SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended:
October 30, 2004
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Commission file number: 000-49885 |
KIRKLANDS, INC.
Tennessee
(State or other jurisdiction of incorporation or organization) |
62-1287151
(IRS Employer Identification No.) |
805 North Parkway
Jackson, Tennessee (Address of principal executive offices) |
38305
(Zip Code) |
Registrants telephone number, including area code: (731) 668-2444
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [
ü
] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). YES [ ü ] NO [ ]
As of December 3, 2004, 19,262,385 shares of the Registrants Common Stock, no par value, were outstanding.
KIRKLANDS, INC.
TABLE OF CONTENTS
Page | ||||||||
PART I FINANCIAL INFORMATION:
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Item 1. Financial Statements (unaudited)
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3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
7 | ||||||||
11 | ||||||||
22 | ||||||||
23 | ||||||||
24 | ||||||||
25 | ||||||||
EX-10.1 NON-QUALIFIED STOCK OPTION AWARD AGREEMENT | ||||||||
EX-10.2 INCENTIVE STOCK OPTION AGREEMENT | ||||||||
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO | ||||||||
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO | ||||||||
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO | ||||||||
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO |
2
KIRKLANDS, INC.
October 30, 2004
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January 31, 2004
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(restated) | ||||||||
ASSETS
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Current assets:
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Cash and cash equivalents
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$ | 6,208 | $ | 17,423 | ||||
Inventories, net
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50,308 | 41,574 | ||||||
Prepaid expenses and other current assets
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8,967 | 9,383 | ||||||
Prepaid income taxes
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6,049 | | ||||||
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Total current assets
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71,532 | 68,380 | ||||||
Property and equipment, net
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61,578 | 46,246 | ||||||
Other assets
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1,475 | 1,662 | ||||||
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Total assets
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$ | 134,585 | $ | 116,288 | ||||
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LIABILITIES AND SHAREHOLDERS EQUITY
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Current liabilities:
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Revolving line of credit
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$ | 16,210 | $ | | ||||
Accounts payable
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27,715 | 19,995 | ||||||
Income taxes payable
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| 6,487 | ||||||
Accrued expenses
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14,729 | 14,085 | ||||||
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Total current liabilities
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58,654 | 40,567 | ||||||
Other liabilities
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20,967 | 16,491 | ||||||
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Total liabilities
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79,621 | 57,058 | ||||||
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Commitments and contingencies
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Shareholders equity:
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Common stock, no par value; 100,000,000 shares authorized;
19,260,048 and 19,166,022 shares issued and outstanding at
October 30, 2004, and January 31, 2004, respectively
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138,594 | 138,149 | ||||||
Loan to shareholder
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(612 | ) | (620 | ) | ||||
Accumulated deficit
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(83,018 | ) | (78,299 | ) | ||||
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Total shareholders equity
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54,964 | 59,230 | ||||||
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Total liabilities and shareholders equity
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$ | 134,585 | $ | 116,288 | ||||
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The accompanying notes are an integral part of these financial statements.
3
KIRKLANDS, INC.
13 Week Period Ended
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39 Week Period Ended
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October 30, | November 1, | October 30, | November 1, | |||||||||||||
2004
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2003
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2004
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2003
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(restated) | (restated) | |||||||||||||||
Net sales
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$ | 82,815 | $ | 84,052 | $ | 250,127 | $ | 236,440 | ||||||||
Cost of sales (exclusive of
depreciation and amortization as
shown below)
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58,092 | 55,814 | 176,868 | 160,279 | ||||||||||||
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Gross profit
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24,723 | 28,238 | 73,259 | 76,161 | ||||||||||||
Operating expenses:
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Compensation and benefits
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16,556 | 14,928 | 46,832 | 41,897 | ||||||||||||
Other operating expenses
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9,320 | 7,731 | 24,915 | 20,815 | ||||||||||||
Depreciation and amortization
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3,065 | 2,273 | 8,425 | 6,622 | ||||||||||||
Non-cash stock compensation charge
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77 | 68 | 211 | 202 | ||||||||||||
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Total operating expenses
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29,018 | 25,000 | 80,383 | 69,536 | ||||||||||||
Operating income (loss)
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(4,295 | ) | 3,238 | (7,124 | ) | 6,625 | ||||||||||
Interest expense:
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Revolving line of credit
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178 | 152 | 368 | 376 | ||||||||||||
Loss on early termination of
indebtedness
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364 | | 364 | | ||||||||||||
Amortization of debt issue costs
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38 | 53 | 143 | 158 | ||||||||||||
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Total interest expense
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580 | 205 | 875 | 534 | ||||||||||||
Interest income
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(8 | ) | (8 | ) | (46 | ) | (19 | ) | ||||||||
Other income
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(61 | ) | (35 | ) | (153 | ) | (110 | ) | ||||||||
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Income (loss) before income taxes
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(4,806 | ) | 3,076 | (7,800 | ) | 6,220 | ||||||||||
Income tax provision (benefit)
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(1,898 | ) | 1,215 | (3,081 | ) | 2,457 | ||||||||||
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Net income (loss)
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$ | (2,908 | ) | $ | 1,861 | $ | (4,719 | ) | $ | 3,763 | ||||||
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Earnings (loss) per share:
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Basic
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$ | (0.15 | ) | $ | 0.10 | $ | (0.25 | ) | $ | 0.20 | ||||||
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Diluted
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$ | (0.15 | ) | $ | 0.10 | $ | (0.25 | ) | $ | 0.19 | ||||||
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Weighted average number of
shares outstanding:
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Basic
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19,253 | 19,108 | 19,214 | 19,017 | ||||||||||||
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Diluted
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19,253 | 19,559 | 19,214 | 19,538 | ||||||||||||
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The accompanying notes are an integral part of these financial statements.
4
KIRKLANDS, INC.
Common Stock | ||||||||||||||||||||
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Loan to | Accumulated | Total | |||||||||||||||||
Shares
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Amount
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Shareholder
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Deficit
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Equity
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Balance at January 31, 2004
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19,166,022 | $ | 138,149 | $ | (620 | ) | $ | (78,299 | ) | $ | 59,230 | |||||||||
Exercise of employee stock options and
employee stock purchases
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94,026 | 341 | 341 | |||||||||||||||||
Tax benefit from exercise of stock options
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104 | 104 | ||||||||||||||||||
Net interest paid on shareholder loan
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8 | 8 | ||||||||||||||||||
Net loss
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(4,719 | ) | (4,719 | ) | ||||||||||||||||
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Balance at October 30, 2004
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19,260,048 | $ | 138,594 | $ | (612 | ) | $ | (83,018 | ) | $ | 54,964 | |||||||||
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The accompanying notes are an integral part of these financial statements.
5
KIRKLANDS, INC.
39 Week Period Ended
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October 30, | November 1, | |||||||
2004
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2003
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(restated) | ||||||||
Cash flows from operating activities:
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Net income (loss)
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$ | (4,719 | ) | $ | 3,763 | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
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Depreciation of property and equipment
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8,425 | 6,622 | ||||||
Amortization of debt issue costs
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143 | 158 | ||||||
Loss on early termination of indebtedness
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139 | | ||||||
Non-cash stock compensation charge
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211 | 202 | ||||||
Loss on disposal of property and equipment
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171 | 454 | ||||||
Deferred income taxes
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| 606 | ||||||
Changes in assets and liabilities:
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Inventories
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(8,734 | ) | (13,185 | ) | ||||
Prepaid expenses and other current assets
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416 | (3,845 | ) | |||||
Other noncurrent assets
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Accounts payable
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7,720 | 10,179 | ||||||
Income taxes payable
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(12,432 | ) | (8,072 | ) | ||||
Accrued expenses and other noncurrent liabilities
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4,995 | 5,443 | ||||||
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Net cash provided by (used in) operating activities
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(3,665 | ) | 2,325 | |||||
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Cash flows from investing activities:
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Proceeds from sale of property and equipment
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4 | 25 | ||||||
Capital expenditures
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(23,933 | ) | (18,163 | ) | ||||
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Net cash used in investing activities
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(23,929 | ) | (18,138 | ) | ||||
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Cash flows from financing activities:
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Borrowings on revolving line of credit
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40,554 | 23,403 | ||||||
Repayments on revolving line of credit
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(24,344 | ) | (10,304 | ) | ||||
Refinancing costs
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(95 | ) | | |||||
Exercise of stock options and employee stock purchases
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256 | 1,967 | ||||||
Advance on shareholder loan and net interest paid (accrued)
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8 | (387 | ) | |||||
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Net cash provided by financing activities
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16,379 | 14,679 | ||||||
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Cash and cash equivalents:
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Net decrease
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$ | (11,215 | ) | $ | (1,134 | ) | ||
Beginning of the period
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17,423 | 4,244 | ||||||
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End of the period
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$ | 6,208 | $ | 3,110 | ||||
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The accompanying notes are an integral part of these financial statements.
