shares of common stock, or % of the common stock then outstanding, following this offering.

(7) Includes 68,552 shares of common stock and shares of common stock issuable upon conversion of Class A Preferred Stock. The members of Kirkland Holdings L.L.C. which are affiliated with us, and their beneficial ownership of the shares of common stock held by Kirkland Holdings L.L.C. (expressed as a percentage), are Advent Direct Investment Program Limited Partnership (17.58%), Global Private Equity II Limited Partnership (45.06%), Advent Partners Limited Partnership (1.62%), SSM Venture Partners, L.P. (10.40052%) and CT/Kirkland Equity Partners, L.P. (13.00%). Kirkland Holdings L.L.C. will be dissolved prior to completion of this offering and all of our shares that are owned by Kirkland Holdings L.L.C. will be distributed to its members.

(8) Includes 13,510 shares of common stock, shares of common stock issuable upon exercise of Class D Preferred Stock and warrants to purchase 6,708 shares of common stock and 30,889 shares of common stock and shares of common stock issuable upon the conversion of Class A Preferred Stock which Global Private Equity II Limited Partnership beneficially owns as a member of Kirkland Holdings L.L.C. Excludes 1,355,238 shares of Class A Preferred Stock and 7,802 shares of Class D Preferred Stock being repurchased by us as part of the Pre-Offering Transactions. David Mussafer, one of our directors, is an affiliate of Global Private Equity II Limited Partnership. See Note 3. If the underwriters' overallotment option is exercised in full, of the shares beneficially owned by Global Private Equity II Limited Partnership will be sold, as a result of which it will beneficially own shares of common stock, or % of the common stock then outstanding, following this offering.

(9) Includes 2,060 shares of common stock, shares of common stock issuable upon exercise of Class D Preferred Stock and warrants to purchase 2,216 shares of common stock and 12,051 shares of common stock and shares of common stock issuable upon the conversion of Class A Preferred Stock which Advent Direct Investment Program Limited Partnership beneficially owns as a member of Kirkland Holdings L.L.C. Excludes 518,001 shares of Class A Preferred Stock being repurchased by us as part of the Pre-Offering Transactions. David Mussafer, one of our directors, is an affiliate of Advent Direct Investment Program Limited Partnership. See Note
3. If the underwriters' overallotment option is exercised in full, of the shares beneficially owned by Advent Direct Investment Program Limited Partnership will be sold, as a result of which it will beneficially own shares of common stock, or % of the common stock then outstanding, following this offering.

(10) Includes 403 shares of common stock, shares of common stock issuable upon exercise of Class D Preferred Stock and warrants to purchase 231 shares of common stock and 1,111 shares of common stock and shares of common stock issuable upon the conversion of Class A Preferred Stock which Advent Partners Limited Partnership beneficially owns as a member of Kirkland Holdings L.L.C. Excludes 48,724 shares of Class A Preferred Stock and 194 shares of Class D Preferred Stock being repurchased by us as part of the Pre-Offering Transactions. David Mussafer, one of our directors, is an affiliate of Advent Partners Limited Partnership. See Note
3. If the underwriters' overallotment option is exercised in full, of the shares beneficially owned by Advent Partners Limited Partnership will be sold, as a result of which it will beneficially own shares of common stock, or % of the common stock then outstanding, following this offering.

(11) Consists of warrants to purchase 1,505 shares of common stock. John Oswald, one of our directors, is an affiliate of Capital Trust Investments, Ltd. See Note 5. If the underwriters' overallotment option is exercised in full, of the shares owned by Capital Trust Investments, Ltd. will be sold, as a result of which it will own shares of common stock, or % of the common stock then outstanding.

(12) Includes 1,781 shares of common stock, shares of common stock issuable upon exercise of Class D Preferred Stock and warrants to purchase 1,916 shares of common stock and 8,912 shares of common

stock and shares of common stock issuable upon the conversion of Class A Preferred Stock which CT/Kirkland Equity Partners, L.P. beneficially owns as a member of Kirkland Holdings L.L.C. Excludes 390,992 shares of Class A Preferred Stock and 180 shares of Class D Preferred Stock being repurchased by us as part of the Pre-Offering Transactions. John Oswald, one of our directors, is an affiliate of CT/Kirkland Equity Partners, L.P. See Note 5. If the underwriters' overallotment option is exercised in full, of the shares beneficially owned by CT/Kirkland Equity Partners, L.P. will be sold, as a result of which it will beneficially own shares of common stock, or % of the common stock then outstanding, following this offering.

(13) Includes 571 shares of common stock, shares of common stock issuable upon exercise of Class D Preferred Stock and warrants to purchase 614 shares of common stock and 3,338 shares of common stock and shares of common stock issuable upon the conversion of Class A Preferred Stock which R-H Capital Partners, L.P. beneficially owns as a member of Kirkland Holdings L.L.C. Excludes 143,502 shares of Class A Preferred Stock being repurchased by us as part of the Pre-Offering Transactions. If the underwriters' overallotment option is exercised in full, of the shares beneficially owned by R-H Capital Partners, L.P. will be sold, as a result of which it will beneficially own shares of common stock, or % of the common stock then outstanding, following this offering.

(14) Includes 1,219 shares of common stock, shares of common stock issuable upon exercise of Class D Preferred Stock and warrants to purchase 1,311 shares of common stock and 7,130 shares of common stock and shares of common stock issuable upon the conversion of Class A Preferred Stock which SSM Venture Partners, L.P. beneficially owns as a member of Kirkland Holdings L.L.C. Excludes 306,474 shares of Class A Preferred Stock being repurchased by us as part of the Pre-Offering Transactions. R. Wilson Orr III, one of our directors, is an affiliate of SSM Venture Partners, L.P. See Note 4. If the underwriters' overallotment option is exercised in full, of the shares beneficially owned by SSM Venture Partners, L.P. will be sold, as a result of which it will beneficially own shares of common stock, or % of the common stock then outstanding, following this offering.

(15) Includes 190 shares of common stock, shares of common stock issuable upon exercise of Class D Preferred Stock and warrants to purchase 204 shares of common stock and 1,111 shares of common stock and shares of common stock issuable upon the conversion of Class A Preferred Stock which Crescent/Mach I Partners, L.P. beneficially owns as a member of Kirkland Holdings L.L.C. Excludes 47,745 shares of Class A Preferred Stock being repurchased by us as part of the Pre-Offering Transactions. If the underwriters' overallotment option is exercised in full, of the shares beneficially owned by Crescent/Mach I Partners, L.P. will be sold, as a result of which it will beneficially own shares of common stock, or % of the common stock then outstanding, following this offering.

(16) Consists of 446 shares of common stock and warrants to purchase 3,177 shares of common stock. Excludes 19,550 shares of Class A Preferred Stock being repurchased by us as part of the Pre-Offering Transactions. If the underwriters' overallotment option is exercised in full, of the shares owned by The Marlborough Capital Investment Fund, L.P. will be sold, as a result of which it will own shares of common stock, or % of the common stock then outstanding, following this offering.

(17) Excludes 10,727 shares of common stock, 347,745 shares of Class B Preferred Stock and 1,353 shares of Class D Preferred Stock owned by Mr. Kirkland, which shares are being repurchased by us as part of the Pre-Offering Transactions.

(18) Includes 1,146 shares of common stock, 7,921 shares of common stock issuable upon the exercise of warrants and shares of common stock upon the conversion of Class D Preferred Stock. Excludes 1,146 shares of Class D Preferred Stock being repurchased by us as part of the Pre-Offering Transactions. Alexander McGrath, one of our directors, is an affiliate of Capital Resource Lenders II, L.P. See Note 6. If the underwriters' overallotment option is exercised in full, of the shares owned by Capital Resource Lenders II, L.P. will be sold, as a result of which it will own shares of common stock, or % of the common stock then outstanding, following this offering.

(19) Includes 917 shares of common stock, shares of common stock issuable upon exercise of Class D Preferred Stock and warrants to purchase 6,337 shares of common stock. Excludes 917 shares of Class D Preferred Stock being repurchased by us as part of the Pre-Offering Transactions. If the underwriters' overallotment option is exercised in full, of the shares owned by Allied Capital Corporation will be sold, as a result of which it will own shares of common stock, or % of the common stock then outstanding, following this offering.

(20) Includes 590 shares of common stock, shares of common stock issuable upon conversion of Class D Preferred Stock and warrants to purchase 635 shares of common stock and 3,342 shares of common stock and shares of common stock issuable upon conversion of Class A Preferred Stock which Mr. Hyde beneficially owns as a member of Kirkland Holdings, L.L.C. Excludes 144,637 shares of Class A Preferred Stock being repurchased by us as part of the Pre-Offering Transactions. If the underwriters' overallotment is exercised in full, of the shares beneficially owned by Mr. Hyde will be sold, as a result of which he will beneficially own shares of common stock or % of the common stock then outstanding, following this offering.

(21) Includes 119,017 shares of common stock, 25,681 shares of common stock issuable upon the exercise of warrants and shares of common stock issuable upon the conversion of Class A Preferred Stock, Class B Preferred Stock and Class D Preferred Stock beneficially owned in the aggregate by our executive officers and our directors. Excludes 2,619,429 shares of Class A Preferred Stock, 604 shares of Class B Preferred Stock and 9,322 shares of Class D Preferred Stock beneficially owned in the aggregate by our executive officers and our directors, which shares are being repurchased by us as part of the Pre-Offering Transactions. If the underwriters' overallotment option is exercised in full, of the shares subject thereto beneficially owned by our directors and our executive officers will be sold, as a result of which they will beneficially own shares of common stock, or % of the common stock then outstanding, following this offering.

DESCRIPTION OF CAPITAL STOCK

GENERAL

Upon completion of this offering, our authorized capital stock will consist of 100,000,000 shares of common stock, no par value, and 10,000,000 shares of preferred stock, no par value. Upon completion of this offering, there will be no preferred stock outstanding, as all of the outstanding preferred stock will be converted into shares of common stock or will be redeemed with a portion of the net proceeds of this offering. See "Use of Proceeds" and "Related Party Transactions - Pre-Offering Transactions."

Upon the completion of this offering, there will be shares of common stock issued and outstanding and shares of common stock reserved for issuance under our employee benefits plans, including 15,570 shares issuable upon the exercise of options that will be outstanding upon the completion of this offering. As of the date of this prospectus, we have 139,264 shares of common stock, 38,124 warrants to purchase common stock, 3,007,630 shares of Class A Preferred Stock, 1,043,235 shares of Class B Preferred Stock, 558,893 shares of Class C Preferred Stock and 44,445 shares of Class D Preferred Stock issued and outstanding. Pursuant to the Pre-Offering Transactions which will take place immediately prior to completion of this offering, $ million of the aggregate stated value and accrued dividends of the outstanding shares of Class A Preferred Stock, Class B Preferred Stock and Class D Preferred Stock will be repurchased by us with proceeds from this offering. All remaining Class A, Class B and Class D Preferred Stock will be converted into shares of common stock. All of our outstanding warrants will be exercised for common stock and then all outstanding shares of common stock will be split on a -for-one basis into shares of common stock. All of the outstanding shares of the Class C Preferred Stock will be exchanged into common stock or repurchased with a portion of our net proceeds of this offering. See "Use of Proceeds" and "Related Party Transactions - Pre-Offering Transactions."

COMMON STOCK

The holders of common stock are entitled to one vote for each share held of record on each matter submitted to a vote of shareholders. All holders of common stock are entitled to share equally in dividends declared on our common stock. See "Dividend Policy." Stock dividends may be paid on common stock, whether or not there are shares of preferred stock outstanding. In the event of any voluntary or involuntary liquidation, dissolution or winding up of Kirkland's, after payment has been made to the holders of shares of preferred stock, if any, for the full amount to which they are entitled, the holders of the shares of common stock are entitled to share equally in the assets available for distribution.

We and the selling shareholders are selling common stock in this offering. All currently outstanding shares of common stock are, and upon issuance, the shares of common stock being sold by us in this offering will be, duly authorized, validly issued, fully paid and non-assessable.

The rights, preferences and privileges of holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock that we may designate and issue in the future. See "Risk Factors - Our charter and bylaw provisions and certain provisions of Tennessee law may make it difficult in some respects to cause a change in control of Kirkland's and replace incumbent management."

PREFERRED STOCK

Pursuant to our amended and restated charter to be filed prior to the completion of this offering, the Board of Directors will be authorized, without further action by the shareholders, to issue up to 10,000,000 shares of preferred stock in one or more series or classes and to establish the designations, preferences, qualifications, privileges, limitations, restrictions, options, conversion rights and other special or relative rights of any series of preferred stock so issued. The issuance of shares of preferred stock could adversely affect the voting power and other rights of holders of common stock. Because the Board of Directors without shareholder action may fix the terms of the preferred stock, the preferred stock could be

issued quickly with terms designed to defeat a proposed takeover of Kirkland's, or to make the removal of our management more difficult. The authority to issue preferred stock or rights to purchase preferred stock could be used to discourage a change in control of Kirkland's. Our management is not aware of any such threatened transaction to obtain control of Kirkland's, and the Board of Directors has no current plans to designate and issue any shares of preferred stock.

WARRANTS

There are currently an aggregate of 38,124 warrants to purchase shares of common stock outstanding. All of these warrants are currently exercisable and their exercise price is $0.01 per share, subject to certain anti-dilution adjustment provisions. Prior to the consummation of this offering, all of our warrantholders will exercise all of their warrants. This offering will not trigger any of the anti-dilution adjustment provisions in the warrants. "See Related Party Transactions - Pre-Offering Transactions."

LIMITATION OF DIRECTORS' LIABILITY

The charter provides that none of our directors will be personally liable to us or any of our shareholders for monetary damages for breach of any fiduciary duty except for liability arising from (i) any breach of a director's duty of loyalty to us or our shareholders, (ii) any acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law or (iii) any unlawful distributions. We believe this provision will assist us in securing and maintaining the services of qualified non-employee directors.

REGISTRATION RIGHTS

Pursuant to a registration rights agreement, by and among us and our shareholders, the holders of shares of our common stock will be entitled to register these shares under the Securities Act.

Under the registration rights agreement, holders may demand that we file a registration statement under the Securities Act covering some or all of the holders' registrable securities. The registration rights agreement limits the number of demand registrations that we are required to make on behalf of the holders, and also requires a minimum anticipated price to the public of $5 million. In an underwritten offering, the managing underwriter has the right, subject to specified conditions, to limit the number of registrable securities if it is believed such registrations will exceed the number that can be sold at the desired price. In such a case, mezzanine warrantholders have priority in registration over other holders of registrable securities.

In addition, holders have "piggyback" registration rights. If we propose to register any of our equity securities under the Securities Act other than pursuant to demand registration rights noted above or specified excluded registrations, holders may require us to include all or a portion of their registrable securities in the registration and in any related underwriting. In an underwritten offering, the managing underwriter, if any, has the right, subject to specified conditions, to limit the number of registrable securities. Additionally, such piggyback registrations are subject to delay or termination of the registration. All shareholders with registration rights have waived their rights with respect to this offering.

The holders also have unlimited rights to require us to register their shares on Form S-3 once we are eligible to use such form.

In general, we will bear all fees, costs and expenses of registrations, other than underwriting discounts and commissions.

ANTI-TAKEOVER EFFECT OF CHARTER AND BYLAW PROVISIONS AND TENNESSEE LAWS

Our charter and bylaws as well as Tennessee law contain various provisions intended to (i) promote stability of our shareholder base and (ii) render more difficult certain unsolicited or hostile attempts to take us over which could disrupt us, divert the attention of our directors, officers and

employees and adversely affect the independence and integrity of our business. A summary of these provisions of the charter, bylaws and Tennessee law is set forth below.

Classified Board; Removal of Directors. Pursuant to the charter, our Board of Directors may consist of between three and 15 members, as determined from time to time by the Board of Directors. The directors will be divided into three classes, each class to consist as nearly as possible of one-third of the directors. Directors elected by shareholders at an annual meeting of shareholders will be elected by a plurality of all votes cast at such annual meeting. Initially, the terms of office of the three classes of directors will expire, respectively, at the annual meeting of shareholders in 2003, 2004 and 2005. After the expiration of the terms of the initial classified Board of Directors, the terms of the successors of each of the three classes of directors will expire three years from the year of their respective election.

The charter provides that except as otherwise provided for or fixed by or pursuant to an amendment to the charter setting forth the rights of the holders of any class or series of preferred stock, newly created directorships resulting from any increase in the number of directors and any vacancies on our Board of Directors resulting from death, resignation, disqualification, removal or other cause will be filled by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors, or by a sole remaining director. Any director elected in accordance with the preceding sentence will hold office until the next annual meeting of shareholders and until such director's successor is elected and qualified. At such next annual meeting, the shareholders shall elect a director to serve the remaining term of the newly created or vacated directorship and until such director's successor shall have been duly elected and qualified. No decrease in the number of directors constituting our Board of Directors will shorten the term of any incumbent director. Subject to the rights of holders of any preferred stock, any director may be removed from office only for cause and only after a finding of cause by a majority of the Board of Directors (excluding the director subject to removal) followed by the affirmative vote of the holders of at least 80% of the voting power of all of our outstanding capital stock entitled to vote generally in the election of directors, voting together as a single class.

These provisions of the charter preclude a third party from removing incumbent directors and simultaneously gaining control of our Board of Directors by filling the vacancies created by removal with its own nominees. Under the classified board provisions described above, it would take at least two elections of directors for any individual or group to gain control of our Board of Directors. Accordingly, these provisions could discourage a third party from initiating a proxy contest, making a tender offer or otherwise attempting to gain control of Kirkland's.

Special Shareholders' Meetings and Right to Act by Written Consent. The charter and the bylaws provide that a special meeting of shareholders may be called only by our Chairman or our President or upon a resolution adopted by a majority of the entire Board of Directors. Shareholders are not generally permitted to call, or to require that the Board of Directors call, a special meeting of shareholders pursuant to the terms of the charter. Moreover, the business permitted to be conducted at any special meeting of shareholders is limited to the business brought before the meeting pursuant to the notice of the meeting given by Kirkland's. Tennessee law provides that shareholders may act by written consent if all shareholders entitled to vote are parties to the written consent. The affirmative vote of the number of shares necessary to authorize shareholder action, evidenced by such written consent, constitutes the act of the shareholders.

Procedures for Shareholder Nominations and Proposals. The bylaws establish an advance notice procedure for shareholders to nominate candidates for election as directors and to propose any new business at any annual meeting. Only persons nominated in accordance with our shareholder notice procedure are eligible to serve as directors, and only business brought before the annual meeting in accordance with our shareholder notice procedure may be conducted at the annual meeting. Under the shareholder notice procedure, notice of shareholder nominations and proposals for new business at the annual meeting must be delivered to our Secretary, subject to certain exceptions, not in less than 60 days nor more than 90 days prior to the first anniversary of the previous year's annual meeting; provided, however that in the event the date of the annual meeting is more than 30 days before or more than

60 days after such anniversary date, notice by the shareholder must be received not earlier than the 90th day prior to the annual meeting and not later than the 60th day prior to the annual meeting or the 15th day following public announcement of such meeting. For nominations and proposals for any special meetings, the bylaws require notice not more than 90 days nor less than 60 days before the special meeting, or the 15th day following the day on which public announcement is first made of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. The bylaws provide that notice to our Secretary with respect to any shareholder nomination or proposal must include certain information regarding the nominee, the proposal and the shareholder nominating a director or proposing business. According to the bylaws, the Chairman has the power to determine whether a shareholder nomination or proposal was brought in accordance with our shareholder notice procedure.

By requiring advance notice of nominations by shareholders, our shareholder notice procedure affords the Board of Directors an opportunity to consider the qualifications of the proposed nominees and, to the extent deemed necessary or desirable by the Board of Directors, to inform shareholders about such qualifications. By requiring advance notice of other proposed business, our shareholder notice procedure provides a more orderly procedure for conducting annual meetings of shareholders and, to the extent deemed necessary or desirable by the Board of Directors, provides the Board of Directors with an opportunity to inform shareholders, prior to such meetings, of the Board of Directors' position regarding action to be taken with respect to such business, so that shareholders can better decide whether to attend such a meeting or to grant a proxy regarding the disposition of any such business.

Although the bylaws do not give the Board of Directors any power to approve or disapprove shareholder nominations for the election of directors or proposals for action, the Chairman has the power to determine compliance with our shareholder notice procedure. The bylaws also may have the effect of precluding a contest for the election of directors or the consideration of shareholder proposals if the proper procedures are not followed, and of discouraging or deterring a third party from conducting a solicitation of proxies to elect its own slate of directors or to approve its own proposal, without regard to whether consideration of such nominees or proposals might be harmful or beneficial to Kirkland's and its shareholders.

Amendment of Kirkland's Charter and Bylaws. The charter provides that, unless previously approved by the Board of Directors, the affirmative vote of at least 80% of all of our outstanding capital stock entitled to vote generally in the election of directors ("Voting Power"), voting together as a single class, would be required to (i) amend or repeal the provisions of the charter with respect to the election of directors and the right to call a special shareholders' meeting, (ii) adopt any provision inconsistent with such provisions and (iii) amend or repeal the provisions of the charter with respect to amendments to the charter or the bylaws. With the previous approval of the Board of Directors, a majority of the Voting Power is required to amend these charter provisions. In addition, the bylaws provide that the amendment or repeal by shareholders of any bylaws made by the Board of Directors would require the affirmative vote of at least 80% of all of our outstanding capital stock entitled to vote generally in the election of directors, voting together as a single class.

Tennessee Corporate Takeover Acts. Tennessee has enacted several corporate takeover acts for the purpose of protecting its substantial interest in domestic corporations conducting a significant amount of business within the state.

Business Combination Act. Tennessee's Business Combination Act provides that a party (such party is called an "interested shareholder") owning 10% or more of the stock in a "resident domestic corporation" (which we are) cannot engage in a business combination with the resident domestic corporation unless the combination (i) takes place at least five years after the interested shareholder first acquired 10% or more of the resident domestic corporation, and
(ii) either (A) is approved by at least two-thirds of the non-interested voting shares of the resident domestic corporation or (B) satisfies certain fairness conditions specified in the Business Combination Act.

These provisions apply unless one of two events occurs. A business combination with an entity can proceed without delay when approved by the target corporation's board of directors before that entity

becomes an interested shareholder, or the resident domestic corporation may enact a charter amendment or bylaw to remove itself entirely from the Business Combination Act. This charter amendment or bylaw must be approved by a majority of the shareholders who have held shares for more than one year prior to the vote. It may not take effect for at least two years after the vote. We have not adopted a charter or bylaw amendment removing us from coverage under the Business Combination Act.

The Business Combination Act further provides an exemption from liability for officers and directors of resident domestic corporations who do not approve proposed business combinations or charter amendments and bylaws removing their corporations from the Business Combination Act's coverage as long as the officers and directors act in "good faith belief" that the proposed business combination would adversely affect their corporation's employees, customers, suppliers or the communities in which their corporation operates and such factors are permitted to be considered by the board of directors under the applicable charter.

Investor Protection Act. Tennessee's Investor Protection Act ("Investor Protection Act") applies to tender offers directed at corporations (called "offeree companies") that have "substantial assets" in Tennessee and that are either incorporated in or have a principal office in Tennessee. We satisfy both of these requirements. The Investor Protection Act requires an offeror making a tender offer for an offeree company to file with the Commissioner of Commerce and Insurance (the "Commissioner") a registration statement. When the offeror intends to gain control of the offeree company, the registration statement must indicate any plans the offeror has for the offeree. The Commissioner may require additional information material concerning the takeover offer and may call for hearings. The Investor Protection Act does not apply to an offer that the offeree company's board of directors recommends to shareholders.

In addition to requiring the offeror to file a registration statement with the Commissioner, the Investor Protection Act requires the offeror and the offeree company to deliver to the Commissioner all solicitation materials used in connection with the tender offer. The Investor Protection Act prohibits "fraudulent, deceptive, or manipulative acts or practices" by either side, and gives the Commissioner standing to apply for equitable relief to the Chancery Court of Davidson County, Tennessee, or to any other chancery court having jurisdiction whenever it appears to the Commissioner that the offeror, the offeree company or any of its respective affiliates has engaged in or is about to engage in a violation of the Investor Protection Act. Upon proper showing, the chancery court may grant injunctive relief. The Investor Protection Act further provides civil and criminal penalties for violations.

Greenmail Act. The Tennessee Greenmail Act ("Greenmail Act") applies to any corporation chartered under the laws of Tennessee that has a class of voting stock registered or traded on a national securities exchange or registered with the Securities and Exchange Commission pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Greenmail Act provides that it is unlawful for any corporation or subsidiary to purchase, either directly or indirectly, any of its shares at a price above the market value, as defined in the Greenmail Act, from any person who holds more than 3% of the class of the securities purchased if such person has held such shares for less than two years, unless either the purchase is first approved by the affirmative vote of a majority of the outstanding shares of each class of voting stock or the corporation makes an offer of at least equal value per share to all holders of shares of such class.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the common stock is StockTrans, Inc.

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for our securities. No predictions can be made of the effect, if any, that the sale or availability for sale of shares of additional common stock will have on the market price of the common stock. Nevertheless, sales of a substantial number of such shares by existing shareholders or by shareholders purchasing in this offering or the perception that such sales may occur could have an adverse effect on the market price of the common stock.

SALE OF RESTRICTED SHARES

Upon completion of this offering, we will have shares of common stock outstanding. Of these shares, the shares of common stock offered in this offering will be freely tradeable without restriction or further registration, except for shares purchased by our "affiliates" or our "underwriters" (as those terms are defined under the Securities Act), which will become eligible for sale in the public market subject to compliance with Rule 144 under the Securities Act. The remaining outstanding shares of common stock ( shares if the underwriters' overallotment option is exercised in full) will be restricted securities (the "Restricted Shares") and may not be sold unless they are registered under the Securities Act or are sold pursuant to an exemption from registration, such as the exemption provided by Rule 144 under the Securities Act. All of the Restricted Shares will be subject to the 180-day "lock-up" agreements described below. Upon expiration of the lock-up agreements, of the Restricted Shares will be eligible for sale immediately in the public market without restriction pursuant to Rule 144(k), and of the Restricted Shares will become eligible for sale, subject to compliance with the volume limitations and manner of sale requirements of Rule
144. The remaining Restricted Shares will become eligible for sale commencing one year after the date of this prospectus. Holders of all of these Restricted Shares have the right to require us to register the shares for sale under the Securities Act in certain circumstances and have the right to include those shares in a Kirkland's initiated registration. See "Description of Capital Stock - Registration Rights."

RULE 144

In general, Rule 144 allows a person who has beneficially owned Restricted Shares for at least one year, including persons who may be deemed our affiliates, to sell, within any three-month period, up to the number of Restricted Shares that does not exceed the greater of:

- 1% of the then outstanding shares of common stock and

- our average weekly trading volume during the four calendar weeks preceding the date on which notice of the sale is filed with the Securities and Exchange Commission.

A person who is not deemed to have been our affiliate at any time during the three months preceding a sale and who has beneficially owned his or her Restricted Shares for at least two years would be entitled to sell such Restricted Shares without regard to the volume limitations described above and certain other conditions of Rule 144.

LOCK-UP AGREEMENTS

We and our executive officers, directors and all of the holders of our common stock before this offering (who will hold, in the aggregate, % of our common stock after this offering) have agreed, except in limited circumstances, not to sell or transfer any shares of our common stock for 180 days after the date of this prospectus without first obtaining the written consent of Merrill Lynch. See "Underwriting - No Sales of Similar Securities."

RULE 701

Under Rule 701, any of our employees, officers or directors or consultants who purchased shares pursuant to a written compensatory plan or contract, including our 1996 Plan and our Incentive Plan, who is not our affiliate, is entitled to sell such shares without having to comply with the public information,

holding period, volume limitation or notice provisions of Rule 144 commencing 90 days after the date of effectiveness (the "Effective Date") of the registration statement of which this prospectus is a part (the "registration statement"). In addition, under Rule 701, any of our affiliates who purchased shares pursuant to a written compensatory plan or contract is entitled to sell such shares without having to comply with the Rule 144 holding period restrictions commencing 90 days after the Effective Date, subject to the "lock-up" agreements described above.

OPTION GRANTS/S-8 REGISTRATION STATEMENT

The shares underlying certain options which will be exercisable upon completion of this offering will also, upon exercise of the options, become eligible for sale subject to the applicable "lock-up" agreements, as described above, and compliance with Rule 144. An additional shares underlying options which will become exercisable periodically beginning in will become eligible for sale subject to compliance with Rule 144. In addition, we may issue up to additional shares of common stock pursuant to our 1996 Plan, the Incentive Plan and the Stock Purchase Plan. See "Management - Employee Benefit Plans." We intend to file one or more registration statements under the Securities Act to register common stock to be issued pursuant to these plans, which would allow the shares issued thereunder to be freely tradeable without restriction or further registration, except for shares purchased by our "affiliates" or our "underwriters."

UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS

The following is a general discussion of the material United States federal income and estate tax consequences of the acquisition, ownership and disposition of our common stock by a non-U.S. holder. As used in this discussion, the term "non-U.S. holder" means a beneficial owner of our common stock that is not, for United States federal income tax purposes:

- an individual who is a citizen or resident of the United States;

- a corporation or partnership (or entity classified as a corporation or partnership for such purposes) created or organized in or under the laws of the United States or of any political subdivision of the United States;

- an estate whose income is includible in gross income for U.S. federal income tax purposes regardless of its source; or

- a trust, if a U.S. court is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have authority to control all substantial decisions of the trust or if the trust has a valid election in effect under applicable U.S. Treasury regulations to be treated as a "United States person" for such purposes.

This discussion does not consider:

- U.S. state and local or non-U.S. tax consequences;

- specific facts and circumstances that may be relevant to a particular non-U.S. holder's tax position, including, if the non-U.S. holder is a partnership or trust that the United States federal income tax consequences of holding and disposing of our common stock may be affected by certain determinations made at the partner or beneficiary level;

- the United States federal income tax consequences for the shareholders, partners or beneficiaries of a non-U.S. holder;

- special United States federal income tax rules that may apply to particular non-U.S. holders, such as financial institutions, insurance companies, tax-exempt organizations, U.S. expatriates, broker-dealers, and traders in securities; and

- special United States federal income tax rules that may apply to a non-U.S. holder that holds our common stock as part of a "straddle," "hedge," "conversion transaction," "synthetic security" or other integrated investment.

The following discussion is based on provisions of the U.S. Internal Revenue Code of 1986, as amended, applicable U.S. Treasury regulations and administrative and judicial interpretations, all as in effect on the date of this prospectus, and all of which are subject to change, retroactively or prospectively. The following summary assumes that a non-U.S. holder holds our common stock as a capital asset. Each non-U.S. holder should consult a tax advisor regarding the United States federal, state, local and non-U.S. income and other tax consequences of acquiring, holding and disposing of shares of our common stock.

DIVIDENDS

We do not anticipate paying cash dividends on our common stock in the foreseeable future. See "Dividend Policy." In the event, however, that we pay dividends on our common stock, we will have to withhold a United States federal withholding tax at a rate of 30%, or a lower rate under an applicable income tax treaty, from the gross amount of the dividends paid to a non-U.S. holder. Non-U.S. holders should consult their own tax advisors regarding their entitlement to benefits under a relevant income tax treaty.

Dividends that are effectively connected with a non-U.S. holder's conduct of a trade or business in the United States and, if an income tax treaty applies, that are attributable to a permanent establishment in the United States, will be taxed on a net income basis at the regular graduated rates and in the manner applicable to United States persons. In that case, we will not have to withhold U.S. federal withholding tax if the non-U.S. holder complies with applicable certification and disclosure requirements. In addition, a "branch profits tax" may be imposed at a 30% rate, or a lower rate under an applicable income tax treaty, on dividends received by a foreign corporation that are effectively connected with the conduct of a trade or business in the United States.

In order to claim the benefit of an applicable income tax treaty to either reduce the withholding tax, or eliminate it because the dividend is attributable to a US permanent establishment, a non-U.S. holder will be required to satisfy applicable certification and other requirements. However,

- in the case of our common stock held by a foreign partnership, the certification requirement will generally be applied to the partners of the partnership and the partnership will be required to provide us certain information;

- if you hold our common stock through an intermediary (as defined in the Treasury regulations, the certification requirement may be applied to you, and not to the intermediary, and the intermediary may be obligated to provide us certain information;

- in the case of our common stock held by a foreign trust, the certification requirement will generally be applied to the trust or the beneficial owners of the trust depending on whether the trust is a "foreign complex trust," "foreign simple trust," or "foreign grantor trust" as defined in the applicable U.S. Treasury regulations; and

- look-through rules will apply for tiered partnerships, foreign simple trusts and foreign grantor trusts.

A non-U.S. holder that is a foreign partnership or a foreign trust is urged to consult its own tax advisor regarding its status under these U.S. Treasury regulations and the certification requirements applicable to it.

If we withhold tax on dividends at 30%, but you are a non-U.S. holder that is eligible for a reduced rate of U.S. federal withholding tax under an income tax treaty, you may obtain a refund or credit of any excess amounts withheld by filing an appropriate claim for a refund with the U.S. Internal Revenue Service.

GAIN ON DISPOSITION OF COMMON STOCK

A non-U.S. holder generally will not be taxed on gain recognized on a disposition of our common stock unless:

- the gain is effectively connected with the non-U.S. holder's conduct of a trade or business in the United States and, if an income tax treaty applies, is attributable to a permanent establishment maintained by the non-U.S. holder in the United States; in these cases, the gain will be taxed on a net income basis at the regular graduated rates and in the manner applicable to United States persons (unless an applicable income tax treaty provides otherwise) and, if the non-U.S. holder is a foreign corporation, the "branch profits tax" described above may also apply;

- the non-U.S. holder is an individual who holds our common stock as a capital asset, is present in the United States for more than 182 days in the taxable year of the disposition and meets other requirements; or

- we are or have been a "U.S. real property holding corporation" for U.S. federal income tax purposes at any time during the shorter of the five-year period ending on the date of disposition or the period that the non-U.S. holder held our common stock.

Generally, a corporation is a "U.S. real property holding corporation" if the fair market value of its "U.S. real property interests" equals or exceeds 50% of the sum of the fair market value of its worldwide real property interests plus its other assets used or held for use in a trade or business. We believe that we are not currently, and we do not anticipate becoming in the future, a U.S. real property holding corporation.

However, even if we are or have been a U.S. real property holding corporation, a non-U.S. holder which did not beneficially own, directly or indirectly, more than 5% of the total fair market value of our common stock at any time during the shorter of the five-year period ending on the date of disposition or the period that our common stock was held by the non-U.S. holder (a "non-5% holder") and which is not otherwise taxed under any other circumstances described above, generally will not be taxed on any gain realized on the disposition of our common stock if, at any time during the calendar year of the disposition, our common stock was regularly traded on an established securities market within the meaning of the applicable U.S. Treasury regulations.

FEDERAL ESTATE TAX

Our common stock that is owned or treated as owned by an individual who is a non-U.S. holder (as specially defined for U.S. federal estate tax purposes) at the time of death will be included in the individual's gross estate for U.S. federal estate tax purposes, unless an applicable estate tax or other treaty provides otherwise and, therefore, may be subject to U.S. federal estate tax.

INFORMATION REPORTING AND BACKUP WITHHOLDING TAX

Dividends paid to you may be subject to information reporting and United States backup withholding tax. If you are a non-U.S. holder, you will be exempt from such backup withholding tax if you provide a Form W-8BEN or otherwise meet documentary evidence requirements for establishing that you are a non-U.S. holder or otherwise establish an exemption. If you are a U.S. Holder, you will be exempt from back up withholding if you provide a completed and executed form W-9 and the IRS has not advised us that you are subject to back up withholding, or you meet certain other exemptions from back up withholding.

The gross proceeds from the disposition of our common stock may be subject to information reporting and backup withholding tax. If you sell your common stock outside the United States through a non-U.S. office of a non-U.S. broker and the sales proceeds are paid to you outside the United States, then the United States backup withholding and information reporting requirements generally will not apply to that payment. However, U.S. information reporting, but not backup withholding, will apply to a payment of sales proceeds, even if that payment is made outside the United States, if you sell your common stock through a non-U.S. office of a broker that:

- is a United States person;

- derives 50% or more of its gross income in specific periods from the conduct of a trade or business in the United States;

- is a "controlled foreign corporation" for United States federal income tax purposes; or

- is a foreign partnership, if at any time during its tax year:

- one or more of its partners are United States persons who in the aggregate hold more than 50% of the income or capital interests in the partnership; or

- the foreign partnership is engaged in a United States trade or business, unless the broker has documentary evidence in its files that you are a non-U.S. person and certain other conditions are met or you otherwise establish an exemption.

If you receive payments of the proceeds of a sale of our common stock to or through a United States office of a broker, the payment is subject to both United States backup withholding and information reporting unless you are a non-US person and provide a Form W-8BEN certifying that you are a non-U.S. person or you are a US person and you provide a completed and executed Form W-9, and the IRS has not advised us that you are subject to back up withholding, or you otherwise establish an exemption.

You generally may obtain a refund of any amounts withheld under the backup withholding rules that exceed your income tax liability by filing a refund claim with the U.S. Internal Revenue Service.

UNDERWRITING

We intend to offer the shares in the U.S. and Canada through the underwriters. Merrill Lynch, Pierce, Fenner & Smith Incorporated, CIBC World Markets Corp., SunTrust Capital Markets, Inc. and U.S. Bancorp Piper Jaffray Inc. are acting as representatives of the underwriters named below. Subject to the terms and conditions described in a purchase agreement among us, the selling shareholders and the underwriters, we and the selling shareholders have agreed to sell to the underwriters, and the underwriters severally have agreed to purchase from us and the selling shareholders, the number of shares listed opposite their names below.

                                                                NUMBER
                                                UNDERWRITERS   OF SHARES
                                                ------------   ---------
Merrill Lynch, Pierce, Fenner & Smith
             Incorporated...................................
CIBC World Markets Corp. ...................................
SunTrust Capital Markets, Inc. .............................
U.S. Bancorp Piper Jaffray Inc. ............................
                                                               --------
             Total..........................................
                                                               ========

The underwriters have agreed to purchase all of the shares sold under the purchase agreement if any of these shares are purchased. If an underwriter defaults, the purchase agreement provides that the purchase commitments of the nondefaulting underwriters may be increased or the purchase agreement may be terminated.

We and the selling shareholders have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in respect of those liabilities.

The underwriters are offering the shares, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel, including the validity of the shares, and other conditions contained in the purchase agreement, such as the receipt by the underwriters of officer's certificates and legal opinions. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part.

COMMISSIONS AND DISCOUNTS

The representatives have advised us and the selling shareholders that the underwriters propose initially to offer the shares to the public at the initial public offering price on the cover page of this prospectus and to dealers at that price less a concession not in excess of $ per share. The underwriters may allow, and the dealers may reallow, a discount not in excess of $ per share to other dealers. After the initial public offering, the public offering price, concession and discount may be changed.

The following table shows the public offering price, underwriting discount and proceeds before expenses to Kirkland's and the selling shareholders. The information assumes either no exercise or full exercise by the underwriters of their overallotment option.

                                             PER SHARE   WITHOUT OPTION   WITH OPTION
                                             ---------   --------------   -----------
Public offering price......................
Underwriting discount......................
Proceeds, before expenses, to Kirkland's...
Proceeds, before expenses, to the selling
  shareholders.............................

The expenses of the offering, not including the underwriting discount, are estimated at $ and are payable by Kirkland's.

OVERALLOTMENT OPTION

The selling shareholders have granted an option to the underwriters to purchase up to additional shares at the public offering price less the underwriting discount. The underwriters may exercise this option for 30 days from the date of this prospectus solely to cover any overallotments. If the underwriters exercise this option, each will be obligated, subject to conditions contained in the purchase agreement, to purchase a number of additional shares proportionate to that underwriter's initial amount reflected in the above table.

RESERVED SHARES

At our request, the underwriters have reserved for sale, at the initial public offering price, up to shares offered by this prospectus for sale to some of our directors, officers, employees and related persons. If these persons purchase reserved shares, this will reduce the number of shares available for sale to the general public. Any reserved shares that are not orally confirmed for purchase within one day of the pricing of this offering will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus.

NO SALES OF SIMILAR SECURITIES

We, our executive officers and directors and all of our existing shareholders have agreed, with exceptions, not to sell or transfer any common stock for 180 days after the date of this prospectus without first obtaining the written consent of Merrill Lynch. Specifically, we and these other individuals have agreed not to directly or indirectly

- offer, pledge, sell or contract to sell any common stock,

- sell any option or contract to purchase any common stock,

- purchase any option or contract to sell any common stock,

- grant any option, right or warrant for the sale of any common stock,

- lend or otherwise dispose of or transfer any common stock,

- request or demand that we file a registration statement related to the common stock, or

- enter into any swap or other agreement that transfers, in whole or in part, the economic consequence of ownership of any common stock whether any such swap or transaction is to be settled by delivery of shares or other securities, in cash or otherwise.

This lockup provision applies to common stock and to securities convertible into or exchangeable or exercisable for or repayable with common stock. It also applies to common stock owned now or acquired later by the person executing the agreement or for which the person executing the agreement later acquires the power of disposition.

Merrill Lynch has informed us that while it does not currently expect to release the entities or persons bound by the lock-up arrangements, including affiliates, prior to the end of the lock-up period, it retains the right to do so at any time without notice at its sole discretion.

The release of any lockup by Merrill Lynch is considered on a case-by-case basis. Factors in deciding whether to release shares may include the length of time before the lock-up expires, the number of shares involved, the reason for the requested release, market conditions, the trading price of our common stock, and whether the person or entity seeking the release is us or one of our affiliates, shareholders, executive officers or directors.

QUOTATION ON THE NASDAQ NATIONAL MARKET

We expect the shares to be approved for quotation on the Nasdaq National Market, subject to notice of issuance, under the symbol "KIRK."

Before this offering, there has been no public market for our common stock. The initial public offering price will be determined through negotiations among us, the selling shareholders and the representatives. In addition to prevailing market conditions, the factors to be considered in determining the initial public offering price are

- the valuation multiples of publicly traded companies that the representatives believe to be comparable to us,

- our financial information,

- the history of, and the prospects for, our company and the industry in which we compete,

- an assessment of our management, its past and present operations, and the prospects for, and timing of, our future revenues,

- the present state of our development, and

- the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to ours.

An active trading market for the shares may not develop. It is also possible that after this offering the shares will not trade in the public market at or above the initial public offering price.

The underwriters do not expect to sell more than 5% of the shares in the aggregate to accounts over which they exercise discretionary authority.

NASD REGULATIONS

Because more than ten percent of the net proceeds of the offering may be paid to members or affiliates of members of the National Association of Securities Dealers, Inc. participating in the offering, the offering will be conducted in accordance with NASD Conduct Rule 2710(c)(8). This rule requires that the public offering price of an equity security be no higher than the price recommended by a qualified independent underwriter which has participated in the preparation of the registration statement and performed its usual standard of due diligence with respect to that registration statement. Merrill Lynch has agreed to act as qualified independent underwriter for the offering. The price of the shares will be no higher than that recommended by Merrill Lynch.

PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS

Until the distribution of the shares is completed, Securities and Exchange Commission rules may limit underwriters and selling group members from bidding for and purchasing our common stock. However, the representatives may engage in transactions that stabilize the price of the common stock, such as bids or purchases to peg, fix or maintain that price.

In connection with the offering, the underwriters may make short sales of the issuer's shares and may purchase the issuer's shares on the open market to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering.

"Covered" short sales are sales made in an amount not greater than the underwriters' "overallotment" option to purchase additional shares in the offering. The underwriters may close out any covered short position by either exercising their overallotment option or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the overallotment option.

"Naked" short sales are sales in excess of the overallotment option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of

the shares in the open market after pricing that could adversely affect investors who purchase in the offering.

Similar to other purchase transactions, the underwriters' purchases to cover the syndicate short sales may have the effect of raising or maintaining the market of our stock or preventing or retarding a decline in the market price of our stock. As a result, the price of our common stock may be higher than the price that might otherwise exist in the open market.

The representatives may also impose a penalty bid on underwriters and selling group members. This means that if the representatives purchase shares in the open market to reduce the underwriter's short position or to stabilize the price of such shares, they may reclaim the amount of the selling concession from the underwriters and selling group members who sold those shares. The imposition of a penalty bid may also affect the price of the shares in that it discourages resales of those shares.

Neither we nor any of the underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the common stock. In addition, neither we nor any of the underwriters makes any representation that the representatives will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.

INTERNET DISTRIBUTION

Merrill Lynch will be facilitating Internet distribution for this offering to certain of its Internet subscription customers. Merrill Lynch intends to allocate a limited number of shares for sale to its online brokerage customers. An electronic prospectus is available on the Internet Web site maintained by Merrill Lynch. Other than the prospectus in electronic format, the information on the Merrill Lynch Web site is not part of this prospectus.

OTHER RELATIONSHIPS

SunTrust Robinson Humphrey, a division of SunTrust Capital Markets, Inc., or its predecessor firm, The Robinson-Humphrey Company, LLC, has from time to time provided us with investment banking services, including services rendered in connection with our 1996 recapitalization, and may continue to provide such services in the future.

LEGAL MATTERS

The validity of the shares of common stock offered hereby is being passed upon for us by Baker, Donelson, Bearman & Caldwell, and certain other matters will be passed upon for us by Pepper Hamilton LLP. The underwriters are being represented by Fried, Frank, Harris, Shriver & Jacobson (a partnership including professional corporations). Pepper Hamilton LLP and Fried, Frank, Harris, Shriver & Jacobson will rely upon Baker, Donelson, Bearman & Caldwell with respect to matters governed by Tennessee law.

EXPERTS

The consolidated balance sheets of Kirkland's as of February 2, 2002, February 3, 2001 and December 31, 2000, and the related consolidated statements of operations, changes in shareholders' deficit and cash flows for the year ended February 2, 2002, the 34 days ended February 3, 2001 and each of the two years in the period ended December 31, 2000, included in this prospectus and elsewhere in the registration statement have been so included in reliance upon the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting.

WHERE YOU CAN FIND MORE INFORMATION

We filed with the Securities and Exchange Commission a registration statement on Form S-1 under the Securities Act for the shares of common stock to be sold in this offering. This prospectus does not contain all of the information in the registration statement and the exhibits and schedule that were filed with the registration statement. For further information with respect to us and our common stock, we refer you to the registration statement and the exhibits and schedules that were filed with the registration statement. Statements contained in this prospectus about the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and we refer you to the full text of the contract or other document filed as an exhibit to the registration statement. A copy of the registration statement and the exhibits and schedules that were filed with the registration statement may be inspected without charge at the public reference facilities maintained by the Securities and Exchange Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all or any part of the registration statement may be obtained from the Securities and Exchange Commission upon payment of the prescribed fee. Information on the operation of the public reference facilities may be obtained by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Securities and Exchange Commission. The address of the site is http://www.sec.gov. You may also request copies of these filings, at no cost, by telephone at (731) 668-2444 or by mail to: Kirkland's, Inc., 805 N. Parkway, Jackson, TN 38305, Attention: General Counsel.

Upon completion of this offering, we will become subject to the information and periodic reporting requirements of the Exchange Act, and, in accordance with such requirements, will file periodic reports, proxy statements and other information with the Securities and Exchange Commission. These periodic reports, proxy statements and other information will be available for inspection and copying at the regional offices, public reference facilities and web site of the Securities and Exchange Commission referred to above. We intend to furnish our shareholders with annual reports containing financial statements audited by our independent accountants.

INDEX TO FINANCIAL STATEMENTS

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                              PAGE
                                                              ----
Report of the Independent Accountants.......................   F-2
Consolidated Statements of Operations for the years ended
  December 31, 1999 and 2000, 34 days ended February 3,
  2001, year ended February 2, 2002 and quarters ended May
  5, 2001 and May 4, 2002...................................   F-3
Consolidated Balance Sheets as of December 31, 2000,
  February 3, 2001, February 2, 2002 and May 4, 2002........   F-4
Consolidated Statements of Changes in Shareholders' Deficit
  for the years ended December 31, 1999 and 2000, 34 days
  ended February 3, 2001, year ended February 2, 2002 and
  quarter ended May 4, 2002.................................   F-5
Consolidated Statements of Cash Flows for the years ended
  December 31, 1999 and 2000, 34 days ended February 3,
  2001, year ended February 2, 2002 and quarters ended May
  5, 2001 and May 4, 2002...................................   F-6
Notes to Consolidated Financial Statements..................   F-7

F-1

REPORT OF THE INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of Kirkland's, Inc.

The stock split described in Note 14 to the consolidated financial statements has not been consummated at June 4, 2002. When it has been consummated, we will be in a position to furnish the following report:

"In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in shareholders' deficit and of cash flows present fairly, in all material respects, the financial position of Kirkland's, Inc. at December 31, 2000, February 3, 2001, and February 2, 2002, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2000, the 34 days ended February 3, 2001, and the year ended February 2, 2002 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these consolidated financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion."

PricewaterhouseCoopers LLP
Memphis, TN

April 19, 2002, except for Note 13
as to which the date is

May 24, 2002 and Note 14 as to which

the date is , 2002

F-2

KIRKLAND'S, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)

                                          YEAR ENDED
                                  ---------------------------   34 DAYS ENDED   YEAR ENDED
                                  DECEMBER 31,   DECEMBER 31,    FEBRUARY 3,    FEBRUARY 2,   QUARTER ENDED   QUARTER ENDED
                                      1999           2000           2001           2002        MAY 5, 2001     MAY 4, 2002
                                  ------------   ------------   -------------   -----------   -------------   -------------
                                                                                               (UNAUDITED)     (UNAUDITED)
Net sales.......................    $236,622       $259,240       $ 23,875       $307,213       $ 55,961        $ 66,184
Cost of sales...................     154,104        172,226         18,990        200,063         40,722          44,285
                                    --------       --------       --------       --------       --------        --------
 Gross profit...................      82,518         87,014          4,885        107,150         15,239          21,899
Operating expenses:
 Other operating expenses.......      57,894         67,422          7,388         71,993         15,379          16,855
 Depreciation and
   amortization.................       5,969          6,522            517          6,370          1,372           1,653
 Non-cash stock compensation
   charge.......................          --             --             --            578             --           1,140
                                    --------       --------       --------       --------       --------        --------
   Total operating expenses.....      63,863         73,944          7,905         78,941         16,751          19,648
 Operating income (loss)........      18,655         13,070         (3,020)        28,209         (1,512)          2,251
Interest expense:
 Senior, subordinated and other
   notes payable................      10,232         11,221          1,043          9,759          2,607           1,486
 Class C Preferred Stock........       1,647          1,850            154          2,007            499             544
 Amortization of debt issue
   costs........................       1,307          1,305             84          1,308            252             366
 Accretion of common stock
   warrants.....................          --             --             --          7,759             --              --
                                    --------       --------       --------       --------       --------        --------
   Total interest expense.......      13,186         14,376          1,281         20,833          3,358           2,396
Interest income.................         (27)            (1)            --           (278)            --             (67)
Offering and financing costs
 (Note 1).......................         852            782             --             --
Other income....................        (222)          (199)           (26)          (109)           (30)            (37)
Other expenses..................          --             --             --             --             --              44
                                    --------       --------       --------       --------       --------        --------
 Income (loss) before income
   taxes........................       4,866         (1,888)        (4,275)         7,763         (4,840)            (85)
Income tax provision
 (benefit)......................         807           (573)        (1,619)         3,184         (2,115)            (33)
                                    --------       --------       --------       --------       --------        --------
 Net income (loss)..............       4,059         (1,315)        (2,656)         4,579         (2,725)            (52)
Accretion of redeemable
 preferred stock and dividends
 accrued........................      (5,053)        (6,555)          (778)        (6,439)        (1,931)         (1,311)
                                    --------       --------       --------       --------       --------        --------
Net loss allocable to common
 shareholders...................    $   (994)      $ (7,870)      $ (3,434)      $ (1,860)      $ (4,656)       $ (1,363)
                                    ========       ========       ========       ========       ========        ========
Loss per common share:
 Basic..........................    $ (10.79)      $ (71.49)      $ (25.11)      $ (13.60)      $ (33.83)       $  (9.95)
                                    ========       ========       ========       ========       ========        ========
 Diluted........................    $ (10.79)      $ (71.49)      $ (25.11)      $ (13.60)      $ (33.83)       $  (9.95)
                                    ========       ========       ========       ========       ========        ========
Weighted average number of
 common shares outstanding:
 Basic..........................      92,101        110,084        136,751        136,752        136,751         137,006
                                    ========       ========       ========       ========       ========        ========
 Diluted........................      92,101        110,084        136,751        136,752        136,751         137,006
                                    ========       ========       ========       ========       ========        ========
Pro Forma Earnings Per Share
 (Note 15):
 Earnings Per Common Share:
   Basic........................
                                                                                 ========       ========        ========
   Diluted......................
                                                                                 ========       ========        ========
 Weighted average number of
   common shares outstanding:
   Basic........................
                                                                                 ========       ========        ========
   Diluted......................
                                                                                 ========       ========        ========

The accompanying notes are an integral part of these consolidated financial statements.

F-3

KIRKLAND'S, INC.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)

                                                                                                   PRO FORMA
                                                                                                     AS OF
                                                                                                    MAY 4,
                                         DECEMBER 31,   FEBRUARY 3,   FEBRUARY 2,     MAY 4,         2002
                                             2000          2001          2002          2002        (NOTE 14)
                                         ------------   -----------   -----------   -----------   -----------
                                                                                    (UNAUDITED)   (UNAUDITED)
ASSETS
Current assets:
  Cash and cash equivalents............    $ 28,156      $ 26,914      $  29,751     $  23,111     $  23,111
  Inventories..........................      47,993        45,330         32,763        36,805        36,805
  Prepaid expenses and other current
     assets............................       1,999         2,006          1,902         2,502         2,502
  Income taxes receivable..............          --            --             51           638           638
  Deferred income taxes................       2,139         1,371          1,375         1,375         1,375
                                           --------      --------      ---------     ---------     ---------
     Total current assets..............      80,287        75,621         65,842        64,431        64,431
Property and equipment, net............      26,047        25,682         23,748        23,819        23,819
Noncurrent deferred income taxes.......       4,210         6,597          3,919         3,919         3,919
Debt issue costs, net..................       1,345         1,261            757           566           566
Goodwill, net..........................       1,472         1,465          1,382         1,382         1,382
Other assets...........................          21            14             --            --            --
                                           --------      --------      ---------     ---------     ---------
     Total assets......................    $113,382      $110,640      $  95,648     $  94,117     $  94,117
                                           ========      ========      =========     =========     =========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' DEFICIT
Current liabilities:
  Current maturities of long-term
     debt..............................    $  9,167      $  9,167      $  38,177     $   2,250     $   2,250
  Revolving line of credit.............      20,000        20,000             --            --            --
  Accounts payable.....................      19,072        19,110         12,530        11,429        11,429
  Income taxes payable.................         100           114             --            --            --
  Accrued expenses.....................      14,242        14,075         21,927        20,773        20,773
                                           --------      --------      ---------     ---------     ---------
     Total current liabilities.........      62,581        62,466         72,634        34,452        34,452
                                           --------      --------      ---------     ---------     ---------
Long-term debt:
  Senior credit facility...............      38,177        38,177             --        34,927        34,927
  Subordinated debt....................      19,894        19,897         19,940        19,951        19,951
  Mandatorily redeemable preferred
     stock (Class C)...................      17,122        17,122         17,122        17,122        17,122
Other liabilities......................       1,558         1,584          2,198         2,245         2,245
Common stock warrants..................          --            --          7,759            --            --
Commitments and Contingencies, note 10
Redeemable convertible preferred stock,
  no par value:
  Class D..............................      20,680        20,879         21,464        21,785            --
  Class A..............................      45,460        45,890         47,089        47,773            --
  Class B..............................      15,769        15,918         16,741        17,047            --
Shareholders' deficit:
  Common stock, at stated value;
     92,306, 136,751 and 136,981 shares
     issued and outstanding at December
     31, 2000, February 3, 2001 and
     February 2, 2002, respectively....         229           229            229           229           229
  Additional paid-in capital...........          --            --             --         8,383        94,988
  Loan to shareholder..................          --            --             --          (217)         (217)
  Accumulated deficit..................    (108,088)     (111,522)      (109,528)     (109,580)     (109,580)
                                           --------      --------      ---------     ---------     ---------
     Total liabilities, redeemable
       preferred stock, and
       shareholders' deficit...........    $113,382      $110,640      $  95,648     $  94,117     $  94,117
                                           ========      ========      =========     =========     =========

The accompanying notes are an integral part of these consolidated financial statements.

F-4

KIRKLAND'S, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT

(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)

                                          COMMON STOCK
                                        ----------------     ADDITIONAL        LOAN TO     ACCUMULATED
                                        SHARES    AMOUNT   PAID IN CAPITAL   SHAREHOLDER     DEFICIT
                                        -------   ------   ---------------   -----------   -----------
Balance at December 31, 1998..........   92,100    $229        $    --          $  --       $ (99,224)
Accretion of redeemable preferred
  stock and dividends accrued.........                                                         (5,053)
Issuance of common stock..............      206
Net income............................                                                          4,059
                                        -------    ----        -------          -----       ---------
Balance at December 31, 1999..........   92,306     229             --             --        (100,218)
Accretion of redeemable preferred
  stock and dividends accrued.........                                                         (6,555)
Issuance of common stock (see Note
  2)..................................   44,445
Net loss..............................                                                         (1,315)
                                        -------    ----        -------          -----       ---------
Balance at December 31, 2000..........  136,751     229             --             --        (108,088)
Accretion of redeemable preferred
  stock and dividends accrued.........                                                           (778)
Net loss..............................                                                         (2,656)
                                        -------    ----        -------          -----       ---------
Balance at February 3, 2001...........  136,751     229             --             --        (111,522)
Fair value adjustment for dividend
  rate change on preferred stock (see
  Note 6).............................                                                          3,832
Accretion of redeemable preferred
  stock and dividends accrued.........                             (22)                        (6,417)
Exercise of stock options.............      230                     22
Net income............................                                                          4,579
                                        -------    ----        -------          -----       ---------
Balance at February 2, 2002...........  136,981     229             --             --        (109,528)
Reclassification of common stock
  warrants to equity (see Note 6)
  (unaudited).........................                           7,759
Accretion of redeemable preferred
  stock and dividends accrued
  (unaudited).........................                          (1,311)
Exercise of stock options
  (unaudited).........................    2,283      --          1,935           (217)             --
Net loss (unaudited)..................                                                            (52)
                                        -------    ----        -------          -----       ---------
Balance at May 4, 2002 (unaudited)....  139,264    $229        $ 8,383          $(217)      $(109,580)
                                        =======    ====        =======          =====       =========

The accompanying notes are an integral part of these consolidated financial statements.

F-5

KIRKLAND'S, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

                                              YEAR ENDED
                                      ---------------------------   34 DAYS ENDED   YEAR ENDED    QUARTER ENDED    QUARTER ENDED
                                      DECEMBER 31,   DECEMBER 31,    FEBRUARY 3,    FEBRUARY 2,       MAY 5,           MAY 4,
                                          1999           2000           2001           2002            2001             2002
                                      ------------   ------------   -------------   -----------   --------------   --------------
                                                                                                   (UNAUDITED)      (UNAUDITED)
Cash flows from operating
 activities:
 Net income (loss)..................    $  4,059       $(1,315)        $(2,656)      $  4,579        $ (2,725)        $   (52)
 Adjustments to reconcile net income
   (loss) to net cash provided by
   (used in) operating activities:
 Depreciation of property and
   equipment........................       5,892         6,439             510          6,287           1,352           1,653
 Amortization of debt issue costs,
   debt discount and goodwill.......       1,384         1,430              94          1,434             283             377
 Non-cash stock compensation
   charge...........................          --            --              --            578              --           1,140
 Loss on disposal of property and
   equipment........................          --            21              --            371              39              61
 Accretion of common stock
   warrants.........................                        --              --          7,759              --              --
 Write-off of debt issue costs......          --           782              --             --              --              --
 Write-off of offering costs........         852            --              --             --              --              --
 Deferred tax expense (benefit).....      (2,385)       (1,015)         (1,619)         2,674              --              --
 Changes in assets and liabilities:
   Inventories......................      (5,091)       (6,146)          2,663         12,567           2,985          (4,042)
   Prepaid expenses and other
     current assets.................        (593)         (179)             (7)           104               4            (600)
   Other noncurrent assets..........         (15)           --               7             14              --              --
   Accounts payable.................       6,405         1,369              38         (6,580)        (11,324)         (1,101)
   Income taxes payable.............         206        (2,591)             14           (165)         (2,392)           (587)
   Accrued expenses and other
     noncurrent liabilities.........       2,231         2,541            (141)         7,888             (56)           (529)
                                        --------       -------         -------       --------        --------         -------
     Net cash provided by (used in)
       operating activities.........      12,945         1,336          (1,097)        37,510         (11,834)         (3,680)
                                        --------       -------         -------       --------        --------         -------
Cash flows from investing
 activities:
 Proceeds from sale of property and
   equipment........................          --            60              --             --              --              --
 Capital expenditures...............     (10,825)       (6,041)           (145)        (4,724)         (1,406)         (1,785)
                                        --------       -------         -------       --------        --------         -------
     Net cash used in investing
       activities...................     (10,825)       (5,981)           (145)        (4,724)         (1,406)         (1,785)
                                        --------       -------         -------       --------        --------         -------
Cash flows from financing
 activities:
 Net borrowings (repayments) on
   revolving line of credit.........      (7,000)       20,000              --        (20,000)             --              --
 Proceeds from issuance of
   short-term debt..................       7,500            --              --             --              --              --
 Proceeds from issuance of long-term
   debt.............................       2,500            --              --             --              --              --
 Debt issue and offering costs......        (595)         (881)             --           (804)             --            (175)
 Principal payments on long-term
   debt.............................      (5,775)       (6,648)             --         (9,167)           (954)         (1,000)
 Proceeds from equity contribution,
   net of issue costs...............          --         7,384              --             --              --              --
 Exercise of options................          --            --              --             22              --              --
                                        --------       -------         -------       --------        --------         -------
     Net cash (used in) provided by
       financing activities.........      (3,370)       19,855              --        (29,949)           (954)         (1,175)
                                        --------       -------         -------       --------        --------         -------
 Cash and cash equivalents
     Net (decrease) increase........      (1,250)       15,210          (1,242)         2,837         (14,194)         (6,640)
     Beginning of period............      14,196        12,946          28,156         26,914          26,914          29,751
                                        --------       -------         -------       --------        --------         -------
     End of period..................    $ 12,946       $28,156         $26,914       $ 29,751        $ 12,720         $23,111
                                        ========       =======         =======       ========        ========         =======
Supplemental disclosures:
 Interest paid......................    $ 10,211       $10,992              --       $  7,298        $  1,844         $   771
                                        ========       =======         =======       ========        ========         =======
 Income taxes paid..................    $  3,132       $ 3,033         $   (16)      $    613        $    278         $   616
                                        ========       =======         =======       ========        ========         =======

The accompanying notes are an integral part of these consolidated financial statements.

F-6

KIRKLAND'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Kirkland's, Inc. (the "Company") is a leading specialty retailer of home decor with stores in 28 states.

The consolidated financial statements of the Company include the accounts of Kirkland's, Inc. and its wholly owned subsidiaries Kirkland's Stores, Inc. and kirklands.com, inc. Significant intercompany accounts and transactions have been eliminated.

Fiscal Year - Effective January 1, 2001, the Company elected to change its fiscal year from a calendar basis to a 52/53-week year ending on the Saturday closest to January 31. The 34-day transition period ended February 3, 2001 is presented separately in these consolidated financial statements. Unless specifically indicated otherwise, any reference herein to "1999" and "2000" or "Fiscal 1999" and "Fiscal 2000" relates to as of or for the years ended December 31, 1999 and 2000, respectively. Any reference to "2001" or "Fiscal 2001" relates to as of or for the year ended February 2, 2002.

Interim Data - The accompanying interim financial data as of May 4, 2002 and for the thirteen weeks ended May 5, 2001 and May 4, 2002 and the pro forma financial data as of May 4, 2002 are unaudited; however, in the opinion of management, the interim data and pro forma data have been prepared on a basis consistent with the audited consolidated financial statements and reflect all adjustments (consisting of only normal recurring accruals) which, in the opinion of management, are necessary for a fair statement of the results for the interim periods. The statements should be read in conjunction with the Notes to the Consolidated Financial Statements for the fiscal year ended February 2, 2002.

Cash Equivalents - Cash equivalents consist of investments with maturities of 90 days or less at the date of purchase.

Inventories - Inventories are stated at the lower of cost or market with cost being determined using the average cost method which approximates current cost.

Property and Equipment - Property and equipment are stated at cost. Tenant allowances provided by the lessors for reimbursement of construction costs incurred in connection with store openings and remodelings are recorded as reductions to the basis of the respective tenant improvements. Depreciation is computed on a straight-line basis over the estimated useful lives of the respective assets. Furniture, fixtures and equipment are depreciated over 5-7 years. Buildings are depreciated over 40 years. Leasehold improvements are amortized over the shorter of the useful life of the asset or the lease term. Maintenance and repairs are expensed as incurred and improvements are capitalized.

Debt Issue Costs - Debt issue costs are amortized using the straight-line method over the life of the debt and are shown net of accumulated amortization of $5,224,000 at December 31, 2000, $4,702,000 at February 3, 2001 and $3,676,000 at February 2, 2002. Amortization of debt issue costs is included in interest expense in the consolidated statement of operations.

Goodwill - During 1998, the Company purchased 100% of the stock of Briar Patch Management Corporation ("Briar Patch"). In connection with this purchase, the Company recorded goodwill in the amount of the excess of the purchase price over the fair market value of the net assets of Briar Patch. The goodwill is being amortized on a straight-line basis over 20 years. The Company recorded amortization expense of $79,000 for December 31, 1999, $83,000 at both December 31, 2000 and February 2, 2002, and $7,000 for the 34-day period ended February 3, 2001.

Long-Lived Assets - The Company periodically reviews the recoverability of property and equipment, goodwill, and other long-lived assets whenever an event or change in circumstances indicates the carrying amount of an asset or group of store-level assets may not be recoverable. The impairment

F-7

KIRKLAND'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

review includes comparison of future cash flows expected to be generated by the asset or group of assets with their associated carrying value. If the carrying value of the asset or group of store-level assets exceeds the expected cash flows (undiscounted and without interest charges), an impairment loss is recognized to the extent the carrying amount of the asset exceeds its fair value. The Company recorded an impairment of $103,000 and $82,000 at December 31, 2000 and February 2, 2002, respectively, which represents the remaining carrying value of these assets, relating to the leasehold improvements of stores anticipated to be closed. Other assets, consisting of computer equipment, furniture and fixtures, with carrying values of $124,000 and $146,000 were not considered to be impaired. This charge is included in depreciation and amortization on the consolidated statement of operations.

Cost of Sales - Cost of sales includes cost of product sold, freight, store occupancy and central distribution costs.

Other Operating Expenses - Other operating expenses consist primarily of store compensation costs, corporate salaries, insurance, advertising, property taxes, losses on disposal of assets and various other store and corporate expenses.

Other Income - Other income consists of sales tax rebates of $120,000, $125,000 and $91,000 for fiscal years 1999, 2000 and 2001, respectively, and $26,000 for the 34-day period ended February 3, 2001, and other miscellaneous income of $102,000, $74,000 and $18,000 for fiscal years 1999, 2000 and 2001, respectively. There were no other miscellaneous income items for the 34-day period ended February 3, 2001.

Offering and Financing Costs - During 2000, the Company expensed offering and financing costs on the Company's statement of operations of $782,000 for costs related to a refinancing effort that was not consummated. Additionally, during 1999, the Company indefinitely postponed plans for an offering of its common stock resulting in an expense of $852,000 for costs previously anticipated to be deducted from the proceeds of the offering.

Preopening Expenses - Preopening expenses, which consist primarily of payroll and occupancy costs, are expensed as incurred.

Advertising Expenses - Advertising costs are expensed as incurred. Advertising expense, including lease-required advertising, was $1,553,000, $2,595,000 and $3,743,000 for fiscal years 1999, 2000 and 2001, respectively, and $402,000 for the 34-day period ended February 3, 2001.

Internally Developed Software Costs - Costs related to development of internal use software, other than those incurred during the application development stage, are expensed as incurred. Costs incurred during the application development stage have not been material.

Income Taxes - Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

Authorized Capital - At February 2, 2002, the authorized capital of Kirkland's, Inc. consisted of 500,000 shares of common stock; 3,100,000 shares of Class A Preferred Stock; 1,100,000 shares of Class B Preferred Stock; 600,000 shares of Class C Preferred Stock; and 75,000 shares of Class D Preferred Stock. See Notes 2 and 6 for a description of the terms of each issue.

Stock Options and Warrants - The Company applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for its stock compensation plans. Compensation cost on stock options is measured as the excess, if any, of the fair value of the Company's stock at the date of the grant over the exercise price. The Company has provided pro forma disclosures of net income as if the fair value based method of accounting for the plan, as prescribed by Statement of Financial

F-8

KIRKLAND'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Accounting Standards No. 123, Accounting for Stock-Based Compensation, had been applied (see Note 8).

The fair value of detachable put warrants is initially recorded as a discount to the related debt and is amortized to interest expense, using the straight-line method which approximates the effective interest method, over the term of the related debt. The put warrants are adjusted to their current fair value at each balance sheet date.

Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and disclosure of contingencies at the date of the financial statements and the related reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Insurance Reserves - Workers' compensation, general liability and employee medical insurance programs are partially self-insured. It is the Company's policy to record its self-insurance liability using estimates of claims incurred but not yet reported or paid, based on historical trends. Actual results can vary from estimates for many reasons, including, among others, inflation rates, claim settlement patterns, litigation trends and legal interpretations.

Fair Value of Financial Instruments - At December 31, 2000, February 3, 2001 and February 2, 2002, the Company did not have any outstanding financial derivative instruments. Financial instruments include cash, accounts payable, a revolving credit agreement and long-term debt. The carrying amounts of these financial instruments, except for long-term debt, approximate fair value because of their short maturities. Long-term debt approximates fair value based on the short periods of interest rate repricing for variable rate long-term debt and estimates based on the current borrowing rates available to the Company for bank loans with similar terms and average maturities for fixed rate long-term debt.

Non-cash Supplemental Disclosure - Accretion and dividends accrued for redeemable Class A Preferred Stock; Class B Preferred Stock; and Class D Preferred Stock of $5,053,000, $6,555,000 and $6,439,000 have been excluded from the Statements of Cash Flows for the years ended December 31, 1999, December 31, 2000 and February 2, 2002, respectively. Accretion and dividends accrued of $778,000 have been excluded from the Statement of Cash Flows for the 34-day period ended February 3, 2001. The effect of the fair value adjustment to the Class A Preferred Stock, Class B Preferred Stock and Class D Preferred Stock of $3,832,000, as more fully discussed in Note 6, was excluded from the Statement of Cash Flows for the year ended February 2, 2002.

Revenue Recognition - The Company recognizes revenue at the time of sale of merchandise to the Company's customers. Sales include the sale of merchandise, net of returns, and exclusive of sales taxes.

Earnings Per Share - Earnings per share is presented on a basic and diluted basis. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.

Comprehensive income - Comprehensive income is reported in accordance with SFAS No. 130, Reporting Comprehensive Income. Comprehensive income does not differ from the consolidated net income presented in the consolidated statements of operations.

Business Segments - An operating segment is defined as a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses, and about which separate

F-9

KIRKLAND'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

financial information is regularly evaluated by the chief operating decision maker in deciding how to allocate resources. The Company's business is operated as one operating segment.

Recent Accounting Pronouncements - In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years beginning after December 15, 2001. SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Under SFAS 142 goodwill (and intangible assets deemed to have indefinite lives) will no longer be amortized but will be subject to annual impairment tests. Other intangible assets will continue to be amortized over their useful lives. The Company had goodwill, net of accumulated amortization, of $1,472,000, $1,465,000 and $1,382,000 as of December 31, 2000, February 3, 2001 and February 2, 2002, respectively. The Company applied the new rules of accounting for goodwill and other intangible assets beginning in the first quarter of fiscal 2002. The Company ceased amortization of goodwill in accordance with SFAS 142 and performed a test for impairment as of the date of adoption and will test again during 2002 in the month the Company expects to perform its annual testing in future years. The Company will test for impairment on an annual basis or more frequently when events and circumstances indicate that a impairment may have occurred. The application of SFAS 141 and SFAS 142 did not have a significant impact on the Company's financial condition or results of operations.

                                     YEAR ENDED
                             ---------------------------   34 DAYS ENDED     YEAR ENDED
                             DECEMBER 31,   DECEMBER 31,    FEBRUARY 3,     FEBRUARY 2,
                                 1999           2000           2001             2002
                             ------------   ------------   -------------    -----------
                                     (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
Reported net loss allocable
  to common
  shareholders:............    $  (994)       $(7,870)        $(3,434)        $(1,660)
Add back: Goodwill
  amortization.............         79             83               7              83
                               -------        -------         -------         -------
Adjusted net loss allocable
  to common
  shareholders:............    $  (915)       $(7,787)        $(3,427)        $(1,777)
                               =======        =======         =======         =======
Earnings per share (basic
  and diluted):
Reported net loss allocable
  to common
  shareholders:............    $(10.79)       $(71.49)        $(25.11)        $(13.60)
Add back: Goodwill
  amortization.............       0.86           0.75            0.05            0.61
                               -------        -------         -------         -------
Adjusted net loss allocable
  to common
  shareholders:............    $ (9.93)       $(70.74)        $(25.06)        $(12.99)
                               =======        =======         =======         =======

In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment or Disposal of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the accounting and reporting provisions of Accounting Principles Board (APB) Opinion No. 30, "Reporting the Results of Operations" for a disposal of a segment of a business. SFAS 144 is effective for fiscal years beginning after December 15, 2001. The adoption of this standard did not have a significant impact on the Company's financial condition or results of operations.

F-10

KIRKLAND'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 2 - EQUITY TRANSACTIONS AND CAPITAL STRUCTURE

EQUITY TRANSACTIONS

Recapitalization

On June 12, 1996, the Company completed a leveraged recapitalization (the "Recapitalization") pursuant to which Advent International Group, through affiliated entities, ("Advent"), a private equity investment firm, became the largest beneficial owner of the Company. The Recapitalization permitted the founding shareholders of the Company to realize a portion of their investment in cash. As a result of the Recapitalization, the capital structure of the Company changed to consist of two classes of redeemable convertible preferred stock ("Class A Preferred Stock" and "Class B Preferred Stock"), a class of mandatorily redeemable preferred stock ("Class C Preferred Stock") and common stock. At the time of the Recapitalization, the Company discontinued its subchapter S corporation election and became a C corporation for federal income tax purposes. Since a new capital structure was formed, the existing retained earnings of the Company were transferred to additional paid-in capital so that a new historical accumulation of earnings could begin post-recapitalization. Distributions of cash and securities to the former shareholders of the Company made immediately subsequent to the Recapitalization were recorded to retained earnings, creating a negative retained earnings balance of $116 million at the beginning of the post-recapitalization period.

August 2000 Equity Offering

On August 8, 2000, the Company and certain of its existing shareholders completed an additional equity offering of $20 million. Investors in the offering received shares of Class D Preferred Stock ("Class D Preferred Stock") and common stock. The new equity offering included the following components:

- A contribution of $7.5 million in cash from shareholders affiliated with Advent ($3.8 million) and a management employee of the Company ($3.7 million) in exchange for a total of 16,667 shares of common stock at $0.01 per share and 16,667 shares of Class D Preferred Stock at $449.99 per share.

- A conversion of a $5.0 million note held by a management employee of the Company to equity through an exchange of the principal on the note for 11,111 shares of common stock at $0.01 per share and 11,111 shares of Class D Preferred Stock at $449.99 per share.

- The repayment of a $7.5 million term note. The term note had been provided to the Company in conjunction with an amendment (see Note 6) to its Senior Debt Agreement and Supplemental Loan Agreement. Of the $7.5 million advanced under the term note, $4.1 million had been collateralized by a pledge from certain shareholders of the Company, and $3.4 million had been loaned to the Company by shareholders affiliated with Advent. The $7.5 million principal on the note was repaid through the surrender of the collateral provided by shareholders in exchange for equity, and conversion into equity of the loan advanced by shareholders affiliated with Advent. Total consideration received by shareholders in connection with the term note repayment was 16,667 shares of common stock at $0.01 per share and 16,667 shares of Class D Preferred Stock at $449.99 per share.

In conjunction with the equity offering, the Company also issued warrants to purchase an aggregate of 5,555 shares of the Company's common stock for $0.01 per share. The warrants were issued to the investors in the equity offering on a pro-rata basis in relation to their participation in the total offering. The warrants were considered to have nominal value at August 8, 2000, based upon the market value received in exchange for common shares in the equity offering.

F-11

KIRKLAND'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Capital Structure - As a result of the aforementioned capital transactions, the charter of Kirkland's, Inc. was amended to establish the following capital structure.

Common Stock

The authorized capital of Kirkland's, Inc. includes 500,000 shares of voting common stock. The holders of the common stock have one vote per share and are not entitled to cumulative voting in the election of directors.

Redeemable Convertible Preferred Stock (Class A, Class B and Class D)

The Class A Preferred Stock, Class B Preferred Stock and Class D Preferred Stock have voting privileges on par with common shareholders and have liquidation values of $30,749,000; $10,654,500; and $20,000,000, respectively, plus accrued dividends. The dividends are cumulative and accrue from 4% to 10% compounded quarterly (see Note 6). The Class D Preferred Stock has a redemption preference over all other classes of stock of the Company. The Class A Preferred Stock and Class B Preferred Stock can be redeemed in whole or in part at the option of the Company once all Class D Preferred Stock and Class C Preferred Stock have been redeemed. The Class A Preferred Stock, Class B Preferred Stock and Class D Preferred Stock are redeemable at our option after the earliest to occur of June 12, 2004 or the closing of a liquidity event (as defined). The Class A Preferred Stock and Class B Preferred Stock must be redeemed in equal proportions. Additionally, at the option of 60% of the holders, all of the outstanding Class A Preferred Stock, Class B Preferred Stock and Class D Preferred Stock, other than any shares being redeemed at our option, will automatically convert into common stock upon the occurrence of an initial public offering of the Company's common stock at a rate equal to the liquidation value plus accrued dividends, divided by the initial public offering price.

The following table summarizes the components of the carrying value of each class of redeemable convertible preferred stock (in thousands):

                                      PREFERRED A   PREFERRED B   PREFERRED D    TOTAL
                                      -----------   -----------   -----------   -------
Original Face Amount................    $30,749       $10,655       $20,000     $61,404
Accrued Dividends...................     18,152         6,505         2,372      27,029
                                        -------       -------       -------     -------
Liquidation Value at February 2,
  2002..............................     48,901        17,160        22,372      88,433
Unamortized Issue Discount..........         --            --           (79)        (79)
Unamortized modification adjustment
  (see Note 6)......................     (1,812)         (419)         (829)     (3,060)
                                        -------       -------       -------     -------
Carrying Value at February 2,
  2002..............................    $47,089       $16,741       $21,464     $85,294
                                        =======       =======       =======     =======

F-12

KIRKLAND'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 3 - PROPERTY AND EQUIPMENT

Property and equipment is comprised of the following (in thousands):

                                              DECEMBER 31,   FEBRUARY 3,   FEBRUARY 2,
                                                  2000          2001          2002
                                              ------------   -----------   -----------
Land........................................    $   402        $   402       $   402
Buildings...................................      3,460          3,460         3,460
Equipment...................................     10,430         10,438        12,916
Furniture and fixtures......................     25,889         25,850        23,706
Leasehold improvements......................     15,791         15,786        12,406
Projects in process.........................      2,088          2,143           623
                                                -------        -------       -------
                                                 58,060         58,079        53,513
Less accumulated depreciation...............     32,013         32,397        29,765
                                                -------        -------       -------
                                                $26,047        $25,682       $23,748
                                                =======        =======       =======

NOTE 4 - ACCRUED EXPENSES

Accrued expenses are comprised of the following (in thousands):

                                              DECEMBER 31,   FEBRUARY 3,   FEBRUARY 2,
                                                  2000          2001          2002
                                              ------------   -----------   -----------
Accrued compensation........................    $   759        $   891       $ 2,618
Sales taxes payable.........................      3,458          1,678         1,234
Percentage rent accrual.....................        441            460           827
Gift certificates and store credits.........      2,597          2,323         2,992
Accrued interest payable....................      6,416          7,613        12,352
Other.......................................        571          1,110         1,326
                                                -------        -------       -------
                                                $14,242        $14,075       $21,349
                                                =======        =======       =======

NOTE 5 - INCOME TAXES

The provision (benefit) for income taxes consists of the following (in thousands):

                                       YEAR ENDED
                               ---------------------------   34 DAYS ENDED   YEAR ENDED
                               DECEMBER 31,   DECEMBER 31,    FEBRUARY 3,    FEBRUARY 2,
                                   1999           2000           2001           2002
                               ------------   ------------   -------------   -----------
Current
  Federal....................    $ 2,563        $   318         $    --        $  239
  State......................        629            124              --           271
                                 -------        -------         -------        ------
                                   3,192            442              --           510
                                 -------        -------         -------        ------
Deferred
  Federal....................     (2,008)        (1,092)         (1,363)        2,416
  State......................       (377)            77            (256)          258
                                 -------        -------         -------        ------
                                  (2,385)        (1,015)         (1,619)        2,674
                                 -------        -------         -------        ------
                                 $   807        $  (573)        $(1,619)       $3,184
                                 =======        =======         =======        ======

F-13

KIRKLAND'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Significant components of the Company's deferred tax assets are as follows (in thousands):

                                              DECEMBER 31,   FEBRUARY 3,   FEBRUARY 2,
                                                  2000          2001          2002
                                              ------------   -----------   -----------
Current deferred tax assets
  Inventory valuation methods...............     $  772        $  663        $  502
  Accruals..................................      1,367           708           873
                                                 ------        ------        ------
                                                  2,139         1,371         1,375
                                                 ------        ------        ------
Noncurrent deferred tax assets
  Property and equipment....................        546           601            --
  Stock options and warrants valuation......         --            --         3,164
  Other.....................................        630           603           835
  Net operating loss and credit
     carryforwards..........................      3,234         5,593         1,966
  Valuation allowance.......................       (200)         (200)         (200)
                                                 ------        ------        ------
                                                  4,210         6,597         5,765
                                                 ------        ------        ------
Noncurrent deferred tax liability
  Property and equipment....................         --            --         1,846
                                                 ------        ------        ------
Net noncurrent deferred tax asset...........      4,210         6,597         3,919
                                                 ------        ------        ------

Total deferred tax assets...................     $6,349        $7,968        $5,294
                                                 ======        ======        ======

A reconciliation of the provision for income taxes to the amount computed by applying the federal statutory tax rate of 35.0% to income before income taxes for the periods indicated below, respectively, is as follows:

                                       YEAR ENDED
                               ---------------------------   34 DAYS ENDED   YEAR ENDED
                               DECEMBER 31,   DECEMBER 31,    FEBRUARY 3,    FEBRUARY 2,
                                   1999           2000           2001           2002
                               ------------   ------------   -------------   -----------
Statutory Federal income tax
  rate.......................      35.0%         (35.0)%         (35.0)%         35.0%
State income taxes, net of
  Federal income tax
  effect.....................       3.4           (4.2)           (3.9)           4.7
Benefit from surtax
  exemptions.................     (21.2)           1.0             1.0             --
Deferred taxes: impact of
  merger on state NOL's......        --            4.4              --             --
Other........................      (0.6)           3.5              --            1.3
                                  -----          -----           -----          -----
                                   16.6%         (30.3)%         (37.9)%         41.0%
                                  =====          =====           =====          =====

Prior to the Company's reorganization of its corporate structure on December 31, 1999, the Company received a tax benefit from surtax exemptions due to graduating tax rates applicable to the separate corporate entities under the previous corporate structure. Differences in the federal statutory rate and the Company's effective rate included in "other" above include non-deductible goodwill amortization, business meals and entertainment expense.

At December 31, 2000, February 3, 2001, and February 2, 2002, the Company was in a net operating loss carryforward position for federal taxes and in certain states. These loss carryforwards aggregated approximately $10.8 million and $14.5 million for federal purposes and $6.7 million and

F-14

KIRKLAND'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$10.0 million for state purposes as of December 31, 2000 and February 3, 2001, respectively. As of February 2, 2002, the Company had $4.7 million in net operating loss carryforwards for federal purposes and $4.3 million in certain states. These carryforwards will expire, if unused, in 2004 through 2021. During the year ended December 31, 2000, certain state loss carryforwards were disallowed. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. The Company has established a valuation allowance, as it is more likely than not that certain net operating loss carryforward items will expire unused.

NOTE 6 - INDEBTEDNESS

Indebtedness consists of the following (in thousands):

                                                    DECEMBER 31,   FEBRUARY 3,   FEBRUARY 2,
                                                        2000          2001          2002
                                                    ------------   -----------   -----------
Senior Credit Facility:
  Senior Debt (Tranche A), principal and interest
    payable quarterly at varying amounts through
    June 2002, interest at a floating rate, as
    defined in the credit agreement (average rate
    of 9.8% in 2000, 11.9% in the 34-day period
    ended February 3, 2001 and 5.6% in 2001)......    $  1,667      $  1,667       $    --
  Senior Debt (Tranche B), principal and interest
    payable quarterly at varying amounts through
    June 2002, interest at a floating rate, as
    defined in the credit agreement (average rate
    of 10.8% in 2000, 12.4% in the 34-day period
    ended February 3, 2001 and 8.5% in 2001)......      45,677        45,677        38,177
  Revolving credit facility, interest at a
    floating rate, as defined in the credit
    agreement (average rate of 9.2% in 2000, 11.9%
    in the 34-day period ended February 3, 2001
    and 8.2% in 2001).............................      20,000        20,000            --
                                                      --------      --------       -------
                                                        67,344        67,344        38,177
Senior Subordinated Notes, interest payable
  quarterly, principal due in June 2003 (average
  rate of 13.5% in 2000, 15.0% in the 34-day
  period ended February 3, 2001 and 15.0% in
  2001)...........................................      20,000        20,000        20,000
Mandatorily redeemable preferred stock, Class C,
  interest at 9% annually.........................      17,122        17,122        17,122
                                                      --------      --------       -------
                                                       104,360       104,363        75,239
Less:
  Unamortized debt discount.......................         106           103            60
  Current portion.................................      29,167        29,167         2,250
                                                      --------      --------       -------
  Total long-term indebtedness....................    $ 75,193      $ 75,196       $72,929
                                                      ========      ========       =======

Senior Credit Facility - The senior credit facility as amended (the "Senior Debt Agreement") entered into in connection with the Recapitalization (see Note 2), with a syndicate bank group provides for $65 million in senior term debt (Tranche A $20 million and Tranche B $45 million) and a $20 million revolving line of credit ("Line of Credit"). The Line of Credit requires a 30-day consecutive zero balance between January 1 and March 1 of each year. The Company is required to pay a commitment fee to the bank at a rate per annum equal to .5% of the unused portion of the Line of Credit. Borrowings under the Tranche A term loan and the Line of Credit bear interest at a floating rate (the higher of the federal funds rate plus .5% or the prime rate) plus 2.25% or a Eurodollar Rate, as defined in the Senior Debt

F-15

KIRKLAND'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Agreement, plus 3.25%. Borrowings under the Tranche B term loan bear interest at a floating rate (the higher of the federal funds rate plus .5% or the prime rate) plus 2.95% or a Eurodollar Rate, as defined, plus 3.95%.

On July 7, 1999, the Company entered an amendment to its Senior Debt Agreement and Supplemental Loan Agreement. The amendment provided an additional $2.5 million in borrowings under the Tranche B term loan and a term note (the "Term Note") for $7.5 million due June 2000. Of the $7.5 million advanced under the Term Note, $3.4 million was loaned by shareholders affiliated with Advent and $4.1 million was collateralized by cash and letters of credit supplied by other shareholders of the Company. In conjunction with the amendment, the Company issued warrants to purchase an aggregate of 15,847 shares of common stock of the Company for $0.01 per share. The warrants were issued to certain shareholders of the Company in consideration for collateralizing the principal on the Term Note or advancing a portion of the borrowings represented by the Term Note. The warrants were considered to have nominal value at July 7, 1999, based upon a fair value analysis of the Company's common stock. On August 8, 2000, the Term Note was repaid through the surrender of the collateral provided by shareholders in exchange for equity and conversion into equity of the loan advanced by shareholders affiliated with Advent (see Note 2).

Effective June 19, 2001, the Company completed an amendment to its Senior Debt Agreement with its senior bank syndicate, whereby all previous financial covenant violations were waived and new financial covenant requirements were established for the duration of the amended agreement. As of February 2, 2002, the Company was in compliance with all financial covenants. In May 2002, the Company completed a refinancing of its senior credit facility (see Note 13).

Subordinated Note Agreement - Concurrent with the Senior Debt Agreement, the Company entered into a Senior Subordinated Note and Warrant Purchase Agreement (the "Subordinated Note Agreement") with a group of preferred shareholders providing for $20 million in subordinated notes. The notes have a maturity date of June 30, 2003 and bear interest at the rate of 12.50% per annum. The holders of the subordinated notes also received warrants to purchase, for $0.01 per share, 11,905 shares of common stock of the Company. Additional warrants ("Incentive Warrants") were reserved for the holders of the notes, entitling them to purchase, for $0.01 per share, an additional 4,817 shares of common stock of the Company if a liquidity event achieving certain valuation targets had not occurred prior to December 31, 1999. This condition not having been met, the Incentive Warrants became exercisable to the holders of the notes effective January 1, 2000. Under the original provisions of this agreement, all of these warrants could be sold back (i.e. put) to the Company at the holders' option on the maturity date of the debt for fair market value, as defined in the Subordinated Note Agreement. An initial value of $300,000 was allocated to the 16,722 warrants and recorded as a discount on the related debt. This discount is being amortized over the life of the notes.

Prior to January 1, 1998, at which time the holders of the warrants agreed to terminate their put option, the warrants were marked to market based upon the fair value of the underlying common stock as of each period end. Upon termination of the put option the recorded liability of $879,000 was reclassified as equity. The put option was reinstated on December 31, 1999. The 16,722 warrants were determined to have nominal value based upon a fair value analysis of the Company's common stock. At December 31, 2000 and February 2, 2002, the warrants were marked to market resulting in accretion of $0 and $7,759,000, respectively, based upon the fair value of the underlying common stock. The put option was terminated again on February 3, 2002.

Concurrent with the June 19, 2001 amendment to the senior credit facilities, the Company also entered into an amendment of its Subordinated Note Agreement (the "Subordinated Amendment"). Pursuant to the Subordinated Amendment, all previous events of default were waived and new financial covenant requirements were established for the duration of the facility. Effective January 1, 2001, the

F-16

KIRKLAND'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

interest rate on the subordinated notes, plus accrued interest, was increased to 15.0% per annum compounded quarterly. Effective January 1, 2002, the interest rate on the subordinated notes, plus accrued interest, was increased to 15.5% per annum. Additionally, as a condition of the Subordinated Amendment, the Company agreed to amend its charter to reduce the dividend rate on the Class A Preferred Stock and Class D Preferred Stock to 4% effective June 30, 2001. Further, the Company agreed to use its best efforts to file an amendment to the same effect with respect to the Class B Preferred Stock on or before June 30, 2001. Although the Company could not get the requisite shareholder consent with respect to the Class B Preferred Stock, in October 2001 the Company entered into an agreement with two of the shareholders of the Class B Preferred Stock whereby the dividend rate for these two shareholders was reduced to 4% effective June 30, 2001. The Company recorded a $2,269,000, $525,000 and $1,038,000 reduction to the Class A Preferred Stock, Class B Preferred Stock and Class D Preferred Stock, respectively, to reflect the fair value adjustment for the change in the dividend rate at July 1, 2001. This reduction was accounted for as a contribution of capital and is being accreted to the liquidation values of each class of preferred stock over their remaining redemption periods.

Under the Company's amended credit agreements (both senior and subordinated), the Company is required to maintain stated levels of net worth as well as comply with certain coverage ratios and limits on capital expenditures. The borrowings are collateralized by substantially all of the Company's assets.

Mandatorily Redeemable Preferred Stock - The Class C Preferred Stock issued in conjunction with the recapitalization (see Note 2) has a liquidation preference to the Class A Preferred Stock and the Class B Preferred Stock. The liquidation value of $17,122,000 at December 31, 2000, February 3, 2001 and February 2, 2002 is equal to the Class C Preferred Stock original face value and current carrying value. The Class C Preferred Stock has no conversion privileges (see Note 13), is non-voting and can be redeemed in whole or in part at the option of the Company at any time provided that all of the Class D Preferred Stock has been redeemed, and is mandatorily redeemable in whole at the earliest to occur of July 2004 or the closing of a liquidity event, as defined. In connection with the Class C Preferred Stock, the Company incurs interest expense equal to 9% per annum of the outstanding balance, including accrued interest compounded semi-annually. This has been reflected in interest expense in the accompanying consolidated statements of operations. At December 31, 2000, February 3, 2001 and February 2, 2002, accrued interest expense related to the Class C Preferred Stock was $5,036,000, $5,190,000, and $7,211,000, respectively.

Other Indebtedness - On October 15, 1998, the Company entered into a Subordinated Promissory Note Agreement (the "Promissory Note Agreement") with a management employee of the Company. Under the Promissory Note Agreement, the Company was permitted to borrow up to $5 million from this employee. The interest rate was equal to the rate specified in the Company's Line of Credit until May 1, 1999, at which time the rate increased to 2.0% higher than the rate specified in the Line of Credit. On August 8, 2000, the management employee exchanged the principal of this note for equity in the Company and received cash for the unpaid interest (see Note 2).

The principal maturities of long-term debt outstanding at February 2, 2002 including unamortized discounts in years subsequent to 2001 are as follows:
$38,177,000 in 2002; $20,000,000 in 2003; and $17,122,000 in 2004.

NOTE 7 - LONG-TERM LEASES

The Company leases retail store facilities and certain equipment under operating leases with terms ranging up to ten years and expiring at various dates through 2013. Most of the retail store lease agreements include renewal options and provide for minimum rentals and contingent rentals based on sales performance in excess of specified minimums. Rent expense under operating leases was $19,570,000, $22,371,000 and $24,344,000 in fiscal years 1999, 2000 and 2001, respectively, and $1,936,000 for the

F-17

KIRKLAND'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

34 days ended February 3, 2001. Contingent rental expense was $435,000, $199,000 and $752,000 for fiscal years 1999, 2000 and 2001, respectively, and $57,000 for the 34-day period ended February 3, 2001.

Future minimum lease payments under all operating leases with initial terms of one year or more are as follows: $22,392,000 in 2002; $20,636,000 in 2003; $19,778,000 in 2004; $18,520,000 in 2005; $15,767,000 in 2006; and $31,797,000 thereafter.

NOTE 8 - EMPLOYEE BENEFIT PLANS

Stock Options - On June 12, 1996, the Company adopted the "1996 Executive Incentive and Non-Qualified Stock Option Plan" (the "Plan") which provides employees and officers with opportunities to purchase shares of the Company's common stock. The Plan authorizes the grant of incentive and non-qualified stock options and requires that the exercise price of incentive stock options be at least 100% of the fair market value of the stock at the date of the grant.

In connection with the 1996 recapitalization, the Company entered into agreements to grant options to two management employees. The agreements provide that each of the two management employees will receive option grants representing 2% of the fully diluted shares. The agreements further provide that future issuances of common stock shall not dilute the management employees' position and that additional grants will be awarded upon each issuance of common stock. These options become 100% vested 24 hours prior to an asset sale, public offering, or stock sale, in which the investors in the 1996 recapitalization achieve a specified internal rate of return on their invested funds. If the specified internal rate of return targets are not met upon a liquidity event, the options automatically terminate and are forfeited. Options outstanding under these agreements were 4,762, 4,762, and 7,900 at December 31, 2000, February 3, 2001, and February 2, 2002, respectively. The increase in the number of options outstanding under these agreements by 3,138 (to a total of 7,900) at February 2, 2002 occurred by virtue of the anti-dilution provisions of these agreements. No compensation expense has been recognized since the options have not vested and management believes the likelihood of exercise is remote.

On September 28, 1999, the Company's Board of Directors re-priced certain employee options granted in 1998 to $95.00 per share, which was not less than the fair value of the Company's stock at the date of the repricing, as determined by the Company's Board of Directors. These options to purchase 2,283 shares remained outstanding at February 2, 2002. The repricing resulted in variable accounting under the provisions of APB 25 and FIN 44. The compensation charge is based on the excess of the fair value of the Company's common stock over the $95 exercise price of the stock options. The Company has recognized a non-cash stock compensation charge of approximately $0, $0 and $578,000 for fiscal years 1999, 2000 and 2001, respectively. No such charge was recorded for the 34-day period ended February 3, 2001.

The following table summarizes information about employee stock options outstanding at February 2, 2002:

              OPTIONS OUTSTANDING                  OPTIONS EXERCISABLE
-----------------------------------------------   ----------------------
                          WEIGHTED
                           AVERAGE     WEIGHTED                 WEIGHTED
RANGE OF     NUMBER       REMAINING    AVERAGE      NUMBER      AVERAGE
EXERCISE   OUTSTANDING   CONTRACTUAL   EXERCISE   EXERCISABLE   EXERCISE
 PRICES    02/02/2002       LIFE        PRICE     02/02/2002     PRICE
 $ 0.45       7,900         6.52        $ 0.45          --       $ 0.45
 $71.00       9,200         9.82        $71.00          --       $71.00
 $95.00       4,482         5.30        $95.00       4,482       $95.00
             ------         ----        ------       -----       ------
             21,582         7.76        $50.16       4,482       $95.00
             ======         ====        ======       =====       ======

F-18

KIRKLAND'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Transactions under the Company's stock option plans in each of the periods indicated are as follows:

                                                            WEIGHTED   WEIGHTED AVERAGE
                                               RANGE OF     AVERAGE     FAIR VALUE OF
                                  NUMBER       EXERCISE     EXERCISE       STOCK AT
                                 OF SHARES      PRICES       PRICE        GRANT DATE
                                 ---------   ------------   --------   ----------------
Outstanding at December 31,
  1999.........................    9,800     $0.45-$95.00    $49.06             --
  Granted......................       --               --        --             --
  Exercised....................       --               --        --             --
  Forfeited....................     (258)    $      95.00     95.00             --
                                  ------     ------------    ------         ------
Outstanding at December 31,
  2000.........................    9,542     $0.45-$95.00    $47.81
  Granted......................       --                         --             --
  Exercised....................       --               --        --             --
  Forfeited....................       --               --        --             --
                                  ------     ------------    ------         ------
Outstanding at February 3,
  2001.........................    9,542     $0.45-$95.00    $47.81             --
  Granted
     Exercise price less than
       FMV of common stock.....    3,138     $       0.45    $ 0.45         $71.00
     Exercise price not less
       than FMV of common
       stock...................    9,200     $      71.00    $71.00         $71.00
  Exercised....................     (230)    $      95.00     95.00             --
  Forfeited....................      (68)    $      95.00     95.00             --
                                  ------     ------------    ------         ------
Outstanding at February 2,
  2002.........................   21,582     $0.45-$95.00    $50.16
                                  ======     ============    ======

The 9,200 options granted during the year ended February 2, 2002 with an exercise price of $71 per share vest ratably over three years. The 3,138 options deemed granted (by virtue of anti-dilution, provisions in option agreements entered into in 1996) during the year ended February 2, 2002 with an exercise price of $0.45 per share vest immediately upon a liquidity event.

Had compensation expense for the Company's stock option plan been determined based on the fair values at the grant date for stock option awards granted during the fiscal years 1999, 2000 and 2001, the Company's pro forma net income (loss) allocable to common shareholders would have been approximately $(1,054,000), $(7,880,000) and $(2,156,000), respectively. Net loss for the 34-day period ended February 3, 2001, on a pro forma basis would have been approximately $(3,247,000). The earnings per share would have been:

                                              YEAR ENDED               34 DAYS
                                      ---------------------------       ENDED       YEAR ENDED
                                      DECEMBER 31,   DECEMBER 31,    FEBRUARY 3,    FEBRUARY 2,
                                          1999           2000           2001           2002
                                      ------------   ------------   -------------   -----------
Basic...............................    $(11.44)       $(71.58)        $(23.74)       $(15.76)
                                        =======        =======         =======        =======
Diluted.............................    $(11.44)       $(71.58)        $(23.74)       $(15.76)
                                        =======        =======         =======        =======

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model based upon the following assumptions: expected volatility of 55%; risk-free interest rates of 5.5%; expected lives of 5 years, and no expected dividend payments. The weighted average remaining contractual life of the options was 7.2 years, 6.2 years, and 7.9 years for the fiscal years ended

F-19

KIRKLAND'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1999, 2000 and 2001, respectively. The weighted average contractual life of the options was 6.1 years at February 3, 2001.

401(k) Savings Plan - The Company maintains a defined contribution 401(k) employee benefit plan, which covers all employees meeting certain age and service requirements. Up to 6% of the employee's compensation may be matched at the Company's discretion. This discretionary percentage was 50% of an employee's contribution subject to Plan maximums in 2001. The Company's matching contributions were approximately $82,000, $102,000 and $249,000 in 1999, 2000 and 2001, respectively. The Company has the option to make additional contributions to the Plan on behalf of covered employees; however, no such contributions were made in 1999, 2000 or 2001.

NOTE 9 - EARNINGS PER SHARE

Basic earnings per share are based upon the weighted average number of shares outstanding. Diluted earnings per share are based upon the weighted average number of shares outstanding plus the shares that would be outstanding assuming exercise of dilutive stock options and warrants.

The computations for basic and diluted earnings per share are as follows (in thousands, except for per share amounts):

                               YEAR ENDED                                                QUARTER       QUARTER
                       ---------------------------     34-DAY PERIOD     YEAR ENDED       ENDED         ENDED
                       DECEMBER 31,   DECEMBER 31,   ENDED FEBRUARY 3,   FEBRUARY 2,     MAY 5,        MAY 4,
                           1999           2000             2001             2002          2001          2002
                       ------------   ------------   -----------------   -----------   -----------   -----------
                                                                                       (UNAUDITED)   (UNAUDITED)
Numerator:
  Net loss allocable
     to common
     stock...........    $  (994)       $ (7,870)        $ (3,434)        $ (1,860)     $ (4,656)     $ (1,363)
                         =======        ========         ========         ========      ========      ========
Denominator for basic
  earnings per share:
  Average number of
     common shares
     outstanding.....     92,101         110,084          136,751          136,752       136,751       137,006
                         =======        ========         ========         ========      ========      ========
Denominator for
  diluted earnings
  per share:
  Average number of
     common shares
     outstanding.....     92,101         110,084          136,751          136,752       136,751       137,006
                         -------        --------         --------         --------      --------      --------
                          92,101         110,084          136,751          136,752       136,751       137,006
                         =======        ========         ========         ========      ========      ========
  Basic earnings per
     share...........    $(10.79)       $ (71.49)        $ (25.11)        $ (13.60)     $ (33.83)     $  (9.95)
                         =======        ========         ========         ========      ========      ========
  Diluted earnings
     per share.......    $(10.79)       $ (71.49)        $ (25.11)        $ (13.60)     $ (33.83)     $  (9.95)
                         =======        ========         ========         ========      ========      ========

F-20

KIRKLAND'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The calculation of fully diluted earnings per share for December 31, 1999, December 31, 2000, and February 3, 2001 and February 2, 2002 excludes stock options outstanding of 9,800, 9,542, 9,542 and 23,470 respectively and outstanding warrants of 38,124 as their effect would be anti-dilutive.

NOTE 10 - RELATED PARTIES

Inventory is purchased in the ordinary course of business from an entity formerly owned by a substantial shareholder of the Company. Purchases approximated $237,000, $128,000 and $332,000 in 1999, 2000 and 2001, respectively.

The Company purchases inventory from a manufacturer in which one of the shareholders had a significant ownership interest. Purchases from this manufacturer totaled $292,000 and $5,000 in 1999 and 2000, respectively. The Company purchased no inventory from this manufacturer in 2001.

The Company rents aircraft from an entity owned by a substantial shareholder. Rental expense approximated $63,000, $92,000 and $23,000 in 1999, 2000 and 2001, respectively.

NOTE 11 - COMMITMENTS AND CONTINGENCIES

Financial instruments which potentially subject the Company to concentration of risk are primarily cash and cash equivalents. The Company places its cash and cash equivalents in insured depository institutions and attempts to limit the amount of credit exposure to any one institution within the covenant restrictions imposed by the Company's debt agreements.

The Company has employment agreements with two key management employees and a consulting agreement with another individual, all of whom were shareholders of the Company prior to the Recapitalization. The employment agreements as amended expire in May 2006 and require annual aggregate salary payments of $450,000. The consulting agreement expires June 12, 2003. These three individuals own all of the outstanding Class C Preferred Stock (see Note 6).

The Company is party to pending legal proceedings and claims. Although the outcome of such proceedings and claims cannot be determined with certainty, the Company's management is of the opinion that it is unlikely that these proceedings and claims will have a material effect on the financial condition, operating results or cash flows of the Company.

NOTE 12 - CONSULTING CONTRACT

In July 2001, the Company entered into a three-year contract with a consultant to provide services to the Company for $16,667 per month. The contract is cancelable by either party upon 30 days notice. Under the terms of the agreement, the consultant was also granted a warrant to purchase 1,888 shares of the Company's common stock for $0.01 per share. The warrant only becomes exercisable upon the consummation of a liquidity event, as defined, and, following the occurrence of such an event, may be exercised until the later of July 1, 2005 or twelve months following the termination of the consulting contract. At the date of a liquidity event, the Company may choose to settle the warrant for a cash payment equal to the excess of the fair value of 1,888 shares of the Company's common stock over the exercise price of the warrant. The Company will measure and record the amount of the expense related to this arrangement at the date of a liquidity event, based upon the fair value of the warrant at that date.

NOTE 13 - SUBSEQUENT EVENTS

In May 2002, the Company completed a refinancing of its senior secured credit facility. The Company entered into a new, three-year senior secured credit facility that includes a $45 million revolving credit facility ($30 million for the first six months of each calendar year) and a $15 million term loan. The

F-21

KIRKLAND'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

revolving credit facility bears interest at a floating rate equal to the prime rate or LIBOR plus 2.25%, at the Company's election. Borrowings under the new revolving credit facility are subject to certain conditions and events of default the most restrictive of which are the maintenance of certain minimum levels of operating profit minus capital expenditures and certain maximum ratios of debt to operating profit. The term loan bears interest at the prime rate plus 7.25%. The proceeds of the term loan, together with a total of approximately $33.6 million of a combination of available cash and borrowings under the revolving credit facility, were used (1) to repay all indebtedness (including accrued interest outstanding) outstanding under the Company's former senior secured credit facility under which $38.3 million was outstanding at May 4, 2002, (2) to pay all accrued and unpaid interest on the Company's subordinated debt, of which there was $4.7 million as of May 4, 2002 and (3) to pay $5.7 million of accrued interest associated with the Class C Preferred Stock, of which there was $7.7 million accrued and unpaid as of May 4, 2002. As a result, the interest rate on the subordinated notes was reduced from 15.5% to 12.5% and the dividend rate on the Class A, Class B and Class D Preferred Stock was increased from 4% to 10%.

On May 4, 2002, the Company loaned $217,000 to its Executive Vice President and Chief Financial Officer. The note bears interest at the rate of 4.75% per year which is payable over the term of the note. The note matures in May 2005 and is due and payable in full at that time. The loan is collateralized by marketable securities having a value of no less than the principal amount of the loan together with 2,283 shares of our common stock owned by borrower. The pledge agreement between the Company and the borrower requires the borrower to supply additional collateral at any time the value of existing collateral falls below 125% of the then principal amount of the loan. In addition, at the request of the borrower, the Company may lend up to an additional $500,000 principal amount under the note in April 2003. Any additional principal amount would be subject to the same interest rate, principal repayment and collateral provisions as the original principal amount. The loan was approved by the board of directors and audit committee.

As part of the Pre-Offering Transactions, in May 2002, the Company entered into a stock repurchase agreement with certain shareholders. This agreement governs the use of a portion of the proceeds from the planned initial public offering to repurchase shares of the Company's capital stock from certain of its shareholders. The class of and number of shares of capital stock that will be repurchased will vary pro rata based upon the proceeds received in the planned public offering. The purchase price for each share of Class A, Class B and Class D Preferred Stock will be an amount equal to 93% of the sum of (i) the stated value of such share plus all dividends with respect to such share accrued and unpaid through the completion of the planned public offering. The purchase price for a share of Class C Preferred Stock will be an amount equal to 100% of the stated value of each share. The purchase price for each share of common stock will be an amount equal to 93% of the initial offering price of the planned initial public offering.

In May 2002, the Company entered into an agreement with the Company's current Chairman under which he agreed to exchange all of his outstanding shares of Class C Preferred Stock, having an aggregate stated value of $7.9 million, into shares of the Company's common stock. The number of shares to be issued under this agreement equals the stated value of the shares of Class C Preferred Stock divided by 93% of the initial public offering price in the planned initial public offering. All of the shares acquired by the current Chairman under this exchange agreement will be sold in the planned initial public offering.

NOTE 14 - PRE-OFFERING STOCK SPLIT

Prior to the completion of the Company's planned public offering, the Company intends to effect a split of its common stock. All share and per share information in the consolidated financial statements will be retroactively restated to reflect the stock split for all periods presented.

F-22

KIRKLAND'S, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 15 - UNAUDITED PRO FORMA BALANCE SHEET AND EARNINGS PER SHARE INFORMATION

The unaudited pro forma balance sheet information as of May 4, 2002 gives effect to the conversion or redemption of the Class A, Class B, and Class D redeemable convertible preferred stock, the redemption of the Class C redeemable preferred stock, and the exercise of all outstanding common stock warrants that is expected to occur upon the consummation of the initial public offering of the Company's common stock.

The unaudited pro forma earnings per share information for the year ended February 2, 2002 and the quarter ended May 4, 2002 gives effect to the conversion of the Class A, Class B, and Class D redeemable convertible preferred stock and the exercise of all outstanding common stock warrants that is expected to occur upon the consummation of the initial public offering of the Company's common stock, as if they had occurred as of February 4, 2001.

The unaudited pro forma balance sheet and pro forma earnings information does not give effect to the sale of shares by the Company in its planned public offering.

F-23

UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Immediately prior to completion of this offering as a part of the Pre-Offering Transactions, $ million of aggregate stated value and accrued dividends on the outstanding shares of our Class A Preferred Stock, Class B Preferred Stock and Class D Preferred Stock will be converted into an aggregate of shares of common stock (at an assumed initial public offering price of $ per share). Additionally, prior to completion of this offering, our warrantholders will exercise all of our outstanding warrants to purchase 38,124 shares of common stock. See "Related Party Transactions - Pre-Offering Transactions." Using a portion of the net proceeds of this offering we will purchase or redeem from current shareholders all of the outstanding shares of our Class C Preferred Stock and $ million of aggregate stated value and accrued dividends on the outstanding shares of Class A Preferred Stock, Class B Preferred Stock and Class D Preferred Stock.

The pro forma consolidated condensed balance sheet as of May 4, 2002 and the pro forma consolidated condensed statement of operations for the quarter ended May 4, 2002 which follow give effect to: (i) the refinancing of our former senior credit facility with our new senior credit facility, as discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources", (ii) the Pre-Offering Transactions, and (iii) this offering and the application of the estimated net proceeds therefrom as if such transactions had occurred as of the balance sheet date for these adjustments affecting the pro forma balance sheet and as of the beginning of the period for those adjustments affecting the pro forma statements of operations.

The pro forma consolidated condensed statement of operations for the year ended February 2, 2002 which follows gives effect to the transactions referred to in clauses (ii) and (iii) as stated above as if such transactions had occurred as of the beginning of the period.

In our opinion all adjustments necessary to present fairly such pro forma consolidated condensed statements of operations have been made. These unaudited pro forma consolidated condensed statements of operations are not necessarily indicative of what actual results would have been had the transactions occurred at the beginning of the respective periods nor do they purport to indicate the results of our future operations. These unaudited pro forma financial statements should be read in conjunction with the accompanying notes.

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UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED FEBRUARY 2, 2002

                                                                                            PRO FORMA
                                                              HISTORICAL    ADJUSTMENTS    AS ADJUSTED
                                                              -----------   ------------   ------------
                                                              (IN THOUSANDS, EXCEPT SHARE AND PER SHARE
                                                                                DATA)
Net sales...................................................   $307,213                      $307,213
Cost of sales...............................................    200,063                       200,063
                                                               --------                      --------
  Gross profit..............................................    107,150                       107,150
Operating expenses:
  Other operating expenses..................................     71,993                        71,993
  Depreciation and amortization.............................      6,370                         6,370
  Non-cash stock compensation charge........................        578                           578
                                                               --------                      --------
  Operating income..........................................     28,209                        28,209
Interest expense:
  Senior credit facility and other indebtedness.............      5,835                         5,835
  Subordinated debt.........................................      3,924        (3,924)(b)          --
  Class C Preferred Stock...................................      2,007        (2,007)(c)          --
  Amortization of debt issue costs..........................      1,308          (147)(b)       1,161
  Accretion of common stock warrants........................      7,759        (7,759)(d)          --
Interest income.............................................       (278)                         (278)
Other expense, net..........................................       (109)                         (109)
                                                               --------                      --------
    Income before income taxes..............................      7,763                        21,600
Income tax provision........................................      3,184         5,240(e)        8,424
                                                               --------        ------        --------
    Net income..............................................      4,579                        13,176
Accretion of redeemable preferred stock and dividends
  accrued...................................................     (6,439)        6,439(f)           --
                                                               --------                      --------
Net income allocable to common stock(a).....................     (1,860)                       13,176
                                                               --------                      --------
Income per common share(a):
  Basic.....................................................   $ (13.60)                     $
                                                               --------                      --------
  Diluted...................................................   $ (13.60)                     $
                                                               --------                      --------
Weighted average number of common shares
  outstanding(a):
  Basic.....................................................    136,752
                                                               --------                      --------
  Diluted...................................................    136,752
                                                               --------                      --------

(a) Assumes the Pre-Offering Transactions (as defined on page 5) were effected as of the beginning of the period, at an assumed initial public offering price of $ per share. At a different initial public offering price, the pro forma number of shares outstanding and pro forma net income per share would be different. See "Related Party Transactions - Pre-Offering Transactions."