6
KIRKLANDS, INC.
Note 1 Basis of Presentation
We are a leading specialty retailer of home décor in the United States, operating 305 stores in 37 states as of October 30, 2004. Our consolidated financial statements include the accounts of Kirklands, Inc. and our wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
The accompanying consolidated financial statements have been prepared without audit. The January 31, 2004 balance sheet was derived from our audited financial statements. In our opinion, the financial statements contain all adjustments, consisting only of normal recurring accruals, which are necessary to present fairly and in accordance with accounting principles generally accepted in the United States of America (GAAP), our financial position as of October 30, 2004, and January 31, 2004, the results of our operations for the 13-week and 39-week periods ended October 30, 2004 and November 1, 2003, and our cash flows for the 39-week periods ended October 30, 2004, and November 1, 2003. It should be understood that accounting measurements at interim dates inherently involve greater reliance on estimates than those at the end of the fiscal year. In addition, because of seasonality factors, the results of our operations for the 13-week and 39-week periods ended October 30, 2004, are not indicative of the results to be expected for the entire fiscal year. Our fiscal year ends on the Saturday closest to January 31, resulting in years of either 52 or 53 weeks. All references to a fiscal year refer to the fiscal year ending on the Saturday closest to January 31 of the following year.
The accompanying unaudited consolidated financial statements have been prepared in accordance with the requirements for Form 10-Q and do not include all the disclosures normally required in annual financial statements prepared in accordance with GAAP; however, we believe that the disclosures are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the audited financial statements included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 15, 2004.
Note 2 Restatement of Financial Statements
On December 8, 2004, we determined that our accounting for tenant allowances received from landlords in connection with store construction did not comply with FASB Technical Bulletin No. 88-1, Issues Relating to Accounting for Leases (FTB 88-1). As a result, we have revised the presentation of our financial statements for the quarter to modify the method by which we account for tenant allowances received from landlords in connection with store construction. We historically have accounted for these allowances as reductions to the related leasehold improvement asset on the balance sheet and capital expenditures on the statement of cash flows. Under FTB 88-1, these allowances should be accounted for as lease incentives and reflected as a long-term liability on the balance sheet and as an operating cash flow on the statement of cash flows. Accordingly, we have restated our balance sheet as of January 31, 2004 and the statement of cash flows for the 39-week period ended November 1, 2003. Additionally, this adjustment results in an increase to depreciation and amortization expense and a corresponding decrease to cost of sales as the liability is amortized over the lease term. This change does not have any impact on net income, net sales or shareholders equity.
Following is a summary of the effect of this change on our balance sheet as of January 31, 2004, our statements of operations for the 13-week and 39-week periods ended November 1, 2003, and the statements of cash flows for the 39-week period ended November 1, 2003 (dollars in thousands).
Balance Sheet Data
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As of January 31, 2004
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As Previously | ||||||||||||
Reported
|
Adjustment
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As Restated
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Property and equipment, net
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$ | 33,087 | $ | 13,159 | $ | 46,246 | ||||||
Other liabilities
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3,332 | 13,159 | 16,491 |
Statement of Operations Data
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13 Weeks Ended November 1, 2003
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39 Weeks Ended November 1, 2003
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As Previously | As Previously | ||||||||||||||||||||||||||
Reported
|
Adjustment
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As Restated
|
Reported
|
Adjustment
|
As Restated
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Net sales
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$ | 84,052 | | $ | 84,052 | $ | 236,440 | | $ | 236,440 | |||||||||||||||||
Cost of sales (exclusive of depreciation
and amortization)
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56,283 | (469 | ) | 55,814 | 161,653 | (1,374 | ) | 160,279 | |||||||||||||||||||
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Gross profit
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27,769 | 469 | 28,238 | 74,787 | 1,374 | 76,161 | |||||||||||||||||||||
Operating
expenses:
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Compensation and benefits
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14,928 | | 14,928 | 41,897 | | 41,897 | |||||||||||||||||||||
Other operating expenses
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7,731 | | 7,731 | 20,759 | 56 | 20,815 | |||||||||||||||||||||
Depreciation and amortization
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1,804 | 469 | 2,273 | 5,304 | 1,318 | 6,622 | |||||||||||||||||||||
Non-cash stock compensation charge
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68 | | 68 | 202 | | 202 | |||||||||||||||||||||
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Total operating expenses
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24,531 | 469 | 25,000 | 68,162 | 1,374 | 69,536 | |||||||||||||||||||||
Operating income
|
3,238 | | 3,238 | 6,625 | | 6,625 | |||||||||||||||||||||
Net income
|
1,861 | | 1,861 | 3,763 | | 3,763 | |||||||||||||||||||||
Earnings per share:
|
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Basic
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$ | 0.10 | $ | 0.10 | $ | 0.20 | $ | 0.20 | |||||||||||||||||||
Diluted
|
$ | 0.10 | $ | 0.10 | $ | 0.19 | $ | 0.19 |
Statement of Cash Flows Data
|
39 Weeks Ended November 1, 2003
|
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As Previously | ||||||||||||
Reported
|
Adjustment
|
As Restated
|
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Cash flows from operating activities
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$ | (3,976 | ) | $ | 6,301 | $ | 2,325 | |||||
Cash flows from investing activities
|
(11,837 | ) | (6,301 | ) | (18,138 | ) | ||||||
Cash flows from financing activities
|
14,679 | | 14,679 | |||||||||
|
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Net decrease in cash
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$ | (1,134 | ) | $ | | $ | (1,134 | ) | ||||
|
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Note 3 Recent Accounting Standards
In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities an interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements to improve financial reporting of special purpose and other entities. In accordance with the interpretation, business enterprises that represent the primary beneficiary of another entity by retaining a controlling financial interest in that entitys assets, liabilities, and results of operating activities must consolidate the entity in their financial statements. Prior to the issuance of FIN 46, consolidation generally occurred when an enterprise controlled another entity through voting interests. Certain variable interest entities (VIEs) that are qualifying special purpose entities (QSPEs) subject to the reporting requirements of Statement of Financial Accounting Standard (SFAS) No. 140, Accounting for Transfer and Servicing of Financial Assets and Extinguishment of Liabilities, will not be required to be consolidated under the provisions of FIN 46. The consolidation provisions of FIN 46 apply to all VIEs created or entered into after January 31, 2003. Originally, the provisions of FIN 46 applied to all pre-existing VIEs in the first reporting period beginning after June 15, 2003. In December of 2003, the FASB issued Interpretation No. 46 revised 2003 (FIN 46R). This deferred the effective date of the interpretation until the first reporting period ending after December 15, 2003 for special purpose entities and until the first reporting period ending after March 15, 2004 for all other entities. If applicable, transition rules allow the restatement of financial statements or prospective application with a cumulative effect adjustment. In addition, FIN 46 expands the disclosure requirements for the beneficiary of a significant or a majority of the variable interests to provide information regarding
7
the nature, purpose and financial characteristics of the entities. The adoption of FIN 46 did not have any impact on our financial statements.
On March 31, 2004 the FASB issued an exposure draft, Share-based Payment, an Amendment of FASB Statements No. 123 and 95 . This proposed change in accounting would replace the existing requirements under Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock Issued to Employees . The exposure draft covers a wide range of equity-based compensation arrangements. Under the FASBs proposal, all forms of share-based payments to employees, including employee stock options, would be treated the same as other forms of compensation by recognizing the related costs in the statement of operations. The expense of the award would generally be measured at fair value at the grant date. The comment period for the exposure draft ended on June 30, 2004 and final rules are expected to be issued in the fourth quarter of calendar year 2004. The standard, if issued in its current form, would be applicable for interim or annual periods beginning after June 15, 2005. We are currently evaluating the impact of the proposed change in accounting but will not know the ultimate impact until the final rules are issued.
Note 4 Stock Compensation
We apply Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees , and related Interpretations, in accounting for our stock compensation plans. Compensation cost on stock options is measured as the excess, if any, of the fair value of our common stock at the date of the grant over the exercise price. The following table illustrates the effect on net income and earnings per share had we applied the fair value recognition provisions of Statement of Financial Accounting Standard (SFAS) No. 123, Accounting for Stock-Based Compensation.
8
Note 5 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):
The calculation of diluted earnings per share for the 13-week period ended October 30, 2004, excludes stock options of 555,963 as the effect of their inclusion would be anti-dilutive. The calculation of diluted earnings per share for the 13-week period ended November 1, 2003 excludes options of 90,659 as the effect of their inclusion would be anti-dilutive.
The calculation of diluted earnings per share for the 39-week period ended October 30, 2004, excludes options of 572,216 as the effect of their inclusion would be anti-dilutive. The calculation of diluted earnings per share for the 39-week period ended November 1, 2003, excludes options of 38,168 as the effect of their inclusion would be anti-dilutive.
Note 6 Revolving Credit Facility
On October 4, 2004, we entered into a new, five-year senior secured revolving credit facility with a revolving loan limit of up to $45 million (the New Credit Facility). The New Credit Facility includes a letter of credit subfacility for up to $15 million of the total loan limit. The New Credit Facility bears interest at a floating rate equal to the LIBOR rate (2.04% at 10/30/04) plus 1.25% to 1.50% (depending on the amount of excess availability under the borrowing base) per annum. We also pay an unused line fee of 0.2% per annum based on the excess of the loan limit over actual borrowings.
Borrowings under the New 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 or a default upon failure to comply with certain covenants. Borrowings under our New Credit Facility are collateralized by substantially all of our personal and real property. The maximum availability under the revolving credit facility is limited by a borrowing base which consists of a percentage of eligible
9
inventory and eligible credit card receivables, less reserves. The facility has one financial covenant that requires us to maintain excess availability under the borrowing base of $3 million at all times.
We used the proceeds of the New Credit Facility to repay existing indebtedness, consisting of indebtedness that had been outstanding under our $45 million secured revolving credit facility dated as of May 22, 2002, which was thereupon terminated. As a result of this early termination, during the third quarter of fiscal 2004 we incurred a prepayment penalty of $225,000 and a write-off of unamortized debt issue costs of $139,000 totaling $364,000 on a pre-tax basis.
10
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
We are a leading specialty retailer of home décor in the United States,
operating 305 stores in 37 states as of October 30, 2004. 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.
Our stores offer a unique combination of style and value that has led to
our emergence as a leader in home décor and has enabled us to develop a strong
customer franchise. As a result, we have achieved substantial growth over the
last six fiscal years. During this period, 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
selected smaller communities. Our current plan is to emphasize non-mall
locations, and a majority of the new stores opened in fiscal 2004 have been
located in non-mall venues. We believe there are currently more than 750
additional locations in the United States that could support a Kirklands
store. We opened 19 new stores in the third quarter of fiscal 2004 and closed
three stores. We are on target to achieve a net increase of 40 stores in
fiscal 2004, consisting of 54 openings and 14 closings, which would represent a
14% increase in the store base over the prior year.
The following table summarizes our stores and square footage under lease
in mall and non-mall locations:
The
financial information included in this section has been revised to
reflect the change in our accounting treatment for tenant allowances received from
landlords in connection with store construction. As further discussed
in Note 2 to the consolidated financial statements, this change did not
impact shareholders equity, net sales, net income, or earnings per share
in any of the periods presented. We will amend our Annual Report on
Form 10-K for the year ended January 31, 2004, and our
Quarterly Reports on Form 10-Q for the quarterly periods ended
May 1, 2004, and July 31, 2004 to restate the financial
statements in those reports as a result of this modification.
11
13 Weeks Ended October 30, 2004, Compared to 13 Weeks Ended November 1, 2003
Results of operations.
The table below sets forth selected results of our
operations in dollars expressed as a percentage of net sales for the periods
indicated (dollars in thousands):
Net sales.
Net sales decreased 1.5% to $82.8 million for the third
quarter of fiscal 2004 from $84.1 million for the third quarter of fiscal 2003.
The overall decrease in net sales was the result of a decrease in comparable
store sales. Comparable store sales declined 13.8% during the third quarter of
fiscal 2004 compared to an increase of 2.7% during the third quarter of fiscal
2003. This decrease was partly offset by an increase in sales due to the
growth in the store base. We opened 37 stores during the first three quarters
of fiscal 2004 and 42 stores during fiscal 2003, and we closed 12 stores during
the first three quarters of fiscal 2004 and 11 stores during fiscal 2003. We
ended the third quarter of fiscal 2004 with 305 stores in operation compared to
279 stores as of the end of the third quarter of fiscal 2003, representing a
9.3% increase in the store base. The negative comparable store sales accounted
for a $9.6 million decrease in sales from the prior year quarter. The growth
in the store base along with sales from expanded, remodeled or relocated stores
accounted for an increase of $8.4 million over the prior year quarter.
Consistent with our year-to-date experience, sales for the third quarter
of fiscal 2004 were characterized by higher average retail prices and lower
transaction volumes. Entering the third quarter, the quality of our
merchandise offering suffered from inventory imbalances across several
categories and an overly broad assortment. We believe these factors were the principal
reasons for our negative comparable store sales performance. In addition, our
stores faced a difficult retail environment due to the continued economic
pressures facing our customers in the form of higher fuel and energy costs.
The impact of the four hurricanes that affected Florida and other parts of the
Southeast during the quarter also had a negative impact on sales. We estimate
that the hurricanes impacted sales by approximately $1.3 million to $1.6
million during the quarter, which translates to approximately 1.7% to 2.0% on a
comparable store sales basis. We
12
sustained only minor damage to a few stores,
and all of the affected stores are open and operational today.
Gross
profit.
Gross profit decreased $3.5 million, or 12.4%, to $24.7
million for the third quarter of fiscal 2004 from $28.2 million for the third
quarter of fiscal 2003. Gross profit expressed as a percentage of net sales
decreased to 29.9% from 33.6% for the third quarter of fiscal 2003. The
decrease as a percentage of net sales was the result of a lower merchandise
margin compared to the prior year, as well as a de-leveraging effect on the
occupancy and central distribution components of gross profit due to the
decline in comparable store net sales. During the third quarter, markdowns
were more prominent than in the prior year as we attempted to respond to the
weak sales environment.
Compensation and other operating expenses.