(b) Represents the interest and amortization expense reduction of $3.9 million and $0.1 million resulting from repayment of approximately $20.0 million of subordinated debt from the estimated net proceeds of this Offering. See "Use of Proceeds."

(c) Represents the interest expense reduction of $2 million resulting from repayment of all outstanding mandatorily redeemable Class C Preferred Stock and amounts classified as interest associated with such preferred stock from the estimated net proceeds of this Offering. See "Use of Proceeds."

(d) Represents the reduction in accretion of common stock warrants of $7.8 million resulting from the exercise of warrants as part of the Pre-Offering Transactions.

(e) Represents the tax effect of the foregoing adjustments, resulting in an effective statutory tax rate of approximately 39.0%.

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(f) Represents the reduction in accretion and dividends accrued of $6.4 million resulting from the issuance of shares of common stock upon the conversion and/or redemption of all $89.4 million of aggregate stated value and accrued dividends on our outstanding Class A Preferred Stock, Class B Preferred Stock and Class D Preferred Stock (at an assumed initial public offering price of $ per share).

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UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET

MAY 4, 2002

(IN THOUSANDS)

                                                                                            PRE-OFFERING
                                                                                                AND
                                                             REFINANCING                      OFFERING        PRO FORMA
                                                HISTORICAL   ADJUSTMENTS      SUBTOTAL      ADJUSTMENTS      AS ADJUSTED
                                                ----------   ------------     ---------     ------------     -----------
ASSETS
Current assets:
  Cash and cash equivalents...................  $  23,111      $(17,713)(a)   $   5,398                       $   5,398
  Inventories.................................     36,805                        36,805                          36,805
  Other current assets........................      4,515                         4,515                           4,515
                                                ---------                     ---------                       ---------
    Total current assets......................     64,431                        46,718                          46,718
Property and equipment, net...................     23,819                        23,819                          23,819
Other noncurrent assets.......................      5,867                         5,867                           5,867
                                                ---------                     ---------                       ---------
    Total assets..............................  $  94,117                     $  76,404                       $  76,404
                                                =========                     =========                       =========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' DEFICIT
Current liabilities:
  Revolving credit facility...................         --        16,000 (a)      16,000                          16,000
  Current maturities of long-term debt........      2,250                         2,250                           2,250
  Accounts payable............................     11,429                        11,429                          11,429
  Other current liabilities...................     20,773        (1,122)(a)       9,237         (2,064)(b)        9,306
                                                                 (4,737)(a)                      2,133 (e)
                                                                 (5,677)(a)
                                                ---------                     ---------                       ---------
Total current liabilities.....................     34,452                        38,916                          38,985
                                                ---------                     ---------                       ---------
Senior debt:
  Revolving credit facility...................         --
  Senior term loan............................     34,927       (37,177)(a)      12,750                          12,750
                                                                 15,000 (a)
Subordinated debt.............................     19,951                        19,951        (20,000)(b)           --
                                                                                                    49 (c)
Class C Preferred Stock.......................     17,122                        17,122        (17,122)(b)           --
Other liabilities.............................      2,245                         2,245                           2,245
                                                ---------                     ---------                       ---------
    Total liabilities.........................    108,697                        90,984                          53,980
                                                ---------                     ---------                       ---------
Redeemable convertible preferred stock:
  Class D.....................................     21,785                        21,785        (21,785)(b)(d)         --
  Class A.....................................     47,773                        47,773        (47,773)(b)(d)         --
  Class B.....................................     17,047                        17,047        (17,047)(b)(d)         --
Shareholders' deficit:
  Common Stock................................        229                           229                             229
  Paid-in capital.............................      8,383                         8,383         96,286 (b)      134,728
                                                                                                29,505 (d)
                                                                                                   554 (e)
  Loan to shareholder.........................       (217)                         (217)                           (217)
  Accumulated deficit.........................   (109,580)                     (109,580)        (2,687)(e)     (112,316)
                                                                                                   (49)(c)
                                                ---------                     ---------                       ---------
    Total shareholders' deficit (equity)......   (102,903)                     (102,903)                         22,424
                                                ---------                     ---------                       ---------
    Total liabilities, redeemable preferred
      stock and shareholders' deficit
      (equity)................................  $  94,117                     $  76,404                       $  76,404
                                                =========                     =========                       =========

(a) Represents the repayment of our existing senior credit facility of $38.3 million (which consists of $37.2 million of principal on our former term loan and $1.1 million of accrued interest), $4.7 million of accrued interest on subordinated debt and $5.7 million of accrued interest associated with the Class C Preferred Stock with the proceeds from a new credit facility consisting of a $15 million term loan and a revolving line of credit. This refinancing transaction closed during May 2002. The maturity date for the new senior credit facility is May 2005.

(b) Assumes net IPO proceeds of $99.7 million, after deductions for underwriting discounts and commissions and offering expenses, of which $20 million is used to retire subordinated debt, $11.3 million is used to redeem mandatorily redeemable Class C Preferred Stock (including

P-4

related accruals classified as interest), $57.1 million is used to redeem a portion of the outstanding Class A Preferred Stock, Class B Preferred Stock and Class D Preferred Stock and $11.3 million is used to redeem shares of outstanding common stock. Also assumes the exchange of $7.9 million of the aggregate stated value of the Class C Preferred Stock into common stock as part of the Pre-Offering transactions.

(c) Relates to the accretion of debt discount of $49,000 associated with the early extinguishment of the subordinated debt.

(d) Assumes conversion of $29.5 million of redeemable convertible preferred stock (Class A, Class B and Class D). The conversion of preferred stock will result in additional common shares outstanding as will the redemption for cash since any cash redemption will be funded by proceeds from the offering.

(e) Reflects the recording of the following: (i) a charge in the amount of $2.1 million associated with stock options granted in July 2001 to a consultant which will become immediately exercisable upon completion of this offering and (ii) a charge in the amount of $0.6 million associated with the inducement relating to the exchange of certain Class C Preferred Stock for common stock as part of the Pre-Offering transactions.

P-5

UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS

FOR THE QUARTER ENDED MAY 4, 2002

                                                                                          PRO FORMA
                                                              HISTORICAL   ADJUSTMENTS   AS ADJUSTED
                                                              ----------   -----------   -----------
                                                                   (IN THOUSANDS, EXCEPT SHARE
                                                                       AND PER SHARE DATA)
Net sales...................................................   $ 66,184                    $66,184
Cost of sales...............................................     44,285                     44,285
                                                               --------                    -------
  Gross profit..............................................     21,899                     21,899
Operating expenses:
  Other operating expenses..................................     16,855                     16,855
  Depreciation and amortization.............................      1,653                      1,653
  Non-cash stock compensation charge........................      1,140                      1,140
                                                               --------
  Operating income..........................................      2,251                      2,251
Interest expense:
  Senior credit facility and other indebtedness.............        553          67(b)         620
  Subordinated debt.........................................        933        (933)(c)         --
  Class C Preferred Stock...................................        544        (544)(d)         --
  Amortization of debt issue costs..........................        366        (283)(e)         83
Interest income.............................................        (67)                       (67)
Other expense, net..........................................          7                          7
                                                               --------                    -------
    Income (loss) before income taxes.......................        (85)                     1,608
Income tax provision (benefit)..............................        (33)        660(f)         627
                                                               --------                    -------
    Net income (loss).......................................        (52)                       981
Accretion of redeemable preferred stock and dividends
  accrued...................................................     (1,311)      1,311(g)          --
                                                               --------                    -------
Net income allocable to common stock(a).....................     (1,363)                       981
                                                               --------                    -------
Income per common share(a):
  Basic.....................................................   $  (9.95)                   $
                                                               --------                    -------
  Diluted...................................................   $  (9.95)                   $
                                                               --------                    -------
Weighted average number of common shares
  outstanding(a):
  Basic.....................................................    137,006
                                                               --------                    -------
  Diluted...................................................    137,006
                                                               --------                    -------

(b) Represents the change in interest expense between the actual amount incurred during the quarter ended May 4, 2002 under the former senior credit facility and the interest expense that would have been incurred had the new senior credit facility been in place at the beginning of the period. A 1/8% change in the interest rate would increase or decrease the pro forma adjustment by approximately $10,000.

(c) Represents the interest expense reduction of $0.9 million resulting from repayment of approximately $20.0 million of subordinated debt from the estimated net proceeds of this Offering. See "Use of Proceeds."

(d) Represents the interest expense reduction of $0.5 million resulting from repayment of all outstanding mandatorily redeemable Class C Preferred Stock and amounts classified as interest associated with such preferred stock from the estimated net proceeds of this Offering. See "Use of Proceeds."

(e) Represents the difference between the amount actually recorded during the quarter ended May 4, 2002 pertaining to the amortization of debt issue costs and the amortization that would have been recorded if the new senior credit facility had been in place at the beginning of the period.

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(f) Represents the tax effect of the foregoing adjustments, resulting in an effective statutory tax rate of approximately 39.0%.

(g) Represents the reduction in accretion and dividends accrued of $1.3 million resulting from the issuance of shares of Common Stock upon the conversion and/or redemption of all $89.4 million of aggregate stated value and accrued dividends on our outstanding Class A Preferred Stock, Class B Preferred Stock and Class D Preferred Stock (at an assumed initial public offering price of $ per share).

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[photographs of stores, customers and merchandise]

Through and including , 2002 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

(KIRKLAND'S, INC. LOGO)

COMMON STOCK

PROSPECTUS

MERRILL LYNCH & CO.

CIBC WORLD MARKETS

SUNTRUST ROBINSON HUMPHREY

U.S. BANCORP PIPER JAFFRAY

, 2002

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth an itemization of all estimated expenses, all of which will be paid by us in connection with the issuance and distribution of the securities being registered:

NATURE OF EXPENSE                                               AMOUNT
-----------------                                               ------
SEC Registration Fee........................................   $ 13,225
Nasdaq National Market Listing Fee..........................    100,000
NASD Fee....................................................     14,875
Printing and engraving fees.................................    150,000
Registrant's counsel fees and expenses......................          *
Selling shareholders' counsel fees and expenses.............          *
Accounting fees and expenses................................          *
Officers and Directors Liability Insurance..................     80,000
Blue Sky expenses and counsel fees..........................      5,000
Transfer agent and registrar fees...........................     10,000
Miscellaneous...............................................          *
                                                               --------
  Total.....................................................   $      *
                                                               ========

* To be filed by amendment.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The Tennessee Business Corporation Act ("TBCA") sets forth in Sections 48-18-502 through 48-18-508 the circumstances governing the indemnification of directors, officers, employees and agents of a corporation against liability incurred in the course of their official capacities. Section 48-18-502 of the TBCA provides that a corporation may indemnify any director against liability incurred in connection with a proceeding if (i) the director acted in good faith, (ii) the director reasonably believed, in the case of conduct in his or her official capacity with the corporation, that such conduct was in the corporation's best interest, or, in all other cases, that his or her conduct was not opposed to the best interests of the corporation and (iii) in connection with any criminal proceeding, the director had no reasonable cause to believe that his or her conduct was unlawful. In actions brought by or in the right of the corporation, however, the TBCA provides that no indemnification may be made if the director or officer is adjudged to be liable to the corporation. Similarly, the TBCA prohibits indemnification in connection with any proceeding charging improper personal benefit to a director, if such director is adjudged liable on the basis that a personal benefit was improperly received. In cases where the director is wholly successful, on the merits or otherwise, in the defense of any proceeding instigated because of his or her status as a director of a corporation, Section 48-18-503 of the TBCA mandates that the corporation indemnify the director against reasonable expenses incurred in the proceeding. Notwithstanding the foregoing, Section 48-18-505 of the TBCA provides that a court of competent jurisdiction, upon application, may order that a director or officer be indemnified for reasonable expense if, in consideration of all relevant circumstances, the court determines that such individual is fairly and reasonably entitled to indemnification, whether or not the standard of conduct set forth above was met. Officers, employees, and agents who are not directors are entitled, through the provisions of Section 48-18-507 of the TBCA to the same degree of indemnification afforded to directors under Sections 48-18-503 and 48-18-505.

Our charter and our bylaws will provide that we will indemnify from liability, and advance expenses to, any of our present or former directors or officers to the fullest extent allowed by the TBCA,

II-1

as amended from time to time, or any subsequent law, rule, or regulation adopted. Additionally, the charter will provide that none of our directors will be personally liable to us or any of our shareholders for monetary damages for breach of any fiduciary duty except for liability arising from (i) any breach of a director's duty of loyalty to us or our shareholders, (ii) any acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) any unlawful distributions, or (iv) receiving any improper personal benefit.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

Since April 1999, we sold the following securities (giving retroactive effect to a -for-one stock split to be effected in connection with the Pre-Offering Transactions) without registration under the Securities Act:

1. In July 1999, in connection with an additional loan from our then-existing senior lenders, certain of our then-existing shareholders collateralized, by cash and letters of credit, $4.1 million of the additional loan or loaned funds directly to us. In consideration for this, we issued to such shareholders warrants to purchase an aggregate of 15,847 shares of common stock at $0.01 per share.

2. In December 1999, we reorganized by merging each of the separate corporations that operated our stores and Briar Patch Management Corporation, our wholly-owned subsidiary, into Kirkland's Stores, Inc., a wholly owned subsidiary of Kirkland's. In conjunction with the merger, we issued 206 additional shares of our common stock, 2,939,230 additional shares of our Class A Preferred Stock, 1,019,535 additional shares of our Class B Preferred Stock and 541,771 additional shares of our Class C Preferred Stock to all of our then-existing shareholders in the same proportion as their ownership interests in each such class prior to the merger.

3. In August 2000, we sold to certain then-existing shareholders, including a management shareholder, 44,445 shares of common stock, 44,445 shares of Class D Preferred Stock and warrants to purchase an aggregate of 5,555 shares of common stock for $0.01 per share, for an aggregate of $7.5 million in cash, the surrender of a $5.0 million note held by a management shareholder and the repayment of a $7.5 million note held by our then-existing senior lenders.

4. In July 2001, in connection with entering into a consulting agreement with a consultant for services to be rendered for us, we granted a stock option to such consultant to purchase 1,888 shares of common stock at an exercise price of $0.01 per share.

5. In November 2001, we granted stock options to 30 of our employees to purchase an aggregate of 9,200 shares of common stock under our 1996 Plan at an exercise price of $71.00 per share.

6. Between December 2001 and May 2002, we issued 2,513 shares of common stock at an exercise price of $95 per share to an executive officer and a former employee upon exercise of options granted between 1997 and 1998.

We believe that the transactions described in paragraphs 1 through 6 above were exempt from registration under Section 3(b) or 4(2) of the Securities Act because the subject securities were either (i) issued pursuant to a compensatory benefit plan pursuant to Rule 701 under the Securities Act or (ii) sold to a limited group of persons, each of whom was believed to have been a sophisticated investor or to have had a preexisting business or personal relationship with us or our management and to have been purchasing for investment without a view to further distribution.

II-2

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) Exhibits:

EXHIBIT
  NO.                            DESCRIPTION
-------                          -----------
  *1.1   Form of Underwriting Agreement
  +2.1   Recapitalization Agreement dated June 12, 1996, by and among
         Kirkland Holdings L.L.C., Kirkland's, Inc., Certain
         Companies Affiliated with Kirkland's, Inc., Carl Kirkland,
         Robert Kirkland, Bruce Moore and Robert E. Alderson (Certain
         exhibits and schedules have been omitted in accordance with
         Item 601(b)(2) of Regulation S-K. A copy of such exhibits
         and schedules shall be furnished supplementally to the
         Securities and Exchange Commission upon request.)
         (Incorporated herein by reference to Exhibit 2.1 to the
         registration statement on Form S-1 of Kirkland's filed on
         May 5, 1998 Registration No. 333-51517 [the "1998 Form
         S-1"])
 **3.1   Amended and Restated Charter of Kirkland's, Inc.
   3.2   Form of Amended and Restated Charter of Kirkland's, Inc. (to
         become effective immediately prior to completion of this
         offering)
 **3.3   Bylaws of Kirkland's, Inc.
   3.4   Form of Amended and Restated Bylaws of Kirkland's, Inc. (to
         become effective immediately prior to completion of this
         offering)
   4.1   Form of Specimen Stock Certificate
   5.1   Form of Opinion of Baker, Donelson, Bearman & Caldwell
  10.1   Loan and Security Agreement dated as of May 22, 2002, by and
         among Kirkland's, Kirkland's Stores, Inc., Kirklands.com,
         Inc., Congress Financial Corporation (Southern) and other
         financial institutions from time to time party to the
         agreement.
 +10.2   Senior Subordinated Note Due 2003 in the amount of
         $8,000,000 dated June 12, 1996 issued to Capital Resource
         Lenders II, L.P. (Identical Senior Subordinated Notes Due
         2003, except as to the payee and the amount of the notes,
         were issued to The Marlborough Capital Investment Fund, L.P.
         ($3,800,000), Allied Capital Corporation ($3,600,000),
         Allied Capital Corporation II ($2,800,000), and Capital
         Trust Investments, Ltd. ($1,800,000) (Incorporated herein by
         reference to Exhibit 10.2 to the 1998 Form S-1)
  10.3   Amended and Restated Registration Rights Agreement dated as
         of April 15, 2002, 2002, by and among Kirkland Holdings
         L.L.C., Kirkland's, Inc., SSM Venture Partners, L.P., Joseph
         R. Hyde III, Johnston C. Adams, Jr., John H. Pontius,
         CT/Kirkland Equity Partners, L.P., R-H Capital Partners,
         L.P., TCW/Kirkland Equity Partners, L.P., Capital Resource
         Lenders II, L.P., Allied Capital Corporation, The
         Marlborough Capital Investment Fund, L.P., Capital Trust
         Investments, Ltd., Global Private Equity II Limited
         Partnership, Advent Direct Investment Program Limited
         Partnership, Advent Partners Limited Partnership, Carl
         Kirkland, Robert Kirkland, Robert E. Alderson, The Amy
         Katherine Alderson Trust, The Allison Leigh Alderson Trust,
         The Carl T. Kirkland Grantor Retained Annuity Trust 2001-1
         and Steven Collins
 +10.4   Consulting Agreement by and between Kirkland's and Robert
         Kirkland dated June 12, 1996 (Incorporated herein by
         reference to Exhibit 10.5 to the 1998 Form S-1)
  10.5   Employment Agreement by and between Kirkland's and Carl
         Kirkland dated June 1, 2002
  10.6   Employment Agreement by and between Kirkland's and Robert E.
         Alderson dated June 1, 2002
**10.7   Employment Agreement by and between Kirkland's and Reynolds
         C. Faulkner dated as of February 2, 1998, as amended through
         July 31, 2000
**10.8   Employment Agreement by and between Kirkland's and H.R.
         Harvey dated June 18, 2001
**10.9   Employment Agreement by and between Kirkland's and C. Edmond
         Wise, Jr. dated December 4, 2000
**10.10  1996 Executive Incentive and Non-Qualified Stock Option
         Plan, as amended through April 17, 2002
  10.11  2002 Incentive Plan
  10.12  Employee Stock Purchase Plan

II-3

EXHIBIT
  NO.                            DESCRIPTION
-------                          -----------
  10.13  Amended and Restated Shareholders Agreement dated as of
         April 15, 2002, by and among Kirkland Holdings L.L.C.,
         Kirkland's, Inc., SSM Venture Partners, L.P., Joseph R. Hyde
         III, Johnston C. Adams, Jr., John H. Pontius, CT/Kirkland
         Equity Partners, L.P., R-H Capital Partners, L.P.,
         TCW/Kirkland Equity Partners, L.P., Capital Resource Lenders
         II, L.P., Allied Capital Corporation, The Marlborough
         Capital Investment Fund, L.P., Capital Trust Investments,
         Ltd., Global Private Equity II Limited Partnership, Advent
         Direct Investment Program Limited Partnership, Advent
         Partners Limited Partnership, Carl Kirkland, Robert
         Kirkland, Robert E. Alderson, The Amy Katherine Alderson
         Trust, The Allison Leigh Alderson Trust, The Carl T.
         Kirkland Grantor Retained Annuity Trust 2001-1 and Steven
         Collins
**10.14  Stock Option Agreement by and between Kirkland's and Carl
         Kirkland dated June 11, 1996 as amended through April 17,
         2002
 +10.15  Stock Option Agreement by and between Kirkland's and
         Reynolds C. Faulkner dated as of February 2, 1998
         (Incorporated herein by reference to Exhibit 10.16 to the
         registration statement on Form S-1/A of Kirkland's filed on
         July 16, 1998 Registration No. 333-51517 1998 Amendment No.
         1 to Form S-1)
**10.16  Sublease Agreement by and between Southwind Properties and
         Kirkland's dated March 5, 2001
  10.17  Sublease Agreement by and between Phoenician Properties and
         Kirkland's dated February 1, 2002
  10.18  Form of Stock Repurchase Agreement by and among Kirkland's
         and certain shareholders of Kirkland's dated             ,
         2002
  10.19  Letter Agreement by and between Kirkland's and Robert
         Kirkland dated June 3, 2002
  10.20  Exchange Agreement by and between Kirkland's and Carl
         Kirkland dated May 31, 2002
  10.21  Special Bonus Agreement by and between Kirkland's and Carl
         Kirkland dated June 1, 2002
  10.22  Special Bonus Agreement by and between Kirkland's and Robert
         E. Alderson dated June 1, 2002
  10.23  Promissory Note for $700,000 by Reynolds C. Faulkner in
         favor of Kirkland's dated May 4, 2002
  10.24  Stock Pledge Agreement by Reynolds C. Faulkner in favor of
         Kirkland's dated May 4, 2002
**21     Subsidiaries of Kirkland's
  23.1   Consent of PricewaterhouseCoopers LLP
 *23.2   Consent of Baker, Donelson, Bearman & Caldwell (included in
         Exhibit 5.1)
**24.1   Power of Attorney (included on signature pages)

* To be filed by amendment.

** Previously filed.

+ Incorporated by reference.

(b) Financial Statement Schedules:

All schedules have been omitted because they are not applicable, not required or the required information is included in the Financial Statements or the notes thereto.

ITEM 17. UNDERTAKINGS.

The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of counsel the matter has been settled by controlling precedent, submit to a court of appropriate

II-4

jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

The undersigned registrant hereby undertakes that:

(i) for purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

(ii) for purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Jackson, State of Tennessee, on the 4th day of June, 2002.

KIRKLAND'S, INC.

By: /s/  ROBERT E. ALDERSON
  ------------------------------------
    Robert E. Alderson
    Chief Executive Officer

POWER OF ATTORNEY

Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed below by the following persons in the capacities and on the dates indicated.

                  SIGNATURE                                    TITLE                        DATE
                  ---------                                    -----                        ----



           /s/ ROBERT E. ALDERSON              President, Chief Executive Officer and   June 4, 2002
---------------------------------------------  Director (Principal Executive Officer)
             Robert E. Alderson




          /s/ REYNOLDS C. FAULKNER                Executive Vice President, Chief       June 4, 2002
---------------------------------------------      Financial Officer and Director
            Reynolds C. Faulkner                   (Principal Financial Officer)




           /s/ CONNIE L. SCOGGINS                  Vice President of Finance and        June 4, 2002
---------------------------------------------     Treasurer/Controller (Principal
             Connie L. Scoggins                         Accounting Officer)




              /s/ CARL KIRKLAND                        Chairman of the Board            June 4, 2002
---------------------------------------------
                Carl Kirkland




                      *                                       Director                  June 4, 2002
---------------------------------------------
            Alexander S. McGrath




                      *                                       Director                  June 4, 2002
---------------------------------------------
              David M. Mussafer

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                  SIGNATURE                                    TITLE                        DATE
                  ---------                                    -----                        ----





                      *                                       Director                  June 4, 2002
---------------------------------------------
             R. Wilson Orr, III




                      *                                       Director                  June 4, 2002
---------------------------------------------
               John P. Oswald




                      *                                       Director                  June 4, 2002
---------------------------------------------
                Murray Spain




         *By: /s/ ROBERT E. ALDERSON                                                    June 4, 2002
  -----------------------------------------
             Robert E. Alderson
              Attorney-in-Fact

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EXHIBIT INDEX

EXHIBIT
  NO.                             DESCRIPTION
-------                           -----------
  3.2     Form of Amended and Restated Charter of Kirkland's, Inc. (to
          become effective immediately prior to completion of this
          offering)
  3.4     Form of Amended and Restated Bylaws of Kirkland's, Inc. (to
          become effective immediately prior to completion of this
          offering)
  4.1     Form of Specimen Stock Certificate
  5.1     Form of Opinion of Baker, Donelson, Bearman & Caldwell
 10.1     Loan and Security Agreement dated as of May 22, 2002, by and
          among Kirkland's, Kirkland's Stores, Inc., Kirklands.com,
          Inc., Congress Financial Corporation (Southern) and other
          financial institutions from time to time party to the
          agreement.
 10.3     Amended and Restated Registration Rights Agreement dated as
          of April 15, 2002, 2002, by and among Kirkland Holdings
          L.L.C., Kirkland's, Inc., SSM Venture Partners, L.P., Joseph
          R. Hyde III, Johnston C. Adams, Jr., John H. Pontius,
          CT/Kirkland Equity Partners, L.P., R-H Capital Partners,
          L.P., TCW/Kirkland Equity Partners, L.P., Capital Resource
          Lenders II, L.P., Allied Capital Corporation, The
          Marlborough Capital Investment Fund, L.P., Capital Trust
          Investments, Ltd., Global Private Equity II Limited
          Partnership, Advent Direct Investment Program Limited
          Partnership, Advent Partners Limited Partnership, Carl
          Kirkland, Robert Kirkland, Robert E. Alderson, The Amy
          Katherine Alderson Trust, The Allison Leigh Alderson Trust,
          The Carl T. Kirkland Grantor Retained Annuity Trust 2001-1
          and Steven Collins
 10.5     Employment Agreement by and between Kirkland's and Carl
          Kirkland dated June 1, 2002
 10.6     Employment Agreement by and between Kirkland's and Robert E.
          Alderson dated June 1, 2002
 10.11    2002 Incentive Plan
 10.12    Employee Stock Purchase Plan
 10.13    Amended and Restated Shareholders Agreement dated as of
          April 15, 2002, by and among Kirkland Holdings L.L.C.,
          Kirkland's, Inc., SSM Venture Partners, L.P., Joseph R. Hyde
          III, Johnston C. Adams, Jr., John H. Pontius, CT/Kirkland
          Equity Partners, L.P., R-H Capital Partners, L.P.,
          TCW/Kirkland Equity Partners, L.P., Capital Resource Lenders
          II, L.P., Allied Capital Corporation, The Marlborough
          Capital Investment Fund, L.P., Capital Trust Investments,
          Ltd., Global Private Equity II Limited Partnership, Advent
          Direct Investment Program Limited Partnership, Advent
          Partners Limited Partnership, Carl Kirkland, Robert
          Kirkland, Robert E. Alderson, The Amy Katherine Alderson
          Trust, The Allison Leigh Alderson Trust, The Carl T.
          Kirkland Grantor Retained Annuity Trust 2001-1 and Steven
          Collins
 10.17    Sublease Agreement by and between Phoenician Properties and
          Kirkland's dated February 1, 2002
 10.18    Form of Stock Repurchase Agreement by and among Kirkland's
          and certain shareholders of Kirkland's dated             ,
          2002
 10.19    Letter Agreement by and between Kirkland's and Robert
          Kirkland dated June 3, 2002
 10.20    Exchange Agreement by and between Kirkland's and Carl
          Kirkland dated May 31, 2002
 10.21    Special Bonus Agreement by and between Kirkland's and Carl
          Kirkland dated June 1, 2002
 10.22    Special Bonus Agreement by and between Kirkland's and Robert
          E. Alderson dated June 1, 2002
 10.23    Promissory Note for $700,000 by Reynolds C. Faulkner in
          favor of Kirkland's dated May 4, 2002
 10.24    Stock Pledge Agreement by Reynolds C. Faulkner in favor of
          Kirkland's dated May 4, 2002
 23.1     Consent of PricewaterhouseCoopers LLP

EXHIBIT 3.2

[COVER CERTIFICATE FOR PRE-EFFECTIVE
CHARTER AMENDMENT]

CERTIFICATE OF KIRKLAND'S, INC.

KIRKLAND'S, INC., a Tennessee corporation (the "Company"), does hereby certify, pursuant to Section 48-20-107(d) of the Tennessee Business Corporation Act, that:

FIRST: The Board of Directors of the Company, on April 17, 2002, adopted a resolution proposing and recommending to the Shareholders of the Company that the Charter of the Company be amended and restated to read in full as set forth in the Amended and Restated Charter attached hereto and filed herewith as Appendix A (the "Amended and Restated Charter").

SECOND: The Shareholders of the Company, on May 24, 2002, approved the recommendation of and adopted the Amended and Restated Charter in accordance with the provisions of Section 48-20-103 of the Tennessee Business Corporation Act.

THIRD: Upon the filing of this Certificate and the Amended and Restated Charter with the Tennessee Department of State, and without any other action on the part of the Company or any other person, (a) with respect to each share of Common Stock issued and outstanding immediately prior to the time (the "Effective Time") that the Certificate is filed with the Tennessee Department of State (the "Old Common Stock"), the Company shall issue ___________ shares of Common Stock (the "Share Dividend"), (b) each holder of record of one or more shares of the Old Common Stock shall be entitled to receive, upon surrender for cancellation of the certificates representing such shares, one or more new certificates representing the sum of (i) the Old Common Stock held by the holder, plus (ii) the shares of Common Stock issued to the holder pursuant to the Share Dividend; provided, however, that any fractional shares resulting from such Share Dividend shall be cancelled without consideration; and (c) the Amended and Restated Charter shall become effective, superseding the Company's existing charter and all prior amendments thereto and restatements thereof.

FOURTH: As of the Effective Time, the certificates representing the Old Common Stock shall be deemed cancelled and shall not be recognized as outstanding on the books of the Company for any purpose, whereupon, there shall be issued and delivered to each holder of Old Common Stock, promptly in his or its name and at his or its address as shown on the records of the Company, a certificate for the number of shares of Common Stock equal to the sum of (a) the Old Common Stock held by the holder, plus (b) the shares of Common Stock issued to the holder pursuant to the Share Dividend.

IN WITNESS WHEREOF, the Company has caused this Certificate to be signed by _____________, its _____________________, and attested by _________________, its Secretary, this _____ day of ___________, 2002.

ATTESTED:                                 KIRKLAND'S, INC.


By:                                       By:
   ---------------------------------         ----------------------------------
     [NAME]                                    [NAME]
     Secretary                                 [TITLE]

[To become effective immediately prior to effectiveness of the Offering]

APPENDIX A

AMENDED AND RESTATED CHARTER

KIRKLAND'S, INC.

This Amended and Restated Charter of Kirkland's, Inc. (the "Corporation") shall be effective upon filing with the Tennessee Secretary of State. The undersigned corporation hereby adopts the following amended and restated charter pursuant to ss. 48-20-107 of the Tennessee Business Corporation Act:

1. Name. The name of the Corporation is Kirkland's, Inc.

2. Registered Office and Agent. The Corporation's registered office is located at 805 North Parkway, Jackson, Madison County, Tennessee 38305. The Corporation's registered agent at that office is Robert Alderson.

3. Principal Office. The principal office of the Corporation is located at 805 North Parkway, Jackson, Madison County, Tennessee 38305.

4. Authorized Shares. The total number of shares of all classes of stock which the Corporation shall have authority to issue is One Hundred Ten Million (110,000,000), of which One Hundred Million (100,000,000) shares shall constitute a separate class of shares known as Common Stock, which shall be without par value (the "Common Stock"), and the remaining Ten Million (10,000,000) shares shall constitute a single class of shares known as Preferred Stock (the "Preferred Stock"). Of the Preferred Stock (i) Three Million One Hundred Thousand (3,100,000) shares shall be designated as a series referred to as Class A Preferred Stock, which shall be without par value (the "Class A Preferred Stock"), (ii) One Million One Hundred Thousand (1,100,000) shares shall be designated as a series referred to as Class B Preferred Stock, which shall be without par value (the "Class B Preferred Stock"), (iii) Six Hundred Thousand (600,000) shares shall be designated as a series referred to as Class C Preferred Stock, which shall be without par value (the "Class C Preferred Stock"), and (iv) Seventy-Five Thousand (75,000) shares shall be designated as a series referred to as Class D Preferred Stock, which shall be without par value (the "Class D Preferred Stock").

5. Certain Definitions. Unless the context otherwise requires, the terms defined in this Section 5 shall have, for all purposes of this Amended and Restated Charter the meanings herein specified (with terms defined in the singular having comparable meanings when used in the plural).

"Anticipated Effective Date" has the meaning set forth in
Section 8.6.

"Board of Directors" means the Board of Directors of the Corporation or any authorized committee of the Board of Directors, as the same may be constituted from time to time.

"Class A Excess Dividend Amount" has the meaning set forth in
Section 8.3.2.

"Class A Liquidation Preference" has the meaning set forth in
Section 8.3.1.

"Class A Preferred Stock" means the Class A Preferred Stock, no par value per share, designated as "Class A Preferred Stock" in the Charter.

"Class A Preferred Stock Stated Value" means $13.58859 per share.

"Class A Redemption Price" has the meaning set forth in
Section 8.5.1.

"Class B Excess Dividend Amount" has the meaning set forth in
Section 9.3.2.

"Class B Liquidation Preference" has the meaning set forth in
Section 9.3.1.

"Class B Preferred Stock" means the Class B Preferred Stock, no par value per share, designated as "Class B Preferred Stock" in the Charter.

"Class B Preferred Stock Stated Value" means $13.58859 per share.

"Class B Redemption Price" has the meaning set forth in
Section 9.5.1.

"Class C Liquidation Preference" has the meaning set forth in
Section 10.3.1.

"Class C Preferred Stock" means the Class C Preferred Stock, no par value per share, designated as "Class C Preferred Stock" in the Charter.

"Class C Preferred Stock Stated Value" means $30.63556 per share.

"Class C Redemption Event" has the meaning set forth in
Section 10.5.2.

"Class C Redemption Price" has the meaning set forth in
Section 10.5.3.

"Class D Liquidation Preference" has the meaning set forth in
Section 11.3.1 hereof.

"Class D Preferred Stock" means the Corporation's Class D Preferred Stock, no par value per share, as the same may be amended or modified from time to time.

"Class D Preferred Stock Stated Value" means $450.00 per share.

"Class D Redemption Price" has the meaning set forth in
Section 11.5.1 hereof.

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"Common Stock" means the Common Stock, no par value per share, of the Corporation.

"Conversion Date" has the meaning set forth in Section 8.6. hereof.

"Conversion Price" means the offering price per share at which the Common Stock of the Corporation is first offered to the public in the Qualified Public Offering.

"Corporation" means Kirkland's, Inc.

"Event of Conversion" has the meaning set forth in Section 8.6.

"Issue Date" means the first date on which any shares of Class D Preferred Stock are issued by the Corporation.

"Liquidation" means any sale, merger, consolidation, dissolution, liquidation or winding up of the Corporation, voluntary or involuntary.

"Liquidity Event" means

(A) a sale of all or a majority in value of the assets of the Corporation and its consolidated subsidiaries, taken as a whole.

(B) the acquisition of more than fifty percent (50%) of the outstanding shares of Common Stock of the Corporation, by a person or group of persons acting in concert, who are not shareholders of the Corporation as of August 8, 2000, other than transfers to an Affiliate or to a Permitted Transferee (as such terms are defined in the shareholders agreement in effect as of August 8, 2000, between the Corporation and the shareholders thereof) if such transfers are permitted without restriction pursuant to the terms of such shareholders agreement;

(D) a refinancing after August 8, 2000 of the indebtedness of the Corporation for borrowed money existing as of August 8, 2000, in connection with which the Corporation repurchase or redeem any capital stock for value.

"Notes" has the meaning set forth in Section 8.2.1 hereof.

"Person" means any individual, corporation, partnership, firm, joint venture, association, limited liability company or partnership, joint-stock company, trust, unincorporated organization or any government, or governmental or regulatory body thereof, or political subdivision thereof, whether federal, state, local or foreign, or any agency or instrumentality thereof, or any court or arbitrator (public or private).

"Past Due Interest" has the meaning set forth in Section 8.2.1 hereof.

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"Preferred Stock Designation" has the meaning set forth in
Section 7 hereof.

"Qualified Public Offering" means a sale of shares of the Common Stock of the Corporation in a registered underwritten public offering resulting in gross proceeds to the Corporation of at least Thirty Million Dollars ($30,000,000).

"Redemption Allowance Date" has the meaning set forth in
Section 8.5.1 hereof.

6. Common Stock. The express terms and conditions of the shares classified and designated as Common Stock are as follows:

6.1. Voting Rights of Common Stock. Each share of Common Stock shall entitle the holder thereof to one vote, in person or by proxy, upon each question or matter submitted generally to the holders of the Common Stock of the Corporation and shall have all voting rights accorded to holders of Common Stock pursuant to the Tennessee Business Corporation Act.

6.2. Liquidation. On Liquidation, and after payment to the holders of shares of Preferred Stock as provided below, the remaining assets and funds of the Corporation, if any, shall be distributed and paid over to the holders of Common Stock, pro rata according to their respective shares.

7. Preferred Stock. The Board of Directors of the Corporation is authorized to amend this Charter, by adoption of articles of amendment to the Charter effective without shareholder approval (hereinafter referred to as a "Preferred Stock Designation"), to provide for the issuance of serial preferred stock in series and to fix the preferences, limitations and relative rights of each such series, including, but not limited to, determination of any of the following:

(a) the distinctive designation for each series and the number of shares constituting such series;

(b) the voting rights, full, conditional or limited, of shares of such series;

(c) whether the shares of such series shall be redeemable and, if so, the price or prices at which, and the terms and conditions upon which, such shares may be redeemed;

(d) the dividend rate or the amount of dividends to be paid on the shares of such series, whether dividends shall be cumulative and, if so, from which date(s), the payment date(s) for dividends, and the participating or other special rights, if any, with respect to dividends;

(e) the amount(s) payable upon the shares of such series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation;

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(f) whether the shares of such series shall be entitled to the benefit of a sinking or retirement fund to be applied to the purchase or redemption of such shares, and if so entitled, the amount of such fund and the manner of its application, including the price(s) at which such shares may be redeemed or purchased through the application of such fund;

(g) whether the shares of such series shall be convertible into, or exchangeable for, shares of any other class or classes or of any other series of the same or any other class or classes of stock of the Corporation and, if so convertible or exchangeable, the conversion price(s) or the rate(s) of exchange, and the adjustments thereof, if any, at which such conversion or exchange may be made, and any other terms and conditions of such conversion or exchange;

(h) the price or other consideration for which the shares of such series shall be issued;

(i) whether the shares of such series that are redeemed or converted shall have the status of authorized but unissued shares of serial preferred stock and whether such shares may be reissued as shares of the same or any other series of serial preferred stock; and

(j) any other designations, preferences, limitations or rights that are now or hereafter permitted by applicable law and are not inconsistent with the provisions of this Charter.

Except as may be provided in this Charter or in a Preferred Stock Designation, the Common Stock shall have the exclusive right to vote for the election of directors and for all other purposes, and holders of Preferred Stock shall not be entitled to receive notice of any meeting of shareholders at which they are not entitled to vote.

8. Class A Preferred Stock. The express terms and conditions of the shares classified and designated as Class A Preferred Stock, no par value, of the Corporation (the "Class A Preferred Stock") are as follows:

8.1. Designation and Number of Shares of Class A Preferred Stock. The designation of the series of preferred stock in this
Section 8 is Class A Preferred Stock and the number of shares of such series is 3,100,000 shares having a stated value per share equal to $13.58859 (the "Class A Preferred Stock Stated Value"). The Class A Preferred Stock shall rank pari passu with the Class B Preferred Stock (except as provided in Section 8.3 and
Section 9.3) and senior with respect to payment of dividends, distributions, redemptions and distributions upon Liquidation to all other shares of capital stock of the Corporation except the Class C Preferred Stock and the Class D Preferred Stock.

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8.2. Dividends with Respect to Class A Preferred Stock.

8.2.1. In each year, the holder of each share of Class A Preferred Stock shall be entitled to receive, subject to the rights of the holders of Class D Preferred Stock, preferential, cumulative dividends in cash, which dividends shall be cumulative and shall accrue from the date upon which the Class A Preferred Stock was issued, in an amount equal to eight percent (8%) of the Class A Preferred Stock Stated Value per share per year, provided, that from and after June 12, 1999, dividends shall accrue in an amount equal to ten (10%) of the Class A Preferred Stock Stated Value per share per year, provided further that dividends shall accrue in an amount equal to four percent (4%) per annum of the Class A Preferred Stock Stated Value per share per year from the period from June 30, 2001 until such time as the Company has paid on the promissory notes (the "Notes") issued in connection with that Senior Subordinated Note and Warrant Purchase Agreement dated as of June 12, 1996, as amended, all interest that had accrued and was not paid as of June 19, 2001, in the amount of Three Million Seventy-Two Thousand Five Hundred Nine Dollars ($3,072,509), plus all additional interest accrued under the Notes after June 19, 2001 that is not paid when due (collectively, "Past Due Interest"). Dividends shall accrue daily whether or not declared and whether or not funds are legally available therefor. If such dividends are not paid within ninety (90) days after the end of the Corporation's fiscal quarter, such dividends shall accrue additional dividends from the last day of such fiscal quarter at the same rate per annum. Dividends shall be paid only to the extent that (i) there shall be sufficient funds of the Corporation legally available for the payment of such dividends, (ii) the payment of such dividend would not violate any covenants of the Corporation to any lender to the Corporation or its subsidiaries and (iii) the payment of such dividend would not violate the terms of any management or shareholder agreement to which the Corporation is party.

8.2.2. If, in any dividend period or periods, full dividends (whether past or current) upon the outstanding Class A Preferred Stock at the dividend rate set forth herein shall not have been paid, then, unless and until all dividends accrued and unpaid on the Class A Preferred Stock through the payment date for such dividends are declared and paid on each share of Class A Preferred Stock, no dividends shall be declared or paid or set apart for payment upon any Common Stock or class or series of the Corporation's capital stock authorized, created or designated after August 8, 2000 which does not expressly provide that it ranks senior to or on a parity with the Class A Preferred Stock as to the payment of dividends, distributions, redemptions and distributions upon Liquidation, nor shall the Corporation purchase, redeem or otherwise acquire for consideration any such stock. If, at any time, the Corporation shall pay less than the total amount of dividends then payable on the then outstanding Class A Preferred Stock, the aggregate payment to all holders of Class A Preferred Stock shall be distributed among all such holders so that an amount ratably in proportion to the respective dividends due thereon shall be paid with respect to each outstanding share of Class A Preferred Stock.

8.2.3. Holders of the Class A Preferred Stock shall not, solely as a result of such holders' ownership of such Class A Preferred Stock, be entitled to participate in any dividends or other distributions (cash, stock or otherwise) declared or paid on or with respect to any other class of stock or equity security of the Corporation or any series of any such class.

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8.2.4. No dividend shall be paid upon shares of Class A Preferred Stock unless like dividends are simultaneously paid on shares of Class B Preferred Stock.

8.3. Liquidation Preference with Respect to Class A Preferred Stock.

8.3.1. Following any Liquidation, no distribution of any of the assets of the Corporation shall be made to the holders of (i) Common Stock, (ii) any class or series of the Corporation's capital stock authorized, created or designated after August 8, 2000 which does not expressly provide that it ranks senior to or on a parity with the Class A Preferred Stock as to the payment of dividends, distributions, redemptions and distributions upon Liquidation, or (iii) Class B Preferred Stock by reason of their ownership thereof unless and until the holders of Class A Preferred Stock shall have received out of the assets of the Corporation legally available for distributions to its shareholders, an amount per share equal to the sum of the Class A Preferred Stock Stated Value plus all accrued and unpaid dividends, if any, to the date of payment, less the Class A Excess Dividend Amount (hereinafter defined) (the "Class A Liquidation Preference") for each share of Class A Preferred Stock held. If upon any Liquidation the assets of the Corporation available for distribution to its shareholders shall be insufficient to pay the holders of shares of Class A Preferred Stock, the full amount of the Class A Liquidation Preference, the holders of shares of Class A Preferred Stock shall share ratably in any distribution of assets available for distribution to the Class A Preferred Stock holders after any distribution of the Class D Liquidation Preference to the holders of Class D Preferred Stock pursuant to Section 11.3 and distribution of the Class C Liquidation Preference to the holders of the Class C Preferred Stock pursuant to Section 10.3.

8.3.2. In the event of any Liquidation, after payment of the Class D Liquidation Preference, the Class C Liquidation Preference, Class A Liquidation Preference and the Class B Liquidation Preference (hereinafter defined), the holders of the Class A Preferred Stock shall be entitled to receive pari passu with the amounts payable to holders of Class B Preferred Stock pursuant to Section 9.3.2, an amount equal to all accrued and unpaid dividends, if any, to the date of payment owing on the Class A Preferred Stock other than accrued and unpaid dividends that would be owing thereon if all dividends accrued on the Class A Preferred Stock at the rate of eight percent (8%) per annum (the "Class A Excess Dividend Amount").

8.3.3. In the event of any Liquidation, after payment shall have been made to the holders of shares of Class A Preferred Stock of the amounts described in Section 8.3.1 and Section 8.3.2, the holders of shares of Class A Preferred Stock shall be entitled to no further participation in the distribution of the assets of the Corporation.

8.3.4. The sale or other disposition (other than by a contribution to or merger with another corporation of which more than eighty percent (80%) of the stock (by vote and value) is owned (directly or indirectly) by the Corporation (or its shareholders)) of all or substantially all the assets of the Corporation shall be deemed to be a Liquidation.

8.4. Voting Rights with Respect to Class A Preferred Stock. The Class A Preferred Stock shall have the right to vote on all matters as to which holders of the Common Stock shall be entitled to vote, in the same manner and with the same effect as such holders of

-7-

the Common Stock, voting together with the holders of Common Stock, Class B Preferred Stock and Class D Preferred Stock as one voting group. The rate at which the Class A Preferred Stock shall have the right to vote shall be ______
[blank to be filled in, prior to filing, with the same number as the stock split ratio to be set forth on the cover certificate accompanying this Amended and Restated Charter] votes per share; provided, however, that in the event that, at any time after the filing date of this Amended and Restated Charter:
(a) the outstanding Common Stock shall be subdivided into a greater number of shares, the number of votes for each share of Class A Preferred Stock shall be proportionately increased; or (b) the outstanding shares of Common Stock shall be combined into a smaller number of shares, the number of votes for each share of Class A Preferred Stock shall be proportionately reduced. Without first obtaining the approval (by vote or written consent) of at least seventy-five percent (75%) of the outstanding shares of the Class A Preferred Stock as a separate class, the Corporation shall not, after August 8, 2000,

8.4.1. in any manner authorize, create or issue
(x) any class or series of capital stock which (A) ranks, either as to payment of dividends, distribution of assets or redemption, prior to or on parity with the Class A Preferred Stock or (B) in any manner adversely affects the holders of the Class A Preferred Stock, or (y) any additional shares of capital stock or any class or series of any bonds, debentures, notes or other obligations convertible into or exchangeable for, or having optional rights to purchase, any shares of capital stock having any priority over or parity with or otherwise adversely affecting the holders of the Class A Preferred Stock;

8.4.2. in any manner alter or change the designations or the powers, preferences or rights, or the qualifications, limitations or restrictions of the Class A Preferred Stock, including without limitation, by increasing or decreasing the number of shares of the Class A Preferred Stock authorized for issuance hereunder, or by increasing or decreasing the par value or Class A Preferred Stock Stated Value of the shares of the Class A Preferred Stock; or

8.4.3. reclassify the shares of any (a) Common Stock, (b) class or series of the Corporation's capital stock authorized, created or designated after August 8, 2000 or (c) Class B Preferred Stock into shares of any class or series of capital stock (A) ranking, either as to payment of dividends, distribution of assets or redemption, prior to or on a parity with the Class A Preferred Stock or (B) which in any manner adversely affects the holders of the Class A Preferred Stock.

8.5. Redemptions with Respect to Class A Preferred Stock.

8.5.1. At any time and from time to time after (or simultaneously with) the completion of the redemption of all of the outstanding Class D Preferred Stock pursuant to Section 11.5 and after (or simultaneously with) the completion of the redemption of all of the outstanding Class C Preferred Stock pursuant to Section 10.5, and after the earlier to occur of (i) the closing of a Liquidity Event, (ii) June 12, 2004, and (iii) the full payment and discharge of the senior subordinated indebtedness of the Corporation in the initial principal amount of Twenty Million Dollars ($20,000,000) (the earlier of such dates being herein the "Redemption Allowance Date"), at the option of the Corporation and upon the Corporation's delivery of thirty (30) days

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prior written notice of such a redemption to be effected on or after the Redemption Allowance Date, the Corporation may redeem all or any portion of the Class A Preferred Stock then outstanding; provided, however, that (x) any redemption of less than all of the shares of Class A Preferred Stock shall be divided ratably and equally among the then extant holders of Class A Preferred Stock and (y) no shares of Class A Preferred Stock shall be redeemed pursuant to this Section 8.5.1 unless a pro rata number (based on aggregate stated values) of Class B Preferred shares shall be redeemed pursuant to Section
9.5.1. For each share of Class A Preferred Stock which is to be redeemed by the Corporation at any time in a redemption pursuant to this Section 8.5.1, the Corporation shall be obligated to pay to the holder thereof (upon surrender by such holder at the Corporation's principal office of the certificate representing such share duly endorsed in blank or accompanied by an appropriate form of assignment) an amount for such share equal to Class A Preferred Stock Stated Value plus all accrued and unpaid dividends with respect to such share to the date of payment (the "Class A Redemption Price").

8.5.2. After (or simultaneously with) the completion of the redemption of all of the outstanding Class D Preferred Stock pursuant to Section 11.5 and after (or simultaneously with) the completion of the redemption of all of the outstanding Class C Preferred Stock pursuant to
Section 10.5, at any time and from time to time after June 12, 2004, at the option of a holder of the Class A Preferred Stock and upon thirty (30) days prior delivery of written notice by the holder to the Corporation of redemption to be effected on or after such date, such holder may require the Corporation to redeem all or any portion of the Class A Preferred Stock held by such holder. For each share of Class A Preferred Stock which is to be redeemed by the Corporation at any time in a redemption pursuant to this Section 8.5.2, the Corporation shall be obligated to pay to the holder thereof (upon surrender by such holder at the Corporation's principal office of the certificate representing such share duly endorsed in blank or accompanied by an appropriate form of assignment) an amount for such share equal to the Class A Preferred Stock Redemption Price.

8.5.3. If the funds of the Corporation legally available for redemption pursuant to Section 8.5.2 and Section 9.5.2 are insufficient to redeem the number of shares which the Corporation is required to redeem pursuant to Section 8.5.2 and Section 9.5.2, those funds which are available will be used to redeem the maximum possible number of shares (or fraction thereof) and such funds shall be distributed ratably among each of the holders of the Class A Preferred Stock and Class B Preferred Stock, in proportion to the amount that would have been distributed to each such holder if the funds of the Corporation would have been sufficient to permit payment of the full amount required to be paid in respect of such redemption. At any time, and from time to time thereafter, until all shares of Class A Preferred Stock and Class B Preferred Stock which the Corporation shall be obligated to redeem are so redeemed, when additional funds of the Corporation are legally available for the redemption of any of the shares of Class A Preferred Stock and Class B Preferred Stock (including fractional shares), such funds shall be used immediately to redeem shares (or fractions thereof) which the Corporation has become obligated to redeem but which it has not redeemed, such amount to be applied ratably among each of the holders of shares of Class A Preferred Stock and Class B Preferred Stock which the Corporation is then obligated to redeem in proportion to the number of shares of Class A Preferred Stock and Class B Preferred Stock which are held by them and which the Corporation shall then be obligated to redeem. Notwithstanding the foregoing, in connection

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with any Liquidation, any redemption payments owing to holders of Class A Preferred Stock shall be paid in full (up to the Class A Liquidation Preference) before payments shall be made to holders of Class B Preferred Stock pursuant to Section 10.5.

8.5.4. Notwithstanding the fact that a written notice of redemption is given, all rights of the redeeming holder with respect to shares of Class A Preferred Stock which are the subject of such written notice of redemption shall continue as if the written notice of redemption had not been given until the Class A Preferred Stock Redemption Price therefor is paid (such payment being a continuing obligation of the Corporation).

8.5.5. At any time after notice of redemption pursuant to Section 8.5.1 or Section 8.5.2 hereof shall have been mailed and before the redemption date specified therein, the Corporation may deposit for the pro rata benefit of the holders of the shares of Class A Preferred Stock so called for redemption the funds necessary for such redemption with a bank or trust company having a capital and surplus of at least $500,000,000. Any monies so deposited by the Corporation and unclaimed at the end of two years from the date designated for such redemption shall revert to the Corporation and at the end of five years of the date designated for such redemption shall be remitted to the Treasurer of the State of Tennessee in accordance with the Tennessee Uniform Disposition of Unclaimed Property Act. After such reversion such bank or trust company shall, upon demand, pay over to the Corporation such unclaimed amounts and thereupon such bank or trust company shall be relieved of all responsibility in respect thereof to such holder and such holder shall look only to the Corporation for the payment of the Class A Redemption Price. Any interest accrued on funds so deposited pursuant to this Section 8.5.5 shall be paid from time to time to the Corporation for its own account. Upon the deposit of funds pursuant to this Section 8.5.5 in respect of shares of Class A Preferred Stock called for redemption, notwithstanding that any certificates for such shares shall not have been surrendered for cancellation, the shares represented thereby shall no longer be deemed outstanding, the rights to receive dividends thereon shall cease to accrue from and after the redemption date, and all rights of the holders of the shares of Class A Preferred Stock called for redemption shall cease and terminate, excepting only the right to receive the Class A Redemption Price therefor, without interest.

8.5.6. When shares are redeemed pursuant to this
Section 8, such redemption shall only occur to the extent that (i) there shall be sufficient funds of the Corporation legally available for such redemption,
(ii) such redemption would not violate any covenants of the Corporation to any lender to the Corporation or its subsidiaries and (iii) such redemption would not violate the terms of any management or shareholder agreement to which the Corporation is party.

8.5.7. Upon payment of the Class A Redemption Price by the Corporation with respect to shares of Class A Preferred Stock being redeemed pursuant to this Section 8.5, such shares of Class A Preferred Stock shall no longer be deemed to be outstanding, shall be canceled and shall not be subject to reissuance by the Corporation.

8.6. Conversion Rights. Upon the occurrence of the closing of a Qualified Public Offering, provided that, prior to such closing:
(a) at least thirty (30) days prior to the date

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which the Board of Directors estimates in good faith to be the likely effective date of the registration of a Qualified Public Offering (the "Anticipated Effective Date"), the Board of Directors shall have provided to all of the holders of Class A Preferred Stock, Class B Preferred Stock and Class D Preferred Stock notice of an anticipated Qualified Public Offering, which notice shall include the Anticipated Effective Date and the anticipated offering price per share of Common Stock at which the Common Stock will be first offered to the public in the Qualified Public Offering and (b) at least twenty (20) days prior to the Anticipated Effective Date, the holders of the Class A Preferred Stock, holders of Class B Preferred Stock and holders of Class D Preferred Stock, together representing at least sixty percent (60%) of the aggregate outstanding shares of Class A Preferred Stock, Class B Preferred Stock and Class D Preferred Stock shall have elected to convert all of the issued and outstanding shares of Class A Preferred Stock, Class B Preferred Stock and Class D Preferred Stock (other than those shares being redeemed pursuant to Section 8.5.1, Section 9.5.1, and Section 11.5.1, respectively) into shares of Common Stock, then in such event (an "Event of Conversion") each and every share of Class A Preferred Stock then outstanding (other than those shares being redeemed pursuant to Section 8.5.1), by virtue of, and simultaneously with the occurrence of the Event of Conversion and without any additional action on the part of the holder thereof, be deemed automatically converted into such number of fully paid and nonassessable shares of Common Stock as is equal to (x) the sum of (A) the Class A Preferred Stock Stated Value plus (B) all accrued but unpaid dividends, if any, payable with respect to such shares of Class A Preferred Stock up to and including the date upon which the Qualified Public Offering is closed (the "Conversion Date") divided by (y) the Conversion Price.

8.6.1. Conversion shall be deemed to have been effected with respect to conversion under Section 8.6 on the Conversion Date. Simultaneous with the conversion being effected, the shares of Class A Preferred Stock so converted shall no longer be deemed outstanding, shall be canceled and shall not be subject to reissuance by the Corporation. As promptly as practicable thereafter, the Corporation shall issue and deliver to the record locations of each of the holders (or upon the written order of a holder, at the place designated by such holder), a certificate or certificates for the number of full shares of Common Stock to which each respective holder is entitled and a check or cash in respect of any fractional interest in a share of Common Stock, as provided in Section 8.6.3, payable with respect to the shares of Class A Preferred Stock so converted. The person in whose name the certificate or certificates for Common Stock are to be issued shall be deemed to have become a stockholder of record on the Conversion Date unless the transfer books of the Corporation are closed on that date, in which event such holder shall be deemed to have become a stockholder of record on the next succeeding date on which the transfer books are open.

8.6.2. No fractional shares of Common Stock shall be issued upon conversion of shares of Class A Preferred Stock. Instead of any fractional shares of Common Stock which would otherwise be issuable upon conversion of any shares of Class A Preferred Stock, the Corporation shall pay a cash adjustment in respect of such fractional interest in an amount equal to the Conversion Price of a share of Class A Preferred Stock multiplied by such fractional interest. Holders of fractional interests shall not be entitled to dividends in respect of such fractional interests and the holders of fractional interests shall not be entitled to any rights as stockholders of the Corporation in respect of such fractional interests.

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8.6.3. The Corporation shall pay all documentary, stamp or other transaction taxes attributable to the issuance or delivery of shares of Common Stock upon conversion of any shares of Class A Preferred Stock; provided, however, that the Corporation shall not be required to pay any taxes which may be payable in respect of any transfer involved in the issuance or delivery of any certificate for such shares in a name other than that of the holder of the shares of Class A Preferred Stock in respect of which such shares are being issued.

8.6.4. The holders of the Class A Preferred Stock, the holders of the Class B Preferred Stock, and the holders of the Class D Preferred Stock by vote of sixty percent (60%) of the aggregate outstanding shares of Class A Preferred Stock, Class B Preferred Stock and Class D Preferred Stock, voting together as a single voting group, shall have the right to amend the Corporation's Charter for the sole purpose of authorizing sufficient additional shares of Common Stock to effect the conversions under this Section 8.6 and Section 9.6, and Section 11.6. The additional shares, when so authorized, shall be reserved by the Corporation for the purpose of effecting such conversions and shall be free of preemptive rights.

8.6.5. All shares of Common Stock which may be issued in connection with the conversion provisions set forth herein will, upon issuance by the Corporation, be validly issued, fully paid and nonassessable and free from all taxes, liens or charges with respect thereto created or imposed by the Corporation.

9. Class B Preferred Stock. The express terms and conditions of the shares classified and designated as Class B Preferred Stock, no par value, of the Corporation are as follows:

9.1. Designation and Number of Shares of Class B Preferred Stock. The designation of the series of Preferred Stock set forth in this Section 9 is Class B Preferred Stock and the number of shares of such series is 1,100,000 shares having a stated value per share equal to $13.58859 (the "Class B Preferred Stock Stated Value"). The Class B Preferred Stock shall rank pari passu with the Class A Preferred Stock (except as provided in Section 8.3 and Section 9.3 hereof) and senior with respect to payment of dividends, distributions, redemptions and distributions upon Liquidation, to all other shares of the capital stock of the Corporation except the Class C Preferred Stock and the Class D Preferred Stock.

9.2. Dividends with respect to Class B Preferred Stock.

9.2.1. In each year, the holder of each share of Class B Preferred Stock shall be entitled to receive subject to the rights of the holders of Class D Preferred Stock, preferential, cumulative dividends in cash, which dividends shall be cumulative and shall accrue from the date upon which the Class B Preferred Stock was issued, in an amount equal to eight percent (8%) of the Class B Preferred Stock Stated Value per share per year, provided, however, that from and after June 12, 1999, dividends shall accrue in an amount equal to ten percent (10%) per annum of the Class B Preferred Stock Stated Value. Dividends shall accrue daily whether or not declared and whether or not funds are legally available therefor. If such dividends are not paid within ninety (90) days after the end of each of the Corporation's fiscal quarters, such dividends shall accrue additional dividends from the last day of such fiscal quarter

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at the same rate per annum. Dividends shall be paid only to the extent that (i) there shall be sufficient funds of the Corporation legally available for the payment of such dividends, (ii) the payment of such dividend would not violate any covenants of the Corporation to any lender to the Corporation or its subsidiaries and (iii) the payment of such dividend would not violate the terms of any management or shareholder agreement to which the Corporation is party.

9.2.2. If, in any dividend period or periods, full dividends (whether past or current) upon the outstanding Class B Preferred Stock at the dividend rate set forth herein shall not have been paid, then, unless and until all dividends accrued and unpaid on the Class B Preferred Stock through the payment date for such dividends are declared and paid on each share of Class B Preferred Stock, no dividends shall be declared or paid or set apart for payment upon any Common Stock or class or series of the Corporation's capital stock authorized, created or designated after August 8, 2000 which does not expressly provide that it ranks senior to or on a parity with the Class B Preferred Stock as to the payment of dividends, distributions, redemptions and distributions upon Liquidation, nor shall the Corporation purchase, redeem or otherwise acquire for consideration any such stock. If, at any time, the Corporation shall pay less than the total amount of dividends then payable on the then outstanding Class B Preferred Stock, the aggregate payment to all holders of Class B Preferred Stock shall be distributed among all such holders so that an amount ratably in proportion to the respective dividends due thereon shall be paid with respect to each outstanding share of Class B Preferred Stock.

9.2.3. Holders of the Class B Preferred Stock shall not, solely as a result of such holders' ownership of such Class B Preferred Stock, be entitled to participate in any dividends or other distributions (cash, stock or otherwise) declared or paid on or with respect to any other class of stock or equity security of the Corporation or any series of any such class.

9.2.4. No dividend shall be paid upon shares of Class B Preferred Stock unless like dividends are simultaneously paid on shares of Class A Preferred Stock.

9.3. Liquidation Preference with Respect to Class B Preferred Stock.

9.3.1. Following any Liquidation, no distribution of any of the assets of the Corporation shall be made to the holders of (i) Common Stock or (ii) any class or series of the Corporation's capital stock authorized, created or designated after August 8, 2000 which does not expressly provide that it ranks senior to or on a parity with the Class B Preferred Stock as to the payment of dividends, distributions, redemptions and distributions upon Liquidation by reason of their ownership thereof unless and until the holders of Class B Preferred Stock shall have received out of the assets of the Corporation legally available for distributions to its shareholders, an amount per share equal to the sum of the Class B Preferred Stock Stated Value plus all accrued and unpaid dividends, if any, to the date of payment, less the Class B Excess Dividend Amount (hereinafter defined) (the "Class B Liquidation Preference") for each share of Class B Preferred Stock held. If upon any Liquidation the assets of the Corporation available for distribution to its shareholders shall be insufficient to pay the holders of shares of Class B Preferred Stock the full amount of the Class B Liquidation Preference, the holders of shares of Class B Preferred Stock shall share ratably in any distribution of assets available for distribution to the Class B Preferred Stock holders after distribution of the Class D Liquidation Preference to

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the holders of Class D Preferred Stock pursuant to Section 11.3, distribution of the Class C Liquidation Preference to the holders of the Class C Preferred Stock pursuant to Section 10.3, and distribution of the Class A Liquidation Preference to the holders of the Class A Preferred Stock pursuant to Section 8.3.

9.3.2. In the event of any Liquidation, after payment of the Class D Liquidation Preference, the Class C Liquidation Preference, the Class A Liquidation Preference and the Class B Liquidation Preference, the holders of the Class B Preferred Stock shall be entitled to receive, pari passu with the amounts payable to holders of Class A Preferred Stock pursuant to Section 8.3.2, an amount equal to all accrued and unpaid dividends, if any, to the date of payment owing on the Class B Preferred Stock other than accrued and unpaid dividends that would be owing thereon if all dividends accrued on the Class B Preferred Stock at the rate of eight percent (8%) per annum (the "Class B Excess Dividend Amount").

9.3.3. In the event of any Liquidation, after payment shall have been made to the holders of shares of Class B Preferred Stock of the amounts described in Section 9.3.1 or Section 9.3.2, the holders of shares of Class B Preferred Stock shall be entitled to no further participation in the distribution of the assets of the Corporation.

9.3.4. The sale or other disposition (other than by a contribution to or merger with another corporation of which more than eighty percent (80%) of the stock (by vote and value) is owned (directly or indirectly) by the Corporation or its shareholders)) of all or substantially all the assets of the Corporation shall be deemed to be a Liquidation.

9.4. Voting Rights with Respect to Class B Preferred Stock. The Class B Preferred Stock shall have the right to vote on all matters as to which holders of the Common Stock shall be entitled to vote, in the same manner and with the same effect as such holders of the Common Stock, voting together with the holders of Common Stock, Class A Preferred Stock and Class D Preferred Stock as one voting group. The rate at which the Class B Preferred Stock shall have the right to vote shall be ______ [blank to be filled in, prior to filing, with the same number as the stock split ratio to be set forth on the cover certificate accompanying this Amended and Restated Charter] votes per share; provided, however, that in the event that, at any time after the filing date of this Amended and Restated Charter: (a) the outstanding Common Stock shall be subdivided into a greater number of shares, the number of votes for each share of Class B Preferred Stock shall be proportionately increased; or (b) the outstanding shares of Common Stock shall be combined into a smaller number of shares, the number of votes for each share of Class B Preferred Stock shall be proportionately reduced. Without first obtaining the approval (by vote or written consent) of at least seventy-five percent (75%) of the outstanding shares of the Class B Preferred Stock as a separate class, the Corporation shall not, after August 8, 2000,

9.4.1. In any manner authorize, create or issue
(x) any class or series of capital stock which (A) ranks, either as to payment of dividends, distribution of assets or redemption, prior to or on parity with the Class B Preferred Stock or (B) in any manner adversely affects the holders of the Class B Preferred Stock, or (y) any additional shares of Class A Preferred Stock, Class C Preferred Stock , Class D Preferred Stock or any shares of any class or

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series of any bonds, debentures, notes or other obligations convertible into or exchangeable for, or having optional rights to purchase, any shares having any such priority or parity with or so adversely affecting the holders of the Class B Preferred Stock;

9.4.2. in any manner alter or change the designations or the powers, preferences or rights, or the qualifications, limitations or restrictions of the Class B Preferred Stock, including without limitation, by increasing or decreasing the number of shares of the Class B Preferred Stock authorized for issuance hereunder, or by increasing or decreasing the par value or Class B Preferred Stock Stated Value of the shares of the Class B Preferred Stock; or

9.4.3. reclassify the shares of any (a) Common Stock, (b) class or series of the Corporation's capital stock authorized, created or designated after August 8, 2000 or (c) Class A Preferred Stock into shares of any class or series of capital stock (A) ranking, either as to payment of dividends, distribution of assets or redemption, prior to or on a parity with the Class B Preferred Stock or (B) which in any manner adversely affects the holders of the Class B Preferred Stock.

9.5. Redemptions with Respect to Class B Preferred Stock.

9.5.1. At any time and from time to time after (or simultaneously with) the completion of the redemption of all of the outstanding Class D Preferred Stock pursuant to Section 11.5 and after (or simultaneously with) the completion of the redemption of all of the outstanding Class C Preferred Stock pursuant to Section 10.5 and after the Redemption Allowance Date, at the option of the Corporation and upon the Corporation's delivery of thirty (30) days prior written notice of such a redemption to be effected on or after the Redemption Allowance Date, the Corporation may redeem all or any portion of the Class B Preferred Stock then outstanding; provided, however, that (x) any redemption of less than all of the shares of Class B Preferred Stock shall be divided ratably and equally among the then extant holders of Class B Preferred Stock and (y) no shares of Class B Preferred Stock shall be redeemed pursuant to this Section 9.5.1 unless a pro rata number (based on aggregate stated values) of Class A Preferred Stock shall be redeemed pursuant to Section 8.5.1. For each share of Class B Preferred Stock which is to be redeemed by the Corporation at any time in a redemption pursuant to this
Section 9.5.1, the Corporation shall be obligated to pay to the holder thereof (upon surrender by such holder at the Corporation's principal office of the certificate representing such share duly endorsed in blank or accompanied by an appropriate form of assignment) an amount for such share equal to the Class B Preferred Stock Stated Value plus all accrued and unpaid dividends with respect to such share to the date of payment (the "Class B Redemption Price").

9.5.2. After (or simultaneously with) the completion of the redemption of all of the outstanding Class D Preferred Stock pursuant to Section 11.5 and after (or simultaneously with) the completion of the redemption of all of the outstanding Class C Preferred Stock pursuant to
Section 10.5, at any time and from time to time after June 12, 2004, at the option of a holder of the Class B Preferred Stock and upon thirty (30) days prior delivery of a written notice by the holder to the Corporation of redemption to be effected on or after such date, such holder may require the Corporation to redeem all or any portion of the Class B Preferred Stock held by such holder. For each share of Class B Preferred Stock which is to be

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redeemed by the Corporation at any time in a redemption pursuant, to this
Section 9.5.2, the Corporation shall be obligated to pay to the holder thereof (upon surrender by such holder at the Corporation's principal office of the certificate representing such share duly endorsed in blank or accompanied by an appropriate form of assignment) an amount for such share equal to the Class B Preferred Stock Redemption Price.

9.5.3. If the funds of the Corporation legally available for redemption pursuant to Section 9.5.2 and Section 8.5.2 are insufficient to redeem the number of shares which the Corporation is required to redeem pursuant to Section 9.5.2 and Section 8.5.2, those funds which are available will be used to redeem the maximum possible number of shares (or fraction thereof) and such funds shall be distributed ratably among each of the holders of the Class A Preferred Stock and Class B Preferred Stock in proportion to the amount that would have been distributed to each such holder if the funds of the Corporation would have been sufficient to permit payment of the full amount required to be paid in respect of such redemption. At any time, and from time to the thereafter, until all shares the Corporation shall be obligated to redeem are so redeemed, when additional funds of the Corporation are legally available for the redemption of any of the shares of Class A Preferred Stock and Class B Preferred Stock (including fractional shares), such funds shall be used immediately to redeem shares (or fractions thereof), which the Corporation has become obligated to redeem but which it has not redeemed, such amount to be applied ratably among each of the holders of shares of Class A Preferred Stock and Class B Preferred Stock which the Corporation is then obligated to redeem in proportion to the number of shares of Class A Preferred Stock and Class B Preferred Stock which are held by them and which the Corporation shall then be obligated to redeem. Notwithstanding the foregoing, in connection with any Liquidation, any redemption payments owing to holders of Class A Preferred Stock shall be paid in full (up to the Class A Liquidation Preference) before payments shall be made to holders of Class B Preferred Stock pursuant to this Section 9.5.

9.5.4. Notwithstanding the fact that a written notice of redemption is given, all rights of the redeeming holder with respect to shares of Class B Preferred Stock which are the subject of such written notice of redemption shall continue as if the written notice of redemption had not been given until the Class B Preferred Stock Redemption Price therefor is paid (such payment being a continuing obligation of the Corporation).

9.5.5. At any time after notice of redemption pursuant to Section 9.5.1 or Section 9.5.2 hereof shall have been mailed and before the redemption date specified therein, the Corporation may deposit for the pro rata benefit of the holders of the shares of Class B Preferred Stock so called for redemption the funds necessary for such redemption with a bank or trust company having a capital and surplus of at least $500,000,000. Any monies so deposited by the Corporation and unclaimed at the end of two years from the date designated for such redemption shall revert to the Corporation and at the end of five years of the date designated for such redemption shall be remitted to the Treasurer of the State of Tennessee in accordance with the Tennessee Uniform Disposition of Unclaimed Property Act. After such reversion such bank or trust company shall, upon demand, pay over to the Corporation such unclaimed amounts and thereupon such bank or trust company shall be relieved of all responsibility in respect thereof to such holder and such holder shall look only to the Corporation for the payment of the Class B

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Redemption Price. Any interest accrued on funds so deposited pursuant to this
Section 9.5.5 shall be paid from time to time to the Corporation for its own account. Upon the deposit of funds pursuant to this Section 9.5.5 in respect of shares of Class B Preferred Stock called for redemption, notwithstanding that any certificates for such shares shall not have been surrendered for cancellation, the shares represented thereby shall no longer be deemed outstanding, the rights to receive dividends thereon shall cease to accrue from and after the redemption date, and all rights of the holders of the shares of Class B Preferred Stock called for redemption shall cease and terminate, excepting only the right to receive the Class B Redemption Price therefor, without interest.

9.5.6. When shares are redeemed pursuant to this
Section 9, such redemption shall only occur to the extent that (i) there shall be sufficient funds of the Corporation legally available for such redemption,
(ii) such redemption would not violate any covenants of the Corporation to any lender to the Corporation or its subsidiaries and (iii) such redemption would not violate the terms of any management or shareholder agreement to which the Corporation is party.

9.5.7. Upon payment of the Class B Redemption Price by the Corporation with respect to shares of Class B Preferred Stock being redeemed pursuant to this Section 9.5, such shares of Class B Preferred Stock shall no longer be deemed to be outstanding, shall be canceled and shall not be subject to reissuance by the Corporation.

9.6. Conversion Rights. Upon the occurrence of an Event of Conversion, each and every share of Class B Preferred Stock then outstanding (other than those shares being redeemed pursuant to Section 9.5.1), by virtue of, and simultaneously with the occurrence of the Event of Conversion and without any additional action on the part of the holder thereof, be deemed automatically converted into such number of fully paid and nonassessable shares of Common Stock as is equal to (x) the sum of (A) the Class B Preferred Stock Stated Value plus (B) accrued but unpaid dividends, if any, payable with respect to such shares of Class B Preferred Stock up to and including the Conversion Date divided by (y) the Conversion Price.

9.6.1. Conversion shall be deemed to have been effected with respect to conversion under Section 9.6 on the Conversion Date. Simultaneous with the conversion being effected, the shares of Class B Preferred Stock so converted shall no longer be deemed outstanding, shall be canceled and shall not be subject to reissuance by the Corporation. As promptly as practicable thereafter, the Corporation shall issue and deliver to the record locations of each of the holders (or upon the written order of a holder, at the place designated by such holder), a certificate or certificates for the number of full shares of Common Stock to which each respective holder is entitled and a check or cash in respect of any fractional interest in a share of Common Stock, as provided in Section 9.6.3, payable with respect to the shares of Class B Preferred Stock so converted. The person in whose name the certificate or certificates for Common Stock are to be issued shall be deemed to have become a stockholder of record on the Conversion Date unless the transfer books of the Corporation are closed on that date, in which event such holder shall be deemed to have become a stockholder of record on the next succeeding date on which the transfer books are open.

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9.6.2. No fractional shares of Common Stock shall be issued upon conversion of shares of Class B Preferred Stock. Instead of any fractional shares of Common Stock which would otherwise be issuable upon conversion of any shares of Class B Preferred Stock, the Corporation shall pay a cash adjustment in respect of such fractional interest in an amount equal to the Conversion Price of a share of Class B Preferred Stock multiplied by such fractional interest. Holders of fractional interests shall not be entitled to dividends in respect of such fractional interests, and the holders of fractional interests shall not be entitled to any rights as stockholders of the Corporation in respect of such fractional interests.

9.6.3. The Corporation shall pay all documentary, stamp or other transaction taxes attributable to the issuance or delivery of shares of Common Stock upon conversion of any shares of Class B Preferred Stock; provided, however, that the Corporation shall not be required to pay any taxes which may be payable in respect of any transfer involved in the issuance or delivery of any certificate for such shares in a name other than that of the holder of the shares of Class B Preferred Stock in respect of which such shares are being issued.

9.6.4. The holders of the Class A Preferred Stock and the holders of the Class B Preferred Stock, by vote of sixty percent (60%) of the aggregate outstanding shares of Class A Preferred Stock and Class B Preferred Stock, voting together as a single voting group, shall have the right to amend the Corporation's Charter for the sole purpose of authorizing sufficient additional shares of Common Stock to effect the conversions under this Section 9.6 and Section 8.6, and Section 11.6. The additional shares, when so authorized, shall be reserved by the Corporation for the purpose of effecting such conversions and shall be free of preemptive rights.

9.6.5. All shares of Common Stock which may be issued in connection with the conversion provisions set forth herein will, upon issuance by the Corporation, be validly issued, fully paid and nonassessable and free from all taxes, liens or charges with respect thereto created or imposed by the Corporation.

10. Class C Preferred Stock. The express terms and conditions of the shares classified and designated as Class C Preferred Stock, no par value, of the Corporation are as follows:

10.1. Designation and Number Preferred Stock. The designation of the series of preferred stock in this Section 10 is Class C Preferred Stock (hereinafter called "Class C Preferred Stock") and the number of shares of such series is 600,000 shares having a stated value per share equal to $30.63556 (the "Class C Preferred Stock Stated Value"). The Class C Preferred Stock shall rank senior with respect to payment of dividends, distributions, redemptions and distributions upon Liquidation to all other shares of the capital stock of the Corporation except the Class D Preferred Stock.

10.2. Dividends with Respect Class C Preferred Stock. Except as provided herein, the holders of shares of Class C Preferred Stock shall not be entitled to receive dividends with respect to their shares of Class C Preferred Stock nor shall they be entitled to participate in any dividends (cash, stock or otherwise) declared or paid on or with respect to any other class of

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stock or equity security of the Corporation or any series of any such class solely as a result of their ownership of such Class C Preferred Stock.

10.3. Liquidation Preference with Respect to Class C Preferred Stock.

10.3.1. Following any Liquidation, no distribution of any of the assets of the Corporation shall be made to the holders of (i) Common Stock (ii) any class or series of the Corporation's capital stock authorized, created or designated after August 8, 2000 which does not expressly provide that it ranks senior to or on a parity with the Class C Preferred Stock as to the payment of dividends, distributions, redemptions, or distributions upon Liquidation, (iii) Class A Preferred Stock, or (iv) Class B Preferred Stock by reason of their ownership thereof unless and until the holders of Class C Preferred Stock shall have received out of the assets of the Corporation legally available for distributions to its shareholders, an amount per share equal to the sum of the Class C Preferred Stock Stated Value to the date of payment (the "Class C Liquidation Preference") for each share of Class C Preferred Stock held. If upon any Liquidation the assets of the Corporation available for distribution to its shareholders shall be insufficient to pay the holders of shares of Class C Preferred Stock the full amount of the Class C Liquidation Preference, the holders of shares of Class C Preferred Stock shall share ratably in any distribution of assets available for distribution to the Class C Preferred Stock holders and after any distribution of the Class D Liquidation Preference to holders of Class D Preferred Stock pursuant to
Section 11.3.

10.3.2. In the event of any Liquidation, after payment of the Class D Liquidation Preference and after payment shall have been made to the holders of shares of Class C Preferred Stock of the amounts described in Section 10.3.1, the holders of shares of Class C Preferred Stock shall be entitled to no further participation in the distribution of the assets of the Corporation.

10.3.3. The sale or other disposition (other than by a contribution to or merger with another corporation of which more than eighty percent (80%) of the stock (by vote and value) is owned (directly or indirectly) by the Corporation or its shareholders)) of all or substantially all the assets of the Corporation shall be deemed to be a Liquidation.

10.4. Voting Rights with Respect to Class C Preferred Stock. The Class C Preferred shall not have any voting rights except as set forth in this Section 10.4. Without first obtaining the approval (by vote or written consent) of at least seventy-five percent (75%) of the outstanding shares of the Class C Preferred Stock as a separate class, the Corporation shall not, after August 8, 2000,

10.4.1. in any manner authorize, create or issue
(x) any class or series of capital stock which (A) ranks, either as to payment of dividends, distribution of assets or redemption, prior to or on parity with the Class C Preferred Stock or (B) in any manner adversely affects the holders of the Class C Preferred Stock, or (y) any shares of any class or series of any bonds, debentures, notes or other obligations convertible into or exchangeable for, or having optional rights to purchase, any shares having any such priority or parity with or so adversely affecting the holders of the Class C Preferred Stock;

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10.4.2. in any manner alter or change the designations or the powers, preferences or rights, or the qualifications, limitations or restrictions of the Class C Preferred Stock, including without limitation, by increasing or decreasing the number of shares of the Class C Preferred Stock authorized for issuance hereunder, or by increasing or decreasing the par value of the shares of the Class C Preferred Stock; or

10.4.3. reclassify any shares of capital stock of the Corporation into shares of any class or series of capital stock (A) ranking, either as to payment of dividends, distribution of assets or redemption, prior to or on a parity with the Class C Preferred Stock or (B) which in any manner adversely affects the holders of the Class C Preferred Stock.

10.5. Redemption with Respect to Class C Preferred Stock.

10.5.1. At any time and from time to time after August 8, 2000 and after (or simultaneously with) the completion of the redemption of all of the outstanding Class D Preferred Stock pursuant to
Section 11.5, at the option of the Corporation and upon the Corporation's delivery of thirty (30) days prior written notice, the Corporation may redeem all or any portion of the Class C Preferred Stock then outstanding; provided, however, that any redemption of less than all of the shares of Class C Preferred Stock shall be divided ratably and equally among the then extant holders of Class C Preferred Stock.

10.5.2. The Class C Preferred Stock shall be mandatorily redeemable in whole upon the Redemption Allowance Date (the "Class C Redemption Event"). In the event that the Corporation is prevented from redeeming the Class C Preferred Stock when required in accordance with the foregoing sentence, whether by contract or law, dividends will accrue and cumulate thereon at an annual rate of nine percent (9%) from the date payment is due as a result of such Class C Redemption Event pursuant to Section 10.5.3, until the redemption occurs.

10.5.3. For each share of Class C Preferred Stock which is to be redeemed by the Corporation at any time in a redemption pursuant to this Section 10.5, the Corporation shall be obligated to pay to the holder thereof (upon surrender by such holder at the Corporation's principal office of the certificate representing such share duly endorsed in blank or accompanied by an appropriate form of assignment) an amount for such share equal to the Class C Preferred Stock Stated Value plus all accrued and unpaid dividends, if any, with respect to such share to the date of payment (the "Class C Redemption Price"), on (i) in the case of a redemption at the option of the Corporation, the last day of any fiscal quarter if, during the quarter then ending, a written notice of redemption shall have been delivered by the Corporation to the holder more than thirty (30) days prior to such last day or thirty (30) or fewer days prior to the end of the immediately preceding fiscal quarter, or
(ii) for purposes of the mandatory redemption described in Section 10.5.2, the earlier to occur of (A) a date set by the Corporation in the redemption notice which is within thirty (30) days after June 12, 2004 or (B) upon the closing of a Liquidity Event.

10.5.4. If the funds of the Corporation legally available for redemption pursuant to Section 10.5.1 or Section 10.5.2 are insufficient to redeem the number of shares which the Corporation is required to redeem pursuant to Section 10.5.1 or Section 10.5.2, those

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funds which are available will be used to redeem the maximum possible number of shares (or fraction thereof) and such funds shall be distributed ratably among each of the holders of the Class C Preferred Stock in proportion to the amount that would have been distributed to each such holder if the funds of the Corporation would have been sufficient to permit payment of the full amount required to be paid in respect of such redemption. At any time, and from time to time there after, until all shares of Class C Preferred Stock which the Corporation shall be obligated to redeem are so redeemed, when additional funds of the Corporation are legally available for the redemption of any of the shares of Class C Preferred Stock (including fractional shares), such funds shall be used immediately to redeem shares (or fractions thereof) which the Corporation has become obligated to redeem but which it has not redeemed, such amount to be applied ratably among each of the holders of shares of Class C Preferred Stock which the Corporation is the obligated to redeem in proportion to the number of shares of Class C Preferred Stock which are held by them and which the Corporation shall be obligated to redeem.

10.5.5. Notwithstanding the fact that a written notice of redemption is given, all rights of the redeeming holder with respect to shares of Class C Preferred Stock which are the subject of such written notice of redemption shall continue as if the written notice of redemption had not been given until the Class C Preferred Stock Redemption Price therefor is paid (it being understood that such payment shall be a continuing obligation of the Corporation).

10.5.6. At any time after notice of redemption pursuant to Section 10.1 or Section 10.2 hereof shall have been mailed and before the redemption date specified therein, the Corporation may deposit for the pro rata benefit of the holders of the shares of Class C Preferred Stock so called for redemption the funds necessary for such redemption with a bank or trust company having a capital and surplus of at least $500,000,000. Any monies so deposited by the Corporation and unclaimed at the end of two years from the date designated for such redemption shall revert to the Corporation and at the end of five years of the date designated for such redemption shall be remitted to the Treasurer of the State of Tennessee in accordance with the Tennessee Uniform Disposition of Unclaimed Property Act. After such reversion such bank or trust company shall, upon demand, pay over to the Corporation such unclaimed amounts and thereupon such bank or trust company shall be relieved of all responsibility in respect thereof to such holder and such holder shall look only to the Corporation for the payment of the Class C Redemption Price. Any interest accrued on funds so deposited pursuant to this Section 10.5.6 shall be paid from time to time to the Corporation for its own account. Upon the deposit of funds pursuant to this Section 10.5.6 in respect of shares of Class C Preferred Stock called for redemption, notwithstanding that any certificates for such shares shall not have been surrendered for cancellation, the shares represented thereby shall no longer be deemed outstanding, the rights to receive dividends thereon shall cease to accrue from and after the redemption date, and all rights of the holders of the shares of Class C Preferred Stock called for redemption shall cease and terminate, excepting only the right to receive the Class C Redemption Price therefor, without interest.

10.5.7. When shares are redeemed pursuant to this
Section 10, such redemption shall only occur to the extent that (i) there shall be sufficient funds of the Corporation legally available for such redemption,
(ii) such redemption would not violate any covenants of the Corporation to any lender to the Corporation or its Subsidiaries, (iii) such

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redemption would not violate the terms of any management or shareholder agreement to which the Corporation is party, and (iv) with respect to a redemption pursuant to Section 10.5.2, all shares of Class D Preferred Stock shall have been redeemed or are otherwise no longer outstanding.

10.5.8. Once the Class C Redemption Price has been paid by the Corporation with respect to shares of Class C Preferred Stock being redeemed pursuant to this Section 10.5, such shares of Class C Preferred Stock shall no longer be deemed to be outstanding, shall be canceled and shall not be subject to reissuance by the Corporation

11. Class D Preferred Stock. The express terms and conditions of the shares classified and designated as Class D Preferred Stock, no par value, of the Corporation are as follows:

11.1. Designation and Number of Shares of Class D Preferred Stock. The designation of the series of preferred stock in this
Section 11 is Class D Preferred Stock and the number of shares of such series is 75,000 shares having a stated value per share equal to $450.00 (the "Class D Preferred Stock Stated Value"). The Class D Preferred Stock shall rank senior with respect to payment of dividends, distributions, redemptions and distributions upon Liquidation to all other shares of capital stock of the Corporation including the Common Stock and the Class A Preferred Stock, Class B Preferred Stock and Class C Preferred Stock.

11.2. Dividends with Respect to Class D Preferred Stock.

11.2.1. The holder of each share of Class D Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors, preferential, cumulative, dividends in cash, which dividends shall be cumulative and shall accrue from the Issue Date, in an amount equal to ten percent (10%) of the Class D Preferred Stock Stated Value per share per year, provided that from the period from June 30, 2001 until the Past Due Interest on the Notes is paid, dividends shall accrue in an amount equal to four (4%) of the Class D Preferred Stock Stated Value per share per year. Dividends shall accrue daily whether or not declared and whether or not funds are legally available therefor. If such dividends are not paid within ninety (90) days after the end of the Corporation's fiscal quarter, such dividends shall accrue additional dividends from the last day of such fiscal quarter at the same rate per annum. Whenever dividends are payable pursuant to this Section 10, dividends shall be paid only to the extent that (i) there shall be sufficient funds of the Corporation legally available for the payment of such dividends, (ii) the payment of such dividend would not violate any covenants of the Corporation to any lender to the Corporation or its subsidiaries and (iii) the payment of such dividend would not violate the terms of any management or shareholder agreement to which the Corporation is party.

11.2.2. If, in any dividend period or periods, full dividends (whether past or current) upon the outstanding shares of Class D Preferred Stock at the dividend rate set forth herein shall not have been paid, then, unless and until all dividends accrued and unpaid on the shares of Class D Preferred Stock through the payment date for such dividends are declared and paid on each share of Class D Preferred Stock, no dividends shall be declared or paid or set apart

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for payment upon any class or series of the Corporation's capital stock authorized, created or designated after August 8, 2000 which does not expressly provide that it ranks senior to or on a parity with the Class D Preferred Stock as to the payment of dividends, distributions, redemptions and distributions upon Liquidation nor shall the Corporation purchase, redeem or otherwise acquire for consideration any such stock. If, at any time, the Corporation shall pay less than the total amount of dividends then payable on the then outstanding shares of Class D Preferred Stock, the aggregate payment to all holders of shares of Class D Preferred Stock shall be distributed among all such holders so that an amount ratably in proportion to the respective dividends due thereon shall be paid with respect to each outstanding share of Class D Preferred Stock.

11.2.3. Holders of the Class D Preferred Stock shall not, solely as a result of such holders' ownership of such Class D Preferred Stock, be entitled to participate in any dividends or other distributions (cash, stock or otherwise) declared or paid on or with respect to any other class of stock or equity security of the Corporation or any series of any such class.

11.3. Liquidation Preference with Respect to Class D Preferred Stock.

11.3.1. Following any Liquidation, no distribution of any of the assets of the Corporation shall be made to the holders of (i) any other class or series of the Corporation's capital stock or (ii) any class or series of the Corporation's capital stock authorized, created or designated after August 8, 2000 which does not expressly provide that it ranks senior to or on a parity with the Class D Preferred Stock as to the payment of dividends, distributions, redemptions and distributions upon Liquidation by reason of their ownership thereof unless and until the holders of Class D Preferred Stock shall have received out of the assets of the Corporation legally available for distributions to its shareholders, an amount per share equal to the sum of the Class D Preferred Stock Stated Value plus all accrued and unpaid dividends, if any, to the date of payment, (the "Class D Liquidation Preference") for each share of Class D Preferred Stock held. If upon any Liquidation the assets of the Corporation available for distribution to its shareholders shall be insufficient to pay the holders of shares of Class D Preferred Stock the full amount of the Class D Liquidation Preference, the holders of shares of Class D Preferred Stock shall share ratably in any distribution of assets available for distribution to the Class D Preferred Stock holders.

11.3.2. In the event of any Liquidation, after payment shall have been made to the holders of shares of Class D Preferred Stock of the amounts described in Section 11.3.1 and Section 11.3.2 hereof, the holders of shares of Class D Preferred Stock shall be entitled to no further participation in the distribution of the assets of the Corporation.

11.3.3. The sale or other disposition (other than by a contribution to or merger with another corporation of which more than eighty percent (80%) of the stock (by vote and value) is owned (directly or indirectly) by the Corporation (or its shareholders)) of all or substantially all the assets of the Corporation shall be deemed to be a Liquidation.

11.4. Voting Rights with Respect to Class D Preferred Stock. The holders of shares of Class D Preferred Stock shall have the right to vote on all matters as to which holders

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of the Common Stock shall be entitled to vote, in the same manner and with the same effect as such holders of shares of Common Stock, voting together with the holders of shares of Common Stock, Class A Preferred Stock and Class B Preferred Stock as one voting group. The rate at which the Class D Preferred Stock shall have the right to vote shall be ______ [blank to be filled in, prior to filing, with the same number as the stock split ratio to be set forth on the cover certificate accompanying this Amended and Restated Charter] votes per share; provided, however, that in the event that, at any time after the filing date of this Amended and Restated Charter: (a) the outstanding Common Stock shall be subdivided into a greater number of shares, the number of votes for each share of Class D Preferred Stock shall be proportionately increased; or (b) the outstanding shares of Common Stock shall be combined into a smaller number of shares, the number of votes for each share of Class D Preferred Stock shall be proportionately reduced. Without first obtaining the approval (by vote or written consent) of at least seventy-five percent (75%) of the outstanding shares of the Class D Preferred Stock as a separate class, the Corporation shall not,

11.4.1. after the Effective Date, in any manner authorize, create or issue (x) any class or series of capital stock which (A) ranks, either as to payment of dividends, distribution of assets or redemption, prior to or on a parity with the Class D Preferred Stock (other than such shares of Class D Preferred Stock issued as dividends hereunder) or (B) in any manner adversely affects the holders of the Class D Preferred Stock, or (y) any additional shares of capital stock or any class or series of any bonds, debentures, notes or other obligations convertible into or exchangeable for, or having optional rights to purchase, any shares of capital stock having any priority over or parity with or otherwise adversely affecting the holders of the Class D Preferred Stock;

11.4.2. in any manner alter or change the designations or the powers, preferences or rights, or the qualifications, limitations or restrictions of the Class D Preferred Stock, including without limitation, by increasing or decreasing the number of shares of the Class D Preferred Stock authorized for issuance hereunder, or by increasing or decreasing the par value or Class D Preferred Stock Stated Value of the shares of the Class D Preferred Stock; or

11.4.3. reclassify the shares of any (a) Common Stock, (b) class or series of the Corporation's capital stock authorized, created or designated after the Effective Date or (c) Class A Preferred Stock, Class B Preferred Stock or Class C Preferred Stock into shares of any class or series of capital stock (A) ranking, either as to payment of dividends, distribution of assets or redemption, prior to or on a parity with the Class D Preferred Stock or (B) which in any manner adversely affects the holders of the Class D Preferred Stock.

11.5. Redemptions with Respect to Class D Preferred Stock.

11.5.1. At any time and from time to time after the Redemption Allowance Date at the option of the Corporation and upon the Corporation's delivery of thirty (30) days prior written notice of such a redemption to be effected on or after the Redemption Allowance Date, the Corporation may redeem all or any portion of the Class D Preferred Stock then outstanding. For each share of Class D Preferred Stock which is to be redeemed by the Corporation at any time in a redemption pursuant to this Section 11.5.1, the Corporation shall be

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obligated to pay to the holder thereof (upon surrender by such holder at the Corporation's principal office of the certificate representing such share duly endorsed in blank or accompanied by an appropriate form of assignment) an amount for such share equal to the Class D Liquidation Preference (for purposes of this Section, the "Class D Redemption Price").

11.5.2. At any time and from time to time after a Redemption Allowance Date, at the option of a holder of the Class D Preferred Stock and upon thirty (30) days prior delivery of written notice by the holder to the Corporation of redemption to be effected on or after such date, such holder may require the Corporation to redeem all or any portion of the shares of Class D Preferred Stock held by such holder. For each share of Class D Preferred Stock which is to be redeemed by the Corporation at any time in a redemption pursuant to this Section 11.5.2, the Corporation shall be obligated to pay to the holder thereof (upon surrender by such holder at the Corporation's principal office of the certificate representing such share duly endorsed in blank or accompanied by an appropriate form of assignment) an amount for such share equal to the Class D Redemption Price.

11.5.3. If the funds of the Corporation legally available for redemption pursuant to Section 11.5.2 are insufficient to redeem the number of shares which the Corporation is required to redeem pursuant to
Section 11.5.2 those funds which are available will be used to redeem the maximum possible number of shares (or fraction thereof) and such funds shall be distributed ratably among each of the holders of the Class D Preferred Stock, in proportion to the amount that would have been distributed to each such holder if the funds of the Corporation would have been sufficient to permit payment of the full amount required to be paid in respect of such redemption. At any time, and from time to time thereafter, until all shares of Class D Preferred Stock which the Corporation shall be obligated to redeem are so redeemed, when additional funds of the Corporation are legally available for the redemption of any of the shares of Class D Preferred Stock (including fractional shares), such funds shall be used immediately to redeem shares (or fractions thereof) which the Corporation has become obligated to redeem but which it has not redeemed, such amount to be applied ratably among each of the holders of shares of Class D Preferred Stock which the Corporation is then obligated to redeem in proportion to the number of shares of Class D Preferred Stock which are held by them and which the Corporation shall then be obligated to redeem. Notwithstanding the foregoing, in connection with any Liquidation, any redemption payments owing to holders of Class D Preferred Stock shall be paid in full before payments shall be made to holders of Class A Preferred Stock pursuant to Section 8.5 and Class B Preferred Stock pursuant to Section 9.5 and Class C Preferred Stock pursuant to Section 10.5.

11.5.4. Notwithstanding the fact that a written notice of redemption is given, all rights of the redeeming holder with respect to shares of Class D Preferred Stock which are the subject of such written notice of redemption shall continue as if the written notice of redemption had not been given until the Class D Redemption Price therefor is paid (such payment being a continuing obligation of the Corporation).

11.5.5. At any time after notice of redemption pursuant to Section 11.2.1 or Section 11.2.2 hereof shall have been mailed and before the redemption date specified therein, the Corporation may deposit for the pro rata benefit of the holders of the shares of Class D

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Preferred Stock so called for redemption the funds necessary for such redemption with a bank or trust company having a capital and surplus of at least $500,000,000. Any monies so deposited by the Corporation and unclaimed at the end of two years from the date designated for such redemption shall revert to the Corporation and at the end of five years of the date designated for such redemption shall be remitted to the Treasurer of the State of Tennessee in accordance with the Tennessee Uniform Disposition of Unclaimed Property Act. After such reversion such bank or trust company shall, upon demand, pay over to the Corporation such unclaimed amounts and thereupon such bank or trust company shall be relieved of all responsibility in respect thereof to such holder and such holder shall look only to the Corporation for the payment of the Class D Redemption Price. Any interest accrued on funds so deposited pursuant to this
Section 11.5.5 shall be paid from time to time to the Corporation for its own account. Upon the deposit of funds pursuant to this Section 11.5.5 in respect of shares of Class D Preferred Stock called for redemption, notwithstanding that any certificates for such shares shall not have been surrendered for cancellation, the shares represented thereby shall no longer be deemed outstanding, the rights to receive dividends thereon shall cease to accrue from and after the redemption date, and all rights of the holders of the shares of Class D Preferred Stock called for redemption shall cease and terminate, excepting only the right to receive the Class D Redemption Price therefor, without interest.

11.5.6. When shares are redeemed pursuant to this
Section 11, such redemption shall only occur to the extent that (i) there shall be sufficient funds of the Corporation legally available for such redemption,
(ii) such redemption would not violate any covenants of the Corporation to any lender to the Corporation or its subsidiaries and (iii) such redemption would not violate the terms of any management or shareholders agreement to which the Corporation is a party.

11.5.7. Once the Class D Redemption Price has been paid by the Corporation with respect to shares of Class D Preferred Stock being redeemed pursuant to this Section 11.5, such shares of Class D Preferred Stock shall no longer be deemed to be outstanding, shall be canceled and shall not be subject to reissuance by the Corporation

11.6. Conversion Rights. Upon an Event of Conversion, each and every share of Class D Preferred Stock then outstanding (other than those shares being redeemed), by virtue of, and simultaneously with the occurrence of a Qualified Public Offering and without any additional action on the part of the holder thereof, be deemed automatically converted into such number of fully paid and nonassessable shares of Common Stock as is equal to (x) the sum of (A) the Class D Preferred Stock Stated Value plus (B) all accrued but unpaid dividends, if any, payable with respect to such shares of Class D Preferred Stock up to and including the Conversion Date divided by (y) the Conversion Price.

11.6.1. Conversion shall be deemed to have been effected with respect to conversion under this Section 11.6 on the Conversion Date. Simultaneous with the conversion being effected, the shares of Class D Preferred Stock so converted shall no longer be deemed outstanding, shall be canceled and shall not be subject to reissuance by the Corporation. As promptly as practicable thereafter, the Corporation shall issue and deliver to the record locations of each of the holders (or upon the written order of a holder, at the place designated by such

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holder), a certificate or certificates for the number of full shares of Common Stock to which each respective holder is entitled and a check or cash in respect of any fractional interest in a share of Common Stock, as provided in
Section 11.6.3 hereof, payable with respect to the shares of Class D Preferred Stock so converted. The person in whose name the certificate or certificates for Common Stock are to be issued shall be deemed to have become a stockholder of record on the Conversion Date unless the transfer books of the Corporation are closed on that date, in which event such holder shall be deemed to have become a stockholder of record on the next succeeding date on which the transfer books are open.

11.6.2. No fractional shares of Common Stock shall be issued upon conversion of shares of Class D Preferred Stock. Instead of any fractional shares of Common Stock which would otherwise be issuable upon conversion of any shares of Class D Preferred Stock, the Corporation shall pay a cash adjustment in respect of such fractional interest in an amount equal to the Conversion Price of a share of Class D Preferred Stock multiplied by such fractional interest. Holders of fractional interests shall not be entitled to dividends in respect of such fractional interests, and the holders of fractional interests shall not be entitled to any rights as stockholders of the Corporation in respect of such fractional interests.

11.6.3. The Corporation shall pay all documentary, stamp or other transaction taxes attributable to the issuance or delivery of shares of Common Stock upon conversion of any shares of Class D Preferred Stock; provided, however, that the Corporation shall not be required to pay any taxes which may be payable in respect of any transfer involved in the issuance or delivery of any certificate for such shares in a name other than that of the holder of the shares of Class D Preferred Stock in respect of which such shares are being issued.

11.6.4. The holders of shares of the Class D Preferred Stock by vote of sixty percent (60%) of the aggregate outstanding shares of Class D Preferred Stock, voting together as a single voting group, shall have the right to amend the Corporation's Charter for the sole purpose of authorizing sufficient additional shares of Common Stock to effect the conversions under this Section 11.6. The additional shares, when so authorized, shall be reserved by the Corporation for the purpose of effecting such conversions and shall be free of preemptive rights.

11.6.5. All shares of Common Stock which may be issued in connection with the conversion provisions set forth herein will, upon issuance by the Corporation, be validly issued, fully paid and nonassessable and free from all taxes, liens or charges with respect thereto created or imposed by the Corporation.

12. Special Shareholder Meetings. Special meetings of shareholders may be called at any time, but only by the Chairman of the Board of Directors, the President of the Company, or upon a resolution adopted by or affirmative vote of a majority of the Board of Directors, and not by the shareholders.

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13. Directors.

13.1. Number. The number of directors of the Corporation shall be such number, neither fewer than three nor more than fifteen (exclusive of directors, if any, to be elected by holders of preferred stock of the Corporation, voting separately as a class), as determined by a majority vote of the Board of Directors. The Board of Directors has the power to fix or change the number of directors, including an increase or decrease in the number of directors from time to time as established by a majority vote of the Board of Directors. A director need not be a shareholder or a resident of the state of Tennessee.

13.2. Classes.

13.2.1. Number of Classes. The Board of Directors of the Corporation shall be divided into three classes as nearly equal in number as the then total number of directors constituting the entire Board of Directors shall permit, which classes shall be designated Class I, Class II and Class III.

13.2.2. Term. Directors assigned to be the initial Class I directors shall be elected to hold office for a term expiring at the annual meeting of shareholders to be held in 2003; directors assigned to be the initial Class II directors shall be elected to hold office for a term expiring at the annual meeting of shareholders to be held in 2004; and, directors assigned to be the initial Class III directors shall be elected to hold office for a term expiring at the annual meeting of shareholders to be held in 2005. Thereafter, at each annual meeting of shareholders of the Corporation, directors of classes the terms of which expire at such annual meeting shall be elected for terms of three years by a plurality vote of all votes cast at such meeting. Notwithstanding the foregoing, a director whose term shall expire at any annual meeting shall continue to serve until such time as his successor shall have been duly elected and shall have qualified unless his position on the Board of Directors shall have been abolished by action taken to reduce the size of the Board of Directors prior to said meeting.

13.2.3. Increase or Decrease in Number. Should the number of directors of the Corporation be reduced, the directorship(s) eliminated shall be allocated among classes as appropriate so that the number of directors in each class is as specified in Section 13.2.1 herein. The Board of Directors shall designate, by the name of the incumbent(s), the position(s) to be abolished. Notwithstanding the foregoing, no decrease in the number of directors shall have the effect of shortening the term of any incumbent director. Should the number of directors of the Corporation be increased, the additional directorships shall be allocated among classes as appropriate so that the number of directors in each class is as specified in paragraph Section 13.2.1.

13.3. Removal. No director of the Corporation (including those directors, if any, elected by holders of any series of preferred stock) may be removed at any time unless for cause. Upon finding of cause as determined by a majority of the Board of Directors (excluding the director which is the subject of removal), the director may be removed only upon the affirmative vote of the holders of at least 80% of outstanding shares of capital stock of the

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Corporation entitled to vote generally in the election of directors (the "Voting Power"), considered for this purpose as one class, except as otherwise required by law.

13.4. Vacancies and Newly Created Directorships. Unless the Board of Directors otherwise determines, and subject to the rights of the holders of any series of preferred stock, newly created directorships resulting from any increase in the authorized number of directors or any vacancies on the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause may be filled only by a majority vote of the directors then in office, though less than a quorum, and shall not be filled by the shareholders, unless there are no directors remaining on the Board of Directors. Any director so chosen (a "vacancy director") shall be a director of the same class as the director whose vacancy he or she fills. Such vacancy director shall hold office until the next annual meeting of shareholders and until his or her successor shall have been elected and qualified. The shareholders shall thereupon elect a director to fill the vacancy or newly created directorship having been temporarily filled by the vacancy director, which individual may include the incumbent vacancy director. The director so elected shall be a director of the same class as the vacancy director and shall serve until the annual meeting of shareholders at which the term of office of such class expires and until such director's successor shall have been duly elected and qualified.

14. Limitation of Liability. Directors of the Corporation shall have no liability to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, provided that this Section 14 shall not eliminate liability of a director for (i) any breach of the director's duty of loyalty to the Corporation or its shareholders; (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) unlawful distributions under Section 48-18-304 of the Tennessee Business Corporation Act, or (iv) receiving any improper personal benefit. If the Tennessee Business Corporation Act is amended or other Tennessee law is enacted to permit further elimination or limitation of the personal liability of directors, then the liability of directors of the Corporation shall be eliminated or limited to the fullest extent permitted by the Tennessee Business Corporation Act, as so amended, or by such other Tennessee law, as so enacted. Any repeal or modification of this Section 14 or subsequent amendment of the Tennessee Business Corporation Act or enactment of other applicable Tennessee law shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal, modification, amendment or enactment.

15. Indemnification.

15.1. Definitions. As used in this Section 15:

15.1.1. "Director" shall mean any individual who is or was a director of the Corporation, or any individual who, while a director of the Corporation, is or was serving at the Corporation's request as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan or other enterprise. A director is considered to be serving an employee benefit plan at the Corporation's request if the director's duties to the Corporation also impose duties on or otherwise involves services by the director to the plan or to participants in or beneficiaries of the plan. "Director"

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includes, unless the context requires otherwise, the estate or personal representative of the director.

15.1.2. "Employee or Agent" shall mean any individual who is or was an employee or agent of the Corporation other than a director or officer of the Corporation, or any individual who, is or was serving at the Corporation's request as an employee or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan or other enterprise;

15.1.3. "Expenses" shall include reasonable costs, disbursements and counsel fees;

15.1.4. "Independent Legal Counsel" means a law firm, or a member of a law firm, that (i) is experienced in matters of corporation law; (ii) neither presently is, nor in the past five years has been, retained to represent the Corporation or the corporate agent claiming indemnification or any other party to the action, suit, or proceeding giving rise to a claim for indemnification, in any matter material to the Corporation, the claimant or any such other party; and (iii) would not, under applicable standards of professional conduct then prevailing, have a conflict of interest in representing either the Corporation or such corporate agent in an action to determine the Corporation's or such person's rights under this Section 15;

15.1.5. "Liability" shall mean any obligation to pay a judgment, settlement, penalty, fine (including an excise tax assessed with respect to an employee benefit plan), or reasonable expenses incurred with respect to a proceeding;

15.1.6. "Officer" shall mean any individual who is or was an officer of the Corporation, or any individual who is or was serving at the Corporation's request as an employee or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan or other enterprise; and

15.1.7. "Proceeding" shall mean any threatened, pending, or completed action, suit or proceeding, whether civil, criminal, administrative, or investigative and whether formal or informal.

15.2. General. Except as provided in Section 15.4, the Corporation shall indemnify any director or officer who is made a party to any proceeding because the individual is or was a director or officer against liability incurred in the proceeding if:

15.2.1. the following standards are met:

(A) the individual's conduct was in good faith;

(B) the individual reasonably believed,

(i) in the case of conduct in the individual's official capacity with the Corporation, that the individual's conduct was in the best interest of the Corporation; and

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(ii) in all other cases, that the individual's conduct was at least not opposed to the best interests of the Corporation; and

(iii) in the case of any criminal proceeding, the individual had no reasonable cause to believe the individual's conduct was unlawful;

For purposes of Section 15.2.1(B)(ii) hereof, with respect to an employee benefit plan maintained by the Corporation, the individual shall be deemed to have reasonably believed that the individual's conduct was not opposed to the best interests of the Corporation if such conduct was for a purpose the individual reasonably believed was in the interests of the participants in and beneficiaries of the plan; and

15.2.2. the individual was wholly successful, on the merits or otherwise, in the defense of any proceedings to which the individual was a party because that individual is or was a director or officer of the Corporation.

15.3. Termination of Proceedings. The termination of any action or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the director or officer (i) did not act in good faith and in a manner that the individual reasonably believed to be in, or not opposed to, the best interests of the Corporation and (ii) with respect to any criminal proceeding, had reasonable cause to believe that the individual's conduct was unlawful.

15.4. Limitations. The Corporation shall not indemnify a director or officer in connection with a proceeding by or in the right of the Corporation in which such individual was adjudged liable to the Corporation or in connection with any other proceeding charging improper personal benefit to the individual, whether or not involving action in the individual's official capacity, in which the individual was adjudged liable on the basis that personal benefit was improperly received by such individual. The Corporation may only indemnify an individual for liability incurred in connection with a proceeding for which such individual's defense is wholly successful, on the merits or otherwise.

15.5. Expenses. The Corporation shall pay for or reimburse the reasonable expenses incurred by a director or officer who is a party to a proceeding in advance of final disposition of the proceeding if:

15.5.1. the director or officer furnishes the Corporation a written affirmation of his good faith belief that he has met the standard of conduct set forth in Section 15.2;

15.5.2. the director or officer furnishes the Corporation a written undertaking, executed personally or on his behalf, to repay the advance if it is ultimately determined that he is not entitled to indemnification; and

15.5.3. a determination is made that the facts then known to those making the determination would not preclude indemnification under this Section 15.

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15.6. Determination and Authorization of Indemnification. The Corporation may not indemnify a director or officer under Section 15.2 unless authorized in the specific case after a determination has been made that indemnification of the director or officer is permissible in the circumstances because he has met the standard set forth in Section 15.2 and is in accordance with the Procedures for Submission and Determination of Claims for Indemnification set forth in the Appendix to this Charter. The determination shall be made:

15.6.1. By the Board of Directors by majority vote of a quorum consisting of directors not at the time parties to the proceeding;

15.6.2. If a quorum cannot be obtained under
Section 15.6.1, by majority vote of a committee duly designated by the Board of Directors (in which designation directors who are parties may participate), consisting solely of two or more directors not at the time parties to the proceeding;

15.6.3. By independent legal counsel:

(A) Selected by the Board of Directors or its committee in the manner prescribed in Section 15.6.1. or Section 15.6.2; or

(B) If a quorum of the Board of Directors cannot be obtained under Section 15.6.1 and a committee cannot be designated under Section 15.6.2, selected by majority vote of the full Board of Directors (in which directors who are parties may participate); or

15.6.4. By the shareholders, but shares owned by or voted under the control of directors who are at the time parties to the proceeding may not be voted on the determination.

15.7. Determination and Authorization of Expenses Authorization of indemnification and evaluation that indemnification is permissible as to reasonableness of expenses under Section 15.5 shall be made in the same manner as the determination that indemnification is permissible, except that, if the determination is made by independent legal counsel, authorization of indemnification and evaluation as to reasonableness of expenses shall be made by those entitled under Section 15.6.3 to select counsel.

15.8. Employees and Agents. The Corporation may indemnify and advance expenses to an employee or agent of the Corporation to the same extent as a director or officer under Section 15.2, subject to the determination and authorization of indemnification procedures set forth in
Section 15.6 and in the Appendix to this Charter.

15.9. Applicability. The indemnification and advancement of expenses granted pursuant to this Section 15 shall not be deemed exclusive of any other rights to which a director, officer, employee or agent seeking indemnification or advancement of expenses may be entitled, whether contained in the Charter or Bylaws of the Corporation, or authorized in a resolution of shareholders, a resolution of directors, or an agreement providing for such indemnification, to the extent permitted by applicable law.

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15.10. Intent and Interpretation. It is the intention of this Section 15 to provide for indemnification of directors and officers to the fullest extent permitted by the Tennessee Business Corporation Act, and this
Section 15 shall be interpreted accordingly. If this Section 15 or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each director, officer, employee, and agent of the Corporation as to costs, charges, and expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement with respect to any proceeding, including an action by or in the right of the Corporation, to the full extent permitted by any applicable portion of this Section 15 that shall not have been invalidated and to the full extent permitted by applicable law. If the Tennessee Business Corporation Act is amended or other Tennessee law is enacted to permit further or additional indemnification of a director, officer, employee or agent of the Corporation beyond that provided in this Section 15, then the Corporation shall be permitted to indemnify such director, officer, employee or agent to the fullest extent permitted by the Tennessee Business Corporation Act, as so amended, or by such other Tennessee law.

15.11. Insurance. The Corporation may purchase and maintain insurance on behalf of an individual who is or was a director, officer, employee, or agent of the Corporation, or who, while a director, officer, employee, or agent of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise, against liability asserted against or incurred by the individual in that capacity or arising from the individual's status as a director, officer, employee, or agent, whether or not the Corporation would have power to indemnify him against the same liability under applicable state law.

16. Amendment of Bylaws. To the extent permitted by the Tennessee Business Corporation Act, the Board of Directors of the Corporation is expressly authorized to repeal, alter, amend or rescind the Bylaws of the Corporation by vote of a majority of the Board of Directors at a legal meeting held in accordance with the Bylaws. The shareholders may adopt or amend a bylaw that fixes a greater quorum or voting requirement for shareholders (or voting group of shareholders) than is required by the Tennessee Business Corporation Act, to the extent such bylaw does not conflict with the provisions of this Charter. The adoption or amendment of a bylaw that adds, changes, or deletes a greater quorum or voting requirement for shareholders must meet the same quorum requirement and be adopted by the same vote and voting groups required to take action under the quorum and voting requirement then in effect or proposed to be adopted, whichever is greater.