Compensation and other
operating expenses, including both store and corporate costs, were $25.9
million, or 31.3% of net sales, for the third quarter of fiscal 2004 compared
with $22.7 million, or 27.0% of net sales, for the third quarter of fiscal
2003. The increase in these expenses as a percentage of sales is primarily the
result of the comparable store sales weakness. In addition, the implementation
of a wide-area network linking our stores with the corporate office resulted in
incremental expenses of approximately $330,000 during the third quarter of
fiscal 2004. Advertising expenses increased over the prior year due to
additional store collateral expenses and marketing efforts. Professional fees
also increased due to the additional costs associated with personnel searches
and Sarbanes-Oxley regulatory compliance. Despite the increase as a
percentage of sales, these operating expenses were below our internal plan due
in part to smaller incentive bonus accruals as a result of our overall sales
and earnings performance for the third quarter of fiscal 2004.
Depreciation and amortization.
Depreciation and amortization expense was
$3.1 million, or 3.7% of net sales, for the third quarter of fiscal 2004 as
compared to $2.3 million, or 2.7% of net sales, for the third quarter of fiscal
2003. This increase was the result of the continued growth in the store base
combined with the completion of certain large distribution and information
systems projects during the first half of fiscal 2004. As a percentage of
sales, the increase was primarily the result of the weak comparable store sales
performance.
Non-cash stock compensation charge.
During the third quarter of fiscal
2004, we incurred a non-cash stock compensation charge of $77,000, or 0.1% of
net sales, primarily related to certain stock options granted to employees in
November 2001 that had an exercise price less than the fair value of the
underlying common stock on the date of the grant. During the third quarter of
fiscal 2003, we incurred non-cash stock compensation charges of $68,000, or
0.1% of net sales, related to the aforementioned November 2001 employee option
grant.
Interest expense, net.
Net interest expense during the third quarter of
fiscal 2004 was $572,000, or 0.7% of net sales, compared with $197,000, or 0.2%
of net sales, for the third quarter of fiscal 2003. The increase was primarily
the result of the early termination and refinancing of our revolving credit
facility that was completed during October 2004. We recorded a charge of
$364,000 during the quarter, which included the early termination fee and the
write-off of the remaining debt issue costs associated with the previous
facility.
Income taxes.
Income tax benefit was $1.9 million, or 39.5% of the loss
before income taxes, for the third quarter of fiscal 2004 as compared to income
tax expense of $1.2 million, or 39.5% of income before income taxes, for the
third quarter of fiscal 2003.
Net income (loss) and diluted earnings (loss) per share.
As a result of
the foregoing, net loss was $2.9 million, or $0.15 per diluted share, for the
third quarter of fiscal 2004 as compared to net income of $1.9 million, or
$0.10 per diluted share, for the third quarter of fiscal 2003.
13
39 Weeks Ended October 30, 2004, Compared to 39 Weeks Ended November 1, 2003
Results of Operations.
The table below sets forth selected results of our
operations in dollars and expressed as a percentage of net sales for the
periods indicated (dollars in thousands):
Net sales.
Net sales increased 5.8% to $250.1 million for the first three
quarters of fiscal 2004 from $236.4 million during the first three quarters of
fiscal 2003. The overall increase is the result of the growth in the store
base. We opened 37 stores during the first three quarters of fiscal 2004 and
42 stores during fiscal 2003, and we closed 12 stores during the first three
quarters of fiscal 2004 and 11 stores during fiscal 2003. We ended the third
quarter of fiscal 2004 with 305 stores in operation compared to 279 stores as
of the end of the third quarter of fiscal 2003, representing a 9.3% increase in
the store base. This growth in the store base along with sales increases from
expanded, remodeled or relocated stores, which are excluded from our comparable
store base, accounted for an increase of $24.6 million over the prior year
period. Comparable store sales decreased 5.3% for the first three quarters of
fiscal 2004 against a 2.2% comparable store sales increase for the first three quarters of fiscal 2003. The
comparable store sales decline accounted for a decrease of $10.9 million from
the prior year period.
14
The comparable store sales decline for the first three quarters of fiscal
2004 was primarily the result of a difficult sales environment characterized by
slow customer traffic and a weaker than expected response to our merchandise
offering and the home décor sector in general. Furthermore, we believe the
inventory positioning among our merchandise categories was overly broad, which
harmed our ability to present a coherent merchandise statement to our
customers. Looking forward, reducing overall SKU count and focusing our
assortment on the key home décor categories are central themes of our
merchandising strategy. Sales during the first three quarters of fiscal 2004
were characterized by a higher average retail price per item offset by lower
transaction volumes and lower numbers of items per transaction. Key categories
posting comparable store sales increases for the period were textiles and
gift/novelty. These increases were offset by declines in wall décor, lamps,
candles, decorative accessories, floral, housewares and frames.
Gross
profit.
Gross profit decreased $2.9 million,
or 4.0%, to $73.3
million for the first three quarters of fiscal 2004 from $76.2 million for the
first three quarters of fiscal 2003. Gross profit expressed as a percentage of
sales decreased to 29.3% from 32.2% for the prior year period. The decrease in
gross profit percentage was primarily the result of increased markdowns and
promotional activities, particularly during the second and third quarter, in
response to weakening sales trends and in order to reposition inventory levels.
Additionally, store occupancy costs increased as a percentage of net sales due
to the impact of the negative comparable store sales performance on the ratio.
Central distribution costs increased slightly as a percentage of sales due to
the additional costs incurred during the transition to our new distribution
center.
Compensation and other operating expenses.
Compensation and other
operating expenses, including both store and corporate costs, were $71.7
million, or 28.7% of net sales, for the first three quarters of fiscal 2004
compared to $62.7 million, or 26.5% of net sales, for the first three quarters
of fiscal 2003. The increase in these expenses as a percentage of net sales is
primarily the result of the impact of the negative comparable store sales
performance on the expense ratio. The implementation of the wide-area network,
which was completed during the second quarter, also contributed to the increase
as a percentage of net sales. Increases in advertising expenses, professional
fees and store-level payroll and travel costs related to the execution of our
growth strategy were additional areas where we experienced increases as a
percentage of net sales as compared to the prior year period. Despite the
increase as a percentage of net sales, these operating expenses were below our
internal plan due in part to lower incentive bonus accruals as a result of our
overall sales and earnings performance for the first three quarters of fiscal
2004.
Depreciation and amortization.
Depreciation and amortization expense was
$8.4 million, or 3.3% of net sales, for the first three quarters of fiscal 2004
compared to $6.6 million, or 2.8% of net sales, for the first three quarters of
fiscal 2003. The increase in depreciation is primarily the result of the
growth in our store base and the completion of certain distribution and
information technology projects. Additionally, the weak comparable store sales
performance had a negative impact on the ratio to net sales.
Non-cash stock compensation charge.
For the first three quarters of
fiscal 2004 and fiscal 2003, we incurred a non-cash stock compensation charge
of $0.2 million, or 0.1% of net sales, related primarily to certain stock
options granted to employees in November 2001 that had an exercise price that
was less than the fair value of the underlying common stock on the date of the
grant. This charge will continue through part of the fourth quarter, at which
time the related options will be fully-vested.
Interest expense, net.
Net interest expense was $0.8 million, or 0.3% of
net sales, for the first three quarters of fiscal 2004 as compared to $0.5
million, or 0.2% of net sales, for the first three quarters of fiscal 2003.
The increase was the result of the early termination and refinancing of our
revolving credit facility that was completed during October 2004. We recorded
a charge of $364,000 during the third quarter, which included the early
termination fee and the write-off of the remaining debt issue costs associated
with the previous facility.
15
Income taxes.
Income tax benefit was $3.1 million, or 39.5% of the loss
before income taxes, for the first three quarters of fiscal 2004 as compared to
income tax expense of $2.5 million, or 39.5% of income before income taxes, for
the first three quarters of fiscal 2003.
Net income (loss) and diluted earnings (loss) per share.
As a result of
the foregoing, net loss was $4.7 million, or $0.25 per share, for the first
three quarters of fiscal 2004 as compared to net income of $3.8 million, or
$0.19 per diluted share, for the third quarter of fiscal 2003.