17. Amendment of Charter. The Corporation reserves the right to repeal, alter, amend or rescind any provision contained in this Charter in the manner now or hereafter prescribed by law, and all rights conferred on shareholders herein are granted subject to this reservation. Notwithstanding the foregoing, the provisions in Sections 12, 13, 14, 15, 16 and this Section 17 of this Charter may not be repealed, altered, amended or rescinded in any respect nor may provisions be adopted inconsistent with Sections 12, 13, 14, 15, 16 and this Section 17 unless the same is approved by the affirmative vote of the holders at least 80% of the Voting Power, considered for this purpose as a single class; except that such repeal, alteration, amendment, rescission or adoption may be made by the affirmative vote of the holders of a

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majority of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (considered for this purpose as a single class) if the same is first approved by a majority of the Board of Directors.

18. Adoption. This amended and restated charter was adopted by the Board of Directors of the Corporation on April 17, 2002 and the Shareholders of the Corporation on May 24, 2002. This charter replaces and supersedes the original charter of the Corporation filed with the Tennessee Secretary of State and all amendments thereto.

19. Corporation for Profit. The Corporation is for profit.

Dated:                           , 2002.
      --------------------------


                                             KIRKLAND'S, INC.

                                             By:
                                                -------------------------------
                                             Title:
                                                   ----------------------------

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APPENDIX TO AMENDED AND RESTATED CHARTER

PROCEDURES FOR SUBMISSION AND
DETERMINATION OF CLAIMS FOR INDEMNIFICATION
PURSUANT TO SECTION 15 OF THE CHARTER.

Section 1. Purpose. The Procedures for Submission and Determination of Claims for Indemnification Pursuant to Section 15 of the Charter (the "Procedures") are to implement the provisions of Section 15 of the Charter of the Corporation (the "Charter") in compliance with the requirements of Section 15.6.

Section 2. Definitions. For purposes of these Procedures:

(a) All terms that are defined in Section 15.1 of the Charter shall have the meanings ascribed to them therein when used in these Procedures unless otherwise defined herein.

(b) "Change of control" shall mean:

(i) the acquisition in one or more transactions by any "Person" (as the term person is used for purposes of Sections 13(d) or 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act")) of "Beneficial ownership" (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of twenty-five percent (25%) or more of the combined voting power of the Corporation's then outstanding voting securities (the "Voting Securities"), provided that for purposes of this clause (i) Voting Securities acquired directly from the Corporation by any Person shall be excluded from the determination of such Person's Beneficial ownership of Voting Securities (but such Voting Securities shall be included in the calculation of the total number of Voting Securities then outstanding); or

(ii) approval by shareholders of the Corporation of:

(A) a merger, reorganization or consolidation involving the Corporation if the shareholders of the Corporation immediately before such merger, reorganization or consolidation do not or will not own directly or indirectly immediately following such merger, reorganization or consolidation, more than fifty percent (50%) of the combined voting power of the outstanding voting securities of the Corporation resulting from or surviving such merger, reorganization or consolidation in substantially the same proportion as their ownership

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of the Voting Securities outstanding immediately before such merger, reorganization or consolidation; or

(B) a complete liquidation or dissolution of the Corporation; or

(D) acceptance by shareholders of the Corporation of shares in a share exchange if the shareholders of the Corporation immediately before such share exchange do not or will not own directly or indirectly immediately following such share exchange more than fifty percent (50%) of the combined voting power of the outstanding voting securities of the entity with which the shareholders effect such share exchange in substantially the same proportion as their ownership of the Voting Securities outstanding immediately before such share exchange.

Section 3. Submission and Determination of Claims.

(a) To obtain indemnification or advancement of expenses under Section 15 of the Charter, a corporate agent shall submit to the Secretary of the Corporation a written request therefor, including therein or therewith such documentation and information as is reasonably available to the corporate agent and is reasonably necessary to permit a determination as to whether and what extent the Corporate agent is entitled to indemnification or advancement of expenses, as the case may be. The Secretary shall, promptly upon receipt of a request for indemnification, advise the Board of Directors thereof in writing if a determination in accordance with Section 15.6 or Section 15.7 of the Charter is required.

(b) Upon written request by an corporate agent for indemnification pursuant to Section 3(a) hereof, a determination with respect to the corporate agent's entitlement thereto in the specific case, if required by the Charter, shall be made in accordance with Section 15.6 of the Charter, and, if it is so determined that the corporate agent is entitled to indemnification, payment to the corporate agent shall be made within ten days after such determination. The corporate agent shall cooperate with the person, persons or entity making such determination, with respect to the corporate agent's entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to the corporate agent and reasonably necessary to such determination.

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(c) If entitlement to indemnification is to be made by independent legal counsel pursuant to Section 15.6.3 of the Charter such counsel shall be selected as provided in this Section 3(c). If a change of control shall not have occurred, the independent legal counsel shall be selected by the Board of Directors as set forth in Section 15.6.3 of the Charter, and the Corporation shall give written notice to the corporate agent advising the corporate agent of the identity of the independent legal counsel so selected. If a change of control shall have occurred, the independent legal counsel shall be selected by the corporate agent (unless the corporate agent shall request that such selection be made by the Board of Directors, in which event the immediately preceding sentence shall apply), and the corporate agent shall give written notice to the Corporation advising it of the identity of the independent legal counsel so selected. In either event, the corporate agent or the Corporation, as the case may be, may, within seven days after such written notice of selection shall have been given, deliver to the Corporation or to the corporate agent, as the case may be, a written objection to such selection. Such objection may be asserted only on the ground that the independent legal counsel so selected does not meet the requirements of "independent legal counsel" as defined in Section 15.1 of the Charter, and the objection shall set forth with particularity the factual basis of such assertion. If such written objection is made, the independent legal counsel so selected may not serve as independent legal counsel unless and until a court has determined that such objection is without merit. If, within twenty days after the next regularly scheduled Board of Directors meeting following submission by the corporate agent of a written request for indemnification pursuant to Section 3(a) hereof, no independent legal counsel shall have been selected and not objected to, either the Corporation or the corporate agent may petition any court of competent jurisdiction for resolution of any objection which shall have been made by the Corporation or the corporate agent to the other's selection of independent legal counsel and/or for the appointment as independent legal counsel of a person selected by the Court or by such other person as the Court shall designate, and the person with respect to whom an objection is favorably resolved or the person so appointed shall act as independent legal counsel under Section 15.6.3 of the Charter. The Corporation shall pay any and all reasonable fees and expenses (including without limitation any advance retainers reasonably required by counsel) of independent legal counsel incurred by such independent legal counsel in connection with acting pursuant to Section 15.6.3 of the Charter, and the Corporation shall pay all reasonable fees and expenses (including without limitation any advance retainers reasonably required by counsel) incident to the procedures of Section 15.6.3 of the Charter and this Section 3(c), regardless of the manner in which independent legal counsel was selected or appointed. Upon the delivery of its opinion pursuant to Section 15.6.3 of the Charter or, if earlier, the due commencement of any judicial proceeding or arbitration pursuant to Section 4(a)(3) of these Procedures, independent legal counsel shall be discharged and relieved of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing).

(d) If a change of control shall have occurred, in making a determination with respect to entitlement to indemnification under the Charter, the person, persons or entity making such determination shall presume that an corporate agent is entitled to indemnification under the Charter if the corporate agent has submitted a request for indemnification in accordance with
Section 3(a) hereof, and the Corporation shall have the burden of proof to overcome that presumption in connection with the making by any person, persons or entity of any determination contrary to that presumption.

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Section 4. Review and Enforcement of Determination.

(a) In the event that (1) advancement of expenses is not timely made pursuant to Section 15.5 of the Charter, (2) payment of indemnification is not made pursuant to Section 15.2 the Charter within ten days after receipt by the Corporation of written request therefor, (3) a determination is made pursuant to Section 15.6 of the Charter that a corporate agent is not entitled to indemnification under the Charter, (4) the determination of entitlement to indemnification is to be made by independent legal counsel pursuant to Section 15.6.3 of the Charter and such determination shall not have been made and delivered in a written opinion within ninety days after receipt by the Corporation of the written request for indemnification, or
(5) payment of indemnification is not made within ten days after a determination has been made pursuant to Section 15.6 of the Charter that a corporate agent is entitled to indemnification, the corporate agent shall be entitled to an adjudication in an appropriate court of the State of Tennessee, or in any other court of competent jurisdiction, of the corporate agent's entitlement to such indemnification or advancement of expenses. Alternatively, the corporate agent, at his or her option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the rules of the American Arbitration Association. The corporate agent shall commence such proceeding seeking an adjudication or an award in arbitration within one year following the date on which the corporate agent first has the right to commence such proceeding pursuant to this Section 4(a). The Corporation shall not oppose the corporate agent's right to seek any such adjudication or award in arbitration.

(b) In the event that a determination shall have been made pursuant to Section 15.6 of the Charter that a corporate agent is not entitled to indemnification, any judicial proceeding or arbitration commenced pursuant to this Section 4 shall be conducted in all respects as a de novo trial, or arbitration, on the merits and the corporate agent shall not be prejudiced by reason of that adverse determination. If a change of control shall have occurred, the Corporation shall have the burden of proving in any judicial proceeding or arbitration commenced pursuant to this Section 4 that the corporate agent is not entitled to indemnification or advancement of expenses, as the case may be.

(c) If a determination shall have been made or deemed to have been made pursuant to Section 15.6 of the Charter that a corporate agent is entitled to indemnification, the Corporation shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 4, absent (1) a misstatement or omission of a material fact in connection with the corporate agent's request for indemnification, or (2) a prohibition of such indemnification under applicable law.

(d) The Corporation shall be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to this Section 4 that the procedures and presumptions of these Procedures are not valid, binding and enforceable, and shall stipulate in any such judicial proceeding or arbitration that the Corporation is bound by all the provisions of these Procedures.

(e) In the event that a corporate agent, pursuant to this Section 4, seeks to enforce the corporate agent's rights under, or to recover damages for breach of, Section 15 of the Charter or these Procedures in a judicial proceeding or arbitration, the Corporate agent shall be entitled to recover from the Corporation, and shall

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be indemnified by the Corporation against, any and all expenses (of the types described in the definition of expenses in Section 15.1 of the Charter) actually and reasonably incurred in such judicial proceeding or arbitration, but only if the corporate agent prevails therein. If it shall be determined in such judicial proceeding or arbitration that the corporate agent is entitled to receive part but not all of the indemnification or advancement of expenses sought, the expenses incurred by the corporate agent in connection with such judicial proceeding or arbitration shall be appropriately prorated.

Section 5. AMENDMENTS. These Procedures may be amended at any time and from time to time in the same manner as any section of the Charter of the Corporation in accordance with the Amended and Restated Charter of the Corporation and the Bylaws; provided, however, that notwithstanding any amendment, alteration or repeal of these Procedures or any provision hereof, any corporate agent shall be entitled to utilize these Procedures with respect to any claim for indemnification arising out of any action taken or omitted prior to such amendment, alteration or repeal except to the extent otherwise required by law.

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EXHIBIT 3.4

[To be adopted effective upon
completion of the Offering]

AMENDED AND RESTATED BYLAWS OF

KIRKLAND'S INC.

ARTICLE I
OFFICES

Section 1. The principal office of Kirkland's, Inc. (the "Corporation"), is 805 North Parkway, Jackson, Tennessee 38305. The principal office may be changed at any time upon a resolution adopted by the Board of Directors of the Corporation (the "Board of Directors"). The Corporation may have offices and places of business at such other places within or without the State of Tennessee as shall be determined by the Board of Directors.

Section 2. The registered office of the Corporation for any particular state may be, but need not be, identical with the principal office of the Corporation in that state, and the address of the registered office may be changed from time to time by appropriate resolution of the Board of Directors.

ARTICLE II
SHAREHOLDERS

Section 1. Meetings. All meetings of shareholders shall be held either in the principal office of the Corporation or at any other place within or without the City of Jackson, Tennessee, as designated by the Board of Directors.

Section 2. Annual Meeting. The annual meeting of the shareholders shall be held on the second Tuesday in May of each year or such other date, in any particular year, designated by the Board of Directors, for the purpose of electing directors and for the transaction of any other business authorized to be transacted by the shareholders. If the appointed day is a legal holiday the meeting shall be held at the same time on the next succeeding day not a holiday. In the event that the annual meeting is committed by oversight or otherwise on the date herein provided for, the Board of Directors shall cause a meeting in lieu thereof to be held as soon thereafter as conveniently may be, and any business transacted or elections held at such meeting shall be as valid as if transacted or held at the annual meeting. Such subsequent meeting shall be called in the same manner as provided for the annual shareholders meeting.

Section 3. Special Meetings. Special meetings of shareholders may be called at any time, but only by the chairman of the Board of Directors (the "Chairman of the Board"), the president of the Corporation (the "President"), or upon a resolution adopted by or affirmative vote of a majority of the Board of Directors, and not by the shareholders.

Section 4. Notice Of Meetings. Notice of all shareholders' meetings stating the time, place and the objects for which such meetings are called shall be given by the Chairman of the Board, the President or any vice-president (a "Vice-President") or the Secretary (the

"Secretary") or any assistant secretary (an "Assistant Secretary") of the Corporation to each shareholder of record entitled to vote at such meeting not less than ten (10) days or more than two (2) months prior to the date of the meeting by written notice delivered personally, mailed or delivered via overnight courier to each shareholder. If delivered personally, such notice shall be deemed to be delivered when received. If mailed or delivered via overnight courier service, such notice shall be deemed to be delivered when deposited in the United States Mail in a sealed envelope with postage thereon prepaid, or deposited with the overnight courier service, as the case may be, addressed to the shareholder at his address as it appears on the stock record books of the Corporation, unless he shall have filed with the Secretary a written request that notice intended for him be mailed to some other address, in which case it shall be mailed to the address designated in such request.

Any meeting at which all shareholders entitled to vote have waived or at any time shall waive notice shall be a legal meeting for the transaction of business, notwithstanding that notice has not been given as herein before provided. The waiver must be in writing, signed by the shareholder entitled to the notice, and be delivered to the Corporation for inclusion in the minutes or filing with the corporate records.

Section 5. Notice for Nominations and Proposals.

5.1. Annual Meetings.

(a) Nominations for the election of directors and proposals for any new business to be taken up at any annual meeting of shareholders may be made by the Board of Directors or, as provided in this bylaw, by any shareholder of the Corporation entitled to vote generally in the election of directors, subject to the rights of the holders of preferred stock, if applicable. For nominations or other business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the Secretary of the Corporation and such other business must otherwise be a proper matter for shareholder action. To be timely, a shareholder's notice with respect to any annual must be received by the Secretary at the principal executive offices of the Corporation not later than the 60th day nor earlier than the 90th day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, notice by the shareholder must be so received not earlier than the 90th day prior to the annual meeting and not later than the later of the 60th day prior to the annual meeting or the 15th day following the day on which public announcement of the date of the meeting is first made by the Corporation. In no event shall the public announcement of an adjournment or postponement of an annual meeting commence a new time period for the giving of a shareholder's notice as described above. A shareholder's notice shall set forth (A) as to each person whom the shareholder proposes to nominate for election or reelection as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934 ("Exchange Act") and Rule 14a-11 thereunder (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (B) as to any other business that the shareholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting

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and any material interest in such business of such shareholder and the beneficial owner, if any, on whose behalf the proposal is made; and (C) as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (1) the name and address of such shareholder, as they appear on the Corporation's books, and of such beneficial owner; (2) the class and number of shares of the Corporation which are owned beneficially and of record by such shareholder and such beneficial owner; and
(3) a representation that such shareholder and beneficial owner intend to appear in person or by proxy at the meeting.

(b) Notwithstanding anything in paragraph (a) of this Section 5.1 to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation at the annual meeting is increased pursuant to an act of the Board of Directors of the Corporation and there is no public announcement by the Corporation naming all of the nominees for director or specifying the size of the increased Board of Directors on or before the date which is 15 days before the latest date by which a shareholder may timely notify the Corporation of nominations or other business to be brought by a shareholder in accordance with paragraph (a) of this Section 5.1, a shareholder's notice required by this Section 5.1 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be received by the Secretary at the principal executive offices of the Corporation not later than the 15th day following the day on which such public announcement is first made by the Corporation.

5.2. Special Meetings. Only such business shall be conducted at a special meeting of shareholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of shareholders at which directors are to be elected pursuant to the Corporation's notice of meeting (i) by or at the direction of the Board of Directors or (ii) provided that the Board of Directors has determined that directors shall be elected at such meeting, by any shareholder of the Corporation who is a shareholder of record at the time of giving of notice provided for in this bylaw, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this bylaw. In the event the Corporation calls a special meeting of shareholders for the purpose of electing one or more directors to the Board of Directors, any such shareholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the Corporation's notice of meeting for inclusion in the shareholder's notice required by Section 5.1 of these Bylaws if such nomination shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the close of business on the 90th day prior to such special meeting and not later than the close of business on the later of the 60th day prior to such special meeting or the 15th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of an adjournment of a special meeting commence a new time period for the giving of a shareholder's notice as described above.

5.3. General. Only such persons who are nominated by a shareholder in accordance with the procedures set forth in this bylaw shall be eligible to serve as directors and only such business shall be conducted at a meeting of shareholders as shall have been brought before the meeting in accordance with the procedures set forth in this bylaw. Except as otherwise provided by law, the charter of the Corporation (the "Charter") or these Bylaws, the

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Chairman of the Board shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this bylaw and, if any proposed nomination or business is not in compliance with this bylaw, to declare that such defective proposal or nomination shall be disregarded.

5.4. Public Announcement. For purposes of this bylaw, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.

5.5. Non-Exclusivity. If the Corporation is required under Rule 14a-8 under the Exchange Act to include a shareholder's proposal in its proxy statement, such shareholder shall be deemed to have given timely notice for purposes of this bylaw with respect to such proposal. Nothing in this bylaw shall be deemed to affect any rights of the holders of any series of Preferred Stock to elect directors.

Section 6. Quorum. Except as may be otherwise provided by law, a majority of the outstanding shares of the Corporation entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. In the event that a majority of the outstanding shares are represented at any meeting, action on a matter is approved if the votes cast favoring the action exceed the votes cast opposing the action, unless the question is one upon which by express provision of law or of the Charter or of these Bylaws a larger or different vote is required, in which case such express provision shall govern and control the decision of each question. If a quorum of the shares entitled to vote shall fail to be obtained at any meeting, or in the event of any other proper business purpose, the chair of the meeting or the holders of a majority of the shares present, in person or by proxy, may adjourn the meeting to another place, date or time by announcement to shareholders present in person at the meeting and no other notice of such place, date or time need be given.

Section 7. Organization. At every meeting of the shareholders the Chairman of the Board, or, in his absence, the President, or in the absence of the Chairman of the Board and the President, a director or an officer of the Corporation designated by the Board shall act as chairman. The Secretary, or, in his absence, an Assistant Secretary, shall act as secretary at all meetings of the shareholders. In the absence from any such meeting of the Secretary and any Assistant Secretary, the chairman may appoint any person to act as secretary of the meeting.

Section 8. Closing of Transfer Books or Fixing of Record Date. For the purpose of determining the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors may provide that the stock transfer book shall be closed for a stated period not to exceed in any case thirty days. If the stock transfer book shall be closed for the purpose of determining shareholders, such books shall be closed for at least ten (10) days immediately preceding such meeting. In lieu of closing the stock transfer books, the Board of Directors may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be

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not more than thirty (30) days and not less than ten (10) days prior to the date on which the particular action requiring such determination of shareholders is to be taken. If the stock transfer books are not closed and no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, or shareholders entitled to receive payment of a dividend, the date on which notice of the meeting is mailed or the date on which the resolution of the Board of Directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this Section, such determination shall apply to any adjournment thereof.

Section 9. Voting Lists. The officer or agent having charge of the stock transfer books for common shares of the Corporation shall make available, within two (2) business days after notice of a meeting is given, a complete list of the shareholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order, with the address of and the number of shares held by each shareholder, which list, for a period beginning within two (2) business days after notice of such meeting is given, shall be kept on file at the registered office of the Corporation and shall be subject to inspection by any shareholder at any time during usual business hours. Such list shall be kept open at the time and place of the meeting and be subject to the inspection of any shareholder during the entire time of the meeting. In the event of any challenge to the right of any person to vote at the meeting, the presiding officer at such meeting may rely on said list as proper evidence of the right of parties to vote at such meeting.

Section 10. Proxies. Shareholders of record who are entitled to vote may vote at any meeting either in person or by written proxy, which shall be filed with the secretary of the meeting before being voted. Such proxy shall entitle the holders thereof to vote at any adjournment of such meeting, but shall not be valid after the final adjournment thereof. No proxy shall be valid after the expiration of eleven months from the date of its execution unless the shareholder executing it shall have specified therein the length of time it is to continue in force, which shall be for some limited period. A proxy is revocable by the shareholder unless it conspicuously states that it is irrevocable and the appointment of the proxy is coupled with an interest.

Section 11. Voting of Shares. Except as otherwise provided in the Charter or these Bylaws, each share of Common Stock shall have all voting rights accorded to holders of Common Stock pursuant to the Tennessee Business Corporation Act, at the rate of one vote per share.

Section 12. Informal Action by Shareholders. Any action required to be taken at a meeting of the shareholders, or any other action which may be taken at a meeting of the shareholders, may be taken without a meeting if all shareholders entitled to vote on the action consent to taking such action without a meeting. If all shareholders entitled to vote on the action consent to taking such action without a meeting, then the affirmative vote of the number of shares that would be necessary to authorize such action at a meeting is the act of the shareholders.

The action must be evidenced by one or more written consents describing the action taken, signed by each shareholder entitled to vote on the action, indicating each signing

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shareholder's vote or abstention on the action, and delivered to the Corporation for inclusion in the minutes or filing with the corporate records.

Section 13. Business and Order of Business. At each meeting of the shareholders such business may be transacted as may properly be brought before such meeting, except as otherwise provided by law or in these Bylaws. The order of business at all meetings of the shareholders shall be as determined by the Chairman, unless otherwise determined by a majority in interest of the shareholders present in person or by proxy at such meeting and entitled to vote thereat.

ARTICLE III
BOARD OF DIRECTORS

Section 1. Number. The number of directors of the Corporation shall be such number, neither fewer than three nor more than fifteen (exclusive of directors, if any, to be elected by holders of Preferred Stock of the Corporation, voting separately as a class), as determined by a majority vote of the Board of Directors. The Board of Directors has the power to fix or change the number of directors, including an increase or decrease in the number of directors, from time to time as established by a majority vote of the Board of Directors. A director need not be a shareholder or a resident of the state of Tennessee.

Section 2. Powers of Directors. The Board of Directors shall have the entire management of the business of the Corporation. In the management and control of the property, business and affairs of the Corporation, the Board of Directors is hereby vested with all the powers possessed by the Corporation itself, so far as this delegation of authority is not inconsistent with the laws of the State of Tennessee, with the Charter, or with these Bylaws. The Board of Directors shall have the power to determine what constitutes net earnings, profits, and surplus, respectively, what amount shall be reserved for working capital and to establish reserves for any other proper purpose, and what amount shall be declared as dividends, and such determination by the Board of Directors shall be final and conclusive. The Board of Directors shall have the power to declare dividends for and on behalf of the Corporation, which dividends may include or consist of stock dividends.

Section 3. Regular Meetings of the Board. Immediately after the annual election of directors, the newly elected directors may meet at the same place for the purpose of organization, the election of corporate officers and the transaction of other business; if a quorum of the directors be then present no prior notice of such meeting shall be required. Other regular meetings of the Board of Directors shall be held at such times and places as the Board of Directors by resolution may determine and specify, and if so determined no notice thereof need be given, provided that, unless all the directors are present at the meeting at which said resolution is passed, the first meeting held pursuant to said resolution shall not be held for at least five (5) days following the date on which the resolution is passed.

Section 4. Special Meetings. Special meetings of the Board of Directors may be held at any time or place whenever called by the Chairman of the Board, the President, or any Vice-President or the Secretary, or by written request of at least two directors, notice thereof being given to each director by the Secretary or other officer calling the meeting, or they may be

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held at any time without formal notice provided all of the directors are present or those not present shall at any time waive or have waived notice thereof.

Section 5. Notice. Notice of any special meetings shall be given at least two (2) days previously thereto by written notice delivered personally, by mail, by telegram, by overnight courier service, or by facsimile. If mailed, such notice shall be mailed to each director at his business address no less than five (5) days previously thereto, and shall be deemed to be delivered when deposited in the United States mail so addressed, with postage thereon prepaid. If notice be given by telegram, such notice shall be deemed to be delivered when the telegram is delivered to the telegraph company. If notice be delivered via overnight courier service, such notice shall be deemed to be delivered when deposited with the overnight courier service. If notice be given by facsimile, such notice shall be deemed to be delivered when confirmation of the transmission is received.

Section 6. Quorum. A majority of the members of the Board of Directors, as constituted for the time being, shall constitute a quorum for the transaction of business, but a lesser number may adjourn any meeting and the meeting may be held as adjourned without further notice. If a quorum is present when a vote is taken, the affirmative vote of a majority of the directors present is the act of the Board of Directors, except as otherwise provided by law or by these Bylaws. The fact that a director has an interest in a matter to be voted on by the meeting shall not prevent his being counted for purposes of a quorum.

Section 7. Presumption of Assent. A director of the Corporation who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the Secretary immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action.

Section 8. Informal Action by Directors. Any action required to be taken at a meeting of the Board of Directors, or any other action which may be taken at a meeting of the Board of Directors, may be taken without a meeting if all directors consent to taking such action without a meeting. If all directors consent to taking such action without a meeting, the affirmative vote of the number of directors that would be necessary to authorize or take such action at a meeting is the act of the Board of Directors. The action must be evidenced by one or more written consents describing the action taken, signed by each director, indicating each signing director's vote or abstention on the action, and shall be included in the minutes or filed with the corporate records reflecting the action taken.

Section 9. Meetings by any Form of Communication. The Board of Directors shall have the power to permit any and all directors to participate in a regular or special meeting by, or conduct the meeting through the use of any means of communication by which all directors participating may simultaneously hear each other during the meeting. A director participating in a meeting by this means is deemed to be present in person at the meeting.

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Section 10. Organization. At each meeting of the Board of Directors, the Chairman of the Board, or, in his absence, the Chief Executive Officer of the Corporation (the "Chief Executive Officer'), or, in the absence of the Chairman of the Board and the Chief Executive Officer, the President, or in the absence of the Chairman of the Board, the Chief Executive Officer and the President, a director or an officer of the Corporation designated by the Board of Directors shall act as chairman. The Secretary, or, in the Secretary's absence, any person appointed by the chairman, shall act as secretary of the meeting.

Section 11. Removal. No director of the Corporation may be removed at any time unless for cause. Upon finding of cause as determined by a majority of the Board of Directors (excluding the director which is the subject of removal), the director may be removed only upon the affirmative vote of the holders of at least 80% of outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (the "Voting Power"), considered for this purpose as one class, except as otherwise required by law.

Section 12. Vacancy. Unless the Board of Directors otherwise determines, and subject to the rights of the holders of any series of Preferred Stock, newly created directorships resulting from any increase in the authorized number of directors or any vacancies on the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause may be filled only by a majority vote of the directors then in office, though less than a quorum, and shall not be filled by the shareholders unless there are no directors remaining on the Board of Directors. Any director so chosen (a "vacancy director") shall be a director of the same class as the director whose vacancy he or she fills. Such vacancy director shall hold office until the next annual meeting of shareholders and until his or her successor shall have been elected and qualified. The shareholders shall thereupon elect a director to fill the vacancy having been temporarily filled by the vacancy director, which individual may include the incumbent vacancy director. The director so elected shall be a director of the same class as the vacancy director and shall serve until the annual meeting of shareholders at which the term of office of such class expires and until such director's successor shall have been duly elected and qualified.

Section 13. Resignations. A director may resign at any time by delivering written notice to the Board of Directors, the Chairman of the Board or the President. Resignation is effective when the notice is delivered, unless the notice specifies a later effective date.

Section 14. Compensation. By resolution of the Board of Directors, the directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor.

ARTICLE IV
COMMITTEES

Section 1. Appointment and Powers. The Board of Directors may, by resolution passed by a majority of the whole Board of Directors, create one or more committees, each committee to consist of two or more directors of the Corporation, which, to the extent provided in said resolution or in these Bylaws and not inconsistent with Section 48-18-206 of the Tennessee Business Corporation Act, shall have and may exercise the powers of the Board of

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Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. The Board of Directors may, by resolution passed by a majority of the whole Board of Directors, abolish any such committee.

Section 2. Term of Office and Vacancies. Each member of a committee shall continue in office until a director to succeed him shall have been elected and shall have qualified, or until he ceases to be a director or until he shall have resigned or shall have been removed in the manner hereinafter provided. Any vacancy in a committee shall be filled by the vote of a majority of the whole Board of Directors at any regular or special meeting thereof.

Section 3. Organization. Unless otherwise provided by the Board of Directors, each committee shall appoint a chairman. Each committee shall keep a record of its acts and proceedings and report the same from time to time to the Board of Directors as the Board of Directors may require.

Section 4. Resignations. Any member of a committee may resign from the committee at any time by giving written notice to the Chairman of the Board, the President or the Secretary. Such resignation shall take effect at the time of the receipt of such notice or at any later time specified therein, and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.

Section 5. Removal. Any member of a committee may be removed from the committee with or without cause at any time by resolution passed by a majority of the whole Board of Directors at any regular or special meeting.

Section 6. Meetings. Regular meetings of each committee, of which no notice shall be required, shall be held on such days and at such places as the chairman of the committee shall determine or as shall be fixed by a resolution passed by a majority of all the members of such committee. Special meetings of each committee will be called by the Secretary at the request of any two members of such committee, or in such other manner as may be determined by the committee. Notice of each special meeting of a committee shall be mailed to each member thereof at least two days before the meeting or shall be given personally or by telephone or other electronic transmission at least one day before the meeting. Every such notice shall state the date, time and place of the meeting, but need not state the purposes of the meeting. No notice of any meeting of a committee shall be required to be given to any alternate.

Section 7. Quorum and Manner of Acting. Unless otherwise provided by resolution of the Board of Directors, a majority of a committee shall constitute a quorum for the transaction of business and the act of a majority of those present at a meeting at which a quorum is present shall be the act of such committee. The members of each committee shall act only as a committee and the individual members shall have no power as such. Actions taken at a meeting of any committee shall be reported to the Board of Directors at its next meeting following such committee meeting; provided that, when the meeting of the Board of Directors is held within two (2) days after the committee meeting, such report may be made to the Board of Directors at its second meeting following such committee meeting.

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Section 8. Compensation. Each member of a committee shall be paid such compensation, if any, as shall be fixed by the Board of Directors.

ARTICLE V
WAIVER OF NOTICE

Whenever any notice is required to be given by these Bylaws, or the Charter, or any other laws of the State of Tennessee, a waiver thereof in writing signed by the person or persons entitled to such notice and filed with the minutes or corporate records, whether before or after the time stated therein, shall be deemed equivalent thereto. Where the person or persons entitled to such notice sign the minutes of any shareholders' or directors' meeting, which minutes contain the statement that said person or persons have waived notice of the meeting, then such person or persons are deemed to have waived notice in writing. A shareholder's attendance at a meeting waives objection to lack of notice or defective notice of the meeting, unless the shareholder at the beginning of the meeting (or promptly upon the shareholder's arrival) objects to holding the meeting or transacting business at the meeting, and also waives objection to consideration of a particular matter at the meeting that is not within the purpose or purposes described in the meeting notice, unless the shareholder objects to considering the matter when it is presented. A director's attendance at or participation in a meeting waives any required notice to the director of the meeting unless the director at the beginning of the meeting (or promptly upon the director's arrival) objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to action taken at the meeting.

ARTICLE VI
OFFICERS

Section 1. Number. The officers of the Corporation shall be a Chairman of the Board, Chief Executive Officer, President, Chief Financial Officer, Chief Operating Officer, one or more Vice Presidents (the number thereof to be determined by the Board of Directors), and a Secretary, each of whom shall be elected by the Board of Directors. Such other officers and assistant officers as may be deemed necessary may be elected or appointed by the Board of Directors. Any two or more offices may be held by the same person, except the offices of President and Secretary.

Section 2. Election and Term of Office. The officers of the Corporation to be elected by the Board of Directors shall be elected annually by the Board of Directors at the first meeting of the Board of Directors held after each annual meeting of the shareholders. If the election of officers shall not be held in such meeting, such election shall be held as soon thereafter as conveniently may be. Each officer shall hold office until his successor is duly elected and is qualified or until his death or until he resigns or is removed in the manner hereinafter provided.

Section 3. Removal. Any officer or agent elected or appointed by the Board of Directors may be removed by the Board of Directors whenever in its judgment the best interests of the Corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed.

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Section 4. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification or otherwise, may be filled by the Board of Directors for the unexpired portion of the term.

Section 5. Chairman of the Board. The Chairman of the Board shall preside at all meetings of the shareholders and the directors. The Chairman of the Board shall represent the Corporation in all matters involving the shareholders of the Corporation. He shall also perform such other duties the Board of Directors may assign to him from time to time.

Section 6. Chief Executive Officer. The Chief Executive Officer shall in general supervise and control all of the business and affairs of the Corporation. He shall, in the absence of the Chairman of the Board, preside at all meetings of the shareholders and of the Board of Directors and shall enforce the observance of the Bylaws of the Corporation and the rules of order for the meetings of the Board of Directors and the shareholders. He shall keep the Board of Directors appropriately informed on the business and affairs of the Corporation. He may sign, either alone or with the Secretary, an Assistant Secretary or any other proper officer of the Corporation thereunto authorized by the Board of Directors, certificates for shares of the Corporation, any deed, mortgages, bonds, contracts, or other instruments which the Board of Directors has authorized to be executed, except in cases where the signing and execution thereof shall be expressly delegated by the Board of Directors or by these Bylaws to some other officer or agent of the Corporation, or shall be required by law to be otherwise signed or executed, and in general shall perform all duties incident to the office of Chief Executive Officer and such other duties as may be prescribed by the Board of Directors from time to time.

Section 7. President. The President shall have general and active management of the business of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. He shall, in the absence of the Chairman of the Board and the Chief Executive Officer, preside at all meetings of the shareholders and of the Board of Directors. He may sign, either alone or with any other proper officer, as necessary, certificates for shares of the Corporation, any deed, mortgages, bonds, contracts, or other instruments which the Board of Directors has authorized to be executed, except in cases where the signing and execution thereof shall be expressly delegated by the Board of Directors or by these Bylaws to some other officer or agent of the Corporation, or shall be required by law to be otherwise signed or executed, and in general shall perform all duties incident to the office of President and such other duties as may be prescribed by the Board of Directors from time to time.

Section 8. Chief Financial Officer. The Chief Financial Officer shall arrange for the keeping of adequate records of all assets, liabilities and transactions of the corporation. He shall provide for the establishment of internal controls and see that adequate audits are currently and regularly made. He shall submit to the President, the Chief Operating Officer, the Chairman of the Board and the Board of Directors timely statements of the accounts of the corporation and the financial results of the operations thereof.

Section 9. Chief Operating Officer. If a Chief Operating Officer is elected, the Chief Operating Officer shall supervise the operation of the Corporation, subject to the policies and directions of the Board of Directors. He shall provide for the proper operation of the Corporation and oversee the internal interrelationship amongst any and all departments of the

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Corporation. He shall submit to the President and the Board of Directors timely reports on the operations of the Corporation.

Section 10. The Vice-Presidents. In the absence of the President or in the event of his death, inability or refusal to act, the Vice-President (or in the event there be more than one Vice-President, the Vice-Presidents in the order designated at the time of their election, or in the absence of any designation, then in the order of their election) shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President . Any Vice-President may sign, either alone or with the Secretary or an Assistant Secretary, certificates for shares of the Corporation any deed, mortgages, bonds, contracts or other instruments which the Board of Directors has authorized to be executed, except in cases where the signing and execution thereof shall be expressly delegated by the Board of Directors or by these bylaws to some other officer or agent of the Corporation, or shall be required by law to be otherwise signed or executed, and shall perform such other duties as from time to time may be assigned to him by the President or by the Board of Directors.

Section 11. The Secretary. The Secretary shall: (a) prepare and keep the minutes of the shareholders' and of the Board of Directors' meetings in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these bylaws or as required by law; (c) be custodian of the corporate records and of the seal (if any) of the Corporation and see that said seal is affixed to all documents, the execution of which on behalf of the Corporation under its seal is duly authorized; (d) keep a register of the post office address of each shareholder which shall be furnished to the Secretary by such shareholder; (e) sign with the President or a Vice-President certificates for shares of the Corporation, the issuance of which shall have been authorized by resolution of the Board of Directors; (f) have general charge of the stock transfer books of the Corporation; and (g) in general perform all duties as from time to time may be assigned to him by the President or by the Board of Directors.

Section 12. Assistant Secretaries. The Assistant Secretaries, when authorized by the Board of Directors, may sign with the President or a Vice-President certificates for shares of the Corporation the issuance of which shall have been authorized by a resolution of the Board of Directors. The Assistant Secretaries, in general, shall perform such duties as shall be assigned to them by the Secretary, or by the President or the Board of Directors.

Section 13. Registered Agent. The Board of Directors shall appoint a Registered Agent for the Corporation in accordance with the Tennessee Business Corporation Act and may pay the agent such compensation from time to time as it may deem appropriate.

ARTICLE VII
CONTRACTS, LOANS, CHECKS AND DEPOSITS

Section 1. Contracts. The Board of Directors may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances.

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Section 2. Loans. No loans shall be contracted on behalf of the Corporation and no evidences of indebtedness shall be issued in its name unless authorized by a resolution of the Board of Directors. Such authority may be general or confined to specific instances. Notwithstanding the foregoing, the Corporation shall not make any loan other than a sale on credit in the ordinary course of business or a life insurance policy loan, either directly or indirectly, to any director or officer of the Corporation except with the consent of the holders of a majority of all the outstanding shares owned or controlled by shareholders other than a shareholder for whose benefit such action is being taken, or if the Board of Directors determines that the loan benefits the Corporation and approves the transaction.

Section 3. Checks, Drafts, etc. All checks, drafts, or other orders for the pavement of money, notes or other evidences of indebtedness issued in the name of the Corporation, shall be signed by such officer or officers, agent or agents of the Corporation and in such manner as shall from time to time be determined by resolution of the Board of Directors.

Section 4. Deposits. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositories as the Board of Directors may select.

ARTICLE VIII
SHARES OF STOCK

Section 1. Certificates for Shares. Certificates representing shares of the Corporation shall be in such form as shall be determined by the Board of Directors. Such certificates shall be signed by the President or Vice-President and by the Secretary or an Assistant Secretary. The use of facsimile signatures on any stock certificate of the Corporation is authorized. All such certificates shall state the name of the Corporation, that it is organized under the laws of the State of Tennessee, the name of the person to whom issued, and the number of shares and class of shares that the certificate represents. All certificates for shares shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares represented thereby are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the Corporation. All certificates surrendered to the Corporation for transfer shall be canceled and no new certificate shall be issued until the former certificate for a number of shares shall have been surrendered and canceled, except that in case of a lost, destroyed or mutilated certificate a new one may be issued therefor upon such terms and indemnity to the Corporation as the Board of Directors may prescribe.

Section 2. Registered Ownership of Shares. The Corporation shall be entitled to treat the person in whose name any share of its stock is registered as the owner thereof for all purposes and shall not be bound to recognize any equitable or other claim to, or interest in, such share on the part of any other person, whether or not the Corporation shall have notice thereof, except as expressly provided by applicable law.

Section 3. Transfer of Shares. Shares of stock may be transferred by delivery of the certificate accompanied either by an assignment in writing on the back of the certificate or by a written power of attorney to sell, assign and transfer the same on the books of the Corporation, signed by the person appearing on the certificate to be the owner of the shares represented

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thereby, and shall be transferable on the books of the Corporation upon surrender thereof so assigned or endorsed. The person registered on the books of the Corporation as the owner of any shares of stock shall be entitled to all the rights of ownership with respect to such shares. It shall be the duty of every shareholder to notify the Corporation of his post office address.

ARTICLE IX
DIVIDENDS

The Board of Directors may from time to time declare, and the Corporation may pay dividends on its outstanding shares in the manner and upon the terms and conditions provided by the Tennessee Business Corporation Act and by its Charter.

ARTICLE X
FISCAL YEAR

The books of the Corporation shall be on a 52/53 week year ending on the Saturday closest to January 31.

ARTICLE XI
SEAL

This Corporation may or may not have a seal and in any event the failure to affix a corporate seal to any instrument executed by the Corporation shall not affect the validity thereof. If a seal is adopted, the seal of this Corporation shall include the following letters cut or engraved thereon:
KIRKLAND'S INC.

ARTICLE XII
AMENDMENTS

The Board of Directors is expressly authorized to repeal, alter, amend or rescind these Bylaws of the Corporation by vote of a majority of the Board of Directors at a legal meeting held in accordance with these Bylaws. Notwithstanding any other provision of the Charter or these Bylaws (and notwithstanding some lesser percentage may be specified by law), the Bylaws shall be repealed, altered, amended or rescinded by the shareholders of the Corporation only by affirmative vote of at least 80 % of the outstanding shares of capital stock of the Corporation entitled to vote generally, considered for this purpose as one class.

ATTEST:

Name:
Title:

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EXHIBIT 4.1

(FORM OF STOCK CERTIFICATE - FRONT SIDE)

NUMBER                                                                    SHARES

                                  KIRKLAND'S(R)

INCORPORATED UNDER THE LAWS                  SEE REVERSE FOR CERTAIN DEFINITIONS
OF THE STATE OF TENNESSEE                               CUSIP 497498 10 5

This certifies that

is the owner of

FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, NO PAR VALUE, OF _________________________________KIRKLAND'S, INC.____________________________ transferable on the books of the Corporation by the holder hereof in person or by a duly authorized attorney upon surrender of this certificate properly endorsed or assigned. This certificate and the shares represented hereby are issued and shall be held subject to all the provisions of the Charter and any and all amendments thereto, to all of which the holder by acceptance hereof assents.

This Certificate is not valid until countersigned by the Transfer Agent and registered by the Registrar.

WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers.

Dated:

                           (SEAL)
----------------------------                    ------------------------------
Lowell E. Pugh, II                              Robert E. Alderson
Secretary                                       President



                                                   COUNTERSIGNED AND REGISTERED:
                                                                STOCKTRANS, INC.

                           BY                       TRANSFER AGENT AND REGISTRAR


                                                            AUTHORIZED SIGNATURE

(FORM OF STOCK CERTIFICATE - BACK SIDE)

The Corporation will furnish without charge to any stockholder who so requests the powers, designations, preferences and relative, participating, optional, or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights.

The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:

TEN COM  -  as tenants in common
TEN ENT  -  as tenants by the entireties         UNIF GIFT MIN ACT -            Custodian
                                                                     ----------           ----------
JT TEN   -  as joint tenants with right of                              (Cust.)            (Minor)
         survivorship and not as tenants in                        under Uniform Gifts to Minors
         common                                                    Act
                                                                       ------------------------
                                                                                (State)

Additional abbreviations may also be used though not in the above list.

For value received, hereby sell, assign and transfer unto

PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE

(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING POSTAL ZIP CODE,
OF ASSIGNEE)

of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint _________________________ Attorney to transfer the said shares on the books of the within named corporation with full power of substitution in the premises.

Dated

Signature(s) Guaranteed

Notice: The signature to this assignment must correspond with the name written upon the face of the certificate in every particular without alteration or enlargement or any change whatever. The signature of the person executing this power must be guaranteed by an Eligible Guarantor Institution such as a Commercial Bank, Trust Company, Securities Broker/Dealer, Credit Union, or a Savings Association participating in a medallion program approved by the Securities Transfer Association, Inc.

EXHIBIT 5.1

Law Offices
Baker, Donelson, Bearman & Caldwell
A PROFESSIONAL CORPORATION
FIRST TENNESSEE BUILDING
165 Madison Avenue
Suite 2000
Memphis, Tennessee 38103

(901) 526-2000

FACSIMILE
(901) 577-2303

June __, 2002

Kirkland's, Inc.
805 N. Parkway
Jackson, TN 38305

Re: Registration Statement on Form S-1

(Registration No. 333-86746)

Ladies and Gentlemen:

We have acted as special counsel to Kirkland's, Inc., a Tennessee corporation (the "Company"), in connection with the registration under the Securities Act of 1933, as amended (the "Act") of a public offering (the "Offering") of up to _________ shares (the "Firm Shares") of the Company's Common Stock, no par value (the "Common Stock"), to be offered by the Company and selling shareholders, and up to an additional _________ shares of Common Stock (the "Over-Allotment Shares" and, together with the Primary Shares, the "Shares") subject to an over-allotment option which may be sold by selling shareholders (the "Selling Shareholders").

The opinion is delivered in accordance in accordance with the requirements of Item 601(b)(5) of Regulation S-K under the Act.

We have examined originals or copies, certified or otherwise identified to our satisfaction, of (i) the Registration Statement on Form S-1 originally filed under the Act with the Securities and Exchange Commission (the "Commission") on April 23, 2002 and Amendment No. 1 thereto filed on June __, 2002 ("Amendment No. 1") (as so amended the "Registration Statement"); (ii) the form of underwriting agreement, filed as Exhibit 1.1 to Amendment No. 1 to the Registration Statement (the "Underwriting Agreement"), to be entered into by and among the Company, the Selling Shareholders and Merrill Lynch & Co., CIBC World Markets, SunTrust Robinson Humphrey, and U.S. Bancorp Piper Jaffray (the "Underwriters"); (iii) the Company's Amended and Restated Charter and By-Laws, as in effect on the date hereof; (iv) the form of the Company's Amended and Restated Charter and Amended and Restated By-Laws, to become effective prior to the Registration Statement being declared effective by the Commission; (v) certain resolutions of the Board of Directors of the Company relating to, among other things, the issuance of the Primary Shares; (vi) a specimen certificate representing the shares of Common

Kirkland's, Inc.

Page 2

June __, 2002

Stock; and (vii) such other documents as we have deemed necessary or appropriate as a basis for the opinions set forth below.

In our examination, we have assumed the legal capacity of all natural persons, the genuineness of all signatures, the authenticity of all documents submitted to us as certified or photostatic copies and the authenticity of the originals of such latter documents. As to any facts material to the opinions expressed herein, which were not independently established or verified, we have relied upon statements and representations of officers and other representatives of the Company, the Selling Shareholders and others. In addition, we have assumed (a) that prior to the consummation of the Offering, the Amended and Restated Charter filed as Exhibit 3.2 to Amendment No. 1 is filed with the Secretary of State of the State of Tennessee and the Pre-Offering Transactions (as defined in the Registration Statement) are effected, and (b) the conformity of the certificates representing the Shares to the form of the specimen thereof examined by us and the due execution and delivery of such certificates.

Members of our firm are admitted to the Bar of the State of Tennessee, and we express no opinion as to the laws of any other jurisdiction other than the Federal laws of the United States of America.

Based upon and subject to the foregoing, we are of the opinion that:

1. When (i) the Board of Directors of the Company authorizes the price per Primary Share, (ii) the duly appointed officers of the Company and the Selling Shareholders execute and deliver the Underwriting Agreement and (iii) the Primary Shares being offered by the Company are issued and delivered against payment therefor in accordance with the terms of the Underwriting Agreement, the Primary Shares being offered by the Company will be duly authorized, validly issued, fully paid and nonassessable.

2. The Primary Shares being offered by the Selling Shareholders and the Over-Allotment Shares are duly authorized, validly issued, fully paid and nonassessable.

We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to this firm under the caption "Legal Opinions" in the prospectus filed as part of the Registration Statement. In giving such consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Act or the Rules and Regulations promulgated thereunder.

Kirkland's, Inc.

Page 3

June __, 2002

This opinion is furnished by us, as your special counsel, in connection with the filing of the Registration Statement and, except as provided in the immediately preceding paragraph, is not to be used, circulated, quoted or otherwise referred to for any other purpose without our express written permission or relied upon by any other person.

Very truly yours,

EXHIBIT 10.1

LOAN AND SECURITY AGREEMENT

by and among

KIRKLAND'S STORES, INC., KIRKLAND'S INC.,

and

kirklands.com, inc.

as Borrowers

and

CONGRESS FINANCIAL CORPORATION (SOUTHERN),
as Agent

and

THE FINANCIAL INSTITUTIONS PARTY HERETO FROM TIME TO TIME,
as Lenders

Dated: May 22, 2002

TABLE OF CONTENTS

                                                                                                                PAGE
                                                                                                                ----

SECTION 1.           DEFINITIONS..................................................................................1


SECTION 2.           CREDIT FACILITIES............................................................................22

   2.1.     Revolving Loans.......................................................................................22
   2.2.     Reserved..............................................................................................23
   2.3.     Term Loan.............................................................................................23
   2.4.     Commitments...........................................................................................24
   2.5.     Reserves..............................................................................................24
   2.6.     Overadvance Facility..................................................................................25

SECTION 3.           INTEREST AND FEES............................................................................26

   3.1.     Interest..............................................................................................26
   3.2.     Fees..................................................................................................28
   3.3.     Changes in Laws and Increased Costs of Loans..........................................................28

SECTION 4.           CONDITIONS PRECEDENT.........................................................................29

   4.1.     Conditions Precedent to Initial Loans.................................................................29
   4.2.     Conditions Precedent to All Loans.....................................................................31

SECTION 5.           GRANT AND PERFECTION OF SECURITY INTEREST....................................................32

   5.1.     Grant of Security Interest............................................................................32
   5.2.     Perfection of Security Interests......................................................................33

SECTION 6.           COLLECTION AND ADMINISTRATION................................................................37

   6.1.     Borrowers' Loan Accounts..............................................................................37
   6.2.     Statements............................................................................................37
   6.3.     Collection of Accounts................................................................................37
   6.4.     Payments..............................................................................................37
   6.5.     Authorization to Make Loans...........................................................................38
   6.6.     Use of Proceeds.......................................................................................39
   6.7.     Pro Rata Treatment....................................................................................40
   6.8.     Sharing of Payments, Etc..............................................................................40
   6.9.     Settlement Procedures.................................................................................40
   6.10.    Obligations Several; Independent Nature of Lenders' Rights............................................41
   6.11.    Agent's Allocation of Payments and Collections........................................................43
   6.12.    Borrowers' Representative.............................................................................45
   6.13.    Nature and Extent of Each Borrower's Liability........................................................46

SECTION 7.           COLLATERAL REPORTING AND COVENANTS...........................................................47

   7.1.     Collateral Reporting..................................................................................47
   7.2.     Accounts Covenants....................................................................................48
   7.3.     Inventory Covenants...................................................................................50
   7.4.     [Reserved]............................................................................................51
   7.5.     Power of Attorney.....................................................................................51

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                                                                                                                PAGE
                                                                                                                ----

   7.6.     Right to Cure.........................................................................................52
   7.7.     Access to Premises....................................................................................52
   7.8.     Sales Taxes...........................................................................................52

SECTION 8.           REPRESENTATIONS AND WARRANTIES...............................................................52

   8.1.     Corporate Existence, Power and Authority..............................................................52
   8.2.     Name; State of Organization; Chief Executive Office; Collateral Locations.............................53
   8.3.     Financial Statements; No Material Adverse Change......................................................53
   8.4.     Priority of Liens; Title to Properties................................................................53
   8.5.     Tax Returns...........................................................................................54
   8.6.     Litigation............................................................................................54
   8.7.     Compliance with Other Agreements and Applicable Laws..................................................55
   8.8.     Environmental Compliance..............................................................................55
   8.9.     Employee Benefits.....................................................................................56
   8.10.    Bank Accounts.........................................................................................56
   8.11.    Intellectual Property.................................................................................57
   8.12.    Subsidiaries; Affiliates; Capitalization; Solvency....................................................57
   8.13.    Labor Disputes........................................................................................58
   8.14.    Restrictions on Subsidiaries..........................................................................58
   8.15.    Material Contracts....................................................................................58
   8.16.    Payable Practices.....................................................................................58
   8.17.    Accuracy and Completeness of Information..............................................................59
   8.18.    Credit Card Agreements................................................................................59
   8.19.    Survival of Warranties; Cumulative....................................................................59

SECTION 9.           AFFIRMATIVE AND NEGATIVE COVENANTS...........................................................59

   9.1.     Maintenance of Existence..............................................................................59
   9.2.     New Collateral Locations..............................................................................59
   9.3.     Compliance with Laws, Regulations, Etc................................................................60
   9.4.     Payment of Taxes and Claims...........................................................................61
   9.5.     Insurance.............................................................................................61
   9.6.     Financial Statements and Other Information............................................................61
   9.7.     Sale of Assets, Consolidation, Merger, Dissolution, Etc...............................................63
   9.8.     Encumbrances..........................................................................................64
   9.9.     Indebtedness..........................................................................................65
   9.10.    Loans, Investments, Etc...............................................................................67
   9.11.    Dividends and Redemptions.............................................................................68
   9.12.    Transactions with Affiliates..........................................................................68
   9.13.    Compliance with ERISA.................................................................................68
   9.14.    End of Fiscal Years; Fiscal Quarters..................................................................69
   9.15.    Change in Business....................................................................................70
   9.16.    Limitation of Restrictions Affecting Subsidiaries.....................................................70
   9.17.    Consolidated Senior Debt/EBITDA Ratio.................................................................70
   9.18.    [Reserved]............................................................................................70
   9.19.    Consolidated EBITDA Less Capital Expenditures.........................................................71
   9.20.    Credit Card Agreements................................................................................71
   9.21.    License Agreements....................................................................................72

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                                                                                                                PAGE
                                                                                                                ----

   9.22.    After Acquired Real Property.......................................................................... 73
   9.23.    Costs and Expenses.................................................................................... 74
   9.24.    Collateral Access Agreements.......................................................................... 74
   9.25.    Survey and Title Insurance Endorsements............................................................... 74
   9.26.    Executive Employment Agreements....................................................................... 75
   9.27.    Further Assurances.................................................................................... 75

SECTION 10.          EVENTS OF DEFAULT AND REMEDIES............................................................... 75

   10.1.    Events of Default..................................................................................... 75
   10.2.    Remedies.............................................................................................. 78

SECTION 11.          JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; GOVERNING LAW................................. 82

   11.1.    Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver................................. 82
   11.2.    Waiver of Notices..................................................................................... 83
   11.3.    Amendments and Waivers................................................................................ 84
   11.4.    Waiver of Counterclaims............................................................................... 86
   11.5.    Indemnification....................................................................................... 86

SECTION 12.          THE AGENT.................................................................................... 86

   12.1.    Appointment, Powers and Immunities.................................................................... 86
   12.2.    Reliance by Agent..................................................................................... 87
   12.3.    Events of Default..................................................................................... 87
   12.4.    Congress in its Individual Capacity................................................................... 88
   12.5.    Indemnification....................................................................................... 88
   12.6.    Non-Reliance on Agent and Other Lenders............................................................... 89
   12.7.    Failure to Act........................................................................................ 89
   12.8.    Additional Loans...................................................................................... 89
   12.9.    Concerning the Collateral and the Related Financing Agreements........................................ 90
   12.10.   Field Audit, Examination Reports and other Information; Disclaimer by Lenders......................... 91
   12.11.   Collateral Matters.................................................................................... 92
   12.12.   Agency for Perfection................................................................................. 92
   12.13.   Successor Agent....................................................................................... 92

SECTION 13.          TERM OF AGREEMENT; MISCELLANEOUS............................................................. 92

   13.1.    Term.................................................................................................. 92
   13.2.    Interpretative Provisions............................................................................. 92
   13.3.    Notices............................................................................................... 94
   13.4.    Partial Invalidity.................................................................................... 95
   13.5.    Confidentiality....................................................................................... 95
   13.6.    Successors............................................................................................ 96
   13.7.    Assignments; Participations........................................................................... 97
   13.8.    Entire Agreement...................................................................................... 97
   13.9.    Counterparts, Etc.....................................................................................100

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INDEX TO
EXHIBITS AND SCHEDULES

Exhibit A                  Form of Assignment and Acceptance

Exhibit B                  Information Certificate

Exhibit C                  Form of Compliance Certificate

Schedule 1.37              Existing Lenders

Schedule 1.38              Existing Letters of Credit

Schedule 8.10              Deposit Accounts

Schedule 8.18              Credit Card Agreements

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LOAN AND SECURITY AGREEMENT

This Loan and Security Agreement dated May ___, 2002 (this "Agreement") is entered into by and among KIRKLAND'S STORES, INC., a Tennessee corporation ("Kirkland's"), KIRKLAND'S, INC., a Tennessee corporation ("Parent"), and kirklands.com, inc., a Tennessee corporation ("kirklands.com;" Kirkland's, Parent and kirklands.com being referred to collectively as "Borrowers," and individually as a "Borrower"), the financial institutions from time to time parties hereto as lenders, whether by execution of this Agreement or an Assignment and Acceptance (each individually, a "Lender" and collectively, "Lenders") and CONGRESS FINANCIAL CORPORATION (SOUTHERN), a Georgia corporation, in its capacity as agent for Lenders (together with its successors and assigns in such capacity, "Agent").

RECITALS:

Each Borrower has requested that Lenders enter into certain financing arrangements with Borrowers, pursuant to which Lenders may make loans and provide other financial accommodations to Borrowers, which shall be used by Borrowers to finance their mutual and collective enterprise of retail sales of decorative home accessories and gifts. In order to utilize the financial powers of each Borrower in the most efficient and economical manner, and in order to facilitate the financing of each Borrower's needs, Lenders will, at the request of any Borrower, make loans to all Borrowers under the term loan and revolving credit facility on a combined basis and in accordance with the provisions hereinafter set forth. Borrowers' business is a mutual and collective enterprise, and Borrowers believe that the consolidation of all term and revolving credit loans under this Agreement will enhance the aggregate borrowing powers of each Borrower and ease the administration of their term and revolving credit loan relationship with Lenders, all to the mutual advantage of Borrowers. Lenders' willingness to extend credit to Borrowers and to administer each Borrower's collateral security therefor, on a combined basis as more fully set forth in this Agreement, is done solely as an accommodation to Borrowers and at Borrowers' request in furtherance of Borrowers' mutual and collective enterprise.

Each Lender is willing to agree (severally and not jointly) to make such loans and provide such financial accommodations to Borrowers on a pro rata basis according to its Commitment (as defined below) on the terms and conditions set forth herein and Agent is willing to act as agent for Lenders on the terms and conditions set forth herein and in the other Financing Agreements.

NOW, THEREFORE, in consideration of the mutual conditions and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:

SECTION 1. DEFINITIONS

For purposes of this Agreement, the following terms shall have the respective meanings given to them below:

"Ableco" shall mean Ableco Finance LLC, a Delaware limited liability company.

"Accounts" shall mean, all present and future rights of a Borrower to payment of a monetary obligation, whether or not earned by performance, which is not evidenced by chattel paper or an instrument, (a) for property that has been or is to be sold, leased, licensed, assigned, or otherwise disposed of,
(b) for services rendered or to be rendered, (c) for a secondary obligation incurred or to be incurred, or (d) arising out of the use of a credit or charge card or information contained on or for use with the card.

"Adjusted Eurodollar Rate" shall mean, for any day during the term hereof, the rate per annum (rounded upwards, if necessary, to the next one-sixteenth (1/16) of one (1%) percent) determined by dividing (a) the Eurodollar Rate by (b) a percentage equal to: (i) one (1) minus (ii) the Reserve Percentage. For purposes hereof, "Reserve Percentage" shall mean the reserve percentage, expressed as a decimal, prescribed by any United States or foreign banking authority for determining the reserve requirement which is or would be applicable to deposits of United States dollars in a non-United States or an international banking office of Reference Bank used to fund a Eurodollar Rate Loan or any Eurodollar Rate Loan made with the proceeds of such deposit, whether or not the Reference Bank actually holds or has made any such deposits or loans. The Adjusted Eurodollar Rate shall be adjusted on and as of the effective day of any change in the Reserve Percentage.

"Affiliate" shall mean, with respect to a specified Person, any other Person which directly or indirectly, through one or more intermediaries, controls or is controlled by or is under common control with such Person, and without limiting the generality of the foregoing, includes (a) any Person which beneficially owns or holds five (5%) percent or more of any class of Voting Stock of such Person or other equity interests in such Person, (b) any Person of which such Person beneficially owns or holds five (5%) percent or more of any class of Voting Stock or in which such Person beneficially owns or holds five (5%) percent or more of the equity interests and (c) any director or executive officer of such Person. For the purposes of this definition, the term "control" (including with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of Voting Stock, by agreement or otherwise.

"Agent" shall mean Congress Financial Corporation (Southern), in its capacity as agent on behalf of Lenders pursuant to the terms hereof and any replacement or successor agent hereunder.

"Agent Payment Account" shall mean account no. 53286051 of Agent at Fleet National Bank or such other account of Agent as Agent may from time to time designate to Borrowers as the Agent Payment Account for purposes of this Agreement and the other Financing Agreements.

"Applicable Law" shall mean all laws, rules and regulations applicable to the Person, conduct, transaction, covenant or Financing Agreement in question, including all applicable common law and equitable principles; all provisions of all applicable state and federal constitutions, statutes, rules, regulations and orders of governmental bodies; and orders, judgments and decrees of all courts and arbitrators.

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"Assignment and Acceptance" shall mean an (i) Assignment and Acceptance substantially in the form of EXHIBIT A attached hereto (with blanks appropriately completed) delivered to Agent in connection with an assignment of a Lender's interest hereunder (other than Term Lender) to an Eligible Transferee in accordance with the provisions of SECTION 13.7 hereof, and (ii) with respect to Term Lender, the Term Loan Assignment.

"Bankruptcy Code" shall mean title 11 of the United States Code.

"Blocked Accounts" shall have the meaning set forth in SECTION 6.3 hereof.

"Borrower Agent" shall mean Kirkland's Stores, Inc.

"Borrowing Base" shall mean, at any time, the amount equal to:

(a) the lesser of:

(i) the amount equal to: (A) for the period from January 1 through June 30 of each calendar year, the lesser of: (x) sixty-two and one-half percent (62.5%) multiplied by the Cost of the Eligible Inventory or (y) ninety percent (90%) percent of the Net Recovery Percentage of the Inventory multiplied by the Cost of the Eligible Inventory, and (B) for the period from July 1 through December 31 of each calendar year, the lesser of:
(x) seventy-two and one-half percent (72.5%) multiplied by the Cost of the Eligible Inventory or (y) ninety percent (90%) of the Net Recovery Percentage of the Inventory multiplied by the Cost of the Eligible Inventory; or

(ii) the Revolving Loan Limit;

minus

(b) any and all Reserves.

"Business Day" shall mean any day other than a Saturday, Sunday, or other day on which commercial banks are authorized or required to close under the laws of the State of Georgia, the State of New York, or the State of North Carolina, and a day on which Agent is open for the transaction of business, except that if a determination of a Business Day shall relate to any Eurodollar Rate Loans, the term Business Day shall also exclude any day on which banks are closed for dealings in dollar deposits in the London interbank market or other applicable Eurodollar Rate market.

"Business Interruption Insurance Assignments" shall mean the Collateral Assignments of Business Interruption Insurance to be executed by each Borrower on the date hereof in favor of Agent, for the benefit of Agent and Lenders, as security for the payment of the Obligations.

"Capital Leases" shall mean, as applied to any Person, any lease of (or any agreement conveying the right to use) any property (whether real, personal or mixed) by such Person as lessee which in accordance with GAAP, is required to be reflected as a liability on the balance sheet of such Person.

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"Capital Stock" shall mean, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated) of such Person's capital stock or partnership, limited liability company or other equity interests at any time outstanding, and any and all rights, warrants or options exchangeable for or convertible into such capital stock or other interests (but excluding any debt security that is exchangeable for or convertible into such capital stock).

"Cash Equivalents" shall mean, at any time, (a) any evidence of Indebtedness with a maturity date of ninety (90) days or less issued or directly and fully guaranteed or insured by the United States of America of any agency or instrumentality thereof; provided, that, the full faith and credit of the United States of America is pledged in support thereof; (b) certificates of deposit or bankers' acceptances with a maturity of ninety (90) days or less of any financial institution that is a member of the Federal Reserve System having combined capital and surplus and undivided profits of not less than $250,000,000; (c) commercial paper (including variable rate demand notes) with a maturity of ninety (90) days or less issued by a corporation (except an Affiliate of a Borrower) organized under the laws of any State of the United States of America or the District of Columbia and rated at least A-1 by Standard & Poor's Ratings Service, a division of The McGraw-Hill Companies, Inc. or at least P-1 by Moody's Investors Service, Inc.; (d) repurchase obligations with a term of not more than thirty (30) days for underlying securities of the types described in clause (a) above entered into with any financial institution having combined capital and surplus and undivided profits of not less than $250,000,000; (e) repurchase agreements and reverse repurchase agreements relating to marketable direct obligations issued or unconditionally guaranteed by the United States of America or issued by any governmental agency thereof and backed by the full faith and credit of the United States of America, in each case maturing within ninety (90) days or less from the date of acquisition; provided, that, the terms of such agreements comply with the guidelines set forth in the Federal Financial Agreements of Depository Institutions with Securities Dealers and Others, as adopted by the Comptroller of the Currency on October 31, 1985; and (f) investments in money market funds and mutual funds which invest substantially all of their assets in securities of the types described in clauses (a) through (e) above.

"Cash Management Agreement" shall mean any agreement entered into from time to time between any Borrower or any of its Subsidiaries, on the one hand, and Wachovia or any of its Affiliates, on the other, in connection with cash management services for operating, collections, payroll and trust accounts of such Borrower or its Subsidiaries provided by such banking or financial institution, including automatic clearinghouse services, controlled disbursement services, electronic funds transfer services, information reporting services, lockbox services, stop payment services and wire transfer services.

"Change of Control" shall mean (a) the transfer (in one transaction or a series of transactions) of all or substantially all of the assets of a Borrower or any other Obligor to any Person or group (as such term is used in
Section 13(d)(3) of the Exchange Act) other than the transfer of stock of Parent in connection with an initial public offering of Parent; (b) the liquidation or dissolution of a Borrower or any other Obligor or the adoption of a plan by the stockholders of a Borrower or any other Obligor relating to the dissolution or liquidation of such Borrower or any other such Obligor; or
(c) the failure by Parent to own one hundred percent (100%) of the Voting Stock of either of Kirkland's or Kirklands.com.

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"Closing Date" shall mean the date on which all of the conditions precedent in SECTION 4 of this Agreement are satisfied (or waived by Agent in its sole and absolute discretion) and the initial Loans are made under this Agreement.

"Code" shall mean the Internal Revenue Code of 1986, as the same now exists or may from time to time hereafter be amended, modified, recodified or supplemented, together with all rules, regulations and interpretations thereunder or related thereto.

"Collateral" shall have the meaning set forth in SECTION 5 hereof.

"Collateral Access Agreement" shall mean an agreement in writing, in form and substance satisfactory to Agent, from any lessor of premises to a Borrower, or any other Person to whom any Collateral is consigned or who has custody, control or possession of any such Collateral or is otherwise the owner or operator of any premises on which any of such Collateral is located, pursuant to which such lessor, consignee or other person, inter alia, acknowledges the first priority security interest of and Lien of Agent in such Collateral, agrees to waive or subordinate any and all claims such lessor, consignee or other person may, at any time, have against such Collateral, whether for processing, storage or otherwise, and agrees to permit Agent access to, and the right to remain on, the premises of such lessor, consignee or other person so as to exercise Agent's rights and remedies and otherwise deal with such Collateral and in the case of any consignee or other Person who at any time has custody, control or possession of any Collateral, acknowledges that it holds and will hold possession of the Collateral for the benefit of Agent and Lenders and agrees to follow all instructions of Agent with respect thereto.

"Commitment" shall mean, at any time, as to each Lender, the principal amount set forth below such Lender's signature on the signatures pages hereto designated as the Commitment or on SCHEDULE 1 to the Assignment and Acceptance Agreement pursuant to which such Lender became a Lender hereunder in accordance with the provisions of SECTION 13.7 hereof, as the same may be adjusted from time to time in accordance with the terms hereof; sometimes being collectively referred to herein as "Commitments".

"Congress" shall mean Congress Financial Corporation (Southern), a Georgia corporation, in its individual capacity, and its successors and assigns.

"Consolidated" shall mean the consolidation in accordance with GAAP of the accounts or other items as to which such term applies.

"Consolidated EBITDA" shall mean, for any fiscal period of Borrowers, on a Consolidated basis, Borrowers' and their Consolidated Subsidiaries' (i) income (or loss) before interest and taxes (excluding therefrom (to the extent otherwise included therein) any gains or losses, together with any related provisions for taxes, realized upon any sale of assets other than in the ordinary course of business) plus (ii) to the extent deducted in determining such income (or loss), depreciation, amortization, any non-cash extraordinary expenses or non-cash charges, any extraordinary expenses directly related to the proposed initial public offering of Parent's Capital Stock if Parent is not able to successfully consummate such initial public offering, so long as the aggregate amount of such extraordinary expenses does not exceed $1,000,000, any

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applicable non-cash restructuring charge-offs, and write-down of goodwill and intangibles and other non-cash charges.

"Consolidated Senior Debt" shall mean, as to Borrowers, on a Consolidated basis, on any date, an amount equal to the principal balance of the Term Loan and the Revolving Loans outstanding on the applicable date of determination.

"Consolidated Senior Debt/EBITDA Ratio" shall mean, at any date of determination, the ratio of Consolidated Senior Debt as of the last day of the most recently ended fiscal quarter of Borrowers to Consolidated EBITDA for the four (4) fiscal quarters ended on such date.

"Consolidated Subsidiaries" shall mean, as to a Borrower, those Subsidiaries of such Borrower whose accounts are at the time in question, in accordance with GAAP (and, with respect to any Subsidiaries created, to the extent permitted by this Agreement, after the date hereof, pursuant to the written consent of Agent, which consent may be withheld in Agent's absolute discretion and which may be conditioned upon, inter alia, the execution and delivery of guaranties, security agreements, mortgages and other documents required by Agent in its absolute discretion), consolidated with those of such Borrower.

"Cost" shall mean, as determined by Agent in good faith, with respect to Inventory as of any date, the lower of (a) the cost of such Inventory as of such date, determined on the weighted average cost basis in accordance with GAAP or (b) market value.

"Credit Card Agreements" shall mean all agreements now or hereafter entered into by any Borrower with any Credit Card Issuer or any Credit Card Processor, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, including the agreements set forth on SCHEDULE 8.18 hereto.

"Credit Card Issuer" shall mean any Person (other than Borrowers) who issues or whose members issue credit cards, including MasterCard or VISA bank credit or debit cards or other bank credit or debit cards issued through MasterCard International, Inc., Visa, U.S.A., Inc. or Visa International and American Express, Discover, Diners Club, Carte Blanche and other non-bank credit or debit cards, including credit or debit cards issued by or through American Express Travel Related Services Company, Inc. and Novus Services, Inc.

"Credit Card Processor" shall mean any servicing or processing agent or any factor or financial intermediary who facilitates, services, processes or manages the credit authorization, billing transfer and/or payment procedures with respect to any Borrower's sales transactions involving credit card or debit card purchases by customers using credit cards or debit cards issued by any Credit Card Issuer.

"Credit Facility" shall mean the Loans provided to or for the benefit of Borrowers pursuant to SECTIONS 2.1 and 2.3 hereof.

"Debt for Money Borrowed" shall mean, as applied to any Person, (i) Indebtedness arising from the lending of money by any other Person to such Person (whether interest-bearing or not); (ii) Indebtedness, whether or not in any such case arising from the lending of money by another Person to such Person, (A) which is represented by notes payable or drafts accepted that

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evidence extensions of credit, (B) which constitutes obligations evidenced by bonds, debentures, notes or similar instruments, or (C) upon which interest charges are customarily paid (other than accounts payable) or that was issued or assumed as full or partial payment for property; (iii) Indebtedness under a Capital Lease; (iv) reimbursement obligations with respect to letters of credit or guaranties of letters of credit; and (v) Indebtedness of such Person under any guaranty of obligations that would constitute Debt for Money Borrowed under clauses (i) through (iv) hereof, if owed directly by such Person.

"Default" shall mean an act, condition or event which with notice or passage of time or both would constitute an Event of Default.

"Defaulting Lender" shall have the meaning set forth in SECTION 6.9 hereof.

"Deposit Account Control Agreement" shall mean an agreement in writing, in form and substance satisfactory to Agent, by and among Agent, a Borrower or other Obligor with a deposit account at any bank and the bank at which such deposit account is at any time maintained which provides that such bank will comply with instructions originated by Agent directing disposition of the funds in the deposit account without further consent by such Borrower or such Obligor and such other terms and conditions as Agent may require, including as to any such agreement with respect to any Blocked Account, providing that all items received or deposited in the Blocked Accounts are the property of Agent, and that the bank has no Lien upon, or right to setoff against, the Blocked Accounts, or the items received for deposit therein, or the funds from time to time on deposit therein.

"Discretionary Overadvance" shall mean any Loan made by a Lender under the Overadvance Facility described in SECTION 2.6 hereof.

"Domestic Subsidiary" shall mean a Subsidiary of a Borrower (other than a Subsidiary that is a Borrower) that is incorporated under the laws of a state of the United States.

"Early Termination Fee" shall mean the meaning set forth in SECTION 13.1 hereof.

"Eligible Inventory" shall mean, Inventory (after giving effect to the Borrowers' inventory shrinkage reserve as shown on Borrowers' weekly inventory report delivered in accordance with SECTION 7.1(a)(iii) consisting of finished goods held for resale in the ordinary course of the business of a Borrower, which are acceptable to Agent based on the criteria set forth below. In general, Eligible Inventory shall not include (a) packaging and shipping materials; (b) supplies used or consumed in a Borrower's business; (c) Inventory at premises other than those owned and controlled by a Borrower unless such location is a leased location and such Borrower has provided a written certificate to Agent that such Borrower is current in the payment of its rent with respect to such location; (d) Inventory subject to a Lien in favor of any Person other than Agent except those permitted in this Agreement (but without limiting the right of Agent to establish any Reserves with respect to amounts secured by such Lien in favor of any Person even if permitted herein); (e) bill and hold goods; (f) obsolete Inventory, or Slow-Moving Inventory, to the extent that (i) the aggregate value of Slow-Moving Inventory (as reported on Borrowers' inventory aging report delivered in accordance with
SECTION 7.1(a)(ii) hereof) minus (ii) Borrowers' obsolescence reserve (as reported on Borrowers' inventory report

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delivered in accordance with SECTION 7.1(a)(iii) hereof) exceeds the product of
(A) the aggregate value of all of Borrowers' Inventory (as so reported)
multiplied by (B) three percent (3%); (g) Inventory which is not subject to the first priority, valid and perfected security interest and Lien of Agent; (h) returned, damaged and/or defective Inventory; (i) Inventory purchased or sold on consignment; (j) Inventory located outside the United States of America or Inventory in transit (unless such Inventory in transit is otherwise deemed to be Eligible Inventory by Agent in its sole discretion at such time); (k) Inventory that is to be returned to vendors; (l) lay-away Inventory; and (m) Inventory subject to deposits made by customers for sales of Inventory that has not been delivered. The criteria for Eligible Inventory set forth above may only be changed and any new criteria for Eligible Inventory may only be established by Agent in good faith based on either: (i) an event, condition or other circumstance arising after the date hereof, or (ii) an event, condition or other circumstance existing on the date hereof to the extent Agent has no written notice thereof from a Borrower prior to the date hereof, in either case under clause (i) or (ii) which adversely affects or could reasonably be expected to adversely affect the Inventory in the good faith determination of Agent. Any Inventory which is not Eligible Inventory shall nevertheless be part of the Collateral.

"Eligible Transferee" shall mean (a) any Lender; (b) the parent company of any Lender and/or any Affiliate of such Lender which is at least fifty (50%) percent owned by such Lender or its parent company; (c) any Person (whether a corporation, partnership, trust or otherwise) that is engaged in the business of making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its business and is administered or managed by a Lender or with respect to any Lender that is a fund or similar investment vehicle which invests in commercial loans and similar extensions of credit, any other fund or similar investment vehicle that invests in commercial loans and similar extensions of credit and is managed or advised by the same investment advisor as such Lender or by an Affiliate of such investment advisor; and (d) any other commercial bank, financial institution or "accredited investor" (as defined in Regulation D under the Securities Act of 1933) approved by Agent (and so long as no Event of Default exists, approved by Borrower Agent also, but such consent not to be unreasonably withheld, conditioned or delayed); provided, that, (i) neither any Borrower nor any other Obligor or any Affiliate of any Borrower or any other Obligor shall qualify as an Eligible Transferee and (ii) no Person to whom any Indebtedness which is in any way subordinated in right of payment to any other Indebtedness of any Borrower or any other Obligor shall qualify as an Eligible Transferee, except as Agent may otherwise specifically agree.

"Enforcement Action" shall mean the exercise by Agent, on behalf of Lenders, in good faith of any of its material enforcement rights and remedies under the Financing Agreements, Applicable Law or otherwise at any time on and after the occurrence and during the continuance of an Event of Default, including the commencement of any action to foreclose on the security interests or Liens of Agent, on behalf of Lenders, in all or any material portion of the Collateral, notification of account debtors to make payments to Agent, any action to take possession of all or any material portion of the Collateral or commencement of any legal proceedings or actions against or with respect to all or any portion of the Collateral.

"Environmental Indemnity Agreement" shall mean the Agreement Regarding Environmental Matters to be executed by Borrowers on the Closing Date in favor of Agent and Lenders.

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"Environmental Laws" shall mean all foreign, Federal, State and local laws (including common law), legislation, rules, codes, licenses, permits (including any conditions imposed therein), authorizations, judicial or administrative decisions, injunctions or agreements between any Borrower and any Governmental Authority, (a) relating to pollution and the protection, preservation or restoration of the environment (including air, water vapor, surface water, ground water, drinking water, drinking water supply, surface land, subsurface land, plant and animal life or any other natural resource), or to human health or safety, (b) relating to the exposure to, or the use, storage, recycling, treatment, generation, manufacture, processing, distribution, transportation, handling, labeling, production, release or disposal, or threatened release, of Hazardous Materials, or (a) relating to all laws with regard to recordkeeping, notification, disclosure and reporting requirements respecting Hazardous Materials. The term "Environmental Laws" includes (i) the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Federal Superfund Amendments and Reauthorization Act, the Federal Water Pollution Control Act of 1972, the Federal Clean Water Act, the Federal Clean Air Act, the Federal Resource Conservation and Recovery Act of 1976 (including the Hazardous and Solid Waste Amendments thereto), the Federal Solid Waste Disposal and the Federal Toxic Substances Control Act, the Federal Insecticide, Fungicide and Rodenticide Act, and the Federal Safe Drinking Water Act of 1974, (ii) applicable state counterparts to such laws and
(iii) any common law or equitable doctrine that may impose liability or obligations for injuries or damages due to, or threatened as a result of, the presence of or exposure to any Hazardous Materials.

"Equipment" shall mean all of a Borrower's now owned and hereafter acquired equipment, wherever located, including machinery, data processing and computer equipment (whether owned or licensed and including embedded software), vehicles, tools, furniture, fixtures, all attachments, accessions and property now or hereafter affixed thereto or used in connection therewith, and substitutions and replacements thereof, wherever located.

"Equity Documents" shall mean the Amended and Restated Charter of Kirkland's, Inc., as filed with the Secretary of State of the State of Tennessee and effective August 8, 2000, the Shareholders Agreement among Kirkland Holdings L.L.C., Parent, affiliates of Parent, Capital Resource Lenders II, L.P., Allied Capital Corporation, Allied Capital Corporation II, The Marlborough Capital Investment Fund, L.P., Capital Trust Investments, Ltd., Carl Kirkland, Robert Kirkland, Bruce Moore and Robert Alderson, as amended by the First Amendment to Shareholders Agreement dated December 31, 1999, and the Registration Rights Agreement among Kirkland Holdings L.L.C., Parent, affiliates of Parent, Capital Resource Lenders II, L.P., Allied Capital Corporation, Allied Capital Corporation II, The Marlborough Capital Investment Fund, L.P., Capital Trust Investments, Ltd., Carl Kirkland, Robert Kirkland, Bruce Moore and Robert Alderson, as amended by the First Amendment to Registration Rights Agreement dated December 31, 1999.

"ERISA" shall mean the United States Employee Retirement Income Security Act of 1974, together with all rules, regulations and interpretations thereunder or related thereto.

"ERISA Affiliate" shall mean any person required to be aggregated with a Borrower or any of its Subsidiaries under Sections 414(b), 414(c), 414(m) or 414(o) of the Code.

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"ERISA Event" shall mean (a) any "reportable event", as defined in
Section 4043(c) of ERISA or the regulations issued thereunder, with respect to a Plan subject to Title IV of ERISA; (b) the adoption of any amendment to a Plan that would require the provision of security pursuant to Section 401(a)(29) of the Code or Section 307 of ERISA; (c) the existence with respect to any Plan of an "accumulated funding deficiency" (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived; (d) the filing pursuant to Section 412 of the Code or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (e) the occurrence of a "prohibited transaction" with respect to which any Borrower or any other Obligor, or any of its or their respective Subsidiaries is a "disqualified person" (within the meaning of Section 4975 of the Code) or with respect to which any Borrower, any other Obligor or any of its or their respective Subsidiaries could otherwise be liable; (f) a complete or partial withdrawal by any Borrower, any other Obligor or any ERISA Affiliate from a Multiemployer Plan or a cessation of operations which is treated as such a withdrawal or notification that a Multiemployer Plan is in reorganization;
(g) the filing of a notice of intent to terminate, the treatment of a Plan amendment as a termination under Section 4041 or 4041A of ERISA, or the commencement of proceedings by the Pension Benefit Guaranty Corporation to terminate a Plan; (h) an event or condition which might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan; (i) the imposition of any liability under Title IV of ERISA, other than the Pension Benefit Guaranty Corporation premiums due but not delinquent under Section 4007 of ERISA, upon any Borrower, any other Obligor or any ERISA Affiliate in excess of $200,000, and (j) any other event or condition with respect to a Plan including any Plan subject to Title IV of ERISA maintained, or contributed to, by any ERISA Affiliate that could reasonably be expected to result in liability of any Borrower in excess of $200,000.

"Eurodollar Rate" shall mean the interest rate per annum equal to the arithmetic average of the rates of interest per annum (rounded upwards, if necessary, to the next one-sixteenth (1/16) of one (1%) percent) at which Reference Bank is offered deposits of United States dollars for a two (2) month period in the London interbank market (or other Eurodollar Rate market selected by Borrowers and approved by Agent) on or about 9:00 a.m. (New York time) in amounts substantially equal to the principal amount of the Eurodollar Rate Loans.

"Eurodollar Rate Election" shall have the meaning ascribed to such term in SECTION 3.1(c).

"Eurodollar Rate Loans" shall mean any Revolving Loans or portion thereof on which interest is payable based on the Adjusted Eurodollar Rate in accordance with the terms hereof.

"Event of Default" shall mean the occurrence or existence of any event or condition described in SECTION 10.1 hereof.

"Excess Availability" shall mean, the amount, as determined by Agent, calculated at any date, equal to: (a) the lesser of: (i) the Borrowing Base (without regard to any Reserves) and (ii) the Revolving Loan Limit minus (b) the sum of: (i) the amount of all then outstanding and unpaid Obligations of Borrowers other than the Term Loan and any Discretionary Overadvances, plus (ii) the amount of all Reserves, plus (iii) the aggregate amount of all then outstanding and

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unpaid trade payables and other obligations of Borrowers which are outstanding more than sixty (60) days past due as of such time (other than trade payables or other obligations being contested or disputed by Borrowers in good faith), plus (iv) without duplication, the amount of checks issued by Borrowers to pay trade payables and other obligations which are more than sixty (60) days past due as of such time (other than trade payables or other obligations being contested or disputed by Borrowers in good faith), but not yet sent.

"Exchange Act" shall mean the Securities Exchange Act of 1934, together with all rules, regulations and interpretations thereunder or related thereto.

"Existing Lenders" shall mean the lenders to Borrowers listed on SCHEDULE 1.37 hereto and their respective predecessors, successors and assigns.

"Existing Letters of Credit" shall mean, collectively, the letters of credit issued for the account of any Borrower or any other Obligor or for which such Borrower is otherwise liable listed on SCHEDULE 1.38 hereto, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced.

"Extraordinary Expenses" shall mean all costs, expenses, fees or advances that Agent or any Lender may suffer or incur, whether prior to or after the occurrence of an Event of Default, and whether prior to, after or during the pendency of an Insolvency Proceeding of an Obligor, on account of or in connection with (i) repossession, storage, repair, appraisal, insuring, completion of the manufacture of, preparing for sale, advertising for sale, selling, collecting or otherwise preserving or realizing upon any Collateral;
(ii) the defense of Agent's Lien upon any Collateral or the priority thereof or any adverse claim with respect to the Loans, the Financing Agreements or the Collateral asserted by any Obligor, any receiver or trustee for any Obligor or any creditor or representative of creditors of any Obligor; (iii) the settlement or satisfaction of any Liens upon any Collateral (whether or not such Liens are permitted hereunder); (iv) the collection or enforcement of any of the Obligations other than through payment in accordance with the terms hereof; (v) the negotiation, documentation, and closing of any restructuring or forbearance agreement with respect to the Financing Agreements or Obligations;
(vi) amounts advanced by Agent pursuant to this Agreement; (vii) the enforcement of any of the provisions of any of the Financing Agreements; or
(viii) any payment under a guaranty, indemnity or other payment agreement provided by Agent or (with Agent's consent) any Lender, which is reimbursable to Agent or such Lender by Borrowers pursuant to this Agreement. Such costs, expenses and advances may include transfer fees, taxes, storage fees, insurance costs, permit fees, utility reservation and standby fees, legal fees, appraisal fees, brokers' fees and commissions, auctioneers' fees and commissions, accountants' fees, environmental study fees, wages and salaries paid to employees of any or all Borrowers or independent contractors in liquidating any Collateral, travel expenses, all other fees and expenses payable or reimbursable by Borrowers or any other Obligor under any of the Financing Agreements, and all other fees and expenses associated with the enforcement of rights or remedies under any of the Financing Agreements, but excluding compensation paid to employees (including inside legal counsel who are employees) of Agent.

"Fee Letter" shall mean the letter agreement, dated of even date herewith, by and among Borrowers, Agent and Lenders, setting forth certain fees payable by Borrowers to Agent for the

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benefit of itself and Lenders, as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced.

"Financing Agreements" shall mean, collectively, this Agreement, the Notes, the Fee Letter, the Collateral Access Agreements, the Subordination Agreement, the Security Documents, the Guaranty Agreements, and all other notes, guarantees, security agreements, deposit account control agreements, investment property control agreements, intercreditor agreements and all other agreements, documents and instruments now or at any time hereafter executed and/or delivered by any Borrower or any other Obligor in connection with this Agreement.

"Fiscal Year" shall mean the fiscal year of Borrowers for accounting and tax purposes, which shall begin on the Sunday after the Saturday nearest January 31 of each calendar year and end on the Saturday nearest January 31 of the next succeeding calendar year and when followed by the designation of a calendar year (e.g., Fiscal Year 2002) means the fiscal year of Borrowers ended on the Saturday nearest January 31 of the next succeeding calendar year.

"Foreign Subsidiary" shall mean a Subsidiary that is not a Domestic Subsidiary.

"GAAP" shall mean generally accepted accounting principles in the United States of America as in effect from time to time as set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and the statements and pronouncements of the Financial Accounting Standards Board which are applicable to the circumstances as of the date of determination consistently applied, except that, for purposes of SECTIONS 9.17 and 9.19 hereof, GAAP shall be determined on the basis of such principles in effect on the date hereof and consistent with those used in the preparation of the most recent audited financial statements delivered to Agent prior to the date hereof.

"Governmental Authority" shall mean any nation or government, any state, province, or other political subdivision thereof, any central bank (or similar monetary or regulatory authority) thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing.

"Guarantors" shall mean each Person who may at any time guarantee payment or performance of the whole or any part of the Obligations.

"Guaranty Agreement" shall mean a guaranty that is at any time executed by a Guarantor in favor of Agent and Lenders.

"Hazardous Materials" shall mean any hazardous, toxic or dangerous substances, materials and wastes, including hydrocarbons (including naturally occurring or man-made petroleum and hydrocarbons), flammable explosives, asbestos, urea formaldehyde insulation, radioactive materials, biological substances, polychlorinated biphenyls, pesticides, herbicides and any other kind and/or type of pollutants or contaminants (including materials which include hazardous constituents), sewage, sludge, industrial slag, solvents and/or any other similar substances, materials, or wastes and including any other substances, materials or wastes that are

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or become regulated under any Environmental Law (including any that are or become classified as hazardous or toxic under any Environmental Law).

"Indebtedness" shall mean, with respect to any Person, any liability, whether or not contingent, (a) in respect of Debt for Money Borrowed (whether or not the recourse of the lender is to the whole of the assets of such Person or only to a portion thereof) or evidenced by bonds, notes, debentures or similar instruments; (b) representing the balance deferred and unpaid of the purchase price of any property or services (except any such balance that constitutes an account payable to a trade creditor (whether or not an Affiliate) created, incurred, assumed or guaranteed by such Person in the ordinary course of business of such Person in connection with obtaining goods, materials or services that is not overdue by more than ninety (90) days, unless the trade payable is being contested in good faith); (c) all obligations as lessee under leases which have been, or should be, in accordance with GAAP recorded as Capital Leases; (d) any contractual obligation, contingent or otherwise, of such Person to pay or be liable for the payment of any indebtedness described in this definition of another Person, including, without limitation, any such indebtedness, directly or indirectly guaranteed, or any agreement to purchase, repurchase, or otherwise acquire such indebtedness, obligation or liability or any security therefor, or to provide funds for the payment or discharge thereof, or to maintain solvency, assets, level of income, or other financial condition; (e) all obligations with respect to redeemable stock and redemption or repurchase obligations under any Capital Stock or other equity securities issued by such Person; (f) all reimbursement obligations and other liabilities of such Person with respect to surety bonds (whether bid, performance or otherwise), letters of credit, banker's acceptances, drafts or similar documents or instruments issued for such Person's account; (g) all indebtedness of such Person in respect of indebtedness of another Person for borrowed money or indebtedness of another Person otherwise described in this definition which is secured by any consensual lien, security interest, collateral assignment, conditional sale, mortgage, deed of trust, or other encumbrance on any asset of such Person, whether or not such obligations, liabilities or indebtedness are assumed by or are a personal liability of such Person, all as of such time; (h) all obligations, liabilities and indebtedness of such Person (marked to market) arising under swap agreements, cap agreements and collar agreements and other agreements or arrangements designed to protect such person against fluctuations in interest rates or currency or commodity values; and (i) all obligations owed by such Person under License Agreements with respect to non-refundable, advance or minimum guarantee royalty payments.

"Indemnified Amount" shall mean the amount of any loss, cost, expenses or damages suffered or incurred by Agent or any of its Indemnities, or by any Lender or any of its Indemnitees and against which any Lender or any Obligor has agreed to indemnify them pursuant to the terms of this Agreement or any of the other Financing Agreements.

"Information Certificate" shall mean the Information Certificate of Borrowers constituting EXHIBIT B hereto containing material information with respect to Borrowers, their businesses and assets provided by or on behalf of Borrowers to Agent in connection with the preparation of this Agreement and the other Financing Agreements and the financing arrangements provided for herein.

"Insolvency Proceeding" shall mean any action, case or proceeding commenced by or against a Person, or any agreement of such Person, for (i) the entry of an order for relief under

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any chapter of the Bankruptcy Code or other insolvency or debt adjustment law (whether state, federal or foreign), (ii) the appointment of a receiver, trustee, liquidator or other custodian for such Person or any part of its property, (iii) an assignment or trust mortgage for the benefit of creditors of such Person, or (iv) the liquidation, dissolution or winding up of the affairs of such Person.

"Intellectual Property@ shall mean a Borrower's now owned and hereafter arising or acquired: patents, patent rights, patent applications, copyrights, works which are the subject matter of copyrights, copyright registrations, trademarks, trade names, trade styles, trademark and service mark applications, and licenses and rights to use any of the foregoing; all extensions, renewals, reissues, divisions, continuations, and continuations-in-part of any of the foregoing; all rights to sue for past, present and future infringement of any of the foregoing; inventions, trade secrets, formulae, processes, compounds, drawings, designs, blueprints, surveys, reports, manuals, and operating standards; goodwill (including any goodwill associated with any trademark or the license of any trademark); customer and other lists in whatever form maintained; trade secret rights, copyright rights, rights in works of authorship, domain names and domain name registration; software and contract rights relating to computer software programs, in whatever form created or maintained.

"Interest Rate" shall mean,

(a) Subject to clause (b) of this definition below:

(i) as to any Revolving Loan, the applicable rate set forth in SECTION 3.1(b) hereof; and

(ii) as to all or any portion of the Term Loan, a rate equal to seven and one-quarter percent (7.25%) in excess of the Prime Rate; provided, that for purposes of this subsection (iii), in no event shall the Prime Rate be less than four and three-quarters percent (4.75%).

(b) Notwithstanding anything to the contrary contained in clause (a) of this definition, the Interest Rate shall mean (i) the rate of two percent (2%) per annum in excess of the Prime Rate as to Prime Rate Loans (other than the Term Loan) and the rate of two percent (2%) per annum in excess of the Adjusted Eurodollar Rate as to Eurodollar Rate Loans, at Agent's option, and (ii) the rate of two percent (2%) per annum in excess of the interest rate otherwise applicable under clause (a)(iii) above as to the Term Loan, in each case without notice, (A) either (I) for the period on and after the date of termination or non-renewal hereof until such time as all Obligations are indefeasibly paid and satisfied in full in immediately available funds, or (II) for the period from and after the date of the occurrence of any Event of Default, and for so long as such Event of Default is continuing as determined by Agent and (B) on the Revolving Loans to at any time outstanding in excess of the Borrowing Base or the Revolving Loan Limit (other than Discretionary Overadvances) (whether or not such excess(es) arise or are made with or without Agent's or any Lender's knowledge or consent and whether made before or after an Event of Default).

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"Interest Rate Contract" shall mean any interest rate agreement, interest rate collar agreement, interest rate swap agreement, or other agreement or arrangement at any time entered into by a Borrower with Wachovia that is designed to protect against fluctuations in interest rates.

"Inventory" shall mean all of a Borrower's now owned and hereafter existing or acquired goods, wherever located, which (a) are leased by such Borrower as lessor; (b) are held by such Borrower for sale or lease or to be furnished under a contract of service; (c) are furnished by such Borrower under a contract of service; or (d) consist of raw materials, work in process, finished goods or materials used or consumed in its business.

"Investment Property Control Agreement" shall mean an agreement in writing, in form and substance satisfactory to Agent, by and among Agent, any Borrower or any other Obligor (as the case may be) and any securities intermediary, commodity intermediary or other Person who has custody, control or possession of any investment property of such Borrower or such other Obligor acknowledging that such securities intermediary, commodity intermediary or other Person has custody, control or possession of such investment property on behalf of Agent, that it will comply with entitlement orders originated by Agent with respect to such investment property, or other instructions of Agent, or (as the case may be) apply any value distributed on account of any commodity contract as directed by Agent, in each case, without the further consent of such Borrower or such other Obligor and including such other terms and conditions as Agent may require.

"Lenders" shall mean the financial institutions who are signatories hereto as Lenders and other persons made a party to this Agreement as a Lender in accordance with SECTION 13.7 hereof, and their respective successors and assigns; each sometimes being referred to herein individually as a "Lender".

"License Agreements" shall have the meaning set forth in SECTION 8.11 hereof.

"Liens" shall mean any interest in property securing an obligation owed to, or a claim by, a Person other than the owner of the property, whether such interest is based on common law, statute or contract. The term "Lien" shall also include reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting property. For the purpose of this Agreement, a Borrower shall be deemed to be the owner of any property which it has acquired or holds subject to a conditional sale agreement or other arrangement pursuant to which title to the property has been retained by or vested in some other Person for security purposes.

"Loans" shall mean, collectively, the Revolving Loans, the Term Loan and any Discretionary Overadvances.

"Material Adverse Effect" shall mean a material adverse effect on (a) the financial condition, business, performance or operations of any Borrower;
(b) the legality, validity or enforceability of this Agreement or any of the other Financing Agreements; (c) the legality, validity, enforceability, perfection or priority of the security interests and Liens of Agent upon the Collateral; (d) the Collateral or its value; (e) the ability of any Borrower to repay the

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Obligations or of any Borrower to perform its obligations under this Agreement or any of the other Financing Agreements as and when to be performed; or (f) the ability of Agent or any Lender to enforce the Obligations or realize upon the Collateral or otherwise with respect to the rights and remedies of Agent and Lenders under this Agreement or any of the other Financing Agreements.

"Material Contract" shall mean (a) any contract or other agreement (other than the Financing Agreements), written or oral, of any Borrower involving monetary liability of or to any Person in an amount in excess of $250,000 in any Fiscal Year and (b) any other contract or other agreement (other than the Financing Agreements), whether written or oral, to which any Borrower is a party as to which the breach, nonperformance, cancellation or failure to renew by any party thereto would have a Material Adverse Effect.

"Maximum Credit" shall mean the amount of $60,000,000.

"Maximum Revolving Credit" shall mean $45,000,000.

"Minimum Return Fee" shall have the meaning ascribed to such term in the Fee Letter.

"Mortgage" shall mean the Tennessee Deed of Trust, Security Agreement and Assignment of Rents, dated or to be dated on or before the Closing Date, by Parent in favor of Agent with respect to the Real Property and related assets of Parent located in Madison County, Tennessee.

"Multiemployer Plan" shall mean a "multi-employer plan" as defined in
Section 4001(a)(3) of ERISA which is or was at any time during the current year or the immediately preceding six (6) years contributed to by any Borrower or any ERISA Affiliate.

"Net Recovery Percentage" shall mean the fraction, expressed as a percentage, (a) the numerator of which is the dollar amount equal to the amount of the recovery in respect of the Inventory at such time a "net orderly liquidation value" basis as set forth in the most recent acceptable appraisal of Inventory received by Agent in accordance with SECTION 7.3, net of operating expenses, liquidation expenses and commissions, and (b) the denominator of which is the Cost of the aggregate amount of the Inventory subject to such appraisal.

"Notes" shall mean each Revolving Note, the Term Note and any other promissory note executed by Borrowers at Agent's request to evidence any of the Obligations.

"Obligations" shall mean, in each case, whether now in existence or hereafter arising, (i) the principal of, and interest and premium, if any, on the Loans, (ii) all letter of credit accommodations, (iii) all indebtedness and other obligations of any Borrower to Congress or Wachovia under or in connection with any Interest Rate Contract or any Cash Management Agreement, and (iv) all other obligations, liabilities and indebtedness of every kind, nature and description owing by any or all Borrowers to Agent or any Lender and/or any of their Affiliates, including principal, interest, charges, fees, costs and expenses, however evidenced, whether as principal, surety, endorser, guarantor or otherwise, arising under this Agreement or any of the other Financing Agreements, whether now existing or hereafter arising, whether arising before, during or after the initial or any renewal term of this Agreement or after the commencement of

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any case with respect to any Borrower under the Bankruptcy Code or any similar statute (including the payment of interest and other amounts which would accrue and become due but for the commencement of such case, whether or not such amounts are allowed or allowable in whole or in part in such case), whether direct or indirect, absolute or contingent, joint or several, due or not due, primary or secondary, liquidated or unliquidated, or secured or unsecured.

"Obligor" shall mean each Borrower, each Guarantor and any other Person who is liable on or with respect to any of the Obligations or who is the owner of any property that is security for any of the Obligations.

"Overadvance Facility" shall have the meaning ascribed to such term in
SECTION 2.6 hereof.

"Parent Pledge Agreements" shall mean the Stock Pledge Agreements executed by Parent on or before the Closing Date in favor of Agent, and by which Parent shall pledge to Agent, for the benefit of Agent and Lenders, as security for the Obligations and the Guaranty of Parent, 100% of the capital stock of each of Kirkland's and kirklands.com.

"Participant" shall mean any financial institution that acquires and holds a participation in the interest of any Lender in any of the Loans in conformity with the provisions of SECTION 13.7 of this Agreement governing participations.

"Payment Direction Letter" shall have the meaning set forth in SECTION 6.3 hereof.

"Person" or "person" shall mean any individual, sole proprietorship, partnership, corporation (including any corporation which elects subchapter S status under the Code), limited liability company, limited liability partnership, business trust, unincorporated association, joint stock corporation, trust, joint venture or other entity or any government or any agency or instrumentality or political subdivision thereof.

"Plan" means an employee benefit plan (as defined in Section 3(3) of ERISA) which any Borrower or any other Obligor sponsors, maintains, or to which it makes, is making, or is obligated to make contributions, or in the case of a Multiemployer Plan has made contributions at any time during the immediately preceding six (6) plan years.

"Preferred Equity Capital" shall mean the Series A through D preferred stock of Parent.

"Prime Rate" shall mean the rate from time to time publicly announced by Wachovia or its successors, as its prime rate, whether or not such announced rate is the best rate available at such bank.

"Prime Rate Loans" shall mean any Loans or portion thereof on which interest is payable based on the Prime Rate in accordance with the terms thereof.

"Priority Event" shall mean the occurrence of any one or more of the following events: (i) the acceleration by Agent, on behalf of Lenders, of all or a material portion of the Obligations by demanding payment therefor as a consequence of an Event of Default, (ii) the commencement of any Enforcement Action by Agent, on behalf of Lenders, as a consequence of an Event of

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Default, (iii) the commencement of an Insolvency Proceeding by any Obligor or
(iv) the commencement of an Insolvency Proceeding against any Obligor and such Insolvency Proceeding is not dismissed within 60 days thereafter or an order for relief is entered in such Insolvency Proceeding.

"Pro Rata Share" shall mean as to any Lender, the fraction (expressed as a percentage) the numerator of which is such Lender's Commitment and the denominator of which is the aggregate amount of all of the Commitments of Lenders, as adjusted from time to time in accordance with the provisions of
SECTION 13.7 hereof; provided, that, (i) if the Commitments have been terminated, the numerator shall be the unpaid principal amount of such Lender's Loans and the denominator shall be the aggregate principal amount of all unpaid Loans and (ii) from and after the making of the Term Loan, such Lender's Commitment in respect of the Term Loan shall be the unpaid principal amount of such Lender's Term Loan.

"Provision for Taxes" shall mean an amount equal to all taxes imposed on or measured by net income, whether Federal, State, Provincial, county or local, and whether foreign or domestic, that are paid or payable by any Person in respect of any period in accordance with GAAP.

"Qualifying Liquidity Event" shall have the meaning ascribed to such term in the Senior Subordinated Loan Agreement as in effect on the date hereof.

"Real Property" shall mean all now owned and hereafter acquired real property of a Borrower, including leasehold interests, together with all buildings, structures, and other improvements located thereon and all licenses, easements and appurtenances relating thereto, wherever located, including the real property and related assets more particularly described in the Mortgage.

"Receivables" shall mean all of the following now owned or hereafter arising or acquired property of a Borrower: (a) all Accounts; (b) all interest, fees, late charges, penalties, collection fees and other amounts due or to become due or otherwise payable in connection with any Account; (c) all payment intangibles of such Borrower; (d) letters of credit, indemnities, guarantees, security or other deposits and proceeds thereof issued payable to such Borrower or otherwise in favor of or delivered to such Borrower in connection with any Account; or (e) all other accounts, contract rights, chattel paper, instruments, notes, general intangibles and other forms of obligations owing to such Borrower, whether from the sale and lease of goods or other property, licensing of any property (including Intellectual Property or other general intangibles), rendition of services or from loans or advances by such Borrower or to or for the benefit of any third Person (including loans or advances to any Affiliates or Subsidiaries of such Borrower) or otherwise associated with any Accounts, Inventory or general intangibles of such Borrower (including, without limitation, choses in action, causes of action, tax refunds, tax refund claims, any funds which may become payable to such Borrower in connection with the termination of any Plan or other employee benefit plan and any other amounts payable to such Borrower from any Plan or other employee benefit plan, rights and claims against carriers and shippers, rights to indemnification, business interruption insurance and proceeds thereof, casualty or any similar types of insurance and any proceeds thereof and proceeds of insurance covering the lives of employees on which such Borrower is a beneficiary).

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"Records" shall mean all of a Borrower's present and future books of account of every kind or nature, purchase and sale agreements, invoices, ledger cards, bills of lading and other shipping evidence, statements, correspondence, memoranda, credit files and other data relating to the Collateral or any account debtor, together with the tapes, disks, diskettes and other data and software storage media and devices, file cabinets or containers in or on which the foregoing are stored (including any rights of such Borrower with respect to the foregoing maintained with or by any other Person).

"Reference Bank" shall mean Wachovia or such other bank as Agent may from time to time designate.

"Register" shall have the meaning set forth in SECTION 13.7 hereof.

"Required Lenders" shall mean, at any time, those Lenders whose Pro Rata Shares aggregate sixty-six and two-thirds percent (66 2/3%) or more of the aggregate of the Commitments of all Lenders, or if the Commitments shall have been terminated, Lenders to whom at least sixty-six and two-thirds percent (66 2/3%) of the then outstanding Obligations are owing.

"Reserves" shall mean as of any date of determination, the sum of (I) the Subordinated Debt Reserve, (II) the Warehouse Reserve, and (III) such other amounts as Agent may from time to time establish and revise in good faith reducing the amount of Revolving Loans which would otherwise be available to Borrowers under the lending formula(s) provided for herein: (a) to reflect events, conditions, contingencies or risks which, as determined by Agent in good faith, adversely affect, or would have a reasonable likelihood of adversely affecting, either (i) the Collateral or any other property which is security for the Obligations or its value or (ii) the assets, business or prospects of any Borrower or any other Obligor or (iii) the security interests and other rights of Agent or any Lender in the Collateral (including the enforceability, perfection and priority thereof) or (b) to reflect Agent's good faith belief that any collateral report or financial information furnished by or on behalf of any Borrower or any other Obligor to Agent is or may have been incomplete, inaccurate or misleading in any material respect (c) in respect of any state of facts which Agent determines in good faith constitutes a Default or an Event of Default. To the extent Agent may revise the lending formulas used to determine the Borrowing Base or establish new criteria or revise existing criteria for Eligible Inventory so as to address any circumstances, condition, event or contingency in a manner satisfactory to Agent, Agent shall not establish a Reserve for the same purpose. The amount of any Reserve established by Agent shall have a reasonable relationship to the event, condition or other matter which is the basis for such reserve as determined by Agent in good faith.

"Revolving Lenders" shall mean Congress and any other Lender that makes any Revolving Loans in accordance with the terms of this Agreement.

"Revolving Loan Limit" shall mean, at any time, the amount equal to:
(i) for the period from January 1 through June 30 of each calendar year, $30,000,000; and (ii) for the period from July 1 through December 31 of each calendar year, $45,000,000.

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"Revolving Loans" shall mean the loans now or hereafter made by or on behalf of any Lender or by Agent for the account of any Lender on a revolving basis pursuant to the Credit Facility (involving advances, repayments and readvances) as set forth in SECTION 2.1 hereof.

"Revolving Notes" shall mean a Revolving Note to be executed by Borrowers in favor of each Lender, which shall evidence all Revolving Loans made by such Lender to Borrowers pursuant to this Agreement.

"Security Documents" shall mean the Mortgage, the Business Interruption Insurance Assignments, the Deposit Account Control Agreements, the Environmental Indemnity Agreement, the Trademark Security Agreements, the Parent Pledge Agreements and the Stock Pledge Agreements and any and all other documents, instruments or agreements that at any time secure any of the Obligations.

"Senior Officer" shall mean the chairman of the board of directors, the president, the chief financial officer or the controller of, or in-house legal counsel to any Borrower.

"Senior Subordinated Loan Agreement" shall mean that certain Senior Subordinated Note and Warrant Purchase Agreement dated as of June 12, 1996, among Borrowers (individually and as successor by merger to the entities listed on Schedule I annexed thereto), Capital Resource Lenders II, L.P., Allied Capital Corporation, Allied Capital Corporation II, The Marlborough Capital Investment Fund, L.P. and Capital Trust Investments, Ltd., as amended.

"Senior Subordinated Notes" shall mean those certain Senior Subordinated Notes, due 2003, in the original principal amount of $20,000,000, as the same may be extended, renewed or otherwise modified from time to time.

"Settlement Loan" shall mean a Loan made by Agent pursuant to SECTION 6.9 hereof.

"Slow-Moving" shall mean that the applicable Inventory is more than three hundred and thirty (330) days old.

"Solvent" shall mean, at any time with respect to any Person, that at such time such Person (a) is able to pay its debts as they mature and has (and has a reasonable basis to believe it will continue to have) sufficient capital (and not unreasonably small capital) to carry on its business consistent with its practices as of the date hereof, and (b) the assets and properties of such Person at a fair valuation (and including as assets for this purpose at a fair valuation all rights of subrogation, contribution or indemnification arising pursuant to any guarantees given by such Person) are greater than the Indebtedness of such Person, and including subordinated and contingent liabilities computed at the amount which, such Person has a reasonable basis to believe, represents an amount which can reasonably be expected to become an actual or matured liability (and including as to contingent liabilities arising pursuant to any guarantee the face amount of such liability as reduced to reflect the probability of it becoming a matured liability).

"Special Agent Advances" shall have the meaning set forth in SECTION 12.11 hereof.

"Stock Pledge Agreements" shall mean each Stock Pledge Agreement executed by a Borrower in favor of Agent and by which such Borrower shall pledge to Agent, for the benefit of

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Agent and Lenders, as security for the Obligations, 65% of the capital stock of each Foreign Subsidiary, if any, of such Borrower and 100% of the capital stock of each Domestic Subsidiary, if any, of such Borrower.

"Subordinated Debt" shall mean all Indebtedness of any or all Borrowers that is fully and absolutely subordinated in right or payment to the Obligations in a manner satisfactory to Agent and Lenders, including, without limitation, the Senior Subordinated Notes and the Warrants.

"Subordinated Debt Documents" shall mean (i) the Senior Subordinated Loan Agreement, (ii) the Senior Subordinated Notes, (iii) the Warrants, (iv) the Subordination Agreement, and (v) any and all other documents, instruments and agreements executed in connection therewith or pursuant thereto.

"Subordinated Debt Reserve" shall mean an amount equal to $1,538,462 per month, commencing June 1, 2002.

"Subordination Agreement" shall mean that certain Subordination and Intercreditor Agreement dated on or about the date hereof among the holders of the Senior Subordinated Notes, Agent and Lenders, pursuant to which such holders have agreed to subordinate the payment and performance of all obligations owing by Borrowers to them to the prior payment in full of the Obligations.

"Subsidiary" or "subsidiary" shall mean, with respect to any Person, any corporation, limited liability company, limited liability partnership or other limited or general partnership, trust, association or other business entity of which an aggregate of at least a majority of the outstanding Capital Stock or other interests entitled to vote in the election of the board of directors of such corporation (irrespective of whether, at the time, Capital Stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency), managers, trustees or other controlling persons, or an equivalent controlling interest therein, of such Person is, at the time, directly or indirectly, owned by such Person and/or one or more subsidiaries of such Person.

"Term" shall have the meaning set forth in SECTION 13.1 hereof.

"Term Lender" shall mean Ableco and its successors and assigns.

"Term Loan" shall mean the term loan made by or on behalf of the Term Lender to Borrowers as provided for in SECTION 2.3 hereof.

"Term Note" shall have the meaning ascribed to such term in SECTION 2.3 hereof.

"Trademark Security Agreements" shall mean a Trademark Security Agreement to be executed by each Borrower in favor of Agent on or about the Closing Date and by which each Borrower shall assign to Agent, for the benefit of Agent and Lenders, as security for the Obligations, all of such Borrower's right, title and interest in and to all of its trademarks.

"UCC" shall mean the Uniform Commercial Code as in effect in the State of Georgia, and any successor statute, as in effect from time to time (except that terms used herein which are

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defined in the Uniform Commercial Code as in effect in the State of Georgia on the date hereof shall continue to have the same meaning notwithstanding any replacement or amendment of such statute except as Agent may otherwise determine).

"Voting Stock" shall mean with respect to any Person, (a) one (1) or more classes of Capital Stock of such Person having general voting powers to elect at least a majority of the board of directors, managers or trustees of such Person, irrespective of whether at the time Capital Stock of any other class or classes have or might have voting power by reason of the happening of any contingency, and (b) any Capital Stock of such Person convertible or exchangeable without restriction at the option of the holder thereof into Capital Stock of such Person described in clause (a) of this definition.

"Wachovia" shall mean Wachovia Bank, National Association and its successors and assigns.

"Warehouse Reserve" shall mean an amount equal to one month's rent for each warehouse location of Borrowers (excluding Borrowers' central distribution centers) based upon the most recent twelve-month average for such warehouse location.

"Warrants" shall have the meaning ascribed to such term in the Senior Subordinated Loan Agreement as in effect on the date hereof.

SECTION 2. CREDIT FACILITIES

2.1. Revolving Loans.

(a) Subject to and upon the terms and conditions contained herein, each Revolving Lender severally (and not jointly) agrees to fund its Pro Rata Share of Revolving Loans to Borrowers from time to time in amounts requested by any Borrower up to the amount outstanding at any time equal to the lesser of: (i) the Borrowing Base at such time or (ii) the Revolving Loan Limit.

(b) Agent may, in its discretion, from time to time, upon not less than five (5) days prior notice to Borrower Agent, reduce the lending formula(s) with respect to Eligible Inventory to the extent that Agent determines in good faith that the liquidation value or Net Recovery Percentage of the Eligible Inventory, or any category thereof, has decreased, including any decrease attributable to a change in the nature, quality, mix or the number of days of the turnover of the Inventory. The amount of any decrease in the lending formulas shall have a reasonable relationship to the event, condition or circumstance which is the basis for such decrease as determined by Agent in good faith. In determining whether to reduce the lending formula(s), Agent may consider events, conditions, contingencies or risks which are also considered in determining Eligible Inventory or in establishing Reserves.

(c) Except in Agent's discretion, with the consent of all Lenders, or as otherwise provided herein, (i) the aggregate amount of the Loans outstanding at any time shall not exceed the Maximum Credit, and (ii) the aggregate principal amount of the Revolving Loans outstanding at any time to Borrowers shall not exceed the lesser of the Borrowing Base or the Revolving Loan Limit.

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(d) In the event that the aggregate principal amount of the Revolving Loans outstanding to Borrowers exceed the Borrowing Base (except with respect to Discretionary Overadvances not yet due and payable) or the Revolving Loan Limit of Borrowers or the aggregate amount of the Loans exceed the Maximum Credit, such event shall not limit, waive or otherwise affect any rights of Agent or Lenders in such circumstances or on any future occasions and Borrowers shall, within three (3) Business Days after written demand by Agent, which may be made at any time or from time to time, immediately repay to Agent the entire amount of any such excess(es) for which payment is demanded.

(e) Borrowers, Agent and Lenders further agree that, if a Material Adverse Effect shall occur, or if an Event of Default exists, Agent shall have the right (exercisable at such time as Agent deems appropriate) to require that separate Borrowing Base calculations be made for each Borrower, as well as the right to limit the use of proceeds of the Loans by each Borrower to an amount equal to such Borrower's Borrowing Base.

2.2. Reserved.

2.3. Term Loan. (a) Subject to and upon the terms and conditions contained herein, the Term Lender agrees to fund the Term Loan to Borrowers in the original principal amount of $15,000,000. The Term Loan is (a) evidenced by a Term Promissory Note (the "Term Note") in such original principal amount duly executed and delivered by the Borrower to Agent concurrently herewith; (b) to be repaid, together with interest and other amounts, in accordance with this Agreement, such Term Note, and the other Financing Agreements and (c) secured by all of the Collateral. The principal amount of the Term Loan shall be repaid in twelve (12) consecutive quarterly installments (or earlier as provided herein) payable on the last day of each calendar quarter commencing June 30, 2002, each such installment to be in the amount of $562,500 and the entire unpaid balance of the Term Loan shall be paid on the last day of the Term.

(b) Borrowers agree to record the Term Loan on the Term Loan Register referred to in SECTION 13.7(h)(i). The Term Loan recorded on the Term Loan Register (the "Registered Term Loan") may not be evidenced by promissory notes other than a Registered Term Note (as defined below). Upon the registration of the Term Loan, any promissory note (other than a Registered Term Note) evidencing the same shall be null and void and shall be returned to the Borrowers. Borrowers agree, at the request of the Term Lender, to execute and deliver to Term Lender a promissory note in registered form to evidence such Registered Term Loan (i.e., containing registered note language) and registered as provided in SECTION 13.7(h) hereof (a "Registered Term Note"), payable to the order of the Term Lender and otherwise duly completed. Once recorded on the Term Loan Register, the Obligations evidenced by such Note may not be removed from the Term Loan Register so long as it remains outstanding, and a Registered Term Note may not be exchanged for a promissory note that is not a Registered Term Note. For purposes hereof, the Term Note shall be deemed a Registered Term Note.

(c) Borrowers may, at their option, prepay any portion of the Term Loan in whole at any time or in part from time to time, in amounts aggregating $100,000 or any greater integral multiple of $100,000, by paying the principal amount to be prepaid

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together with interest accrued or unpaid thereon to the date of prepayment and any applicable breakage costs. Borrowers shall give written notice (or telephonic notice confirmed in writing) to the Agent of any intended prepayment not less than 2 Business Day prior to any prepayment of the Term Loan. Such notice, once given, shall be irrevocable and, upon receipt of any such notice of optional prepayment, Agent shall promptly notify Term Lender of the contents thereof.

(d) Borrowers shall be jointly and severally obligated to prepay the entire unpaid principal balance of the Term Loan, and all accrued but unpaid interest thereon, at the end of the Term. Borrowers shall also be jointly and severally required to prepay the Term Loan from the net proceeds of dispositions of Equipment by any Borrower permitted by SECTION 9.7(b)(iii) hereof and from the net proceeds of sales or other dispositions of any Equipment, leasehold interests or fixtures in connection with any closure or sale of retail stores that is permitted by SECTION 9.7(b)(iv) hereof, to the extent that the aggregate amount of all such net proceeds during any Fiscal Year exceeds $200,000.

(e) Each prepayment of the Term Loan shall be remitted by Borrowers to Agent and be applied first to accrued but unpaid interest on the Term Loan, and the balance to installments of principal of the Term Loan in the inverse order of their maturities. To the extent that any proceeds remain after the foregoing payments, the remainder of the proceeds shall be applied to the Revolving Loans or such other Obligations as Agent may determine.

2.4. Commitments. The aggregate amount of each Lender's Pro Rata Share of the Loans shall not exceed the amount of such Lender's Commitment, as the same may from time to time be amended in accordance with the provisions hereof.

2.5. Reserves. All Revolving Loans otherwise available to Borrowers pursuant to the lending formulas and subject to the Revolving Loan Limit and other applicable limits hereunder shall be subject to Agent's continuing right to establish and revise Reserves. Without limiting any other rights or remedies of Agent under this Agreement or any of the other Financing Agreements with respect to the establishment of Reserves or otherwise, Agent may establish and revise Reserves to reflect: (a) inventory shrinkage; (b) the aggregate amount of deposits, if any, received by any Borrower from its customers in respect of unfilled orders for merchandise; (c) amounts due or to become due in respect of sales, use and/or withholding taxes; (d) any rental payments, service charges or other amounts due to lessors of real or personal property to the extent Inventory or Records are located in or on property or such Records are needed to monitor or otherwise deal with the Collateral and with respect to any rental payments, to the extent that Agent determines that Borrowers are not current with respect to such payments; and (e) amounts owing by any Borrower to Credit Card Issuers or Credit Card Processors in connection with the Credit Card Agreements.

2.6. Overadvance Facility. Subject to the satisfaction of all of the terms and conditions contained herein so long as no Default or Event of Default exists and no Qualifying Liquidity Event has occurred, Revolving Lenders and Term Lender shall make available to Borrowers on a several (but not joint basis) their Pro Rata Share of an overadvance facility (the "Overadvance Facility") during the period commencing on April 1, 2003 and ending on September 30, 2003. Borrowers shall only be permitted to receive Discretionary Overadvances

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under the Overadvance Facility only one time and only if (a) no initial public offering for any Borrower shall have occurred and (b) Consolidated EBITDA for the consecutive 12-fiscal month period ended on the last day of the most recently ended fiscal month for which Agent has received Borrowers' financial statements prepared and delivered in accordance with SECTION 9.6(A) hereof and as shown on such financial statements equaled or exceeded the amount set forth below for such period. No Discretionary Overadvance may be used by any Borrower to make any payment of Indebtedness permitted to be paid under SECTION 9.12(b)(iv) hereof. The aggregate amount of all Discretionary Overadvances made by Lenders under the Overadvance Facility shall not exceed $4,500,000, shall be secured by the Collateral and shall bear interest at a per annum rate equal to
(i) the Interest Rate applicable to the Term Loan for any Discretionary Overadvances advanced by Term Lender, and (ii) a variable rate equal to four percent (4%) per annum in excess of the Adjusted Eurodollar Rate for any Discretionary Overadvances advanced by a Revolving Lender. Any Discretionary Overadvances advanced by a Revolving Lender shall be deemed to be Revolving Loans for all purposes of this Agreement, except as expressly provided in this
SECTION 2.6 with respect to repayment and interest terms. All Discretionary Overadvances shall be payable, if not sooner paid, in equal weekly installments of one-twelfth of the aggregate amount of such Discretionary Overadvances, payable on Wednesday of each week commencing on the earlier of (A) the first Wednesday after the 180th day after the date on which such Discretionary Overadvance(s) are made or (B) October 1, 2003, and ending on the eleventh
(11th) Wednesday after such commencement date; provided, that, if a Qualifying Liquidity Event occurs, all Discretionary Overadvances shall be due and payable in full at such time. If Borrowers elect to have Lenders make Discretionary Overadvances, Borrowers shall give written notice to Agent at least ten (10) days prior to the date on which the Discretionary Overadvance requested is to be disbursed. Any Discretionary Overadvances may be prepaid at any time by Borrowers, provided that each such prepayment shall be applied to the Lenders' Discretionary Overadvance then outstanding based on each Lender's Pro Rata Share. For purposes of this SECTION 2.6, the minimum Consolidated EBITDA for the corresponding consecutive 12-fiscal month periods shall be as follows:

12-Fiscal Month Period                   Minimum
       Ending on                   Consolidated EBITDA
----------------------             -------------------

  June 1, 2002                        $27,786,000
  July 6, 2002                        $28,025,000
  August 3, 2002                      $27,710,000
  August 31, 2002                     $27,571,000
  October 5, 2002                     $27,364,000
  November 2, 2002                    $27,521,000
  November 30, 2002                   $26,691,000
  January 4, 2003                     $28,108,000
  February 1, 2003                    $28,804,000
  March 1, 2003                       $28,724,000
  April 5, 2003                       $28,836,000
  May 3, 2003                         $28,694,000
  May 31, 2003                        $28,702,000
  July 5, 2003                        $28,942,000
  August 2, 2003                      $29,105,000
  August 30, 2003                     $29,201,000
  October 4, 2003                     $29,622,000

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SECTION 3. INTEREST AND FEES

3.1. Interest.

(a) Borrowers jointly and severally shall pay to Agent, for the benefit of Lenders, interest on the outstanding principal amount of the Loans at the applicable Interest Rate. All interest accruing hereunder on and after the date of any Event of Default or termination hereof shall be payable ON DEMAND.

(b) Unless Agent shall have received a Prime Rate Election in accordance with SECTION 3.1(C) hereof, the outstanding principal amount of the Revolving Loans shall bear interest for any month at the per annum rate equal to two and one-quarter percent (2.25%) per annum in excess of the Adjusted Eurodollar Rate. For any month when Agent shall have received a Prime Rate Election in accordance with SECTION 3.1(c) hereof, the outstanding principal amount of the Revolving Loans shall bear interest for such month at the per annum rate equal to the Prime Rate.

(c) Any Borrower may from time to time request that Eurodollar Rate Loans be converted to Prime Rate Loans effective as of the first day of the immediately succeeding calendar month. Such request (a "Prime Rate Election") shall be effective for the month specified and for each succeeding month unless Agent shall receive a Eurodollar Rate Election in accordance with is SECTION 3.1(c) and shall be delivered to Agent no later than three (3) Business Days prior to the first day of such calendar month; provided, that, no Default or Event of Default shall exist or have occurred and be continuing and no party hereto shall have sent any notice of termination of this Agreement. Any Borrower may from time to time request that Prime Rate Loans be converted to Eurodollar Rate Loans effective as of the first day of the immediately succeeding calendar month. Such request (a "Eurodollar Rate Election") shall be effective for the month specified and for each succeeding month unless Agent shall receive a Prime Rate Election in accordance with is
SECTION 3.1(c) and shall be delivered to Agent no later than three (3) Business Days prior to the first day of such calendar month; provided, that, no Default or Event of Default shall exist or have occurred and be continuing and no party hereto shall have sent any notice of termination of this Agreement. Any request by or on behalf of any Borrower to convert Eurodollar Rate Loans to Prime Loans or Prime Rate Loans to Eurodollar Rate Loans shall be irrevocable. Notwithstanding anything to the contrary contained herein, Agent and Lenders shall not be required to purchase United States Dollar deposits in the London interbank market or other applicable Eurodollar Rate market to fund any Eurodollar Rate Loans, but the provisions hereof shall be deemed to apply as if Agent and Lenders had purchased such deposits to fund the Eurodollar Rate Loans.

(d) Interest shall be payable by Borrowers to Agent, for the account of Lenders, monthly in arrears not later than the first day of each calendar month and

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shall be calculated on the basis of a three hundred sixty (360) day year and actual days elapsed. The interest rate on non-contingent Obligations (other than Eurodollar Rate Loans) shall increase or decrease by an amount equal to each increase or decrease in the Prime Rate effective on the first day of the month after any change in such Prime Rate is announced based on the Prime Rate in effect on the last day of the month in which any such change occurs. In no event shall charges constituting interest payable by Borrowers to Agent and Lenders exceed the maximum amount or the rate permitted under any Applicable Law, and if any such part or provision of this Agreement is in contravention of any such Applicable Law, such part or provision shall be deemed amended to conform thereto.

(e) On the date hereof, the Prime Rate is four and three quarters percent (4.75%). Therefore, the rate of interest in effect hereunder on the date hereof for Revolving Loans bearing interest as a Prime Rate Loan on the date of this Agreement, expressed in simple interest terms, is four and three quarters percent (4.75%) per annum; and the rate of interest in effect hereunder on the date hereof for all or any portion of the Term Loan bearing interest as a Prime Rate Loan on the date of this Agreement, expressed in simple interest terms, is twelve percent (12.0%) per annum.

3.2. Fees.

(a) Borrowers jointly and severally shall pay to Agent, for the account of the Revolving Lenders, monthly an unused line fee at a rate equal to one half of one percent (0.50%) per annum calculated upon the amount by which the Revolving Loan Limit exceeds the average daily principal balance of the outstanding Revolving Loans during the immediately preceding month (or part thereof) while this Agreement is in effect and for so long thereafter as any of the Obligations are outstanding, which fee shall be payable on the first day of each month in arrears.

(b) Borrowers jointly and severally agree to pay to Agent and Lenders the other fees and amounts set forth in the Fee Letter in the amounts and at the times specified therein.

3.3. Changes in Laws and Increased Costs of Loans.

(a) If after the date hereof, either (i) any change in, or in the interpretation of, any law or regulation is introduced, including, without limitation, with respect to reserve requirements, applicable to any Lender or any banking or financial institution from whom any Lender borrows funds or obtains credit (a "Funding Bank"), or (ii) a Funding Bank or any Lender complies with any future guideline or request from any central bank or other Governmental Authority or (iii) a Funding Bank or any Lender determines that the adoption of any Applicable Law regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof has or would have the effect described below, or a Funding Bank or any Lender complies with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, and in the case of any event set forth in this clause (iii), such adoption, change or compliance has or would have the direct or indirect effect of

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reducing the rate of return on any Lender's capital as a consequence of its obligations hereunder to a level below that which such Lender could have achieved but for such adoption, change or compliance (taking into consideration the Funding Bank's or Lender's policies with respect to capital adequacy) by an amount deemed by such Lender to be material, and the result of any of the foregoing events described in clauses (i), (ii) or (iii) is or results in an increase in the cost to any Lender of funding or maintaining the Loans then Borrowers shall from time to time upon demand by Agent pay to Agent additional amounts sufficient to indemnify Lenders against such increased cost on an after-tax basis (after taking into account applicable deductions and credits in respect of the amount indemnified). A certificate as to the amount of such increased cost shall be submitted to Borrower Agent by Agent and shall be conclusive, absent manifest error.

(b) If prior to the first day of any month, (i) Agent shall have determined in good faith (which determination shall be conclusive and binding upon Borrowers) that, by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the Eurodollar Rate, (ii) Agent has received notice from the Required Lenders that the Eurodollar Rate determined or to be determined for such month will not adequately and fairly reflect the cost to such Lenders of making or maintaining their Eurodollar Rate Loans during such month, or (iii) Dollar deposits in the principal amounts of the Eurodollar Rate Loans for such two month period on which the Eurodollar Rate is to be based are not generally available in the London interbank market, Agent shall give telecopy or telephonic notice thereof to Borrowers and Lenders as soon as practicable thereafter, and will also give prompt written notice to Borrowers and Lenders when such conditions no longer exist. If such notice is given (A) any Eurodollar Rate Loans requested to be made on the first day of such month shall be made as Prime Rate Loans, (B) any Loans that were to have been converted on the first day of such month to or continued as Eurodollar Rate Loans shall be converted to or continued as Prime Rate Loans and (C) each outstanding Eurodollar Rate Loan shall be converted, on the last day of the then-current month to Prime Rate Loans. Until such notice has been withdrawn by Agent, no further Eurodollar Rate Loans shall be made or continued as such, nor shall Borrowers have the right to convert Prime Rate Loans to Eurodollar Rate Loans.

(c) Notwithstanding any other provision herein, if the adoption of or any change in any law, treaty, rule or regulation or final, non-appealable determination of an arbitrator or a court or other Governmental Authority or in the interpretation or application thereof occurring after the date hereof shall make it unlawful for Agent or any Lender to make or maintain Eurodollar Rate Loans as contemplated by this Agreement,
(i) Agent or such Lender shall promptly give written notice of such circumstances to Borrower Agent and Agent (which notice shall be withdrawn whenever such circumstances no longer exist), (ii) the commitment of such Lender hereunder to make Eurodollar Rate Loans, continue Eurodollar Rate Loans as such and convert Prime Rate Loans to Eurodollar Rate Loans shall forthwith be canceled and, until such time as it shall no longer be unlawful for such Lender to make or maintain Eurodollar Rate Loans, such Lender shall then have a commitment only to make a Prime Rate Loan when a Eurodollar Rate Loan is requested and (iii) such Lender's Loans then outstanding as Eurodollar Rate Loans, if any, shall be converted automatically to Prime Rate Loans on the respective last days of the then current months with respect to such Loans or within such earlier period as required by law.

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SECTION 4. CONDITIONS PRECEDENT

4.1. Conditions Precedent to Initial Loans. Each of the following is a condition precedent to Agent and Lenders making the initial Loans hereunder:

(a) Agent shall have received, in form and substance satisfactory to Agent, all releases, terminations and such other documents as Agent may request to evidence and effectuate the termination by the Existing Lenders of their respective financing arrangements with Borrowers and the termination and release by it or them, as the case may be, of any interest in and to any assets and properties of each Borrower and each other Obligor, duly authorized, executed and delivered by it or each of them, including, but not limited to, (i) UCC termination statements for all UCC financing statements previously filed by it or any of them or their predecessors, as secured party and such Borrower or any other Obligor, as debtor; and (ii) satisfactions and discharges of any mortgages, deeds of trust or deeds to secure debt by any Borrower or any other Obligor in favor of it or any of them, in form acceptable for recording with the appropriate Governmental Authority;

(b) all requisite corporate action and proceedings in connection with this Agreement and the other Financing Agreements shall be satisfactory in form and substance to Agent, and Agent shall have received all information and copies of all documents, including records of requisite corporate action and proceedings which Agent may have requested in connection therewith, such documents where requested by Agent or its counsel to be certified by appropriate corporate officers or Governmental Authority (and including a copy of the certificate of incorporation of each Borrower and each Guarantor certified by the Secretary of State (or equivalent Governmental Authority) which shall set forth the same complete corporate name of such Borrower or such Guarantor, as is set forth herein and such document as shall set forth the organizational identification number of such Borrower, or such Guarantor, if one is issued in its jurisdiction of incorporation);

(c) no material adverse change shall have occurred in the assets, business or prospects of any Obligor since the date of Agent's latest field examination (not including for this purpose the field review referred to in clause (d) below) and no change or event shall have occurred which would impair the ability of any Obligor to perform its obligations hereunder or under any of the other Financing Agreements to which it is a party or of Agent or any Lender to enforce the Obligations or realize upon the Collateral;

(d) Agent shall have completed a field review of the Records and such other information with respect to the Collateral as Agent may require to determine the amount of Loans available to Borrowers (including, without limitation, current perpetual inventory records and/or roll-forwards of Accounts and Inventory through the date of closing and test counts of the Inventory in a manner satisfactory to Agent, together with such supporting documentation as may be necessary or appropriate, and other documents and information that will enable Agent to accurately identify and verify the Collateral), the results of which each case shall be satisfactory to Agent and the Term Lender, not more than three (3) Business Days prior to the date hereof;

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(e) Agent shall have received, in form and substance satisfactory to Agent, all consents, waivers, acknowledgments and other agreements from third Persons which Agent may deem necessary or desirable in order to permit, protect and perfect its security interests in and Liens upon the Collateral or to effectuate the provisions or purposes of this Agreement and the other Financing Agreements, including, without limitation, subject to the provisions of SECTION 9.24 hereof, Collateral Access Agreements by owners and lessors of leased premises of each Borrower and by processors and warehouses at which Collateral is located;

(f) the Excess Availability as determined by Agent, as of the date hereof, shall be not less than $5,000,000 after giving effect to the initial Loans made or to be made in connection with the initial transactions hereunder and the payment of accrued interest on Subordinated Debt and the payment of all fees and expenses in connection with the transactions contemplated hereby;

(g) Agent shall have received, in form and substance satisfactory to Agent, (i) a Deposit Account Control Agreement by and among Agent, Parent and Fleet National Bank, and Deposit Account Control Agreements among Agent, Kirkland's and Bank of America, N.A., AmSouth Bank, and Wachovia, respectively, in each case duly authorized, executed and delivered by such bank and such Obligor, and (ii) evidence of Borrowers' delivery of a Payment Direction Letter to each other bank at which any Borrower maintains a deposit account;

(h) Agent shall have received evidence, in form and substance satisfactory to Agent, that Agent has a valid perfected first priority security interest in and Lien upon all of the Collateral;

(i) Agent shall have received and reviewed lien and judgement search results for the jurisdiction of incorporation of each Obligor, the jurisdiction of the chief executive office of each Obligor and all jurisdictions in which assets of each Obligor is located, which search results shall be in form and substance satisfactory to Agent;

(j) Agent shall have received environmental audits of the Real Property to be subject to the Mortgage conducted by an independent environmental engineering firm acceptable to Agent, and in form, scope and methodology satisfactory to Agent, confirming that (i) each Borrower is in compliance with all material applicable Environmental Laws and (ii) the absence of any material environmental problems;

(k) Agent shall have received evidence of insurance and loss payee endorsements required hereunder and under the other Financing Agreements, in form and substance satisfactory to Agent, and certificates of insurance policies and/or endorsements naming Agent as lender's loss payee, mortgagee and additional insured;

(l) Agent shall have received, in form and substance satisfactory to Agent, such opinion letters of counsel to Borrowers and Guarantors with respect to the Financing Agreements and such other matters as Agent may request;

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(m) the other Financing Agreements (including the Mortgage) and all instruments and documents hereunder and thereunder shall have been duly executed and delivered to Agent, in form and substance satisfactory to Agent and the Term Lender; and

(n) Agent shall have reviewed, and found acceptable in all respects, each of the Subordinated Debt Documents, and all Subordinated Debt shall be expressly subordinated in right of payment to the prior payment and satisfaction in full of all of the Obligations, all in a manner and pursuant to such written agreements binding on the holders of such Subordinated Debt as will be satisfactory to Agent and Lenders and their respective counsel.

4.2. Conditions Precedent to All Loans. Each of the following is an additional condition precedent to the Loans to Borrowers, including the initial Loans and any future Loans:

(a) all representations and warranties contained herein and in the other Financing Agreements shall be true and correct in all material respects with the same effect as though such representations and warranties had been made on and as of the date of the making of each such Loan and after giving effect thereto, except to the extent that such representations and warranties expressly relate solely to an earlier date (in which case such representations and warranties shall have been true and accurate on and as of such earlier date);

(b) no law, regulation, order, judgment or decree of any Governmental Authority shall exist, and no action, suit, investigation, litigation or proceeding shall be pending or threatened in any court or before any arbitrator or Governmental Authority, which (i) purports to enjoin, prohibit, restrain or otherwise affect (A) the making of the Loans, or (B) the consummation of the transactions contemplated pursuant to the terms hereof or the other Financing Agreements or (ii) has or has a reasonable likelihood of having a Material Adverse Effect; and

(c) no Default or Event of Default shall exist or have occurred and be continuing on and as of the date of the making of such Loan and after giving effect thereto.

SECTION 5. GRANT AND PERFECTION OF SECURITY INTEREST

5.1. Grant of Security Interest. To secure payment and performance of all Obligations, each Borrower hereby grants to Agent, for itself and the ratable benefit of Lenders, a continuing security interest in, a Lien upon, and a right of set off against, and hereby assigns to Agent, for itself and the ratable benefit of Lenders, as security, all personal and real property and fixtures, and interests in property and fixtures, of such Borrower, whether now owned or hereafter acquired or existing, and wherever located (together with all other collateral security for the Obligations at any time granted to or held or acquired by Agent or any Lender, collectively, the "Collateral"):

(a) all Accounts;

(b) all general intangibles, including, without limitation, all Intellectual Property;

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(d) all Real Property and fixtures;

(e) all chattel paper, including, without limitation, all tangible and electronic chattel paper;

(f) all instruments, including, without limitation, all promissory notes;

(g) all documents;

(h) all deposit accounts;

(i) all letters of credit, banker's acceptances and similar instruments and including all letter-of-credit rights;

(j) all supporting obligations and all present and future liens, security interests, rights, remedies, title and interest in, to and in respect of Receivables and other Collateral, including (i) rights and remedies under or relating to guaranties, contracts of suretyship, letters of credit and credit and other insurance related to the Collateral, (ii) rights of stoppage in transit, replevin, repossession, reclamation and other rights and remedies of an unpaid vendor, lienor or secured party, (iii) goods described in invoices, documents, contracts or instruments with respect to, or otherwise representing or evidencing, Receivables or other Collateral, including returned, repossessed and reclaimed goods, and (iv) deposits by and property of account debtors or other persons securing the obligations of account debtors;

(k) all (i) investment property (including securities, whether certificated or uncertificated, securities accounts, security entitlements, commodity contracts or commodity accounts) and (ii) monies, credit balances, deposits and other property of Borrower now or hereafter held or received by or in transit to Agent, any Lender or its Affiliates or at any other depository or other institution from or for the account of such Borrower, whether for safekeeping, pledge, custody, transmission, collection or otherwise;

(l) all commercial tort claims, including, without limitation, those identified in the Information Certificate;

(m) to the extent not otherwise described above, all Receivables;

(n) all Records; and

(o) all products and proceeds of the foregoing, in any form, including insurance proceeds and all claims against third parties for loss or damage to or destruction of or other involuntary conversion of any kind or nature of any or all of the other Collateral.

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5.2. Perfection of Security Interests.

(a) Each Borrower irrevocably and unconditionally authorizes Agent (or its agent) to file at any time and from time to time such financing statements with respect to the Collateral naming Agent or its designee as the secured party and such Borrower as debtor, as Agent may require to perfect its security interest in the Collateral, and including any other information with respect to such Borrower or otherwise required by part 5 of Article 9 of the Uniform Commercial Code of such jurisdiction as Agent may determine, together with any amendment and continuations with respect thereto, which authorization shall apply to all financing statements filed on, prior to or after the date hereof. Each Borrower hereby ratifies and approves all financing statements naming Agent or its designee as secured party and such Borrower, as debtor with respect to the Collateral (and any amendments with respect to such financing statements) filed by or on behalf of Agent prior to the date hereof and ratifies and confirms the authorization of Agent to file such financing statements (and amendments, if any). Each Borrower hereby authorizes Agent to adopt on behalf of such Borrower any symbol required for authenticating any electronic filing. In the event that the description of the collateral in any financing statement naming Agent or its designee as the secured party and such Borrower as debtor includes assets and properties of such Borrower that do not at any time constitute Collateral, whether hereunder, under any of the other Financing Agreements or otherwise, the filing of such financing statement shall nonetheless be deemed authorized by such Borrower to the extent of the Collateral included in such description and it shall not render the financing statement ineffective as to any of the Collateral or otherwise affect the financing statement as it applies to any of the Collateral. In no event shall any Borrower at any time file, or permit or cause to be filed, without the prior written consent of Agent, any correction statement or termination statement with respect to any financing statement (or amendment or continuation with respect thereto) naming Agent or its designee as secured party and such Borrower as debtor.

(b) No Borrower has any chattel paper (whether tangible or electronic) or instruments as of the date hereof, except as set forth in the Information Certificate. In the event that a Borrower shall be entitled to or shall receive any chattel paper or instrument after the date hereof, such Borrower shall promptly notify Agent thereof in writing. Promptly upon the receipt thereof by or on behalf of such Borrower (including by any agent or representative), such Borrower shall deliver, or cause to be delivered to Agent, all tangible chattel paper and instruments that such Borrower has or may at any time acquire, accompanied by such instruments of transfer or assignment duly executed in blank as Agent may from time to time specify, in each case except as Agent may otherwise agree. At Agent's option, Borrowers shall, or Agent may at any time on behalf of Borrowers, cause the original of any such instrument or chattel paper to be conspicuously marked in a form and manner acceptable to Agent with the following legend referring to chattel paper or instruments as applicable: "This [chattel paper][instrument] is subject to the security interest of Congress Financial Corporation (Southern), as agent and any sale, transfer, assignment or encumbrance of this [chattel paper][instrument] violates the rights of such secured party."

(c) In the event that any Borrower shall at any time hold or acquire an interest in any electronic chattel paper or any Atransferable record@ (as such term is defined in Section 201 of the Federal Electronic Signatures in Global and National Commerce Act or in Section 16 of the Uniform Electronic Transactions Act as in effect in any relevant

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jurisdiction), such Borrower shall promptly notify Agent thereof in writing. Promptly upon Agent's request, such Borrower shall take, or cause to be taken, such actions as Agent may request to give Agent control of such electronic chattel paper under Section 9-105 of the UCC and control of such transferable record under Section 201 of the Federal Electronic Signatures in Global and National Commerce Act or, as the case may be, Section 16 of the Uniform Electronic Transactions Act, as in effect in such jurisdiction.

(d) No Borrower has any deposit accounts as of the date hereof, except as set forth in the Information Certificate. No Borrower shall directly or indirectly, after the date hereof open, establish or maintain any deposit account unless each of the following conditions is satisfied: (i) Agent shall have received not less than five (5) Business Days prior written notice of the intention of a Borrower to open or establish such account which notice shall specify in reasonable detail and specificity acceptable to Agent the name of the account, the owner of the account, the name and address of the bank at which such account is to be opened or established, the individual at such bank with whom such Borrower is dealing and the purpose of the account, (ii) the bank where such account is opened or maintained shall be acceptable to Agent, and (iii) on or before the opening of such deposit account, such Borrower shall, as Agent may specify, either (A) deliver to Agent a Deposit Account Control Agreement with respect to such deposit account duly authorized, executed and delivered by such Borrower and the bank at which such deposit account is opened and maintained, (B) arrange for Agent to become the customer of the bank with respect to the deposit account on terms and conditions acceptable to Agent or (C) deliver a Payment Direction Letter to such bank. The terms of this subsection (d) shall not apply to deposit accounts specifically and exclusively used for payroll, payroll taxes and other employee wage and benefit payments to or for the benefit of a Borrower's salaried employees.

(e) Each Borrower owns or holds, directly or indirectly, beneficially or as record owner or both, any investment property, as of the date hereof, or have any investment account, securities account, commodity account or other similar account with any bank or other financial institution or other securities intermediary or commodity intermediary as of the date hereof, in each case except as set forth in the Information Certificate.

(i) In the event that any Borrower shall be entitled to or shall at any time after the date hereof hold or acquire any certificated securities, such Borrower shall promptly endorse, assign and deliver the same to Agent, accompanied by such instruments of transfer or assignment duly executed in blank as Agent may from time to time specify. If any securities, now or hereafter acquired by any Borrower is uncertificated and are issued to such Borrower or its nominee directly by the issuer thereof, such Borrower shall immediately notify Agent thereof and shall as Agent may specify, either (A) cause the issuer to agree to comply with instructions from Agent as to such securities, without further consent of such Borrower or such nominee, or (B) arrange for Agent to become the registered owner of the securities.

(ii) No Borrower shall directly or indirectly, after the date hereof open, establish or maintain any investment account, securities account, commodity account or any other similar account (other than a deposit account) with any securities intermediary or commodity intermediary unless each of the following conditions is satisfied: (A) Agent shall have received not less than five (5) Business Days prior written notice of the

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intention of such Borrower to open or establish such account which notice shall specify in reasonable detail and specificity acceptable to Agent the name of the account, the owner of the account, the name and address of the securities intermediary or commodity intermediary at which such account is to be opened or established, the individual at such intermediary with whom such Borrower is dealing and the purpose of the account, (B) the securities intermediary or commodity intermediary (as the case may be) where such account is opened or maintained shall be acceptable to Agent, and (C) on or before the opening of such investment account, securities account or other similar account with a securities intermediary or commodity intermediary, such Borrower shall as Agent may specify either (1) execute and deliver, and cause to be executed and delivered to Agent, an Investment Property Control Agreement with respect thereto duly authorized, executed and delivered by such Borrower and such securities intermediary or commodity intermediary or (2) arrange for Agent to become the entitlement holder with respect to such investment property on terms and conditions acceptable to Agent.

(f) No Borrower is a beneficiary or otherwise entitled to any right to payment under any letter of credit, banker's acceptance or similar instrument as of the date hereof, except as set forth in the Information Certificate. In the event that any Borrower shall be entitled to or shall receive any right to payment under any letter of credit, banker's acceptance or any similar instrument, whether as beneficiary thereof or otherwise after the date hereof, such Borrower shall promptly notify Agent thereof in writing. Each Borrower shall immediately, as Agent may specify, either (i) deliver, or cause to be delivered to Agent, with respect to any such letter of credit, banker's acceptance or similar instrument, the written agreement of the issuer and any other nominated person obligated to make any payment in respect thereof (including any confirming or negotiating bank), in form and substance satisfactory to Agent, consenting to the assignment of the proceeds of the letter of credit to Agent by such Borrower and agreeing to make all payments thereon directly to Agent or as Agent may otherwise direct or (ii) cause Agent to become, at Borrowers' expense, the transferee beneficiary of the letter of credit, banker's acceptance or similar instrument (as the case may be).

(g) No Borrower has any commercial tort claims as of the date hereof, except as set forth in the Information Certificate. In the event that any Borrower shall at any time after the date hereof have any commercial tort claims, such Borrower shall promptly notify Agent thereof in writing, which notice shall (i) set forth in reasonable detail the basis for and nature of such commercial tort claim and (ii) include the express grant by such Borrower to Agent of a security interest in such commercial tort claim (and the proceeds thereof). In the event that such notice does not include such grant of a security interest, the sending thereof by such Borrower to Agent shall be deemed to constitute such grant to Agent. Upon the sending of such notice, any commercial tort claim described therein shall constitute part of the Collateral and shall be deemed included therein. Without limiting the authorization of Agent provided in SECTION 5.2(a) hereof or otherwise arising by the execution by Borrowers of this Agreement or any of the other Financing Agreements, Agent is hereby irrevocably authorized from time to time and at any time to file such financing statements naming Agent or its designee as secured party and any Borrower as debtor, or any amendments to any financing statements, covering any such commercial tort claim as Collateral. In addition, each Borrower shall promptly upon Agent's request, execute and deliver, or cause to be executed and delivered, to Agent such other agreements, documents and instruments as Agent may require in connection with such commercial tort claim.

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(h) No Borrower has any goods, documents of title or other Collateral in the custody, control or possession of a third party as of the date hereof, except as set forth in the Information Certificate and except for goods located in the United States in transit to a location of such Borrower permitted herein in the ordinary course of business of such Borrower in the possession of the carrier transporting such goods. In the event that any goods, documents of title or other Collateral are at any time after the date hereof in the custody, control or possession of any other Person not referred to in the Information Certificate or such carriers, Borrowers shall promptly notify Agent thereof in writing. Promptly upon Agent's request, each Borrower shall use its best efforts to deliver to Agent a Collateral Access Agreement duly authorized, executed and delivered by such Person and such Borrower.

(i) Each Borrower shall take any other actions reasonably requested by Agent from time to time to cause the attachment, perfection and first priority of, and the ability of Agent to enforce, the security interest and Lien of Agent in any and all of the Collateral, including, without limitation, (i) executing, delivering and, where appropriate, filing financing statements and amendments relating thereto under the UCC or other Applicable Law, to the extent, if any, that such Borrower's signature thereon is required therefor, (ii) causing Agent's name to be noted as secured party on any certificate of title for a titled good if such notation is a condition to attachment, perfection or priority of, or ability of Agent to enforce, the security interest of Agent in such Collateral, (iii) complying with any provision of any statute, regulation or treaty of the United States as to any Collateral if compliance with such provision is a condition to attachment, perfection or priority of, or ability of Agent to enforce, the security interest of Agent in such Collateral, (iv) obtaining the consents and approvals of any Governmental Authority or third party, including, without limitation, any consent of any licensor, lessor or other person obligated on Collateral, and taking all actions required by any earlier versions of the UCC or by other law, as applicable in any relevant jurisdiction.

SECTION 6. COLLECTION AND ADMINISTRATION

6.1. Borrowers' Loan Accounts. Agent shall maintain one or more loan account(s) on its books in which shall be recorded (a) all Loans and other Obligations and the Collateral, (b) all payments made by or on behalf of any Borrower and (c) all other appropriate debits and credits as provided in this Agreement, including fees, charges, costs, expenses and interest. All entries in the loan account(s) shall be made in accordance with Agent's customary practices as in effect from time to time.

6.2. Statements. Agent shall render to Borrower Agent each month a statement setting forth the balance in the Borrowers' loan account(s) maintained by Agent for Borrower pursuant to the provisions of this Agreement, including principal, interest, fees, costs and expenses. Each such statement shall be subject to subsequent adjustment by Agent but shall, absent manifest errors or omissions, be considered correct and deemed accepted by Borrowers and conclusively binding upon Borrowers as an account stated except to the extent that Agent receives a written notice from Borrower Agent of any specific exceptions of Borrowers thereto within thirty (30) days after the date such statement has been received by Borrower Agent. Until such time as Agent shall have rendered to Borrower Agent a written statement as provided above, the balance in Borrowers' loan account(s) shall be presumptive evidence of the amounts due and owing to Agent and Lenders by Borrowers.

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6.3. Collection of Accounts.

(a) Borrowers shall establish and maintain, at their expense, deposit account arrangements and merchant payment arrangements with the banks set forth on SCHEDULE 8.10 hereto and after prior written notice to Agent, such other banks as Borrowers may hereafter select as are acceptable to Agent. The banks set forth on SCHEDULE 8.10 constitute all of the banks with whom Borrowers have deposit account arrangements and merchant payment arrangements as of the date hereof and identifies the Borrower maintaining such arrangements and identifies each of the deposit accounts at such banks to a retail store location of Borrowers or otherwise describes the nature of the use of such deposit account by Borrowers.

(b) Each Borrower shall deposit all proceeds from sales of Inventory in every form, including cash, checks, credit card sales drafts, credit card sales or charge slips or receipts and other forms of daily store receipts, from each retail store location of such Borrower on each Business Day into the deposit accounts of such Borrower used solely for such purpose and identified to each retail store location as set forth on SCHEDULE
8.10. Borrowers shall cause all such funds deposited into the separate deposit accounts to be sent by wire transfer or by automated clearinghouse transfer at least every three (3) Business Days (or more frequently as required by Agent if an Event of Default exists) and all other proceeds of Collateral to be sent by wire transfer, to the Blocked Accounts or the Agent Payment Account. Each Borrower shall irrevocably direct in writing, in form and substance satisfactory to Agent (a "Payment Direction Letter"), each of the banks in which any such deposit account is located and into which proceeds from sales of Inventory from a retail store location of such Borrower are at any time deposited not to honor any instruction from a Borrower with respect to such deposit account or any funds in such account other than an instruction of such Borrower to send all funds deposited in such account by wire transfer or automated clearinghouse transfer to a Blocked Account or the Agent Payment Account, and to honor any direction of Agent with respect to such deposit account and the funds in such account, even if Agent's direction is contrary to any instruction of a Borrower. Such direction shall not be rescinded, revoked or modified without the prior written consent of Agent.

(c) Borrowers shall establish and maintain, at its expense, deposit accounts with such banks as are acceptable to Agent (the "Blocked Accounts"). Each Borrower shall promptly either cause all amounts on deposit in its deposit accounts used by each retail store location to be sent as provided in SECTION 6.3(b) above, or shall itself deposit or cause to be deposited to the Blocked Accounts or cause to be sent directly to the Agent Payment Account all proceeds from sales of Inventory, all amounts payable to such Borrower from Credit Card Issuers and Credit Card Processors and all other proceeds of Collateral. The banks at which the Blocked Accounts are established shall enter into an agreement, in form and substance satisfactory to Agent, providing that all items received or deposited in the Blocked Accounts are the Property of Agent, that the depository bank has no Lien upon, or right to setoff against, the Blocked Accounts, the items received for deposit therein, or the funds from time to time on deposit therein and that the depository bank will wire, or otherwise transfer, in immediately available funds, on Borrower's or Agent's instruction, all funds received or deposited into the Blocked Accounts into the Agent Payment Account, and will not honor any instruction from a Borrower other than an instruction to transfer such funds to the Agent Payment Account. Borrowers agrees that all amounts deposited in such Blocked Accounts or other funds received

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and collected by Agent, whether on the Accounts or as proceeds of Inventory or other Collateral or otherwise shall be the Property of Agent held for the benefit of Agent and Lenders; provided that, so long as no Event of Default exists and Excess Availability does not fall below $3,000,000 for any period of more than two (2) consecutive weeks, Agent agrees to remit monies in the Agent Payment Account to Borrowers for working capital purposes.

(d) For purposes of calculating the amount of the Loans available to Borrowers such payments will be applied (conditional upon final collection) to the Obligations (except to the extent remitted to Borrowers as provided in SECTION 6.3(c) above) on the Business Day of receipt by Agent of immediately available funds in the Agent Payment Account provided such payments and notice thereof are received in accordance with Agent's usual and customary practices as in effect from time to time and within sufficient time to credit Borrowers' loan account on such day, and if not, then on the next Business Day. For purposes of calculating interest on the Obligations, such payments or other funds received will be applied (conditional upon final collection) to the Obligations one (1) Business Day following the date of receipt of immediately available funds by Agent in the Agent Payment Account provided such payments or other funds and notice thereof are received in accordance with Agent's usual and customary practices as in effect from time to time and within sufficient time to credit Borrowers' Loan Account on such day, and if not, then on the next Business Day.

6.4. Payments.

(a) All Obligations shall be payable to the Agent Payment Account as provided in SECTION 6.3 or such other place as Agent may designate from time to time. Except to the extent remitted to Borrowers as provided in SECTION 6.3(c) above, Agent shall apply payments received or collected from any Borrower or any other Obligor or for the account of Borrowers (including the monetary proceeds of collections or of realization upon any Collateral) in accordance with SECTION 6.11 hereof. Notwithstanding anything to the contrary contained in this Agreement, to the extent Borrowers use any proceeds of the Loans to acquire rights in or the use of any Collateral or to repay any Indebtedness used to acquire rights in or the use of any Collateral, payments in respect of the Obligations shall be deemed applied first to the Obligations arising from Loans that were not used for such purposes and second to the Obligations arising from Loans the proceeds of which were used to acquire rights in or the use of any Collateral in the chronological order in which Borrowers acquired such rights in or the use of such Collateral. So long as no Event of Default has occurred and is continuing,
SECTION 6.4(a) shall not be deemed to apply to any payment by Borrowers specified by Borrowers to be for the payment of specific Obligations then due and payable (or prepayable) under any provision of this Agreement.

(b) Notwithstanding the last proviso contained in SECTION 6.3(c), at Agent's option, all principal, interest, fees, costs, expenses and other charges provided for in this Agreement or the other Financing Agreements may be charged directly to the loan account(s) of Borrowers. So long as no Event of Default exists, Agent shall charge the loan account(s) of Borrowers for all principal, interest, fees, costs, expenses and other charges (to the extent then due and payable) provided for in this Agreement and the other Financing Agreements; provided, that this sentence shall be for the benefit of the Lenders only and shall not be enforceable by Borrowers and in no event shall Agent be required to charge the loan

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account(s) for any of the foregoing amounts if such amounts would exceed the Borrowing Base. Borrowers shall make all payments to Agent and Lenders on the Obligations free and clear of, and without deduction or withholding for or on account of, any setoff, counterclaim, defense, duties, taxes, levies, imposts, fees, deductions, withholding, restrictions or conditions of any kind. If after receipt of any payment of, or proceeds of Collateral applied to the payment of, any of the Obligations, Agent or any Lender is required to surrender or return such payment or proceeds to any Person for any reason, then the Obligations intended to be satisfied by such payment or proceeds shall be reinstated and continue and this Agreement shall continue in full force and effect as if such payment or proceeds had not been received by Agent or such Lender. Borrowers shall be jointly and severally liable to pay to Agent, and do hereby indemnify, defend and hold Agent and Lenders harmless for the amount of any payments or proceeds surrendered or returned. This SECTION 6.4(b) shall remain effective notwithstanding any contrary action which may be taken by Agent or any Lender in reliance upon such payment or proceeds. This SECTION 6.4 shall survive the payment of the Obligations and the termination of this Agreement.

6.5. Authorization to Make Loans. Agent and Lenders are authorized to make the Loans based upon telephonic or other instructions received from anyone purporting to be an officer of any Borrower or other authorized Person or, at the discretion of Agent, if such Loans are necessary to satisfy any Obligations then due and payable as determined by Agent. All requests for Loans hereunder shall specify the date on which the requested advance is to be made (which day shall be a Business Day) and the amount of the requested Loan. Requests received after 11:00 a.m., Atlanta, Georgia time on any day shall be deemed to have been made as of the opening of business on the immediately following Business Day. All Loans under this Agreement shall be conclusively presumed to have been made to, and at the request of and for the benefit of, Borrowers or when deposited to the credit of Borrowers or otherwise disbursed or established in accordance with the instructions of any Borrower or in accordance with the terms and conditions of this Agreement.

6.6. Use of Proceeds. Borrowers shall use the initial proceeds of the Loans provided by Agent to Borrowers hereunder only for: (a) payments to each of the Persons listed in the disbursement direction letter furnished by Borrowers to Agent on the Closing Date and (b) costs, expenses and fees in connection with the preparation, negotiation, execution and delivery of this Agreement and the other Financing Agreements. All other Loans made to or for the benefit of Borrowers pursuant to the provisions hereof shall be used by Borrowers only for general operating, working capital and other proper corporate purposes of Borrowers not otherwise prohibited by the terms hereof. None of the proceeds will be used, directly or indirectly, for the purpose of purchasing or carrying any margin security or for the purposes of reducing or retiring any indebtedness which was originally incurred to purchase or carry any margin security or for any other purpose which might cause any of the Loans to be considered a "purpose credit" within the meaning of Regulation U of the Board of Governors of the Federal Reserve System, as amended.

6.7. Pro Rata Treatment. Except to the extent otherwise provided in this Agreement: (a) the making and conversion of Loans shall be made among the Lenders based on their respective Pro Rata Shares as to the Loans and (b) each payment on account of any Obligations to or for the account of one or more of Lenders in respect of any Obligations due on

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a particular day shall be allocated among the Lenders entitled to such payments based on their respective Pro Rata Shares and shall be distributed accordingly.

6.8. Sharing of Payments, Etc.

(a) Each Borrower agrees that, in addition to (and without limitation of) any right of setoff, banker's lien or counterclaim Agent or any Lender may otherwise have, each Lender shall be entitled, at its option (but subject, as among Agent and Lenders, to the provisions of SECTION 12.3(b) hereof), to offset balances held by it for the account of Borrowers at any of its offices, in dollars or in any other currency, against any principal of or interest on any Loans owed to such Lender or any other amount payable to such Lender hereunder, that is not paid when due (regardless of whether such balances are then due to Borrowers), in which case it shall promptly notify Borrower Agent and Agent thereof; provided, that, such Lender's failure to give such notice shall not affect the validity thereof.

(b) If any Lender (including Agent) shall obtain from any Borrower payment of any principal of or interest on any Loan owing to it or payment of any other amount under this Agreement or any of the other Financing Agreements through the exercise of any right of setoff, banker's lien or counterclaim or similar right or otherwise (other than from Agent as provided herein), and, as a result of such payment, such Lender shall have received more than its Pro Rata Share of the principal of the Loans or more than its share of such other amounts then due hereunder or thereunder by any Borrower to such Lender than the percentage thereof received by any other Lender, it shall promptly pay to Agent, for the benefit of Lenders, the amount of such excess and simultaneously purchase from such other Lenders a participation in the Loans or such other amounts, respectively, owing to such other Lenders (or such interest due thereon, as the case may be) in such amounts, and make such other adjustments from time to time as shall be equitable, to the end that all Lenders shall share the benefit of such excess payment (net of any expenses that may be incurred by such Lender in obtaining or preserving such excess payment) in accordance with their respective Pro Rata Shares or as otherwise agreed by Lenders. To such end all Lenders shall make appropriate adjustments among themselves (by the resale of participation sold or otherwise) if such payment is rescinded or must otherwise be restored.

(c) Each Borrower agrees that any Lender purchasing a participation (or direct interest) as provided in this Section may exercise, in a manner consistent with this Section, all rights of setoff, banker's lien, counterclaim or similar rights with respect to such participation as fully as if such Lender were a direct holder of Loans or other amounts (as the case may be) owing to such Lender in the amount of such participation.

(d) Nothing contained herein shall require any Lender to exercise any right of setoff, banker's lien, counterclaims or similar rights or shall affect the right of any Lender to exercise, and retain the benefits of exercising, any such right with respect to any other Indebtedness or obligation of any Borrower. If, under any applicable bankruptcy, insolvency or other similar law, any Lender receives a secured claim in lieu of a setoff to which this Section applies, such Lender shall, to the extent practicable, assign such rights to Agent for the benefit of Lenders and, in any event, exercise its rights in respect of such secured claim in a

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manner consistent with the rights of Lenders entitled under this Section to share in the benefits of any recovery on such secured claim.

6.9. Settlement Procedures.

(a) In order to administer the Credit Facility in an efficient manner and to minimize the transfer of funds between Agent and Lenders, Agent may, at its option, subject to the terms of this Section, make available, on behalf of Lenders, the full amount of the Loans requested or charged to Borrowers' loan account(s) or otherwise to be advanced by Lenders pursuant to the terms hereof, without requirement of prior notice to Lenders of the proposed Loans.

(b) With respect to all Loans made by Agent on behalf of Lenders as provided in this Section, the amount of each Lender's Pro Rata Share of the outstanding Loans shall be computed weekly, and shall be adjusted upward or downward on the basis of the amount of the outstanding Loans as of 5:00 p.m. New York time on the Business Day immediately preceding the date of each settlement computation; provided, that, Agent retains the absolute right at any time or from time to time to make the above described adjustments at intervals more frequent than weekly, but in no event more than twice in any week. Agent shall deliver to each of the Lenders after the end of each week, or at such lesser period or periods as Agent shall determine, a summary statement of the amount of outstanding Loans for such period (such week or lesser period or periods being hereinafter referred to as a "Settlement Period"). If the summary statement is sent by Agent and received by a Lender prior to 12:00 p.m. New York time, then such Lender shall make the settlement transfer described in this Section by no later than 3:00 p.m. New York City time on the same Business Day and if received by a Lender after 12:00 p.m. New York City time, then such Lender shall make the settlement transfer by not later than 3:00 p.m. New York City time on the next Business Day following the date of receipt. If, as of the end of any Settlement Period, the amount of a Lender's Pro Rata Share of the outstanding Loans is more than such Lender's Pro Rata Share of the outstanding Loans as of the end of the previous Settlement Period, then such Lender shall forthwith (but in no event later than the time set forth in the preceding sentence) transfer to Agent by wire transfer in immediately available funds the amount of the increase. Alternatively, if the amount of a Lender's Pro Rata Share of the outstanding Loans in any Settlement Period is less than the amount of such Lender's Pro Rata Share of the outstanding Loans for the previous Settlement Period, Agent shall forthwith transfer to such Lender by wire transfer in immediately available funds the amount of the decrease. The obligation of each of the Lenders to transfer such funds and effect such settlement shall be irrevocable and unconditional and without recourse to or warranty by Agent. Agent and each Lender agrees to mark its books and records at the end of each Settlement Period to show at all times the dollar amount of its Pro Rata Share of the outstanding Loans. Each Lender shall only be entitled to receive interest on its Pro Rata Share of the Loans to the extent such Loans have been funded by such Lender. Because the Agent on behalf of Lenders may be advancing and/or may be repaid Loans prior to the time when Lenders will actually advance and/or be repaid such Loans, interest with respect to Loans shall be allocated by Agent in accordance with the amount of Loans actually advanced by and repaid to each Lender and the Agent and shall accrue from and including the date such Loans are so advanced to but excluding the date such Loans are either repaid by Borrowers or actually settled with the applicable Lender as described in this Section.

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(c) To the extent that Agent has made any such amounts available and the settlement described above shall not yet have occurred, upon repayment of any Loans by Borrowers, Agent may apply such amounts repaid directly to any amounts made available by Agent pursuant to this Section. In lieu of weekly or more frequent settlements, Agent may, at its option, at any time require each Lender to provide Agent with immediately available funds representing its Pro Rata Share of each Loan, prior to Agent's disbursement of such Loan to Borrowers. In such event, all Loans under this Agreement shall be made by the Lenders simultaneously and proportionately to their Pro Rata Shares. No Lender shall be responsible for any default by any other Lender in the other Lender's obligation to make a Loan requested hereunder nor shall the Commitment of any Lender be increased or decreased as a result of the default by any other Lender in the other Lender's obligation to make a Loan hereunder.

(d) If Agent is not funding a particular Loan to Borrowers pursuant to this Section on any day, Agent may assume that each Lender will make available to Agent such Lender's Pro Rata Share of the Loan requested or otherwise made on such day and Agent may, in its discretion, but shall not be obligated to, cause a corresponding amount to be made available to or for the benefit of Borrowers on such day. If Agent makes such corresponding amount available to Borrowers and such corresponding amount is not in fact made available to Agent by such Lender, Agent shall be entitled to recover such corresponding amount on demand from such Lender together with interest thereon for each day from the date such payment was due until the date such amount is paid to Agent at the Federal Funds Rate for each day during such period (as published by the Federal Reserve Bank of New York or at Agent's option based on the arithmetic mean determined by Agent of the rates for the last transaction in overnight Federal funds arranged prior to 9:00 a.m. (New York City time) on that day by each of the three leading brokers of Federal funds transactions in New York City selected by Agent) and if such amounts are not paid within three
(3) days of Agent's demand, at the highest Interest Rate provided for in
SECTION 3.1 hereof applicable to Prime Rate Loans. During the period in which such Lender has not paid such corresponding amount to Agent, notwithstanding anything to the contrary contained in this Agreement or any of the other Financing Agreements, the amount so advanced by Agent to or for the benefit of Borrowers shall, for all purposes hereof, be a Loan made by Agent for its own account. Upon any such failure by a Lender to pay Agent, Agent shall promptly thereafter notify Borrower Agent of such failure and Borrowers shall pay such corresponding amount to Agent for its own account within five (5) Business Days of Borrower Agent's receipt of such notice. A Lender who fails to pay Agent its Pro Rata Share of any Loans made available by the Agent on such Lender's behalf, or any Lender who fails to pay any other amount owing by it to Agent, is a "Defaulting Lender". Agent shall not be obligated to transfer to a Defaulting Lender any payments received by Agent for the Defaulting Lender's benefit, nor shall a Defaulting Lender be entitled to the sharing of any payments hereunder (including any principal, interest or fees). Amounts payable to a Defaulting Lender shall instead be paid to or retained by Agent. Agent may hold and, in its discretion, relend to Borrowers the amount of all such payments received or retained by it for the account of such Defaulting Lender. For purposes of voting or consenting to matters with respect to this Agreement and the other Financing Agreements and determining Pro Rata Shares, such Defaulting Lender shall be deemed not to be a "Lender" and such Lender's Commitment shall be deemed to be zero (0). This Section shall remain effective with respect to a Defaulting Lender until such default is cured. The operation of this Section shall not be construed to increase or otherwise affect the

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Commitment of any Lender, or relieve or excuse the performance by Borrowers or any other Obligor of their duties and obligations hereunder.

(e) Nothing in this Section or elsewhere in this Agreement or the other Financing Agreements shall be deemed to require Agent to advance funds on behalf of any Lender or to relieve any Lender from its obligation to fulfill its Commitment hereunder or to prejudice any rights that Borrowers may have against any Lender as a result of any default by any Lender hereunder in fulfilling its Commitment.

6.10. Obligations Several; Independent Nature of Lenders' Rights. The obligation of each Lender hereunder is several, and no Lender shall be responsible for the obligation or commitment of any other Lender hereunder. Nothing contained in this Agreement or any of the other Financing Agreements and no action taken by the Lenders pursuant hereto or thereto shall be deemed to constitute the Lenders to be a partnership, an association, a joint venture or any other kind of entity. The amounts payable at any time hereunder to each Lender shall be a separate and independent debt, and subject to SECTION 12.3 hereof, each Lender shall be entitled to protect and enforce its rights arising out of this Agreement and it shall not be necessary for any other Lender to be joined as an additional party in any proceeding for such purpose.

6.11. Agent's Allocation of Payments and Collections.

(a) Except to the extent otherwise expressly provided with respect to Defaulting Lenders under SECTION 6.9, prior to the occurrence of a Priority Event, all monies to be applied to the Obligations shall be allocated among Agent and such of the Lenders as are entitled thereto (and, with respect to monies allocated to Lenders, on a Pro Rata Share basis, unless otherwise provided herein):

first, to pay any fees or expense reimbursements (including any Extraordinary Expenses) then due and payable by Borrowers to Agent under the Financing Agreements and to pay any Indemnified Amount then due and payable by Borrowers to Agent under the Financing Agreements;

second, to pay any fees (other than the Early Termination Fee and Minimum Return Fee), expense reimbursements (including any Extraordinary Expenses) and any Indemnified Amount then due and payable by Borrowers to Lenders under the Financing Agreements;

third, to pay interest then due and payable in respect of all Special Agent Advances which Agent has not been reimbursed;

fourth, to pay interest then due and payable in respect of all Settlement Loans;

fifth, to pay interest then due and payable in respect of the Loans (including interest payable in respect of the Revolving

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Loans and the Term Loan but excluding Settlement Loans and Special Agent Advances);

sixth, to pay the outstanding principal amount of Special Agent Advances;

seventh, to pay the outstanding principal amount of any Settlement Loans;

eighth, to pay the outstanding principal amount of the Revolving Loans (other than Settlement Loans, Special Agent Advances and Discretionary Overadvances);

ninth, to pay the principal amount of the Term Loan that is then due and payable by Borrowers;

tenth, to pay any other Obligations (including the Early Termination Fee and Minimum Return Fee but excluding any Discretionary Overadvances) then due and payable by Borrowers to Agent or any Lender; and

eleventh, to pay any Discretionary Overadvances; provided that, any monies to be applied to the payment of Discretionary Overadvances that are paid when due in accordance with SECTION 2.6 hereof shall be allocated to the Lenders as and when paid.

(b) Except to the extent otherwise expressly provided with respect to Defaulting Lenders under SECTION 6.9, if a Priority Event has occurred and is continuing, all monies to be applied to the Obligations shall be allocated among Agent and such of the Lenders as are entitled thereto (and, with respect to monies allocated to Lenders, on a Pro Rata Share basis, unless otherwise provided herein):

first, to pay any fees, expense reimbursements (including any Extraordinary Expenses) and any Indemnified Amount then due and payable by Borrowers to Agent under the Financing Agreements;

second, to pay any fees (other than the Early Termination Fee and the Minimum Return Fee and any other fees payable solely to the Term Lender), expense reimbursements (including any Extraordinary Expenses), and any Indemnified Amount then due and payable by Borrowers to the Lenders under the Financing Agreements;

third, to pay principal and interest then due and payable in respect of all Loans (other than the Term Loan and Discretionary Overadvances);

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fourth, to pay any principal and interest of the Term Loan and any fees (including the Minimum Return Fee) then due to Term Lender under the Financing Agreements;

fifth, to pay the Early Termination Fee and any other Obligations (other than any Discretionary Overadvances) due to Agent or any Lender by Borrowers; and

sixth, to pay any Discretionary Overadvances.

(c) In the event of a direct conflict between the allocation provisions of SECTIONS 6.11(a) and (b) and other provisions contained in any other Financing Agreement, it is the intention of Agent and Lenders that the allocation provisions in such documents shall be read together and construed, to the fullest extent possible, to be in concert with each other. In the event of any actual conflict that cannot be resolved as aforesaid, the provisions of SECTION 6.11(a) and (b) shall control and govern.

(d) The allocations set forth in this SECTION 6.11 are solely to determine the rights and priorities of Agent and Lenders as among themselves and may be changed by Agent and Lenders without notice to or the consent or approval of Borrowers or any other Person.

6.12. Borrowers' Representative. Each Borrower hereby irrevocably appoints Borrower Agent and Borrower Agent agrees to act under this Agreement, as the agent and representative of itself and each other Borrower for all purposes under this Agreement, including requesting Borrowings, selecting whether any Loan or portion thereof is to bear interest as a Prime Rate Loan or an Eurodollar Rate Loan, and receiving account statements and other notices and communications to Borrowers (or any of them) from Agent. Agent may rely, and shall be fully protected in relying, on any notice of borrowing, disbursement instructions, reports, information or any other notice or communication made or given by Borrower Agent, whether in its own name, on behalf of any Borrower or on behalf of "the Borrowers," and Agent shall have no obligation to make any inquiry or request any confirmation from or on behalf of any other Borrower as to the binding effect on such Borrower of any such request, instruction, report, information, notice or communication, nor shall the joint and several character of Borrowers' liability for the Obligations be affected, provided that the provisions of this SECTION 6.12 shall not be construed so as to preclude any Borrower from directly requesting Borrowings or taking other actions permitted to be taken by "a Borrower" hereunder. Agent may maintain a single Loan Account in the name of "Kirkland's Stores, Inc." hereunder, and each Borrower expressly agrees to such arrangement and confirms that such arrangement shall have no effect on the joint and several character of such Borrower's liability for the Obligations.

6.13. Nature and Extent of Each Borrower's Liability.

(a) Joint and Several Liability. Each Borrower shall be liable for, on a joint and several basis, and hereby guarantees the timely payment by all other Borrowers of, all of the Loans and other Obligations, regardless of which Borrower actually may have received the proceeds of any Loans or other extensions of credit hereunder or the amount of

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such Loans received or the manner in which Agent or any Lender accounts for such Loans or other extensions of credit on its books and records, it being acknowledged and agreed that Loans to any Borrower inure to the mutual benefit of all Borrowers and that Agent and Lenders are relying on the joint and several liability of Borrowers in extending the Loans and other financial accommodations hereunder. Each Borrower hereby unconditionally and irrevocably agrees that upon default in the payment when due (whether at stated maturity, by acceleration or otherwise) of any principal of, or interest owed on, any of the Loans or other Obligations, such Borrower shall forthwith pay the same, without notice or demand.

(b) Unconditional Nature of Liability. Each Borrower's joint and several liability hereunder with respect to, and guaranty of, the Loans and other Obligations shall, to the fullest extent permitted by Applicable Law, be unconditional irrespective of (i) the validity, enforceability, avoidance or subordination of any of the Obligations or of any promissory note or other document evidencing all or any part of the Obligations, (ii) the absence of any attempt to collect any of the Obligations from any other Obligor or any Collateral or other security therefor, or the absence of any other action to enforce the same, (iii) the waiver, consent, extension, forbearance or granting of any indulgence by Agent or any Lender with respect to any provision of any instrument evidencing or securing the payment of any of the Obligations, or any other agreement now or hereafter executed by any other Borrower and delivered to Agent or any Lender, (iv) the failure by Agent to take any steps to perfect or maintain the perfected status of its security interest in or Lien upon, or to preserve its rights to, any of the Collateral or other security for the payment or performance of any of the Obligations or Agent's release of any Collateral or of its Liens upon any Collateral, (v) Agent's or Lenders' election, in any proceeding instituted under the Bankruptcy Code, for the application of Section 1111(b)(2) of the Bankruptcy Code, (vi) any borrowing or grant of a security interest by any other Borrower, as debtor-in-possession under Section 364 of the Bankruptcy Code, (vii) the release or compromise, in whole or in part, of the liability of any Obligor for the payment of any of the Obligations, (viii) any amendment or modification of any of the Financing Agreements or waiver of any Default or Event of Default thereunder, (ix) any increase in the amount of the Obligations beyond any limits imposed herein or in the amount of any interest, fees or other charges payable in connection therewith, or any decrease in the same, (x) the disallowance of all or any portion of Agent's or any Lender's claims for the repayment of any of the Obligations under Section 502 of the Bankruptcy Code, or (xi) any other circumstance that might constitute a legal or equitable discharge or defense of any Borrower. After the occurrence and during the continuance of any Event of Default, Agent may proceed directly and at once, without notice to any Obligor, against any or all of Obligors to collect and recover all or any part of the Obligations, without first proceeding against any other Obligor or against any Collateral or other security for the payment or performance of any of the Obligations, and each Borrower waives any provision that might otherwise require Agent under Applicable Law to pursue or exhaust its remedies against any Collateral or Obligor before pursuing another Obligor. Each Borrower consents and agrees that Agent shall be under no obligation to marshall any assets in favor of any Obligor or against or in payment of any or all of the Obligations.

(c) No Reduction in Liability for Obligations. No payment or payments made by an Obligor or received or collected by Agent from a Borrower or any other Person by virtue of any action or proceeding or any setoff or appropriation or application at any time or from time to time in reduction of or in payment of the Obligations shall be deemed to

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modify, reduce, release or otherwise affect the liability of any Borrower under this Agreement, each of whom shall remain jointly and severally liable for the payment and performance of all Loans and other Obligations until the Obligations are paid in full and this Agreement is terminated.

(d) Contribution. Each Borrower is unconditionally obligated to repay the Obligations as a joint and several obligor under this Agreement. If, as of any date, the aggregate amount of payments made by a Borrower on account of the Obligations and proceeds of such Borrower's Collateral that are applied to the Obligations exceeds the aggregate amount of Loan proceeds actually used by such Borrower in its business (such excess amount being referred to as an "Accommodation Payment"), then each of the other Borrowers (each such Borrower being referred to as a "Contributing Borrower") shall be obligated to make contribution to such Borrower (the "Paying Borrower") in an amount equal to (A) the product derived by multiplying the sum of each Accommodation Payment of each Borrower by the Allocable Percentage of the Borrower from whom contribution is sought less (B) the amount, if any, of the then outstanding Accommodation Payment of such Contributing Borrower (such last mentioned amount which is to be subtracted from the aforesaid product to be increased by any amounts theretofore paid by such Contributing Borrower by way of contribution hereunder, and to be decreased by any amounts theretofore received by such Contributing Borrower by way of contribution hereunder); provided, however, that a Paying Borrower's recovery of contribution hereunder from the other Borrowers shall be limited to that amount paid by the Paying Borrower in excess of its Allocable Percentage of all Accommodation Payments then outstanding of all Borrowers. As used herein, the term "Allocable Percentage" shall mean, on any date of determination thereof, a fraction the denominator of which shall be equal to the number of Borrowers who are parties to this Agreement on such date and the numerator of which shall be 1; provided, however, that such percentages shall be modified in the event that contribution from a Borrower is not possible by reason of insolvency, bankruptcy or otherwise by reducing such Borrower's Allocable Percentage equitably and by adjusting the Allocable Percentage of the other Borrowers proportionately so that the Allocable Percentages of all Borrowers at all times equals 100%.

(e) Subordination. Each Borrower hereby subordinates any claims, including any right of payment, subrogation, contribution and indemnity, that it may have from or against any other Obligor, and any successor or assign of any other Obligor, including any trustee, receiver or debtor-in-possession, howsoever arising, due or owing or whether heretofore, now or hereafter existing, to the payment in full of all of the Obligations.

SECTION 7. COLLATERAL REPORTING AND COVENANTS

7.1. Collateral Reporting.

(a) Borrowers shall provide Agent with the following documents in a form satisfactory to Agent:

(i) on a weekly basis on or before Tuesday of each week for the week ended on the immediately preceding Saturday (or if an Event of Default

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exists, more frequently as required by Agent), schedules of sales made, credits issued and cash received;

(ii) on a weekly basis on or before Tuesday of each week for the week ended on the immediately preceding Saturday
(or if an Event of Default exists, more frequently as required by Agent), (A) perpetual inventory reports, and (B) inventory reports by location, category and mix (and including the amounts of Inventory and the value thereof at any store, leased locations and premises of warehouses, processors or other third parties);

(iii) on a monthly basis, on or before the first Tuesday after the last day of each of Borrowers' fiscal months, (A) an aging of inventory report which includes as the oldest category of inventory the inventory that is aged over 330 days, and (B) agings of accounts payable (and including information indicating the amounts owing to owners and lessors of leased premises, warehouses, processors and other third parties from time to time in possession of any Collateral);

(iv) upon Agent's request, (A) copies of customer statements and credit memos, remittance advices and reports, and copies of deposit slips and bank statements, (B) copies of shipping and delivery documents, and (C) copies of purchase orders, invoices and delivery documents for Inventory acquired by any Borrower;

(v) on a monthly basis on or before the twentieth (20th) day after the end of each of Borrowers' fiscal months, reports by retail store location of sales and contribution to Consolidated EBITDA for each such retail store location,

(vi) on a monthly basis, on or before the fifth (5th) day of each calendar month, a written certificate that all rent payable by any Borrower with respect to each leased location of a Borrower had been paid as of the last day of the immediately preceding month and that all sales taxes payable by any Borrower through the last day of the immediately preceding month have been paid;

(vii) on a monthly basis, on or before the 20th day after the end of each of Borrowers' fiscal months, a written report listing the address and lessor of each leased premises at which any Inventory is located, other than Borrowers' leased retail store locations; and

(viii) such other reports as to the Collateral as Agent shall request from time to time.

(b) If any Borrower's records or reports of the Collateral are prepared or maintained by an accounting service, contractor, shipper or other agent, Borrower hereby irrevocably authorizes such service, contractor, shipper or agent to deliver such records, reports, and related documents to Agent and to follow Agent's instructions with respect to further services at any time that an Event of Default exists or has occurred and is continuing.

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7.2. Accounts Covenants.

(a) Each Borrower shall notify Agent promptly of the assertion of any material claims, offsets, defenses or counterclaims by any account debtor, Credit Card Issuer or Credit Card Processor or any disputes with any of such Persons or any settlement, adjustment or compromise thereof and (ii) all material adverse information relating to the financial condition of any account debtor, Credit Card Issuer or Credit Card Processor. No credit, discount, allowance or extension or agreement for any of the foregoing shall be granted to any account debtor, Credit Card Issuer or Credit Card Processor except in the ordinary course of a Borrower's business in accordance with the current practices of a Borrower as in effect on the date hereof. So long as no Event of Default exists or has occurred and is continuing, Borrowers shall settle, adjust or compromise any claim, offset, counterclaim or dispute with any account debtor, Credit Card Issuer, or Credit Card Processor. At any time that an Event of Default exists or has occurred and is continuing, Agent shall, at its option, have the exclusive right to settle, adjust or compromise any claim, offset, counterclaim or dispute with account debtors, Credit Card Issuers or Credit Card Processors or grant any credits, discounts or allowances.

(b) Each Borrower shall notify Agent promptly of: (i) any notice of a material default by such Borrower under any of the Credit Card Agreements or of any default which might result in the Credit Card Issuer or Credit Card Processor ceasing to make payments or suspending payments to such Borrower, (ii) any notice from any Credit Card Issuer or Credit Card Processor that such Person is ceasing or suspending, or will cease or suspend, any present or future payments due or to become due to such Borrower from such Person, or that such Person is terminating or will terminate any of the Credit Card Agreements, and (iii) the failure of such Borrower to comply with any material terms of the Credit Card Agreements or any terms thereof which might result in the Credit Card Issuer or Credit Card Processor ceasing or suspending payments to such Borrower.

(c) With respect to each Account: (i) no payments shall be made thereon except payments delivered to Agent pursuant to the terms of this Agreement, (ii) there shall be no setoffs, deductions, contras, defenses, counterclaims or disputes existing or asserted with respect thereto except as reported to Agent in accordance with the terms of this Agreement and (iii) none of the transactions giving rise thereto will violate any applicable State or Federal Laws or regulations, all documentation relating thereto will be legally sufficient under such laws and regulations and all such documentation will be legally enforceable in accordance with its terms.

(d) Agent may, at any time or times that an Event of Default exists or has occurred, (i) unless such amounts are already being directly deposited in the Agent Payment Account, notify any or all account debtors, Credit Card Issuers and Credit Card Processors that the Accounts have been assigned to Agent and that Agent has a security interest therein and Agent may direct any or all account debtors, Credit Card Issuers and Credit Card Processors to make payments of Accounts directly to Agent, (ii) extend the time of payment of, compromise, settle or adjust for cash, credit, return of merchandise or otherwise, and upon any terms or conditions, any and all Accounts or other obligations included in the Collateral and thereby discharge or release the account debtor or any other party or parties in any way liable for payment thereof without affecting any of the Obligations, (iii) demand, collect or enforce

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payment of any Accounts or such other obligations, but without any duty to do so, and Agent shall not be liable for its failure to collect or enforce the payment thereof not for the negligence of its agents or attorneys with respect thereto and (iv) take whatever other action Agent may deem necessary or desirable for the protection of its interests. At any time that an Event of Default exists or has occurred and is continuing, at Agent's request, all invoices and statements sent to any account debtor, Credit Card Issuer or Credit Card Processor shall state that the Accounts due from such account debtor, Credit Card Issuer or Credit Card Processor and such other obligations have been assigned to Agent and are payable directly and only to Agent, and each Borrower shall deliver to Agent such originals of documents evidencing the sale and delivery of goods or the performance of services giving rise to any Accounts as Agent may require.

(e) Agent shall have the right at any time or times, in Agent's name or in the name of a nominee of Agent, to verify the validity, amount or any other matter relating to any Account or other Collateral, by mail, telephone, facsimile transmission or otherwise.

(f) Each Borrower shall deliver or cause to be delivered to Agent, with appropriate endorsement and assignment, with full recourse to such Borrower, all chattel paper and instruments which such Borrower now owns or may at any time acquire immediately upon such Borrower's receipt thereof, except as Agent may otherwise agree in writing.

7.3. Inventory Covenants. With respect to the Inventory:
(a) each Borrower shall at all times maintain inventory records reasonably satisfactory to Agent, keeping correct and accurate records itemizing and describing the kind, type, quality, quantity and aging of Inventory, such Borrower's cost therefor and daily withdrawals therefrom and additions thereto;
(b) each Borrower shall conduct a physical count of the Inventory at least once each year, but at any time or times as Agent may request on or after an Event of Default, and promptly following such physical inventory shall supply Agent with a report in the form and with such specificity as may be reasonably satisfactory to Agent concerning such physical count; (c) no Borrower shall remove any Inventory from the locations set forth or permitted herein, without the prior written consent of Agent, except for sales of Inventory in the ordinary course of a Borrower's business and except to move Inventory directly from one location set forth or permitted herein to another such location; (d) upon Agent's request, Borrowers shall, at its expense, no more than two times in any twelve (12) month period, but at any time or times as Agent may request at Agent's expense, or at any time or times as Agent may request at Borrowers' expense on or after an Event of Default, deliver or cause to be delivered to Agent written reports or appraisals or appraisal updates as to the Inventory in form, scope and methodology acceptable to Agent and by an appraiser acceptable to Agent, addressed to Agent and upon which Agent is expressly permitted to rely; (e) upon Agent's request, Borrowers shall, at their expense, conduct through RGIS Inventory Specialists, Inc. or another inventory counting service acceptable to Agent, a physical count of the Inventory in form, scope and methodology acceptable to Agent no more than once in any twelve (12) month period, but at any time or times as Agent may request on or after an Event of Default or at any time or times as Agent may request in the event of test count variances is in excess of 5% of the Cost of all Eligible Inventory, the results of which shall be reported directly by such inventory counting service to Agent and Borrowers shall promptly

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deliver confirmation in a form satisfactory to Agent that appropriate adjustments have been made to the inventory records of each Borrower to reconcile the inventory count to each Borrower's inventory records; (f) each Borrower shall produce, use, store and maintain the Inventory, with all reasonable care and caution and in accordance with applicable standards of any insurance and in conformity with Applicable Law (including, but not limited to, the requirements of the Federal Fair Labor Standards Act of 1938, as amended and all rules, regulations and orders related thereto); (g) each Borrower assumes all responsibility and liability arising from or relating to the production, use, sale or other disposition of the Inventory; (h) no Borrower shall sell Inventory to any customer on approval, or any other basis which entitles the customer to return or may obligate a Borrower to repurchase such Inventory except for the right of return given to retail customers of a Borrower in the ordinary course of the business of a Borrower in accordance with the then current return policy of such Borrower; (i) each Borrower shall keep the Inventory in good and marketable condition; and (j) no Borrower shall acquire or accept any Inventory on consignment or approval.

7.4. [Reserved]

7.5. Power of Attorney. Each Borrower hereby irrevocably designates and appoints Agent (and all persons designated by Agent) as such Borrower's true and lawful attorney-in-fact, and authorizes Agent, in such Borrower's, or Agent's name, to: (a) at any time an Event of Default exists or has occurred and is continuing (i) demand payment on Receivables or other Collateral, (ii) enforce payment of Receivables by legal proceedings or otherwise, (iii) exercise all of Borrower's rights and remedies to collect any Receivable or other Collateral, (iv) sell or assign any Receivable upon such terms, for such amount and at such time or times as the Agent deems advisable,
(v) settle, adjust, compromise, extend or renew an Account, (vi) discharge and release any Receivable, (vii) prepare, file and sign such Borrower's name on any proof of claim in bankruptcy or other similar document against an account debtor or other obligor in respect of any Receivables or other Collateral, (viii) notify the post office authorities to change the address for delivery of remittances from account debtors or other obligors in respect of Receivables or other proceeds of Collateral to an address designated by Agent, and open and dispose of all mail addressed to such Borrower and handle and store all mail relating to the Collateral; and (ix) do all acts and things which are necessary, in Agent's determination, to fulfill such Borrower's obligations under this Agreement and the other Financing Agreements and (b) at any time to (i) take control in any manner of any item of payment in respect of Receivables or constituting Collateral or otherwise received in or for deposit in the Blocked Accounts or otherwise received by Agent or any Lender, (ii) have access to any lockbox or postal box into which remittances from account debtors or other obligors in respect of Receivables or other proceeds of Collateral are sent or received, (iii) endorse such Borrower's name upon any items of payment in respect of Receivables or constituting Collateral or otherwise received by Agent and any Lender and deposit the same in Agent's account for application to the Obligations, (iv) endorse such Borrower's name upon any chattel paper, document, instrument, invoice, or similar document or agreement relating to any Receivable or any goods pertaining thereto or any other Collateral, including any warehouse or other receipts, or bills of lading and other negotiable or non-negotiable documents, and (v) sign such Borrower's name on any verification of Receivables and notices thereof to account debtors or any secondary obligors or other obligors in respect thereof. Each Borrower hereby releases Agent and Lenders and their respective officers, employees and designees from any liabilities arising from any act or acts under this power of

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attorney and in furtherance thereof, whether of omission or commission, except as a result of Agent's or any Lender's own gross negligence or wilful misconduct as determined pursuant to a final non-appealable order of a court of competent jurisdiction.

7.6. Right to Cure. Agent may, at its option, upon notice to Borrower Agent, (a) cure any default by any Borrower under any material agreement with a third party that affects the Collateral, its value or the ability of Agent to collect, sell or otherwise dispose of the Collateral or the rights and remedies of Agent or any Lender therein or the ability of any Borrower or any other Obligor to perform its obligations hereunder or under any of the other Financing Agreements, (b) pay or bond on appeal any judgment entered against any Borrower, (c) discharge taxes, Liens, security interests or other encumbrances at any time levied on or existing with respect to the Collateral and (d) pay any amount, incur any expense or perform any act which, in Agent's judgment, is necessary or appropriate to preserve, protect, insure or maintain the Collateral and the rights of Agent and Lenders with respect thereto. Agent may add any amounts so expended to the Obligations and charge Borrowers' account therefor, such amounts to be repayable by Borrowers on demand. Agent and Lenders shall be under no obligation to effect such cure, payment or bonding and shall not, by doing so, be deemed to have assumed any obligation or liability of any Borrower or any other Obligor. Any payment made or other action taken by Agent or any Lender under this Section shall be without prejudice to any right to assert an Event of Default hereunder and to proceed accordingly.

7.7. Access to Premises. From time to time as requested by Agent or Term Lender, at the cost and expense of Borrowers, (a) Agent, Term Lender or their respective designees shall have complete access to all of each Borrower premises during normal business hours and after notice to, or at any time and without notice to any Borrower if an Event of Default exists or has occurred and is continuing, for the purposes of inspecting, verifying and auditing the Collateral and all of Borrowers' books and records, including the Records, and (b) each Borrower shall promptly furnish to Agent such copies of such books and records or extracts therefrom as Agent may request, and (c) Agent or any Lender or Agent's designee may use during normal business hours such of each Borrower's personnel, equipment, supplies and premises as may be reasonably necessary for the foregoing and if an Event of Default exists or has occurred and is continuing for the collection of Receivables and realization of other Collateral.

7.8. Sales Taxes. Borrowers shall segregate collections of sales tax in a separate Blocked Account at any time upon Agent's request if an Event of Default exists.

SECTION 8. REPRESENTATIONS AND WARRANTIES

Each Borrower hereby represents and warrants to Agent and Lenders the following (which shall survive the execution and delivery of this Agreement), the truth and accuracy of which are a continuing condition of the making of Loans by Lenders to Borrowers:

8.1. Corporate Existence, Power and Authority. Each Borrower is a corporation duly organized and in good standing under the laws of its state of incorporation or organization and is duly qualified as a foreign corporation and in good standing in all states or other jurisdictions where the nature and extent of the business transacted by it or the ownership

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of assets makes such qualification necessary, except for those jurisdictions in which the failure to so qualify would not have a Material Adverse Effect. The execution, delivery and performance of this Agreement, the other Financing Agreements and the transactions contemplated hereunder and thereunder (a) are all within such Borrower's corporate powers, (b) have been duly authorized, (c) are not in contravention of law or the terms of such Borrower's certificate of incorporation, by-laws, or other organizational documentation, or any indenture, agreement or undertaking to which such Borrower is a party or by which such Borrower or its property are bound and (d) will not result in the creation or imposition of, or require or give rise to any obligation to grant, any Lien, security interest, charge or other encumbrance upon any property of such Borrower. This Agreement and the other Financing Agreements to which a Borrower is a party constitute legal, valid and binding obligations of such Borrower enforceable in accordance with their respective terms.

8.2. Name; State of Organization; Chief Executive Office; Collateral Locations.

(a) The exact legal name of each Borrower is as set forth on the signature page of this Agreement and in the Information Certificate applicable to such Borrower. No Borrower has, during the past five years, been known by or used any other corporate or fictitious name or been a party to any merger or consolidation, or acquired all or substantially all of the assets of any Person, or acquired any of its property or assets out of the ordinary course of business, except as set forth in the Information Certificate.

(b) Each Borrower is an organization of the type and organized in the jurisdiction set forth in the Information Certificate applicable to such Borrower. The Information Certificate accurately set forth the organizational identification numbers of each Borrower or accurately state that such Borrower has none and accurately set forth the federal employer identification number of each Borrower.

(c) The chief executive office and mailing address of each Borrower and each Borrower's Records concerning Accounts are located only at the address identified as such in SCHEDULE 8.2 to the Information Certificate and its only other places of business and the only other locations of Collateral, if any, are the addresses set forth in SCHEDULE 8.2 to the Information Certificate applicable to such Borrower, subject to the rights of Borrowers to establish new locations in accordance with SECTION 9.2 below. The Information Certificate correctly identify any of such locations which are not owned by a Borrower and set forth the owners and/or operators thereof.

8.3. Financial Statements; No Material Adverse Change. All financial statements relating to Borrowers which have been or may hereafter be delivered by Borrowers to Agent and Lenders have been prepared in accordance with GAAP (except as to any interim financial statements, to the extent such statements are subject to normal year-end adjustments and do not include any notes) and fairly present in all material respects the financial condition and the results of operation of each Borrower as at the dates and for the periods set forth therein. Except as disclosed in any interim financial statements furnished by Borrowers to Agent prior to the date of this Agreement, there has been no act, condition or event which has had or is reasonably likely to have a Material Adverse Effect since the date of the most recent audited

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financial statements of Borrowers furnished by Borrowers to Agent prior to the date of this Agreement.

8.4. Priority of Liens; Title to Properties. The security interests and Liens granted to Agent under this Agreement and the other Financing Agreements constitute valid and perfected first priority Liens and security interests in and upon the Collateral subject only to the Liens indicated on SCHEDULE 8.4 to the Information Certificate and the other Liens permitted under SECTION 9.8 hereof. Each Borrower has good and marketable fee simple title to or valid leasehold interests in all of its Real Property and good, valid and merchantable title to all of its other properties and assets subject to no Liens, of any kind, except those granted to Agent and such others as are specifically listed on SCHEDULE 8.4 to the Information Certificate or permitted under SECTION 9.8 hereof.

8.5. Tax Returns. Each Borrower has filed, or caused to be filed, in a timely manner all tax returns, reports and declarations which are required to be filed by it. All information in such tax returns, reports and declarations is complete and accurate in all material respects. Each Borrower has paid or caused to be paid all taxes due and payable or claimed due and payable in any assessment received by it, except taxes the validity of which are being contested in good faith by appropriate proceedings diligently pursued and available to such Borrower and with respect to which adequate reserves have been set aside on its books. Adequate provision has been made for the payment of all accrued and unpaid Federal, State, county, local, foreign and other taxes whether or not yet due and payable and whether or not disputed.

8.6. Litigation. Except as set forth on SCHEDULE 8.6 to the Information Certificate, (a) there is no investigation by any Governmental Authority pending, or to the best of each Borrower's knowledge threatened, against or affecting any Borrower, its or their assets or business and (b) there is no action, suit, proceeding or claim by any Person pending, or to the best of each Borrower's knowledge threatened, against any Borrower or its or their assets or goodwill, or against or affecting any transactions contemplated by this Agreement, in each case, which if adversely determined against such Borrower has or could reasonably be expected to have a Material Adverse Effect.

8.7. Compliance with Other Agreements and Applicable Laws.

(a) No Borrower is in default in any respect under, or in violation in any respect of the terms of, any material agreement, contract, instrument, lease or other commitment to which it is a party or by which it or any of its assets are bound. Each Borrower is in compliance with the requirements of all Applicable Laws, rules, regulations and orders of any Governmental Authority relating to its respective business, including, without limitation, those set forth in or promulgated pursuant to the Occupational Safety and Health Act of 1970, as amended, the Fair Labor Standards Act of 1938, as amended, ERISA, the Code, as amended, and the rules and regulations thereunder, and all Environmental Laws.

(b) Each Borrower has obtained all material permits, licenses, approvals, consents, certificates, orders or authorizations of any Governmental Authority required for the lawful conduct of its business (the "Permits"). All of the Permits are valid and

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subsisting and in full force and effect. There are no actions, claims or proceedings pending or to the best of each Borrower's knowledge, threatened that seek the revocation, cancellation, suspension or modification of any of the Permits.

8.8. Environmental Compliance.

(a) Except as set forth on SCHEDULE 8.8 to the Information Certificate or in that certain Phase I Environmental Assessment with respect to the Real Property subject to the Mortgage dated October, 2000, prepared by Water & Air Research, Inc. for Parent and Agent (the "Phase I Report"), neither any Borrower nor any of its Subsidiaries has generated, used, stored, treated, transported, manufactured, handled, produced or disposed of any Hazardous Materials, on or off its premises (whether or not owned by it) in any manner which at any time violates in any material respect any applicable Environmental Law or Permit, and the operations of each Borrower and each of its Subsidiaries complies in all material respects with all Environmental Laws and all Permits.

(b) Except as set forth on SCHEDULE 8.8 to the Information Certificate or the Phase I report, there has been no investigation by any Governmental Authority or any proceeding, complaint, order, directive, claim, citation or notice by any Governmental Authority or any other person nor is any pending or to the best of each Borrower's knowledge threatened, with respect to any non-compliance with or violation of the requirements of any Environmental Law by any Borrower or any of its Subsidiaries or the release, spill or discharge, threatened or actual, of any Hazardous Material or the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials or any other environmental, health or safety matter, which adversely affects or could reasonably be expected to adversely affect in any material respect any Borrower or its business, operations or assets or any properties at which any Borrower has transported, stored or disposed of any Hazardous Materials.

(c) Except as set forth on SCHEDULE 8.8 to the Information Certificate or the Phase I report, no Borrower nor any of its Subsidiaries has material liability (contingent or otherwise) in connection with a release, spill or discharge, threatened or actual, of any Hazardous Materials or the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials.

(d) Each Borrower and each of its Subsidiaries have all Permits required to be obtained or filed in connection with the operations of such Borrower under any Environmental Law and all of such licenses, certificates, approvals or similar authorizations and other Permits are valid and in full force and effect.

8.9. Employee Benefits.

(a) Each Plan is in compliance in all material respects with the applicable provisions of ERISA, the Code and other Federal or State law. Each Plan which is intended to qualify under Section 401(a) of the Code has received a favorable determination, opinion or notification letter from the Internal Revenue Service and to the best of each Borrower's knowledge, nothing has occurred which would cause the loss of such qualification.

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Each Borrower and its ERISA Affiliates have made all required contributions to any Plan subject to Section 412 of the Code, and no application for a funding waiver or an extension of any amortization period pursuant to Section 412 of the Code has been made with respect to any Plan.

(b) There are no pending, or to the best of each Borrower's knowledge, threatened claims, actions or lawsuits, or action by any Governmental Authority, with respect to any Plan (other than claims for benefits made in the ordinary course of the operation of the Plan). To the best of each Borrower's knowledge, there has been no prohibited transaction or violation of the fiduciary responsibility rules with respect to any Plan.

(c) (i) No ERISA Event has occurred or is reasonably expected to occur; (ii) the current value of each Plan's assets (determined in accordance with the assumptions used for funding such Plan pursuant to Section 412 of the Code) are not less than such Plan's liabilities under Section 4001(a)(16) of ERISA; (iii) no Borrower nor any of its ERISA Affiliates, has incurred and do not reasonably expect to incur, any liability under Title IV of ERISA with respect to any Plan (other than premiums due and not delinquent under Section 4007 of ERISA); (iv) no Borrower nor any of its Affiliates, has incurred and do not reasonably expect to incur, any liability (and no event has occurred which, with the giving of notice under Section 4219 of ERISA, would result in such liability) under Section 4201 or 4243 of ERISA with respect to a Multiemployer Plan; and (v) no Borrower nor any of its ERISA Affiliates, has engaged in a transaction that would be subject to Section 4069 or 4212(c) of ERISA with respect to any Plan subject to Title IV of ERISA.

8.10. Bank Accounts. All of the deposit accounts, investment accounts or other accounts in the name of or used by any Borrower maintained at any bank or other financial institution are set forth on SCHEDULE 8.10 to the Information Certificate, subject to the right of each Borrower to establish new accounts in accordance with SECTION 5.2 hereof.

8.11. Intellectual Property. Each Borrower owns or licenses or otherwise has the right to use all Intellectual Property necessary for the operation of its business as presently conducted or proposed to be conducted. As of the date hereof, no Borrower has any Intellectual Property registered, or subject to pending applications, in the United States Patent and Trademark Office or any similar office or agency in the United States, any State thereof, any political subdivision thereof or in any other country, other than those described in SCHEDULE 8.11 to the Information Certificate and has not granted any licenses with respect thereto other than as set forth in SCHEDULE 8.11 to the Information Certificate. No event has occurred which permits or would permit after notice or passage of time or both, the revocation, suspension or termination of such rights. To the best of each Borrower's knowledge, no slogan or other advertising device, product, process, method, substance or other Intellectual Property or goods bearing or using any Intellectual Property presently contemplated to be sold by or employed by such Borrower infringes any patent, trademark, service mark, tradename, copyright, license or other Intellectual Property owned by any other Person presently and no claim or litigation is pending or threatened against or affecting such Borrower contesting its right to sell or use any such Intellectual Property. SCHEDULE 8.11 to the Information Certificate sets forth all of the agreements or other arrangements of Borrowers pursuant to which any Borrower has a license or other right to use any trademarks, logos, designs, representations or other Intellectual Property owned by another person as in effect on the date hereof and the dates of the expiration of such agreements or other

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arrangements of any Borrower as in effect on the date hereof (collectively, together with such agreements or other arrangements as may be entered into by any Borrower after the date hereof, collectively, the "License Agreements" and individually, a "License Agreement"). No trademark, service mark, copyright or other Intellectual Property at any time used by any Borrower which is owned by another person, or owned by any Borrower subject to any security interest, Lien, collateral assignment, pledge or other encumbrance in favor of any Person other than Agent, is affixed to any Eligible Inventory, except (a) to the extent permitted under the term of the license agreements listed on SCHEDULE 8.11 to the Information Certificate and (b) to the extent the sale of Inventory to which such Intellectual Property is affixed is permitted to be sold by such Borrower under Applicable Law (including the United States Copyright Act of 1976).

8.12. Subsidiaries; Affiliates; Capitalization; Solvency.

(a) No Borrower has any direct or indirect Subsidiaries or Affiliates nor is any Borrower engaged in any joint venture or partnership except as set forth in SCHEDULE 8.12 to the Information Certificate.

(b) Each Borrower is the record and beneficial owner of all of the issued and outstanding shares of Capital Stock of each of its Subsidiaries listed on SCHEDULE 8.12 to its Information Certificate as being owned by such Borrower and there are no proxies, irrevocable or otherwise, with respect to such shares and no equity securities of any of the Subsidiaries are or may become required to be issued by reason of any options, warrants, rights to subscribe to, calls or commitments of any kind or nature and there are no contracts, commitments, understandings or arrangements by which any Subsidiary is or may become bound to issue additional shares of it Capital Stock or securities convertible into or exchangeable for such shares.

(c) The issued and outstanding shares of Capital Stock of each Borrower are directly and beneficially owned and held by the persons indicated in the Information Certificate, and in each case all of such shares have been duly authorized and are fully paid and non-assessable, free and clear of all claims, Liens, pledges and encumbrances of any kind, except as disclosed in writing to Agent prior to the date hereof.

(d) Each Borrower is Solvent and will continue to be Solvent after the creation of the Obligations, the security interests of Agent and the other transaction contemplated hereunder.

8.13. Labor Disputes.

(a) Set forth on SCHEDULE 8.13 to each Information Certificate is a list (including dates of termination) of all collective bargaining or similar agreements between or applicable to any Borrower and any union, labor organization or other bargaining agent in respect of the employees of any Borrower on the date hereof.

(b) There is (i) no significant unfair labor practice complaint pending against any Borrower or, to the best of each Borrower's knowledge, threatened against it, before the National Labor Relations Board, and no significant grievance or significant

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arbitration proceeding arising out of or under any collective bargaining agreement is pending on the date hereof against any Borrower or, to best of each Borrower's knowledge, threatened against it, and (ii) no significant strike, labor dispute, slowdown or stoppage is pending against any Borrower or, to the best of each Borrower's knowledge, threatened against any Borrower.

8.14. Restrictions on Subsidiaries. Except for restrictions contained in this Agreement or any other agreement with respect to Indebtedness of any Borrower permitted hereunder as in effect on the date hereof, there are no contractual or consensual restrictions on any Borrower or any of its Subsidiaries which prohibit or otherwise restrict (a) the transfer of cash or other assets (i) between any Borrower and any of its Subsidiaries or
(ii) between any Subsidiaries of any Borrower or (b) the ability of any Borrower or any of its Subsidiaries to incur Indebtedness or grant security interests to Agent or any Lender in the Collateral.

8.15. Material Contracts. SCHEDULE 8.15 to each Information Certificate sets forth all Material Contracts to which a Borrower is a party or is bound as of the date hereof. Each Borrower has delivered true, correct and complete copies of such Material Contracts to Agent on or before the date hereof. No Borrower is in breach or in default in any material respect of or under any Material Contract and no Borrower has received any notice of the intention of any other party thereto to terminate any Material Contract.

8.16. Payable Practices. No Borrower has made any material change in the historical accounts payable practices from those in effect immediately prior to the date hereof.

8.17. Accuracy and Completeness of Information. All information furnished by or on behalf of each Borrower in writing to Agent or any Lender in connection with this Agreement or any of the other Financing Agreements or any transaction contemplated hereby or thereby, including all information on the Information Certificate is true and correct in all material respects on the date as of which such information is dated or certified and does not omit any material fact necessary in order to make such information not misleading. No event or circumstance has occurred which has had or could reasonably be expected to have a Material Adverse Affect, which has not been fully and accurately disclosed to Agent in writing prior to the date hereof.

8.18. Credit Card Agreements. Set forth in SCHEDULE 8.18 hereto is a correct and complete list of (a) all of the Credit Card Agreements and all other agreements, documents and instruments existing as of the date hereof between or among a Borrower, any of its Affiliates, the Credit Card Issuers, the Credit Card Processors and any of their Affiliates, (b) the percentage of each sale payable to the Credit Card Issuer or Credit Card Processor under the terms of the Credit Card Agreements, (c) all other fees and charges payable by a Borrower under or in connection with the Credit Card Agreements and (d) the term of such Credit Card Agreements. The Credit Card Agreements constitute all of such agreements necessary for each Borrower to operate its business as presently conducted with respect to credit cards and debit cards and no Accounts of any Borrower arise from purchases by customers of Inventory with credit cards or debit cards, other than those which are issued by Credit Card Issuers with whom a Borrower has entered into one of the Credit Card Agreements set forth on SCHEDULE 8.18 hereto or with whom a Borrower has entered into a Credit Card Agreement in accordance with SECTION 9.21 hereof. Each of the Credit Card Agreements constitutes the legal, valid and binding

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obligations of a Borrower and to the best of each Borrower's knowledge, the other parties thereto, enforceable in accordance with their respective terms and are in full force and effect. No default or event of default, or act, condition or event which after notice or passage of time or both, would constitute a default or an event of default under any of the Credit Card Agreements exists or has occurred. Borrowers and the other parties thereto have complied with all of the terms and conditions of the Credit Card Agreements to the extent necessary for any Borrower to be entitled to receive all payments thereunder. Each Borrower has delivered, or caused to be delivered to Agent, true, correct and complete copies of all of the Credit Card Agreements.

8.19. Survival of Warranties; Cumulative. All representations and warranties contained in this Agreement or any of the other Financing Agreements shall survive the execution and delivery of this Agreement and shall be deemed to have been made again to Agent and Lenders on the date of each additional borrowing or other credit accommodation hereunder and shall be conclusively presumed to have been relied on by Agent and Lenders regardless of any investigation made or information possessed by Agent or any Lender. The representations and warranties set forth herein shall be cumulative and in addition to any other representations or warranties which any Borrower shall now or hereafter give, or cause to be given, to Agent or any Lender.

SECTION 9. AFFIRMATIVE AND NEGATIVE COVENANTS

9.1. Maintenance of Existence.

(a) Each Borrower shall at all times preserve, renew and keep in full force and effect its corporate existence and rights and franchises with respect thereto and maintain in full force and effect all licenses, trademarks, tradenames, approvals, authorizations, leases, contracts and Permits necessary to carry on the business as presently or proposed to be conducted.

(b) No Borrower shall change its name unless each of the following conditions is satisfied: (i) Agent shall have received not less than thirty (30) days prior written notice from such Borrower of such proposed change in its corporate name, which notice shall accurately set forth the new name; and (ii) Agent shall have received a copy of the amendment to the Certificate of Incorporation of such Borrower providing for the name change certified by the Secretary of State of the jurisdiction of incorporation or organization of such Borrower as soon as it is available.

(c) No Borrower shall change its chief executive office or its mailing address or organizational identification number (or if it does not have one, shall not acquire one) unless Agent shall have received not less than thirty (30) days' prior written notice from such Borrower of such proposed change, which notice shall set forth such information with respect thereto as Agent may require and Agent shall have received such agreements as Agent may reasonably require in connection therewith. No Borrower shall change its type of organization, jurisdiction of organization or other legal structure.

9.2. New Collateral Locations. A Borrower may only open any new location within the continental United States provided such Borrower
(a) gives Agent thirty (30) days

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prior written notice of the intended opening of any such new location, if such new location is not a new warehouse location, and (b) executes and delivers, and uses its best efforts to cause the owner or lessor of such location to execute and deliver, to Agent such agreements, documents, and instruments as Agent may deem reasonably necessary or desirable to protect its interests in the Collateral at such location. A Borrower may only lease, occupy or use any new warehouse location provided such Borrower (i) gives Agent written notice of such new location, including its address and the name and address of its owner or lessor within five (5) days after such Borrower occupies or delivers Inventory to such warehouse, and (ii) executes and delivers, and uses its best efforts to cause the owner or lessor of such warehouse to execute and deliver, to Agent such agreements, documents, and instruments as Agent may deem reasonably necessary or desirable to protect its interests in the Collateral at such location.

9.3. Compliance with Laws, Regulations, Etc.

(a) Each Borrower shall, and shall cause each of its Subsidiaries to, at all times, comply in all material respects with all laws, rules, regulations, licenses, approvals, orders and other Permits applicable to it and duly observe in all material respects all requirements of any foreign, Federal, State or local Governmental Authority, including ERISA, the Code, the Occupational Safety and Health Act of 1970, as amended, the Fair Labor Standards Act of 1938, as amended, and all statutes, rules, regulations, orders, permits and stipulations relating to environmental pollution and employee health and safety, including all of the Environmental Laws.

(b) Each Borrower shall give written notice to Agent immediately upon such Borrower's receipt of any notice of, or such Borrower's otherwise obtaining knowledge of, (i) the occurrence of any event involving the release, spill or discharge, threatened or actual, of any Hazardous Material or (ii) any investigation, proceeding, complaint, order, directive, claims, citation or notice with respect to: (A) any non-compliance with or violation of any Environmental Law by such Borrower or (B) the release, spill or discharge, threatened or actual, of any Hazardous Material other than in the ordinary course of business and other than as permitted under any applicable Environmental Law. Copies of all environmental surveys, audits, assessments, feasibility studies and results of remedial investigations shall be promptly furnished, or caused to be furnished, by such Borrower to Agent. Each Borrower shall take prompt action to respond to any material non-compliance with any of the Environmental Laws and shall regularly report to Agent on such response.

(c) Without limiting the generality of the foregoing, whenever Agent reasonably determines that there is non-compliance, or any condition which requires any action by or on behalf of a Borrower in order to avoid any non-compliance, with any Environmental Law, that could reasonably be expected to have a Material Adverse Effect, such Borrower shall, at Agent's request and Borrowers' expense: (i) cause an independent environmental engineer reasonably acceptable to Agent to conduct such tests of the site where non-compliance or alleged non-compliance with such Environmental Laws has occurred as to such non-compliance and prepare and deliver to Agent a report as to such non-compliance setting forth the results of such tests, a proposed plan for responding to any environmental problems described therein, and an estimate of the costs thereof and (ii) provide to Agent a

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supplemental report of such engineer whenever the scope of such non-compliance, or such Borrower's response thereto or the estimated costs thereof, shall change in any material respect.

(d) Each Borrower shall indemnify, defend and hold harmless Agent and Lenders and their respective directors, officers, employees, agents, invitees, representatives, successors and assigns, from and against any and all losses, claims, damages, liabilities, costs, and expenses (including reasonable attorneys' fees and expenses) directly or indirectly arising out of or attributable to the use, generation, manufacture, reproduction, storage, release, threatened release, spill, discharge, disposal or presence of a Hazardous Material, including the costs of any required or necessary repair, cleanup or other remedial work with respect to any property of a Borrower and the preparation and implementation of any closure, remedial or other required plans. All representations, warranties, covenants and indemnifications in this SECTION 9.3 shall survive the payment of the Obligations and the termination of this Agreement.

9.4. Payment of Taxes and Claims. Each Borrower shall, and shall cause each of its Subsidiaries to, duly pay and discharge all taxes, assessments, contributions and governmental charges upon or against it or its properties or assets, except for taxes the validity of which are being contested in good faith by appropriate proceedings diligently pursued and available to such Borrower or such Subsidiary, as the case may be, and with respect to which adequate reserves have been set aside on its books. Borrowers shall be jointly and severally liable for any tax or penalties imposed on Agent or any Lender as a result of the financing arrangements provided for herein and each Borrower agrees to indemnify and hold Agent harmless with respect to the foregoing, and to repay to Agent, for the benefit of Lenders, on demand the amount thereof, and until paid by Borrowers such amount shall be added and deemed part of the Loans, provided, that, nothing contained herein shall be construed to require Borrowers to pay any income or franchise taxes attributable to the income of Lenders from any amounts charged or paid hereunder to Lenders. The foregoing indemnity shall survive the payment of the Obligations and the termination of this Agreement.

9.5. Insurance. Each Borrower shall, and shall cause each of its Subsidiaries to, at all times, maintain with financially sound and reputable insurers insurance with respect to the Collateral against loss or damage and all other insurance of the kinds and in the amounts customarily insured against or carried by corporations of established reputation engaged in the same or similar businesses and similarly situated. Said policies of insurance shall be reasonably satisfactory to Agent as to form, amount and insurer. Each Borrower shall furnish certificates, policies or endorsements to Agent as Agent shall reasonably require as proof of such insurance, and, if any Borrower fails to do so, Agent is authorized, but not required, to obtain such insurance at the expense of Borrowers. All policies shall provide for at least thirty (30) days prior written notice to Agent of any cancellation or reduction of coverage and that Agent may act as attorney for each Borrower in obtaining, and at any time an Event of Default exists or has occurred and is continuing, adjusting, settling, amending and canceling such insurance. Each Borrower shall cause Agent to be named as a loss payee and an additional insured (but without any liability for any premiums) under such insurance policies and Borrowers shall obtain non-contributory lender's loss payable endorsements to all insurance policies in form and substance satisfactory to Agent. Such lender's loss payable endorsements shall specify that the proceeds of such insurance shall be payable to Agent as its interests may appear and further specify that

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Agent and Lenders shall be paid regardless of any act or omission by any Borrower or any of its or their Affiliates.

9.6. Financial Statements and Other Information.

(a) Each Borrower shall, and shall cause each of its Subsidiaries to, keep proper books and records in which true and complete entries shall be made of all dealings or transactions of or in relation to the Collateral and the business of such Borrower and its Subsidiaries in accordance with GAAP. Each Borrower shall promptly furnish to Agent and Lenders all such financial and other information as Agent shall reasonably request relating to the Collateral and the assets, business and operations of such Borrower, and to notify the auditors and accountants of such Borrower that Agent is authorized to obtain such information directly from them. Without limiting the foregoing, Borrowers shall furnish or cause to be furnished to Agent, the following: (i) within thirty (30) days after the end of each fiscal month (unless such month is the last month of a fiscal quarter, and then within forty-five (45) days after the end of such month, and if the initial public offering of Parent occurs, concurrently with each delivery of its 10-Q for any period), monthly unaudited consolidated financial statements, and unaudited consolidating financial statements (including in each case balance sheets, statements of income and loss, statements of cash flow, and statements of shareholders' equity), all in reasonable detail, fairly presenting the financial position and the results of the operations of Borrowers and their Subsidiaries as of the end of and through such fiscal month, certified to be correct by the chief financial officer of Borrowers, subject to normal year-end adjustments and no footnotes and accompanied by a compliance certificate substantially in the form of EXHIBIT C hereto, along with a schedule in a form satisfactory to Agent of the calculations used in determining, as of the end of such month, whether Borrower are in compliance with the covenants set forth in SECTIONS 9.17 and 9.19 of this Agreement for such month and (ii) within ninety (90) days after the end of each Fiscal Year, audited consolidated financial statements and unaudited consolidating financial statements of Borrowers and their Subsidiaries (including in each case balance sheets, statements of income and loss, statements of cash flow, and statements of shareholders' equity), and the accompanying notes thereto, all in reasonable detail, fairly presenting the financial position and the results of the operations of Borrowers and their Subsidiaries as of the end of and for such Fiscal Year, together with the unqualified opinion (which shall not contain a "going concern" qualification) of independent certified public accountants with respect to the audited consolidated financial statements, which accountants shall be an independent accounting firm selected by Borrowers and acceptable to Agent, that such audited consolidated financial statements have been prepared in accordance with GAAP, and present fairly the results of operations and financial condition of Borrowers and their Subsidiaries as of the end of and for the Fiscal Year then ended.

(b) Borrowers shall promptly notify Agent in writing of the details of (i) any loss, damage, investigation, action, suit, proceeding or claim relating to Collateral having a value of more than $250,000 or which if adversely determined would result in any material adverse change in any Borrower's business, properties, assets, goodwill or condition, financial or otherwise, (ii) any Material Contract being terminated or amended or any new Material Contract entered into (in which event Borrowers shall provide Agent with a copy of such Material Contract), (iii) any order, judgment or decree in excess of $250,000 shall have been entered against any Borrower any of its properties or assets, (iv) any notification of a

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material violation of laws or regulations received by any Borrower, (v) any ERISA Event, and (vi) the occurrence of any Default or Event of Default.

(c) Each Borrower shall promptly after the sending or filing thereof furnish or cause to be furnished to Agent copies of all reports which such Borrower sends to its stockholders generally and copies of all reports and registration statements which such Borrower files with the Securities and Exchange Commission, any national securities exchange or the National Association of Securities Dealers, Inc.

(d) Each Borrower shall furnish or cause to be furnished to Agent such budgets, forecasts, projections and other information respecting the Collateral and the business of such Borrower, as Agent may, from time to time, reasonably request. Agent is hereby authorized to deliver a copy of any financial statement or any other information relating to the business of such Borrower to any court or other Governmental Authority, or to any Lender or Participant or prospective Lender or Participant, or any Affiliate of any Lender or Participant, subject to SECTION 13.5 hereof. Each Borrower hereby irrevocably authorizes and directs all accountants or auditors to deliver to Agent, at Borrowers' expense, copies of the financial statements of Borrowers and any reports or management letters prepared by such accountants or auditors on behalf of Borrowers and to disclose to Agent and Lenders such information as they may have regarding the business of any Borrower. Any documents, schedules, invoices or other papers delivered to Agent or any Lender may be destroyed or otherwise disposed of by Agent or such Lender one (1) year after the same are delivered to Agent or such Lender, except as otherwise designated by party to Agent or such Lender in writing.

9.7. Sale of Assets, Consolidation, Merger, Dissolution, Etc. No Borrower shall, and shall not permit any of its Subsidiaries to, directly or indirectly,

(a) merge into or with or consolidate with any other Person or permit any other Person to merge into or with or consolidate with it;

(b) sell, assign, lease, transfer, abandon or otherwise dispose of any Capital Stock or Indebtedness to any other Person or any of its assets to any other Person, except for

(i) sales of Inventory in the ordinary course of business,

(ii) the sale or other disposition of Equipment (including worn-out or obsolete Equipment or Equipment no longer used or useful in the business of Borrower) so long as such sales or other dispositions do not involve Equipment having an aggregate fair market value in excess of $500,000 for all such Equipment disposed of by all Borrowers in any Fiscal Year of Borrowers, and

(iii) the issuance of Capital Stock of a Borrower consisting of common stock pursuant to an employee stock option or grant or similar equity plan or 401(k) plans of a Borrower for the benefit of its employees, directors and consultants, provided, that, in no event shall any Borrower be required to issue, or shall any Borrower issue,

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Capital Stock pursuant to such stock plans or 401(k) plans which would result in a Change of Control or other Event of Default,

(iv) sales or other dispositions by a Borrower of assets in connection with the closing or sale of a retail store location of a Borrower in the ordinary course of a Borrower's business, which assets consist of leasehold interests in the premises of such store, the Equipment and fixtures located at such premises and the books and records relating exclusively and directly to the operations of such store; provided, that, as to each and all such closures of retail stores, (A) on the date of, and after giving effect to, any such retail store closure, Borrowers shall not have closed retail store locations accounting for more than $2,000,000 of Consolidated EBITDA in the immediately preceding twelve (12) fiscal month period, and (B) Agent shall have received not less than ten (10) Business Days prior written notice of such closure; and provided further that, as to each and all such sales of retail stores (V) on the date of, and after giving effect to, any such retail store sale in any calendar year, Borrowers shall not have sold retail store locations accounting for more than five percent (5%) of all sales of all Borrowers in the immediately preceding twelve (12) fiscal month period, (W) Agent shall have received not less than ten (10) Business Days prior written notice of such sale, which notice shall set forth in reasonable detail satisfactory to Agent the parties to such sale, the assets to be sold or otherwise disposed of, the purchase price and the manner of payment thereof and such other information with respect thereto as Agent may request, (X) as of the date of such sale or other disposition and after giving effect thereto, no Default or Event of Default shall exist or have occurred, (Y) such sale shall be on commercially reasonable prices and terms in a bona fide arm's length transaction, and (Z) any and all net proceeds payable or delivered to any Borrower in respect of such sale or other disposition shall be paid or deposited into the Agent Payment Account or, as and when required by SECTION 2.3(d) hereof, paid or delivered to Agent as a prepayment on the Term Loan, and

(v) the sale or transfer of Capital Stock of Parent in connection with Parent's initial public offering or any subsequent public offering of Capital Stock of Parent;

(d) agree to do any of the foregoing.

9.8. Encumbrances. No Borrower shall, and shall not permit any of its Subsidiaries to, create, incur, assume or suffer to exist any Lien of any nature whatsoever on any of its assets or properties, including the Collateral, except:

(a) Liens of Agent for itself and the benefit of Lenders;

(b) Liens securing the payment of taxes, assessments or other governmental charges or levies either not yet overdue or the validity of which are being contested in good faith by appropriate proceedings diligently pursued and available to Borrowers or their Subsidiaries, as the case may be and with respect to which adequate reserves have been set aside on its books;

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(c) non-consensual statutory Liens (other than liens securing the payment of taxes) arising in the ordinary course of a Borrower's or its Subsidiary's business to the extent: (i) such liens secure Indebtedness which is not overdue or (ii) such Liens secure Indebtedness relating to claims or liabilities which are fully insured and being defended at the sole cost and expense and at the sole risk of the insurer or being contested in good faith by appropriate proceedings diligently pursued and available to such Borrower or its Subsidiary, in each case prior to the commencement of foreclosure or other similar proceedings and with respect to which adequate reserves have been set aside on its books;

(d) zoning restrictions, easements, licenses, covenants and other restrictions affecting the use of Real Property which do not interfere in any material respect with the use of such Real Property or ordinary conduct of the business of a Borrower or its Subsidiaries as presently conducted thereon or materially impair the value of the Real Property which may be subject thereto;

(e) purchase money security interests in Equipment (including Capital Leases) and purchase money mortgages on Real Property to secure Indebtedness permitted under SECTION 9.9(b) hereof;

(f) pledges and deposits of cash by a Borrower after the date hereof in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security benefits consistent with the current practices of such Borrower as of the date hereof;

(g) pledges and deposits of cash by a Borrower after the date hereof to secure the performance of tenders, bids, leases, trade contracts (other than for the repayment of Indebtedness), statutory obligations and other similar obligations in each case in the ordinary course of business consistent with the current practices of such Borrower as of the date hereof; provided, that, in connection with any performance bonds issued by a surety or other person, the issuer of such bond shall have waived in writing any rights in or to, or other interest in, any of the Collateral in an agreement, in form and substance satisfactory to Agent;

(h) Liens arising from (i) operating leases and the precautionary UCC financing statement filings in respect thereof and (ii) equipment or other materials which are not owned by a Borrower located on the premises of such Borrower (but not in connection with, or as part of, the financing thereof) from time to time in the ordinary course of business and consistent with current practices of such Borrower and the precautionary UCC financing statement filings in respect thereof;

(i) judgments and other similar liens arising in connection with court proceedings that do not constitute an Event of Default, provided, that, (i) such Liens are being contested in good faith and by appropriate proceedings diligently pursued, (ii) adequate reserves or other appropriate provision, if any, as are required by GAAP have been made therefor,
(iii) a stay of enforcement of any such liens is in effect and (iv) Agent may establish a Reserve with respect thereto; and

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(j) the security interests and liens set forth on SCHEDULE 8.4 to the Information Certificate.