Liquidity and Capital Resources
Our principal capital requirements are for working capital and capital
expenditures. Working capital consists mainly of merchandise inventories,
which typically reach their peak by the end of the third quarter of each fiscal
year. Capital expenditures primarily relate to new store openings; existing
store expansions, remodels or relocations; and purchases of equipment or
information technology assets for our stores, distribution facilities or
corporate headquarters. Historically, we have funded our working capital and
capital expenditure requirements with internally generated cash, and borrowings
under our credit facilities.
Cash flows from operating activities.
Net cash used in operating
activities for the first three quarters of fiscal 2004 was $3.7 million
compared to $2.3 million in cash provided by operating activities for the first three quarters of fiscal 2003. The
increase in the amount of cash used in operations as compared to the prior year
period was primarily the result of the weaker operating performance as compared
to the prior year and an increase in the amount of income taxes paid, offset by
a decrease in the build-up of inventories. We reported a net loss of $4.7
million for the first three quarters of fiscal 2004 as compared to net income
of $3.8 million in the prior year period. Our April income tax payments
increased as compared to the prior year due to higher taxable income levels for
the fiscal 2003 tax year as compared to fiscal 2002. Inventories increased
$8.7 million during the first three quarters of fiscal 2004 as compared to an
increase of $13.2 million during the first three quarters of fiscal 2003. The
smaller growth in inventories was the result of the clearance efforts undertaken
during the second quarter in order to position inventories for the second half
of the year combined with a slowdown in our receipts during the third quarter.
This slowdown was due to delays in processing imported merchandise through the
California ports that was evident during the late summer and early fall.
Cash flows from investing activities.
Net cash used in investing
activities for the first three quarters of fiscal 2004 consisted principally of
$23.9 million in capital expenditures. These expenditures related primarily to
the construction of new stores and the purchase of materials handling equipment
and information technology assets associated with the move to our new
distribution center during the second quarter. During the first three quarters
of fiscal 2004, we opened 37 new stores and remodeled 4 stores. As of the end
of the quarter, an additional 17 new stores were under construction along with
3 remodeling projects. We expect that capital expenditures for fiscal 2004
will range from $27 to $29 million, primarily to fund the construction of 54
stores, complete the move to the new distribution center and finalize several
ongoing information technology projects. We anticipate that capital
expenditures, including leasehold improvements and furniture and fixtures, for
new stores during fiscal 2004 will average approximately $325,000 -
$350,000 per store.
Effective
December 9, 2004, we revised the reporting by which we account for
tenant allowances received from landlords in connection with store
construction. See Note 2 to the Consolidated Financial Statements.
Accordingly, capital expenditures for store construction are
presented gross, before taking into account the tenant
allowance contributed by the landlord. The tenant allowance is
reflected as an operating cash flow on the statement of cash flows.
Cash flows from financing activities.
Net cash provided by financing
activities for the first three quarters of fiscal 2004 was $16.4 million
compared to $14.7 million in the prior year period. The increase in cash
provided by financing activities was due to an increase in the amount of
borrowings under our revolving credit facility as compared to the prior year
period. As of October 30, 2004, we had borrowed $16.2 million under our
revolving line of credit as compared to $13.1 million in the prior year period.
16
Revolving credit facility.
We maintain a revolving credit facility with a
bank that provides for up to $45 million in borrowings. Amounts borrowed under
the facility bear interest at a floating rate equal to the 60-day LIBOR plus
1.25% or 1.50% per annum depending upon the amount of excess availability under
the borrowing base. The maximum availability under the credit facility is
limited by a borrowing base that consists of a percentage of eligible inventory
and receivables less reserves. Our credit lender may from time to time reduce
the lending formula with respect to the eligible inventory to the extent our
lender determines that the liquidation value of the eligible inventory has
decreased. Our lender also from time to time may decrease the borrowing base
by adding reserves with respect to matters such as inventory shrinkage. The
facility also contains provisions that could result in changes in the presented
terms of the facility or the acceleration of maturity. Circumstances that
could lead to such changes in terms or acceleration of maturity include, but
are not limited to, a material adverse change in our business or an event of
default under the credit agreement. The facility has one financial covenant
that requires us to maintain excess availability under the borrowing base of $3
million at all times. The facility terminates in October 2009. As of October
30, 2004, we had $16.2 million in borrowings outstanding under the facility.
At October 30, 2004, our balance of cash and cash equivalents was $6.2
million and the borrowing availability was approximately $16.5 million. We
believe that these sources of cash, together with cash provided by our
operations, will be adequate to carry out our fiscal 2004 growth plans in full
and fund our planned capital expenditures and working capital requirements for
at least the next twelve months.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and the results of
our operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States of America. The preparation of these financial statements
requires us to make estimates that affect the reported amounts contained in the
financial statements and related disclosures. We base our estimates on
historical experience and on various other assumptions which are believed to be
reasonable under the circumstances. Actual results may differ from these
estimates. 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.
Cost of sales and inventory valuation
- Our inventory is stated at the
lower of cost or market net of allowances with cost determined using the
average cost method with average cost approximating current cost. We estimate
net of allowances 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. 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 merchandise 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 46%
of our assets at October 30, 2004, represent investments in property and
equipment. Determining appropriate depreciable lives and reasonable assumptions
in evaluating the carrying value of capital assets requires judgments and
estimates.
17
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.
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 excess of the fair value of
our common stock at the date of grant over the exercise price of the stock
options. Other options have been granted to employees or directors 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 persons
other than employees or directors in exchange for services are valued using an
option-pricing model. The fair value of our common stock is a significant
element of determining the value of the stock option or the amount of the
non-cash stock compensation charge to be recorded for our stock option awards
or for non-employee stock option grants. Prior to our initial public offering
in July 2002, our common stock was not traded on a stock exchange. To determine
the value of our common stock prior to the initial public offering we first
considered the amount paid to us for our common stock in recent transactions.
Absent a recent sale of our common stock, we obtained a fair market valuation.
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.
18
Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities
an interpretation of Accounting Research Bulletin No. 51, Consolidated
Financial Statements
to improve financial reporting of special purpose and
other entities. In accordance with the interpretation, business enterprises
that represent the primary beneficiary of another entity by retaining a
controlling financial interest in that entitys assets, liabilities, and
results of operating activities must consolidate the entity in their financial
statements. Prior to the issuance of FIN 46, consolidation generally occurred
when an enterprise controlled another entity through voting interests. Certain
variable interest entities (VIEs) that are qualifying special purpose
entities (QSPEs) subject to the reporting requirements of SFAS No. 140,
Accounting for Transfer and Servicing of Financial Assets and Extinguishment of
Liabilities,
will not be required to be consolidated under the provisions of
FIN 46. The consolidation provisions of FIN 46 apply to all VIEs created or
entered into after January 31, 2003. Originally, the provisions of FIN 46
applied to all pre-existing VIEs in the first reporting period beginning after
June 15, 2003. In December of 2003, the FASB issued Interpretation No. 46
revised 2003 (FIN 46R). This deferred the effective date of the interpretation
until the first reporting period ending after December 15, 2003 for special
purpose entities and until the first reporting period ending after March 15,
2004 for all other entities. If applicable, transition rules allow the
restatement of financial statements or prospective application with a
cumulative effect adjustment. In addition, FIN 46 expands the disclosure
requirements for the beneficiary of a significant or a majority of the variable
interests to provide information regarding the nature, purpose and financial
characteristics of the entities. The adoption of FIN 46 did not have any
impact on our financial statements.
On March 31, 2004 the FASB issued an exposure draft,
Share-based Payment,
an Amendment of FASB Statements No. 123 and 95. This proposed change in
accounting would replace the existing requirements under Statement of Financial
Accounting Standards (SFAS) No. 123,
Accounting for Stock Issued to
Employees"
. The exposure draft covers a wide range of equity-based
compensation arrangements. Under the FASBs proposal, all forms of share-based
payments to employees, including employee stock options, would be treated the
same as other forms of compensation by recognizing the related costs in the
statement of operations. The expense of the award would generally be measured
at fair value at the grant date. The comment period for the exposure draft
ended on June 30, 2004 and final rules are expected to be issued in the fourth
quarter of calendar year 2004. The standard, if issued in its current form,
would be applicable for interim or annual periods beginning after June 15,
2005. We are currently evaluating the impact of the proposed change in
accounting but will not know the ultimate impact until the final rules are
issued.