9.9. Indebtedness. No Borrower shall, nor shall it permit any of its Subsidiaries to, incur, create, assume, become or be liable in any manner with respect to, or permit to exist, any Indebtedness, or guarantee, assume, endorse, or otherwise become responsible for (directly or indirectly), the Indebtedness, performance, obligations or dividends of any other Person, except:

(a) the Obligations;

(b) purchase money Indebtedness (including Capital Leases) arising after the date hereof to the extent secured by purchase money security interests in Equipment (including Capital Leases) and purchase money mortgages on Real Property not to exceed $2,500,000 in the aggregate at any time outstanding so long as such security interests and mortgages do not apply to any property of any Borrower or any Subsidiary other than the Equipment or Real Property so acquired, and the Indebtedness secured thereby does not exceed the cost of the Equipment or Real Property so acquired, as the case may be;

(d) the Indebtedness of a Borrower to any other Borrower arising after the date hereof pursuant to loans by such Borrower permitted under
SECTION 9.10(g) hereof;

(e) unsecured Indebtedness of a Borrower arising after the date hereof to any third Person (but not to any other Borrower ), provided, that, each of the following conditions is satisfied as determined by Agent and the Term Lender: (i) such Indebtedness shall be on terms and conditions acceptable to Agent and the Term Lender and shall be subject and subordinate in right of payment to the right of Agent, the Term Lender and the other Lenders to receive the prior indefeasible payment and satisfaction in full payment of all of the Obligations pursuant to the terms of an intercreditor agreement between Agent and such third party, in form and substance satisfactory to Agent, (ii) Agent shall have received not less than ten (10) days prior written notice of the intention of such Borrower to incur such Indebtedness, which notice shall set forth in reasonable detail satisfactory to Agent the amount of such Indebtedness, the Person or Persons to whom such Indebtedness will be owed, the interest rate, the schedule of repayments and maturity date with respect thereto and such other information as Agent may request with respect thereto, (iii) Agent shall have received true, correct and complete copies of all agreements, documents and instruments evidencing or otherwise related to such Indebtedness,
(iv) except as Agent and the Term Lender may otherwise agree in writing, all of the proceeds of the loans or other accommodations giving rise to such Indebtedness shall be paid to Agent for application to the Obligations in such order and manner as Agent and Term Lender may determine, (v) as of the date of incurring such Indebtedness and after giving effect thereto, no Default or Event of Default shall exist or have occurred, (vi) such Borrower shall not, directly or indirectly, (A) amend, modify, alter or change the terms of such Indebtedness or any agreement, document or instrument related thereto, except, that, Borrower may, after prior written notice to

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Agent, amend, modify, alter or change the terms thereof so as to extend the maturity thereof, or defer the timing of any payments in respect thereof, or to forgive or cancel any portion of such Indebtedness (other than pursuant to payments thereof), or to reduce the interest rate or any fees in connection therewith, or (B) redeem, retire, defease, purchase or otherwise acquire such Indebtedness (except pursuant to regularly scheduled payments permitted herein), or set aside or otherwise deposit or invest any sums for such purpose, and (vii) such Borrower shall furnish to Agent all notices or demands in connection with such Indebtedness either received by such Borrower or on its behalf promptly after the receipt thereof, or sent by such Borrower or on its behalf concurrently with the sending thereof, as the case may be;

(f) the Indebtedness set forth on SCHEDULE 9.9 to the Information Certificate; provided, that, (i) a Borrower may only make payments of principal and interest in respect of such Indebtedness in accordance with the terms of the Subordination Agreement, (ii) such Borrower shall not, directly or indirectly, (A) amend, modify, alter or change the terms of such Indebtedness or any agreement, document or instrument related thereto as in effect on the date hereof except, that, such Borrower may, after prior written notice to Agent, amend, modify, alter or change the terms thereof so as to extend the maturity thereof, or defer the timing of any payments in respect thereof, or to forgive or cancel any portion of such Indebtedness (other than pursuant to payments thereof), or to reduce the interest rate or any fees in connection therewith, or (B) redeem, retire, defease, purchase or otherwise acquire such Indebtedness, or set aside or otherwise deposit or invest any sums for such purpose, and (iii) such Borrower shall furnish to Agent all notices or demands in connection with such Indebtedness either received by such Borrower or on its behalf, promptly after the receipt thereof, or sent by such Borrower or on its behalf, concurrently with the sending thereof, as the case may be.

9.10. Loans, Investments, Etc. No Borrower shall, nor shall it permit any of its Subsidiaries to, directly or indirectly, make any loans or advance money or property to any Person, or invest in (by capital contribution, dividend or otherwise) or purchase or repurchase the Capital Stock (other than the purchase of Capital Stock of Parent in connection with Parent's initial public offering) or Indebtedness or all or a substantial part of the assets or property of any Person, or form or acquire any Subsidiaries, or agree to do any of the foregoing, except:

(a) the endorsement of instruments for collection or deposit in the ordinary course of business;

(b) investments in cash or Cash Equivalents, provided, that, (i) no Loans are then outstanding and (ii) the terms and conditions of SECTION 5.2 hereof shall have been satisfied with respect to the deposit account, investment account or other account in which such cash or Cash Equivalents are held;

(c) the existing equity investments of a Borrower as of the date hereof in its Subsidiaries, provided, that, no Borrower shall have any further obligations or liabilities to make any capital contributions or other additional investments or other payments to or in or for the benefit of any of such Subsidiaries;

(d) loans and advances by a Borrower to employees of such Borrower (i) not to exceed the principal amount of $250,000 in the aggregate at any time

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outstanding for all Borrowers and their Subsidiaries: (A) reasonably and necessary work-related travel or other ordinary business expenses to be incurred by such employee in connection with their work for such Borrower and (B) reasonable and necessary relocation expenses of such employees (including home mortgage financing for relocated employees); and (ii) not to exceed the principal amount of $1,000,000 in the aggregate at any time outstanding for all Borrowers and their Subsidiaries to permit such employees to purchase Capital Stock in such Borrower so long as no Default or Event of Default shall exist or have occurred and be continuing;

(e) stock or obligations issued to a Borrower by any Person (or the representative of such Person) in respect of Indebtedness of such Person owing to such Borrower in connection with the insolvency, bankruptcy, receivership or reorganization of such Person or a composition or readjustment of the debts of such Person; provided, that, the original of any such stock or instrument evidencing such obligations shall be promptly delivered to Agent, upon Agent's request, together with such stock power, assignment or endorsement by such Borrower as Agent may request;

(f) obligations of account debtors to a Borrower arising from Accounts which are past due evidenced by a promissory note made by such account debtor payable to such Borrower; provided, that, promptly upon the receipt of the original of any such promissory note by such Borrower, such promissory note shall be endorsed to the order of Agent by such Borrower and promptly delivered to Agent as so endorsed;

(g) the loans and advances set forth on SCHEDULE 9.10 to the Information Certificate; provided, that, as to such loans and advances, (i) no Borrower shall, directly or indirectly, amend, modify, alter or change the terms of such loans and advances or any agreement, document or instrument related thereto and (ii) each Borrower shall furnish to Agent all notices or demands in connection with such loans and advances either received by such Borrower or on its behalf, promptly after the receipt thereof, or sent by such Borrower or on its behalf, concurrently with the sending thereof, as the case may be.

9.11. Dividends and Redemptions. No Borrower shall, directly or indirectly, declare or pay any dividends on account of any shares of class of any Capital Stock of such Borrower now or hereafter outstanding, or set aside or otherwise deposit or invest any sums for such purpose, or redeem, retire, defease, purchase or otherwise acquire any shares of any class of Capital Stock (or set aside or otherwise deposit or invest any sums for such purpose) other than the purchase of Capital Stock of Parent in connection with Parent's initial public offering, for any consideration or apply or set apart any sum, or make any other distribution (by reduction of capital or otherwise) in respect of any such shares or agree to do any of the foregoing, except that:

(a) a Borrower may declare and pay such dividends or redeem, retire, defease, purchase or otherwise acquire any shares of any class of Capital Stock for consideration in the form of shares of common stock (so long as after giving effect thereto no Change of Control or other Default or Event of Default shall exist or occur);

(b) a Borrower may pay dividends to the extent permitted in SECTION 9.12 below;

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(c) a Borrower may repurchase Capital Stock consisting of common stock held by employees pursuant to any employee stock ownership plan thereof upon the termination, retirement or death of any such employee in accordance with the provisions of such plan, provided, that, as to any such repurchase, each of the following conditions is satisfied: (i) as of the date of the payment for such repurchase and after giving effect thereto, no Default or Event of Default shall exist or have occurred and be continuing, (ii) such repurchase shall be paid with funds legally available therefor, (iii) such repurchase shall not violate any law or regulation or the terms of any indenture, agreement or undertaking to which such Borrower is a party or by which sch Borrower or its or their property are bound, and (iv) the aggregate amount of all payments for such repurchases in any calendar year shall not exceed $250,000.

9.12. Transactions with Affiliates. No Borrower shall, directly or indirectly:

(a) purchase, acquire or lease any property from, or sell, transfer or lease any property to, any officer, director or other Affiliate of a Borrower, except in the ordinary course of and pursuant to the reasonable requirements of such Borrower's business (as the case may be) and upon fair and reasonable terms no less favorable to such Borrower than such Borrower would obtain in a comparable arm's length transaction with an unaffiliated person; or

(b) make any payments (whether by dividend, loan or otherwise) of management, consulting or other fees for management or similar services, or of any Indebtedness owing to any officer, employee, shareholder, director or any other Affiliate of a Borrower, except (i) reasonable compensation to officers, employees and directors for services rendered to such Borrower in the ordinary course of business; (ii) purchase of Capital Stock of Parent in connection with Parent's initial public offering so long as no Default or Event of Default exists after or would result from giving effect to such payment; (iii) on the Closing Date, up to $5,700,000 to the holders of Preferred Equity Capital, Series C in payment of accrued and unpaid interest on the Preferred Equity Capital, Series C, so long as (A) Excess Availability is at least $5,000,000 at the time of and after giving effect to the payment of all accrued and unpaid interest on the Senior Subordinated Notes, the payment in full of all Indebtedness to the Existing Lenders and such accrual payment on the Preferred Equity Capital, Series C, and (B) no Default or Event of Default exists after or would result from giving effect to such payment; (iv) after the Closing Date, payment to the holders of Preferred Equity Capital, Series C, in payment of accrued and unpaid interest on the Preferred Equity Capital, Series C, so long as each of the Preferred C Accrued Interest Payment Conditions is met; and (v) after the Closing Date, regularly scheduled payments of interest accruing on the Preferred Equity Capital, Series C after the Closing Date so long as (1) immediately after giving effect to such payment, Excess Availability will be at least $3,500,000, and (2) no Default or Event of Default exists after or would result from giving effect to such payments. For purposes of this Section, "Preferred C Accrued Interest Payment Conditions" shall mean the following, each of which shall be satisfied: (1) during the eight (8) consecutive weeks period immediately preceding the date of such payment Excess Availability averaged at least $5,000,000, (2) for the weekly reporting period immediately preceding such payment Excess Availability was not less than $5,000,000, (3) at the time of and after giving effect to such payment Excess Availability will be not less than $5,000,000, (4) Borrowers shall have delivered to Agent at least ten (10) days prior to the payment date, and Agent shall have reviewed and found acceptable, Borrowers' forecasted

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Consolidated balance sheets and profit and loss and cash flow statements, all prepared on a consistent basis with Borrowers' historical financial statements, together with appropriate supporting details and a statement of underlying assumptions, that show Excess Availability at all times during the immediately succeeding twelve (12) fiscal month period projected to be not less than the Excess Availability that was projected by Borrowers in such forecasted Consolidated financial statements delivered to Agent dated May 3, 2002, and (5) no Default or Event of Default exists after or would result from giving effect to such payment.

9.13. Compliance with ERISA. Each Borrower shall, and shall cause each of its ERISA Affiliates, to: (a) maintain each Plan in compliance in all material respects with the applicable provisions of ERISA, the Code and other Federal and State law; (b) cause each Plan which is qualified under Section 401(a) of the Code to maintain such qualification; (c) not terminate any of such Plans so as to incur any material liability to the Pension Benefit Guaranty Corporation; (d) not allow or suffer to exist any prohibited transaction involving any of such Plans or any trust created thereunder which would subject such Borrower or such ERISA Affiliate to a material tax or penalty or other liability on prohibited transactions imposed under Section 4975 of the Code or ERISA; (e) make all required contributions to any Plan which it is obligated to pay under Section 302 of ERISA, Section 412 of the Code or the terms of such Plan; (f) not allow or suffer to exist any accumulated funding deficiency, whether or not waived, with respect to any such Plan; or (g) allow or suffer to exist any occurrence of a reportable event or any other event or condition which presents a material risk of termination by the Pension Benefit Guaranty Corporation of any such Plan that is a single employer plan, which termination could result in any material liability to the Pension Benefit Guaranty Corporation.

9.14. End of Fiscal Years; Fiscal Quarters. Each Borrower shall, for financial reporting purposes, cause its, and each of its Subsidiaries' (a) fiscal years to end on the Saturday closest to January 31 of each year and (b) fiscal quarters to end in April, July, October, and January (on a 4/5/4 basis) of each year.

9.15. Change in Business. No Borrower shall engage in any business other than the business of such Borrower on the date hereof and any business reasonably related, ancillary or complimentary to the business in which such Borrower is engaged on the date hereof.

9.16. Limitation of Restrictions Affecting Subsidiaries. No Borrower shall, directly, or indirectly, create or otherwise cause or suffer to exist any encumbrance or restriction which prohibits or limits the ability of any Subsidiary of such Borrower to (a) pay dividends or make other distributions or pay any Indebtedness owed to such Borrower or any Subsidiary of such Borrower;
(b) make loans or advances to such Borrower or any Subsidiary of such Borrower,
(c) transfer any of its properties or assets to such Borrower or any Subsidiary of such Borrower; or (d) create, incur, assume or suffer to exist any Lien upon any of its property, assets or revenues, whether now owned or hereafter acquired, other than encumbrances and restrictions arising under (i) Applicable Law, (ii) this Agreement, (iii) customary provisions restricting subletting or assignment of any lease governing a leasehold interest of such Borrower or any Subsidiary of such Borrower, (iv) customary restrictions on dispositions of real property interests found in reciprocal easement agreements of such Borrower or any Subsidiary of Borrower, (v) any agreement relating to permitted Indebtedness incurred by a Subsidiary of such Borrower prior to the date on which such Subsidiary was acquired by such Borrower and outstanding on

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such acquisition date, and (vi) the extension or continuation of contractual obligations in existence on the date hereof; provided, that, any such encumbrances or restrictions contained in such extension or continuation are no less favorable to Agent and Lenders than those encumbrances and restrictions under or pursuant to the contractual obligations so extended or continued.

9.17. Consolidated Senior Debt/EBITDA Ratio. Borrowers shall maintain a Consolidated Senior Debt/EBITDA Ratio of not more than the ratio set forth below for the period applicable thereto:

Period                                                          Ratio
------                                                          -----
Second fiscal quarter of Fiscal Year 2002                       1.29 to 1.0
Third fiscal quarter of Fiscal Year 2002                        1.43 to 1.0
Fourth fiscal quarter of Fiscal Year 2002                       1.00 to 1.0
First fiscal quarter of Fiscal Year 2003                        1.00 to 1.0
Second fiscal quarter of Fiscal Year 2003                       1.65 to 1.0
Third fiscal quarter of Fiscal Year 2003                        1.80 to 1.0
Fourth fiscal quarter of Fiscal Year 2003                       1.00 to 1.0
First fiscal quarter of Fiscal Year 2004                        1.00 to 1.0
Second fiscal quarter of Fiscal Year 2004                       1.11 to 1.0
Third fiscal quarter of Fiscal Year 2004                        1.23 to 1.0
Fourth fiscal quarter of Fiscal Year 2004 and each fiscal       1.00 to 1.0
quarter thereafter

9.18. [Reserved]

9.19. Consolidated EBITDA Less Capital Expenditures. Borrowers shall maintain Consolidated EBITDA less Capital Expenditures of at least the amounts set forth below for the period applicable thereto:

Period                                                           Amount
------                                                           ------
Second fiscal quarter of  Fiscal Year 2002                       $20,660,000
Third fiscal quarter of  Fiscal Year 2002                        $18,947,000
Fourth fiscal quarter of  Fiscal Year 2002                       $20,304,000
First fiscal quarter of Fiscal Year 2003                         $20,299,000
Second fiscal quarter of  Fiscal Year 2003                       $18,157,000
Third fiscal quarter of Fiscal Year 2003                         $17,229,000
Fourth fiscal quarter of Fiscal Year 2003                        $21,080,000
First fiscal quarter of Fiscal Year 2004                         $21,070,000
Second fiscal quarter of Fiscal Year 2004                        $20,980,000
Third fiscal quarter of Fiscal Year 2004                         $21,457,000
Fourth fiscal quarter of Fiscal Year 2004 and each fiscal        $26,653,000
quarter thereafter

9.20. Credit Card Agreements. Each Borrower shall (a) observe and perform all material terms, covenants, conditions and provisions of the Credit Card Agreements to be observed and performed by it at the times set forth therein; (b) not do, permit, suffer or refrain

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from doing anything, as a result of which there could be a default under or breach of any of the terms of any of the Credit Card Agreements and (c) at all times maintain in full force and effect the Credit Card Agreements and not terminate, cancel, surrender, modify, amend, waive or release any of the Credit Card Agreements, or consent to or permit to occur any of the foregoing; except, that, (i) a Borrower may terminate or cancel any of the Credit Card Agreements in the ordinary course of the business of a Borrower; provided, that, such Borrower shall give Agent not less than fifteen (15) days prior written notice of its intention to so terminate or cancel any of the Credit Card Agreements;
(d) not enter into any new Credit Card Agreements with any new Credit Card Issuer unless Agent shall have received not less than thirty (30) days prior written notice of the intention of such Borrower to enter into such agreement (together with such other information with respect thereto as Agent may request); (e) give Agent immediate written notice of any Credit Card Agreement entered into by such Borrower after the date hereof, together with a true, correct and complete copy thereof and such other information with respect thereto as Agent may request; and (f) furnish to Agent, promptly upon the request of Agent, such information and evidence as Agent may require from time to time concerning the observance, performance and compliance by such Borrower or the other party or parties thereto with the terms, covenants or provisions of the Credit Card Agreements.

9.21. License Agreements.

(a) Each Borrower shall (i) promptly and faithfully observe and perform all of the material terms, covenants, conditions and provisions of the material License Agreements to which it is a party to be observed and performed by it, at the times set forth therein, if any, (ii) not do, permit, suffer or refrain from doing anything that could reasonably be expected to result in a default under or breach of any of the terms of any material License Agreement, (iii) not cancel, surrender, modify, amend, waive or release any material License Agreement in any material respect or any term, provision or right of the licensee thereunder in any material respect, or consent to or permit to occur any of the foregoing; except, that, subject to
SECTION 9.22(b) below, a Borrower may cancel, surrender or release any material License Agreement in the ordinary course of the business of such Borrower; provided, that, such Borrower (as the case may be) shall give Agent not less than thirty (30) days prior written notice of its intention to so cancel, surrender and release any such material License Agreement, (iv) give Agent prompt written notice of any material License Agreement entered into by such Borrower after the date hereof, together with a true, correct and complete copy thereof and such other information with respect thereto as Agent may request,
(v) give Agent prompt written notice of any material breach of any obligation, or any default, by any party under any material License Agreement, and deliver to Agent (promptly upon the receipt thereof by such Borrower in the case of a notice to Borrower and concurrently with the sending thereof in the case of a notice from such Borrower ) a copy of each notice of default and every other notice and other communication received or delivered by such Borrower in connection with any material License Agreement which relates to the right of such Borrower to continue to use the property subject to such License Agreement, and (vi) furnish to Agent, promptly upon the request of Agent, such information and evidence as Agent may reasonably require from time to time concerning the observance, performance and compliance by such Borrower or the other party or parties thereto with the material terms, covenants or provisions of any material License Agreement.

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(b) Each Borrower will either exercise any option to renew or extend the term of each material License Agreement to which it is a party in such manner as will cause the term of such material License Agreement to be effectively renewed or extended for the period provided by such option and give prompt written notice thereof to Agent or give Agent prior written notice that such Borrower does not intend to renew or extend the term of any such material License Agreement or that the term thereof shall otherwise be expiring, not less than sixty (60) days prior to the date of any such non-renewal or expiration. In the event of the failure of a Borrower to extend or renew any material License Agreement to which it is a party, Agent shall have, and is hereby granted, the irrevocable right and authority, at its option, to renew or extend the term of such material License Agreement, whether in its own name and behalf, or in the name and behalf of a designee or nominee of Agent or in the name and behalf of such Borrower, as Agent shall determine at any time that an Event of Default shall exist or have occurred and be continuing. Agent may, but shall not be required to, perform any or all of such obligations of any Borrower under any of the License Agreements, including, but not limited to, the payment of any or all sums due from such Borrower thereunder. Any sums so paid by Agent shall constitute part of the Obligations.

9.22. After Acquired Real Property.

(a) If any Borrower hereafter acquires any Real Property (other than a leasehold interest), fixtures or any other property that is of the kind or nature described in the Mortgage and such Real Property, fixtures or other property at any one location has a fair market value in an amount equal to or greater than $250,000 (or if a Default or Event of Default exists, then regardless of the fair market value of such assets), without limiting any other rights of Agent or any Lender, or duties or obligations of any Borrower, promptly upon Agent's request, such Borrower shall execute and deliver to Agent a mortgage, deed of trust or deed to secure debt, as Agent may determine, in form and substance substantially similar to the Mortgage and as to any provisions relating to specific state laws satisfactory to Agent and in form appropriate for recording in the real estate records of the jurisdiction in which such Real Property or other property is located granting to Agent a first and only Lien and mortgage on in such Real Property, fixtures or other property (except as such Borrower would otherwise be permitted to incur hereunder or under the Mortgage or as otherwise consented to in writing by Agent) and such other agreements, documents and instruments as Agent may require in connection therewith.

(b) If any Borrower hereafter acquires any leasehold interest in any Real Property (other than a retail store or a warehouse not owned by an Affiliate of a Borrower) or fixtures and such Real Property or fixtures at any one location has a fair market value in an amount equal to or greater than $250,000 (or if a Default or Event of Default exists, then regardless of the fair market value of such assets), without limiting any other rights of Agent or any Lender, or duties or obligations of any Borrower, promptly upon Agent's request, such Borrower shall execute and deliver to Agent, and shall use its best efforts to obtain all necessary consents of any other Person with respect to, a leasehold mortgage, deed of trust or deed to secure debt, or collateral assignment of leasehold interest, as Agent may determine, in form and substance substantially similar to the Mortgage and as to any provisions relating to specific state laws satisfactory to Agent and in form appropriate for recording in the real estate records of the jurisdiction in which such Real Property or other property is located granting to

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Agent a first and only Lien and mortgage on in such leasehold interest (except as such Borrower would otherwise be permitted to incur hereunder or under the Mortgage or as otherwise consented to in writing by Agent) and such other agreements, documents and instruments as Agent may require in connection therewith.

9.23. Costs and Expenses. Borrowers jointly and severally shall pay to Agent and Lenders on demand all costs, expenses, filing fees and taxes paid or payable in connection with the preparation, negotiation, execution, delivery, recording, administration, collection, liquidation, enforcement and defense of the Obligations, Agent's rights in the Collateral, this Agreement, the other Financing Agreements and all other documents related hereto or thereto, including any amendments, supplements or consents which may hereafter be contemplated (whether or not executed) or entered into in respect hereof and thereof, including: (a) all costs and expenses of filing or recording (including Uniform Commercial Code financing statement filing taxes and fees, documentary taxes, intangibles taxes and mortgage recording taxes and fees, if applicable);
(b) costs and expenses and fees for insurance premiums, appraisal fees and search fees, costs and expenses of remitting loan proceeds, collecting checks and other items of payment, and establishing and maintaining the Blocked Accounts, together with Agent's customary charges and fees with respect thereto;
(c) costs and expenses of preserving and protecting the Collateral; (d) costs and expenses paid or incurred in connection with obtaining payment of the Obligations, enforcing the Liens of Agent, selling or otherwise realizing upon the Collateral, and otherwise enforcing the provisions of this Agreement and the other Financing Agreements or defending any claims made or threatened against Agent or any Lender arising out of the transactions contemplated hereby and thereby (including preparations for and consultations concerning any such matters); (e) all out-of-pocket expenses and costs heretofore and from time to time hereafter incurred by Agent and Lenders during the course of periodic field examinations of the Collateral and any Borrower's operations, plus a per diem charge at the rate of $750 per person per day for Agent's examiners in the field and office; and (f) the fees and disbursements of counsel (including legal assistants) to Agent and Lenders in connection with any of the foregoing.

9.24. Collateral Access Agreements. Borrowers shall use their best efforts to obtain Collateral Access Agreements for each leased location of a Borrower prior to the Closing Date but in any event on a best efforts basis, within ninety (90) days after the Closing Date.

9.25. Survey and Title Insurance Endorsements. Within thirty (30) days after the Closing Date, Borrowers shall deliver to Agent an as-built ALTA survey, in form and substance satisfactory to Agent and Term Lender in all respects, with respect to each parcel of Real Property subject to the Mortgage, which survey shall indicate the following: (i) an accurate metes and bounds or lot, block and parcel description of such property; (ii) the correct location of all buildings, structures and other improvements on such property, including all streets, easements, rights of way and utility lines; (iii) the location of ingress and egress from such property, and the location of any set-back or other building lines affecting such property; and (iv) a certification by a registered land surveyor in form and substance acceptable to Agent, certifying to the accuracy and completeness of such survey and to such other matters relating to such Real Property and survey as Agent shall require, and (b) within sixty (60) days after the Closing Date, Borrowers shall deliver to Agent in form and substance satisfactory to Agent and Term Lender in all respects, such endorsements to the mortgagee policy of title insurance issued

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to Agent with respect to the Mortgage and such other documents as Agent shall request to remove any survey exception, to conform the legal description of the Mortgage to such survey, to confirm the zoning of such property and to address such other matters customarily addressed in mortgagee policies of title insurance as Agent may request.

9.26. Executive Employment Agreements. Within thirty (30) days after the Closing Date, Borrowers shall deliver to Agent copies of duly executed employment agreements with each of Carl Kirkland, Reynolds C. Faulkner and Robert E. Alderson evidencing the extension of the term of each such employment agreement to at least June 30, 2005.

9.27. Further Assurances. At the request of Agent at any time and from time to time, each Borrower shall, at their expense, duly execute and deliver, or cause to be duly executed and delivered, such further agreements, documents and instruments, and do or cause to be done such further acts as may be necessary or proper to evidence, perfect, maintain and enforce the security interests and Liens and the priority thereof in the Collateral and to otherwise effectuate the provisions or purposes of this Agreement or any of the other Financing Agreements. Agent may at any time and from time to time request a certificate from an officer of Borrowers representing that all conditions precedent to the making of Loans contained herein are satisfied. In the event of such request by Agent, Agent and Lenders may, at Agent's option, cease to make any further Loans until Agent has received such certificate and, in addition, Agent has determined that such conditions are satisfied.

SECTION 10. EVENTS OF DEFAULT AND REMEDIES

10.1. Events of Default. The occurrence or existence of any one or more of the following events are referred to herein individually as an "Event of Default", and collectively as "Events of Default":

(a) any Obligor fails to pay any of the Obligations when due (whether due at stated maturity, on demand, upon acceleration or otherwise);

(b) any Obligor shall fail or neglect to perform, keep or observe any covenant contained in Sections 6, 7.1, 7.2, 7.3, 7.7, 8.8, 8.9, 9.1 THROUGH 9.26 hereof on the date that such Obligor is required to perform, keep or observe such covenant;

(c) any Obligor shall fail or neglect to perform, keep or observe any covenant contained in this Agreement or in any of the other Financing Agreements (other than a covenant which is dealt with specifically elsewhere in Section 10.1 hereof) and the breach of such other covenant is not cured to Agent's and Lenders' satisfaction within 10 days after the sooner to occur of Borrower Agent's receipt of notice of such breach from Agent or the date on which such failure or neglect first becomes known to any Senior Officer; provided, however, that such notice and opportunity to cure shall not apply in the case of any failure to perform, keep or observe any covenant which is not capable of being cured at all or within such 10-day period or which is a willful and knowing breach by any Obligor;

(d) any representation, warranty or statement of fact made by any Obligor to Agent in this Agreement, the other Financing Agreements or any other written

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agreement, schedule, confirmatory assignment or otherwise shall when made or deemed made be false or misleading in any material respect;

(e) any Obligor revokes or terminates, or purports to revoke or terminate, or fails to perform any of the terms, covenants, conditions or provisions of any guarantee, endorsement or other agreement of such party in favor of Agent or any Lender;

(f) any judgment for the payment of money is rendered against any Obligor in excess of $250,000 in any one case or in excess of $500,000 in the aggregate (to the extent not covered by insurance where the insurer has assumed responsibility in writing for such judgment) and shall remain undischarged or unvacated for a period in excess of thirty (30) days or execution shall at any time not be effectively stayed, or any judgment other than for the payment of money, or injunction, attachment, garnishment or execution is rendered against any Obligor or any of the Collateral having a value in excess of $250,000;

(g) any Obligor (being a natural person or a general partner of an Obligor which is a partnership) dies or any Obligor, which is a partnership, limited liability company, limited liability partnership or a corporation, dissolves or suspends or discontinues doing business;

(h) any Obligor makes an assignment for the benefit of creditors, makes or sends notice of a bulk transfer or calls a meeting of its creditors or principal creditors in connection with a moratorium or adjustment of the Indebtedness due to them;

(i) a case or proceeding under the bankruptcy laws of the United States of America now or hereafter in effect or under any insolvency, reorganization, receivership, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction now or hereafter in effect (whether at law or in equity) is filed against any Obligor or all or any part of its properties and such petition or application is not dismissed within sixty
(60) days after the date of its filing or any Obligor shall file any answer admitting or not contesting such petition or application or indicates its consent to, acquiescence in or approval of, any such action or proceeding or the relief requested is granted sooner;

(j) a case or proceeding under the bankruptcy laws of the United States of America now or hereafter in effect or under any insolvency, reorganization, receivership, readjustment of debt, dissolution or liquidation law or statute of any jurisdiction now or hereafter in effect (whether at a law or equity) is filed by any Obligor or for all or any part of its property;

(k) any default in respect of any Indebtedness of any Obligor (other than Indebtedness owing to Agent and Lenders hereunder), in any case in an amount in excess of $500,000, which default continues for more than the applicable cure period, if any, with respect thereto and/or is not waived in writing by the other parties thereto, or any default by any Obligor under any Material Contract, which default continues for more than the applicable cure period, if any, with respect thereto and/or is not waived in writing by the other parties thereto;

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(l) any material provision hereof or of any of the other Financing Agreements shall for any reason cease to be valid, binding and enforceable with respect to any party hereto or thereto (other than Agent) in accordance with its terms, or any such party shall challenge the enforceability hereof or thereof, or shall assert in writing, or take any action or fail to take any action based on the assertion that any provision hereof or of any of the other Financing Agreements has ceased to be or is otherwise not valid, binding or enforceable in accordance with its terms, or any security interest or Lien provided for herein or in any of the other Financing Agreements shall cease to be a valid and perfected first priority security interest or Lien in any of the Collateral purported to be subject thereto (except as otherwise permitted herein or therein);

(m) an ERISA Event shall occur which results in or could reasonably be expected to result in liability of any Obligor in an aggregate amount in excess of $200,000;

(n) any Change of Control shall occur;

(o) the indictment by any Governmental Authority, or as Agent may reasonably and in good faith determine, the threatened indictment by any Governmental Authority of any Obligor of which any Obligor or Agent receives notice, in either case, as to which there is a reasonable possibility of an adverse determination, in the good faith determination of Agent, under any criminal statute, or commencement or threatened commencement of criminal or civil proceedings against any Obligor, pursuant to which statute or proceedings the penalties or remedies sought or available include forfeiture of (i) any of the Collateral having a value in excess of $250,000, or (ii) any other property of any Obligor which is necessary or material to the conduct of its business;

(p) there shall be a material adverse change in the business, assets or prospects of any Obligor after the date hereof;

(q) there shall be an event of default under any of the other Financing Agreements;

(r) there shall be an event of default under any of the Equity Documents;

(s) there shall be an event of default under any of the Subordinated Debt Documents;

(t) any Credit Card Issuer or Credit Card Processor shall send notice to any Borrower that it is ceasing to make or suspending payments to such Borrower of amounts due or to become due to such Borrower or shall cease or suspend such payments, or shall send notice to any Borrower that it is terminating its arrangements with such Borrower or such arrangements shall terminate as a result of any event of default under such arrangements, which continues for more than the applicable cure period, if any, with respect thereto, unless such Borrower shall have entered into arrangements with another Credit Card Issuer or Credit Card Processor, as the case may be, within thirty (30) days after the date of any such notice; or

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(u) the Preferred Equity Capital is not redeemed from proceeds of Parent's initial public offering on or before June 1, 2004, or the redemption dates of the Preferred Equity Capital are not extended on or before June 1, 2004 to at least June 30, 2005, or such Preferred Equity Capital is not converted in accordance with its terms (as in effect on the date hereof) on or before June 1, 2004.

10.2. Remedies.

(a) At any time an Event of Default exists or has occurred and is continuing, Agent and Lenders shall have all rights and remedies provided in this Agreement, the other Financing Agreements, the UCC and other Applicable Law, all of which rights and remedies may be exercised without notice to or consent by any Borrower or any other Obligor, except as such notice or consent is expressly provided for hereunder or required by Applicable Law. All rights, remedies and powers granted to Agent and Lenders hereunder, under any of the other Financing Agreements, the UCC or other Applicable Law, are cumulative, not exclusive and enforceable, in Agent's discretion, alternatively, successively, or concurrently on any one or more occasions, and shall include, without limitation, the right to apply to a court of equity for an injunction to restrain a breach or threatened breach by any Borrower or any other Obligor of this Agreement or any of the other Financing Agreements. Subject to SECTION 12 hereof, Agent may, and at the direction of the Required Lenders shall, at any time or times, proceed directly against any Borrower or any other Obligor to collect the Obligations without prior recourse to the Collateral.

(b) Without limiting the foregoing, at any time an Event of Default exists or has occurred and is continuing, Agent may, in its discretion, and upon the direction of the Required Lenders, shall (i) accelerate the payment of all Obligations and demand immediate payment thereof to Agent for itself and the ratable benefit of Lenders, (provided, that, upon the occurrence of any Event of Default described in SECTIONS 10.1(i) AND 10.1(j), all Obligations shall automatically become immediately due and payable), (ii) with or without judicial process or the aid or assistance of others, enter upon any premises on or in which any of the Collateral may be located and take possession of the Collateral or complete processing, manufacturing and repair of all or any portion of the Collateral, (iii) require any Borrower or any other Obligor, at Borrowers' expense, to assemble and make available to Agent any part or all of the Collateral at any place and time designated by Agent, (iv) collect, foreclose, receive, appropriate, setoff and realize upon any and all Collateral,
(v) remove any or all of the Collateral from any premises on or in which the same may be located for the purpose of effecting the sale, foreclosure or other disposition thereof or for any other purpose, (vi) sell, lease, transfer, assign, deliver or otherwise dispose of any and all Collateral (including entering into contracts with respect thereto, public or private sales at any exchange, broker's board, at any office of Agent or elsewhere) at such prices or terms as Agent may deem reasonable, for cash, upon credit or for future delivery, with the Agent having the right to purchase the whole or any part of the Collateral at any such public sale, all of the foregoing being free from any right or equity of redemption of any Borrower or any other Obligor, which right or equity of redemption is hereby expressly waived and released by Borrowers and all other Obligors and/or (vii) terminate this Agreement. If any of the Collateral is sold or leased by Agent upon credit terms or for future delivery, the Obligations shall not be reduced as a result thereof until payment therefor is finally collected by Agent. If notice of disposition of Collateral is required by law, ten (10) days prior

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notice by Agent to Borrower designating the time and place of any public sale or the time after which any private sale or other intended disposition of Collateral is to be made, shall be deemed to be reasonable notice thereof and each Borrower waives any other notice. In the event Agent institutes an action to recover any Collateral or seeks recovery of any Collateral by way of prejudgment remedy, each Borrower waives the posting of any bond which might otherwise be required. At any time an Event of Default exists or has occurred and is continuing, upon Agent's request, Borrowers will either, as Agent shall specify, furnish cash collateral to the issuer to be used to secure and fund Agent's reimbursement obligations to the issuer in connection with any letter of credit or furnish cash collateral to Agent for any letter of credit. Such cash collateral shall be in the amount equal to one hundred five percent (105%) of the amount of the letter of credit plus the amount of any fees and expenses payable in connection therewith through the end of the latest expiration date of such letter of credit.

(c) At any time or times that an Event of Default exists or has occurred and is continuing, Agent may, in its discretion, and upon the direction of the Required Lenders, Agent shall, enforce the rights of any Borrower or any Obligor against any account debtor, secondary obligor or other obligor in respect of any of the Accounts or other Receivables. Without limiting the generality of the foregoing, Agent may, in its discretion, and upon the direction of the Required Lenders, Agent shall, at such time or times (i) notify any or all account debtors, secondary obligors or other obligors in respect thereof that the Receivables have been assigned to Agent and that Agent has a security interest therein and Agent may direct any or all account debtors, secondary obligors and other obligors to make payment of Receivables directly to Agent, (ii) extend the time of payment of, compromise, settle or adjust for cash, credit, return of merchandise or otherwise, and upon any terms or conditions, any and all Receivables or other obligations included in the Collateral and thereby discharge or release the account debtor or any secondary obligors or other obligors in respect thereof without affecting any of the Obligations, (iii) demand, collect or enforce payment of any Receivables or such other obligations, but without any duty to do so, and Agent and Lenders shall not be liable for any failure to collect or enforce the payment thereof nor for the negligence of its agents or attorneys with respect thereto and (iv) take whatever other action Agent may deem necessary or desirable for the protection of its interests and the interests of Lenders. At any time that an Event of Default exists or has occurred and is continuing, at Agent's request, all invoices and statements sent to any account debtor shall state that the Accounts and such other obligations have been assigned to Agent and are payable directly and only to Agent and each Borrower shall deliver to Agent such originals of documents evidencing the sale and delivery of goods or the performance of services giving rise to any Accounts as Agent may require. In the event any account debtor returns Inventory when an Event of Default exists or has occurred and is continuing, each Borrower shall, upon Agent's request, hold the returned Inventory in trust for Agent, segregate all returned Inventory from all of its other property, dispose of the returned Inventory solely according to Agent's instructions, and not issue any credits, discounts or allowances with respect thereto without Agent's prior written consent.

(d) Notwithstanding anything to the contrary contained herein except as the Term Lender shall otherwise agree, Agent shall demand payment of the Obligations and commence and pursue such other Enforcement Actions as Agent in good faith deems appropriate within ninety (90) days (except with respect to Events of Default described in SECTIONS 10.1(I) and 10.1(J), Agent shall take such Enforcement Actions as it deems appropriate

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under the circumstances promptly upon receipt of notice) after the date of the receipt by Agent of written notice executed and delivered by the Term Lender of an Event of Default described in SECTIONS 10.1(a), 10.1(i), 10.1(j), 10.1(n) 10.1(s) or 10.1(b)) (to the extent arising as a result of the failure to comply with SECTIONS 9.7, 9.8, 9.9, 9.10, 9.11, 9.17 or 9.19 hereof after giving effect to all applicable cure periods) and requesting that Agent commence Enforcement Actions, provided, that, (i) such Event of Default has not been waived or cured,
(ii) in the good faith determination of Agent, taking an Enforcement Action is permitted under the terms of this Agreement and Applicable Law, (iii) taking an Enforcement Action shall not result in any liability of Agent or Lenders to any Borrower, any other Obligor or any other Person, (iv) Agent shall be entitled to all of the benefits of SECTION 12 hereof, and (v) Agent shall not be required to take an Enforcement Action so long as within the period provided above, Agent shall, at its option, either (A) appoint Ableco Finance LLC, as an agent of Agent for purposes of exercising the rights of Agent to take an Enforcement Action, subject to the terms hereof or (B) resign as Agent and Ableco Finance LLC shall automatically be deemed to be the successor Agent hereunder for purposes hereof, except with respect to the provisions of Section 2 hereof and except in connection with all matters relating to the determination of the Borrowing Base and each of its components (including, without limitation, Eligible Inventory, Reserves and receiving reports in respect of Collateral and conducting field examinations with respect to the Collateral and similar matters).

(e) To the extent that Applicable Law imposes duties on Agent or any Lender to exercise remedies in a commercially reasonable manner (which duties cannot be waived under such law), each Borrower acknowledges and agrees that it is not commercially unreasonable for Agent or any Lender (i) to fail to incur expenses reasonably deemed significant by Agent or any Lender to prepare Collateral for disposition or otherwise to complete raw material or work in process into finished goods or other finished products for disposition, (ii) to fail to obtain third party consents for access to Collateral to be disposed of, or to obtain or, if not required by other law, to fail to obtain consents of any Governmental Authority or other third party for the collection or disposition of Collateral to be collected or disposed of,
(iii) to fail to exercise collection remedies against account debtors, secondary obligors or other persons obligated on Collateral or to remove Liens or encumbrances on or any adverse claims against Collateral, (iv) to exercise collection remedies against account debtors and other persons obligated on Collateral directly or through the use of collection agencies and other collection specialists, (v) to advertise dispositions of Collateral through publications or media of general circulation, whether or not the Collateral is of a specialized nature, (vi) to contact other persons, whether or not in the same business as such Borrower, for expressions of interest in acquiring all or any portion of the Collateral, (vii) to hire one or more professional auctioneers to assist in the disposition of Collateral, whether or not the collateral is of a specialized nature, (viii) to dispose of Collateral by utilizing Internet sites that provide for the auction of assets of the types included in the Collateral or that have the reasonable capability of doing so, or that match buyers and sellers of assets, (ix) to dispose of assets in wholesale rather than retail markets, (x) to disclaim disposition warranties,
(xi) to purchase insurance or credit enhancements to insure Agent or Lenders against risks of loss, collection or disposition of Collateral or to provide to Agent or Lenders a guaranteed return from the collection or disposition of Collateral, or (xii) to the extent deemed appropriate by Agent, to obtain the services of other brokers, investment bankers, consultants and other professionals to assist Agent in the collection or disposition of any of the Collateral. Each Borrower acknowledges that the purpose of this Section is to provide non-

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exhaustive indications of what actions or omissions by Agent or any Lender would not be commercially unreasonable in the exercise by Agent or any Lender of remedies against the Collateral and that other actions or omissions by Agent or any Lender shall not be deemed commercially unreasonable solely on account of not being indicated in this Section. Without limitation of the foregoing, nothing contained in this Section shall be construed to grant any rights to any Borrower or to impose any duties on Agent or Lenders that would not have been granted or imposed by this Agreement or by Applicable Law in the absence of this Section.

(f) For the purpose of enabling Agent to exercise the rights and remedies hereunder, each Borrower hereby grants to Agent, to the extent assignable, an irrevocable, non-exclusive license (exercisable at any time an Event of Default shall exist or have occurred and for so long as the same is continuing) without payment of royalty or other compensation to such Borrower, to use or assign to the extent required in connection with any sale, liquidation or other disposition of the Collateral, any of the trademarks, service-marks, trade names, business names, trade styles, designs, logos and other source of business identifiers and other Intellectual Property and general intangibles now owned or hereafter acquired by such Borrower, wherever the same maybe located, including in such license reasonable access to all media in which any of the licensed items may be recorded or stored and to all computer programs used for the compilation or printout thereof.

(g) Agent may apply the cash proceeds of Collateral actually received by Agent from any sale, lease, foreclosure or other disposition of the Collateral to payment of the Obligations, in whole or in part and in accordance with SECTION 6.11 hereof, whether or not then due. Borrowers and all other Obligors shall remain liable to Agent and Lenders for the payment of any deficiency with interest at the highest rate provided for herein and all costs and expenses of collection or enforcement, including attorneys' fees and expenses.

(h) Without limiting the foregoing, upon the occurrence of a Default or an Event of Default, (i) Agent and Lenders may, at Agent's option, and upon the occurrence of an Event of Default, at the direction of the Required Lenders, Agent and Lenders shall, without notice, (A) cease making Loans or reduce the lending formulas or amounts of Loans available to Borrowers and/or (B) terminate any provision of this Agreement providing for any future Loans to be made by Agent and Lenders to Borrowers, and (ii) Agent may, at its option, establish such Reserves as Agent determines without limitation or restriction, notwithstanding anything to the contrary provided herein.

SECTION 11. JURY TRIAL WAIVER; OTHER WAIVERS AND CONSENTS; GOVERNING LAW

11.1. Governing Law; Choice of Forum; Service of Process; Jury Trial Waiver.

(a) The validity, interpretation and enforcement of this Agreement and the other Financing Agreements (other than the Mortgage to the extent provided therein) and any dispute arising out of the relationship between the parties hereto, whether in contract, tort, equity or otherwise, shall be governed by the internal laws of the State of Georgia (without regard to principles of conflicts of laws).

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(b) Borrowers, Agent and Lenders irrevocably consent and submit to the non-exclusive jurisdiction of the State of Georgia and the United States District Court for the Northern District of Georgia (Atlanta Division), whichever Agent may elect, and waive any objection based on venue or forum non conveniens with respect to any action instituted therein arising under this Agreement or any of the other Financing Agreements or in any way connected with or related or incidental to the dealings of the parties hereto in respect of this Agreement or any of the other Financing Agreements or the transactions related hereto or thereto, in each case whether now existing or hereafter arising, and whether in contract, tort, equity or otherwise, and agree that any dispute with respect to any such matters shall be heard only in the courts described above (except that Agent and Lenders shall have the right to bring any action or proceeding against any Borrower or any other Obligor or its or their property in the courts of any other jurisdiction which Agent deems necessary or appropriate in order to realize on the Collateral or to otherwise enforce its rights against any Borrower or any other Obligor or its or their property).

(c) Each Borrower hereby waives personal service of any and all process upon it and consents that all such service of process may be made by certified mail (return receipt requested) directed to its address set forth herein and service so made shall be deemed to be completed five (5) days after the same shall have been so deposited in the U.S. mails, or, at Agent's option, by service upon Borrower Agent in any other manner provided under the rules of any such courts. Within thirty (30) days after such service, Borrowers shall appear in answer to such process, failing which Borrowers shall be deemed in default and judgment may be entered by Agent against Borrowers for the amount of the claim and other relief requested.

(d) EACH BORROWER, AGENT AND LENDERS EACH HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (i) ARISING UNDER THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR (ii) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO IN RESPECT OF THIS AGREEMENT OR ANY OF THE OTHER FINANCING AGREEMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER IN CONTRACT, TORT, EQUITY OR OTHERWISE. EACH BORROWER, AGENT AND LENDERS EACH HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT SUCH BORROWER, AGENT OR ANY LENDER MAY FILE AN ORIGINAL COUNTERPART OF A COPY OF THIS AGREEMENT WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.

(e) Agent and Lenders shall not have any liability to any Borrower or any other Obligor (whether in tort, contract, equity or otherwise) for losses suffered by any Borrower in connection with, arising out of, or in any way related to the transactions or relationships contemplated by this Agreement, or any act, omission or event occurring in connection herewith, unless it is determined by a final and non-appealable judgment or court order binding on Agent and such Lender, that the losses were the result of acts or omissions

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constituting gross negligence or willful misconduct. In any such litigation, Agent and Lenders shall be entitled to the benefit of the rebuttable presumption that it acted in good faith and with the exercise of ordinary care in the performance by it of the terms of this Agreement. Each Borrower: (i) certifies that neither Agent, any Lender nor any representative, agent or attorney acting for or on behalf of Agent or any Lender has represented, expressly or otherwise, that Agent and Lenders would not, in the event of litigation, seek to enforce any of the waivers provided for in this Agreement or any of the other Financing Agreements and (ii) acknowledges that in entering into this Agreement and the other Financing Agreements, Agent and Lenders are relying upon, among other things, the waivers and certifications set forth in this SECTION 11.1 and elsewhere herein and therein.

11.2. Waiver of Notices. Each Borrower hereby expressly waives demand, presentment, protest and notice of protest and notice of dishonor with respect to any and all instruments and chattel paper, included in or evidencing any of the Obligations or the Collateral, and any and all other demands and notices of any kind or nature whatsoever with respect to the Obligations, the Collateral and this Agreement, except such as are expressly provided for herein. No notice to or demand on any Borrower which Agent or any Lender may elect to give shall entitle such Borrower to any other or further notice or demand in the same, similar or other circumstances.

11.3. Amendments and Waivers.

(a) Neither this Agreement nor any other Financing Agreement nor any terms hereof or thereof may be amended, waived, discharged or terminated unless such amendment, waiver, discharge or termination is in writing signed by Agent and the Required Lenders or at Agent's option, by Agent with the authorization of the Required Lenders, and as to amendments to any of the Financing Agreements (other than with respect to any provision of
SECTION 12 hereof), by Borrowers; except, that, no such amendment, waiver, discharge or termination shall:

(i) reduce the interest rate or any fees or extend the time of payment of interest or any fees or reduce the principal amount of any Loan, in each case without the consent of each Lender directly affected thereby,

(ii) increase the Commitment of any Lender over the amount thereof then in effect or provided hereunder, in each case without the consent of the Lender directly affected thereby,

(iii) release any Collateral (except as expressly required hereunder or under any of the other Financing Agreements or Applicable Law and except as permitted under SECTION 12.11(b) hereof), without the consent of Agent and all Lenders,

(iv) reduce any percentage specified in the definition of Required Lenders, without the consent of Agent and all Lenders,

(v) consent to the assignment or transfer by any Borrower or any other Obligor of any of their rights and obligations under this Agreement, without the consent of Agent and all Lenders,

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(vi) amend, modify or waive any terms of this SECTION 11.3 or SECTION 12.8 hereof, without the consent of Agent and all Lenders, or

(vii) increase the advance rates constituting part of the Borrowing Base, without the consent of Agent and all Lenders.

(viii) without the prior written consent of Term Lender, no waiver, modification or amendment shall be effective that would (a) reduce the interest rate or fees applicable to the Term Loan; (b) extend the final maturity date of the Term Loan; (c) increase the Maximum Credit, the Revolving Loan Limit or the outstanding principal amount of the Term Loan; (d) release or subordinate any Liens on any portion of the Collateral having a value in excess of $100,000 (except to the extent expressly provided in this Agreement or in any of the other Financing Agreements); (e) amend, modify or waive any of the financial covenants set forth in SECTIONS 9.17 or 9.19 of this Agreement (or any definition with respect to financial terms used in such financial covenants in a manner which has the effect of reducing the amounts which Borrowers are required to maintain pursuant to such financial covenants);
(f) forgive, compromise or cancel any of the Term Loan; (g) agree to subordinate the Term Loan in right of payment to any other Indebtedness (or any interest in respect thereof); (h) reduce or increase the amount of, or postpone the due date of, any principal repayments in respect of the Term Loan, or interest payments or fees in respect of the Term Loan; (i) release any Obligor from liability for any obligation for the payment of money; (j) amend or modify the definitions of "Eligible Inventory," "Reserves," "Subordinated Debt Reserve" "Interest Rate," "Term Loan," "Maximum Credit," "Maximum Revolving Credit," "Revolving Loan Limit," "Enforcement Action," "Priority Event," "Change of Control," "Eligible Transferee" or "Excess Availability"; (k) amend, modify or waive any of the following Sections in any material respect: 2.1, 2.3, 2.6, 3.2(b), 6.4, 6.11, 9.1, 9.7, 9.8, 9.9, 9.10, 9.12(b), 9.11, 9.22, 9.23, 10.1(a), 10.1(b), 10.2, 11.5, 12.11, 13.1, and 13.7(a), or (l) permit the sale of all or substantially all of the capital stock of any material Subsidiary of any Borrower.

(b) Agent and Lenders shall not, by any act, delay, omission or otherwise be deemed to have expressly or impliedly waived any of its or their rights, powers and/or remedies unless such waiver shall be in writing and signed as provided herein. Any such waiver shall be enforceable only to the extent specifically set forth therein. A waiver by Agent or any Lender of any right, power and/or remedy on any one occasion shall not be construed as a bar to or waiver of any such right, power and/or remedy which Agent or any Lender would otherwise have on any future occasion, whether similar in kind or otherwise.

(c) Notwithstanding anything to the contrary contained in SECTION 11.3(a) above, in the event that Borrowers request that this Agreement or any other Financing Agreements be amended or otherwise modified in a manner which would require the unanimous consent of all of the Lenders and such amendment or other modification is agreed to by the Required Lenders, then, with the consent of Borrowers, Agent and the Required Lenders, Borrowers, Agent and the Required Lenders may amend this Agreement without the consent of the Lenders that did not agree to such amendment or other modification (collectively, the "Minority Lenders") to provide for (i) the termination of the Commitment of each of the Minority Lenders, (ii) the addition to this Agreement of one or more other Lenders, or an increase in the Commitment of one or more of the Required Lenders, so that the Commitments, after

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giving effect to such amendment, shall be in the same aggregate amount as the Commitments immediately before giving effect to such amendment, (iii) if any Loans are outstanding at the time of such amendment, the making of such additional Loans by such new Lenders or Required Lenders, as the case may be, as may be necessary to repay in full the outstanding Loans of the Minority Lenders immediately before giving effect to such amendment and (iv) the payment of all interest, fees and other Obligations payable or accrued in favor of the Minority Lenders and such other modifications to this Agreement as Borrowers and the Required Lenders may determine to be appropriate.

(d) The consent of Agent shall be required for any amendment, waiver or consent affecting the rights or duties of Agent hereunder or under any of the other Financing Agreements, in addition to the consent of the Lenders otherwise required by this Section.

11.4. Waiver of Counterclaims. Each Borrower waives all rights to interpose any claims, deductions, setoffs or counterclaims of any nature (other then compulsory counterclaims) in any action or proceeding with respect to this Agreement, the Obligations, the Collateral or any matter arising therefrom or relating hereto or thereto.

11.5. Indemnification. Each Borrower shall indemnify, defend and hold Agent and each Lender, and its officers, directors, agents, employees, advisors and counsel and their respective Affiliates (each such person being an "Indemnitee"), harmless from and against any and all losses, claims, damages, liabilities, costs or expenses (including attorneys' fees and expenses) imposed on, incurred by or asserted against any of them in connection with any litigation, investigation, claim or proceeding commenced or threatened related to the negotiation, preparation, execution, delivery, enforcement, performance or administration of this Agreement, any other Financing Agreements, or any undertaking or proceeding related to any of the transactions contemplated hereby or any act, omission, event or transaction related or attendant thereto, including amounts paid in settlement, court costs, and the fees and expenses of counsel except that no Borrower shall have any obligation under this SECTION 11.5 to indemnify an Indemnitee with respect to a matter covered hereby resulting from the gross negligence or wilful misconduct of such Indemnitee as determined pursuant to a final, non-appealable order of a court of competent jurisdiction (but without limiting the obligations of any Borrower as to any other Indemnitee). To the extent that the undertaking to indemnify, defend, pay and hold harmless set forth in this Section may be unenforceable because it violates any law or public policy, Borrowers shall pay the maximum portion which it is permitted to pay under Applicable Law to Agent and Lenders in satisfaction of indemnified matters under this Section. To the extent permitted by Applicable Law, no Borrower shall assert, and each Borrower hereby waives any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement, any of the other Financing Agreements or any undertaking or transaction contemplated hereby. All amounts due under this Section shall be payable upon demand. The foregoing indemnity shall survive the payment of the Obligations and the termination or non-renewal of this Agreement.

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SECTION 12. THE AGENT

12.1. Appointment, Powers and Immunities. Each Lender irrevocably designates, appoints and authorizes Congress to act as Agent hereunder and under the other Financing Agreements with such powers as are specifically delegated to Agent by the terms of this Agreement and of the other Financing Agreements, together with such other powers as are reasonably incidental thereto. Agent (a) shall have no duties or responsibilities except those expressly set forth in this Agreement and in the other Financing Agreements, and shall not by reason of this Agreement or any other Financing Agreement be a trustee or fiduciary for any Lender; (b) shall not be responsible to Lenders for any recitals, statements, representations or warranties contained in this Agreement or in any of the other Financing Agreements, or in any certificate or other document referred to or provided for in, or received by any of them under, this Agreement or any other Financing Agreement, or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Financing Agreement or any other document referred to or provided for herein or therein or for any failure by any Borrower or any other Obligor or any other Person to perform any of its obligations hereunder or thereunder; and (c) shall not be responsible to Lenders for any action taken or omitted to be taken by it hereunder or under any other Financing Agreement or under any other document or instrument referred to or provided for herein or therein or in connection herewith or therewith, except for its own gross negligence or willful misconduct as determined by a final non-appealable judgment of a court of competent jurisdiction. Agent may employ agents and attorneys-in-fact and shall not be responsible for the negligence or misconduct of any such agents or attorneys-in-fact selected by it in good faith. Agent may deem and treat the payee of any note as the holder thereof for all purposes hereof unless and until the assignment thereof pursuant to an agreement (if and to the extent permitted herein) in form and substance satisfactory to Agent shall have been delivered to and acknowledged by Agent.

12.2. Reliance by Agent. Agent shall be entitled to rely upon any certification, notice or other communication (including any thereof by telephone, telecopy, telex, telegram or cable) believed by it to be genuine and correct and to have been signed or sent by or on behalf of the proper Person or Persons, and upon advice and statements of legal counsel, independent accountants and other experts selected by Agent. As to any matters not expressly provided for by this Agreement or any other Financing Agreement, Agent shall in all cases be fully protected in acting, or in refraining from acting, hereunder or thereunder in accordance with instructions given by the Required Lenders or all of Lenders as is required in such circumstance, and such instructions of such Agents and any action taken or failure to act pursuant thereto shall be binding on all Lenders.

12.3. Events of Default.

(a) Agent shall not be deemed to have knowledge or notice of the occurrence of an Event of Default or other failure of a condition precedent to the Loans hereunder, unless and until Agent has received written notice from a Lender, or a Borrower specifying such Event of Default or any unfulfilled condition precedent, and stating that such notice is a "Notice of Default or Failure of Condition". In the event that Agent receives such a Notice of Default or Failure of Condition, Agent shall give prompt notice thereof to the Lenders. Agent shall (subject to SECTION 12.7) take such action with respect to any such Event of Default

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or failure of condition precedent as shall be directed by the Required Lenders; provided, that, unless and until Agent shall have received such directions, Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to or by reason of such Event of Default or failure of condition precedent, as it shall deem advisable in the best interest of Lenders. Without limiting the foregoing, and notwithstanding the existence or occurrence and continuance of an Event of Default or any other failure to satisfy any of the conditions precedent set forth in SECTION 4 of this Agreement to the contrary, Agent may, but shall have no obligation to, continue to make Loans for the ratable account and risk of Lenders from time to time if Agent believes making such Loans is in the best interests of Lenders.

(b) Except with the prior written consent of Agent, no Lender may assert or exercise any enforcement right or remedy in respect of the Loans or other Obligations, as against any Borrower or any other Obligor or any of the Collateral or other property of any Borrower or any other Obligor.

12.4. Congress in its Individual Capacity. With respect to its Commitment and the Loans made by it (and any successor acting as Agent), so long as Congress shall be a Lender hereunder, it shall have the same rights and powers hereunder as any other Lender and may exercise the same as though it were not acting as Agent, and the term "Lender" or "Lenders" shall, unless the context otherwise indicates, include Congress in its individual capacity as Lender hereunder. Congress (and any successor acting as Agent) and its Affiliates may (without having to account therefor to any Lender) lend money to, make investments in and generally engage in any kind of business with any Borrower (and any of its Subsidiaries or Affiliates) as if it were not acting as Agent, and Congress and its Affiliates may accept fees and other consideration from any Borrower or any other Obligor and any of its Subsidiaries and Affiliates for services in connection with this Agreement or otherwise without having to account for the same to Lenders.

12.5. Indemnification. Lenders agree to indemnify Agent (to the extent not reimbursed by Borrowers hereunder and without limiting any obligations of any Borrower hereunder) ratably, in accordance with their Pro Rata Shares, for any and all claims of any kind and nature whatsoever that may be imposed on, incurred by or asserted against Agent (including by any Lender) arising out of or by reason of any investigation in or in any way relating to or arising out of this Agreement or any other Financing Agreement or any other documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby (including the costs and expenses that Agent is obligated to pay hereunder) or the enforcement of any of the terms hereof or thereof or of any such other documents, provided, that, no Lender shall be liable for any of the foregoing to the extent it arises from the gross negligence or willful misconduct of the party to be indemnified as determined by a final non-appealable judgment of a court of competent jurisdiction. The foregoing indemnity shall survive the payment of the Obligations and the termination or non-renewal of this Agreement.

12.6. Non-Reliance on Agent and Other Lenders. Each Lender agrees that it has, independently and without reliance on Agent or other Lender, and based on such documents and information as it has deemed appropriate, made its own credit analysis of each Borrower and each other Obligor and has made its own decision to enter into this Agreement and that it will, independently and without reliance upon Agent or any other Lender, and based on such

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documents and information as it shall deem appropriate at the time, continue to make its own analysis and decisions in taking or not taking action under this Agreement or any of the other Financing Agreements. Agent shall not be required to keep itself informed as to the performance or observance by any Borrower or any other Obligor of any term or provision of this Agreement or any of the other Financing Agreements or any other document referred to or provided for herein or therein or to inspect the properties or books of Borrower or any Obligor. Agent will use reasonable efforts to provide Lenders with any information received by Agent from any Borrower or any other Obligor which is required to be provided to Lenders hereunder and with a copy of any Notice of Default or Failure of Condition received by Agent from any Borrower or any Lender; provided, that, Agent shall not be liable to any Lender for any failure to do so, except to the extent that such failure is attributable to Agent's own gross negligence or willful misconduct as determined by a final non-appealable judgment of a court of competent jurisdiction. Except for notices, reports and other documents expressly required to be furnished to Lenders by Agent hereunder, Agent shall not have any duty or responsibility to provide any Lender with any other credit or other information concerning the affairs, financial condition or business of any Borrower or any other Obligor that may come into the possession of Agent.

12.7. Failure to Act. Except for action expressly required of Agent hereunder and under the other Financing Agreements, Agent shall in all cases be fully justified in failing or refusing to act hereunder and thereunder unless it shall receive further assurances to its satisfaction from Lenders of their indemnification obligations under SECTION 12.5 hereof against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action.

12.8. Additional Loans. Agent shall not make any Revolving Loans to any Borrower on behalf of Lenders intentionally and with actual knowledge that such Revolving Loans would cause the aggregate amount of the total outstanding Revolving Loans to Borrowers to exceed the Borrowing Base, without the prior consent of all Lenders, except, that, Agent may make such additional Revolving Loans on behalf of Lenders, intentionally and with actual knowledge that such Revolving Loans will cause the total outstanding Revolving Loans to Borrowers to exceed the Borrowing Base, as Agent may deem necessary or advisable in its discretion, provided, that: (a) the total principal amount of the additional Revolving Loans or additional letter of credit accommodations to Borrowers which Agent may make or provide after obtaining such actual knowledge that the aggregate principal amount of the Revolving Loans equal or exceed the Borrowing Base shall not exceed, when taken together with the Special Agent Advances described in SECTION 12.11(a)(i) or (iii), the aggregate amount outstanding at any time equal to the lesser of (i) an amount equal to ten percent (10%) of the Cost of Eligible Inventory, or (ii) $3,500,000, and shall not cause the total principal amount of the Loans to exceed the Maximum Credit or cause the total principal amount of Revolving Loans to exceed the Revolving Loan Limit and (b) no such additional Revolving Loans shall be outstanding more than ninety (90) days after the date such additional Revolving Loan is made or issued (as the case may be), except as the Required Lenders may otherwise agree. Each Revolving Lender shall be obligated to pay Agent the amount of its Pro Rata Share of any such additional Revolving Loans provided that Agent is acting in accordance with the terms of this SECTION 12.8.

12.9. Concerning the Collateral and the Related Financing Agreements. Each Lender authorizes and directs Agent to enter into this Agreement and the other Financing

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Agreements. Each Lender agrees that any action taken by Agent or Required Lenders in accordance with the terms of this Agreement or the other Financing Agreements and the exercise by Agent or Required Lenders of their respective powers set forth therein or herein, together with such other powers that are reasonably incidental thereto, shall be binding upon all of the Lenders.

12.10. Field Audit, Examination Reports and other Information; Disclaimer by Lenders. By signing this Agreement, each Lender:

(a) is deemed to have requested that Agent furnish such Lender, promptly after it becomes available, a copy of each field audit or examination report and a weekly report with respect to the Borrowing Base prepared by Agent (each field audit or examination report and monthly report with respect to the Borrowing Base being referred to herein as a "Report" and collectively, "Reports");

(b) expressly agrees and acknowledges that Agent (A) does not make any representation or warranty as to the accuracy of any Report, or (B) shall not be liable for any information contained in any Report;

(c) expressly agrees and acknowledges that the Reports are not comprehensive audits or examinations, that Agent or any other party performing any audit or examination will inspect only specific information regarding any Borrower and any other Obligor and will rely significantly upon Borrowers' and other Obligors' books and records, as well as on representations of Borrowers' and other Obligors' personnel; and

(d) agrees to keep all Reports confidential and strictly for its internal use in accordance with the terms of SECTION 13.5 hereof, and not to distribute or use any Report in any other manner.

12.11. Collateral Matters.

(a) Agent may, at its option, from time to time, at any time on or after an Event of Default and for so long as the same is continuing or upon any other failure of a condition precedent to the Loans, make such disbursements and advances ("Special Agent Advances") which Agent, in its sole discretion, deems necessary or desirable either (i) to preserve or protect the Collateral or any portion thereof or (ii) to enhance the likelihood or maximize the amount of repayment by any Borrower or any other Obligor of the Loans and other Obligations or (iii) to pay any other amount chargeable to any Borrower or any other Obligor pursuant to the terms of this Agreement or any of the other Financing Agreements consisting of costs, fees and expenses and payments to any issuer of letter of credit; provided, that, the Special Agent Advances described in clauses (i) and (ii) above, together with the aggregate outstanding principal amount of additional Revolving Loans described in SECTION 12.8, shall not exceed the lesser of (A) an amount equal to ten percent (10%) of the Cost of Eligible Inventory, or (B) $3,500,000. Special Agent Advances shall be repayable on demand and be secured by the Collateral. Special Agent Advances shall not constitute Loans but shall otherwise constitute Obligations hereunder. Agent shall notify each Lender and Borrower Agent in writing of each such Special Agent Advance, which notice shall include a description of the purpose of such Special Agent Advance. Without limitation of its obligations pursuant to
SECTION 6.9, each

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Revolving Lender agrees that it shall make available to Agent, upon Agent's demand, in immediately available funds, the amount equal to such Lender's Pro Rata Share of each such Special Agent Advance. If such funds are not made available to Agent by such Lender, Agent shall be entitled to recover such funds, on demand from such Lender together with interest thereon for each day from the date such payment was due until the date such amount is paid to Agent at the Federal Funds Rate for each day during such period (as published by the Federal Reserve Bank of New York or at Agent's option based on the arithmetic mean determined by Agent of the rates for the last transaction in overnight Federal funds arranged prior to 9:00 a.m. (New York City time) on that day by each of the three leading brokers of Federal funds transactions in New York City selected by Agent) and if such amounts are not paid within three (3) days of Agent's demand, at the highest Interest Rate provided for in SECTION 3.1 hereof applicable to Prime Rate Loans.

(b) Lenders hereby irrevocably authorize Agent, at its option and in its discretion to release any security interest in, mortgage or Lien upon, any of the Collateral (i) upon termination of the Commitments and payment and satisfaction of all of the Obligations and delivery of cash collateral to the extent required under SECTION 13.1 below, or (ii) constituting property being sold or disposed of if Borrowers certify to Agent that the sale or disposition is made in compliance with SECTION 9.7 hereof (and Agent may rely conclusively on any such certificate, without further inquiry), or (iii) constituting property in which any Borrower or any other Obligor did not own an interest at the time the security interest, mortgage or Lien was granted or at any time thereafter, or (iv) having a value in the aggregate in any twelve (12) month period of less than $50,000, so long as no Event of Default exists at the time of such release, or (v) if approved, authorized or ratified in writing by all of Lenders. Except as provided above, Agent will not release any security interest in, mortgage or Lien upon, any of the Collateral without the prior written authorization of all of Lenders. Upon request by Agent at any time, Lenders will promptly confirm in writing Agent's authority to release particular types or items of Collateral pursuant to this Section.

(c) Without any manner limiting Agent's authority to act without any specific or further authorization or consent by the Required Lenders, each Lender agrees to confirm in writing, upon request by Agent, the authority to release Collateral conferred upon Agent under this Section. Agent shall (and is hereby irrevocably authorized by Lenders to) execute such documents as may be necessary to evidence the release of the security interest, mortgage or Liens granted to Agent upon any Collateral to the extent set forth above; provided, that, (i) Agent shall not be required to execute any such document on terms which, in Agent's opinion, would expose Agent to liability or create any obligations or entail any consequence other than the release of such security interest, mortgage or Liens without recourse or warranty and (ii) such release shall not in any manner discharge, affect or impair the Obligations or any security interest, mortgage or Lien upon (or obligations of any Borrower or any other Obligor in respect of) the Collateral retained by such Borrower or such other Obligor.

(d) Agent shall have no obligation whatsoever to any Lender or any other Person to investigate, confirm or assure that the Collateral exists or is owned by any Borrower or any other Obligor or is cared for, protected or insured or has been encumbered, or that any particular items of Collateral meet the eligibility criteria applicable in respect of the Loans hereunder, or whether any particular reserves are appropriate, or that the Liens and

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security interests granted to Agent pursuant hereto or any of the Financing Agreements or otherwise have been properly or sufficiently or lawfully created, perfected, protected or enforced or are entitled to any particular priority, or to exercise at all or in any particular manner or under any duty of care, disclosure or fidelity, or to continue exercising, any of the rights, authorities and powers granted or available to Agent in this Agreement or in any of the other Financing Agreements, it being understood and agreed that in respect of the Collateral, or any act, omission or event related thereto, Agent may act in any manner it may deem appropriate, in its discretion, given Agent's own interest in the Collateral as a Lender and that Agent shall have no duty or liability whatsoever to any other Lender.

12.12. Agency for Perfection. Each Lender hereby appoints Agent and each other Lender as agent and bailee for the purpose of perfecting the security interests in and Liens upon the Collateral of Agent in assets which, in accordance with Article 9 of the UCC can be perfected only by possession (or where the security interest of a secured party with possession has priority over the security interest of another secured party) and Agent and each Lender hereby acknowledges that it holds possession of any such Collateral for the benefit of Agent as secured party. Should any Lender obtain possession of any such Collateral, such Lender shall notify Agent thereof, and, promptly upon Agent's request therefor shall deliver such Collateral to Agent or in accordance with Agent's instructions.

12.13. Successor Agent. Agent may resign as Agent upon thirty (30) days' notice to Lenders and Borrower Agent. If Agent resigns under this Agreement, the Required Lenders shall appoint from among the Lenders a successor agent for Lenders. If no successor agent is appointed prior to the effective date of the resignation of Agent, Agent may appoint, after consulting with Lenders and Borrowers, a successor agent from among Lenders. Upon the acceptance by the Lender so selected of its appointment as successor agent hereunder, such successor agent shall succeed to all of the rights, powers and duties of the retiring Agent and the term "Agent" as used herein and in the other Financing Agreements shall mean such successor agent and the retiring Agent's appointment, powers and duties as Agent shall be terminated. After any retiring Agent's resignation hereunder as Agent, the provisions of this SECTION 12 shall inure to its benefit as to any actions taken or omitted by it while it was Agent under this Agreement. If no successor agent has accepted appointment as Agent by the date which is thirty (30) days after the date of a retiring Agent's notice of resignation, the retiring Agent's resignation shall nonetheless thereupon become effective and Lenders shall perform all of the duties of Agent hereunder until such time, if any, as the Required Lenders appoint a successor agent as provided for above.

SECTION 13. TERM OF AGREEMENT; MISCELLANEOUS

13.1. Term.

(a) This Agreement and the other Financing Agreements shall become effective as of the date set forth on the first page hereof and shall continue in full force and effect for a term ending on the date three (3) years from the date hereof (the "Term"), unless sooner terminated pursuant to the terms hereof. Borrowers may terminate this Agreement at any time upon ten (10) days prior written notice to Agent (which notice shall be irrevocable) and Agent may, at its option, and shall at the direction of Required Lenders, terminate this

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Agreement at any time on or after an Event of Default; provided, that, in each case, this Agreement and all other Financing Agreements must be terminated simultaneously. Upon the earlier of: (i) the last day of the Term or (ii) the effective date of termination of the Financing Agreements, Borrowers shall pay to Agent all outstanding and unpaid Obligations and shall furnish cash collateral to Agent (or at Agent's option, a letter of credit issued for the account of Borrowers and at Borrowers' expense, in form and substance satisfactory to Agent, by an issuer acceptable to Agent and payable to Agent as beneficiary) in such amounts as Agent determines are reasonably necessary to secure Agent and Lenders from loss, cost, damage or expense, including attorneys' fees and expenses, in connection with any contingent Obligations, including letters of credit, checks or other payments provisionally credited to the Obligations and/or as to which Agent or any Lender has not yet received final and indefeasible payment. The amount of such cash collateral (or letter of credit, as Agent may determine) as to any letter of credit accommodations shall be in the amount equal to one hundred ten (110%) percent of the amount of the letter of credit accommodations plus the amount of any fees and expenses payable in connection therewith through the end of the latest expiration date of such letter of credit accommodations. Such payments in respect of the Obligations and cash collateral shall be remitted by wire transfer in Federal funds to the Agent Payment Account or such other bank account of Agent, as Agent may, in its discretion, designate in writing to Borrowers for such purpose. Interest shall be due until and including the next Business Day, if the amounts so paid by Borrowers to the Agent Payment Account or other bank account designated by Agent are received in such bank account later than 12:00 noon, Atlanta, Georgia time.

(b) No termination of this Agreement or the other Financing Agreements shall relieve or discharge any Borrower or any other Obligor of its respective duties, obligations and covenants under this Agreement or the other Financing Agreements until all Obligations have been fully and finally discharged and paid, and Agent's continuing security interest in the Collateral and the rights and remedies of Agent and Lenders hereunder, under the other Financing Agreements and Applicable Law, shall remain in effect until all such Obligations have been fully and finally discharged and paid. Accordingly, each Borrower waives any rights it may have under the UCC to demand the filing of termination statements with respect to the Collateral and Agent shall not be required to send such termination statements to any Borrower, or to file them with any filing office, unless and until this Agreement shall have been terminated in accordance with its terms and all Obligations paid and satisfied in full in immediately available funds.

(c) If for any reason this Agreement is terminated prior to the last day of the Term, in view of the impracticality and extreme difficulty of ascertaining actual damages and by mutual agreement of the parties as to a reasonable calculation of Agent's and each Lender's lost profits as a result thereof, Borrowers jointly and severally agree to pay to Agent for itself and the ratable benefit of Revolving Lenders, upon the effective date of such termination, an early termination fee in the amount equal to (the "Early Termination Fee"):

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Amount                                Period
------                                ------
(i) 2.0% of Maximum Revolving Credit  From the date hereof to and including the
                                      first anniversary of the date hereof

(ii) 1.0% of Maximum Revolving        From and after the first anniversary of the
Credit                                date hereof to and including the second
                                      anniversary of the date hereof

(iii) 0.50% of Maximum Revolving      From and after the second anniversary of the
Credit                                date hereof, to but not including the third
                                      anniversary of the date hereof or if the
                                      term of this Agreement is extended, at any
                                      time prior to the end of the then current
                                      term.

In addition to and not in lieu of the fees set forth above, Borrowers jointly and severally agree to pay Term Lender the Minimum Return Fee in the amount and at the time set forth in the Fee Letter. Such Early Termination Fee and Minimum Return Fee shall be presumed to be the amount of damages sustained by Agent and Lenders as a result of such early termination and Borrowers agree that they are reasonable under the circumstances currently existing. In addition, Agent and Lenders shall be entitled to such Early Termination Fee and Minimum Return Fee upon the occurrence of any Event of Default described in SECTIONS 10.1(i) AND 10.1(j) hereof, even if Agent and Lenders do not exercise the right to terminate this Agreement, but elect, at their option, to provide financing to Borrowers and/or permit the use of cash collateral under the United States Bankruptcy Code. The Early Termination Fee and Minimum Return Fee provided for in this
SECTION 13.1 shall be deemed included in the Obligations.

Notwithstanding the foregoing, the Early Termination Fee (but not the Minimum Return Fee) shall be waived if the Obligations are refinanced by Wachovia Bank, National Association or any of its Affiliates so long as no Event of Default exists at such time.

13.2. Interpretative Provisions.

(a) All terms used herein which are defined in Article 1, Article 8 or Article 9 of the UCC shall have the meanings given therein unless otherwise defined in this Agreement.

(b) All references to the plural herein shall also mean the singular and to the singular shall also mean the plural unless the context otherwise requires.

(c) All references to any Borrower, any Obligor, Agent and Lenders pursuant to the definitions set forth in the recitals hereto, or to any other person herein, shall include their respective successors and assigns.

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(d) The words "hereof", "herein", "hereunder", "this Agreement" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not any particular provision of this Agreement and as this Agreement now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced.

(e) The word "including" when used in this Agreement shall mean "including, without limitation".

(f) An Event of Default shall exist or continue or be continuing until such Event of Default is waived in accordance with
SECTION 11.3 or is cured in a manner satisfactory to Agent, if such Event of Default is capable of being cured as determined by Agent.

(g) All references to the term "good faith" used herein when applicable to Agent or any Lender shall mean, notwithstanding anything to the contrary contained herein or in the UCC, honesty in fact in the conduct or transaction concerned. Borrowers shall have the burden of proving any lack of good faith on the part of Agent or any Lender alleged by Borrowers at any time.

(h) Any accounting term used in this Agreement shall have, unless otherwise specifically provided herein, the meaning customarily given in accordance with GAAP, and all financial computations hereunder shall be computed unless otherwise specifically provided herein, in accordance with GAAP as consistently applied and using the same method for inventory valuation as used in the preparation of the financial statements of Borrowers most recently received by Agent prior to the date hereof.

(i) In the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including", the words "to" and "until" each mean "to but excluding" and the word "through" means "to and including".

(j) Unless otherwise expressly provided herein,
(i) references herein to any agreement, document or instrument shall be deemed to include all subsequent amendments, modifications, supplements, extensions, renewals, restatements or replacements with respect thereto, but only to the extent the same are not prohibited by the terms hereof or of any other Financing Agreement, and (ii) references to any statute or regulation are to be construed as including all statutory and regulatory provisions consolidating, amending, replacing, recodifying, supplementing or interpreting the statute or regulation.

(k) The captions and headings of this Agreement are for convenience of reference only and shall not affect the interpretation of this Agreement.

(l) This Agreement and other Financing Agreements may use several different limitations, tests or measurements to regulate the same or similar matters. All such limitations, tests and measurements are cumulative and shall each be performed in accordance with their terms.

(m) This Agreement and the other Financing Agreements are the result of negotiations among and have been reviewed by counsel to Agent and the other

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parties, and are the products of all parties. Accordingly, this Agreement and the other Financing Agreements shall not be construed against Agent or Lenders merely because of Agent's or any Lender's involvement in their preparation.

13.3. Notices. All notices, requests and demands hereunder shall be in writing and deemed to have been given or made: if delivered in person, immediately upon delivery; if by telex, telegram or facsimile transmission, immediately upon sending and upon confirmation of receipt; if by nationally recognized overnight courier service with instructions to deliver the next Business Day, one (1) Business Day after sending; and if by certified mail, return receipt requested, five (5) days after mailing. All notices, requests and demands upon the parties are to be given to the following addresses (or to such other address as any party may designate by notice in accordance with this Section):

If to Borrowers:             Kirkland's Stores, Inc.
                             805 North Parkway
                             P.O. Box 7222
                             Jackson, Tennessee 38305
                             Attention:  President
                             Telephone No.: (901) 668-2444
                             Telecopy No.: (901) 664-9345

with a copy to:              Kirkland's Stores, Inc.
                             P. O. Box 7222
                             Jackson, Tennessee  38305
                             Attention:  General Counsel
                             Telephone No.:  (901) 668-2444
                             Telecopy No.:  (901) 664-9345

and to:                      Pepper Hamilton LLP
                             3000 Two Logan Square
                             18th & Arch Streets
                             Philadelphia, Pennsylvania 1903
                             Attention:  James S. Lawlor
                             Telephone No.: (215) 981-4000
                             Telecopy No.: (215) 981-4750

If to Agent:                 Congress Financial Corporation (Southern)
                             200 Galleria Parkway, Suite  1500
                             Atlanta, Georgia 30339
                             Attention: Office Head
                             Telephone No.: (770) 956-0094
                             Telecopy No.: (770) 956-1861

13.4. Partial Invalidity. If any provision of this Agreement is held to be invalid or unenforceable, such invalidity or unenforceability shall not invalidate this Agreement as a whole, but this Agreement shall be construed as though it did not contain the particular provision

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held to be invalid or unenforceable and the rights and obligations of the parties shall be construed and enforced only to such extent as shall be permitted by Applicable Law.

13.5. Confidentiality.

(a) Agent and each Lender shall use all reasonable efforts to keep confidential, in accordance with its customary procedures for handling confidential information and safe and sound lending practices, any non-public information supplied to it by any Borrower pursuant to this Agreement, provided, that, nothing contained herein shall limit the disclosure of any such information: (i) to the extent required by statute, rule, regulation, subpoena or court order, (ii) to bank examiners and other regulators, auditors and/or accountants, (iii) in connection with any litigation to which Agent or such Lender is a party relating to this Agreement, (iv) to any Lender or any Affiliate of any Lender or to any Participant (or prospective Lender or Participant) so long as such Lender or Participant (or prospective Lender or Participant) shall have been instructed to treat such information as confidential in accordance with this SECTION 13.5, or (v) to counsel for Agent or any Participant or Lender (or prospective Participant or Lender so long as clause (iv) of this Section is satisfied as to such Person).

(b) In the event that Agent or any Lender receives a request or demand to disclose any confidential information pursuant to any subpoena or court order, Agent or such Lender, as the case may be, agrees
(i) to the extent permitted by Applicable Law or if permitted by Applicable Law, statute, rule or regulation to the extent Agent determines in good faith that it will not create any risk of liability to Agent or such Lender, that Agent or such Lender will promptly notify Borrower Agent of such request so that Borrowers may seek a protective order or other appropriate relief or remedy and
(ii) if disclosure of such information is required, disclose such information and, subject to reimbursement by Borrowers of Agent's or such Lender's reasonable expenses, cooperate with Borrowers in reasonable efforts to obtain an order or other reliable assurance that confidential treatment will be accorded to such portion of the disclosed information which Borrowers so designate, to the extent permitted by Applicable Law or if permitted by Applicable Law, to the extent Agent or such Lender determines in good faith that it will not create any risk of liability to Agent or such Lender.

(c) In no event shall this SECTION 13.5 or any other provision of this Agreement or Applicable Law be deemed: (i) to apply to or restrict disclosure of information that has been or is made public by any Borrower or any third party, (ii) to apply to or restrict disclosure of information that was or becomes available to Agent or any Lender from a Person other than a Borrower, (iii) require Agent or any Lender to return any materials furnished by any Borrower to Agent or (iv) prevent Agent from responding to routine informational requests in accordance with the Code of Ethics for the Exchange of Credit Information promulgated by The Robert Morris Associates or other applicable industry standards relating to the exchange of credit information. The obligations of Agent and Lenders under this SECTION 13.5 shall supersede and replace the obligations of Agent and Lenders under any confidentiality letter signed prior to the date hereof.

13.6. Successors. This Agreement, the other Financing Agreements and any other document referred to herein or therein shall be binding upon and inure to the benefit of and be enforceable by Agent, Lenders, each Borrower, and their respective successors and assigns,

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except that no Borrower may assign its rights under this Agreement, the other Financing Agreements and any other document referred to herein or therein without the prior written consent of Agent and Lenders. Any such purported assignment without such express prior written consent shall be void. No Lender may assign its rights and obligations under this Agreement without the prior written consent of Agent, except as provided in SECTION 13.7 below. The terms and provisions of this Agreement and the other Financing Agreements are for the purpose of defining the relative rights and obligations of Borrowers, Agent and Lenders with respect to the transactions contemplated hereby and there shall be no third party beneficiaries of any of the terms and provisions of this Agreement or any of the other Financing Agreements.

13.7. Assignments; Participations.

(a) Each Lender may assign all or, if less than all, a portion equal to at least $5,000,000 in the aggregate for the assigning Lender (other than an assignment by Term Lender to an Affiliate of Term Lender, which shall not be subject to such minimum amount), of such rights and obligations under this Agreement to one or more Eligible Transferees (but not including for this purpose any assignments in the form of a participation), each of which assignees shall become a party to this Agreement as a Lender by execution of an Assignment and Acceptance; provided, that, such transfer or assignment to an Eligible Transferee that is not a Lender or an Affiliate of a Lender will not be effective until recorded by Agent on the Register; and provided, further, that so long as no Event of Default exists, Congress shall hold not less than sixty-six and two-thirds percent (66 2/3%) of all outstanding Revolving Loans.

(b) Agent shall maintain a register of the names and addresses of Lenders, their Commitments and the principal amount of their Loans (the "Register"). Agent shall also maintain a copy of each Assignment and Acceptance delivered to and accepted by it and shall modify the Register to give effect to each Assignment and Acceptance. The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and all Obligors, Agent and Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by Borrowers and any Lender at any reasonable time and from time to time upon reasonable prior notice.

(c) Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, (i) the assignee thereunder shall be a party hereto and to the other Financing Agreements and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Lender hereunder and thereunder and (ii) the assigning Lender shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement.

(d) By execution and delivery of an Assignment and Acceptance, the assignor and assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, the assigning Lender makes no representation or warranty and assumes no responsibility with

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respect to any statements, warranties or representations made in or in connection with this Agreement or any of the other Financing Agreements or the execution, legality, enforceability, genuineness, sufficiency or value of this Agreement or any of the other Financing Agreements furnished pursuant hereto,
(ii) the assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of any Borrower, any other Obligor or any of their Subsidiaries or the performance or observance by any Borrower or any other Obligor of any of the Obligations; (iii) such assignee confirms that it has received a copy of this Agreement and the other Financing Agreements, together with such other documents and information it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance, (iv) such assignee will, independently and without reliance upon the assigning Lender, Agent and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement and the other Financing Agreements, (v) such assignee appoints and authorizes Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the other Financing Agreements as are delegated to Agent by the terms hereof and thereof, together with such powers as are reasonably incidental thereto, and (vi) such assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of this Agreement and the other Financing Agreements are required to be performed by it as a Lender. Agent and Lenders may furnish any information concerning any Borrower or any other Obligor in the possession of Agent or any Lender from time to time to assignees and Participants.

(e) Each Lender may sell participations to one or more banks or other entities in or to all or a portion of its rights and obligations under this Agreement and the other Financing Agreements (including, without limitation, all or a portion of its Commitments and the Loans owing to it, without the consent of Agent or the other Lenders); provided, that, (i) such Lender's obligations under this Agreement (including, without limitation, its Commitment hereunder) and the other Financing Agreements shall remain unchanged,
(ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, and Borrowers and Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and the other Financing Agreements,
(iii) the Participant shall not have any rights under this Agreement or any of the other Financing Agreements (the Participant's rights against such Lender in respect of such participation to be those set forth in the agreement executed by such Lender in favor of the Participant relating thereto) and all amounts payable by Borrowers or any other Obligor hereunder shall be determined as if such Lender had not sold such participation,

(f) Nothing in this Agreement shall prevent or prohibit any Lender from pledging its Loans hereunder to a Federal Reserve Bank in support of borrowings made by such Lenders from such Federal Reserve Bank,

(g) Each Borrower shall assist Agent or any Lender permitted to sell assignments or participations under this SECTION 13.7 in whatever manner reasonably necessary in order to enable or effect any such assignment or participation, including (but not limited to) the execution and delivery of any and all agreements, notes and other documents and instruments as shall be requested and the delivery of informational materials, appraisals or other documents for, and the participation of relevant management in meetings and conference calls

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with, potential Lenders or Participants. Each Borrower shall certify the correctness, completeness and accuracy, in all material respects, of all descriptions of each Borrower and its affairs provided, prepared or reviewed by such Borrower that are contained in any selling materials and all other information provided by it and included in such materials.

(h) (i) Borrower Agent shall maintain, or cause to be maintained, a register (the "Term Loan Register") on which it enters the name of each Lender as the registered owner of the Term Loan held by such Lender. A Registered Term Loan (and the Registered Term Note, if any, evidencing the same) may be assigned or sold in whole or in part only by registration of such assignment or sale on the Term Loan Register (and each Registered Term Note shall expressly so provide). Any assignment or sale of all or part of such Registered Term Loan (and the Registered Term Note, if any, evidencing the same) may be effected only by registration of such assignment or sale on the Term Loan Register, together with the surrender of the Registered instrument of assignment or sale duly executed by) the holder of such Registered Term Note, whereupon, at the request of the designated assignee(s) or transferee(s), one or more new Registered Term Notes in the same aggregate principal amount shall be issued to the designated assignee(s) or transferee(s). Prior to the registration of assignment or sale of any Registered Term Loan (and the Registered Term Note, if any evidencing the same), Borrowers shall treat the Person in whose name such Loan (and the Registered Term Note, if any, evidencing the same) is registered as the owner thereof for the purpose of receiving all payments thereon and for all other purposes, notwithstanding notice to the contrary.

(ii) In the event that any Lender sells participations in a Registered Term Loan, such Lender shall maintain a register on which it enters the name of all participants in such Registered Term Loan (the "Participant Register"). A Registered Term Loan (and the Registered Term Note, if any, evidencing the same) may be participated in whole or in part only by registration of such participation on the Participant Register (and each Registered Term Note shall expressly so provide). Any participation of such Registered Term Loan (and the Registered Term Note, if any, evidencing the same) may be effected only by the registration of such participation on the Participant Register.

13.8. Entire Agreement. This Agreement, the other Financing Agreements, any supplements hereto or thereto, and any instruments or documents delivered or to be delivered in connection herewith or therewith represents the entire agreement and understanding concerning the subject matter hereof and thereof between the parties hereto, and supersede all other prior agreements, understandings, negotiations and discussions, representations, warranties, commitments, proposals, offers and contracts concerning the subject matter hereof, whether oral or written. In the event of any inconsistency between the terms of this Agreement and any schedule or exhibit hereto, the terms of this Agreement shall govern.

13.9. Counterparts, Etc. This Agreement or any of the other Financing Agreements may be executed in any number of counterparts, each of which shall be an original, but all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of this Agreement or any of the other Financing Agreements by telefacsimile shall have the same force and effect as the delivery of an original executed counterpart of this Agreement or any of such other Financing Agreements. Any party delivering an executed counterpart of any such agreement by telefacsimile shall also deliver an original

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executed counterpart, but the failure to do so shall not affect the validity, enforceability or binding effect of such agreement.

[Signatures will commence on following page]

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IN WITNESS WHEREOF, Agent, Lenders and Borrowers have caused these presents to be duly executed under seal on the day and year first above written.

                                      BORROWERS:
                                      ---------

ATTEST:                               KIRKLAND'S STORES, INC.


/s/ Lowell E. Pugh, II                By: /s/ Reynolds C. Faulkner
-------------------------------          ---------------------------------------
LOWELL E. PUGH, II, Secretary            REYNOLDS C. FAULKNER, Executive Vice
                                         President and Chief Financial Officer

                                         Address:
                                         -------
                                         805 North Parkway
                                         Jackson, Tennessee  38305
                                         Attention:  President
                                         Telecopier No.:  731-664-9345
                                         -------------    ----------------------

ATTEST:                               KIRKLAND'S, INC.


/s/ Lowell E. Pugh, II                By: /s/ Reynolds C. Faulkner
-------------------------------          ---------------------------------------
LOWELL E. PUGH, II, Secretary            REYNOLDS C. FAULKNER, Executive Vice
                                         President and Chief Financial Officer

                                         Address:
                                         -------
                                         805 North Parkway
                                         Jackson, Tennessee  38305
                                         Attention:  President
                                         Telecopier No.:  731-664-9345
                                         -------------    ----------------------

ATTEST:                               KIRKLANDS.COM, INC.


/s/ Lowell E. Pugh, II                By: /s/ Reynolds C. Faulkner
--------------------------------         ---------------------------------------
LOWELL E. PUGH, II, Secretary            REYNOLDS C. FAULKNER, Executive Vice
                                         President and Chief Financial Officer

                                         Address:
                                         -------
                                         805 North Parkway
                                         Jackson, Tennessee  38305
                                         Attention:  President
                                         Telecopier No.:  731-664-9345
                                         -------------    ----------------------

[Signatures continued on following page]

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AGENT:

CONGRESS FINANCIAL CORPORATION
(SOUTHERN), as Collateral and
Administrative Agent

By: /s/ William L. Prindle
   ------------------------------------
         Title: Vice President
                -----------------------

Address:

200 Galleria Parkway Suite 1500 Atlanta, Georgia 30339 Attention: Office Head Telecopier No.: (770) 956-8120

LENDERS:

CONGRESS FINANCIAL CORPORATION
(SOUTHERN), a Lender

Revolving Loan Commitment: $45,000,000/$30,000,000

By: /s/ William L. Prindle
   ------------------------------------
         Title: Vice President
               ------------------------

Address:

200 Galleria Parkway Suite 1500 Atlanta, Georgia 30339 Attention: Office Head Telecopier No.: (770) 956-8120

ABLECO FINANCE LLC, a Lender

Term Loan Commitment: $15,000,000

By: /s/ Daniel Wolf
   ------------------------------------
         Title: SVP
               ------------------------

Address:

450 Park Avenue 28th Floor New York, New York 10022 Attention: Daniel Wolf Telecopier No.: (212) 891-1541

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EXHIBIT A

FORM OF ASSIGNMENT AND ACCEPTANCE

A-1

EXHIBIT B

INFORMATION CERTIFICATE

B-1

EXHIBIT C

FORM OF COMPLIANCE CERTIFICATE

[Letterhead of Parent]

, 200_

Congress Financial Corporation (Southern) 200 Galleria Parkway, N.W.
Suite 1500
Atlanta, Georgia 30339
Attention: Barry Dolin

Ladies and Gentlemen:

I hereby certify to you pursuant to Section 9.6 of the Loan Agreement (as defined below) as follows:

1. I am the duly elected Chief Financial Officer of Kirkland's, Inc., a Tennessee corporation ("Parent"). Capitalized terms used herein without definition shall have the meanings given to such terms in the Loan and Security Agreement, dated May ____, 2002, by and among Congress Financial Corporation (Southern), as Agent ("Agent"), and Parent, Kirkland's Stores, Inc., a Tennessee corporation, and kirklands.com, inc., a Tennessee corporation (collectively, "Borrowers"), and the parties thereto from time to time as Lenders (as such Loan and Security Agreement is amended, modified or supplemented, from time to time, the "Loan Agreement").

2. I have reviewed the terms of the Loan Agreement, and have made, or have caused to be made under my supervision, a review in reasonable detail of the transactions and the financial condition of Borrowers and each of their Subsidiaries, during the immediately preceding fiscal month.

3. The review described in Section 2 above did not disclose the existence during or at the end of such fiscal month, and I have no knowledge of the existence and continuance on the date hereof, of any condition or event which constitutes a Default or an Event of Default, except as set forth on Schedule I attached hereto. Described on Schedule I attached hereto are the exceptions, if any, to this Section 3 listing, in detail, the nature of the condition or event, the period during which it has existed and the action which any Borrower or Obligor has taken, is taking, or proposes to take with respect to such condition or event.

4. I further certify that, based on the review described in
Section 2 above, no Borrower and no Obligor has at any time during or at the end of such fiscal month, except as specifically described on Schedule II attached hereto or as permitted by the Loan Agreement, done any of the following:

(a) Changed its respective corporate name, or transacted business under any trade name, style, or fictitious name, other than those previously described to you and set forth in the Financing Agreements.

C-1

(b) Changed the location of its chief executive office, changed its jurisdiction of incorporation, changed its type of organization or changed the location of or disposed of any of its properties or assets (other than pursuant to the sale of Inventory in the ordinary course of its business or as otherwise permitted by Section 9.7 of the Loan Agreement), or established any new asset locations, except as previously reported to Agent as required in the Loan Agreement.

(c) Materially changed the terms upon which it sells goods (including sales on consignment) or provides services, nor has any vendor or trade supplier to Borrower or any Obligor during or at the end of such period materially adversely changed the terms upon which it supplies goods to Borrower or such Obligor.

(d) Permitted or suffered to exist any security interest in or liens on any of its properties, whether real or personal, other than as specifically permitted in the Financing Agreements.

(e) Received any notice of, or obtained knowledge of any of the following not previously disclosed to Lender: (i) the occurrence of any event involving the release, spill or discharge of any Hazardous Material in violation of applicable Environmental Law in a material respect or (ii) any investigation, proceeding, complaint, order, directive, claims, citation or notice with respect to: (A) any non-compliance with or violation of any applicable Environmental Law by a Borrower or any Obligor in any material respect or (B) the release, spill or discharge of any Hazardous Material in violation of applicable Environmental Law in a material respect or
(C) the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials in violation of applicable Environmental Laws in a material respect or (D) any other environmental, health or safety matter, which has a material adverse effect on Borrower or any Obligor or its business, operations or assets or any properties at which Borrower or such Obligor transported, stored or disposed of any Hazardous Materials.

(f) Become aware of, obtained knowledge of, or received notification of, any breach or violation of any material covenant contained in any instrument or agreement in respect of Indebtedness for money borrowed by a Borrower.

5. In the case of financial statements delivered for the last month of a Fiscal Quarter, attached hereto as Schedule III are the calculations used in determining, as of the end of such Fiscal Quarter whether Borrower is in compliance with the covenants set forth in Section 9.17 and SECTION 9.19 of the Loan Agreement for such Fiscal Quarter.

The foregoing certifications are made and delivered this day of ___________, 20__.

Very truly yours,

By:
Title:

C-2

SCHEDULE 1.37

EXISTING LENDERS

Syndicated Loan Funding Trust
Fleet National Bank
Hibernia National Bank
AmSouth Bank
Mitsui Leasing Capital Corporation
Union Planters Bank of Jackson, Mississippi BancorpSouth Bank
TCW Leveraged Income Trust, II, L.P.
Crescent/Mach I Partners, L.P.
Indosuez Capital Funding IIA, Ltd.
Van Kampen Senior Floating Rate Fund
Van Kampen Prime Rate Income Trust

SCHEDULE 1.38

EXISTING LETTERS OF CREDIT

None

SCHEDULE 8.10

DEPOSIT ACCOUNTS

WACHOVIA BANK - KIRKLAND'S STORES, INC.

WACHOVIA CONCENTRATION ACCOUNT                          ACCOUNT NO.

Attn:  Ginger Powell                                    2000013946382
TN1253
150 4th Avenue North

SUB-ACCOUNTS UNDER WACHOVIA CONCENTRATION ACCOUNT

STORE NO.                                               SUB-ACCOUNT NO.
---------                                               ---------------
K-102                                                   2000013846395
K-107                                                   2000013946405
K-109                                                   2000013946418
K-110                                                   2000013946421
K-118                                                   2000013946434
K-126                                                   2000013946447
K-128                                                   2000013946450
K-129                                                   2000013946463
K-160                                                   2000013946476
K-214                                                   2000013946489
K-227                                                   2000013946492
K-230                                                   2000013946502
K-231                                                   2000013946515
K-240                                                   2000013946528
K-267                                                   2000013946531
K-282                                                   2000013946557
K-284                                                   2000005974689
K-294                                                   2000013946560
K-295                                                   2000013946573
K-297                                                   2000013946586
K-300                                                   2000013946599
K-308                                                   2000013946609
K-312                                                   2000013946612
K-704                                                   2000013946625
K-705                                                   2000013946638
BP-812                                                  2000013946654
BP-814                                                  2000013946667
BP-816                                                  2000013946670
BP-818                                                  2000013946683

BP-825                                                  2000013946706
BP-826                                                  2000013946696
BP-827                                                  2000001293393
BP-836                                                  2000013946719
BP-837                                                  2000013946722

BANK OF AMERICA - KIRKLAND'S STORES, INC.

BANK OF AMERICA CONCENTRATION ACCOUNT                   ACCOUNT NO.
Attn:  Rob Bailey                                       0032745901587
TN1-100-02-25
414 Union Street
Nashville, TN  37239-1697
SUB-ACCOUNTS UNDER BANK OF AMERICA CONCENTRATION ACCOUNT

STORE NO.                                               SUB-ACCOUNT NO.
---------                                               ---------------
K-122                                                   003275901728
K-125                                                   003275904359
K-134                                                   003275901298
K-140                                                   003275901736
K-142                                                   000107520067
K-143                                                   003275901744
K-148                                                   003275901306
K-149                                                   003275901751
K-150                                                   003275901769
K-156                                                   003275901314
K-159                                                   003275901322
K-165                                                   003275901330
K-168                                                   003275901777
K-170                                                   003275901785
K-172                                                   003275901348
K-173                                                   003275901793
K-174                                                   003275901801
K-175                                                   003275901819
K-180                                                   003275901827
K-181                                                   003275901835
K-182                                                   003275901843
K-186                                                   003275901850
K-188                                                   000102139335
K-189                                                   003275901868
K-192                                                   003275901876
K-194                                                   003275901884

K-195                                                   003275901892
K-197                                                   003275901900
K-199                                                   003275901363
K-200                                                   003275901371
K-201                                                   003275901918
K-207                                                   003275901926
K-208                                                   003275901934
K-216                                                   003275901942
K-220                                                   003275901959
K-221                                                   003275901967
K-223                                                   003275901975
K-224                                                   003275901389
K-226                                                   003275901983
K-229                                                   003275901991
K-232                                                   003275902007
K-233                                                   003275902015
K-235                                                   003275901397
K-236                                                   003275901405
K-239                                                   003275902023
K-241                                                   003275901413
K-247                                                   003275902031
K-255                                                   003275902049
K-256                                                   003275901421
K-258                                                   003275901546
K-261                                                   003275902056
K-263                                                   003275902064
K-264                                                   003275902072
K-275                                                   003275902080
K-278                                                   003275902098
K-279                                                   003275901439
K-281                                                   003275902106
K-288                                                   003275902114
K-291                                                   003275902122
K-292                                                   003275902130
K-293                                                   003275901447
K-298                                                   003275902148
K-302                                                   003275901454
K-305                                                   003275901462
K-307                                                   003275901470
K-309                                                   003275902155
K-310                                                   003275901488
K-314                                                   003275902163

K-315                                                   003275902171
K-317                                                   003275902429
K-319                                                   003252639317
K-701                                                   003275902189
K-706                                                   003275901496
K-708                                                   003275901504
K-709                                                   003275902197
K-710                                                   003275901512
K-712                                                   003275901520
BP-801                                                  003252962354
BP-803                                                  003275902205
BP-805                                                  003256566102
BP-808                                                  003275902213
BP-809                                                  003263065312
BP-810                                                  003271385306
BP-815                                                  003275901538
BP-817                                                  000201290840
BP-819                                                  003275902221
BP-820                                                  003275902239
BP-821                                                  003275902247
BP-823                                                  003275901553
BP-824                                                  003275902254
BP-829                                                  003275902270
BP-830                                                  003275902288
BP-831                                                  003275901561
BP-834                                                  003275901579
BP-838                                                  003275901355
BP-891                                                  003271385249
K-905                                                   003275902296

AMSOUTH BANK - KIRKLAND'S STORES, INC.

AMSOUTH CONCENTRATION ACCOUNT                           ACCOUNT NO.

Attn:  Jon Tutor                                        5325414151
6000 Poplar Avenue, Suite 300
Memphis, TN 38119

SUB-ACCOUNTS UNDER AMSOUTH BANK CONCENTRATION ACCOUNT:

STORE NO.                                               SUB-ACCOUNT NO.:
---------                                               ----------------
K-103                                                   5325414151
K-104                                                   5325414151

K-111                                                   5325414151
K-114                                                   5325414151
K-115                                                   5325414151
K-116                                                   5325414151
K-117                                                   5325414151
K-120                                                   5325414151
K-127                                                   5325414151
K-130                                                   5325414151
K-141                                                   5325414151
K-146                                                   5325414151
K-151                                                   5325414151
K-152                                                   5325414151
K-154                                                   5325414151
K-158                                                   5325414151
K-161                                                   5325414151
K-164                                                   5325414151
K-176                                                   5325414151
K-183                                                   5325414151
K-193                                                   5325414151
K-198                                                   5325414151
K-202                                                   5325414151
K-203                                                   5325414151
K-204                                                   5325414151
K-218                                                   5325414151
K-243                                                   5325414151
K-248                                                   5325414151
K-260                                                   5325414151
K-276                                                   5325414151
K-277                                                   5325414151
K-280                                                   5325414151
K-285                                                   5325414151
K-296                                                   5325414151
K-299                                                   5325414151
K-303                                                   5325414151
K-311                                                   5325414151
K-318                                                   5325414151
K-320                                                   5325414151
K-508                                                   5325414151
K-702                                                   5325414151
BP-813                                                  5325414151
BP-832                                                  5325414151
BP-833                                                  5325414151

BP-835                                                  5325414151

FLEET NATIONAL BANK - KIRKLAND'S, INC.

FLEET NATIONAL BANK ACCOUNT                             ACCOUNT NO.
Attn:                                                   53286051
100 Federal Street
MS:  01-07-05
Boston, MA  02110

                         AMSOUTH BANK - KIRKLAND'S, INC.

AMSOUTH BANK ACCOUNT                                              ACCOUNT NO.
Attn:  Jon Tutor
6000 Poplar Avenue, Suite 300
Memphis, TN  38119
Checking                                                          0000602132
Accounts Payable                                                  0000606472
Master Payroll                                                    0000602213
ACH                                                               9000058891

OTHER DEPOSIT ACCOUNTS - KIRKLAND'S STORES, INC.

ACCOUNT NAME AND ADDRESS              STORE NO.                              ACCOUNT NO.

Bank One                              K-123                                  8800363715
P.O. Box 3399                         K-167                                  8700374510
Baton Rouge, LA  70821                K-250                                  7900541257
1-888-434-3030

Laredo National Bank                  K-131                                  0080101484
P.O. Box 59
Laredo, TX  78042
1-888-723-1151

PNC Bank                              K136                                   3095450867
P.O. Box 609
Pittsburgh, PA  15230-9738
1-877-287-2654

Centura                               K-137                                  0700128224
P.O. Box 911
Rocky Mount, NC  27802
1-800-236-8872

FVB-colonial                          K-139                                  37390104
P.O. Box 27346
Richmond, VA  23261-7346
1-800-382-4115

Old National Bank                     K-144                                  412002523
P.O. Box 718
Evansville, IN  47705
1-800-731-2265

Central Bank & Trust                  K-145                                  10251639
P.O. Box 1360
Lexington, KY  40588-1360
1-606-253-6222

Hibernia                              K-153                                  882107671
P.O. Box 61540                        K-272                                  6020010922
New Orleans, LA  70161
1-800-262-5689

Provident Bank                        K-155                                  0730201
One East Fourth Street
Cincinnati, OH  45269
1-800-335-2230

Regions Bank                          K-157                                  0300763691
P.O. Box 10247
Birmingham, AL  35202-0247
1-205-290-5999

Fifth Third Bank                      K-166                                  74136795
8100 Burlington Pike
Florence, KY  41042
1-606-371-6626

Key Bank                              K-169                                  428294075
P.O. Box  22114                       K-219                                  6001240237
Albany, NY  12201-2114
1-800-539-2968

United Nations Bank                   K-171                                  043071102
P.O. Box 393
Charleston, WV  25322-0393
1-800-327-9862

Compass Bank                          K-178                                  0055000686
P.O. Box 10566
Birmingham, AL  35296
1-800-293-1017

Bank of Louisiana                     K-185                                  0000430269
P.O. Box 6972
Metairie, LA  70009-6972
1-504-889-9400

Bank One                              K-187                                  000715001293029
7610 W. Washington Street             K-259                                  000000615426970
Indianapolis, IN  46231               K-304                                  000000627456452
1-800-404-4111

Bank of America                       K-190                                  002832974754
P.O. Box 31019                        BP-822                                 001740042756
Tampa, FL  33631-3019
1-800-287-4637

Bank One                              K-191                                  000000975830580
Department 1045                       K-196                                  000000801743061
Columbus, OH  43271-1045              K-265                                  000000620830778
1-800-440-4111

Bank One                              K-205                                  1883899732
P.O. Box 655415
Dallas, TX  75265-5415
1-800-404-4111

Union Planters Bank                   K-206                                  0010006330
P.O. Box 78086
St. Louis, MO  63178-8086
1-800-333-1882

Bank One                              K-209                                  111500282737
Mail Suite 0314                       K-711                                  1115002014837
Chicago, IL  60670-0314
1-888-963-1900

National City Bank                    K-210                                  4330049281
P.O. Box 8043                         K-238                                  5230139858
Royal Oak, MI  48068-8043             K-290                                  628771994
1-800-925-9259

First American                        K-211                                  16021558702
P.O. Box 0794
Elk Grove Village, IL  60009-0794
1-847-952-3700

Lasalle Bank                          K-212                                  5800212283
135 South Lasalle Street
Chicago, IL  60603
1-312-904-6100

Hancock Bank                          K-215                                  010489077
P.O. Box 4019
Gulfport, MS  39502
1-800-448-8812

Union Federal Savings Bank            K-217                                  0590103016
P.O. Box 6054                         K-266                                  0590135791
Indianapolis, IN  46206-6054
1-800-284-4090

Commerica Bank                        K-222                                  1850478809
P.O. Box 75000
Detroit, MI  48275-8368
1-800-643-4418

Fifth Third Bank                      K-225                                  72609819
P.O. Box 630900                       K-162                                  71178412
Cincinnati, OH  45263-0900
1-513-923-4790

Northwest Bank & Trust Co.            K-228                                  2206308
100 E Kimberly Rd.
Davenport, IA  52808-8001
1-563-388-2511

Farmers State Bank                    K-234                                  753723
1240 8th Ave.
Marion, IA 52302
1-319-377-4891

First National Bank                   K-237                                  4681126
P.O. Box 2122
Terre Haute, IN  47802
1-812-238-6324

The Huntington National Bank          K-242                                  01891749126
P.O. Box 1558
Columbus, OH  43216-1558
1-800-480-2265

Cornhusker Bank                       K-244                                  1005171
P.O. Box 80009
Lincoln, NE  68501-00009
1-402-434-2265

Central Progressive Bank              K-246                                  771003498
111 North Oak St.
Hammond, LA  70401
1-504-542-2040

Huntington Federal Savings            K-249                                  059513087
1049 Fifth Ave.
Huntington, WV  25701
304-528-6200

Northwest Savings Bank                K-251                                  244200689
P.O. Box 128
Warren, PA  16365
1-814-726-2360

Regions Bank                          K-252                                  4105057159
P.O. Box 30280
New Orleans, LA  70190
1-504-584-2101

Chase Bank of Texas                   K-253                                  66308001067
P.O. Box 1231
Houston, TX  77251-1231
1-800-242-7338

Union Planters Bank                   K-254                                  3353702141
P.O. Box 78086
St. Lois, MO  63178-8086
1-800-333-1346

Central Bank                          K-257                                  0040000127866
P.O. Box 503
Hollidaysburg, PA  16648
1-800-711-2265

National City Bank                    K-262                                  394959934
P.O. Box 5756                         K-268                                  394975483
Cleveland, OH 44101-0756
1-800-738-3888

Firestar Bank                         K-269                                  0912082707
Location 0999
Cincinnati, OH  45264-0999
1-800-538-0838

Firestar Bank                         K-270                                  0492698907
Location 0999                         K-306                                  0492704861
Cincinnati, OH  45264-0999
1-800-627-7827

Key Bank                              K-271                                  327190049806
2000 Walden Ave.
Cheektowaga, NY  14225
1-888-539-4249

Dime Savings Bank                     K273                                   00003390218190
P.O. Box 150
Huntington Station, NY 11746
1-888-937-3463

Integra                               K-274                                  1003603047
P.O. Box 868
Evansville, IN  47705
1-800-743-3262

Bank One                              K-283                                  1890241316
100 Independence Place
Tyler, TX  75703
1-903-533-1111

BB&T                                  K-286                                  5271866315
P.O. Box 200
Wilson, NC  27894
1-800-543-6727

Bank Champaign                        K-287                                  1100181
P.O. Box 1490
Champaign, IL  61824-1490
1-217-351-2870

Belmont National Bank                 K-289                                  2084392
P.O. Box 249
St. Clairsville, OH  43950
1-800-695-1555

Old Kent Bank                         K-301                                  7514238265
One Vandenbers Center
Grand Rapids, MI  49503
1-616-771-5515

TFC National Bank                     K-703                                  3862619076
P.O. Box 8600
Ann Arbor, MI  48107
1-800-452-1890

Community Bank & Trust                K-707                                  160903
P.O. Box 1900
Cornelia, GA  30531
1-706-335-3151

The Savannah Bank                     BP-802                                 0001029637
P.O. Box 188
Savannah, GA  31402-0188
1-912-651-8200

First Citizens Bank                   BP-828                                 001411159208
P.O. Box 27131
Raleigh, NC  27611-7131
1-888-323-4732

PETTY CASH ACCOUNTS -- KIRKLAND'S STORES, INC.

ACCOUNT NAME AND ADDRESS            STORE NO.                              ACCOUNT NO.

AmSouth Bank                          K-102                                00607819
Jackson Central Office                K-104                                9000015741
423 N. Parkway                        K-109                                00607835
Jackson, TN  38305                    K-110                                00608092
1-800-267-6884                        K-111                                9000011797
                                      K-115                                00015105
                                      K-116                                00015148
                                      K-117                                9000015237
                                      K-118                                00015504
                                      K-120                                4000127
                                      K-122                                40000518
                                      K-123                                9040000755
                                      K-125                                40000771
                                      K-126                                40000801
                                      K-127                                00605409
                                      K-128                                00605743
                                      K-129                                00605727
                                      K-130                                5900248491
                                      K-131                                00606421
                                      K-134                                00608297
                                      K-136                                00609986
                                      K-139                                5900248598
                                      K-140                                00611166
                                      K-141                                9000610135
                                      K-142                                00690066
                                      K-143                                00690937
                                      K-144                                5900249254
                                      K-145                                5900249267
                                      K-148                                5900249306
                                      K-149                                00691623
                                      K-150                                5900249296

K-151                                00692670
K-152                                00692468
K-153                                00692921
K-154                                5900249348
K-155                                9000057452
K-156                                9000075382
K-157                                9000057546
K-159                                9000058228
K-160                                9000058215
K-161                                9000057957
K-162                                9000058383
K-164                                9000058697
K-165                                9000110166
K-166                                9000110140
K-167                                9000111770
K-168                                9000111699
K-169                                9000058846
K-170                                9000111372
K-171                                9000058862
K-172                                9000111275
K-173                                9000111314
K-174                                9000111291
K-175                                9000111330
K-176                                9000111149
K-178                                9000109960
K-180                                9000106426
K-181                                9000106442
K-182                                9000106468
K-183                                9000106549
K-185                                90001112054
K-186                                9000067112
K-187                                9000067073
K-188                                9000067028
K-189                                9000067044
K-194                                9000065978
K-195                                9000065994
K-196                                9000066016
K-197                                9000066058
K-198                                9000066061
K-199                                9000066087
K-200                                9000066139
K-201                                9000066100
K-202                                9000066142
K-204                                9000066184
K-205                                9000075214
K-206                                9000075337
K-207                                9000075230

K-209                                9000075256
K-210                                9000075272
K-211                                9000075298
K-212                                9000075311
K-214                                9000075379
K-215                                9000075405
K-216                                9000075421
K-217                                9000075447
K-219                                9000104444
K-220                                9000067963
K-221                                9000067989
K-222                                9000068001
K-223                                9000068027
K-224                                9000068030
K-225                                9000068072
K-226                                9000068098
K-227                                9000068111
K-228                                9000068137
K-229                                9000068153
K-230                                9000068221
K-231                                9000068179
K-232                                9000068195
K-233                                9000068247
K-234                                9000068250
K-235                                9000068276
K-236                                9000068292
K-237                                9000068315
K-238                                9000068331
K-239                                9000068373
K-240                                9000068357
K-241                                9000068399
K-242                                9000068412
K-243                                9000102886
K-244                                9000068425
K-246                                9000068467
K-247                                9000102909
K-248                                9000102941
K-249                                9000102925
K-250                                9000102967
K-251                                9000102983
K-252                                9000103089
K-253                                9000103063
K-254                                9000103322
K-255                                9000103128
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K-258                                9000103144

K-259                                9000103241
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K-311                                5324356271
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K-315                                5325413112
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K-320                                Does not have a # listed
K-508                                5324453021
K-701                                9000103047
K-702                                1003621090
K-703                                1003653806
K-704                                1003637547
K-705                                1003637592
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K-712                                5325413074
BP-801                               1003653864
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BP-803                               10033653903
BP-805                               1003653929
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BP-824                               1003654245

BP-825                               1003654261
BP-826                               1003654287
BP-827                               1003654300
BP-828                               1003654326
BP-830                               1003653356
BP-831                               1003653372
BP-832                               1003653398
BP-833                               1003653411
BP-834                               1003653437
BP-835                               1003653453
BP-836                               1003653479
BP-837                               1003653495
BP-838                               1003653741
BP-891                               1003653518
BP-905                               1003653592

Bancorp South                          K103                               0161241
2910 West Jackson Street               K-107                              0154148
Tupelo, MS  38801                      K-114                              60348281
1-888-797-7711

Union Planters                         K-146                              1210072044
P.O. Box 387                           K-158                              0000079286
Memphis, TN  38147                     K-190                              0000089125
1-800-921-0086                         K-191                              0000089192
                                       K-192                              0000089184
                                       K-193                              1210089729
                                       K-203                              0000093459
                                       K-208                              0000093769
                                       K-218                              0000096873

SCHEDULE 8.18

CREDIT CARD AGREEMENTS

1. EFS National Bank Authorization, Settlement and Payment Merchant Agreement between Kirkland's Stores, Inc. and EFS National Bank dated August 13, 2000 (relates to VISA and MasterCard services)

2. Merchant Services Agreement with Discover Business Services

3. Terms and Conditions for American Express Card Acceptance

Exhibit 10.3

EXECUTION

AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT

among

KIRKLAND'S, INC.

AND

THE OTHER PARTIES SPECIFIED HEREIN

Dated as of April 15, 2002

AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT

THIS AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT (the "Agreement") amends and restates a Registration Rights Agreement dated as of June 12, 1996, and is made as of the 15th day of April, 2002, by and among

- KIRKLAND HOLDINGS L.L.C., a Delaware limited liability company ("Holdings"),

- KIRKLAND'S INC., a corporation incorporated under Tennessee law ("Kirkland's"),

- SSM VENTURE PARTNERS, L.P.

- JOSEPH R. HYDE, III

- JOHNSTON C. ADAMS, JR.

- JOHN H. PONTIUS

- CT/KIRKLAND EQUITY PARTNERS, L.P.,

- R-H CAPITAL PARTNERS, L.P.,

- TCW/KIRKLAND EQUITY PARTNERS, L.P.,

- CAPITAL RESOURCE LENDERS II, L.P. ("CRL"),

- ALLIED CAPITAL CORPORATION ("Allied"),

- CAPITAL TRUST INVESTMENTS, LTD. ("Capital Trust"),

- THE MARLBOROUGH CAPITAL INVESTMENT FUND, L.P. ("Marlborough" and together with CRL, Allied and Capital Trust, the "Mezzanine Warrant Holders"),

- GLOBAL PRIVATE EQUITY II LIMITED PARTNERSHIP,

- ADVENT DIRECT INVESTMENT PROGRAM LIMITED PARTNERSHIP,

- ADVENT PARTNERS LIMITED PARTNERSHIP,

- CARL KIRKLAND,

- ROBERT KIRKLAND,

- ROBERT ALDERSON,

- THE AMY KATHERINE ALDERSON TRUST, (the "AKA Trust"),

- THE ALLISON LEIGH ALDERSON TRUST (the "ALA Trust"),

- THE CARL T. KIRKLAND GRANTOR RETAINED ANNUITY TRUST 2001-1 (the "CTK GRAT"), and

- STEVEN COLLINS (Carl Kirkland, Robert Kirkland, Robert Alderson, the AKA Trust, the ALA Trust, the CTK GRAT and Steven Collins being herein referred to collectively as the "Individual Investors").

WHEREAS, on June 12, 1996, Holdings, the Company, and those companies then affiliated with the Company (the "Affiliated Companies") and certain other parties consummated the transactions contemplated by a Recapitalization Agreement, dated as of April 26, 1996 (the "Recapitalization Agreement"), which, among other things, included the issuance by the Company and the Affiliated Companies of shares of Class A Preferred Stock, Class B Preferred Stock and Class C Preferred Stock in accordance with the terms of the Recapitalization Agreement. Capitalized terms used but not defined herein have the meanings set forth in the Recapitalization Agreement;

WHEREAS, in connection with the Company's execution of the Senior Subordinated Note and Warrant Purchase Agreement dated on or about June 12, 1996 (the "Mezzanine Purchase Agreement"), pursuant to which the Mezzanine Warrant Holders have loaned a total of $20,000,000 in subordinated debt to the Company and the Affiliated Companies, the Mezzanine Warrant Holders received warrants to purchase shares of Common Stock ("Mezzanine Warrants" and the shares subject to the Mezzanine Warrants, the "Mezzanine Warrant Shares"); and

WHEREAS, in connection with the transactions contemplated by the Recapitalization Agreement, the Company granted options to purchase shares (the "Option Shares") of Common Stock to Carl Kirkland and Robert Alderson; and

WHEREAS, as an inducement to completion of the transactions contemplated by the Recapitalization Agreement and the Mezzanine Purchase Agreement, the Company and the Affiliated Companies provided on June 12, 1996 certain registration rights pursuant to the terms of the Registration Rights Agreement dated as of June 12, 1996 (the "Original Registration Rights Agreement"); and

WHEREAS, in connection with the consummation of the transactions contemplated by the sixth amendment to that credit agreement between the Company, the Affiliated Companies, BankBoston, N.A. and the other lenders specified therein dated on or about July 7, 1999, the Company and the Affiliated Companies issued to certain investors warrants to purchase shares of Common Stock (the "1999 Warrants", and the shares subject to the 1999 Warrants the "1999 Warrant Shares");

WHEREAS, on or about December 31, 1999, (i) the Affiliated Companies merged with and into Kirkland's Stores, Inc., a wholly owned subsidiary of the Company (the "Merger"), (ii) pursuant to the Merger; the Mezzanine Warrants and the 1999 Warrants became exercisable only with respect to shares of Common Stock of the Company;

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WHEREAS, in connection with the consummation of the transactions contemplated by a Securities Purchase Agreement dated on or about August 8, 2000 (the "Purchase Agreement"), the Company issued to the purchasers specified in the Purchase Agreement additional shares of Common Stock, shares of Class D Preferred Stock and warrants to purchase shares of Common Stock (the "2000 Warrants," and together with the 1999 Warrants and the Mezzanine Warrants, the "Warrants," and the shares subject to the 2000 Warrants (the "2000 Warrant Shares"), together with the Mezzanine Warrant Shares and the 1999 Warrant Shares, the "Warrant Shares"); and

WHEREAS, the Company desires to hereby amend and restate the Original Registration Rights Agreement, as amended, to incorporate the Class D Preferred Stock, the 1999 Warrant Shares, the 2000 Warrant Shares and otherwise reflect the Company's current capital structure.

NOW THEREFORE, in consideration of the premises and the mutual terms and provisions hereof, the parties hereto hereby agree as follows:

1. Definitions. For purposes of this Agreement, the following terms shall have the following respective meanings:

(a) "Act" shall mean the Securities Act of 1933, as amended, or any similar federal statute enacted hereafter, and the rules and regulations of the commission thereunder, all as the same shall be in effect from time to time.

(b) "Commission" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Act.

(c) "Common Stock" shall mean (i) the common stock, par value $.01 of each of the Company and/or any successor Company, and
(ii) any other capital stock of any class or classes (however designated) of the Company, authorized on or after the date hereof, the holders of which shall have the right, without limitation as to amount per share, either to all or to a share of the balance of current dividends and liquidating distributions after the payment of dividends and distributions on any shares entitled to preference in the payment thereof, and the holders of which shall ordinarily, in the absence of contingencies, be entitled to vote for the election of a majority of directors of the Company (even though the right so to vote has been suspended by the happening of such a contingency), and (iii) any other securities into which or for which any of the securities described in (i) or (ii) above may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise.

(d) "Company" shall mean Kirkland's, Inc. or any successor by merger or similar corporate consolidation thereto.

(e) "Counterpart" shall mean a counterpart to this Agreement in the form of Exhibit A hereto, pursuant to the execution of which a Person shall become bound by all of the terms and conditions to this Agreement.

(f) "Demand Piggybacker" shall have the meaning set forth in Section 2(c) hereof.

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(g) "Demand Registration" shall mean a Non-Mezzanine Demand Registration or a Mezzanine Demand Registration.

(h) "Holder" shall mean each of the Shareholders if such Shareholder holds Registrable Securities and any other person holding Registrable Securities or such other securities to whom these registration rights have been transferred pursuant to Section 12 of this Agreement; provided, however, that any person who acquires any of the Registrable Securities in a distribution pursuant to a registration statement filed by the Company under the Act or pursuant to a sale under Rule 144 under the Act shall not be considered a Holder.

(i) "Management Investors" shall mean Carl Kirkland and Robert Alderson, the AKA Trust, the ALA Trust and the CTK GRAT.

(j) "Mezzanine Demand Registration" shall have the meaning set forth in Section 2(a) hereof.

(k) "Mezzanine Warrant Stock" shall mean, as of the applicable date of determination, shares of Common Stock then issued or issuable to the Mezzanine Warrant Holders upon exercise of the Mezzanine Warrants, assuming the maximum potential exercise of the Mezzanine Warrants as of such date of determination.

(l) "Non-Mezzanine Demand Registration" shall have the meaning set forth in Section 2(b) hereof.

(m) "Person" shall mean an individual, partnership, corporation, limited liability company, limited liability partnership, trust, joint venture, unincorporated association, or other entity or association.

(n) "Piggyback Registration" shall have the meaning set forth in Section 3.

(o) "Preferred Stock" shall mean shares of the Class A Preferred Stock, Class B Preferred Stock and Class D Preferred Stock of the Company from time to time outstanding.

(p) "Public Offering" shall mean an underwritten public offering of Common Stock registered pursuant to the Act resulting in gross proceeds to the Company of at least Thirty Million Dollars ($30,000,000).

(q) The terms "register," "registered" and "registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Act and the declaration or ordering of effectiveness of such registration statement by the Commission.

(r) "Registered Holder" shall mean, with respect to a registration statement, each Holder of Registrable Securities covered by such registration statement.

(s) "Registered Securities" shall mean, with respect to a registration statement, the Registrable Securities covered by such registration statement.

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(t) "Registrable Securities" shall mean (i) shares of Common Stock held by the Shareholders from time to time and shall include Warrant Shares, provided the warrants under which the Warrant Shares may be purchased are exercised no later than the effective date of any registration with respect to which the Holder of such warrants (A) demanded a Demand Registration, (B) is a Demand Piggybacker, or (C) requested a Piggyback Registration as to the Common Stock issuable upon exercise of such Warrants,
(ii) shares of Common Stock acquired by any Shareholder other than pursuant to a registration, either from any other shareholder of the Company in compliance with the terms of the Shareholders Agreement, or directly from the Company, and
(iii) securities issued or received in respect of, or in exchange or in substitution for any of the foregoing, including, but not limited to, those arising from a stock dividend, stock split, reclassification, reorganization, merger, consolidation/sale of assets or other exchange of securities.

(u) "Shareholder" shall mean any Person who holds, from time to time, any Common Stock, Preferred Stock or Warrants, and who is or who becomes a party to this Agreement pursuant to the terms hereof.

(v) "Shareholders Agreement" shall mean that certain Amended and Restated Shareholders Agreement dated as of the date hereof and among the parties hereto, as amended from time to time.

(w) "1934 Act" shall mean the Securities Exchange Act of 1934, as amended, or any similar federal statute enacted hereafter, and the rules and regulations of the Commission thereunder, all as the same shall be in effect from time to time.

2. Demand Registrations. The Holders may make a demand for registration of Common Stock as provided in this Section 2 at any time.

(a) Mezzanine Demand. If the Company shall receive a written request from Mezzanine Warrant Holders holding more than sixty-six and two-thirds percent (66.67%) of the Mezzanine Warrant Stock (determined without taking into account any shares of Common Stock previously sold to the public in a public offering) that the Company file a registration statement under the Act covering the registration for the offer and sale of all or part of the Mezzanine Warrant Stock (determined without taking into account any shares of Common Stock previously sold to the public in a public offering) (a "Mezzanine Demand Registration"), then the Company shall promptly notify in writing all other Holders of Registrable Securities (including other Mezzanine Warrant Holders) (a "Company Mezzanine Demand Notice").

(b) Other Demand. If the Company shall receive a written request from Holders of more than fifty percent (50%) of the Registrable Securities other than the Mezzanine Warrant Stock, that the Company file a registration statement under the Act covering the registration for the offer and sale of all or part of such Holders' Registrable Securities (a "Non-Mezzanine Demand Registration"), then the Company shall promptly notify in writing all other Holders of Registrable Securities (including the Mezzanine Warrant Holders) of such request (the "Company Non-Mezzanine Demand Notice"). Upon receipt of the Company Non-Mezzanine Demand Notice, the Mezzanine Warrant Holders holding more than sixty-six and two-thirds percent (66.67%) of the Mezzanine Warrant Stock (determined without taking into account any shares of Common Stock previously sold to the public in a public offering) shall be

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entitled to render such demand for a Non-Mezzanine Demand Registration ineffective, null and void by making a demand for registration under subsection
(a) of this Section 2 for a Mezzanine Demand Registration within thirty (30) days after the Company Non-Mezzanine Demand Notice is given. In such event, (i) the preempted Non-Mezzanine Demand Registration shall be treated for all purposes, including for purposes of Section 2(d) hereof, as if it had never been made, (ii) the Company shall give a Company Mezzanine Demand Notice to other Holders contemplated by Section 2(a) (with all notices previously given by other Holders in connection with such Non-Mezzanine Demand Registration pursuant to Section 2(c) being void), and (iii) Holders other than the Mezzanine Warrant Holders shall not be entitled to make a demand under this
Section 2(b) until the Mezzanine Demand Registration shall have been completed or abandoned and all waiting periods required by this Agreement shall have been complied with.

(c) Procedure. Each request for a Mezzanine Demand Registration or a Non-Mezzanine Demand Registration shall specify the number of shares of Registrable Securities requested to be sold. Within thirty
(30) calendar days after a Company Mezzanine Demand Notice or Company Non-Mezzanine Demand Notice has been given, any other Holder (a "Demand Piggybacker") may give written notice to the Company of its intent to include its Registrable Securities in the registration (including without limitation any Holder whose demand is preempted under Section 2(b) above). As soon as practicable after the expiration of such thirty (30) day period, the Company shall cause all Registrable Securities that Holders have requested be registered to be registered under the Act, subject to the limitations contained in this Agreement.

(d) Number of Demands. Subject to the provisions of Section 8 below, a demand (i) may not be made unless the reasonably anticipated price to the public of such public offering would exceed Five Million Dollars ($5,000,000), (ii) may be made under Section 2(a) hereof a total of one (1) time and (iii) may be made under Section 2(b) hereof a total of two (2) times. An effective Demand Registration will not count as a Demand Registration for purposes of the preceding sentence if (a) the Holders whose Registrable Securities are to be included in such registration have not registered for sale at least seventy percent (70%) of the Registrable Securities requested to be registered in the registration statement for such registration by such Holders, or (b) the Holders have withdrawn their request for Demand Registration and have paid all fees and expenses as provided in
Section 8 hereof.

(e) Delay of Registration. If at the time of any request to register Registrable Securities pursuant to Section 2(a) or (b) the Company is preparing or within thirty (30) days thereafter commences to prepare a registration statement for a public offering (other than a registration effected solely to implement an employee benefit plan or a transaction to which Rule 145 of the Commission is applicable) which in fact is filed and becomes effective within (90) days after the request, or is engaged in any activity which, in the good faith determination of the Company's Board of Directors, would be adversely affected by the requested registration to the material detriment of the Company, then the Company may at its option direct that such request be delayed for a period not in excess of four (4) months from the date of such request to register Registrable Securities, such right to delay a request to be exercised by the Company not more than once in any one
(1) year period. Nothing in this Section 2(e) shall preclude a holder of Registrable Securities from enjoying registration rights which it might otherwise possess under Section 3 hereof.

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3. Piggyback Registration. Subject to Section 9, if at any time the Company proposes to register any of its equity securities under the Act, either for its own account or for the account of others (unless already covered by Section 2 hereof) or pursuant to a request under Section 4 hereof, in connection with the public offering of such equity securities solely for cash, on a registration form that would also permit the registration of Registrable Securities (other than registration statement on Form S-8 or any successor form, or a registration in connection with any stock option, stock purchase or other benefit plan or for the purpose of offering such securities to another business entity or the shareholders of such entity in connection with the acquisition of assets or shares of capital stock, respectively, of such entity), the Company shall, each such time, promptly give each Holder written notice of such proposal (a "Piggyback Registration Notice"). Within thirty (30) days after the Piggyback Registration Notice is given, the Holders shall give notice as to the number of shares of Registrable Securities, if any, which such Holders request be registered simultaneously with such registration by the Company ("Piggyback Registration"). The Company shall use its best efforts to include any Registrable Securities in such registration statement (or in a separate registration statement concurrently filed) which the Holders thereof request to be so included and to cause such registration statement to become effective with respect to such Registrable Securities in accordance with the registration procedures set forth in Section 5 hereof. Notwithstanding the foregoing, if at any time after giving written notice of its intention to register equity securities and before the effectiveness of the registration statement filed in connection with such registration, the Company determines for any reason either not to effect such registration or to delay such registration, the Company may, at its election, by delivery of prior written notice to each Holder, (i) in the case of a determination not to effect registration, relieve itself of its obligation to register the Registrable Securities in connection with such registration or (ii) in the case of a determination to delay registration, delay the registration of such Registrable Securities for the same period as the delay in the registration of such other equity securities. Each Holder requesting inclusion in a registration pursuant to this Section 3 may, at any time before the effective date of the registration statement relating to such registration, revoke such request by delivering written notice of such revocation to the Company (which notice shall be effective only upon receipt by the Company, notwithstanding the provisions of Section 18 hereof); provided, however, that if the Company, in consultation with its financial and legal advisors, determines that such revocation would require a recirculation of the prospectus contained in the registration statement, then such Holder shall have no right to revoke its request.

4. Registrations on Forms S-2 and S-3. After the conclusion by the Company of an initial public offering of its Common Stock (which for purposes hereof shall include any Registrable Securities sold pursuant to Section 2 above) pursuant to a registration under the Act, at such time as the Company shall have qualified for the use of Forms S-2 and/or S-3 (as the case may be), or any similar form or forms promulgated by the Commission, the Holders of Registrable Securities shall each have the right to request an unlimited number of registrations on Form S-2 and/or Form S-3 (as the case may be). Any such request shall be in writing, shall specify the Registrable Securities intended to be sold or disposed of by the Holders thereof, shall state the intended method of disposition of such Registrable Securities by the Holder(s) requesting such registration and shall relate to Registrable Securities (i) in an amount exceeding two percent (2%) of all shares of Common Stock then outstanding, or (ii) having proposed gross cash offering proceeds (prior to deduction of underwriters commissions and expenses, if any) of Two Million Dollars ($2,000,000) or more for all Registrable Securities to be included, on the basis of a reasonable (in light of the current market price) proposed per share

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offering price. The Company shall be obligated to effect such registration or registrations on Form S-2 or Form S-3 (as the case may be) as soon as practicable after receipt of such a request; provided, however, that the Company shall not be obligated to effect the filing of a registration pursuant to this Section 4 (i) during the period starting with the date ninety (90) days prior to the Company's estimated date of filing of, and ending on a date one hundred eighty (180) days following the effective date of, a registration statement pertaining to a public offering of Common Stock for the account of the Company, provided that the Company is actively employing in good faith all reasonable efforts to cause such registration statement to become effective and that, in the good faith judgment of the Company's underwriter for an underwritten offering or of the Company's Board of Directors for any other offering, an offering pursuant to such a registration statement would interfere in any material respect with the successful marketing (including pricing) of the Common Stock to be included in the Company's proposed registration statement, or (ii) if the Company's Board of Directors shall determine in good faith that such filing will interfere in any material respect with a pending or contemplated financing, merger, sale or assets, recapitalization or other similar corporate action of the Company. In the event the Company's obligations are abated pursuant to the foregoing proviso, and if any of the Holders on whose behalf the requested registration statement would be filed and who were unable to have all of the Registrable Securities included in the Company's registration statement pursuant to Section 3 then want such registration statement to be filed, the Company shall file such registration statement as promptly as practicable following (x) one hundred eighty (180) days after the effective date of the registration statement with respect to the offering referred to in clause (i) above, or (y) the date on which the transactions referred to in clause (ii) above shall have been completed or abandoned as the case may be); provided further, however, that the Company shall not be obligated to file and cause to become effective (a) more than two (2) registrations on Forms S-2 and/or S-3 in any one twelve (12) month period or
(b) any registration on Form S-2 and/or S-3 within six (6) months after the effective date of any previous registration statement filed under Section 2 or
Section 3, with respect to which all Holders who had requested the inclusion of any such shares in a registration statement were entitled to include in such registration statement all Registrable Securities requested to be included therein. No registration pursuant to this Section 4 shall count as a Demand Registration pursuant to Section 2.

5. Obligation of the Company. Whenever required under this Agreement to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible:

(a) Prepare and file with the Commission a registration statement covering such Registrable Securities and use its best efforts to cause such registration statement to be declared effective by the Commission and to keep such registration effective until the earlier of (i) the date when all Registrable Securities covered by the registration statement have been sold or (ii) in the case of a registration under Section 2 or 3 hereof, nine (9) months after the effective date of the registration statement or prospectus or any amendments or supplements thereto, or (iii) in the case of a shelf registration, the applicable period permitted under the Act. The Company will furnish to each Holder of Registrable Securities covered by such registration statement and the underwriters, if any, copies of all such documents proposed to be filed (excluding exhibits, unless any such person shall specifically request exhibits), which documents will be subject to the review (for a reasonable period of time in light of all facts and circumstances) of each Holder and the underwriters, and the Company will not file such

-8-

registration statement or any amendment thereto or any prospectus or any supplement thereto including any documents incorporated by reference therein) with the Commission if (i) the Holders of a majority of the Registrable Securities covered by such registration statement or the underwriters, if any, shall reasonably object to such filing or (ii) information in such registration statement or prospectus concerning a particular Registered Holder is inaccurate.

(b) Prepare and file with the Commission such amendments and post-effective amendments to such registration statement as may be necessary to keep such registration statement effective until the earlier of the dates referred to in clauses (i) and (ii) of Section 5(a) hereof and to comply with the provisions of the Act with respect to the disposition of all securities covered by such registration statement, and cause the prospectus to be supplemented by any required prospectus supplement, and as so supplemented to be filed with the commission pursuant to Rule 424 under the Act.

(c) Furnish to the Registered Holders such number of copies of such registration statement, each amendment thereto, the prospectus included in such registration statement (including each preliminary prospectus), each supplement thereto and such other documents, as they may reasonably request in order to facilitate the disposition of Registered Securities owned by them.

(d) Use its best efforts to register and qualify the Registered Securities under such other securities laws of such jurisdictions as shall be reasonably requested by any Registered Holder and do any and all other acts and things which may be reasonably necessary or advisable to enable each Registered Holder to consummate the disposition of the Registered Securities owned by such Holder in such jurisdictions; provided that the Company shall not be required in connection therewith or as a condition thereto to qualify generally to transact business in any such states or jurisdictions; and provided further that (anything in this Agreement to the contrary notwithstanding with respect to the bearing of expenses) if any jurisdiction in which the Registered Securities shall be qualified shall require that expenses incurred in connection with the qualification of the Registered Securities in that jurisdiction be borne by selling shareholders, then such expenses shall be payable by the Registered Holders pro rata, to the extent required by such jurisdiction.

(e) Promptly notify each Registered Holder at any time when a prospectus is required to be delivered under the Act relating to the happening of any event as a result of which the prospectus included in such registration statement contains an untrue statement of a material fact or omits any fact necessary to make the statements therein not misleading and, at the request of any such Holder, the Company will promptly prepare a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registered Securities, such prospectus will not contain an untrue statement of a material fact or omit to state any fact necessary to make the statements therein not misleading.

(f) Make available for inspection by any Registered Holder, any underwriter participating in any disposition pursuant to such registration statement and any attorney, accountant or other agent retained by any such Registered Holder or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the officers, directors, employees and independent accountants of the Company to supply all information reasonably requested by any such Registered Holder, underwriter, attorney,

-9-

accountant or agent in connection with such registration statement, which information shall be subject to reasonable restrictions concerning confidentiality and nondisclosure.

(g) Promptly notify the Registered Holders and the underwriters, if any, of the following events and (if requested by any such person) confirm such notification in writing and provide copies of any relevant documents relating to: (1) the filing of the prospectus or any prospectus supplement and the registration statement and any amendment or post-effective amendment thereto and, with respect to the registration statement and any amendment or post-effective amendment thereto, the declaration of the effectiveness of such documents, (2) any comment letters from or requests by the Commission for amendments or supplements to the registration statement or the prospectus or for additional information, (3) the issuance or threat of issuance by the Commission of any stop order suspending the effectiveness of the registration statement or the initiation of any proceedings for that purpose and (4) the receipt by the Company of any notification with respect to the suspension of the qualification of the Registered Securities for sale in any jurisdiction or the initiation or threat of initiation of any proceeding for such purpose.

(h) Make every reasonable effort to prevent the entry of any order suspending the effectiveness of the registration statement and obtain the withdrawal of any such order, if entered.

(i) If reasonably requested by any underwriter or a Registered Holder in connection with any underwritten offering, incorporate in a prospectus supplement or post-effective amendment such information as the underwriters and the Holders of a majority of the Registered Securities agree should be included therein relating to the sale of the Registered Securities, including, without limitation, information with respect to the number of Registered Securities being sold to such underwriters, the purchase price being paid therefor by such underwriters and any other terms of the underwritten offering of the Registered Securities to be sold in such offering, and make all required filings of such prospectus supplement or Post-effective amendment after being notified of the matters to be incorporated in such prospectus supplement or post-effective amendment.

(j) Cooperate with the Registered Holders and the underwriters, if any, to facilitate the timely preparation and delivery of certificates evidencing Registered Securities and not bearing any restrictive legends, and enable such Registered securities to be in such lots and registered in such names as the underwriters may request at least two (2) business days prior to any delivery of Registered Securities to the underwriters.

(k) Provide a transfer agent, registrar and CUSIP number for all Registrable Securities not later than the effective date of the registration statement.

(l) Prior to the effectiveness of the registration statement and any post-effective amendment thereto and at each closing of any underwritten offering, (i) make such representations and warranties to the Registered Holders and the underwriters, if any, with respect to the Registered Securities and the registration statement as are customarily made by issuers to underwriters in primary underwritten offerings; (ii) obtain opinions of counsel to the Company and updates thereof (which opinions shall be reasonably satisfactory to the underwriters, if any, and to the Holders of a majority of the Registered Securities) addressed to

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each Registered Holder and the underwriters, if any, covering the matters customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by such Holders and underwriters or their counsel; (iii) obtain "cold comfort" letters and updates thereof from the Company's independent certified public accountants addressed to the Registered Holders and the underwriters, if any, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters by underwriters in connection with primary underwritten offerings; and (iv) deliver such documents and certificates as may be reasonably requested by the Holders of a majority of the Registered Securities being sold and by the underwriters, if any, to evidence compliance with clause
(i) above and with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company.

(m) Enter into such agreements and take all such other reasonable actions in connection therewith in order to expedite or facilitate the disposition of such Registered Securities and in such connection, in the case of an underwritten offering, enter into an underwriting agreement or other similar agreement in form, scope and substance as is customary in underwritten offerings which underwriting agreement shall set forth in full the indemnification provisions and procedures of Section 13 hereof with respect to all parties to be indemnified pursuant to said Section. The above shall be done at each closing under such underwriting or similar agreement or as and to the extent required thereunder.

(n) Use its best efforts to cause all Registered Securities included in such registration statement to be listed, by the date of first sale of Registered Securities pursuant to such registration statement, on each securities exchange on which shares of Common Stock are then listed or proposed by the Company to be listed, if any.

(o) Provide such reasonable assistance in the marketing of the Registered Securities as is customary of issuers in public offerings (including participation by its senior management in "road shows"), subject to reasonable time and expense constraints.

(p) Otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, and make generally available to its security holders earnings statements satisfying the provisions of Section 11(a) of the Act, no later than forty-five (45) days after the end of any twelve (12) month period (i) commencing at the end of any fiscal quarter in which Registered Securities are sold to underwriters in a firm or best efforts underwritten offering, or (ii) if not sold to underwriters in such an offering, beginning with the first day of the first fiscal quarter of the Company commencing after the effective date of the registration statement.

6. Furnish Information. It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Agreement that the Holders shall furnish to the Company such information regarding them, the Registrable Securities held by them, and the intended method of disposition of such Registrable Securities as the Company shall reasonably request and as shall be required in connection with the action to be taken by the Company.

7. Suspension of Disposition of Registrable Securities. Each Registered Holder agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 5(e) or 5(g)(3) or (4) hereof, such Registered Holder will

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forthwith discontinue disposition of Registered Securities until such Registered Holder's receipt of copies of a supplemented or amended prospectus contemplated by Section 5(e) hereof, or until it is advised in writing (the "Advice") by the Company that the use of the prospectus may be resumed, and has received copies of any additional or supplemental filings which are incorporated by reference in the prospectus, and, if so directed by the Company, such Registered Holder will deliver to the Company (at the expense of the company) all copies, other than permanent file copies then in such Registered Holder's possession, of the prospectus covering such Registered Securities at the time of receipt of such notice. In the event the Company shall give any such notice, the time period mentioned in Section 5(a) hereof shall be extended by the number of days during the period from and including the date of the giving of such notice pursuant to Section 5(e) or 5(g)(3) or
(4) hereof to and including the date when each Registered Holder shall have received the copies of the supplemented or amended prospectus contemplated by
Section 5(e) hereof or the Advice.

8. Expenses of Registration.

(a) Except as provided in Section 8(b) through 8(d) hereof, all expenses incurred in connection with a registration pursuant to Sections 2, 3 or 4 (excluding underwriters' discounts and commissions), including, without limitation all registration and qualification fees, fees and disbursements of counsel for the Company, and, the reasonable fees and disbursements of one (1) counsel chosen by the Registered Holders owning a majority of the Registered Securities (or by the Registered Holders owning a majority of the Mezzanine Warrant Stock constituting Registered Securities in the case of a Mezzanine Demand Registration) shall be borne by the Company.

(b) If a registration proceeding is begun under
Section 2 but subsequently withdrawn at the request of the Registered Holders owning a majority of the Registered Securities (or at the request of Registered Holders owning a majority of the Mezzanine Warrant Stock constituting Registered Securities in the case of a Mezzanine Demand Registration) such Registered Holders shall have the option (exercisable by Registered Holders owning a majority of the Registered Securities, or a majority of the Mezzanine Warrant Stock constituting Registered Securities in the case of a Mezzanine Demand Registration) of either (i) reserving their right to such Demand Registration pursuant to Section 2, in which case the Registered Holders will pay all expenses of such registration proceeding, or (ii) waiving their right to one (1) Demand Registration under Section 2 (Section 2(a) if the registration proceeding originated with a demand under Section 2(a) hereof), in which case the Company will pay the expenses of such registration proceeding.

(c) Registered Holders may withdraw a request made within forty-five (45) days after the end of the fiscal year if the audited financial statements of the Company for such year and at such year-end materially and adversely differ from the financial information furnished to such Holders by the Company at the time of their request, in which event such Registered Holders shall not be required to pay any of the expenses of such withdrawn registration and such withdrawn registration shall be treated for all purposes of this Agreement, including without limitation Section 2(d) hereof, as if it had never occurred.

(d) All expenses incurred in connection with a registration which are, under this Section 8, to be borne by Registered Holders shall be borne pro rata by the Registered

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Holders on the basis of the number of such Holder's Registered Securities (or Registrable Securities proposed to be registered, as the case may be); provided, however, that if any such cost or expense is attributable solely to one Registered Holder and does not constitute a normal cost or expense of such a registration, such cost or expense shall be allocated to and borne by that Registered Holder.

9. Underwriting Requirements: Priorities.

(a) (i) With respect to a Mezzanine Demand Registration pursuant to Section 2(a), the Registered Holders owning a majority of the Mezzanine Warrant Stock included in the registration shall have the right to select the investment banker(s) and manager(s), if any, to administer such registration, subject to the approval of the Company, which will not be unreasonably withheld. With respect to a Non-Mezzanine Demand Registration pursuant to Section 2(b), the Registered Holders owning a majority of the Registered Securities shall have the right to select the investment banker(s) and manager(s) to administer such registration, subject to the approval of the Company, which will not be unreasonably withheld.

(ii) The Registered Holders owning a majority of the Registered Securities included in any registration under
Section 4 shall have the right to select the investment banker(s) and manager(s), if any, to administer the offering, if any, subject to the approval of the Company, which will not be unreasonably withheld.

(iii) The Company will have the right to select the investment banker(s) and manager(s), if any, to administer any offering to which Section 3 hereof is applicable.

(b) (i) if a registration under Section 2(a) hereof is an underwritten offering and the managing underwriters advise the Company in writing that in their opinion the number of Registrable Securities requested to be registered by the Mezzanine Warrant Holders and Demand Piggybackers exceeds the number of shares which can be sold at the desired price in such offering, the Company will include in such registration
(i) first, the Mezzanine Warrant Stock demanded to be registered under Section
2 (a) and the Mezzanine Warrant Stock held by Demand Piggybackers (pro rata among the Holders thereof based on the number of shares of Mezzanine Warrant Stock such Holders have requested to be registered), and (ii) second, Registrable Securities other than Mezzanine Warrant Stock owned by Demand Piggybackers (pro rata among the Holders thereof on the basis of the number of Registrable Securities such Holders have requested to be registered); provided that, such aggregate Registered Securities shall not exceed the number of Registrable Securities requested to be included which in the opinion of such underwriters can be sold at the desired price.

(ii) If a registration under Section 2(b) hereof is an underwritten offering and the managing underwriters advise the Company in writing that in their opinion the number of shares of Common Stock requested to be registered exceeds the number of shares which can be sold at the desired price in such offering, then the Company will include in such registration Registrable Securities owned by Holders requesting registration of Registrable Securities with respect to such registration pro rata among such Holders on the basis of the number of Registrable Securities such Holders have requested to be registered; provided

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that, such aggregate Registered Securities shall not exceed the number of Registrable Securities requested to be included therein which in the opinion of such underwriters can be sold at the desired price.

(iii) If a registration under Section 3 hereof is an underwritten registration and the managing underwriters advise the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold at the desired price in such offering, the Company will include in such registration
(i) first, the securities the Company proposes to sell; (ii) second, the Registrable Securities held by the Holders (other than Management Investors) requesting to be included in such registration pursuant to Section 3 hereof (pro rata among the respective Holders thereof on the basis of the number of Registered Securities such Holders have requested to be registered); and (iii) third, the Registrable Securities held by the Management Investors requesting to be included in such registration pursuant to Section 3 hereof (pro rata among such Management Investors on the basis of the number of Registered Securities such Management Investors have requested to be registered).

(iv) If a registration under Section 4 hereof is an underwritten offering and the managing underwriters advise the Company in writing that in their opinion the number of Registrable Securities requested to be registered exceeds the number of shares which can be sold at the desired price in such offering, the Company will include in such registration the number of Registrable Securities requested to be included which in the opinion of such underwriters can be sold at the desired price. Registrable Securities held by the Holders requesting to be included in such registration shall be included pro rata among the respective Holders thereof on the basis of the number of Registrable Securities such Holders have requested to be registered.

(c) Notwithstanding the priorities set forth in
Section 9(b), in the event Individual Investors request registration of Registrable Securities under Sections 2(a) (as Demand Piggybackers), 2(b), 3 or 4 hereof, such Individual Investors, or any one of them, shall be given priority over all other holders of Registrable Securities (other than Mezzanine Warrant Holders) to the extent such priority is necessary to allow such Individual Investors to sell enough Registrable Securities to qualify any redemption of other Company securities from such Individual Investor occurring simultaneously with (or part of a series of related transactions with) such offering for sale or exchange treatment under Section 302(b)(2) of the Internal Revenue Code of 1986, as amended; provided that the priority provided by this subparagraph (c) shall not extend to Registrable Securities which constitute more than one and one-half percent (1.5%) of the outstanding Common Stock of the Company at the time of (and measured prior to) such redemption (the "Priority Inversion Percent"); and provided further, that the rights provided to Individual Investors pursuant to this subparagraph (c) may be terminated by Holdings if Holdings shall, or shall cause the Company to, purchase the Priority Inversion Percent from the Individual Investor and thereby reduce the number of Individual Investors' Registrable Securities requested to be registered.

(d) In the case of a non-underwritten Demand Registration, the priorities provided in Section 9(b)(i) or (ii) shall apply in the event the number of shares salable (in the opinion of the Board of Directors) is less than the total number of Registrable Securities sought to be registered.

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(e) No Holder may participate in any underwritten registration hereunder unless such Holder (i) agrees to sell such Holder's Registrable Securities on the basis provided in any underwriting arrangements approved by the persons entitled hereunder to approve such arrangements and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements.

(f) The Company shall not grant registration rights to any person which impair in any way the priorities for inclusion in a registration set forth in this Section 9, including, without limitation, by providing any such person with higher priority than or equal priority to that provided to the Parties herein with regard to any registration statement filed by be Company, whether upon such person's demand or otherwise. In addition, in any demand registration rights granted to any such person, the Company shall provide that such demand registration rights shall be subject to a right of the Mezzanine Warrant Holders to render such a demand thereunder ineffective by making demand for registration under Section 2(a) of this Agreement in accordance with the procedures set forth in Section 2(b) hereof. Notwithstanding anything to the contrary contained in this paragraph (f), nothing in this paragraph (f) shall restrict the Company's ability to register on Form S-8 (or any successor form) shares issuable upon exercise of options which may be granted pursuant to any Stock Option Plan adopted by the Company after the date hereof, providing for the issuance of shares of Common Stock to certain employees of the Company.

10. Rule 144.

(a) The Company shall not be obligated under
Section 2, 3 or 4 hereof to register or include in any registration statement Registrable Securities that any Holder has requested to be registered if the Company shall furnish such Holder with a written opinion of counsel to the Company, which opinion shall be reasonably satisfactory to such Holder, that all Registrable Securities that such Holder holds may be publicly offered, sold and distributed within a single ninety (90) day period without registration under the Act pursuant to Rule 144 promulgated by the Commission under the Act; provided, however, that the provisions of this Section 10(a) shall not apply if such Holder requesting registration shall provide to the Company written advice from a refutable investment banker reasonably satisfactory to such Holder and the Company, that the per share price reasonably likely to be attainable in a sale under Rule 144 (net of expenses of such sale) is not substantially as great as the per share price reasonably likely to be attainable pursuant to a Registration under the applicable section. The cost of obtaining a letter from an investment banker containing such advice shall be borne by the Company.

(b) At such time as the Company becomes subject to the reporting requirements of the 1934 Act, the Company will file the reports required to be filed by it under the Act and the 1934 Act and the rules and regulations adopted by the Commission thereunder, and will use its best efforts to take such further action as any Holder of Registrable Securities may reasonably deem to be necessary, all to the extent required from time to time to enable such Holder to sell Registrable Securities without registration under the Act within the limitation of the exemptions provided by (i) Rule 144 under the Act, as such Rule may be amended from time to time, or (ii) any similar rule or regulation hereafter adopted by the Commission. Upon the request of any Holder of Registrable Securities, the Company will deliver to such Holder a written statement as to whether it has complied with such information and requirements.

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11. Lockup Agreement.

(a) All Holders agree that, upon the request of and to the extent required by the underwriter(s) managing (i) an initial underwritten public offering of Common Stock, or (ii) any other registration of Common Stock at the time of which such Holder is a Restricted Holder (as defined in this section 11(a)), such Holders will not sell, make any short sale of, pledge, grant any option for the purchase of or otherwise dispose of any Registrable Securities (other than those included in the registration) without the prior written consent of the Company or such underwriters), as the case may be, during the seven (7) days prior to, and during the one hundred twenty (120) day period beginning on, the effective date of such registration as the Company or the underwriters) may specify. For purposes of this section 11(a), "Restricted Holder" shall mean any Holder who beneficially owns (within the meaning of Rule 13d-3 of the 1934 Act or any successor rule) five percent (5%) or more of the Common Stock ("5% Holder"), any director or officer of the Company (without regard to his or her level of ownership of Common Stock), or any Holder whose Registrable Securities are being included in the registration (without regard to the amount of Registrable Securities being registered). Any lockup imposed on Holders pursuant to clause (i) of this Section 11(a) shall be imposed on all Holders and any lockup imposed on Restricted Holders pursuant to clause (ii) of this Section 11(a) shall be imposed on all Restricted Holders.

(b) The Company agrees (i) not to effect any public sale or distribution of its equity securities, or any securities convertible into or exchangeable or exercisable for such securities, during the seven (7) days prior to and during the one hundred twenty (120) day period beginning on the effective date of any registration statement related to an registered underwritten public offering pursuant to which Registrable Securities are to be sold (except as part of such underwritten registration or pursuant to registrations on Form S-8 or any successor form), unless the underwriters) managing the registered public offering otherwise agree, and (ii) to use its best efforts to cause each holder of at least five percent (5%) (on a fully-diluted basis) of its equity securities, or any securities convertible into or exchangeable or exercisable for such securities, in either case purchased from the Company at any time after the date of this Agreement (other than in a registered public offering) to agree not to effect any sale or distribution of any such securities during such period (except as part of such underwritten registration, if otherwise permitted), unless the underwriters managing the registered public offering otherwise agree.

12. Transfer of Registration Rights. Provided that the Company is given written notice by the Holder at the time of such transfer stating the name and address of the transferee and identifying the securities with respect to which the rights under this Agreement are being assigned, the registration rights under this Agreement may be transferred in whole or in part in connection with the transfer of Registrable Securities. Notwithstanding the foregoing, if such transfer is subject to covenants, agreements or other undertakings restricting transferability thereof the registration rights under this Agreement shall not be transferred in connection with such transfer unless such transfer complies with all such covenants, agreements and other undertakings. In all cases, such registration rights shall not be transferred unless the transferee thereof executes a counterpart signature page, agreeing to assume and be bound by the obligations imposed upon Holders pursuant to this Agreement.

13. Indemnification. In the event any Registrable Securities are included in a registration statement under this Agreement:

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(a) To the full extent permitted by law, the Company will and hereby does (i) indemnify and hold harmless each Holder, each director, officer, partner, employee, or agent of or for such Holder, any underwriter (as defined in the Act) for such Holder, and each person, if any, who controls such Holder or underwriter within the meaning of the Act, against any losses, claims, damages or liabilities, joint or several, to which they may become subject under the Act and applicable state securities laws insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based on any untrue or alleged untrue statement of any material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein in light of the circumstances under which it was made or necessary to make the statements therein not misleading, or arise out of any violation by the company of any securities law, rule or regulation applicable to the Company and relating to action or inaction required of the company in connection with any such registration; and (ii) will reimburse each such person or entity for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this Section 13(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld or delayed) nor shall the Company be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon an untrue statement or an alleged untrue statement or omission or alleged omission made in connection with such registration statement, preliminary prospectus, final prospectus, or amendments or supplements thereto in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by or on behalf of any such Holder, underwriter or controlling person.

(b) To the full extent permitted by law, each Holder requesting or joining in a registration under this Agreement will and hereby does (i) indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the registration statement, each person, if any, who controls the Company within the meaning of the Act, and any Underwriter (as defined in the Act) for the Company, each other holder and each person, if any, who controls such other Holder within the meaning of Section 15 of the Act, against any losses, claims, damages or liabilities, joint or several, to which the Company or any such director, officer, controlling person, other Holder or underwriter may become subject, under the Act and applicable state securities laws, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in such registration statement, preliminary or final prospectus, or amendments or supplements thereto, in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and (ii) reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, other Holder, controlling person or underwriter attributable to investigating or defending any loss, claim, damage, liability or action

-17-

indemnified by such Holder pursuant to clause (i); provided, however, that the indemnity agreement contained in this Section 13(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of such Holder (which consent shall not be unreasonably withheld or delayed).

In no event shall the liability of any Registered Holder be greater than the dollar amount of the proceeds received by such Registered Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation.

(c) Promptly after receipt by an indemnified party under this Section 13 of notice of the commencement of any action or knowledge of a claim that would, if asserted, give rise to a claim for indemnity hereunder, such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 13, notify the indemnifying party in writing of the commencement thereof or knowledge thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties. The failure to notify an indemnifying party promptly of the commencement of any such action or of the knowledge of any such claim, if prejudicial to any material extent to his ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 13 to the extent so prejudiced, but the omission so to notify the indemnifying party will not relieve him of any liability that he may have to any indemnified party otherwise than under this
Section 13.

(d) If the indemnification provided for in this
Section 13 is for any reason, other than pursuant to the terms thereof, held to be unavailable to an indemnified party in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the indemnifying and indemnified parties from the offering of Common Stock. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or otherwise results in a materially inequitable result (as determined by the Board of Directors of the Company in its reasonable discretion), then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the indemnifying and indemnified parties in connection with the statements) or omissions) which resulted in such losses, claims, damages, liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by a party shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by such party bears to the total net proceeds from the offering received by all parties. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact relates to information supplied by the Company or a Holder and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Holders agree that it would not be just and equitable if contribution pursuant to this subsection (d) were determined by pro rata allocation or by any other method of allocation take into account the equitable considerations referred to above in this subsection
(d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or

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liabilities (or actions in respect thereof) referred to above in this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. No Person guilty of fraudulent misrepresentation within the meaning of Section 11(f) of the Act shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.

14. Remedies. In addition to being entitled to exercise all rights provided in this Agreement as well as all rights granted by law, including recovery of damages, each Holder of Registrable Securities will be entitled to specific performance of its rights under this Agreement. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agrees not to raise the defense in any action for specific performance that a remedy at law would be adequate.

15. Subsequent Issuances by the Company. If the Board of Directors of the Company determines that any Person hereafter issued any Common Stock, Preferred Stock or Warrants by the Company should become a party to this Agreement, then the execution of a Counterpart to this Agreement by such Person shall result in such Person being deemed to be a Shareholder hereunder for all purposes of this Agreement.

16. Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless the Company has obtained the written consent of all of the Holders; provided, however, that any such waiver or consent will be effective against any Holder actually executing a written waiver or consent whether or not other Holders of the outstanding Registrable Securities grant such waiver or consent.

17. Filing Notices and Copies. The Company shall provide to each Holder of Registrable Securities such number of copies of any registration statement, amendment thereto (including post-effective amendments) or other report, document or notice that is filed with the Securities and Exchange Commission or other authority under the securities laws, as may be reasonably requested by such Holder of Registrable Securities. In addition, the Company shall provide prior notice to any Holder of Registrable Securities of any such filing of a registration statement or amendment thereto, provided that the foregoing notice provision shall not shorten any other advance notice provision contained in this Agreement.

18. Notices. All notices and other communications hereunder shall be in writing and shall be given to the person either personally or by sending a copy thereof by first class or express mail, postage prepaid, or by telegram (with messenger service specified), telex or TWX (with answerback received) or courier services, charges prepaid, or by telecopier, to such party's address (or to such party's telex, TWX, telecopier or telephone number). If the notice is sent by mail, it shall be deemed to have been given to the person entitled thereto five (5) business days after being deposited in the United States mail, and if the notice is sent by telegraph or courier services, it shall be deemed to have been given to the person entitled thereto one (1) business day after deposited with a telegraph office or courier service for delivery to that person or, in the case of telex, TWX, or telecopy when dispatched.

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If to Holdings, to:

Kirkland Holdings L.L.C.
75 State Street
Boston, MA 02109
Attention: David M. Mussafer
Telecopy No.: (617) 951-0568

With a copy to:

Pepper Hamilton LLP
3000 Two Logan Square
Philadelphia, PA 19103
Attention: Robert A. Friedel, Esq.
Telecopy No.: (215) 981-4750

If to the Management Investors or the Company, to:

Kirkland's, Inc.
P.O. Box 7222
Jackson, TN 38303-7222
Attention: Robert Alderson
Telecopy No.: (731) 664-9345

With a copy to:

Baker, Donelson, Bearman & Caldwell
20th Floor
First Tennessee Building
165 Madison Avenue
Memphis, TN 38103
Attention: Robert Walker, Esq.
Telecopy No.: (901) 577-2303

If to Robert Kirkland, to:

Robert Kirkland
760 Sanders Chapel Road
Union City, Tennessee 38261
Telecopy No.: (731) 885-7850

With a copy to:

Warner Law Firm PLC
308 West Church Street
Union City, Tennessee 38261
Attention: John L. Warner, Jr., Esquire
Telecopy No.: (731) 885-2440

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If to Mezzanine Warrant Holders, to:

Capital Resource Lenders II, L.P.
85 Merrimac Street
Suite 200
Boston, MA 02114
Attention: Alexander S. McGrath
Telecopy No.: (617) 723-9819

Allied Capital Corporation
1919 Pennsylvania Avenue, N.W.
3rd Floor
Washington, D.C. 20006
Attention: Susan Gallagher
Telecopy No.: (202) 659-2053

The Marlborough Capital Investment Fund, L.P.
9 Newbury Street
Boston, MA 02116
Attention: Margaret Laroix
Telecopy No.: (617)421-9631

Capital Trust Investments, Ltd.
575 Fifth Avenue, 40th Floor
New York, NY 10017
Attention: John P. Oswald
Telecopy No.: (212) 490-6950

With a copy to:

Testa, Hurwitz & Thibeault, LLP
High Street Tower
125 High Street
Boston, MA 02110
Attention: Andrew E. Taylor, Jr., Esquire
Telecopy No.: (617) 248-7100

If to any other party hereto, to the address of record as most recently provided to the Company. Upon request by any party hereto, the Company agrees to provide address and telecopier information for any other party for the purpose of providing a notice in accordance with this Section 18.

Notice of any change in any such address shall also be given in the manner set forth above. Whenever the giving of notice is required, the giving of such notice may be waived by the party entitled to receive such notice.

19. Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed

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shall be deemed to be an original and all of which taken together shall constitute one and the same agreement.

20. Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.

21. Governing Law. This Agreement shall be governed by and construes in accordance with the laws of the State of Delaware.

22. Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained imp herein shall not be affected or impaired thereby.

23. Entire Agreement. This Agreement is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein with respect to the registration rights granted by the Company with respect to the Registrable Securities. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter.

24. Parties Benefited. Nothing in this Agreement, express or implied, is intended to confer upon any third party any rights, remedies, obligations or liabilities.

25. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, personal representatives, successors and assigns including, without limitation, subsequent Holders of Registrable Securities agreeing to be bound by all and the terms and conditions of this Agreement.

IN WITNESS WHEREOF, this Amended and Restated Registration Rights Agreement has been executed as of the date and year first above written.

KIRKLAND HOLDINGS L.L.C.

By: /s/ David M. Mussafer
   ----------------------------------------
   Name:  David M. Mussafer
   Title:

KIRKLAND'S, INC.

By: /s/ Robert E. Alderson
   ----------------------------------------
   Name:  Robert E. Alderson
   Title: President and Chief Executive
          Officer

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SSM VENTURE PARTNERS, L.P.
By: SSM I, L.P., general partner
By: SSM Corporation, general partner

By: /s/ R. Wilson Orr, III
   ----------------------------------------
   Name: R. Wilson Orr, III
   Title: V.P.


/s/ Joseph R. Hyde, III
-------------------------------------------
JOSEPH R. HYDE, III


/s/ Johnston C. Adams, Jr.
-------------------------------------------
JOHNSTON C. ADAMS, JR.


/s/ John H. Pontius
-------------------------------------------
JOHN H. PONTIUS

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CT/KIRKLAND EQUITY PARTNERS, L.P.

By: /s/ John P. Oswald
   ----------------------------------------
   Name:
   Title:

R-H CAPITAL PARTNERS, L.P.
By: RH/Travelers, L.P., its general partner
By: R-H Capital, Inc., its general partner

By: /s/ Kenneth T. Millar
   ----------------------------------------
   Name: Kenneth T. Millar
   Title: Executive Vice President

TCW/KIRKLAND EQUITY PARTNERS, L.P.

By: /s/ Richard F. Kurth
   ----------------------------------------
   Name: Richard F. Kurth
   Title: Vice President

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CAPITAL RESOURCE LENDERS II, L.P., by
CAPITAL RESOURCE PARTNERS II, L.P., its
General Partner

By: /s/ Alexander S. McGrath
   ----------------------------------------
   Name: Alexander S. McGrath
   Title: Partner

ALLIED CAPITAL CORPORATION

By: /s/ Gay S. Truscott
   ----------------------------------------
   Name: Gay S. Truscott
   Title: Senior V.P.

THE MARLBOROUGH CAPITAL INVESTMENT FUND,
L.P., by MARLBOROUGH CAPITAL MANAGEMENT,
L.P., its general partner

By: /s/ Margaret L. Lanoix
   ----------------------------------------
   Margaret Lanoix, its authorized partner

CAPITAL TRUST INVESTMENTS, LTD.

By: /s/ John P. Oswald
   ----------------------------------------
   Name: John P. Oswald
   Title: Attorney-in-fact

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GLOBAL PRIVATE EQUITY II LIMITED
PARTNERSHIP

By: /s/ David M. Mussafer
   ----------------------------------------
   Name:  David M. Mussafer
   Title:

ADVENT DIRECT INVESTMENT PROGRAM LIMITED
PARTNERSHIP

By: /s/ David M. Mussafer
   ----------------------------------------
   Name:  David M. Mussafer
   Title:

ADVENT PARTNERS LIMITED PARTNERSHIP

By: /s/ David M. Mussafer
   ----------------------------------------
   Name:  David M. Mussafer
   Title:

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/s/ Carl Kirkland
-------------------------------------------
CARL KIRKLAND

/s/ Robert E. Kirkland
-------------------------------------------
ROBERT KIRKLAND

/s/ Robert E. Alderson
-------------------------------------------
ROBERT ALDERSON

THE AMY KATHERINE ALDERSON TRUST

By: /s/ Carl Kirkland
   ----------------------------------------
   Name:  Carl Kirkland
   Title: Trustee

THE ALLISON LEIGH ALDERSON TRUST

By: /s/ Carl Kirkland
   ----------------------------------------
   Name:  Carl Kirkland
   Title: Trustee

THE CARL T. KIRKLAND GRANTOR
RETAINED ANNUITY TRUST 2001-1

By: /s/ Robert E. Alderson
   ----------------------------------------
   Name:  Robert E. Alderson
   Title: Trustee

/s/ Steven J. Collins
-------------------------------------------
STEVEN COLLINS

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EXHIBIT A

COUNTERPART

THIS INSTRUMENT forms part of the Amended and Restated Registration Rights Agreement (the "Agreement") made as of the 15th day of April 2002, among Kirkland Holdings L.L.C., Kirkland's Inc., SSM Venture Partners, L.P., Joseph R. Hyde, III, Johnston C. Adams, Jr., John H. Pontius, CT/Kirkland Equity Partners, L.P., R-H Capital Partners, L.P., TCW/Kirkland Equity Partners, L.P., Capital Resource Lenders II, L.P., Allied Capital Corporation, The Marlborough Capital Investment Fund, L.P., Capital Trust Investments, Ltd., Global Private Equity II Limited Partnership, Advent Direct Investment Program Limited Partnership, Advent Partners Limited Partnership, Carl Kirkland, Robert Kirkland, Robert Alderson, The Amy Katherine Alderson Trust, The Allison Leigh Alderson Trust, The Carl T. Kirkland Grantor Retained Annuity Trust 2001-1 and Steven Collins, and any additional Shareholders of the Company (as defined in the Agreement), from time to time, which Agreement permits execution by counterpart. The undersigned hereby acknowledges having received a copy of the said Agreement (which is annexed hereto as Schedule I) and having read the said Agreement in its entirety, and for good and valuable consideration, receipt and sufficiency of which is hereby acknowledged, hereby agrees that the terms and conditions of the said Agreement shall be binding upon the undersigned as a Shareholder and such terms and conditions shall inure to the benefit of and be binding upon the undersigned and its successors and permitted assigns.

IN WITNESS WHEREOF, the undersigned has executed this instrument this ____ day of ___________, 200_ .

(Signature of Shareholder)

(Name in block letters)

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EXHIBIT 10.5

EMPLOYMENT AGREEMENT

THIS AGREEMENT (the "Agreement"), made as of the 1st day of June, 2002, by and between KIRKLAND'S, INC., a Tennessee corporation, (the "Company"), and CARL KIRKLAND("Executive").

WHEREAS, Executive is an individual qualified by education and experience to serve the Company as its Chairman; and

WHEREAS, the Company desires to employ Executive as its Chairman and thereby gain the benefit of Executive's knowledge and experience, and Executive desires to accept such employment pursuant to the terms of this Agreement.

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

SECTION 1. Definitions.

1.1. "Annual Bonus" means a bonus payable pursuant to
Section 3.2.

1.2. "Benefits" means the benefits described in Sections 3.3, 3.4 and 3.5.

1.3. "Board" means the Board of Directors of the Company.

1.4. "Cause" means the occurrence of any of the following material violations, as determined in good faith by the Board: (a) Executive's failure, refusal or inability (other than due to mental or physical disability) to perform, in any material respect, his duties to the Company, which failure continues for more than fifteen (15) days after written notice thereof from the Company, (b) alcohol abuse or use of controlled drugs (other than in accordance with a physician's prescription), (c) illegal conduct or gross misconduct of Executive which is materially and demonstrably injurious to the Company, its affiliates or subsidiaries including, without limitation, fraud, embezzlement, theft or proven dishonesty in the course of his employment, (d) conviction of a misdemeanor involving moral turpitude or a felony, or (v) the entry of a plea of guilty or nolo contendere to a misdemeanor involving moral turpitude or a felony.

1.5. "COBRA" means 29 U.S.C. ss .ss.1161-1169.

1.6. "Competing Business" means any business primarily engaged in the retail sale of specialty gifts, decorative accessories or home furnishings, or any Significant Supplier.

1.7. "Effective Date" means the date upon which this Agreement is entered into by the Executive and the Company.

1.8. "Expiration Date" means the fourth anniversary of the Effective Date; provided, however, that if written notice not to extend the Term by either party is not received at least 90 days prior to the fourth anniversary of the Effective Date (or any subsequent anniversary

of the Effective Date, if this Agreement is extended pursuant to this Section 1.8), then the Expiration Date will be automatically extended to the next anniversary of the Effective Date.

1.9. "Good Reason" means that any of the following has occurred with respect to the Executive:

(a) the assignment to Executive of any duties inconsistent in any respect with Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 2 of this Employment Agreement, or any other action by the Company which results in a material diminution in such position, authority, duties or responsibilities;

(b) a reduction by the Company in Executive's Annual Salary; provided, however, that if the salaries of substantially all of the Company's senior executive officers (including the Company's President and CEO) are contemporaneously and proportionately reduced, a reduction in the Executive's Annual Salary to an amount not less than $250,000 will not constitute "Good Reason" hereunder;

(c) the failure by the Company, without Executive's consent, to pay to him any portion of his current compensation, except pursuant to a compensation deferral elected by Executive, or to pay to Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company within thirty days of the date such compensation is due; and

(d) the failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement.

Provided, however, that the foregoing events or conditions will constitute "Good Reason" hereunder only if the Executive provides the Company with written objection to the event or condition within 60 days following the occurrence thereof, the Company does not reverse or otherwise cure the event or condition within 30 days of receiving that written objection and the Executive resigns his employment within 90 days following the expiration of that cure period.

1.10. "Intellectual Property" means (a) all inventions (whether patentable or unpatentable and whether or not reduced to practice), all improvements thereto, and all patents, (b) all trademarks, service marks, trade dress, logos, trade names, fictitious names, brand names, brand marks and corporate names, together with all translations, adaptations, derivations, and combinations thereof and including all goodwill associated therewith, and all applications, registrations, and renewals in connection therewith, (c) all copyrightable works, all copyrights, and all applications, registrations, and renewals in connection therewith, (d) all mask works and all applications, registrations, and renewals in connection therewith, (e) all trade secrets and confidential business information (including ideas, research and development, know-how, formulas, compositions, manufacturing and production processes and techniques, technical data, designs, drawings, specifications, customer and supplier lists, pricing and cost information, and business and marketing plans and proposals), (f) all computer software (including data, source codes and related documentation), (g) all other proprietary rights, (h) all copies and tangible embodiments thereof (in whatever form or medium), or similar intangible personal property

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which have been or are developed or created in whole or in part by Executive:
(i) at any time and at any place while Executive is employed by the Company and which are related to or used in connection with the business of the Company, or
(ii) as a result of tasks assigned to Executive by the Company.

1.11. "Proprietary Information" means confidential, proprietary, business and technical information or trade secrets of the Company or of any subsidiary or affiliate of the Company. Such Proprietary Information shall include, but shall not be limited to, the following items and information relating to the following items: (a) computer codes or instructions (including source and object code listings, program logic algorithms, subroutines, modules or other subparts of computer programs and related documentation, including program notation), computer processing systems and techniques, all computer inputs and outputs (regardless of the media on which stored or located), hardware and software configurations, designs, architecture and interfaces, (b) business research, studies, procedures and costs, (c) financial data, (d) distribution methods, (e) marketing data, methods, plans and efforts, (f) the identities of the Company's relationship(s) with actual and prospective customers, contractors and suppliers, (g) the terms of contracts and agreements with customers, contractors and suppliers, (h) the needs and requirements of, and the Company's course of dealing with, actual or prospective customers, contractors and suppliers, (i) personnel information, (j) customer and vendor credit information, and (k) any Intellectual Property of the Company (whether developed by Executive or others). Failure by the Company to mark any of the Proprietary Information as confidential or proprietary shall not affect its status as Proprietary Information under the terms of this Agreement.

1.12. "Restrictive Covenants" means the provisions contained in Section 5.1 of this Agreement.

1.13. "Significant Supplier" means, as of a given date, a supplier of specialty gifts, decorative accessories or home furnishings whose aggregate sales to the Company, its affiliates or subsidiaries during the three
(3) year period immediately preceding that given date exceeded $400,000.

1.14. "Term" means the period beginning on the date hereof and ending on (i) the Expiration Date, or (ii) the date that Executive's employment by the Company is terminated for any reason.

1.15. "Total After-Tax Payments" means the total of all "parachute payments" (as that term is defined in Section 280G(b)(2) of the Internal Revenue Code) made to or for the benefit of Executive (whether made hereunder or otherwise), after reduction for all applicable federal taxes (including, without limitation, the tax described in Section 4999 of the Internal Revenue Code).

SECTION 2. Duration of Agreement; Duties. Executive will be employed as the Company's Chairman. Executive's employment by the Company may be terminated by the Company at any time; provided, however, that during the Term, the terms and conditions of Executive's employment by the Company shall be as herein set forth. Executive will report to the Board of the Company. Executive will render his services hereunder to the Company and its Affiliates and shall use his best efforts, judgment and energy in the performance of the duties assigned to

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him. During the Term, Executive will devote substantially all of his business time and services to the Company to perform such duties as may be customarily incident to his position and as may reasonably be assigned from time to time by the Board. During the Term, Executive will not serve as a director of any other corporation without the prior consent of the Company; provided, however, that Executive may, at his discretion, serve as a director of charitable, community and other not-for-profit entities, subject to Executive's duty to inform the Company of his assumption of any such directorship; and further provided, that Executive may continue to serve as a director of any entity for which he serves as a director on the Effective Date.

SECTION 3. Compensation and Benefits.

3.1. Annual Salary. Executive hereby agrees to accept, as compensation for all services rendered by Executive in any capacity hereunder and for the Restrictive Covenants made by Executive in Section 5 hereof, an initial base salary at an annual rate of $150,000 (as the same may hereafter be increased, the "Annual Salary") commencing on the date hereof and continuing until expiration or termination of the Term. The Annual Salary and all other payments made by the Company to Executive will be inclusive of all applicable income, social security and other taxes and charges which are required by law to be withheld by the Company, which taxes and other charges will be withheld and paid in accordance with the Company's normal payroll practices from time to time in effect. The Annual Salary will be reviewed on an annual basis by the Compensation Committee of the Board and may be increased from time to time with the approval of the Board.

3.2. Annual Bonus.

(a) With respect to each fiscal year of the Company ending during the Term, Executive will be eligible to receive an Annual Bonus of up to 100 percent of his Annual Salary if he meets or exceeds specified personal performance goals and/or the Company meets or exceeds specified corporate performance goals. Such personal and corporate performance goals will be established each year by the Compensation Committee of the Board and communicated to Executive prior to the end of the first quarter of the applicable fiscal year.

(b) The Compensation Committee of the Board, in its sole discretion, will determine whether and to what extent the personal and corporate performance goals have been achieved in any fiscal year and will compute the amount of any Annual Bonus payable with respect to that fiscal year. From time to time, the Compensation Committee of the Board may make adjustments to those personal or corporate performance goals so that required departures from the Company's operating budget, changes in accounting principles, acquisitions, dispositions, mergers, consolidations and other corporate transactions, and other factors influencing the achievement or calculation of those targets do not affect the operation of this Section 3.2 in a manner inconsistent with the achievement of its intended purposes.

(c) Payment Timing. Any amount payable pursuant to this Section 3.2 will be paid within 21 days following the Board's approval of the Company's audited financial statements for the relevant fiscal year.

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3.3. Benefits. Executive will be entitled to receive the same benefits enjoyed by other executive officers of the Company from time to time (as determined by the Board in good faith, in its absolute discretion), as well as the benefits described below in Sections 3.4 and 3.5.

3.4. Life Insurance. The Company will provide Executive with a life insurance policy (in addition to life insurance benefits generally provided or available to other employees of the Company) with a face amount of $500,000, with the beneficiary to be designated by Executive, which will be issued on the basis of being paid up at age 65. The policy will (a) contain a waiver of premium in the event of disability (to the extent available at commercially reasonable rates), and (b) permit (upon termination of employment with the Company) the transfer of ownership of such policy to Executive, such transfer to be with all benefits, values and other ownership rights incident thereto at the time of such transfer, without cost to Executive, who may thereafter continue coverage under such policy at his own cost.

3.5. Automobile Allowance. Executive will receive a monthly allowance of $600 to be applied against automobile leasing, insurance and operating expenses.

SECTION 4. Payment of Expenses. The Company will pay or reimburse all reasonable and necessary expenses incurred by Executive in the performance of his duties hereunder, in accordance with the Company's practices and policies regarding the payment or reimbursement of expenses from time to time in effect.

SECTION 5. Non-Compete; Confidentiality; Non-Solicitation.

5.1. Restrictive Covenants. These Restrictive Covenants will survive the expiration of this Agreement or the termination of Executive's employment and will apply without regard to whether any such termination is initiated by the Company or Executive, and without regard to the reason for that termination.

(a) Non-Compete. Executive shall not, during the Term and for a period of three (3) years thereafter (the "Restricted Period"), in the United States do any of the following, directly or indirectly, without the prior written consent of the Company (except in Executive's capacity as an employee of the Company, and in the best interests of the Company):

(i) engage or participate in any Competing Business;

(ii) become interested in (as owner, stockholder, lender, partner, co-venturer, director, officer, employee, agent or consultant) any person, firm, corporation, association or other entity engaged in any Competing Business;

(iii) arrange or facilitate the solicitation by a Competing Business of any Significant Supplier;

(iv) influence or attempt to influence any supplier, customer or potential customer of the Company to terminate or modify any written or oral agreement or course of dealing with the Company; or

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(v) influence or attempt to influence any Person to either (1) terminate or modify any employment, consulting, agency, distributorship or other arrangement with the Company, or (2) employ, or arrange to have any other person or entity employ, any person who has been employed by the Company as an employee, consultant, agent or distributor of the Company at any time during the Restricted Period.

Notwithstanding the foregoing, Executive may hold less than five percent (5%) of the outstanding securities of any class of any publicly traded securities of any company.

(b) Confidentiality. Executive recognizes and acknowledges that the Proprietary Information is a valuable, special and unique asset of the business of the Company. As a result, both during the Term and five
(5) years thereafter, Executive shall not, without the prior written consent of the Company, for any reason either directly or indirectly divulge to any third-party or use for his own benefit, or for any purpose other than the exclusive benefit of the Company, any Proprietary Information revealed, obtained or developed in the course of his employment by the Company; provided, however, that nothing herein contained shall restrict Executive's ability to make such disclosures during the Term as may be necessary or appropriate to the effective and efficient discharge of his duties as an employee hereunder or as such disclosures may be required by law; and further provided, that nothing herein contained shall restrict Executive from divulging or using for his own benefit or for any other purpose any Proprietary Information which is publicly available, so long as such information did not become available to the public as a direct or indirect result of Executive's breach of this Section 5.1(b). In the event that Executive or any of its representatives becomes legally compelled to disclose any of the Proprietary Information, Executive will provide the Company with prompt written notice so that the Company may seek a protective order or other appropriate remedy.

(c) Property of the Company. All right, title and interest in and to Proprietary Information shall be and remain the sole and exclusive property of the Company. During the Term, Executive shall not remove from the Company's offices or premises any documents, records, notebooks, files, correspondence, reports, memoranda or similar materials of or containing Proprietary Information, or other materials or property of any kind belonging to the Company unless necessary or appropriate (as reasonably determined by Executive) in accordance with Executive's duties and responsibilities to the Company and, in the event that such materials or property are removed, all of the foregoing shall be returned to their proper files or places of safekeeping as promptly as possible after the removal shall serve its specific purpose. Executive shall not make, retain, remove and/or distribute any copies of any of the foregoing for any reason whatsoever except as may be necessary in the discharge of his assigned duties and shall not divulge to any third person the nature of and/or contents of any of the foregoing or of any other oral or written information to which he may have access or with which for any reason he may become familiar, except as disclosure shall be necessary or appropriate (as reasonably determined by Executive) in the performance of his duties; and upon the termination of his employment with the Company, he shall leave with or return to the Company all originals and copies of the foregoing then in his possession, whether prepared by Executive or by others.

5.2. Acknowledgements. Executive acknowledges that the Restrictive Covenants are reasonable and necessary to protect the legitimate interests of the Company and its affiliates and that the duration and geographic scope of the Restrictive Covenants are reasonable

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given the nature of this Agreement and the position Executive will hold within the Company. Executive further acknowledges that the Restrictive Covenants are included herein in order to induce the Company to compensate Executive pursuant to this Agreement and that the Company would not have entered into this Agreement or otherwise continued to employ Executive in the absence of the Restrictive Covenants.

5.3. Rights and Remedies Upon Breach.

(a) Specific Enforcement. Executive acknowledges that any breach by him of the Restrictive Covenants will cause continuing and irreparable injury to the Company for which monetary damages would not be an adequate remedy. Executive shall not, in any action or proceeding to enforce any of the provisions of this Agreement, assert the claim or defense that such an adequate remedy at law exists. In the event of such breach by Executive, the Company shall have the right to enforce the Restrictive Covenants by seeking injunctive or other relief in any court and this Agreement shall not in any way limit remedies of law or in equity otherwise available to the Company. If an action at law or in equity is necessary to enforce or interpret the terms of this agreement, the prevailing party shall be entitled to recover, in addition to any other relief, reasonable attorneys' fees, costs and disbursements.

(b) Extension of Restrictive Period. In the event that Executive breaches any of the Restrictive Covenants contained in
Section 5.1(a), then the Restricted Period shall be extended for a period of time equal to the period of time that Executive is in breach of such restriction.

(c) Accounting. If Executive is determined by any court, arbitrator, mediator or other adjudicative body to have breached any of the Restrictive Covenants, the Company will have the right and remedy to require Executive to account for and pay over to the Company all compensation, profits, monies, accruals, increments or other benefits derived or received by Executive as the result of any action constituting a breach of the Restrictive Covenants. This right and remedy will be in addition to, and not in lieu of, any other rights and remedies available to the Company under law or in equity.

5.4. Judicial Modification. If any court determines that any of the Restrictive Covenants, or any part thereof, is unenforceable because of the duration or geographical scope of such provision, such court shall have the power to modify such provision and, in its modified form, such provision shall then be enforceable.

5.5. Disclosure of Restrictive Covenants. Executive agrees to disclose the existence and terms of the Restrictive Covenants to any employer that Executive may work for during the Restricted Period.

5.6. Restrictions Enforceable in All Jurisdictions. If a court of any jurisdiction holds the Restrictive Covenants unenforceable by reason of their breadth or scope or otherwise, it is the intention of the parties hereto that such determination not bar or in any way affect the right of the Company to the relief provided above in the courts of any other jurisdiction within the geographical scope of such Restrictive Covenants.

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SECTION 6. Termination. Executive's employment hereunder may be terminated by the Company or Executive at any time. Upon termination, Executive shall be entitled only to such compensation and benefits as described in this Section 6.

6.1. Termination Without Cause or For Good Reason. If Executive's employment by the Company is terminated by the Company without Cause or by Executive for Good Reason, the Executive shall be entitled to:

(a) payment of all accrued and unpaid Annual Salary and Benefits through the date of such termination (including any earned but unpaid Annual Bonus for a fiscal year ending prior to such termination);

(b) payment of monthly severance payments equal to one-twelfth of Executive's Annual Salary for a period of twenty-four (24) months, or, at the discretion of the Board, a single sum payment equal to the discounted present value of such monthly payments (discounted at the highest interest rate in effect under any credit agreement to which the Company is then a party);

(c) continuation of group health benefits for Executive until the earliest of (i) the date on which Executive reaches the age of seventy-two (72), (ii) Executive's death or (iii) the end of the COBRA continuation coverage period due to Executive having other group health coverage or the Company ceasing to maintain a group health plan; provided that if the continuation of group health benefits extends beyond the COBRA continuation coverage period applicable to the Executive, the provision of coverage beyond such period shall be subject to the Company's insurance carrier agreeing to provide such coverage at a cost not in excess of 125% of the cost of providing such coverage to employees as of any date following the expiration of the Executive's COBRA continuation coverage period. The continuation of group health benefits provided hereby will be in lieu of any benefits otherwise available to Executive pursuant to COBRA; and

(d) use of Executive's office at the Company until the earlier of (i) the date on which Executive reaches the age of seventy-two (72) or (ii) Executive's death.

The severance benefits described in this Section 6.1 will be paid in lieu of and not in addition to any other severance arrangement maintained by the Company. Notwithstanding the foregoing, no amount will be paid under this Section 6.1 unless Executive executes and delivers to the Company a release substantially identical to that attached hereto as Exhibit I in a manner consistent with the requirements of the Older Workers Benefit Protection Act.

6.2. Any Other Termination. If Executive's employment by the Company is terminated for any reason other than as set forth in Section 6.1 (including, but not limited to, termination (a) by the Company for Cause, (b) as a result of Executive's death, (c) as a result of Executive's disability or (d) by Executive without Good Reason), the Company's obligation to Executive (or, in the case of Executive's death, to Executive's estate) will be limited solely to the payment of accrued and unpaid Annual Salary and Benefits through the date of such termination. All Annual Salary and Benefits will cease at the time of such termination, subject to the terms of any benefits or compensation plans then in force and applicable to Executive, and, except as

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otherwise provided in this Section 6.2 or pursuant to COBRA, the Company shall have no further liability or obligation hereunder by reason of such termination.

6.3. Adjustments to Maximize Payments to Executive. Payments under this Agreement will be made without regard to whether the deductibility of such payments (or any other payments) would be limited or precluded by Section 280G of the Internal Revenue Code and without regard to whether such payments would subject the Executive to the federal excise tax levied on certain "excess parachute payments" under Section 4999 of the Code; provided, however, that if the Total After-Tax Payments would be increased by the limitation or elimination of any amount payable to Executive (whether under this Agreement of otherwise), then the amount payable to Executive will be reduced to the extent necessary to maximize the Total After-Tax Payments. The determination of whether and to what extent payments to Executive are required to be reduced in accordance with the preceding sentence will be made at the Company's expense by an independent, certified public accountant selected by the Company and reasonably acceptable to Executive. In the event of any underpayment or overpayment to Executive (as determined after the application of this Section 6.3), the amount of such underpayment or overpayment will be immediately paid by the Company to the Executive or refunded by the Executive to the Company, as the case may be, with interest at the applicable federal rate provided for in
Section 7872(f)(2) of the Internal Revenue Code.

SECTION 7. Miscellaneous.

7.1. Other Agreements. Executive represents and warrants to the Company that there are no restrictions, agreements or understandings whatsoever to which he is party (or by which he is otherwise bound) that would prevent or make unlawful his execution of this Agreement or employment by the Company, or that would in any way prohibit, limit or impair (or purport to prohibit, limit or impair) his provision of services to the Company.

7.2. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the Company and Executive and their respective successors, executors, administrators, heirs and (in the case of the Company) permitted assigns. The Company may, without the consent of Executive, assign this Agreement to any successor to all or substantially all of its assets and business by means of liquidation, dissolution, merger, consolidation, transfer of assets, or otherwise. Executive may not make any assignment of this Agreement or any interest therein.

7.3. Notice. Any notice or communication required or permitted under this Agreement will be made in writing and (a) sent by overnight courier, (b) mailed by certified or registered mail, return receipt requested or
(c) sent via facsimile. Any notice or communication to Executive will be sent to his most current home address on file with the Company. Any notice or communication to the Company will be sent to the Company's principal executive office, care of the Company's General Counsel, with a copy to Robert A. Friedel, Esq., Pepper Hamilton LLP, 3000 Two Logan Square, 18th & Arch Streets, Philadelphia, Pennsylvania 19103 (or via facsimile to (215) 981-4750).

7.4. Entire Agreement; Amendments. This Agreement contains the entire agreement and understanding of the parties hereto relating to the subject matter hereof, and

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supersedes the Employment Agreement between the Company and Executive dated June 12, 1996 and all other prior or contemporaneous discussions, agreements and understandings of every nature relating to the employment of Executive by the Company. This Agreement may not be changed or modified, except by an Agreement in writing signed by each of the parties hereto.

7.5. Waiver. Any waiver by either party of any breach of any term or condition in this Agreement shall not operate as a waiver of any other breach of such term or condition or of any other term or condition, nor shall any failure to enforce any provision hereof operate as a waiver of such provision or of any other provision hereof or constitute or be deemed a waiver or release of any other rights, in law or in equity.

7.6. Governing Law. This Agreement shall be governed by, and enforced in accordance with, the laws of the State of Tennessee without regard to the application of the principles of conflicts or choice of laws.

7.7. Survival of Provisions. The provisions of this Agreement set forth in Sections 5 and 7 (including any pertinent definitions) will survive the termination or expiration of this Agreement.

7.8. Severability. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or the effectiveness or validity of any provision in any other jurisdiction, and this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein.

7.9. Section Headings. The section headings in this Agreement are for convenience only; they form no part of this Agreement and shall not affect its interpretation.

7.10. Counterparts and Facsimiles. This Agreement may be executed, including execution by facsimile signature, in one or more counterparts, each of which shall be deemed an original, and all of which together shall be deemed to be one and the same instrument.

[This space left blank intentionally; signature page follows.]

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IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officers, and Executive has executed this Agreement, on June 1, 2002, effective as of the date first above written.

KIRKLAND'S, INC.

By:    /s/ Robert Alderson
       ------------------------------------
       Robert Alderson

Title: Chief Executive Officer and President

EXECUTIVE

    /s/ Carl Kirkland
-------------------------------------------
Carl Kirkland

Exhibit I

Release and Non-Disparagement Agreement

THIS MUTUAL RELEASE AND NON-DISPARAGEMENT AGREEMENT (the "Release") is made as of the ___ day of _______, _____ by and between __________________________ ("Executive") and KIRKLAND'S, INC. (the "Company").

WHEREAS, Executive's employment by the Company will terminate; and

WHEREAS, in connection with that termination and pursuant to
Section 6.1 of the Employment Agreement by and between the Company and Executive dated June 1, 2002 (the "Employment Agreement"), the Company has agreed to pay Executive certain amounts, subject to the execution of this Agreement.

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

SECTION 1. Resignation. Executive hereby resigns as the Company's __________________ _______________, as an employee of the Company, as a director of the Company and as an employee, officer, director or board committee member of any subsidiary or affiliate of the Company, effective as of the date of this Release.

SECTION 2. Acknowledgements. Executive acknowledges that: (i) the payments described in Section 6.1 of the Employment Agreement constitute full settlement of all his rights under the Employment Agreement, (ii) he has no entitlement under any other severance or similar arrangement maintained by the Company, and (iii) except as otherwise provided specifically in this Release, the Company does not and will not have any other liability or obligation to him. Executive further acknowledges that, in the absence of his execution of this Release, he would not otherwise be entitled to the payments described in Section 6.1 of the Employment Agreement.

SECTION 3. Mutual Release and Covenant Not to Sue.

3.1. Mutual Release. The Company (including for purposes of this Section 3, its parents, affiliates and subsidiaries) hereby fully and forever releases and discharges Executive (and his heirs, executors and administrators), and Executive hereby fully and forever releases and discharges Company (including, for purposes of this Section 3, all predecessors and successors, subsidiaries, affiliates, assigns, officers, directors, trustees, employees, agents and attorneys, past and present) from any and all claims, demands, liens, agreements, contracts, covenants, actions, suits, causes of action, obligations, controversies, debts, costs, expenses, damages, judgments, orders and liabilities, of whatever kind or nature, direct or indirect, in law, equity or otherwise, whether known or unknown, arising through the date of this Release, out of Executive's employment by the Company or the termination thereof, including, but not limited to, any claims for relief or causes of action under the Age Discrimination in Employment Act, 29 U.S.C. ss. 621 et seq., or any other federal, state or local statute, ordinance or regulation regarding discrimination in employment and any claims, demands or actions based upon alleged wrongful or retaliatory discharge or breach of contract under any state or federal law.

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3.2. Covenant Not to Sue. Executive expressly represents that he has not filed a lawsuit or initiated any other administrative proceeding against the Company and that he has not assigned any claim against the Company to any other person or entity. The Company expressly represents that it has not filed a lawsuit or initiated any other administrative proceeding against Executive and that it has not assigned any claim against Executive to any other person or entity. Both Executive and Company further promise not to initiate a lawsuit or to bring any other claim against the other arising out of or in any way related to Executive's employment by the Company or the termination of that employment. This Release will not prevent Executive from filing a charge with the Equal Employment Opportunity Commission (or similar state agency) or participating in any investigation conducted by the Equal Employment Opportunity Commission (or similar state agency); provided, however, that any claims by Executive for personal relief in connection with such a charge or investigation (such as reinstatement or monetary damages) will be barred.

3.3. Claims Not Released. The forgoing will not be deemed to release the Company or Executive from claims solely (a) to enforce this Release, (b) to enforce Section 6.1 of the Employment Agreement, (c) to enforce
Section 5 of the Employment Agreement, or (c) for indemnification under the Company's By-Laws, under applicable law, under any indemnification agreement between the Company and Executive or under any similar arrangement.

SECTION 4. Non-Competition and Confidentiality Obligations. Executive acknowledges that Section 5 of the Employment Agreement survives the termination of his employment. Executive affirms that the restrictions contained in Section 5 of the Employment Agreement are reasonable and necessary to protect the legitimate interests of the Company, that he received adequate consideration in exchange for agreeing to those restrictions, and that he will abide by those restrictions.

SECTION 5. Non-Disparagement. The Company will not disparage Executive or Executive's performance or otherwise take any action which could reasonably be expected to adversely affect Executive's personal or professional reputation. Similarly, Executive will not disparage Company or any of its directors, officers, agents or employees or otherwise take any action which could reasonably be expected to adversely affect the personal or professional reputation of Company or any of its directors, officers, agents or employees.

SECTION 6. Cooperation. Executive further agrees that he will cooperate fully with the Company and its counsel with respect to any matter (including litigation, investigations, or governmental proceedings) which relates to matters with which Executive was involved during his employment with Company. Executive shall render such cooperation in a timely manner on reasonable notice from the Company.

SECTION 7. Rescission Right. Executive expressly acknowledges and recites that (a) he has read and understands this Release in its entirety, (b) he has entered into this Release knowingly and voluntarily, without any duress or coercion; (c) he has been advised orally and is hereby advised in writing to consult with an attorney with respect to this Release before signing it; (d) he was provided twenty-one (21) calendar days after receipt of the Release to consider its terms before signing it; and (e) he is provided seven (7) calendar days from the date of signing to

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terminate and revoke this Release in which case this Release shall be unenforceable, null and void. Executive may revoke this Release during those seven (7) days by providing written notice of revocation to the Company.

SECTION 8. Challenge. If Executive violates or challenges the enforceability of this Release, no further payments under Section 6.1 of the Employment Agreement will be paid or provided to Executive.

SECTION 9. Miscellaneous.

9.1. No Admission of Liability. This Release is not to be construed as an admission of any violation of any federal, state or local statute, ordinance or regulation or of any duty owed by the Company to Executive. There have been no such violations, and the Company specifically denies any such violations.

9.2. No Reinstatement. Executive agrees that he will not apply for reinstatement with the Company or seek in any way to be reinstated, re-employed or hired by the Company in the future.

9.3. Successors and Assigns. This Release will inure to the benefit of and be binding upon the Company and Executive and their respective successors, executors, administrators, heirs and (in the case of the Company) permitted assigns. The Company may assign this Release to any successor to all or substantially all of its assets and business by means of liquidation, dissolution, merger, consolidation, transfer of assets, or otherwise. Executive may not make any assignment of this Release or any interest herein.

9.4. Severability. The provisions of this Release are severable. If any provision or the scope of any provision is found to be unenforceable or is modified by a court of competent jurisdiction, the other provisions or the affected provisions as so modified shall remain fully valid and enforceable.

9.5. Entire Agreement; Amendments. Except as otherwise provided herein, this Release contains the entire agreement and understanding of the parties hereto relating to the subject matter hereof, and merges and supersedes all prior and contemporaneous discussions, agreements and understandings of every nature relating subject matter hereof. This Release may not be changed or modified, except by an agreement in writing signed by each of the parties hereto.

9.6. Governing Law. This Release shall be governed by, and enforced in accordance with, the laws of the State of Tennessee, without regard to the application of the principles of conflicts of laws.

9.7. Counterparts and Facsimiles. This Release may be executed, including execution by facsimile signature, in one or more counterparts, each of which shall be deemed an original, and all of which together shall be deemed to be one and the same instrument.

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IN WITNESS WHEREOF, the Company has caused this Release to be executed by its duly authorized officer, and Executive has executed this Release, in each case as of the date first above written.

KIRKLAND'S, INC.

By:

Title:

EXECUTIVE

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EXHIBIT 10.6

EMPLOYMENT AGREEMENT

THIS AGREEMENT (the "Agreement"), made as of the 1st day of June, 2002, by and between KIRKLAND'S, INC., a Tennessee corporation, (the "Company"), and ROBERT E. ALDERSON ("Executive").

WHEREAS, Executive is an individual qualified by education and experience to serve the Company as its Chief Executive Officer and President; and

WHEREAS, the Company desires to employ Executive as its Chief Executive Officer and President and thereby gain the benefit of Executive's knowledge and experience, and Executive desires to accept such employment pursuant to the terms of this Agreement.

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

SECTION 1. Definitions.

1.1. "Annual Bonus" means a bonus payable pursuant to Section 3.2.

1.2. "Benefits" means the benefits described in Sections 3.3, 3.4 and 3.5.

1.3. "Board" means the Board of Directors of the Company.

1.5. "COBRA" means 29 U.S.C.ss.ss. 1161-1169.

1.6. "Competing Business" means any business primarily engaged in the retail sale of specialty gifts, decorative accessories or home furnishings, or any Significant Supplier.

1.7. "Effective Date" means the date upon which this Agreement is entered into by the Executive and the Company.

of the Effective Date, if this Agreement is extended pursuant to this Section 1.8), then the Expiration Date will be automatically extended to the next anniversary of the Effective Date.

1.9. "Good Reason" means that any of the following has occurred with respect to the Executive:

(d) the failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement.

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1.12. "Restrictive Covenants" means the provisions contained in
Section 5.1 of this Agreement.

1.13. "Significant Supplier" means, as of a given date, a supplier of specialty gifts, decorative accessories or home furnishings whose aggregate sales to the Company, its affiliates or subsidiaries during the three (3) year period immediately preceding that given date exceeded $400,000.

1.14. "Term" means the period beginning on the date hereof and ending on (i) the Expiration Date, or (ii) the date that Executive's employment by the Company is terminated for any reason.

SECTION 2. Duration of Agreement; Duties. Executive will be employed as the Company's Chief Executive Officer. Executive's employment by the Company may be terminated by the Company at any time; provided, however, that during the Term, the terms and conditions of Executive's employment by the Company shall be as herein set forth. Executive will report to the Board of the Company. Executive will render his services hereunder to the Company and its Affiliates and shall use his best efforts, judgment and energy in the performance of the duties

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assigned to him. During the Term, Executive will devote substantially all of his business time and services to the Company to perform such duties as may be customarily incident to his position and as may reasonably be assigned from time to time by the Board. During the Term, Executive will not serve as a director of any other corporation without the prior consent of the Company, provided, however, that Executive may, at his discretion, serve as a director of charitable, community and other not-for-profit entities, subject to Executive's duty to inform the Company of his assumption of any such directorship.

SECTION 3. Compensation and Benefits.

3.1. Annual Salary. Executive hereby agrees to accept, as compensation for all services rendered by Executive in any capacity hereunder and for the Restrictive Covenants made by Executive in Section 5 hereof, an initial base salary at an annual rate of $300,000 (as the same may hereafter be increased, the "Annual Salary") commencing on the date hereof and continuing until expiration or termination of the Term. The Annual Salary and all other payments made by the Company to Executive will be inclusive of all applicable income, social security and other taxes and charges which are required by law to be withheld by the Company, which taxes and other charges will be withheld and paid in accordance with the Company's normal payroll practices from time to time in effect. The Annual Salary will be reviewed on an annual basis by the Compensation Committee of the Board and may be increased from time to time with the approval of the Board; provided, however, that the Annual Salary will be increased by not less than five percent (5%) as of the first day of each fiscal year of the Company.

3.2. Annual Bonus.

(a) With respect to each fiscal year of the Company ending during the Term, Executive will be eligible to receive an Annual Bonus of up to 100% of his Annual Salary if he meets or exceeds specified personal performance goals and/or the Company meets or exceeds specified corporate performance goals. Such personal and corporate performance goals will be established each year by the Compensation Committee of the Board and communicated to Executive prior to the end of the first quarter of the applicable fiscal year.

(c) Payment Timing. Any amount payable pursuant to this
Section 3.2 will be paid within 21 days following the Board's approval of the Company's audited financial statements for the relevant fiscal year.

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3.5. Automobile Allowance. Executive will receive a monthly allowance of $600 to be applied against automobile leasing, insurance and operating expenses.

SECTION 5. Non-Compete; Confidentiality; Non-Solicitation.

(i) engage or participate in any Competing Business;

(iii) arrange or facilitate the solicitation by a Competing Business of any Significant Supplier;

(iv) influence or attempt to influence any supplier, customer or potential customer of the Company to terminate or modify any written or oral agreement or course of dealing with the Company; or

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Notwithstanding the foregoing, Executive may hold less than five percent (5%) of the outstanding securities of any class of any publicly traded securities of any company.

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5.3. Rights and Remedies Upon Breach.

(b) Extension of Restrictive Period. In the event that Executive breaches any of the Restrictive Covenants contained in Section 5.1(a), then the Restricted Period shall be extended for a period of time equal to the period of time that Executive is in breach of such restriction.

5.5. Disclosure of Restrictive Covenants. Executive agrees to disclose the existence and terms of the Restrictive Covenants to any employer that Executive may work for during the Restricted Period.

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(c) continuation of group health benefits for Executive until the earlier of (i) the end of the COBRA continuation coverage period due to Executive having other group health coverage or the Company ceasing to maintain group health coverage or (ii) twenty-four (24) months following termination, provided that if the continuation of group health benefits extends beyond the COBRA continuation coverage period applicable to the Executive, the provision of coverage beyond such period shall be subject to the Company's insurance carrier agreeing to provide such coverage at a cost not in excess of 125% of the cost of providing such coverage to employees as of any date following the expiration of the Executive's COBRA continuation coverage period. The continuation of group health benefits provided hereby will be in lieu of any benefits otherwise available to Executive pursuant to COBRA.

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SECTION 7. Miscellaneous.

7.3. Notice. Any notice or communication required or permitted under this Agreement will be made in writing and (a) sent by overnight courier,
(b) mailed by certified or registered mail, return receipt requested or (c) sent via facsimile. Any notice or communication to Executive will be sent to his most current home address on file with the Company. Any notice or communication to the Company will be sent to the Company's principal executive office, care of the Company's General Counsel, with a copy to Robert A. Friedel, Esq., Pepper Hamilton LLP, 3000 Two Logan Square, 18th & Arch Streets, Philadelphia, Pennsylvania 19103 (or via facsimile to (215) 981-4750).

7.4. Entire Agreement; Amendments. This Agreement contains the entire agreement and understanding of the parties hereto relating to the subject matter hereof, and supersedes the Employment Agreement between the Company and Executive dated June 12, 1996 and all other prior or contemporaneous discussions, agreements and understandings of

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every nature relating to the employment of Executive by the Company. This Agreement may not be changed or modified, except by an Agreement in writing signed by each of the parties hereto.

7.7. Survival of Provisions. The provisions of this Agreement set forth in Sections 5 and 7 (including any pertinent definitions) will survive the termination or expiration of this Agreement.

7.9. Section Headings. The section headings in this Agreement are for convenience only; they form no part of this Agreement and shall not affect its interpretation.

KIRKLAND'S, INC.

By:      /s/ Carl Kirkland
   ---------------------------
         Carl Kirkland

Title:  Chairman

EXECUTIVE

         /s/ Robert Alderson
------------------------------
Robert Alderson

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Exhibit I

Release and Non-Disparagement Agreement

WHEREAS, Executive's employment by the Company will terminate; and

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

SECTION 3. Mutual Release and Covenant Not to Sue.

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SECTION 8. Challenge. If Executive violates or challenges the enforceability of this Release, no further payments under Section 6.1 of the Employment Agreement will be paid or provided to Executive.

SECTION 9. Miscellaneous.

9.2. No Reinstatement. Executive agrees that he will not apply for reinstatement with the Company or seek in any way to be reinstated, re-employed or hired by the Company in the future.

9.6. Governing Law. This Release shall be governed by, and enforced in accordance with, the laws of the State of Tennessee, without regard to the application of the principles of conflicts of laws.

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IN WITNESS WHEREOF, the Company has caused this Release to be executed by its duly authorized officer, and Executive has executed this Release, in each case as of the date first above written.

KIRKLAND'S, INC.

By:

Title:

EXECUTIVE

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EXHIBIT 10.11

KIRKLAND'S, INC.
2002 EQUITY INCENTIVE PLAN

1. PURPOSE; DEFINITIONS.

The purpose of the Kirkland's, Inc. 2002 Equity Incentive Plan (the "Plan") are to (a) enable Kirkland's, Inc. (the "Company") and its affiliated companies to recruit and retain highly qualified employees, directors and consultants; (b) provide those employees, directors and consultants with an incentive for productivity; and (c) provide those employees, directors and consultants with an opportunity to share in the growth and value of the Company.

For purposes of the Plan, the following initially capitalized words and phrases have the meanings defined below, unless the context clearly requires a different meaning:

(a) "Award" means a grant of Options, SARs or Restricted Shares pursuant to the provisions of this Plan.

(b) "Award Agreement" means, with respect to any particular Award, the written document that sets forth the terms of that particular Award.

(c) "Board" means the Board of Directors of the Company, as constituted from time to time; provided, however, that if the Board appoints a Committee to perform some or all of the Board's administrative functions hereunder pursuant to Section 2, references in this Plan to the "Board" will be deemed to also refer to that Committee in connection with administrative matters to be performed by that Committee.

(d) "Cause" exists when a Participant (as determined by the Board, in its sole discretion):

(i) engages in any type of disloyalty to the Company, including without limitation, fraud, embezzlement, theft, or dishonesty in the course of his employment or engagement, or otherwise breaches any fiduciary duty owed to the Company;

(ii) is convicted of a felony or a misdemeanor involving moral turpitude;

(iii) enters a plea of guilty or nolo contendere to a felony or a misdemeanor involving moral turpitude.

(iv) discloses any proprietary information belonging to the Company without the consent of the Company; or

(v) breaches any agreement with or duty to the Company.

However, notwithstanding the foregoing, if an Participant is bound by the terms of an employment agreement with the Company or any Subsidiary that includes a definition of "cause," the determination of whether that Participant has been terminated for "Cause" will be made in accordance with that employment agreement.

(e) "Change in Control" means (i) the sale, transfer, assignment or other disposition (including by merger or consolidation) by shareholders of the Company, in one transaction or a series of related transactions, of more than 50% of the voting power represented by the then outstanding capital stock of the Company to one or more persons, (ii) the sale of substantially all the assets of the Company, or (iii) the liquidation or dissolution of the Company.

(f) "Code" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto.

(g) "Committee" means a committee appointed by the Board in accordance with Section 2 of this Plan.

(h) "Director" means a member of the Board.

(i) "Disability" means a condition rendering a Participant Disabled.

(j) "Disabled" means, with respect to any Participant (i) entitled to benefits under a long-term disability policy or program of the Company, or (ii) if the Participant is not covered by any such policy or program, when the Participant is prevented by a physical or mental impairment from engaging in any substantial, gainful activity for a period of at least six (6) months, as determined by the Board, in its sole and absolute discretion; provided, however, notwithstanding the foregoing, if an Participant is bound by the terms of an employment agreement with the Company or any Subsidiary that includes a definition of "disabled" or disability," the determination of whether that Participant is "Disabled" for purposes of this Plan will be made in accordance with that employment agreement.

(k) "Exchange Act" means the Securities Exchange Act of 1934, as amended.

(l) "Fair Market Value" means, as of any date: (i) the closing price of the Shares as reported on the principal nationally recognized stock exchange on which the Shares are traded on such date, or if no Share prices are reported on such date, the closing price of the Shares on the last preceding date on which there were reported Share prices; or (ii) if the Shares are not listed or admitted to unlisted trading privileges on a nationally recognized stock exchange, the closing price of the Shares as reported by The Nasdaq Stock Market on such date, or if no Share prices are reported on such date, the closing price of the Shares on the last preceding date on which there were reported Share prices; or (iii) if the Shares are not listed or admitted to unlisted trading privileges on a nationally recognized stock exchange or traded on The Nasdaq Stock Market, the Fair Market Value will be determined by the Board acting in its discretion, which determination will be conclusive.

(m) "Incentive Stock Option" means any Option intended to be and designated as an "Incentive Stock Option" within the meaning of Section 422 of the Code.

(n) "Non-Employee Director" will have the meaning set forth in Rule 16b-3(b)(3)(i) promulgated by the Securities and Exchange Commission under the Exchange Act, or any successor definition adopted by the Securities and Exchange Commission; provided, however, that the Board may, to the extent necessary to comply with Section 162(m) of the Code or

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regulations thereunder, require each "Non-Employee Director" to also be an "outside director," as that term is defined in regulations under Section 162(m) of the Code.

(o) "Non-Qualified Stock Option" means any Option that is not an Incentive Stock Option.

(p) "Option" means any option to purchase Shares (including Restricted Shares, if the Board so determines) granted pursuant to Section 5 hereof.

(q) "Participant" means an employee, consultant or director of the Company or a Subsidiary to whom an Award is granted.

(r) "Restricted Shares" means Shares that are subject to restrictions pursuant to Section 8 hereof.

(s) "SAR" means a share appreciation right granted under the Plan and described in Section 6 hereof.

(t) "Share" means a share of common stock, no par value, of the Company, subject to substitution or adjustment as provided in Section 3(c) hereof.

(u) "Subsidiary" means, in respect of the Company, a subsidiary company, whether now or hereafter existing, as defined in Sections 424(f) and (g) of the Code.

2. ADMINISTRATION.

The Plan will be administered by the Board; provided, however, that the Board may at any time appoint a Committee to perform some or all of the Board's administrative functions hereunder; and provided further, that the authority of any Committee appointed pursuant to this Section 2 will be subject to such terms and conditions as the Board may prescribe and will be coextensive with, and not in lieu of, the authority of the Board hereunder.

Any Committee established under this Section 2 will be composed of not fewer than two members, each of whom will serve for such period of time as the Board determines; provided, however, that if the Company has a class of securities required to be registered under Section 12 of the Exchange Act, all members of any Committee established pursuant to this Section 2 will be Non-Employee Directors. From time to time the Board may increase the size of the Committee and appoint additional members thereto, remove members (with or without cause) and appoint new members in substitution therefore, fill vacancies however caused, or remove all members of the Committee and thereafter directly administer the Plan.

Members of the Board who are eligible for Awards or have received Awards may vote on any matters affecting the administration of the Plan or the grant of Awards, except that no such member will act upon the grant of an Award to himself or herself, but any such member may be counted in determining the existence of a quorum at any meeting of the Board or Committee during which action is taken with respect to the grant of Awards to himself or herself.

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The Board will have full authority to grant Awards under this Plan. In particular, the Board will have the authority:

(a) to select the persons to whom Awards may from time to time be granted hereunder (consistent with the eligibility conditions set forth in Section 4);

(b) to determine the type of Award to be granted hereunder;

(d) to establish the terms of each Award Agreement;

(e) to determine whether and under what circumstances an Option may be exercised without a payment of cash under Section 5(f); and

(f) to determine whether, to what extent and under what circumstances Shares and other amounts payable with respect to an Award may be deferred either automatically or at the election of the Participant.

The Board will have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it, from time to time, deems advisable; to interpret the terms and provisions of the Plan and any Award Agreement; to amend the terms of any Award Agreement, provided that the Participant consents to such amendment or that such amendment does not have a material adverse effect on the Participant; and to otherwise supervise the administration of the Plan. The Board may correct any defect, supply any omission or reconcile any inconsistency in the Plan or in any Award in the manner and to the extent it deems necessary to carry out the intent of the Plan.

All decisions made by the Board pursuant to the provisions of the Plan will be final and binding on all persons, including the Company and Participants. No member of the Board will be liable for any good faith determination, act or omission in connection with the Plan or any Award.

3. SHARES SUBJECT TO THE PLAN.

(a) Shares Subject to the Plan. The Shares to be subject or related to awards under the Plan will be authorized and unissued Shares of the Company, whether or not previously issued and subsequently acquired by the Company. The maximum number of Shares that may be the subject of awards under the Plan is 2,500,000 and the Company will reserve for the purposes of the Plan such number of Shares. No Participant will receive Options or SARs with respect to more than 500,000 Shares in any calendar year.

(b) Effect of the Expiration or Termination of Awards. If and to the extent that an Award expires, terminates or is canceled or forfeited for any reason without having been exercised in full, the Shares associated with the expired, terminated, canceled or forfeited portion of the Award will again become available for grant under the Plan. If any Share is received in satisfaction of the exercise price payable upon exercise of an Option, or if any Share is withheld

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pursuant to Section 11(d) in settlement of a tax obligation associated with an Award, that Share will become available for grant under the Plan.

(c) Other Adjustment. In the event of any merger, reorganization, consolidation, recapitalization, stock distribution or dividend, stock split or combination, or other similar event or transaction affecting the Shares, substitutions or adjustments may be made by the Board, in its sole and absolute discretion, to the aggregate number, type and issuer of the securities reserved for issuance under the Plan, to the limit on the number of shares that may be subject to Options or SARs granted to a single Participant in any calendar year, and to the number, type, issuer and price of securities subject to outstanding Awards.

(d) Change Control. Notwithstanding anything to the contrary set forth in this Plan, upon or in anticipation of any Change in Control, the Board may, in its sole and absolute discretion and without the need for the consent of any Participant, take one or more of the following actions contingent upon the occurrence of that Change in Control: (i) cause all outstanding Options and SARs to become fully vested and immediately exercisable; (ii) cause all outstanding Restricted Shares to become non-forfeitable; (iii) cancel any Option in exchange for an option to purchase common stock of any successor corporation, which new option satisfies the requirements of Treas. Reg. ss. 1.425-1(a)(4)(i) (without regard to whether the original Option was intended to be an Incentive Stock Option), (iv) cancel any Restricted Shares in exchange for a restricted shares of the common stock of any successor corporation, (v) redeem any Restricted Share for cash and/or other substitute consideration with a value equal to the Fair Market Value of an unrestricted Share on the date of the Change in Control, and/or (vi) cancel any Option or SAR in exchange for cash and/or other substitute consideration with a value equal to the (A) the number of Shares subject to that Option or SAR, multiplied by (B) the difference between the Fair Market Value per Share on the date of the Change in Control and the exercise price of that Option or SAR.

4. ELIGIBILITY.

Employees, directors, consultants, and other individuals who provide services to the Company or its Subsidiaries are eligible to be granted Awards. Persons who are not employees of the Company or a Subsidiary are eligible to be granted Awards, but are not eligible to be granted Incentive Stock Options.

5. OPTIONS.

Options may be either: (i) Incentive Stock Options or (ii) Non-Qualified Stock Options. The Award Agreement evidencing any Option will incorporate the following terms and conditions and may contain such additional terms and conditions (not inconsistent with the terms of this Plan) as the Board deems appropriate, in its sole discretion:

(a) Option Price. The exercise price per Share purchasable under a Non-Qualified Stock Option will be determined by the Board. The exercise price per Share purchasable under an Incentive Stock Option will not be less than 100% of the Fair Market Value of one Share on the date of the grant. However, any Incentive Stock Option granted to any Participant who, at the time the Option is granted, owns more than 10% of the voting power of all classes of shares

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of the Company or of a Subsidiary will have an exercise price per Share of not less than 110% of Fair Market Value of one Share on the date of the grant.

(b) Option Term. The term of each Option will be fixed by the Board, but no Option will be exercisable more than ten (10) years after the date the Option is granted. However, any Incentive Stock Option granted to any Participant who, at the time such Option is granted, owns more than 10% of the voting power of all classes of shares of the Company or of a Subsidiary may not have a term of more than five (5) years. No Option may be exercised by any person after expiration of the term of the Option.

(c) Method of Exercise. Subject to the terms of the applicable Award Agreement and the termination provisions set forth in Section 7, Options may be exercised in whole or in part at any time and from time to time during the term of the Option, by giving written notice of exercise to the Company specifying the number of Shares to be purchased. Such notice will be accompanied by payment in full of the purchase price, either by certified or bank check, or such other means as the Board may accept. As determined by the Board, in its sole discretion, at or after grant, payment in full or in part of the exercise price of an Option may be made in the form of previously acquired Shares based on the Fair Market Value of the Shares on the date the Option is exercised.

No Shares will be issued upon exercise of an Option until full payment therefore has been made. A Participant will not have the right to distributions or dividends or any other rights of a shareholder with respect to Shares subject to the Option until the Participant has given written notice of exercise, has paid in full for such Shares, and, if requested, has given the representation described in Section 11(a) hereof.

(d) Incentive Stock Option Limitations. In the case of an Incentive Stock Option, the aggregate Fair Market Value (determined as of the time of grant) of the Shares with respect to which Incentive Stock Options are exercisable for the first time by the Participant during any calendar year under the Plan and/or any other plan of the Company or any Subsidiary will not exceed $100,000. For purposes of applying the foregoing limitation, Incentive Stock Options will be taken into account in the chronological order in which they were granted. Any Option not meeting such limitation will be treated for all purposes as a Non-Qualified Stock Option.

(e) Termination of Employment. Unless otherwise specified in the applicable Award Agreement, Options will be subject to the terms of Section 7 with respect to exercise following termination of employment.

(f) Transferability of Options. Except as may otherwise be specifically determined by the Board with respect to a particular Option, no Option will be transferable by the Participant other than by will or by the laws of descent and distribution, and all Options will be exercisable, during the Participant's lifetime, only by the Participant or, in the event of his Disability, by his personal representative.

6. STOCK APPRECIATION RIGHTS.

(a) Grant. The grant of an SAR provides the holder the right to receive the appreciation in value of Shares between the date of grant and the date of exercise. SARs may be

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granted alone ("Stand-Alone SARs") or in conjunction with all or part of any Option ("Tandem SARs"). In the case of a Non-Qualified Stock Option, a Tandem SAR may be granted either at or after the time of the grant of such Option. In the case of an Incentive Stock Option, a Tandem SAR may be granted only at the time of the grant of such Option.

(b) Exercise.

(i) Tandem SARs. A Tandem SAR or applicable portion thereof will terminate and no longer be exercisable upon the termination or exercise of the related Option or portion thereof, except that, unless otherwise determined by the Board, in its sole discretion at the time of grant, a Tandem SAR granted with respect to less than the full number of Shares covered by a related Option will be reduced only after such related Option is exercised or otherwise terminated with respect to the number of Shares not covered by the Tandem SAR.

A Tandem SAR may be exercised by a Participant by surrendering the applicable portion of the related Option, only at such time or times and to the extent that the Option to which such Tandem SAR relates will be exercisable in accordance with the provisions of Section 5 and this Section 6. Options which have been so surrendered, in whole or in part, will no longer be exercisable to the extent the related Tandem SARs have been exercised.

Upon the exercise of a Tandem SAR, a Participant will be entitled to receive, upon surrender to the Company of all (or a portion) of an Option in exchange for cash and/or Shares, an amount equal to the excess of (A) the Fair Market Value, as of the date such Option (or such portion thereof) is surrendered, of the Shares covered by such Option (or such portion thereof) over (B) the aggregate exercise price of such Option (or such portion thereof).

Upon the exercise of a Tandem SAR, the Option or part thereof to which such Tandem SAR is related, will be deemed to have been exercised for the purpose of the limitation set forth in Section 3 of the Plan on the number of Shares to be issued under the Plan, but only to the extent of the number of Shares issued under the Tandem SAR at the time of exercise based on the value of the Tandem SAR at such time.

A Tandem SAR may be exercised only if and when the Fair Market Value of the Shares subject to the Option exceeds the exercise price of such Option.

(ii) Stand-Alone SARs. A Stand-Alone SAR may be exercised by a Participant giving notice of intent to exercise to the Company, provided that all or a portion of such Stand-Alone SAR will have become vested and exercisable as of the date of exercise.

Upon the exercise of a Stand-Alone SAR, a Participant will be entitled to receive, in either cash and/or Shares, an amount equal to the excess, if any, of (A) the Fair Market Value, as of the date such SAR (or portion of such SAR) is exercised, of the Shares covered by such SAR (or portion of such SAR) over (B) the Fair Market Value of the Shares covered by such SAR
(or a portion of such SAR) as of the date such SAR (or a portion of such SAR)
was granted.

(c) Terms and Conditions. The Award Agreement evidencing any SAR will incorporate the following terms and conditions and will contain such additional terms and

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conditions, not inconsistent with the terms of the Plan, as the Board deems appropriate in its sole and absolute discretion:

(i) Term of SAR. Unless otherwise specified in the Award Agreement, the term of a Tandem SAR will be identical to the term of the associated Option, and the term of a Stand-Alone SAR will be ten (10) years.