19
Cautionary Statement for Purposes of the Safe Harbor Provisions of the
Private Securities Litigation Reform Act of 1995
The following information is provided pursuant to the Safe Harbor provisions
of the Private Securities Litigation Reform Act of 1995. Certain statements
under the heading Managements Discussion and Analysis of Financial Condition
and Results of Operations in this Form 10-Q are forward-looking statements
made pursuant to these provisions. Forward-looking statements provide current
expectations of future events based on certain assumptions and include any
statement that does not directly relate to any historical or current fact.
Words such as should, likely to, forecasts, strategy, goal,
anticipates, believes, expects, estimates, intends, plans,
projects, and similar expressions, may identify such forward-looking
statements. Such statements are subject to certain risks and uncertainties
which could cause actual results to differ materially from the results
projected in such statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. We undertake no obligation to republish revised forward-looking
statements to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
We caution readers that the following important factors, among others, have in
the past, in some cases, affected and could in the future affect our actual
results of operations and cause our actual results to differ materially from
the results expressed in any forward-looking statements made by us or on our
behalf.
20
21
Table of Contents
13 Week Period Ended
October 30, 2004
November 1, 2003
Change
$
%
$
%
$
%
$
82,815
100.0
%
$
84,052
100.0
%
$
(1,237
)
-1.5
%
58,092
70.1
%
55,814
66.4
%
2,278
4.1
%
24,723
29.9
%
28,238
33.6
%
(3,515
)
-12.4
%
25,876
31.3
%
22,659
27.0
%
3,217
14.2
%
3,065
3.7
%
2,273
2.7
%
792
34.8
%
77
0.1
%
68
0.1
%
9
13.2
%
29,018
35.1
%
25,000
29.8
%
4,018
16.1
%
(4,295
)
(5.2
%)
3,238
3.8
%
(7,533
)
(232.6
%)
178
0.2
%
152
0.1
%
26
17.1
%
364
0.5
%
0.0
%
364
0.0
%
38
0.0
%
53
0.1
%
(15
)
(28.3
%)
580
0.7
%
205
0.2
%
375
182.9
%
(8
)
(0.0
%)
(8
)
(0.0
%)
0.0
%
(61
)
(0.1
%)
(35
)
(0.0
%)
(26
)
74.3
%
(4,806
)
(5.8
%)
3,076
3.6
%
(7,882
)
(256.2
%)
(1,898
)
(2.3
%)
1,215
1.4
%
(3,113
)
(256.2
%)
$
(2,908
)
(3.5
%)
$
1,861
2.2
%
$
(4,769
)
(256.3
%)
Table of Contents
Table of Contents
39 Week Period Ended
October 30, 2004
November 1, 2003
Change
$
%
$
%
$
%
$
250,127
100.0
%
$
236,440
100.0
%
$
13,687
5.8
%
176,868
70.7
%
160,279
67.8
%
16,589
10.4
%
73,259
29.3
%
76,161
32.2
%
(2,902
)
(3.8
%)
71,747
28.7
%
62,712
26.5
%
9,035
14.4
%
8,425
3.3
%
6,622
2.8
%
1,803
27.2
%
211
0.1
%
202
0.1
%
9
4.5
%
80,383
32.1
%
69,536
29.4
%
10,847
15.6
%
(7,124
)
(2.8
%)
6,625
2.8
%
(13,749
)
(207.5
%)
368
0.1
%
376
0.1
%
(8
)
(2.1
%)
364
0.1
%
0.0
%
364
0.0
%
143
0.1
%
158
0.1
%
(15
)
(9.5
%)
875
0.3
%
534
0.2
%
341
63.9
%
(46
)
(0.0
%)
(19
)
(0.0
%)
(27
)
142.1
%
(153
)
(0.0
%)
(110
)
(0.0
%)
(43
)
39.1
%
(7,800
)
(3.1
%)
6,220
2.6
%
(14,020
)
(225.4
%)
(3,081
)
(1.2
%)
2,457
1.0
%
(5,538
)
(225.4
%)
$
(4,719
)
(1.9
%)
$
3,763
1.6
%
$
(8,482
)
(225.4
%)
Table of Contents
Table of Contents
Table of Contents
Table of Contents
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
generally depreciated over 5 years. Leasehold improvements are
amortized over the shorter of the useful lives of the asset or the
lease term. Our lease terms typically range from 5 to 10 years.
To the extent we replace or dispose of fixtures or equipment
prior to the end of their assigned depreciable lives, we could
realize a loss or gain on the disposition. To the extent our assets
are used beyond their assigned depreciable lives, no depreciation
expense is being realized. We periodically 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 undiscounted 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. 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.
Table of Contents
Table of Contents
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.
A prolonged economic downturn could result in reduced net sales and
profitability.
Reduced consumer spending in the southeastern part of the United
States where a majority of our stores are concentrated could reduce our
net sales.
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.
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 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.
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.
We face an extremely competitive specialty retail business market,
and such competition could result in a reduction of our prices and/or a
loss of our market share.
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
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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 may experience significant variations in our quarterly results.
The agreement covering our debt places certain reporting and consent
requirements on us which may affect our ability to operate our business
in accord with our business and growth strategy.
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.
Our hardware and software systems are vulnerable to damage that could
harm our business.
We depend on key personnel, and if we lose the services of any of our
principal executive officers, including Carl Kirkland, our Chairman
Emeritus, and Robert E. Alderson, our Chairman, President and Chief
Executive Officer, we may not be able to run our business effectively.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks related to our operations result primarily from changes in
the prime lending rate and short-term London Interbank Offered Rates, or LIBOR,
as our revolving credit facility utilizes both rates in determining interest.
Adverse changes in such short-term term interest rates could affect our overall
borrowing rate during the term of the credit facility.
As of October 30, 2004, there was $16.2 million in outstanding borrowings
under our revolving credit facility, which is based upon a 60-day LIBOR rate or
the prime rate, at our discretion.
We did not have any foreign exchange contracts, hedges, interest rate
swaps, derivatives or other significant market risk as of October 30, 2004.
22
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ITEM 4. CONTROLS AND PROCEDURES
(a)
Evaluation of disclosure controls and procedures
. Our Chief Executive Officer and Chief
Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15(e) or 15(d)-(e) of the Securities Exchange Act of 1934, as amended (the
Exchange Act) as of the end of the period covered by this report, have concluded, based on the
evaluation of these controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15
or 15d-15, that our disclosure controls and procedures were effective and designed to ensure that
information required to be disclosed under the Exchange Act is accumulated and communicated to our
management on a timely basis to allow decisions regarding required disclosure.
Our disclosure controls and procedures specifically include quarterly controls and procedures
over financial reporting. These controls and procedures are designed to ensure that (i) our
quarterly financial statements are presented in accordance with GAAP, and (ii) our related
financial statement disclosures are both complete and not misleading.
In connection with our preparation of this Quarterly Report on Form 10-Q for the quarter ended
October 30, 2004, we followed our customary quarterly controls and procedures including, but not
limited to, (i) reviewing the Companys critical accounting policies, (ii) identifying changes in
prevailing accounting standards, (iii) obtaining and incorporating into the Form 10-Q any comments
and feedback from key members of Company management concerning disclosures in the Form 10-Q, (iv)
holding a meeting of the Companys Disclosure Controls Committee to discuss the Form 10-Q and to
consider the completeness and adequacy of the disclosures therein, including financial statement
disclosures, and incorporating any comments of the Disclosure Controls Committee into the Form
10-Q, (v) discussing the Form 10-Q with the Audit Committee of the Board of Directors and answering
questions and incorporating any comments from members of the Audit Committee, and (vi) obtaining
approval of the Form 10-Q from the Audit Committee.