(ii) Exercisability. SARs will vest and become exercisable at such time or times and subject to such terms and conditions as will be determined by the Board at the time of grant; provided that, unless otherwise specified in the Award Agreement, a Tandem SAR will vest and become exercisable in the same manner and at the same time as the associated Option.

(iii) Termination of Employment. Unless otherwise specified in the Award Agreement, SARs will be subject to the terms of Section 7 with respect to exercise upon termination of employment.

7. TERMINATION OF SERVICE.

Unless otherwise specified with respect to a particular Award, Options or SARs granted hereunder will remain exercisable after termination of employment only to the extent specified in this Section 7.

(a) Termination by Reason of Death. If a Participant's service with the Company or any Subsidiary terminates by reason of death, any Option or SAR held by such Participant may thereafter be exercised, to the extent then exercisable or on such accelerated basis as the Board may determine, at or after grant, by the legal representative of the estate or by the legatee of the Participant under the will of the Participant, for a period expiring (i) at such time as may be specified by the Board at or after the time of grant, or (ii) if not specified by the Board, then one (1) year from the date of death, or (iii) if sooner than the applicable period specified under (i) or (ii) above, then upon the expiration of the stated term of such Option or SAR.

(b) Termination by Reason of Disability. If a Participant's service with the Company or any Subsidiary terminates by reason of Disability, any Option or SAR held by such Participant may thereafter be exercised by the Participant or his personal representative, to the extent it was exercisable at the time of termination, or on such accelerated basis as the Board may determine at or after grant, for a period expiring (i) at such time as may be specified by the Board at or after the time of grant, or (ii) if not specified by the Board, then one
(1) year from the date of termination of service, or (iii) if sooner than the applicable period specified under (i) or (ii) above, then upon the expiration of the stated term of such Option or SAR.

(c) Cause. If a Participant's service is terminated for Cause: (i) any Option or SAR not already exercised will be immediately and automatically forfeited as of the date of such termination, and (ii) any Shares for which the Company has not yet delivered share certificates will be immediately and automatically forfeited and the Company will refund to the Participant the Option exercise price paid for such Shares, if any.

(d) Other Termination. If a Participant's service with the Company or any Subsidiary terminates for any reason other than death, Disability, or Cause, any Option or SAR held by such

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Participant may thereafter be exercised by the Participant, to the extent it was exercisable at the time of such termination or on such accelerated basis as the Board may determine at or after the time of grant, for a period expiring at such time as may be specified by the Board at or after the time of grant, but in no event later than the expiration of the stated term of such Option or SAR; provided, however, that if the Board does not specifically provide for any post-termination exercise period, then any Option or SAR held by such terminated Participant will expire immediately upon the date of such termination.

8. RESTRICTED SHARES.

(a) Issuance. Restricted Shares may be issued either alone or in conjunction with other Awards. The Board will determine the time or times within which Restricted Shares may be subject to forfeiture, and all other conditions of such Awards.

(b) Awards and Certificates. The Award Agreement evidencing the grant of any Restricted Shares will contain such terms and conditions, not inconsistent with the terms of the Plan, as the Board deems appropriate in its sole and absolute discretion. The prospective recipient of an Award of Restricted Shares will not have any rights with respect to such Award, unless and until such recipient has executed an Award Agreement and has delivered a fully executed copy thereof to the Company, and has otherwise complied with the applicable terms and conditions of such Award. The purchase price for Restricted Shares may, but need not, be zero.

A share certificate will be issued in connection with each Award of Restricted Shares. Such certificate will be registered in the name of the Participant receiving the Award and will bear the following legend and/or any other legend required by this Plan, the Award Agreement, the Company's shareholders' agreement, if any, and any applicable law:

THE TRANSFERABILITY OF THIS CERTIFICATE AND THE SHARES REPRESENTED HEREBY ARE SUBJECT TO THE TERMS AND CONDITIONS OF THE KIRKLAND'S, INC. 2002 INCENTIVE PLAN AND AN AGREEMENT ENTERED INTO BETWEEN THE REGISTERED OWNER AND KIRKLAND'S, INC. COPIES OF THAT PLAN AND AGREEMENT ARE ON FILE IN THE PRINCIPAL OFFICES OF KIRKLAND'S, INC. AND WILL BE MADE AVAILABLE TO THE HOLDER OF THIS CERTIFICATE WITHOUT CHARGE UPON REQUEST TO THE SECRETARY OF THE COMPANY.

Share certificates evidencing Restricted Shares be held in custody by the Company or in escrow by an escrow agent until the restrictions thereon have lapsed. As a condition of any Restricted Share award, the Participant may be required to deliver to the Company a share power, endorsed in blank, relating to the Shares covered by such Award.

(c) Restrictions and Conditions. The Restricted Shares awarded pursuant to this Section 8 will be subject to the following restrictions and conditions:

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(i) During a period commencing with the date of an Award of Restricted Shares and ending at such time or times as specified by the Board (the "Restriction Period"), the Participant will not be permitted to sell, transfer, pledge, assign or otherwise encumber Restricted Shares awarded under the Plan. The Board may condition the lapse of restrictions on Restricted Shares upon the continued employment or service of the recipient, the attainment of specified individual or corporate performance goals, or such other factors as the Board may determine, in its sole and absolute discretion.

(ii) Except as provided in this Paragraph (ii) or Section 8(c)(i), once the Participant has been issued a certificate or certificates for Restricted Shares, the Participant will have, with respect to the Restricted Shares, all of the rights of a shareholder of the Company, including the right to vote the Shares, and the right to receive any cash distributions or dividends. The Board, in its sole discretion, as determined at the time of award, may permit or require the payment of cash distributions or dividends to be deferred and, if the Board so determines, reinvested in additional Restricted Shares to the extent Shares are available under Section 3 of the Plan. Any distributions or dividends paid in the form of securities with respect to Restricted Shares will be subject to the same terms and conditions as the Restricted Shares with respect to which they were paid, including, without limitation, the same Restriction Period.

(iii) Subject to the applicable provisions of the Award Agreement, if a Participant's service with the Company terminates prior to the expiration of the Restriction Period, all of that Participant's Restricted Shares which then remain subject to forfeiture will then be forfeited automatically.

(iv) If and when the Restriction Period expires without a prior forfeiture of the Restricted Shares subject to such Restriction Period (or if and when the restrictions applicable to Restricted Shares lapse pursuant to Sections 3(d)), the certificates for such Shares will be replaced with new certificates, without the portion restrictive legends described in Section 8(b) applicable to such lapsed restrictions, and such new certificates will be promptly delivered to the Participant, the Participant's representative (if the Participant has suffered a Disability), or the Participant's estate or heir (if the Participant has died).

9. AMENDMENTS AND TERMINATION.

The Board may amend, alter or discontinue the Plan at any time, but, except as otherwise provided in Section 3(d) of the Plan, no amendment, alteration or discontinuation will be made that would impair the rights of a Participant with respect to an Award that is outstanding under the Plan without the Participant's consent, or that, without the approval of such amendment within one year (365 days) of its adoption by the Board, by a majority of the votes cast at a duly held shareholder meeting at which a quorum representing a majority of the Company's outstanding voting shares is present (either in person or by proxy), would: (i) increase the total number of Shares reserved for the purposes of the Plan (except as otherwise provided in Section 3(c)), or (ii) change the persons or class of persons eligible to receive Awards.

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10. UNFUNDED STATUS OF PLAN.

The Plan is intended to be "unfunded." With respect to any payments not yet made to a Participant by the Company, nothing contained herein will give any such Participant any rights that are greater than those of a general creditor of the Company. In its sole discretion, the Board may authorize the creation of grantor trusts or other arrangements to meet the obligations created under the Plan to deliver Shares or payments in lieu of Shares or with respect to Awards.

11. GENERAL PROVISIONS.

(a) The Board may require any Participant to represent to and agree with the Company in writing that the Participant is acquiring securities of the Company for investment purposes and without a view to distribution thereof and as to such other matters as the Board believes are appropriate. The certificate evidencing any Award and any securities issued pursuant thereto may include any legend which the Board deems appropriate to reflect any restrictions on transfer and compliance with securities laws. All certificates for Shares or other securities delivered under the Plan will be subject to such share-transfer orders and other restrictions as the Board may deem advisable under the rules, regulations, and other requirements of the Securities Act of 1933, as amended, the Exchange Act, any stock exchange upon which the Shares are then listed, and any other applicable Federal or state securities laws, and the Board may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions.

(b) Nothing contained in the Plan will prevent the Board from adopting other or additional compensation arrangements, subject to shareholder approval if such approval is required; and such arrangements may be either generally applicable or applicable only in specific cases.

(c) The adoption of the Plan will not confer upon any person the right to continued employment or engagement by the Company or such Subsidiary, nor will it interfere in any way with the right of the Company or such Subsidiary to terminate the employment or engagement of any of its service providers at any time.

(d) No later than the date as of which an amount first becomes includable in the gross income of the Participant for Federal income tax purposes with respect to any Award, the Participant will pay to the Company, or make arrangements satisfactory to the Board regarding the payment, of any Federal, state or local taxes of any kind required by law to be withheld with respect to such amount. Unless otherwise determined by the Board, the minimum required withholding obligations may be settled with Shares, including Shares that are part of the Award that gives rise to the withholding requirement. The obligations of the Company under this Plan are conditioned on such payment or arrangements and the Company will, to the extent permitted by law, have the right to deduct any such taxes from any payment otherwise due to the Participant.

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12. EFFECTIVE DATE OF PLAN.

This Plan will become effective on the date that it is adopted by the Board; provided, however, that all Options intended to be Incentive Stock Options will automatically be converted into Non-Qualified Stock Options if the Plan is not approved by the Company's stockholders within one year (365 days) of its adoption by the Board, by a majority of the votes cast at a duly held shareholder meeting at which a quorum representing a majority of the Company's outstanding voting shares is present, either in person or by proxy.

13. TERM OF PLAN.

This Plan will continue in effect until terminated in accordance with
Section 9; provided, however, that no Incentive Stock Option will be granted hereunder on or after the tenth (10th) anniversary of the date of shareholder approval of the Plan; but provided further, that Incentive Stock Options granted prior to such tenth (10th) anniversary may extend beyond that date.

14. INVALID PROVISIONS.

In the event that any provision of this Plan is found to be invalid or otherwise unenforceable under any applicable law, such invalidity or unenforceability will not be construed as rendering any other provisions contained herein as invalid or unenforceable, and all such other provisions will be given full force and effect to the same extent as though the invalid or unenforceable provision was not contained herein.

15. GOVERNING LAW.

This Plan and all Awards made and actions taken thereunder will be governed by and construed in accordance with the laws and judicial decisions of the State of Tennessee, without regard to the application of the principles of conflicts of laws.

16. BOARD ACTION.

Notwithstanding anything to the contrary set forth in this Plan, any and all actions of the Board taken under or in connection with this Plan and any agreements, instruments, documents, certificates or other writings entered into, executed, granted, issued and/or delivered pursuant to the terms hereof, will be subject to and limited by any and all votes, consents, approvals, waivers or other actions of all or certain stockholders of the Company or other persons required by:

(i) the Company's Articles of Incorporation (as the same may be amended and/or restated from time to time);

(ii) the Company's Bylaws (as the same may be amended and/or restated from time to time); and

(iii) any other agreement, instrument, document or writing now or hereafter existing, between or among the Company and its stockholders or other persons (as the same may be amended from time to time).

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17. NOTICES. Any notice to be given to the Company pursuant to the provisions of the Plan will be addressed to the Company in care of its Secretary (or such other person as the Company may designate from time to time) at its principal executive office, and any notice to be given to a Participant will be delivered personally or addressed to him or her at the address given beneath his or her signature on his or her Award Agreement, or at such other address as such Participant may hereafter designate in writing to the Company. Any such notice will be deemed duly given on the date and at the time delivered via personal, courier or recognized overnight delivery service or, if sent via telecopier, on the date and at the time telecopied with confirmation of delivery or, if mailed, on the date five (5) days after the date of the mailing (which will be by regular, registered or certified mail). Delivery of a notice by telecopy (with confirmation) will be permitted and will be considered delivery of a notice notwithstanding that it is not an original that is received.

ADOPTION AND APPROVAL OF PLAN

DATE PLAN ADOPTED BY BOARD: April 17, 2002
DATE PLAN APPROVED BY STOCKHOLDERS: May 24, 2002
EFFECTIVE DATE OF PLAN: _____________

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EXHIBIT 10.12

KIRKLAND'S, INC.
2002 EMPLOYEE STOCK PURCHASE PLAN

1. Purpose and Effective Date.

(a) Purpose. The purpose of the Plan is to provide Eligible Employees with an opportunity to increase their interest in the success of the Company by purchasing Stock from the Company on favorable terms and to pay for such purchases through payroll deductions. The Plan is intended to satisfy the requirements of Section 423 of the Code and will be interpreted accordingly.

(b) Effective Date. The Plan is effective as of the first date that Stock is sold to the public pursuant to an effective registration statement filed by the Company with the Securities and Exchange Commission.

2. Administration.

(a) Committee Composition. The Plan will be administered by the Committee. The Committee will consist exclusively of one or more directors of the Company, who will be appointed by the Board.

(b) Committee Responsibilities. The Committee will interpret the Plan and make all other policy decisions relating to the operation of the Plan. The Committee may adopt such rules, guidelines and forms as it deems appropriate to implement the Plan. The Committee's determinations under the Plan will be final and binding on all persons.

3. Enrollment And Participation.

(a) Offering Periods. While the Plan is in effect, two overlapping Offering Periods will commence in each calendar year. The Offering Periods will consist of the 24-month periods commencing on each February 1st and August 1st, except that the first Offering Period will commence on the date of the IPO and end on July 31, 2004.

(b) Accumulation Periods. While the Plan is in effect, two Accumulation Periods will commence in each calendar year. The Accumulation Periods will consist of the six-month periods commencing on each February 1st and August 1st, except that the first Accumulation Period will commence on the date of the IPO and end on July 31, 2002.

(c) Enrollment. Any individual who, on the day preceding the first day of an Offering Period, qualifies as an Eligible Employee may elect to become a Participant in the Plan for such Offering Period by executing the enrollment form prescribed for this purpose by the Committee. The enrollment form must be filed with the Company at the prescribed location at least 15 days prior to the commencement of such Offering Period.

(d) Duration of Participation. Once enrolled in the Plan, a Participant will continue to participate in the Plan until he or she ceases to be an Eligible Employee, withdraws from the Plan under Section 5(a) or reaches the end of the Accumulation Period in which his or her employee contributions were discontinued under Section 4(d) or 8(b). A Participant who discontinued employee contributions under

Section 4(d) or withdrew from the Plan under Section 5(a) may again become a Participant, if he or she then is an Eligible Employee, by following the procedure described in Subsection (c) above. A Participant whose employee contributions were discontinued automatically under Section 8(b) will automatically resume participation at the beginning of the earliest Accumulation Period ending in the next calendar year, if he or she then is an Eligible Employee.

(e) Applicable Offering Period. For purposes of calculating the Purchase Price under Section 7(b), the applicable Offering Period will be determined as follows:

(i) Once a Participant is enrolled in the Plan for an Offering Period, such Offering Period will continue to apply to him or her until the earliest of (A) the end of such Offering Period, (B) the end of his or her participation under Subsection (d) above or (C) re-enrollment in a subsequent Offering Period under Paragraph (ii) below.

(ii) If the Fair Market Value of Stock on the last trading day before the commencement of the Offering Period in which the Participant is enrolled is higher than on the last trading day before the commencement of any subsequent Offering Period, the Participant will automatically be re-enrolled for such subsequent Offering Period.

(iii) When a Participant reaches the end of an Offering Period but his or her participation is to continue, then such Participant will automatically be re-enrolled for the Offering Period that commences immediately after the end of the prior Offering Period.

4. Employee Contributions.

(a) Frequency of Payroll Deductions. A Participant may purchase shares of Stock under the Plan solely by means of payroll deductions. Payroll deductions, as designated by the Participant pursuant to Subsection (b) below, will occur on each payday during participation in the Plan.

(b) Amount of Payroll Deductions. An Eligible Employee will designate on the enrollment form the portion of his or her Compensation that he or she elects to have withheld for the purchase of Stock. Such portion may be any whole percentage of the Eligible Employee's Compensation not less than 1% and not more than 15%.

(c) Changing Withholding Rate. If a Participant wishes to change the rate of payroll withholding, he or she may do so by filing a new enrollment form with the Company at the prescribed location at any time. The new withholding rate will be effective as soon as reasonably practicable after such form has been received by the Company.

(d) Discontinuing Payroll Deductions. If a Participant wishes to discontinue employee contributions entirely, he or she may do so by filing a new enrollment form with the Company at the prescribed location at any time. Payroll withholding will cease as soon as reasonably practicable after such form has been received by the Company. (In addition, employee contributions may be discontinued automatically pursuant to Section 8(b).) A Participant who has discontinued employee contributions may resume such contributions by filing a new enrollment form with the Company at the prescribed location. Payroll withholding will resume as soon as reasonably practicable after such form has been received by the Company.

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5. Withdrawals and Re-enrollment.

(a) Withdrawals. A Participant may elect to withdraw from the Plan by filing the prescribed form with the Company at the prescribed location at any time before the last day of an Accumulation Period. As soon as reasonably practicable thereafter, payroll deductions will cease and the entire amount credited to the Participant's Plan Account will be refunded to him or her in cash, without interest. No partial withdrawals will be permitted.

(b) Re-enrollment. A former Participant who has withdrawn from the Plan will not be a Participant until he or she re-enrolls in the Plan under
Section 3(c). Re-enrollment may be effective only at the commencement of an Offering Period.

6. Change in Employment Status.

(a) Termination of Employment. Termination of employment as an Eligible Employee for any reason, including death, will be treated as an automatic withdrawal from the Plan under Section 5(a). (A transfer from one Participating Company to another will not be treated as a termination of employment.)

(b) Leave of Absence. For purposes of the Plan, employment will not be deemed to terminate when the Participant goes on a military leave, a sick leave or another bona fide leave of absence, if the leave was approved by the Company in writing. Employment, however, will be deemed to terminate 90 days after the Participant goes on a leave, unless a contract or statute guarantees his or her right to return to work. Employment will be deemed to terminate in any event when the approved leave ends, unless the Participant immediately returns to work.

(c) Death. In the event of the Participant's death, the amount credited to his or her Plan Account will be paid to a beneficiary designated by him or her for this purpose on the prescribed form or, if none, to the Participant's estate. Such form will be valid only if it was filed with the Company at the prescribed location before the Participant's death.

7. Plan Accounts and Purchase of Shares.

(a) Plan Accounts. The Company will maintain a Plan Account on its books in the name of each Participant. Whenever an amount is deducted from the Participant's Compensation under the Plan, such amount will be credited to the Participant's Plan Account. Amounts credited to Plan Accounts will not be trust funds and may be commingled with the Company's general assets and applied to general corporate purposes. No interest will be credited to Plan Accounts.

(b) Purchase Price. The Purchase Price for each share of Stock purchased at the close of an Accumulation Period will be 85% of the lower of:

(i) the Fair Market Value on the last day of such Accumulation Period; or

(ii) the Fair Market Value on the first day of the applicable Offering Period (as determined under Section 3(e)).

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(c) Number of Shares Purchased. As of the last day of each Accumulation Period, each Participant will be deemed to have elected to purchase the number of shares of Stock calculated in accordance with this Subsection (c), unless the Participant has previously elected to withdraw from the Plan in accordance with Section 5(a). The amount then in the Participant's Plan Account will be divided by the Purchase Price, and the number of shares that results will be purchased from the Company with the funds in the Participant's Plan Account. The foregoing notwithstanding, no Participant will purchase more than
[25,000] shares of Stock with respect to any Accumulation Period nor more than the amounts of Stock set forth in Sections 8(b).

(d) Available Shares Insufficient. If the aggregate number of shares that all Participants elect to purchase during an Accumulation Period exceeds the maximum number of shares remaining available for issuance under Section
13(a), then the number of shares to which each Participant is entitled will be determined by multiplying the number of shares available for issuance by a fraction, the numerator of which is the number of shares that such Participant has elected to purchase and the denominator of which is the number of shares that all Participants have elected to purchase.

(e) Issuance of Stock. Certificates representing the shares of Stock purchased by a Participant under the Plan will be issued to him or her as soon as reasonably practicable after the close of the applicable Accumulation Period, except that the Committee may determine that such shares will be held for each Participant's benefit by a broker designated by the Committee (unless the Participant has elected that certificates be issued to him or her). Shares may be registered in the name of the Participant or jointly in the name of the Participant and his or her spouse as joint tenants with right of survivorship or as community property.

(f) Unused Cash Balances. An amount remaining in the Participant's Plan Account that represents the Purchase Price for any fractional share will be carried over in the Participant's Plan Account to the next Accumulation Period. Any amount remaining in the Participant's Plan Account that represents the Purchase Price for whole shares that could not be purchased by reason of Subsection (c) above, Section 8(b) or Section 13(a) will be refunded to the Participant in cash, without interest.

8. Limitations on Stock Ownership.

(a) Five Percent Limit. Any other provision of the Plan notwithstanding, no Participant will be granted a right to purchase Stock under the Plan if such Participant, immediately after his or her election to purchase such Stock, would own stock possessing more than 5% of the total combined voting power or value of all classes of stock of the Company or any parent or Subsidiary of the Company. For purposes of this Subsection (a), the following rules will apply:

(i) Ownership of stock will be determined after applying the attribution rules of Section 424(d) of the Code; and

(ii) Each Participant will be deemed to own any stock that he or she has a right or option to purchase under this or any other plan or arrangement.

(b) Dollar Limit. Any other provision of the Plan notwithstanding, no Participant will purchase Stock with a Fair Market Value in excess of the following limit:

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(i) In the case of Stock purchased during an Offering Period that commenced in the current calendar year, the limit will be equal to (A) $25,000 minus (B) the Fair Market Value of the Stock that the Participant previously purchased in the current calendar year (under this Plan and all other employee stock purchase plans of the Company or any parent or Subsidiary of the Company).

(ii) In the case of Stock purchased during an Offering Period that commenced in the immediately preceding calendar year, the limit will be equal to (A) $50,000 minus (B) the Fair Market Value of the Stock that the Participant previously purchased (under this Plan and all other employee stock purchase plans of the Company or any parent or Subsidiary of the Company) in the current calendar year and in the immediately preceding calendar year.

(iii) In the case of Stock purchased during an Offering Period that commenced in the second preceding calendar year, the limit will be equal to (A) $75,000 minus (B) the Fair Market Value of the Stock that the Participant previously purchased (under this Plan and all other employee stock purchase plans of the Company or any parent or Subsidiary of the Company) in the current calendar year and in the two preceding calendar years.

9. Rights Not Transferable. The rights of any Participant under the Plan, or any Participant's interest in any Stock or moneys to which he or she may be entitled under the Plan, will not be transferable by voluntary or involuntary assignment or by operation of law, or in any other manner other than by beneficiary designation or the laws of descent and distribution. If a Participant in any manner attempts to transfer, assign or otherwise encumber his or her rights or interest under the Plan, other than by beneficiary designation or the laws of descent and distribution, then such act will be treated as an election by the Participant to withdraw from the Plan under Section 5(a).

10. No Rights as an Employee. Nothing in the Plan or in any right granted under the Plan will confer upon the Participant any right to continue in the employ of a Participating Company for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Participating Companies or of the Participant, which rights are hereby expressly reserved by each, to terminate his or her employment at any time and for any reason, with or without cause.

11. No Rights as a Stockholder. A Participant will have no rights as a stockholder with respect to any shares of Stock that he or she may have a right to purchase under the Plan until such shares have been purchased on the last day of the applicable Accumulation Period.

12. Securities Law Requirements. Shares of Stock will not be issued under the Plan unless the issuance and delivery of such shares comply with (or are exempt from) all applicable requirements of law, including (without limitation) the Securities Act of 1933, as amended, the rules and regulations promulgated thereunder, state securities laws and regulations, and the regulations of any stock exchange or other securities market on which the Company's securities may then be traded.

13. Stock Offered Under the Plan.

(a) Authorized Shares. The aggregate number of shares of Stock available for purchase under the Plan will be 500,000, subject to adjustment pursuant to this Section 13.

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(b) Adjustments. The aggregate number of shares of Stock offered under the Plan, the share limit described in Section 7(c) and the price of shares that any Participant has elected to purchase will be adjusted proportionately by the Committee for any increase or decrease in the number of outstanding shares of Stock resulting from a subdivision or consolidation of shares or the payment of a stock dividend, any other increase or decrease in such shares effected without receipt or payment of consideration by the Company, the distribution of the shares of a Subsidiary to the Company's stockholders or a similar event.

(c) Reorganizations. Any other provision of the Plan notwithstanding, immediately prior to the effective time of a Corporate Reorganization, the Offering Period and Accumulation Period then in progress will terminate and shares will be purchased pursuant to Section 7, unless the Plan is assumed by the surviving corporation or its parent corporation pursuant to the plan of merger or consolidation. The Plan will in no event be construed to restrict in any way the Company's right to undertake a dissolution, liquidation, merger, consolidation or other reorganization.

14. Amendment or Discontinuance. The Board will have the right to amend, suspend or terminate the Plan at any time and without notice. Except as provided in Section 13, any increase in the aggregate number of shares of Stock to be issued under the Plan will be subject to approval by a vote of the stockholders of the Company.

15. Definitions. Capitalized terms used herein have the meanings set forth in this Section 15.

(a) "Accumulation Period" means a period during which contributions may be made toward the purchase of Stock under the Plan, as determined pursuant to Section 3(b).

(b) "Board" means the Board of Directors of the Company, as constituted from time to time.

(d) "Committee" means a committee of the Board, as described in
Section 2.

(e) "Company" means Kirkland's, Inc.

(f) "Compensation" means (i) the total compensation paid in cash to a Participant by a Participating Company, including salaries, wages, bonuses, incentive compensation, commissions, overtime pay and shift premiums, plus (ii) any pre-tax contributions made by the Participant under Section 401(k) or 125 of the Code. "Compensation" will exclude all non-cash items, moving or relocation allowances, cost-of-living equalization payments, car allowances, tuition reimbursements, imputed income attributable to cars or life insurance, severance pay, fringe benefits, contributions or benefits received under employee benefit plans, income attributable to the exercise of stock options, and similar items. The Committee will determine whether a particular item is included in Compensation.

(g) "Corporate Reorganization" means:

(i) The consummation of a merger or consolidation of the Company with or into another entity, or any other corporate reorganization; or

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(ii) The sale, transfer or other disposition of all or substantially all of the Company's assets or the complete liquidation or dissolution of the Company.

(h) "Eligible Employee" means any employee of a Participating Company who meets both of the following requirements:

(i) His or her customary employment is for more than five months per calendar year and for more than 20 hours per week; and

(ii) He or she has been an employee of a Participating Company for at least 12 consecutive months.

(i) "Exchange Act" means the Securities Exchange Act of 1934, as amended.

(j) "Fair Market Value" means, as of any specified date:

(i) the closing price of the Stock as reported on the principal nationally recognized stock exchange on which Stock is traded, or if no price is are reported on that date, the closing price on the last preceding date on which there were reported Stock prices;

(ii) if the Stock is not listed or admitted to unlisted trading privileges on a nationally recognized stock exchange, the closing price of the Stock on that date as reported by The Nasdaq Stock Market, or if no price is reported for that date, the closing price of the Stock on the last preceding date for which there were reported Stock prices; or

(iii) if the Stock is not listed or admitted to unlisted trading privileges on a nationally recognized stock exchange or traded on The Nasdaq Stock Market, the fair market value of one share of Stock, as determined by the Board in its discretion, which determination will be conclusive and binding on all persons.

Notwithstanding the foregoing, the Fair Market Value on the first day of the first Offering Period will be equal to the price set forth in the final prospectus included in the Form S-1 filed with the Securities and Exchange Commission in connection with the IPO.

(k) "IPO" means the first offering of Stock to the public pursuant to an effective registration statement filed by the Company with the Securities and Exchange Commission.

(l) "Offering Period" means a period with respect to which the right to purchase Stock may be granted under the Plan, as determined pursuant to
Section 3(a).

(m) "Participant" means an Eligible Employee who elects to participate in the Plan, as provided in Section 3(c).

(n) "Participating Company" means (i) the Company and (ii) each present or future Subsidiary designated by the Committee as a Participating Company.

(o) "Plan" means this Kirkland's, Inc. 2002 Employee Stock Purchase Plan, as amended from time to time.

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(p) "Plan Account" means the account established for each Participant pursuant to Section 7(a).

(q) "Purchase Price" means the price at which Participants may purchase Stock under the Plan, as determined pursuant to Section 7(b).

(r) "Stock" means the Common Stock of the Company.

(s) "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

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Exhibit 10.13

EXECUTION

AMENDED AND RESTATED SHAREHOLDERS AGREEMENT

among

KIRKLAND'S, INC.,

AND

THE OTHER PARTIES SPECIFIED HEREIN

Dated as of April 15, 2002

TABLE OF CONTENTS

SECTIONS                                                                                                        PAGE
                                                                                                                ----

1.     Certain Defined Terms......................................................................................3
2.     Prohibited Transfers.......................................................................................8
3.     Preemptive Rights.........................................................................................10
4.     Third Party Offers to Shareholders; Participation Rights..................................................12
5.     Stock Splits, Etc.........................................................................................16
6.     Joinder Requirements......................................................................................16
7.     Failure to Deliver Shares.................................................................................17
8.     Termination...............................................................................................17
9.     Registration Rights.......................................................................................18
10.    Financial Reports and Information.........................................................................18
11.    Company Governance Provisions.............................................................................18
12.    Specific Performance......................................................................................20
13.    Legend....................................................................................................20
14.    Notices...................................................................................................21
15.    Issuance of Stock by the Company..........................................................................23
16.    Entire Agreement and Amendments...........................................................................23
17.    Expenses..................................................................................................24
18.    Dividends.................................................................................................24
19.    Amendment to Charter......................................................................................24
20.    Governing Law; Successors and Assigns.....................................................................24
21.    Waivers...................................................................................................25
22.    Severability..............................................................................................25
23.    Captions..................................................................................................25
24.    Counterparts..............................................................................................25
25.    Attorney's Fees...........................................................................................25
26.    Parties Benefited.........................................................................................25
27.    Successors and Assigns....................................................................................25
28.    Prior Agreement Void......................................................................................25

AMENDED AND RESTATED SHAREHOLDERS AGREEMENT

THIS AMENDED AND RESTATED SHAREHOLDERS AGREEMENT (the "Agreement") amends and restates a Shareholders Agreement dated as of June 12, 1996, and is made as of the 15th day of April, 2002, by and among

- KIRKLAND HOLDINGS L.L.C., a Delaware limited liability company ("Holdings"),

- KIRKLAND'S, INC., a corporation incorporated under Tennessee law ("Kirkland's" or the "Company" or the "Representative"),

- SSM VENTURE PARTNERS, L.P.,

- JOSEPH R. HYDE, III,

- JOHNSTON C. ADAMS, JR.,

- JOHN H. PONTIUS,

- CT/KIRKLAND EQUITY PARTNERS, L.P.,

- R-H CAPITAL PARTNERS, L.P.,

- TCW/KIRKLAND EQUITY PARTNERS, L.P.,

- CAPITAL RESOURCE LENDERS II, L.P. ("CRL"),

- ALLIED CAPITAL CORPORATION ("Allied"),

- THE MARLBOROUGH CAPITAL INVESTMENT FUND, L.P. ("Marlborough"),

- CAPITAL TRUST INVESTMENTS, LTD. ("Capital Trust" and together with CRL, Allied, and Marlborough, the "Mezzanine Warrant Holders"),

- GLOBAL PRIVATE EQUITY II LIMITED PARTNERSHIP,

- ADVENT DIRECT INVESTMENT PROGRAM LIMITED PARTNERSHIP,

- ADVENT PARTNERS LIMITED PARTNERSHIP,

- CARL KIRKLAND,

- ROBERT KIRKLAND,

- ROBERT ALDERSON,

- THE AMY KATHERINE ALDERSON TRUST, (the "AKA Trust"),

- THE ALLISON LEIGH ALDERSON TRUST (the "ALA Trust"),

- THE CARL T. KIRKLAND GRANTOR RETAINED ANNUITY TRUST 2001-1 (the "CTK GRAT"), and

- STEVEN COLLINS (Carl Kirkland, Robert Kirkland, Robert Alderson, the AKA Trust, the ALA Trust, the CTK GRAT and Steven Collins being herein referred to collectively as the "Individual Investors").

WHEREAS, on June 12, 1996, Holdings, the Company, those companies then affiliated with the Company (collectively, the "Affiliated Companies") and certain of the Individual Investors consummated the transactions contemplated by a Recapitalization Agreement (the "Recapitalization Agreement") which, among other things, included the issuance by the Company and the Affiliated Companies of shares of Common Stock, Class A Preferred Stock, Class B Preferred Stock and Class C Preferred Stock in accordance with the terms of the Recapitalization Agreement;

WHEREAS, in connection with the Company's consummation of the transactions contemplated by that certain Senior Subordinated Note and Warrant Purchase Agreement dated on or about June 12, 1996, as amended and in effect as of the date hereof (the "Mezzanine Purchase Agreement"), pursuant to which the Mezzanine Warrant Holders loaned a total of $20,000,000 in subordinated debt to the Company and the Affiliated Companies and the Mezzanine Warrant Holders received warrants to purchase shares of Common Stock of the Company and the Affiliated Companies ("Mezzanine Warrants" and the shares subject to the Mezzanine Warrants, the "Mezzanine Warrant Shares");

WHEREAS, in connection with the transactions contemplated by the Recapitalization Agreement, the Company granted to the Management Investors options to purchase shares of Common Stock and the Company subsequently granted Reynolds C. Faulkner options to purchase shares of Common Stock, in each case pursuant to the Company's 1996 Executive Incentive and Non-Qualified Stock Option Plan and the respective option agreements governing such options (collectively, as the same may be amended hereafter, the "Option Agreements", and the shares underlying such options are referred to herein as the "Option Shares");

WHEREAS, on or about June 12, 1996, as an inducement to completion of the transactions contemplated by the Recapitalization Agreement and the Mezzanine Purchase Agreement discussed above, Holdings, the Company, the Mezzanine Warrant Holders and certain of the Individual Investors agreed to provide for certain restrictions with respect to the ownership and transfer of the shares of Stock owned by them and certain rights incident to the ownership of shares of Stock pursuant to the Shareholders Agreement dated as of June 12, 1996, as amended (the "Original Shareholders Agreement");

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WHEREAS, on or about December 31, 1999, (i) the Affiliated Companies merged with and into Kirkland's Stores, Inc., a wholly owned subsidiary of the Company (the Merger"), (ii) pursuant to the Merger the Mezzanine Warrants and the 1999 Warrants became exercisable only with respect to shares of Common Stock of the Company and the Class A Preferred Stock, the Class B Preferred Stock, and the Class C Preferred Stock remained issued and outstanding in the Company only, and (iii) the Company amended the Original Shareholders Agreement to reflect the Merger;

WHEREAS, in connection with the consummation of the transactions contemplated by a Securities Purchase Agreement dated on or about August 8, 2000 (the "Purchase Agreement"), the Company issued to the purchasers specified in the Purchase Agreement additional shares of Common Stock, shares of Class D Preferred Stock and warrants to purchase shares of Common Stock (the "2000 Warrants" and the shares subject to the 2000 Warrants, the "2000 Warrant Shares"); and

WHEREAS, the Company desires to hereby amend and restate the Original Shareholders Agreement, as amended, to incorporate into the scope of the Original Shareholders Agreement the Class D Preferred Stock, the 1999 Warrants, the 2000 Warrants, the 1999 Warrant Shares and the 2000 Warrant Shares, and otherwise reflect the Company's current capital structure.

NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and undertakings of the Company set forth below, the parties hereto, intending to be legally bound hereby, agree with each other as follows:

1. Certain Defined Terms. Capitalized terms used in this Agreement and not previously defined have the meanings set forth in this
Section 1, or are defined in the provisions of this Agreement identified in this Section 1.

(a) "Adjusted Common Equity Percentage" shall mean, with respect to a Shareholder, such Shareholder's Common Equity Percentage calculated without taking Offered Shares into account.

(b) "Advent" shall mean Advent International Corporation, a Delaware corporation, and any Affiliate of Advent International Corporation.

(c) "Affiliate" of a Person shall mean any Person which, directly or indirectly, controls, is controlled by, is under common control with, or under a common management agreement with, such Person. For purposes hereof (i) each Mezzanine Investor

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shall be deemed to be an Affiliate of each other Mezzanine Investor, (ii) the partners or shareholders of a Mezzanine Investor shall be deemed to be Affiliates of that Mezzanine Investor (but only to the extent of their pro rata interest therein), (iii) the members of Holdings shall be considered to be Affiliates of Holdings (but only to the extent of their pro rata interest therein).

(d) "Agreement" means this Shareholders Agreement, as the same may be amended from time to time in accordance herewith.

(e) "Bona Fide Offer" shall mean a bona fide written offer from any Person other than the Company to purchase any Securities owned by a Shareholder; provided, that if such offer includes an offer to purchase any Preferred Stock, the offer must set forth the aggregate stated value of Preferred Stock which the offeror desires to purchase, which may be accepted through the sale of shares of either Class A Preferred Stock, Class B Preferred Stock, Class C Preferred Stock or Class D Preferred Stock having an aggregate stated value equal to the amount set forth.

(f) "Common Equity Percentage" shall mean, as to any Shareholder, the percentage that (i) the outstanding shares of Common Stock then owned by such Shareholder and any shares of Common Stock issuable upon exercise of any warrants or Options, in each case which are fully vested and then owned by such Shareholder, is of (ii) the aggregate outstanding number of shares of Common Stock then owned by all of the Shareholders plus all shares of Common Stock issuable upon exercise of any warrants or Options, in each case which are fully vested and then owned by any Shareholder.

(g) "Common Shares" shall mean issued and outstanding shares of Common Stock.

(h) "Common Stock" shall mean the common stock, par value $.01 per share, of the Company.

(i) "Consulting Agreement" shall mean the Consulting Agreement by and between Robert Kirkland and the Company and dated on or about June 12, 1966, as the same may have been or may hereafter be amended.

(j) "Counterpart" shall mean a counterpart to this Agreement in the form of Exhibit A hereto, pursuant to the execution of which a Person shall become bound by all of the terms and conditions to this Agreement.

(k) "Equity" means all initial capital contributed to the Company by the Shareholders as of June 12, 1996, including in the form of continuing ownership as well as subsequent capital contributions by the Shareholders. For all purposes hereof (i) the Equity shall be considered to have a value of Forty-five Million Dollars ($45,000,000) as of June 12, 1996; (ii) shares of capital stock shall be valued without regard to voting rights, and (iii) the Class C Preferred Stock shall not be considered Equity.

(l) "Excluded Securities" shall mean, collectively:

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(i) All options available for grant under a Stock Option Plan and all shares of Common Stock purchaseable under a Stock Option Plan;

(ii) Common Stock to be issued as a stock dividend;

(iii) Common Stock issuable upon the exercise of warrants or rights or upon conversion or exchange of convertible or exchangeable securities;

(iv) Shares of any class of the Company's capital stock to be issued upon any subdivision, combination, stock split or reverse stock split of all the outstanding shares of such class of capital stock of the Company;

(v) Any securities to be issued by the Company pursuant to the acquisition by the Company of any Person by means of merger, stock purchase, reorganization, purchase of substantially all the assets or otherwise in which the Company, or the Shareholders of record immediately prior to the effective date of such transaction, directly or indirectly, own at least a majority of the voting power of the acquired or resulting entity after such transaction; provided, that such recipient(s) of shares of Stock execute(s) a Counterpart and agree(s) to be bound by the terms and conditions hereof; and

(vi) Any securities to be issued pursuant to a Public Offering.

(m) "Fully Diluted Common Stock" means the number of Common Shares plus the number of shares of Common Stock issuable upon conversion, exchange or exercise of other outstanding securities of the Company.

(n) "Management Investors" shall mean Carl Kirkland and Robert Alderson.

(o) "Mezzanine Investor" shall mean any Mezzanine Warrant Holder or any other Person who holds, from time to time, any Mezzanine Warrants or Warrant Shares, and who is or who becomes a party to this Agreement pursuant to the terms hereof.

(p) "Management Agreements" shall mean those letter agreements dated June 12, 1996, providing for employment of the Management Investors with the Company, as the same may have been or may hereafter be amended.

(q) "Management Pledge Agreement" shall mean the Management Pledge Agreement dated June 12, 1996, executed by certain of the Individual Investors in favor of the First National Bank of Boston, as Administrative Agent, as the same may have been or may hereafter be amended.

(r) "Options" shall mean incentive stock or non-qualified options granted pursuant to a Stock Option Plan, including without limitation the Options granted pursuant to the Option Agreements.

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(s) "Parent Pledge Agreement" shall mean the Parent Pledge Agreement dated June 12, 1996, executed by Holdings in favor of The First National Bank of Boston, as Administrative Agent, as the same may have been or may hereafter be amended.

(t) "Permitted Transferee" shall mean, with respect to any Individual Investor (i) such Person's spouse, (ii) any lineal descendant of such Person, (iii) spouses of such lineal descendants, (iv) trusts for the benefit of any such spouse, lineal descendant or spouse of a lineal descendant, or (v) organizations exempt from federal income taxation under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended, provided that such 501(c)(3) organizations shall only constitute Permitted Transferees where the Individual Investor Transfers Stock to such organization for purposes of permitting such organization either to (x) register and sell such Stock in a Public Offering, or (y) sell such Stock to either a Non-Selling Shareholder or a Third Party Offeror pursuant to Section 4 hereof. The reversion of Stock from a trust described in clause (iv) above to the Individual Investor who is the settlor of such trust shall also constitute a "Permitted Transfer."

(u) "Person" shall mean an individual, a sole proprietorship, a corporation, a partnership, limited liability company, limited liability partnership, a joint venture, an association, a trust, or any other entity or organization, including a government or a political subdivision, agency or instrumentality thereof.

(v) "Preferred Stock" shall mean the Class A Preferred Stock, the Class B Preferred Stock, the Class D Preferred Stock and, where applicable, the Class C Preferred Stock, of the Company.

(w) "Public Offering" shall mean the sale of shares of Common Stock in a registered underwritten public offering resulting in gross proceeds to the Company of at least Thirty Million Dollars ($30,000,000).

(x) "Securities" shall mean all shares of capital stock, options, warrants, notes, bonds or other equity or debt securities offered or sold by the Company from time to time on or after the date hereof. (y) "Shareholder" shall mean any Person who holds, from time to time, any Shares or Warrants, and who or which is or becomes a party to this Agreement pursuant to the terms hereof.

(z) "Shares" shall mean and include all issued and outstanding shares of Common Stock or Preferred Stock now owned or hereafter acquired by the Shareholders.

(aa) "Stock" shall mean and include all shares of Common Stock and Preferred Stock of the Company, including without limitation, shares of Common Stock issued, issuable or transferable on the exercise of Options, warrants, or other rights to acquire shares of Common Stock or on the conversion or exchange of securities convertible into or exchangeable for Common Stock, and all other securities of the Company which may be issued in exchange for

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or in respect of shares of Common Stock or Preferred Stock (whether by way of stock split, stock dividend, combination, reclassification, reorganization or any other means).

(bb) "Stock Option Plan" shall mean any Stock Option Plan adopted by the Company providing for the issuance of the shares of Common Stock to employees of the Company or Company subsidiaries.

(cc) "Transfer" shall mean any transfer of Stock, whether by sale, assignment, gift, will, devise, bequest, operation of the laws of descent and distribution, or in trust, pledge, hypothecation, mortgage, encumbrance or other disposition. The verb to "Transfer" shall mean to sell, assign, give, transfer (including by gift, will, devise, bequest, or operation of laws of descent and distribution, or in trust), pledge, hypothecate, mortgage, encumber or dispose of.

(dd) "Warrants" shall mean the Mezzanine Warrants, 1999 Warrants, 2000 Warrants or other warrants issued by the Company from time to time hereafter.

Other capitalized terms used in this Agreement have the definitions set forth in the following sections:

              Capitalized Term                        Section
              ----------------                        -------

10-Day Period                                        3(d)
30-Day Exercise Period                               4(c)
30-Day Period                                        3(b)
90 Day Period                                        3(f)
Accepting Shareholders                               3(d)
Allied                                               Preamble
Class A Preferred Stock                              Preamble
Class B Preferred Stock                              Preamble
Class C Preferred Stock                              Preamble
Class D Preferred Stock                              Preamble
Company                                              Preamble
Company Notice                                       4(b)
Company Option Period                                4(b)
Contingent Warrant Shares                            Preamble
CRL                                                  Preamble
CT                                                   Preamble
Exercise Notice                                      4(c)
Fair Market Value                                    6(d)
Final Purchase Notice                                4(f)
Final Remaining Shares                               4(g)(iv)
First Option                                         4(c)
First Refusal Notice                                 4(a)
Holdings                                             Preamble
Initiating Holders                                   6(a)

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Kirkland's                                           Preamble
Individual Investors                                 Preamble
Marlborough                                          Preamble
Mezzanine Purchase Agreement                         Preamble
Mezzanine Warrant Holders                            Preamble
Mezzanine Warrants                                   Preamble
Non-Selling Shareholders                             4(a)
Notice of Acceptance                                 3(c)
Notice of Refused Securities                         3(c)
Offer                                                3(b)
Offered A/B/D Preferred Shares                       4(g)(ii)(B)
Offered C Preferred Shares                           4(g)(ii)(C)
Offered Common Shares                                4(g)(ii)(A)
Offered Shares                                       4(a)
Outside Offer                                        3(f)
Participating Shareholder                            (4)(g)(i)
Participation Right                                  4(g)(ii)
Preemptive Offer                                     3(a)
Preferred A/B/D Value                                4(g)(ii)(B)
Preferred C Value                                    4(g)(ii)(C)
Preferred Initiating Holders                         6(b)
Preferred Purchase Percentage                        6(b)
Preferred Stock                                      Preamble
Purchase Percentage                                  6(a)
Purchasers                                           4(g)(i)
Recapitalization Agreement                           Preamble
Refused Securities                                   3(c)
Remaining Offered Shares                             4(b)
Representative                                       Preamble
Second Option                                        4(c)
Selling Shareholder                                  4(a)
Third Party Offer Terms                              4(b)
Third Party Offeror                                  4(f)
Transferring Shareholder                             7
Unpurchased Remaining Offered Shares                 4(c)
Unpurchased Remaining Shares Notice                  4(c)
Warrant Shares                                       Preamble

2. Prohibited Transfers.

(a) Each Shareholder hereby agrees that it shall not Transfer all or any of his or its Stock except to the Company or as expressly provided in this Agreement. No Transfer shall be effective and the Company shall not, and shall not be compelled to, recognize

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any Transfer or record any Transfer on their books made other than in accordance with the terms of this Agreement, or issue any certificate representing any Stock to any Person who has received such Stock in a Transfer made other than in accordance with the terms of this Agreement or to any Person who has not delivered to it an executed Counterpart.

(b) Each Shareholder shall be permitted to Transfer its Stock to any Affiliate of such Shareholder without compliance with
Section 4 hereof, provided that any such transferee shall, as a condition to such Transfer, execute a Counterpart and thereafter the transferee shall be treated as a Shareholder for all purposes under this Agreement; and provided further that if the Notes (as defined in the Mezzanine Agreement) shall be bearing interest at thirteen and one-half percent (13.5%) pursuant to Section 2.06(b) of the Mezzanine Agreement, then, until such Notes shall be redeemed, Holdings shall not be permitted to transfer any of its Common Stock except to its members and then only if the members agree in writing to be bound by the terms of Section 2.06(b) of the Mezzanine Agreement (imposing transfer restrictions).

(c) Each Individual Investor shall be permitted to Transfer all or any of his Stock to such Individual Investor's Permitted Transferees without compliance with Section 4 hereof, provided that such Permitted Transferee executes a Counterpart, and, except in the case of a Transfer occasioned as a result of the death of an Individual Investor:

(i) notwithstanding such Transfer, the Individual Investor making such Transfer shall remain jointly and severally liable for any breach by the Permitted Transferee of the provisions of this Agreement; and

(ii) any Individual Investor who Transfers any or all of his Stock to a Permitted Transferee shall, except with the consent of the holders of a majority of the Shares other than the Shares of the Transferring Individual Investor, retain the right to vote the transferred Stock on any matter on which such Stock is entitled to vote under the provisions of the applicable Company's Certificate of Incorporation.

(d) Notwithstanding this Section 2, the Individual Investors and Holdings shall be permitted to pledge their shares in favor of The First National Bank of Boston, as Administrative Agent, pursuant to the Management Pledge Agreement and the Parent Pledge Agreement, both dated the date hereof.

(e) Notwithstanding this Section 2, any Individual Investor shall be permitted to pledge his shares of Class C Preferred Stock to a lender to the pledging Individual Investor provided that
(i) prior to completing the pledge, the lender undertakes in a writing (in form and substance acceptable to the lender and the Company) delivered to the Company that (A) such lender is prohibited from selling or syndicating all, or any portion of the debt obligation secured by the pledge, and (B) in the event of any default on the debt secured by such pledge, all or any portion of the pledged shares (as determined by the Company) may be purchased by the Company for a price equal to the lowest of (1) the aggregate Stated Value of the shares being purchased, (2) the Fair Market Value (as determined under procedures comparable to those set forth in Section 6(d) hereof with decisions as to choice of the valuation determiner being made by the Representative and the Lender) of the shares being purchased, or (3) the unpaid principal,

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plus accrued interest, plus all other amounts accrued and owing to the lender in respect of such indebtedness, secured by the pledge, (ii) if Robert Kirkland is the borrower and pledgor, the Consulting Agreement will terminate in the event the lender executes against, or otherwise obtains an ownership interest in, the pledged shares or their proceeds, (iii) if any other Individual Investor is the borrower and pledgor, the Management Agreement, if any, of such Individual Investor will terminate in the event the lender executes against, or otherwise obtains an ownership interest in, the shares pledged by that Individual Investor or their proceeds, and (iv) the lender is an institution normally engaged in the business of making commercial loans.

3. Preemptive Rights.

(a) Except in the case of Excluded Securities, the Company shall not issue, sell or exchange, agree to issue, sell or exchange, or reserve or set aside for issuance, sale or exchange, any Securities unless the Company shall have first offered (the "Preemptive Offer") to sell such Securities to the Company's Shareholders on the terms set forth herein. Each Shareholder shall have a preemptive right to purchase up to such Shareholder's Common Equity Percentage of such Securities. Each Shareholder may assign all or any part of its rights and responsibilities with respect to such Offer (as defined below) to an Affiliate. Such Affiliate or Affiliates which are such assignees shall thereafter be deemed to be such assigning Shareholder (to the extent of such assignment) for purposes of applying this Section 3 to such Preemptive Offer. Each such Affiliate shall agree in writing, as a condition to such assignment, to execute a Counterpart in the event of a purchase of Securities pursuant to such assignment.

(b) The Company shall deliver to each Shareholder written notice of the Preemptive Offer, specifying the price and terms and conditions of the offer, including without limitation, the minimum and maximum limits on the amount of Securities proposed to be sold by the Company pursuant to the offer (the "Offer"), and the Common Equity Percentage applicable to the Shareholder receiving such notice. The Preemptive Offer by its terms shall remain open and irrevocable for a period of thirty (30) days from the date such notice is given (the "30-Day Period").

(c) If a Shareholder desires to purchase Securities pursuant to the Preemptive Offer, such Shareholder shall evidence his or its intention to accept the Preemptive Offer by delivering a written notice to the Company, signed by the Shareholder, setting forth the percentage of the Securities (not exceeding such Shareholder's Common Equity Percentage of such Securities) that the Shareholder elects to purchase (the "Notice of Acceptance"). Provided the minimum number of Securities set forth in the Preemptive Offer has been sold after conclusion of all procedures set forth in this Section 3, then, upon closing of the Preemptive Offer, each Shareholder shall be obligated to buy the percentage set forth in such Shareholder's Notice of Acceptance times the number of Securities being sold at such closing. The Company shall not be permitted to sell at such closing (or any subsequent closing with respect to which the procedures set forth in this Section 3 have not again been followed, except as provided in this Section 3) more than the maximum number of Securities set forth in the Preemptive Offer. The Notice of Acceptance must be given, if at all, prior to the end of the 30-Day Period. Within five (5) days following the end of the 30-Day Period, the Company shall give written notice (the

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"Notice of Refused Securities") to the Shareholders setting forth the percentage of Securities for which a Notice of Acceptance was not received (the "Refused Securities").

(d) If the Shareholders give Notices of Acceptance to the Company prior to the end of the 30-Day Period indicating their intention to purchase, in the aggregate, less than the maximum amount of Securities set forth in the Preemptive Offer, each Shareholder giving a Notice of Acceptance ("Accepting Shareholders") shall be entitled to purchase by an additional Notice of Acceptance given to the Company within ten (10) days after the date the Notice of Refused Securities is given (the "10-Day Period"), that proportion of the Refused Securities which the Common Equity Percentage of such Accepting Shareholder (prior to the Offer) bears to the Common Equity Percentage of all Accepting Shareholders.

(e) If the Shareholders give Notices of Acceptance prior to the end of the 30-Day Period or 10-Day Period, as applicable, indicating their intention to purchase, in the aggregate, at least the minimum amount of Securities set forth in the Preemptive Offer, the Company shall schedule a closing of the sale of the Securities to occur on a date not more than sixty (60) days nor less than twenty (20) days after the termination of the 30-Day Period or 10-Day Period, as applicable. Upon the closing of the sale of the Securities, each Accepting Shareholder shall purchase those Securities for which it tendered a Notice of Acceptance upon the terms specified in the Offer.

(f) Regardless of whether the Shareholders tender Notices of Acceptance pursuant to subsection (c) and (d) of this Section 3 for at least the minimum amount of Securities set forth in the Offer within the 30-Day Period or the 10-Day Period, as applicable, any remaining Refused Securities may be sold for a period of ninety (90) days after the expiration of the 30-Day Period or 10-Day Period, as applicable (the "90-Day Period"), to any other Person or Persons (including without limitation, executive officers of the Company), upon terms and conditions which are in all material respects (including without limitation, price, form of consideration, payment period and interest rates) the same as those set forth in the Preemptive Offer. The closing of the sale of such Refused Securities (which shall include full payment to the Company in cash or notes in accordance with the terms of such offer (the "Outside Offer")) shall take place not more than thirty (30) days after the expiration of such 90-Day Period and not less than twenty (20) days after notice of said closing shall have been given by the Company to each Accepting Shareholder. In the event Accepting Shareholders gave Notices of Acceptance for less than the minimum number of Securities set forth in the Preemptive Offer, provided the Refused Securities agreed to be purchased plus the Securities for which Accepting Shareholders gave Notices of Acceptance exceeds such minimum, then at the same time as the closing of the sale of Refused Securities, each Accepting Shareholder shall purchase those Securities for which it tendered a Notice of Acceptance upon the terms specified in the Preemptive Offer.

(g) (i) If at least the minimum amount of the Securities set forth in the Preemptive Offer and the Outside Offer are not agreed to be purchased within the 90-Day Period, the Company may rescind all Notices of Acceptance tendered by Shareholders by providing written notice of such rescission to each Accepting Shareholder and the Company shall not sell any Securities pursuant to the Outside Offer.

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(ii) Any Securities as to which Notices of Acceptance are rescinded, and any Refused Securities not purchased in the Outside Offer may not be sold or otherwise disposed of until they are again offered to the Shareholders under the procedures specified in subsections (a) through (g) hereof.

(h) The transferability of Securities purchased by any Shareholder or other Person pursuant to this Section 3 shall be subject to the terms and conditions set forth in this Agreement and any Person who is not then a Shareholder and who purchases Securities shall execute a Counterpart as a condition precedent to such purchase. The obligation of any Shareholder to purchase such Securities is further conditioned upon the preparation of a purchase agreement embodying the terms of the Preemptive Offer or Outside Offer which shall be reasonably satisfactory in form and substance to the Company and its counsel, and such Shareholder or other purchaser and such Shareholder's or other purchaser's counsel.

(i) The Shareholders hereby waive any preemptive rights that they may have in connection with the grant of options to purchase 1,918 shares of Common Stock at $0.01 per share to a consultant as of July 1, 2001 and the grant of options to purchase up to 9,200 shares of Common Stock at $71.00 per share to management employees on November 27, 2001. The Board of Directors determined that these exercise prices were not less than the fair market value of the Common Stock on the respective grant dates.

4. Third Party Offers to Shareholders; Participation Rights.

(a) If any Shareholder (a "Selling Shareholder") receives a Bona Fide Offer to purchase part or all of the Selling Shareholder's Stock in the Company ("Offered Shares") which it desires to accept, it must give written notice ("First Refusal Notice") to the Company and comply with this Section 4 before accepting such Bona Fide Offer. Any Bona Fide Offer offering to purchase less than all a Shareholder's Stock shall either be rejected or be an offer to purchase the same percentage of Stock of the Company. The First Refusal Notice shall identify the third party purchaser and the terms of the Bona Fide Offer to purchase the Offered Shares. The Company shall, within five (5) days of receipt of the First Refusal Notice, provide copies thereof to all other Shareholders (the "Non-Selling Shareholders") and shall simultaneously notify each Non-Selling Shareholder of such Non-Selling Shareholder's Adjusted Common Equity Percentage. The Company and the Non-Selling Shareholders shall have the options and rights set forth in this
Section 4. Each Shareholder may assign all or any part of its rights and obligations with respect to such Bona Fide Offer to an Affiliate. Such Affiliate or Affiliates who are such assignees shall thereafter be deemed to be such assigning Shareholder (to the extent of such assignment) for purposes of applying this Section 4 to such Bona Fide Offer. Each Affiliate shall agree in writing, as a condition to such assignment, to execute a Counterpart, in the event of a purchase of Offered Shares pursuant to such assignment.

(b) For a period of up to thirty (30) days after receipt of the First Refusal Notice ("Company Option Period") the Company shall have the right to purchase up to all of the Offered Shares which it has issued at the price and on the other terms and conditions contained in the Bona Fide Offer (the "Third Party Offer Terms"). The Company shall notify the Selling Shareholder within the Company Option Period whether the Company will exercise such

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right, such notice (the "Company Notice") specifying the amount of Offered Shares to be purchased by the Company, if any (any remaining amount being the "Remaining Offered Shares"). A notice by the Company that it will purchase Offered Shares is herein referred to as a "Company Purchase Notice.") The Company Option Period shall expire on the thirtieth day after the First Refusal Notice or the date the Company gives a Company Notice indicating that the Company will not purchase any Offered Shares.

(c) Each Non-Selling Shareholder shall have the option (the "First Option") to purchase up to such Non-Selling Shareholder's Adjusted Common Equity Percentage of the Remaining Offered Shares on the Third Party Offer Terms. The First Option may be exercised by giving written notice (an "Exercise Notice") to the Selling Shareholder within thirty (30) days after the expiration of the Company Option Period (the "30-Day Exercise Period"). The Exercise Notice given by a Non-Selling Shareholder shall state the number of Offered Shares (up to such Non-Selling Shareholder's Adjusted Common Equity Percentage of the Remaining Offered Shares) which such Non-Selling Shareholder is willing to purchase. Within five (5) days following expiration of the 30-Day Exercise Period, the Selling Shareholder shall give a written notice ("Unpurchased Remaining Shares Notice") to the Non-Selling Shareholders setting forth the number of Remaining Offered Shares for which an Exercise Notice was not received ("Unpurchased Remaining Offered Shares"). Any Non-Selling Shareholder who exercised its option under this Section 4(b) to purchase such Non-Selling Shareholders' entire Adjusted Common Equity Percentage of the Remaining Offered Shares, shall have an option ("Second Option") to purchase such amount of the Unpurchased Remaining Offered Shares as such Non-Selling Shareholders shall agree upon or, failing such agreement, that proportion of the Unpurchased Remaining Offered Shares which such Non-Selling Shareholder's Common Equity Percentage bears to the aggregate Common Equity Percentage of all such Non-Selling Shareholders. A Non-Selling Shareholder shall exercise the Second Option, if at all, by giving a written second Exercise Notice to the Selling Shareholder within fifteen (15) days after the Selling Shareholder shall have given the Unpurchased Remaining Shares Notice relating to the Unpurchased Remaining Offered Shares.

(d) Unless otherwise agreed to by the Selling Shareholder, all Company Purchase Notices and Exercise Notices given by the Company and Non-Selling Shareholders shall be deemed rescinded if all of the Offered Shares are not to be purchased pursuant thereto.

(e) If the Company or Non-Selling Shareholders shall have given Company Purchase Notices or Exercise Notices as to all of the Offered Shares, all certificates for the Offered Shares shall be delivered to the purchaser(s) thereof, duly endorsed for transfer, at a closing held within not more than thirty (30) days nor less than twenty (20) days after the last such Exercise Notice is given at the then principal office of the Company or such other place as the Selling Shareholder and the Company (if the Company is a purchaser) and Non-Selling Shareholders who are purchasers of such Offered Shares shall agree.

(f) If all of the Offered Shares are not agreed to be purchased by the Company and Non-Selling Shareholders, then, within ten
(10) days after the earlier of (i) the

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expiration of the applicable periods in which Non-Selling Shareholders could have exercised the First Option or, if applicable, the Second Option, or (ii) the date on which the Non-Selling Shareholders shall have declined in writing to purchase all of the Offered Shares, the Selling Shareholder shall give notice to all Non-Selling Shareholders and the Company of the Offered Shares not intended to be purchased pursuant to the operation of Section 4(b) (c) and
(d) (the "Final Purchase Notice"). For a period of thirty (30) days after the date the Final Purchase Notice is given, the Selling Shareholder may, subject to Section 4(g) and 4(h) below, sell the Offered Shares to the Person who made the Bona Fide Offer ("Third Party Offeror"); provided, however, that such Offered Shares are sold to the Third Party Offeror upon the Third Party Offer Terms, and that such Third Party Offeror executes a Counterpart. If the Selling Shareholder elects not to rescind Company Purchase Notices and Exercise Notices pursuant to Section 4(d) hereof, the sale of Offered Shares to the Company and the purchasing Non-Selling Shareholders shall take place at the closing of the sale of the balance of the Offered Shares to the Third Party Offeror and, unless such Non-Selling Shareholders otherwise agree, shall be conditioned on the occurrence of said closing. If the Selling Shareholder wishes to sell all or any part of the Offered Shares on terms other than the Third Party Offer Terms or does not sell such Offered Shares on the Third Party Offer Terms within the aforementioned thirty (30) day period, the Selling Shareholder shall be obligated to make new offers and re-offers to the Company and the Non-Selling Shareholders, in accordance with this Section 4, before it shall be permitted to Transfer its Shares, or any part thereof, to any Person.

(g) (i) If a Non-Selling Shareholder does not exercise its First Option or if such exercise is rescinded pursuant to Section 4(d) above, such Non-Selling Shareholder may elect to participate (each Shareholder so electing being herein a "Participating Shareholder") in the Selling Shareholder's sale of Remaining Offered Shares to the Company and the Non-Selling Shareholders whose Company Purchase Notices and Exercise Notices have not been rescinded (if any) and the Third Party Offeror (collectively, the "Purchasers"), in accordance with this subsection (g);

(ii) Each such Participating Shareholder shall have the right ("Participation Right") to Transfer to the Purchasers on the Third Party Offer Terms:

(A) if the Offered Shares include Common Stock (the "Offered Common Shares"), a number of shares of Common Stock equal to the product of the number of Offered Common Shares times a fraction, the numerator of which is the Common Equity Percentage of such Participating Shareholder and the denominator of which is the aggregate Common Equity Percentage of all Participating Shareholders and the Selling Shareholder. The number of shares of Common Stock to be sold by the Selling Shareholder to the Purchasers shall be reduced by the number of shares of Common Stock to be sold to the Purchasers by a Participating Shareholder pursuant to the exercise of a Participation Right; and

(B) if the Offered Shares include Class A Preferred Stock, Class B Preferred Stock or Class D Preferred Stock (the "Offered A/B/D Preferred Shares," and the aggregate stated value of the Offered A/B/D Preferred Shares being herein referred to as the "Preferred A/B/D Value"), a number of shares of Class A Preferred Stock,

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Class B Preferred Stock or Class D Preferred Stock (without regard to voting rights) having an aggregate stated value equal to the product of the Preferred A/B/D Value times a fraction, the numerator of which is the aggregate stated value of the shares of Class A Preferred Stock, Class B Preferred Stock or Class D Preferred Stock owned by such Participating Shareholder and the denominator of which is the sum of the Preferred A/B/D Value and the aggregate stated value of all shares of Class A Preferred Stock, Class B Preferred Stock and Class D Preferred Stock owned by all Participating Shareholders and the Selling Shareholder. The number of Offered A/B/D Preferred Shares to be sold by the Selling Shareholder to the Purchasers shall be reduced by the number of Offered A/B/D Preferred Shares having an aggregate stated value equal to the aggregate stated value of the shares of Class A Preferred Stock, Class B Preferred Stock or Class D Preferred Stock to be sold to the Purchasers by Participating Shareholders pursuant to the exercise of Participation Rights;

(C) if the Offered Shares include Class C Preferred Stock (the "Offered C Preferred Shares," and the aggregate stated value of the Offered C Preferred Shares being herein referred to as the "Preferred C Value"), a number of shares of Class C Preferred Stock (without regard to voting rights) having an aggregate stated value equal to the product of the Preferred C Value times a fraction, the numerator of which is the aggregate stated value of the shares of Class C Preferred Stock owned by such Participating Shareholder and the denominator of which is the sum of the Preferred C Value and the aggregate stated value of all shares of Class C Preferred Stock owned by all Participating Shareholders and the Selling Shareholder. The number of Offered C Preferred Shares to be sold by the Selling Shareholder to the Purchasers shall be reduced by the number of Offered C Preferred Shares having an aggregate stated value equal to the aggregate stated value of the shares of Class C Preferred Stock to be sold to the Purchasers by Participating Shareholders pursuant to the exercise of Participation Rights;

(iii) The Participation Right shall be exercised, if at all, by the Participating Shareholder giving written notice of exercise of the Participation Right to the Selling Shareholder and each of the other Non-Selling Shareholders within fifteen (15) days after the Final Purchase Notice is given pursuant to Section 4(f);

(iv) If the Selling Shareholder would retain ownership of Offered Shares by reason of the exercise of Participation Rights (such remaining shares being herein the "Final Remaining Shares"), the Selling Shareholder may either (i) rescind all exercises of Participation Rights, reject the Bona Fide Offer and retain ownership of the Offered Shares, or (ii) negotiate with the Purchasers to purchase the Final Remaining Shares on the Third Party Offer Terms or terms less advantageous to the Selling Shareholder than the Third Party Offer Terms. Any such sale of the Final Remaining Shares to the Purchasers shall not be subject to the provisions of Sections 2 or 4 of this Agreement, except the obligation on the part of the Third Party Offeror to execute a Counterpart. A Transfer of Shares pursuant to the exercise of a Participation Right shall not be subject to the provisions of Sections 2 and 4 of this Agreement.

(h) Notwithstanding anything to the contrary contained in this Section 4, (i) any Transfer permitted by Section 2 hereof shall not be restricted by this Section 4, (ii) any

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sale of Stock in connection with a Public Offering, or pursuant to the provisions of Rule 144 of the Securities Act of 1933, as amended, shall not be restricted by this Section 4.

5. Stock Splits, Etc. If there shall be any change in the Stock of the Company after the date of this Agreement as a result of any merger, consolidation, reorganization, recapitalization, stock dividend, split-up, combination or exchange of Shares, or otherwise, the provisions of this Agreement shall apply with equal force to additional and/or substitute Securities, if any, received by each Shareholder in exchange for or by virtue of its ownership of Shares.

6. Joinder Requirements.

(a) If at any time holders (the "Initiating Holders") of a majority of the outstanding shares of Common Stock desire to sell at least a majority of the outstanding shares of Common Stock to a prospective purchaser which is not an Affiliate of any of such holders at a per share price of at least eighty percent (80%) of the Fair Market Value (as defined in Section 6(d) below), and the purchaser of such Shares requires, as a condition of the sale, that the purchaser acquire more than a majority of the outstanding shares of the Common Stock (the percentage of Common Stock sought to be purchased by the purchaser being herein referred to as the "Purchase Percentage"), then (i) all of the holders of Mezzanine Warrants shall be required to exercise the Purchase Percentage of their Mezzanine Warrants and sell such Mezzanine Warrant Shares, and (ii) all Management Investors or other holders of Options shall be required to exercise the Purchase Percentage of their vested Options and sell the Shares purchased pursuant to such exercise, and (iii) all of the Shareholders (including the Initiating Holders) shall be required to sell the Purchase Percentage (and shall not sell more than the Purchase Percentage) of their Stock (as constituted after such exercise of Mezzanine Warrants), to the purchaser on the same price and other terms and conditions as those offered to the Initiating Holders.

(b) If at any time holders ("Preferred Initiating Holders") of at least a majority of the outstanding shares of Preferred Stock desire to sell at least a majority of the outstanding Preferred Stock to a prospective purchaser which is not an Affiliate of any of such holders, and the purchaser of such Preferred Stock requires, as a condition of the sale, that the purchaser acquire more than a majority of the outstanding shares of Preferred Stock of all Shareholders (the percentage of Preferred Stock sought to be purchased by the purchaser being herein referred to as the "Preferred Purchase Percentage"), then all of the Shareholders shall be required to sell the Preferred Purchase Percentage of their Preferred Stock to the purchaser on the same price and other terms and conditions as those offered to the Preferred Initiating Holders.

(c) For purposes of Section 6(b), the term "Preferred Stock" shall not include the Class C Preferred Stock. Any sale of Common Stock or Preferred Stock pursuant to this Section 6, including the sale by the Initiating Holders or Preferred Initiating Holders, shall not be subject to the provisions of Sections 2 and 4 of this Agreement.

(d) For purposes of this Agreement, "Fair Market Value" of a share of Common Stock shall mean such value as determined by an investment banking firm mutually acceptable to both the Board of Directors of the Company and holders of a majority of Stock

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being involuntarily required to join in the sale under Section 6 hereof. In the event an investment banking firm cannot be mutually agreed upon, such value shall be a value per share of Stock as determined by a nationally recognized firm engaged in the business of (among other things) valuing privately held businesses, which is not an Affiliate of the Company, any director of the Company, or any of the Shareholders, and which is selected by the mutual agreement of the holders of a majority of the Stock being involuntarily required to join in the sale under Section 6 hereof. If such holders are unable to agree, then holders of the Mezzanine Warrants and the Management Investors shall agree on one appraiser, and if they cannot agree the Mezzanine Warrant holders shall select one appraiser and the Management Investors shall select one appraiser. The appraiser or appraisers so selected shall determine the Fair Market Value. An average of all appraisals shall be the Fair Market Value if more than one appraisal is used. If the Fair Market Value is more than eighty percent (80%) of the sale price, the fees paid to the investment banking firm or appraiser or appraisers for determining the Fair Market Value shall be borne by the holders of Stock who are being required to involuntarily join the sale under Section 6(a). Otherwise, such cost shall be borne by the Company.

7. Failure to Deliver Shares. If a Shareholder (the "Transferring Shareholder") becomes obligated to Transfer any Stock to the Company or to another Shareholder pursuant to this Agreement (including a Transfer to another Shareholder for purposes of Transfer to another purchaser pursuant to Section 6 or otherwise) and fails to deliver such Stock in accordance with the terms of this Agreement, the Company or such other Shareholder, as the case may be, may, at its option, in addition to all other remedies it may have, either (i) send to the Transferring Shareholder the purchase price for such Stock as is herein specified, or (ii) deposit such amount with a trustee or escrow agent for the benefit of the Transferring Shareholder for release upon delivery of such Stock to the trustee or escrow agent in accordance with the terms of this Agreement. Thereupon, the Company, upon written notice to the Transferring Shareholder, (a) shall cancel on its books the certificate or certificates representing the Stock so required to be transferred by the Transferring Shareholder and (b) shall issue, in lieu thereof, in the name of the Company, such other Shareholder or purchaser, as the case may be, a new certificate or certificates representing such Stock; provided, however, the Company shall be under no obligation to so cancel and issue Stock unless the other Shareholder or purchaser, as the case may be, delivers to the Company its agreement to indemnify, defend and hold harmless the Company, its officers and employees, successors and assigns, from any and all losses, claims, damages or liabilities (or actions in respect thereof) to which the Company may become subject as a result of, arising out of, or based upon the Company so canceling and issuing Stock, and such other Shareholder or purchaser, as the case may be, shall reimburse the Company for any legal or other expenses reasonably incurred by the Company in connection therewith. All of the Transferring Shareholder's rights in and to such Stock shall terminate as of the date of such Notice.

8. Termination. Except as provided in Section 16 hereof, this Agreement shall terminate upon (i) the consummation of a Public Offering or (ii) the earlier mutual agreement of Shareholders having an aggregate Common Equity Percentage of at least eighty percent (80%).

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9. Registration Rights. The Shareholders shall have the registration and other rights set forth in the Amended and Restated Registration Rights Agreement dated as of the date hereof and among the parties hereto.

10. Financial Reports and Information.

(a) Within ninety (90) days after the end of each fiscal year of the Company, for so long as this Agreement shall be in effect, the Company agrees to furnish each of the Shareholders with audited consolidated and consolidating financial statements of the Company for such fiscal year (showing comparison to the prior fiscal year) which shall include a statement of income and retained earnings for each such fiscal year, a balance sheet as at the last day thereof, and a statement of cash flows prepared in accordance with generally accepted accounting principles consistently applied, and accompanied by the report, without qualification, of the Company's independent certified public accountants (which shall be of recognized national standing), including such accountant's management letters to the Company and a breakdown of all the Shareholders of the Company, listing next to each Shareholder's name, the Shareholder's Common Equity Percentage.

(b) If for any period the Company shall have any subsidiary or subsidiaries whose accounts are consolidated with those of the Company, then in respect of such period the financial statements delivered pursuant to the foregoing Section 10(a) shall be the consolidated financial statements of the Company and all such consolidated subsidiaries.

(c) Promptly upon becoming available, copies of all financial statements, reports, press releases, notices, proxy statements and other documents sent by any of the Company to their lenders or released to the public and copies of all regular and periodic reports, if any, filed by the Company with the Securities and Exchange Commission or any securities exchange.

(d) Upon request from any Shareholder including any Selling Shareholder to the Company, the Company shall disclose to such Shareholder, in writing, the name and address of such Shareholder (as it then appears on the records of the Company) and such Shareholder's Common Equity Percentage.

11. Company Governance Provisions.

(a) From and after the date hereof, each Shareholder agrees to vote (including by execution of a written consent or in any other manner permitted by law and the Company's certificate or articles of incorporation and by-laws) all of his or its Shares over which he or it has voting control, and will take all other necessary or desirable actions within his or its control, and the Company will take all necessary or desirable actions within its control, in order to cause:

(i) the election to the Board of Directors of the Company of:

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(A) two (2) representatives nominated by Advent International Corporation, but only for so long as investment funds affiliated with Advent International Corporation have a Common Equity Percentage (directly or indirectly through Holdings) of at least fifteen percent (15%);

(B) one representative nominated by Capital Trust, but only for so long as Capital Trust (or any of its Affiliates) has (directly or indirectly through Holdings) a Common Equity Percentage of at least two percent (2%), or holds $900,000 aggregate principal amount of Senior Subordinated Notes (as defined in the Mezzanine Agreement);

(C) one representative nominated by CRL (or if CRL distributes any of its Warrant Shares to any of its partners, by a majority in interest of the holders of such Warrant Shares, or if CRL transfers its Warrant Shares, by the holder of the highest aggregate principal amount of the Senior Subordinated Notes (as defined in the Mezzanine Agreement) owned by CRL, its successors or assigns), but only for so long as CRL (or any of its partners) has a Common Equity Percentage of at least three percent (3%);

(D) One (1) representative nominated by Carl Kirkland, so long as he remains an employee (or retired employee) of the Company and he has a Common Equity Percentage of at least four percent (4%) of the outstanding shares of Common Stock;

(E) One (1) representative nominated by Robert Alderson, so long as he remains an employee (or retired employee) of the Company and he has a Common Equity Percentage of at least four percent (4%) of the outstanding shares of Common Stock; and

(F) One (1) representative nominated by SSM Venture Partners, L.P., but only for so long as SSM Venture Partners, L.P. (or any of its affiliates) has a Common Equity Percentage of at least two percent (2%); and

(ii) the removal from the Board of any representative nominated as provided in Section 11(a)(i) upon the express written request of the designator thereof or upon the failure of any of the thresholds specified in Section 11(a)(i) with respect to such particular nominator.

(b) in the event that any representative nominated as provided in Section 11(a)(i) for any reason ceases to serve as a member of the Board of Directors of the Company during his term of office, the resulting vacancy on each Board to be filled by a representative nominated by the person who or which nominated the ceasing director; provided that if such person ceases to serve as a member of the Board of Directors because the nominator thereof ceases to meet the thresholds set forth in Section 11(a)(i), such vacancy shall be filled as required by the bylaws of the Company, as amended from time to time.

(c) If the Company receives a written notice requesting that any action be taken to implement the provisions of Section 11, the Company and each Shareholder agree

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promptly to take such action as may be necessary so to implement such provisions in accordance with this Section, including, without limitation, the calling of a special meeting, the voting of Shares, the execution of written consents or any other necessary action in connection therewith.

(d) Absent cause, neither the Company nor the Shareholders will take any action to remove any Board representative nominated pursuant to Section 11(a)(i) without the advance written consent of the Person who or which nominated that director.

(e) Each of Capital Trust and CRL shall, at all times that it has a right to nominate directors pursuant to Section 11(a)(i) hereof, have a representative on each committee of the Board of Directors of the Company unless, and only for so long as, it waives in writing such right with respect to a specific committee.

(f) Unless an individual nominated to serve on the Board of Directors of the Company hereunder expressly agrees in writing otherwise, such nominee shall not be deemed to be the deputy of or otherwise required to discharge his or her duties on the Board under the direction of, or with special attention to the interests of, the Person designating such nominee to serve on the Board.

(g) Nothing in this Agreement shall limit the size of the Board of Directors of the Company or the Board's ability to mandate any procedure for nominating or voting for any directors except to the extent specifically set forth in this Section 11.

12. Specific Performance. Because of the unique character of the shares of Stock, the Company will be irreparably damaged if this Agreement is not specifically enforced. Should any dispute arise concerning the Transfer of Stock, an injunction may be issued restraining any Transfer pending the determination of such controversy. In the event of any controversy concerning the right or obligation to Transfer any such Stock, such right or obligation shall be enforceable in a court of equity by a decree of specific performance. Such remedy shall be cumulative and not exclusive, and shall be in addition to any other remedy which the Company or the other Shareholders of the Company may have.

13. Legend. Each certificate issued on or after April 15, 2002 evidencing any of the Shares shall bear a legend substantially as follows:

"The shares represented by this certificate are subject to restrictions on transfer and may not be sold, exchanged, transferred, pledged, hypothecated or otherwise disposed of except in accordance with and subject to all the terms and conditions of a certain Shareholders Agreement dated as of June 12, 1996, as amended and restated as of April 15, 2002, among the Company, certain affiliates of the Company and their shareholders, a copy of which the Company will furnish to the holder of this certificate upon request and without charge."

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14. Notices. All notices and other communications hereunder shall be in writing and shall be given to the person either personally or by sending a copy thereof by first class or express mail, postage prepaid, or by telegram (with messenger service specified), telex or TWX (with answer back received) or courier services, charges prepaid, or by telecopier, to such party's address (or to such party's telex, TWX, telecopier or telephone number). If the notice is sent by mail, telegraph or courier services, it shall be deemed to have been given to the person entitled thereto when deposited in the United States mail or with a telegraph office or courier service for delivery to that person or, in the case of telex of TWX, when dispatched.

If to Holdings, to:

Kirkland Holdings L.L.C.
75 State Street
Boston, MA 02109

Attention: David M. Mussafer Telecopy No.: (617) 951-0568

With a copy to:

Pepper Hamilton LLP
3000 Two Logan Square
Philadelphia, PA 19103
Attention: Robert A. Friedel, Esq.

Telecopy No.: (215) 981-4750

If to the Management Investors or the Company or The Amy Katherine Alderson Trust The Allison Leigh Alderson Trust The Carl T. Kirkland Grantor Retained Annuity Trust 2001-1, to:

Kirkland's, Inc.
P.O. Box 7222
Jackson, TN 38303-7222
Attention: Robert Alderson Telecopy No.: (731) 664-9345

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With a copy to:

Baker, Donelson, Bearman & Caldwell 20th Floor
First Tennessee Building 165 Madison Avenue
Memphis, TN 38103
Attention: Robert Walker, Esq.

Telecopy No.: (901) 577-2303

If to Robert Kirkland, to:

Robert Kirkland
760 Sanders Chapel Road
Union City, Tennessee 38261

Telecopy No.: (731) 885-7850

With a copy to:

Warner Law Firm PLC
308 West Church Street Union City, Tennessee 38261 Attention: John L. Warner, Jr., Esquire Telecopy No.: (731) 885-2440

If to Mezzanine Warrant Holders, to:

Capital Resource Lenders II, L.P.
85 Merrimac Street

Suite 200
Boston, MA 02114
Attention: Alexander S. McGrath Telecopy No.: (617) 723-9819

Allied Capital Corporation 1919 Pennsylvania Avenue, N.W. 3rd Floor
Washington, D.C. 20006 Attention: Susan Gallagher Telecopy No.: (202) 659-2053

-22-

The Marlborough Capital Investment Fund, L.P.

9 Newbury Street
Boston, MA 02116

Attention: Margaret Lanoix Telecopy No.: (617) 421-9631

Capital Trust Investments, Ltd.

575 Fifth Avenue, 40th Floor
New York, NY 10017

Attention: John P. Oswald Telecopy No.: (212) 490-6950

With a copy to:

Testa, Hurwitz & Thibeault, LLP High Street Tower
125 High Street
Boston, MA 02110
Attention: Andrew E. Taylor, Jr., Esquire Telecopy No.: (617) 248-7100

15. Issuance of Stock by the Company. If the Board of Directors of the Company determines that any Person hereafter issued Stock or Warrants by the Company should become a party to this Agreement, then the execution of a Counterpart to this Agreement by such Person shall result in such Person being deemed to be a Shareholder hereunder for all purposes of this Agreement.

16. Entire Agreement and Amendments. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and, except as provided in clause (i) of Section 8 hereof, neither this Agreement nor any provision hereof may be waived, modified, amended or terminated except by a writing duly executed by holders of Stock having an aggregate Common Equity Percentage of at least eighty percent (80%), and, if the waiver, modification, amendment or termination would affect the rights or obligations of a holder of Preferred Stock, by holders of at least eighty percent (80%) of the aggregate stated value of the class of Preferred Stock so affected; provided, that (i) until the termination of this Agreement

-23-

pursuant to clause (i) of Section 8 hereof, and except as otherwise provided by operation of the terms of Section 11 hereof, the right of any Shareholder to nominate a director in accordance with the provisions of Section 11 hereof may not be modified, amended or terminated without the consent of such Shareholder, and (ii) the terms and provisions of this Section 16 shall not be modified or amended without the prior written consent of each of the Shareholders. To the extent any term or other provision of any other indenture, agreement or instrument by which any party hereto is bound conflicts with this Agreement, this Agreement shall have precedence over such conflicting term or provision. In the event Holdings dissolves, each of the members of Holdings shall execute a Counterpart to this Agreement and shall thereafter be deemed to be a Shareholder hereunder for all purposes of this Agreement.

17. Expenses. The Company shall reimburse the Shareholders for expenses incurred by them (or by the members of Holdings to the extent such expenses are to be paid by Holdings), including the reasonable expenses of counsel, in connection with (i) the negotiation, preparation, execution and delivery of this Agreement, the Operating Agreement of Holdings, and the Agreement of Limited Partnership of CT/Kirkland Equity Partners, L.P., Marlborough/Kirkland Equity Partners, L.P., TCW/Kirkland Equity Partners, L.P. and SSM/Kirkland Equity Partners, L.P., or (ii) the administration of such entities, including the filing of tax returns and preparation of financial reports provided that the expenses reimbursed under clause (ii) above shall not exceed $5,000 per year.

18. Dividends. The Company shall not allow the payment of dividends on the Class A Preferred Stock, the Class B Preferred Sock or the Class D Preferred Stock unless and until any and all payments required to be made by the Company under the Management Agreements have been paid to the Management Investors and any and all payments required to be made to the Company under the Consulting Agreement shall have been made to Robert Kirkland.

19. Amendment to Charter. From and after the date hereof, each Shareholder agrees to vote all of his, or its shares over which he or it has voting control, and will take all other necessary or desirable actions within his or its control, and the Company will take all necessary or desirable actions within its control, in order to cause an amendment to the Company's charter to increase the authorized Common Stock of the Company upon exercise by holders of Class A Preferred Stock, Class B Preferred Stock or Class D Preferred Stock of their rights to convert such stock into shares of Common Stock.

20. Governing Law; Successors and Assigns. This Agreement shall be construed and enforced in accordance with Delaware law and shall be binding upon the parties hereto and their respective successors and assigns. The parties hereto agree that any action to enforce this Agreement may be properly brought in any court within the State of Delaware or in the United States District Court for the District of Delaware, and the parties hereto agree that the courts of the State of Delaware and the United States District Court for the District of Delaware shall have jurisdiction with respect to the subject matter hereof and the person of the parties hereto.

-24-

21. Waivers. The failure of any party to insist upon strict performance of any of the terms or conditions of this Agreement will not constitute a waiver of any of its rights hereunder.

22. Severability. If any provision of this Agreement is held illegal, invalid, or unenforceable, such illegality, invalidity, or unenforceability will not affect any other provision hereof. This Agreement shall, in such circumstances, be deemed modified to the extent necessary to render enforceable the provisions hereof.

23. Captions. Captions are for convenience only and are not deemed to be part of this Agreement.

24. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

25. Attorney's Fees. In the event of litigation of any dispute or controversy arising from, in, under or concerning this Agreement or any amendment hereof, including, without limiting the generality of the foregoing, any claimed breach hereof or thereof, the prevailing party in such action shall be entitled to recover from the other party in such action, such sum as the court shall fix as reasonable attorney's fees incurred by such prevailing party.

26. Parties Benefited. Nothing in this Agreement, express or implied, is intended to confer upon any third party any rights, remedies, obligations or liabilities.

27. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, personal representatives, successors and assigns.

28. Prior Agreement Void. This Amended and Restated Shareholders Agreement amends and restates the Original Shareholders Agreement and such Original Shareholders Agreement is of no further force or effect.

-25-

IN WITNESS WHEREOF, the parties have executed this Amended and Restated Shareholders Agreement under seal as of the date first above written.

KIRKLAND HOLDINGS L.L.C.

By: /s/ David M. Mussafer
   ----------------------------------------
   Name:  David M. Mussafer
   Title:

KIRKLAND'S, INC.

By: /s/ Robert E. Alderson
   ----------------------------------------
   Name:  Robert E. Alderson
   Title: President and Chief Executive
          Officer

-26-

SSM VENTURE PARTNERS, L.P.
By: SSM I, L.P., general partner
By: SSM Corporation, general partner

By: /s/ R. Wilson Orr, III
   ----------------------------------------
   Name: R. Wilson Orr, III
   Title: V.P.


/s/ Joseph R. Hyde, III
-------------------------------------------
JOSEPH R. HYDE, III


/s/ Johnston C. Adams, Jr.
-------------------------------------------
JOHNSTON C. ADAMS, JR.


/s/ John H. Pontius
-------------------------------------------
JOHN H. PONTIUS

-27-

CT/KIRKLAND EQUITY PARTNERS, L.P.

By: /s/ John P. Oswald
   ----------------------------------------
   Name:  John P. Oswald
   Title:

R-H CAPITAL PARTNERS, L.P.

By: RH/Travelers, L.P., its general partner

By: R-H Capital, Inc., its general partner

By: /s/ Kenneth T. Millar
   ----------------------------------------
   Name:  Kenneth T. Millar
   Title:

TCW/KIRKLAND EQUITY PARTNERS, L.P.

By: /s/ Richard F. Kurth
   ----------------------------------------
   Name:  Richard F. Kurth
   Title: Vice President

-28-

CAPITAL RESOURCE LENDERS II, L.P., by
CAPITAL RESOURCE PARTNERS II, L.P.,
its General Partner

By: /s/ Alexander S. McGrath
   ----------------------------------------
   Name:  Alexander S. McGrath
   Title: Partner

ALLIED CAPITAL CORPORATION

By: /s/ Gay S. Truscott
   ----------------------------------------
   Name:  Gay S. Truscott
   Title: Senior Vice President

THE MARLBOROUGH CAPITAL
INVESTMENT FUND, L.P., by
MARLBOROUGH CAPITAL
MANAGEMENT, L.P., its general partner

By: /s/ Margaret L. Lanoix
   ----------------------------------------
   Margaret Lanoix, its authorized partner

CAPITAL TRUST INVESTMENTS, LTD.

By: /s/ John P. Oswald
   ----------------------------------------
   Name:  John P. Oswald
   Title: Attorney-in-fact

-29-

GLOBAL PRIVATE EQUITY II LIMITED
PARTNERSHIP

By: /s/ David M. Mussafer
   ----------------------------------------
   Name: David M. Mussafer
   Title:

ADVENT DIRECT INVESTMENT
PROGRAM LIMITED PARTNERSHIP

By: /s/ David M. Mussafer
   ----------------------------------------
   Name: David M. Mussafer
   Title:

ADVENT PARTNERS LIMITED PARTNERSHIP

By: /s/ David M. Mussafer
   ----------------------------------------
   Name: David Mussafer
   Title:

-30-

/s/ Carl Kirkland
-------------------------------------------
   CARL KIRKLAND

/s/ Robert E. Kirkland
-------------------------------------------
   ROBERT KIRKLAND

/s/ Robert E. Alderson
-------------------------------------------
   ROBERT ALDERSON

THE AMY KATHERINE ALDERSON TRUST

By: /s/ Carl Kirkland
   ----------------------------------------
   Name: Carl Kirkland
   Title: Trustee

THE ALLISON LEIGH ALDERSON TRUST

By: /s/ Carl Kirkland
   ----------------------------------------
   Name: Carl Kirkland
   Title: Trustee

THE CARL T. KIRKLAND GRANTOR RETAINED
ANNUITY TRUST 2001-1

By: /s/ Robert E. Alderson
   ----------------------------------------
   Name: Robert E. Alderson
   Title: Trustee

/s/ Steven J. Collins
-------------------------------------------
STEVEN COLLINS

-31-

EXHIBIT A
TO
AMENDED AND RESTATED SHAREHOLDERS AGREEMENT

COUNTERPART

THIS INSTRUMENT forms part of the Amended and Restated Shareholders Agreement (the "Agreement") made as of the 15th day of April, 2002, among Kirkland Holdings L.L.C., Kirkland's Inc., SSM Venture Partners, L.P., Joseph R. Hyde, III, Johnston C. Adams, Jr., John H. Pontius, CT/Kirkland Equity Partners, L.P., R-H Capital Partners, L.P., TCW/Kirkland Equity Partners, L.P., Capital Resource Lenders II, L.P., Allied Capital Corporation, The Marlborough Capital Investment Fund, L.P., Capital Trust Investments, Ltd., Global Private Equity II Limited Partnership, Advent Direct Investment Program Limited Partnership, Advent Partners Limited Partnership, Carl Kirkland, Robert Kirkland, Robert Alderson, The Amy Katherine Alderson Trust, The Allison Leigh Alderson Trust, The Carl T. Kirkland Grantor Retained Annuity Trust 2001-1 and Steven Collins, and any additional Shareholders of the Company (as defined in the Agreement), from time to time, which Agreement permits execution by counterpart. The undersigned hereby acknowledges having received a copy of the said Agreement (which is annexed hereto as Schedule I) and having read the said Agreement in its entirety, and for good and valuable consideration, receipt and sufficiency of which is hereby acknowledged, hereby agrees that the terms and conditions of the said Agreement shall be binding upon the undersigned as a Shareholder and such terms and conditions shall inure to the benefit of and be binding upon the undersigned and its successors and permitted assigns.

IN WITNESS WHEREOF, the undersigned has executed this instrument this ____ day of ___________, 20__.

(Signature of Shareholder)

(Name in block letters)

A-1

EXHIBIT 10.17

SUBLEASE AGREEMENT
BETWEEN
PHOENICIAN PROPERTIES
AND
KIRKLAND'S, INC.

DUPLICATE ORIGINAL 1 OF 2

February 1, 2002

William C. Bell, Jr.
Rainey, Kizer, Butler, Reviere & Bell, P.L.C.
P. O. Box 1147 - 105 South Highland Ave.
Jackson, TN 38302-1147
(731) 423-2414
File No. 01436\53316

TABLE OF CONTENTS

1.       Leased Premises..........................................................................................1

2.       Construction of Renovations..............................................................................1

3.       Lease Term...............................................................................................2

4.       Option Terms.............................................................................................2

5.       Holdover By Tenant.......................................................................................3

6.       Rent.....................................................................................................4
         (a)      Base Rent.......................................................................................4
         (b)      3 Year Option Term..............................................................................4
         (c)      First 5 Year Option Term........................................................................5
         (d)      Second 5 Year Option Term.......................................................................5
         (e)      Third 5 Year Option Term........................................................................6
         (f)      Proration of Rent...............................................................................6
         (g)      Late Charges....................................................................................7

7.       Utilities................................................................................................7

8.       Taxes....................................................................................................7

9.       Repairs And Maintenance..................................................................................7
         (a)      Maintenance and Repair Obligations..............................................................7
         (b)      Default with Respect to Tenant's Repair and Maintenance Obligations.............................8
         (c)      Default with Respect to Landlord's Repair and Maintenance Obligations...........................9

10.      Insurance................................................................................................9

11.      Improvements............................................................................................10

12.      Damage or Destruction to Improvements on Leased Premises................................................11

13.      Use of Premises.........................................................................................12

14.      Condemnation............................................................................................13
         (a)      Total Taking in the Event of Condemnation......................................................13
         (b)      Partial Taking in the Event of Condemnation....................................................13

15.      Quiet Enjoyment.........................................................................................14

16.      Subordination Of Lease/Attornment.......................................................................15

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17.      Surrender Upon Termination..............................................................................15

18.      Assignment And Sub-letting..............................................................................15

19.      Events of Default by Tenant and Remedies of Landlord....................................................16
         (a)      Events of Default Defined......................................................................16
         (b)      Remedies on Default............................................................................17
         (c)      Effect Of Termination Rights...................................................................18
         (d)      No Remedy Exclusive............................................................................18
         (e)      No Additional Waiver Implied By One Waiver.....................................................19
         (f)      Right of Entry.................................................................................19
         (g)      Notice of Default to IDB.......................................................................20

20.      Landlord Defaults and Tenant Remedies...................................................................20

21.      Tenant's Indemnity of Landlord..........................................................................22

22.      Landlord Indemnity of Tenant............................................................................23

23.      Notices.................................................................................................24

24.      Periodic Financial Reporting by Tenant..................................................................24

25.      Environmental Requirements of Tenant....................................................................25
         (a)      Landlord's Warranty............................................................................25
         (b)      Environmental Covenants of Tenant..............................................................25
         (c)      Definition of Environmental Laws...............................................................26
         (d)      Definition of Hazardous Materials..............................................................27
         (e)      Definition of Environmental Contamination......................................................27

26.      Environmental Requirements of Landlord..................................................................27

27.      Expansions to Building(s) on Leased Premises............................................................28

28.      Lease Termination Rights Of Tenant......................................................................30

29.      Miscellaneous...........................................................................................31
         (a)      Entire Agreement...............................................................................31
         (b)      Recordation....................................................................................31
         (c)      Binding Effect.................................................................................31
         (d)      Governing Law..................................................................................32
         (e)      Captions.......................................................................................32
         (f)      Severability...................................................................................32
         (g)      Rules of Construction..........................................................................32
         (h)      Duplicate Originals............................................................................32
         (i)      Attorney's Fees................................................................................33
         (j)      Estoppel Certificate...........................................................................33
         (k)      No Landlord Liens..............................................................................33

-ii-

SUBLEASE AGREEMENT

THIS SUBLEASE AGREEMENT made and entered into to be effective the 1st day of February, 2002, by and between Phoenician Properties, a Tennessee general partnership ("Landlord"), and Kirkland's, Inc., a Tennessee corporation ("Tenant").

R E C I T A L S:

A. Landlord has leased the Leased Premises (defined below) from the Industrial Development Board of the City of Jackson, Tennessee (the "IDB"), pursuant to that certain Industrial Lease Agreement effective February 1, 2002 (the "IDB Lease").

B. Landlord desires to sublease its interest in the Leased Premises under the IDB Lease to Tenant as provided herein.

In consideration of the parties' respective representations, covenants and agreements herein contained, the Landlord and Tenant agree as follows:

1. LEASED PREMISES. The Landlord does hereby sublease to the Tenant, and the Tenant subleases from the Landlord, in accordance with the terms and conditions of this Agreement, the premises described in EXHIBIT A located in Madison County, Tennessee, in good repair at the date of the beginning of this Lease Term, which shall herein be referred to as the "Leased Premises."

2. CONSTRUCTION OF RENOVATIONS. Landlord, at Landlord's expense, agrees to make certain renovations to the Leased Premises described in the scope of work attached hereto as EXHIBIT B (the "Renovations") not later than June 15, 2002. Upon execution of this Sublease, Landlord and Tenant shall sign EXHIBIT B to signify their

approval of the scope of work. The dates for beginning and completing construction of the Renovations shall be deferred for a period equal to any delay caused by reason of labor controversy, act of God, fire, or other casualty, governmental regulations, or other causes beyond the reasonable control of Landlord. Tenant shall have the right after Tenant takes possession of the Leased Premises to submit to Landlord a "punch list" of incomplete or defective renovation items within the Leased Premises within sixty (60) days after Tenant takes possession, and Landlord agrees to correct the items on the punch list. Landlord will remain liable for any latent defects in the Leased Premises (established by engineering and architectural experts who have to be mutually acceptable to both parties).

3. LEASE TERM. The initial term of this Sublease Agreement shall commence effective February 1, 2002 (the "Commencement Date"), and subject to the Lease Termination Rights of Tenant set forth in paragraph 28 of this Lease, shall continue until March 31, 2005 (the "Initial Term").

4. OPTION TERMS. At the expiration of the Initial Term, if this Sublease then shall be in full force and effect, and the Tenant shall not be in default hereunder beyond any applicable cure period, and if Landlord is still the Lessee under the IDB Lease, or if Landlord is the fee, simple owner of the Leased Premises, the Tenant shall have the option to extend the term of this Sublease, upon the same terms, provisions, and conditions provided herein, for one three year term through March 31, 2008 (the "3 Year Option Term"), and then for three (3) consecutive five (5) year terms (the "5 Year Option Term"), with the 3 Year Option Term beginning as of and from the expiration of the Initial Term and the first such 5 Year Option Term beginning as of and from the expiration of the 3 Year

Option Term and the second and third 5 Year Option Terms beginning from the expiration of the previous extended terms. Each Option Term year would begin on April 1 of the respective year. Each such Option Term must be exercised by written notice in the manner provided in this Lease Agreement below, not less than six (6) months prior to the expiration of the Initial Term, or the subject Option Term, as the case may be. Time is of the essence for providing written notice not less than six (6) months prior to the expiration of the applicable term, and failure to provide such notice shall render any exercise of Options null and void. As used in this Lease Agreement and unless otherwise specified, "Lease Term" shall mean the Initial Term and any Option Terms properly exercised by Tenant. The Option Terms shall be subject to the Lease Termination Rights of Tenant set forth in paragraph 28 of the Lease.

5. HOLDOVER BY TENANT. In the event the Tenant remains in possession of the Leased Premises beyond the expiration of the Initial Term without properly exercising the first Option Term or if Tenant remains in possession beyond the expiration of any validly exercised Option Term, or if Tenant remains in possession after termination of this Lease as provided in paragraph 28 hereof, such tenancy shall be deemed month-to-month only, with thirty (30) days' written notice required by either party to terminate such tenancy. Except as provided in the last sentence in this Paragraph 5, the Rent during such holdover tenancy shall be 125% of the amount of the Rent that was payable immediately prior to the commencement of the holdover occupancy. Otherwise, the holdover tenancy shall be subject to all provisions of this Sublease Agreement. However, in the event that Tenant and Landlord engage in good faith negotiations for an extension of the term of this

Sublease for a period up to two (2) months after the expiration of the Sublease, then Tenant shall be obligated to pay rent in the amount of Rent at the expiration of the preceding term for such sixty (60) day period.

6. RENT.

(A) BASE RENT. The Tenant shall pay the Landlord monthly base rent ("Base Rent") for the use of the Leased Premises as provided below:

       Period                    Monthly Rent
       ------                    ------------
2/1/02 - 12/31/02                $  4,545.45
1/1/03 - 12/31/03                $ 34,300.00
1/1/04 - 12/31/04                $ 37,520.00
1/1/05 - 3/31/05                 $ 37,520.00

The Base Rent shall be due and payable on the first day of each month, without setoff rights, except as provided in Paragraphs 9(c) and 20. Rent shall be paid to Landlord at the address shown in Paragraph 23 until such time as Landlord shall notify Tenant of a different address for payment of rent.

(B) 3 YEAR OPTION TERM. If Tenant exercises its option for the 3 Year Option Term, the monthly rent during the 3 Year Option Term (the "3 Year Option Term Rent") shall be:

3/31/05 - 12/31/05                $ 37,520.00
1/1/06 - 12/31/06                 $ 37,520.00
1/1/07 - 12/31/07                 $ 39,760.00
1/1/08 - 3/31/08                  $ 39,760.00

The 3 Year Option Term Rent shall be due and payable on the first day of each month, without setoff rights, except as provided in Paragraphs 9(c) and 20. Rent shall be paid to Landlord at the address shown in Paragraph 23 until such time as Landlord shall notify Tenant of a different address for payment of rent.

(C) FIRST 5 YEAR OPTION TERM. If Tenant exercises its option for the first 5 Year Option Term, the monthly rent during the first three
(3) years of the first 5 Year Option Term ("Years 7-9") shall be in the amount of Thirty Nine Thousand Seven Hundred Sixty and No/100 Dollars ($39,760.00). After Years 7-9, and for the remainder of the first 5 Year Option Term, the monthly rent shall increase to Forty-Two Thousand One Hundred Forty and No/100 Dollars ($42,140.00). The rent during the first 5 Year Option Term (the "First 5 Year Option Term Rent") shall become due and payable in advance on the first day of each month, without setoff rights, except as provided in Paragraphs 9(c) and
20. The First 5 Year Option Term Rent shall be paid to the Landlord at the address contained below in this Sublease Agreement, until such time as the Landlord shall notify the Tenant, in writing, of a different address to which the payment shall be sent.

(D) SECOND 5 YEAR OPTION TERM. If Tenant exercises its option for the second 5 Year Option Term, the monthly rent during the first three (3) years of the second 5 Year Option Term ("Years 12-14") shall be in the amount of Forty-Two Thousand One Hundred Forty and No/100 Dollars ($42,140.00). After Years 12-14, and for the remainder of the second 5 Year Option Term, the monthly rent shall increase to Forty-Four Thousand Six Hundred Sixty and No/100 Dollars ($44,660.00) during the second 5 Year Option Term (the "Second Option Term Rent"). The Second 5 Year Option Term Rent shall become

due and payable in advance on the first day of each month, without setoff rights, except as provided in Paragraphs 9(c) and 20. The Second 5 Year Option Term Rent shall be paid to the Landlord at the address contained below in this Sublease Agreement, until such time as the Landlord shall notify the Tenant, in writing, of a different address to which the payment shall be sent.

(E) THIRD 5 YEAR OPTION TERM. If Tenant exercises its option for the third 5 Year Option Term, the monthly rent during the first three
(3) years of the third 5 Year Option Term ("Years 17-19") shall be in the amount of Forty-Four Thousand Six Hundred Sixty and No/100 Dollars ($44,660.00). After Years 17-19, and for the remainder of the third 5 Year Option Term, the monthly rent shall increase to Forty-Seven Thousand Three Hundred Twenty and No/100 Dollars ($47,320.00). The rent payable during the third 5 Year Option Term (the "Third Option Term Rent") shall become due and payable in advance on the first day of each month, without setoff rights, except as provided in Paragraphs 9(c) and 20. The Third 5 Year Option Term Rent shall be paid to the Landlord at the address contained below in this Sublease Agreement, until such time as the Landlord shall notify the Tenant, in writing, of a different address to which the payment shall be sent. As used in this Lease Agreement, the term "Rent" shall include the "Base Rent, the "3 Year Option Term Rent", the "First 5 Year Option Term Rent", the "Second 5 Year Option Term Rent", and the "Third 5 Year Option Term Rent", unless otherwise specified.

(F) PRORATION OF RENT. All Rent shall be prorated if the Initial Term or any Option Term does not commence on the first (1st) day of a calendar month or expire on the last day of a calendar month.

(G) LATE CHARGES. A late charge shall be payable in the amount of one percent (1%) of the Rent then in effect in the event that Tenant shall fail to pay any installment of monthly Rent when due or additional rent when due within fifteen (15) days after the due date thereof and such failure shall have occurred two (2) times during any calendar year.

7. UTILITIES. Tenant shall contract for all utility service required on the Leased Premises and shall be liable for payment of all utility services received during its occupancy of the Leased Premises.

8. TAXES. Tenant acknowledges that the Leased Premises are owned by the IDB, and that assets owned by the Board are exempt from ad valorem taxation in the State of Tennessee under TCA ss.7-53-305. Landlord agrees to "pass on" to Tenant any payment in lieu of tax ("PILOT") benefits granted to Landlord in its lease with the IDB, and Tenant agrees to make all PILOT payments required to be made pursuant to the PILOT Program attached as EXHIBIT C, and any and all other taxes assessed against Landlord as a lessee of the Leased Premises from the IDB, including within such taxes to be paid by Tenant, any leasehold taxes if such are assessed against Landlord by any taxing authority, all of such taxes to be paid before becoming delinquent.

9. REPAIRS AND MAINTENANCE.

(A) MAINTENANCE AND REPAIR OBLIGATIONS. Landlord shall be responsible for maintaining the roof, foundation, slab, HVAC units (including all necessary replacements thereof), and structural walls of the Leased Premises during the Lease Term

and for repaving parking lots at the time of the end of the useful life of the prior paving of such parking lots ("Landlord's Repair Obligations"). With the exception of Landlord's Repair Obligations, Tenant shall at all times put, keep and maintain the Leased Premises in good repair and appearance, including without limitation: the landscaping; windows; plumbing and electrical systems; and routine maintenance and patching and sealing of parking lots.

Tenant shall promptly make all repairs and replacements (substantially equivalent in quality and workmanship to the original work) of every kind and nature, which may be required to be made upon or in connection with any of the Leased Premises in order to keep and maintain the Leased Premises in as good repair and appearance as they were as of the commencement of the Initial Term, ordinary wear and tear excepted. Tenant shall, in all events, make all repairs for which it is responsible hereunder promptly, and all repairs shall be done in a good, proper, and workmanlike manner. Landlord shall, in all events, make the Landlord repair obligations promptly, and all repairs shall be done in a good, proper, and workmanlike manner.

(B) DEFAULT WITH RESPECT TO TENANT'S REPAIR AND MAINTENANCE OBLIGATIONS. If Tenant shall be in default of Tenant's maintenance and repair obligations hereunder, Landlord may, after thirty (30) days' notice to Tenant and failure of Tenant to cure such default, but immediately upon notice in the event of an emergency, do whatever is necessary to cure such default for the account of and at the expense of Tenant. All actual and reasonable costs and expenses so incurred by Landlord shall constitute additional Rent payable by Tenant under this Lease Agreement and shall be paid with the next installment of Rent that becomes due.

(C) DEFAULT WITH RESPECT TO LANDLORD'S REPAIR AND MAINTENANCE OBLIGATIONS. If Landlord shall be in default of Landlord's Repair Obligations hereunder after notice to Landlord of the Repair Obligations, and a reasonable opportunity to complete such Repair Obligations, Tenant may, after thirty (30) days notice to Landlord of Landlord's failure to make such repairs within a reasonable time, but immediately upon notice in the event of an emergency, do whatever is reasonably necessary to cure such default at the expense of Landlord. If Landlord does not pay the cost and expenses so incurred by Tenant within thirty (30) days after invoiced by Tenant, Tenant shall have the right to offset such amount against its rent obligations hereunder.

10. INSURANCE. Landlord shall maintain fire and extended coverage insurance and earthquake coverage on the building and appurtenances located on the Leased Premises with the replacement cost endorsement, in accordance with comparable industry standards, with a financially responsible insurer duly authorized to do business in the State of Tennessee. The costs of and premiums thereof shall be charged to and paid to Landlord by the Tenant as additional rent. Tenant shall, at Tenant's expense, obtain and keep in force during the Initial Term and all Option Terms and holdover Tenancy, commercial general liability insurance coverage with limits of not less than $2,000,000 per occurrence for bodily injury and property damage, insuring both Landlord and Tenant against liability arising out of Tenant's use and occupancy of the Leased Premises and all areas appurtenant thereto. All such liability policies shall name Tenant as the insured party, and Landlord and Landlord's designated mortgagees as additional insureds. The

Tenant shall furnish the Landlord with a certificate from the insurance companies indicating the issuance of the required liability insurance coverage required in this paragraph. Landlord may, but shall not be obligated, to maintain time element insurance coverage (loss of rents) covering the loss of rental income for a period chosen by Landlord that may occur as a result of loss or damage to the building(s) located on the Leased Premises.

11. IMPROVEMENTS. Tenant agrees that it will not make any alterations to the Leased Premises that would diminish the value of the Leased Premises, after giving consideration to the completed alteration, without Landlord's prior written consent. Any alterations by Tenant, at Tenant's expense, the cost of which (per alteration or group of related alterations) exceeds One Hundred Thousand and No/100 Dollars ($100,000.00) shall be deemed a "Significant Alteration." All Significant Alterations shall require Landlord's prior written consent. Prior to making any Significant Alterations, Tenant shall submit written plans and specifications for such work to Landlord and shall obtain Landlord's prior written consent to the same. Tenant may make alterations other than Significant Alterations or alterations that would not diminish the value of the Leased Premises without the prior written consent of Landlord. Any alterations or additions will be at Tenant's expense and will remain a portion of the Leased Premises upon expiration of the rights of Tenant under this Lease. Trade fixtures and other equipment owned by the Tenant and installed on or within the Leased Premises by Tenant shall remain as personal property, and may be removed upon termination of the Lease, but only upon the condition that any repairs necessary due to removal of such trade fixtures or equipment be made by Tenant at its own expense.

12. DAMAGE OR DESTRUCTION TO IMPROVEMENTS ON LEASED PREMISES. Except as provided in the next two (2) grammatical paragraphs of this Paragraph 12, if the improvements on the Leased Premises (excluding the parking lot, lights, landscaping, and fences) are damaged or destroyed by fire or other casualty insured under the fire and extended casualty insurance policy applicable to the Leased Premises (the "Casualty"), the insurance proceeds from such policy shall be used to repair and/or restore the Leased Premises to substantially the condition it was in immediately prior to the Casualty within one hundred eighty (180) days following the date of Landlord's receipt of the insurance proceeds.

However, if the Casualty renders the improvements on the Leased Premises untenantable, in the reasonable opinion of Tenant, and the estimated time for restoration thereof exceeds one hundred-eighty (180) days from the date of the Landlord's receipt of the insurance proceeds, then Tenant may terminate this Sublease Agreement by the delivery of written notice to the Landlord within fifteen (15) days following the date on which Landlord notifies Tenant of the estimated time for restoration. Landlord must provide that estimate to Tenant within sixty (60) days following its receipt of the insurance proceeds.

Further, (i) if there are less than three (3) years remaining in the existing term of this Lease (whether the Initial Term or any Option Term) at the time of any Casualty; and (ii) if Tenant does not provide written notice to Landlord within thirty (30) days of the date of the Casualty that it is waiving its Termination Rights as set forth in paragraph 28 for a period of five (5) years from the date of completion of the repairs or restoration of the Leased Premises; and (iii) if the Casualty renders the improvements on the Leased

Premises untenantable, in the reasonable opinion of Landlord; and (iv) if Tenant does not exercise the next renewal Option Term, then Landlord shall have no obligation to repair or restore the Leased Premises, and Landlord may terminate this Lease Agreement by the delivery of written notice to Tenant within sixty
(60) days following the date of the Casualty, unless Tenant exercises the next renewal Option Term at such time and waives its Termination Rights for such five
(5) year period as described above at such time. If Tenant exercises the next renewal Option and waives its Termination Rights before such sixty (60) day period, Landlord shall be obligated to repair and restore the Leased Premises to substantially the condition it was in immediately prior to the Casualty.

The obligation to repair or restore the Leased Premises shall not exceed the scope of the original construction of the improvements on the Leased Premises. If the Lease is not terminated, Tenant shall replace and/or restore its furniture, equipment and trade fixtures.

Rent payable under this Sublease Agreement shall be abated proportionately according to the floor area of the building improvements on the Leased Premises which is usable by the Tenant, and such abatement shall continue for the period commencing with such damage or destruction and ending with the completion of such work of repair and/or reconstruction of the Leased Premises as provided herein. Landlord shall be entitled to receive the proceeds payable in respect of any time element insurance that Landlord maintains in accordance with the terms of this Sublease Agreement.

13. USE OF PREMISES. The Tenant agrees that the Leased Premises are to be used solely and exclusively for storage, warehouse, and distribution, with appropriate

offices for the management of such distribution center, unless otherwise consented to in writing in advance by Landlord, in its sole and absolute discretion. Further, Tenant agrees: (i) to use and occupy the Leased Premises in a careful, safe, proper and lawful manner; and (ii) not to permit any unlawful nuisance, trade or custom, or condition thereon; and (iii) not to commit any waste upon, or do any damage to the Leased Premises, ordinary wear and tear excepted. Further Tenant agrees that it shall not bring or knowingly allow any hazardous materials or hazardous substances (as defined by the state of Tennessee statutes and United States of America statutes) to be brought onto the Leased Premises, unless done in accordance with applicable laws for hazardous materials or substances.

14. CONDEMNATION.

(A) TOTAL TAKING IN THE EVENT OF CONDEMNATION. In the event of a "taking" of all or a substantial part of the Leased Premises (defined as greater than one-half of the usable floor space of the building improvements on the Leased Premises) by any governmental authority under eminent domain proceedings, this Lease shall terminate on the date when the Leased Premises shall be so taken, and the rent shall be abated as of that date. No part of any award for the property and improvements shall belong to the Tenant. However, the Tenant shall have the right to make a separate claim with the condemning authority for the value of the Tenant's leasehold interest and/or moving or relocation expenses; provided, however, that such separate claim shall not reduce or adversely affect the amount of the Landlord's award.

(B) PARTIAL TAKING IN THE EVENT OF CONDEMNATION. If any
part of the Leased Premises (being less than a substantial part) of the Leased Premises shall be

taken as aforesaid, and such partial taking shall render that portion not so taken unsuitable for the business of the Tenant as reasonably determined by Tenant, then this Lease shall terminate as set forth in subparagraph (a) above. If such partial taking is not sufficiently extensive to render the Leased Premises unsuitable for the business of the Tenant as reasonably determined by Tenant, then this Lease shall continue in effect except that the monthly rental payment shall be reduced in the same proportion that floor space of any building improvements so taken bears as to the original floor space leased. Upon receipt of the award in condemnation, Landlord shall make all necessary repairs or alterations so as to constitute the Leased Premises a complete architectural unit. However, in no event shall the Landlord be required to spend for such work an amount in excess of the net amount received free and clear by Landlord's damages for the part of the Leased Premises so taken.

Tenant shall not be entitled to and expressly waives any claims or any condemnation or other award for such taking, whether whole or partial, and whether for diminution in value of the leasehold or to the fee, or otherwise; except that the Tenant shall have the right, to the extent permitted by law, and provided by the same shall not reduce the Landlord's award, to claim from the condemnor, but not the Landlord, such compensation as may be recoverable by Tenant in its own right for the damage to the Tenant's business.

15. QUIET ENJOYMENT. Landlord covenants that it is seized of a leasehold interest in the Leased Premises pursuant to the IDB Lease and has the full right to enter into this Sublease Agreement, and that the Tenant shall have the quiet and peaceful

possession of the Leased Premises during the Initial Term and all Option Terms, as against lawful acts of third parties and as against the acts of all parties claiming title to, or right to possession of the Leased Premises.

16. SUBORDINATION OF LEASE /ATTORNMENT. This Sublease shall be subordinate to the rights of the IDB under the IDB Lease. Tenant shall enter into a subordination, nondisturbance, and attornment agreement in a form acceptable to Landlord's lender and Tenant. Further, this Sublease shall be subordinate to any renewal, amendment, or modification of the IDB Lease to the extent that such amendment or modification does not change Tenant's right of quiet enjoyment of the Leased Premises in accordance with the terms hereof.

17. SURRENDER UPON TERMINATION. At the expiration of the Initial Term or Option Terms, or any holdover tenancy, or after termination of the Lease because of Tenant's Termination Rights set forth in paragraph 28 hereof, as the case may be, Tenant shall surrender the Leased Premises in as good a condition as it was at the beginning of the Initial Term, reasonable use and wear and tear and damages by casualty or the elements excepted. At such expiration, the Tenant shall have the right to remove any fixtures or equipment owned by it, provided, however, that in so doing, the Tenant shall repair, at its expense, any damage caused by such removal.

18. ASSIGNMENT AND SUB-LETTING. Tenant shall not have the right to assign or sub-let the Leased Premises without the prior written consent of Landlord, such consent not to be unreasonably delayed or withheld.

19. EVENTS OF DEFAULT BY TENANT AND REMEDIES OF LANDLORD.

(A) EVENTS OF DEFAULT DEFINED. The following shall be "Events of Default" under this Sublease Agreement and the term "Events of Default" or "Default" shall mean, whenever they are used in this Sublease Agreement, any one or more of the following events:

(1) Delinquency in the due and punctual payment of any Rent, additional rent, or additional payment under this Sublease Agreement when such Rent or additional payment shall become payable, and such default shall continue for ten (10) days after payment is due; provided, however, that for the two delinquent payments for any calendar year (January - December) Landlord must give written notice of non-payment, and Tenant shall have ten (10) days from the date of delivery of such notice before a default hereunder.

(2) Delinquency by the Tenant in the performance or compliance with any of the conditions or covenants contained in this Sublease Agreement, other than payment of Rent or additional payments (which is provided for in subparagraph (1) above), for a period of thirty (30) days after written notice thereof from the Landlord to the Tenant, except for any default not susceptible of being cured within such thirty (30) day period, in which event the time permitted to the Tenant to cure such default shall be extended for so long as shall be reasonably necessary to cure such default, provided the Tenant commences promptly and proceeds diligently to cure such default, and provided further that such period of time shall not be so extended as to jeopardize the interest of the Landlord in this Sublease Agreement or the Leased Premises or so as to subject the Landlord or the Tenant to any civil or criminal liabilities.

(3) The filing by the Tenant of a voluntary petition in bankruptcy, or adjudication of the Tenant as a bankrupt, or assignment, partial or general, by the Tenant for the

benefit of its creditors, or the entry by the Tenant into an agreement of composition with creditors, or the approval by a court of competent jurisdiction of a petition applicable to the Tenant in any proceeding for their reorganization instituted under the provisions of the general bankruptcy act, as amended, or under any similar act which may hereafter be enacted.

(4) The assignment or sub-letting of the Leased Premises in violation of this Sublease Agreement.

(5) Contravention of the use restriction provision contained in this Sublease Agreement and continues for thirty (30) days after notice by Landlord.

(B) REMEDIES ON DEFAULT. Whenever any Event of Default referred to herein shall have occurred, the Landlord may take any one or more of the following remedial steps:

(1) Landlord may re-enter and take possession of the Leased Premises without terminating this Sublease Agreement, and sublease the Leased Premises for the account of the Tenant, holding the Tenant liable for the difference in the rent and other amounts payable by such Subtenant in such subleasing and the rents and other amounts payable by the Tenant hereunder.

(2) In the event of payment default hereunder, Landlord may terminate this Sublease Agreement and demand and collect from Tenant as damages the discounted present value (determined based on then commercially reasonable rates) of the entire unpaid balance of Rent for balance of the Initial Term or any exercised Option Terms that remains as of the effective date of termination.

(3) Landlord may terminate this Sublease Agreement and exclude the Tenant from possession of the Leased Premises and may lease the Leased Premises to another for the account of the Tenant, holding the Tenant liable for all rent and other payments due up to

the effective date of such leasing and for the excess, if any, of the Rent and other amounts payable by the Tenant under this Sublease Agreement had the Initial Term or any exercised Option Term not have been terminated over the rents and other amounts which are payable by such new Tenant under such new lease.

(4) The remedies herein specified are to be exercised by the Landlord in pursuance of the availability of these remedies as provided for under the laws of the State of Tennessee; and in pursuance of these laws the Landlord may take whatever action at law and equity is available in the enforcement of these remedies, and otherwise as may appear necessary or desirable to collect rents due, or to become due, or to enforce specific performance and observation of any obligation, agreement or covenant of the Tenant under this Sublease Agreement.

(C) EFFECT OF TERMINATION RIGHTS. If an Event of Default occurs as to Tenant, Tenant shall have the option of termination the Lease as provided in paragraph 28. However, in order to prevent all available remedies to Landlord, Tenant must complete the following within thirty (30) days of Landlord's notice of its intent to exercise its remedies:

(1) cure the Event of Default; and

(2) give the Notice of Intent to Terminate six
(6) months before the desired termination date required in paragraph 28, or alternatively pay the rent that would be due during the succeeding six (6) months after Notice of Intent to Terminate; and

(3) pay the Lease Termination Fee set forth in paragraph 28.

(D) NO REMEDY EXCLUSIVE. No remedy herein conferred upon or reserved to the Landlord is intended to be exclusive of any other available remedy or

remedies, but each and every remedy shall be cumulative and alternative and shall be in addition to every other remedy given under this Sublease Agreement, now or hereafter existing at law or in equity or by statute, unless Tenant takes the actions permitted in subparagraph (c) above. No delay or omission to exercise any right or power shall be construed to be a waiver thereof, but any such right and power may be exercised from time to time as often as may be deemed expedient. In order to entitle the Landlord to exercise any remedy reserved to them in this paragraph, it shall not be necessary to give any notice other than such notice as may be herein expressly required, or as required by law.

(E) NO ADDITIONAL WAIVER IMPLIED BY ONE WAIVER. In the event any agreement contained in this Sublease Agreement should be breached and thereafter waived, such waiver shall be limited to the particular breach so waived and shall not be deemed to waive any other breach hereunder.

(F) RIGHT OF ENTRY. Landlord and/or its representatives may enter the Leased Premises at any reasonable time, before or after default by Tenant, for purposes including without limitation taking possession after default, inspecting the Leased Premises, performing any work which the Landlord may elect to undertake made necessary by reason of the Tenant's default under the terms of this Sublease Agreement, exhibiting the Leased Premises for sale or posting any appropriate notices, including those pertaining to availability for leasing during the last six (6) months of any term if Tenant has not exercised the next Option Term. Such right of entry may be exercised by the Landlord or its representatives without the same constituting an eviction of the Tenant in whole or in part.

Notwithstanding the foregoing, if Tenant is not in default hereunder, Landlord shall give reasonable notice to Tenant before entering the Leased Premises (provided that no notice shall be required in the event of an emergency). Landlord agrees that it will not materially interfere with Tenant's use of the Leased Premises, and Landlord agrees to repair any damage it causes as a result of such activity.

(G) NOTICE OF DEFAULT TO IDB. Tenant shall give written notice to the IDB of any alleged default by Landlord.

20. LANDLORD DEFAULTS AND TENANT REMEDIES. Any one or more of the following shall constitute a default by the Landlord:

(A) if Landlord is adjudicated bankrupt or insolvent and such adjudication is not vacated within thirty (30) days from the date of such adjudication;

(B) the admission in writing by Landlord of its inability to pay its debts when due;

(C) the appointment of a receiver or trustee for the business or property of Landlord, unless such appointment is vacated within ninety (90) days after its entry;

(D) Landlord making an assignment for the benefit of its creditors;

(E) the failure of Landlord to pay any amounts due to Tenant within thirty (30) days after written notice from Tenant that the same is due; or

(F) the failure by Landlord to cure any failure to perform or observe any of its covenants under this Lease within sixty (60) days after written notice thereof from Tenant, unless such failure is of such nature that it cannot be cured within such sixty (60) day period, in which case Landlord shall have such additional time as is necessary to cure so long as Landlord commences the curing within such sixty (60) day period and thereafter diligently pursues the curing.

Upon any occurrence of any default by Landlord, Tenant shall have the right to sue for damages, or specific performance, or other remedies it may have at law or in equity. Upon the occurrence of any default by Landlord, in addition to notice to the IDB and to Landlord, Tenant agrees to also give notice to the holder of any mortgage (the "Mortgage Holder") on the Leased Premises, to the extent Tenant shall have received written notice of any such Mortgage Holder. Tenant agrees that such Mortgage Holder shall have sixty (60) days after written notice thereof from Tenant to cure such default, unless such failure or default is of such nature that it cannot be cured within such sixty (60) day period, in which case the Mortgage Holder shall have such additional time to cure so long as Mortgage Holder commences the curing within such sixty (60) days and thereafter diligently pursues the curing. In addition, Tenant may cure Landlord's default and offset the reasonable expense thereof against Rent thereafter accruing. Finally, if in Tenant's reasonable business judgment, Landlord's default materially interferes with Tenant's use of the Leased Premises ("Landlord's Material Default"); and if Tenant reasonably determines that it is impractical for Tenant to attempt to cure such default and offset the cost thereof against Rent, and if the original written notice of default in this Paragraph 20 to Landlord indicated that the default was a Landlord's Material Default, then Tenant shall have the right to terminate this Sublease with no further liability to Landlord (except for sums already due prior to the termination), and exercise any other legal or equitable right or remedy it may have if Landlord does not cure the Landlord's Material Default within the time allowed.

21. TENANT'S INDEMNITY OF LANDLORD. Unless caused by the negligence or willful misconduct of Landlord, its agents, contractors, or employees, the Tenant shall indemnify the Landlord against all claims, actions, damages, liabilities and expenses, including reasonable attorney's fees and other professional fees incurred by the Landlord as a result of:

(A) Failure of the Tenant to perform any covenant required to be performed by the Tenant hereunder; and

(B) Any accident, occurrence, injury or damage which shall happen in or on the Leased Premises, or resulting from the operation of Tenant's business; and

(D) Any mechanics' lien, security agreement or mortgage filed, with regard to the Leased Premises, and equipment therein, or any materials used to repair or alteration of the Leased Premises incurred by Tenant. In the event any mechanics or materialmen's, or other liens shall be filed against the Leased Premises or any improvements or appurtenances thereon by reason of or arising out of any labor or material services furnished or alleged to have been furnished to or for the Tenant at or on the Leased Premises, the Tenant shall, within thirty (30) days after written notice from the Landlord, pay or bond the same or procure the discharge thereof in such manner as may be provided by law or cause other acts to be done which will provide reasonable assurance that the Leased Premises shall not be sold to satisfy any such lien. The Tenant shall defend, on behalf of the Landlord, at the expense of Tenant, any action, suit or proceeding

which may be brought for the enforcement of any such lien or liens or similar claims against the Leased Premises, and the Tenant shall pay any damage and discharge any judgment entered thereon and save harmless the Landlord from any claim or damage resulting therefrom. Notwithstanding the foregoing, Landlord shall be responsible for any materialmen's or mechanic's liens filed against the Leased Premises in connection with any of Landlord's work (including without limitation the work described on EXHIBIT B hereto), and any work in fulfillment of Landlord's repair obligations under this Lease;

(E) Any environmental contamination to the Leased Premises, caused by Tenant, its agents, employees, contractors, or invitees.

(F) Tenant's indemnity shall not include the intentional or negligent acts or omissions of Landlord, its officers, agents, contractors, or employees.

(G) Tenant's indemnity obligations under this Paragraph 21 shall survive the termination of this Sublease with respect to any occurrence that arose or took place prior to such termination.

22. LANDLORD INDEMNITY OF TENANT. Landlord shall indemnify the Tenant against any and all claims, actions, damages, liability, and expenses, including reasonable attorney's fees and other professional fees, in connection with any accident, occurrence, injury, or damage which shall happen in or on the Leased Premises as a result of the negligence or intentional misconduct of Landlord, its officers, agents, contractors, or employees. Notwithstanding the foregoing, Landlord's indemnity shall not include the intentional or negligent acts or omissions of Tenant, its officers, agents, contractors, employees, or licensees. Landlord's indemnity obligations under this Paragraph 22 shall

survive the termination of the Lease with respect to any such occurrence that took place prior to such termination.

23. NOTICES. All notices hereunder shall be in writing and shall be delivered in person or sent by certified mail or overnight courier service or sent by facsimile transmission to the address or facsimile numbers of the parties shown below. Notice shall be effective upon delivery when received by the party to whom delivered and shall be effective two (2) days after mailing and one (1) day after overnight courier when deposited with the United States Postal Service, or an overnight courier service, respectively. If such notice is sent by facsimile, such notice shall be deemed received by the recipient upon receipt by the sender of an acknowledgment or transmission report generated by the machine from which the facsimile was sent indicating that the facsimile was sent in its entirety to the recipient's facsimile number.

LANDLORD:                                   TENANT:                              IDB:
--------                                    ------                               ---
Phoenician Properties                       Kirkland's, Inc.                     Industrial Development
529 Old Hickory Blvd., Suite D              805 North Parkway                    Board of the City of
Jackson, TN  38305                          Jackson, TN  38305                      Jackson
Fax No. 731-661-0195                        ATTN:  General Counsel               c/o General Counsel
                                            Fax No. (731) 664-9345               312 East Lafayette Street
                                                                                 Jackson, TN  38301
                                                                                 Fax No. (731) 424-0562

24. PERIODIC FINANCIAL REPORTING BY TENANT. During the Initial Term, and Option Terms, if applicable, Tenant shall provide to Landlord, annually, within thirty (30) days of request by Landlord, copies of all financial statements, including at least Tenant's Annual Profit and Loss Statement and Annual Balance Sheet, required to be furnished by

Landlord to Landlord's primary lender, or requested by any potential purchaser of the Leased Premises. The form of such statements shall be as customarily prepared by Tenant. Landlord agrees to keep all financial statements confidential and request Landlord's lender and any potential purchaser do the same.

25. ENVIRONMENTAL REQUIREMENTS OF TENANT.

(A) LANDLORD'S WARRANTY. Landlord warrants that to Landlord's knowledge, the Leased Premises are not in violation of any Environmental Laws.

(B) ENVIRONMENTAL COVENANTS OF TENANT. Throughout the Tenant's occupancy of the Leased Premises, Tenant agrees to comply with all requirements of Environmental Laws relating to air quality, water quality, solid waste disposal, hazardous waste disposal, hazardous or toxic substances, and the protection of health and environment. Further, Tenant immediately shall notify Landlord should Tenant become aware of:

(I) any hazardous substance or other environmental problems or liability with respect to the Leased Premises; or

(II) any lien, action, or notice of environmental problems with respect to Tenant's business or with respect to the Leased Premises.

Tenant shall at its own cost and expense take all action as shall be necessary for the "cleanup" of any environmental contamination to the Leased Premises caused by Tenant, its agents, employees, contractors, or invitees, including all removal and remedial action in accordance with all applicable Environmental Laws. Further, Tenant shall pay or cause to be paid at its own expense all clean up, administrative, and enforcement cost of all

applicable governmental agencies which may be asserted against the Leased Premises with respect to any environmental contamination caused by Tenant. All costs, including without limitation, those costs set forth above, damages, liabilities, claims, and expenses (including reasonable attorney's fees and expenses) which are incurred by Landlord with respect to environmental contamination caused by Tenant, without the requirement of waiting for the ultimate outcome of any litigation, claim, or other proceedings, shall be paid by Tenant to Landlord, as incurred, within ten (10) days after notice from Landlord, itemizing the amount incurred to the date of such notice. Tenant shall provide Landlord with copies of all environmental permits from any governmental agency or organization as to Tenant's storage, processing, or locating of Hazardous Materials on or about the Leased Premises.

Notwithstanding anything herein to the contrary, Tenant shall not be responsible for any Hazardous Materials in or environmental contamination to the Leased Premises that exists prior to Tenant's possession of the Leased Premises.

(C) DEFINITION OF ENVIRONMENTAL LAWS. The term "Environmental Law" means any and all federal, state, regional, county, or local laws, statutes, rules, regulations or ordinances; and any state, regional, county or local statute, law, rule, regulation or ordinance relating to public health, safety or the discharges, emissions, or disposal to air, water, land or groundwater, to the withdrawal or use of groundwater, to the use, handling or disposal or polychlorinated biphenyls (PCBs), asbestos, or urea formaldehyde, to the treatment, storage, disposal or management of Hazardous Materials, to exposure to Hazardous Materials, to the transportation, storage, disposal, management or release or

gaseous or liquid substances, and any regulation, order, injunction, judgment, declaration, notice or demand issues thereunder.

(D) DEFINITION OF HAZARDOUS MATERIALS. The term "Hazardous Materials" means any hazardous, toxic or dangerous materials, substances, chemicals, waste or pollutants that is from time to time defined by pursuant to or is regulated under any of the Environmental Laws, including without limitation, asbestos, PCBs petroleum derivatives or by-products, other hydrocarbons, including without limitation any material, substances, pollutants or wastes that are defined as a hazardous waste under RCRA or defined as a hazardous substance under CERCLA.

(E) DEFINITION OF ENVIRONMENTAL CONTAMINATION. The term "Environmental Contamination" shall be defined by applicable federal and state cleanup standards.

26. ENVIRONMENTAL REQUIREMENTS OF LANDLORD. In the event any environmental survey, assessment, or inspection is required for any construction permit, Landlord shall be responsible for the cost of such survey, assessment, or inspection. Landlord shall remove any existing known Hazardous Materials from the Leased Premises prior to delivery of possession thereto to Tenant. Landlord has provided Tenant with a Phase I Environmental Assessment of the Leased Premises at the time of the execution of this Lease, and Landlord agrees to indemnity Tenant from any and all claims, actions, liens, demands, costs, damages, expenses, fines, and judgments (including legal costs and attorneys fees) as a result of any conditions identified in the Phase I Environmental Assessment.

27. EXPANSIONS TO BUILDING(S) ON LEASED PREMISES. Upon written request from Tenant (the "Expansion Notice") received by Landlord at any time prior to the expiration of the Initial Term, and provided that Tenant exercises its option to renew for the 3 Year Option and 5 Year Option Term, Landlord agrees, at Landlord's expense, to use diligent, good faith efforts to develop schematic plans and specifications ("Plans") for an addition to the building(s) on the Leased Premises (the "Expansion") that are satisfactory to Tenant. Tenant's Expansion Notice must contain details as to the desired size of the Expansion, which must be at least 80,000 square feet, and not more than 160,000 square feet, the desired location of the Expansion, current and historical financial condition of Tenant, and other reasonable details necessary to allow Landlord to develop Plans for the Expansion and obtain financing for the Expansion. The Plans for the Expansion must, in all events, be consistent with and must not exceed plans and specifications for a normal and customary, non-airconditioned, typical distribution/warehouse center.

Landlord shall have ninety (90) days from the date of receipt of the Expansion Notice to develop the Plans for the Expansion. Landlord and Tenant must agree upon the Plans for the Expansion. If Landlord and Tenant cannot agree on the Plans for Expansion, Landlord will have thirty (30) days after the date Landlord and Tenant determine they cannot agree on the Plans for Expansion within which to develop alternative Plans for the Expansion. If Landlord and Tenant still do not agree on the alternative Plans for Expansion, either side may cancel the Expansion Notice, and Tenant may cancel its exercise of the option to renew for the first Option Term, provided such Cancellation Notice of the exercise of the First Option is delivered within sixty (60) days of the date that either Landlord or Tenant cancels the Expansion Notice.

The additional rent payable by Tenant for the Expansion shall range between Two and 68/100 Dollars ($2.68) per square foot and Three and 00/100 Dollars ($3.00) per square foot. The rental amount for the Expansion shall be agreed upon by Landlord and Tenant prior to the commencement of construction of the Expansion, and be subject to the six percent (6%) increases in rent from the previous rent amount at every time the rent in paragraph 6 increases, i.e., 5 years, 10 years, 15 years after the beginning of the Initial Term. (For example, if an Extension occurs in year 3 of the Initial Term, and the rent is agreed upon at $2.80 per square foot, the rent for the Expansion will increase to $2.97 per square foot in year 2 of the 3 Year Option Term, even though it is only 2 years after the Expansion. The next rent increase will occur in year 10 of the Lease (during the first 5 Year Option Term). Upon the agreement of Landlord and Tenant as to the Plans for the Expansion and the rental amount to be paid therefor, the parties shall execute an addendum to this Lease setting forth relevant terms relating to the Expansion.

After the Addendum to the Lease has been signed, Landlord will have a period of sixty (60) days from such date to obtain financing for the Expansion, if necessary, and engage a contractor or construction manager for construction of the Expansion, and ninety (90) days from the Date the Addendum To Lease is signed to begin work on the Expansion construction. Except as provided in the paragraph below, if Landlord has not begun the Expansion construction within ninety (90) days of the date of the Addendum to the Lease, Tenant shall be allowed to give Landlord notice of its intent to terminate this Lease ("Notice Of Intent To Terminate"). Except as provided in the paragraph below, if Landlord has not

begun construction of the Expansion within forty-five (45) days after the date of the Notice Of Intent To Terminate, Tenant shall be allowed to terminate this Lease, irrespective of and in addition to the rights under paragraph 28, without payment of a termination fee by giving its notice to terminate ("Notice To Terminate") to Landlord of its right to exercise termination of the Lease, one
(1) year after the date of the Notice To Terminate, provided that such notice is delivered to Landlord within ninety (90) days after the expiration of the forty-five (45) days after the date of the Notice of Intent to Terminate.

Notwithstanding any of the above referenced provisions as to termination of the Lease to the contrary, Tenant shall not have the right to terminate the Lease if the reason that Landlord has not begun construction of the Expansion within the time allowed is because Landlord's lender has declined to make a loan for construction of the Expansion because of the creditworthiness (or lack thereof) of Tenant.

If the Expansion Notice is not given during the Initial Term, none of the provisions of this paragraph 27 shall apply, but Landlord and Tenant agree to negotiate in good faith toward any expansion plans of Tenant after the Initial Term.

28. LEASE TERMINATION RIGHTS OF TENANT. The Tenant shall have the right during the Initial Term, and any Option Terms to terminate the Lease by giving not less than six (6) months written advance notice to Landlord ("Notice Of Intent To Terminate") of the desired termination date, and paying a lease termination fee as a condition precedent to the termination of the Lease equivalent to the greater of: (i) $450,240.00; or (ii) what the rent would be for the next twelve (12) months after the desired termination date ("Lease Termination Fee"), payable in cash to Landlord at the time of the Lease termination ("Termination Rights") and as a condition precedent to the Lease termination.

At any time after an Expansion Notice, as defined in paragraph 27, the Lease Termination Rights would continue to apply. However, the Lease Termination Fee shall change and would be the greater of $675,360.00; or (ii) the equivalent to what the rent would be for the next eighteen (18) months after the desired termination date, payable in cash to Landlord at the time of the Lease termination and as a condition precedent to the Lease termination.

29. MISCELLANEOUS.

(A) ENTIRE AGREEMENT. This Sublease Agreement contains the entire agreement and understanding between the parties. There are no oral understandings, terms or conditions and no party hereto has relied upon any representations, express or implied, not contained in this Sublease Agreement. This Sublease Agreement cannot be changed or supplemented orally, but only by an agreement in writing and signed by the party against whom enforcement of any waiver, change, modification or discharge is sought.

(B) RECORDATION. Landlord or Tenant may record a Short Form Sublease, at the expense of whomever wants to record such instrument.

(C) BINDING EFFECT. All covenants, conditions and obligations contained herein or implied by law shall be binding upon the Landlord, the Tenant, their heirs, successors, legal representatives and assigns; provided, however, in the event of a sale of the Leased Premises, Landlord shall be personally relieved of all obligations hereunder and the Tenant bound to such new owner as a Landlord.

(D) GOVERNING LAW. This Sublease Agreement is prepared and entered into with the intention that the laws of the State of Tennessee shall govern its construction.

(E) CAPTIONS. The captions or headings in this Sublease Agreement are for convenience only and in no way define, limit or describe the scope or intent of any provision of this Sublease Agreement.

(F) SEVERABILITY. If any clause, paragraph or part of this Sublease Agreement, for any reason, should be finally adjudged by any court of competent jurisdiction to be unconstitutional or invalid, such judgment shall not affect, impair or invalidate the remainder of this Sublease Agreement but shall be confined in its operation to the clause, sentence, paragraph or any part thereof directly involved in the controversy in which such judgment has been rendered. The unconstitutionality, invalidity or ineffectiveness of any one or more provisions or covenants contained in this Lease Agreement shall not relieve the Tenant from liability to make the payments of Rent provided for in this Sublease Agreement.

(G) RULES OF CONSTRUCTION. The normal rules of construction which require the terms of an agreement to be construed most strictly against the drafter of such agreement are hereby waived since each party has been represented by counsel or has had the opportunity to be represented by counsel in the drafting and negotiations of this Sublease Agreement.

(H) DUPLICATE ORIGINALS. This Sublease Agreement may be executed in one or more counterparts, each of which should be deemed an original, but all of which together shall constitute but one and the same instrument.

(I) ATTORNEY'S FEES. In the event of any dispute or claim arising out of the terms and provisions of this Agreement, the parties agree that the prevailing party in any court proceeding shall be entitled to recover, in addition to any award made in such proceeding, from the non-prevailing party, the prevailing party's reasonable attorney's fees.

(J) ESTOPPEL CERTIFICATE. Tenant shall at any time upon not less than thirty (30) days' prior written notice from Landlord, execute and deliver to Landlord a statement in writing certifying that: (i) this Sublease is unmodified and is in full force and effect and the date to which Rent or other payments are paid in advance; (ii) to Tenant's knowledge, there are not any uncured defaults by Landlord under this Sublease, or specifying any defaults if any such defaults are claimed; and (iii) any such other information as may reasonably be required by Landlord.

(K) NO LANDLORD LIENS. Landlord hereby waives and releases any Landlord's liens it might have in Tenant's personal property located on the Leased Premises.

IN WITNESS WHEREOF, the parties have executed this Lease Agreement, to be effective the day and date first shown above.

SEPARATE SIGNATURE PAGES

SIGNATURE PAGE 1 OF 2

LANDLORD:

PHOENICIAN PROPERTIES

By: /s/ Larry P. Becker
   ----------------------------------

Title: Managing Partner
      -------------------------------

(NOTARY SEAL)

STATE OF FLORIDA :
COUNTY OF OKALOOSA :

Personally appeared before me Larry P. Becker, with whom I am personally acquainted, and who acknowledged that he/she executed the within instrument for the purposes therein contained, and who further acknowledged that he/she is the Managing Partner of PHOENICIAN PROPERTIES, a Tennessee General Partnership, and is authorized by said partnership to execute this instrument on its behalf.

Witness my hand, at office this the 13TH day of May, 2002.

 /s/ Nicole Julia Merritt
---------------------------------
          Notary Public

My Commission Expires: 3-29-2003.

SIGNATURE PAGE 2 OF 2

TENANT:

KIRKLAND'S, INC.

By:  /s/ Robert E. Alderson
     ------------------------------
Title:  Pres/CEO
      -----------------------------

STATE OF TENNESSEE :
COUNTY OF MADISON :

Personally appeared before me Robert E. Alderson, with whom I am personally acquainted, and who acknowledged that he/she executed the within instrument for the purposes therein contained, and who further acknowledged that he/she is the Pres./CEO of KIRKLAND'S, INC., a Tennessee Corporation, and is authorized by said corporation to execute this instrument on its behalf.

Witness my hand, at office this the 15TH day of May, 2002.

 /s/ Teresa A. Riley
--------------------------------------
Notary Public

My Commission Expires: Feb. 23, 2005.

(NOTARY SEAL)

EXHIBIT A

LEASED PREMISES

LOCATED IN JACKSON, MADISON COUNTY, TENNESSEE:

Beginning at the intersection of the North margin of Highway 70 with the East margin of Bobrick Drive, which point is the Southwest corner of the herein described tract:

Thence, with the East margin of Bobrick Drive the following calls:

North 08 degrees 04 minutes 49 seconds East 300.00 feet; North 82 degrees 04 minutes 48 seconds West 69.87 feet; North 08 degrees 04 minutes 49 seconds East 892.36 feet to the Southwest corner of the property of Madison County, Tennessee;

Thence, with the South line of the property of Madison County, Tennessee, South 81 degrees 55 minutes 11 seconds East 1000.00 feet to the Northwest corner of the property of Allsteel Inc.;

Thence, with the West line of the property of Allsteel Inc., South 08 degrees 04 minutes 49 seconds West 956.62 feet to a point in the North margin of Highway 70;

Thence, with the North margin of Highway 70, South 83 degrees 52 minutes 11 seconds West 959.49 feet to the point of beginning, containing 24.37 acres.

EXHIBIT B

RENOVATIONS

Kerr Building Renovations:

NEW DOCK POSITIONS

-None at this time

MECHANICAL:
-raise the existing HVAC discharge plenums to a level above proposed storage height.
-demolish existing warehouse ceiling sprinkler system. Replace 96,000 SF of area with a system designed to provide a density of .495 GPM/sq. ft. over the most remote 2000 sq. ft. with a 500 GPM hose allowance. This design is for 24' high storage of Class IV non-encapsulated commodities, using conventional pallets, with single or double row racks having 8' aisle widths. The remainder of the warehouse is sprinkled with a system of at least the density set forth above.

EXHIBIT C

RESTATED
PAYMENT IN LIEU OF TAX SUMMARY
[JANUARY 15, 2002]

1. DEFINITIONS. For purposes of this summary, the following terms or phrases shall have the meanings assigned in this paragraph:

(a) "Base Period" means the time period beginning January 1, 2001 and ending June 30, 2010.

(b) "Board" means the Industrial Development Board of the City of Jackson.

(d) "Company Site" means (1) the Southwind Property, (2) the Phoenician Property, or (3) any other warehouse or distribution facility constructed after January 1, 2001 on the Phase III Land and, with respect to each of the foregoing, either owned by the Company or leased by the Company (as Lessee) for purposes of conducting the Company's business operations.

(e) "Equipment" means all industrial machinery and equipment purchased by the Company and installed by the Company at a Company Site during the Base Period.

(f) "Equipment Component" means the aggregate items of Equipment installed during any single calendar year during the Base Period.

(g) "Headquarters Facility" means a new office headquarters building which will serve as the principal executive offices of the Company to be constructed on any site in Jackson, Tennessee during the Base Period.

(h) "Phase I Project" means the Southwind Property.

(i) "Phase II Project" means collectively the Southwind Property together with the Southwind Building Addition.

(j) "Phase III Improvements" means either of (i) the Southwind Building Addition, (ii) the Phoenician Building Addition, or (iii) a proposed warehouse or distribution facility, or facilities, and related building improvements to be constructed on the Phase III Land, and in each case, by or for the benefit of the Company and used exclusively by the Company in conducting its business operations.

(k) "Phase III Land" means that certain unimproved parcel of land presently owned by Madison County, Tennessee consisting of approximately 22.02 acres which lies immediately north of and contiguous to the Southwind Property.

(l) "Phase III Project" means and includes the Phase III Improvements.

(m) "Phase III Project Notice" means written notice from the Company to the Board given at least forty-five (45) days prior to the date that the Company intends to identify the property or facility which will constitute the Phase III Project.

(n) "Phase IV Improvements" means either of (i) the Southwind Building Addition, (ii) the Phoenician Building Addition, or
(iii) a distribution facility to be constructed by or for the benefit of the Company on the Phase III Land to be used exclusively by the Company in conducting its business operations.

(o) "Phoenician Property" means the Land owned currently by Phoenician Partners, being approximately 24.37 acres.

(p) "Phoenician Building" means the building structure presently situated on the Phoenician Property as of the date hereof, consisting of approximately 168,000 square feet.

(q) "Phoenician Building Addition" means a proposed addition to the Phoenician Building, consisting of a minimum addition of 50,000 square feet and having a minimum cost of $1,000,000.00.

(r) "PILOT" means payments to the City of Jackson, Tennessee and Madison County, Tennessee in lieu of ad valorem taxes ordinarily assessable against the Equipment and the Phase I Project, Phase II Project, Phase III Project, and Phase IV Project and/or Headquarters Facility, as applicable.

(s) "Southwind" means Southwind Properties, a Tennessee partnership.

(t) "Southwind Building" means the building structure situated on the Southwind Property as of the date hereof, consisting of approximately 303,000 square feet.

(u) "Southwind Building Addition" means a proposed addition to the Southwind Building, consisting of a minimum addition of 50,000 square feet and having a minimum cost of $1,000,000.00.

(v) "Southwind Property" means that certain parcel of land owned by the Board consisting of approximately 28 acres and currently leased to Southwind by the Board pursuant to Lease Agreement dated February 4, 2000, and as amended by "Restated Lease Agreement" dated December 29, 2000.

2. PHASE I AND PHASE II PROJECT - PILOT. If Southwind Building is acquired by the Company or leased exclusively by the Company (as Lessee) and used exclusively by the Company in conducting its business operations no later than June 30, 2002, then the PILOT incentive for the Phase I Project will be based upon the following PILOT schedule:

(A) PHASE I PILOT

YEAR                                                    PILOT PERCENTAGE
----                                                    ----------------
 1  Year of Occupancy by the Company                           0%
 2                                                            25%
 3                                                            25%
 4                                                            25%
 5                                                            25%
 6                                                            25%
 7                                                            25%
 8                                                            25%
 9                                                            25%
10                                                            25%
11                                                            25%
12                                                            25%
13                                                            25%
14                                                            25%
15                                                            25%

(b) PHASE II PILOT. If the Southwind Building Addition is completed and occupied exclusively by the Company on or prior to June 30, 2005, then the PILOT schedule for the Phase II Project shall be revised and shall be as follows:

YEAR                                                   PILOT PERCENTAGE
----                                                   ----------------
 1  Year of Completion of Southwind Building Addition        25%
 2                                                           25%
 3                                                           25%
 4                                                           25%
 5                                                           25%
 6                                                           25%
 7                                                           25%
 8                                                           25%
 9                                                           25%
10                                                           25%
11                                                           25%
12                                                           25%
13                                                           25%
14                                                           25%
15                                                           25%

3. PHOENICIAN PROPERTY - PILOT. If the Phoenician Property is acquired by the Company or leased exclusively by the Company (as Lessee) and used exclusively by the Company in conducting its business operations no later than June 30, 2002, then the PILOT incentive for the Phoenician Property will be based upon the following PILOT schedule:

YEAR                                         PILOT PERCENTAGE
----                                         ----------------
1 Year of Occupancy by the Company                 25%
2                                                  25%
3                                                  25%
4                                                  25%
5                                                  25%
6                                                  25%
7                                                  25%
8                                                  25%
9                                                  25%
10                                                 25%
11                                                 25%
12                                                 25%
13                                                 25%
14                                                 25%
15                                                 25%

4. PHASE III PROJECT - PILOT. Upon the Company identifying the Phase III Project pursuant to the Phase III Project Notice, the PILOT incentive for the Phase III Project will be as follows:

(a) If on or prior to June 30, 2006, the Phase III Project consists of Phase III Improvements upon the Phase III Land having minimum square footage of 75,000 square feet (the "First Phase III Improvement"), the PILOT incentive for the Phase III Project will be based upon the following PILOT schedule:

YEAR                                                              PILOT PERCENTAGE
----                                                              ----------------
1 Year of Completion of the First Phase III Land Improvement            25%
2                                                                       25%
3                                                                       25%
4                                                                       25%
5                                                                       25%
6                                                                       25%
7                                                                       25%
8                                                                       25%
9                                                                       25%
10                                                                      25%
11                                                                      25%
12                                                                      25%
13                                                                      25%
14                                                                      25%
15                                                                      25%

(b) If by June 30, 2008, there is constructed additional facilities added to the First Phase III Improvements, with such additions being in a minimum square footage of 100,000 square feet (the Second Phase III Improvements), then the PILOT incentive shall be revised for the Phase III Project as follows:

YEAR                                                              PILOT PERCENTAGE
----                                                              ----------------
1 Year of Completion of the Second Phase III Improvements               25%
2                                                                       25%
3                                                                       25%
4                                                                       25%
5                                                                       25%
6                                                                       25%
7                                                                       25%
8                                                                       25%
9                                                                       25%
10                                                                      25%
11                                                                      25%
12                                                                      25%
13                                                                      25%
14                                                                      25%
15                                                                      25%

(c) If by June 30, 2009, there is constructed additional facilities, to be added to the First Phase III Improvements and Second Phase III Improvements, with such additions having a minimum square footage of 100,000 square feet (the "Third Phase III Improvements"), then, in such event the PILOT schedule for the Phase III Project shall be revised and shall be as follows:

YEAR                                                              PILOT PERCENTAGE
----                                                              ----------------
1 Year of Completion of the Third Phase III Improvements                25%
2                                                                       25%
3                                                                       25%
4                                                                       25%
5                                                                       25%
6                                                                       25%
7                                                                       25%
8                                                                       25%
9                                                                       25%
10                                                                      25%
11                                                                      25%
12                                                                      25%
13                                                                      25%
14                                                                      25%
15                                                                      25%

(d) If on or prior to June 30, 2006, the Company designates either the Southwind Building Addition or the Phoenician Building Addition as the Phase III Project, then in such event, the PILOT incentive for the Phase III Project will be based upon the following PILOT schedule:

YEAR                                         PILOT PERCENTAGE
----                                         ----------------
1 Year of Occupancy of Phase III Project           25%
2                                                  25%
3                                                  25%
4                                                  25%
5                                                  25%
6                                                  25%
7                                                  25%
8                                                  25%
9                                                  25%
10                                                 25%
11                                                 25%
12                                                 25%
13                                                 25%
14                                                 25%
15                                                 25%

5. EQUIPMENT - PILOT. For each Equipment Component installed on a Company Site, the PILOT schedule for such Equipment Component shall be as follows:

YEAR                                                              PILOT PERCENTAGE
----                                                              ----------------
1 Year of Installation of Equipment Component                            0%
2                                                                        0%
3                                                                        0%
4                                                                        0%
5                                                                        0%
6                                                                       35%
7                                                                       35%
8                                                                       55%
9                                                                       55%
10                                                                      75%
11                                                                      75%
12                                                                      90%
13                                                                      90%
14                                                                      90%
15                                                                     100%

6. HEADQUARTERS FACILITY - PILOT. In the event there is constructed a Headquarters Facility, the PILOT schedule for the Headquarters Facility shall be as follows:

YEAR                                                              PILOT PERCENTAGE
----                                                              ----------------
1 Year of Completion of Headquarters Facility                            0%
2                                                                        0%
3                                                                        0%
4                                                                        0%
5                                                                        0%
6                                                                       35%
7                                                                       35%
8                                                                       55%
9                                                                       55%
10                                                                      75%
11                                                                      75%
12                                                                      90%
13                                                                      90%
14                                                                      90%
15                                                                     100%

EXHIBIT 10.18

STOCK REPURCHASE AGREEMENT

Among

KIRKLAND'S, INC.

AND

THE OTHER PARTIES SPECIFIED HEREIN

Dated as of May 31, 2002

STOCK REPURCHASE AGREEMENT

THIS STOCK REPURCHASE AGREEMENT (the "Agreement") is made as of the 31st day of May, 2002, by and among

- KIRKLAND'S INC., a corporation incorporated under Tennessee law ("Kirkland's"),

- KIRKLAND HOLDINGS L.L.C. ("Holdings"),

- SSM VENTURE PARTNERS, L.P.,

- JOSEPH R. HYDE, III,

- JOHNSTON C. ADAMS, JR.,

- JOHN H. PONTIUS,

- CT/KIRKLAND EQUITY PARTNERS, L.P.,

- R-H CAPITAL PARTNERS, L.P.,

- CAPITAL RESOURCE LENDERS II, L.P.,

- ALLIED CAPITAL CORPORATION,

- CRESCENT/MACH I PARTNERS, L.P.,

- THE MARLBOROUGH CAPITAL INVESTMENT FUND, L.P.,

- GLOBAL PRIVATE EQUITY II LIMITED PARTNERSHIP,

- ADVENT DIRECT INVESTMENT PROGRAM LIMITED PARTNERSHIP,

- ADVENT PARTNERS LIMITED PARTNERSHIP,

- ROBERT E. KIRKLAND,

- THE ROBERT E. KIRKLAND ANNUITY TRUST - 2002, and

- ROBERT ALDERSON.

WHEREAS, on April 23, 2002, Kirkland's filed a registration statement on Form S-1 with the U.S. Securities and Exchange Commission in connection with an initial public offering of Kirkland's common stock (the offering pursuant to such registration statement, as the same may be hereafter amended, including any related registration statement filed pursuant to Rule 462 under the Securities Act of 1933, as amended, being referred to as the "IPO");

WHEREAS, in connection with the IPO, Kirkland's desires to repurchase certain shares of capital stock from the parties to this Agreement immediately prior to the conversion of

Kirkland's convertible preferred stock into shares of Common Stock of Kirkland's, as more particularly set forth in this Agreement; and

WHEREAS, in connection with the IPO, the parties to this Agreement desire to sell certain shares of capital stock to Kirkland's immediately prior to the conversion of Kirkland's convertible preferred stock into shares of Common Stock of Kirkland's, as more particularly set forth in this Agreement.

NOW THEREFORE, in consideration of the premises and the mutual terms and provisions hereof, the parties hereto hereby agree as follows:

1. Sale and Purchase of the Repurchased Shares.

(a) Purchase Price. Effective immediately prior to the conversion (the "Conversion") that will take place upon the initial closing of the IPO (the "IPO Closing"), of shares of Kirkland's Class A Preferred Stock, Class B Preferred Stock and Class D Preferred Stock, in each case into Kirkland's Common Stock, each party to this Agreement other than Kirkland's (the "Redeemed Shareholders") hereby sells, assigns, delivers and transfers to Kirkland's, and effective immediately prior to the Conversion, Kirkland's hereby repurchases and acquires from each of the Redeemed Shareholders, all right, title and interest in and to the shares of capital stock indicated on Schedule 1 attached hereto (collectively, the "Redeemed Shares") (or such lesser amount of such shares as may be provided for pursuant to Section 1(b) hereof), for a purchase price determined in accordance with
Section 1(c) hereof. The purchase price for the Redeemed Shares shall be paid by Kirkland's at the IPO Closing by wire transfer of immediately available funds to the Wire Account (as defined below) of each of the Redeemed Shareholders. Except with respect to Robert E. Kirkland and his annuity trust, the number of shares to be sold by the Redeemed Shareholders hereunder will depend on the amount of gross proceeds to be received by Kirkland's at the IPO Closing, as more particularly described in Section 1(b) below. The term "Wire Account" shall mean with respect to each Redeemed Shareholder, the account capable of accepting wire transfers of immediately available funds designated by such Redeemed Shareholder to Kirkland's in writing not later than three (3) days prior to the IPO Closing.

(b) Order of Priority in Applying Kirkland's Net IPO Proceeds. The net proceeds to Kirkland's from the IPO Closing (after underwriting discounts and commissions and after offering expenses) shall be applied in the following declining order or priority:

(i) to purchase all of the capital stock in Kirkland's owned by Robert Kirkland and his annuity trust, as set forth beside his name in the stock chart set forth in Schedule 1 hereto;

(ii) to pay all accrued and unpaid consulting payments to Robert Kirkland pursuant to the Consulting Agreement between Robert Kirkland and Kirkland's dated June 12, 1996;

(iii) to repay all of Kirkland's outstanding subordinated debt, including accrued and unpaid interest;

-2-

(iv) to purchase all of the outstanding Class C Preferred Stock of Robert Alderson, as set forth beside his name in the stock chart set forth in Schedule 1 hereto;

(v) to pay all accrued and unpaid compensation payments to Carl Kirkland and Robert Alderson pursuant to their employment agreements with Kirkland's (or pursuant to any Special Bonus Agreement(s) entered into by either of them and Kirkland's), to the extent such compensation payments had previously been subordinated to Kirkland's senior and subordinated debt.

(vi) to establish a working capital reserve of up to $1 million to be retained by the Company and used from time to time for general corporate and working capital purposes.

(vii) to purchase the shares of Class A Preferred Stock indicated in the stock chart set forth in Schedule 1 hereto. The amount of Class A Preferred Stock to be repurchased from each Redeemed Shareholder will be equal to the lesser of (1) all shares of all Class A Preferred Stock held by such Redeemed Shareholder, (2) the number of shares or dollar value (including accrued dividends) of shares of Class A Preferred Stock indicated for such Redeemed Shareholder in Schedule 1 hereto, including any limitations described in the footnotes thereto, or (3) the number of shares of Class A Preferred Stock having a value (including accrued dividends) equal to such Redeemed Shareholder's pro rata share of the lesser of (A) the value of all equity securities (other than Class C Preferred Stock) in the Company held by all Redeemed Shareholders (other than Robert Alderson and Robert Kirkland and his annuity trust), or (B) the amount available for the purchase of Class A Preferred Stock pursuant to this paragraph (vi). For purposes of this Agreement, each Redeemed Shareholder's "pro rata share" shall be equal to the quotient of the value of all equity securities (other than Class C Preferred Stock) in the Company held by such Redeemed Shareholder, divided by the value of all equity securities (other than Class C Preferred Stock) in the Company held by all Redeemed Shareholders (other than Robert Alderson and Robert Kirkland and his annuity trust).

(viii) except as otherwise provided in
Section 1(d) below, to purchase shares of Class D Preferred Stock indicated in the stock chart set forth in Schedule 1 hereto. The amount of Class D Preferred Stock to be repurchased from each Redeemed Shareholder will be equal to the lesser of (1) all shares of all Class D Preferred Stock held by such Redeemed Shareholder, (2) the number of shares or dollar value (including accrued dividends) of shares of Class D Preferred Stock indicated for such Redeemed Shareholder in Schedule 1 hereto, including any limitations described in the footnotes thereto, or (3) the number of shares of Class D Preferred Stock having a value (including accrued dividends) equal to such Redeemed Shareholder's pro rata share of the lesser of (A) the value of all equity securities (other than Class C Preferred Stock) in the Company held by all Redeemed Shareholders (other than Robert Alderson and Robert Kirkland and his annuity trust), or (B) the amount available for the purchase of Class D Preferred Stock pursuant to this paragraph (vii).

(ix) to repay all amounts outstanding under Kirkland's revolving credit facility.

(i) The purchase price for each share of Class A Preferred Stock sold pursuant to this Agreement shall be an amount equal to (x) 100% minus the underwriting discount in the IPO, expressed as a percentage (the "Net Percentage"), multiplied by (y) the sum of (1) the stated value of such share, plus (2) all dividends with respect to such share accrued and unpaid through the IPO Closing. For purposes of illustration, in the event the underwriting discount in the IPO were 7% and the stated value plus accrued dividends per share

-3-

for each share of Class A Preferred Stock were $16.59, the Net Percentage would be 93% and the purchase price for each share of Class A Preferred Stock would be $15.43.

(ii) The purchase price for each share of Class B Preferred Stock sold pursuant to this Agreement shall be an amount equal to the Net Percentage multiplied by the sum of (x) the stated value of such share, plus (y) all dividends with respect to such share accrued and unpaid through the IPO Closing.

(iii) The purchase price for each share of Class C Preferred Stock sold pursuant to this Agreement shall be an amount equal to 100% of the stated value of each such share.

(iv) The purchase price for each share of Class D Preferred Stock sold pursuant to this Agreement shall be an amount equal to the Net Percentage multiplied by the sum of (x) the stated value of such share, plus (y) all dividends with respect to such share accrued and unpaid through the IPO Closing.

(v) The purchase price for each share of Common Stock sold pursuant to this Agreement shall be an amount equal to the Net Percentage multiplied by the initial public offering price of Common Stock in the IPO.

(d) Allocation of Proceeds for Sales in the IPO by Certain Shareholders. The rights of the Redeemed Shareholders (other than shareholders who are holders of Kirkland's subordinated notes (the "Sub Debt Holders") and other than Robert Kirkland and his annuity trust) to have their shares of Class A Preferred Stock and Class D Preferred Stock redeemed pursuant to this agreement shall be contingent upon the Sub Debt Holders' right to be granted the ability to sell shares of Common Stock held by such Sub Debt Holders as selling shareholders at the IPO Closing such that each of the Sub Debt Holders will have the opportunity to sell not less than approximately the same percentage (within a variance not to exceed 1.5%) of the aggregate value of their capital stock in Kirkland's (determined immediately prior to the effectiveness of the IPO by reference to the initial public offering price in the IPO), through a combination of the purchase price being paid pursuant to this Agreement and the net proceeds from sales of shares of Common Stock at the IPO Closing, than any other stockholder (other than Robert Kirkland and his annuity trust) who holds shares of capital stock of Kirkland's with an aggregate value of at least $5 million (as determined by reference to the initial public offering price).

For avoidance of doubt, if the Sub Debt Holders are not granted the opportunity to sell all of the shares of the capital stock of Kirkland's held by them either as selling shareholders in the IPO or as Redeemed Shareholders hereunder and are instead only permitted to sell some lesser percentage of the aggregate value of their shares of Kirkland's's capital stock, then no other stockholder of Kirkland's (with the exception of Robert Kirkland and his annuity trust and the holders of Class C Preferred Stock) holding shares of capital stock of Kirkland's with an aggregate value of at least $5 million (as determined by reference to the initial public offering price) shall have any shares redeemed pursuant to this agreement or sell any shares at the IPO Closing except for redemptions and/or sales which shall yield such stockholder in the aggregate a percentage of the aggregate value of the shares of Kirkland's capital stock held by such stockholder equal to no more than 1.5% in excess of the percentage of the aggregate value of the shares of the Kirkland's capital stock that the Sub Debt Holders were granted the opportunity to have redeemed under this Agreement or to sell in the IPO.

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(e) Transfer/Surrender of Stock Certificates. Contemporaneously with the execution of this Agreement, each of the Redeemed Shareholders has deposited with StockTrans, Inc., the Custodian (the "Custodian") under the Power of Attorney and Custody Agreements dated on or about the date of this Agreement and executed by the Redeemed Shareholders (the "POA and Custody Agreements"), one or more certificates representing each such Redeemed Shareholder's Redeemed Shares. Each of the Redeemed Shareholders hereby represents and warrants to Kirkland's that each certificate delivered has (i) been duly executed and is in negotiable form or (ii) is accompanied by a duly executed stock power or powers in blank. The Custodian shall hold the certificates representing the Redeemed Shares, and shall dispose of them in accordance with the terms of the POA and Custody Agreements.

(f) Share Lot Notification. In the event a Redeemed Shareholder owns shares of the same class with different holding periods or tax bases, such Redeemed Shareholder may notify the Custodian and Kirkland's in writing which lots of shares of each class of such Redeemed Shareholder's Redeemed Shares will be sold hereunder, and such lots of shares shall be those that are sold hereunder.

2. Termination.

(a) If the IPO Closing does not occur on or before December 31, 2002, this Agreement shall terminate and shall be of no further force or effect, and no sales and purchases of Kirkland's capital stock will be deemed to have taken place pursuant to this Agreement.

(b) Except as provided in Section 2(a), the Redeemed Shareholders shall have no right to decline to sell their Redeemed Shares as contemplated by this Agreement.

3. Kirkland Holdings L.L.C.

(a) As of the date hereof, the members of Holdings are: SSM Venture Partners, L.P.; Joseph R. Hyde, III; Johnston C. Adams, Jr.; John H. Pontius; CT/Kirkland Equity Partners, L.P.; R-H Capital Partners, L.P.; Crescent/Mach I Partners, L.P.; The Marlborough Capital Investment Fund, L.P.; Global Private Equity II Limited Partnership; Advent Direct Investment Program Limited Partnership; and Advent Partners Limited Partnership (collectively, the "Members"). In accordance with the Operating Agreement of Holdings dated as of June 12, 1996, as amended, each of the Members hereby agrees to sell to Kirkland's in accordance with this Agreement the shares of Class A Preferred Stock indicated on Schedule 1 attached hereto.

(b) Unless Holdings shall have been liquidated prior thereto, then immediately prior to the sale and purchase of the Repurchased Shares under this Agreement, Holdings shall distribute all of its assets to its Members in accordance with each such Member's percentage interest in Holdings.

4. Waiver of Registration Rights Agreement. Each of the Redeemed Shareholders agrees that his or its execution of this Agreement shall be deemed to satisfy in full, and constitutes a waiver of, his or its rights under that certain Registration Rights Agreement dated June 12, 1996 by and among Kirkland's and certain shareholders of Kirkland's with respect to the IPO, as same may have been or may hereafter be amended or amended and restated

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(as so amended or amended and restated, the "Registration Rights Agreement")
(collectively, the "IPO Registration Rights Waiver"). Notwithstanding the foregoing, if this Agreement is terminated for any reason prior to the IPO Closing, the IPO Registration Rights Waiver shall be null and void. Nothing in this Agreement shall be construed as a waiver of any rights that the parties hereto may have pursuant to the Registration Rights Agreement with respect to any future registration of Kirkland's securities other than the IPO.

5. Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, except with respect to any Redeemed Shareholder from whom Kirkland's has obtained a written waiver or consent.

6. Notices. All notices that are required or permitted hereunder shall be in writing and shall be sufficient if personally delivered or sent by mail, facsimile message or by a nationally recognized overnight delivery courier. Any notices shall be deemed given upon the earlier of the date when received at, or the third day after the date when sent by registered or certified mail or the day after the date when sent by overnight delivery courier to, the address or fax number set forth below, unless such address or fax number is changed by notice to the other party hereto:

If to Kirkland's, to:

Kirkland's, Inc.
P.O. Box 7222
Jackson, TN 38303-7222
Attention: Robert Alderson
Fax Number: (731) 664-9345

With a copy to:

Pepper Hamilton LLP
3000 Two Logan Square
Philadelphia, PA 19103
Attention: Robert A. Friedel, Esq.
Fax Number: (215) 981-4750

If to Holdings, Global Private Equity II Limited Partnership, Advent Direct Investment Program Limited Partnership and Advent Partners Limited Partnership:

c/o Advent International Corporation 75 State Street Boston, MA 02109 Attention: David M. Mussafer Fax Number: (617) 951-0568

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With a copy to:

Pepper Hamilton LLP 3000 Two Logan Square Philadelphia, PA 19103 Attention: Robert A. Friedel, Esq.

Fax Number: (215) 981-4750

If to Robert Alderson, to:

Kirkland's, Inc.
P.O. Box 7222
Jackson, TN 38303-7222
Attention: Robert Alderson
Fax Number: (731) 664-9345

With a copy to:

Baker, Donelson, Bearman & Caldwell
20th Floor
First Tennessee Building
165 Madison Avenue
Memphis, TN 38103
Attention: Robert Walker, Esq.
Fax Number: (901) 577-2303

If to Robert E. Kirkland or The Robert E. Kirkland Annuity Trust - 2002, to:

Robert E. Kirkland 760 Sanders Chapel Road Union City, Tennessee 38261 Fax Number: (731) 885-7850

With a copy to:

Warner Law Firm PLC 308 West Church Street Union City, Tennessee 38261 Attention: John L. Warner, Jr., Esquire Fax Number: (731) 885-2440

If to Capital Resource Lenders II, L.P., Allied Capital Corporation or The Marlborough Capital Investment Fund, L.P., to:

Capital Resource Lenders II, L.P.

85 Merrimac Street
Suite 200
Boston, MA 02114
Attention: Alexander S. McGrath
Fax Number: (617) 723-9819

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Allied Capital Corporation 1919 Pennsylvania Ave N.W., 3rd Floor Washington, DC 20006 Attention: Gay Truscott Fax Number: (202) 659-2053

The Marlborough Capital Investment Fund, L.P.

9 Newbury Street
Boston, MA 02116
Attention: Margaret Lanoix
Fax Number: (617) 421-9631

With a copy to:

Testa, Hurwitz & Thibeault, LLP
High Street Tower
125 High Street
Boston, MA 02110
Attention: Andrew E. Taylor, Jr., Esquire
Fax Number: (617) 248-7100

If to SSM Venture Partners, L.P., to:

SSM Venture Partners, L.P.
845 Crossover Lane
Suite 140
Memphis, TN 38117
Attention: R. Wilson Orr, III
Fax Number: (901) 767-1135

With a copy to:

Bass Berry & Sims PLC
315 Deaderick Street
AmSouth Center, Suite 2700
Nashville, TN 37238-3001
Attn: Howard H. Lamar III
Fax Number: (615) 742-2709

If to Joseph R. Hyde, III, Johnston C. Adams, Jr. or John H.

Pontius, to:

c/o John H. Pontius
Pittco Management, LLC
6075 Poplar Avenue
Suite 335
Memphis, TN 38119
Fax Number: (901) 683-3147

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If to CT/Kirkland Equity Partners, L.P., to:

CT/Kirkland Equity Partners, L.P.
75 Fifth Avenue
22nd Floor
New York, NY 10017
Attention: John Oswald, Managing Director
Fax Number: (212) 277-1011

With a copy to:

LeBoeuf, Lamb, Greene & MacRae, L.L.P.
125 West 55th Street
New York, NY 10019
Attention: John R. Fallon, Partner
Fax Number: (212) 424-8500

If to R-H Capital Partners, L.P., to:

R-H Capital Partners, L.P.
303 Peachtree Road, 25th Floor
Atlanta, GA 30308
Attention: Ken Millar
Fax Number: (404) 588-7501

With a copy to:

R-H Capital Partners, L.P.
333 Peach Road
Atlanta, GA 30326
Attention: David Prince, Esquire
Fax Number: (404) 926-5229

If to Crescent/Mach I Partners, L.P., to:

c/o TCW Asset Management Company
200 Park Avenue
Suite 2200
New York, NY 10168-0228
Attention: Matthew Miller
Fax Number: (212) 771-4159

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With a copy to:

c/o TCW Asset Management Company 200 Park Avenue Suite 2200
New York, NY 10168-0228 Attention: Rich Kurth, Esquire Fax Number: (212) 771-4089

Notice of any change in any such contact information shall also be given in the manner set forth above. Whenever the giving of notice is required, the giving of such notice may be waived by the party entitled to receive such notice.

7. Counterparts. This Agreement may be executed in two or more counterparts and by facsimile, each of which shall be binding as of the date first written above, and all of which shall constitute one and the same instrument. Each such copy shall be deemed an original, and it shall not be necessary in making proof of this Agreement to produce or account for more than one such counterpart.

8. Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.

9. Governing Law. This Agreement shall be governed by and construes in accordance with the laws of the State of Tennessee.

10. Further Assurances. Each of the Redeemed Shareholders shall do or cause to be done such further acts and things and deliver or cause to be delivered such additional assignments, agreements, documents, powers, and instruments as may reasonably be required to carry into effect the purposes of this Agreement

11. Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby.

12. Entire Agreement. Other than the POA and Custody Agreement, this Agreement is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and matter contained herein. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter.

13. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, personal representatives, successors and assigns.

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IN WITNESS WHEREOF, this Stock Repurchase Agreement has been executed as of the date and year first above written.

KIRKLAND'S, INC.

By:

Name:

Title:

KIRKLAND HOLDINGS L.L.C.

By:

Name:

Title:

SSM VENTURE PARTNERS, L.P.

By:

Name:

Title:

JOSEPH R. HYDE, III

JOHNSTON C. ADAMS, JR.

JOHN H. PONTIUS

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CT/KIRKLAND EQUITY PARTNERS, L.P.

By:

Name:

Title:

R-H CAPITAL PARTNERS, L.P.

By:

Name:

Title:

CAPITAL RESOURCE LENDERS II, L.P., by
CAPITAL RESOURCE PARTNERS II, L.P.,
its General Partner

By:

Name:

Title:

ALLIED CAPITAL CORPORATION

By:

Name:

Title:

CRESCENT/MACH I PARTNERS, L.P., by
TCW ASSET MANAGEMENT COMPANY,
its investment manager

By:

Name:

Title:

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THE MARLBOROUGH CAPITAL
INVESTMENT FUND, L.P., by
MARLBOROUGH CAPITAL
MANAGEMENT, L.P., its general partner

By:

Margaret Lanoix, its authorized partner

GLOBAL PRIVATE EQUITY II LIMITED
PARTNERSHIP

By:

Name:

Title:

ADVENT DIRECT INVESTMENT PROGRAM
LIMITED PARTNERSHIP

By:

Name:

Title:

ADVENT PARTNERS LIMITED PARTNERSHIP

By:

Name:

Title:

ROBERT E. KIRKLAND

THE ROBERT E. KIRKLAND ANNUITY
TRUST - 2002

By:
Robert E. Kirkland, Trustee

ROBERT ALDERSON

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SCHEDULE 1

STOCK CHART

                                                 Class A                           Class C
                                                Preferred         Class B         Preferred         Class D
            Name                                  Stock       Preferred Stock       Stock       Preferred Stock   Common Stock(1)
            ----                                ----------    ---------------     ----------    ---------------   ---------------
Kirkland Holdings, Inc.                              --                  --               --            --                   --

SSM Venture Partners, L.P.                      312,808*(2)              --               --         1,219(2)                --

Joseph R. Hyde, III                             146,622*(2)              --               --           590(2)                --

Johnston C. Adams, Jr                             4,880*(3)              --               --            --                   --

John H. Pontius                                      --                  --               --            --                   --

CT/Kirkland Equity Partners, L.P.               390,992*                 --               --         1,781                   --

R-H Capital Partners, L.P.                      146,472*                 --               --           571                   --

Capital Resource Lenders II, L.P.                    --                  --               --         1,146                   --

Allied Capital Corporation                           --                  --               --           917                   --

Crescent/Mach I Partners, L.P.                   48,724*                 --               --           190                   --

The Marlborough Capital Investment               19,550*                 --               --            --                   --
Fund, L.P.

Global Private Equity II Limited              1,355,238*                 --               --        13,510                   --
Partnership

Advent Direct Investment Program                528,740*                 --               --         2,060                   --
Limited Partnership

Advent Partners Limited Partnership              48,724*                 --               --           403                   --

Robert Kirkland                                      --             347,745          246,250         1,353                   --

The Robert E. Kirkland Annuity                       --                  --               --            --               10,727(4)
Trust - 2002                                                                                                             pre-split
Robert Alderson                                      --                  (5)          54,218            --                   --

* The number of shares of Class A Preferred Stock held by such Member indirectly through Holdings.

(1) Including common stock issuable upon the exercise of warrants pursuant to irrevocable exercise notices previously delivered by the Redeemed Shareholders to Kirkland's.

(2) The maximum amount of all classes of preferred stock to be repurchased from this shareholder is the amount having a value equal to one-third (1/3) of the value of all equity securities held by this shareholder, with the value determined on the basis of the initial public offering price in the IPO.

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(3) The maximum amount of all classes of preferred stock to be repurchased from this shareholder is the amount having a value equal to one-quarter (1/4) of the value of all equity securities held by this shareholder, with the value determined on the basis of the initial public offering price in the IPO.

(4) The 10,727 shares of common stock for The Robert E. Kirkland Annuity Trust - 2002 is based upon the number of shares of common stock before the split of Kirkland's common stock which will take place after the date hereof but before the IPO Closing, and will be adjusted to give effect to the split of Kirkland's common stock which will take place after the date hereof but before the IPO Closing.

(5) Class B Preferred Stock having a value (including accrued dividends) of $10,000.00 will be repurchased from this shareholder.

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KIRKLAND'S, INC.
805 North Parkway
Jackson, Tennessee, 38305

June 3, 2002

Robert E. Kirkland, individually and as Trustee for The Robert E. Kirkland Annuity Trust - 2002 (the "Trust") 760 Sanders Chapel Road
Union City, Tennessee 38261

Re: Kirkland's, Inc.

Dear Robert:

As you are aware, Kirkland's, Inc. (the "Company") intends to conduct an underwritten initial public offering of the common stock of the Company (the "IPO") on the terms set forth on a registration statement on Form S-1 filed with the U.S. Securities and Exchange Commission on April 23, 2002. The purpose of this letter agreement (this "Agreement") is to set forth the agreement between you, the Trust and the Company with respect to certain issues and documents related to the IPO.

The parties hereby agree as follows:

1. If and when the IPO is consummated, in connection with the IPO, you and the Trust will sell all of the securities you currently hold (directly or as trustee of any trust) in the Company that has been acquired by you directly from the Company, including all preferred stock and all common stock, including common stock issuable upon exercise of warrants. The sale of such Company securities will be pursuant to a repurchase Agreement by and between the Company, you and certain other shareholders of the Company (the "Repurchase Agreement").

a. Pursuant to the Repurchase Agreement, at the closing of the IPO and contingent upon the closing of the IPO:

(1) all of your Class C Preferred Stock in the Company will be repurchased at 100% of its stated value;

(2) all of your Class B Preferred Stock and Class D Preferred Stock in the Company will be repurchased at 93% of the sum of its total stated value plus accrued dividends (or a higher percentage to the extent that the underwriting discount payable to the underwriters in the IPO is less than 7%);

(3) all of your and the Trust's common stock in the Company, including common stock issuable upon exercise of warrants, will be repurchased at a per share price equal to 93% of the initial public offering price of shares offered in the IPO (or a higher

percentage to the extent that the underwriting discount payable to the underwriters in the IPO is less than 7%).

b. At the closing of the IPO and contingent upon the closing of the IPO, the Company will pay in full any accrued and unpaid amounts pursuant to your Consulting Agreement with the Company dated June 12, 1996.

2. In return for the Company's agreement to provide you with the rights and make the payments to you as provided for herein, subject to the terms and conditions of this Agreement, you agree that:

a. contemporaneously with the execution of this Agreement you will:

(1) execute and deliver the Amended and Restated Shareholders Agreement, dated as of April 15, 2002, by and among the Company, you and certain other shareholders of the Company (the "Amended and Restated Shareholders Agreement"):

(2) execute and deliver the Amended and Restated Registration Rights Agreement, dated as of April 15, 2002, by and among the Company, you and certain other shareholders of the Company;

(3) execute and deliver the 180-day lock-up letter dated April 1, 2002 in the form previously provided by the underwriters in the IPO;

(4) exercise the warrants held by you to purchase Company common stock by executing and delivering irrevocable exercise notices in such form as shall be provided by the Company, together with the exercise price for the shares purchasable upon exercise of the warrants;

(5) execute and deliver the Power of Attorney and Custody Agreement and deposit with the Custodian all stock certificates and stock powers requested by the Company;

(6) complete, execute and deliver questionnaires solicited by the Company from its shareholders in connection with the IPO in the form previously provided by the Company;

(7) execute and deliver a Form W-9 and all other documents and instruments reasonably requested by the Company;

b. other shareholders of the Company will be able to sell shares of Company common stock as selling shareholders in the IPO, or have their shares of Company common stock redeemed or repurchased by the Company pursuant to the Repurchase Agreement or otherwise, in each case in such number and amounts as may be determined by the Company and such other shareholders; and

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c. from and after the date of this Agreement neither you, nor your affiliates, as defined in rule 12b-2 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), will (and you and they will not assist or encourage others to), directly or indirectly, unless specifically requested in writing to do so in advance or consented prior thereto in writing by the Company:

(1) acquire or agree, offer, seek or propose to acquire, or cause to be acquired, ownership (including, but not limited to, beneficial ownership as defined in Rule 13d-3 under the Exchange Act) of any of the assets or business of the Company or of any of its subsidiaries or any securities issued by the Company or any of its subsidiaries, or any rights or options to acquire such ownership (including from a third party), provided, however, that the restriction in this clause (1) shall be deemed not to restrict your ability (or that of your affiliates) to purchase shares of a mutual fund managed by an investment company registered as such with the Securities and Exchange Commission, so long as all such mutual funds own in the aggregate not more than two percent (2%) of the outstanding Common Stock of the Company; or

(2) make, or in any way participate in, any "solicitation" of "proxies" (as such terms are defined under Regulation 14A of the Exchange Act) to vote or seek to advise or influence in any manner whatsoever any person or entity with respect to the voting or any securities of the Company or any of its subsidiaries; or

(3) form, join or in any way participate in a "group" (within the meaning of Section 13(d)(3) of the Exchange Act) with respect to any voting securities of the Company or any of its subsidiaries; or

(4) arrange, or in any way participate in, any financing for the purchase of any voting securities or securities convertible or exchangeable into or exercisable for any voting securities or assets of the Company of any of its subsidiaries, provided, however, that the restriction in this clause (4) shall be deemed not to restrict the ability of any bank with which you are affiliated from extending loans in the ordinary course of business for the purchase of Common Stock of the Company in amounts aggregating not more than two percent (2%) of the outstanding Common Stock of the Company in total for all such loans taken together; or

(5) otherwise act, whether alone or in concert with others, to seek to propose to the Company or any of its shareholders any merger, business combination, restructuring, recapitalization or similar transaction to or with the Company or any of its subsidiaries or otherwise seek or propose to influence or control the Company's management or policies; or

(6) seek to negotiate or influence the terms and conditions of employment of employees of the Company or any of its subsidiaries or any agreement of collective bargaining with employees of the Company or any of its subsidiaries; or

(7) enter into any discussions, negotiations, arrangements or understandings with or advise, assist or encourage any third party with respect to any of the foregoing; or

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(8) disparage in any way the Company, its officers, directors, shareholders or employees or otherwise take any action that could reasonably be anticipated to harm any of their personal or professional reputations.

In addition, you also agree not to (x) request the Company directly or indirectly to amend or waive any provision of this paragraph 2(c) (including this sentence) or (y) take any action designed to or which can reasonably be expected to require the Company to make a public announcement regarding any of the matters referred to in this paragraph 2(c).

3. The parties agree that to the knowledge of each party, the following list correctly sets forth all Company securities owned by you:

Shares of Common Stock                                     9,271

Shares of Class B Preferred Stock                        347,745

Shares of Class C Preferred Shares                       246,250

Shares of Class D Preferred Shares                         1,353

Warrants to Purchase Common Stock                          1,456

4. You agree that notwithstanding your vote against each of the proposals presented to the shareholders for a vote at the meeting of shareholders of the Company held on May 24, 2002, as a result of intervening events you have reconsidered your opinion with respect to each of such proposals and you have determined that you are in favor of each such proposal and that you approve and ratify each such proposal.

5. In the event the closing of the IPO has not occurred by December 31, 2002:

a. this Agreement shall terminate and shall thereafter be of no further force or effect; and

b. the waiver of preemptive rights by you that is effectuated pursuant to Section 3(i) of the Amended and Restated Shareholders Agreement shall be null and void, and the Company shall be permitted to fully satisfy and discharge such preemptive rights through the payment to you of an amount equal to your pro rata share (as determined according to your pro rata ownership of the outstanding common stock of the Company on a fully diluted basis) of the fair market value of the options described in said Section 3(i), measured as of the date of termination of this Agreement. For purposes of the preceding sentence, except as described below in this paragraph (b), the fair market value of the options (the "Option Value") will be determined by a nationally recognized appraisal firm mutually acceptable to you and the Company. The costs of the appraisal will be borne by the Company. In the absence of agreement on the selection of an appraiser, the appraisal firm to be engaged for such valuation will be Mercer Capital of Memphis, Tennessee. In the event this Agreement terminates pursuant

-4-

to Section 5(a) and the Company thereafter completes an underwritten initial public offering of its common stock on or before June 30, 2003, the Option Value will be determined by reference to the initial public offering price in such initial public offering. If you receive any consideration from the Company pursuant to this paragraph (b), you agree not to object or otherwise receive any additional consideration from the Company in the event the Company permits other shareholders of the Company to exercise their preemptive rights (which will have been similarly waived) with respect to such option grants and receive a pro rata payment determined on basis no more favorable to the shareholders than the basis on which the payment made to you pursuant to this paragraph (b) was determined.

6. Without prejudice to the rights and remedies otherwise available to you or the Company, each of you and the Company agree that the other party shall be entitled to equitable relief by way of injunction if the other party or any of the other party's representatives breach or threaten to breach any of the provisions of this Agreement.

7. This Agreement constitutes the entire and exclusive agreement between the you and the Company respecting the subject matter hereof, superseding all prior discussions, agreements or arrangements, whether oral or written, with respect to the subject matter hereof. It may not be amended unless in writing and signed by you and the Company.

8. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other party, it being understood that all parties need not sign the same counterpart.

Very truly yours,

KIRKLAND'S, INC.

By: /s/ Reynolds C. Faulkner
   ----------------------------------
   Reynolds C. Faulkner,
   Executive Vice President and
   Chief Financial Officer

Accepted and agreed to this
3rd day of June, 2002

/s/ ROBERT E. KIRKLAND
--------------------------------------
ROBERT E. KIRKLAND,
individually and as trustee of
The Robert E. Kirkland Annuity Trust - 2002

050

EXCHANGE AGREEMENT

THIS EXCHANGE AGREEMENT (this "Agreement") is made this 31st day of May, 2002, by and between Kirkland's, Inc., a Tennessee corporation (the "Company") and Carl Kirkland ("Shareholder").

RECITALS

WHEREAS, Shareholder owns 258,425 shares of Class C Preferred Stock of the Company (the "Class C Preferred Stock"), and each share of the Class C Preferred Stock has a stated value equal to $30.83556 (the "Stated Value");

WHEREAS, the Company intends to conduct an initial public offering of the common stock of the Company (the "IPO") on the terms set forth on a registration statement on Form S-1 filed with the U.S. Securities and Exchange Commission (the "SEC") on April 23, 2002 (as the same may be hereafter amended, including any related registration statement filed pursuant to Rule 462 under the Securities Act of 1933, the "Registration Statement").

WHEREAS, the parties have agreed that, immediately prior to the closing of the IPO (the "IPO Closing"), Shareholder will exchange all of the shares of Class C Preferred Stock held by him (the "Exchange Shares") for such number of shares of the Company's common stock, no par value per share (the "Common Stock"), as provided for in this Agreement;

NOW THEREFORE, in consideration of the premises and the mutual covenants contained in this Agreement, the parties to this Agreement, intending to be legally bound, hereby agree as follows:

1. Exchange. Upon the terms and subject to the conditions set forth herein, effective immediately prior to the IPO Closing, Shareholder hereby assigns, transfers, conveys and delivers the Exchange Shares to the Company, and the Company, in exchange therefor, hereby agrees to issue and deliver to Shareholder, immediately prior to the IPO Closing, such number of shares of Common Stock equal to (x) the Stated Value for all of the Exchange Shares divided by (y) 93% of the initial public offering price per share at which the Common Stock is sold in the IPO.

2. Deliveries. Contemporaneously with the execution of this Agreement, Shareholder agrees to deposit with the Custodian, pursuant to the Irrevocable Power of Attorney and Custodian Agreement executed by the Shareholder as of May 31, 2002 (the "POA"), (i) the stock certificates representing the Exchange Shares exchanged by Shareholder pursuant to Section 1 hereof and (ii) stock powers for the shares of Common Stock that Shareholder is to receive under this Agreement pursuant to Section 1 hereof (the "New Common Shares"), duly endorsed or accompanied by appropriate stock, in order to facilitate the transfer of the Exchange Shares under this Agreement and the shares of Common Stock in connection with the IPO.

3. Sale of Common Stock. Shareholder hereby agrees to sell the New Common Shares, as a selling shareholder in the IPO pursuant to a Purchase Agreement with the

underwriters, and Shareholder has authorized the attorney-in-fact under the POA to enter into a Purchase Agreement with the underwriters for that purpose.

4. Termination. This Agreement shall terminate and be wholly without force or effect in the event that the IPO Closing does not occur by December 31, 2002.

5. Representations and Warranties of Shareholder. Shareholder hereby represents, warrants, covenants, agrees and acknowledges to the Company the following to be true and correct in all respects as to himself:

a. Title; Third-Party Options. There are no contracts, options, commitments or rights of any kind, by or through Shareholder, with, to or in any third party to acquire all or any portion of the Exchange Shares held by Shareholder and Shareholder has good title to such shares and owns such shares free and clear of any claim, mortgage, assignment, conditional sale, lease, easement, consignment, bailment, contingent interest, pledge, lien, option, charge, security interest, preemptive right, encumbrance or other restrictions of any kind or nature whatsoever, other than restrictions imposed by the Securities Act (as defined below) or any other securities laws, and other than any restrictions which have been waived or will terminate prior to the IPO Closing.

b. No View to Distribution or Resale. Shareholder will acquire the New Common Shares solely for his own account without a view to the distribution or resale thereof other than pursuant to a Registration (as defined below) or an exemption therefrom, and Shareholder does not have any contract, undertaking, agreement or arrangement to sell or otherwise transfer or dispose of any of such shares in any manner to any person except as contemplated by this Agreement.

c. No Transfer Without Registration or Exemption. Shareholder will not, except as contemplated by this Agreement, sell, transfer or otherwise dispose of any of the New Common Shares in any manner, unless at the time of any such transfer: (i) a Registration is in effect with respect to the New Common Shares to be sold, transferred or disposed of, and Shareholder complies with all of the requirements of the Securities Act and the Applicable Laws (as defined below) with respect to the proposed transaction; or
(ii) Shareholder has obtained and has provided to the Company an opinion from counsel satisfactory to the Company (as to both the counsel rendering such opinion and the substance of the opinion) that the proposed sale, transfer or disposition does not require Registration.

d. Securities Legend. A legend will be placed on the certificates evidencing all New Common Shares and stop-transfer instructions will be issued to any transfer agent with respect to such shares to ensure compliance with the provisions of this Agreement the Securities Act and the Applicable Laws.

e. Investment Risk. Shareholder can bear the economic risk of his acquisition and ownership of the New Common Shares, including the total loss of his investment, has no need for liquidity in this investment and, either individually or with his advisers, has such knowledge and experience in financial and business matters that he is capable

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of evaluating the merits and risks of the Company and the investment in the New Common Shares.

f. Review of Company's Registration Statement. Shareholder has received the Registration Statement and all other documents requested by Shareholder have been carefully reviewed by him and Shareholder understands the information contained therein.

g. Knowledge and Experience. Shareholder, together with his advisers, have such knowledge and experience in financial, tax, and business matters, and, in particular, investments in securities, so as to enable them to utilize the information made available to them in connection with the New Common Shares to evaluate the merits and risks of an investment in the New Common Shares and to make an informed investment decision with respect thereto.

h. Accredited Investor Status. Shareholder is an "accredited investor," as such term is defined under Regulation D under the Securities Act.

i. No Reliance. Shareholder is not relying on the Company or any of its employees or agents with respect to the legal, tax, economic and related considerations of an investment in the New Common Shares, and Shareholder has relied on the advice of, or have consulted with, only his own advisers with respect to such matters.

j. Definitions. As used herein: the term "Registration" means registration under the Securities Act and, with respect to the Applicable Laws, such registration thereunder (or, with respect to any of the Applicable Laws which do not provide for registration, such compliance therewith which is similar to registration) which has then resulted in statutory or administration authorization for the proposed transaction; the term "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations thereunder; and the term "Applicable Laws" means any applicable state securities laws and, to the extent applicable to offers or sales of securities, the Securities Exchange Act of 1934, as amended, and the rules and regulations under the foregoing.

6. Governing Law. This Agreement shall be governed by and interpreted and enforced in accordance with the substantive laws of the State of Tennessee.

7. No Benefit to Others. The representations, warranties, covenants and agreements contained in this Agreement are for the sole benefit of the parties hereto and their executors, legal representatives, successors and assigns, and they shall not be construed as conferring and are not intended to confer any rights on any other persons.

8. Contents of Agreement. This Agreement together with any documents referred to herein set forth the entire agreement of the parties hereto and supersede any prior agreement or understanding of the parties with respect to the transactions contemplated hereby. This Agreement may not be amended except by an instrument in writing signed by the parties hereto, and no claimed amendment, modification, termination or waiver shall be binding unless in writing and signed by the party against whom or which such claimed amendment, modification, termination or waiver is sought to be enforced.

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9. Further Assurances. Each of the Shareholder and the Company shall do or cause to be done such further acts and things and deliver or cause to be delivered such additional assignments, agreements, documents, powers, and instruments as may reasonably be required to carry into effect the purposes of this Agreement

10. Severability. Any provision of this Agreement which is invalid or unenforceable in any jurisdiction shall be ineffective to the extent of such invalidity or unenforceability without invalidating or rendering unenforceable the remaining provisions hereof, and any such invalidity or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

11. Counterparts. This Agreement may be executed in any number of counterparts, which when taken together, shall constitute but one and the same instrument. Any and all counterparts may be executed by facsimile.

[Execution page to follow]

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IN WITNESS WHEREOF, the parties have executed and delivered this Exchange Agreement on the date first above written.

KIRKLAND'S, INC.

By: /s/ Robert Alderson
   ------------------------------
    Name:  Robert Alderson
    Title: Chief Executive Officer and
           President


 /s/ Carl Kirkland
------------------------------
Carl Kirkland

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SPECIAL BONUS AGREEMENT

THIS SPECIAL BONUS AGREEMENT (the "Agreement") is made as of the 1st day of June, 2002, by and between KIRKLAND'S, INC., a Tennessee corporation, (the "Company"), and CARL KIRKLAND ("Executive").

WHEREAS, in recognition of extraordinary efforts by Executive on behalf of the Company and as an inducement to the continuation of those efforts, the Company wishes to provide for the payment of certain special bonuses to Executive subject to the terms of this Agreement.

NOW THEREFORE, in consideration of this premise and the mutual promises contained herein, and intending to be legally bound hereby, the parties agree as follows:

SECTION 1. Special Bonuses.

1.1. Generally. In addition to the rights, payments and benefits that Executive will have under the Employment Agreement between him and the Company dated on the same date as this Agreement, Executive will be eligible to receive the Special Bonuses described in this Section 1.1, which are in addition to and not in lieu of the payment due to Executive pursuant to Section 1.4 hereof.

(a) If a Transaction occurs between the date hereof and April 15, 2003 and the Executive remains continuously employed by the Company through the date of that Transaction, Executive will be entitled to a payment equal to $712,500 times a fraction, the numerator of which will be the number of days between April 15, 2002 and the date of the Transaction, and the denominator of which will be 365. Thereafter, no further Special Bonuses will be paid.

(b) If no Transaction occurs between the date hereof and April 15, 2003, Executive will be entitled to the payment of $712,500 if he remains continuously employed by the Company through April 15, 2003.

(c) If no Transaction occurs between the date hereof and April 15, 2003, but a Transaction occurs between April 15, 2003 and June 12, 2003 and Executive remains continuously employed by the Company through the date of that Transaction, Executive will be entitled to a payment equal to $113,500 times a fraction, the numerator of which will be the number of days between April 15, 2003 and the date of the Transaction, and the denominator of which will be 58. Thereafter, no further Special Bonuses will be paid.

(d) If the provisions of Section 1.1(b) hereof apply, and no Transaction occurs between April 15, 2003 and June 12, 2003, Executive will be entitled to the payment of $113,500 if he remains continuously employed by the Company through June 12, 2003. Thereafter, no Special Bonuses will be paid.

Amounts payable under this Section 1.1 will be paid within two (2) business days following the date or Transaction triggering the right to such payment.

1.2. Termination for Cause. If Executive's employment is terminated by the Company for Cause, he will not be entitled to any Special Bonus payment for which the applicable payment date has not by then occurred and he will have no further rights under this Agreement.

1.3. Other Terminations. If Executive's employment with the Company terminates for any reason other than for Cause, the payments described in
Section 1.1 will be made in the amounts and at the times therein specified, as though he had remained employed by the Company. In the event of Executive's death, amounts payable under this Section will be paid to Executive's estate.

1.4. Amounts Payable Under 1996 Agreement. As soon as allowable under the Debt Obligations, Executive will be entitled to a payment from the Company equal to the amount accrued but unpaid under Sections 2(b) and 10 of the 1996 Agreement as of the date immediately prior to the date hereof. This payment will be in lieu of, and not in addition to, any further payment under Sections 2(b) or 10 of the 1996 Agreement, which agreement is terminated and superseded as of the date hereof.

SECTION 2. Subordination. The obligations of the Company set forth in this Agreement are intended to be and are subordinated in all respects to the Debt Obligations. If any payment hereunder is deferred by reason of this Section 2, such payment will be made to the Executive as soon as allowable under the terms of the Debt Obligations and the payment shall be increased by nine percent (9%) per annum, compounded semi-annually from the date originally due until the date paid.

SECTION 3. Definitions. For purposes of this Agreement, capitalized terms have the meanings defined in this section, unless the context clearly requires otherwise.

3.1. "1996 Agreement" means the Employment Agreement between Executive and the Company dated June 12, 1996, as amended.

3.2. "Cause" means the occurrence of any of the following material violations, as determined in good faith by the Board: (a) Executive's failure, refusal or inability (other than due to mental or physical disability) to perform, in any material respect, his duties to the Company, which failure continues for more than fifteen (15) days after written notice thereof from the Company, (b) alcohol abuse or use of controlled drugs (other than in accordance with a physician's prescription), (c) illegal conduct or gross misconduct of Executive which is materially and demonstrably injurious to the Company, its affiliates or subsidiaries including, without limitation, fraud, embezzlement, theft or proven dishonesty in the course of his employment, (d) conviction of a misdemeanor involving moral turpitude or a felony, or (v) the entry of a plea of guilty or nolo contendere to a misdemeanor involving moral turpitude or a felony. For purposes of this Agreement, any resignation by Executive in anticipation of a termination by the Company for Cause will be deemed to be a termination for Cause.

3.3. "Debt Obligations" means the "Mezzanine Debt," as that term is defined in the Recapitalization Agreement, and any debt financing senior in priority to the Mezzanine Debt and secured by a first priority perfected security interest in substantially all of the Company's assets.

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3.4. "Recap Agreement" means the Recapitalization Agreement among Kirkland Holdings L.L.C., Kirkland's, Inc., certain companies affiliated with Kirkland's, Inc., Carl Kirkland, Robert Kirkland, Bruce Moore, and Robert Alderson dated April 26, 1996, as amended.

3.5. "Special Bonuses" means the bonuses described in Section 1.1 of this Agreement.

3.6. "Transaction" means the occurrence of a "Change in Control," "Qualified Public Offering," "Sale," or "Refinancing," as those terms are defined in the Recap Agreement.

SECTION 4. Miscellaneous.

4.1. Withholding. All payments under this Agreement will be subject to withholding for applicable income, social security and other taxes and charges which are required by law to be withheld by the Company.

4.2. Successors and Assigns. This Agreement will inure to the benefit of and be binding upon the Company and Executive and their respective successors, executors, administrators, heirs and (in the case of the Company) permitted assigns. The Company may assign this Agreement to any successor to all or substantially all of its assets and business by means of liquidation, dissolution, merger, consolidation, transfer of assets, or otherwise. Executive may not make any assignment of this Agreement or any interest herein.

4.3. Entire Agreement; Amendments. Except as otherwise provided herein, this Agreement contains the entire agreement and understanding of the parties hereto relating to the subject matter hereof, and merges and supersedes all prior and contemporaneous discussions, agreements and understandings of every nature relating subject matter hereof (including the 1996 Agreement, as provided for in Section 1.4 thereof). This Agreement may not be changed or modified, except by an Agreement in writing signed by each of the parties hereto.

4.4. Governing Law. This Agreement will be governed by, and enforced in accordance with, the laws of the State of Tennessee, without regard to the application of the principles of conflicts of laws.

4.5. Section Headings. The section headings in this Agreement are for convenience only; they form no part of this Agreement and will not affect its interpretation.

4.6. Counterparts and Facsimiles. This Agreement may be executed, including execution by facsimile signature, in one or more counterparts, each of which shall be deemed an original, and all of which together shall be deemed to be one and the same instrument.

[This space left blank intentionally; signature page follows.]

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IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer, and Executive has executed this Agreement, on June 1, 2002, effective as of the date first above written.

KIRKLAND'S, INC.

By: /s/ Robert Alderson
    -------------------------------------------
    Robert Alderson

Title: Chief Executive Officer and President

EXECUTIVE

/s/ Carl Kirkland
-----------------------------------------------
Carl Kirkland

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SPECIAL BONUS AGREEMENT

THIS SPECIAL BONUS AGREEMENT (the "Agreement") is made as of the 1st day of June, 2002, by and between KIRKLAND'S, INC., a Tennessee corporation, (the "Company"), and ROBERT ALDERSON ("Executive").

NOW THEREFORE, in consideration of this premise and the mutual promises contained herein, and intending to be legally bound hereby, the parties agree as follows:

SECTION 1. Special Bonuses.

(a) If a Transaction occurs between the date hereof and April 15, 2003 and the Executive remains continuously employed by the Company through the date of that Transaction, Executive will be entitled to a payment equal to $149,500 times a fraction, the numerator of which will be the number of days between April 15, 2002 and the date of the Transaction, and the denominator of which will be 365. Thereafter, no further Special Bonuses will be paid.

(b) If no Transaction occurs between the date hereof and April 15, 2003, Executive will be entitled to the payment of $149,500 if he remains continuously employed by the Company through April 15, 2003.

(c) If no Transaction occurs between the date hereof and April 15, 2003, but a Transaction occurs between April 15, 2003 and June 12, 2003 and Executive remains continuously employed by the Company through the date of that Transaction, Executive will be entitled to a payment equal to $24,000 times a fraction, the numerator of which will be the number of days between April 15, 2003 and the date of the Transaction, and the denominator of which will be 58. Thereafter, no further Special Bonuses will be paid.

(d) If the provisions of Section 1.1(b) hereof apply, and no Transaction occurs between April 15, 2003 and June 12, 2003, Executive will be entitled to the payment of $24,000 if he remains continuously employed by the Company through June 12, 2003. Thereafter, no Special Bonuses will be paid.

Amounts payable under this Section 1.1 will be paid within two (2) business days following the date or Transaction triggering the right to such payment.

SECTION 3. Definitions. For purposes of this Agreement, capitalized terms have the meanings defined in this section, unless the context clearly requires otherwise.

3.1. "1996 Agreement" means the Employment Agreement between Executive and the Company dated June 12, 1996, as amended.

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3.5. "Special Bonuses" means the bonuses described in Section 1.1 of this Agreement.

3.6. "Transaction" means the occurrence of a "Change in Control," "Qualified Public Offering," "Sale," or "Refinancing," as those terms are defined in the Recap Agreement.

SECTION 4. Miscellaneous.

4.4. Governing Law. This Agreement will be governed by, and enforced in accordance with, the laws of the State of Tennessee, without regard to the application of the principles of conflicts of laws.

4.5. Section Headings. The section headings in this Agreement are for convenience only; they form no part of this Agreement and will not affect its interpretation.

[This space left blank intentionally; signature page follows.]

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KIRKLAND'S, INC.

By:    /s/ Carl Kirkland
       -------------------------------
       Carl Kirkland

Title: Chairman

EXECUTIVE

/s/ Robert Alderson
 --------------------------------------
 Robert Alderson

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PROMISSORY NOTE
(Reynolds C. Faulkner)

Up to $717,000 as of May 4, 2002

In consideration of the loan (hereinafter referred to as a "Loan"), KIRKLAND'S, INC., a Tennessee corporation (the "Lender"), has made or has agreed to make to REYNOLDS C. FAULKNER, (the "Borrower"), and for value received, the Borrower hereby promises to pay to the order of the Lender, at the Lender's office located at 805 N. Parkway, Jackson, Tennessee 38308 or at such other place in the continental United States as the Lender may designate in writing, in lawful money of the United States, and in immediately available funds, the principal sum of SEVEN HUNDRED SEVENTEEN THOUSAND DOLLARS ($717,000), or such lesser amount as has actually been advanced by the Lender to the Borrower hereunder, together with all accrued interest thereon.

1. Advances under this Note.

a. Initial Advance. The Lender has advanced to the Borrower Two Hundred Seventeen Thousand Dollars ($217,000) under this Note as of the date first set forth above, constituting the initial principal amount outstanding hereunder.

b. Subsequent Advance. At the request of the Borrower, the Lender agrees to lend an additional amount under this Note to the Borrower on one occasion only, on April 10, 2003, in an amount not to exceed the lesser of (a) Five Hundred Thousand Dollars ($500,000), or (b) the amount payable by the Borrower to the U.S. Treasury as "alternative minimum tax" as shown on the Borrower's Form 1040 tax return that he will be filing for the year 2002. Any additional advance pursuant to this paragraph (b) shall give rise to an increase in the outstanding principal amount of the Loan in the amount of such additional advance.

2. Payments of Principal and Interest.

a. Scheduled Maturity. The entire outstanding principal balance of this Promissory Note (the "Note"), together with all accrued interest and other fees, expenses and other amounts accrued hereunder, shall be due and payable in full on the earlier of May 4, 2005 or such earlier date that this Note is accelerated pursuant to Paragraph 3(b) hereof.

b. Interest. The Borrower hereby further promises to pay to the order of the Lender interest on the outstanding principal amount from the date first set forth above, at a per annum rate equal to four and seventy-five hundredths percent (4.75%)(the "Loan Rate"). Interest will accrue on any additional advance made pursuant to Section 1(b) hereof from and after the date of such additional advance on the outstanding principal amount of such additional advance. Accrued interest will be due and payable on each of the first, second and third anniversaries of the date first set forth above. The Borrower shall pay on demand interest on any overdue payment of principal and interest (to the extent legally enforceable) at the Loan Rate plus two percent (2%) (the "Default Rate").

c. Application of Payments. All payments made on this Note (including, without limitation, prepayments) shall be applied, at the option of the Lender, first to late charges and collection costs, if any, then to accrued interest and then to principal. Interest

payable hereunder shall be calculated for actual days elapsed on the basis of a 360-day year. All accrued and unpaid interest shall be due and payable upon maturity of this Note. After maturity or in the Event of Default, interest shall continue to accrue on this Note at the Default Rate set forth above, and shall be payable on demand of the Lender.

d. Optional Prepayment. The outstanding principal amount of this Note may be prepaid in whole or in part without any prepayment penalty or premium at any time or from time to time by Borrower upon notice to the Lender; provided, that any prepayment shall be applied first to any interest due to the date of such prepayment on this Note and thereafter shall be applied to the installments of principal hereunder in the inverse order of maturity.

e. Maximum Interest Rate. Notwithstanding anything in this Note, the interest rate charged hereon shall not exceed the maximum rate allowable by applicable law. If any stated interest rate herein exceeds the maximum allowable rate, then the interest rate shall be reduced to the maximum allowable rate, and any excess payment of interest made by Borrower at any time shall be applied to the unpaid balance of any outstanding principal of this Note.

3. Events of Default.

a. The occurrence of any of the following events or circumstances shall constitute an Event of Default hereunder:

(i) A default in the payment by the Borrower to the Lender of principal or interest under this Note as and when the same shall become due and payable; or

(ii) Institution of any proceeding by or against the Borrower under any present or future bankruptcy or insolvency statute or similar law and, if involuntary, if the same are not stayed or dismissed within sixty (60) days, or the Borrower's assignment for the benefit of creditors or the appointment of a receiver, trustee, conservator or other judicial representative for the Borrower or the Borrower's property or the Borrower's being adjudicated as bankrupt or insolvent; or

(iii) An event of default under any pledge or security agreement collateralizing the obligations under this Note; or

(iv) The expiration of the thirty (30) day period following the date the Borrower ceases for any reason to remain in service to the Lender. For this purpose, the Borrower will be considered to remain in service to the Lender for so long as the Borrower renders services as a director, consultant or employee of the Lender, or to any successor entity or one or more of the Lender's fifty (50%) percent or more owned (direct or indirect) subsidiaries.

b. Upon the occurrence of an Event of Default hereunder, this Note shall automatically without any action or notice by Lender, be accelerated and become immediately due and payable, and Lender shall have all of the rights and remedies provided for herein or otherwise available at law or in equity, all of which remedies shall be cumulative.

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4. Notices. Notices required to be given hereunder shall be deemed validly given (i) three business days after sent, postage prepaid, by certified mail, return receipt requested, (ii) one business day after sent, charges paid by the sender, by Federal Express Next Day Delivery or other guaranteed delivery service, (iii) when sent by facsimile transmission, or (iv) when delivered by hand:

If to the Lender:        Kirkland's, Inc.
                         805 N. Parkway
                         P.O. Box 7222
                         Jackson, Tennessee 38308-7222
                         Attn: General Counsel

If to the Borrower:      Reynolds C. Faulkner
                         20 Deepwood Drive
                         Jackson, Tennessee 38305

or to such other address, or in care of such other person, as the holder or the Borrower shall hereafter specify to the other from time to time by due notice.

5. Miscellaneous.

a. Payment of this Note will be secured by a pledge of certain collateral with the Lender pursuant to a separate pledge or security agreement. However, the Borrower is personally liable for payment of this note and his assets may be applied to the satisfaction of his obligations hereunder. Neither the reference to nor the provisions of any agreement or document referred to herein shall affect or impair the absolute and unconditional obligation of the Borrower to pay the principal of and interest on this Note as herein provided.

b. In addition to any rights now or hereafter granted under applicable law and not by way of limitation of any such rights, upon and after any amount becomes due and payable hereunder, the Lender is hereby authorized by the Borrower, without notice to the Borrower, any such notice being hereby expressly waived, to set off and appropriate and to apply any and all obligations of Lender to the Borrower (including, without limitation, salary, bonuses, deferred compensation and non-qualified retirement plan benefits then payable and any other compensatory amounts) against and on account of the amount then due and payable to Lender.

c. Any action, suit or proceeding arising out of or relating to this Note, or the breach, termination or validity thereof, shall be litigated exclusively in the [trial court] of the State of Tennessee (the "State Court"). Each of the parties hereto hereby irrevocably and unconditionally (i) submits to the jurisdiction of the State Court, (ii) agrees not to commence any proceeding relating to this Note except in the State Court, (iii) waives, and agrees not to plead or to make, any objection to the venue of any such proceeding in the State Court, (iv) waives, and agrees not to plead or to make, any claim that any such proceeding brought in the State Court has been brought in an improper or otherwise inconvenient forum, (v) waives, and agrees not to plead or to make any claim that the State Court lacks personal jurisdiction over it, (vi) waives its right to remove any such proceeding to the federal courts except where such courts are vested with sole and exclusive jurisdiction by statute, and (vii) understands and agrees

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that it shall not seek a jury trial or punitive damages in any such proceeding based upon or arising out of or otherwise related to this Note and waives any and all rights to any such jury trial or to seek punitive damages. Borrower waives personal service of process and agrees that a summons and complaint commencing an action or proceeding in State Court will be properly served if served by registered or certified mail in accordance with the notice provisions set forth herein.

d. The Borrower hereby waives presentment, demand, notice of nonpayment, protest, notice of protest, notice of dishonor and any and all other notices in connection with any default in the payment of, or any enforcement of the payment of all amounts due under this Note. To the extent permitted by law, the Borrower waives the right to any stay of execution and the benefit of all exemption laws now or hereafter in effect. The Borrower agrees that extension or extensions of the time of payment of this Note or any installment or part thereof may be made before, at or after maturity by agreement by the Lender. The Borrower shall pay to the Lender, upon demand, all costs and expenses, including, without limitation, attorneys' fees and legal expenses, that may be incurred by the Lender in connection with the enforcement of this Note.

e. Any failure by the Lender to exercise any right hereunder shall not be construed as a waiver of the right to exercise the same or any other right at any time. No amendment to or modification of this Note shall be binding upon the Lender unless in writing and signed by it. Any provision hereof found to be illegal, invalid or unenforceable for any reason whatsoever shall not affect the validity, legality or enforceability of the remainder hereof. This Note shall apply to and bind the successors of the Borrower and shall inure to the benefit of the Lender, its successors and assigns.

f. This Note shall be governed by and interpreted in accordance with the laws of the State of Tennessee.

IN WITNESS WHEREOF, the Borrower has duly executed this Note as of the day and year first set forth above.

/s/ Reynolds C. Faulkner
------------------------
REYNOLDS C. FAULKNER

Accepted, Acknowledged and Agreed:

KIRKLAND'S, INC.

By: /s/ Robert E. Alderson
   --------------------------------------------
   Name: Robert E. Alderson
   Title: Chief Executive Officer and President

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EXHIBIT 10.24

STOCK PLEDGE AGREEMENT

THIS STOCK PLEDGE AGREEMENT (the "Agreement") is made this 4th day of May 2002, by REYNOLDS C. FAULKNER (the "Obligor") in favor of KIRKLAND'S, INC., a Tennessee corporation (the "Secured Party").

Background

A. Contemporaneously herewith, the Obligor is borrowing up to $717,000 from the Secured Party pursuant to a Term Note dated the date hereof (as hereafter amended, modified or supplemented, the "Note").

B. The Obligor is a director, an Executive Vice President and the Chief Financial Officer of the Secured Party. In order to secure the Obligor's obligations under the Note, the Obligor has agreed to pledge and to grant to the Secured Party a security interest in and to (i) certain marketable securities owned by the Obligor and (ii) all of the shares of Common Stock of the Secured Party ("Common Stock") and all other securities of the Secured Party owned or hereafter acquired by the Obligor.

NOW, THEREFORE, the parties hereto, in consideration of the consummation of the aforementioned loan by the Secured Party to the Obligor, and intending to be legally bound hereby, agree as follows:

1. Pledge of Collateral.

1.1. Pledge of Stock. To secure the payment of all amounts due or to become due to the Secured Party under the Note (collectively the "Indebtedness"), the Obligor hereby pledges to the Secured Party and grants to the Secured Party a first lien on, and security interest in, the Collateral (as hereinafter defined). In furtherance of this Agreement, the Obligor has entered into that certain Collateral Assignment of Brokerage Account with Solomon Smith Barney (the "Brokerage Firm") in favor of the Secured Party (the "Collateral Assignment")

1.2. Designation of Collateral. The term "Collateral" when used herein shall include (i) marketable securities owned by the Obligor having a Fair Market Value (as hereinafter defined) as of the date of this Agreement equal to no less than the principal amount outstanding under the Note and (ii) any shares of Common Stock and any other securities of the Secured Party now owned or hereafter acquired by the Obligor, or in which the Obligor now has or hereafter acquires any beneficial interest, together with any securities, instruments or distributions of any kind issuable, issued or received upon conversion of, in respect of, or in exchange or in substitution for any such Collateral, including, but not limited to, those arising from a stock dividend, stock split, reclassification, reorganization, merger, consolidation, sale of assets or other exchange of securities, or any dividends, cash, property or other distributions of any kind upon, with respect to, or in consequence of the ownership of, the Collateral. In the event subscriptions, warrants, options or other rights are issued in connection with any Collateral, such subscriptions, warrants, options and rights shall be deemed to be part of the Collateral. The term "Collateral" shall also include any additional Collateral delivered by the Obligor to the Secured Party pursuant to Section 1.3 hereof. As used in this Agreement, the term "Fair Market Value" shall mean, as of any date: (i) with respect to the marketable securities, the

closing price of such marketable securities as reported on the principal national securities exchange(s) on which such marketable securities are traded on such date, or if no price for such marketable securities are reported on such date, the closing price of such securities on the last preceding date on which there were reported prices for such securities; or (ii) with respect to marketable securities that are not listed or admitted to unlisted trading privileges on a national securities exchange, the closing price of such securities as reported by The Nasdaq Stock Market on such date, or if no price for such marketable securities are reported on such date, the closing price of such securities on the last preceding date on which there were reported prices for such securities; or (iii) with respect to any assets that are not marketable securities traded on a national securities exchange or on The Nasdaq National Stock Market, then the Fair Market Value shall be determined by the Secured Party, acting in its discretion, which determination shall be conclusive.

1.3. Delivery of Initial Collateral and Additional Collateral. The Obligor has delivered, and by these presents does hereby deliver, to the Secured Party the certificates representing the Collateral (the "Certificates"), together with stock powers for the Certificates duly executed in blank for transfer by the Obligor. The Obligor agrees that upon the acquisition by the Obligor of any additional securities of the Secured Party included in the definition of Collateral prior to the termination of this Agreement, the Obligor shall deliver the Certificates representing such securities, with stock powers duly endorsed for transfer, to the Secured Party as additional Collateral to be held by the Secured Party pursuant to the terms of this Agreement. The Obligor further agrees that, within 10 days after the Secured Party's written request, he shall deliver additional collateral to the Secured Party from time to time hereafter to be held pursuant to the terms of this Agreement to the extent that the Fair Market Value of the Collateral held by the Secured Party, together with all Collateral pledged pursuant to the Collateral Assignment, falls below 125% of the principal amount then outstanding under the Note; provided, however, to to the extent that the additional collateral consists of marketable securities, the Obligor may subject such marketable securities to the pledge under the Collateral Assignment though the Brokerage Firm. Such additional collateral shall be in such form as shall be reasonably acceptable to the Secured Party.

2. Additional Amounts Secured. In addition to the Obligor's prompt and full repayment of the Indebtedness, the security interest and pledge created hereby shall secure reimbursement to the Secured Party for: (i) all costs and expenses incurred in collection of all amounts due to the Secured Party from the Obligor, including without limitation, the costs of suit and attorneys' fees in execution of this Agreement and the Note; (ii) prompt performance by the Obligor of his obligations under the Note and this Agreement; and (iii) interest on all of the foregoing at the rates set forth in the Note.

3. Covenants. Until the termination of this Agreement and the security interest and pledge created hereby:

3.1. The Obligor shall not, nor shall the Obligor permit, without the prior written consent of the Secured Party, the sale, transfer, pledge, hypothecation or other encumbrance, or the execution of an agreement contemplating any of the foregoing for all or any part of the Collateral;

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3.2. The Obligor shall, at the Obligor's expense, defend the Secured Party's right, title, special property and security interest in and to the Collateral and the proceeds thereof; and

3.3. In the event any of the Collateral ceases to be certificated and is held by a financial intermediary in electronic form, the Obligor agrees promptly to cause such financial intermediary to enter into a control agreement satisfactory to the Secured Party and do all other acts and things reasonably required by the Secured Party to perfect and maintain perfected the security interest and pledge created hereby.

4. Representations and Warranties of the Obligor.

The Obligor hereby makes the following representations and warranties to the Secured Party:

4.1. Except for the security interest granted pursuant to
Section 1 hereof, all of the Collateral is owned by the Obligor, free and clear of any and all options, claims, security interests, liens, pledges, encumbrances and security interests, except that created herein; and

4.2. The execution and delivery of this Agreement, the consummation of the transactions provided for herein, and the fulfillment of the terms hereof, will not result in the breach of any of the terms, conditions or provisions of, or constitute a default under, or conflict with, or cause any acceleration of any obligation under, any agreement or other instrument to which the Obligor or the Secured Party is a party or by which either of them is bound, or any provision of the Charter or Bylaws of the Secured Party, or any judgment, decree, order or award of any court, governmental body or arbitrator or any applicable law, rule or regulation.

5. Voting and Distributions Prior to Default.

5.1. Voting. Prior to the occurrence of an Event of Default hereunder, the Obligor shall have the right to vote the securities constituting the Collateral owned by him; provided, however, that the Obligor shall not in any event vote such securities in a manner which would cause or constitute an Event of Default under this Agreement or under the Note or would otherwise be inconsistent with any of the terms, conditions or provisions of this Agreement or the Note.

5.2. Distributions. Prior to the occurrence of an Event of Default, the Obligor shall be entitled to receive directly from the Secured Party all dividends, property and cash distributions with respect to, or in consequence of the ownership of, the Collateral.

6. Default

6.1. Events of Default. There shall be an "Event of Default" for purposes of this Agreement if: (i) any "event of default" (as defined therein) shall have occurred and be continuing under the Note; or (ii) the Obligor shall fail to observe any agreement, condition, undertaking, or covenant in this Agreement.

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6.2. Consequences of Default. Upon the occurrence of an Event of Default, and until the termination of this Agreement:

6.2.1. The Secured Party may notify the Obligor of the occurrence of such Event of Default;

6.2.2. The Secured Party shall be entitled to receive and apply in payment of amounts payable by the Obligor under the Note all dividends, property and cash distributions with respect to, or in consequence of the ownership of, the Collateral;

6.2.3. The Secured Party shall be entitled and authorized to exercise in its discretion all voting rights, if any, pertaining to the Collateral and in connection therewith, which authorization herein granted shall be deemed an irrevocable power coupled with an interest;

6.2.4. The Obligor shall take any action necessary or required or requested by the Secured Party, in order to allow the Secured Party fully to enforce the pledge of the security interest in and to the Collateral hereunder and realize thereon to the fullest possible extent, including but not limited to the filing of any claims with any court, liquidator or trustee, custodian, receiver or other like person or party and the execution of any dividend, payment or brokerage orders or proxies; and

6.2.5. The Secured Party shall have all the rights and remedies granted or available to it hereunder, under the Uniform Commercial Code as in effect from time to time, under any other statute or the common law, or under the Note, including the right to sell the Collateral or any portion thereof at one or more public or private sales upon twenty (20) days' written notice and to bid thereat or purchase any part or all thereof in its own or a nominee's or nominees' names, free and clear of any equity of redemption; and to apply the net proceeds of the sale, after deduction for any expenses of sale, including the payment of all the Secured Party's reasonable attorneys' fees in connection with the Indebtedness and the sale, to the payment of the Indebtedness in any manner or order which the Secured Party in its sole discretion may elect, without further notice to or consent of the Obligor and without regard to any equitable principles of marshalling or other like equitable doctrines. To the extent that the proceeds of such sale are insufficient to satisfy all of the Indebtedness, the Obligor shall remain liable for the amount of such deficiency.

7. Delay, Non-Waiver and Exclusive Remedies.

7.1. Non-Exclusive Remedies. No remedy or right herein conferred upon or reserved to the Secured Party is intended to be to the exclusion of any other remedy or right, but each and every such remedy or right shall be cumulative, and shall be in addition to every other remedy or right given hereunder, and now or hereafter existing at law or in equity.

7.2. Delay and Non-Waiver. No delay or omission by the Secured Party to exercise any remedy or right accruing upon an Event of Default shall impair any such remedy or right, or shall be construed to be a waiver of any such Event of Default, or an acquiescence therein, nor shall it affect any subsequent Event of Default of the same, or a different nature.

8. Indemnification. The Obligor shall defend, indemnify, and hold harmless Secured

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Party from and against any loss, liability, damage, or expense which the Secured Party may incur as a result of the taking, holding, and/or disposing of the Collateral and the Certificates, unless such loss, liability, damage, or expense was caused by the gross negligence or willful misconduct of the Secured Party or its agents.

9. Rights Retained by the Obligor. So long as no Event of Default shall have occurred and be continuing hereunder or under the Note, the Obligor shall retain and may exercise all rights of or incident to the ownership of the Collateral.

10. Termination. This Agreement and the security interests and pledge created hereby shall terminate on the payment in full by the Obligor of all of the Indebtedness. Upon termination, the Secured Party shall forthwith deliver to the Obligor the Certificates, with the stock powers therefor, delivered by the Obligor to the Secured Party.

11. Strict Enforcement. The Secured Party shall at all times have the right to enforce the provisions of this Agreement in strict accordance with the terms hereof, notwithstanding any conduct or custom to the contrary. The failure of the Secured Party at any time to enforce its rights hereunder shall not be construed as having created a custom contrary to the provisions of this Agreement, as having modified in any manner the terms hereof, or as having prevented the Secured Party from thereafter enforcing strict compliance. All rights and remedies of the Secured Party are cumulative and concurrent and the exercise of one right or remedy shall not be deemed a waiver or release of any other right or remedy.

12. Entire Agreement. This Agreement contains the entire understanding of the parties hereto with respect to the subject matter contained herein and supersedes all prior and contemporaneous agreements and understandings, oral and written, with respect thereto.

13. Modification. This Agreement may be modified or amended only by means of a writing signed by the party against whom such modification or amendment is sought to be enforced.

14. Severability; Governing Law. If any provision of this Agreement shall be determined to be illegal and unenforceable by any court of law, the remaining provisions shall be severable and enforceable in accordance with their terms. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Tennessee.

15. Benefits of Agreement. This Agreement shall be binding upon and shall inure to the benefit of the parties and their respective heirs, legal representatives, successors and assigns.

16. Counterparts. This Agreement may be signed in any number of counterparts and by different parties on different counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original, and all of which counterparts, taken together shall constitute but one and the same agreement.

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IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written.

SECURED PARTY

KIRKLAND'S, INC.

By: /s/ Robert. E. Alderson
   -------------------------------
   Name: Robert E. Alderson
   Title: Chief Executive Officer and
          President

OBLIGOR

/s/ Reynolds C. Faulkner
----------------------------------
REYNOLDS C. FAULKNER

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EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in this Registration Statement on Form S-1 of our report dated April 19, 2002 except for Note 13 as to which the date is May 24, 2002 and Note 14 as to which the date is , 2002 relating to the financial statements of Kirkland's Inc., which appear in such Registration Statement. We also consent to the references to us under the heading "Experts" in such Registration Statement.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Memphis, Tennessee
June 5, 2002