On
December 8, 2004, we determined that our accounting for tenant
allowances received from landlords in connection with store
construction did not comply with FTB 88-1. As a result, we have
revised the
presentation of our financial statements for
the quarter for tenant allowances received from
landlords in connection with store construction. The revisions are reflected in this Quarterly
Report on Form 10-Q. This conclusion differed from the conclusion that we had reached in
connection with the preparation of the audited financial statements
included in our Annual Report on Form 10-K for the year ended January 31,
2004, at which time we conducted an extensive analysis of our facts
and circumstances, accounting standards and industry practice. We
concluded that the
presentation of reporting for tenant allowances that we were using was appropriate.
The
Chairman of our Audit Committee discussed the foregoing revision in
reporting with
our independent registered public accounting firm on December 8, 2004, and the Chairman of our
Audit Committee and management of the Company discussed the revision
in reporting with other
members of the Audit Committee on December 9, 2004.
The Company will amend its Annual Report on Form 10-K for the year ended January 31, 2004 and
the Quarterly Reports on Form 10-Q for the quarterly periods ended May 1 and July 31, 2004 to
restate the financial statements included in those reports in order to reflect the foregoing change
in the accounting method by which we are for tenant allowances received from landlords in connection with store
construction. The restatements do not result in any
modification to the net income, net sales or shareholders equity numbers for any of the
periods presented.
(b)
Change in internal controls over financial reporting
. There have been no changes in
internal controls over financial reporting identified in connection with the foregoing evaluation
that occurred during our last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
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PART II OTHER INFORMATION
ITEM 6. EXHIBITS
(a) Exhibits.
24
Exhibit No.
Description of Document
Non-Qualified Stock Option Award Agreement for Director Grants
Incentive Stock Option Agreement
Certification of the President and Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of the Executive Vice President and Chief
Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
Certification of the President and Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
Certification of the Executive Vice President and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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KIRKLANDS, INC. | |
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Date:
December 14, 2004
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/s/ Robert E. Alderson | |
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Robert E. Alderson
Chairman, President and Chief Executive Officer |
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/s/ Reynolds C. Faulkner | |
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Reynolds C. Faulkner
Executive Vice President and Chief Financial Officer |
25
EXHIBIT 10.1
NON-QUALIFIED STOCK OPTION AWARD AGREEMENT
UNDER THE KIRKLAND'S, INC. 2002 EQUITY INCENTIVE PLAN
[USED FOR AUTOMATIC GRANTS TO DIRECTORS]
KIRKLAND'S, INC. (the "Company") has, on __________, 200_, granted to _________ _________________ (the "Optionee") the option to purchase the number of shares of Common Stock set forth below in Section 3 at the price set forth below in Section 4 (the "Option"). The Option is subject to the terms set forth herein, and in all respects is subject to the terms and provisions of the Kirkland's, Inc. 2002 Equity Incentive Plan (as amended, the "Plan"), which terms and provisions are incorporated herein by this reference. Unless the context herein requires otherwise, the terms defined in the Plan will have the same meanings when used in this Award Agreement.
1. NATURE OF THE OPTION. The Option is intended to be a Non-Qualified Stock Option for federal income tax purposes and is not intended to be an Incentive Stock Option described by Section 422 of the Code.
2. DATE OF GRANT; TERM OF OPTION. The Option was granted on __________, 200_ (the "Grant Date"). The Option may not be exercised later than the tenth anniversary of the Grant Date and is subject to earlier termination, as provided in the Plan and in Section 7 of this Award Agreement.
3. COMMON STOCK SUBJECT TO OPTION. The Option applies with respect to ______ shares of the Common Stock, subject to adjustment in accordance with the Plan.
4. OPTION EXERCISE PRICE. The cost to purchase each share of Common Stock subject to the Option (each "Option Share") is $_______, subject to adjustment in accordance with the Plan.
5. EXERCISE OF OPTION. The Option will be exercisable during its term only in accordance with the terms and provisions of the Plan and this Award Agreement, as follows:
a. RIGHT TO EXERCISE. The Option is fully vested and exercisable as of the Grant Date.
b. METHOD OF EXERCISE. The Optionee may exercise the Option by providing written notice to the Secretary of the Company or such other person as may be designated by the Company. Such written notice must be signed by the Optionee and delivered in person or by certified mail. The written notice must be accompanied by payment of the exercise price in the form of cash, certified check or such other method of payment as may be authorized by the Board pursuant to the Plan.
c. PARTIAL EXERCISE. The Option may be exercised in whole or in part; provided, however, that any exercise may apply only with respect to a whole number of Option Shares.
d. RESTRICTIONS ON EXERCISE. The Option may not be exercised if the issuance of the Option Shares would constitute a violation of any applicable federal or state securities laws or other laws or regulations. As a condition to the exercise of the Option, the Company may require the Optionee to make any representation and warranty to the Company as may be required by the Plan, or as may be required by or advisable under any applicable law or regulation.
6. CERTIFICATES. The Optionee will have no right to vote or receive dividends and will have no other rights as a stockholder with respect to any Option Shares, notwithstanding the exercise of the Option with respect to those Option Shares, until the issuance (as evidenced by the appropriate
entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate(s) evidencing those Option Shares. Any certificate evidencing Option Shares will contain such legends as may be required by the Plan, or as may be required by or advisable under any applicable law or regulation.
7. TERMINATION OF RELATIONSHIP WITH THE COMPANY. If the Optionee's service to the Company ceases for any reason other than death, Disability or removal for Cause, the Option will terminate 90 days following such cessation. If the Optionee's service to the Company ceases due to removal for Cause, the Option will terminate immediately and automatically. If the Optionee's service to the Company ceases due to the death or Disability of the Optionee, the Option will terminate one year following such cessation. In the case of death, the Option may be exercised by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance. In the case of Disability, the Option may be exercised by the Optionee or his legal guardian or representative. To the extent that the Option is not exercised within the time specified herein, the Option will terminate. Notwithstanding the foregoing, the Option will not be exercisable after the expiration of the term set forth above in Section 2.
8. NONTRANSFERABILITY OF OPTION. The Option may not be sold, pledged, assigned, hypothecated, gifted, transferred or disposed of in any manner, either voluntarily or involuntarily by operation of law, other than by will or by the laws of descent or distribution. During the lifetime of the Optionee, the Option may be exercised only by the Optionee. Subject to the foregoing and the terms of the Plan, the terms of the Option will be binding upon the executors, administrators, heirs and successors of the Optionee.
9. THE PLAN. The Optionee has received a copy of the Plan (a copy of which is attached hereto), has read the Plan and is familiar with its terms, and hereby accepts the Option subject to all of the terms and provisions of the Plan, as amended from time to time. Pursuant to the Plan, the Board of Directors and any duly authorized Committee thereof are authorized to interpret the Plan and to adopt rules and regulations not inconsistent with the Plan as they deem appropriate. The Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board of Directors and any duly authorized Committee thereof upon any questions arising under the Plan.
10. MARKET STAND-OFF. The Optionee agrees that, in connection with any public offering by the Company of its equity securities pursuant to a registration statement filed under the Exchange Act, he or she will not sell, make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of or otherwise dispose of any Option Shares without the prior written consent of the Company or its underwriters, for such period of time before or after the effective date of such registration as may be requested by the Company or such underwriters, provided that all similarly situated stockholders are subject to a similar lock-up restriction.
11. ENTIRE AGREEMENT. This Award Agreement, together with the Plan and the other exhibits attached thereto or hereto, represents the entire agreement between the parties.
12. GOVERNING LAW. This Award Agreement will be construed in accordance with the laws of the State of Tennessee, without regard to the application of the principles of conflicts of laws.
13. SURVIVAL. Sections 6 and 9 through 13 of this Award Agreement will survive the exercise of the Option.
IN WITNESS WHEREOF, this Award Agreement has been executed by the parties as of the day of , 20 .
COMPANY
Title:
OPTIONEE
EXHIBIT 10.2
INCENTIVE STOCK OPTION AGREEMENT
UNDER THE KIRKLAND'S, INC. 2002 EQUITY INCENTIVE PLAN
KIRKLAND'S, INC. (the "Company") has granted to ________________ (the "Optionee") the option to purchase the number of shares of Common Stock set forth below in Section 3 at the price set forth below in Section 4 (the "Option"). The Option is subject to the terms set forth herein, and in all respects is subject to the terms and provisions of the Kirkland's, Inc. 2002 Equity Incentive Plan (as amended, the "Plan"), which terms and provisions are incorporated herein by this reference. Unless the context herein requires otherwise, the terms defined in the Plan will have the same meanings when used in this Award Agreement.
1. NATURE OF THE OPTION. The Option is intended to be an Incentive Stock Option described by Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), to the maximum extent permitted by Section 422(d) of the Code. To the extent that the Option exceeds the limit set forth in Section 422(d) of the Code, it will be treated as a non-qualified stock option.
2. DATE OF GRANT; TERM OF OPTION. The Option was granted on _________, 20__ (the "Grant Date"). The Option may not be exercised later than the tenth anniversary of the Grant Date and is subject to earlier termination, as provided in the Plan and in Section 7 of this Award Agreement.
3. COMMON STOCK SUBJECT TO OPTION. The Option applies with respect to ______ shares of the Common Stock, subject to adjustment in accordance with the Plan.
4. OPTION EXERCISE PRICE. The cost to purchase each share of Common Stock subject to the Option (each "Option Share") is $_____, the Fair Market Value Per Share on the Grant Date, subject to adjustment in accordance with the Plan.
5. EXERCISE OF OPTION. The Option will be exercisable during its term only in accordance with the terms and provisions of the Plan and this Award Agreement, as follows:
a. RIGHT TO EXERCISE. The Option will vest and become exercisable with respect to 33.33% of the Option Shares on the first anniversary of the Grant Date, provided that the Optionee remains continuously employed by the Company through such anniversary. Thereafter, the Option will vest and become exercisable with respect to an additional 8.33% of the Option Shares on the last day of each of the next eight calendar quarters, provided that the Optionee remains continuously employed by the Company through the applicable, quarterly vesting date. Notwithstanding the foregoing, if the Optionee dies while employed by the Company, the Option will become fully vested and immediately exercisable upon the date of the Optionee's death.
b. METHOD OF EXERCISE. The Optionee may exercise the Option by providing written notice to the Secretary of the Company or such other person as may be designated by the Company. Such written notice must be signed by the Optionee and delivered in person or by certified mail. The written notice must be accompanied by payment of the exercise price in the form of cash, certified check or such other method of payment as may be authorized by the Board pursuant to the Plan.
c. PARTIAL EXERCISE. The Option may be exercised in whole or in part; provided, however, that any exercise may apply only with respect to a whole number of Option Shares.
d. RESTRICTIONS ON EXERCISE. The Option may not be exercised if the issuance of the Option Shares would constitute a violation of any applicable federal or state securities laws or other laws or regulations. As a condition to the exercise of the Option, the Company may require the Optionee to make any representation and warranty to the Company as may be required by the Plan, or as may be required by or advisable under any applicable law or regulation.
6. CERTIFICATES. The Optionee will have no right to vote or receive dividends and will have no other rights as a stockholder with respect to any Option Shares, notwithstanding the exercise of the Option with respect to those Option Shares, until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate(s) evidencing those Option Shares. Any certificate evidencing Option Shares will contain such legends as may be required by the Plan, or as may be required by or advisable under any applicable law or regulation.
7. TERMINATION OF RELATIONSHIP WITH THE COMPANY. If the Optionee's service to the Company ceases for any reason other than death, Disability or removal for Cause, the Option will terminate 90 days following such cessation. If the Optionee's service to the Company ceases due to removal for Cause, the Option will terminate immediately and automatically. If the Optionee's service to the Company ceases due to the death or Disability of the Optionee, the Option will terminate one year following such cessation. In the case of death, the Option may be exercised by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance. In the case of Disability, the Option may be exercised by the Optionee or his legal guardian or representative. To the extent that the Option is not exercised within the time specified herein, the Option will terminate. Notwithstanding the foregoing, the Option will not be exercisable after the expiration of the term set forth above in Section 2.
8. NONTRANSFERABILITY OF OPTION. The Option may not be sold, pledged, assigned, hypothecated, gifted, transferred or disposed of in any manner, either voluntarily or involuntarily by operation of law, other than by will or by the laws of descent or distribution. During the lifetime of the Optionee, the Option may be exercised only by the Optionee. Subject to the foregoing and the terms of the Plan, the terms of the Option will be binding upon the executors, administrators, heirs and successors of the Optionee.
9. THE PLAN. The Optionee has received a copy of the Plan (a copy of which is attached hereto), has read the Plan and is familiar with its terms, and hereby accepts the Option subject to all of the terms and provisions of the Plan, as amended from time to time. Pursuant to the Plan, the Board of Directors and any duly authorized Committee thereof are authorized to interpret the Plan and to adopt rules and regulations not inconsistent with the Plan as they deem appropriate. The Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board of Directors and any duly authorized Committee thereof upon any questions arising under the Plan.
10. MARKET STAND-OFF. The Optionee agrees that, in connection with any public offering by the Company of its equity securities pursuant to a registration statement filed under the Exchange Act, he or she will not sell, make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of or otherwise dispose of any Option Shares without the prior written consent of the Company or its underwriters, for such period of time before or after the effective date of such registration as may be requested by the Company or such underwriters, provided that all similarly situated stockholders are subject to a similar lock-up restriction.
11. ENTIRE AGREEMENT. This Award Agreement, together with the Plan and the other exhibits attached thereto or hereto, represents the entire agreement between the parties.
12. GOVERNING LAW. This Award Agreement will be construed in accordance with the laws of the State of Tennessee, without regard to the application of the principles of conflicts of laws.
13. SURVIVAL. Sections 6 and 9 through 14 of this Award Agreement will survive the exercise of the Option.
14. EARLY DISPOSITION OF STOCK. The Optionee hereby agrees that if he or she disposes of any Option Shares within one year after such Option Shares were issued to the Optionee, or within two years after the Grant Date, the Optionee will notify the Company in writing within 30 days after the date of such disposition.
IN WITNESS WHEREOF, this Award Agreement has been executed by the parties on the _____ day of __________, 20__.
COMPANY
KIRKLAND'S, INC.
By:____________________________
Title
OPTIONEE
EXHIBIT 31.1
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION OF CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
I, Robert E. Alderson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kirkland's, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of and for the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and
(c) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's first fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: December 14, 2004 /s/ Robert E. Alderson ----------------------------------------------- Robert E. Alderson Chairman, President and Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION OF EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
I, Reynolds C. Faulkner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kirkland's, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of and for the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and
(c) disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's first fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: December 14, 2004 /s/ Reynolds C. Faulkner ----------------------------------- Reynolds C. Faulkner Executive Vice President and Chief Financial Officer |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Kirkland's, Inc. (the
"Company") on Form 10-Q for the fiscal quarter ending October 30, 2004 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Robert E. Alderson, Chairman, President and Chief Executive Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Robert E. Alderson ----------------------------------------------- Chairman, President and Chief Executive Officer December 14, 2004 |
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Kirkland's, Inc. (the
"Company") on Form 10-Q for the fiscal quarter ending October 30, 2004 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Reynolds C. Faulkner, Executive Vice President and Chief Financial Officer of
the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Reynolds C. Faulkner ---------------------------------------------------- Executive Vice President and Chief Financial Officer December 14, 2004 |